UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,June 30, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number 001-32195
GENWORTH FINANCIAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 33-1073076 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
6620 West Broad Street Richmond, Virginia | 23230 | |
(Address of Principal Executive Offices) | (Zip Code) |
(804) 281-6000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 27,July 25, 2011, 490,561,211490,716,493 shares of Class A Common Stock, par value $0.001 per share, were outstanding.
Page | ||||||
3 | ||||||
Item 1. | 3 | |||||
3 | ||||||
Condensed Consolidated Balance Sheets as of | 4 | |||||
5 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | ||||||
Item 4. | ||||||
Item 1. | ||||||
Item 1A. | ||||||
Item 5. | 139 | |||||
Item 6. | ||||||
Item 1. | Financial Statements |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in millions, except per share amounts)
(Unaudited)
Three months ended March 31, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Premiums | $ | 1,437 | $ | 1,470 | $ | 1,455 | $ | 1,470 | $ | 2,892 | $ | 2,940 | ||||||||||||
Net investment income | 830 | 765 | 881 | 823 | 1,711 | 1,588 | ||||||||||||||||||
Net investment gains (losses) | (28 | ) | (70 | ) | (40 | ) | (139 | ) | (68 | ) | (209 | ) | ||||||||||||
Insurance and investment product fees and other | 329 | 256 | 359 | 256 | 688 | 512 | ||||||||||||||||||
Total revenues | 2,568 | 2,421 | 2,655 | 2,410 | 5,223 | 4,831 | ||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||
Benefits and other changes in policy reserves | 1,409 | 1,315 | 1,672 | 1,340 | 3,081 | 2,655 | ||||||||||||||||||
Interest credited | 201 | 213 | 204 | 211 | 405 | 424 | ||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 500 | 475 | 514 | 499 | 1,014 | 974 | ||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 185 | 184 | 197 | 179 | 382 | 363 | ||||||||||||||||||
Interest expense | 127 | 115 | 134 | 109 | 261 | 224 | ||||||||||||||||||
Total benefits and expenses | 2,422 | 2,302 | 2,721 | 2,338 | 5,143 | 4,640 | ||||||||||||||||||
Income before income taxes | 146 | 119 | ||||||||||||||||||||||
Income (loss) before income taxes | (66 | ) | 72 | 80 | 191 | |||||||||||||||||||
Provision (benefit) for income taxes | 30 | (93 | ) | (6 | ) | (5 | ) | 24 | (98 | ) | ||||||||||||||
Net income | 116 | 212 | ||||||||||||||||||||||
Net income (loss) | (60 | ) | 77 | 56 | 289 | |||||||||||||||||||
Less: net income attributable to noncontrolling interests | 34 | 34 | 36 | 35 | 70 | 69 | ||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 82 | $ | 178 | ||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | (96 | ) | $ | 42 | $ | (14 | ) | $ | 220 | ||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||||||||||||||||||
Basic | $ | 0.17 | $ | 0.36 | $ | (0.20 | ) | $ | 0.09 | $ | (0.03 | ) | $ | 0.45 | ||||||||||
Diluted | $ | 0.17 | $ | 0.36 | $ | (0.20 | ) | $ | 0.08 | $ | (0.03 | ) | $ | 0.45 | ||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||
Basic | 490.1 | 488.8 | 490.6 | 489.1 | 490.4 | 489.0 | ||||||||||||||||||
Diluted | 494.4 | 493.5 | 490.6 | 494.2 | 490.4 | 493.9 | ||||||||||||||||||
Supplemental disclosures: | ||||||||||||||||||||||||
Total other-than-temporary impairments | $ | (31 | ) | $ | (77 | ) | $ | (28 | ) | $ | (24 | ) | $ | (59 | ) | $ | (101 | ) | ||||||
Portion of other-than-temporary impairments recognized in other comprehensive income (loss) | (5 | ) | (3 | ) | ||||||||||||||||||||
Portion of other-than-temporary impairments included in other comprehensive income (loss) | 2 | (27 | ) | (3 | ) | (30 | ) | |||||||||||||||||
Net other-than-temporary impairments | (36 | ) | (80 | ) | (26 | ) | (51 | ) | (62 | ) | (131 | ) | ||||||||||||
Other investments gains (losses) | 8 | 10 | ||||||||||||||||||||||
Other investment gains (losses) | (14 | ) | (88 | ) | (6 | ) | (78 | ) | ||||||||||||||||
Total net investment gains (losses) | $ | (28 | ) | $ | (70 | ) | $ | (40 | ) | $ | (139 | ) | $ | (68 | ) | $ | (209 | ) | ||||||
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share amounts)
March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Investments: | ||||||||||||||||
Fixed maturity securities available-for-sale, at fair value | $ | 54,998 | $ | 55,183 | $ | 56,221 | $ | 55,183 | ||||||||
Equity securities available-for-sale, at fair value | 355 | 332 | 374 | 332 | ||||||||||||
Commercial mortgage loans | 6,600 | 6,718 | 6,432 | 6,718 | ||||||||||||
Restricted commercial mortgage loans related to securitization entities | 485 | 507 | 457 | 507 | ||||||||||||
Policy loans | 1,480 | 1,471 | 1,542 | 1,471 | ||||||||||||
Other invested assets | 3,752 | 3,854 | 3,301 | 3,854 | ||||||||||||
Restricted other invested assets related to securitization entities ($374 and $370 at fair value) | 376 | 372 | ||||||||||||||
Restricted other invested assets related to securitization entities ($378 and $370 at fair value) | 379 | 372 | ||||||||||||||
Total investments | 68,046 | 68,437 | 68,706 | 68,437 | ||||||||||||
Cash and cash equivalents | 3,742 | 3,132 | 2,831 | 3,132 | ||||||||||||
Accrued investment income | 794 | 733 | 693 | 733 | ||||||||||||
Deferred acquisition costs | 7,334 | 7,256 | 7,362 | 7,256 | ||||||||||||
Intangible assets | 713 | 741 | 692 | 741 | ||||||||||||
Goodwill | 1,331 | 1,329 | 1,333 | 1,329 | ||||||||||||
Reinsurance recoverable | 17,102 | 17,191 | 16,999 | 17,191 | ||||||||||||
Other assets | 883 | 810 | 988 | 810 | ||||||||||||
Deferred tax asset | 1,188 | 1,100 | 1,291 | 1,100 | ||||||||||||
Separate account assets | 11,807 | 11,666 | 11,452 | 11,666 | ||||||||||||
Total assets | $ | 112,940 | $ | 112,395 | $ | 112,347 | $ | 112,395 | ||||||||
Liabilities and stockholders’ equity | ||||||||||||||||
Liabilities: | ||||||||||||||||
Future policy benefits | $ | 30,872 | $ | 30,717 | $ | 31,177 | $ | 30,717 | ||||||||
Policyholder account balances | 26,399 | 26,978 | 26,115 | 26,978 | ||||||||||||
Liability for policy and contract claims | 6,959 | 6,933 | 7,327 | 6,933 | ||||||||||||
Unearned premiums | 4,529 | 4,541 | 4,563 | 4,541 | ||||||||||||
Other liabilities ($139 and $150 other liabilities related to securitization entities) | 6,189 | 6,085 | ||||||||||||||
Other liabilities ($145 and $150 other liabilities related to securitization entities) | 5,637 | 6,085 | ||||||||||||||
Borrowings related to securitization entities ($58 and $51 at fair value) | 489 | 494 | 452 | 494 | ||||||||||||
Non-recourse funding obligations | 3,431 | 3,437 | 3,374 | 3,437 | ||||||||||||
Long-term borrowings | 5,347 | 4,952 | 4,755 | 4,952 | ||||||||||||
Deferred tax liability | 1,689 | 1,621 | 1,937 | 1,621 | ||||||||||||
Separate account liabilities | 11,807 | 11,666 | 11,452 | 11,666 | ||||||||||||
Total liabilities | 97,711 | 97,424 | 96,789 | 97,424 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 579 million and 578 million shares issued as of March 31, 2011 and December 31, 2010, respectively; 491 million and 490 million shares outstanding as of March 31, 2011 and December 31, 2010, respectively | 1 | 1 | ||||||||||||||
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 579 million and 578 million shares issued as of June 30, 2011 and December 31, 2010, respectively; 491 million and 490 million shares outstanding as of June 30, 2011 and December 31, 2010, respectively | 1 | 1 | ||||||||||||||
Additional paid-in capital | 12,101 | 12,095 | 12,110 | 12,095 | ||||||||||||
Accumulated other comprehensive income (loss): | ||||||||||||||||
Net unrealized investment gains (losses): | ||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | 77 | 21 | 352 | 21 | ||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | (114 | ) | (121 | ) | (116 | ) | (121 | ) | ||||||||
Net unrealized investment gains (losses) | (37 | ) | (100 | ) | 236 | (100 | ) | |||||||||
Derivatives qualifying as hedges | 864 | 924 | 943 | 924 | ||||||||||||
Foreign currency translation and other adjustments | 793 | 668 | 883 | 668 | ||||||||||||
Total accumulated other comprehensive income (loss) | 1,620 | 1,492 | 2,062 | 1,492 | ||||||||||||
Retained earnings | 3,055 | 2,973 | 2,959 | 2,973 | ||||||||||||
Treasury stock, at cost (88 million shares as of March 31, 2011 and December 31, 2010) | (2,700 | ) | (2,700 | ) | ||||||||||||
Treasury stock, at cost (88 million shares as of June 30, 2011 and December 31, 2010) | (2,700 | ) | (2,700 | ) | ||||||||||||
Total Genworth Financial, Inc.’s stockholders’ equity | 14,077 | 13,861 | 14,432 | 13,861 | ||||||||||||
Noncontrolling interests | 1,152 | 1,110 | 1,126 | 1,110 | ||||||||||||
Total stockholders’ equity | 15,229 | 14,971 | 15,558 | 14,971 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 112,940 | $ | 112,395 | $ | 112,347 | $ | 112,395 | ||||||||
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in millions)
(Unaudited)
Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Treasury stock, at cost | Total Genworth Financial, Inc.’s stockholders’ equity | Noncontrolling interests | Total stockholders’ equity | |||||||||||||||||||||||||
Balances as of December 31, 2010 | $ | 1 | $ | 12,095 | $ | 1,492 | $ | 2,973 | $ | (2,700 | ) | $ | 13,861 | $ | 1,110 | $ | 14,971 | |||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Net income | — | — | — | 82 | — | 82 | 34 | 116 | ||||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | — | — | 56 | — | — | 56 | (9 | ) | 47 | |||||||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | — | — | 7 | — | — | 7 | — | 7 | ||||||||||||||||||||||||
Derivatives qualifying as hedges | — | — | (60 | ) | — | — | (60 | ) | — | (60 | ) | |||||||||||||||||||||
Foreign currency translation and other adjustments | — | — | 125 | — | — | 125 | 29 | 154 | ||||||||||||||||||||||||
Total comprehensive income (loss) | 264 | |||||||||||||||||||||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | (12 | ) | (12 | ) | ||||||||||||||||||||||
Stock-based compensation expense and exercises and other | — | 6 | — | — | — | 6 | — | 6 | ||||||||||||||||||||||||
Balances as of March 31, 2011 | $ | 1 | $ | 12,101 | $ | 1,620 | $ | 3,055 | $ | (2,700 | ) | $ | 14,077 | $ | 1,152 | $ | 15,229 | |||||||||||||||
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY—
(CONTINUED)
(Amounts in millions)
(Unaudited)
Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Treasury stock, at cost | Total Genworth Financial, Inc.’s stockholders’ equity | Noncontrolling interests | Total stockholders’ equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2010 | $ | 1 | $ | 12,095 | $ | 1,492 | $ | 2,973 | $ | (2,700 | ) | $ | 13,861 | $ | 1,110 | $ | 14,971 | |||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of subsidiary shares | — | — | — | — | — | — | (71 | ) | (71 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | (14 | ) | — | (14 | ) | 70 | 56 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | — | — | 331 | �� | — | 331 | 5 | 336 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | — | — | 5 | — | — | 5 | — | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives qualifying as hedges | — | — | 19 | — | — | 19 | — | 19 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation and other adjustments | — | — | 215 | — | — | 215 | 36 | 251 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) | 667 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | (24 | ) | (24 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense and exercises and other | — | 15 | — | — | — | 15 | — | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of June 30, 2011 | $ | 1 | $ | 12,110 | $ | 2,062 | $ | 2,959 | $ | (2,700 | ) | $ | 14,432 | $ | 1,126 | $ | 15,558 | |||||||||||||||||||||||||||||||||||||||||||||||
Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Treasury stock, at cost | Total Genworth Financial, Inc.’s stockholders’ equity | Noncontrolling interests | Total stockholders’ equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2009 | $ | 1 | $ | 12,034 | $ | (164 | ) | $ | 3,105 | $ | (2,700 | ) | $ | 12,276 | $ | 1,074 | $ | 13,350 | $ | 1 | $ | 12,034 | $ | (164 | ) | $ | 3,105 | $ | (2,700 | ) | $ | 12,276 | $ | 1,074 | $ | 13,350 | ||||||||||||||||||||||||||||
Cumulative effect of change in accounting, net of taxes and other adjustments | — | — | 91 | (104 | ) | — | (13 | ) | — | (13 | ) | — | — | 91 | (104 | ) | — | (13 | ) | — | (13 | ) | ||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 178 | — | 178 | 34 | 212 | — | — | — | 220 | — | 220 | 69 | 289 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | — | — | 408 | — | — | 408 | (1 | ) | 407 | — | — | 1,268 | — | — | 1,268 | 9 | 1,277 | |||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | — | — | 39 | — | — | 39 | — | 39 | — | — | 68 | — | — | 68 | — | 68 | ||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives qualifying as hedges | — | — | (25 | ) | — | — | (25 | ) | — | (25 | ) | — | — | 360 | — | — | 360 | — | 360 | |||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation and other adjustments | — | — | (2 | ) | — | — | (2 | ) | 37 | 35 | — | — | (292 | ) | — | — | (292 | ) | (15 | ) | (307 | ) | ||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) | 668 | 1,687 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | (10 | ) | (10 | ) | — | — | — | — | — | — | (21 | ) | (21 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense and exercises and other | — | 10 | — | — | — | 10 | — | 10 | — | 24 | — | — | — | 24 | — | 24 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other capital transactions | — | 20 | — | — | — | 20 | — | 20 | — | 20 | — | — | — | 20 | — | 20 | ||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of March 31, 2010 | $ | 1 | $ | 12,064 | $ | 347 | $ | 3,179 | $ | (2,700 | ) | $ | 12,891 | $ | 1,134 | $ | 14,025 | |||||||||||||||||||||||||||||||||||||||||||||||
Balances as of June 30, 2010 | $ | 1 | $ | 12,078 | $ | 1,331 | $ | 3,221 | $ | (2,700 | ) | $ | 13,931 | $ | 1,116 | $ | 15,047 | |||||||||||||||||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
Three months ended March 31, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 116 | $ | 212 | $ | 56 | $ | 289 | ||||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||||||
Amortization of fixed maturity discounts and premiums | (18 | ) | 24 | |||||||||||||
Amortization of fixed maturity discounts and premiums and limited partnerships | (53 | ) | 5 | |||||||||||||
Net investment losses (gains) | 28 | 70 | 68 | 209 | ||||||||||||
Charges assessed to policyholders | (159 | ) | (113 | ) | (327 | ) | (233 | ) | ||||||||
Acquisition costs deferred | (229 | ) | (193 | ) | (449 | ) | (392 | ) | ||||||||
Amortization of deferred acquisition costs and intangibles | 185 | 184 | 382 | 363 | ||||||||||||
Deferred income taxes | (37 | ) | (101 | ) | (85 | ) | (173 | ) | ||||||||
Net increase in trading securities, held-for-sale investments and derivative instruments | 35 | 58 | 79 | 119 | ||||||||||||
Stock-based compensation expense | 7 | 11 | 16 | 23 | ||||||||||||
Change in certain assets and liabilities: | ||||||||||||||||
Accrued investment income and other assets | (117 | ) | (43 | ) | (83 | ) | 24 | |||||||||
Insurance reserves | 557 | 576 | 1,281 | 1,208 | ||||||||||||
Current tax liabilities | 25 | (163 | ) | 5 | (211 | ) | ||||||||||
Other liabilities and other policy-related balances | (57 | ) | (392 | ) | (48 | ) | (674 | ) | ||||||||
Net cash from operating activities | 336 | 130 | 842 | 557 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Proceeds from maturities and repayments of investments: | ||||||||||||||||
Fixed maturity securities | 1,627 | 941 | 3,069 | 2,057 | ||||||||||||
Commercial mortgage loans | 148 | 136 | 411 | 263 | ||||||||||||
Restricted commercial mortgage loans related to securitization entities | 22 | 12 | 49 | 27 | ||||||||||||
Proceeds from sales of investments: | ||||||||||||||||
Fixed maturity and equity securities | 1,009 | 1,021 | 1,893 | 2,393 | ||||||||||||
Purchases and originations of investments: | ||||||||||||||||
Fixed maturity and equity securities | (2,200 | ) | (3,623 | ) | (5,183 | ) | (6,867 | ) | ||||||||
Commercial mortgage loans | (38 | ) | — | (142 | ) | (23 | ) | |||||||||
Other invested assets, net | (59 | ) | 344 | (28 | ) | 1,491 | ||||||||||
Policy loans, net | (9 | ) | (5 | ) | (71 | ) | (64 | ) | ||||||||
Payments for businesses purchased, net of cash acquired | (4 | ) | — | (4 | ) | — | ||||||||||
Net cash from investing activities | 496 | (1,174 | ) | (6 | ) | (723 | ) | |||||||||
Cash flows from financing activities: | ||||||||||||||||
Deposits to universal life and investment contracts | 560 | 490 | 1,221 | 1,174 | ||||||||||||
Withdrawals from universal life and investment contracts | (1,115 | ) | (913 | ) | (2,123 | ) | (1,734 | ) | ||||||||
Short-term borrowings and other, net | (33 | ) | (37 | ) | 137 | (285 | ) | |||||||||
Redemption of non-recourse funding obligations | (6 | ) | (6 | ) | ||||||||||||
Redemption and repurchase of non-recourse funding obligations | (45 | ) | (6 | ) | ||||||||||||
Proceeds from the issuance of long-term debt | 397 | — | 545 | 660 | ||||||||||||
Repayment and repurchase of long-term debt | (760 | ) | — | |||||||||||||
Repayment of borrowings related to securitization entities | (12 | ) | (11 | ) | (49 | ) | (31 | ) | ||||||||
Repurchase of subsidiary shares | (71 | ) | — | |||||||||||||
Dividends paid to noncontrolling interests | (12 | ) | (10 | ) | (24 | ) | (21 | ) | ||||||||
Net cash from financing activities | (221 | ) | (487 | ) | (1,169 | ) | (243 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (1 | ) | (5 | ) | 32 | (7 | ) | |||||||||
Net change in cash and cash equivalents | 610 | (1,536 | ) | (301 | ) | (416 | ) | |||||||||
Cash and cash equivalents at beginning of period | 3,132 | 5,002 | 3,132 | 5,002 | ||||||||||||
Cash and cash equivalents at end of period | $ | 3,742 | $ | 3,466 | $ | 2,831 | $ | 4,586 | ||||||||
See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Formation of Genworth and Basis of Presentation
Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware on October 23, 2003. The accompanying condensed financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or where we are the primary beneficiary of a variable interest entity, which we refer to as the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.
We have the following three operating segments:
• | Retirement and Protection. We offer and/or manage a variety of protection, wealth management and retirement income products. Our primary insurance products include life and long-term care insurance. Additionally, we offer other Medicare supplement insurance products, as well as care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs and advisor services, financial planning services and fixed deferred and immediate individual annuities. We previously offered variable deferred annuities and group variable annuities offered through retirement plans. |
• | International. We offer mortgage and lifestyle protection insurance products and related services in multiple markets. We are a leading provider of mortgage insurance products in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. We are a leading provider of protection coverages primarily associated with certain financial obligations (referred to as lifestyle protection) in multiple European countries. These lifestyle protection insurance products primarily help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death. |
• | U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively provide mortgage insurance on a structured, or bulk, basis with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage capital and risk. |
We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”).
In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business. We continue to offer fixed annuities.
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.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Actual results could differ from those estimates. These condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these condensed consolidated
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2010 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.
(2) Accounting Pronouncements
Recently Adopted
On January 1, 2011, we adopted new accounting guidance related to goodwill impairment testing when a reporting unit’s carrying value is zero or negative. This guidance did not impact our consolidated financial statements upon adoption, as all of our reporting units with goodwill balances have positive carrying values.
On January 1, 2011, we adopted new accounting guidance related to how investments held through separate accounts affect an insurer’s consolidation analysis of those investments. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.
On January 1, 2011, we adopted new accounting guidance related to additional disclosures about purchases, sales, issuances and settlements in the rollforward of Level 3 fair value measurements. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.
Not Yet Adopted
In AprilJune 2011, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance requiring presentation of the components of net income (loss), the components of other comprehensive income (loss) (“OCI”) and total comprehensive income either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. This new accounting guidance is effective for us on January 1, 2012. We do not expect the adoption of this accounting guidance to have a material impact on our consolidated financial results.
In May 2011, the FASB issued new accounting guidance for fair value measurements. This new accounting guidance clarifies existing fair value measurement requirements and changes certain fair value measurement principles and disclosure requirements that will be effective for us on January 1, 2012. We have not yet determined the impact this accounting guidance will have on our consolidated financial statements.
In April 2011, the FASB issued new accounting guidance for troubled debt restructurings. This new accounting guidance and related disclosures will be effective for us on July 1, 2011. The adoption of this accounting guidance will not have a material impact on our consolidated financial statements.
In April 2011, the FASB issued new accounting guidance for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removes the requirement to consider a transferor’s ability to fulfill its contractual rights from the criteria when determining effective control and is effective, for us, prospectively to any transactions occurring on or after January 1, 2012. We do not expect the adoption of this accounting guidance to have a material impact on our consolidated financial statements.
In October 2010, the FASB issued new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This new accounting guidance will be effective for us on January 1, 2012. When adopted, we expect to defer fewer costs. The new guidance is effective prospectively with retrospective adoption allowed. We have not yet determined the method nor impact this accounting guidance will have on our consolidated financial statements.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
retrospective adoption allowed. We intend to adopt this new guidance retrospectively. We have not yet determined the impact this accounting guidance will have on our consolidated financial statements.
(3) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted shares outstanding for the periods indicated:
Three months ended March 31, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions, except per share amounts) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Net income | $ | 116 | $ | 212 | ||||||||||||||||||||
Net income (loss) | $ | (60 | ) | $ | 77 | $ | 56 | $ | 289 | |||||||||||||||
Less: net income attributable to noncontrolling interests | 34 | 34 | 36 | 35 | 70 | 69 | ||||||||||||||||||
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Net income available to Genworth Financial, Inc.’s common stockholders | $ | 82 | $ | 178 | ||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | (96 | ) | $ | 42 | $ | (14 | ) | $ | 220 | ||||||||||||||
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Basic per common share: | ||||||||||||||||||||||||
Net income | $ | 0.24 | $ | 0.43 | ||||||||||||||||||||
Net income (loss) | $ | (0.12 | ) | $ | 0.16 | $ | 0.11 | $ | 0.59 | |||||||||||||||
Less: net income attributable to noncontrolling interests | 0.07 | 0.07 | 0.07 | 0.07 | 0.14 | 0.14 | ||||||||||||||||||
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Net income available to Genworth Financial, Inc.’s common stockholders(1) | $ | 0.17 | $ | 0.36 | ||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders(1) | $ | (0.20 | ) | $ | 0.09 | $ | (0.03 | ) | $ | 0.45 | ||||||||||||||
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Diluted per common share: | ||||||||||||||||||||||||
Net income | $ | 0.23 | $ | 0.43 | ||||||||||||||||||||
Net income (loss) | $ | (0.12 | ) | $ | 0.16 | $ | 0.11 | $ | 0.59 | |||||||||||||||
Less: net income attributable to noncontrolling interests | 0.07 | 0.07 | 0.07 | 0.07 | 0.14 | 0.14 | ||||||||||||||||||
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Net income available to Genworth Financial, Inc.’s common stockholders(1) | $ | 0.17 | $ | 0.36 | ||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders(1) | $ | (0.20 | ) | $ | 0.08 | $ | (0.03 | ) | $ | 0.45 | ||||||||||||||
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Weighted-average shares used in basic earnings per common share calculations | 490.1 | 488.8 | 490.6 | 489.1 | 490.4 | 489.0 | ||||||||||||||||||
Potentially dilutive securities: | ||||||||||||||||||||||||
Stock options, restricted stock units and stock appreciation rights | 4.3 | 4.7 | — | 5.1 | — | 4.9 | ||||||||||||||||||
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Weighted-average shares used in diluted earnings per common share calculations | 494.4 | 493.5 | ||||||||||||||||||||||
Weighted-average shares used in diluted earnings per common share calculations(2) | 490.6 | 494.2 | 490.4 | 493.9 | ||||||||||||||||||||
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(1) | May not total due to whole number calculation. |
(2) | Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss available to Genworth Financial, Inc.’s common stockholders for the three and six months ended June 30, 2011, we were required to use basic weighted-average common shares outstanding in the calculation for the three and six months ended June 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 3.7 million and 4.0 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.’s common stockholders for the three and six months ended June 30, 2011, dilutive potential common shares would have been 494.3 million and 494.4 million, respectively. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the periods indicated:
Three months ended March 31, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Fixed maturity securities—taxable | $ | 670 | $ | 626 | $ | 693 | $ | 646 | $ | 1,363 | $ | 1,272 | ||||||||||||
Fixed maturity securities—non-taxable | 11 | 16 | 10 | 16 | 21 | 32 | ||||||||||||||||||
Commercial mortgage loans | 92 | 104 | 92 | 99 | 184 | 203 | ||||||||||||||||||
Restricted commercial mortgage loans related to securitization entities | 10 | 10 | 9 | 10 | 19 | 20 | ||||||||||||||||||
Equity securities | 3 | 2 | 10 | 5 | 13 | 7 | ||||||||||||||||||
Other invested assets | 34 | (2 | ) | 55 | 39 | 89 | 37 | |||||||||||||||||
Restricted other invested assets related to securitization entities | — | 1 | — | — | — | 1 | ||||||||||||||||||
Policy loans | 29 | 27 | 30 | 28 | 59 | 55 | ||||||||||||||||||
Cash, cash equivalents and short-term investments | 6 | 5 | 6 | 4 | 12 | 9 | ||||||||||||||||||
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Gross investment income before expenses and fees | 855 | 789 | 905 | 847 | 1,760 | 1,636 | ||||||||||||||||||
Expenses and fees | (25 | ) | (24 | ) | (24 | ) | (24 | ) | (49 | ) | (48 | ) | ||||||||||||
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Net investment income | $ | 830 | $ | 765 | $ | 881 | $ | 823 | $ | 1,711 | $ | 1,588 | ||||||||||||
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(b) Net Investment Gains (Losses)
The following table sets forth net investment gains (losses) for the periods indicated:
Three months ended March 31, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||
Realized gains | $ | 29 | $ | 23 | $ | 25 | $ | 53 | $ | 54 | $ | 76 | ||||||||||||
Realized losses | (31 | ) | (38 | ) | (34 | ) | (36 | ) | (65 | ) | (74 | ) | ||||||||||||
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Net realized gains (losses) on available-for-sale securities | (2 | ) | (15 | ) | (9 | ) | 17 | (11 | ) | 2 | ||||||||||||||
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Impairments: | ||||||||||||||||||||||||
Total other-than-temporary impairments | (31 | ) | (77 | ) | (28 | ) | (24 | ) | (59 | ) | (101 | ) | ||||||||||||
Portion of other-than-temporary impairments recognized in other comprehensive income (loss) | (5 | ) | (3 | ) | ||||||||||||||||||||
Portion of other-than-temporary impairments included in other comprehensive income (loss) | 2 | (27 | ) | (3 | ) | (30 | ) | |||||||||||||||||
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Net other-than-temporary impairments | (36 | ) | (80 | ) | (26 | ) | (51 | ) | (62 | ) | (131 | ) | ||||||||||||
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Trading securities | 11 | 6 | 14 | (4 | ) | 25 | 2 | |||||||||||||||||
Commercial mortgage loans | (1 | ) | (4 | ) | 2 | (18 | ) | 1 | (22 | ) | ||||||||||||||
Net gains (losses) related to securitization entities | 10 | 11 | (5 | ) | (47 | ) | 5 | (36 | ) | |||||||||||||||
Derivative instruments(1) | (10 | ) | (8 | ) | (15 | ) | (38 | ) | (25 | ) | (46 | ) | ||||||||||||
Other | — | 20 | (1 | ) | 2 | (1 | ) | 22 | ||||||||||||||||
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Net investment gains (losses) | $ | (28 | ) | $ | (70 | ) | $ | (40 | ) | $ | (139 | ) | $ | (68 | ) | $ | (209 | ) | ||||||
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(1) | See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses). |
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 periodsthree months ended March 31,June 30, 2011 and 2010 was $397$294 million and $558$858 million, respectively, which was approximately 94%91% and 96%, respectively, of book value. The aggregate fair value for both periods.of securities sold at a loss during the six months ended June 30, 2011 and 2010 was $691 million and $1,416 million, respectively, which was approximately 93% and 95%, 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”)OCI as of or for the three months ended March 31: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) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Beginning balance | $ | 784 | $ | 1,059 | $ | 755 | $ | 1,025 | $ | 784 | $ | 1,059 | ||||||||||||
Additions: | ||||||||||||||||||||||||
Other-than-temporary impairments not previously recognized | 3 | 20 | 1 | 11 | 4 | 31 | ||||||||||||||||||
Increases related to other-than-temporary impairments previously recognized | 31 | 46 | 17 | 32 | 48 | 78 | ||||||||||||||||||
Reductions: | ||||||||||||||||||||||||
Securities sold, paid down or disposed | (63 | ) | (100 | ) | (47 | ) | (90 | ) | (110 | ) | (190 | ) | ||||||||||||
Securities where there is intent to sell | — | — | ||||||||||||||||||||||
Ending balance | $ | 755 | $ | 1,025 | $ | 726 | $ | 978 | $ | 726 | $ | 978 | ||||||||||||
(c) Unrealized Investment Gains and Losses
Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:
(Amounts in millions) | March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | ||||||||||||
Net unrealized gains (losses) on investment securities: | ||||||||||||||||
Fixed maturity securities | $ | 548 | $ | 511 | $ | 1,141 | $ | 511 | ||||||||
Equity securities | 20 | 9 | 21 | 9 | ||||||||||||
Other invested assets | (20 | ) | (22 | ) | (24 | ) | (22 | ) | ||||||||
Subtotal | 548 | 498 | 1,138 | 498 | ||||||||||||
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves | (546 | ) | (583 | ) | (694 | ) | (583 | ) | ||||||||
Income taxes, net | 2 | 35 | (153 | ) | 35 | |||||||||||
Net unrealized investment gains (losses) | 4 | (50 | ) | 291 | (50 | ) | ||||||||||
Less: net unrealized investment gains (losses) attributable to noncontrolling interests | 41 | 50 | 55 | 50 | ||||||||||||
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc. | $ | (37 | ) | $ | (100 | ) | $ | 236 | $ | (100 | ) | |||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The change in net unrealized gains (losses) on available-for-sale securities reported in accumulated other comprehensive income (loss) was as follows as of or for the three months ended March 31:periods indicated:
As of or for the three months ended June 30, | ||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Beginning balance | $ | (100 | ) | $ | (1,398 | ) | $ | (37 | ) | $ | (860 | ) | ||||
Impact upon adoption of new accounting guidance | — | 91 | ||||||||||||||
Unrealized gains (losses) arising during the period: | ||||||||||||||||
Unrealized gains (losses) on investment securities | 12 | 763 | 555 | 1,498 | ||||||||||||
Adjustment to deferred acquisition costs | (21 | ) | (113 | ) | (36 | ) | (80 | ) | ||||||||
Adjustment to present value of future profits | (1 | ) | (31 | ) | (15 | ) | (51 | ) | ||||||||
Adjustment to sales inducements | (4 | ) | (15 | ) | (3 | ) | (10 | ) | ||||||||
Adjustment to benefit reserves | 63 | — | (94 | ) | — | |||||||||||
Provision for income taxes | (20 | ) | (220 | ) | (142 | ) | (480 | ) | ||||||||
Change in unrealized gains (losses) on investment securities | 29 | 384 | 265 | 877 | ||||||||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(13) and $(34) | 25 | 62 | ||||||||||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(13) and $(11) | 22 | 22 | ||||||||||||||
Change in net unrealized investment gains (losses) | 54 | 537 | 287 | 899 | ||||||||||||
Less: change in net unrealized investment (gains) losses attributable to noncontrolling interests | 9 | 1 | ||||||||||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests | 14 | 10 | ||||||||||||||
Ending balance | $ | (37 | ) | $ | (860 | ) | $ | 236 | $ | 29 | ||||||
As of or for the six months ended June 30, | ||||||||
(Amounts in millions) | 2011 | 2010 | ||||||
Beginning balance | $ | (100 | ) | $ | (1,398 | ) | ||
Cumulative effect of change in accounting | — | 91 | ||||||
Unrealized gains (losses) arising during the period: | ||||||||
Unrealized gains (losses) on investment securities | 567 | 2,261 | ||||||
Adjustment to deferred acquisition costs | (57 | ) | (193 | ) | ||||
Adjustment to present value of future profits | (16 | ) | (81 | ) | ||||
Adjustment to sales inducements | (7 | ) | (26 | ) | ||||
Adjustment to benefit reserves | (31 | ) | — | |||||
Provision for income taxes | (162 | ) | (700 | ) | ||||
Change in unrealized gains (losses) on investment securities | 294 | 1,261 | ||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(26) and $(45) | 47 | 84 | ||||||
Change in net unrealized investment gains (losses) | 341 | 1,436 | ||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests | 5 | 9 | ||||||
Ending balance | $ | 236 | $ | 29 | ||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(d) Fixed Maturity and Equity Securities
As of March 31,June 30, 2011, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
(Amounts in millions) | Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||
Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | |||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 3,352 | $ | 102 | $ | — | $ | (40 | ) | $ | — | $ | 3,414 | |||||||||||
Tax-exempt | 1,029 | 16 | — | (117 | ) | — | 928 | |||||||||||||||||
Government—non-U.S. | 2,267 | 99 | — | (7 | ) | — | 2,359 | |||||||||||||||||
U.S. corporate | 23,069 | 1,062 | 12 | (390 | ) | — | 23,753 | |||||||||||||||||
Corporate—non-U.S. | 13,655 | 454 | — | (163 | ) | (9 | ) | 13,937 | ||||||||||||||||
Residential mortgage-backed | 4,897 | 134 | 20 | (270 | ) | (181 | ) | 4,600 | ||||||||||||||||
Commercial mortgage-backed | 3,841 | 120 | 3 | (172 | ) | (36 | ) | 3,756 | ||||||||||||||||
Other asset-backed | 2,324 | 19 | — | (90 | ) | (2 | ) | 2,251 | ||||||||||||||||
Total fixed maturity securities | 54,434 | 2,006 | 35 | (1,249 | ) | (228 | ) | 54,998 | ||||||||||||||||
Equity securities | 334 | 24 | — | (3 | ) | — | 355 | |||||||||||||||||
Total available-for-sale securities | $ | 54,768 | $ | 2,030 | $ | 35 | $ | (1,252 | ) | $ | (228 | ) | $ | 55,353 | ||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions) | Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||
Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | |||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 3,548 | $ | 153 | $ | — | $ | (19 | ) | $ | — | $ | 3,682 | |||||||||||
Tax-exempt | 940 | 19 | — | (94 | ) | — | 865 | |||||||||||||||||
Government—non-U.S. | 2,265 | 128 | — | (4 | ) | — | 2,389 | |||||||||||||||||
U.S. corporate | 23,081 | 1,260 | 13 | (307 | ) | — | 24,047 | |||||||||||||||||
Corporate—non-U.S. | 14,038 | 530 | — | (139 | ) | (1 | ) | 14,428 | ||||||||||||||||
Residential mortgage-backed | 5,252 | 174 | 15 | (268 | ) | (190 | ) | 4,983 | ||||||||||||||||
Commercial mortgage-backed | 3,767 | 135 | 6 | (153 | ) | (34 | ) | 3,721 | ||||||||||||||||
Other asset-backed | 2,172 | 22 | — | (86 | ) | (2 | ) | 2,106 | ||||||||||||||||
Total fixed maturity securities | 55,063 | 2,421 | 34 | (1,070 | ) | (227 | ) | 56,221 | ||||||||||||||||
Equity securities | 352 | 25 | — | (3 | ) | — | 374 | |||||||||||||||||
Total available-for-sale securities | $ | 55,415 | $ | 2,446 | $ | 34 | $ | (1,073 | ) | $ | (227 | ) | $ | 56,595 | ||||||||||
As of December 31, 2010, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
(Amounts in millions) | Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||
Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | |||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 3,568 | $ | 145 | $ | — | $ | (8 | ) | $ | — | $ | 3,705 | |||||||||||
Tax-exempt | 1,124 | 19 | — | (113 | ) | — | 1,030 | |||||||||||||||||
Government—non-U.S. | 2,257 | 118 | — | (6 | ) | — | 2,369 | |||||||||||||||||
U.S. corporate | 23,282 | 1,123 | 10 | (448 | ) | — | 23,967 | |||||||||||||||||
Corporate—non-U.S. | 13,180 | 485 | — | (167 | ) | — | 13,498 | |||||||||||||||||
Residential mortgage-backed | 4,821 | 116 | 18 | (304 | ) | (196 | ) | 4,455 | ||||||||||||||||
Commercial mortgage-backed | 3,936 | 132 | 6 | (286 | ) | (45 | ) | 3,743 | ||||||||||||||||
Other asset-backed | 2,494 | 18 | — | (94 | ) | (2 | ) | 2,416 | ||||||||||||||||
Total fixed maturity securities | 54,662 | 2,156 | 34 | (1,426 | ) | (243 | ) | 55,183 | ||||||||||||||||
Equity securities | 323 | 13 | — | (4 | ) | — | 332 | |||||||||||||||||
Total available-for-sale securities | $ | 54,985 | $ | 2,169 | $ | 34 | $ | (1,430 | ) | $ | (243 | ) | $ | 55,515 | ||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of March 31,June 30, 2011:
Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses(1) | Number of securities | Fair value | Gross unrealized losses(2) | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses(1) | Number of securities | Fair value | Gross unrealized losses(2) | Number of securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description of Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 1,187 | $ | (40 | ) | 56 | $ | — | $ | — | — | $ | 1,187 | $ | (40 | ) | 56 | $ | 1,002 | $ | (19 | ) | 43 | $ | — | $ | — | — | $ | 1,002 | $ | (19 | ) | 43 | ||||||||||||||||||||||||||||||||||||||
Tax-exempt | 229 | (13 | ) | 81 | 244 | (104 | ) | 91 | 473 | (117 | ) | 172 | 114 | (3 | ) | 31 | 253 | (91 | ) | 88 | 367 | (94 | ) | 119 | ||||||||||||||||||||||||||||||||||||||||||||||||
Government—non-U.S. | 312 | (6 | ) | 80 | 39 | (1 | ) | 11 | 351 | (7 | ) | 91 | 189 | (3 | ) | 58 | 11 | (1 | ) | 5 | 200 | (4 | ) | 63 | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate | 3,883 | (140 | ) | 484 | 2,068 | (250 | ) | 174 | 5,951 | (390 | ) | 658 | 2,933 | (94 | ) | 337 | 1,712 | (213 | ) | 150 | 4,645 | (307 | ) | 487 | ||||||||||||||||||||||||||||||||||||||||||||||||
Corporate—non-U.S. | 2,633 | (82 | ) | 362 | 992 | (90 | ) | 92 | 3,625 | (172 | ) | 454 | 1,896 | (65 | ) | 276 | 854 | (75 | ) | 78 | 2,750 | (140 | ) | 354 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 454 | (23 | ) | 80 | 964 | (428 | ) | 389 | 1,418 | (451 | ) | 469 | 450 | (19 | ) | 92 | 884 | (439 | ) | 373 | 1,334 | (458 | ) | 465 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 254 | (10 | ) | 37 | 1,105 | (198 | ) | 199 | 1,359 | (208 | ) | 236 | 361 | (17 | ) | 51 | 1,034 | (170 | ) | 180 | 1,395 | (187 | ) | 231 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 173 | (1 | ) | 30 | 424 | (91 | ) | 46 | 597 | (92 | ) | 76 | 113 | (5 | ) | 20 | 343 | (83 | ) | 39 | 456 | (88 | ) | 59 | ||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal, fixed maturity securities | 9,125 | (315 | ) | 1,210 | 5,836 | (1,162 | ) | 1,002 | 14,961 | (1,477 | ) | 2,212 | 7,058 | (225 | ) | 908 | 5,091 | (1,072 | ) | 913 | 12,149 | (1,297 | ) | 1,821 | ||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 71 | (2 | ) | 46 | 6 | (1 | ) | 11 | 77 | (3 | ) | 57 | 83 | (2 | ) | 54 | 10 | (1 | ) | 10 | 93 | (3 | ) | 64 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 9,196 | $ | (317 | ) | 1,256 | $ | 5,842 | $ | (1,163 | ) | 1,013 | $ | 15,038 | $ | (1,480 | ) | 2,269 | $ | 7,141 | $ | (227 | ) | 962 | $ | 5,101 | $ | (1,073 | ) | 923 | $ | 12,242 | $ | (1,300 | ) | 1,885 | ||||||||||||||||||||||||||||||||||||
% Below cost—fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | $ | 6,969 | $ | (190 | ) | 883 | $ | 3,966 | $ | (354 | ) | 544 | $ | 10,935 | $ | (544 | ) | 1,427 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
20%-50% Below cost | 89 | (34 | ) | 20 | 986 | (432 | ) | 249 | 1,075 | (466 | ) | 269 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
>50% Below cost | — | (1 | ) | 5 | 139 | (286 | ) | 120 | 139 | (287 | ) | 125 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 7,058 | (225 | ) | 908 | 5,091 | (1,072 | ) | 913 | 12,149 | (1,297 | ) | 1,821 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
% Below cost—equity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | 78 | (1 | ) | 53 | 10 | (1 | ) | 10 | 88 | (2 | ) | 63 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
20%-50% Below cost | 5 | (1 | ) | 1 | — | — | — | 5 | (1 | ) | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
>50% Below cost | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total equity securities | 83 | (2 | ) | 54 | 10 | (1 | ) | 10 | 93 | (3 | ) | 64 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 7,141 | $ | (227 | ) | 962 | $ | 5,101 | $ | (1,073 | ) | 923 | $ | 12,242 | $ | (1,300 | ) | 1,885 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment grade | $ | 6,837 | $ | (217 | ) | 863 | $ | 3,616 | $ | (505 | ) | 527 | $ | 10,453 | $ | (722 | ) | 1,390 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Below investment grade(3) | 304 | (10 | ) | 99 | 1,485 | (568 | ) | 396 | 1,789 | (578 | ) | 495 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 7,141 | $ | (227 | ) | 962 | $ | 5,101 | $ | (1,073 | ) | 923 | $ | 12,242 | $ | (1,300 | ) | 1,885 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) | Amounts included |
(2) | Amounts included |
(3) | Amounts that have been in a continuous loss position for 12 months or more included $208 million of unrealized losses on other-than-temporarily impaired securities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
AgingAs indicated in the table above, the majority of Gross Unrealized Lossesthe securities in a continuous unrealized loss position for less than 12 months were investment grade and Other-Than-Temporary Losses
The following table presents the grossless than 20% below cost. These unrealized losses were primarily attributable to credit spreads that have widened since acquisition for corporate securities across various industry sectors, including finance and number of investmentinsurance as well as transportation. For securities aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position,for less than 12 months, the average fair value percentage below cost was approximately 3% as of March 31,June 30, 2011.
Fixed Maturity Securities In A Continuous Unrealized Loss Position For 12 Months Or More
Of the $354 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 75% of the unrealized losses were related to investment grade securities as of June 30, 2011. These unrealized losses were attributable to the widening of credit spreads for these securities since acquisition, primarily associated with corporate securities in the finance and insurance sector as well as mortgaged-back and asset-backed securities. The average fair value percentage below cost for these securities was approximately 8% as of June 30, 2011. See below for additional discussion related to fixed maturity securities that have been in a continuous loss position for 12 months or more with a fair value that was more than 20% below cost.
The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by asset class as of June 30, 2011:
Less than 20% | 20% to 50% | Greater than 50% | ||||||||||||||||||||||||||||||||||
(Dollar amounts in | Gross unrealized losses | % of total gross unrealized losses | Number of securities | Gross unrealized losses | % of total gross unrealized losses | Number of securities | Gross unrealized losses | % of total gross unrealized losses | Number of securities | |||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||
Less than 12 months: | ||||||||||||||||||||||||||||||||||||
Investment grade | $ | (278 | ) | 19 | % | 1,143 | $ | (24 | ) | 2 | % | 8 | $ | — | — | % | — | |||||||||||||||||||
Below investment grade | (11 | ) | 1 | 50 | (1 | ) | — | 3 | (1 | ) | — | 6 | ||||||||||||||||||||||||
Total | (289 | ) | 20 | 1,193 | (25 | ) | 2 | 11 | (1 | ) | — | 6 | ||||||||||||||||||||||||
12 months or more: | ||||||||||||||||||||||||||||||||||||
Investment grade | (279 | ) | 19 | 437 | (246 | ) | 16 | 128 | (63 | ) | 4 | 24 | ||||||||||||||||||||||||
Below investment grade (1) | (86 | ) | 6 | 149 | (293 | ) | 20 | 155 | (195 | ) | 13 | 109 | ||||||||||||||||||||||||
Total | (365 | ) | 25 | 586 | (539 | ) | 36 | 283 | (258 | ) | 17 | 133 | ||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||||||
Less than 12 months: | ||||||||||||||||||||||||||||||||||||
Investment grade | (1 | ) | — | 24 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Below investment grade | (1 | ) | — | 22 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Total | (2 | ) | — | 46 | — | — | — | — | — | — | ||||||||||||||||||||||||||
12 months or more: | ||||||||||||||||||||||||||||||||||||
Investment grade | (1 | ) | — | 11 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Below investment grade | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Total | (1 | ) | — | 11 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Total | $ | (657 | ) | 45 | % | 1,836 | $ | (564 | ) | 38 | % | 294 | $ | (259 | ) | 17 | % | 139 | ||||||||||||||||||
|
Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Fair value | Gross unrealized losses | % of total gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | % of total gross unrealized losses | Number of securities | ||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||
Tax-exempt | $ | 184 | $ | (78 | ) | 6 | % | 55 | $ | — | $ | — | — | % | — | |||||||||||||||||
Government—non-U.S. | 2 | (1 | ) | — | 1 | — | — | — | — | |||||||||||||||||||||||
U.S. corporate | 77 | (30 | ) | 2 | 4 | 14 | (26 | ) | 2 | 1 | ||||||||||||||||||||||
Corporate—non-U.S. | 66 | (20 | ) | 2 | 4 | — | — | — | — | |||||||||||||||||||||||
Structured securities: | ||||||||||||||||||||||||||||||||
Residential mortgage-backed | 56 | (23 | ) | 2 | 21 | 12 | (27 | ) | 2 | 14 | ||||||||||||||||||||||
Commercial mortgage-backed | 80 | (30 | ) | 2 | 9 | 2 | (3 | ) | — | 5 | ||||||||||||||||||||||
Other asset-backed | 4 | (1 | ) | — | 1 | 1 | (1 | ) | — | 1 | ||||||||||||||||||||||
Total structured securities | 140 | (54 | ) | 4 | 31 | 15 | (31 | ) | 2 | 20 | ||||||||||||||||||||||
Total | $ | 469 | $ | (183 | ) | 14 | % | 95 | $ | 29 | $ | (57 | ) | 4 | % | 21 | ||||||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Below Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Fair value | Gross unrealized losses | % of total gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | % of total gross unrealized losses | Number of securities | ||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||
Tax-exempt | $ | — | $ | — | — | % | — | $ | — | $ | — | — | % | — | ||||||||||||||||||
U.S. corporate | 14 | (6 | ) | — | 2 | — | — | — | — | |||||||||||||||||||||||
Structured securities: | ||||||||||||||||||||||||||||||||
Residential mortgage-backed | 342 | (168 | ) | 13 | 124 | 82 | (184 | ) | 14 | 81 | ||||||||||||||||||||||
Commercial mortgage-backed | 61 | (22 | ) | 2 | 23 | 17 | (33 | ) | 3 | 16 | ||||||||||||||||||||||
Other asset-backed | 100 | (53 | ) | 4 | 5 | 11 | (12 | ) | 1 | 2 | ||||||||||||||||||||||
Total structured securities | 503 | (243 | ) | 19 | 152 | 110 | (229 | ) | 18 | 99 | ||||||||||||||||||||||
Total | $ | 517 | $ | (249 | ) | 19 | % | 154 | $ | 110 | $ | (229 | ) | 18 | % | 99 | ||||||||||||||||
The securities less than 20% below cost were primarily attributable to credit spreads that have widened since acquisition for certain mortgage-backed and asset-backed securities and corporateFor all securities in the finance and insurance sector.
Concentration of Gross Unrealized Losses and Other-Than-Temporary Losses by Sector
The following table presents the concentration of grossan unrealized losses by sector as of March 31, 2011:
Investment grade | Below investment grade | |||||||||||||||
(Amounts in millions) | Gross unrealized losses | % of gross unrealized losses | Gross unrealized losses | % of gross unrealized losses | ||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | (40 | ) | 3 | % | $ | — | — | % | |||||||
Tax-exempt | (115 | ) | 8 | (2 | ) | — | ||||||||||
Government—non-U.S. | (7 | ) | 1 | — | — | |||||||||||
U.S. corporate | (360 | ) | 24 | (30 | ) | 2 | ||||||||||
Corporate—non-U.S. | (158 | ) | 11 | (14 | ) | 1 | ||||||||||
Residential mortgage-backed | (95 | ) | 6 | (356 | ) | 24 | ||||||||||
Commercial mortgage-backed | (93 | ) | 6 | (115 | ) | 8 | ||||||||||
Other asset-backed | (22 | ) | 1 | (70 | ) | 5 | ||||||||||
Subtotal, fixed maturity securities | (890 | ) | 60 | (587 | ) | 40 | ||||||||||
Equity securities | (2 | ) | — | (1 | ) | — | ||||||||||
Total | $ | (892 | ) | 60 | % | $ | (588 | ) | 40 | % | ||||||
While certain securities included in the preceding tables were considered other-than-temporarily impaired,loss position, we expect to recover the new amortized cost based on our estimate of cash flows to be collected. We do not intend to sell and it is not more likely than not that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.
DespiteTax-Exempt Securities
As indicated in the considerabletable above, $78 million of gross unrealized losses were related to tax-exempt securities that have been in a continuous unrealized loss position for more than 12 months and were more than 20% below cost. The unrealized losses for tax-exempt securities represent municipal bonds that were diversified by state as well as municipality or political subdivision within those states. Of these tax-exempt securities, the average unrealized loss was approximately $1 million which represented an average of 30% below cost. The unrealized losses primarily related to widening of credit spreads on these securities since acquisition as a result of higher risk premiums being attributed to these securities from uncertainty in many political subdivisions related to special revenues supporting these obligations as well as certain securities having longer duration that may be viewed as less desirable in the current market place. Additionally, the fair value of certain of these securities has been negatively impacted as a result of having certain bond insurers associated with the security. In our analysis of impairment for these securities, we expect to recover our amortized cost from the cash flows of the underlying securities before any guarantee support. However, the existence of these guarantees may negatively impact the value of the debt security in certain instances. We performed an analysis of these securities and rigor employedthe underlying activities that are expected to support the cash flows and determined we expect to recover our amortized cost.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Corporate Debt Securities
The following tables present the concentration of gross unrealized losses and fair values related to corporate debt fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by industry as of June 30, 2011:
Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Fair value | Gross unrealized losses | % of total gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | % of total gross unrealized losses | Number of securities | ||||||||||||||||||||||||
Industry: | ||||||||||||||||||||||||||||||||
Finance and insurance | $ | 139 | $ | (49 | ) | 4 | % | 7 | $ | — | $ | — | — | % | — | |||||||||||||||||
Transportation | — | — | — | — | 14 | (26 | ) | 2 | 1 | |||||||||||||||||||||||
Other | 4 | (1 | ) | — | 1 | — | — | — | — | |||||||||||||||||||||||
Total | $ | 143 | $ | (50 | ) | 4 | % | 8 | $ | 14 | $ | (26 | ) | 2 | % | 1 | ||||||||||||||||
Below Investment Grade | ||||||||||||||||||||||||||||||||
20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Fair value | Gross unrealized losses | % of total gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | % of total gross unrealized losses | Number of securities | ||||||||||||||||||||||||
Industry: | ||||||||||||||||||||||||||||||||
Finance and insurance | $ | 14 | $ | (6 | ) | — | % | 2 | $ | — | $ | — | — | % | — | |||||||||||||||||
Consumer – cyclical | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Transportation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | $ | 14 | $ | (6 | ) | — | % | 2 | $ | — | $ | — | — | % | — | |||||||||||||||||
Of the total unrealized losses of $82 million for corporate fixed maturity securities presented in the preceding tables, $55 million, or 67%, of the unrealized losses related to issuers in the finance and insurance sector that were 26% below cost on average. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our structuredexamination of these securities, it is at least reasonably possiblewe considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the underlying collateralunrealized losses on these debt securities represented temporary impairments as of June 30, 2011. Of the $55 million of unrealized losses related to the finance and insurance industry, $28 million related to financial hybrid securities on which a debt impairment model was employed. Most of our hybrid securities retained a credit rating of investment grade. The fair value of these investments will perform worse than current market expectations. Such eventshybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions and continued but diminishing risk that income payments may leadbe deferred. We continue to adverse changesreceive our contractual payments and expect to fully recover our amortized cost.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As presented in the table above, we also had one security related to the transportation industry that had a total unrealized loss of $26 million that was 65% below cost as of June 30, 2011. The issuer of this security has diverse holdings in long-term franchises on toll roads, bridges and tunnels in economically important regions. Our security holding represented a senior interest that benefits from structural enhancements that protect our rights to the issuer’s cash flows. In our evaluation of the issuer, we believed there were sufficient assets and cash flows onfor the issuer to continue to make their contractual payments and that resulted in our holdingsconclusion that we will recover the amortized cost despite the fair value of asset-backed and mortgage-backed securities and potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. this security being greater than 50% below cost.
