UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172018
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to to
Commission file number001-32195
GENWORTH FINANCIAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 80-0873306 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
6620 West Broad Street Richmond, Virginia | 23230 | |
(Address of Principal Executive Offices) | (Zip Code) |
(804)281-6000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 26, 2017, 499,158,848July 24, 2018, 500,679,748 shares of Class A Common Stock, par value $0.001 per share, were outstanding.
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Notes to Condensed Consolidated Financial Statements (Unaudited) | 8 | |||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
Item 1. | Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share amounts)
September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Investments: | ||||||||||||||||
Fixed maturity securitiesavailable-for-sale, at fair value | $ | 62,552 | $ | 60,572 | $ | 60,032 | $ | 62,525 | ||||||||
Equity securitiesavailable-for-sale, at fair value | 765 | 632 | ||||||||||||||
Equity securities, at fair value | 758 | 820 | ||||||||||||||
Commercial mortgage loans | 6,268 | 6,111 | 6,480 | 6,341 | ||||||||||||
Restricted commercial mortgage loans related to securitization entities | 111 | 129 | 90 | 107 | ||||||||||||
Policy loans | 1,818 | 1,742 | 1,872 | 1,786 | ||||||||||||
Other invested assets | 1,590 | 2,071 | 1,650 | 1,813 | ||||||||||||
Restricted other invested assets related to securitization entities, at fair value | — | 312 | ||||||||||||||
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Total investments | 73,104 | 71,569 | 70,882 | 73,392 | ||||||||||||
Cash and cash equivalents | 2,836 | 2,784 | ||||||||||||||
Cash, cash equivalents and restricted cash | 2,243 | 2,875 | ||||||||||||||
Accrued investment income | 639 | 659 | 602 | 644 | ||||||||||||
Deferred acquisition costs | 2,342 | 3,571 | 3,086 | 2,329 | ||||||||||||
Intangible assets and goodwill | 315 | 348 | 354 | 301 | ||||||||||||
Reinsurance recoverable | 17,553 | 17,755 | 17,385 | 17,569 | ||||||||||||
Other assets | 552 | 673 | 574 | 453 | ||||||||||||
Deferred tax asset | 24 | — | 601 | 504 | ||||||||||||
Separate account assets | 7,264 | 7,299 | 6,750 | 7,230 | ||||||||||||
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Total assets | $ | 104,629 | $ | 104,658 | $ | 102,477 | $ | 105,297 | ||||||||
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Liabilities and equity | ||||||||||||||||
Liabilities: | ||||||||||||||||
Future policy benefits | $ | 38,022 | $ | 37,063 | $ | 37,913 | $ | 38,472 | ||||||||
Policyholder account balances | 24,531 | 25,662 | 23,366 | 24,195 | ||||||||||||
Liability for policy and contract claims | 9,384 | 9,256 | 9,665 | 9,594 | ||||||||||||
Unearned premiums | 3,512 | 3,378 | 3,669 | 3,967 | ||||||||||||
Other liabilities ($1 of other liabilities are related to securitization entities in each period) | 2,002 | 2,916 | ||||||||||||||
Borrowings related to securitization entities ($12 are carried at fair value in each period) | 59 | 74 | ||||||||||||||
Other liabilities | 1,965 | 1,910 | ||||||||||||||
Borrowings related to securitization entities | 28 | 40 | ||||||||||||||
Non-recourse funding obligations | 310 | 310 | 310 | 310 | ||||||||||||
Long-term borrowings | 4,224 | 4,180 | 4,047 | 4,224 | ||||||||||||
Deferred tax liability | 234 | 53 | 23 | 27 | ||||||||||||
Separate account liabilities | 7,264 | 7,299 | 6,750 | 7,230 | ||||||||||||
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Total liabilities | 89,542 | 90,191 | 87,736 | 89,969 | ||||||||||||
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Commitments and contingencies | ||||||||||||||||
Equity: | ||||||||||||||||
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 588 million and 587 million shares issued as of September 30, 2017 and December 31, 2016, respectively; 499 million and 498 million shares outstanding as of September 30, 2017 and December 31, 2016, respectively | 1 | 1 | ||||||||||||||
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 589 million and 588 million shares issued as of June 30, 2018 and December 31, 2017, respectively; 501 million and 499 million shares outstanding as of June 30, 2018 and December 31, 2017, respectively | 1 | 1 | ||||||||||||||
Additionalpaid-in capital | 11,973 | 11,962 | 11,981 | 11,977 | ||||||||||||
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Accumulated other comprehensive income (loss): | ||||||||||||||||
Net unrealized investment gains (losses): | ||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | 1,098 | 1,253 | 726 | 1,075 | ||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | 10 | 9 | 10 | 10 | ||||||||||||
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Net unrealized investment gains (losses) | 1,108 | 1,262 | 736 | 1,085 | ||||||||||||
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Derivatives qualifying as hedges | 2,052 | 2,085 | 1,863 | 2,065 | ||||||||||||
Foreign currency translation and other adjustments | (125 | ) | (253 | ) | (272 | ) | (123 | ) | ||||||||
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Total accumulated other comprehensive income (loss) | 3,035 | 3,094 | 2,327 | 3,027 | ||||||||||||
Retained earnings | 760 | 287 | 1,301 | 1,113 | ||||||||||||
Treasury stock, at cost (88 million shares as of September 30, 2017 and December 31, 2016) | (2,700 | ) | (2,700 | ) | ||||||||||||
Treasury stock, at cost (88 million shares as of June 30, 2018 and December 31, 2017) | (2,700 | ) | (2,700 | ) | ||||||||||||
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Total Genworth Financial, Inc.’s stockholders’ equity | 13,069 | 12,644 | 12,910 | 13,418 | ||||||||||||
Noncontrolling interests | 2,018 | 1,823 | 1,831 | 1,910 | ||||||||||||
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Total equity | 15,087 | 14,467 | 14,741 | 15,328 | ||||||||||||
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Total liabilities and equity | $ | 104,629 | $ | 104,658 | $ | 102,477 | $ | 105,297 | ||||||||
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See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in millions, except per share amounts)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 1,135 | $ | 1,108 | $ | 3,382 | $ | 3,029 | $ | 1,136 | $ | 1,111 | $ | 2,276 | $ | 2,247 | ||||||||||||||||
Net investment income | 797 | 805 | 2,388 | 2,373 | 828 | 801 | 1,632 | 1,591 | ||||||||||||||||||||||||
Net investment gains (losses) | 85 | 20 | 220 | 31 | (14 | ) | 101 | (45 | ) | 135 | ||||||||||||||||||||||
Policy fees and other income | 198 | 217 | 619 | 738 | 209 | 210 | 411 | 421 | ||||||||||||||||||||||||
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Total revenues | 2,215 | 2,150 | 6,609 | 6,171 | 2,159 | 2,223 | 4,274 | 4,394 | ||||||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 1,344 | 1,662 | 3,796 | 3,715 | 1,205 | 1,206 | 2,516 | 2,452 | ||||||||||||||||||||||||
Interest credited | 164 | 173 | 494 | 523 | 152 | 163 | 308 | 330 | ||||||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 265 | 269 | 775 | 990 | 253 | 240 | 493 | 510 | ||||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 83 | 94 | 316 | 305 | 112 | 139 | 216 | 233 | ||||||||||||||||||||||||
Interest expense | 73 | 77 | 209 | 262 | 77 | 74 | 153 | 136 | ||||||||||||||||||||||||
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Total benefits and expenses | 1,929 | 2,275 | 5,590 | 5,795 | 1,799 | 1,822 | 3,686 | 3,661 | ||||||||||||||||||||||||
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Income (loss) from continuing operations before income taxes | 286 | (125 | ) | 1,019 | 376 | |||||||||||||||||||||||||||
Income from continuing operations before income taxes | 360 | 401 | 588 | 733 | ||||||||||||||||||||||||||||
Provision for income taxes | 102 | 222 | 348 | 355 | 111 | 130 | 174 | 246 | ||||||||||||||||||||||||
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Income (loss) from continuing operations | 184 | (347 | ) | 671 | 21 | |||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of taxes | (9 | ) | 15 | (9 | ) | (25 | ) | |||||||||||||||||||||||||
Income from continuing operations | 249 | 271 | 414 | 487 | ||||||||||||||||||||||||||||
Loss from discontinued operations, net of taxes | — | — | — | — | ||||||||||||||||||||||||||||
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Net income (loss) | 175 | (332 | ) | 662 | (4 | ) | ||||||||||||||||||||||||||
Net income | 249 | 271 | 414 | 487 | ||||||||||||||||||||||||||||
Less: net income attributable to noncontrolling interests | 68 | 48 | 198 | 151 | 59 | 69 | 112 | 130 | ||||||||||||||||||||||||
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Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 107 | $ | (380 | ) | $ | 464 | $ | (155 | ) | ||||||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 190 | $ | 202 | $ | 302 | $ | 357 | ||||||||||||||||||||||||
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Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders per share: | ||||||||||||||||||||||||||||||||
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.23 | $ | (0.79 | ) | $ | 0.95 | $ | (0.26 | ) | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.72 | ||||||||||||||
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Diluted | $ | 0.23 | $ | (0.79 | ) | $ | 0.94 | $ | (0.26 | ) | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.71 | ||||||||||||||
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Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share: | ||||||||||||||||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.21 | $ | (0.76 | ) | $ | 0.93 | $ | (0.31 | ) | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.72 | ||||||||||||||
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Diluted | $ | 0.21 | $ | (0.76 | ) | $ | 0.93 | $ | (0.31 | ) | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.71 | ||||||||||||||
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Weighted-average common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 499.1 | 498.3 | 498.9 | 498.3 | 500.6 | 499.0 | 500.1 | 498.8 | ||||||||||||||||||||||||
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Diluted | 501.6 | 498.3 | 501.2 | 498.3 | 502.6 | 501.2 | 502.6 | 501.1 | ||||||||||||||||||||||||
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Supplemental disclosures: | ||||||||||||||||||||||||||||||||
Total other-than-temporary impairments | $ | (1 | ) | $ | (2 | ) | $ | (4 | ) | $ | (35 | ) | $ | — | $ | (2 | ) | $ | — | $ | (3 | ) | ||||||||||
Portion of other-than-temporary impairments included in other comprehensive income (loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Net other-than-temporary impairments | (1 | ) | (2 | ) | (4 | ) | (35 | ) | — | (2 | ) | — | (3 | ) | ||||||||||||||||||
Other investments gains (losses) | 86 | 22 | 224 | 66 | (14 | ) | 103 | (45 | ) | 138 | ||||||||||||||||||||||
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Total net investment gains (losses) | $ | 85 | $ | 20 | $ | 220 | $ | 31 | $ | (14 | ) | $ | 101 | $ | (45 | ) | $ | 135 | ||||||||||||||
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See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Net income (loss) | $ | 175 | $ | (332 | ) | $ | 662 | $ | (4 | ) | ||||||||||||||||||||||
Net income | $ | 249 | $ | 271 | $ | 414 | $ | 487 | ||||||||||||||||||||||||
Other comprehensive income (loss), net of taxes: | ||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | (89 | ) | 72 | (173 | ) | 1,624 | (185 | ) | (72 | ) | (526 | ) | (84 | ) | ||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | — | 5 | 1 | 6 | (2 | ) | — | (2 | ) | 1 | ||||||||||||||||||||||
Derivatives qualifying as hedges | (12 | ) | 54 | (33 | ) | 448 | (64 | ) | 28 | (216 | ) | (21 | ) | |||||||||||||||||||
Foreign currency translation and other adjustments | 81 | (1 | ) | 261 | 223 | (98 | ) | 61 | (185 | ) | 180 | |||||||||||||||||||||
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Total other comprehensive income (loss) | (20 | ) | 130 | 56 | 2,301 | (349 | ) | 17 | (929 | ) | 76 | |||||||||||||||||||||
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Total comprehensive income (loss) | 155 | (202 | ) | 718 | 2,297 | (100 | ) | 288 | (515 | ) | 563 | |||||||||||||||||||||
Less: comprehensive income attributable to noncontrolling interests | 108 | 64 | 313 | 260 | 10 | 87 | 14 | 205 | ||||||||||||||||||||||||
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Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 47 | $ | (266 | ) | $ | 405 | $ | 2,037 | $ | (110 | ) | $ | 201 | $ | (529 | ) | $ | 358 | |||||||||||||
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See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in millions)
(Unaudited)
Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Treasury stock, at cost | Total Genworth Financial, Inc.’s stockholders’ equity | Noncontrolling interests | Total equity | Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Treasury stock, at cost | Total Genworth Financial, Inc.’s stockholders’ equity | Noncontrolling interests | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2016 | $ | 1 | $ | 11,962 | $ | 3,094 | $ | 287 | $ | (2,700 | ) | $ | 12,644 | $ | 1,823 | $ | 14,467 | |||||||||||||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2017 | $ | 1 | $ | 11,977 | $ | 3,027 | $ | 1,113 | $ | (2,700 | ) | $ | 13,418 | $ | 1,910 | $ | 15,328 | |||||||||||||||||||||||||||||||||||||||||||||||
Cumulative effect of change in accounting, net of taxes | — | — | — | 9 | — | 9 | — | 9 | — | — | 131 | (114 | ) | — | 17 | — | 17 | |||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of subsidiary shares | — | — | — | — | — | — | (31 | ) | (31 | ) | — | — | — | — | — | — | (49 | ) | (49 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 464 | — | 464 | 198 | 662 | — | — | — | 302 | — | 302 | 112 | 414 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) net of taxes | — | — | (59 | ) | — | — | (59 | ) | 115 | 56 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | 405 | 313 | 718 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss net of taxes | — | — | (831 | ) | — | — | (831 | ) | (98 | ) | (929 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) | (529 | ) | 14 | (515 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | (92 | ) | (92 | ) | — | — | — | — | — | — | (50 | ) | (50 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense and exercises and other | — | 11 | — | — | — | 11 | 5 | 16 | — | 4 | — | — | — | 4 | 6 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Balances as of September 30, 2017 | $ | 1 | $ | 11,973 | $ | 3,035 | $ | 760 | $ | (2,700 | ) | $ | 13,069 | $ | 2,018 | $ | 15,087 | |||||||||||||||||||||||||||||||||||||||||||||||
Balances as of June 30, 2018 | $ | 1 | $ | 11,981 | $ | 2,327 | $ | 1,301 | $ | (2,700 | ) | $ | 12,910 | $ | 1,831 | $ | 14,741 | |||||||||||||||||||||||||||||||||||||||||||||||
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Balances as of December 31, 2015 | $ | 1 | $ | 11,949 | $ | 3,010 | $ | 564 | $ | (2,700 | ) | $ | 12,824 | $ | 1,813 | $ | 14,637 | |||||||||||||||||||||||||||||||||||||||||||||||
Return of capital to noncontrolling interests | — | — | — | — | — | — | (70 | ) | (70 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2016 | $ | 1 | $ | 11,962 | $ | 3,094 | $ | 287 | $ | (2,700 | ) | $ | 12,644 | $ | 1,823 | $ | 14,467 | |||||||||||||||||||||||||||||||||||||||||||||||
Cumulative effect of change in accounting, net of taxes | — | — | — | 9 | — | 9 | — | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | (155 | ) | — | (155 | ) | 151 | (4 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 357 | — | 357 | 130 | 487 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of taxes | — | — | 2,192 | — | — | 2,192 | 109 | 2,301 | — | — | 1 | — | — | 1 | 75 | 76 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income | 2,037 | 260 | 2,297 | 358 | 205 | 563 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | (126 | ) | (126 | ) | — | — | — | — | — | — | (52 | ) | (52 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense and exercises and other | — | 10 | — | — | — | 10 | 1 | 11 | — | 7 | — | — | — | 7 | 2 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Balances as of September 30, 2016 | $ | 1 | $ | 11,959 | $ | 5,202 | $ | 409 | $ | (2,700 | ) | $ | 14,871 | $ | 1,878 | $ | 16,749 | |||||||||||||||||||||||||||||||||||||||||||||||
Balances as of June 30, 2017 | $ | 1 | $ | 11,969 | $ | 3,095 | $ | 653 | $ | (2,700 | ) | $ | 13,018 | $ | 1,978 | $ | 14,996 | |||||||||||||||||||||||||||||||||||||||||||||||
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See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
Nine months ended September 30, | Six months ended June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 662 | $ | (4 | ) | |||||||||||
Less loss from discontinued operations, net of taxes | 9 | 25 | ||||||||||||||
Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||||||||||
Gain on sale of business | — | (26 | ) | |||||||||||||
Amortization of fixed maturity securities discounts and premiums and limited partnerships | (107 | ) | (112 | ) | ||||||||||||
Net investment gains | (220 | ) | (31 | ) | ||||||||||||
Net income | $ | 414 | $ | 487 | ||||||||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||||||
Amortization of fixed maturity securities discounts and premiums | (62 | ) | (76 | ) | ||||||||||||
Net investment (gains) losses | 45 | (135 | ) | |||||||||||||
Charges assessed to policyholders | (534 | ) | (574 | ) | (359 | ) | (365 | ) | ||||||||
Acquisition costs deferred | (67 | ) | (124 | ) | (40 | ) | (44 | ) | ||||||||
Amortization of deferred acquisition costs and intangibles | 316 | 305 | 216 | 233 | ||||||||||||
Deferred income taxes | 234 | 173 | 83 | 166 | ||||||||||||
Trading securities,held-for-sale investments and derivative instruments | 716 | 759 | ||||||||||||||
Trading securities, limited partnerships and derivative instruments | (195 | ) | 431 | |||||||||||||
Stock-based compensation expense | 29 | 25 | 16 | 18 | ||||||||||||
Change in certain assets and liabilities: | ||||||||||||||||
Accrued investment income and other assets | (21 | ) | (258 | ) | (89 | ) | (23 | ) | ||||||||
Insurance reserves | 1,202 | 691 | 691 | 806 | ||||||||||||
Current tax liabilities | (27 | ) | 44 | (37 | ) | (32 | ) | |||||||||
Other liabilities, policy and contract claims and other policy-related balances | (260 | ) | 905 | (122 | ) | (158 | ) | |||||||||
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Net cash from operating activities | 1,932 | 1,798 | 561 | 1,308 | ||||||||||||
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Cash flows used by investing activities: | ||||||||||||||||
Proceeds from maturities and repayments of investments: | ||||||||||||||||
Fixed maturity securities | 3,396 | 2,646 | 1,979 | 2,358 | ||||||||||||
Commercial mortgage loans | 454 | 555 | 350 | 307 | ||||||||||||
Restricted commercial mortgage loans related to securitization entities | 18 | 27 | 16 | 11 | ||||||||||||
Proceeds from sales of investments: | ||||||||||||||||
Fixed maturity and equity securities | 3,269 | 4,064 | 1,920 | 2,587 | ||||||||||||
Purchases and originations of investments: | ||||||||||||||||
Fixed maturity and equity securities | (6,709 | ) | (8,758 | ) | (4,082 | ) | (4,733 | ) | ||||||||
Commercial mortgage loans | (608 | ) | (405 | ) | (489 | ) | (431 | ) | ||||||||
Other invested assets, net | (521 | ) | (138 | ) | 93 | (638 | ) | |||||||||
Policy loans, net | 28 | (80 | ) | 15 | 21 | |||||||||||
Proceeds from sale of businesses, net of cash transferred | — | 39 | ||||||||||||||
Payments for business purchased, net of cash acquired | (5 | ) | — | — | (5 | ) | ||||||||||
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Net cash used by investing activities | (678 | ) | (2,050 | ) | (198 | ) | (523 | ) | ||||||||
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Cash flows used by financing activities: | ||||||||||||||||
Deposits to universal life and investment contracts | 902 | 1,028 | 503 | 429 | ||||||||||||
Withdrawals from universal life and investment contracts | (2,003 | ) | (1,463 | ) | (1,177 | ) | (1,091 | ) | ||||||||
Redemption ofnon-recourse funding obligations | — | (1,620 | ) | |||||||||||||
Proceeds from issuance of long-term debt | 441 | — | ||||||||||||||
Repayment and repurchase of long-term debt | — | (362 | ) | (597 | ) | — | ||||||||||
Repayment of borrowings related to securitization entities | (16 | ) | (37 | ) | (12 | ) | (12 | ) | ||||||||
Repurchase of subsidiary shares | (31 | ) | — | (49 | ) | — | ||||||||||
Return of capital to noncontrolling interests | — | (70 | ) | |||||||||||||
Dividends paid to noncontrolling interests | (92 | ) | (126 | ) | (50 | ) | (52 | ) | ||||||||
Other, net | (30 | ) | (49 | ) | (2 | ) | (29 | ) | ||||||||
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Net cash used by financing activities | (1,270 | ) | (2,699 | ) | (943 | ) | (755 | ) | ||||||||
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Effect of exchange rate changes on cash and cash equivalents | 68 | 36 | ||||||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (52 | ) | 39 | |||||||||||||
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Net change in cash and cash equivalents | 52 | (2,915 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | 2,784 | 5,993 | ||||||||||||||
Net change in cash, cash equivalents and restricted cash | (632 | ) | 69 | |||||||||||||
Cash, cash equivalents and restricted cash at beginning of period | 2,875 | 2,784 | ||||||||||||||
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Cash and cash equivalents at end of period | $ | 2,836 | $ | 3,078 | ||||||||||||
Cash, cash equivalents and restricted cash at end of period | $ | 2,243 | $ | 2,853 | ||||||||||||
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See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Formation of Genworth and Basis of Presentation
Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering (“IPO”) of Genworth’s common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.
On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”(the “Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth’sGenworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement.
The transaction remains subject to closing conditions, including the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions. Both parties are engaging with the relevant regulators regarding the applications and the pending transaction.
The accompanying unaudited condensed financial statements include on a consolidated basis the accounts of Genworth Financial and the affiliate companies in which it holds a majority voting interest or where it is the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.
References to “Genworth,” the “Company,” “we” or “our” in the accompanying unaudited condensed consolidated financial statements and these notes thereto are, unless the context otherwise requires, to Genworth Financial on a consolidated basis.
We operate our business through the following five operating segments:
• | U.S. Mortgage Insurance.In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based. |
• | Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada. |
• | Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
• | U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States. |
• | Runoff.The Runoff segment includes the results ofnon-strategic products which have not been actively sold but we continue to service our existing blocks of business. Ournon-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist |
In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 20162017 Annual Report on Form10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.
(2) Accounting Changes
Accounting Pronouncements Recently Adopted
On January 1, 2017,2018, we early adopted new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this new accounting guidance on a modified retrospective basis and recorded a previously disallowed deferred tax asset of $9 million with a corresponding increase to cumulative effect of change in accounting within retained earnings at adoption.
On January 1, 2017, we adopted new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has anavailable-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss inreclassification from accumulated other comprehensive income atto retained earnings for stranded tax effects resulting from the dateTax Cuts and Jobs Act (“TCJA”), or “stranded tax effects.” Under current U.S. GAAP, deferred tax assets and liabilities are adjusted for the investment becomes qualified for useeffect of a change in tax laws or rates with the equity method. We did not have any significant impacteffect included in income from this guidance on our consolidated financial statements.
On January 1, 2017, we adopted new accounting guidancecontinuing operations in the period that the changes were enacted. This also includes situations in which the related tax effects were originally recognized in other comprehensive income as opposed to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent callincome from continuing
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(put) options that can accelerateoperations. The following summarizes the payment of principalcomponents for the cumulative effect adjustment recorded on debt instruments are clearly and closelyJanuary 1, 2018 related to their debt hosts. An entity performing the assessment underadoption of this new accounting guidance:
Accumulated other comprehensive income (loss) | ||||||||||||||||||||
(Amounts in millions) | Net unrealized investment gains (losses) | Derivatives qualifying as hedges | Foreign currency translation and other adjustments | Retained earnings | Total stockholders’ equity | |||||||||||||||
Deferred taxes: | ||||||||||||||||||||
Net unrealized gains on investment securities | $ | 192 | $ | — | $ | — | $ | (192 | ) | $ | — | |||||||||
Net unrealized gains on derivatives | — | 12 | — | (12 | ) | — | ||||||||||||||
Investment in foreign subsidiaries | (3 | ) | — | (46 | ) | 49 | — | |||||||||||||
Accrued commission and general expenses | — | — | (1 | ) | 1 | — | ||||||||||||||
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Cumulative effect of changes in accounting | $ | 189 | $ | 12 | $ | (47 | ) | $ | (154 | ) | $ | — | ||||||||
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The accounting for the amendmentstemporary differences related to investment in this updateforeign subsidiaries recorded in accumulated other comprehensive income (loss) at adoption of the TCJA, were provisional. Therefore, additional reclassification adjustments may be recorded in future periods as tax effects of the TCJA on related temporary differences are finalized. However, no reclassification adjustments were recorded in the second quarter of 2018. Other than those effects related to the TCJA, our policy is required to assessrelease stranded tax effects from accumulated other comprehensive income (loss) using the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance is consistent with our previous accounting practicesportfolio approach for items related to investments and accordingly, did not have any impact on our consolidated financial statements.derivatives, and upon disposition of a subsidiary for items related to outside basis differences.
On January 1, 2017,2018, we early adopted new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships.model. The new guidance clarifies that a change inamends the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is consistent with our previous accounting for derivative contract novations and, accordingly, did not have any impact on our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In August 2017, the Financial Accounting Standards Board (“the FASB”) issued new guidance intendedmodel to enable entities to better portray the economics of their derivative risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In certain situations, the amendments also simplify the application of hedge accounting. The guidance is currently effective for us onaccounting and removed the requirements to separately measure and report hedge ineffectiveness. We adopted this new accounting using the modified retrospective method and recognized a gain of $2 million in accumulated other comprehensive income with a corresponding decrease to retained earnings at adoption. This gain was the cumulative amount of hedge ineffectiveness related to active hedges that was previously included in earnings.
On January 1, 2019, with early adoption permitted. We are in process of evaluating adopting this2018, we adopted new accounting guidance early and the impact it may have on our consolidated financial statements.
In May 2017, the FASB issued new guidance to clarifythat clarifies when to account for a change to share-based compensation as a modification. The new guidance requires modification accounting only if there are changes to the fair value, vesting conditions or classification as a liability or equity of the share-based compensation. TheWe adopted this new accounting guidance is effective, prospectively for us on January 1, 2018, accordingly,and therefore, the guidance willdid not have any impact at adoption.
In March 2017, the FASB issued new guidance shortening the amortization period for the premium component of callable debt securities purchased at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance is currently effective for us onOn January 1, 2019, with early adoption permitted. We are in process of evaluating2018, we adopted new accounting guidance that clarifies the impact the guidance may have on our consolidated financial statements.