We expect that our investments in corporate securities will continue to perform in accordance with our conclusionsexpectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities.
GENWORTH FINANCIAL, INC.securities in the future.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Structured Securities
The following table presentsOf the concentration$557 million of gross unrealized losses related to structured securities as of March 31, 2011:
Investment grade | Below investment grade | |||||||||||||||
(Amounts in millions) | Gross unrealized losses | % of gross unrealized losses | Gross unrealized losses | % of gross unrealized losses | ||||||||||||
Structured securities: | ||||||||||||||||
Residential mortgage-backed | $ | (95 | ) | 13 | % | $ | (356 | ) | 48 | % | ||||||
Commercial mortgage-backed | (93 | ) | 12 | (115 | ) | 15 | ||||||||||
Other asset-backed | (22 | ) | 3 | (70 | ) | 9 | ||||||||||
Total structured securities | $ | (210 | ) | 28 | % | $ | (541 | ) | 72 | % | ||||||
Most of the structured securitiesthat have been in an unrealized loss position for 12 months or more. Givenmore and were more than 20% below cost, $192 million related to other-than-temporarily-impaired securities where the unrealized losses represented the non-credit portion of the impairment. The extent and duration of the unrealized loss position on our structured securities is due to the ongoing concern and uncertainty about the housingresidential and commercial real estate market and unemployment, the fair value of these securities has declined due toresulting in credit spreads that have widened since acquisition. We examinedAdditionally, the fair value of certain structured securities has been significantly impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the housing market.
While we considered the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of 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 developedinvoluntary prepayments and severity of losses, including recent trends in this information; ii) current payment status; iii) loan to collateral value ratios, as applicable; iv) vintage; and v) other underlying characteristics such as current financial condition.
We used our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. In doing so,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 identified certain securities whereconsider the non-credit portionrating of other-than-temporary impairments was recorded in OCI. Based onthe security as an indicator of the financial condition of the issuer, this evaluation, we determined that the unrealized lossesfactor does not have a significant impact on our mortgage-backed and asset-backed securities represented temporary impairments as of March 31, 2011.
Corporate Securities
The following table presents the concentration of gross unrealized losses related to corporate debt and equity securities by industry as of March 31, 2011:
Investment grade | Below investment grade | |||||||||||||||
(Amounts in millions) | Less than 12 months | 12 months or more | Less than 12 months | 12 months or more | ||||||||||||
Industry: | ||||||||||||||||
Finance and insurance | $ | (45 | ) | $ | (216 | ) | $ | (9 | ) | $ | (15 | ) | ||||
Utilities and energy | (64 | ) | (9 | ) | — | — | ||||||||||
Consumer—non-cyclical | (23 | ) | (7 | ) | — | (3 | ) | |||||||||
Consumer—cyclical | (4 | ) | (6 | ) | (1 | ) | (2 | ) | ||||||||
Capital goods | (6 | ) | (7 | ) | — | (7 | ) | |||||||||
Industrial | (15 | ) | (13 | ) | — | (2 | ) | |||||||||
Technology and communications | (19 | ) | (6 | ) | — | (2 | ) | |||||||||
Transportation | (3 | ) | (27 | ) | — | — | ||||||||||
Other | (33 | ) | (17 | ) | (2 | ) | (2 | ) | ||||||||
Total | $ | (212 | ) | $ | (308 | ) | $ | (12 | ) | $ | (33 | ) | ||||
A portion of the unrealized losses in the finance and insurance sector included debt securities where an other-than-temporary impairment was recorded in OCI. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of theseexpected
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
securities,cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we considered all available evidence, includingbelieve the issuers’ financial condition and current industry eventsguarantor will have sufficient assets to develop our conclusion onpay claims under the amount and timing offinancial 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 be collected. 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 these debteach of our structured securities represented temporary impairments as of March 31,June 30, 2011. A subset of
Despite the considerable analysis and rigor employed on our structured securities, issued by banks and other financial institutions represent investments in financial hybrid securities on which a debt impairment model was employed. The majority of hybrid securities retain a credit rating of investment grade and were issued by foreign financial institutions. The fair value ofit is at least reasonably possible that the hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuringunderlying collateral of these institutions,investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and continued but diminishing risk that income payments may be deferred.future write-downs within our portfolio of structured securities.
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, 2010:
Less than 12 months | 12 months or more | Total | Less than 12 months | 12 months or more | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses(1) | Number of securities | Fair value | Gross unrealized losses(2) | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses(1) | Number of securities | Fair value | Gross unrealized losses(2) | Number of securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description of Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 545 | $ | (8 | ) | 36 | $ | — | $ | — | — | $ | 545 | $ | (8 | ) | 36 | $ | 545 | $ | (8 | ) | 36 | $ | — | $ | — | — | $ | 545 | $ | (8 | ) | 36 | ||||||||||||||||||||||||||||||||||||||
Tax-exempt | 285 | (12 | ) | 101 | 244 | (101 | ) | 90 | 529 | (113 | ) | 191 | 285 | (12 | ) | 101 | 244 | (101 | ) | 90 | 529 | (113 | ) | 191 | ||||||||||||||||||||||||||||||||||||||||||||||||
Government—non-U.S. | 431 | (5 | ) | 69 | 21 | (1 | ) | 7 | 452 | (6 | ) | 76 | 431 | (5 | ) | 69 | 21 | (1 | ) | 7 | 452 | (6 | ) | 76 | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate | 3,615 | (125 | ) | 443 | 2,338 | (323 | ) | 191 | 5,953 | (448 | ) | 634 | 3,615 | (125 | ) | 443 | 2,338 | (323 | ) | 191 | 5,953 | (448 | ) | 634 | ||||||||||||||||||||||||||||||||||||||||||||||||
Corporate—non-U.S. | 2,466 | (53 | ) | 296 | 1,141 | (114 | ) | 102 | 3,607 | (167 | ) | 398 | 2,466 | (53 | ) | 296 | 1,141 | (114 | ) | 102 | 3,607 | (167 | ) | 398 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 461 | (23 | ) | 92 | 1,031 | (477 | ) | 416 | 1,492 | (500 | ) | 508 | 461 | (23 | ) | 92 | 1,031 | (477 | ) | 416 | 1,492 | (500 | ) | 508 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 177 | (8 | ) | 26 | 1,167 | (323 | ) | 225 | 1,344 | (331 | ) | 251 | 177 | (8 | ) | 26 | 1,167 | (323 | ) | 225 | 1,344 | (331 | ) | 251 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 401 | (2 | ) | 37 | 512 | (94 | ) | 53 | 913 | (96 | ) | 90 | 401 | (2 | ) | 37 | 512 | (94 | ) | 53 | 913 | (96 | ) | 90 | ||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal, fixed maturity securities | 8,381 | (236 | ) | 1,100 | 6,454 | (1,433 | ) | 1,084 | 14,835 | (1,669 | ) | 2,184 | 8,381 | (236 | ) | 1,100 | 6,454 | (1,433 | ) | 1,084 | 14,835 | (1,669 | ) | 2,184 | ||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 77 | (3 | ) | 48 | 5 | (1 | ) | 4 | 82 | (4 | ) | 52 | 77 | (3 | ) | 48 | 5 | (1 | ) | 4 | 82 | (4 | ) | 52 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 8,458 | $ | (239 | ) | 1,148 | $ | 6,459 | $ | (1,434 | ) | 1,088 | $ | 14,917 | $ | (1,673 | ) | 2,236 | $ | 8,458 | $ | (239 | ) | 1,148 | $ | 6,459 | $ | (1,434 | ) | 1,088 | $ | 14,917 | $ | (1,673 | ) | 2,236 | ||||||||||||||||||||||||||||||||||||
% Below cost—fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | $ | 8,359 | $ | (226 | ) | 1,076 | $ | 4,852 | $ | (418 | ) | 588 | $ | 13,211 | $ | (644 | ) | 1,664 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
20%-50% Below cost | 22 | (8 | ) | 18 | 1,428 | (652 | ) | 328 | 1,450 | (660 | ) | 346 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
>50% Below cost | — | (2 | ) | 6 | 174 | (363 | ) | 168 | 174 | (365 | ) | 174 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 8,381 | (236 | ) | 1,100 | 6,454 | (1,433 | ) | 1,084 | 14,835 | (1,669 | ) | 2,184 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
% Below cost—equity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | 72 | (2 | ) | 47 | 5 | (1 | ) | 4 | 77 | (3 | ) | 51 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
20%-50% Below cost | 5 | (1 | ) | 1 | — | — | — | 5 | (1 | ) | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total equity securities | 77 | (3 | ) | 48 | 5 | (1 | ) | 4 | 82 | (4 | ) | 52 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 8,458 | $ | (239 | ) | 1,148 | $ | 6,459 | $ | (1,434 | ) | 1,088 | $ | 14,917 | $ | (1,673 | ) | 2,236 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment grade | $ | 8,249 | $ | (231 | ) | 1,060 | $ | 4,850 | $ | (764 | ) | 683 | $ | 13,099 | $ | (995 | ) | 1,743 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Below investment grade(3) | 209 | (8 | ) | 88 | 1,609 | (670 | ) | 405 | 1,818 | (678 | ) | 493 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 8,458 | $ | (239 | ) | 1,148 | $ | 6,459 | $ | (1,434 | ) | 1,088 | $ | 14,917 | $ | (1,673 | ) | 2,236 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) | Amounts included $240 million of unrealized losses on other-than-temporarily impaired securities. |
(2) | Amounts included $243 million of unrealized losses on other-than-temporarily impaired securities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gross unrealized losses and number of 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, 2010:
Less than 20% | 20% to 50% | Greater than 50% | ||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Gross unrealized losses | % of total gross unrealized losses | Number of securities | Gross unrealized losses | % of total gross unrealized losses | Number of securities | Gross unrealized losses | % of total gross unrealized losses | Number of securities | |||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||
Less than 12 months: | ||||||||||||||||||||||||||||||||||||
Investment grade | $ | (222 | ) | 13 | % | 1,031 | $ | (7 | ) | 1 | % | 8 | $ | — | — | % | — | |||||||||||||||||||
Below investment grade | (4 | ) | — | 45 | (1 | ) | — | 10 | (2 | ) | — | 6 | ||||||||||||||||||||||||
Total | (226 | ) | 13 | 1,076 | (8 | ) | 1 | 18 | (2 | ) | — | 6 | ||||||||||||||||||||||||
12 months or more: | ||||||||||||||||||||||||||||||||||||
Investment grade | (330 | ) | 20 | 473 | (328 | ) | 20 | 166 | (105 | ) | 6 | 40 | ||||||||||||||||||||||||
Below investment grade (1) | (88 | ) | 5 | 115 | (324 | ) | 19 | 162 | (258 | ) | 16 | 128 | ||||||||||||||||||||||||
Total | (418 | ) | 25 | 588 | (652 | ) | 39 | 328 | (363 | ) | 22 | 168 | ||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||||||
Less than 12 months: | ||||||||||||||||||||||||||||||||||||
Investment grade | (1 | ) | — | 20 | (1 | ) | — | 1 | — | — | — | |||||||||||||||||||||||||
Below investment grade | (1 | ) | — | 27 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Total | (2 | ) | — | 47 | (1 | ) | — | 1 | — | — | — | |||||||||||||||||||||||||
12 months or more: | ||||||||||||||||||||||||||||||||||||
Investment grade | (1 | ) | — | 4 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Below investment grade | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Total | (1 | ) | — | 4 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Total | $ | (647 | ) | 38 | % | 1,715 | $ | (661 | ) | 40 | % | 347 | $ | (365 | ) | 22 | % | 174 | ||||||||||||||||||
Amounts that have been in a continuous loss position for 12 months or more included $213 million of unrealized losses on other-than-temporarily impaired securities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The scheduled maturity distribution of fixed maturity securities as of March 31,June 30, 2011 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 | Amortized cost or cost | Fair value | ||||||||||||
Due one year or less | $ | 2,360 | $ | 2,379 | $ | 2,831 | $ | 2,857 | ||||||||
Due after one year through five years | 11,966 | 12,248 | 11,766 | 12,103 | ||||||||||||
Due after five years through ten years | 9,324 | 9,678 | 9,570 | 10,031 | ||||||||||||
Due after ten years | 19,722 | 20,086 | 19,705 | 20,420 | ||||||||||||
Subtotal | 43,372 | 44,391 | 43,872 | 45,411 | ||||||||||||
Residential mortgage-backed | 4,897 | 4,600 | 5,252 | 4,983 | ||||||||||||
Commercial mortgage-backed | 3,841 | 3,756 | 3,767 | 3,721 | ||||||||||||
Other asset-backed | 2,324 | 2,251 | 2,172 | 2,106 | ||||||||||||
Total | $ | 54,434 | $ | 54,998 | $ | 55,063 | $ | 56,221 | ||||||||
As of March 31,June 30, 2011, $4,504$4,505 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.
As of March 31,June 30, 2011, securities issued by finance and insurance, utilities and energy, and consumer—non-cyclical industry groups represented approximately 23%22%, 22% and 11% of our domestic and foreign corporate fixed maturity securities portfolio, respectively. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States and internationally, and is not dependent on the economic stability of one particular region.
As of March 31,June 30, 2011, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.
(e) Commercial Mortgage Loans
Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of prepayments, amortization and allowance for loan losses.
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:
March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||
Retail | $ | 1,976 | 30 | % | $ | 1,974 | 29 | % | $ | 1,912 | 30 | % | $ | 1,974 | 29 | % | ||||||||||||||||
Office | 1,822 | 27 | 1,850 | 27 | 1,757 | 27 | 1,850 | 27 | ||||||||||||||||||||||||
Industrial | 1,745 | 26 | 1,788 | 26 | 1,753 | 27 | 1,788 | 26 | ||||||||||||||||||||||||
Apartments | 700 | 11 | 725 | 11 | 718 | 11 | 725 | 11 | ||||||||||||||||||||||||
Mixed use/other | 411 | 6 | 435 | 7 | 345 | 5 | 435 | 7 | ||||||||||||||||||||||||
Total principal balance | 6,654 | 100 | % | 6,772 | 100 | % | ||||||||||||||||||||||||||
Subtotal | 6,485 | 100 | % | 6,772 | 100 | % | ||||||||||||||||||||||||||
Unamortized balance of loan origination fees and costs | 4 | 5 | 4 | 5 | ||||||||||||||||||||||||||||
Allowance for losses | (58 | ) | (59 | ) | (57 | ) | (59 | ) | ||||||||||||||||||||||||
Total | $ | 6,600 | $ | 6,718 | $ | 6,432 | $ | 6,718 | ||||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||||||||||
Geographic region: | ||||||||||||||||||||||||||||||||
Pacific | $ | 1,746 | 26 | % | $ | 1,769 | 26 | % | ||||||||||||||||||||||||
South Atlantic | 1,577 | 24 | 1,583 | 23 | ||||||||||||||||||||||||||||
Middle Atlantic | 880 | 13 | 937 | 14 | ||||||||||||||||||||||||||||
East North Central | 603 | 9 | 612 | 9 | ||||||||||||||||||||||||||||
Mountain | 527 | 8 | 540 | 8 | ||||||||||||||||||||||||||||
New England | 480 | 7 | 482 | 7 | ||||||||||||||||||||||||||||
West North Central | 355 | 5 | 369 | 6 | ||||||||||||||||||||||||||||
West South Central | 305 | 5 | 297 | 4 | ||||||||||||||||||||||||||||
East South Central | 181 | 3 | 183 | 3 | ||||||||||||||||||||||||||||
Total principal balance | 6,654 | 100 | % | 6,772 | 100 | % | ||||||||||||||||||||||||||
Unamortized balance of loan origination fees and costs | 4 | 5 | ||||||||||||||||||||||||||||||
Allowance for losses | (58 | ) | (59 | ) | ||||||||||||||||||||||||||||
Total | $ | 6,600 | $ | 6,718 | ||||||||||||||||||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2011 | December 31, 2010 | |||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||||||
Geographic region: | ||||||||||||||||
South Atlantic | $ | 1,624 | 25 | % | $ | 1,583 | 23 | % | ||||||||
Pacific | 1,615 | 25 | 1,769 | 26 | ||||||||||||
Middle Atlantic | 865 | 13 | 937 | 14 | ||||||||||||
East North Central | 577 | 9 | 612 | 9 | ||||||||||||
Mountain | 516 | 8 | 540 | 8 | ||||||||||||
New England | 422 | 7 | 482 | 7 | ||||||||||||
West North Central | 349 | 5 | 369 | 6 | ||||||||||||
West South Central | 348 | 5 | 297 | 4 | ||||||||||||
East South Central | 169 | 3 | 183 | 3 | ||||||||||||
Subtotal | 6,485 | 100 | % | 6,772 | 100 | % | ||||||||||
Unamortized balance of loan origination fees and costs | 4 | 5 | ||||||||||||||
Allowance for losses | (57 | ) | (59 | ) | ||||||||||||
Total | $ | 6,432 | $ | 6,718 | ||||||||||||
The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:
March 31, 2011 | June 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 31 – 60 days past due | 61 – 90 days past due | Greater than 90 days past due | Total past due | Current | Total | 31 – 60 days past due | 61 – 90 days past due | Greater than 90 days past due | Total past due | Current | Total | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | 3 | $ | 3 | $ | — | $ | 6 | $ | 1,970 | $ | 1,976 | $ | 9 | $ | — | $ | 5 | $ | 14 | $ | 1,898 | $ | 1,912 | ||||||||||||||||||||||||
Office | — | — | 10 | 10 | 1,812 | 1,822 | 4 | — | 18 | 22 | 1,735 | 1,757 | ||||||||||||||||||||||||||||||||||||
Industrial | — | 4 | 12 | 16 | 1,729 | 1,745 | 2 | — | 10 | 12 | 1,741 | 1,753 | ||||||||||||||||||||||||||||||||||||
Apartments | — | — | — | — | 700 | 700 | — | — | — | — | 718 | 718 | ||||||||||||||||||||||||||||||||||||
Mixed use/other | — | — | — | — | 411 | 411 | — | — | — | — | 345 | 345 | ||||||||||||||||||||||||||||||||||||
Total principal balance | $ | 3 | $ | 7 | $ | 22 | $ | 32 | $ | 6,622 | $ | 6,654 | ||||||||||||||||||||||||||||||||||||
Total recorded investment | $ | 15 | $ | — | $ | 33 | $ | 48 | $ | 6,437 | $ | 6,485 | ||||||||||||||||||||||||||||||||||||
% of total commercial mortgage loans | — | % | — | % | — | % | — | % | 100 | % | 100 | % | — | % | — | % | 1 | % | 1 | % | 99 | % | 100 | % | ||||||||||||||||||||||||
December 31, 2010 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 31 – 60 days past due | 61 – 90 days past due | Greater than 90 days past due | Total past due | Current | Total | 31 – 60 days past due | 61 – 90 days past due | Greater than 90 days past due | Total past due | Current | Total | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | — | $ | — | $ | — | $ | — | $ | 1,974 | $ | 1,974 | $ | — | $ | — | $ | — | $ | — | $ | 1,974 | $ | 1,974 | ||||||||||||||||||||||||
Office | — | — | 12 | 12 | 1,838 | 1,850 | — | — | 12 | 12 | 1,838 | 1,850 | ||||||||||||||||||||||||||||||||||||
Industrial | — | 6 | 27 | 33 | 1,755 | 1,788 | — | 6 | 27 | 33 | 1,755 | 1,788 | ||||||||||||||||||||||||||||||||||||
Apartments | — | — | — | — | 725 | 725 | — | — | — | — | 725 | 725 | ||||||||||||||||||||||||||||||||||||
Mixed use/other | — | — | — | — | 435 | 435 | — | — | — | — | 435 | 435 | ||||||||||||||||||||||||||||||||||||
Total principal balance | $ | — | $ | 6 | $ | 39 | $ | 45 | $ | 6,727 | $ | 6,772 | ||||||||||||||||||||||||||||||||||||
Total recorded investment | $ | — | $ | 6 | $ | 39 | $ | 45 | $ | 6,727 | $ | 6,772 | ||||||||||||||||||||||||||||||||||||
% of total commercial mortgage loans | — | % | — | % | 1 | % | 1 | % | 99 | % | 100 | % | — | % | — | % | 1 | % | 1 | % | 99 | % | 100 | % | ||||||||||||||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of March 31,June 30, 2011 and December 31, 2010, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During 2011 and 2010, we modified or extended 11 and 13, respectively, commercial mortgage loans with a total carrying value of $36 million and $98 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.
The following table sets forth the commercial mortgage loans on nonaccrual status by property type as of the dates indicated:
(Amounts in millions) | March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | ||||||||||||
Property type: | ||||||||||||||||
Retail | $ | — | $ | — | $ | 5 | $ | — | ||||||||
Office | 10 | 12 | 18 | 12 | ||||||||||||
Industrial | 12 | 27 | 10 | 27 | ||||||||||||
Apartments | — | — | — | — | ||||||||||||
Mixed use/other | — | — | — | — | ||||||||||||
|
| |||||||||||||||
Total principal balance | $ | 22 | $ | 39 | ||||||||||||
Total recorded investment | $ | 33 | $ | 39 | ||||||||||||
|
|
The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans for the period ended March 31:periods indicated:
(Amounts in millions) | 2011 | |||
Allowance for credit losses: | ||||
Beginning balance | $ | 59 | ||
Charge-offs | (1 | ) | ||
Recoveries | — | |||
Provision | — | |||
Ending balance | $ | 58 | ||
Ending allowance for individually impaired loans | $ | — | ||
Ending allowance for loans not individually impaired that were evaluated collectively for impairment | $ | 58 | ||
Principal balance: | ||||
Ending balance | $ | 6,654 | ||
Ending balance of individually impaired loans | $ | 14 | ||
Ending balance of loans not individually impaired that were evaluated collectively for impairment | $ | 6,640 | ||
The following table presents the activity in the allowance for losses for the period ended March 31:
(Amounts in millions) | 2010 | Three months ended June 30, 2011 | Six months ended June 30, 2011 | |||||||||
Allowance for credit losses: | ||||||||||||
Beginning balance | $ | 48 | $ | 58 | $ | 59 | ||||||
Charge-offs | (4 | ) | (5 | ) | ||||||||
Recoveries | — | — | ||||||||||
Provision | 4 | 3 | 3 | |||||||||
Release | — | |||||||||||
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| |||||||||||
Ending balance | $ | 52 | $ | 57 | $ | 57 | ||||||
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| |||||||||||
Ending allowance for individually impaired loans | $ | — | $ | — | ||||||||
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Ending allowance for loans not individually impaired that were evaluated collectively for impairment | $ | 57 | $ | 57 | ||||||||
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Recorded investment: | ||||||||||||
Ending balance | $ | 6,485 | $ | 6,485 | ||||||||
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| |||||||||||
Ending balance of individually impaired loans | $ | 13 | $ | 13 | ||||||||
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Ending balance of loans not individually impaired that were evaluated collectively for impairment | $ | 6,472 | $ | 6,472 | ||||||||
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|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the activity in the allowance for losses for the periods indicated:
(Amounts in millions) | Three months ended June 30, 2010 | Six months ended June 30, 2010 | ||||||
Beginning balance | $ | 52 | $ | 48 | ||||
Provision(1) | 18 | 22 | ||||||
Release | — | — | ||||||
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| |||||
Ending balance | $ | 70 | $ | 70 | ||||
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(1) | Included $13 million related to held-for-sale commercial mortgage loans. |
The following tables set forth our individually impaired commercial mortgage loans by property type as of the dates indicated:
March 31, 2011 | June 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Recorded investment | Unpaid principal balance | Charge- offs | Related allowance | Average recorded investment | Interest income recognized | Recorded investment | Unpaid principal balance | Charge- offs | Related allowance | Average recorded investment | Interest income recognized | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | 1 | $ | 2 | $ | 1 | $ | — | $ | 1 | $ | — | $ | 3 | $ | 4 | $ | 1 | $ | — | $ | 2 | $ | — | ||||||||||||||||||||||||
Office | 9 | 10 | 1 | — | $ | 3 | — | 10 | 13 | 3 | — | $ | 10 | — | ||||||||||||||||||||||||||||||||||
Industrial | 4 | 6 | 2 | — | $ | 4 | — | — | — | — | — | $ | — | — | ||||||||||||||||||||||||||||||||||
Apartments | — | — | — | — | $ | — | — | — | — | — | — | $ | — | — | ||||||||||||||||||||||||||||||||||
Mixed use/other | — | — | — | — | $ | — | — | — | — | — | — | $ | — | — | ||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 14 | $ | 18 | $ | 4 | $ | — | $ | 3 | $ | — | $ | 13 | $ | 17 | $ | 4 | $ | — | $ | 6 | $ | — | ||||||||||||||||||||||||
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December 31, 2010 | ||||||||||||||||||||||||
(Amounts in millions) | Recorded investment | Unpaid principal balance | Charge- offs | Related allowance | Average recorded investment | Interest income recognized | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 5 | $ | 8 | $ | 3 | $ | — | $ | 2 | $ | — | ||||||||||||
Office | 6 | 8 | 2 | — | $ | 2 | — | |||||||||||||||||
Industrial | 19 | 24 | 5 | — | $ | 3 | — | |||||||||||||||||
Apartments | — | — | — | — | $ | — | — | |||||||||||||||||
Mixed use/other | — | — | — | — | $ | — | — | |||||||||||||||||
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Total | $ | 30 | $ | 40 | $ | 10 | $ | — | $ | 3 | $ | — | ||||||||||||
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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 mortgages 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
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, 2011 | ||||||||||||||||||||||||
(Amounts in millions) | 0% – 50% | 51% – 60% | 61% – 75% | 76% – 100% | Greater than 100% (1) | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 458 | $ | 247 | $ | 847 | $ | 322 | $ | 38 | $ | 1,912 | ||||||||||||
Office | 321 | 294 | 605 | 365 | 172 | 1,757 | ||||||||||||||||||
Industrial | 498 | 329 | 613 | 283 | 30 | 1,753 | ||||||||||||||||||
Apartments | 147 | 191 | 304 | 61 | 15 | 718 | ||||||||||||||||||
Mixed use/other | 83 | 40 | 72 | 140 | 10 | 345 | ||||||||||||||||||
Total recorded investment | $ | 1,507 | $ | 1,101 | $ | 2,441 | $ | 1,171 | $ | 265 | $ | 6,485 | ||||||||||||
% of total | 23 | % | 17 | % | 38 | % | 18 | % | 4 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio | 2.28 | 1.86 | 2.16 | 1.80 | 1.56 | 2.05 | ||||||||||||||||||
(1) | Included $13 million of impaired loans and $252 million of loans in good standing, with a total weighted-average loan-to-value of 119%, where borrowers continued to make timely payments and have no history of delinquencies or distress. |
December 31, 2010 | ||||||||||||||||||||||||
(Amounts in millions) | 0% – 50% | 51% – 60% | 61% – 75% | 76% – 100% | Greater than 100% (1) | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 477 | $ | 287 | $ | 805 | $ | 363 | $ | 42 | $ | 1,974 | ||||||||||||
Office | 320 | 327 | 612 | 446 | 145 | 1,850 | ||||||||||||||||||
Industrial | 431 | 361 | 625 | 284 | 87 | 1,788 | ||||||||||||||||||
Apartments | 99 | 172 | 321 | 133 | — | 725 | ||||||||||||||||||
Mixed use/other | 123 | 10 | 63 | 221 | 18 | 435 | ||||||||||||||||||
Total recorded investment | $ | 1,450 | $ | 1,157 | $ | 2,426 | $ | 1,447 | $ | 292 | $ | 6,772 | ||||||||||||
% of total | 22 | % | 17 | % | 36 | % | 21 | % | 4 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio | 2.24 | 1.99 | 1.79 | 2.42 | 0.75 | 2.01 | ||||||||||||||||||
(1) | Included $25 million of impaired loans and $267 million of loans in good standing, with a total weighted-average loan-to-value of 117%, where borrowers continued to make timely payments and have no history of delinquencies or distress. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth the average loan-to-value of commercial mortgage loans by property type as of the dates indicated:
March 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) | 0% – 50% | 51% – 60% | 61% – 75% | 76% – 100% | Greater than 100% | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 477 | $ | 268 | $ | 845 | $ | 347 | $ | 39 | $ | 1,976 | ||||||||||||
Office | 318 | 308 | 702 | 364 | 130 | 1,822 | ||||||||||||||||||
Industrial | 418 | 372 | 624 | 260 | 71 | 1,745 | ||||||||||||||||||
Apartments | 125 | 188 | 265 | 107 | 15 | 700 | ||||||||||||||||||
Mixed use/other | 99 | 19 | 143 | 141 | 9 | 411 | ||||||||||||||||||
Total | $ | 1,437 | $ | 1,155 | $ | 2,579 | $ | 1,219 | $ | 264 | $ | 6,654 | ||||||||||||
% of total | 22 | % | 17 | % | 39 | % | 18 | % | 4 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio | 2.24 | 1.98 | 2.42 | 1.83 | 1.02 | 2.14 | ||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
(Amounts in millions) | 0% – 50% | 51% – 60% | 61% – 75% | 76% – 100% | Greater than 100% | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 477 | $ | 287 | $ | 805 | $ | 363 | $ | 42 | $ | 1,974 | ||||||||||||
Office | 320 | 327 | 612 | 446 | 145 | 1,850 | ||||||||||||||||||
Industrial | 431 | 361 | 625 | 284 | 87 | 1,788 | ||||||||||||||||||
Apartments | 99 | 172 | 321 | 133 | — | 725 | ||||||||||||||||||
Mixed use/other | 123 | 10 | 63 | 221 | 18 | 435 | ||||||||||||||||||
Total | $ | 1,450 | $ | 1,157 | $ | 2,426 | $ | 1,447 | $ | 292 | $ | 6,772 | ||||||||||||
% of total | 22 | % | 17 | % | 36 | % | 21 | % | 4 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio | 2.24 | 1.99 | 1.79 | 2.42 | 0.75 | 2.01 | ||||||||||||||||||
The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:
March 31, 2011 | ||||||||||||||||||||||||
(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 | $ | 119 | $ | 309 | $ | 499 | $ | 522 | $ | 412 | $ | 1,861 | ||||||||||||
Office | 196 | 182 | 241 | 486 | 538 | 1,643 | ||||||||||||||||||
Industrial | 245 | 163 | 278 | 708 | 333 | 1,727 | ||||||||||||||||||
Apartments | 7 | 61 | 123 | 296 | 146 | 633 | ||||||||||||||||||
Mixed use/other | 47 | 18 | 11 | 77 | 69 | 222 | ||||||||||||||||||
Total | $ | 614 | $ | 733 | $ | 1,152 | $ | 2,089 | $ | 1,498 | $ | 6,086 | ||||||||||||
% of total | 10 | % | 12 | % | 19 | % | 34 | % | 25 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value | 86 | % | 71 | % | 68 | % | 60 | % | 51 | % | 63 | % | ||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2011 | ||||||||||||||||||||||||
(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 | $ | 92 | $ | 357 | $ | 412 | $ | 587 | $ | 352 | $ | 1,800 | ||||||||||||
Office | 194 | 135 | 268 | 432 | 553 | 1,582 | ||||||||||||||||||
Industrial | 242 | 226 | 316 | 596 | 355 | 1,735 | ||||||||||||||||||
Apartments | 12 | 91 | 79 | 301 | 168 | 651 | ||||||||||||||||||
Mixed use/other | 56 | 17 | 11 | 71 | 91 | 246 | ||||||||||||||||||
Total recorded investment | $ | 596 | $ | 826 | $ | 1,086 | $ | 1,987 | $ | 1,519 | $ | 6,014 | ||||||||||||
% of total | 10 | % | 14 | % | 18 | % | 33 | % | 25 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value | 84 | % | 72 | % | 66 | % | 60 | % | 51 | % | 63 | % | ||||||||||||
December 31, 2010 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Less than 1.00 | 1.00 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | Less than 1.00 | 1.00 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | 125 | $ | 317 | $ | 490 | $ | 512 | $ | 415 | $ | 1,859 | $ | 125 | $ | 317 | $ | 490 | $ | 512 | $ | 415 | $ | 1,859 | ||||||||||||||||||||||||
Office | 176 | 186 | 238 | 524 | 547 | 1,671 | 176 | 186 | 238 | 524 | 547 | 1,671 | ||||||||||||||||||||||||||||||||||||
Industrial | 260 | 166 | 292 | 698 | 346 | 1,762 | 260 | 166 | 292 | 698 | 346 | 1,762 | ||||||||||||||||||||||||||||||||||||
Apartments | 7 | 62 | 160 | 290 | 135 | 654 | 7 | 62 | 160 | 290 | 135 | 654 | ||||||||||||||||||||||||||||||||||||
Mixed use/other | 49 | 12 | 17 | 78 | 94 | 250 | 49 | 12 | 17 | 78 | 94 | 250 | ||||||||||||||||||||||||||||||||||||
Total | $ | 617 | $ | 743 | $ | 1,197 | $ | 2,102 | $ | 1,537 | $ | 6,196 | $ | 617 | $ | 743 | $ | 1,197 | $ | 2,102 | $ | 1,537 | $ | 6,196 | ||||||||||||||||||||||||
% of total | 10 | % | 12 | % | 19 | % | 34 | % | 25 | % | 100 | % | ||||||||||||||||||||||||||||||||||||
% of total recorded investment | 10 | % | 12 | % | 19 | % | 34 | % | 25 | % | 100 | % | ||||||||||||||||||||||||||||||||||||
Weighted-average loan-to-value | 90 | % | 71 | % | 68 | % | 62 | % | 50 | % | 64 | % | 90 | % | 71 | % | 68 | % | 62 | % | 50 | % | 64 | % | ||||||||||||||||||||||||
The following tables set forth the debt service coverage ratio for floating rate commercial mortgage loans by property type as of the dates indicated:
March 31, 2011 | June 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Less than 1.00 | 1.00 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | Less than 1.00 | 1.00 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | — | $ | — | $ | — | $ | 2 | $ | 113 | $ | 115 | $ | — | $ | — | $ | 1 | $ | — | $ | 111 | $ | 112 | ||||||||||||||||||||||||
Office | — | — | — | 9 | 170 | 179 | — | — | 8 | — | 167 | 175 | ||||||||||||||||||||||||||||||||||||
Industrial | 1 | 5 | — | 1 | 11 | 18 | 1 | — | — | 6 | 11 | 18 | ||||||||||||||||||||||||||||||||||||
Apartments | — | — | — | 29 | 38 | 67 | — | — | — | 29 | 38 | 67 | ||||||||||||||||||||||||||||||||||||
Mixed use/other | — | 4 | — | — | 185 | 189 | — | 4 | — | — | 95 | 99 | ||||||||||||||||||||||||||||||||||||
Total | $ | 1 | $ | 9 | $ | — | $ | 41 | $ | 517 | $ | 568 | ||||||||||||||||||||||||||||||||||||
Total recorded investment | $ | 1 | $ | 4 | $ | 9 | $ | 35 | $ | 422 | $ | 471 | ||||||||||||||||||||||||||||||||||||
% of total | — | % | 2 | % | — | % | 7 | % | 91 | % | 100 | % | — | % | 1 | % | 2 | % | 7 | % | 90 | % | 100 | % | ||||||||||||||||||||||||
Weighted-average loan-to-value | 28 | % | 58 | % | — | % | 69 | % | 77 | % | 76 | % | 47 | % | 77 | % | 26 | % | 77 | % | 79 | % | 77 | % | ||||||||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||||||
(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 | $ | — | $ | — | $ | — | $ | 2 | $ | 113 | $ | 115 | ||||||||||||||||||||||||||||||||||||
Office | — | — | — | 57 | 122 | 179 | ||||||||||||||||||||||||||||||||||||||||||
Industrial | 1 | 5 | — | 1 | 19 | 26 | ||||||||||||||||||||||||||||||||||||||||||
Apartments | — | 4 | — | 21 | 46 | 71 | ||||||||||||||||||||||||||||||||||||||||||
Mixed use/other | — | — | — | — | 185 | 185 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1 | $ | 9 | $ | — | $ | 81 | $ | 485 | $ | 576 | ||||||||||||||||||||||||||||||||||||
% of total | — | % | 2 | % | — | % | 14 | % | 84 | % | 100 | % | ||||||||||||||||||||||||||||||||||||
Weighted-average loan-to-value | 30 | % | 62 | % | — | % | 83 | % | 77 | % | 78 | % | ||||||||||||||||||||||||||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2010 | ||||||||||||||||||||||||
(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 | $ | — | $ | — | $ | — | $ | 2 | $ | 113 | $ | 115 | ||||||||||||
Office | — | — | — | 57 | 122 | 179 | ||||||||||||||||||
Industrial | 1 | 5 | — | 1 | 19 | 26 | ||||||||||||||||||
Apartments | — | 4 | — | 21 | 46 | 71 | ||||||||||||||||||
Mixed use/other | — | — | — | — | 185 | 185 | ||||||||||||||||||
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Total recorded investment | $ | 1 | $ | 9 | $ | — | $ | 81 | $ | 485 | $ | 576 | ||||||||||||
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% of total | — | % | 2 | % | — | % | 14 | % | 84 | % | 100 | % | ||||||||||||
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Weighted-average loan-to-value | 30 | % | 62 | % | — | % | 83 | % | 77 | % | 78 | % | ||||||||||||
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(f) Restricted Commercial Mortgage Loans Related To Securitization Entities
The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the dates indicated:
March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||
Retail | $ | 177 | 36 | % | $ | 182 | 36 | % | $ | 175 | 38 | % | $ | 182 | 36 | % | ||||||||||||||||
Industrial | 120 | 25 | 124 | 24 | 113 | 24 | 124 | 24 | ||||||||||||||||||||||||
Office | 105 | 22 | 117 | 23 | 101 | 22 | 117 | 23 | ||||||||||||||||||||||||
Apartments | 63 | 13 | 64 | 13 | 62 | 14 | 64 | 13 | ||||||||||||||||||||||||
Mixed use/other | 22 | 4 | 22 | 4 | 8 | 2 | 22 | 4 | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Total principal balance | 487 | 100 | % | 509 | 100 | % | ||||||||||||||||||||||||||
Subtotal | 459 | 100 | % | 509 | 100 | % | ||||||||||||||||||||||||||
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Allowance for losses | (2 | ) | (2 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Total | $ | 485 | $ | 507 | $ | 457 | $ | 507 | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||||||
Geographic region: | ||||||||||||||||||||||||||||||||
South Atlantic | $ | 176 | 36 | % | $ | 189 | 37 | % | $ | 160 | 35 | % | $ | 189 | 37 | % | ||||||||||||||||
Pacific | 88 | 18 | 90 | 18 | 77 | 17 | 90 | 18 | ||||||||||||||||||||||||
Middle Atlantic | 68 | 14 | 70 | 14 | 71 | 15 | 70 | 14 | ||||||||||||||||||||||||
East North Central | 50 | 10 | 51 | 10 | 48 | 10 | 51 | 10 | ||||||||||||||||||||||||
Mountain | 31 | 7 | 32 | 6 | 31 | 7 | 32 | 6 | ||||||||||||||||||||||||
East South Central | 31 | 7 | 32 | 6 | 30 | 7 | 32 | 6 | ||||||||||||||||||||||||
West North Central | 30 | 6 | 31 | 6 | 29 | 6 | 31 | 6 | ||||||||||||||||||||||||
West South Central | 12 | 2 | 13 | 3 | 12 | 3 | 13 | 3 | ||||||||||||||||||||||||
New England | 1 | — | 1 | — | 1 | — | 1 | — | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Total principal balance | 487 | 100 | % | 509 | 100 | % | ||||||||||||||||||||||||||
Subtotal | 459 | 100 | % | 509 | 100 | % | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Allowance for losses | (2 | ) | (2 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Total | $ | 485 | $ | 507 | $ | 457 | $ | 507 | ||||||||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Of our restricted commercial mortgage loans as of June 30, 2011, $457 million were current, $1 million were 61 to 90 days past due and $1 million were past due for more than 90 days and still accruing interest. As of March 31, 2011 and December 31, 2010, all restricted commercial mortgage loans were current and there were no restricted commercial mortgage loans on nonaccrual status.
Of the total carrying valueAs of restricted commercial mortgage loans as of March 31,June 30, 2011 and December 31, 2010, $485 million and $507 million, respectively, related to loans not individually impaired that were evaluated collectively for impairment.impairment were $458 million and $509 million, respectively, of the total recorded investment of restricted commercial mortgage loans of $459 million and $509 million, respectively. There was no provision for credit losses recorded during the three months ended March 31,June 30, 2011 or 2010 related to restricted commercial mortgage loans. There was no provision for credit losses recorded during the six months ended June 30, 2011 related to restricted commercial mortgage loans. A provision for credit losses of $2 million was recorded during the threesix months ended March 31,June 30, 2010 related to restricted commercial mortgage loans, which reflected our ending allowance for credit losses balance and was required upon consolidation of securitization entities as of January 1, 2010.
In evaluating the credit quality of restricted commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. The risks associated with restricted commercial
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
mortgage loans can typically be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.
The following tables set forth the average loan-to-value of restricted commercial mortgage loans by property type as of the dates indicated:
March 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) | 0% – 50% | 51% – 60% | 61% – 75% | 76% – 100% | Greater than 100% | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 146 | $ | 26 | $ | — | $ | 2 | $ | 3 | $ | 177 | ||||||||||||
Industrial | 105 | 8 | 4 | 2 | 1 | 120 | ||||||||||||||||||
Office | 88 | 7 | 5 | 3 | 2 | 105 | ||||||||||||||||||
Apartments | 35 | 9 | — | 19 | — | 63 | ||||||||||||||||||
Mixed use/other | 16 | 6 | — | — | — | 22 | ||||||||||||||||||
Total | $ | 390 | $ | 56 | $ | 9 | $ | 26 | $ | 6 | $ | 487 | ||||||||||||
% of total | 80 | % | 12 | % | 2 | % | 5 | % | 1 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio | 1.78 | 1.32 | 1.02 | 1.16 | 0.39 | 1.66 | ||||||||||||||||||
December 31, 2010 | June 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 0% – 50% | 51% – 60% | 61% – 75% | 76% – 100% | Greater than 100% | Total | 0% – 50% | 51% – 60% | 61% – 75% | 76% – 100% | Greater than 100% | Total | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | 141 | $ | 34 | $ | 1 | $ | 3 | $ | 3 | $ | 182 | $ | 147 | $ | 25 | $ | — | $ | — | $ | 3 | $ | 175 | ||||||||||||||||||||||||
Industrial | 108 | 8 | 4 | 2 | 2 | 124 | 97 | 8 | 6 | — | 2 | 113 | ||||||||||||||||||||||||||||||||||||
Office | 90 | 19 | 5 | 3 | — | 117 | 87 | 7 | 5 | 1 | 1 | 101 | ||||||||||||||||||||||||||||||||||||
Apartments | 35 | 9 | — | 20 | — | 64 | 34 | 9 | — | 19 | — | 62 | ||||||||||||||||||||||||||||||||||||
Mixed use/other | 17 | 5 | — | — | — | 22 | 8 | — | — | — | — | 8 | ||||||||||||||||||||||||||||||||||||
Total | $ | 391 | $ | 75 | $ | 10 | $ | 28 | $ | 5 | $ | 509 | ||||||||||||||||||||||||||||||||||||
Total recorded investment | $ | 373 | $ | 49 | $ | 11 | $ | 20 | $ | 6 | $ | 459 | ||||||||||||||||||||||||||||||||||||
% of total | 77 | % | 15 | % | 2 | % | 5 | % | 1 | % | 100 | % | 82 | % | 11 | % | 2 | % | 4 | % | 1 | % | 100 | % | ||||||||||||||||||||||||
Weighted-average debt service coverage ratio | 1.82 | 1.35 | 1.05 | 1.18 | 0.52 | 1.69 | 1.74 | 1.46 | 1.26 | 0.93 | 0.47 | 1.65 | ||||||||||||||||||||||||||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2010 | ||||||||||||||||||||||||
(Amounts in millions) | 0% – 50% | 51% – 60% | 61% – 75% | 76% – 100% | Greater than 100% | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 141 | $ | 34 | $ | 1 | $ | 3 | $ | 3 | $ | 182 | ||||||||||||
Industrial | 108 | 8 | 4 | 2 | 2 | 124 | ||||||||||||||||||
Office | 90 | 19 | 5 | 3 | — | 117 | ||||||||||||||||||
Apartments | 35 | 9 | — | 20 | — | 64 | ||||||||||||||||||
Mixed use/other | 17 | 5 | — | — | — | 22 | ||||||||||||||||||
Total recorded investment | $ | 391 | $ | 75 | $ | 10 | $ | 28 | $ | 5 | $ | 509 | ||||||||||||
% of total | 77 | % | 15 | % | 2 | % | 5 | % | 1 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio | 1.82 | 1.35 | 1.05 | 1.18 | 0.52 | 1.69 | ||||||||||||||||||
The following tables set forth the debt service coverage ratio for fixed rate restricted commercial mortgage loans by property type as of the dates indicated:
March 31, 2011 | June 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Less than 1.00 | 1.01 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | Less than 1.00 | 1.00 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | 14 | $ | 9 | $ | 43 | $ | 78 | $ | 33 | $ | 177 | $ | 7 | $ | 48 | $ | 66 | $ | 21 | $ | 33 | $ | 175 | ||||||||||||||||||||||||
Industrial | 16 | 5 | 22 | 44 | 33 | 120 | 20 | 24 | 27 | 11 | 31 | 113 | ||||||||||||||||||||||||||||||||||||
Office | 11 | 17 | 24 | 37 | 16 | 105 | 12 | 12 | 39 | 25 | 13 | 101 | ||||||||||||||||||||||||||||||||||||
Apartments | — | 24 | 12 | 18 | 9 | 63 | 12 | 10 | 20 | 15 | 5 | 62 | ||||||||||||||||||||||||||||||||||||
Mixed use/other | — | — | 7 | 10 | 5 | 22 | — | — | 3 | — | 5 | 8 | ||||||||||||||||||||||||||||||||||||
Total | $ | 41 | $ | 55 | $ | 108 | $ | 187 | $ | 96 | $ | 487 | ||||||||||||||||||||||||||||||||||||
Total recorded investment | $ | 51 | $ | 94 | $ | 155 | $ | 72 | $ | 87 | $ | 459 | ||||||||||||||||||||||||||||||||||||
% of total | 9 | % | 11 | % | 22 | % | 38 | % | 20 | % | 100 | % | 11 | % | 21 | % | 34 | % | 15 | % | 19 | % | 100 | % | ||||||||||||||||||||||||
Weighted-average loan-to-value | 63 | % | 55 | % | 41 | % | 39 | % | 31 | % | 42 | % | 63 | % | 39 | % | 37 | % | 43 | % | 31 | % | 40 | % | ||||||||||||||||||||||||
December 31, 2010 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Less than 1.00 | 1.01 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | Less than 1.00 | 1.00 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | 14 | $ | 6 | $ | 52 | $ | 77 | $ | 33 | $ | 182 | $ | 14 | $ | 6 | $ | 52 | $ | 77 | $ | 33 | $ | 182 | ||||||||||||||||||||||||
Industrial | 11 | 9 | 25 | 50 | 29 | 124 | 11 | 9 | 25 | 50 | 29 | 124 | ||||||||||||||||||||||||||||||||||||
Office | 14 | 14 | 23 | 45 | 21 | 117 | 14 | 14 | 23 | 45 | 21 | 117 | ||||||||||||||||||||||||||||||||||||
Apartments | — | 21 | 10 | 26 | 7 | 64 | — | 21 | 10 | 26 | 7 | 64 | ||||||||||||||||||||||||||||||||||||
Mixed use/other | — | — | 7 | 11 | 4 | 22 | — | — | 7 | 11 | 4 | 22 | ||||||||||||||||||||||||||||||||||||
Total | $ | 39 | $ | 50 | $ | 117 | $ | 209 | $ | 94 | $ | 509 | ||||||||||||||||||||||||||||||||||||
Total recorded investment | $ | 39 | $ | 50 | $ | 117 | $ | 209 | $ | 94 | $ | 509 | ||||||||||||||||||||||||||||||||||||
% of total | 8 | % | 10 | % | 23 | % | 41 | % | 18 | % | 100 | % | 8 | % | 10 | % | 23 | % | 41 | % | 18 | % | 100 | % | ||||||||||||||||||||||||
Weighted-average loan-to-value | 65 | % | 55 | % | 42 | % | 41 | % | 31 | % | 43 | % | 65 | % | 55 | % | 42 | % | 41 | % | 31 | % | 43 | % | ||||||||||||||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
There were no floating rate restricted commercial mortgage loans as of March 31,June 30, 2011 or December 31, 2010.
(g) Restricted Other Invested Assets Related To Securitization Entities
We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities whereby the changes in fair value are recorded in current period income.income (loss). The trading securities are comprised of asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables.
(5) Derivative Instruments
Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges��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.
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 | |||||||||||||||||||
(Amounts in millions) | Balance sheet classification | Fair value | Balance sheet classification | Fair value | ||||||||||||||||
March 31, 2011 | December 31, 2010 | March 31, 2011 | December 31, 2010 | |||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||
Interest rate swaps | Other invested assets | $ | 168 | $ | 222 | Other liabilities | $ | 106 | $ | 56 | ||||||||||
Inflation indexed swaps | Other invested assets | — | — | Other liabilities | 35 | 33 | ||||||||||||||
Foreign currency swaps | Other invested assets | 192 | 205 | Other liabilities | — | — | ||||||||||||||
Total cash flow hedges | 360 | 427 | 141 | 89 | ||||||||||||||||
Fair value hedges: | ||||||||||||||||||||
Interest rate swaps | Other invested assets | 77 | 95 | Other liabilities | 6 | 8 | ||||||||||||||
Foreign currency swaps | Other invested assets | 36 | 35 | Other liabilities | — | — | ||||||||||||||
Total fair value hedges | 113 | 130 | 6 | 8 | ||||||||||||||||
Total derivatives designated as hedges | 473 | 557 | 147 | 97 | ||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||||
Interest rate swaps | Other invested assets | 385 | 446 | Other liabilities | 20 | 74 | ||||||||||||||
Equity return swaps | Other invested assets | — | — | Other liabilities | 1 | 3 | ||||||||||||||
Interest rate swaps related to securitization entities | Restricted other invested assets | — | — | Other liabilities | 16 | 19 | ||||||||||||||
Interest rate swaptions | Other invested assets | — | — | Other liabilities | — | — | ||||||||||||||
Credit default swaps | Other invested assets | 11 | 11 | Other liabilities | 7 | 7 | ||||||||||||||
Credit default swaps related to securitization entities | Restricted other invested assets | — | — | Other liabilities | 120 | 129 | ||||||||||||||
Equity index options | Other invested assets | 32 | 33 | Other liabilities | — | 3 | ||||||||||||||
Financial futures | Other invested assets | — | — | Other liabilities | — | — | ||||||||||||||
Other foreign currency contracts | Other invested assets | — | — | Other liabilities | 8 | — | ||||||||||||||
Reinsurance embedded | Other assets | — | 1 | Other liabilities | — | — | ||||||||||||||
GMWB embedded derivatives | Reinsurance recoverable (2) | (7 | ) | (5 | ) | Policyholder account balances (3) | 69 | 121 | ||||||||||||
Total derivatives not designated as hedges | 421 | 486 | 241 | 356 | ||||||||||||||||
Total derivatives | $ | 894 | $ | 1,043 | $ | 388 | $ | 453 | ||||||||||||
Derivative assets | Derivative liabilities | |||||||||||||||||||
(Amounts in millions) | Balance sheet classification | Fair value | Balance sheet classification | Fair value | ||||||||||||||||
June 30, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||
Interest rate swaps | Other invested assets | $ | 264 | $ | 222 | Other liabilities | $ | 62 | $ | 56 | ||||||||||
Inflation indexed swaps | Other invested assets | — | — | Other liabilities | 61 | 33 | ||||||||||||||
Foreign currency swaps | Other invested assets | — | 205 | Other liabilities | — | — | ||||||||||||||
Total cash flow hedges | 264 | 427 | 123 | 89 | ||||||||||||||||
Fair value hedges: | ||||||||||||||||||||
Interest rate swaps | Other invested assets | 69 | 95 | Other liabilities | 4 | 8 | ||||||||||||||
Foreign currency swaps | Other invested assets | 46 | 35 | Other liabilities | — | — | ||||||||||||||
Total fair value hedges | 115 | 130 | 4 | 8 | ||||||||||||||||
Total derivatives designated as hedges | 379 | 557 | 127 | 97 | ||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||||
Interest rate swaps | Other invested assets | 386 | 446 | Other liabilities | 21 | 74 | ||||||||||||||
Equity return swaps | Other invested assets | 6 | — | Other liabilities | 1 | 3 | ||||||||||||||
Interest rate swaps related to securitization entities | Restricted other invested assets | — | — | Other liabilities | 18 | 19 | ||||||||||||||
Interest rate swaptions | Other invested assets | — | — | Other liabilities | — | — | ||||||||||||||
Credit default swaps | Other invested assets | 9 | 11 | Other liabilities | 9 | 7 | ||||||||||||||
Credit default swaps related to securitization entities | Restricted other invested assets | — | — | Other liabilities | 126 | 129 | ||||||||||||||
Equity index options | Other invested assets | 40 | 33 | Other liabilities | — | 3 | ||||||||||||||
Financial futures | Other invested assets | — | — | Other liabilities | — | — | ||||||||||||||
Other foreign currency contracts | Other invested assets | — | — | Other liabilities | 12 | — | ||||||||||||||
Reinsurance embedded derivatives (1) | Other assets | — | 1 | Other liabilities | 1 | — | ||||||||||||||
GMWB embedded derivatives | Reinsurance recoverable (2) | (5 | ) | (5 | ) | Policyholder account balances (3) | 113 | 121 | ||||||||||||
Total derivatives not designated as hedges | 436 | 486 | 301 | 356 | ||||||||||||||||
Total derivatives | $ | 815 | $ | 1,043 | $ | 428 | $ | 453 | ||||||||||||
(1) | Represents embedded derivatives associated with certain reinsurance agreements. |
(2) | Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities. |
(3) | Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements. The amounts recognized for derivative counterparty collateral retained by us was recorded in other invested assets with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us.