In February 2017, the FASB issued new guidance to clarify thescope and accounting for gains and losses from the derecognition of nonfinancial assets or an in substance nonfinancial asset that is not a business and accounting for partial sales of nonfinancial assets. The new guidance clarifies when transferring ownership interests in a consolidated subsidiary holding nonfinancial assets is within scope. It also states that the reporting entity should identify each distinct nonfinancial asset and derecognize when a counterparty obtains control, and clarifiescontrol. We adopted this new accounting guidance using the accounting for partial sales. The new guidance is currently effective for us on January 1, 2018. We do not expect any significant impacts from this guidancemodified retrospective method, which had no impact on our consolidated financial statements.statements at adoption.
In
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 2017, the FASB issued1, 2018, we early adopted new accounting guidance simplifying the test for goodwill impairment. The new guidance states goodwill impairment is equal to the difference between the carrying value and fair value of the reporting unit up to the amount of recorded goodwill. We adopted this new accounting guidance prospectively and will apply it to our 2018 goodwill impairment test.
On January 1, 2018, we adopted new accounting guidance related to the classification and presentation of changes in restricted cash. The new guidance is currently effective for usrequires that changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents be shown in the statements of cash flows and requires additional disclosures related to restricted cash and restricted cash equivalents. We adopted this new accounting guidance retrospectively and modified the line item descriptions on January 1, 2020, with early adoption permitted for testing dates after January 1, 2017. We do not expect any significantour consolidated balance sheets and statements of cash flows in our consolidated financial statements. The other impacts from this new accounting guidance did not have a significant impact on our consolidated financial statements.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In October 2016, the FASB issuedOn January 1, 2018, we adopted new accounting guidance related to the income tax effects of intra-entity transfers of assets other than inventory. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. TheWe adopted this new accounting guidance is currently effective for us on January 1, 2018. We are still in process of evaluatingusing the modified retrospective method, which did not have any significant impact the guidance may have on our consolidated financial statements including any cumulative effect adjustmentor disclosures at adoption.
On January 1, 2018, we adopted new accounting guidance related to the classification of certain cash payments and cash receipts on our statement of cash flows. The guidance reduces diversity in practice related to eight specific cash flow issues. We adopted this new accounting guidance retrospectively. We will reclassify a $20 million make-whole premium that will be recorded directly to retained earnings aswas incurred in the first quarter of 2016 previously included in the operating activities section of the beginningstatement of cash flows, within the periodline item “other liabilities, policy and contract claims and other policy-related balances” to the financing activities section within the line item “repayment and repurchase of adoption.long-term debt” in our 2018 annual consolidated financial statements filed on Form10-K. The reclassification will result in an increase in net cash used by financing activities and an increase in net cash from operating activities. The remaining specific cash flow issues did not have a significant impact on our consolidated financial statements.
InOn January 2016, the FASB issued1, 2018, we adopted new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Changes to the current financial instruments accounting primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, will beare measured at fair value with changes in fair value recognized in net income (loss). As of September 30, 2017, we have approximately $45 million of cumulative unrealized gains related to equity securities included in accumulated other comprehensive income as well as approximately $25 million of gains related to limited partnership investments currently recorded at cost, that will be reclassed to cumulative effect of change in accounting within retained earnings upon adoption of this new accounting guidance.income. The new guidance also clarifies that the need for a valuation allowance on a deferred tax asset related toavailable-for-sale securities should be evaluated in combination with other deferred tax assets. ThisWe adopted this new accounting guidance using the modified retrospective method and reclassified, after adjustments for deferred acquisition costs (“DAC”) and other intangible amortization and certain benefit reserves, taxes and noncontrolling interests, $25 million of gains related to equity securities from accumulated other comprehensive income and $17 million of gains related to limited partnerships previously recorded at cost to cumulative effect of change in accounting within retained earnings.
On January 1, 2018, we adopted new accounting guidance related to revenue from contracts with customers. The key principle of the new guidance willis that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. Insurance contracts are specifically excluded from this new
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
guidance. The Financial Accounting Standards Board (“the FASB”) has clarified the scope that all of our insurance contracts, including mortgage insurance and investment contracts are excluded from the scope of this new guidance. We adopted this new accounting guidance using the modified retrospective method, which did not have any significant impact on our consolidated financial statements at adoption.
Accounting Pronouncements Not Yet Adopted
In June 2018, the FASB issued new guidance related to accounting for nonemployee share-based payments. The guidance aligns the measurement and classification of share-based payments to nonemployees issued in exchange for goods or services with the guidance for share-based payments to employees, with certain exceptions. The guidance is currently effective for us on January 1, 2018.2019 using the modified retrospective method, with early adoption permitted. While we are still evaluating the full impact, at this time we do not expect any impacts from this new guidance on our consolidated financial statements.
In March 2017, the FASB issued new guidance shortening the amortization period of certain callable debt securities held at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance is currently effective for us on January 1, 2019 using the modified retrospective method, with early adoption permitted. While we are still evaluating the full impact, at this time we do not expect any significant impact from this guidance on our consolidated financial statements.
In June 2016, the FASB issued new guidance related to accounting for credit losses on financial instruments. The guidance requires that entities recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most debt instruments not measured at fair value, which would primarily include our commercial mortgage loans and reinsurance receivables. The new guidance retains most of the existing impairment guidance foravailable-for-sale debt securities but amends the presentation of credit losses to be presented as an allowance as opposed to a write-down and permits the reversal of credit losses when reassessing changes in the credit losses each reporting period. The new guidance is effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019. Upon adoption, the modified retrospective method will be used and a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption will be recorded. We are still in process of evaluating the full impact the guidance may have on our consolidated financial statements.
In February 2016, the FASB issued new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both aright-to-use asset and a corresponding liability on the balance sheet. The guidance is effective for us on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the period adopted in the financial statements, with certain practical expedients available, which we are in the processes of evaluating. While we are still evaluating the full impact, at this time we do not expect any significant impact from this guidance on our consolidated financial statements.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted common shares outstanding for the periods indicated:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Amounts in millions, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Weighted-average shares used in basic earnings (loss) per share calculations | 499.1 | 498.3 | 498.9 | 498.3 | ||||||||||||
Potentially dilutive securities: | ||||||||||||||||
Stock options, restricted stock units and stock appreciation rights | 2.5 | — | 2.3 | — | ||||||||||||
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Weighted-average shares used in diluted earnings (loss) per share calculations (1) | 501.6 | 498.3 | 501.2 | 498.3 | ||||||||||||
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Income (loss) from continuing operations: | ||||||||||||||||
Income (loss) from continuing operations | $ | 184 | $ | (347 | ) | $ | 671 | $ | 21 | |||||||
Less: income from continuing operations attributable to noncontrolling interests | 68 | 48 | 198 | 151 | ||||||||||||
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Income (loss) from continuing operations available to Genworth Financial, Inc.’scommon stockholders | $ | 116 | $ | (395 | ) | $ | 473 | $ | (130 | ) | ||||||
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Basic per share | $ | 0.23 | $ | (0.79 | ) | $ | 0.95 | $ | (0.26 | ) | ||||||
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Diluted per share | $ | 0.23 | $ | (0.79 | ) | $ | 0.94 | $ | (0.26 | ) | ||||||
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Income (loss) from discontinued operations: | ||||||||||||||||
Income (loss) from discontinued operations, net of taxes | $ | (9 | ) | $ | 15 | $ | (9 | ) | $ | (25 | ) | |||||
Less: income from discontinued operations, net of taxes, attributable tononcontrolling interests | — | — | — | — | ||||||||||||
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Income (loss) from discontinued operations, net of taxes, available to GenworthFinancial, Inc.’s common stockholders | $ | (9 | ) | $ | 15 | $ | (9 | ) | $ | (25 | ) | |||||
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Basic per share | $ | (0.02 | ) | $ | 0.03 | $ | (0.02 | ) | $ | (0.05 | ) | |||||
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Diluted per share | $ | (0.02 | ) | $ | 0.03 | $ | (0.02 | ) | $ | (0.05 | ) | |||||
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Net income (loss): | ||||||||||||||||
Income (loss) from continuing operations | $ | 184 | $ | (347 | ) | $ | 671 | $ | 21 | |||||||
Income (loss) from discontinued operations, net of taxes | (9 | ) | 15 | (9 | ) | (25 | ) | |||||||||
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Net income (loss) | 175 | (332 | ) | 662 | (4 | ) | ||||||||||
Less: net income attributable to noncontrolling interests | 68 | 48 | 198 | 151 | ||||||||||||
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Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 107 | $ | (380 | ) | $ | 464 | $ | (155 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
Basic per share | $ | 0.21 | $ | (0.76 | ) | $ | 0.93 | $ | (0.31 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
Diluted per share | $ | 0.21 | $ | (0.76 | ) | $ | 0.93 | $ | (0.31 | ) | ||||||
|
|
|
|
|
|
|
|
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Amounts in millions, except per share amounts) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Weighted-average shares used in basic earnings per share calculations | 500.6 | 499.0 | 500.1 | 498.8 | ||||||||||||
Potentially dilutive securities: | ||||||||||||||||
Stock options, restricted stock units and stock appreciation rights | 2.0 | 2.2 | 2.5 | 2.3 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted-average shares used in diluted earnings per share calculations | 502.6 | 501.2 | 502.6 | 501.1 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations: | ||||||||||||||||
Income from continuing operations | $ | 249 | $ | 271 | $ | 414 | $ | 487 | ||||||||
Less: income from continuing operations attributable to noncontrolling interests | 59 | 69 | 112 | 130 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations available to Genworth Financial, Inc.’scommon stockholders | $ | 190 | $ | 202 | $ | 302 | $ | 357 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Basic per share | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.72 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted per share | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.71 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Loss from discontinued operations: | ||||||||||||||||
Loss from discontinued operations, net of taxes | $ | — | $ | — | $ | — | $ | — | ||||||||
Less: income from discontinued operations, net of taxes, attributable tononcontrolling interests | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Loss from discontinued operations, net of taxes, available to GenworthFinancial, Inc.’s common stockholders | $ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Basic per share | $ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted per share | $ | — | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
| |||||||||
Net income: | ||||||||||||||||
Income from continuing operations | $ | 249 | $ | 271 | $ | 414 | $ | 487 | ||||||||
Loss from discontinued operations, net of taxes | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income | 249 | 271 | 414 | 487 | ||||||||||||
Less: net income attributable to noncontrolling interests | 59 | 69 | 112 | 130 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 190 | $ | 202 | $ | 302 | $ | 357 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Basic per share | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.72 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted per share | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.71 | ||||||||
|
|
|
|
|
|
|
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the periods indicated:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Fixed maturity securities—taxable | $ | 640 | $ | 655 | $ | 1,930 | 1,930 | $ | 651 | $ | 649 | $ | 1,286 | $ | 1,290 | |||||||||||||||||
Fixed maturitysecurities—non-taxable | 3 | 3 | 9 | 9 | 3 | 3 | 6 | 6 | ||||||||||||||||||||||||
Equity securities | 10 | 9 | 20 | 17 | ||||||||||||||||||||||||||||
Commercial mortgage loans | 78 | 79 | 231 | 237 | 77 | 76 | 159 | 153 | ||||||||||||||||||||||||
Restricted commercial mortgage loans related to securitization entities | 3 | 3 | 7 | 8 | 2 | 2 | 4 | 4 | ||||||||||||||||||||||||
Equity securities | 9 | 8 | 26 | 20 | ||||||||||||||||||||||||||||
Policy loans | 41 | 39 | 84 | 81 | ||||||||||||||||||||||||||||
Other invested assets | 39 | 34 | 106 | 105 | 53 | 35 | 92 | 67 | ||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | — | — | 1 | 3 | — | 1 | — | 1 | ||||||||||||||||||||||||
Policy loans | 39 | 38 | 120 | 107 | ||||||||||||||||||||||||||||
Cash, cash equivalents and short-term investments | 10 | 5 | 26 | 16 | 14 | 10 | 26 | 16 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Gross investment income before expenses and fees | 821 | 825 | 2,456 | 2,435 | 851 | 824 | 1,677 | 1,635 | ||||||||||||||||||||||||
Expenses and fees | (24 | ) | (20 | ) | (68 | ) | (62 | ) | (23 | ) | (23 | ) | (45 | ) | (44 | ) | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net investment income | $ | 797 | $ | 805 | $ | 2,388 | $ | 2,373 | $ | 828 | $ | 801 | $ | 1,632 | $ | 1,591 | ||||||||||||||||
|
|
|
|
|
|
|
|
(b) Net Investment Gains (Losses)
The following table sets forth net investment gains (losses) for the periods indicated:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
Realized gains | $ | 40 | $ | 39 | $ | 177 | $ | 205 | $ | 13 | $ | 74 | $ | 20 | $ | 137 | ||||||||||||||||
Realized losses | (10 | ) | (24 | ) | (55 | ) | (75 | ) | (21 | ) | (11 | ) | (37 | ) | (45 | ) | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net realized gains (losses) onavailable-for-sale securities | 30 | 15 | 122 | 130 | (8 | ) | 63 | (17 | ) | 92 | ||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Impairments: | ||||||||||||||||||||||||||||||||
Total other-than-temporary impairments | (1 | ) | (2 | ) | (4 | ) | (35 | ) | — | (2 | ) | — | (3 | ) | ||||||||||||||||||
Portion of other-than-temporary impairments included inother comprehensive income (loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net other-than-temporary impairments | (1 | ) | (2 | ) | (4 | ) | (35 | ) | — | (2 | ) | — | (3 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net realized gains (losses) on equity securities sold | 8 | — | 10 | — | ||||||||||||||||||||||||||||
Net unrealized gains (losses) on equity securities still held | 3 | — | (15 | ) | — | |||||||||||||||||||||||||||
Trading securities | — | (4 | ) | 1 | 40 | — | 1 | — | 1 | |||||||||||||||||||||||
Limited partnerships | (2 | ) | — | 5 | — | |||||||||||||||||||||||||||
Commercial mortgage loans | 1 | (1 | ) | 3 | 1 | — | 1 | — | 2 | |||||||||||||||||||||||
Net gains (losses) related to securitization entities | 1 | 2 | 5 | (51 | ) | — | 2 | — | 4 | |||||||||||||||||||||||
Derivative instruments (1) | 54 | 10 | 93 | (52 | ) | (15 | ) | 36 | (28 | ) | 39 | |||||||||||||||||||||
Contingent consideration adjustment | — | — | — | (2 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net investment gains (losses) | $ | 85 | $ | 20 | $ | 220 | $ | 31 | $ | (14 | ) | $ | 101 | $ | (45 | ) | $ | 135 | ||||||||||||||
|
|
|
|
|
|
|
|
(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 three months ended SeptemberJune 30, 2018 and 2017 and 2016 was $286$640 million and $293$228 million, respectively, which was approximately 97% and 95%, respectively, of book value. The aggregate fair value of securities sold at a loss during the ninesix months ended SeptemberJune 30, 2018 and 2017 and 2016 was $1,390$1,259 million and $833$1,104 million, respectively, which was approximately 96%97% and 93%96%, respectively, of book value.
The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (loss) (“OCI”) as of and for the periods indicated:
As of or for the three months ended September 30, | As of or for the nine months ended September 30, | As of or for the three months ended June 30, | As of or for the six months ended June 30, | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Beginning balance | $ | 38 | $ | 62 | $ | 42 | $ | 64 | $ | 28 | $ | 41 | $ | 32 | $ | 42 | ||||||||||||||||
Additions: | ||||||||||||||||||||||||||||||||
Other-than-temporary impairments not previously recognized | — | — | — | 1 | ||||||||||||||||||||||||||||
Reductions: | ||||||||||||||||||||||||||||||||
Securities sold, paid down or disposed | (5 | ) | (8 | ) | (9 | ) | (11 | ) | (3 | ) | (3 | ) | (7 | ) | (4 | ) | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Ending balance | $ | 33 | $ | 54 | $ | 33 | $ | 54 | $ | 25 | $ | 38 | $ | 25 | $ | 38 | ||||||||||||||||
|
|
|
|
|
|
|
|
(c) Unrealized Investment Gains and Losses
Net unrealized gains and losses onavailable-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:
(Amounts in millions) | September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | ||||||||||||
Net unrealized gains (losses) on investment securities: | ||||||||||||||||
Fixed maturity securities | $ | 4,878 | $ | 3,656 | $ | 2,555 | $ | 5,125 | ||||||||
Equity securities | 49 | 12 | — | 69 | ||||||||||||
|
|
|
| |||||||||||||
Subtotal (1) | 4,927 | 3,668 | 2,555 | 5,194 | ||||||||||||
Adjustments to deferred acquisition costs, present value of future profits, salesinducements and benefit reserves | (3,134 | ) | (1,611 | ) | (1,549 | ) | (3,451 | ) | ||||||||
Income taxes, net | (619 | ) | (711 | ) | (230 | ) | (583 | ) | ||||||||
|
|
|
| |||||||||||||
Net unrealized investment gains (losses) | 1,174 | 1,346 | 776 | 1,160 | ||||||||||||
Less: net unrealized investment gains (losses) attributable to noncontrolling interests | 66 | 84 | 40 | 75 | ||||||||||||
|
|
|
| |||||||||||||
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc. | $ | 1,108 | $ | 1,262 | $ | 736 | $ | 1,085 | ||||||||
|
|
|
|
(1) | Excludes foreign exchange. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The change in net unrealized gains (losses) onavailable-for-sale investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:
As of or for the three months ended September 30, | As of or for the three months ended June 30, | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Beginning balance | $ | 1,180 | $ | 2,789 | $ | 917 | $ | 1,243 | ||||||||
Unrealized gains (losses) arising during the period: | ||||||||||||||||
Unrealized gains (losses) on investment securities | (10 | ) | 228 | (905 | ) | 995 | ||||||||||
Adjustment to deferred acquisition costs | (1 | ) | (17 | ) | 467 | (741 | ) | |||||||||
Adjustment to present value of future profits | (3 | ) | 3 | 20 | (28 | ) | ||||||||||
Adjustment to sales inducements | — | (6 | ) | 9 | (6 | ) | ||||||||||
Adjustment to benefit reserves | (92 | ) | (81 | ) | 162 | (269 | ) | |||||||||
Provision for income taxes | 36 | (41 | ) | 54 | 17 | |||||||||||
|
|
|
| |||||||||||||
Change in unrealized gains (losses) on investment securities | (70 | ) | 86 | (193 | ) | (32 | ) | |||||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $10 and $4 | (19 | ) | (9 | ) | ||||||||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(2) and $21 | 6 | (40 | ) | |||||||||||||
|
|
|
| |||||||||||||
Change in net unrealized investment gains (losses) | (89 | ) | 77 | (187 | ) | (72 | ) | |||||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests | (17 | ) | 6 | (6 | ) | (9 | ) | |||||||||
|
|
|
| |||||||||||||
Ending balance | $ | 1,108 | $ | 2,860 | $ | 736 | $ | 1,180 | ||||||||
|
|
|
|
As of or for the nine months ended September 30, | As of or for the six months ended June 30, | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Beginning balance | $ | 1,262 | $ | 1,254 | $ | 1,085 | $ | 1,262 | ||||||||
Cumulative effect of changes in accounting: | ||||||||||||||||
Stranded tax effects | 189 | — | ||||||||||||||
Recognition and measurement of financial assets and liabilities, net of taxes of $18 and $— | (25 | ) | — | |||||||||||||
|
| |||||||||||||||
Total cumulative effect of changes in accounting | 164 | — | ||||||||||||||
|
| |||||||||||||||
Unrealized gains (losses) arising during the period: | ||||||||||||||||
Unrealized gains (losses) on investment securities | 1,377 | 3,584 | (2,586 | ) | 1,387 | |||||||||||
Adjustment to deferred acquisition costs | (1,047 | ) | (291 | ) | 909 | (1,046 | ) | |||||||||
Adjustment to present value of future profits | (36 | ) | (26 | ) | 56 | (33 | ) | |||||||||
Adjustment to sales inducements | (11 | ) | (46 | ) | 29 | (11 | ) | |||||||||
Adjustment to benefit reserves | (429 | ) | (612 | ) | 902 | (337 | ) | |||||||||
Provision for income taxes | 51 | (917 | ) | 149 | 15 | |||||||||||
|
|
|
| |||||||||||||
Change in unrealized gains (losses) on investment securities | (95 | ) | 1,692 | (541 | ) | (25 | ) | |||||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $41 and $33 | (77 | ) | (62 | ) | ||||||||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(3) and $31 | 13 | (58 | ) | |||||||||||||
|
|
|
| |||||||||||||
Change in net unrealized investment gains (losses) | (172 | ) | 1,630 | (528 | ) | (83 | ) | |||||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests | (18 | ) | 24 | (15 | ) | (1 | ) | |||||||||
|
|
|
| |||||||||||||
Ending balance | $ | 1,108 | $ | 2,860 | $ | 736 | $ | 1,180 | ||||||||
|
|
|
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(d) Fixed Maturity and Equity Securities
As of SeptemberJune 30, 2018, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified asavailable-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
(Amounts in millions) | Amortized cost or cost | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Fair value | ||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 4,733 | $ | 632 | $ | — | $ | (12 | ) | $ | — | $ | 5,353 | |||||||||||
State and political subdivisions | 2,699 | 195 | — | (39 | ) | — | 2,855 | |||||||||||||||||
Non-U.S. government | 2,347 | 69 | — | (36 | ) | — | 2,380 | |||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||
Utilities | 4,550 | 395 | — | (66 | ) | — | 4,879 | |||||||||||||||||
Energy | 2,160 | 139 | — | (29 | ) | — | 2,270 | |||||||||||||||||
Finance and insurance | 6,095 | 288 | — | (108 | ) | — | 6,275 | |||||||||||||||||
Consumer—non-cyclical | 4,298 | 323 | — | (80 | ) | — | 4,541 | |||||||||||||||||
Technology and communications | 2,709 | 133 | — | (61 | ) | — | 2,781 | |||||||||||||||||
Industrial | 1,244 | 59 | — | (20 | ) | — | 1,283 | |||||||||||||||||
Capital goods | 2,216 | 185 | — | (40 | ) | — | 2,361 | |||||||||||||||||
Consumer—cyclical | 1,538 | 66 | — | (31 | ) | — | 1,573 | |||||||||||||||||
Transportation | 1,200 | 83 | — | (31 | ) | — | 1,252 | |||||||||||||||||
Other | 337 | 18 | — | (1 | ) | — | 354 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total U.S. corporate | 26,347 | 1,689 | — | (467 | ) | — | 27,569 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Non-U.S. corporate: | ||||||||||||||||||||||||
Utilities | 962 | 22 | — | (22 | ) | — | 962 | |||||||||||||||||
Energy | 1,316 | 101 | — | (18 | ) | — | 1,399 | |||||||||||||||||
Finance and insurance | 2,471 | 102 | — | (36 | ) | — | 2,537 | |||||||||||||||||
Consumer—non-cyclical | 709 | 11 | — | (18 | ) | — | 702 | |||||||||||||||||
Technology and communications | 992 | 30 | — | (15 | ) | — | 1,007 | |||||||||||||||||
Industrial | 943 | 46 | — | (12 | ) | — | 977 | |||||||||||||||||
Capital goods | 603 | 15 | — | (7 | ) | — | 611 | |||||||||||||||||
Consumer—cyclical | 527 | 2 | — | (7 | ) | — | 522 | |||||||||||||||||
Transportation | 690 | 48 | — | (11 | ) | — | 727 | |||||||||||||||||
Other | 2,454 | 128 | — | (24 | ) | — | 2,558 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Totalnon-U.S. corporate | 11,667 | 505 | — | (170 | ) | — | 12,002 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Residential mortgage-backed | 3,426 | 156 | 13 | (28 | ) | — | 3,567 | |||||||||||||||||
Commercial mortgage-backed | 3,387 | 46 | — | (84 | ) | — | 3,349 | |||||||||||||||||
Other asset-backed | 2,966 | 7 | 1 | (17 | ) | — | 2,957 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Totalavailable-for-sale fixed maturity securities | $ | 57,572 | $ | 3,299 | $ | 14 | $ | (853 | ) | $ | — | $ | 60,032 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of December 31, 2017, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified asavailable-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
(Amounts in millions) | Amortized cost or cost | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Fair value | ||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 4,893 | $ | 784 | $ | — | $ | (7 | ) | $ | — | $ | 5,670 | |||||||||||
State and political subdivisions | 2,639 | 247 | — | (26 | ) | — | 2,860 | |||||||||||||||||
Non-U.S. government | 2,143 | 107 | — | (24 | ) | — | 2,226 | |||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||
Utilities | 4,382 | 556 | — | (15 | ) | — | 4,923 | |||||||||||||||||
Energy | 2,243 | 207 | — | (10 | ) | — | 2,440 | |||||||||||||||||
Finance and insurance | 6,051 | 547 | — | (11 | ) | — | 6,587 | |||||||||||||||||
Consumer—non-cyclical | 4,330 | 508 | — | (10 | ) | — | 4,828 | |||||||||||||||||
Technology and communications | 2,558 | 193 | — | (11 | ) | — | 2,740 | |||||||||||||||||
Industrial | 1,247 | 102 | — | (3 | ) | — | 1,346 | |||||||||||||||||
Capital goods | 2,067 | 263 | — | (9 | ) | — | 2,321 | |||||||||||||||||
Consumer—cyclical | 1,506 | 111 | — | (6 | ) | — | 1,611 | |||||||||||||||||
Transportation | 1,188 | 124 | — | (6 | ) | — | 1,306 | |||||||||||||||||
Other | 358 | 24 | — | (2 | ) | — | 380 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total U.S. corporate | 25,930 | 2,635 | — | (83 | ) | — | 28,482 | |||||||||||||||||
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| |||||||||||||
Non-U.S. corporate: | ||||||||||||||||||||||||
Utilities | 1,022 | 45 | — | (5 | ) | — | 1,062 | |||||||||||||||||
Energy | 1,330 | 140 | — | (7 | ) | — | 1,463 | |||||||||||||||||
Finance and insurance | 2,524 | 177 | — | (5 | ) | — | 2,696 | |||||||||||||||||
Consumer—non-cyclical | 692 | 27 | — | (3 | ) | — | 716 | |||||||||||||||||
Technology and communications | 945 | 71 | — | (2 | ) | — | 1,014 | |||||||||||||||||
Industrial | 979 | 81 | — | (2 | ) | — | 1,058 | |||||||||||||||||
Capital goods | 556 | 33 | — | (2 | ) | — | 587 | |||||||||||||||||
Consumer—cyclical | 518 | 10 | — | (1 | ) | — | 527 | |||||||||||||||||
Transportation | 650 | 71 | — | (3 | ) | — | 718 | |||||||||||||||||
Other | 2,594 | 193 | — | (5 | ) | — | 2,782 | |||||||||||||||||
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|
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|
|
|
|
| |||||||||||||
Totalnon-U.S. corporate | 11,810 | 848 | — | (35 | ) | — | 12,623 | |||||||||||||||||
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| |||||||||||||
Residential mortgage-backed | 3,950 | �� | 255 | 14 | (10 | ) | — | 4,209 | ||||||||||||||||
Commercial mortgage-backed | 3,346 | 105 | 2 | (39 | ) | — | 3,414 | |||||||||||||||||
Other asset-backed | 3,052 | 20 | 1 | (5 | ) | — | 3,068 | |||||||||||||||||
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| |||||||||||||
Total fixed maturity securities | 57,763 | 5,001 | 17 | (229 | ) | — | 62,552 | |||||||||||||||||
Equity securities | 720 | 59 | — | (14 | ) | — | 765 | |||||||||||||||||
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| |||||||||||||