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
(Notional in millions) | Measurement | December 31, 2010 | Additions | Maturities/ terminations | March 31, 2011 | Measurement | December 31, 2010 | Additions | Maturities/ terminations | June 30, 2011 | ||||||||||||||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | $ | 12,355 | $ | 995 | $ | (3 | ) | $ | 13,347 | Notional | $ | 12,355 | $ | 995 | $ | (157 | ) | $ | 13,193 | ||||||||||||||||||
Inflation indexed swaps | Notional | 525 | 9 | — | 534 | Notional | 525 | 16 | — | 541 | ||||||||||||||||||||||||||||
Foreign currency swaps | Notional | 491 | — | — | 491 | Notional | 491 | — | (491 | ) | — | |||||||||||||||||||||||||||
Total cash flow hedges | 13,371 | 1,004 | (3 | ) | 14,372 | 13,371 | 1,011 | (648 | ) | 13,734 | ||||||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 1,764 | — | (326 | ) | 1,438 | Notional | 1,764 | — | (405 | ) | 1,359 | ||||||||||||||||||||||||||
Foreign currency swaps | Notional | 85 | — | — | 85 | Notional | 85 | — | — | 85 | ||||||||||||||||||||||||||||
Total fair value hedges | 1,849 | — | (326 | ) | 1,523 | 1,849 | — | (405 | ) | 1,444 | ||||||||||||||||||||||||||||
Total derivatives designated as hedges | 15,220 | 1,004 | (329 | ) | 15,895 | 15,220 | 1,011 | (1,053 | ) | 15,178 | ||||||||||||||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 7,681 | 35 | (1,275 | ) | 6,441 | Notional | 7,681 | 314 | (1,550 | ) | 6,445 | ||||||||||||||||||||||||||
Equity return swaps | Notional | 208 | 7 | — | 215 | Notional | 208 | 139 | — | 347 | ||||||||||||||||||||||||||||
Interest rate swaps related to securitization entities | Notional | 129 | — | (3 | ) | 126 | Notional | 129 | — | (6 | ) | 123 | ||||||||||||||||||||||||||
Interest rate swaptions | Notional | 200 | — | (200 | ) | — | Notional | 200 | — | (200 | ) | — | ||||||||||||||||||||||||||
Credit default swaps | Notional | 1,195 | 115 | (100 | ) | 1,210 | Notional | 1,195 | 115 | (100 | ) | 1,210 | ||||||||||||||||||||||||||
Credit default swaps related to securitization entities | Notional | 317 | — | — | 317 | Notional | 317 | — | — | 317 | ||||||||||||||||||||||||||||
Equity index options | Notional | 744 | 288 | (451 | ) | 581 | Notional | 744 | 521 | (480 | ) | 785 | ||||||||||||||||||||||||||
Financial futures | Notional | 3,937 | 1,372 | (1,806 | ) | 3,503 | Notional | 3,937 | 2,687 | (3,463 | ) | 3,161 | ||||||||||||||||||||||||||
Other foreign currency contracts | Notional | 521 | 185 | — | 706 | Notional | 521 | 185 | (535 | ) | 171 | |||||||||||||||||||||||||||
Reinsurance embedded derivatives | Notional | 72 | 12 | — | 84 | Notional | 72 | 89 | — | 161 | ||||||||||||||||||||||||||||
Total derivatives not designated as hedges | 15,004 | 2,014 | (3,835 | ) | 13,183 | 15,004 | 4,050 | (6,334 | ) | 12,720 | ||||||||||||||||||||||||||||
Total derivatives | $ | 30,224 | $ | 3,018 | $ | (4,164 | ) | $ | 29,078 | $ | 30,224 | $ | 5,061 | $ | (7,387 | ) | $ | 27,898 | ||||||||||||||||||||
(Number of policies) | Measurement | December 31, 2010 | Additions | Terminations | March 31, 2011 | Measurement | December 31, 2010 | Additions | Terminations | June 30, 2011 | ||||||||||||||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives | Policies | 49,566 | 675 | (654 | ) | 49,587 | Policies | 49,566 | 690 | (1,326 | ) | 48,930 |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Approximately $1.1 billion$125 million of notional value above is related to derivatives with counterparties that can be terminated at the option of the derivative counterparty and represented a net fair value asset of $195$1 million as of March 31,June 30, 2011.
Cash Flow Hedges
Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) pay U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure on liabilities denominated in foreign currencies; (v) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed-rate bond purchases and/or interest income; and (vi) other instruments to hedge the cash flows of various forecasted transactions.
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended March 31,June 30, 2011:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income from OCI | Classification of gain | Gain (loss) recognized in net income (1) | Classification of gain | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI | Classification of gain | Gain (loss) recognized in net income (loss) (1) | Classification of gain | ||||||||||||||||||||||
Interest rate swaps hedging assets | $ | (101 | ) | $ | (5 | ) | Net investment income | $ | (2 | ) | Net investment gains (losses) | $ | 113 | $ | (6 | ) | Net investment income | $ | 2 | Net investment gains (losses) | ||||||||||||
Interest rate swaps hedging liabilities | — | 1 | Interest expense | — | Net investment gains (losses) | |||||||||||||||||||||||||||
Foreign currency swaps | 3 | (1 | ) | Interest expense | — | Net investment gains (losses) | 1 | (4 | ) | Interest expense | — | Net investment gains (losses) | ||||||||||||||||||||
Total | $ | (98 | ) | $ | (6 | ) | $ | (2 | ) | $ | 114 | $ | (9 | ) | $ | 2 | ||||||||||||||||
(1) | Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended March 31,June 30, 2010:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income from OCI | Classification of gain | Gain (loss) recognized in net income(1) | Classification of gain | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI | Classification of gain | Gain (loss) recognized in net income (loss) (1) | Classification of gain | ||||||||||||||||||||||
Interest rate swaps hedging assets | $ | (36 | ) | $ | 4 | Net investment income | $ | (3 | ) | Net investment gains (losses) | $ | 599 | $ | 4 | Net investment income | $ | 15 | Net investment gains (losses) | ||||||||||||||
Interest rate swaps hedging assets | — | 1 | Net investment gains (losses) | — | Net investment gains (losses) | |||||||||||||||||||||||||||
Interest rate swaps hedging liabilities | (3 | ) | 1 | Interest expense | — | Net investment gains (losses) | ||||||||||||||||||||||||||
Foreign currency swaps | 1 | (2 | ) | Interest expense | — | Net investment gains (losses) | 6 | (2 | ) | Interest expense | — | Net investment gains (losses) | ||||||||||||||||||||
Total | $ | (35 | ) | $ | 3 | $ | (3 | ) | $ | 602 | $ | 3 | $ | 15 | ||||||||||||||||||
(1) | Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the six months ended June 30, 2011:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI | Classification of gain | Gain (loss) recognized in net income (loss) (1) | Classification of gain | |||||||||||
Interest rate swaps hedging assets | $ | 12 | $ | (11 | ) | Net investment income | $ | — | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities | — | 1 | Interest expense | — | Net investment gains (losses) | |||||||||||
Foreign currency swaps | 4 | (5 | ) | Interest expense | — | Net investment gains (losses) | ||||||||||
Total | $ | 16 | $ | (15 | ) | $ | — | |||||||||
(1) | Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the six months ended June 30, 2010:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI | Classification of gain | Gain (loss) recognized in net income (loss) (1) | Classification of gain | |||||||||||
Interest rate swaps hedging assets | $ | 563 | $ | 8 | Net investment income | $ | 12 | Net investment gains (losses) | ||||||||
Interest rate swaps hedging assets | — | 1 | Net investment gains (losses) | — | Net investment gains (losses) | |||||||||||
Interest rate swaps hedging liabilities | (3 | ) | 1 | Interest expense | — | Net investment gains (losses) | ||||||||||
Foreign currency swaps | 7 | (4 | ) | Interest expense | — | Net investment gains (losses) | ||||||||||
Total | $ | 567 | $ | 6 | $ | 12 | ||||||||||
(1) | Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The total of derivatives designated as cash flow hedges of $864$943 million, net of taxes, recorded in stockholders’ equity as of March 31,June 30, 2011 is expected to be reclassified to future net income (loss), concurrently with and primarily offsetting changes in interest expense and interest income on floating-rate instruments and interest income on future fixed-rate bond purchases. Of this amount, $18$23 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2045. No amounts were reclassified to net income (loss) during the threesix months ended March 31,June 30, 2011 in connection with forecasted transactions that were no longer considered probable of occurring.
Fair Value Hedges
Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income (loss). In addition, changes in the fair value attributable to the hedged
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
portion of the underlying instrument are reported in net income (loss). We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (iii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iv) other instruments to hedge various fair value exposures of investments.
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended March 31,June 30, 2011:
Derivative instrument | Hedged item | Derivative instrument | Hedged item | |||||||||||||||||||||||||||||||||||
(Amounts in millions) | Gain (loss) recognized in net income | Classification net income | Other impacts to net income | Classification of other impacts to net income | Gain (loss) recognized in net income | Classification | Gain (loss) recognized in net income (loss) | Classification net income | Other impacts to net income (loss) | Classification | Gain (loss) recognized in net income (loss) | Classification | ||||||||||||||||||||||||||
Interest rate swaps hedging assets | $ | 1 | Net investment gains (losses) | $ | (3 | ) | | Net investment income | | $ | (1 | ) | Net investment gains (losses) | $ | 1 | Net investment gains (losses) | $ | (2 | ) | Net investment income | $ | (1 | ) | Net investment gains (losses) | ||||||||||||||
Interest rate swaps hedging liabilities | (22 | ) | Net investment gains (losses) | 20 | Interest credited | 22 | Net investment gains (losses) | (7 | ) | Net investment gains (losses) | 17 | Interest credited | 7 | Net investment gains (losses) | ||||||||||||||||||||||||
Foreign currency swaps | — | Net investment gains (losses) | 1 | Interest credited | (1 | ) | Net investment gains (losses) | 11 | Net investment gains (losses) | — | Interest credited | (11 | ) | Net investment gains (losses) | ||||||||||||||||||||||||
Total | $ | (21 | ) | $ | 18 | $ | 20 | $ | 5 | $ | 15 | $ | (5 | ) | ||||||||||||||||||||||||
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended June 30, 2010:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) | Gain (loss) recognized in net income (loss) | Classification | Other impacts to net income (loss) | Classification | Gain (loss) recognized in net income (loss) | Classification | ||||||||||||
Interest rate swaps hedging assets | $ | 1 | Net investment gains (losses) | $ | (3 | ) | Net investment income | $ | (1 | ) | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities | (6 | ) | Net investment gains (losses) | 25 | Interest credited | 6 | Net investment gains (losses) | |||||||||||
Foreign currency swaps | (2 | ) | Net investment gains (losses) | 1 | Interest credited | 2 | Net investment gains (losses) | |||||||||||
Total | $ | (7 | ) | $ | 23 | $ | 7 | |||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the threesix months ended March 31,June 30, 2011:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) | Gain (loss) recognized in net income (loss) | Classification net income | Other impacts to net income (loss) | Classification | Gain (loss) recognized in net income (loss) | Classification | ||||||||||||
Interest rate swaps hedging assets | $ | 2 | Net investment gains (losses) | $ | (5 | ) | Net investment income | $ | (2 | ) | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities | (29 | ) | Net investment gains (losses) | 37 | Interest credited | 29 | Net investment gains (losses) | |||||||||||
Foreign currency swaps | 11 | Net investment gains (losses) | 1 | Interest credited | (12 | ) | Net investment gains (losses) | |||||||||||
Total | $ | (16 | ) | $ | 33 | $ | 15 | |||||||||||
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the six months ended June 30, 2010:
Derivative instrument | Hedged item | Derivative instrument | Hedged item | |||||||||||||||||||||||||||||||||
(Amounts in millions) | Gain (loss) recognized in net income | Classification net income | Other impacts to net income | Classification impacts to net income | Gain (loss) recognized in net income | Classification | Gain (loss) recognized in net income (loss) | Classification | Other impacts to net income (loss) | Classification | Gain (loss) recognized in net income (loss) | Classification | ||||||||||||||||||||||||
Interest rate swaps hedging assets | $ | 1 | Net investment gains (losses) | $ | (3 | ) | Net investment income | $ | (1 | ) | Net investment gains (losses) | $ | 2 | Net investment gains (losses) | $ | (6 | ) | Net investment income | $ | (2 | ) | Net investment gains (losses) | ||||||||||||||
Interest rate swaps hedging liabilities | (1 | ) | Net investment gains (losses) | 25 | Interest credited | 1 | Net investment gains (losses) | (7 | ) | Net investment gains (losses) | 50 | Interest credited | 7 | Net investment gains (losses) | ||||||||||||||||||||||
Foreign currency swaps | (2 | ) | Net investment gains (losses) | 1 | Interest credited | 2 | Net investment gains (losses) | (4 | ) | Net investment gains (losses) | 2 | Interest credited | 4 | Net investment gains (losses) | ||||||||||||||||||||||
Total | $ | (2 | ) | $ | 23 | $ | 2 | $ | (9 | ) | $ | 46 | $ | 9 | ||||||||||||||||||||||
The difference between the gain (loss) recognized for the derivative instrument and the hedged item presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the net income (loss) effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged item. There were no amounts excluded from the measurement of effectiveness.
Derivatives Not Designated As Hedges
We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps, swaptions and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; and (vi) foreign currency forward contracts to mitigate currency risk associated with future dividends from certain foreign subsidiaries to our holding company.company; and (vii) equity index options and credit default swaps
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain products that are required to be bifurcated as embedded derivatives and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.
We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap.
The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Three months ended June 30, | Classification of gain (loss) recognized | |||||||||
(Amounts in millions) | 2011 | 2010 | ||||||||
Interest rate swaps | $ | 2 | $ | 63 | Net investment gains (losses) | |||||
Equity return swaps | (6 | ) | — | Net investment gains (losses) | ||||||
Interest rate swaps related to securitization entities | (4 | ) | (9 | ) | Net investment gains (losses) | |||||
Interest rate swaptions | — | 35 | Net investment gains (losses) | |||||||
Credit default swaps | — | (32 | ) | Net investment gains (losses) | ||||||
Credit default swaps related to securitization entities | (4 | ) | (46 | ) | Net investment gains (losses) | |||||
Equity index options | (9 | ) | 50 | Net investment gains (losses) | ||||||
Financial futures | 34 | 105 | Net investment gains (losses) | |||||||
Other foreign currency contracts | (4 | ) | 2 | Net investment gains (losses) | ||||||
Reinsurance embedded derivatives | (1 | ) | 2 | Net investment gains (losses) | ||||||
GMWB embedded derivatives | (33 | ) | (278 | ) | Net investment gains (losses) | |||||
Total derivatives not designated as hedges | $ | (25 | ) | $ | (108 | ) | ||||
The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Six months ended June 30, | Classification of gain (loss) recognized | |||||||||
(Amounts in millions) | 2011 | 2010 | ||||||||
Interest rate swaps | $ | 4 | $ | 57 | Net investment gains (losses) | |||||
Equity return swaps | (10 | ) | — | Net investment gains (losses) | ||||||
Interest rate swaps related to securitization entities | (3 | ) | (12 | ) | Net investment gains (losses) | |||||
Interest rate swaptions | — | 57 | Net investment gains (losses) | |||||||
Credit default swaps | 3 | (27 | ) | Net investment gains (losses) | ||||||
Credit default swaps related to securitization entities | 5 | (41 | ) | Net investment gains (losses) | ||||||
Equity index options | (28 | ) | 23 | Net investment gains (losses) | ||||||
Financial futures | (5 | ) | 72 | Net investment gains (losses) | ||||||
Other foreign currency contracts | (13 | ) | (1 | ) | Net investment gains (losses) | |||||
Reinsurance embedded derivatives | (1 | ) | 2 | Net investment gains (losses) | ||||||
GMWB embedded derivatives | 26 | (242 | ) | Net investment gains (losses) | ||||||
Total derivatives not designated as hedges | $ | (22 | ) | $ | (112 | ) | ||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides the pre-tax gain (loss) recognized in net income for the effects of derivatives not designated as hedges for the periods indicated:
Three months ended March 31, | Classification of gain (loss) recognized | |||||||||
(Amounts in millions) | 2011 | 2010 | ||||||||
Interest rate swaps | $ | 2 | $ | (6 | ) | Net investment gains (losses) | ||||
Equity return swaps | (4 | ) | — | Net investment gains (losses) | ||||||
Interest rate swaps related to securitization entities | 1 | (3 | ) | Net investment gains (losses) | ||||||
Interest rate swaptions | — | 22 | Net investment gains (losses) | |||||||
Credit default swaps | 3 | 5 | Net investment gains (losses) | |||||||
Credit default swaps related to securitization entities | 9 | 5 | Net investment gains (losses) | |||||||
Equity index options | (19 | ) | (27 | ) | Net investment gains (losses) | |||||
Financial futures | (39 | ) | (33 | ) | Net investment gains (losses) | |||||
Other foreign currency contracts | (9 | ) | (3 | ) | Net investment gains (losses) | |||||
GMWB embedded derivatives | 59 | 36 | Net investment gains (losses) | |||||||
Total derivatives not designated as hedges | $ | 3 | $ | (4 | ) | |||||
Derivative Counterparty Credit Risk
As of March 31,June 30, 2011 and December 31, 2010, net fair value assets by counterparty totaled $773$691 million and $888 million, respectively. As of March 31,June 30, 2011 and December 31, 2010, net fair value liabilities by counterparty totaled $191$186 million and $172 million, respectively. As of March 31,June 30, 2011 and December 31, 2010, we retained collateral of $745$704 million and $794 million, respectively, related to these agreements, including over collateralization of $53$86 million and $29 million, respectively, from certain counterparties. As of March 31,June 30, 2011 and December 31, 2010, we posted $67$23 million and $30 million, respectively, of collateral to derivative counterparties, including over collateralization of $16$1 million and $11 million, respectively. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.
Except for derivatives related to securitization entities, all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If the downgrade provisions had been triggered as of March 31,June 30, 2011 and December 31, 2010, we could have been allowed to claim up to $81$73 million and $123 million, respectively, from counterparties and required to disburse up to $4$20 million and $5 million, respectively. This represented the net fair value of gains and losses by counterparty, less available collateral held, and did not include any fair value gains or losses for derivatives related to securitization entities.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit Derivatives
We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction.
In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we consolidated in 2010. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity.
The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||||||||
Reference entity credit rating and maturity: | ||||||||||||||||||||||||
AAA | ||||||||||||||||||||||||
Matures after one year through five years | $ | 5 | $ | — | $ | — | $ | 5 | $ | — | $ | — | ||||||||||||
AA | ||||||||||||||||||||||||
Matures after one year through five years | 6 | — | — | 6 | — | — | ||||||||||||||||||
Matures after five years through ten years | 5 | — | — | 5 | — | — | ||||||||||||||||||
A | ||||||||||||||||||||||||
Matures after one year through five years | 37 | 1 | — | 37 | 1 | — | ||||||||||||||||||
Matures after five years through ten years | 10 | — | — | 5 | — | — | ||||||||||||||||||
BBB | ||||||||||||||||||||||||
Matures after one year through five years | 68 | 2 | — | 68 | 2 | �� | — | |||||||||||||||||
Matures after five years through ten years | 24 | — | — | 29 | — | — | ||||||||||||||||||
Total credit default swaps on single name reference entities | $ | 155 | $ | 3 | $ | — | $ | 155 | $ | 3 | $ | — | ||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:
June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||||||||
Reference entity credit rating and maturity: | ||||||||||||||||||||||||
AAA | ||||||||||||||||||||||||
Matures after one year through five years | $ | 5 | $ | — | $ | — | $ | 5 | $ | — | $ | — | ||||||||||||
AA | ||||||||||||||||||||||||
Matures after one year through five years | 6 | — | — | 6 | — | — | ||||||||||||||||||
Matures after five years through ten years | 5 | — | — | 5 | — | — | ||||||||||||||||||
A | ||||||||||||||||||||||||
Matures after one year through five years | 37 | 1 | — | 37 | 1 | — | ||||||||||||||||||
Matures after five years through ten years | 10 | — | — | 5 | — | — | ||||||||||||||||||
BBB | ||||||||||||||||||||||||
Matures after one year through five years | 68 | 1 | — | 68 | 2 | — | ||||||||||||||||||
Matures after five years through ten years | 24 | — | — | 29 | — | — | ||||||||||||||||||
Total credit default swaps on single name reference entities | $ | 155 | $ | 2 | $ | — | $ | 155 | $ | 3 | $ | — | ||||||||||||
The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:
March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||||||||||||||||||||||||||
Original index tranche attachment/detachment point and maturity: | ||||||||||||||||||||||||||||||||||||||||||||||||
9% – 12% matures after one year through five years (1) | $ | 300 | $ | 1 | $ | 3 | $ | 300 | $ | — | $ | 3 | $ | 300 | $ | 1 | $ | 4 | $ | 300 | $ | — | $ | 3 | ||||||||||||||||||||||||
10% – 15% matures after one year through five years(2) | 250 | 4 | — | 250 | 4 | — | 250 | 3 | — | 250 | 4 | — | ||||||||||||||||||||||||||||||||||||
12% – 22% matures after five years through ten years (3) | 248 | — | 4 | 248 | — | 4 | 248 | — | 5 | 248 | — | 4 | ||||||||||||||||||||||||||||||||||||
15% – 30% matures after five years through ten years(4) | 127 | 1 | — | 127 | 2 | — | 127 | — | — | 127 | 2 | — | ||||||||||||||||||||||||||||||||||||
Total credit default swap index tranches | 925 | 6 | 7 | 925 | 6 | 7 | 925 | 4 | 9 | 925 | 6 | 7 | ||||||||||||||||||||||||||||||||||||
Customized credit default swap index tranches related to securitization entities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Portion backing third-party borrowings maturing 2017 (5) | 17 | — | 7 | 17 | — | 8 | 17 | — | 7 | 17 | — | 8 | ||||||||||||||||||||||||||||||||||||
Portion backing our interest maturing 2017(6) | 300 | — | 113 | 300 | — | 121 | 300 | — | 119 | 300 | — | 121 | ||||||||||||||||||||||||||||||||||||
Total customized credit default swap index tranches related to securitization entities | 317 | — | 120 | 317 | — | 129 | 317 | — | 126 | 317 | — | 129 | ||||||||||||||||||||||||||||||||||||
Total credit default swaps on index tranches | $ | 1,242 | $ | 6 | $ | 127 | $ | 1,242 | $ | 6 | $ | 136 | $ | 1,242 | $ | 4 | $ | 135 | $ | 1,242 | $ | 6 | $ | 136 | ||||||||||||||||||||||||
(1) | The current attachment/detachment as of |
(2) | The current attachment/detachment as of |
The current attachment/detachment as of |
The current attachment/detachment as of |
(5) | Original notional value was $39 million. |
(6) | Original notional value was $300 million. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) Fair Value of Financial Instruments
Assets and liabilities that are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and cash equivalents, investment securities, separate accounts, securities held as collateral and derivative instruments. Other financial assets and liabilities—those not carried at fair value—are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The basis on which we estimate fair value is as follows:
Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates.
Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates.
Other invested assets.Based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the related instrument. Primarily represents short-term investments, limited partnerships accounted for under the cost method.
Long-term borrowings.Based on market quotes or comparable market transactions.
Non-recourse funding obligations. Based on the then current coupon, revalued based on the London Interbank Offered Rate (“LIBOR”) and current spread assumption based on commercially available data. The model is a floating rate coupon model using the spread assumption to derive the valuation.
Borrowings related to securitization entities.Based on market quotes or comparable market transactions.
Investment contracts.Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following represents the fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:
(Amounts in millions) | March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||||||
Notional amount | Carrying amount | Fair value | Notional amount | Carrying amount | Fair value | Notional amount | Carrying amount | Fair value | Notional amount | Carrying amount | Fair value | |||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | $ | (1) | $ | 6,600 | $ | 6,827 | $ | (1) | $ | 6,718 | $ | 6,896 | $ | (1) | $ | 6,432 | $ | 6,742 | $ | (1) | $ | 6,718 | $ | 6,896 | ||||||||||||||||||||||||
Restricted commercial mortgage loans | (1) | 485 | 529 | (1) | 507 | 554 | (1) | 457 | 506 | (1) | 507 | 554 | ||||||||||||||||||||||||||||||||||||
Other invested assets | (1) | 328 | 340 | (1) | 267 | 272 | (1) | 282 | 293 | (1) | 267 | 272 | ||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Long-term borrowings(2) | (1) | 5,347 | 5,320 | (1) | 4,952 | 4,928 | (1) | 4,755 | 4,766 | (1) | 4,952 | 4,928 | ||||||||||||||||||||||||||||||||||||
Non-recourse funding obligations(2) | (1) | 3,431 | 2,175 | (1) | 3,437 | 2,170 | (1) | 3,374 | 2,339 | (1) | 3,437 | 2,170 | ||||||||||||||||||||||||||||||||||||
Borrowings related to securitization entities | (1) | 431 | 452 | (1) | 443 | 467 | (1) | 394 | 417 | (1) | 443 | 467 | ||||||||||||||||||||||||||||||||||||
Investment contracts | (1) | 19,106 | 19,671 | (1) | 19,772 | 20,471 | (1) | 18,728 | 19,365 | (1) | 19,772 | 20,471 | ||||||||||||||||||||||||||||||||||||
Other firm commitments: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commitments to fund limited partnerships | 106 | — | — | 110 | — | — | 90 | — | — | 110 | — | — | ||||||||||||||||||||||||||||||||||||
Ordinary course of business lending commitments | 39 | — | — | 28 | — | — | 49 | — | — | 28 | — | — |
(1) | These financial instruments do not have notional amounts. |
(2) | See note 8 for additional information related to borrowings. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recurring Fair Value Measurements
We have fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.
Fixed maturity, equity and trading securities
The valuations of fixed maturity, equity and trading securities are determined using a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information.
We utilize certain third-party data providers when determining fair value. We consider information obtained from third-party pricing services as well as third-party broker provided prices, or broker quotes, in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by third-party pricing services and broker quotes, management determines the fair value of our investment securities after considering all relevant and available information. We also obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received and determine the appropriate fair value.
In general, we first obtain valuations from pricing services. If a price is not supplied by a pricing service, we will typically seek a broker quote. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for identical
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
securities are not readily observable and these securities are not typically valued by pricing services. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quote valuation is available, we determine fair value using internal models.
For pricing services, we obtain an understanding of the pricing methodologies and procedures for each type of instrument. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs.
For private fixed maturity securities, we utilize an internal model to determine fair value and utilize public bond spreads by sector, rating and maturity to develop the market rate that would be utilized for a similar public bond. We then add an additional premium to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We assign each security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds to determine whether the spreads utilized would be considered observable inputs for the private placement being valued. To determine the significance of unobservable inputs, we calculate the impact on the valuation from the unobservable input and will classify a security as Level 3 when the impact on the valuation exceeds 10%.
For broker quotes, we discussconsider the valuation methodology utilized by the third party but cannot typically obtain sufficient evidence to determine the valuation does not include significant unobservable inputs. Accordingly, we typically classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For remaining securities priced using internal models, we maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables summarize the primary sources considered when determining fair value of each class of fixed maturity securities as of the dates indicated:
March 31, 2011 | June 30, 2011 | |||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises: | ||||||||||||||||||||||||||||||||
Pricing services | $ | 3,401 | $ | — | $ | 3,401 | $ | — | $ | 3,669 | $ | — | $ | 3,669 | $ | — | ||||||||||||||||
Internal models | 13 | — | 12 | 1 | 13 | — | — | 13 | ||||||||||||||||||||||||
Total U.S. government, agencies and government-sponsored enterprises | 3,414 | — | 3,413 | 1 | 3,682 | — | 3,669 | 13 | ||||||||||||||||||||||||
Tax-exempt: | ||||||||||||||||||||||||||||||||
Pricing services | 928 | — | 928 | — | 865 | — | 865 | — | ||||||||||||||||||||||||
Total tax-exempt | 928 | — | 928 | — | 865 | — | 865 | — | ||||||||||||||||||||||||
Government—non-U.S.: | ||||||||||||||||||||||||||||||||
Pricing services | 2,348 | — | 2,348 | — | 2,378 | — | 2,378 | — | ||||||||||||||||||||||||
Internal models | 11 | — | 10 | 1 | 11 | — | 10 | 1 | ||||||||||||||||||||||||
Total government—non-U.S. | 2,359 | — | 2,358 | 1 | 2,389 | — | 2,388 | 1 | ||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||
Pricing services | 20,506 | — | 20,506 | — | 20,787 | — | 20,787 | — | ||||||||||||||||||||||||
Broker quotes | 232 | — | — | 232 | 277 | — | — | 277 | ||||||||||||||||||||||||
Internal models | 3,015 | — | 2,532 | 483 | 2,983 | — | 2,311 | 672 | ||||||||||||||||||||||||
Total U.S. corporate | 23,753 | — | 23,038 | 715 | 24,047 | — | 23,098 | 949 | ||||||||||||||||||||||||
Corporate—non-U.S.: | ||||||||||||||||||||||||||||||||
Pricing services | 12,081 | — | 12,081 | — | 12,568 | — | 12,568 | — | ||||||||||||||||||||||||
Broker quotes | 87 | — | — | 87 | 86 | — | — | 86 | ||||||||||||||||||||||||
Internal models | 1,769 | — | 1,654 | 115 | 1,774 | — | 1,489 | 285 | ||||||||||||||||||||||||
Total corporate—non-U.S. | 13,937 | — | 13,735 | 202 | 14,428 | — | 14,057 | 371 | ||||||||||||||||||||||||
Residential mortgage-backed: | ||||||||||||||||||||||||||||||||
Pricing services | 4,465 | — | 4,465 | — | 4,859 | — | 4,859 | — | ||||||||||||||||||||||||
Broker quotes | 64 | — | — | 64 | 63 | — | — | 63 | ||||||||||||||||||||||||
Internal models | 71 | — | — | 71 | 61 | — | — | 61 | ||||||||||||||||||||||||
Total residential mortgage-backed | 4,600 | — | 4,465 | 135 | 4,983 | — | 4,859 | 124 | ||||||||||||||||||||||||
Commercial mortgage-backed: | ||||||||||||||||||||||||||||||||
Pricing services | 3,714 | — | 3,714 | — | 3,678 | — | 3,678 | — | ||||||||||||||||||||||||
Broker quotes | 16 | — | — | 16 | 16 | — | — | 16 | ||||||||||||||||||||||||
Internal models | 26 | — | — | 26 | 27 | — | — | 27 | ||||||||||||||||||||||||
Total commercial mortgage-backed | 3,756 | — | 3,714 | 42 | 3,721 | — | 3,678 | 43 | ||||||||||||||||||||||||
Other asset-backed: | ||||||||||||||||||||||||||||||||
Pricing services | 2,083 | — | 1,985 | 98 | 1,840 | — | 1,840 | — | ||||||||||||||||||||||||
Broker quotes | 165 | — | — | 165 | 265 | — | — | 265 | ||||||||||||||||||||||||
Internal models | 3 | — | 3 | — | 1 | — | 1 | — | ||||||||||||||||||||||||
Total other asset-backed | 2,251 | — | 1,988 | 263 | 2,106 | — | 1,841 | 265 | ||||||||||||||||||||||||
Total fixed maturity securities | $ | 54,998 | $ | — | $ | 53,639 | $ | 1,359 | $ | 56,221 | $ | — | $ | 54,455 | $ | 1,766 | ||||||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2010 | ||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
U.S. government, agencies and government-sponsored enterprises: | ||||||||||||||||
Pricing services | $ | 3,688 | $ | — | $ | 3,688 | $ | — | ||||||||
Internal models | 17 | — | 6 | 11 | ||||||||||||
Total U.S. government, agencies and government-sponsored enterprises | 3,705 | — | 3,694 | 11 | ||||||||||||
Tax-exempt: | ||||||||||||||||
Pricing services | 1,030 | — | 1,030 | — | ||||||||||||
Total tax-exempt | 1,030 | — | 1,030 | — | ||||||||||||
Government—non-U.S.: | ||||||||||||||||
Pricing services | 2,357 | — | 2,357 | — | ||||||||||||
Internal models | 12 | — | 11 | 1 | ||||||||||||
Total government—non-U.S. | 2,369 | — | 2,368 | 1 | ||||||||||||
U.S. corporate: | ||||||||||||||||
Pricing services | 20,563 | — | 20,563 | — | ||||||||||||
Broker quotes | 235 | — | — | 235 | ||||||||||||
Internal models | 3,169 | — | 2,304 | 865 | ||||||||||||
Total U.S. corporate | 23,967 | — | 22,867 | 1,100 | ||||||||||||
Corporate—non-U.S.: | ||||||||||||||||
Pricing services | 11,584 | — | 11,584 | — | ||||||||||||
Broker quotes | 113 | — | — | 113 | ||||||||||||
Internal models | 1,801 | — | 1,546 | 255 | ||||||||||||
Total corporate—non-U.S. | 13,498 | — | 13,130 | 368 | ||||||||||||
Residential mortgage-backed: | ||||||||||||||||
Pricing services | 4,312 | — | 4,312 | — | ||||||||||||
Broker quotes | 72 | — | — | 72 | ||||||||||||
Internal models | 71 | — | — | 71 | ||||||||||||
Total residential mortgage-backed | 4,455 | — | 4,312 | 143 | ||||||||||||
Commercial mortgage-backed: | ||||||||||||||||
Pricing services | 3,693 | — | 3,693 | — | ||||||||||||
Broker quotes | 16 | — | — | 16 | ||||||||||||
Internal models | 34 | — | — | 34 | ||||||||||||
Total commercial mortgage-backed | 3,743 | — | �� | 3,693 | 50 | |||||||||||
Other asset-backed: | ||||||||||||||||
Pricing services | 2,241 | — | 2,143 | 98 | ||||||||||||
Broker quotes | 169 | — | — | 169 | ||||||||||||
Internal models | 6 | — | 5 | 1 | ||||||||||||
Total other asset-backed | 2,416 | — | 2,148 | 268 | ||||||||||||
Total fixed maturity securities | $ | 55,183 | $ | — | $ | 53,242 | $ | 1,941 | ||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables summarize the primary sources considered when determining fair value of equity securities as of the dates indicated:
March 31, 2011 | ||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services | $ | 268 | $ | 262 | $ | 6 | $ | — | ||||||||
Broker quotes | 6 | — | — | 6 | ||||||||||||
Internal models | 81 | — | — | 81 | ||||||||||||
Total equity securities | $ | 355 | $ | 262 | $ | 6 | $ | 87 | ||||||||
December 31, 2010 | June 30, 2011 | |||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Pricing services | $ | 245 | $ | 240 | $ | 5 | $ | — | $ | 268 | $ | 260 | $ | 8 | $ | — | ||||||||||||||||
Broker quotes | 6 | — | — | 6 | 6 | — | — | 6 | ||||||||||||||||||||||||
Internal models | 81 | — | — | 81 | 100 | — | — | 100 | ||||||||||||||||||||||||
Total equity securities | $ | 332 | $ | 240 | $ | 5 | $ | 87 | $ | 374 | $ | 260 | $ | 8 | $ | 106 | ||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
Pricing services | $ | 245 | $ | 240 | $ | 5 | $ | — | ||||||||||||||||||||||||
Broker quotes | 6 | — | — | 6 | ||||||||||||||||||||||||||||
Internal models | 81 | — | — | 81 | ||||||||||||||||||||||||||||
Total equity securities | $ | 332 | $ | 240 | $ | 5 | $ | 87 | ||||||||||||||||||||||||
The following tables summarize the primary sources considered when determining fair value of trading securities as of the dates indicated:
March 31, 2011 | ||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services | $ | 329 | $ | — | $ | 329 | $ | — | ||||||||
Internal models | 238 | — | — | 238 | ||||||||||||
Broker quotes | 100 | — | — | 100 | ||||||||||||
Total trading securities | $ | 667 | $ | — | $ | 329 | $ | 338 | ||||||||
June 30, 2011 | ||||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
Pricing services | $ | 316 | $ | — | $ | 316 | $ | — | ||||||||||||||||||||||||
Broker quotes | 291 | — | — | 291 | ||||||||||||||||||||||||||||
Total trading securities | $ | 607 | $ | — | $ | 316 | $ | 291 | ||||||||||||||||||||||||
December 31, 2010 | December 31, 2010 | |||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Pricing services | $ | 348 | $ | — | $ | 348 | $ | — | $ | 348 | $ | — | $ | 348 | $ | — | ||||||||||||||||
Broker quotes | 230 | — | — | 230 | 230 | — | — | 230 | ||||||||||||||||||||||||
Internal models | 99 | — | — | 99 | 99 | — | — | 99 | ||||||||||||||||||||||||
Total trading securities | $ | 677 | $ | — | $ | 348 | $ | 329 | $ | 677 | $ | — | $ | 348 | $ | 329 | ||||||||||||||||
Restricted other invested assets related to securitization entities
We have trading securities related to securitization entities that are classified as restricted other invested assets and are carried at fair value. The trading securities represent asset-backed securities. The valuation for trading securities is determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there is observable market information for transactions of the same or similar instruments and is provided to us by a third-party pricing service and is classified as Level 2. For certain securities that are not actively traded, we determine fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classify these valuations as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Securities lending and derivative counterparty collateral
The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.
Separate account assets
The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.
Derivatives
In determining the fair value of derivatives, we consider the counterparty collateral arrangements and rights of set-off when determining whether any incremental adjustment should be made for both the counterparty’s and our non-performance risk. As a result of these counterparty arrangements, we determined no adjustment for our non-performance risk was required to our derivative liabilities.
Interest rate swaps.The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2. For certain other swaps, there are features that provide an option to the counterparty to terminate the swap at specified dates and would be considered a significant unobservable input and results in the fair value measurement of the derivative being classified as Level 3.
Interest rate swaps related to securitization entities.The valuation of interest rate swaps related to securitization entities is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2.
Inflation indexed swaps. The valuation of inflation indexed swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and consumer price index, which are generally considered observable inputs, and results in the derivative being classified as Level 2.
Interest rate swaptions. The valuation of interest rate swaptions is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, which is generally considered an observable input, forward interest rate volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate volatility input, the derivative is classified as Level 3.
Foreign currency swaps. The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency exchange rates, both of which are considered an observable input, and results in the derivative being classified as Level 2.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit default swaps. We have both single name credit default swaps and index tranche credit default swaps. For single name credit default swaps, we utilize an income approach to determine fair value based on using current market information for the credit spreads of the reference entity, which is considered observable inputs based on the reference entities of our derivatives and results in these derivatives being classified as Level 2. For index tranche credit default swaps, we utilize an income approach that utilizes current market information related to credit spreads and expected defaults and losses associated with the reference entities that comprise the respective index associated with each derivative. There are significant unobservable inputs associated with the timing and amount of losses from the reference entities as well as the timing or amount of losses, if any, that will be absorbed by our tranche. Accordingly, the index tranche credit default swaps are classified as Level 3.
Credit default swaps related to securitization entities.Credit default swaps related to securitization entities represent customized index tranche credit default swaps and are valued using a similar methodology as described above for index tranche credit default swaps. We determine fair value of these credit default swaps after considering both the valuation methodology described above as well as the valuation provided by the derivative counterparty. In addition to the valuation methodology and inputs described for index tranche credit default swaps, these customized credit default swaps contain a feature that permits the securitization entity to provide the par value of underlying assets in the securitization entity to settle any losses under the credit default swap. The valuation of this settlement feature is dependent upon the valuation of the underlying assets and the timing and amount of any expected loss on the credit default swap, which is considered a significant unobservable input. Accordingly, these customized index tranche credit default swaps related to securitization entities are classified as Level 3.
Equity index options. We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rate volatility and time value component associated with the optionality in the derivative, which are considered significant unobservable inputs in most instances. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 33.
Financial futures. The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.
Equity return swaps.The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.
Other foreign currency contracts. We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, and foreign currency exchange rate volatility, foreign equity index volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate, and foreign currency exchange rate volatility input,and foreign equity index volatility inputs, the derivative is classified as Level 3. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reinsurance embedded derivatives
We have certain reinsurance agreements that result in a reinsurance counterparty holding assets for our benefit where this feature is considered an embedded derivative requiring bifurcation. As a result, we measure the embedded derivatives at fair value with changes in fair value being recorded in income.income (loss). Fair value is determined by comparing the fair value and cost basis of the underlying assets. The underlying assets are primarily comprised of highly rated investments and result in the fair value of the embedded derivatives being classified as Level 2.
GMWB embedded derivatives
We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. In addition to these inputs, we also consider risk and expense margins when determining the projected cash flows that would be determined by another market participant. While the risk and expense margins are considered in determining fair value, these inputs do not have a significant impact on the valuation.
For GMWB liabilities, non-performance risk is integrated into the discount rate. Prior to the third quarter of 2010, the discount rate was based on the swap curve, which incorporated the non-performance risk of our GMWB liabilities. Beginning in 2009, the swap curve dropped below the U.S. Treasury curve at certain points on the longer end of the curve, and in 2010, the points below the U.S. Treasury curve expanded to several points beyond 10 years. For these points on the curve, we utilized the U.S. Treasury curve as our discount rate through the second quarter of 2010. Beginning in the third quarter of 2010, we revised our discount rate to reflect market credit spreads that represent an adjustment for the non-performance risk of the GMWB liabilities. The credit spreads included in our discount rate range from 60 to 80 basis points over the most relevant points on the U.S. Treasury curve. As of March 31,June 30, 2011 and December 31, 2010, the impact of non-performance risk resulted in a lower fair value of our GMWB liabilities of $39 million and $44 million, respectively.million.
To determine the appropriate discount rate to reflect the non-performance risk of the GMWB liabilities, we evaluate the non-performance risk in our liabilities based on a hypothetical exit market transaction as there is no exit market for these types of liabilities. A hypothetical exit market can be viewed as a hypothetical transfer of the liability to another similarly rated insurance company which would closely resemble a reinsurance transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities.
For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected near-term equity market volatility with more significance being placed on projected and recent historical data.
Equity index and fund correlations are determined based on historical price observations for the fund and equity index.
For policyholder assumptions, we use our expected lapse, mortality and utilization assumptions and update these assumptions for our actual experience, as necessary. For our lapse assumption, we adjust our base lapse assumption by policy based on a combination of the policyholder’s current account value and GMWB benefit.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We classify the GMWB valuation as Level 3 based on having significant unobservable inputs. We evaluate the inputs and methodologies used to determine fair value based on how we expect a market participant would determine exit value. As stated above, there is no exit market or market participants for the GMWB embedded derivatives. Accordingly, we evaluate our inputs and resulting fair value based on a hypothetical exit market and hypothetical market participants. A hypothetical exit market could be viewed as a transaction that would closely resemble reinsurance. While reinsurance transactions for this type of product are not an observable input, we consider this type of hypothetical exit market, as appropriate, when evaluating our inputs and determining that our inputs are consistent with that of a hypothetical market participant.