Total available-for-sale securities | $ | 58,483 | $ | 5,060 | $ | 17 | $ | (243 | ) | $ | — | $ | 63,317 | |||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of December 31, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified asavailable-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Amortized cost or cost | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Fair value | Amortized cost or cost | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Fair value | ||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 5,439 | $ | 647 | $ | — | $ | (50 | ) | $ | — | $ | 6,036 | $ | 4,681 | $ | 870 | $ | — | $ | (3 | ) | $ | — | $ | 5,548 | ||||||||||||||||||||||
State and political subdivisions | 2,515 | 182 | — | (50 | ) | — | 2,647 | 2,678 | 270 | — | (22 | ) | — | 2,926 | ||||||||||||||||||||||||||||||||||
Non-U.S. government | 2,024 | 101 | — | (18 | ) | — | 2,107 | 2,147 | 106 | — | (20 | ) | — | 2,233 | ||||||||||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 4,137 | 454 | — | (41 | ) | — | 4,550 | 4,396 | 611 | — | (9 | ) | — | 4,998 | ||||||||||||||||||||||||||||||||||
Energy | 2,167 | 157 | — | (24 | ) | — | 2,300 | 2,239 | 227 | — | (8 | ) | — | 2,458 | ||||||||||||||||||||||||||||||||||
Finance and insurance | 5,719 | 424 | — | (46 | ) | — | 6,097 | 5,984 | 556 | — | (12 | ) | — | 6,528 | ||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 4,335 | 433 | — | (34 | ) | — | 4,734 | 4,314 | 530 | — | (13 | ) | — | 4,831 | ||||||||||||||||||||||||||||||||||
Technology and communications | 2,473 | 157 | — | (32 | ) | — | 2,598 | 2,665 | 192 | — | (12 | ) | — | 2,845 | ||||||||||||||||||||||||||||||||||
Industrial | 1,161 | 76 | — | (14 | ) | — | 1,223 | 1,241 | 106 | — | (1 | ) | — | 1,346 | ||||||||||||||||||||||||||||||||||
Capital goods | 2,043 | 228 | — | (13 | ) | — | 2,258 | 2,087 | 273 | — | (5 | ) | — | 2,355 | ||||||||||||||||||||||||||||||||||
Consumer—cyclical | 1,455 | 92 | — | (17 | ) | — | 1,530 | 1,493 | 116 | — | (4 | ) | — | 1,605 | ||||||||||||||||||||||||||||||||||
Transportation | 1,121 | 86 | — | (17 | ) | — | 1,190 | 1,160 | 134 | — | (3 | ) | — | 1,291 | ||||||||||||||||||||||||||||||||||
Other | 332 | 17 | — | (1 | ) | — | 348 | 355 | 25 | — | (1 | ) | — | 379 | ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Total U.S. corporate | 24,943 | 2,124 | — | (239 | ) | — | 26,828 | 25,934 | 2,770 | — | (68 | ) | — | 28,636 | ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Non-U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 940 | 40 | — | (11 | ) | — | 969 | 979 | 42 | — | (4 | ) | — | 1,017 | ||||||||||||||||||||||||||||||||||
Energy | 1,234 | 109 | — | (12 | ) | — | 1,331 | 1,337 | 158 | — | (5 | ) | — | 1,490 | ||||||||||||||||||||||||||||||||||
Finance and insurance | 2,413 | 134 | — | (9 | ) | — | 2,538 | 2,567 | 174 | — | (6 | ) | — | 2,735 | ||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 711 | 17 | — | (14 | ) | — | 714 | 686 | 30 | — | (4 | ) | — | 712 | ||||||||||||||||||||||||||||||||||
Technology and communications | 953 | 44 | — | (10 | ) | — | 987 | 913 | 71 | — | (2 | ) | — | 982 | ||||||||||||||||||||||||||||||||||
Industrial | 928 | 39 | — | (9 | ) | — | 958 | 958 | 88 | — | (2 | ) | — | 1,044 | ||||||||||||||||||||||||||||||||||
Capital goods | 518 | 21 | — | (4 | ) | — | 535 | 614 | 33 | — | (2 | ) | — | 645 | ||||||||||||||||||||||||||||||||||
Consumer—cyclical | 434 | 10 | — | (2 | ) | — | 442 | 532 | 9 | — | (1 | ) | — | 540 | ||||||||||||||||||||||||||||||||||
Transportation | 619 | 65 | — | (7 | ) | — | 677 | 656 | 68 | — | (3 | ) | — | 721 | ||||||||||||||||||||||||||||||||||
Other | 2,967 | 190 | — | (13 | ) | — | 3,144 | 2,536 | 193 | — | (4 | ) | — | 2,725 | ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Totalnon-U.S. corporate | 11,717 | 669 | — | (91 | ) | — | 12,295 | 11,778 | 866 | — | (33 | ) | — | 12,611 | ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 4,122 | 259 | 10 | (12 | ) | — | 4,379 | 3,831 | 223 | 14 | (11 | ) | — | 4,057 | ||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 3,084 | 98 | 3 | (56 | ) | — | 3,129 | 3,387 | 94 | 2 | (37 | ) | — | 3,446 | ||||||||||||||||||||||||||||||||||
Other asset-backed | 3,170 | 15 | 1 | (35 | ) | — | 3,151 | 3,056 | 17 | 1 | (6 | ) | — | 3,068 | ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 57,014 | 4,095 | 14 | (551 | ) | — | 60,572 | 57,492 | 5,216 | 17 | (200 | ) | — | 62,525 | ||||||||||||||||||||||||||||||||||
Equity securities | 628 | 31 | — | (27 | ) | — | 632 | 756 | 72 | — | (8 | ) | — | 820 | ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Totalavailable-for-sale securities | $ | 57,642 | $ | 4,126 | $ | 14 | $ | (578 | ) | $ | — | $ | 61,204 | $ | 58,248 | $ | 5,288 | $ | 17 | $ | (208 | ) | $ | — | $ | 63,345 | ||||||||||||||||||||||
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|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gross unrealized losses and fair values of our investmentfixed maturity securities, aggregated by investment type and length of time that individual investmentfixed maturity securities have been in a continuous unrealized loss position, as of SeptemberJune 30, 2017:2018:
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 | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description of Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agenciesand government-sponsoredenterprises | $ | 283 | $ | (6 | ) | 22 | $ | 31 | $ | (1 | ) | 4 | $ | 314 | $ | (7 | ) | 26 | $ | 314 | $ | (6 | ) | 35 | $ | 84 | $ | (6 | ) | 5 | $ | 398 | $ | (12 | ) | 40 | ||||||||||||||||||||||||||||||||||||
State and political subdivisions | 213 | (5 | ) | 45 | 230 | (21 | ) | 23 | 443 | (26 | ) | 68 | 482 | (13 | ) | 98 | 318 | (26 | ) | 41 | 800 | (39 | ) | 139 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-U.S. government | 922 | (23 | ) | 36 | 24 | (1 | ) | 14 | 946 | (24 | ) | 50 | 649 | (18 | ) | 85 | 418 | (18 | ) | 25 | 1,067 | (36 | ) | 110 | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate | 2,335 | (47 | ) | 333 | 766 | (36 | ) | 106 | 3,101 | (83 | ) | 439 | 9,473 | (354 | ) | 1,322 | 1,215 | (113 | ) | 167 | 10,688 | (467 | ) | 1,489 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-U.S. corporate | 1,562 | (22 | ) | 222 | 261 | (13 | ) | 36 | 1,823 | (35 | ) | 258 | 4,146 | (126 | ) | 574 | 697 | (44 | ) | 96 | 4,843 | (170 | ) | 670 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 656 | (9 | ) | 80 | 33 | (1 | ) | 28 | 689 | (10 | ) | 108 | 866 | (19 | ) | 133 | 321 | (9 | ) | 62 | 1,187 | (28 | ) | 195 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 837 | (25 | ) | 120 | 201 | (14 | ) | 30 | 1,038 | (39 | ) | 150 | 1,159 | (29 | ) | 168 | 590 | (55 | ) | 87 | 1,749 | (84 | ) | 255 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 736 | (4 | ) | 131 | 173 | (1 | ) | 40 | 909 | (5 | ) | 171 | 1,654 | (14 | ) | 301 | 194 | (3 | ) | 54 | 1,848 | (17 | ) | 355 | ||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal, fixed maturitysecurities | 7,544 | (141 | ) | 989 | 1,719 | (88 | ) | 281 | 9,263 | (229 | ) | 1,270 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 82 | (5 | ) | 142 | 111 | (9 | ) | 89 | 193 | (14 | ) | 231 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for fixed maturity securities inan unrealized loss position | $ | 18,743 | $ | (579 | ) | 2,716 | $ | 3,837 | $ | (274 | ) | 537 | $ | 22,580 | $ | (853 | ) | 3,253 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealizedloss position | $ | 7,626 | $ | (146 | ) | 1,131 | $ | 1,830 | $ | (97 | ) | 370 | $ | 9,456 | $ | (243 | ) | 1,501 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
% Below cost—fixed maturitysecurities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | $ | 7,544 | $ | (141 | ) | 989 | $ | 1,719 | $ | (88 | ) | 281 | $ | 9,263 | $ | (229 | ) | 1,270 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 7,544 | (141 | ) | 989 | 1,719 | (88 | ) | 281 | 9,263 | (229 | ) | 1,270 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
% Below cost—equity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
% Below cost: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | 79 | (4 | ) | 139 | 111 | (9 | ) | 89 | 190 | (13 | ) | 228 | $ | 18,743 | $ | (579 | ) | 2,714 | $ | 3,828 | $ | (270 | ) | 533 | $ | 22,571 | $ | (849 | ) | 3,247 | ||||||||||||||||||||||||||||||||||||||||||
20%-50% Below cost | 3 | (1 | ) | 3 | — | — | — | 3 | (1 | ) | 3 | — | — | 2 | 9 | (4 | ) | 4 | 9 | (4 | ) | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total equity securities | 82 | (5 | ) | 142 | 111 | (9 | ) | 89 | 193 | (14 | ) | 231 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealizedloss position | $ | 7,626 | $ | (146 | ) | 1,131 | $ | 1,830 | $ | (97 | ) | 370 | $ | 9,456 | $ | (243 | ) | 1,501 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for fixed maturity securities inan unrealized loss position | $ | 18,743 | $ | (579 | ) | 2,716 | $ | 3,837 | $ | (274 | ) | 537 | $ | 22,580 | $ | (853 | ) | 3,253 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment grade | $ | 7,437 | $ | (139 | ) | 984 | $ | 1,656 | $ | (90 | ) | 287 | $ | 9,093 | $ | (229 | ) | 1,271 | $ | 17,627 | $ | (535 | ) | 2,555 | $ | 3,704 | $ | (261 | ) | 508 | $ | 21,331 | $ | (796 | ) | 3,063 | ||||||||||||||||||||||||||||||||||||
Below investment grade | 189 | (7 | ) | 147 | 174 | (7 | ) | 83 | 363 | (14 | ) | 230 | 1,116 | (44 | ) | 161 | 133 | (13 | ) | 29 | 1,249 | (57 | ) | 190 | ||||||||||||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealizedloss position | $ | 7,626 | $ | (146 | ) | 1,131 | $ | 1,830 | $ | (97 | ) | 370 | $ | 9,456 | $ | (243 | ) | 1,501 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total for fixed maturity securities inan unrealized loss position | $ | 18,743 | $ | (579 | ) | 2,716 | $ | 3,837 | $ | (274 | ) | 537 | $ | 22,580 | $ | (853 | ) | 3,253 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of SeptemberJune 30, 2017:2018:
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 | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description of Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | $ | 468 | $ | (10 | ) | 69 | $ | 104 | $ | (5 | ) | 17 | $ | 572 | $ | (15 | ) | 86 | $ | 1,187 | $ | (46 | ) | 185 | $ | 214 | $ | (20 | ) | 35 | $ | 1,401 | $ | (66 | ) | 220 | ||||||||||||||||||||||||||||||||||||
Energy | 123 | (1 | ) | 22 | 146 | (9 | ) | 16 | 269 | (10 | ) | 38 | 639 | (19 | ) | 102 | 119 | (10 | ) | 12 | 758 | (29 | ) | 114 | ||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 542 | (7 | ) | 75 | 154 | (4 | ) | 21 | 696 | (11 | ) | 96 | 2,596 | (90 | ) | 366 | 243 | (18 | ) | 32 | 2,839 | (108 | ) | 398 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 325 | (7 | ) | 50 | 84 | (3 | ) | 12 | 409 | (10 | ) | 62 | 1,579 | (61 | ) | 194 | 188 | (19 | ) | 23 | 1,767 | (80 | ) | 217 | ||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 208 | (4 | ) | 30 | 127 | (7 | ) | 19 | 335 | (11 | ) | 49 | 1,111 | (42 | ) | 142 | 159 | (19 | ) | 21 | 1,270 | (61 | ) | 163 | ||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 55 | (1 | ) | 12 | 56 | (2 | ) | 8 | 111 | (3 | ) | 20 | 416 | (15 | ) | 61 | 55 | (5 | ) | 7 | 471 | (20 | ) | 68 | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 274 | (8 | ) | 31 | 8 | (1 | ) | 2 | 282 | (9 | ) | 33 | 717 | (32 | ) | 94 | 64 | (8 | ) | 11 | 781 | (40 | ) | 105 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 127 | (2 | ) | 18 | 70 | (4 | ) | 9 | 197 | (6 | ) | 27 | 668 | (24 | ) | 107 | 86 | (7 | ) | 11 | 754 | (31 | ) | 118 | ||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 190 | (5 | ) | 24 | 17 | (1 | ) | 2 | 207 | (6 | ) | 26 | 492 | (24 | ) | 67 | 73 | (7 | ) | 14 | 565 | (31 | ) | 81 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other | 23 | (2 | ) | 2 | — | — | — | 23 | (2 | ) | 2 | 68 | (1 | ) | 4 | 14 | — | 1 | 82 | (1 | ) | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Subtotal, U.S. corporatesecurities | 2,335 | (47 | ) | 333 | 766 | (36 | ) | 106 | 3,101 | (83 | ) | 439 | 9,473 | (354 | ) | 1,322 | 1,215 | (113 | ) | 167 | 10,688 | (467 | ) | 1,489 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Non-U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 227 | (4 | ) | 31 | 19 | (1 | ) | 2 | 246 | (5 | ) | 33 | 359 | (14 | ) | 48 | 81 | (8 | ) | 10 | 440 | (22 | ) | 58 | ||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 142 | (3 | ) | 21 | 69 | (4 | ) | 11 | 211 | (7 | ) | 32 | 346 | (12 | ) | 48 | 98 | (6 | ) | 12 | 444 | (18 | ) | 60 | ||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 324 | (3 | ) | 49 | 50 | (2 | ) | 9 | 374 | (5 | ) | 58 | 1,007 | (28 | ) | 143 | 150 | (8 | ) | 25 | 1,157 | (36 | ) | 168 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 131 | (2 | ) | 16 | 34 | (1 | ) | 4 | 165 | (3 | ) | 20 | 323 | (12 | ) | 37 | 57 | (6 | ) | 5 | 380 | (18 | ) | 42 | ||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 80 | (1 | ) | 17 | 12 | (1 | ) | 2 | 92 | (2 | ) | 19 | 466 | (13 | ) | 65 | 23 | (2 | ) | 4 | 489 | (15 | ) | 69 | ||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 67 | (1 | ) | 10 | 11 | (1 | ) | 2 | 78 | (2 | ) | 12 | 280 | (9 | ) | 41 | 34 | (3 | ) | 4 | 314 | (12 | ) | 45 | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 34 | (1 | ) | 6 | 34 | (1 | ) | 3 | 68 | (2 | ) | 9 | 227 | (6 | ) | 27 | 29 | (1 | ) | 4 | 256 | (7 | ) | 31 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 101 | (1 | ) | 15 | — | — | — | 101 | (1 | ) | 15 | 283 | (7 | ) | 36 | 28 | — | 7 | 311 | (7 | ) | 43 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 61 | (1 | ) | 13 | 32 | (2 | ) | 3 | 93 | (3 | ) | 16 | 206 | (6 | ) | 24 | 64 | (5 | ) | 8 | 270 | (11 | ) | 32 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other | 395 | (5 | ) | 44 | — | — | — | 395 | (5 | ) | 44 | 649 | (19 | ) | 105 | 133 | (5 | ) | 17 | 782 | (24 | ) | 122 | |||||||||||||||||||||||||||||||||||||||||||||||||
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Subtotal,non-U.S. corporatesecurities | 1,562 | (22 | ) | 222 | 261 | (13 | ) | 36 | 1,823 | (35 | ) | 258 | 4,146 | (126 | ) | 574 | 697 | (44 | ) | 96 | 4,843 | (170 | ) | 670 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total for corporate securities in anunrealized loss position | $ | 3,897 | $ | (69 | ) | 555 | $ | 1,027 | $ | (49 | ) | 142 | $ | 4,924 | $ | (118 | ) | 697 | $ | 13,619 | $ | (480 | ) | 1,896 | $ | 1,912 | $ | (157 | ) | 263 | $ | 15,531 | $ | (637 | ) | 2,159 | ||||||||||||||||||||||||||||||||||||
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As indicated in the tables above, the majority of theFor all securities in a continuousan unrealized loss position, for less than 12 months were investment gradewe expect to recover the amortized cost based on our estimate of the amount and less than 20% belowtiming of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost. These unrealized losses were primarily attributable to increase in interest rates, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 2% as of September 30, 2017.
Fixed Maturity Securities In A Continuous Unrealized Loss Position For 12 Months Or More
Of the $88 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “A” and approximately
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
92% of the unrealized losses were related to investment grade securities as of September 30, 2017. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 5% as of September 30, 2017. As of September 30, 2017, the company did not have any fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.
The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2016:2017:
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 | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description of Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agenciesand government-sponsoredenterprises | $ | 1,074 | $ | (50 | ) | 37 | $ | — | $ | — | — | $ | 1,074 | $ | (50 | ) | 37 | $ | 78 | $ | (1 | ) | 21 | $ | 94 | $ | (2 | ) | 7 | $ | 172 | $ | (3 | ) | 28 | |||||||||||||||||||||||||||||||||||||
State and political subdivisions | 644 | (32 | ) | 109 | 142 | (18 | ) | 12 | 786 | (50 | ) | 121 | 125 | (1 | ) | 35 | 327 | (21 | ) | 42 | 452 | (22 | ) | 77 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-U.S. government | 497 | (18 | ) | 51 | — | — | — | 497 | (18 | ) | 51 | 583 | (7 | ) | 26 | 239 | (13 | ) | 20 | 822 | (20 | ) | 46 | |||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate | 5,221 | (190 | ) | 711 | 662 | (49 | ) | 94 | 5,883 | (239 | ) | 805 | 1,871 | (26 | ) | 296 | 1,347 | (42 | ) | 190 | 3,218 | (68 | ) | 486 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-U.S. corporate | 2,257 | (66 | ) | 330 | 408 | (25 | ) | 57 | 2,665 | (91 | ) | 387 | 1,323 | (12 | ) | 217 | 548 | (21 | ) | 77 | 1,871 | (33 | ) | 294 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 725 | (11 | ) | 100 | 58 | (1 | ) | 35 | 783 | (12 | ) | 135 | 707 | (7 | ) | 81 | 130 | (4 | ) | 46 | 837 | �� | (11 | ) | 127 | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 1,091 | (55 | ) | 168 | 25 | (1 | ) | 9 | 1,116 | (56 | ) | 177 | 476 | (4 | ) | 69 | 646 | (33 | ) | 90 | 1,122 | (37 | ) | 159 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 1,069 | (13 | ) | 184 | 328 | (22 | ) | 68 | 1,397 | (35 | ) | 252 | 853 | (4 | ) | 160 | 230 | (2 | ) | 57 | 1,083 | (6 | ) | 217 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Subtotal, fixed maturitysecurities | 12,578 | (435 | ) | 1,690 | 1,623 | (116 | ) | 275 | 14,201 | (551 | ) | 1,965 | 6,016 | (62 | ) | 905 | 3,561 | (138 | ) | 529 | 9,577 | (200 | ) | 1,434 | ||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 119 | (9 | ) | 182 | 114 | (18 | ) | 47 | 233 | (27 | ) | 229 | 74 | (3 | ) | 134 | 100 | (5 | ) | 58 | 174 | (8 | ) | 192 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total for securities in an unrealizedloss position | $ | 12,697 | $ | (444 | ) | 1,872 | $ | 1,737 | $ | (134 | ) | 322 | $ | 14,434 | $ | (578 | ) | 2,194 | $ | 6,090 | $ | (65 | ) | 1,039 | $ | 3,661 | $ | (143 | ) | 587 | $ | 9,751 | $ | (208 | ) | 1,626 | ||||||||||||||||||||||||||||||||||||
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% Below cost—fixed maturitysecurities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | $ | 12,578 | $ | (435 | ) | 1,690 | $ | 1,543 | $ | (90 | ) | 267 | $ | 14,121 | $ | (525 | ) | 1,957 | $ | 6,016 | $ | (62 | ) | 905 | $ | 3,555 | $ | (136 | ) | 526 | $ | 9,571 | $ | (198 | ) | 1,431 | ||||||||||||||||||||||||||||||||||||
20%-50% Below cost | — | — | — | 80 | (26 | ) | 8 | 80 | (26 | ) | 8 | — | — | — | 6 | (2 | ) | 3 | 6 | (2 | ) | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Total fixed maturity securities | 12,578 | (435 | ) | 1,690 | 1,623 | (116 | ) | 275 | 14,201 | (551 | ) | 1,965 | 6,016 | (62 | ) | 905 | 3,561 | (138 | ) | 529 | 9,577 | (200 | ) | 1,434 | ||||||||||||||||||||||||||||||||||||||||||||||||
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% Below cost—equity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | 118 | (8 | ) | 167 | 101 | (14 | ) | 38 | 219 | (22 | ) | 205 | 74 | (3 | ) | 134 | 100 | (5 | ) | 58 | 174 | (8 | ) | 192 | ||||||||||||||||||||||||||||||||||||||||||||||||
20%-50% Below cost | 1 | (1 | ) | 15 | 13 | (4 | ) | 9 | 14 | (5 | ) | 24 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total equity securities | 119 | (9 | ) | 182 | 114 | (18 | ) | 47 | 233 | (27 | ) | 229 | 74 | (3 | ) | 134 | 100 | (5 | ) | 58 | 174 | (8 | ) | 192 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total for securities in an unrealizedloss position | $ | 12,697 | $ | (444 | ) | 1,872 | $ | 1,737 | $ | (134 | ) | 322 | $ | 14,434 | $ | (578 | ) | 2,194 | $ | 6,090 | $ | (65 | ) | 1,039 | $ | 3,661 | $ | (143 | ) | 587 | $ | 9,751 | $ | (208 | ) | 1,626 | ||||||||||||||||||||||||||||||||||||
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Investment grade | $ | 12,339 | $ | (432 | ) | 1,657 | $ | 1,354 | $ | (108 | ) | 250 | $ | 13,693 | $ | (540 | ) | 1,907 | $ | 5,867 | $ | (55 | ) | 898 | $ | 3,488 | $ | (135 | ) | 528 | $ | 9,355 | $ | (190 | ) | 1,426 | ||||||||||||||||||||||||||||||||||||
Below investment grade | 358 | (12 | ) | 215 | 383 | (26 | ) | 72 | 741 | (38 | ) | 287 | 223 | (10 | ) | 141 | 173 | (8 | ) | 59 | 396 | (18 | ) | 200 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total for securities in an unrealizedloss position | $ | 12,697 | $ | (444 | ) | 1,872 | $ | 1,737 | $ | (134 | ) | 322 | $ | 14,434 | $ | (578 | ) | 2,194 | $ | 6,090 | $ | (65 | ) | 1,039 | $ | 3,661 | $ | (143 | ) | 587 | $ | 9,751 | $ | (208 | ) | 1,626 | ||||||||||||||||||||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of December 31, 2016:2017:
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 | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | Fair value | Gross unrealized losses | Number of securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description of Securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | $ | 855 | $ | (39 | ) | 130 | $ | 21 | $ | (2 | ) | 5 | $ | 876 | $ | (41 | ) | 135 | $ | 181 | $ | (2 | ) | 33 | $ | 219 | $ | (7 | ) | 36 | $ | 400 | $ | (9 | ) | 69 | ||||||||||||||||||||||||||||||||||||
Energy | 190 | (5 | ) | 30 | 276 | (19 | ) | 38 | 466 | (24 | ) | 68 | 106 | (1 | ) | 22 | 140 | (7 | ) | 15 | 246 | (8 | ) | 37 | ||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 1,438 | (38 | ) | 177 | 113 | (8 | ) | 15 | 1,551 | (46 | ) | 192 | 626 | (6 | ) | 91 | 222 | (6 | ) | 30 | 848 | (12 | ) | 121 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 921 | (34 | ) | 117 | — | — | — | 921 | (34 | ) | 117 | 299 | (7 | ) | 46 | 221 | (6 | ) | 31 | 520 | (13 | ) | 77 | |||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 507 | (22 | ) | 70 | 126 | (10 | ) | 17 | 633 | (32 | ) | 87 | 217 | (4 | ) | 32 | 210 | (8 | ) | 29 | 427 | (12 | ) | 61 | ||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 226 | (7 | ) | 38 | 77 | (7 | ) | 10 | 303 | (14 | ) | 48 | — | — | — | 62 | (1 | ) | 9 | 62 | (1 | ) | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 322 | (12 | ) | 50 | 6 | (1 | ) | 1 | 328 | (13 | ) | 51 | 176 | (2 | ) | 25 | 81 | (3 | ) | 14 | 257 | (5 | ) | 39 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 431 | (16 | ) | 56 | 26 | (1 | ) | 6 | 457 | (17 | ) | 62 | 137 | (2 | ) | 24 | 95 | (2 | ) | 13 | 232 | (4 | ) | 37 | ||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 302 | (16 | ) | 41 | 17 | (1 | ) | 2 | 319 | (17 | ) | 43 | 117 | (1 | ) | 21 | 97 | (2 | ) | 13 | 214 | (3 | ) | 34 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other | 29 | (1 | ) | 2 | — | — | — | 29 | (1 | ) | 2 | 12 | (1 | ) | 2 | — | — | — | 12 | (1 | ) | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Subtotal, U.S. corporatesecurities | 5,221 | (190 | ) | 711 | 662 | (49 | ) | 94 | 5,883 | (239 | ) | 805 | 1,871 | (26 | ) | 296 | 1,347 | (42 | ) | 190 | 3,218 | (68 | ) | 486 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Utilities | 240 | (10 | ) | 32 | 14 | (1 | ) | 1 | 254 | (11 | ) | 33 | 113 | (1 | ) | 23 | 72 | (3 | ) | 8 | 185 | (4 | ) | 31 | ||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 105 | (3 | ) | 18 | 91 | (9 | ) | 16 | 196 | (12 | ) | 34 | 118 | (2 | ) | 19 | 74 | (3 | ) | 12 | 192 | (5 | ) | 31 | ||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 474 | (8 | ) | 79 | 71 | (1 | ) | 16 | 545 | (9 | ) | 95 | 347 | (3 | ) | 56 | 117 | (3 | ) | 19 | 464 | (6 | ) | 75 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 308 | (14 | ) | 30 | — | — | — | 308 | (14 | ) | 30 | 69 | (1 | ) | 11 | 60 | (3 | ) | 6 | 129 | (4 | ) | 17 | |||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 232 | (9 | ) | 34 | 28 | (1 | ) | 2 | 260 | (10 | ) | 36 | 107 | (1 | ) | 18 | 30 | (1 | ) | 6 | 137 | (2 | ) | 24 | ||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 165 | (5 | ) | 21 | 91 | (4 | ) | 10 | 256 | (9 | ) | 31 | 52 | — | 9 | 38 | (2 | ) | 5 | 90 | (2 | ) | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 104 | (2 | ) | 14 | 28 | (2 | ) | 2 | 132 | (4 | ) | 16 | 54 | — | 11 | 46 | (2 | ) | 3 | 100 | (2 | ) | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 90 | (2 | ) | 17 | — | — | — | 90 | (2 | ) | 17 | 131 | (1 | ) | 21 | — | — | — | 131 | (1 | ) | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 106 | (5 | ) | 16 | 25 | (2 | ) | 2 | 131 | (7 | ) | 18 | 47 | (1 | ) | 7 | 64 | (2 | ) | 8 | 111 | (3 | ) | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other | 433 | (8 | ) | 69 | 60 | (5 | ) | 8 | 493 | (13 | ) | 77 | 285 | (2 | ) | 42 | 47 | (2 | ) | 10 | 332 | (4 | ) | 52 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Subtotal,non-U.S. corporatesecurities | 2,257 | (66 | ) | 330 | 408 | (25 | ) | 57 | 2,665 | (91 | ) | 387 | 1,323 | (12 | ) | 217 | 548 | (21 | ) | 77 | 1,871 | (33 | ) | 294 | ||||||||||||||||||||||||||||||||||||||||||||||||