Borrowings related to securitization entities
We record certain borrowings related to securitization entities at fair value. The fair value of these borrowings is determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determine fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may impact the valuation. After considering all relevant inputs, we determine fair value of the borrowings using the net valuation of the underlying assets and derivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth our assets and liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:
March 31, 2011 | June 30, 2011 | |||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 3,414 | $ | — | $ | 3,413 | $ | 1 | $ | 3,682 | $ | — | $ | 3,669 | $ | 13 | ||||||||||||||||
Tax-exempt | 928 | — | 928 | — | 865 | — | 865 | — | ||||||||||||||||||||||||
Government—non-U.S. | 2,359 | — | 2,358 | 1 | 2,389 | — | 2,388 | 1 | ||||||||||||||||||||||||
U.S. corporate | 23,753 | — | 23,038 | 715 | 24,047 | — | 23,098 | 949 | ||||||||||||||||||||||||
Corporate—non-U.S. | 13,937 | — | 13,735 | 202 | 14,428 | — | 14,057 | 371 | ||||||||||||||||||||||||
Residential mortgage-backed | 4,600 | — | 4,465 | 135 | 4,983 | — | 4,859 | 124 | ||||||||||||||||||||||||
Commercial mortgage-backed | 3,756 | — | 3,714 | 42 | 3,721 | — | 3,678 | 43 | ||||||||||||||||||||||||
Other asset-backed | 2,251 | — | 1,988 | 263 | 2,106 | — | 1,841 | 265 | ||||||||||||||||||||||||
Total fixed maturity securities | 54,998 | — | 53,639 | 1,359 | 56,221 | — | 54,455 | 1,766 | ||||||||||||||||||||||||
Equity securities | 355 | 262 | 6 | 87 | 374 | 260 | 8 | 106 | ||||||||||||||||||||||||
Other invested assets: | ||||||||||||||||||||||||||||||||
Trading securities | 667 | — | 329 | 338 | 607 | — | 316 | 291 | ||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 630 | — | 627 | 3 | 719 | — | 715 | 4 | ||||||||||||||||||||||||
Foreign currency swaps | 228 | — | 228 | — | 46 | — | 46 | — | ||||||||||||||||||||||||
Credit default swaps | 11 | — | 5 | 6 | 9 | — | 5 | 4 | ||||||||||||||||||||||||
Equity index options | 32 | — | — | 32 | 40 | — | — | 40 | ||||||||||||||||||||||||
Equity return swaps | 6 | — | 6 | — | ||||||||||||||||||||||||||||
Total derivative assets | 901 | — | 860 | 41 | 820 | — | 772 | 48 | ||||||||||||||||||||||||
Securities lending collateral | 811 | — | 811 | — | 554 | — | 554 | — | ||||||||||||||||||||||||
Derivatives counterparty collateral | 605 | — | 605 | — | 522 | — | 522 | — | ||||||||||||||||||||||||
Total other invested assets | 2,984 | — | 2,605 | 379 | 2,503 | — | 2,164 | 339 | ||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 374 | — | 199 | 175 | 378 | — | 203 | 175 | ||||||||||||||||||||||||
Reinsurance recoverable(1) | (7 | ) | — | — | (7 | ) | ||||||||||||||||||||||||||
Other assets(1) | (1 | ) | — | (1 | ) | — | ||||||||||||||||||||||||||
Reinsurance recoverable(2) | (5 | ) | — | — | (5 | ) | ||||||||||||||||||||||||||
Separate account assets | 11,807 | 11,807 | — | — | 11,452 | 11,452 | — | — | ||||||||||||||||||||||||
Total assets | $ | 70,511 | $ | 12,069 | $ | 56,449 | $ | 1,993 | $ | 70,922 | $ | 11,712 | $ | 56,829 | $ | 2,381 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Policyholder account balances(2) | $ | 69 | $ | — | $ | — | $ | 69 | ||||||||||||||||||||||||
Policyholder account balances(3) | $ | 113 | $ | — | $ | — | $ | 113 | ||||||||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 132 | — | 132 | — | 87 | — | 87 | — | ||||||||||||||||||||||||
Interest rate swaps related to securitization entities | 16 | — | 16 | — | 18 | — | 18 | — | ||||||||||||||||||||||||
Inflation indexed swaps | 35 | — | 35 | — | 61 | — | 61 | — | ||||||||||||||||||||||||
Credit default swaps | 7 | — | — | 7 | 9 | — | — | 9 | ||||||||||||||||||||||||
Credit default swaps related to securitization entities | 120 | — | — | 120 | 126 | — | — | 126 | ||||||||||||||||||||||||
Equity return swaps | 1 | — | 1 | — | 1 | — | 1 | — | ||||||||||||||||||||||||
Other foreign currency contracts | 8 | — | 8 | — | 12 | — | 12 | — | ||||||||||||||||||||||||
Total derivative liabilities | 319 | — | 192 | 127 | 314 | — | 179 | 135 | ||||||||||||||||||||||||
Borrowings related to securitization entities | 58 | — | — | 58 | 58 | — | — | 58 | ||||||||||||||||||||||||
Total liabilities | $ | 446 | $ | — | $ | 192 | $ | 254 | $ | 485 | $ | — | $ | 179 | $ | 306 | ||||||||||||||||
(1) | Represents embedded derivatives associated with certain reinsurance agreements. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2010 | ||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets | ||||||||||||||||
Investments: | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 3,705 | $ | — | $ | 3,694 | $ | 11 | ||||||||
Tax-exempt | 1,030 | — | 1,030 | — | ||||||||||||
Government—non-U.S. | 2,369 | — | 2,368 | 1 | ||||||||||||
U.S. corporate | 23,967 | — | 22,867 | 1,100 | ||||||||||||
Corporate—non-U.S. | 13,498 | — | 13,130 | 368 | ||||||||||||
Residential mortgage-backed | 4,455 | — | 4,312 | 143 | ||||||||||||
Commercial mortgage-backed | 3,743 | — | 3,693 | 50 | ||||||||||||
Other asset-backed | 2,416 | — | 2,148 | 268 | ||||||||||||
Total fixed maturity securities | 55,183 | — | 53,242 | 1,941 | ||||||||||||
Equity securities | 332 | 240 | 5 | 87 | ||||||||||||
Other invested assets: | ||||||||||||||||
Trading securities | 677 | — | 348 | 329 | ||||||||||||
Derivative assets: | ||||||||||||||||
Interest rate swaps | 763 | — | 758 | 5 | ||||||||||||
Foreign currency swaps | 240 | — | 240 | — | ||||||||||||
Credit default swaps | 11 | — | 5 | 6 | ||||||||||||
Equity index options | 33 | — | — | 33 | ||||||||||||
Total derivative assets | 1,047 | — | 1,003 | 44 | ||||||||||||
Securities lending collateral | 772 | — | 772 | — | ||||||||||||
Derivatives counterparty collateral | 630 | — | 630 | — | ||||||||||||
Total other invested assets | 3,126 | — | 2,753 | 373 | ||||||||||||
Restricted other invested assets related to securitization entities | 370 | — | 199 | 171 | ||||||||||||
Other assets(1) | 1 | — | 1 | — | ||||||||||||
Reinsurance recoverable(2) | (5 | ) | — | — | (5 | ) | ||||||||||
Separate account assets | 11,666 | 11,666 | — | — | ||||||||||||
Total assets | $ | 70,673 | $ | 11,906 | $ | 56,200 | $ | 2,567 | ||||||||
Liabilities | ||||||||||||||||
Policyholder account balances(3) | $ | 121 | $ | — | $ | — | $ | 121 | ||||||||
Derivative liabilities: | ||||||||||||||||
Interest rate swaps | 138 | — | 138 | — | ||||||||||||
Interest rate swaps related to securitization entities | 19 | — | 19 | — | ||||||||||||
Inflation indexed swaps | 33 | — | 33 | — | ||||||||||||
Credit default swaps | 7 | — | — | 7 | ||||||||||||
Credit default swaps related to securitization entities | 129 | — | — | 129 | ||||||||||||
Equity index options | 3 | — | — | 3 | ||||||||||||
Equity return swaps | 3 | — | 3 | — | ||||||||||||
Total derivative liabilities | 332 | — | 193 | 139 | ||||||||||||
Borrowings related to securitization entities | 51 | — | — | 51 | ||||||||||||
Total liabilities | $ | 504 | $ | — | $ | 193 | $ | 311 | ||||||||
(1) | Represents embedded derivatives associated with certain reinsurance agreements. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(3) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur. Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from third-party pricing sources to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
Beginning balance as of January 1, 2011 | �� | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2011 | Total gains (losses) included in net income attributable to assets still held | Beginning balance as of April 1, 2011 | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2011 | Total gains (losses) included in net income (loss) attributable to assets still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net income | Included in OCI | Included in net income (loss) | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 11 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (10 | ) | $ | 1 | $ | — | $ | 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 12 | $ | — | $ | 13 | $ | — | |||||||||||||||||||||||||||||||||||||||||||
Government—non-U.S. | 1 | — | — | — | — | — | — | — | — | 1 | — | 1 | — | — | — | — | — | — | — | — | 1 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate(1) | 1,100 | 4 | (3 | ) | 3 | — | — | (45 | ) | 16 | (360 | ) | 715 | 4 | 715 | 4 | 9 | 27 | (5 | ) | — | (18 | ) | 236 | (19 | ) | 949 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate—non-U.S. (1) | 368 | (12 | ) | (3 | ) | 25 | (25 | ) | — | (5 | ) | 40 | (186 | ) | 202 | (11 | ) | 202 | 1 | — | 15 | (10 | ) | — | (2 | ) | 165 | — | 371 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 143 | (1 | ) | 2 | — | — | — | (8 | ) | — | (1 | ) | 135 | (1 | ) | 135 | — | (10 | ) | 3 | — | — | (4 | ) | — | — | 124 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 50 | — | — | — | — | — | (8 | ) | — | — | 42 | — | 42 | — | 2 | — | — | — | (1 | ) | — | — | 43 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 268 | (1 | ) | 2 | 8 | (8 | ) | — | (21 | ) | 15 | — | 263 | (1 | ) | 263 | — | 7 | — | — | — | (5 | ) | — | — | 265 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 1,941 | (10 | ) | (2 | ) | 36 | (33 | ) | — | (87 | ) | 71 | (557 | ) | 1,359 | (9 | ) | 1,359 | 5 | 8 | 45 | (15 | ) | — | (30 | ) | 413 | (19 | ) | 1,766 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 87 | 1 | 1 | — | — | — | (2 | ) | — | — | 87 | — | 87 | — | — | 24 | (5 | ) | — | — | — | — | 106 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other invested assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities | 329 | 9 | — | 5 | — | — | (5 | ) | — | — | 338 | 9 | 338 | 7 | — | — | (41 | ) | — | (13 | ) | — | — | 291 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 5 | (2 | ) | — | — | — | — | — | — | — | 3 | (2 | ) | 3 | 1 | — | — | — | — | — | — | — | 4 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | 6 | — | — | — | — | — | — | — | — | 6 | — | 6 | (2 | ) | — | — | — | — | — | — | — | 4 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 33 | (19 | ) | — | 24 | — | — | (6 | ) | — | — | 32 | (19 | ) | 32 | (8 | ) | — | 15 | — | — | 1 | — | — | 40 | (8 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total derivative assets | 44 | (21 | ) | — | 24 | — | — | (6 | ) | — | — | 41 | (21 | ) | 41 | (9 | ) | — | 15 | — | — | 1 | — | — | 48 | (9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other invested assets | 373 | (12 | ) | — | 29 | — | — | (11 | ) | — | — | 379 | (12 | ) | 379 | (2 | ) | — | 15 | (41 | ) | — | (12 | ) | — | — | 339 | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 171 | 4 | — | — | — | — | — | — | — | 175 | 4 | 175 | — | — | — | — | — | — | — | — | 175 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable (2) | (5 | ) | (3 | ) | — | — | — | 1 | — | — | — | (7 | ) | (3 | ) | (7 | ) | 1 | — | — | — | 1 | — | — | — | (5 | ) | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | 2,567 | $ | (20 | ) | $ | (1 | ) | $ | 65 | $ | (33 | ) | $ | 1 | $ | (100 | ) | $ | 71 | $ | (557 | ) | $ | 1,993 | $ | (20 | ) | $ | 1,993 | $ | 4 | $ | 8 | $ | 84 | $ | (61 | ) | $ | 1 | $ | (42 | ) | $ | 413 | $ | (19 | ) | $ | 2,381 | $ | 4 | |||||||||||||||||||||||||||||||||||
(1) | The transfers in and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Beginning balance as of January 1, 2010 | Total realized and unrealized gains (losses) | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2010 | Total gains (losses) included in net income attributable to assets still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net income | Included in OCI | Beginning balance as of April 1, 2010 | Total realized and unrealized gains (losses) | Purchases, sales, issuances and settlements, net | Transfer in Level 3 (1) | Transfer out of Level 3 | Ending balance as of June 30, 2010 | Total gains (losses) included in net income (loss) attributable to assets still held | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net income (loss) | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 16 | $ | — | $ | — | $ | (1 | ) | $ | 3 | $ | (10 | ) | $ | 8 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government- sponsored enterprises | $ | 8 | $ | — | $ | — | $ | (1 | ) | $ | 6 | $ | (4 | ) | $ | 9 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||
Tax-exempt | 2 | — | — | — | — | — | 2 | — | 2 | — | — | — | — | (2 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Government—non-U.S. | 7 | — | — | — | — | (6 | ) | 1 | — | 1 | — | 1 | — | 16 | — | 18 | — | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate | 1,073 | — | 15 | 60 | 25 | (267 | ) | 906 | 4 | 906 | 11 | 19 | (29 | ) | 653 | (40 | ) | 1,520 | 4 | |||||||||||||||||||||||||||||||||||||||||||||
Corporate—non-U.S. | 504 | 1 | 1 | 9 | 59 | (66 | ) | 508 | 1 | 508 | — | 7 | 2 | 294 | (91 | ) | 720 | — | ||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed (1) | 1,481 | — | 3 | 106 | — | (1,419 | ) | 171 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed (1) | 3,558 | 1 | 4 | (62 | ) | — | (3,454 | ) | 47 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage- backed | 171 | — | — | (26 | ) | 1 | (84 | ) | 62 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage- backed | 47 | — | 10 | (1 | ) | 11 | (8 | ) | 59 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 1,419 | (16 | ) | 21 | (4 | ) | 10 | (1,021 | ) | 409 | (16 | ) | 409 | (8 | ) | 2 | (14 | ) | — | (28 | ) | 361 | (8 | ) | ||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 8,060 | (14 | ) | 44 | 108 | 97 | (6,243 | ) | 2,052 | (11 | ) | 2,052 | 3 | 39 | (69 | ) | 981 | (257 | ) | 2,749 | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||
Equity securities | 9 | — | (1 | ) | 7 | 52 | — | 67 | — | 67 | — | 1 | 1 | — | (60 | ) | 9 | — | ||||||||||||||||||||||||||||||||||||||||||||||
Other invested assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities | 145 | 8 | — | (11 | ) | — | — | 142 | 8 | 142 | (7 | ) | — | 1 | — | — | 136 | (7 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 3 | 1 | — | — | — | — | 4 | 2 | 4 | 5 | — | — | — | — | 9 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaptions | 54 | (10 | ) | — | (30 | ) | — | — | 14 | (5 | ) | 14 | 24 | — | (34 | ) | — | — | 4 | 24 | ||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | 6 | 1 | — | — | — | — | 7 | 1 | 7 | (7 | ) | — | — | — | — | — | (7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 39 | (25 | ) | — | 20 | — | — | 34 | (24 | ) | 34 | 46 | — | 17 | — | — | 97 | 46 | ||||||||||||||||||||||||||||||||||||||||||||||
Other foreign currency contracts | 8 | (4 | ) | — | — | — | — | 4 | (4 | ) | 4 | (3 | ) | — | — | — | — | 1 | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Total derivative assets | 110 | (37 | ) | — | (10 | ) | — | — | 63 | (30 | ) | 63 | 65 | — | (17 | ) | — | — | 111 | 65 | ||||||||||||||||||||||||||||||||||||||||||||
Total other invested assets | 255 | (29 | ) | — | (21 | ) | — | — | 205 | (22 | ) | 205 | 58 | — | (16 | ) | — | — | 247 | 58 | ||||||||||||||||||||||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | — | — | — | — | 174 | — | 174 | — | 174 | (2 | ) | 2 | — | — | — | 174 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable(2) | (5 | ) | (1 | ) | — | — | — | — | (6 | ) | (1 | ) | (6 | ) | 15 | — | — | — | — | 9 | 15 | |||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | 8,319 | $ | (44 | ) | $ | 43 | $ | 94 | $ | 323 | $ | (6,243 | ) | $ | 2,492 | $ | (34 | ) | $ | 2,492 | $ | 74 | $ | 42 | $ | (84 | ) | $ | 981 | $ | (317 | ) | $ | 3,188 | $ | 67 | |||||||||||||||||||||||||||
(1) | The transfer into Level 3 was primarily related to private fixed U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
Beginning balance as of January 1, 2011 | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2011 | Total gains (losses) included in net income (loss) attributable to assets still held | |||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net income (loss) | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 11 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 12 | $ | (10 | ) | $ | 13 | $ | — | |||||||||||||||||||||
Government—non-U.S. | 1 | — | — | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||||||||
U.S. corporate(1) | 1,100 | 8 | 6 | 30 | (5 | ) | — | (63 | ) | 252 | (379 | ) | 949 | 8 | ||||||||||||||||||||||||||||||
Corporate—non-U.S. (1) | 368 | (11 | ) | (3 | ) | 40 | (35 | ) | — | (7 | ) | 205 | (186 | ) | 371 | (10 | ) | |||||||||||||||||||||||||||
Residential mortgage-backed | 143 | (1 | ) | (8 | ) | 3 | — | — | (12 | ) | — | (1 | ) | 124 | (1 | ) | ||||||||||||||||||||||||||||
Commercial mortgage-backed | 50 | — | 2 | — | — | — | (9 | ) | — | — | 43 | — | ||||||||||||||||||||||||||||||||
Other asset-backed | 268 | (1 | ) | 9 | 8 | (8 | ) | — | (26 | ) | 15 | — | 265 | (1 | ) | |||||||||||||||||||||||||||||
Total fixed maturity securities | 1,941 | (5 | ) | 6 | 81 | (48 | ) | — | (117 | ) | 484 | (576 | ) | 1,766 | (4 | ) | ||||||||||||||||||||||||||||
Equity securities | 87 | 1 | 1 | 24 | (5 | ) | — | (2 | ) | — | — | 106 | — | |||||||||||||||||||||||||||||||
Other invested assets: | ||||||||||||||||||||||||||||||||||||||||||||
Trading securities | 329 | 16 | — | 5 | (41 | ) | — | (18 | ) | — | — | 291 | 16 | |||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 5 | (1 | ) | — | — | — | — | — | — | — | 4 | (1 | ) | |||||||||||||||||||||||||||||||
Credit default swaps | 6 | (2 | ) | — | — | — | — | — | — | — | 4 | (2 | ) | |||||||||||||||||||||||||||||||
Equity index options | 33 | (27 | ) | — | 39 | — | — | (5 | ) | — | — | 40 | (27 | ) | ||||||||||||||||||||||||||||||
Total derivative assets | 44 | (30 | ) | — | 39 | — | — | (5 | ) | — | — | 48 | (30 | ) | ||||||||||||||||||||||||||||||
Total other invested assets | 373 | (14 | ) | — | 44 | (41 | ) | — | (23 | ) | — | — | 339 | (14 | ) | |||||||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 171 | 4 | — | — | — | — | — | — | — | 175 | 4 | |||||||||||||||||||||||||||||||||
Reinsurance recoverable (2) | (5 | ) | (2 | ) | — | — | — | 2 | — | — | — | (5 | ) | (2 | ) | |||||||||||||||||||||||||||||
Total Level 3 assets | $ | 2,567 | $ | (16 | ) | $ | 7 | $ | 149 | $ | (94 | ) | $ | 2 | $ | (142 | ) | $ | 484 | $ | (576 | ) | $ | 2,381 | $ | (16 | ) | |||||||||||||||||
(1) | The transfers in and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Beginning balance as of January 1, 2010 | Total realized and unrealized gains (losses) | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 (1) | Ending balance as of June 30, 2010 | Total gains (losses) included in net income (loss) attributable to assets still held | ||||||||||||||||||||||||||
(Amounts in millions) | Included in net income (loss) | Included in OCI | ||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 16 | $ | — | $ | — | $ | (2 | ) | $ | 9 | $ | (14 | ) | $ | 9 | $ | — | ||||||||||||||
Tax-exempt | 2 | — | — | — | — | (2 | ) | — | — | |||||||||||||||||||||||
Government—non-U.S. | 7 | — | 1 | — | 16 | (6 | ) | 18 | — | |||||||||||||||||||||||
U.S. corporate | 1,073 | 11 | 34 | 31 | 678 | (307 | ) | 1,520 | 8 | |||||||||||||||||||||||
Corporate—non-U.S. | 504 | 1 | 8 | 11 | 353 | (157 | ) | 720 | 1 | |||||||||||||||||||||||
Residential mortgage- backed | 1,481 | — | 3 | 80 | 1 | (1,503 | ) | 62 | — | |||||||||||||||||||||||
Commercial mortgage- backed | 3,558 | 1 | 14 | (63 | ) | 11 | (3,462 | ) | 59 | — | ||||||||||||||||||||||
Other asset-backed | 1,419 | (24 | ) | 23 | (18 | ) | 10 | (1,049 | ) | 361 | (24 | ) | ||||||||||||||||||||
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Total fixed maturity securities | 8,060 | (11 | ) | 83 | 39 | 1,078 | (6,500 | ) | 2,749 | (15 | ) | |||||||||||||||||||||
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Equity securities | 9 | — | — | 8 | 52 | (60 | ) | 9 | — | |||||||||||||||||||||||
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Other invested assets: | ||||||||||||||||||||||||||||||||
Trading securities | 145 | 1 | — | (10 | ) | — | — | 136 | 1 | |||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 3 | 6 | — | — | — | — | 9 | 6 | ||||||||||||||||||||||||
Interest rate swaptions | 54 | 15 | — | (65 | ) | — | — | 4 | 15 | |||||||||||||||||||||||
Credit default swaps | 6 | (6 | ) | — | — | — | — | — | (6 | ) | ||||||||||||||||||||||
Equity index options | 39 | 22 | — | 36 | — | — | 97 | 22 | ||||||||||||||||||||||||
Other foreign currency contracts | 8 | (7 | ) | — | — | — | — | 1 | (7 | ) | ||||||||||||||||||||||
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Total derivative assets | 110 | 30 | — | (29 | ) | — | — | 111 | 30 | |||||||||||||||||||||||
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Total other invested assets | 255 | 31 | — | (39 | ) | — | — | 247 | 31 | |||||||||||||||||||||||
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Restricted other invested assets related to securitization entities | — | (2 | ) | 2 | — | 174 | — | 174 | (2 | ) | ||||||||||||||||||||||
Reinsurance recoverable(2) | (5 | ) | 14 | — | — | — | — | 9 | 14 | |||||||||||||||||||||||
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Total Level 3 assets | $ | 8,319 | $ | 32 | $ | 85 | $ | 8 | $ | 1,304 | $ | (6,560 | ) | $ | 3,188 | $ | 28 | |||||||||||||||
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(1) | During 2010, primary market issuance and secondary market activity for commercial and non-agency residential mortgage-backed and other asset-backed securities increased the market observable inputs used to establish fair values for similar securities. These factors, along with more consistent pricing from third-party sources, resulted in our conclusion that there is sufficient trading activity in similar instruments to support classifying certain mortgage-backed and asset-backed securities as Level 2. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
Beginning balance as of January 1, 2011 | Total realized and unrealized (gains) losses | Settlements | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2011 | Total (gains) losses included in net (income) attributable to liabilities still held | Beginning balance as of April 1, 2011 | Total realized and unrealized (gains) losses | Settlements | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2011 | Total (gains) losses included in net (income) loss attributable to liabilities still held | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net (income) | Included in OCI | Purchases | Sales | Issuances | Included in net (income) loss | Included in OCI | Purchases | Sales | Issuances | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances (1) | $ | 121 | $ | (62 | ) | $ | — | $ | — | $ | — | $ | 10 | $ | — | $ | — | $ | — | $ | 69 | $ | (61 | ) | $ | 69 | $ | 34 | $ | — | $ | — | $ | — | $ | 10 | $ | — | $ | — | $ | — | $ | 113 | $ | 34 | ||||||||||||||||||||||||||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | 7 | (2 | ) | — | 3 | — | — | (1 | ) | — | — | 7 | (2 | ) | 7 | 2 | — | — | — | — | — | — | — | 9 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities | 129 | (9 | ) | — | — | — | — | — | — | — | 120 | (9 | ) | 120 | 6 | — | — | — | — | — | — | — | 126 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 3 | — | — | — | — | — | (3 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total derivative liabilities | 139 | (11 | ) | — | 3 | — | — | (4 | ) | — | — | 127 | (11 | ) | 127 | 8 | — | — | — | — | — | — | — | 135 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings related to securitization entities | 51 | 7 | — | — | — | — | — | — | — | 58 | 7 | 58 | — | — | — | — | — | — | — | — | 58 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | 311 | $ | (66 | ) | $ | — | $ | 3 | $ | — | $ | 10 | $ | (4 | ) | $ | — | $ | — | $ | 254 | $ | (65 | ) | $ | 254 | $ | 42 | $ | — | $ | — | $ | — | $ | 10 | $ | — | $ | — | $ | — | $ | 306 | $ | 42 | |||||||||||||||||||||||||||||||||||||||||
(1) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
Beginning balance as of January 1, 2010 | Total realized and unrealized (gains) losses | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2010 | Total (gains) losses included in net (income) attributable to liabilities still held | Beginning balance as of April 1, 2010 | Total realized and unrealized (gains) losses | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2010 | Total (gains) losses included in net (income) loss attributable to liabilities still held | |||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net (income) | Included in OCI | Included in net (income) loss | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account | $ | 175 | $ | (39 | ) | $ | 9 | $ | — | $ | — | $ | — | $ | 145 | $ | (37 | ) | $ | 145 | $ | 294 | $ | — | $ | 8 | $ | — | $ | — | $ | 447 | $ | 294 | ||||||||||||||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 2 | (2 | ) | — | — | — | — | — | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaptions | 67 | (32 | ) | — | (17 | ) | — | — | 18 | (15 | ) | 18 | (10 | ) | — | (8 | ) | — | — | — | (10 | ) | ||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | — | 1 | — | — | — | — | 1 | 1 | 1 | 25 | — | — | — | — | 26 | 25 | ||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities | — | (5 | ) | — | 2 | 121 | — | 118 | (5 | ) | 118 | 46 | — | (5 | ) | — | — | 159 | 46 | |||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 2 | 3 | — | (1 | ) | — | — | 4 | 3 | 4 | (3 | ) | — | (1 | ) | — | — | — | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Total derivative liabilities | 71 | (35 | ) | — | (16 | ) | 121 | — | 141 | (18 | ) | 141 | 58 | — | (14 | ) | — | — | 185 | 58 | ||||||||||||||||||||||||||||||||||||||||||||
Borrowings related to securitization entities | — | (2 | ) | — | — | 60 | — | 58 | (2 | ) | 58 | (7 | ) | — | — | — | — | 51 | (6 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | 246 | $ | (76 | ) | $ | 9 | $ | (16 | ) | $ | 181 | $ | — | $ | 344 | $ | (57 | ) | $ | 344 | $ | 345 | $ | — | $ | (6 | ) | $ | — | $ | — | $ | 683 | $ | 346 | ||||||||||||||||||||||||||||
(1) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
Beginning balance as of January 1, 2011 | Total realized and unrealized (gains) losses | Settlements | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2011 | Total (gains) losses included in net (income) loss attributable to liabilities still held | ||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net (income) loss | Included in OCI | Purchases | Sales | Issuances | |||||||||||||||||||||||||||||||||||||||
Policyholder account balances (1) | $ | 121 | $ | (28 | ) | $ | — | $ | — | $ | — | $ | 20 | $ | — | $ | — | $ | — | $ | 113 | $ | (27 | ) | ||||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | 7 | — | — | 3 | — | — | (1 | ) | — | — | 9 | — | ||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities | 129 | (3 | ) | — | — | — | — | — | — | — | 126 | (3 | ) | |||||||||||||||||||||||||||||||
Equity index options | 3 | — | — | — | — | — | (3 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||
Total derivative liabilities | 139 | (3 | ) | — | 3 | — | — | (4 | ) | — | — | 135 | (3 | ) | ||||||||||||||||||||||||||||||
Borrowings related to securitization entities | 51 | 7 | — | — | — | — | — | — | — | 58 | 7 | |||||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | 311 | $ | (24 | ) | $ | — | $ | 3 | $ | — | $ | 20 | $ | (4 | ) | $ | — | $ | — | $ | 306 | $ | (23 | ) | |||||||||||||||||||
(1) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
Beginning balance as of January 1, 2010 | Total realized and unrealized (gains) losses | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2010 | Total (gains) losses included in net (income) loss attributable to liabilities still held | ||||||||||||||||||||||||||
(Amounts in millions) | Included in net (income) loss | Included in OCI | ||||||||||||||||||||||||||||||
Policyholder account balances (1) | $ | 175 | $ | 255 | $ | — | $ | 17 | $ | — | $ | — | $ | 447 | $ | 255 | ||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 2 | (2 | ) | — | — | — | — | — | (2 | ) | ||||||||||||||||||||||
Interest rate swaptions | 67 | (42 | ) | — | (25 | ) | — | — | — | (42 | ) | |||||||||||||||||||||
Credit default swaps | — | 26 | — | — | — | — | 26 | 26 | ||||||||||||||||||||||||
Credit default swaps related to securitization entities | — | 41 | — | (3 | ) | 121 | — | 159 | 41 | |||||||||||||||||||||||
Equity index options | 2 | (1 | ) | — | (1 | ) | — | — | — | (1 | ) | |||||||||||||||||||||
Total derivative liabilities | 71 | 22 | — | (29 | ) | 121 | — | 185 | 22 | |||||||||||||||||||||||
Borrowings related to securitization entities | — | (8 | ) | — | — | 59 | — | 51 | (8 | ) | ||||||||||||||||||||||
Total Level 3 liabilities | $ | 246 | $ | 269 | $ | — | $ | (12 | ) | $ | 180 | $ | — | $ | 683 | $ | 269 | |||||||||||||||
(1) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
Realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either net investment gains (losses) within the consolidated statements of income or OCI within stockholders’ equity based on the appropriate accounting treatment for the instrument.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Purchases, sales, issuances and settlements represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases, sales and settlements of fixed maturity, equity and trading securities and purchases, issuances and settlements of derivative instruments.
Issuances and settlements presented for policyholder account balances represent the issuances and settlements of embedded derivatives associated with our GMWB liabilities where: issuances are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance and settlements are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income)” loss” in the tables presented above.
The amount presented for unrealized gains (losses) for assets and liabilities still held as of the reporting date primarily represents impairments for available-for-sale securities, changes in fair value of trading securities and certain derivatives and changes in fair value of embedded derivatives associated with our GMWB liabilities that existed as of the reporting date, which were recorded in net investment gains (losses), and accretion on certain fixed maturity securities which was recorded in net investment income.
(7) Commitments and Contingencies
(a) Litigation
We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, bidding practices in connection with our management and administration of a third-party’s municipal guaranteed investment contract business, claims payments and procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 or related state anti-inducement laws, and breaching fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations. At this time, it is not feasible to predict, nor determine the ultimate outcomes of any pending investigations and legal proceedings, nor to provide reasonable ranges of possible losses.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On June 22, 2011, we received a subpoena from the office of the New York Attorney General, relating to an industry-wide investigation of unclaimed property and escheatment practices and procedures. In addition to the subpoena, other state regulators are conducting reviews and examinations on the same subject. We are cooperating with these requests and inquiries.
As previously disclosed, in December 2009, one of our non-insurance subsidiaries, one of the subsidiary’s officers and Genworth Financial, Inc. were named in a putative class action lawsuit captionedMichael J. Goodman and Linda Brown v. Genworth Financial Wealth Management, Inc., et al, in the United States District Court for the Eastern District of New York. In response to our motion to dismiss the complaint in its entirety, the Court granted on March 30, 2011 the motion to dismiss the state law fiduciary duty claim and denied the motion to dismiss the remaining federal claims. We continue to vigorously defend this action.
As previously disclosed, we and one of our mortgage insurance subsidiaries were named in a putative class action lawsuit filed in November 2010 captionedArchie Moses and Violet M. Moses v. SunTrust Banks, Inc., et al,in the United States District Court for the District of Columbia. On March 10, 2011, plaintiffs voluntarily dismissed the action without prejudice as to Genworth Financial, Inc. and our mortgage insurance subsidiary.
(b) Commitments
As of March 31,June 30, 2011, we were committed to fund $106$90 million in limited partnership investments and $39$49 million in U.S. commercial mortgage loan investments.
(8) Borrowings and Other Financings
Revolving Credit Facilities
We have two five-year revolving credit facilities that mature in May 2012 and August 2012. These facilities bear variable interest rates based on one-month LIBOR plus a margin and we have access to $1.9 billion under these facilities. As of March 31,June 30, 2011, we had no borrowings under these facilities; however, we utilized $280$279 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our life insurance subsidiaries. As of December 31, 2010, we had no borrowings under these facilities; however, we utilized $56 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our lifestyle protection insurance subsidiaries.
Long-Term Senior Notes
In June 2011, our indirect wholly-owned subsidiary, Genworth Financial Mortgage Insurance Pty Limited, issued AUD$140 million of subordinated floating rate notes due 2021 with an interest rate of three-month Bank Bill Swap reference rate plus a margin of 4.75%. Genworth Financial Mortgage Insurance Pty Limited expects to use the proceeds it received from this transaction for general corporate purposes.
During the second quarter of 2011, we repaid ¥57.0 billion of senior notes that matured in June 2011, plus accrued interest. In addition, the arrangements to swap our obligations under these notes to a U.S. dollar obligation matured. These swaps had a notional principal amount of $491 million with interest at a rate of 4.84% per year. Upon maturity of these swaps, we received $212 million from the derivative counterparty resulting in a net repayment of $491 million of principal related to these notes.
In March 2011, we issued senior notes having an aggregate principal amount of $400 million, with an interest rate equal to 7.625% per year payable semi-annually, and maturing in September 2021 (“2021 Notes”). The 2021 Notes are our direct, unsecured obligations and will rank equally with all of our existing and future unsecured and unsubordinated obligations. We have the option to redeem all or a portion of the 2021 Notes at any time with proper notice to the note holders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread. The net proceeds of $397 million from the issuance of the 2021 Notes were used for general corporate purposes.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Mandatorily Redeemable Preferred Stock
On June 1, 2011, we redeemed all the remaining outstanding shares of the Series A Preferred Stock at a price of $50 per share, plus unpaid dividends accrued to the date of redemption, for $57 million.
Non-Recourse Funding Obligations
As of March 31,June 30, 2011, we had $3.4 billion of fixed and floating rate non-recourse funding obligations outstanding backing additional statutory reserves. In the second quarter of 2011, we repurchased principal of $57 million of notes secured by our non-recourse funding obligations, plus accrued interest, for a pre-tax gain of $17 million. As of March 31,June 30, 2011 and December 31, 2010, the weighted-average interest rates on our non-recourse funding obligations were 1.41%1.33% and 1.44%, respectively.
(9) Income Taxes
The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:
Three months ended March 31, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Statutory U.S. federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||||||
Increase (reduction) in rate resulting from: | ||||||||||||||||||||||||
State income tax, net of federal income tax effect | 1.2 | (3.4 | ) | (2.4 | ) | — | 4.3 | (2.1 | ) | |||||||||||||||
Benefit on tax favored investments | (2.7 | ) | (6.6 | ) | (0.4 | ) | (8.0 | ) | (4.5 | ) | (7.1 | ) | ||||||||||||
Effect of foreign operations | (14.4 | ) | (13.7 | ) | (24.8 | ) | (33.7 | ) | (5.9 | ) | (21.3 | ) | ||||||||||||
Non-deductible expenses | 0.6 | (0.5 | ) | 1.2 | 2.2 | 0.2 | 0.5 | |||||||||||||||||
Interest on uncertain tax positions | — | (2.2 | ) | (0.4 | ) | (2.4 | ) | 0.4 | (2.3 | ) | ||||||||||||||
Tax benefits related to separation from our former parent | — | (89.5 | ) | — | — | — | (55.8 | ) | ||||||||||||||||
Other, net | 0.8 | 2.7 | 0.9 | — | 0.5 | 1.8 | ||||||||||||||||||
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Effective rate | 20.5 | % | (78.2 | )% | 9.1 | % | (6.9 | )% | 30.0 | % | (51.3 | )% | ||||||||||||
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TheFor the three months ended June 30, 2011, the effective tax rate increased significantlycompared to the prior year primarily due to higher taxes in the current year as a result of a Canadian legislative change and an Australian tax legislation benefit in the prior year. The Canadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase the effective tax rate on our U.S. GAAP earnings as prior deductions for contributions to the fund lowered the effective tax rate on U.S. GAAP earnings.
For the six months ended June 30, 2011, the effective tax rate increased from the prior year primarily due to changes in uncertain tax benefits related to separation from our former parent in the prior year that did not recur. In connection with our 2004 separation from our former parent, General Electric (“GE”),. At the time of the separation, we made certain joint tax elections and realized certain tax benefits. During the first quarter of 2010, the Internal Revenue Service (“IRS”) completed an examination of GE’s 2004 tax return, including these tax impacts. Therefore, $106 million of previously uncertain tax benefits related to separation became certain and we recognized those in the first quarter of 2010. Additionally, we recorded $20 million as additional paid-in capital related to our 2004 separation. The effective tax rate also increased due to higher taxes in the current year pursuant to the Canadian legislative change as compared to an Australian tax legislative benefit in the prior year.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) Segment Information
We conduct our operations in three operating business segments: (1) Retirement and Protection, which includes our life insurance, long-term care insurance, wealth management products and services and retirement income products; (2) International, which includes international mortgage and lifestyle protection insurance; and (3) U.S. Mortgage Insurance.
We also have Corporate and Other activities which include interest and other debt financing expenses, other corporate income and expenses not allocated to the segments, the results of non-strategic products that are managed outside of our operating segments, and eliminations of inter-segment transactions.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income (loss) and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “net operating income (loss) available to Genworth Financial, Inc.’s common stockholders.” We define net operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding net income attributable to noncontrolling interests, after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that net operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate net operating income (loss) available to Genworth Financial, Inc.’s common stockholders, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. However, net operating income (loss) available to Genworth Financial, Inc.’s common stockholders is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.
There were no infrequent or unusual non-operating items excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders during the periods presented other than a $106 million tax benefit related to separation from our former parent recorded in the first quarter of 2010.
The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:
Three months ended March 31, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Retirement and Protection | $ | 1,738 | $ | 1,593 | $ | 1,784 | $ | 1,643 | $ | 3,522 | $ | 3,236 | ||||||||||||
International | 632 | 651 | 658 | 622 | 1,290 | 1,273 | ||||||||||||||||||
U.S. Mortgage Insurance | 177 | 181 | 170 | 181 | 347 | 362 | ||||||||||||||||||
Corporate and Other | 21 | (4 | ) | 43 | (36 | ) | 64 | (40 | ) | |||||||||||||||
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Total revenues | $ | 2,568 | $ | 2,421 | $ | 2,655 | $ | 2,410 | $ | 5,223 | $ | 4,831 | ||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities and a reconciliation of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities to net income (loss) for the periods indicated:
Three months ended March 31, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Retirement and Protection’s net operating income | $ | 127 | $ | 122 | $ | 149 | $ | 114 | $ | 276 | $ | 236 | ||||||||||||
International’s net operating income | 124 | 91 | 107 | 105 | 231 | 196 | ||||||||||||||||||
U.S. Mortgage Insurance’s net operating loss | (81 | ) | (36 | ) | (253 | ) | (40 | ) | (334 | ) | (76 | ) | ||||||||||||
Corporate and Other’s net operating loss | (72 | ) | (63 | ) | (77 | ) | (61 | ) | (149 | ) | (124 | ) | ||||||||||||
Net operating income | 98 | 114 | ||||||||||||||||||||||
Net operating income (loss) available to Genworth Financial, Inc.’s common stockholders | (74 | ) | 118 | 24 | 232 | |||||||||||||||||||
Net investment gains (losses), net of taxes and other adjustments | (16 | ) | (42 | ) | (22 | ) | (76 | ) | (38 | ) | (118 | ) | ||||||||||||
Net tax benefit related to separation from our former parent | — | 106 | — | — | — | 106 | ||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | 82 | 178 | ||||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | (96 | ) | 42 | (14 | ) | 220 | ||||||||||||||||||
Add: net income attributable to noncontrolling interests | 34 | 34 | 36 | 35 | 70 | 69 | ||||||||||||||||||
Net income | $ | 116 | $ | 212 | ||||||||||||||||||||
Net income (loss) | $ | (60 | ) | $ | 77 | $ | 56 | $ | 289 | |||||||||||||||
The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:
(Amounts in millions) | March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | ||||||||||||
Assets: | ||||||||||||||||
Retirement and Protection | $ | 86,622 | $ | 86,352 | $ | 87,119 | $ | 86,352 | ||||||||
International | 12,838 | 12,422 | 12,834 | 12,422 | ||||||||||||
U.S. Mortgage Insurance | 3,989 | 3,875 | 4,048 | 3,875 | ||||||||||||
Corporate and Other | 9,491 | 9,746 | 8,346 | 9,746 | ||||||||||||
Total assets | $ | 112,940 | $ | 112,395 | $ | 112,347 | $ | 112,395 | ||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(11) Liability for Policy and Contract Claims
The following table sets forth changes in the liability for policy and contract claims for the dates indicated:
As of or for the six months ended June 30, | ||||||||
(Amounts in millions) | 2011(1) | 2010(2) | ||||||
Beginning balance | $ | 6,933 | $ | 6,567 | ||||
Less reinsurance recoverables | (1,654 | ) | (1,769 | ) | ||||
Net beginning balance | 5,279 | 4,798 | ||||||
Incurred related to insured events of: | ||||||||
Current year | 1,720 | 1,641 | ||||||
Prior years | 494 | 120 | ||||||
Total incurred | 2,214 | 1,761 | ||||||
Paid related to insured events of: | ||||||||
Current year | (475 | ) | (452 | ) | ||||
Prior years | (1,373 | ) | (1,539 | ) | ||||
Total paid | (1,848 | ) | (1,991 | ) | ||||
Interest on liability for policy and contract claims | 67 | 59 | ||||||
Foreign currency translation | 37 | (63 | ) | |||||
Net ending balance | 5,749 | 4,564 | ||||||
Add reinsurance recoverables | 1,578 | 1,738 | ||||||
Ending balance | $ | 7,327 | $ | 6,302 | ||||
(1) | Current year reserves related to our U.S. Mortgage Insurance segment for the six months ended June 30, 2011 were reduced by loss mitigation activities of $22 million related to workouts, loan modifications and pre-sales. Loss mitigation actions related to prior year delinquencies resulted in a reduction of expected losses of $230 million to date, including $211 million related to workouts, loan modifications and pre-sales, and $19 million related to rescissions, net of reinstatements of $49 million. |
(2) | Current year reserves related to our U.S. Mortgage Insurance segment for the six months ended June 30, 2010 were reduced by loss mitigation activities of $97 million, including $94 million related to workouts, loan modifications and pre-sales, and $3 million related to rescissions, net of reinstatements. Loss mitigation actions related to prior year delinquencies resulted in a reduction of expected losses of $353 million to date, including $201 million related to workouts, loan modifications and pre-sales, and $152 million related to rescissions, net of reinstatements of $107 million. |
We establish reserves for the ultimate cost of settling claims on reported and unreported insured events that have occurred on or before the respective reporting period. These liabilities are associated primarily with our mortgage, long-term care and lifestyle protection insurance products and represent our best estimates of the liabilities at the time based on known facts, historical trends of claim payments and other external factors, such as various trends in economic conditions, housing prices, employment rates, mortality, morbidity and medical costs.
While the liability for policy and contract claims represents our current best estimates, there may be additional adjustments to these amounts based on information and trends not presently known. Such adjustments, reflecting any variety of new and adverse or favorable trends, could possibly be significant, exceeding the currently recorded reserves by an amount that could be material to our results of operations, financial condition and liquidity. For
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
example, in our U.S. mortgage insurance business, the amount and rate at which home prices, employment levels and cure rates for delinquent loans change could result in additional changes to reserves in future periods.
As of June 30, 2011, the increase in the ending liability for policy and contract claims was largely related to our U.S. Mortgage Insurance segment due to a reserve strengthening in the second quarter of 2011. In addition, our long-term care insurance business increased as a result of growth of the in-force block and claims experience including the severity and duration of existing claims.
During the six months ended June 30, 2011, we strengthened prior year reserves by $494 million as a result of changes in estimates related to prior year insured events and the development of information and trends not previously known when establishing the reserves in prior periods.
During the six months ended June 30, 2011, we increased prior year reserves in our U.S. Mortgage Insurance segment by $382 million from $2,282 million as of December 31, 2010. During the second quarter of 2011, we strengthened reserves by $299 million as a result of worsening trends in recent experience in the quarter as well as market trends in an environment of continuing weakness in the U.S. residential real estate market. These trends reflected a decline in cure rates in the second quarter of 2011 for delinquent loans and continued aging trends in the delinquent loan inventory. These trends were associated with a range of factors, including slow-moving pipelines of mortgages in some stage of foreclosure and delinquent loans under consideration for loan modifications. Specifically, reduced cure rates were driven by lower borrower self-cures and lower levels of lender loan modifications outside of government-sponsored modification programs. The decline in cure rates was also concentrated in earlier term delinquencies at a level higher than expected or historically experienced. In our U.S. Mortgage Insurance segment, loss mitigation actions that occurred during the six months ended June 30, 2011 resulted in a reduction of expected losses of $252 million.
During the six months ended June 30, 2011, we increased prior year claim reserves related to our long-term care insurance business by $144 million from $3,678 million as of December 31, 2010. In the current stressed economic environment, we have experienced an increase in severity and duration of claims associated with observed loss development which contributed to the reserve increase.
For our other businesses, the remaining favorable development during the six months ended June 30, 2011 related to refinements to our estimates as part of our reserving process on both reported and unreported insured events occurring in the prior year that were not significant.
As of June 30, 2010, the decrease in the ending liability for policy and contract claims was largely related to our U.S. Mortgage Insurance segment due principally to a substantial decrease in flow delinquencies, coupled with a settlement that was reached with a GSE counterparty regarding certain bulk Alt-A business in the first quarter of 2010. In our U.S. Mortgage Insurance segment, loss mitigation actions that occurred during the six months ended June 30, 2010 resulted in a reduction of expected losses of $450 million. Our international mortgage insurance business also decreased from favorable global economic and housing market conditions. These decreases were partially offset by an increase related to our long-term care insurance business as a result of growth of the in-force block and claims experience, including the severity and duration of existing claims.
During the six months ended June 30, 2010, we strengthened prior year reserves by $120 million primarily related to our long-term care insurance business. During the six months ended June 30, 2010, we increased prior year reserves in our long-term care insurance business by $109 million from $3,188 million as of December 31, 2009. We experienced an increase in severity and duration of claims associated with observed loss development which contributed to the reserve increase.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For our other businesses, the remaining unfavorable development during the six months ended June 30, 2010 related to refinements to our estimates as part of our reserving process on both reported and unreported insured events occurring in the prior year that were not significant.
(12) Sale of Medicare Supplement Insurance Business
In June 2011, we reached an agreement to sell our Medicare supplement insurance business for $290 million in cash, subject to customary adjustments based on the amount of capital in the business at closing. We expect to recognize a realized gain on the sale, with the closing of the sale expected to occur in the fourth quarter of 2011. Our Medicare supplement insurance business is included in our long-term care insurance business in our Retirement and Protection segment. The transaction includes the sale of Continental Life Insurance Company of Brentwood, Tennessee and its subsidiary, American Continental Insurance Company, and the reinsurance of the Medicare supplement insurance in-force business written by other Genworth life insurance subsidiaries.
(13) Noncontrolling Interests
In June 2011, Genworth MI Canada Inc. (“Genworth Canada”), our indirect subsidiary, repurchased approximately 6.2 million common shares for CAD$160 million through a substantial issuer bid. Brookfield Life Assurance Company Limited, our indirect wholly-owned subsidiary, participated in the issuer bid by making a proportionate tender and received CAD$90 million and continues to hold approximately 57.5% of the outstanding common shares of Genworth Canada.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included herein and with our 2010 Annual Report on Form 10-K.
Cautionary note regarding forward-looking statements
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to global political, economic, business, competitive, market, regulatory and other factors and risks, including the following:
• | Risks relating to our businesses, including downturns and volatility in global economies and equity and credit markets, downgrades in our financial strength or credit ratings, interest rate fluctuations and levels, adverse capital and credit market conditions, the valuation of fixed maturity, equity and trading securities, defaults, |
• | Risks relating to our Retirement and Protection segment, including changes in morbidity and mortality, accelerated amortization of deferred acquisition costs and present value of future profits, reputational risks as a result of rate increases on certain in-force long-term care insurance products, medical advances, such as genetic research and diagnostic imaging, and related legislation, unexpected changes in persistency rates, ability to continue to implement actions to mitigate the impact of statutory reserve requirements and the failure of demand for long-term care insurance to increase; |
• | Risks relating to our International segment, including political and economic instability or changes in government policies, foreign exchange rate fluctuations, unexpected changes in unemployment rates, unexpected increases in mortgage insurance default rates or severity of defaults, the significant portion of high loan-to-value insured international mortgage loans which generally result in more and larger claims than lower loan-to-value ratios, competition with government-owned and government-sponsored enterprises (“GSEs”) offering mortgage insurance and changes in regulations; |
• | Risks relating to our U.S. Mortgage Insurance segment, including increases in mortgage insurance default rates, failure to meet, or have waived to the extent needed, the minimum statutory capital requirements and hazardous financial condition standards, uncertain results of continued investigations of insured U.S. mortgage loans, possible rescissions of coverage and the results of objections to our rescissions, the extent to which loan modifications and other similar programs may provide benefits to us, unexpected changes in unemployment and underemployment rates, further deterioration in economic conditions or a further decline in home prices, problems associated with foreclosure process |
defects that may defer claim payments, changes to the role or structure of Federal National Mortgage |
Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), competition with government-owned and government-sponsored enterprises offering mortgage insurance, changes in regulations that affect the U.S. mortgage insurance business, the influence of Fannie Mae, Freddie Mac and a small number of large mortgage lenders and investors, decreases in the volume of high loan-to-value mortgage originations or increases in mortgage insurance cancellations, increases in the use of alternatives to private mortgage insurance and reductions by lenders in the level of coverage they select, the impact of the use of reinsurance with reinsurance companies affiliated with mortgage lending customers, legal actions under the Real Estate Settlement Procedures Act of 1974 (“RESPA”) and potential liabilities in connection with our U.S. contract underwriting services; |
• | Other risks, including the possibility that in certain circumstances we will be obligated to make payments to General Electric Company (“GE”) under the tax matters agreement with GE even if our corresponding tax savings are never realized and payments could be accelerated in the event of certain changes in control and provisions of our certificate of incorporation and bylaws and the tax matters agreement with GE may discourage takeover attempts and business combinations that stockholders might consider in their best interests; and |
• | Risks relating to our common stock, including the suspension of dividends and stock price fluctuations. |
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
Overview
Our business
We are a leading financial security company dedicated to providing insurance, wealth management, investment and financial solutions to more than 15 million customers, with a presence in more than 25 countries. We have three operating segments: Retirement and Protection, International and U.S. Mortgage Insurance.
• | Retirement and Protection. We offer and/or manage a variety of protection, wealth management and retirement income products. Our primary insurance products include life and long-term care insurance. Additionally, we offer other Medicare supplement insurance products, as well as care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs and advisor services, financial planning services and fixed deferred and immediate individual annuities. We previously offered variable deferred annuities and group variable annuities offered through retirement plans. For the three months ended |
• | International. We offer mortgage and lifestyle protection insurance products and related services in multiple markets. We are a leading provider of mortgage insurance products in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. We are a leading provider of protection coverages primarily associated with certain financial obligations (referred to as lifestyle protection) in multiple European countries. These lifestyle protection insurance products help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary |
unemployment, disability or death. For the three months ended |
• | U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively provide mortgage insurance on a structured, or bulk, basis with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage capital and risk. For the three months ended |
We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). For the three months ended March 31,June 30, 2011, the net loss available to Genworth Financial, Inc.’s common stockholders and net operating loss available to Genworth Financial, Inc.’s common stockholders were both $77 million for Corporate and Other activities. For the six months ended June 30, 2011, Corporate and Other activities had a net loss available to Genworth Financial, Inc.’s common stockholders and a net operating loss available to Genworth Financial, Inc.’s common stockholders of $76$153 million and $72$149 million, respectively.
Business trends and conditions
Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions. The following discussion of business trends and conditions should be read together with the trends discussed in our 2010 Annual Report on Form 10-K, which described additional business trends and conditions.
General conditions and trends affecting our businesses
Financial and economic environment. The stability of both the financial markets and global economies in which we operate impacts the sales, revenue growth and profitability trends of our businesses. Improvements in equity markets, credit markets and interest rate spreads and global financial markets seen during 2010 generally continued in the first half of 2011. Although global financial markets experienced some improvement, the European debt crisis and concerns regarding the U.S. debt ceiling impacted the rate of recovery. The U.S. housing market reflected continuing stress and growing levels of foreclosures with variations in performance by sub-market, including signs of stabilization within certain regions while others declined. Unemployment and underemployment levels in the United States remained relatively constant with the fourth quarter of 2010 and the first quarter of 2011. We expect unemployment and underemployment levels in the United States to stabilize and gradually decrease over time though remain elevated for an extended period. In Canada, the housing market continued to improve with home prices remaining stable, while unemployment levels remained relatively in line withimproved modestly from the fourthfirst quarter of 2010.2011. In Australia, the housing market has remained fairly stable with home prices declining modestly from the first quarter of 2011 and unemployment levels remainedremaining consistent with the fourthfirst quarter of 2010 despite2011. Consumers in
Australia became more cautious given higher interest rates, higher costs of living, general concerns about the global economy and slow recovery in regions impacted by the recent natural disasters though these disasters could impact regional economies over the medium-term. The U.S. housing market reflected continuing stress, growing levels of foreclosures and variations in performance by sub-market, including continued signs of stabilization within certain regions.disasters. Europe remained a slow growth environment with lower lending activity and reduced consumer lending activity.spending, particularly in Greece, Spain, Portugal, Ireland and Italy, in part as a result of the European debt crisis. See “—Trends and conditions affecting our segments” below for a discussion regarding the impacts the financial markets and global economies have on our businesses.
Slow or varied levels of economic growth, coupled with uncertain financial markets and economic outlooks, changes in government policy, regulatory reforms and other changes in market conditions, influenced, and we believe will continue to influence, investment and spending decisions by consumers and businesses as they adjust their consumption, debt, capital and risk profiles in response to these conditions. Although these trends have generally improved as investor confidence in the markets and the outlook for some consumers and businesses strengthened, our sales, revenues and profitability trends of certain insurance and investment products have been and could be further adversely impacted going forward. In particular, factors such as government spending, monetary policies, concerns around resolution of the U.S. debt ceiling, the volatility and strength of the capital markets, anticipated tax policy changes and the impact of U.S. healthcare and global financial regulation reform will continue to affect economic and business outlooks and consumer behaviors moving forward.
The U.S. government, Federal Reserve and other legislative and regulatory bodies continue to take a variety ofcertain actions to support the economy and capital markets, influence interest rates, stabilizeinfluence housing markets and mortgage servicing and provide liquidity to promote economic growth. These include various mortgage restructuring programs
implemented or under consideration by the GSEs, lenders, servicers and the U.S. government. Outside of the United States, various governments took actions to stimulate economies, stabilize financial systems and improve market liquidity. In general, these actions have positively affectedpreviously had a positive effect on these countries and their markets; however, there can be no assurance as to the future level of impact these types of any of these actionsaction may have on the economic and financial markets, including levels of volatility. A delayed economic recovery period or a U.S. or global recessionary or debt crisis setback could materially and adversely affect our business, financial condition and results of operations.
We evaluate our product offerings, investment and asset-liability management strategies to moderate risk especially during periods of strained economic and financial market conditions. In addition, we continue to review our product and distribution management strategies to align with our strengths, profitability targets and risk tolerance. These and other company actions should enhance our competitive position as well as our capital flexibility and liquidity.
Volatility in credit and investment markets. During the firstsecond quarter of 2011, markets were characterized by rising volatilityhigh levels of uncertainty regarding resolution of issues around peripheral Europe and, particularly toward the latter part of the quarter, disappointing economic data and concerns around resolution of the U.S. debt ceiling. Spreads on domestic U.S. issuances continued to decline early in the second quarter of 2011, as uncertainty remained contained and demand and issuance was strong. However, as the European Union’s policy failed to provide conclusive support for Greece and other less stable peripheral European countries, and concerns about the U.S. Treasurydebt ceiling rose, issuances declined markedly and credit spreads began to widen. Despite these adverse developments and spread widening during the second quarter of 2011, investor demand remained strong for investment grade debt and higher quality issues that came to market due to external events in Europe, North Africa and the Middle East and due to the earthquake in Japan. Credit spreads were generally less volatile and ended the quarter tighter. Macroeconomic conditions, improving company fundamentals, declining corporate default rates, reduced net supply of spread product and continued strong investor demand drove the tightening in both credit and securitized products. Fears regarding systemic risk were largely contained this quarter, despite European sovereign concerns and political instability in North Africa and the Middle East. Foroversubscribed. Similarly for securitized products, the market continued to see shrinking supply, thoughlatter half of the second quarter of 2011 saw increased volatility, mainly driven by weaker economic and housing data. In addition, the liquidation of certain non-agency securities by the Federal Reserve weighed heavily on the markets, and this coupled with heavy issuance did improve inof commercial mortgage-backed securities. Asset valuations in securitized sectors continued to improve given a strong supplysecurities put pressure on both residential and demand imbalance, stable credit performance and the structural protections embedded in the transactions brought to market.commercial mortgage-backed securities.
Certain segments of the marketplace are still experiencing declines in the performance of collateral underlying certain structured securities, but impairments in our investment portfolio remained consistent withdeclined further in the second quarter of 2011 from the moderate levels recorded in the thirdsecond half of 2010 and fourth quartersthe first quarter of 2010. 2011.
We recorded net other-than-temporary impairments of $36$62 million induring the first quarter ofsix months ended June 30, 2011 which were lower than prior year levels and we expect losses to moderate further. Although economic conditions may continue to negatively impact certain investment valuations, the underlying collateral associated with securities that have not been impaired continues to perform.
Looking ahead, we believe that the current credit environment provides us with opportunities to invest across a variety of asset classes to meet our yield requirements, as well as to continue execution of various risk management disciplines involving further diversification within the investment portfolio. See “—Investments and Derivative Instruments” for additional information on our investment portfolio.
Trends and conditions affecting our segments
Retirement and Protection
Life insurance. Results of our life insurance business are impacted by sales, mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements. Additionally, sales of our products and persistency of our insurance in-force are dependent on competitive product features and pricing, effective distribution and customer service.
Life insurance sales increased in the first half of 2011 compared to the first half of 2010 in part due to strong adoption of our new term universal life insurance product and remained stable through the second half of 2010 and into the first quarter of 2011 with salesproduct. Sales of our term universal life insurance product were up 29% in the first quarterhalf of 2011 versus the traditional term and term universal life insurance sales in the prior year.year and up 16% from the first quarter of 2011. We believe our term universal life insurance product offers a better value proposition to the consumer when compared to our traditional term life insurance products which we no longer sell. Based on recent sales trends, weWe believe our term universal life insurance product ishas been competitively priced for the middle and emerging affluent markets. markets as reflected in recent trends. We expect our sales levels could be impacted by shifts in consumer demand, relative pricing, return on capital decisions and other factors; therefore, we expect to see a reduced level of sales in the second half of 2011.
Throughout 2010 and into 2011, we experienced favorable mortality results in our term life insurance products as compared to priced
mortality assumptions. Additionally,During this same period, while less severe in the first quarter of 2011 than in prior quarters, we have experienced lower persistency as compared to pricing assumptions for 10-year term life insurance policies written in 1999 and 2000 as they go through their post-level rate period. We expect this trend in persistency to continue as these 10-year term life insurance policies go through their post-level rate period and then moderate thereafter.
Regulations XXX and AXXX require insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and for certain universal life insurance policies with secondary guarantees. This increases the capital required to write these products beyondto be in excess of economic requirements. The alternatives available to reduce the impact for the increased reserve requirements on some of our in-force books of business have over time become limited andor more expensive. Despite this, committed funding sources are in place for approximately 95% of our anticipated peak level reserves required under Regulations XXX and AXXX, and therefore we believe unfunded reserve exposure is minimal. In addition, the statutory reserve requirements of Regulations XXX and AXXX are currently being reviewed by the Life Actuarial Task Force of the National Association of Insurance Commissioners (“NAIC”). While it is too early to assess how this task force will address specific issues, if any, related to the statutory reserve requirements, any new interpretation of, or future revisions to, the valuation requirements could impact our life insurance business.
Long-term care insurance. Results of our long-term care insurance business are influenced by sales, morbidity, mortality, persistency, investment yields, new product sales, expenses and reinsurance as well as the relative competitiveness of our offerings.
In recent years, industry-wide first-year annualized premiums of long-term care insurance declined during the recession and rebounded as the economy stabilized. This positive trend continued during the first quarter of 2011. Sales of our individual long-term care insurance product have increased 48%47% in the firstsecond quarter of 2011 versus the prior year
due in part to growth in the market and competitor actionsactions. These trends combined with the impacts of the progress made on our multiple growth initiatives relating to distribution effectiveness and broadening of our individual and group offerings.offerings have resulted in increased sales. We expect our sales levels could be impacted by shifts in consumer demand, relative pricing, pricing of next generation products, return on capital decisions and other factors; therefore, we expect to see a reduced level of sales in the second half of 2011. In addition, we have experienced, and may continue to experience, higher claims than priced for in older issued policies which negatively impact our results of operations.
InSince the fourth quarter of 2010, oneseveral of our competitors announced its intent to exithave exited the long-term care insurance market effective January 1, 2011. In addition, several competitors haveor announced their intent to seek rate actions on their individual and certain group long-term care insurance products. These announcements by competitors could disrupthave disrupted the market and could impact our sales going forward.
We continue pursuing multiple initiatives including: new product issuance and service offerings; investing in care coordination capabilities; maintaining tight expense management; actively exploring alternative reinsurance strategies; executing effective investment strategies; and considering other actions to improve business profitability and the performance of the overall block. These efforts include evaluating the need for future in-force rate increases, where warranted. In this connection,regard, we began filing for a rate increase of 18% on two blocks of older long-term care insurance policies in November 2010. As of June 30, 2011, we have received approvals in 30 states which represent more than 50% of the impacted premiums. The state approval process of an in-force rate increase varies, and in certain states can take up to two years to obtain approval. Upon approval, premium increases may only occur on an insured’s policy anniversary date. Therefore, the benefits of any rate increase may not be fully realized until the implementation is complete over the next severalfew years.
In addition, changesChanges in regulations or government programs, including long-term care insurance rate action legislation and certain aspects of healthcare reform, such as the Community Living Assistance Services and Supports (“CLASS”) Act, could impact our long-term care insurance business positively or negatively. As such, we continue to actively monitor regulatory developments.
In June 2011, we reached an agreement to sell our Medicare supplement insurance business for $290 million in cash, subject to customary adjustments based on the amount of capital in the business at closing. We expect to recognize a realized gain on the sale, with the closing of the sale expected to occur in the fourth quarter of 2011.
Wealth management.Results of our wealth management business are impacted by the demand for asset management products and related support services, investment performance and equity market conditions.
The equity and fixed income market improvements since the second quarter of 2009, ourOur introduction of new investment strategies, the expansion of products and services we offer to our advisors and an increase in the
number of advisors that do business with us have collectively contributed to our highergrowth in assets under management from sales and positive net flows and assets under management.for nine sequential quarters. Depending upon the direction of equity and fixed income markets in the future, we could see a correlated impact on sales, net flows and assets under management.
On December 31, 2010, we purchased the operating assets of Altegris Capital, LLC (“Altegris”). This acquisition provided a platform of alternative investments including hedge funds and managed futures products and had approximately $2.2 billion in client assets as of December 31, 2010.
Retirement income.Results of our retirement income business are affected by investment performance, interest rate levels, slope of the interest rate yield curve, net interest spreads, equity market conditions, mortality, policyholder lapses, new product sales and relative competitiveness of our offerings. Our competitive position within many of our distribution channels and our ability to grow this business depends on many factors, including product offerings, relative pricing and company ratings. Our product offerings include current and minimum crediting rates on our spread-based products and surrender charges. Guaranteed benefit features of our in-force variable annuity products provide guaranteed death or living benefits to the consumer.
Refinements of product offerings and related pricing, including reduced commission structures, and investment strategies reflect targeted growth plans to achieve appropriate risk adjusted returns. In January 2011, we discontinued sales of our individual and group variable annuities; however, we will continue to service our existing block of business and accept additional deposits on existing contracts.
In fixed annuities, sales may fluctuate as a result of consumer demand, changes in interest rates, changecredit spreads, relative pricing, return on capital decisions and as we offer these products using a disciplined approach to meet targeted returns.manage risks. We have introduced new market value adjustment deferred annuity products in the brokerage general agency (“BGA”) channel and we have re-priced immediate annuities to maintain spreads and targeted returns. Early in 2010, we reinvested a significant portion of the excess cash and achieved improvements in spread-related income as a result of higher yields. Looking ahead, we will continue to actively evaluate marketing and investment strategies in the event that interest rates increase. We have targeted distributors and producers and maintained sales capabilities that align with our focused strategy. We have expanded distribution relationships with new financial institutions, independent financial planners and BGAs and we expect to continue to further expand these distribution relationships while selectively adding additional product offerings.
In variable annuities, the improvement in equity markets favorably impacted our results. In the future, equity market performance and volatility could result in additional gains or losses in our variable annuity products although associated hedging activities are expected to mitigate these impacts. As this is a closed block of business, we will see limited new deposits as we will only accept additional deposits on existing contracts.
International
International mortgage insurance.Results of our international mortgage insurance business are affected by changes in regulatory environments, employment levels, consumer borrowing behavior, lender mortgage-related strategies and other economic and housing market trends,influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels of mortgage delinquencies and movements in foreign currency exchange rates.
Canada and Australia comprise approximately 97% of our international mortgage insurance risk in-force with an estimated average effective loan-to-value ratio of 62%60% as of March 31,June 30, 2011. We expect that these established markets will continue to be key drivers of revenues and earnings in our international mortgage insurance business. Our entry and growth in developing international markets will remain selective and disciplined.
During 2010, we continued to observe increased stability in international housing markets, particularly inIn Canada, and Australia, asduring the economic recovery which began in 2009 gained momentum. As a result of improving economic and employment outlooks, relatively low mortgage rates, improved housing affordability
and consumer confidence, home sales activity remained strong and home prices increased at the start of 2010 in these two markets. During the secondfirst half of 2011, favorable economic conditions persisted with housing affordability benefiting from low interest rates and historically low unemployment levels. In 2011, the Bank of Canada maintained the overnight rate at 1.0% which was set in 2010 home price appreciation moderated after a sustained periodand we expect the Bank of growth.Canada to slightly increase the overnight rate through the remainder of 2011. During the first quarterhalf of 2011, home prices increased modestly in Canada and we expect home prices to remain consistent with the current levels during the remainder of the year. Additionally, the unemployment rate in Canada improved marginally from the first quarter of 2011.
In Canada, flow new insurance written during the first half of 2011 remained consistent with levels in the first half of 2010. As of June 30, 2011, our 2010 book of business represents 12% of our insurance in-force while our 2007 and 2008 book years, the two largest in our portfolio, together represent 31% of our insurance in-force. As a result of our large 2007 and 2008 book years and subsequent smaller books seasoning during 2011, earned premiums in Canada are expected to decline moderately relative to 2010 levels. In January 2011, the Canadian government announced new mortgage rules that became effective in March and April of 2011. These changes may reduce the amount of flow new insurance written in 2011 primarily due to a smaller refinance market. The impact on net premiums written will depend upon the refinance share of new mortgage originations and the effect of the elimination of the 35-year amortization option. We expect this trend to continue if economic conditions in Canada continue to be favorable and we are able to continue to gradually increase our market share.
Losses in Canada have remained relatively flat from levels experienced in Australia. During2010 as improving overall economic conditions and stable housing markets, as well as the remaindersuccess we experienced with our loss mitigation initiatives, were pressured by delinquency trends in Alberta earlier in the year. While loss levels may vary quarterly based on seasonal or event-driven fluctuations, we expect our overall loss levels in Canada to improve modestly over time compared with levels experienced in 2010.
In June 2011, the Canadian government passed legislation, that when effective, will formalize existing mortgage insurance arrangements with private mortgage insurers to eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase our effective tax rate on a U.S. GAAP basis, as prior deductions for contributions to the fund lowered the effective tax rate on Canadian earnings. However, this legislation does not change the current government guarantee of 90% provided on mortgages we insure. While we do not anticipate any significant impacts to our business as a result of this legislation, a full assessment of the impact on our business cannot be completed until the regulations are finalized.
As part of our capital optimization strategies, Genworth MI Canada Inc. (“Genworth Canada”), our indirect subsidiary, repurchased CAD$160 million of its existing common shares through a substantial issuer bid in June 2011. Brookfield Life Assurance Company Limited (“Brookfield”), our indirect wholly-owned subsidiary, participated in the issuer bid by making a proportionate tender and received CAD$90 million and continues to hold approximately 57.5% of the outstanding common shares of Genworth Canada.
In Australia, the economy has slowed, particularly in Queensland, given the economic impact of the flooding in January 2011, pressures from higher interest rates, higher costs of living, higher exchange rates and cautious consumer spending. As a result, increased levels of new delinquencies were reported by financial institutions in this market, which adversely impacted the results of our operations. The housing market in Australia has remained fairly stable despite home price declines in the second quarter of 2011 and we expect home prices to remain consistent with current levels. Additionally, unemployment levels remained consistent with the first quarter of 2011. In 2011, the Reserve Bank of Australia maintained the cash rate at 4.75% which is consistent with the rate in both CanadaDecember 2010 and Australia.we expect the Reserve Bank of Australia to maintain the cash rate near current levels through the remainder of the year.
Total mortgage market activity in Australia continued to slow during the first half of 2011 as consumers became more cautious about higher interest rates, rising personal debt levels and global economic uncertainty. Additionally, we observed a decline in unemployment rates in these two markets during 2010 with rates remaining fairly stablesome lenders were slow to return to the high loan-to-value market. Our flow new insurance written further decreased during the first quarter of 2011. However,2011 compared to the fourth quarter of 2010 reflecting a smaller mortgage originations market, as well as the economic impact of recent natural disasters. While flow new insurance written in the second quarter of 2011 improved from the first quarter of 2011, we expect flow new insurance written to remain flat compared to 2010 levels for the remainder of the year.
Losses in Australia withimproved throughout most of 2010 as a result of continued loss mitigation activities and the combinedbenefits of the improving economic environment. In the first quarter of 2011, this trend reversed driven by higher reserves for claims anticipated from the natural disasters during that quarter, particularly the flooding in Queensland. In the second quarter of 2011, there was an increase in delinquencies and reserves as the cumulative impact of higher mortgage interest rates, increasesthe factors noted previously exerted pressure on elements of the portfolio. We expect these pressures to continue through the remainder of 2011 resulting in an elevated loss ratio as was seen in the costsecond quarter of living2011 which may begin to moderate in 2012.
As part of our strategy to reduce dependence on affiliate reinsurance and January flooding,to aid the Queensland economy is pressured which could adversely impactcapital optimization strategies in Australia, our resultsindirect wholly-owned subsidiary, Genworth Financial Mortgage Insurance Pty Limited, issued AUD$140 million of operations.subordinated floating rate notes in June 2011.
In many of our European mortgage insurance markets, we have observed early signs of stabilization as unemployment rates appear to be peaking and declines in home prices have moderated. The overall economic environment in Europe, however, continues to be dominated by concerns about the fiscal health of the region, which has created uncertainty about the timing and speed of economic recovery.
Since the beginning of 2010, the Bank of Canada increased the overnight rate by 75 basis points to 1.0% and we expect the Bank of Canada to maintain the overnight rate at current levels at least through the first half of 2011. In Australia, as a sign of the relative health and stability of that economy, the Reserve Bank of Australia increased the cash rate by 175 basis points to 4.75% between September 30, 2009 and March 31, 2011. We also expect the Reserve Bank of Australia to maintain the cash rate at current levels through the first half of 2011.
In Canada, we experienced higher than anticipated levels of flow new insurance written during 2010. A low mortgage interest rate environment in 2010 and improved consumer confidence contributed to these higher levels. During the first quarter of 2011, favorable economic conditions persisted with housing affordability benefiting from low interest rates and historically low unemployment levels. As of March 31, 2011, our 2010 book of business represents 12% of our insurance in-force while our 2007 and 2008 book years, the two largest in our portfolio, together represent 33% of our insurance in-force. As a result of our large 2007 and 2008 book years and subsequent smaller books seasoning during 2011, earned premiums in Canada are expected to decline moderately relative to 2010 levels. In January 2011, the Canadian government announced new mortgage rules that became effective in March and April of 2011. These changes may reduce the amount of net premiums written in 2011. This decline may be offset by modest growth in flow new insurance written in 2011 if economic conditions in Canada continue to be favorable and we are able to continue to gradually increase our market share.
In Australia, total mortgage market activity slowed during 2010 as the incremental government stimulus and incentives for first-time homebuyers implemented during the economic downturn were eliminated. Additionally, high loan-to-value mortgage originations, particularly above 90% loan-to-value, declined significantly in 2010 as banks allocated less capital to high loan-to-value lending and consumers became cautious of rising personal debt levels. This trend continued during the first quarter of 2011. These factors, combined with increased interest rates beginning in the fourth quarter of 2009, led to a decrease in mortgage originations and an associated decrease in our flow new insurance written during 2010 compared to 2009 levels. Our flow new insurance written further decreased during the first quarter of 2011 compared to the fourth quarter of 2010 reflecting smaller mortgage originations market as well as the economic impact of recent natural disasters. For the remainder of 2011, we expect flow new insurance written to remain flat compared to 2010 levels.
Over the past twoseveral years, we significantly expanded our focus on, and the resources devoted to, loss mitigation initiatives, including programs that actively partner with our lenders to find solutions that cure delinquencies through actions such as loan modifications that keep borrowers in their homes, asset management strategies such as arranged and facilitated sales and pursuing recoveries. Loan modification programs benefit all parties as borrowers are able to remain in their homes, lenders maintain their relationship with the borrower andwhile retaining an interest earning asset, and we mitigate claim payments under the terms of our mortgage insurance policies. Additionally, in cases where no solution is found to cure the delinquency and keep the borrower in their home, we are actively partnering with our lenders to optimize the transition process, including taking early possession of properties andto mitigate claim payments. As a result of our expanded focus, there was an increase in the
number of loans subject to our loss mitigation initiatives, which had a favorable impact on our results of operations. We have also seen improvements in our total losses as economies continue to improve, home price appreciation transitions to a stable rate of growth and unemployment levels decline. With ongoing improvement in the Canadian and Australian economies and stable housing markets, as well as the success we are experiencing with our loss mitigation initiatives outlined above, we expect our overall loss levels to improve modestly over time compared with levels experienced in 2010. These loss levels will vary quarterly based on seasonal or event-driven fluctuations.
Lifestyle protection insurance. Growth and performance of our lifestyle protection insurance business is dependent in part on economic conditions, including consumer lending levels, unemployment trends, client account penetration and mortality and morbidity trends. Additionally, the types and mix of our products will vary based on regulatory and consumer acceptance of our products.
The profitability of our lifestyle protection insurance business improved during 2010 and inthrough the first quarterhalf of 2011 and has been driven by lower new claim registrations from stabilizing European unemployment levels and the impact of our policy re-pricing and distribution contract restructuring initiatives. Sales during 2010 decreased primarily as a result of stagnating economies across Europe, which resulted in a decline in consumer lending where most of our insurance coverages attach as banks tightened lending criteria and consumer demand declined. Sales in the first quarter of 2011 remained consistent with the fourth quarter of 2010 levels.levels but improved in the second quarter of 2011 as a result of signing new clients during the quarter. We are actively pursuing various growth initiatives to expand our distribution channels and our product offerings which have begun to help to mitigate lower consumer lending levels. However, depending on the severity and length of these conditions, we could experience additional declines in sales or the inability to generate targeted growth in new sales.
New claim registrations on unemployment-related policies declined throughout 2010 and through the first quarterhalf of 2011 and areremain at the lowest levels since the third quarter of 2008. This, combined with stabilizing claim durations, has led to a decrease inlower loss ratio since the second quarter of 2010 and our loss ratio.ratio has remained relatively consistent with the third quarter of 2010. The improvement in our loss ratio has been most notable in the Nordic and Western Europe regions. We expect unemployment rates in Europe to slowly declineimprove over the next several quarters with regional variation. Additionally, we expect slow but positive European gross domestic product growth, which could positively impact consumer lending demand as well as reduce claim pressures through new job creation.
During 2010 and into 2011, significant progress was made in improving profitability through pricing, coverage or distribution contract changes on both new and eligible in-force policies. With most of these contract restructuring projects complete, we are focusing on increasing sales through improved product offerings and expanded distribution channels. We expect these strategies to continue to improve profitability and help to offset the impact of continued high unemployment as well as lower levels of consumer lending.
U.S. Mortgage Insurance
Results of our U.S. mortgage insurance business are affected by unemployment, underemployment and other economic and housing market trends, interest rates, home prices, mortgage origination volume mix and practices, the levels and aging of mortgage delinquencies including seasonal variations, the inventory of unsold homes and lender modification efforts. These economic and housing market trends are continuing to be adversely affected by ongoing weakness in the domestic economy and related levels of unemployment.unemployment and underemployment. This has resulted in numerous outcomes including rising foreclosures, more borrowers seeking loan modifications and elevated housing inventories which place downward pressure on home values. At the same time, home prices are continuing to show signs of stabilizing or improving in several U.S. markets after a significant decline from their peak levels. Overall, we anticipate additional declines in home values during 2011 and we expect unemployment and underemployment levels to stabilize and gradually declinedecrease over time though remain elevated for an extended period.
During
Beginning in 2010, a weak housing market, tightened lending standards, the lack of consumer confidence and the lack of liquidity in some mortgage securitization markets, along with volatility in mortgage interest rates,
continued to drive a smaller mortgage origination market. Within the private mortgage insurance market, the mortgage insurance penetration rate and overall market size was driven down by growth in Federal Housing Administration (“FHA”) originations, associated with multiple pricing, underwriting and loan size factors, and the negative impact of GSE market fees and loan level pricing which made private mortgage insurance solutions less competitive with the FHA solution. Given ongoing FHA risk management actions, we have seen the private mortgage insurance penetration rate increase somewhat inthrough the firstsecond quarter of 2011 and expect this to continue given the additional FHA pricing changes effective in April 2011. This increase has been mitigated in part by increased GSE loan level fees which can make private mortgage insurance less attractive. Going forward, further feesGSE fee increases could limit the demand for or competitiveness of private mortgage insurance. Considering both of these trends, the industry continues to expect to regain market share over time. The mortgage insurance industry level of market penetration and eventual market size will continue to be affected by any actions taken by the GSEs, the FHA or the U.S. government impacting housing policy, underwriting standards or related reforms. The Housing and Economic Recovery Act of 2008 provided for changes to, among other things, the regulatory authority and oversight of the GSEs and the authority of the FHA including with respect to premium pricing, maximum loan limits and down payment requirements. In addition, Fannie Mae and Freddie Mac remain the largest purchasers and guarantors of mortgage loans in the United States.
We continue to manage the quality of new business through prudent underwriting guidelines, which we modify from time to time when circumstances warrant. We also expect to continue realizing the benefit of previously implemented rate increases along with other pricing-related actions. In addition, we regularly monitor competitor pricing and underwriting changes and their potential market impact.
While we are currently experiencingcontinue to experience a decrease in the level of new delinquencies, overall pressure on the housing market continues to adversely affect the performance of our portfolio, particularly our 2006, 2007 and first half of 2008 book years that we believe peaked in their delinquency development during the first quarter of 2010. DelinquenciesAlbeit at a lower rate, delinquencies for these book years continue to drive the level of new delinquencies being reported. While the impact was originally concentrated in certain states and alternative product types, during the last few years, the impact has shifted to more traditional products reflecting the elevated unemployment and underemployment levels throughout the country. Beginning mid-2010, we saw an increase in foreclosure starts as well as an increase in our paid claims as late stage delinquency loans go through foreclosure. We expect thisThis trend to continue at leastcontinued through the second quarter of 2011. Suspensions and delays of foreclosure actions in response to problems associated with lender and servicer foreclosure process defects have caused, and could further cause, claim payments to be deferred to later periods and potentially have an adverse impact on the timing of a recovery of the U.S. residential mortgage market.
The recent stabilization of home prices and unemployment levels in certain markets, expandedExpanded efforts in the mortgage lending market to modify loans and improved performance of our second half of 2008 and the 2009 and 2010 book years compared with the performance of prior book years, resulted in a decreasecontinued reductions in delinquenciesdelinquency levels during the firstsecond quarter of 2011. This decrease reflected a reduction in new delinquencies combined with a higher number of paid claims and increased cures from government and lender loan modification programs and other loss mitigation activities through the first half of 2010. However, aging of delinquencies continued to increase through the remainder of 2010 and through the firstsecond quarter of 2011; moreover, foreclosures continued increasing and liquidations remained elevated through the same period, thereby resulting in higher levels of claims. If home values experience further decline, credit remains tight andor interest rates increase, the ability to cure a delinquent loan could be more difficult to achieve. In addition, while we continue to execute on our loan modification strategy, during the first quarterhalf of 2011, we have seen the level of loan modification actions remain consistent withmoderating against the levellevels we experienced during the fourth quarter of 2010. We saw evidence of low levels of modification activity outside of government programs and servicers distracted by various regulatory and legal actions. Further reduction of loan modifications would have an adverse impact on the ability of borrowers to cure a delinquent loan.
Our loss mitigation activities, including those relating to workouts, loan modifications, pre-sales, rescissions and targeted settlements, net of reinstatements, which occurred during the first quarter ofsix months ended June 30, 2011 resulted in a reduction of expected losses of $122$252 million compared to $233$450 million induring the first quarter ofsix months ended June 30, 2010.
Workouts and loan modifications, which related to loans representing 1%2% of our primary risk in-force as of March 31,June 30, 2011, and occurred during the period then ended, resulted in a reduction of expected losses during the six months ended June 30, 2011 of $94$195 million compared to $113$267 million induring the first quarter ofsix months ended June 30, 2010. Our workout and loan modification programs with various lenders and servicers are designed to help borrowers in default regain current repayment status on their mortgage loans, which ultimately allowed many of these borrowers to remain in their homes. During the first quarter of 2011, we executed a loan restructuringsrestructuring and modificationsmodification program with some of our lender partners that resulted in reduced monthly mortgage loan repayment amounts through reductions of the underlying loans’ interest rates or debt forgiveness by lenders, or through a lengthening of the loans’ principal amortization period, or through some combination thereof. The loans that are subject to workouts and loan modifications that were completed could be subject to potential re-default by the underlying borrower at some future date. In addition, pre-sales and other non-cure workouts that occurred during the first quarter ofsix months ended June 30, 2011 resulted in a reduction of expected losses of $17$38 million compared to $13$28 million that occurred during the first quarter ofsix months ended June 30, 2010.
As a result of investigation activities on certain insured delinquent loans, we found certain levels of misrepresentation and non-compliance with specific terms and conditions of our underlying master insurance policies, as well as fraud. These findings separately resulted in rescission actions that occurred during the first quarter ofsix months ended June 30, 2011 which reduced our expected losses at the time of rescission by $11$19 million compared to $107$155 million that occurred during the first quarter ofsix months ended June 30, 2010. We expect limited benefit from rescission actions in future periods.
During 2010, benefits from loss mitigation activities began shifting from rescissions to loan modifications where we expect a majority of our loss mitigation benefits to be achieved going forward. Although loan servicers continue to pursue a wide range of approaches to execute appropriate loan modifications, government-sponsored programs such as Home Affordable Modification Program (“HAMP”) continue to decline as alternative programs have begun to gain momentum. With lower benefits from government-sponsored programs and the limited impact from alternative programs to date, we have experienced higher levels of paid claims. Depending upon the mix of loss mitigation activity, market trends, and employment levels in future periods and other general economic impacts which influence the U.S. residential housing market, we could see additional adverse loss reserve changes going forward.
We also participate in reinsurance programs in which we share portions of our premiums associated with flow insurance written on loans originated or purchased by lenders with captive insurance entities of these lenders in exchange for an agreed upon level of loss coverage above a specified attachment point. For the threesix months ended March 31,June 30, 2011, we recorded reinsurance recoveries of $21$66 million where cumulative losses have exceeded the attachment points in captive reinsurance arrangements, primarily related to our 2005, 2006, 2007 and 2008 book years. We have exhausted certain captive reinsurance tiers for these book years based on loss development trends. Once the captive reinsurance or trust assets are exhausted, we are responsible for additional losses incurred. We have begun to experience constraints on the recognition of captive benefit recovery due to the amount of funds held in certain captive trusts and the exhaustion of captive loss tiers for certain reinsurers. As of January 1, 2009, we no longer enter into excess loss of captive reinsurance transactions and, therefore, only participate in quota share reinsurance arrangements. The majority of our excess of loss captive reinsurance arrangements are in runoff with no new books of business being added going forward; however, we will continue to benefit from captive reinsurance on our 2005, 2006, 2007 and 2008 book years.
We are executing a non-cash intercompany transaction to increase the statutory capital in our U.S. mortgage insurance companies by using a portion of common shares of Genworth Canada, with an estimated market value of $375 million, currently held by Brookfield, our indirect wholly-owned subsidiary. Once this transaction is complete, we will continue to hold approximately 57.5% of the outstanding common shares of Genworth Canada on a consolidated basis. In addition, Brookfield will have the right, exercisable at its discretion, to purchase for cash these common shares of Genworth Canada from our U.S. mortgage insurance companies at the then current
market price. Brookfield will also have a right of first refusal with respect to the transfer of these common shares of Genworth Canada by the U.S. mortgage insurance companies. This transaction is undergoing customary regulatory review and is expected to be effective as of June 30, 2011, for statutory financial reporting purposes.
As of March 31,June 30, 2011, Genworth Mortgage Insurance Corporation (“GEMICO”) exceeded the maximum risk-to-capital requirement of 25:1. GEMICO is authorized and continues to write new business in North Carolina under a revocable two-year waiver of that state’s maximum 25:1 risk-to-capital requirement limitation, which the North Carolina Department of Insurance (“NCDOI”) approved in a letter dated January 31, 2011. By extension, GEMICO also remains authorized and continues to write business in 34 additional states that do not have a maximum risk-to-capital requirement. TenEleven additional states have granted GEMICO the authority to continue to write new business by a waiver (or other communication) regarding their relative state’s risk-to-capital requirements, subject to varying terms and conditions. Consequently, GEMICO is authorized to write new business in 4546 states as of March 31,June 30, 2011. While we continue to seek this regulatory flexibility through additional state waivers, where available, we expect to manage our capital and business operations so as
to maintain capacity to write new profitable business. Currently, we utilize another one of our U.S. mortgage insurance subsidiaries, Genworth Residential Mortgage Insurance Corporation of North Carolina (“GRMIC-NC”), to write business in those fivefour states where GEMICO is restricted under risk-to-capital requirements and where no waiver has been granted to date. We have also taken steps to be able to utilize another one of our U.S. mortgage insurance subsidiaries, Genworth Residential Mortgage Assurance Corporation (“GRMAC”), for similar purposes. In this regard, Fannie Mae has approved both our use of GRMIC-NC and our request that GRMAC be recognized as an eligible insurer. Fannie Mae’s approvals allow either entity to write business in lieu of GEMICO subject to specified conditions, including that we refrain from utilizing either entity, except in states where GEMICO is prohibited from writing business due to a breach of its maximum risk-to-capital requirement and has not obtained the applicable waiver of such breach. We remain in ongoing consultation with our state regulators and the GSEs regarding our ongoing use of these alternative arrangements, as necessary.
Ratings
Following our announcement on July 20, 2011 that we strengthened reserves by approximately $300 million in our U.S. mortgage insurance business, Standard & Poor’s Financial Services LLC (“S&P”) lowered the financial strength ratings on GEMICO and GRMIC-NC to “BB-” from “BB+.” The “BB” range is the fifth-highest of nine financial strength rating ranges assigned by S&P, which range from “AAA” to “R.” A plus (+) or minus (-) shows relative standing in a rating category. Accordingly, the “BB-” rating is the thirteenth-highest of S&P’s 21 ratings categories.
Consolidated Results of Operations
The following is a discussion of our consolidated results of operations and should be read in conjunction with “—Business trends and conditions.” For a discussion of our segment results, see “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.”
Three Months Ended March 31,June 30, 2011 Compared to Three Months Ended March 31,June 30, 2010
The following table sets forth the consolidated results of operations for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 1,437 | $ | 1,470 | $ | (33 | ) | (2 | )% | $ | 1,455 | $ | 1,470 | $ | (15 | ) | (1 | )% | ||||||||||||||
Net investment income | 830 | 765 | 65 | 8 | % | 881 | 823 | 58 | 7 | % | ||||||||||||||||||||||
Net investment gains (losses) | (28 | ) | (70 | ) | 42 | 60 | % | (40 | ) | (139 | ) | 99 | 71 | % | ||||||||||||||||||
Insurance and investment product fees and other | 329 | 256 | 73 | 29 | % | 359 | 256 | 103 | 40 | % | ||||||||||||||||||||||
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Total revenues | 2,568 | 2,421 | 147 | 6 | % | 2,655 | 2,410 | 245 | 10 | % | ||||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 1,409 | 1,315 | 94 | 7 | % | 1,672 | 1,340 | 332 | 25 | % | ||||||||||||||||||||||
Interest credited | 201 | 213 | (12 | ) | (6 | )% | 204 | 211 | (7 | ) | (3 | )% | ||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 500 | 475 | 25 | 5 | % | 514 | 499 | 15 | 3 | % | ||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 185 | 184 | 1 | 1 | % | 197 | 179 | 18 | 10 | % | ||||||||||||||||||||||
Interest expense | 127 | 115 | 12 | 10 | % | 134 | 109 | 25 | 23 | % | ||||||||||||||||||||||
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Total benefits and expenses | 2,422 | 2,302 | 120 | 5 | % | 2,721 | 2,338 | 383 | 16 | % | ||||||||||||||||||||||
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Income before income taxes | 146 | 119 | 27 | 23 | % | |||||||||||||||||||||||||||
Provision (benefit) for income taxes | 30 | (93 | ) | 123 | 132 | % | ||||||||||||||||||||||||||
Income (loss) before income taxes | (66 | ) | 72 | (138 | ) | (192 | )% | |||||||||||||||||||||||||
Benefit for income taxes | (6 | ) | (5 | ) | (1 | ) | (20 | )% | ||||||||||||||||||||||||
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Net income | 116 | 212 | (96 | ) | (45 | )% | ||||||||||||||||||||||||||
Net income (loss) | (60 | ) | 77 | (137 | ) | (178 | )% | |||||||||||||||||||||||||
Less: net income attributable to noncontrolling interests | 34 | 34 | — | — | % | 36 | 35 | 1 | 3 | % | ||||||||||||||||||||||
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Net income available to Genworth Financial, Inc.’s common stockholders | $ | 82 | $ | 178 | $ | (96 | ) | (54 | )% | |||||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | (96 | ) | $ | 42 | $ | (138 | ) | NM | (1) | ||||||||||||||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Premiums.Premiums consist primarily of premiums earned on insurance products for life, long-term care and Medicare supplement insurance, single premium immediate annuities and structured settlements with life contingencies, lifestyle protection insurance and mortgage insurance.
Our Retirement and Protection segment decreased $6was flat as a $22 million primarily related toincrease in our long-term care insurance business was offset by a $16$12 million decrease in our retirement income business and a $7$10 million decrease in our life insurance business, partially offset by a $17 million increase in our long-term care insurance business.
Our International segment decreased $27$4 million as a result of a $21 million decrease of $43 million in our lifestyle protection insurance business, partially offset by a $16$17 million increase in our international mortgage insurance business. The three months ended March 31,June 30, 2011 included an increase of $10$44 million attributable to changes in foreign exchange rates.
Our U.S. Mortgage Insurance segment was flat.decreased $11 million.
Net investment income. Net investment income represents the income earned on our investments.
Weighted-average investment yields increased to 5.1% for the three months ended June 30, 2011 from 4.8% for the three months ended March 31, 2011 from 4.4% for the three months ended March 31,June 30, 2010. The increase in weighted-average investment yields was primarily attributable to the improved performance of limited partnerships accounted for under the equity method and $16 million of bond calls and prepayments in the reinvestment of cash balances.current year. Net investment income for the three months ended March 31,June 30, 2011 included $4$7 million of higher gains related to limited partnerships as compared to $34 million of losses related to limited partnerships for the three months ended March 31,June 30, 2010.
The three months ended March 31,June 30, 2011 included an increase of $5$13 million attributable to changes in foreign exchange rates in our International segment.
Net investment gains (losses).Net investment gains (losses) consist of realized gains and losses from the sale or impairment of our investments and unrealized and realized gains and losses from our trading securities and derivative instruments. For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”
We recorded $36$26 million of net other-than-temporary impairments for the three months ended March 31,June 30, 2011 as compared to $80$51 million for the three months ended March 31,June 30, 2010. Of total impairments for the three months ended March 31,June 30, 2011 and 2010, $21$17 million and $62$43 million, respectively, related to structured securities, including $15$9 million and $36$23 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Impairments related to corporate securities as a result of bankruptcies, receivership or concerns aboutFor the issuer’s ability to continue to make contractual payments or wherethree months ended June 30, 2011 and 2010, we have intent to sell were $14recorded $4 million and $5 million, forrespectively, of impairments related to commercial mortgage loans and $2 million and $4 million, respectively, of impairments related to limited partnership investments. For the three months ended March 31,June 30, 2011, and 2010, respectively. Wewe also recorded impairments$3 million of $6 millionimpairments related to financial hybrid securities and $7 million related to limited partnership investments during the three months ended March 31, 2010.real estate held-for-investment.
Net investment losses related to derivatives of $10$15 million infor the first quarter ofthree months ended June 30, 2011 were primarily relateddue to $8 million of losses associated with derivative instruments used to hedge foreign currency risk, $4$16 million of losses from the change in the value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”) exceeding the change in value of the embedded derivative liabilities and $2$4 million of losses dueassociated with derivatives used to hedge ineffectiveness.foreign currency risk. These losses were partially offset by $3 million of gains from credit default swaps due to narrowing credit spreads and $1 million of gains related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position.position and $2 million of gains in other non-qualified interest rate swaps. Net investment losses related to derivatives of $8$38 million infor the first quarter ofthree months ended June 30, 2010 were primarily related to $14$31 million of losses from the change in value of our credit default swaps due to widening credit spreads, $21 million of losses from the change in value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of the embedded derivative liabilities and $3$9 million of losses related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. These losses were partially offset by $15 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $4 million of gains from other non-qualified interest rate swaps, $2 million of gains related to embedded derivatives associated with certain reinsurance agreements and $2 million of gains from foreign currency options and forward contracts.
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Net losses related to the sale of available-for-sale securities were $2$9 million induring the first quarter ofthree months ended June 30, 2011 compared to $15net gains of $17 million induring the first quarterthree months ended June 30, 2010. We recorded $14 million of 2010.net gains related to trading securities during the three months ended June 30, 2011. We recorded $42 million of lower net losses related to securitization entities during the three months ended June 30, 2011 compared to the three months ended June 30, 2010 primarily associated with lower losses related to derivatives. We also recorded $16$2 million fromof gains related to commercial mortgage loans during the recovery ofthree months ended June 30, 2011 attributable to a counterparty receivabledecrease in the first quarterallowance compared to $18 million of 2010.losses during the three months ended June 30, 2010 from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance.
Insurance and investment product fees and other. Insurance and investment product fees and other consist primarily of fees assessed against policyholder and contractholder account values, surrender charges, cost of insurance assessed on universal and term universal life insurance policies, advisory and administration service fees assessed on investment contractholder account values, broker/dealer commission revenues and other fees.
Our Retirement and Protection segment increased $78$88 million largely driven by ana $61 million increase of $39 million in our life insurance business, ana $25 million increase of $29 million in our wealth management business and ana $4 million increase of $8 million in our retirement income business.
Our International segment increased $10 million primarily as a result of an increase of $6 million in our international mortgage insurance business and an increase of $4 million in our lifestyle protection insurance business. The three months ended June 30, 2011 did not include a change attributable to changes in foreign exchange rates.
Corporate and Other activities increased $4 million.
Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of benefits paid and reserve activity related to current claims and future policy benefits on insurance and investment products for life, long-term care and Medicare supplement insurance, structured settlements and single premium immediate annuities with life contingencies, lifestyle protection insurance and claim costs incurred related to mortgage insurance products.
Our Retirement and Protection segment increased $44$43 million primarily attributable to a $34$62 million increase in our long-term care insurance business and a $30$7 million increase in our life insurance business, partially offset by a $20$26 million decrease in our retirement income business.
Our International segment decreased $33$21 million primarily as a result of a decrease of $36$22 million in our lifestyle protection insurance business, partially offset by an increase of $3$1 million in our international mortgage insurance business. The three months ended March 31,June 30, 2011 included an increase of $6$13 million attributable to changes in foreign exchange rates.
Our U.S. Mortgage Insurance segment increased $83$310 million.
Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances.
Our Retirement and Protection segment decreased $6$3 million principally relatedprimarily attributable to a $10 million decrease in our retirement income business, partially offset by an $8 million increase in our life insurance business.
Corporate and Other activities decreased $6$4 million.
Acquisition and operating expenses, net of deferrals. Acquisition and operating expenses, net of deferrals, represent costs and expenses related to the acquisition and ongoing maintenance of insurance and investment contracts, including commissions, policy issuance expenses and other underwriting and general operating costs. These costs and expenses are net of amounts that are capitalized and deferred, which are primarily costs and expenses that vary with and are primarily related to the sale and issuance of our insurance policies and investment contracts, such as first-year commissions in excess of ultimate renewal commissions and other policy issuance expenses.
Our Retirement and Protection segment increased $43$22 million primarily attributable to a $26$20 million increase in our wealth management business and a $14$2 million increase in our retirement income business and an $11 million increase in our long-term care insurance business, partially offset by an $8 million decrease in our life insurance business.
Our International segment decreased $5 million primarily related towas flat as a $6 million decrease in our lifestyle protection insurance business was offset by an increase of $6 million in our international mortgage insurance business. The three months ended March 31,June 30, 2011 included a decreasean increase of $2$17 million attributable to changes in foreign exchange rates.
Corporate and Other activities decreased $13$9 million.
Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles consists primarily of the amortization of acquisition costs that are capitalized, present value of future profits and capitalized software.
Our Retirement and Protection segment increased $6$14 million primarily attributable to an $18a $16 million increase in our retirement income business, partially offset by a $7$2 million decrease in our life insurance business and a $5 million decrease in our long-term care insurance business.
Our International segment decreasedincreased $5 million primarily related to a $10$3 million decreaseincrease in our lifestyle protection insurance business partially offset byand a $5$2 million increase in our international mortgage insurance business. The three months ended March 31,June 30, 2011 included an increase of $1$5 million attributable to changes in foreign exchange rates.
Interest expense. Interest expense represents interest related to our borrowings that are incurred at our holding company or subsidiary level and our non-recourse funding obligations and interest expense related to certain reinsurance arrangements being accounted for as deposits.
Our Retirement and Protection segment increased $4decreased $3 million related to our life insurance business.
Our International segment decreased $4increased $12 million related to a decreasedriven by an increase of $10$6 million in each of our international mortgage insurance and our lifestyle protection insurance business, partially offset by a $6 million increase in our international mortgage insurance business.businesses. The three months ended March 31,June 30, 2011 included a decreasean increase of $1$2 million attributable to changes in foreign exchange rates.
Corporate and other activities increased $12$16 million.
Provision (benefit)Benefit for income taxes.The effective tax rate increased to 20.5%9.1% for the three months ended March 31,June 30, 2011 from (78.2)(6.9)% for the three months ended March 31,June 30, 2010. This increase in the effective tax rate was primarily attributable to changeshigher taxes in uncertainthe current year as a result of a Canadian legislative change as compared to an Australian tax benefitslegislative benefit in the prior year relatedyear. The Canadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to separation fromincrease the effective tax rate on our former parent, partially offset by lower taxed foreign income andU.S. generally accepted accounting principles (“U.S. GAAP”) earnings as prior deductions for contributions to the fund lowered the effective tax favored investments.rate on U.S. GAAP earnings. The three months ended March 31,June 30, 2011 included an increase of $3$4 million attributable to changes in foreign exchange rates.
Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portion of equityincome in a subsidiary attributable to third parties. The three months ended March 31,June 30, 2011 included an increase of $2 million attributable to changes in foreign exchange rates.
Net income (loss) available to Genworth Financial, Inc.’s common stockholders. We reported lowera net incomeloss available to Genworth Financial, Inc.’s common stockholders in the current year compared to net income available to Genworth Financial, Inc.’s common stockholders in the prior year primarily related to a $106 million tax benefit related to separation from our former parent recorded in the first quarter of 2010 and a higher net operating loss in our U.S. Mortgage Insurance segmentmortgage insurance business largely related to the reserve strengthening during the three months ended June 30, 2011 and additional tax benefits recognized in the prior year. These decreases were partially offset by higher product fee income and improved investment performance in the current year. For a discussion of our Retirement and Protection, International and U.S. Mortgage Insurance segments and Corporate and Other activities, see the “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.” Included in the net loss available to Genworth Financial, Inc.’s common stockholders for the three months ended June 30, 2011 was an increase of $14 million, net of tax, attributable to changes in foreign exchange rates.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
The following table sets forth the consolidated results of operations for the periods indicated:
Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 2,892 | $ | 2,940 | $ | (48 | ) | (2 | )% | |||||||
Net investment income | 1,711 | 1,588 | 123 | 8 | % | |||||||||||
Net investment gains (losses) | (68 | ) | (209 | ) | 141 | 67 | % | |||||||||
Insurance and investment product fees and other | 688 | 512 | 176 | 34 | % | |||||||||||
Total revenues | 5,223 | 4,831 | 392 | 8 | % | |||||||||||
Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 3,081 | 2,655 | 426 | 16 | % | |||||||||||
Interest credited | 405 | 424 | (19 | ) | (4 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | 1,014 | 974 | 40 | 4 | % | |||||||||||
Amortization of deferred acquisition costs and intangibles | 382 | 363 | 19 | 5 | % | |||||||||||
Interest expense | 261 | 224 | 37 | 17 | % | |||||||||||
Total benefits and expenses | 5,143 | 4,640 | 503 | 11 | % | |||||||||||
Income before income taxes | 80 | 191 | (111 | ) | (58 | )% | ||||||||||
Provision (benefit) for income taxes | 24 | (98 | ) | 122 | 124 | % | ||||||||||
Net income | 56 | 289 | (233 | ) | (81 | )% | ||||||||||
Less: net income attributable to noncontrolling interests | 70 | 69 | 1 | 1 | % | |||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | (14 | ) | $ | 220 | $ | (234 | ) | (106 | )% | ||||||
Premiums
Our Retirement and Protection segment decreased $6 million primarily related to a $28 million decrease in our retirement income business and a $17 million decrease in our life insurance business, partially offset by an increase of $39 million in our long-term care insurance business.
Our International segment decreased $31 million as a result of a decrease of $64 million in our lifestyle protection insurance business, partially offset by an increase of $33 million in our international mortgage insurance business. The six months ended June 30, 2011 included an increase of $54 million attributable to changes in foreign exchange rates.
Our U.S. Mortgage Insurance segment decreased $11 million.
Net investment income
Weighted-average investment yields increased to 5.0% for the six months ended June 30, 2011 from 4.6% for the six months ended June 30, 2010. The increase in weighted-average investment yields was primarily attributable to improved performance of limited partnerships and $20 million of higher bond calls and prepayments in the current year. Net investment income for the six months ended June 30, 2011 included $21 million of gains related to limited partnerships accounted for under the equity method as compared to $24 million of losses for the six months ended June 30, 2010.
The six months ended June 30, 2011 included an increase of $18 million attributable to changes in foreign exchange rates in our International segment.
Net investment gains (losses).For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”
We recorded $62 million of net other-than-temporary impairments for the six months ended June 30, 2011 as compared to $131 million for the six months ended June 30, 2010. Of total impairments for the six months ended June 30, 2011 and 2010, $38 million and $105 million, respectively, related to structured securities, including $24 million and $59 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Impairments related to corporate securities as a result of bankruptcies, receivership or concerns about the issuer’s ability to continue to make contractual payments or where we have intent to sell were $14 million and $5 million for the six months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, we recorded $5 million of impairments related to commercial mortgage loans and $2 million and $10 million, respectively, of impairments related to limited partnership investments. For the six months ended June 30, 2011, we also recorded $3 million of impairments related to real estate held-for-investment. For the six months ended June 30, 2010, we also recorded $6 million of impairments related to financial hybrid securities.
Net investment losses related to derivatives of $25 million for the six months ended June 30, 2011 were primarily due to $20 million of losses from the change in value of derivative instruments used for mitigating the risk of embedded derivative liabilities exceeding the gains in value of the embedded derivative liabilities associated with our variable annuity products with GMWBs and $13 million of losses associated with derivatives used to hedge foreign currency risk. These losses were partially offset by $5 million of gains related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position and $3 million of gains in other non-qualified interest rate swaps. Net investment losses related to derivatives of $46 million for the six months ended June 30, 2010 were primarily related to $35 million of losses from the change in value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs, $27 million of losses from the change in value of our credit default swaps due to widening credit spreads and $6 million of losses related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. These losses were partially offset by $13 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $7 million of gains from other non-qualified interest rate swaps and $2 million of gains related to embedded derivatives associated with certain reinsurance agreements.
Net losses related to the sale of available-for-sale securities were $11 million during the six months ended June 30, 2011 compared to net gains of $2 million during the six months ended June 30, 2010. We recorded $23 million of higher gains related to trading securities during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. We recorded $5 million of net gains related to securitization entities during the six months ended June 30, 2011 primarily related to gains on trading securities compared to $36 million of net losses during the six months ended June 30, 2010 primarily associated with derivatives. We also recorded $1 million of gains related to commercial mortgage loans during the six months ended June 30, 2011 attributable to a decrease in the allowance compared to $22 million of losses during the six months ended June 30, 2010 from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance. There was also a net gain of $16 million from the recovery of a counterparty receivable in 2010.
Insurance and investment product fees and other
Our Retirement and Protection segment increased $166 million largely driven by an increase of $100 million in our life insurance business, an increase of $54 million in our wealth management business and an increase of $12 million in our retirement income business.
Our U.S. Mortgage Insurance segment decreased $3 million.
Corporate and Other activities increased $3 million.
Benefits and other changes in policy reserves
Our Retirement and Protection segment increased $87 million primarily attributable to a $96 million increase in our long-term care insurance business and a $37 million increase in our life insurance business, partially offset by a $46 million decrease in our retirement income business.
Our International segment decreased $54 million as a result of a decrease of $58 million in our lifestyle protection insurance business, partially offset by an increase of $4 million in our international mortgage insurance business. The six months ended June 30, 2011 included an increase of $19 million attributable to changes in foreign exchange rates.
Our U.S. Mortgage Insurance segment increased $393 million.
Interest credited
Our Retirement and Protection segment decreased $9 million primarily attributable to an $18 million decrease in our retirement income business, partially offset by an $11 million increase in our life insurance business.
Corporate and Other activities decreased $10 million.
Acquisition and operating expenses, net of deferrals
Our Retirement and Protection segment increased $65 million primarily attributable to a $46 million increase in our wealth management business, a $13 million increase in our retirement income business and a $12 million increase in our long-term care insurance business, partially offset by a $6 million decrease in our life insurance business.
Our International segment decreased $5 million related to a $12 million decrease in our lifestyle protection insurance business, partially offset by a $7 million increase in our international mortgage insurance business. The six months ended June 30, 2011 included an increase of $15 million attributable to changes in foreign exchange rates.
Corporate and Other activities decreased $22 million.
Amortization of deferred acquisition costs and intangibles
Our Retirement and Protection segment increased $20 million primarily attributable to a $34 million increase in our retirement income business, partially offset by a $9 million decrease in our life insurance business and a $5 million decrease in our long-term care insurance business.
Our International segment was flat as a $7 million decrease in our lifestyle protection insurance business was offset by a $7 million increase in our international mortgage insurance business. The six months ended June 30, 2011 included an increase of $6 million attributable to changes in foreign exchange rates.
Interest expense
Our International segment increased $8 million related to a $12 million increase in our international mortgage insurance business, partially offset by a decrease of $4 million in our lifestyle protection insurance business. The three months ended June 30, 2011 included an increase of $1 million attributable to changes in foreign exchange rates.
Corporate and other activities increased $28 million.
Provision (benefit) for income taxes. The effective tax rate increased to 30.0% for the six months ended June 30, 2011 from (51.3)% for the six months ended June 30, 2010. This increase in the effective tax rate was attributable to changes in uncertain tax benefits in the prior year related to our separation from our former parent and higher taxes in the current year as a result of a Canadian legislative change as compared to an Australian tax legislative benefit in the prior year. The Canadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase the effective tax rate on our U.S. GAAP earnings as prior deductions for contributions to the fund lowered the effective tax rate on U.S. GAAP earnings. The six months ended June 30, 2011 included an increase of $7 million attributable to changes in foreign exchange rates.
Net income attributable to noncontrolling interests. The six months ended June 30, 2011 included an increase of $4 million attributable to changes in foreign exchange rates.
Net income (loss) available to Genworth Financial, Inc.’s common stockholders. We reported a net loss available to Genworth Financial, Inc.’s common stockholders in the current year compared to net income available to Genworth Financial, Inc.’s common stockholders in the prior year primarily related to a higher loss in our U.S. mortgage insurance business largely related to the reserve strengthening in the current year and additional tax benefits recognized in the prior year. These decreases were partially offset by higher product fee income and improved investment performance in the current year. For a discussion of our Retirement and Protection, International and U.S. Mortgage Insurance segments and Corporate and Other activities, see the “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.” Included in the net loss available to Genworth Financial, Inc.’s common stockholders for the six months ended June 30, 2011 was an increase of $6$20 million, net of tax, attributable to changes in foreign exchange rates.
Reconciliation of net income (loss) to net operating income (loss) available to Genworth Financial, Inc.’s common stockholders
The net operating loss available to Genworth Financial, Inc.’s common stockholders for the three months ended June 30, 2011 was $74 million compared to net operating income available to Genworth Financial, Inc.’s common stockholders
of $118 million for the three months ended June 30, 2010. Net operating income available to Genworth Financial, Inc.’s common stockholders for the threesix months ended March 31,June 30, 2011 and 2010 was $98$24 million and $114$232 million, respectively. We define net operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding net income attributable to noncontrolling interests, after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. We exclude net investment gains (losses) and
infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends. There were no infrequent or unusual non-operating items excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders during the periods presented other than a $106 million tax benefit related to separation from our former parent recorded in the first quarter of 2010.
While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”),GAAP, we believe that net operating income (loss) available to Genworth Financial, Inc.’s common stockholders and measures that are derived from or incorporate net operating income (loss) available to Genworth Financial, Inc.’s common stockholders, including net operating income (loss) available to Genworth Financial, Inc.’s common stockholders per common share on a basic and diluted basis, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. However, net operating income (loss) available to
Genworth Financial, Inc.’s common stockholders and net operating income (loss) available to Genworth Financial, Inc.’s common stockholders per common share on a basic and diluted basis are not substitutes for net income (loss) available to Genworth Financial, Inc.’s common stockholders or net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share on a basic and diluted basis determined in accordance with U.S. GAAP. In addition, our definition of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.
The following table includes a reconciliation of net income (loss) to net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the periods indicated:
Three months ended March 31, | ||||||||
(Amounts in millions) | 2011 | 2010 | ||||||
Net income | $ | 116 | $ | 212 | ||||
Less: net income attributable to noncontrolling interests | 34 | 34 | ||||||
Net income available to Genworth Financial, Inc.’s common stockholders | 82 | 178 | ||||||
Adjustments to net income available to Genworth Financial, Inc.’s common stockholders: | ||||||||
Net investment (gains) losses, net of taxes and other adjustments | 16 | 42 | ||||||
Net tax benefit related to separation from our former parent | — | (106 | ) | |||||
Net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 98 | $ | 114 | ||||
(Amounts in millions) Net income (loss) Less: net income attributable to noncontrolling interests Net income (loss) available to Genworth Financial, Inc.’s common stockholders Adjustments to net income (loss) available to Genworth Financial, Inc.’s common stockholders: Net investment (gains) losses, net of taxes and other adjustments Net tax benefit related to separation from our former parent Net operating income (loss) available to Genworth Financial, Inc.’s common stockholders Three months ended
June 30, Six months ended
June 30, 2011 2010 2011 2010 $ (60 ) $ 77 $ 56 $ 289 36 35 70 69 (96 ) 42 (14 ) 220 22 76 38 118 — — — (106 ) $ (74 ) $ 118 $ 24 $ 232
Earnings (loss) per share
The following table provides basic and diluted net income (loss) available to Genworth Financial, Inc.’s common stockholders and net operating income (loss) available to Genworth Financial, Inc.’s common stockholders per common share for the periods indicated:
Three months ended March 31, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions, except per share amounts) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||||||||||||||||||
Basic | $ | 0.17 | $ | 0.36 | $ | (0.20 | ) | $ | 0.09 | $ | (0.03 | ) | $ | 0.45 | ||||||||||
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Diluted | $ | 0.17 | $ | 0.36 | $ | (0.20 | ) | $ | 0.08 | $ | (0.03 | ) | $ | 0.45 | ||||||||||
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Net operating income available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||||||||||||||||||
Net operating income (loss) available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||||||||||||||||||
Basic | $ | 0.20 | $ | 0.23 | $ | (0.15 | ) | $ | 0.24 | $ | 0.05 | $ | 0.47 | |||||||||||
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Diluted | $ | 0.20 | $ | 0.23 | $ | (0.15 | ) | $ | 0.24 | $ | 0.05 | $ | 0.47 | |||||||||||
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Weighted-average common shares outstanding: | ||||||||||||||||||||||||
Basic | 490.1 | 488.8 | 490.6 | 489.1 | 490.4 | 489.0 | ||||||||||||||||||
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Diluted | 494.4 | 493.5 | ||||||||||||||||||||||
Diluted(1) | 490.6 | 494.2 | 490.4 | 493.9 | ||||||||||||||||||||
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(1) | Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss available to Genworth Financial, Inc.’s common stockholders for the three and six months ended June 30, 2011, we were required to use basic weighted-average common shares outstanding in the calculation for the three and six months ended June 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 3.7 million and 4.0 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.’s common stockholders for the three and six months ended June 30, 2011, dilutive potential common shares would have been 494.3 million and 494.4 million, respectively. |
Diluted weighted-average shares outstanding in 2010 reflect the effects of potentially dilutive securities including stock options, restricted stock units and other equity-based compensation.
Results of Operations and Selected Financial and Operating Performance Measures by Segment
Our chief operating decision maker evaluates segment performance and allocates resources on the basis of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders. See note 10 in our “—Notes to Condensed Consolidated Financial Statements” for a reconciliation of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders of our segments and Corporate and Other activities to net income (loss) available to Genworth Financial, Inc.’s common stockholders.
Management’s discussion and analysis by segment also contains selected operating performance measures including “sales,” “assets under management” and “insurance in-force” or “risk in-force” which are commonly used in the insurance and investment industries as measures of operating performance.
Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refer to: (1) annualized first-year premiums for term life, long-term care and Medicare supplement insurance; (2) new and additional premiums/deposits for universal and term universal life insurance, linked-benefits, spread-based and variable products; (3) gross flows and net flows, which represent gross flows less redemptions, for our wealth management business; (4) written premiums and deposits, gross of ceded reinsurance and cancellations, and premium equivalents, where we earn a fee for administrative services only business, for our lifestyle protection insurance business; (5) new insurance written for mortgage insurance; and (6) written premiums, net of cancellations, for our Mexican insurance operations, which in each case reflects the amount of business we generated during each period presented. Sales do not include renewal premiums on policies or contracts written during prior periods. We consider annualized first-year premiums, new premiums/deposits, gross and net flows, written premiums, premium equivalents and new insurance written to be a measure of our operating performance because they represent a measure of new sales of insurance policies or contracts during a specified period, rather than a measure of our revenues or profitability during that period.