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Total for corporate securities in anunrealized loss position | $ | 7,478 | $ | (256 | ) | 1,041 | $ | 1,070 | $ | (74 | ) | 151 | $ | 8,548 | $ | (330 | ) | 1,192 | $ | 3,194 | $ | (38 | ) | 513 | $ | 1,895 | $ | (63 | ) | 267 | $ | 5,089 | $ | (101 | ) | 780 | ||||||||||||||||||||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The scheduled maturity distribution of fixed maturity securities as of SeptemberJune 30, 20172018 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 | $ | 1,943 | $ | 1,966 | $ | 1,692 | $ | 1,701 | ||||||||
Due after one year through five years | 10,901 | 11,333 | 11,006 | 11,149 | ||||||||||||
Due after five years through ten years | 12,363 | 12,933 | 12,517 | 12,601 | ||||||||||||
Due after ten years | 22,208 | 25,629 | 22,578 | 24,708 | ||||||||||||
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|
|
| |||||||||||||
Subtotal | 47,415 | 51,861 | 47,793 | 50,159 | ||||||||||||
Residential mortgage-backed | 3,950 | 4,209 | 3,426 | 3,567 | ||||||||||||
Commercial mortgage-backed | 3,346 | 3,414 | 3,387 | 3,349 | ||||||||||||
Other asset-backed | 3,052 | 3,068 | 2,966 | 2,957 | ||||||||||||
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|
|
| |||||||||||||
Total | $ | 57,763 | $ | 62,552 | $ | 57,572 | $ | 60,032 | ||||||||
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|
|
As of SeptemberJune 30, 2017, $12,426 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.
As of September 30, 2017,2018, securities issued by finance and insurance, utilities andconsumer—non-cyclical industry groups represented approximately 23%22%, 15% and 13%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.
As of SeptemberJune 30, 2017,2018, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.
(e) Commercial Mortgage Loans
Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of principal payments, amortization and allowance for loan losses.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:
September 30, 2017 | December 31, 2016 | |||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||||||
Property type: | ||||||||||||||||
Retail | $ | 2,220 | 35 | % | $ | 2,178 | 36 | % | ||||||||
Industrial | 1,608 | 26 | 1,533 | 25 | ||||||||||||
Office | 1,465 | 23 | 1,430 | 23 | ||||||||||||
Apartments | 489 | 8 | 455 | 7 | ||||||||||||
Mixed use | 222 | 4 | 245 | 4 | ||||||||||||
Other | 277 | 4 | 284 | 5 | ||||||||||||
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| |||||||||
Subtotal | 6,281 | 100 | % | 6,125 | 100 | % | ||||||||||
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| |||||||||||||
Unamortized balance of loan origination fees and costs | (3 | ) | (2 | ) | ||||||||||||
Allowance for losses | (10 | ) | (12 | ) | ||||||||||||
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Total | $ | 6,268 | $ | 6,111 | ||||||||||||
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September 30, 2017 | December 31, 2016 | |||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||||||
Geographic region: | ||||||||||||||||
South Atlantic | $ | 1,620 | 26 | % | $ | 1,546 | 25 | % | ||||||||
Pacific | 1,600 | 26 | 1,567 | 27 | ||||||||||||
Middle Atlantic | 904 | 14 | 915 | 15 | ||||||||||||
Mountain | 556 | 9 | 554 | 9 | ||||||||||||
West North Central | 441 | 7 | 435 | 7 | ||||||||||||
East North Central | 386 | 6 | 388 | 6 | ||||||||||||
West South Central | 327 | 5 | 311 | 5 | ||||||||||||
New England | 237 | 4 | 206 | 3 | ||||||||||||
East South Central | 210 | 3 | 203 | 3 | ||||||||||||
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| |||||||||
Subtotal | 6,281 | 100 | % | 6,125 | 100 | % | ||||||||||
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| |||||||||||||
Unamortized balance of loan origination fees and costs | (3 | ) | (2 | ) | ||||||||||||
Allowance for losses | (10 | ) | (12 | ) | ||||||||||||
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| |||||||||||||
Total | $ | 6,268 | $ | 6,111 | ||||||||||||
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June 30, 2018 | December 31, 2017 | |||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||||||
Property type: | ||||||||||||||||
Retail | $ | 2,375 | 37 | % | $ | 2,239 | 35 | % | ||||||||
Industrial | 1,644 | 25 | 1,628 | 26 | ||||||||||||
Office | 1,482 | 23 | 1,510 | 24 | ||||||||||||
Apartments | 474 | 7 | 478 | 8 | ||||||||||||
Mixed use | 237 | 4 | 223 | 3 | ||||||||||||
Other | 280 | 4 | 275 | 4 | ||||||||||||
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| |||||||||
Subtotal | 6,492 | 100 | % | 6,353 | 100 | % | ||||||||||
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| |||||||||
Unamortized balance of loan origination fees and costs | (3 | ) | (3 | ) | ||||||||||||
Allowance for losses | (9 | ) | (9 | ) | ||||||||||||
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| |||||||||||||
Total | $ | 6,480 | $ | 6,341 | ||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2018 | December 31, 2017 | |||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||||||
Geographic region: | ||||||||||||||||
South Atlantic | $ | 1,669 | 26 | % | $ | 1,625 | 26 | % | ||||||||
Pacific | 1,652 | 25 | 1,622 | 26 | ||||||||||||
Middle Atlantic | 926 | 14 | 927 | 14 | ||||||||||||
Mountain | 617 | 10 | 556 | 9 | ||||||||||||
West North Central | 453 | 7 | 446 | 7 | ||||||||||||
East North Central | 399 | 6 | 394 | 6 | ||||||||||||
West South Central | 360 | 6 | 336 | 5 | ||||||||||||
East South Central | 214 | 3 | 208 | 3 | ||||||||||||
New England | 202 | 3 | 239 | 4 | ||||||||||||
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Subtotal | 6,492 | 100 | % | 6,353 | 100 | % | ||||||||||
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| |||||||||
Unamortized balance of loan origination fees and costs | (3 | ) | (3 | ) | ||||||||||||
Allowance for losses | (9 | ) | (9 | ) | ||||||||||||
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Total | $ | 6,480 | $ | 6,341 | ||||||||||||
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The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:
September 30, 2017 | June 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||
(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 | $ | — | $ | — | $ | — | $ | — | $ | 2,220 | $ | 2,220 | $ | — | $ | — | $ | — | $ | — | $ | 2,375 | $ | 2,375 | ||||||||||||||||||||||||
Industrial | — | — | — | — | 1,608 | 1,608 | — | — | — | — | 1,644 | 1,644 | ||||||||||||||||||||||||||||||||||||
Office | 6 | — | — | 6 | 1,459 | 1,465 | — | — | 6 | 6 | 1,476 | 1,482 | ||||||||||||||||||||||||||||||||||||
Apartments | — | — | — | — | 489 | 489 | — | — | — | — | 474 | 474 | ||||||||||||||||||||||||||||||||||||
Mixed use | — | — | — | — | 222 | 222 | — | — | — | — | 237 | 237 | ||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | 277 | 277 | — | — | — | — | 280 | 280 | ||||||||||||||||||||||||||||||||||||
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Total recorded investment | $ | 6 | $ | — | $ | — | $ | 6 | $ | 6,275 | $ | 6,281 | $ | — | $ | — | $ | 6 | $ | 6 | $ | 6,486 | $ | 6,492 | ||||||||||||||||||||||||
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% of total commercial mortgage loans | — | % | — | % | — | % | — | % | 100 | % | 100 | % | — | % | — | % | — | % | — | % | 100 | % | 100 | % | ||||||||||||||||||||||||
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December 31, 2016 | December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 31 - 60 days past due | 61 - 90 days past due | Greater than 90 days past due | Total past due | Current | Total | 31 - 60 days past due | 61 - 90 days past due | Greater than 90 days past due | Total past due | Current | Total | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | — | $ | — | $ | — | $ | — | $ | 2,178 | $ | 2,178 | $ | 5 | $ | — | $ | — | $ | 5 | $ | 2,234 | $ | 2,239 | ||||||||||||||||||||||||
Industrial | 1 | — | 12 | 13 | 1,520 | 1,533 | — | — | — | — | 1,628 | 1,628 | ||||||||||||||||||||||||||||||||||||
Office | — | — | — | — | 1,430 | 1,430 | — | — | 6 | 6 | 1,504 | 1,510 | ||||||||||||||||||||||||||||||||||||
Apartments | — | — | — | — | 455 | 455 | — | — | — | — | 478 | 478 | ||||||||||||||||||||||||||||||||||||
Mixed use | — | — | — | — | 245 | 245 | — | — | — | — | 223 | 223 | ||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | 284 | 284 | — | — | — | — | 275 | 275 | ||||||||||||||||||||||||||||||||||||
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Total recorded investment | $ | 1 | $ | — | $ | 12 | $ | 13 | $ | 6,112 | $ | 6,125 | $ | 5 | $ | — | $ | 6 | $ | 11 | $ | 6,342 | $ | 6,353 | ||||||||||||||||||||||||
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% of total commercial mortgage loans | — | % | — | % | — | % | — | % | 100 | % | 100 | % | — | % | — | % | — | % | — | % | 100 | % | 100 | % | ||||||||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. As of September 30, 2017, we had one commercial mortgage loan past due for less than 90 days onnon-accrual status due to the borrower filing for bankruptcy in September 2017. We also did not have any commercial mortgage loans that were past due for less than 90 days onnon-accrual status as of June 30, 2018 and December 31, 2016.2017.
We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of SeptemberJune 30, 2017, none of2018, our commercial mortgage loans were greater than 90 days past due.due included an impaired loan. This loan had an appraised value in excess of the recorded investment and the current recorded investment of this loan is expected to be recoverable.
During the ninesix months ended SeptemberJune 30, 20172018 and the year ended December 31, 2016,2017, we modified or extended 7two and 16ten commercial mortgage loans, respectively, with a total carrying value of $19$12 million and $85$27 million, respectively. All of these modifications or extensions were based on current market interest rates and did not result in any forgiveness in the outstanding principal amount owed by the borrower, except during the year ended December 31, 2016, one loan with a carrying value $1 million at the time of modification was considered a troubled debt restructuring. This loan was sold in the fourth quarter of 2016.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
borrower.