Management regularly monitors and reports assets under management for our wealth management business, insurance in-force and risk in-force. Assets under management for our wealth management business represent third-party assets under management that are not consolidated in our financial statements. Insurance in-force for our life, international mortgage and U.S. mortgage insurance businesses is a measure of the aggregate face value of outstanding insurance policies as of the respective reporting date. For our risk in-force in our international mortgage insurance business, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor of 35% that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Canada, Australia and New Zealand. Risk in-force for our U.S. mortgage insurance business is our obligation that is limited under contractual terms to the amounts less than 100% of the mortgage loan value. We consider assets under management for our wealth management business, insurance in-force and risk in-force to be a measure of our operating performance because they represent a measure of the size of our business at a specific date which will generate revenues and profits in a future period, rather than a measure of our revenues or profitability during that period.
We also include information related to loss mitigation activities for our U.S. mortgage insurance business. We define loss mitigation activities as rescissions, cancellations, borrower loan modifications, repayment plans, lender- and borrower-titled presalespre-sales, claims curtailment and other loan workouts and claim mitigation actions. Estimated savings related to rescissions are the reduction in carried loss reserves, net of premium refunds and reinstatement of prior rescissions. Estimated savings related to loan modifications and other cure related loss mitigation actions represent the reduction in carried loss reserves. For non-cure related actions, including presales,pre-sales, the estimated savings represent the difference between the full claim obligation and the actual amount paid. We believe that this
information helps to enhance the understanding of the operating performance of our U.S. mortgage insurance business as they specifically impact current and future loss reserves and level of claim payments.
These operating measures enable us to compare our operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources.
The following discussions of our segment results of operations should be read in conjunction with the “—Business trends and conditions.”
Retirement and Protection segment
Segment results of operations
Three Months Ended March 31,June 30, 2011 Compared to Three Months Ended March 31,June 30, 2010
The following table sets forth the results of operations relating to our Retirement and Protection segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 818 | $ | 824 | $ | (6 | ) | (1 | )% | $ | 822 | $ | 822 | $ | — | — | % | |||||||||||||||
Net investment income | 628 | 594 | 34 | 6 | % | 660 | 630 | 30 | 5 | % | ||||||||||||||||||||||
Net investment gains (losses) | (28 | ) | (67 | ) | 39 | 58 | % | (46 | ) | (69 | ) | 23 | 33 | % | ||||||||||||||||||
Insurance and investment product fees and other | 320 | 242 | 78 | 32 | % | 348 | 260 | 88 | 34 | % | ||||||||||||||||||||||
Total revenues | 1,738 | 1,593 | 145 | 9 | % | 1,784 | 1,643 | 141 | 9 | % | ||||||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 989 | 945 | 44 | 5 | % | 1,004 | 961 | 43 | 4 | % | ||||||||||||||||||||||
Interest credited | 168 | 174 | (6 | ) | (3 | )% | 173 | 176 | (3 | ) | (2 | )% | ||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 273 | 230 | 43 | 19 | % | 274 | 252 | 22 | 9 | % | ||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 111 | 105 | 6 | 6 | % | 118 | 104 | 14 | 13 | % | ||||||||||||||||||||||
Interest expense | 26 | 22 | 4 | 18 | % | 26 | 29 | (3 | ) | (10 | )% | |||||||||||||||||||||
Total benefits and expenses | 1,567 | 1,476 | 91 | 6 | % | 1,595 | 1,522 | 73 | 5 | % | ||||||||||||||||||||||
Income before income taxes | 171 | 117 | 54 | 46 | % | 189 | 121 | 68 | 56 | % | ||||||||||||||||||||||
Provision for income taxes | 59 | 33 | 26 | 79 | % | 66 | 40 | 26 | 65 | % | ||||||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | 112 | 84 | 28 | 33 | % | 123 | 81 | 42 | 52 | % | ||||||||||||||||||||||
Adjustment to net income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | 15 | 38 | (23 | ) | (61 | )% | 26 | 33 | (7 | ) | (21 | )% | ||||||||||||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 127 | $ | 122 | $ | 5 | 4 | % | $ | 149 | $ | 114 | $ | 35 | 31 | % | ||||||||||||||||
The following table sets forth net operating income available to Genworth Financial, Inc.’s common stockholders for the businesses included in our Retirement and Protection segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Life insurance | $ | 52 | $ | 37 | $ | 15 | 41 | % | $ | 72 | $ | 32 | $ | 40 | 125 | % | ||||||||||||||||
Long-term care insurance | 40 | 40 | — | — | % | 31 | 47 | (16 | ) | (34 | )% | |||||||||||||||||||||
Wealth management | 10 | 11 | (1 | ) | (9 | )% | 13 | 10 | 3 | 30 | % | |||||||||||||||||||||
Retirement income | 25 | 34 | (9 | ) | (26 | )% | 33 | 25 | 8 | 32 | % | |||||||||||||||||||||
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Total net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 127 | $ | 122 | $ | 5 | 4 | % | $ | 149 | $ | 114 | $ | 35 | 31 | % | ||||||||||||||||
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Net operating income available to Genworth Financial, Inc.’s common stockholders
Our life insurance business increased $40 million principally from an $11 million gain on the repurchase of notes secured by our non-recourse funding obligations, favorable mortality, higher investment income, improved persistency and growth of our term universal life insurance product.
Our long-term care insurance business decreased $16 million mainly attributable to higher claims in older issued policies, partially offset by the favorable performance of newer issued policies.
Our wealth management business increased $3 million primarily from higher average assets under management from market growth and positive net flows.
Our retirement income business increased $8 million largely related to an increase of $9 million in our fee-based products from favorable market performance in the current year. This increase was partially offset by a $1 million decrease in our spread-based products from higher amortization due to less favorable adjustments related to lapses, partially offset by more favorable mortality in our single premium immediate annuity product.
Revenues
Premiums
Our life insurance business decreased $10 million primarily as a result of the runoff of our term life insurance products.
Our long-term care insurance business increased $22 million mainly attributable to growth of the in-force block from new sales.
Our retirement income business decreased $12 million primarily driven by lower life-contingent sales of our spread-based products.
Net investment income
Our life insurance business increased $22 million mainly related to higher average invested assets and reinvestment of cash balances. Net investment income in the second quarter of 2011 also included higher gains of $4 million from limited partnerships accounted for under the equity method and $4 million from bond calls and prepayments.
Our long-term care insurance business increased $18 million largely as a result of an increase in average invested assets due to growth of our long-term care insurance in-force block.
Our retirement income business decreased $10 million primarily attributable to a decline in average invested assets. Net investment income also included $10 million of additional investment income from bond calls and prepayments in the current year.
Net investment gains (losses).For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”
Net investment losses in our life insurance business increased $8 million primarily driven by higher losses from the sale of investment securities related to portfolio repositioning.
Our long-term care insurance business had net investment losses of $8 million in the current year mainly from impairments. Net investment gains of $4 million in the prior year were primarily attributable to gains from the sale of investment securities related to portfolio repositioning, partially offset by impairments.
Net investment losses in our retirement income business decreased $43 million largely attributable to a $37 million decrease in losses related to our spread-based products primarily related to higher derivative gains and higher gains from the sale of investment securities related to portfolio repositioning in the current year compared to prior year. Our fee-based products had $6 million of lower losses on embedded derivatives associated with our variable annuity products with GMWBs in the current year, partially offset by lower derivative gains.
Insurance and investment product fees and other
Our life insurance business increased $61 million primarily from growth of our term universal and universal life insurance products and also included a gain of $17 million from the repurchase of notes secured by our non-recourse funding obligations in the current year.
Our wealth management business increased $25 million primarily attributable to higher average assets under management from the purchase of Altegris in the fourth quarter of 2010, market growth and positive net flows.
Our retirement income business increased $4 million mainly as a result of higher average account values in our fee-based products from favorable market performance.
Benefits and expenses
Benefits and other changes in policy reserves
Our life insurance business increased $7 million principally related to growth of our term universal life insurance product. This increase was partially offset by improved persistency in our term life insurance products in the current year as a result of smaller blocks entering the post-level rate period and overall lower lapse rates and favorable mortality on our universal and term life insurance products in the current year as compared to the prior year.
Our long-term care insurance business increased $62 million primarily as a result of the aging and growth of our long-term care insurance in-force block and higher claims on older issued policies.
Our retirement income business decreased $26 million largely attributable to a decrease of $22 million from our life-contingent spread-based products as a result of a decline in sales in the current year and more favorable mortality in the current year compared to prior year. Our fee-based products decreased $4 million driven by a decline in our guaranteed minimum death benefit claims.
Interest credited
Our life insurance business increased $8 million from the timing of reinsurance activity in the current year.
Our retirement income business decreased $10 million from lower account values on fixed annuities and lower crediting rates as the fixed annuities reach the end of their initial crediting rate guarantee period in a low interest rate environment.
Acquisition and operating expenses, net of deferrals
Our life insurance business increased $2 million primarily related to higher expenses from growth of our term universal life insurance product.
Our wealth management business increased $20 million primarily from increased asset-based expenses from the acquisition of Altegris in the fourth quarter of 2010, market growth and positive net flows.
Amortization of deferred acquisition costs and intangibles
Our life insurance business decreased $2 million primarily attributable to lower amortization of deferred acquisition costs related to our term life insurance products in the post-level rate period, partially offset by an increase in amortization of deferred acquisition costs driven by favorable mortality in our universal life insurance products.
Our long-term care insurance business was flat as growth of our long-term care insurance in-force block was offset by a decrease in amortization due to deferring costs associated with the sale of joint policies that were incorrectly expensed in prior years as a result of a system conversion in late 2008 that was identified and corrected in the fourth quarter of 2010.
Our retirement income business increased $16 million primarily related to an increase of $20 million in our spread-based products principally from less favorable adjustments related to lapses and higher amortization of deferred acquisition costs attributable to lower net investment losses in the current year. This increase was partially offset by a decrease in the account values of these products. Our fee-based products decreased $4 million mainly from favorable equity market performance in the current year, partially offset by an increase in amortization of deferred acquisition costs from lower derivative losses.
Interest expense. Interest expense decreased $3 million related to our life insurance business from the write-off of capitalized costs associated with our non-recourse funding obligations in the prior year, partially offset by higher letter of credit fees in the current year.
Provision for income taxes.The effective tax rate increased to 34.9% for the three months ended June 30, 2011 from 33.1% for the three months ended June 30, 2010. The increase in the effective tax rate was primarily attributable to tax favored investment benefits in relation to higher pre-tax earnings in the current year compared to the prior year.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
The following table sets forth the results of operations relating to our Retirement and Protection segment for the periods indicated:
Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 1,640 | $ | 1,646 | $ | (6 | ) | — | % | |||||||
Net investment income | 1,288 | 1,224 | 64 | 5 | % | |||||||||||
Net investment gains (losses) | (74 | ) | (136 | ) | 62 | 46 | % | |||||||||
Insurance and investment product fees and other | 668 | 502 | 166 | 33 | % | |||||||||||
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Total revenues | 3,522 | 3,236 | 286 | 9 | % | |||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 1,993 | 1,906 | 87 | 5 | % | |||||||||||
Interest credited | 341 | 350 | (9 | ) | (3 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | 547 | 482 | 65 | 13 | % | |||||||||||
Amortization of deferred acquisition costs and intangibles | 229 | 209 | 20 | 10 | % | |||||||||||
Interest expense | 52 | 51 | 1 | 2 | % | |||||||||||
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Total benefits and expenses | 3,162 | 2,998 | 164 | 5 | % | |||||||||||
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Income before income taxes | 360 | 238 | 122 | 51 | % | |||||||||||
Provision for income taxes | 125 | 73 | 52 | 71 | % | |||||||||||
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Net income available to Genworth Financial, Inc.’s common stockholders | 235 | 165 | 70 | 42 | % | |||||||||||
Adjustment to net income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | 41 | 71 | (30 | ) | (42 | )% | ||||||||||
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Net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 276 | $ | 236 | $ | 40 | 17 | % | ||||||||
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The following table sets forth net operating income for the businesses included in our Retirement and Protection segment for the periods indicated:
Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Life insurance | $ | 124 | $ | 69 | $ | 55 | 80 | % | ||||||||
Long-term care insurance | 71 | 87 | (16 | ) | (18 | )% | ||||||||||
Wealth management | 23 | 21 | 2 | 10 | % | |||||||||||
Retirement income | 58 | 59 | (1 | ) | (2 | )% | ||||||||||
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Total net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 276 | $ | 236 | $ | 40 | 17 | % | ||||||||
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Net operating income available to Genworth Financial, Inc.’s common stockholders
Our life insurance business increased $15$55 million from growth inof our universal and term universal life insurance products,product, an $11 million gain on the repurchase of notes secured by our non-recourse funding obligations, an $8 million favorable cumulative impact from a recent change in premium taxes in Virginia and favorablehigher investment income,income. These increases were partially offset by less favorable mortality inthe runoff of our term life insurance products in the current year compared to the prior year.products. The prior year also included an unfavorable reinsurance adjustment of $5 million and a favorable tax settlement that did not recur.
Our long-term care insurance business was flatdecreased $16 million as higher investment spreadclaims in the current year wasolder issued policies were partially offset by higher claims as a resultthe favorable performance of the aging and growth of the in-force block.newer issued policies.
Our wealth management business was relatively flatincreased $2 million as a result of higher average assets under management from market growth and positive net flows which were partially offset by a $2 million favorable tax adjustment in the prior year that did not recur.
Our retirement income business decreased $9 million.was relatively flat. Our fee-based products decreased $6increased $3 million mainly attributable to favorable market performance, partially offset by an $8 million favorable adjustment to deferred acquisition costs in the prior year that did not recur and a $7 million charge in the first quarter of 2011 from the discontinuance of our variable annuity offerings announced in 2011, partially offset by favorable market performance.2011. Our spread-based products decreased $3$4 million primarily from an increase in an accrualamortization due to less favorable adjustments related to guarantee fundslapses and a decrease in the current year.net investment income, partially offset by more favorable mortality in our single premium immediate annuity product.
Revenues
Premiums
Our life insurance business decreased $7$17 million primarily as a result of the runoff of our term life insurance products, partially offset by an unfavorable reinsurance adjustment of $8 million in the prior year that did not recur.
Our long-term care insurance business increased $17$39 million mainly attributable to growth in the in-force block from new sales.
Our retirement income business decreased $16$28 million primarily driven by lower life contingentlife-contingent sales of our spread-based products.
Net investment income
Our life insurance business increased $24$46 million mainly related to higher average invested assets an increase inand reinvestment of cash balances. Net investment income for the six months ended June 30, 2011 also included gains of $9 million from limited partnerships accounted for under the equity method and reinvestment of cash balances. Net investment income included $2 million of gains related to limited partnerships in the first quarter of 2011 as compared to losses related to limited partnerships of $5$2 million in the first quarterprior year and $6 million of 2010.additional investment income from bond calls and prepayments in the current year.
Our long-term care insurance business increased $19$37 million largely as a result of an increase in average invested assets due to growth of our long-term care insurance in-force block. Additionally, net investment income in the first quarter of 2011 included lower losses of $3 million related to limited partnerships accounted for under the equity method as compared to the first quarter of 2010. These increases were partially offset by an unfavorable adjustment of $6 million related to the accounting for interest rate swaps in the current year.
Our retirement income business decreased $9$19 million primarily attributable to a decline in average invested assets, partially offset by an increase inassets. Net investment income for the six months ended June 30, 2011 also included $14 million of additional income from bond calls and prepayments and higher gains of $5 million from limited partnerships accounted for under the equity method. Net investment income in the first quarter of 2011 included gains of $1 million related to limited partnerships asmethod compared to losses related to limited partnerships of $4 million in the first quarter of 2010.prior year.
Net investment gains (losses).For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”
Net investment losses in our life insurance business decreased $26$18 million primarily driven by lower impairments in the current year.
Our long-term care insurance business had net investment losses of $16 million in the current year mainly from impairments compared to net investment gains of $6 million in the prior year primarily from derivative gains and gains from the sale of investment securities related to portfolio repositioning, partially offset by impairments.
Net investment losses in our retirement income business decreased $66 million largely attributable to a $52 million decrease in our spread-based products primarily related to derivative gains in the current year compared to losses in the prior year and higher gains from the sale of investment securities related to portfolio repositioning in the current year.
Our long-term care insurance businessfee-based products had net investment losses of $8$14 million in the current year mainly from impairments compared to net investment gains of $2 million in the prior year primarily from derivative gains, partially offset by impairments.
Net investmentlower losses in our retirement income business decreased $23 million primarily related to higher gains related toon embedded derivatives associated with our variable annuity products with GMWBs partially offset by higherin the current year compared to losses fromin the sale of investment securities related to portfolio repositioning.prior year.
Insurance and investment product fees and other
Our life insurance business increased $39$100 million primarily from growth of our term universal and universal life insurance products.products and also included a gain of $17 million from the repurchase of notes secured by our non-recourse funding obligations in the current year.
Our wealth management business increased $29$54 million primarily attributable to higher average assets under management from the purchase of Altegris in the fourth quarter of 2010, market growth and positive net flows and market growth.flows.
Our retirement income business increased $8$12 million mainly as a result of higher average account values in our fee-based products from favorable market performance.
Benefits and expenses
Benefits and other changes in policy reserves
Our life insurance business increased $30$37 million principally related to growth of our term universal life insurance product, and less favorable mortality in our term life insurance products in the current year as compared to the prior year, partially offset by the runoff of our term life insurance products.
Our long-term care insurance business increased $34$96 million primarily as a result of the aging and growth of our long-term care insurance in-force block.block and higher claims on older issued policies.
Our retirement income business decreased $20$46 million largely attributable to a decrease of $17$39 million from our life-contingent spread-based products as a result of a decline in sales in the current year and more favorable mortality in the current year compared to prior year. Our fee-based products decreased $3$7 million driven by a decline in our guaranteed minimum death benefit claims.
Interest credited.credited Interest credited decreased $6
Our life insurance business increased $11 million primarily related to ourfrom the timing of reinsurance activity in the current year.
Our retirement income business decreased $18 million from lower account values on fixed annuities and lower crediting rates as the fixed annuities reach the end of their initial crediting rate guarantee period.period in a low interest rate environment.
Acquisition and operating expenses, net of deferrals
Our life insurance business decreased $8$6 million primarily related to a $13 million favorable cumulative impact from a recent change in premium taxes in Virginia in the current year,first quarter of 2011, partially offset by higher expenses from growth of our term universal life insurance product.
Our long-term care insurance business increased $11$12 million largely attributable to growth of our long-term care insurance in-force block.
Our wealth management business increased $26$46 million primarily from increased asset-based expenses from the acquisition of Altegris in the fourth quarter of 2010, market growth and positive net flows and market growth.flows.
Our retirement income business increased $14$13 million largely driven by a $9 million charge in the first quarter of 2011 from the discontinuance of our variable annuity offerings announced in 2011 and an increase of $4 million from an accrual related to guarantee funds in the current year.
Amortization of deferred acquisition costs and intangibles
Our life insurance business decreased $7$9 million primarily attributable to lower amortization of deferred acquisition costs related to our term life insurance policies coming out of theirin the post-level rate period and a decrease in amortization of present value of future profits driven by higher mortality in our universal life insurance products. These decreases were partially offset by an increase in amortization of deferred acquisition costs due to growth of our universal life insurance products.
Our long-term care insurance business decreased $5 million primarily from a decrease in amortization due to deferring costs associated with the sale of joint policies that were incorrectly expensed in prior years as a result of a system conversion in late 2008 that was identified and corrected in the fourth quarter of 2010. This decrease2010 that was partially offset by growth of our long-term care insurance in-force block.
Our retirement income business increased $18$34 million primarily related to an increase of $13$25 million in our spread-based products mainly from less favorable adjustments related to lapses and higher amortization of deferred acquisition costs attributable to lower net investment losses in the current year. This increase was partially offset by a decrease in the account values of these products. Our fee-based products increased $9 million principally from a $12 million favorable adjustment recorded in the prior year that did not recur. Our spread-based products increased $5 million mainlyrecur and an increase in amortization of deferred acquisition costs from less favorable adjustments related to lapseslower derivative losses in the current year, partially offset by a decrease in the account values of these products.
Interest expense. Interest expense increased $4 million related to our life insurance business from higher letter of credit feesfavorable equity market performance in the current year.
Provision for income taxes.The effective tax rate increased to 34.5%34.7% for the threesix months ended March 31,June 30, 2011 from 28.2%30.7% for the threesix months ended March 31,June 30, 2010. The increase in the effective tax rate was primarily attributable to the proportion of tax favored investment benefits in relation to higher pre-tax resultsearnings in the current year compared to the prior year and a change in uncertain tax positions in the prior year.
Retirement and Protection selected financial and operating performance measures
Life insurance
The following table setstables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:
As of or for the three months ended March 31, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||||||||||||||||||
Term life insurance | ||||||||||||||||||||||||||||||||||||||||||||||||
Net earned premiums | $ | 219 | $ | 224 | $ | (5 | ) | (2 | )% | $ | 218 | $ | 228 | $ | (10 | ) | (4 | )% | $ | 437 | $ | 452 | $ | (15 | ) | (3 | )% | |||||||||||||||||||||
Annualized first-year premiums | — | 14 | (14 | ) | (100 | )% | — | 4 | (4 | ) | (100 | )% | — | 18 | (18 | ) | (100 | )% | ||||||||||||||||||||||||||||||
Life insurance in-force, net of reinsurance | 452,116 | 472,696 | (20,580 | ) | (4 | )% | ||||||||||||||||||||||||||||||||||||||||||
Life insurance in-force before reinsurance | 587,545 | 620,108 | (32,563 | ) | (5 | )% | ||||||||||||||||||||||||||||||||||||||||||
Term universal life insurance | ||||||||||||||||||||||||||||||||||||||||||||||||
Net deposits | $ | 35 | $ | 5 | $ | 30 | NM | (1) | $ | 45 | $ | 14 | $ | 31 | NM | (1) | $ | 80 | $ | 19 | $ | 61 | NM | (1) | ||||||||||||||||||||||||
Annualized first-year deposits | 31 | 10 | 21 | NM | (1) | 36 | 24 | 12 | 50 | % | 67 | 34 | 33 | 97 | % | |||||||||||||||||||||||||||||||||
Life insurance in-force, net of reinsurance | 58,371 | 5,453 | 52,918 | NM | (1) | |||||||||||||||||||||||||||||||||||||||||||
Life insurance in-force before reinsurance | 58,811 | 5,456 | 53,355 | NM | (1) | |||||||||||||||||||||||||||||||||||||||||||
Universal and whole life insurance | ||||||||||||||||||||||||||||||||||||||||||||||||
Net earned premiums and deposits | $ | 162 | $ | 118 | $ | 44 | 37 | % | $ | 156 | $ | 121 | $ | 35 | 29 | % | $ | 318 | $ | 239 | $ | 79 | 33 | % | ||||||||||||||||||||||||
Universal life annualized first-year deposits | 11 | 7 | 4 | 57 | % | 9 | 10 | (1 | ) | (10 | )% | 20 | 17 | 3 | 18 | % | ||||||||||||||||||||||||||||||||
Universal life excess deposits | 36 | 20 | 16 | 80 | % | 35 | 28 | 7 | 25 | % | 71 | 48 | 23 | 48 | % | |||||||||||||||||||||||||||||||||
Linked-benefits(2) | 23 | — | 23 | NM | (1) | 25 | — | 25 | NM | (1) | 48 | — | 48 | NM | (1) | |||||||||||||||||||||||||||||||||
Life insurance in-force, net of reinsurance | 44,131 | 43,712 | 419 | 1 | % | |||||||||||||||||||||||||||||||||||||||||||
Life insurance in-force before reinsurance | 50,855 | 50,655 | 200 | — | % | |||||||||||||||||||||||||||||||||||||||||||
Total life insurance | ||||||||||||||||||||||||||||||||||||||||||||||||
Net earned premiums and deposits | $ | 416 | $ | 347 | $ | 69 | 20 | % | $ | 419 | $ | 363 | $ | 56 | 15 | % | $ | 835 | $ | 710 | $ | 125 | 18 | % | ||||||||||||||||||||||||
Annualized first-year premiums | — | 14 | (14 | ) | (100 | )% | — | 4 | (4 | ) | (100 | )% | — | 18 | (18 | ) | (100 | )% | ||||||||||||||||||||||||||||||
Annualized first-year deposits | 42 | 17 | 25 | 147 | % | 45 | 34 | 11 | 32 | % | 87 | 51 | 36 | 71 | % | |||||||||||||||||||||||||||||||||
Universal life excess deposits | 36 | 20 | 16 | 80 | % | 35 | 28 | 7 | 25 | % | 71 | 48 | 23 | 48 | % | |||||||||||||||||||||||||||||||||
Linked-benefits(2) | 23 | — | 23 | NM | (1) | 25 | — | 25 | NM | (1) | 48 | — | 48 | NM | (1) | |||||||||||||||||||||||||||||||||
Life insurance in-force, net of reinsurance | 554,618 | 521,861 | 32,757 | 6 | % | |||||||||||||||||||||||||||||||||||||||||||
Life insurance in-force before reinsurance | 697,211 | 676,219 | 20,992 | 3 | % |
(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
(2) | In the first quarter of 2011, we began reporting the results of the linked-benefits product for universal life insurance in our life insurance business. The linked-benefits product for universal life insurance was previously reported in our long-term care insurance business. The amounts associated with this product were not material and the prior period amounts were not re-presented. |
As of June 30, | Percentage change | |||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||
Term life insurance | ||||||||||||
Life insurance in-force, net of reinsurance | $ | 447,336 | $ | 468,098 | (4 | )% | ||||||
Life insurance in-force before reinsurance | 580,113 | 612,284 | (5 | )% | ||||||||
Term universal life insurance | ||||||||||||
Life insurance in-force, net of reinsurance | $ | 73,569 | $ | 17,754 | NM | (1) | ||||||
Life insurance in-force before reinsurance | 74,107 | 17,820 | NM | (1) | ||||||||
Universal and whole life insurance | ||||||||||||
Life insurance in-force, net of reinsurance | $ | 44,207 | $ | 43,743 | 1 | % | ||||||
Life insurance in-force before reinsurance | 50,884 | 50,617 | 1 | % | ||||||||
Total life insurance | ||||||||||||
Life insurance in-force, net of reinsurance | $ | 565,112 | $ | 529,595 | 7 | % | ||||||
Life insurance in-force before reinsurance | 705,104 | 680,721 | 4 | % |
(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Term life insurance
Net earned premiums decreased mainly as a result of the runoff of our term life insurance products,products. For the six months ended June 30 2011, the decrease was partially offset by an unfavorable reinsurance adjustment of $8 million in the prior year that did not recur. The in-force block also decreased due to runoff.
Term universal life insurance
Net deposits increased due to growth of this product since its introduction in late 2009. The in-force block has increased primarily driven by strong production and product adoption.
Universal and whole life insurance
Net earned premiums and deposits increased due primarily to the growth of our universal life insurance products. The in-force block was relatively flat as the growth in our universal life insurance products was offset by the continued runoff of our closed block of the whole life insurance product.insurance.
Long-term care insurance
The following table sets forth selected financial and operating performance measures regarding our long-term care insurance business, which includes individual and group long-term care insurance, Medicare supplement insurance, as well as several runoff blocks of accident and health insurance for the periods indicated:
(Amounts in millions) | Three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||||||||||||||||||||||||||||||||||||
Three months ended June 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||||||||||||||||||
Long-term care | $ | 492 | $ | 479 | $ | 13 | 3 | % | $ | 495 | $ | 480 | $ | 15 | 3 | % | $ | 987 | $ | 959 | $ | 28 | 3 | % | ||||||||||||||||||||||||
Medicare supplement and other | 84 | 80 | 4 | 5 | % | 85 | 78 | 7 | 9 | % | 169 | 158 | 11 | 7 | % | |||||||||||||||||||||||||||||||||
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Total | $ | 576 | $ | 559 | $ | 17 | 3 | % | $ | 580 | $ | 558 | $ | 22 | 4 | % | $ | 1,156 | $ | 1,117 | $ | 39 | 3 | % | ||||||||||||||||||||||||
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Annualized first-year premiums and deposits | $ | 65 | $ | 67 | $ | (2 | ) | (3 | )% | $ | 69 | $ | 60 | $ | 9 | 15 | % | $ | 134 | $ | 127 | $ | 7 | 6 | % | |||||||||||||||||||||||
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Net earned premiums increased mainly attributable to growth in our in-force block from new sales.
The decreaseincrease in annualized first-year premiums and deposits was primarily attributable to growth in our individual long-term care insurance products, partially offset by a change in reporting related to our linked-benefits products. In the first quarter of 2011, we began reporting the results of the linked-benefits products for universal life insurance and single premium deferred annuity products in our life insurance and spread-based retirement income businesses, respectively. The linked-benefits products were previously reported in our long-term care insurance business. This decrease was partially offset by growth in our individual long-term care insurance products.
Wealth management
The following table sets forth selected financial performance measures regarding our wealth management business as of or for the dates indicated:
As of or for the three months ended March 31, | As of or for the three months ended June 30, | As of or for the six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Assets under management, beginning of period | $ | 24,740 | $ | 18,865 | $ | 25,551 | $ | 20,037 | $ | 24,740 | $ | 18,865 | ||||||||||||
Gross flows | 2,058 | 1,475 | 1,807 | 1,362 | 3,865 | 2,837 | ||||||||||||||||||
Redemptions | (1,703 | ) | (971 | ) | (1,143 | ) | (926 | ) | (2,846 | ) | (1,897 | ) | ||||||||||||
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Net flows | 355 | 504 | 664 | 436 | 1,019 | 940 | ||||||||||||||||||
Market performance | 456 | 668 | (285 | ) | (925 | ) | 171 | (257 | ) | |||||||||||||||
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Assets under management, end of period | $ | 25,551 | $ | 20,037 | $ | 25,930 | $ | 19,548 | $ | 25,930 | $ | 19,548 | ||||||||||||
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Wealth Management results represent Genworth Financial Wealth Management, Inc., Genworth Financial Investment Services, Inc., Genworth Financial Trust Company, Centurion Financial Advisers, Inc., Quantavis Consulting, Inc. and the Altegris companies.
The increase in assets under management was attributable to market growth, positive net flows and the acquisition of Altegris on December 31, 2010, positive net flows and market growth.2010.
Retirement income
Fee-based products
The following table sets forth selected operating performance measures regarding our fee-based products as of or for the dates indicated:
As of or for the three months ended March 31, | As of or for the three months ended June 30, | As of or for the six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Income Distribution Series (1) | ||||||||||||||||||||||||
Account value, beginning of period | $ | 6,590 | $ | 5,943 | $ | 6,687 | $ | 6,135 | $ | 6,590 | $ | 5,943 | ||||||||||||
Deposits | 117 | 173 | 33 | 141 | 150 | 314 | ||||||||||||||||||
Surrenders, benefits and product charges | (185 | ) | (127 | ) | (171 | ) | (150 | ) | (356 | ) | (277 | ) | ||||||||||||
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Net flows | (68 | ) | 46 | (138 | ) | (9 | ) | (206 | ) | 37 | ||||||||||||||
Interest credited and investment performance | 165 | 146 | 57 | (162 | ) | 222 | (16 | ) | ||||||||||||||||
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Account value, end of period | $ | 6,687 | $ | 6,135 | $ | 6,606 | $ | 5,964 | $ | 6,606 | $ | 5,964 | ||||||||||||
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Traditional variable annuities | ||||||||||||||||||||||||
Account value, net of reinsurance, beginning of period | $ | 2,078 | $ | 2,016 | $ | 2,096 | $ | 2,048 | $ | 2,078 | $ | 2,016 | ||||||||||||
Deposits | 17 | 27 | 3 | 25 | 20 | 52 | ||||||||||||||||||
Surrenders, benefits and product charges | (88 | ) | (65 | ) | (100 | ) | (70 | ) | (188 | ) | (135 | ) | ||||||||||||
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Net flows | (71 | ) | (38 | ) | (97 | ) | (45 | ) | �� | (168 | ) | (83 | ) | |||||||||||
Interest credited and investment performance | 89 | 70 | 13 | (124 | ) | 102 | (54 | ) | ||||||||||||||||
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Account value, net of reinsurance, end of period | $ | 2,096 | $ | 2,048 | $ | 2,012 | $ | 1,879 | $ | 2,012 | $ | 1,879 | ||||||||||||
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Variable life insurance | ||||||||||||||||||||||||
Account value, beginning of period | $ | 313 | $ | 298 | $ | 319 | $ | 303 | $ | 313 | $ | 298 | ||||||||||||
Deposits | 3 | 3 | 3 | 3 | 6 | 6 | ||||||||||||||||||
Surrenders, benefits and product charges | (11 | ) | (10 | ) | (11 | ) | (8 | ) | (22 | ) | (18 | ) | ||||||||||||
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Net flows | (8 | ) | (7 | ) | (8 | ) | (5 | ) | (16 | ) | (12 | ) | ||||||||||||
Interest credited and investment performance | 14 | 12 | 3 | (19 | ) | 17 | (7 | ) | ||||||||||||||||
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Account value, end of period | $ | 319 | $ | 303 | $ | 314 | $ | 279 | $ | 314 | $ | 279 | ||||||||||||
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(1) | The Income Distribution Series products are comprised of our deferred and immediate variable annuity products, including those variable annuity products with rider options that provide guaranteed income benefits, including GMWBs and certain types of guaranteed annuitization benefits. These products do not include fixed single premium immediate annuities or deferred annuities, which may also serve income distribution needs. |
Income Distribution Series
Account value related to our Income Distribution Series products increased from the prior year mainly attributable to market growth, partially offset by surrenders outpacing sales. Beginning in the first quarter of 2011, we no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts.
Traditional variable annuities
In our traditional variable annuities, the increase in account value from the prior year was principally as a result of market growth, partially offset by surrenders outpacing sales. Beginning in the first quarter of 2011, we no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts.
Variable life insurance
We no longer solicit sales of this product; however, we continue to service our existing block of business.
Spread-based products
The following table sets forth selected operating performance measures regarding our spread-based products as of or for the dates indicated:
As of or for the three months ended March 31, | As of or for the three months ended June 30, | As of or for the six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Fixed annuities | ||||||||||||||||||||||||
Account value, beginning of period | $ | 10,819 | $ | 11,409 | $ | 10,660 | $ | 11,234 | $ | 10,819 | $ | 11,409 | ||||||||||||
Deposits | 120 | 41 | 275 | 92 | 395 | 133 | ||||||||||||||||||
Surrenders, benefits and product charges | (368 | ) | (312 | ) | (441 | ) | (304 | ) | (809 | ) | (616 | ) | ||||||||||||
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Net flows | (248 | ) | (271 | ) | (166 | ) | (212 | ) | (414 | ) | (483 | ) | ||||||||||||
Interest credited | 89 | 96 | 88 | 95 | 177 | 191 | ||||||||||||||||||
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Account value, end of period | $ | 10,660 | $ | 11,234 | $ | 10,582 | $ | 11,117 | $ | 10,582 | $ | 11,117 | ||||||||||||
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Single premium immediate annuities | ||||||||||||||||||||||||
Account value, beginning of period | $ | 6,528 | $ | 6,675 | $ | 6,411 | $ | 6,593 | $ | 6,528 | $ | 6,675 | ||||||||||||
Premiums and deposits | 85 | 95 | 85 | 100 | 170 | 195 | ||||||||||||||||||
Surrenders, benefits and product charges | (256 | ) | (265 | ) | (253 | ) | (251 | ) | (509 | ) | (516 | ) | ||||||||||||
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Net flows | (171 | ) | (170 | ) | (168 | ) | (151 | ) | (339 | ) | (321 | ) | ||||||||||||
Interest credited | 83 | 88 | 82 | 87 | 165 | 175 | ||||||||||||||||||
Effect of accumulated net unrealized investment gains (losses) | (29 | ) | — | 59 | — | 30 | — | |||||||||||||||||
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Account value, end of period | $ | 6,411 | $ | 6,593 | $ | 6,384 | $ | 6,529 | $ | 6,384 | $ | 6,529 | ||||||||||||
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Structured settlements | ||||||||||||||||||||||||
Account value, net of reinsurance, beginning of period | $ | 1,113 | $ | 1,115 | $ | 1,113 | $ | 1,115 | $ | 1,113 | $ | 1,115 | ||||||||||||
Surrenders, benefits and product charges | (15 | ) | (14 | ) | (14 | ) | (15 | ) | (29 | ) | (29 | ) | ||||||||||||
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Net flows | (15 | ) | (14 | ) | (14 | ) | (15 | ) | (29 | ) | (29 | ) | ||||||||||||
Interest credited | 15 | 14 | 14 | 15 | 29 | 29 | ||||||||||||||||||
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Account value, net of reinsurance, end of period | $ | 1,113 | $ | 1,115 | $ | 1,113 | $ | 1,115 | $ | 1,113 | $ | 1,115 | ||||||||||||
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Total premiums from spread-based products | $ | 20 | $ | 36 | $ | 20 | $ | 32 | $ | 40 | $ | 68 | ||||||||||||
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Total deposits on spread-based products | $ | 185 | $ | 100 | $ | 340 | $ | 160 | $ | 525 | $ | 260 | ||||||||||||
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Fixed annuities
Account value of our fixed annuities decreased as surrenders exceeded deposits. Sales have increased overin the priorcurrent year driven by reduced commission offerings but remain at lower levels given the low interest rate environment and other market conditions.
Single premium immediate annuities
Account value of our single premium immediate annuities decreased as surrenderspayouts exceeded premiums and deposits. Sales have slowed given the low interest rate environment and other market conditions.
Structured settlements
We no longer solicit sales of this product; however, we continue to service our existing block of business.
International segment
Segment results of operations
Three Months Ended March 31,June 30, 2011 Compared to Three Months Ended March 31,June 30, 2010
The following table sets forth the results of operations relating to our International segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 477 | $ | 504 | $ | (27 | ) | (5 | )% | $ | 491 | $ | 495 | $ | (4 | ) | (1 | )% | ||||||||||||||
Net investment income | 143 | 132 | 11 | 8 | % | 152 | 127 | 25 | 20 | % | ||||||||||||||||||||||
Net investment gains (losses) | 6 | 9 | (3 | ) | (33 | )% | 6 | 1 | 5 | NM | (1) | |||||||||||||||||||||
Insurance and investment product fees and other | 6 | 6 | — | — | % | 9 | (1 | ) | 10 | NM | (1) | |||||||||||||||||||||
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Total revenues | 632 | 651 | (19 | ) | (3 | )% | 658 | 622 | 36 | 6 | % | |||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 141 | 174 | (33 | ) | (19 | )% | 142 | 163 | (21 | ) | (13 | )% | ||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 198 | 203 | (5 | ) | (2 | )% | 205 | 205 | — | — | % | |||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 67 | 72 | (5 | ) | (7 | )% | 72 | 67 | 5 | 7 | % | |||||||||||||||||||||
Interest expense | 19 | 23 | (4 | ) | (17 | )% | 22 | 10 | 12 | 120 | % | |||||||||||||||||||||
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Total benefits and expenses | 425 | 472 | (47 | ) | (10 | )% | 441 | 445 | (4 | ) | (1 | )% | ||||||||||||||||||||
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Income before income taxes | 207 | 179 | 28 | 16 | % | 217 | 177 | 40 | 23 | % | ||||||||||||||||||||||
Provision for income taxes | 46 | 50 | (4 | ) | (8 | )% | 71 | 35 | 36 | 103 | % | |||||||||||||||||||||
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Net income | 161 | 129 | 32 | 25 | % | 146 | 142 | 4 | 3 | % | ||||||||||||||||||||||
Less: net income attributable to noncontrolling interests | 34 | 34 | — | — | % | 36 | 35 | 1 | 3 | % | ||||||||||||||||||||||
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Net income available to Genworth Financial, Inc.’s common stockholders | 127 | 95 | 32 | 34 | % | 110 | 107 | 3 | 3 | % | ||||||||||||||||||||||
Adjustment to net income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | (3 | ) | (4 | ) | 1 | 25 | % | (3 | ) | (2 | ) | (1 | ) | (50 | )% | |||||||||||||||||
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Net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 124 | $ | 91 | $ | 33 | 36 | % | $ | 107 | $ | 105 | $ | 2 | 2 | % | ||||||||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
The following table sets forth net operating income available to Genworth Financial, Inc.’s common stockholders for the businesses included in our International segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
International mortgage insurance | $ | 99 | $ | 79 | $ | 20 | 25 | % | ||||||||
Lifestyle protection insurance | 25 | 12 | 13 | 108 | % | |||||||||||
Total net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 124 | $ | 91 | $ | 33 | 36 | % | ||||||||
(Amounts in millions) Net operating income available to Genworth Financial, Inc.’s common stockholders: International mortgage insurance Lifestyle protection insurance Total net operating income available to Genworth Financial, Inc.’s common stockholders Three months ended
June 30, Increase
(decrease) and
percentage
change 2011 2010 2011 vs. 2010 $ 82 $ 93 $ (11 ) (12 )% 25 12 13 108 % $ 107 $ 105 $ 2 2 %
Net operating income available to Genworth Financial, Inc.’s common stockholders
The three months ended March 31,June 30, 2011 included an increaseincreases of $7$11 million and a decrease of $1$3 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Net operating income for ourOur international mortgage insurance business increaseddecreased from overall lower losseshigher taxes and taxes,interest expense, partially offset by lower overall losses and higher interest expense.investment income.
Net operating income for ourOur lifestyle protection insurance business increased attributable to lower new claim registrations from improving economic conditions and a favorable impact from our re-pricing actions taken in 2010, partially offset by reduced levels of consumer lending.
Revenues
Premiums
Our international mortgage insurance business increased $16$17 million and our lifestyle protection insurance business decreased $43$21 million.
The three months ended March 31,June 30, 2011 included an increaseincreases of $17$24 million and $20 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, the decrease in our international mortgage insurance business was primarily related to lower premiums in Canada and Australia attributable to seasoning of our in-force blocks of business. In addition, in Australia, lower ceded affiliated reinsurance was largely offset by a decrease in premiums from a lower rate of policy cancellations in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year.
The decrease in our lifestyle protection insurance business was primarily attributable to our runoff block of business and a decrease in premium volume driven by reduced levels of $7consumer lending. These decreases were partially offset by re-pricing actions taken during 2010.
Net investment income
Our international mortgage insurance business increased $10 million and our lifestyle protection insurance business increased $15 million.
The three months ended June 30, 2011 included increases of $9 million and $4 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, our international mortgage insurance business was relatively flat as higher average invested assets were offset by lower investment yields.
The increase in our lifestyle protection insurance business was principally attributable to reinsurance arrangements accounted for under the deposit method as certain of these arrangements were in a higher gain position in the current year.
Insurance and investment product fees and other
Our international mortgage insurance business increased $6 million and our lifestyle protection insurance business increased $4 million.
The increase in our international mortgage insurance business was mainly attributable to currency transactions related to a foreign branch in the current year.
The increase in our lifestyle protection insurance business was mainly attributable to non-functional currency transactions attributable to changes in foreign exchange rates.
Benefits and expenses
Benefits and other changes in policy reserves
Our international mortgage insurance business increased $1 million and our lifestyle protection insurance business decreased $22 million.
The three months ended June 30, 2011 included increases of $10 million and $3 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, the decrease in our international mortgage insurance business was primarily driven by lower losses in Europe related to lender settlements in the prior year and ongoing loss mitigation activities. In Australia, losses increased primarily as a result of higher new delinquencies from the seasoning of our in-force block of business and a higher average reserve per delinquency reflecting the economic impact of recent flooding, partially offset by lower paid claims. Losses in Canada were relatively flat as lower severity from overall economic improvement in the current year was offset by new delinquencies in Alberta which have a higher average reserve per delinquency.
The decrease in our lifestyle protection insurance business was largely attributable to a decrease in claim reserves from declining claim registrations.
Acquisition and operating expenses, net of deferrals
Our international mortgage insurance business increased $6 million and our lifestyle protection insurance business decreased $6 million.
The three months ended June 30, 2011 included increases of $4 million and $13 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
The increase in our international mortgage insurance business was driven by lower net deferred acquisition costs which were partially offset by lower overall expenses.
The decrease in our lifestyle protection insurance business was driven by a decrease in paid commissions related to a decline in new business, partially offset by an increase in profit commissions driven by lower claims.
Amortization of deferred acquisition costs and intangibles
Our international mortgage insurance business increased $2 million and our lifestyle protection insurance business increased $3 million.
The three months ended June 30, 2011 included increases of $2 million and $3 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, our international mortgage insurance business was relatively flat. Inflat as higher amortization of deferred acquisition costs from the seasoning of our in-force blocks of business in Australia and Canada was offset by lower amortization in Europe as a result of lender settlements in the prior year.
Excluding the effects of foreign exchange, our lifestyle protection insurance business was flat as our runoff block of business was offset by higher amortization of deferred acquisition costs in the current year due to a favorable client adjustment in the prior year that did not recur.
Interest expense
Our international mortgage insurance and lifestyle protection insurance businesses each increased $6 million.
The three months ended June 30, 2011 included increases of $1 million attributable to changes in foreign exchange rates in both our international mortgage insurance and lifestyle protection businesses.
The increase in our international mortgage insurance business was related to Canada from the issuance of debt by our majority-owned subsidiary in June and Australia, lower premiumsDecember 2010.
The increase in our lifestyle protection insurance business was due to reinsurance arrangements accounted for under the deposit method of accounting as certain of these arrangements were in a higher loss position in the current year.
Provision for income taxes.The effective tax rate increased to 32.7% for the three months ended June 30, 2011 from 19.8% for the three months ended June 30, 2010. This increase in the effective tax rate was primarily attributable to higher taxes in the current year as a result of a Canadian legislative change as compared to an Australian tax legislative benefit in the prior year. The Canadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase the effective tax rate on our U.S. GAAP earnings as prior deductions for contributions to the fund lowered the effective tax rate on U.S. GAAP earnings. The three months ended June 30, 2011 included increases of $3 million and $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
The following table sets forth the results of operations relating to our International segment for the periods indicated:
Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 968 | $ | 999 | $ | (31 | ) | (3 | )% | |||||||
Net investment income | 295 | 259 | 36 | 14 | % | |||||||||||
Net investment gains (losses) | 12 | 10 | 2 | 20 | % | |||||||||||
Insurance and investment product fees and other | 15 | 5 | 10 | 200 | % | |||||||||||
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Total revenues | 1,290 | 1,273 | 17 | 1 | % | |||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 283 | 337 | (54 | ) | (16 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | 403 | 408 | (5 | ) | (1 | )% | ||||||||||
Amortization of deferred acquisition costs and intangibles | 139 | 139 | — | — | % | |||||||||||
Interest expense | 41 | 33 | 8 | 24 | % | |||||||||||
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Total benefits and expenses | 866 | 917 | (51 | ) | (6 | )% | ||||||||||
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Income before income taxes | 424 | 356 | 68 | 19 | % | |||||||||||
Provision for income taxes | 117 | 85 | 32 | 38 | % | |||||||||||
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Net income | 307 | 271 | 36 | 13 | % | |||||||||||
Less: net income attributable to noncontrolling interests | 70 | 69 | 1 | 1 | % | |||||||||||
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Net income available to Genworth Financial, Inc.’s common stockholders | 237 | 202 | 35 | 17 | % | |||||||||||
Adjustment to net income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | (6 | ) | (6 | ) | — | — | % | |||||||||
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Net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 231 | $ | 196 | $ | 35 | 18 | % | ||||||||
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The following table sets forth net operating income available to Genworth Financial, Inc.’s common stockholders for the businesses included in our International segment for the periods indicated:
Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
International mortgage insurance | $ | 181 | $ | 172 | $ | 9 | 5 | % | ||||||||
Lifestyle protection insurance | 50 | 24 | 26 | 108 | % | |||||||||||
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Total net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 231 | $ | 196 | $ | 35 | 18 | % | ||||||||
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Net operating income available to Genworth Financial, Inc.’s common stockholders
The six months ended June 30, 2011 included increases of $18 million and $2 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, our international mortgage insurance business decreased from higher taxes and interest expense, partially offset by lower overall losses and higher investment income.
Our lifestyle protection insurance business increased attributable to lower new claim registrations from improving economic conditions and a favorable impact from our re-pricing actions taken in 2010, partially offset by reduced levels of consumer lending.
Revenues
Premiums
Our international mortgage insurance business increased $33 million and our lifestyle protection insurance business decreased $64 million.
The six months ended June 30, 2011 included increases of $41 million and $13 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, the decrease in our international mortgage insurance business was related to lower overall premiums attributable to the seasoning of our in-force blocks of business. This decrease was offset byIn addition, in Australia, lower ceded affiliated reinsurance was more than offset by a decrease in Australiapremiums from a lower rate of policy cancellations and lower flow new business volume in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year and ongoing loss mitigation activities.year.
The decrease in our lifestyle protection insurance business was primarily attributable to our runoff block of business and a decrease in premium volume driven by reduced levels of consumer lending. Additionally, there was a favorable premium adjustment related to the timing of receiving client data which was partially offset by an unfavorable reinsurance adjustment in the first quarter of 2010 both of which were offset in expenses. These decreases were partially offset by re-pricing actions taken during 2010.
Net investment income
Our international mortgage insurance business increased $10$20 million and our lifestyle protection insurance business increased $1$16 million.
The threesix months ended March 31,June 30, 2011 included an increaseincreases of $7$16 million and a decrease of $2 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
The increase in our international mortgage insurance business was primarily as a result of higher average invested assets in Australia and Canada, and Australia.partially offset by lower investment yields in Canada.
The increase in our lifestyle protection insurance business was principally attributable to reinsurance arrangements accounted for under the deposit method as certain of these arrangements were in a higher gain position.position in the current year.
Insurance and investment product fees and other
Our international mortgage and lifestyle protection insurance businesses each increased $5 million.
The increase in our international mortgage insurance business was mainly attributable to currency transactions related to a foreign branch in the current year.
The increase in our lifestyle protection insurance business was mainly attributable to non-functional currency transactions as the result of changes in foreign exchange rates.
Benefits and expenses
Benefits and other changes in policy reserves
Our international mortgage insurance business increased $3$4 million and our lifestyle protection insurance business decreased $36$58 million.
The threesix months ended March 31,June 30, 2011 included an increaseincreases of $7$17 million and a decrease of $1$2 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, the decrease in our international mortgage insurance business decrease was primarily driven by lower losses in Europe related to lender settlements in the prior year and ongoing loss mitigation activities. In Australia, was relatively flatlosses increased primarily as an increase in reserves driven bya result of higher new delinquencies from seasoning of our in-force block of business and a higher average reserve per delinquency reflecting the economic impact of the recent floodingflooding. Partially offsetting this increase was offset by lower paid claims.claims in Australia as a result of lender settlements in the prior year. Losses in Canada were relatively flat as lower severity from overall economic improvement in the current year was offset by higher new delinquencies in Alberta which have a higher average reserve per delinquency.
The decrease in our lifestyle protection insurance business was largely attributable to a decrease in claim reserves from declining claim registrations driven by continued stabilization of economic conditions in Europe.registrations.
Acquisition and operating expenses, net of deferrals.deferralsAcquisition and operating expenses, net of deferrals, decreased $5
Our international mortgage insurance business increased $7 million largely attributable toand our lifestyle protection insurance business fromdecreased $12 million.
The six months ended June 30, 2011 included increases of $6 million and $9 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, our international mortgage insurance business was relatively flat as lower net deferred acquisition costs were offset by lower overall expenses.
The decrease in our lifestyle protection insurance business was driven by a decrease in paid commissions related to a decline in new business, partially offset by an increase in profit commissions driven by lower claims. Additionally, there was a favorable commission adjustment in the first quarter of 2010 that was offset in premiums. The three months ended March 31, 2011 included an increase of $2 million and a decrease of $4 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Amortization of deferred acquisition costs and intangibles
Our international mortgage insurance business increased $5$7 million and our lifestyle protection insurance business decreased $10$7 million.
The threesix months ended March 31,June 30, 2011 included an increaseincreases of $2$4 million and a decrease of $1$2 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
The increase in our international mortgage insurance business resulted primarily from an increase related to software and higher amortization of deferred acquisition costs driven byfrom the seasoning of our in-force blocks of business.business in Australia and Canada. This increase was partially offset by lower amortization in Europe as the result of lender settlements in the prior year.
The decrease in our lifestyle protection insurance business was primarily attributable to our runoff block of business. Additionally, there was an unfavorable adjustment in the first quarter of 2010 related to the timing of receiving client data that was offset in premiums.
Interest expense
Our international mortgage insurance business increased $6$12 million and our lifestyle protection insurance business decreased $10$4 million.
The threesix months ended March 31,June 30, 2011 included a decreasean increase of $1 million attributable to changes in foreign exchange rates in our lifestyle protectioninternational mortgage insurance business.
The increase in our international mortgage insurance business was related to Canada from the issuance of debt by our majority-owned subsidiary in June and December 2010.
The decrease in our lifestyle protection insurance business was due to reinsurance arrangements accounted for under the deposit method of accounting as certain of these arrangements were in a lower loss position in the current year.
Provision for income taxes.The effective tax rate decreasedincreased to 22.2%27.6% for the threesix months ended March 31,June 30, 2011 from 27.9%23.9% for the threesix months ended March 31,June 30, 2010. This decreaseincrease in the effective tax rate was primarily attributable to changeshigher taxes in lower taxed foreign income.the current year as a result of a Canadian legislative change as compared to an Australian tax legislative benefit in the prior year. The threeCanadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase the effective tax rate on our U.S. GAAP earnings as prior deductions for contributions to the fund lowered the effective tax rate on U.S. GAAP earnings. The six months ended March 31,June 30, 2011 included an increase of $4 million and a decrease of $1$7 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.business.
International selected operating performance measures
International mortgage insurance
The following table setstables set forth selected operating performance measures regarding our international mortgage insurance business as of or for the dates indicated:
As of or for the three months ended March 31, | Increase (decrease) and percentage change | As of June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||
Primary insurance in-force | $ | 577,500 | $ | 515,500 | $ | 62,000 | 12 | % | $ | 597,900 | $ | 484,100 | $ | 113,800 | 24 | % | ||||||||||||||||
Risk in-force | 194,700 | 172,900 | 21,800 | 13 | % | 201,600 | 163,000 | 38,600 | 24 | % | ||||||||||||||||||||||
New insurance written | 12,700 | 13,900 | (1,200 | ) | (9 | )% | ||||||||||||||||||||||||||
Net premiums written | 172 | 163 | 9 | 6 | % | |||||||||||||||||||||||||||
Net earned premiums | 262 | 246 | 16 | 7 | % |
Three months ended June 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||
New insurance written | $ | 17,800 | $ | 14,900 | $ | 2,900 | 19 | % | $ | 30,500 | $ | 28,800 | $ | 1,700 | 6 | % | ||||||||||||||||
Net premiums written | 257 | 218 | 39 | 18 | % | 429 | 381 | 48 | 13 | % | ||||||||||||||||||||||
Net earned premiums | 268 | 251 | 17 | 7 | % | 530 | 497 | 33 | 7 | % |
Primary insurance in-force and risk in-force
Our businesses in Australia, New Zealand and Canada currently provide 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our risk in-force, we have computed an “effective”
“effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Australia, New Zealand and Canada. For the three and six months ended March 31,June 30, 2011 and 2010, this factor was 35%.
Primary insurance in-force and risk in-force increased primarily as a result of new insurance written in Canada and Australia, partially offset by cancellations in Australia and loss mitigation activities in Europe during 2010. Primary insurance in-force and risk in-force included increases of $45.8$92.7 billion and $15.7$31.3 billion, respectively, attributable to changes in foreign exchange rates as of March 31,June 30, 2011.
New insurance written
NewFor the three months ended June 30, 2011, new insurance written was lowerincreased primarily drivenas a result of increases in bulk transactions in Canada, Australia and Europe in the current year. These increases were partially offset by decreases in flow new insurance written in Australia due toand Canada as a result of smaller mortgage originations marketmarkets. In addition, flow new insurance written declined in Europe due to lower volume from existing lenders. The three months ended June 30, 2011 included an increase of $1.8 billion attributable to changes in foreign exchange rates.
For the six months ended June 30, 2011, excluding the effects of foreign exchange, new insurance written decreased primarily as a result of decreases in flow new insurance written in Australia and Canada as a result of smaller mortgage originations markets. In addition, flow new insurance written declined in Europe due to lower bulk transactions volume in Canada.from existing lenders. These decreases were partially offset by higher flow new insurance writtenincreases in Canada from an estimated increase in our market share and bulk transactions in Australia, Europe and EuropeCanada in the current year. The threesix months ended March 31,June 30, 2011 included an increase of $1.0$2.8 billion attributable to changes in foreign exchange rates.
Net premiums written and net earned premiums
Most of our international mortgage insurance policies provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premiums earned over time in accordance with the expected pattern of risk emergence. As of March 31,June 30, 2011, our unearned premium reserves were $3.1 billion, including an increase of $0.2$0.4 billion attributable to changes in foreign exchange rates, compared to $3.1$2.8 billion as of March 31,June 30, 2010. Excluding the effects of foreign exchange, our unearned premium reserves decreased primarily related to seasoning of our in-force block of business.
ExcludingFor the effects of foreign exchange,three and six months ended June 30, 2011, net premiums written decreasedincreased primarily from lower flowhigher average price, bulk new insurance written in Australia, Canada and bulk new insurance written in Canada. Partially offsetting this decrease was higher flow new insurance written in CanadaEurope and lower ceded affiliated reinsurance premiums in Australia.Australia in the current year. These increases were partially offset by lower flow net premiums written in Canada as an increase in market share was more than offset by lower business volume with loan-to-value ratios of more than 90%. The three and six months ended March 31,June 30, 2011 included an increaseincreases of $11$22 million and $33 million, respectively, attributable to changes in foreign exchange rates.
ExcludingFor the three months ended June 30, 2011, excluding the effects of foreign exchange, net earned premiums were relatively flat. In bothdecreased primarily related to lower premiums in Canada and Australia lower premiums were attributable to the seasoning of our in-force blockblocks of business. This decrease was offset byIn addition, in Australia, lower ceded affiliated reinsurance was largely offset by a decrease in Australiapremiums from a lower rate of policy cancellations in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year and ongoing loss mitigation activities.year. The three months ended March 31,June 30, 2011 included an increase of $17$24 million attributable to changes in foreign exchange rates.
For the six months ended June 30, 2011, excluding the effects of foreign exchange, net earned premiums decreased related to lower overall premiums attributable to the seasoning of our in-force blocks of business. In addition, in Australia, lower ceded affiliated reinsurance was more than offset by a decrease in premiums from a lower rate of policy cancellations and lower flow new business volume in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year. The six months ended June 30, 2011 included an increase of $41 million attributable to changes in foreign exchange rates.
Loss and expense ratios
The following table sets forth the loss and expense ratios for our international mortgage insurance business for the dates indicated:
Three months ended March 31, | Increase (decrease) | Three months ended June 30, | Increase (decrease) | Six months ended June 30, | Increase (decrease) | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||||
Loss ratio | 42 | % | 43 | % | (1 | )% | 40 | % | 42 | % | (2 | )% | 41 | % | 43 | % | (2 | )% | ||||||||||||||||||
Expense ratio | 45 | % | 44 | % | 1 | % | 31 | % | 33 | % | (2 | )% | 37 | % | 38 | % | (1 | )% |
The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. The expense ratio is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition costs and intangibles.
The decrease in the loss ratio for the three and six months ended June 30, 2011 was primarily attributable to lower losses in Europe related to lender settlements in the prior year and ongoing loss mitigation activities. In Australia, the loss ratio increased primarily from an increase inhigher reserves driven by higher new delinquencies from the seasoning of our in-force block of business and the economic impact of the recent flooding.
The increasedecrease in the expense ratio for the three and six months ended June 30, 2011 was primarily attributable to Australia from loweran increase in net premiums written.written, partially offset by higher general expenses.
Delinquent loans
The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our international mortgage insurance portfolio as of the dates indicated:
March 31, 2011 | December 31, 2010 | March 31, 2010 | June 30, 2011 | December 31, 2010 | June 30, 2010 | |||||||||||||||||||
Primary insurance: | ||||||||||||||||||||||||
Insured loans in-force | 2,983,530 | 2,986,059 | 2,937,992 | 3,004,011 | 2,986,059 | 2,938,624 | ||||||||||||||||||
Delinquent loans | 21,615 | 21,082 | 24,015 | 22,495 | 21,082 | 22,093 | ||||||||||||||||||
Percentage of delinquent loans (delinquency rate) | 0.72 | % | 0.71 | % | 0.82 | % | 0.75 | % | 0.71 | % | 0.75 | % | ||||||||||||
Flow loans in-force | 2,477,736 | 2,468,354 | 2,442,408 | 2,486,842 | 2,468,354 | 2,447,543 | ||||||||||||||||||
Flow delinquent loans | 18,218 | 17,684 | 20,931 | 19,070 | 17,684 | 19,219 | ||||||||||||||||||
Percentage of flow delinquent loans (delinquency rate) | 0.74 | % | 0.72 | % | 0.86 | % | 0.77 | % | 0.72 | % | 0.79 | % | ||||||||||||
Bulk loans in-force | 505,794 | 517,705 | 495,584 | 517,169 | 517,705 | 491,081 | ||||||||||||||||||
Bulk delinquent loans(1) | 3,397 | 3,398 | 3,084 | 3,425 | 3,398 | 2,874 | ||||||||||||||||||
Percentage of bulk delinquent loans (delinquency rate) | 0.67 | % | 0.66 | % | 0.62 | % | 0.66 | % | 0.66 | % | 0.59 | % |
(1) | Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were |
Flow loans in-force increased primarily from flow new insurance writtengrowth in Canada during the current year while bulk loans in-force decreased from higherprimarily due to cancellations in Australia. Delinquent loans increased from higher delinquencies in Australia and Europe as a result of the seasoning of our insurance in-force blocks of business, partially offset by lower delinquencies in Canada and Mexico.
Lifestyle protection insurance
The following table sets forth selected operating performance measures regarding our lifestyle protection insurance business and other related consumer protection insurance products for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||||||||||||||||||
Lifestyle protection insurance gross written premiums, premium equivalents and deposits | $ | 423 | $ | 437 | $ | (14 | ) | (3 | )% | $ | 469 | $ | 424 | $ | 45 | 11 | % | $ | 892 | $ | 861 | $ | 31 | 4 | % | |||||||||||||||||||||||
Net earned premiums | 215 | 258 | (43 | ) | (17 | )% | 223 | 244 | (21 | ) | (9 | )% | 438 | 502 | (64 | ) | (13 | )% |
Gross written premiums, premium equivalents and deposits
Gross written premiums, premium equivalents and deposits, gross of ceded reinsurance and cancellations, were relatively flat as our re-pricing initiatives were offset by reduced levels of consumer lending.increased from sales growth. The three and six months ended March 31,June 30, 2011 included a decreaseincreases of $13$40 million and $27 million, respectively, attributable to changes in foreign exchange rates.
Net earned premiums
For the three months ended March 31,June 30, 2011, the decrease was primarily attributable to our runoff block of business and a decrease in premium volume driven by reduced levels of consumer lending. The three months ended June 30, 2011 included an increase of $20 million attributable to changes in foreign exchange rates.
For the six months ended June 30, 2011, the decrease was primarily attributable to our runoff business and a decrease in premium volume driven by reduced levels of consumer lending. Additionally, there was a favorable premium adjustment related to the timing of receiving client data which was partially offset by an unfavorable reinsurance adjustment in the first quarter of 2010.2010, both of which were offset in expenses. The threesix months ended March 31,June 30, 2011 included a decreasean increase of $7$13 million attributable to changes in foreign exchange rates.
U.S. Mortgage Insurance segment
Segment results of operations
Three Months Ended March 31,June 30, 2011 Compared to Three Months Ended March 31,June 30, 2010
The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 142 | $ | 142 | $ | — | — | % | $ | 142 | $ | 153 | $ | (11 | ) | (7 | )% | |||||||||||||||
Net investment income | 33 | 30 | 3 | 10 | % | 26 | 31 | (5 | ) | (16 | )% | |||||||||||||||||||||
Net investment gains (losses) | 1 | 4 | (3 | ) | (75 | )% | 1 | (3 | ) | 4 | 133 | % | ||||||||||||||||||||
Insurance and investment product fees and other | 1 | 5 | (4 | ) | (80 | )% | 1 | — | 1 | — | % | |||||||||||||||||||||
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Total revenues | 177 | 181 | (4 | ) | (2 | )% | 170 | 181 | (11 | ) | (6 | )% | ||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 279 | 196 | 83 | 42 | % | 526 | 216 | 310 | 144 | % | ||||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 34 | 34 | — | — | % | 35 | 33 | 2 | 6 | % | ||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 4 | 3 | 1 | 33 | % | 4 | 4 | — | — | % | ||||||||||||||||||||||
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Total benefits and expenses | 317 | 233 | 84 | 36 | % | 565 | 253 | 312 | 123 | % | ||||||||||||||||||||||
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Loss before income taxes | (140 | ) | (52 | ) | (88 | ) | (169 | )% | (395 | ) | (72 | ) | (323 | ) | NM | (1) | ||||||||||||||||
Benefit for income taxes | (59 | ) | (19 | ) | (40 | ) | NM | (1) | (143 | ) | (29 | ) | (114 | ) | NM | (1) | ||||||||||||||||
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Net loss available to Genworth Financial, Inc.’s common stockholders | (81 | ) | (33 | ) | (48 | ) | (145 | )% | (252 | ) | (43 | ) | (209 | ) | NM | (1) | ||||||||||||||||
Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | — | (3 | ) | 3 | 100 | % | (1 | ) | 3 | (4 | ) | (133 | )% | |||||||||||||||||||
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Net operating loss available to Genworth Financial, Inc.’s common stockholders | $ | (81 | ) | $ | (36 | ) | $ | (45 | ) | (125 | )% | $ | (253 | ) | $ | (40 | ) | $ | (213 | ) | NM | (1) | ||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Net operating loss available to Genworth Financial, Inc.’s common stockholders
The increase in the net operating loss available to Genworth Financial, Inc.’s common stockholders was asmainly related to the reserve strengthening in the second quarter of 2011 from a result of lower benefits from loss mitigation activitiesdecline in the cure rates and an increase in thecontinued aging of existing delinquencies, partially offset by lower new delinquencies.delinquent loans.
Revenues
Premiums remained flatdecreased driven by lower new insurance written as lower premium refunds related to rescission activity were offset by both lower average primarya result of a smaller mortgage insurance in-forceorigination market and lower premiums assumed from an affiliate under an intercompany reinsurance agreement.agreement, partially offset by less policy coverage rescission activity.
Net investment income increaseddecreased primarily relateddue to a preferred stock dividend in the current year, partially offset by lower average invested assets.assets and lower yield from holding higher cash balances.
The decreaseincrease in net investment gains was primarily driven by lowerhigher gains on the sale of investments from portfolio repositioning activities.
Insurance and investment product fees and other income decreased from the commutation of a captive trust in the prior year that did not recur.
Benefits and expenses
Benefits and other changes in policy reserves increased due to an increase in change in reserves of $258$343 million, andpartially offset by a decrease in net paid claims of $175$33 million. In the second quarter of 2011, we strengthened reserves by $299 million primarily related to a decline in cure rates during the second quarter of 2011 for delinquent loans and continued aging of existing delinquencies. Of the reserve strengthening, approximately $102 million was associated with worsening trends in recent experience. These trends were associated with a range of factors, including reduced opportunities to mitigate losses through loan modification actions due to a higher percentage of early stage delinquencies shifting to a more aged delinquency status. Specifically, reduced cure rates were driven by lower levels of borrower self-cures and lender loan modifications outside of government-sponsored modification programs. In addition, our expectations going forward include further deterioration in cure rates from a continuation of current market trends and an ongoing weakness in the U.S. residential real estate market. Accordingly, these expectations going forward resulted in an additional reserve strengthening of approximately $197 million in the second quarter of 2011. These increases were partially offset by lower new delinquencies. The decrease in net paid claims was attributable to lower claim counts and lower average claim payments reflecting lower loan balances.
Benefit for income taxes.The effective tax rate decreased to 36.2% for the three months ended June 30, 2011 from 40.3% for the three months ended June 30, 2010. This decrease in the effective tax rate was primarily attributable to tax favored investment benefits in relation to pre-tax results in the current year compared to the prior year.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:
Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 284 | $ | 295 | $ | (11 | ) | (4 | )% | |||||||
Net investment income | 59 | 61 | (2 | ) | (3 | )% | ||||||||||
Net investment gains (losses) | 2 | 1 | 1 | 100 | % | |||||||||||
Insurance and investment product fees and other | 2 | 5 | (3 | ) | (60 | )% | ||||||||||
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Total revenues | 347 | 362 | (15 | ) | (4 | )% | ||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 805 | 412 | 393 | 95 | % | |||||||||||
Acquisition and operating expenses, net of deferrals | 69 | 67 | 2 | 3 | % | |||||||||||
Amortization of deferred acquisition costs and intangibles | 8 | 7 | 1 | 14 | % | |||||||||||
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Total benefits and expenses | 882 | 486 | 396 | 81 | % | |||||||||||
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Loss before income taxes | (535 | ) | (124 | ) | (411 | ) | NM | (1) | ||||||||
Benefit for income taxes | (202 | ) | (48 | ) | (154 | ) | NM | (1) | ||||||||
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Net loss available to Genworth Financial, Inc.’s common stockholders | (333 | ) | (76 | ) | (257 | ) | NM | (1) | ||||||||
Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | (1 | ) | — | (1 | ) | — | % | |||||||||
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Net operating loss available to Genworth Financial, Inc.’s common stockholders | $ | (334 | ) | $ | (76 | ) | $ | (258 | ) | NM | (1) | |||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Net operating loss available to Genworth Financial, Inc.’s common stockholders
The increase in the net operating loss available to Genworth Financial, Inc.’s common stockholders was mainly related to the reserve strengthening in the second quarter of 2011 from a decline in the cure rates and continued aging of existing delinquent loans.
Revenues
Premiums decreased driven by lower new insurance written as a result of a smaller mortgage insurance origination market and lower premiums assumed from an affiliate under an intercompany reinsurance agreement, partially offset by less policy coverage rescission activity.
Net investment income decreased primarily related to lower average invested assets, partially offset by a preferred stock dividend in the current year.
The increase in net investment gains was primarily driven by gains on the sale of investments from portfolio repositioning activities.
Insurance and investment product fees and other income decreased primarily from the commutation of a captive trust in the prior year that did not recur.
Benefits and expenses
Benefits and other changes in policy reserves increased due to an increase in change in reserves of $601 million, partially offset by a decrease in net paid claims of $208 million. In the second quarter of 2011, we strengthened reserves by $299 million primarily related to a decline in cure rates in the second quarter of 2011 for delinquent loans and continued aging of existing delinquencies. Of the reserve strengthening, approximately $102 million was associated with worsening trends in recent experience. These trends were associated with a range of factors, including reduced opportunities to mitigate losses through loan modification actions due to a higher percentage of early stage delinquencies shifting to a more aged delinquency status. Specifically, reduced cure rates were driven by lower levels of borrower self-cures and lender loan modifications outside of government-sponsored modification programs. In addition, our expectations going forward include further deterioration in cure rates from a continuation of current market trends and an ongoing weakness in the U.S. residential real estate market. Accordingly, these expectations going forward resulted in an additional reserve strengthening of approximately $197 million in the second quarter of 2011. These increases were partially offset by lower new delinquencies. The decrease in net paid claims was attributable to lower claim counts and lower average claim payments reflecting lower loan balances. The prior year also included a settlement with a counterparty related to our GSE Alt-A business of $5 million, consisting of net paid claims of $180 million and a decrease in change in reserves of $185 million in the first quarter of 2010. Excluding the settlement in the prior year, the increase in incurred losses in the current year was driven by lower benefits from loss mitigation activities and an increase in the aging of existing delinquencies, partially offset by lower new delinquencies. The increase in paid claims was attributable to higher claim counts offset by a decrease in average claim payments reflecting lower loan balances.that did not recur.
Benefit for income taxes.The effective tax rate increaseddecreased to 42.1%37.8% for the threesix months ended March 31,June 30, 2011 from 36.5%38.7% for the threesix months ended March 31,June 30, 2010. This increasedecrease in the effective tax rate was primarily attributable to changes in tax favored investment income and a state income tax adjustmentbenefits in relation to pre-tax results in the current year compared to the prior year that did not recur.year.
U.S. Mortgage Insurance selected operating performance measures
The following table setstables set forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:
As of or for the three months ended March 31, | Increase (decrease) and percentage change | As of June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||
Primary insurance in-force | $ | 123,300 | $ | 134,800 | $ | (11,500 | ) | (9 | )% | $ | 120,900 | $ | 131,900 | $ | (11,000 | ) | (8 | )% | ||||||||||||||
Risk in-force | 28,800 | 31,100 | (2,300 | ) | (7 | )% | 28,300 | 30,700 | (2,400 | ) | (8 | )% | ||||||||||||||||||||
New insurance written | 2,400 | 1,700 | 700 | 41 | % | |||||||||||||||||||||||||||
Net premiums written | 142 | 142 | — | — | % |
(Amounts in millions) New insurance written Net premiums written Three months ended
June 30, Increase
(decrease) and
percentage
change Six months ended
June 30, Increase
(decrease) and
percentage
change 2011 2010 2011 vs. 2010 2011 2010 2011 vs. 2010 $ 1,900 $ 2,200 $ (300 ) (14 )% $ 4,300 $ 3,900 $ 400 10 % 145 152 (7 ) (5 )% 287 294 (7 ) (2 )%
Primary insurance in-force and risk in-force
Primary insurance in-force decreased primarily as a result of rescission and other loss mitigation actions. This decrease was partially offset by an increase in newactions, as well as a smaller mortgage insurance written from an increasemarket in the overall mortgage insurance market. In addition, riskcurrent year. Risk in-force decreased due to tighter mortgage insurance guidelines and mortgage lender underwriting standards as well as a weak housing market and reduced mortgage credit liquidity. Flow persistency was 86% and 87% for the threesix months ended March 31,June 30, 2011 and 2010.2010, respectively.
New insurance written
New insurance written increased duringFor the three months ended March 31,June 30, 2011, new insurance written decreased primarily driven by a slight decline in our mortgage insurance market share, coupled with a decline in mortgage originations. For the six months ended June 30, 2011, new insurance written increased primarily driven by an increase in the overall mortgage insurance market partially offset byfollowing FHA pricing changes.
Net premiums written
For the three months ended June 30, 2011, net premiums written decreased due to lower new insurance written as a result of a decline in our mortgage insurance market share due to tighter mortgage insurance guidelines and mortgage lender underwriting standards.
Netlower premiums written
Netassumed from an affiliate under an intercompany reinsurance agreement. For the six months ended June 30, 2011, net premiums written remained flat asdecreased due to lower reinsurance premiums, werepartially offset by higher new insurance written as a result of an overall increase in the overall mortgage insurance market.
Loss and expense ratios
The following table sets forth the loss and expense ratios for our U.S. Mortgage Insurance segment for the dates indicated:
Three months ended March 31, | Increase (decrease) | Three months ended June 30, | Increase (decrease) | Six months ended June 30, | Increase (decrease) | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||||
Loss ratio | 197 | % | 138 | % | 59 | % | 369 | % | 141 | % | 228 | % | 283 | % | 140 | % | 143 | % | ||||||||||||||||||
Expense ratio | 27 | % | 26 | % | 1 | % | 27 | % | 25 | % | 2 | % | 27 | % | 25 | % | 2 | % |
The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. The expense ratio is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition costs and intangibles.
The loss ratio for the three and six months ended March 31,June 30, 2011 increased primarily attributable to a reserve strengthening of $299 million primarily related to a decline in cure rates during the second quarter of 2011 for delinquent loans and continued aging of existing delinquencies. Of the reserve strengthening, approximately $102 million was associated with worsening trends in recent experience. These trends were associated with a range of factors, including reduced opportunities to mitigate losses through loan modification actions due to a higher percentage of early stage delinquencies shifting to a more aged delinquency status. Specifically, reduced
cure rates were driven by lower levels of borrower self-cures and lender loan modifications outside of government-sponsored modification programs. In addition, our expectations going forward include further deterioration in cure rates from a continuation of current market trends and an ongoing weakness in the U.S. residential real estate market. Accordingly, these expectations going forward resulted in an additional reserve strengthening of approximately $197 million in the second quarter of 2011. These increases were partially offset by lower new delinquencies and a decrease in paid claims attributable to lower claim counts and lower average claim payments reflecting lower loan balances. The six months ended June 30, 2010 also included a settlement with a counterparty related to our GSE Alt-A business of $5 million, consisting of net paid claims of $180 million and a decrease in change in reserves of $185 million. Excluding the settlement
The expense ratio increased as a result of a decrease in the first quarter of 2010, the loss rationet premiums written for the three and six months ended March 31, 2010 would have been 141%. The increase in the loss ratio was primarily attributable to an increase in change in reserves largely driven by lower benefits from loss mitigation activities and an increase in the aging of existing delinquencies, partially offset by lower new delinquencies. In addition, the loss ratio increased as net paid claims increased from higher claim counts, partially offset by a decrease in average claim payments reflecting lower loan balances.June 30, 2011.
Delinquent loans
The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our U.S. mortgage insurance portfolio as of the dates indicated:
March 31, 2011 | December 31, 2010 | March 31, 2010 | June 30, 2011 | December 31, 2010 | June 30, 2010 | |||||||||||||||||||
Primary insurance: | ||||||||||||||||||||||||
Insured loans in-force | 763,439 | 781,024 | 840,618 | 746,740 | 781,024 | 821,617 | ||||||||||||||||||
Delinquent loans | 89,018 | 95,395 | 107,104 | 87,464 | 95,395 | 101,759 | ||||||||||||||||||
Percentage of delinquent loans (delinquency rate) | 11.66 | % | 12.21 | % | 12.74 | % | 11.71 | % | 12.21 | % | 12.39 | % | ||||||||||||
Flow loans in-force | 673,276 | 687,964 | 735,564 | 658,251 | 687,964 | 723,301 | ||||||||||||||||||
Flow delinquent loans | 85,758 | 92,225 | 102,389 | 84,442 | 92,225 | 98,771 | ||||||||||||||||||
Percentage of flow delinquent loans (delinquency rate) | 12.74 | % | 13.41 | % | 13.92 | % | 12.83 | % | 13.41 | % | 13.66 | % | ||||||||||||
Bulk loans in-force | 90,163 | 93,060 | 105,054 | 88,489 | 93,060 | 98,316 | ||||||||||||||||||
Bulk delinquent loans(1) | 3,260 | 3,170 | 4,715 | 3,022 | 3,170 | 2,988 | ||||||||||||||||||
Percentage of bulk delinquent loans (delinquency rate) | 3.62 | % | 3.41 | % | 4.49 | % | 3.42 | % | 3.41 | % | 3.04 | % | ||||||||||||
A minus and sub-prime loans in-force | 75,421 | 77,822 | 86,185 | 73,211 | 77,822 | 83,859 | ||||||||||||||||||
A minus and sub-prime delinquent loans | 20,656 | 22,827 | 26,387 | 20,284 | 22,827 | 24,867 | ||||||||||||||||||
Percentage of A minus and sub-prime delinquent loans (delinquency rate) | 27.39 | % | 29.33 | % | 30.62 | % | 27.71 | % | 29.33 | % | 29.65 | % | ||||||||||||
Pool insurance: | ||||||||||||||||||||||||
Insured loans in-force | 17,421 | 17,880 | 19,907 | 16,943 | 17,880 | 19,473 | ||||||||||||||||||
Delinquent loans | 913 | 989 | 783 | 931 | 989 | 831 | ||||||||||||||||||
Percentage of delinquent loans (delinquency rate) | 5.24 | % | 5.53 | % | 3.93 | % | 5.49 | % | 5.53 | % | 4.27 | % |
(1) | Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were |
Delinquency and foreclosure levels that developed principally in our 2006, 2007 and 2008 book years have remained high as the United States continues to experience an economic recession and weakness in its housing markets.residential real estate market. These trends continue to be especially evident in Florida, California, Arizona and Nevada, as well as in our A minus, Alt-A, adjustable rate mortgages (“ARMs”) and certain 100% loan-to-value products. However, we have seen a decline in new delinquencies.
The following tables set forth flow delinquencies, direct case reserves and risk in-force by aged missed payment status in our U.S. mortgage insurance portfolio as of the dates indicated:
June 30, 2011 | ||||||||||||||||
(Dollar amounts in millions) | Delinquencies | Direct case reserves (1) | Risk in-force | Reserves as % of risk in-force | ||||||||||||
Payments in default: | ||||||||||||||||
3 payments or less | 20,255 | $ | 193 | $ | 810 | 24 | % | |||||||||
4 – 11 payments | 26,099 | 714 | 1,186 | 60 | % | |||||||||||
12 payments or more | 38,088 | 1,349 | 1,901 | 71 | % | |||||||||||
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Total | 84,442 | $ | 2,256 | $ | 3,897 | 58 | % | |||||||||
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(1) | Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves. |
December 31, 2010 | ||||||||||||||||
(Dollar amounts in millions) | Delinquencies | Direct case reserves (1) | Risk in-force | Reserves as % of risk in-force | ||||||||||||
Payments in default: | ||||||||||||||||
3 payments or less | 24,104 | $ | 152 | $ | 959 | 16 | % | |||||||||
4 – 11 payments | 33,635 | 754 | 1,546 | 49 | % | |||||||||||
12 payments or more | 34,486 | 1,142 | 1,757 | 65 | % | |||||||||||
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Total | 92,225 | $ | 2,048 | $ | 4,262 | 48 | % | |||||||||
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(1) | Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves. |
Primary insurance delinquency rates differ from region to region in the United States at any one time depending upon economic conditions and cyclical growth patterns. The tables below set forth our primary delinquency rates for the various regions of the United States and the ten largest states by our risk in-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.
Delinquency rate | Percent of primary risk in-force as of June 30, 2011 | Percent of total reserves as of June 30, 2011 (1) | Delinquency rate | |||||||||||||||||||||||||||||||||||||
Percent of primary risk in-force as of March 31, 2011 | Percent of total reserves as of March 31, 2011 (1) | March 31, 2011 | December 31, 2010 | March 31, 2010 | June 30, 2011 | December 31, 2010 | June 30, 2010 | |||||||||||||||||||||||||||||||||
By Region: | ||||||||||||||||||||||||||||||||||||||||
Southeast(2) | 22% | 34% | 16.26 | % | 16.79 | % | 17.28 | % | 22 | % | 35 | % | 16.37 | % | 16.79 | % | 17.06 | % | ||||||||||||||||||||||
South Central(3) | 16 | 13 | 10.01 | % | 11.00 | % | 11.81 | % | 16 | 12 | 9.90 | % | 11.00 | % | 11.41 | % | ||||||||||||||||||||||||
Northeast(4) | 14 | 11 | 11.44 | % | 11.66 | % | 11.13 | % | 14 | 12 | 11.71 | % | 11.66 | % | 10.85 | % | ||||||||||||||||||||||||
North Central(5) | 12 | 12 | 11.06 | % | 11.51 | % | 11.66 | % | 12 | 11 | 11.36 | % | 11.51 | % | 11.50 | % | ||||||||||||||||||||||||
Pacific(6) | 11 | 14 | 13.64 | % | 14.39 | % | 16.66 | % | 11 | 13 | 13.29 | % | 14.39 | % | 15.83 | % | ||||||||||||||||||||||||
Great Lakes(7) | 9 | 7 | 8.44 | % | 8.92 | % | 9.47 | % | 9 | 7 | 8.49 | % | 8.92 | % | 9.08 | % | ||||||||||||||||||||||||
Plains(8) | 6 | 3 | 7.73 | % | 8.14 | % | 7.72 | % | 6 | 3 | 7.75 | % | 8.14 | % | 7.59 | % | ||||||||||||||||||||||||
New England(9) | 5 | 3 | 10.43 | % | 10.71 | % | 11.67 | % | 5 | 3 | 10.36 | % | 10.71 | % | 11.11 | % | ||||||||||||||||||||||||
Mid-Atlantic(10) | 5 | 3 | 10.09 | % | 10.67 | % | 11.85 | % | 5 | 4 | 10.12 | % | 10.67 | % | 11.23 | % | ||||||||||||||||||||||||
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Total | 100% | 100% | 11.66 | % | 12.21 | % | 12.74 | % | 100 | % | 100 | % | 11.71 | % | 12.21 | % | 12.39 | % | ||||||||||||||||||||||
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(1) | Total reserves were |
(2) | Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee. |
(3) | Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah. |
(4) | New Jersey, New York and Pennsylvania. |
(5) | Illinois, Minnesota, Missouri and Wisconsin. |
(6) | Alaska, California, Hawaii, Nevada, Oregon and Washington. |
(7) | Indiana, Kentucky, Michigan and Ohio. |
(8) | Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming. |
(9) | Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. |
(10) | Delaware, Maryland, Virginia, Washington D.C. and West Virginia. |
Delinquency rate | Percent of primary risk in-force as of June 30, 2011 | Percent of total reserves as of June 30, 2011 (1) | Delinquency rate | |||||||||||||||||||||||||||||||||||||
Percent of primary risk in-force as of March 31, 2011 | Percent of total reserves as of March 31, 2011 (1) | March 31, 2011 | December 31, 2010 | March 31, 2010 | June 30, 2011 | December 31, 2010 | June 30, 2010 | |||||||||||||||||||||||||||||||||
By State: | ||||||||||||||||||||||||||||||||||||||||
Florida | 7% | 23% | 28.09 | % | 28.31 | % | 29.07 | % | 7 | % | 24 | % | 28.35 | % | 28.31 | % | 28.86 | % | ||||||||||||||||||||||
Texas | 7% | 3% | 7.63 | % | 8.71 | % | 9.10 | % | 7 | % | 3 | % | 7.61 | % | 8.71 | % | 8.80 | % | ||||||||||||||||||||||
New York | 7% | 4% | 9.59 | % | 9.76 | % | 9.12 | % | 7 | % | 5 | % | 9.71 | % | 9.76 | % | 8.88 | % | ||||||||||||||||||||||
California | 5% | 7% | 12.89 | % | 13.99 | % | 17.72 | % | 5 | % | 7 | % | 12.24 | % | 13.99 | % | 16.40 | % | ||||||||||||||||||||||
Illinois | 5% | 8% | 15.44 | % | 15.79 | % | 16.09 | % | 5 | % | 7 | % | 15.90 | % | 15.79 | % | 15.79 | % | ||||||||||||||||||||||
Georgia | 4% | 4% | 15.12 | % | 16.16 | % | 17.40 | % | 4 | % | 4 | % | 14.70 | % | 16.16 | % | 17.13 | % | ||||||||||||||||||||||
North Carolina | 4% | 2% | 10.73 | % | 11.23 | % | 11.50 | % | 4 | % | 3 | % | 10.93 | % | 11.23 | % | 11.12 | % | ||||||||||||||||||||||
New Jersey | 4% | 4% | 17.53 | % | 17.30 | % | 16.68 | % | 4 | % | 5 | % | 17.73 | % | 17.30 | % | 16.36 | % | ||||||||||||||||||||||
Pennsylvania | 4% | 2% | 10.32 | % | 10.94 | % | 10.66 | % | 4 | % | 2 | % | 10.81 | % | 10.94 | % | 10.34 | % | ||||||||||||||||||||||
Ohio | 3% | 2% | 7.97 | % | 8.19 | % | 8.11 | % | 3 | % | 2 | % | 8.00 | % | 8.19 | % | 7.85 | % |
(1) | Total reserves were |
The following table sets forth the dispersion of our total reserves and primary insurance in-force and risk in-force by year of policy origination and average annual mortgage interest rate as of March 31,June 30, 2011:
(Amounts in millions) | Average rate | Percent of total reserves(1) | Primary insurance in-force | Percent of total | Primary risk in-force | Percent of total | Average rate | Percent of total reserves(1) | Primary insurance in-force | Percent of total | Primary risk in-force | Percent of total | ||||||||||||||||||||||||||||||||||||
Policy Year | ||||||||||||||||||||||||||||||||||||||||||||||||
2000 and prior | 7.86 | % | 0.8 | % | $ | 1,995 | 1.6 | % | $ | 512 | 1.8 | % | 7.84 | % | 1.3 | % | $ | 1,876 | 1.6 | % | $ | 481 | 1.7 | % | ||||||||||||||||||||||||
2001 | 7.56 | % | 0.5 | 1,037 | 0.8 | 261 | 0.9 | 7.58 | % | 0.7 | 954 | 0.8 | 240 | 0.9 | ||||||||||||||||||||||||||||||||||
2002 | 6.64 | % | 1.0 | 2,559 | 2.1 | 629 | 2.2 | 6.64 | % | 1.5 | 2,358 | 2.0 | 581 | 2.1 | ||||||||||||||||||||||||||||||||||
2003 | 5.65 | % | 2.3 | 10,225 | 8.3 | 1,762 | 6.2 | 5.65 | % | 3.7 | 9,603 | 7.9 | 1,622 | 5.8 | ||||||||||||||||||||||||||||||||||
2004 | 5.88 | % | 2.6 | 6,245 | 5.1 | 1,416 | 5.0 | 5.88 | % | 4.2 | 5,963 | 4.9 | 1,354 | 4.8 | ||||||||||||||||||||||||||||||||||
2005 | 5.98 | % | 13.5 | 10,088 | 8.2 | 2,589 | 9.1 | 5.98 | % | 12.6 | 9,710 | 8.0 | 2,501 | 8.9 | ||||||||||||||||||||||||||||||||||
2006 | 6.49 | % | 22.4 | 13,590 | 11.0 | 3,316 | 11.6 | 6.49 | % | 19.7 | 13,144 | 10.9 | 3,216 | 11.5 | ||||||||||||||||||||||||||||||||||
2007 | 6.57 | % | 48.8 | 29,931 | 24.3 | 7,377 | 25.8 | 6.56 | % | 40.0 | 29,077 | 24.0 | 7,171 | 25.6 | ||||||||||||||||||||||||||||||||||
2008 | 6.16 | % | 7.9 | 27,807 | 22.5 | 6,894 | 24.1 | 6.15 | % | 15.8 | 26,922 | 22.3 | 6,685 | 23.8 | ||||||||||||||||||||||||||||||||||
2009 | 5.08 | % | 0.1 | 8,254 | 6.7 | 1,421 | 5.0 | 5.08 | % | 0.3 | 7,982 | 6.6 | 1,386 | 4.9 | ||||||||||||||||||||||||||||||||||
2010 | 4.66 | % | 0.1 | 9,248 | 7.5 | 1,901 | 6.7 | 4.66 | % | 0.2 | 9,085 | 7.5 | 1,872 | 6.7 | ||||||||||||||||||||||||||||||||||
2011 | 4.50 | % | — | 2,343 | 1.9 | 465 | 1.6 | 4.63 | % | — | 4,264 | 3.5 | 920 | 3.3 | ||||||||||||||||||||||||||||||||||
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Total portfolio | 6.10 | % | 100.0 | % | $ | 123,322 | 100.0 | % | $ | 28,543 | 100.0 | % | 6.08 | % | 100.0 | % | $ | 120,938 | 100.0 | % | $ | 28,029 | 100.0 | % | ||||||||||||||||||||||||
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(1) | Total reserves were |
Corporate and Other
Results of Operations
Three Months Ended March 31,June 30, 2011 Compared to Three Months Ended March 31,June 30, 2010
The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | — | $ | — | $ | — | — | % | ||||||||||||||||||||||||
Net investment income | 26 | 9 | 17 | 189 | % | $ | 43 | $ | 35 | $ | 8 | 23 | % | |||||||||||||||||||
Net investment gains (losses) | (7 | ) | (16 | ) | 9 | 56 | % | (1 | ) | (68 | ) | 67 | 99 | % | ||||||||||||||||||
Insurance and investment product fees and other | 2 | 3 | (1 | ) | (33 | )% | 1 | (3 | ) | 4 | 133 | % | ||||||||||||||||||||
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Total revenues | 21 | (4 | ) | 25 | NM | (1) | 43 | (36 | ) | 79 | NM | (1) | ||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Interest credited | 33 | 39 | (6 | ) | (15 | )% | 31 | 35 | (4 | ) | (11 | )% | ||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | (5 | ) | 8 | (13 | ) | (163 | )% | — | 9 | (9 | ) | (100 | )% | |||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 3 | 4 | (1 | ) | (25 | )% | 3 | 4 | (1 | ) | (25 | )% | ||||||||||||||||||||
Interest expense | 82 | 70 | 12 | 17 | % | 86 | 70 | 16 | 23 | % | ||||||||||||||||||||||
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Total benefits and expenses | 113 | 121 | (8 | ) | (7 | )% | 120 | 118 | 2 | 2 | % | |||||||||||||||||||||
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Loss before income taxes | (92 | ) | (125 | ) | 33 | 26 | % | (77 | ) | (154 | ) | 77 | 50 | % | ||||||||||||||||||
Benefit for income taxes | (16 | ) | (157 | ) | 141 | 90 | % | — | (51 | ) | 51 | 100 | % | |||||||||||||||||||
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Net income (loss) available to Genworth Financial, Inc.’s common stockholders | (76 | ) | 32 | (108 | ) | NM | (1) | |||||||||||||||||||||||||
Adjustments to net income (loss) available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Net loss available to Genworth Financial, Inc.’s common stockholders | (77 | ) | (103 | ) | 26 | 25 | % | |||||||||||||||||||||||||
Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | 4 | 11 | (7 | ) | (64 | )% | — | 42 | (42 | ) | (100 | )% | ||||||||||||||||||||
Net tax benefit related to separation from our former parent | — | (106 | ) | 106 | 100 | % | ||||||||||||||||||||||||||
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Net operating loss available to Genworth Financial, Inc.’s common stockholders | $ | (72 | ) | $ | (63 | ) | $ | (9 | ) | (14 | )% | $ | (77 | ) | $ | (61 | ) | $ | (16 | ) | (26 | )% | ||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Net operating loss available to Genworth Financial, Inc.’s common stockholders
We reported a higher net operating loss available to Genworth Financial, Inc.’s common stockholders in the current year compared to the prior year primarily as a result of lower tax benefits and higher interest expense, partially offset by an increase in net investment income and lower operating expenses.
Revenues
Higher investment income was primarily driven by higher dividend income from equity investments and $3 million of higher gains related to limited partnerships accounted for under the equity method in the current year.
Net investment losses decreased primarily related to derivative activity associated with certain consolidated securitization entities and lower impairments.
Insurance and investment product fees and other increased mainly attributable to non-functional currency transactions attributable to changes in foreign exchange rates in the current year.
Benefits and expenses
The decrease in interest credited was attributable to lower interest rates on interest paid on our floating rate policyholder liabilities and a decrease in average outstanding liabilities.
Operating expenses decreased as a result of higher allocated expenses to the operating segments in the current year.
Interest expense increased related to the debt issuances in June and November 2010 and March 2011.
The decrease in the income tax benefit was primarily related to tax expense allocated to Corporate and Other activities in the current year.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:
Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Net investment income | $ | 69 | $ | 44 | $ | 25 | 57 | % | ||||||||
Net investment gains (losses) | (8 | ) | (84 | ) | 76 | 90 | % | |||||||||
Insurance and investment product fees and other | 3 | — | 3 | NM | (1) | |||||||||||
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Total revenues | 64 | (40 | ) | 104 | NM | (1) | ||||||||||
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Benefits and expenses: | ||||||||||||||||
Interest credited | 64 | 74 | (10 | ) | (14 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | (5 | ) | 17 | (22 | ) | (129 | )% | |||||||||
Amortization of deferred acquisition costs and intangibles | 6 | 8 | (2 | ) | (25 | )% | ||||||||||
Interest expense | 168 | 140 | 28 | 20 | % | |||||||||||
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Total benefits and expenses | 233 | 239 | (6 | ) | (3 | )% | ||||||||||
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Loss before income taxes | (169 | ) | (279 | ) | 110 | 39 | % | |||||||||
Benefit for income taxes | (16 | ) | (208 | ) | 192 | 92 | % | |||||||||
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Net loss available to Genworth Financial, Inc.’s common stockholders | (153 | ) | (71 | ) | (82 | ) | (115 | )% | ||||||||
Adjustments to net loss available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | 4 | 53 | (49 | ) | (92 | )% | ||||||||||
Net tax benefit related to separation from our former parent | — | (106 | ) | 106 | 100 | % | ||||||||||
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Net operating loss available to Genworth Financial, Inc.’s common stockholders | $ | (149 | ) | $ | (124 | ) | $ | (25 | ) | (20 | )% | |||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Net operating loss available to Genworth Financial, Inc.’s common stockholders
We reported a higher net operating loss available to Genworth Financial, Inc.’s common stockholders in the current year compared to the prior year primarily as a result of lower tax benefits and higher interest expense, partially offset by an increase in net investment income and lower operating expenses.
Revenues
Higher investment income was primarily driven by the improved performance of limited partnership investments accounted for under the equity method. Net investment income included $1$4 million of gains related to limited partnerships induring the first quarter ofsix months ended June 30, 2011 compared to losses of $21 million ofduring the six months ended June 30, 2010.
Net investment losses decreased primarily related to limited partnershipsderivative activity associated with certain consolidated securitization entities and lower impairments.
Insurance and investment product fees and other increased mainly attributable to non-functional currency transactions attributable to changes in foreign exchange rates in the first quarter of 2010. The increase was partially offset by a decline in average invested assets.current year.
Benefits and expenses
The decrease in interest credited was attributable to lower interest rates on interest paid on our floating rate policyholder liabilities and a decrease in average outstanding liabilities.
Operating expenses decreased as a result of higher allocated expenses to the operating segments in the current year.
Interest expense increased related to the debt issuances in the second half of 2010.June and November 2010 and March 2011.
The decrease in the income tax benefit was primarily related to changes in uncertain tax benefits in the prior year related to separation from our former parent.
Investments and Derivative Instruments
Investment results
The following table setstables set forth information about our investment income, excluding net investment gains (losses), for each component of our investment portfolio for the periods indicated:
Three months ended March 31, | Increase (decrease) | Three months ended June 30, | Increase (decrease) | |||||||||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | ||||||||||||||||||||||||||||||||||||
Fixed maturity securities—taxable | 5.0 | % | $ | 670 | 4.9 | % | $ | 626 | 0.1 | % | $ | 44 | 5.2 | % | $ | 693 | 5.0 | % | $ | 646 | 0.2 | % | $ | 47 | ||||||||||||||||||||||||
Fixed maturity securities—non-taxable | 4.2 | % | 11 | 4.3 | % | 16 | (0.1 | )% | (5 | ) | 4.1 | % | 10 | 4.3 | % | 16 | (0.2 | )% | (6 | ) | ||||||||||||||||||||||||||||
Commercial mortgage loans | 5.5 | % | 92 | 5.8 | % | 104 | (0.3 | )% | (12 | ) | 5.6 | % | 92 | 5.5 | % | 99 | 0.1 | % | (7 | ) | ||||||||||||||||||||||||||||
Restricted commercial mortgage loans related to securitization entities | 7.6 | % | 10 | 7.3 | % | 10 | 0.3 | % | — | 7.8 | % | 9 | 7.3 | % | 10 | 0.5 | % | (1 | ) | |||||||||||||||||||||||||||||
Equity securities | 3.2 | % | 3 | 6.6 | % | 2 | (3.4 | )% | 1 | 11.7 | % | 10 | 11.8 | % | 5 | (0.1 | )% | 5 | ||||||||||||||||||||||||||||||
Other invested assets | 10.1 | % | 34 | (0.7 | )% | (2 | ) | 10.8 | % | 36 | 16.9 | % | 55 | 14.9 | % | 39 | 2.0 | % | 16 | |||||||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 0.3 | % | — | 1.0 | % | 1 | (0.7 | )% | (1 | ) | 0.2 | % | — | — | % | — | 0.2 | % | — | |||||||||||||||||||||||||||||
Policy loans | 8.0 | % | 29 | 7.7 | % | 27 | 0.3 | % | 2 | 7.9 | % | 30 | 7.7 | % | 28 | 0.2 | % | 2 | ||||||||||||||||||||||||||||||
Cash, cash equivalents and short-term investments | 0.7 | % | 6 | 0.4 | % | 5 | 0.3 | % | 1 | 0.7 | % | 6 | 0.3 | % | 4 | 0.4 | % | 2 | ||||||||||||||||||||||||||||||
Gross investment income before expenses and fees | 5.0 | % | 855 | 4.6 | % | 789 | 0.4 | % | 66 | 5.3 | % | 905 | 4.9 | % | 847 | 0.4 | % | 58 | ||||||||||||||||||||||||||||||
Expenses and fees | (0.2 | )% | (25 | ) | (0.2 | )% | (24 | ) | — | % | (1 | ) | (0.2 | )% | (24 | ) | (0.1 | )% | (24 | ) | (0.1 | )% | — | |||||||||||||||||||||||||
Net investment income | 4.8 | % | $ | 830 | 4.4 | % | $ | 765 | 0.4 | % | $ | 65 | 5.1 | % | $ | 881 | 4.8 | % | $ | 823 | 0.3 | % | $ | 58 | ||||||||||||||||||||||||
(Amounts in millions) Fixed maturity securities—taxable Fixed maturity securities—non-taxable Commercial mortgage loans Restricted commercial mortgage loans related to securitization entities Equity securities Other invested assets Restricted other invested assets related to securitization entities Policy loans Cash, cash equivalents and short-term investments Gross investment income before expenses and fees Expenses and fees Net investment income Six months ended
June 30, Increase (decrease) 2011 2010 2011 vs. 2010 Yield Amount Yield Amount Yield Amount 5.1 % $ 1,363 5.0 % $ 1,272 0.1 % $ 91 4.1 % 21 4.3 % 32 (0.2 )% (11 ) 5.6 % 184 5.7 % 203 (0.1 )% (19 ) 7.7 % 19 7.4 % 20 0.3 % (1 ) 7.6 % 13 9.4 % 7 (1.8 )% 6 13.5 % 89 6.8 % 37 6.7 % 52 0.2 % — 0.6 % 1 (0.4 )% (1 ) 7.9 % 59 7.6 % 55 0.3 % 4 0.7 % 12 0.3 % 9 0.4 % 3 5.1 % 1,760 4.8 % 1,636 0.3 % 124 (0.1 )% (49 ) (0.2 )% (48 ) 0.1 % (1 ) 5.0 % $ 1,711 4.6 % $ 1,588 0.4 % $ 123
Yields for fixed maturity and equity securities are based on weighted-average amortized cost or cost, respectively. Yields for other invested assets, which include securities lending activity, are calculated net of the corresponding securities lending liability. All other yields are based on average carrying values.
For the three months ended March 31,June 30, 2011, the increase in overall weighted-average investment yields was primarily attributable to the improved performance of limited partnerships accounted for under the equity method
and $16 million of bond calls and prepayments in the reinvestment of cash balances.current year. Net investment income for the three months ended March 31,June 30, 2011 included $4$7 million of higher gains related to limited partnerships as compared the three months ended June 30, 2010.
For the six months ended June 30, 2011, the increase in overall weighted-average investment yields was primarily attributable to the improved performance of limited partnerships accounted for under the equity method and $20 million of higher bond calls and prepayments in the current year. Net investment income for the six months ended June 30, 2011 included $21 million of gains related to limited partnerships as compared to $34$24 million of losses related to limited partnerships for the threesix months ended March 31,June 30, 2010.
The following table sets forth net investment gains (losses) for the periods indicated:
Three months ended March 31, | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||
Realized gains | $ | 29 | $ | 23 | $ | 25 | $ | 53 | $ | 54 | $ | 76 | ||||||||||||
Realized losses | (31 | ) | (38 | ) | (34 | ) | (36 | ) | (65 | ) | (74 | ) | ||||||||||||
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Net realized gains (losses) on available-for-sale securities | (2 | ) | (15 | ) | (9 | ) | 17 | (11 | ) | 2 | ||||||||||||||
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Impairments: | ||||||||||||||||||||||||
Total other-than-temporary impairments | (31 | ) | (77 | ) | (28 | ) | (24 | ) | (59 | ) | (101 | ) | ||||||||||||
Portion of other-than-temporary impairments recognized in other comprehensive income (loss) | (5 | ) | (3 | ) | 2 | (27 | ) | (3 | ) | (30 | ) | |||||||||||||
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Net other-than-temporary impairments | (36 | ) | (80 | ) | (26 | ) | (51 | ) | (62 | ) | (131 | ) | ||||||||||||
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Trading securities | 11 | 6 | 14 | (4 | ) | 25 | 2 | |||||||||||||||||
Commercial mortgage loans | (1 | ) | (4 | ) | 2 | (18 | ) | 1 | (22 | ) | ||||||||||||||
Net gains (losses) related to securitization entities | 10 | 11 | (5 | ) | (47 | ) | 5 | (36 | ) | |||||||||||||||
Derivative instruments | (10 | ) | (8 | ) | (15 | ) | (38 | ) | (25 | ) | (46 | ) | ||||||||||||
Other | — | 20 | (1 | ) | 2 | (1 | ) | 22 | ||||||||||||||||
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Net investment gains (losses) | $ | (28 | ) | $ | (70 | ) | $ | (40 | ) | $ | (139 | ) | $ | (68 | ) | $ | (209 | ) | ||||||
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Three Months Ended March 31,June 30, 2011 Compared to Three Months Ended March 31,June 30, 2010
We recorded $36$26 million of net other-than-temporary impairments for the three months ended March 31,June 30, 2011 as compared to $80$51 million for the three months ended March 31,June 30, 2010. Of total impairments for the three months ended March 31,June 30, 2011 and 2010, $21$17 million and $62$43 million, respectively, related to structured securities, including $9 million and $23 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. For the three months ended June 30, 2011 and 2010, we recorded $4 million and $5 million, respectively, of impairments related to commercial mortgage loans and $2 million and $4 million, respectively, of impairments related to limited partnership investments. For the three months ended June 30, 2011, we also recorded $3 million of impairments related to real estate held-for-investment.
Net investment losses related to derivatives of $15 million for the three months ended June 30, 2011 were primarily due to $16 million of losses from the change in value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs and $36$4 million of losses associated with derivatives used to hedge foreign currency risk. These losses were partially offset by $3 million of gains related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position and $2 million of gains in other non-qualified interest rate swaps. Net investment losses related to derivatives of $38 million for the three months ended June 30, 2010 were primarily related to $31 million of losses from the change in value of our credit default swaps due to widening credit spreads, $21 million of losses from the change in value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs and $9 million of losses related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. These losses were partially offset by $15 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $4 million of gains from other non-qualified interest rate swaps, $2 million of gains related to embedded derivatives associated with certain reinsurance agreements and $2 million of gains from foreign currency options and forward contracts.
Net losses related to the sale of available-for-sale securities were $9 million during the three months ended June 30, 2011 compared to net gains of $17 million during the three months ended June 30, 2010. We recorded $14 million of net gains related to trading securities during the three months ended June 30, 2011. We recorded $42 million of lower net losses related to securitization entities during the three months ended June 30, 2011 compared to the three months ended June 30, 2010 primarily associated with lower losses related to derivatives. We also recorded $2 million of gains related to commercial mortgage loans during the three months ended June 30, 2011 attributable to a decrease in the allowance compared to $18 million of losses during the three months ended June 30, 2010 from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance.
The aggregate fair value of securities sold at a loss during the three months ended June 30, 2011 and 2010 was $294 million from the sale of 78 securities and $858 million from the sale of 159 securities, respectively, which was approximately 91% and 96% of book value for the three months ended June 30, 2011 and 2010, respectively. The loss on sales of securities in the three months ended June, 2011 was primarily driven by widening credit spreads. Generally, securities that are sold at a loss represent either small dollar amounts or percentage losses upon disposition. The securities sold at a loss in the second quarter of 2011 included one foreign corporate security that was sold for a total loss of $11 million related to portfolio repositioning activities. The securities sold at a loss in the second quarter of 2010 included one mortgage-backed security that was sold for a total loss of $4 million related to portfolio repositioning activities.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
We recorded $62 million of net other-than-temporary impairments for the six months ended June 30, 2011 as compared to $131 million for the six months ended June 30, 2010. Of total impairments for the six months ended June 30, 2011 and 2010, $38 million and $105 million, respectively, related to structured securities, including $24 million and $59 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Impairments related to corporate securities as a result of bankruptcies, receivership or concerns about the issuer’s ability to continue to make contractual payments or where we have intent to sell were $14 million and $5 million for the threesix months ended March 31,June 30, 2011 and 2010, respectively. WeFor the six months ended June 30, 2011 and 2010, we recorded $5 million of impairments related to commercial mortgage loans and $2 million and $10 million, respectively, of impairments related to limited partnership investments. For the six months ended June 30, 2011, we also recorded $3 million of impairments ofrelated to real estate held-for-investment. For the six months ended June 30, 2010, we also recorded $6 million of impairments related to financial hybrid securities and $7 million related to limited partnership investments during the three months ended March 31, 2010.securities.
Net investment losses related to derivatives of $10$25 million infor the first quarter ofsix months ended June 30, 2011 were primarily relateddue to $8 million of losses associated with derivative instruments used to hedge foreign currency risk, $4$20 million of losses from the change in the value of derivative instruments used for mitigating the risk of embedded derivative liabilities exceeding the gains in value of the embedded derivative liabilities associated with our variable annuity products with GMWBs and $13 million of losses associated with derivatives used to hedge foreign currency risk. These losses were partially offset by $5 million of gains related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position and $3 million of gains in other non-qualified interest rate swaps. Net investment losses related to derivatives of $46 million for the six months ended June 30, 2010 were primarily related to $35 million of losses from the change in value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs, exceeding$27 million of losses from the change in value of the embedded derivative liabilities and $2 million of losses due to hedge ineffectiveness. These losses were partially offset by $3 million of gains fromour credit default swaps due to narrowingwidening credit spreads and $1$6 million of gainslosses related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. Net investment losses related to derivatives of $8 million in the first quarter of 2010 were primarily related to $14 million of losses in derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of the embedded derivative liabilities and $3 million of losses from foreign currency options. These losses were partially offset by $5$13 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $7 million of gains from credit defaultother non-qualified interest rate swaps utilized to improve our diversification and portfolio yield and $5$2 million of gains in non-qualified interest rate swaps.related to embedded derivatives associated with certain reinsurance agreements.
Net losses related to the sale of available-for-sale securities were $2$11 million induring the first quarter ofsix months ended June 30, 2011 compared to $15net gains of $2 million during the six months ended June 30, 2010. We recorded $23 million of higher gains related to trading securities during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. We recorded $5 million of net gains related to securitization entities during the six months ended June 30, 2011 primarily related to gains on trading securities compared to $36 million of net losses during the six months ended June 30, 2010 primarily associated with derivatives. We also recorded $1 million of gains related to commercial mortgage loans during the six months ended June 30, 2011 attributable to a decrease in the first quarterallowance compared to $22 million of 2010. Welosses during the six months ended June 30, 2010 from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance. There was also recordeda net gain of $16 million from the recovery of a counterparty receivable in the first quarter of 2010.
The aggregate fair value of securities sold at a loss during the threesix months ended March 31,June 30, 2011 and 2010 was $397$691 million from the sale of 74145 securities and $558$1,416 million from the sale of 128239 securities, respectively, which was approximately 94%93% and 95%, respectively, of book value for both 2011 and 2010.value. The loss on sales of securities in the threesix months ended March 31,June 30, 2011 was primarily driven by widening credit spreads. Generally, securities that are sold at a loss represent either small dollar amounts or percentage losses upon disposition. However, in certain circumstances, events may occur that change our intent to hold specificThe securities and thus result in our disposition of the security at a loss. Examples of these events include unforeseen issuer-specific events or conditions and shifts in risk or uncertainty of certain securities. Of the securities that were sold at a loss during the threesix months ended March 31, 2011, the average period of time those securities had been continuously in an unrealized loss position was approximately 13 months. The securities sold at a loss in the first quarter ofJune 30, 2011 included two U.S. corporate securities that were sold for a total loss of $11 million in the first quarter of 2011 and one foreign corporate security that was sold for a total loss of $11 million in the second quarter of 2011 related to portfolio repositioning activities. Of theThe securities that were sold at a loss during the threesix months ended March 31, 2010, the average period of time those securities had been continuously in an unrealized loss position was approximately 16 months. The securities sold at a loss in the first quarter ofJune 30, 2010 included one non-U.S. government security that was sold for a total loss of $7 million in the first quarter of 2010 and one mortgage-backed security that was sold for a total loss of $4 million in the second quarter of 2010 related to portfolio repositioning activities.
Investment portfolio
We analyze our investment portfolio on a security by security basis as part of our ongoing evaluation of our holdings. A component of this ongoing evaluation is an internal credit monitoring process that includes a fundamental evaluation of the credit risk for each security. In this evaluation, we consider published ratings, when available. However, our analysis is not intended to validate nor make any judgments with respect to the validity of any third-party credit ratings but, rather, is intended to serve as the basis for making decisions with respect to our ongoing management of our investment portfolio. Additionally, in any financial reporting disclosure where ratings are presented or stratified, such as investment grade and below investment grade, we utilize the Nationally Recognized Statistical Rating Organization (“NRSRO”) rating, when available, and do not make any adjustments to third-party ratings in such disclosures.
In our evaluation of our securities, we consider current market spreads and ratings published by a NRSRO in our analysis. For corporate securities, we consider factors such as the financial results and ratios of a company, capital structure, industry, covenants and other available information including updates from rating agencies. For structured securities, we also consider underlying asset performance including default, delinquency, loan-to-value of the collateral, third-party enhancement and current levels of subordination. Although we consider NRSRO ratings, they are not considered a significant component of our analysis of fair value or other-than-temporary impairments.
The following table sets forth our cash, cash equivalents and invested assets as of the dates indicated:
March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||||||
Fixed maturity securities, available-for-sale: | ||||||||||||||||||||||||||||||||
Public | $ | 42,385 | 59 | % | $ | 42,526 | 59 | % | $ | 43,525 | 61 | % | $ | 42,526 | 59 | % | ||||||||||||||||
Private | 12,613 | 18 | 12,657 | 18 | 12,696 | 18 | 12,657 | 18 | ||||||||||||||||||||||||
Commercial mortgage loans | 6,600 | 9 | 6,718 | 9 | 6,432 | 9 | 6,718 | 9 | ||||||||||||||||||||||||
Other invested assets | 3,752 | 5 | 3,854 | 5 | 3,301 | 5 | 3,854 | 5 | ||||||||||||||||||||||||
Policy loans | 1,480 | 2 | 1,471 | 2 | 1,542 | 2 | 1,471 | 2 | ||||||||||||||||||||||||
Restricted commercial mortgage loans related to securitization entities | 485 | 1 | 507 | 1 | 457 | 1 | 507 | 1 | ||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 376 | 1 | 372 | 1 | 379 | — | 372 | 1 | ||||||||||||||||||||||||
Equity securities, available-for-sale | 355 | — | 332 | 1 | 374 | — | 332 | 1 | ||||||||||||||||||||||||
Cash and cash equivalents | 3,742 | 5 | 3,132 | 4 | 2,831 | 4 | 3,132 | 4 | ||||||||||||||||||||||||
Total cash, cash equivalents and invested assets | $ | 71,788 | 100 | % | $ | 71,569 | 100 | % | $ | 71,537 | 100 | % | $ | 71,569 | 100 | % | ||||||||||||||||
For a discussion of the change in cash, cash equivalents and invested assets, see the comparison for this line item under “—Consolidated Balance Sheets.” See note 4 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to our investment portfolio.
We hold fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral and certain other financial instruments, which are carried at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. As of March 31,June 30, 2011, approximately 3%4% of our investment holdings recorded at fair value was based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 6 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to fair value.
Fixed maturity and equity securities
As of March 31,June 30, 2011, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
(Amounts in millions) | Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||||||||||||||||||||||
Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | |||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 3,352 | $ | 102 | $ | — | $ | (40 | ) | $ | — | $ | 3,414 | $ | 3,548 | $ | 153 | $ | — | $ | (19 | ) | $ | — | $ | 3,682 | ||||||||||||||||||||||
Tax-exempt | 1,029 | 16 | — | (117 | ) | — | 928 | 940 | 19 | — | (94 | ) | — | 865 | ||||||||||||||||||||||||||||||||||
Government—non-U.S. | 2,267 | 99 | — | (7 | ) | — | 2,359 | 2,265 | 128 | — | (4 | ) | — | 2,389 | ||||||||||||||||||||||||||||||||||
U.S. corporate | 23,069 | 1,062 | 12 | (390 | ) | — | 23,753 | 23,081 | 1,260 | 13 | (307 | ) | — | 24,047 | ||||||||||||||||||||||||||||||||||
Corporate—non-U.S. | 13,655 | 454 | — | (163 | ) | (9 | ) | 13,937 | 14,038 | 530 | — | (139 | ) | (1 | ) | 14,428 | ||||||||||||||||||||||||||||||||
Residential mortgage-backed | 4,897 | 134 | 20 | (270 | ) | (181 | ) | 4,600 | 5,252 | 174 | 15 | (268 | ) | (190 | ) | 4,983 | ||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 3,841 | 120 | 3 | (172 | ) | (36 | ) | 3,756 | 3,767 | 135 | 6 | (153 | ) | (34 | ) | 3,721 | ||||||||||||||||||||||||||||||||
Other asset-backed | 2,324 | 19 | — | (90 | ) | (2 | ) | 2,251 | 2,172 | 22 | — | (86 | ) | (2 | ) | 2,106 | ||||||||||||||||||||||||||||||||
Total fixed maturity securities | 54,434 | 2,006 | 35 | (1,249 | ) | (228 | ) | 54,998 | 55,063 | 2,421 | 34 | (1,070 | ) | (227 | ) | 56,221 | ||||||||||||||||||||||||||||||||
Equity securities | 334 | 24 | — | (3 | ) | — | 355 | 352 | 25 | — | (3 | ) | — | 374 | ||||||||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 54,768 | $ | 2,030 | $ | 35 | $ | (1,252 | ) | $ | (228 | ) | $ | 55,353 | $ | 55,415 | $ | 2,446 | $ | 34 | $ | (1,073 | ) | $ | (227 | ) | $ | 56,595 | ||||||||||||||||||||
(1) | Fair value included |
(2) | Fair value included municipal bonds of $522 million related to special revenue bonds and $356 million related to general obligation bonds. |
(3) | Fair value included $414 million collateralized by sub-prime residential mortgage loans and |
As of December 31, 2010, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
(Amounts in millions) | Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||||||||||||||||||||||
Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | |||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 3,568 | $ | 145 | $ | — | $ | (8 | ) | $ | — | $ | 3,705 | $ | 3,568 | $ | 145 | $ | — | $ | (8 | ) | $ | — | $ | 3,705 | ||||||||||||||||||||||
Tax-exempt | 1,124 | 19 | — | (113 | ) | — | 1,030 | 1,124 | 19 | — | (113 | ) | — | 1,030 | ||||||||||||||||||||||||||||||||||
Government—non-U.S. | 2,257 | 118 | — | (6 | ) | — | 2,369 | 2,257 | 118 | — | (6 | ) | — | 2,369 | ||||||||||||||||||||||||||||||||||
U.S. corporate | 23,282 | 1,123 | 10 | (448 | ) | — | 23,967 | 23,282 | 1,123 | 10 | (448 | ) | — | 23,967 | ||||||||||||||||||||||||||||||||||
Corporate—non-U.S. | 13,180 | 485 | — | (167 | ) | — | 13,498 | 13,180 | 485 | — | (167 | ) | — | 13,498 | ||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 4,821 | 116 | 18 | (304 | ) | (196 | ) | 4,455 | 4,821 | 116 | 18 | (304 | ) | (196 | ) | 4,455 | ||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 3,936 | 132 | 6 | (286 | ) | (45 | ) | 3,743 | 3,936 | 132 | 6 | (286 | ) | (45 | ) | 3,743 | ||||||||||||||||||||||||||||||||
Other asset-backed | 2,494 | 18 | — | (94 | ) | (2 | ) | 2,416 | 2,494 | 18 | — | (94 | ) | (2 | ) | 2,416 | ||||||||||||||||||||||||||||||||
Total fixed maturity securities | 54,662 | 2,156 | 34 | (1,426 | ) | (243 | ) | 55,183 | 54,662 | 2,156 | 34 | (1,426 | ) | (243 | ) | 55,183 | ||||||||||||||||||||||||||||||||
Equity securities | 323 | 13 | — | (4 | ) | — | 332 | 323 | 13 | — | (4 | ) | — | 332 | ||||||||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 54,985 | $ | 2,169 | $ | 34 | $ | (1,430 | ) | $ | (243 | ) | $ | 55,515 | $ | 54,985 | $ | 2,169 | $ | 34 | $ | (1,430 | ) | $ | (243 | ) | $ | 55,515 | ||||||||||||||||||||
(1) | Fair value included municipal bonds of $666 million related to special revenue bonds, $309 million related to general obligation bonds and $55 million related to other municipal bonds. |
(2) | Fair value included municipal bonds of $682 million related to special revenue bonds and $394 million related to general obligation bonds. |
(3) | Fair value included $457 million collateralized by sub-prime residential mortgage loans and $376 million collateralized by Alt-A residential mortgage loans. |
Fixed maturity securities decreased $185 million as maturities exceeded purchases duringincreased $1.0 billion primarily due to the period.decline in interest rates and the decline in the value of the U.S. dollar.
The majority of our unrealized losses were related to securities held within our Retirement and Protection segment. Our U.S. Mortgage Insurance segment had gross unrealized losses of $131$98 million and $128 million as of March 31,June 30, 2011 and December 31, 2010, respectively.
Commercial mortgage loans
The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:
March 31, 2011 | June 30, 2011 | |||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total loan balance (1) | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(2) | Total recorded investment | Number of loans | Loan- to-value (1) | Delinquent principal balance | Number of delinquent loans | ||||||||||||||||||||||||||||||
Loan Year | ||||||||||||||||||||||||||||||||||||||||
2004 and prior | $ | 2,103 | $ | 35 | 886 | 8 | 50 | % | $ | 1,988 | 846 | 49 | % | $ | 30 | 5 | ||||||||||||||||||||||||
2005 | 1,440 | 3 | 310 | 1 | 64 | % | 1,415 | 309 | 64 | % | 3 | 1 | ||||||||||||||||||||||||||||
2006 | 1,397 | — | 281 | — | 72 | % | 1,293 | 278 | 73 | % | 4 | 1 | ||||||||||||||||||||||||||||
2007 | 1,293 | — | 191 | — | 77 | % | 1,275 | 188 | 77 | % | — | — | ||||||||||||||||||||||||||||
2008 | 281 | 11 | 58 | 2 | 77 | % | 272 | 57 | 73 | % | 2 | 1 | ||||||||||||||||||||||||||||
2009 | — | — | — | — | — | % | — | — | — | % | — | — | ||||||||||||||||||||||||||||
2010 | 103 | — | 17 | — | 64 | % | 103 | 17 | 63 | % | — | — | ||||||||||||||||||||||||||||
2011 | 38 | — | 9 | — | 70 | % | 139 | 27 | 65 | % | — | — | ||||||||||||||||||||||||||||
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|
| |||||||||||||||||||||||||||||||||||||
Total | $ | 6,655 | $ | 49 | 1,752 | 11 | 65 | % | $ | 6,485 | 1,722 | 64 | % | $ | 39 | 8 | ||||||||||||||||||||||||
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|
|
|
(1) |
|
December 31, 2010 | ||||||||||||||||||||
(Dollar amounts in millions) | Total recorded investment(1) | Number of loans | Loan- to-value (2) | Delinquent principal balance | Number of delinquent loans | |||||||||||||||
Loan Year | ||||||||||||||||||||
2004 and prior | $ | 2,167 | 908 | 51 | % | $ | 21 | 6 | ||||||||||||
2005 | 1,457 | 312 | 65 | % | — | — | ||||||||||||||
2006 | 1,417 | 283 | 73 | % | 9 | 1 | ||||||||||||||
2007 | 1,347 | 193 | 79 | % | 9 | 2 | ||||||||||||||
2008 | 280 | 58 | 77 | % | 11 | 2 | ||||||||||||||
2009 | — | — | — | % | — | — | ||||||||||||||
2010 | 104 | 17 | 58 | % | — | — | ||||||||||||||
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| |||||||||||||
Total | $ | 6,772 | 1,771 | 65 | % | $ | 50 | 11 | ||||||||||||
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|
|
|
|
(1) | Re-presented to include $4 million of net |
(2) | Represents |
December 31, 2010 | ||||||||||||||||||||
(Dollar amounts in millions) | Total loan balance (1) | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(2) | |||||||||||||||
Loan Year | ||||||||||||||||||||
2004 and prior | $ | 2,169 | $ | 21 | 908 | 6 | 51 | % | ||||||||||||
2005 | 1,458 | — | 312 | — | 65 | % | ||||||||||||||
2006 | 1,418 | 9 | 283 | 1 | 73 | % | ||||||||||||||
2007 | 1,345 | 9 | 193 | 2 | 79 | % | ||||||||||||||
2008 | 282 | 11 | 58 | 2 | 77 | % | ||||||||||||||
2009 | — | — | — | — | — | % | ||||||||||||||
2010 | 104 | — | 17 | — | 58 | % | ||||||||||||||
Total | $ | 6,776 | $ | 50 | 1,771 | 11 | 65 | % | ||||||||||||
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The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans for the period ended March 31:periods indicated:
(Amounts in millions) | 2011 | |||
Allowance for credit losses: | ||||
Beginning balance | $ | 59 | ||
Charge-offs | (1 | ) | ||
Recoveries | — | |||
Provision | — | |||
Ending balance | $ | 58 | ||
Ending allowance for individually impaired loans | $ | — | ||
Ending allowance for loans not individually impaired that were evaluated collectively for impairment | $ | 58 | ||
Principal balance: | ||||
Ending balance | $ | 6,654 | ||
Ending balance of individually impaired loans | $ | 14 | ||
Ending balance of loans not individually impaired that were evaluated collectively for impairment | $ | 6,640 | ||
The following table presents the activity in the allowance for losses for the period ended March 31:
(Amounts in millions) | 2010 | Three months ended June 30, 2011 | Six months ended June 30, 2011 | |||||||||
Allowance for credit losses: | ||||||||||||
Beginning balance | $ | 48 | $ | 58 | $ | 59 | ||||||
Charge-offs | (4 | ) | (5 | ) | ||||||||
Recoveries | — | — | ||||||||||
Provision | 4 | 3 | 3 | |||||||||
Release | — | |||||||||||
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Ending balance | $ | 52 | $ | 57 | $ | 57 | ||||||
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Ending allowance for individually impaired loans | $ | — | $ | — | ||||||||
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Ending allowance for loans not individually impaired that were evaluated collectively for impairment | $ | 57 | $ | 57 | ||||||||
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Recorded investment: | ||||||||||||
Ending balance | $ | 6,485 | $ | 6,485 | ||||||||
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Ending balance of individually impaired loans | $ | 13 | $ | 13 | ||||||||
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Ending balance of loans not individually impaired that were evaluated collectively for impairment | $ | 6,472 | $ | 6,472 | ||||||||
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The charge-offs during 2011 were related to individually impaired commercial mortgage loans.
The following table presents the activity in the allowance for losses during the periods indicated:
(Amounts in millions) | As of or for the three months ended June 30, 2010 | As of or for the six months ended June 30, 2010 | ||||||
Beginning balance | $ | 52 | $ | 48 | ||||
Provision(1) | 18 | 22 | ||||||
Release | — | — | ||||||
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| |||||
Ending balance | $ | 70 | $ | 70 | ||||
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(1) | Includes $13 million related to held-for-sale commercial mortgage loans. |
Restricted commercial mortgage loans related to securitization entities
The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the dates indicated:
March 31, 2011 | June 30, 2011 | |||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total loan balance | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(1) | Total recorded investment | Number of loans | Loan- to-value (1) | Delinquent principal balance | Number of delinquent loans | ||||||||||||||||||||||||||||||
Loan Year | ||||||||||||||||||||||||||||||||||||||||
2004 and prior | $ | 487 | $ | — | 198 | — | 42 | % | $ | 459 | 192 | 40 | % | $ | 3 | 2 | ||||||||||||||||||||||||
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Total | $ | 487 | $ | — | 198 | — | 42 | % | $ | 459 | 192 | 40 | % | $ | 3 | 2 | ||||||||||||||||||||||||
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(1) | Represents weighted-average loan-to-value as of |
December 31, 2010 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total loan balance | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(1) | Total recorded investment | Number of loans | Loan- to-value (1) | Delinquent principal balance | Number of delinquent loans | ||||||||||||||||||||||||||||||
Loan Year | ||||||||||||||||||||||||||||||||||||||||
2004 and prior | $ | 509 | $ | — | 202 | — | 43 | % | $ | 509 | 202 | 43 | % | $ | — | — | ||||||||||||||||||||||||
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Total | $ | 509 | $ | — | 202 | — | 43 | % | $ | 509 | 202 | 43 | % | $ | — | — | ||||||||||||||||||||||||
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(1) | Represents weighted-average loan-to-value as of December 31, 2010. |
Other invested assets
The following table sets forth the carrying values of our other invested assets as of the dates indicated:
March 31, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||||||
Derivatives | $ | 901 | 24 | % | $ | 1,047 | 27 | % | $ | 820 | 25 | % | $ | 1,047 | 27 | % | ||||||||||||||||
Securities lending collateral | 811 | 22 | 772 | 20 | ||||||||||||||||||||||||||||
Derivatives counterparty collateral | 745 | 20 | 794 | 21 | 705 | 21 | 794 | 21 | ||||||||||||||||||||||||
Trading securities | 667 | �� | 18 | 677 | 18 | 607 | 18 | 677 | 18 | |||||||||||||||||||||||
Securities lending collateral | 554 | 17 | 772 | 20 | ||||||||||||||||||||||||||||
Limited partnerships | 339 | 9 | 340 | 9 | 346 | 11 | 340 | 9 | ||||||||||||||||||||||||
Short-term investments | 198 | 5 | 139 | 3 | 155 | 5 | 139 | 3 | ||||||||||||||||||||||||
Other investments | 91 | 2 | 85 | 2 | 114 | 3 | 85 | 2 | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Total other invested assets | $ | 3,752 | 100 | % | $ | 3,854 | 100 | % | $ | 3,301 | 100 | % | $ | 3,854 | 100 | % | ||||||||||||||||
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Our investments in derivatives and derivative counterparty collateral decreased primarily as a result the maturity of an increasethe swap arrangements associated with the maturity of ¥57.0 billion of senior notes in long-term interest rates.June 2011. Securities lending collateral increaseddecreased primarily from increaseddue to no longer recording the non-cash collateral asset related to the securities lending program demand.in Canada during the second quarter of 2011 as a result of not having any rights to sell or re-pledge the collateral assets. The increasedecrease in short-term investmentstrading securities was attributable to purchases during the first quarter of 2011.sales and maturities exceeding purchases.
Derivatives
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
(Notional in millions) | Measurement | December 31, 2010 | Additions | Maturities/ terminations | March 31, 2011 | |||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||
Interest rate swaps | Notional | $ | 12,355 | $ | 995 | $ | (3 | ) | $ | 13,347 | ||||||||||
Inflation indexed swaps | Notional | 525 | 9 | — | 534 | |||||||||||||||
Foreign currency swaps | Notional | 491 | — | — | 491 | |||||||||||||||
Total cash flow hedges | 13,371 | 1,004 | (3 | ) | 14,372 | |||||||||||||||
Fair value hedges: | ||||||||||||||||||||
Interest rate swaps | Notional | 1,764 | — | (326 | ) | 1,438 | ||||||||||||||
Foreign currency swaps | Notional | 85 | — | — | 85 | |||||||||||||||
Total fair value hedges | 1,849 | — | (326 | ) | 1,523 | |||||||||||||||
Total derivatives designated as hedges | 15,220 | 1,004 | (329 | ) | 15,895 | |||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||||
Interest rate swaps | Notional | 7,681 | 35 | (1,275 | ) | 6,441 | ||||||||||||||
Equity return swaps | Notional | 208 | 7 | — | 215 | |||||||||||||||
Interest rate swaps related to securitization entities | Notional | 129 | — | (3 | ) | 126 | ||||||||||||||
Interest rate swaptions | Notional | 200 | — | (200 | ) | — | ||||||||||||||
Credit default swaps | Notional | 1,195 | 115 | (100 | ) | 1,210 | ||||||||||||||
Credit default swaps related to securitization entities | Notional | 317 | — | — | 317 | |||||||||||||||
Equity index options | Notional | 744 | 288 | (451 | ) | 581 | ||||||||||||||
Financial futures | Notional | 3,937 | 1,372 | (1,806 | ) | 3,503 | ||||||||||||||
Other foreign currency contracts | Notional | 521 | 185 | — | 706 | |||||||||||||||
Reinsurance embedded derivatives | Notional | 72 | 12 | — | 84 | |||||||||||||||
Total derivatives not designated as hedges | 15,004 | 2,014 | (3,835 | ) | 13,183 | |||||||||||||||
Total derivatives | $ | 30,224 | $ | 3,018 | $ | (4,164 | ) | $ | 29,078 | |||||||||||
(Notional in millions) | Measurement | December 31, 2010 | Additions | Maturities/ terminations | June 30, 2011 | |||||||||||||||||||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | $ | 12,355 | $ | 995 | $ | (157 | ) | $ | 13,193 | ||||||||||||||||||||||||||||
Inflation indexed swaps | Notional | 525 | 16 | — | 541 | |||||||||||||||||||||||||||||||||
Foreign currency swaps | Notional | 491 | — | (491 | ) | — | ||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||
Total cash flow hedges | 13,371 | 1,011 | (648 | ) | 13,734 | |||||||||||||||||||||||||||||||||
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Fair value hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 1,764 | — | (405 | ) | 1,359 | ||||||||||||||||||||||||||||||||
Foreign currency swaps | Notional | 85 | — | — | 85 | |||||||||||||||||||||||||||||||||
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Total fair value hedges | 1,849 | — | (405 | ) | 1,444 | |||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||
Total derivatives designated as hedges | 15,220 | 1,011 | (1,053 | ) | 15,178 | |||||||||||||||||||||||||||||||||
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Derivatives not designated as hedges | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 7,681 | 314 | (1,550 | ) | 6,445 | ||||||||||||||||||||||||||||||||
Equity return swaps | Notional | 208 | 139 | — | 347 | |||||||||||||||||||||||||||||||||
Interest rate swaps related to securitization entities | Notional | 129 | — | (6 | ) | 123 | ||||||||||||||||||||||||||||||||
Interest rate swaptions | Notional | 200 | — | (200 | ) | — | ||||||||||||||||||||||||||||||||
Credit default swaps | Notional | 1,195 | 115 | (100 | ) | 1,210 | ||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities | Notional | 317 | — | — | 317 | |||||||||||||||||||||||||||||||||
Equity index options | Notional | 744 | 521 | (480 | ) | 785 | ||||||||||||||||||||||||||||||||
Financial futures | Notional | 3,937 | 2,687 | (3,463 | ) | 3,161 | ||||||||||||||||||||||||||||||||
Other foreign currency contracts | Notional | 521 | 185 | (535 | ) | 171 | ||||||||||||||||||||||||||||||||
Reinsurance embedded derivatives | Notional | 72 | 89 | — | 161 | |||||||||||||||||||||||||||||||||
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Total derivatives not designated as hedges | 15,004 | 4,050 | (6,334 | ) | 12,720 | |||||||||||||||||||||||||||||||||
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Total derivatives | $ | 30,224 | $ | 5,061 | $ | (7,387 | ) | $ | 27,898 | |||||||||||||||||||||||||||||
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(Number of policies) | Measurement | December 31, 2010 | Additions | Terminations | March 31, 2011 | Measurement | December 31, 2010 | Additions | Terminations | June 30, 2011 | ||||||||||||||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives | Policies | 49,566 | 675 | (654 | ) | 49,587 | Policies | 49,566 | 690 | (1,326 | ) | 48,930 |
The decrease in the notional value of derivatives was primarily attributable to a $1.1 billion notional decrease in interest rate swaps and swaptions related to a derivative strategy to mitigate interest rate risk associated with our statutory capital position, a $0.6$1.0 billion notional decrease in interest rate swaps and financial futures used to hedge liabilities related to our institutional products and a $0.5$1.0 billion notional decrease from maturing cross currency swaps and options related to the maturity of ¥57.0 billion of senior notes in derivatives used to hedge our variable annuity products with GMWBs.June 2011. These decreases were partially offset by a $1.0$0.8 billion notional increase in cash flow hedges related to our interest rate hedging strategy associated with our long-term care insurance products.
Consolidated Balance Sheets
Total assets. Total assets increased $0.5decreased $0.1 billion from $112.4 billion as of December 31, 2010 to $112.9$112.3 billion as of March 31,June 30, 2011.
Cash, cash equivalents and invested assets increased $0.2 billiondecreased $32 million primarily from an increasea decrease of $0.6 billion$301 million in cash and cash equivalents, partially offset by a decreasean increase of $0.4 billion$269 million in invested assets. The increasedecrease in cash was primarily attributable to ourthe repayment of debt issuance in MarchJune 2011. Our fixed maturity securities portfolio decreased $0.2 billionincreased $1,038 million resulting primarily from maturities exceeding purchases during the first quarterdecline in interest rates and the decline in the value of 2011.the U.S. dollar. Commercial mortgage loans decreased $0.1 billion$286 million as collections exceeded originations during the first quarter of 2011. Other invested assets decreased $0.1 billion$553 million primarily driven by no longer recording the non-cash collateral asset related to the securities lending program in Canada during the second quarter of 2011 as a result of not having any rights to sell or re-pledge the collateral assets and a decrease in derivatives, and derivatives counterparty collateral partially offset by an increase in our securities lending program and short-term investments.trading securities.
Separate account assets increased $0.1 billiondecreased $214 million primarily as a result of favorable market performancethe discontinuance of the underlying securities.new sales of variable annuities.
Total liabilities. Total liabilities increased $0.3decreased $0.6 billion from $97.4 billion as of December 31, 2010 to $97.7$96.8 billion as of March 31,June 30, 2011.
Our policyholder-related liabilities decreased $0.4 billion largely attributable toincreased $13 million. Our long-term care insurance business increased from growth of the in-force block and higher claims. Our U.S. mortgage insurance business increased from a reserve strengthening in the current year which was partially offset by higher paid claims. These increases were partially offset by a decrease in our spread-based products from benefit payments and scheduled maturities of our spread-based and institutional products. These decreases were partially offset by an increase in our long-term care insurance business from growth of our in-force block.
Other liabilities increased $0.1 billiondecreased $448 million primarily as a result of no longer recording the timing of payments and an increase in ouroffsetting liability to the non-cash collateral asset related to the securities lending program partially offset byin Canada during the second quarter of 2011 as a result of not having any rights to sell or re-pledge the collateral assets and a decrease in our repurchase program.
Long-term borrowings increased $0.4 billiondecreased $197 million principally from the issuancematurity of our ¥57.0 billion of senior notes in June 2011 and the redemption of the remaining outstanding shares of the Series A Preferred Stock for $57 million in June 2011. These decreases were partially offset by the issuance of $400 million of senior notes in March 2011 and the issuance of AUD$140 million of subordinated floating rate notes by our indirect wholly-owned subsidiary, Genworth Financial Mortgage Insurance Pty Limited, in June 2011.
Separate account liabilities increased $0.1 billiondecreased $214 million primarily as a result of favorable market performancethe discontinuance of the underlying securities.new sales of variable annuities.
Total stockholders’ equity. Total stockholders’ equity increased $0.2$0.5 billion from $15.0 billion as of December 31, 2010 to $15.2$15.5 billion as of March 31,June 30, 2011.
We reported a net incomeloss available to Genworth Financial, Inc.’s common stockholders of $0.1 billion$14 million for the threesix months ended March 31,June 30, 2011.
Accumulated other comprehensive income (loss) increased $0.1 billion$570 million predominately attributable to higher unrealized investment gains and the weakening of the U.S. dollar against other currencies resulting in higher foreign currency translation adjustments.
Liquidity and Capital Resources
Liquidity and capital resources represent our overall financial strength and our ability to generate cash flows from our businesses, borrow funds at competitive rates and raise new capital to meet our operating and growth needs.
Genworth Financial and subsidiaries
The following table sets forth our condensed consolidated cash flows for the threesix months ended March 31:June 30:
(Amounts in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Net cash from operating activities | $ | 336 | $ | 130 | $ | 842 | $ | 557 | ||||||||
Net cash from investing activities | 496 | (1,174 | ) | (6 | ) | (723 | ) | |||||||||
Net cash from financing activities | (221 | ) | (487 | ) | (1,169 | ) | (243 | ) | ||||||||
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Net increase (decrease) in cash before foreign exchange effect | $ | 611 | $ | (1,531 | ) | |||||||||||
Net decrease in cash before foreign exchange effect | $ | (333 | ) | $ | (409 | ) | ||||||||||
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Our principal sources of cash include sales of our products and services, income from our investment portfolio and proceeds from sales of investments. As an insurance business, we typically generate positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed policy acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. The increase in cash inflows from operating activities in the first quarterhalf of 2011 compared to the first quarterhalf of 2010 was primarily as a result of lower tax settlements in the first quarterhalf of 2011 and an increase from policy-related balances associated with the timing of payments.
In analyzing our cash flow, we focus on the change in the amount of cash available and used in investing activities. We had lower net cash inflowsoutflows from investing activities in the first quarterhalf of 2011 as proceedsprimarily from higher maturities and sales of fixed maturity securities, exceededpartially offset by purchases of investments.exceeding sales in the current year.
Changes in cash from financing activities primarily relate to the issuance of, and redemptions and benefit payments on, universal life insurance and investment contracts; the issuance and acquisition of debt and equity securities; the issuance and repayment or repurchase of borrowings and non-recourse funding obligations; and dividends to our stockholders and other capital transactions. We had higher net cash outflows from financing activities in the first quarterhalf of 2011 primarily related to debt repayments and redemptions of our investment contracts primarily from scheduled maturities and surrenders which exceeded deposits received on these contracts. Net cash from financing activities increased related to net proceeds received from the issuance of senior notes during the first quarter of 2011.
In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio, which require the borrower to provide collateral, consisting of cash and government securities, on a daily basis in amounts equal to or exceeding 102% in the United States and 105% in Canada of the fair value of the applicable securities loaned.portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary.
Under the securities lending program in the United States, the borrower is required to provide collateral, consisting of cash and government securities, on a daily basis in amounts equal to or exceeding 102% of the applicable securities loaned. Cash and non-cash collateral, such as a security, received by us on securities lending transactions is reflected in other invested assets with an offsetting liability recognized in other liabilities for the obligation to return the collateral. Any cash collateral received is reinvested by our custodian based upon the investment guidelines provided within our agreement. In the United States, the reinvested cash collateral is primarily invested in a money market fund approved by the National Association of Insurance Commissioners (“NAIC”),NAIC, U.S. and foreign government securities, U.S. government agency securities, asset-backed securities and corporate debt securities. As of June 30, 2011 and December 31, 2010, the fair value of securities loaned under our securities lending program in the United States was $0.5 billion. As of June 30, 2011 and December 31, 2010, the fair value of collateral held under our securities lending program in the United States was $0.5 billion and the offsetting obligation to return collateral of $0.5 billion was included in other liabilities in the consolidated balance sheets. We had no non-cash collateral in our securities lending program in the United States as of June 30, 2011 and December 31, 2010.
Under our securities lending program in Canada, the borrower is required to provide collateral consisting of government securities on a daily basis in amounts equal to or exceeding 105% of the fair value of the applicable securities loaned. Securities received from counterparties as collateral are not recorded on our consolidated balance sheet given that the risk and rewards of ownership is not transferred from the counterparties to us in the course of such transactions. Additionally, there was no cash collateral as cash collateral is not permitted as an acceptable form of collateral under the program. In Canada, the lending institution must be included on the approved Securities Lending Borrowers List with the Canadian regulator and the intermediary must be rated at least “AA-” by Standard & Poor’s Financial Services LLC. We are currently indemnified against counterparty credit risk by the intermediary.S&P. As of March 31,June 30, 2011 and December 31, 2010, the fair value of securities loaned under theour securities lending program in Canada was $0.8 billion, consisting$0.3 billion. Prior to the second quarter of $0.5 billion2011, we recorded non-cash collateral in the United States and $0.3 billionother invested assets with a corresponding liability in Canada. As of March 31, 2011 and December 31, 2010, the fair value of collateral held under the securities
lending program was $0.8 billion and the offsettingother liabilities representing our obligation to return the non-cash collateral. Since we do not have rights to sell or pledge the non-cash collateral, we determined the gross presentation of $0.8 billion was included in other liabilitiesthese amounts were not required and changed our presentation of these amounts in the consolidated balance sheets. We had non-cash collateralsecond quarter of $0.3 billion as of March 31, 2011 and December 31, 2010.2011.
We also have a repurchase program in which we sell an investment security at a specified price and agree to repurchase that security at another specified price at a later date. Repurchase agreements are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired, including accrued interest, as specified in the respective agreement. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities. As of March 31,June 30, 2011 and December 31, 2010, the fair value of securities pledged under the repurchase program was $1.6 billion and $1.7 billion, respectively, and the repurchase obligation of $1.6$1.5 billion and $1.7 billion, respectively, was included in other liabilities in the consolidated balance sheets.
Genworth Financial, Inc.—holding company
We conduct all our operations through our operating subsidiaries. Dividends from our subsidiaries and permitted payments to us under our tax sharing arrangements with our subsidiaries are our principal sources of cash to pay stockholder dividends and to meet our holding company obligations, including payments of principal and interest on our outstanding indebtedness. Other principal sources of cash include proceeds from the issuance of debt and equity securities, including borrowings pursuant to our credit facilities, and sales of assets.
Our primary uses of funds at our holding company level include payment of general operating expenses, payment of principal, interest and other expenses related to holding company debt, payment of dividends on our common and preferred stock, amounts we owe to GE under the Tax Matters Agreement, contributions to subsidiaries, repurchase of stock, and, potentially, acquisitions.
Our holding company had $1,140$657 million and $813 million of cash and cash equivalents as of March 31,June 30, 2011 and December 31, 2010, respectively. Our holding company also had $10 million and $200 million in highly liquid U.S. government bonds as of March 31,June 30, 2011 and December 31, 2010.2010, respectively.
During the six months ended June 30, 2011, we received dividends from our subsidiaries of $39 million, of which $24 million came from our non-U.S. subsidiaries. In July 2011, we received $65 million of dividends from one of our non-U.S. subsidiaries in connection with proceeds from the Canadian share repurchase in the second quarter of 2011.
In November 2008, our Board of Directors decided to suspend the payment of dividends on our common stock indefinitely. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will be dependent on many factors including the receipt of dividends from our operating subsidiaries, our financial condition and operating results, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, our credit and financial strength ratings and such other factors as the Board of Directors deems relevant.
Regulated insurance subsidiaries
The liquidity requirements of our regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to us, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements.
Our insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. Our insurance subsidiaries’ principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income, including commissions, cost of insurance, mortality, expense and surrender charges, contract underwriting fees, investment management fees and dividends and distributions from their subsidiaries. The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets.
Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar estimated lives such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. As of March 31,June 30, 2011, our total cash, cash equivalents and invested assets were $71.8$71.5 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership interests and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 31% of the carrying value of our total cash, cash equivalents and invested assets as of March 31,June 30, 2011.
As of March 31,June 30, 2011, we had approximately $444$291 million of GICs outstanding. Substantially all of these contracts allow for the payment of benefits at contract value to Employee Retirement Income Security Act (“ERISA”) plans prior to contract maturity in the event of death, disability, retirement or change in investment election. These contracts also provide for early termination by the contractholder but are subject to an adjustment to the contract value for changes in the level of interest rates from the time the GIC was issued plus an early withdrawal penalty. We carefully underwrite these risks before issuing a GIC to a plan and historically have been able to effectively manage our exposure to these benefit payments. Our GICs typically credit interest at a fixed interest rate and have a fixed maturity generally ranging from two to six years.
We are executing a non-cash intercompany transaction to increase the statutory capital in our U.S. mortgage insurance companies by using a portion of common shares of Genworth Canada, with an estimated market value of $375 million, currently held by Brookfield, our indirect wholly-owned subsidiary. Once this transaction is complete, we will continue to hold approximately 57.5% of the outstanding common shares of Genworth Canada on a consolidated basis. In addition, Brookfield will have the right, exercisable at its discretion, to purchase for cash these common shares of Genworth Canada from our U.S. mortgage insurance companies at the then current market price. Brookfield will also have a right of first refusal with respect to the transfer of these common shares of Genworth Canada by the U.S. mortgage insurance companies. This transaction is undergoing customary regulatory review and is expected to be effective as of June 30, 2011, for statutory financial reporting purposes.
Capital resources and financing activities
We have two five-year revolving credit facilities that mature in May 2012 and August 2012. These facilities bear variable interest rates based on one-month London Interbank Offered Rate (“LIBOR”) plus a margin and we have access to $1.9 billion under these facilities. As of March 31,June 30, 2011, we had no borrowings under these
facilities; however, we utilized $280$279 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our life insurance subsidiaries. As of December 31, 2010, we had no borrowings under these facilities; however, we utilized $56 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our lifestyle protection insurance subsidiaries.
In June 2011, our indirect wholly-owned subsidiary, Genworth Financial Mortgage Insurance Pty Limited, issued AUD$140 million of subordinated floating rate notes due 2021 with an interest rate of three-month Bank Bill Swap reference rate plus a margin of 4.75%. Genworth Financial Mortgage Insurance Pty Limited expects to use the proceeds it received from this transaction for general corporate purposes.
During the second quarter of 2011, we repaid ¥57.0 billion of senior notes that matured in June 2011, plus accrued interest. In addition, the arrangements to swap our obligations under these notes to a U.S. dollar obligation matured. These swaps had a notional principal amount of $491 million with interest at a rate of 4.84% per year. Upon maturity of these swaps, we received $212 million from the derivative counterparty resulting in a net repayment of $491 million of principal related to these notes.
On June 1, 2011, we redeemed all the remaining outstanding shares of the Series A Preferred Stock at a price of $50 per share, plus unpaid dividends accrued to the date of redemption, for $57 million.
In March 2011, we issued senior notes having an aggregate principal amount of $400 million, with an interest rate equal to 7.625% per year payable semi-annually, and maturing in September 2021 (“2021 Notes”). The 2021 Notes are our direct, unsecured obligations and will rank equally with all of our existing and future unsecured and unsubordinated obligations. We have the option to redeem all or a portion of the 2021 Notes at any time with proper notice to the note holders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread. The net proceeds of $397 million from the issuance of the 2021 Notes were used for general corporate purposes.
In the second quarter of 2011, we repurchased principal of $57 million of notes secured by our non-recourse funding obligations, plus accrued interest, for a pre-tax gain of $17 million.
In June 2011, Genworth Canada, our indirect subsidiary, repurchased approximately 6.2 million common shares for CAD$160 million through a substantial issuer bid. Brookfield, our indirect wholly-owned subsidiary, participated in the issuer bid by making a proportionate tender and received CAD$90 million and continues to hold approximately 57.5% of the outstanding common shares of Genworth Canada.
We believe our revolving credit facilities and anticipated cash flows from operations will provide us with sufficient capital flexibility and liquidity to meet our future operating requirements, as well as optimize our capital structure. In addition, we actively monitor our liquidity position, liquidity generation options and the credit markets given changing market conditions. However, we cannot predict with any certainty the impact to us from any further disruptions in the credit markets or further downgrades by one or more of the rating agencies of the financial strength ratings of our insurance company subsidiaries and/or the credit ratings of our holding company. The availability of additional funding will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, the overall availability of credit to the financial services industry, the level of activity and availability of reinsurers, our credit ratings and credit capacity and the performance of and outlook for our business.
Genworth MI Canada Inc., our majority-owned subsidiary, plans to repurchase approximately CAD$160 million of its existing common shares, with the amount and timing subject to market conditions and customary approvals. We expect to receive approximately CAD$82 million after-tax in net proceeds, with no percentage change in ownership.
Contractual obligations and commercial commitments
We enter into obligations to third parties in the ordinary course of our operations. However, we do not believe that our cash flow requirements can be assessed based upon analysis of these obligations as the funding of these future cash obligations will be from future cash flows from premiums, deposits, fees and investment
income that are not reflected herein. Future cash outflows, whether they are contractual obligations or not, also will vary based upon our future needs. Although some outflows are fixed, others depend on future events. Examples of fixed obligations include our obligations to pay principal and interest on fixed-rate borrowings. Examples of obligations that will vary include obligations to pay interest on variable-rate borrowings and insurance liabilities that depend on future interest rates and market performance. Many of our obligations are linked to cash-generating contracts. These obligations include payments to contractholders that assume those contractholders will continue to make deposits in accordance with the terms of their contracts. In addition, our operations involve significant expenditures that are not based upon “commitments.”
There have been no material additions or changes to our contractual obligations and commercial commitments as set forth in our 2010 Annual Report on Form 10-K filed on February 25, 2011, except as discussed above under “—Capital resources and financing activities.” However, we announced in March 2011 that we intend to redeem all outstanding shares of our Series A Preferred Stock on June 1, 2011, in accordance with their terms.
Securitization Entities
There were no off-balance sheet securitization transactions induring the threesix months ended March 31,June 30, 2011 or 2010.
New Accounting Standards
For a discussion of recently adopted and not yet adopted accounting standards, see note 2 in our “—Notes to Condensed Consolidated Financial Statements.”
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. The following is a discussion of our market risk exposures and our risk management practices.
Credit markets continued to show signs of improvement across most asset classes in the first quarterhalf of 2011. See “—Business trends and conditions” and “—Investments and Derivative Instruments” in “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of recent market conditions.
In the firstsecond quarter of 2011, the currencies in Canada, Australia and AustraliaEurope strengthened against the U.S. dollar, while in Europe, the currencies weakened against the U.S. dollar as compared to the firstsecond quarter of 2010 and remained relatively flat from the fourthfirst quarter of 2010.2011. This has generally resulted in higher levels of reported revenues and net income (loss), assets, liabilities and accumulated other comprehensive income (loss) in our U.S. dollar consolidated financial statements. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact changes in foreign currency exchange rates.
There were no other material changes in these risks since December 31, 2010.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of March 31,June 30, 2011, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31,June 30, 2011.
Changes in Internal Control Over Financial Reporting During the Quarter Ended March 31,June 30, 2011
There were no changes in our internal control over financial reporting that occurred during the quartersix months ended March 31,June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. | Legal Proceedings |
We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, bidding practices in connection with our management and administration of a third-party’s municipal guaranteed investment contract business, claims payments and procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of RESPA or related state anti-inducement laws, and breaching fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations.
Except as disclosed below, there were no material developments during the threesix months ended March 31,June 30, 2011 in any of the legal proceedings identified in Part I, Item 3 of our 2010 Annual Report on Form 10-K.10-K, as updated in Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011. In addition, except as described below, there were no new material legal proceedings during the three monthsquarter ended March 31,June 30, 2011.
As previously disclosed, in December 2009, one of our non-insurance subsidiaries, oneOn June 22, 2011, we received a subpoena from the office of the subsidiary’s officersNew York Attorney General, relating to an industry-wide investigation of unclaimed property and Genworth Financial, Inc. were named in a putative class action lawsuit captionedMichael J. Goodmanescheatment practices and Linda Brown v. Genworth Financial Wealth Management, Inc., et al, inprocedures. In addition to the United States District Court forsubpoena, other state regulators are conducting reviews and examinations on the Eastern District of New York. In response to our motion to dismiss the complaint in its entirety, the Court granted on March 30, 2011 the motion to dismiss the state law fiduciary duty claimsame subject. We are cooperating with these requests and denied the motion to dismiss the remaining federal claims. We continue to vigorously defend this action.
As previously disclosed, we and one of our mortgage insurance subsidiaries were named in a putative class action lawsuit filed in November 2010 captionedArchie Moses and Violet M. Moses v. SunTrust Banks, Inc., et al,in the United States District Court for the District of Columbia. On March 10, 2011, plaintiffs voluntarily dismissed the action without prejudice as to Genworth Financial, Inc. and our mortgage insurance subsidiary.inquiries.
We cannot ensure that the current investigations and proceedings will not have a material adverse effect on our business, financial condition or results of operations. In addition, it is possible that related investigations and proceedings may be commenced in the future, and we could become subject to additional unrelated investigations and lawsuits. Increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal precedents and industry-wide regulations or practices that could adversely affect our business, financial condition and results of operations.
Item 1A. | Risk Factors |
The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our 2010 Annual Report on Form 10-K which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. As of March 31,June 30, 2011, there have been no material changes to the risk factors set forth in the above-referenced filing.
Item 5. | Other Information |
Genworth Financial, Inc. (the “Company”) maintains the Amended and Restated 2005 Change of Control Plan (the “2005 Plan”), under which severance benefits are offered to certain of the Company’s key executives, including executive officers, in the event that their employment is terminated in connection with a change of control of the Company. The Management Development and Compensation Committee (the “Committee”) of the Board of Directors of the Company reviews the 2005 Plan annually. Following the Committee’s 2011 review, the Committee decided that there will be no new participants under the 2005 Plan and that a new plan should be created to offer comparable severance benefits to newly designated key executives. On August 1, 2011, the Committee adopted the Genworth Financial, Inc. 2011 Change of Control Plan (the “2011 Plan”).
The 2011 Plan is identical to the 2005 Plan, except that the 2011 Plan does not provide participants with any tax gross-up benefits. Consistent with the 2005 Plan, the 2011 Plan includes two tiers of benefits that apply to executives who are designated by the Committee. Upon adoption of the 2011 Plan, Tier I benefits initially apply to Martin P. Klein, who was previously appointed Senior Vice President—Chief Financial Officer of the Company effective May 11, 2011, and Tier II benefits initially apply to selected other executives approved by the Committee. The following summary of the 2011 Plan is qualified in its entirety by reference to the text of the 2011 Plan, a copy of which is filed as an exhibit to this report.
Summary of 2011 Plan
Benefits under the 2011 Plan are paid only upon the occurrence of two clearly defined events. First, a change of control of the Company (as defined in the 2011 Plan) must have occurred. Second, in order to be eligible for benefits under the 2011 Plan, the designated executive’s employment must either be terminated without cause (and not as a result of death or permanent disability), or by the designated executive for “good reason,” in each case within 24 months from the date of a change of control. Such employment terminations are referred to as a “Qualified Termination.”
Upon the occurrence of a Qualified Termination, a participating executive will receive the following severance benefits:
• | Cash payment. A Tier I executive will receive 200% of the sum of his or her base salary and a targeted annual incentive payment; a Tier II executive will receive 150% of the sum of his or her base salary and a targeted annual incentive payment. |
• | Short-term incentive award. The participating executive will receive a pro-rated bonus earned for the portion of the year worked in which termination occurs, based on the executive’s targeted annual incentive payment and the number of days in the year prior to the Qualified Termination. |
• | Equity-based incentive awards. All performance-based equity awards will become fully vested based on a target level of performance, and will payout pro rata based on the portion of the performance period elapsed prior to the Qualified Termination. Stock options, restricted stock units and other time-vesting equity awards will become immediately vested, and all restrictions on shares subject to awards will lapse, except for the portion of any award of restricted stock units that vest upon retirement. |
• | Retirement provisions. The participating executive will be fully and immediately vested in any funded or unfunded or nonqualified pension or deferred compensation plans in which he or she participates, with payment being made in accordance with the terms of such plans. |
• | Health and welfare benefits. The participating executive will receive health and welfare benefit coverage for 18 months. |
In addition, upon a Qualified Termination, if a participating executive elects to enter into a non-competition agreement for 18 months, then he or she will be entitled to receive the following enhanced benefits, in addition to the benefits described above:
• | Cash payment. Upon the expiration and successful completion of the non-competition agreement, a Tier I executive will receive an additional payment equal to 100% of the sum of his or her base salary and a targeted annual incentive payment. A Tier II executive will receive an additional payment equal to 50% of the sum of his or her base salary and a targeted annual incentive payment. |
• | Equity-based incentive awards. The restrictions on an award of restricted stock units that vest upon retirement shall immediately lapse. |
Section 4999 of the Internal Revenue Code imposes a 20% excise tax on individuals who receive compensation in connection with a change of control that exceeds certain specified limits (generally three times his or her average taxable compensation over the last five or fewer years). Because of the way the excise tax is applied, a participant could be better off on an after-tax basis in some instances by taking a lower severance benefit in order to avoid the excise tax. The 2011 Plan provides for such a cut back of benefits, but only if the participant would be benefited by the cut back.
To receive any severance benefits under the 2011 Plan, a participant must execute a general release of claims against the Company and agree to certain restrictive covenants, including restrictions on the use of confidential information and restrictions on the solicitation of customers and employees for 18 months following a Qualified Termination.
The 2011 Plan became effective August 1, 2011. It is attached as Exhibit 10 to this report and is incorporated herein by reference.
Item 6. | Exhibits |
3.1 | Amended and Restated Certificate of Incorporation of Genworth Financial, Inc. | |
3.2 | ||
10 | Genworth Financial, Inc. | |
12 | Statement of Ratio of Income to Fixed Charges | |
31.1 | Certification of Michael D. Fraizer | |
31.2 | Certification of | |
32.1 | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Michael D. Fraizer | |
32.2 | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code— | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GENWORTH FINANCIAL, INC. (Registrant) | ||||||
Date: | ||||||
| By: | / | ||||
Amy R. Corbin | ||||||
Vice President and Controller | ||||||
(Duly Authorized Officer and | ||||||
Principal Accounting Officer) |
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