The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans as of or for the periods indicated:
Three months ended | Six months ended | |||||||||||||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 10 | $ | 13 | $ | 12 | $ | 15 | $ | 9 | $ | 11 | $ | 9 | $ | 12 | ||||||||||||||||
Charge-offs | — | — | — | (4 | ) | — | — | — | — | |||||||||||||||||||||||
Recoveries | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Provision | — | — | (2 | ) | 2 | — | (1 | ) | — | (2 | ) | |||||||||||||||||||||
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Ending balance | $ | 10 | $ | 13 | $ | 10 | $ | 13 | $ | 9 | $ | 10 | $ | 9 | $ | 10 | ||||||||||||||||
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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 | $ | 10 | $ | 13 | $ | 10 | $ | 13 | $ | 9 | $ | 10 | $ | 9 | $ | 10 | ||||||||||||||||
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Recorded investment: | ||||||||||||||||||||||||||||||||
Ending balance | $ | 6,281 | $ | 6,032 | $ | 6,281 | $ | 6,032 | $ | 6,492 | $ | 6,250 | $ | 6,492 | $ | 6,250 | ||||||||||||||||
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Ending balance of individually impaired loans | $ | — | $ | 17 | $ | — | $ | 17 | $ | 6 | $ | — | $ | 6 | $ | — | ||||||||||||||||
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Ending balance of loans not individually impaired that were evaluated collectively for impairment | $ | 6,281 | $ | 6,015 | $ | 6,281 | $ | 6,015 | $ | 6,486 | $ | 6,250 | $ | 6,486 | $ | 6,250 | ||||||||||||||||
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As of SeptemberJune 30, 2018 and December 31, 2017, we had one individually impaired loan within the office property type with a recorded investment and unpaid principal balance of $6 million. As of June 30, 2017, we had no individually impaired commercial mortgage loans. As of September 30, 2016, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $7 million, charge-offs of $2 million and an average recorded investment of $3 million. As of December 31, 2016, we had one individually impaired loan within the industrial property type with a recorded investment of $12 million, an unpaid principal balance of $15 million and charge-offs of $3 million.
In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both theloan-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 averageloan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lowerloan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annualone-time events such as capital expenditures, prepaid or late real estate tax payments ornon-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.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth theloan-to-value of commercial mortgage loans by property type as of the dates indicated:
September 30, 2017 | June 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% (1) | Total | 0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% | Total | ||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | 933 | $ | 499 | $ | 788 | $ | — | $ | — | $ | 2,220 | $ | 848 | $ | 505 | $ | 1,022 | $ | — | $ | — | $ | 2,375 | ||||||||||||||||||||||||
Industrial | 747 | 356 | 503 | 2 | — | 1,608 | 676 | 355 | 613 | — | — | 1,644 | ||||||||||||||||||||||||||||||||||||
Office | 583 | 393 | 473 | 14 | 2 | 1,465 | 438 | 447 | 589 | 8 | — | 1,482 | ||||||||||||||||||||||||||||||||||||
Apartments | 236 | 105 | 143 | 5 | — | 489 | 201 | 122 | 146 | 5 | — | 474 | ||||||||||||||||||||||||||||||||||||
Mixed use | 101 | 59 | 62 | — | — | 222 | 101 | 54 | 82 | — | — | 237 | ||||||||||||||||||||||||||||||||||||
Other | 68 | 29 | 180 | — | — | 277 | 49 | 42 | 189 | — | — | 280 | ||||||||||||||||||||||||||||||||||||
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Total recorded investment | $ | 2,668 | $ | 1,441 | $ | 2,149 | $ | 21 | $ | 2 | $ | 6,281 | $ | 2,313 | $ | 1,525 | $ | 2,641 | $ | 13 | $ | — | $ | 6,492 | ||||||||||||||||||||||||
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% of total | 43 | % | 23 | % | 34 | % | — | % | — | % | 100 | % | 36 | % | 23 | % | 41 | % | — | % | — | % | 100 | % | ||||||||||||||||||||||||
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Weighted-average debt service coverage ratio | 2.65 | 1.85 | 1.60 | 0.63 | 1.04 | 2.10 | 2.30 | 1.85 | 1.61 | 1.07 | — | 1.91 | ||||||||||||||||||||||||||||||||||||
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December 31, 2017 | ||||||||||||||||||||||||
(Amounts in millions) | 0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% (1) | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 919 | $ | 500 | $ | 820 | $ | — | $ | — | $ | 2,239 | ||||||||||||
Industrial | 731 | 363 | 532 | 2 | — | 1,628 | ||||||||||||||||||
Office | 575 | 386 | 534 | 13 | 2 | 1,510 | ||||||||||||||||||
Apartments | 226 | 101 | 146 | 5 | — | 478 | ||||||||||||||||||
Mixed use | 99 | 59 | 65 | — | — | 223 | ||||||||||||||||||
Other | 68 | 28 | 179 | — | — | 275 | ||||||||||||||||||
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Total recorded investment | $ | 2,618 | $ | 1,437 | $ | 2,276 | $ | 20 | $ | 2 | $ | 6,353 | ||||||||||||
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% of total | 41 | % | 23 | % | 36 | % | — | % | — | % | 100 | % | ||||||||||||
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Weighted-average debt service coverage ratio | 2.65 | 1.85 | 1.62 | 0.62 | 1.04 | 2.09 | ||||||||||||||||||
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(1) | Included a loan with a recorded investment of $2 million in good standing, where the borrower continued to make timely payments, with aloan-to-value of |
December 31, 2016 | ||||||||||||||||||||||||
(Amounts in millions) | 0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% (1) | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 743 | $ | 511 | $ | 913 | $ | 11 | $ | — | $ | 2,178 | ||||||||||||
Industrial | 605 | 430 | 484 | 14 | — | 1,533 | ||||||||||||||||||
Office | 431 | 310 | 656 | 26 | 7 | 1,430 | ||||||||||||||||||
Apartments | 188 | 89 | 173 | 5 | — | 455 | ||||||||||||||||||
Mixed use | 67 | 87 | 91 | — | — | 245 | ||||||||||||||||||
Other | 60 | 30 | 194 | — | — | 284 | ||||||||||||||||||
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Total recorded investment | $ | 2,094 | $ | 1,457 | $ | 2,511 | $ | 56 | $ | 7 | $ | 6,125 | ||||||||||||
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% of total | 34 | % | 24 | % | 41 | % | 1 | % | — | % | 100 | % | ||||||||||||
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Weighted-average debt service coverage ratio | 2.20 | 1.88 | 1.61 | 0.80 | (0.07 | ) | 1.87 | |||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:
September 30, 2017 | ||||||||||||||||||||||||
(Amounts in millions) | Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 43 | $ | 242 | $ | 298 | $ | 999 | $ | 638 | $ | 2,220 | ||||||||||||
Industrial | 24 | 63 | 180 | 679 | 662 | 1,608 | ||||||||||||||||||
Office | 72 | 67 | 151 | 521 | 654 | 1,465 | ||||||||||||||||||
Apartments | — | 20 | 75 | 193 | 201 | 489 | ||||||||||||||||||
Mixed use | 2 | 4 | 26 | 86 | 104 | 222 | ||||||||||||||||||
Other | 1 | 149 | 15 | 72 | 40 | 277 | ||||||||||||||||||
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Total recorded investment | $ | 142 | $ | 545 | $ | 745 | $ | 2,550 | $ | 2,299 | $ | 6,281 | ||||||||||||
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% of total | 2 | % | 9 | % | 12 | % | 40 | % | 37 | % | 100 | % | ||||||||||||
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Weighted-averageloan-to-value | 57 | % | 60 | % | 58 | % | 57 | % | 41 | % | 52 | % | ||||||||||||
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December 31, 2016 | June 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||
(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 | $ | 67 | $ | 204 | $ | 425 | $ | 899 | $ | 583 | $ | 2,178 | $ | 41 | $ | 216 | $ | 406 | $ | 1,137 | $ | 575 | $ | 2,375 | ||||||||||||||||||||||||
Industrial | 71 | 113 | 236 | 599 | 514 | 1,533 | 19 | 66 | 208 | 751 | 600 | 1,644 | ||||||||||||||||||||||||||||||||||||
Office | 91 | 117 | 172 | 609 | 441 | 1,430 | 34 | 70 | 178 | 678 | 522 | 1,482 | ||||||||||||||||||||||||||||||||||||
Apartments | 19 | 22 | 44 | 217 | 153 | 455 | 12 | 18 | 79 | 186 | 179 | 474 | ||||||||||||||||||||||||||||||||||||
Mixed use | 2 | 9 | 19 | 128 | 87 | 245 | 5 | 4 | 38 | 86 | 104 | 237 | ||||||||||||||||||||||||||||||||||||
Other | 1 | 148 | 60 | 55 | 20 | 284 | 1 | 147 | 23 | 87 | 22 | 280 | ||||||||||||||||||||||||||||||||||||
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Total recorded investment | $ | 251 | $ | 613 | $ | 956 | $ | 2,507 | $ | 1,798 | $ | 6,125 | $ | 112 | $ | 521 | $ | 932 | $ | 2,925 | $ | 2,002 | $ | 6,492 | ||||||||||||||||||||||||
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% of total | 4 | % | 10 | % | 16 | % | 41 | % | 29 | % | 100 | % | 2 | % | 8 | % | 14 | % | 45 | % | 31 | % | 100 | % | ||||||||||||||||||||||||
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Weighted-averageloan-to-value | 61 | % | 60 | % | 59 | % | 58 | % | 45 | % | 55 | % | 54 | % | 60 | % | 59 | % | 59 | % | 44 | % | 54 | % | ||||||||||||||||||||||||
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December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Less than 1.00 | 1.00 - 1.25 | 1.26 - 1.50 | 1.51 - 2.00 | Greater than 2.00 | Total | ||||||||||||||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Retail | $ | 43 | $ | 235 | $ | 301 | $ | 1,020 | $ | 640 | $ | 2,239 | ||||||||||||||||||||||||||||||||||||
Industrial | 23 | 61 | 174 | 700 | 670 | 1,628 | ||||||||||||||||||||||||||||||||||||||||||
Office | 51 | 61 | 157 | 569 | 672 | 1,510 | ||||||||||||||||||||||||||||||||||||||||||
Apartments | — | 17 | 77 | 191 | 193 | 478 | ||||||||||||||||||||||||||||||||||||||||||
Mixed use | 2 | 4 | 26 | 86 | 105 | 223 | ||||||||||||||||||||||||||||||||||||||||||
Other | 1 | 149 | 14 | 71 | 40 | 275 | ||||||||||||||||||||||||||||||||||||||||||
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Total recorded investment | $ | 120 | $ | 527 | $ | 749 | $ | 2,637 | $ | 2,320 | $ | 6,353 | ||||||||||||||||||||||||||||||||||||
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% of total | 2 | % | 8 | % | 12 | % | 42 | % | 36 | % | 100 | % | ||||||||||||||||||||||||||||||||||||
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Weighted-averageloan-to-value | 55 | % | 60 | % | 58 | % | 58 | % | 42 | % | 52 | % | ||||||||||||||||||||||||||||||||||||
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As of SeptemberJune 30, 20172018 and December 31, 2016,2017, we did not have any floating rate commercial mortgage loans.
(f) Restricted Commercial Mortgage Loans Related To Securitization Entities
We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to securitization entities.
(g) Restricted Other Invested Assets Related To Securitization Entities
We previously had consolidated securitization entities that held certain investments that were recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities held certain investments as trading securities whereby the changes in fair value were recorded in current period
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
income (loss). The trading securities comprised asset-backed securities, including highly rated bonds that were primarily backed by credit card receivables. In 2017, these trading securities were sold as we repositioned these assets in connection with the maturity of the associated liabilities.
(h) Limited Partnerships or Similar Entities
Limited partnerships are accounted for at fair value when our partnership interest is considered minor (generally less than 3% ownership in the limited partnerships) and we exercise no influence over operating and financial policies. If our ownership percentage exceeds that threshold, limited partnerships are accounted for using the equity method of accounting. In applying either method, we use financial information provided by the investee generally on aone-to-three month lag.
Investments in partnerships or similar entities are generally considered VIEs when the equity group lacks sufficient financial control. Generally, these investments are limited partner ornon-managing member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of SeptemberJune 30, 20172018 and
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2016,2017, the total carrying value of these investments was $208$295 million and $178$222 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.
(5) Derivative Instruments
Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
The following table sets forth our positions in derivative instruments as of the dates indicated:
Derivative assets | Derivative liabilities | Derivative assets | Derivative liabilities | |||||||||||||||||||||||||||||||||||||||
Fair value | Fair value | Fair value | Fair value | |||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Balance sheet classification | September 30, 2017 (5) | December 31, 2016 | Balance sheet classification | September 30, 2017 (5) | December 31, 2016 | Balancesheet classification | June 30, 2018 | December 31, 2017 | Balancesheet | June 30, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||||
Derivatives designated ashedges | ||||||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Other invested assets | $ | 70 | $ | 237 | Other liabilities | $ | 39 | $ | 203 | Other invested assets | $ | 49 | $ | 74 | Other liabilities | $ | 71 | $ | 25 | ||||||||||||||||||||||
Foreign currency swaps | Other invested assets | 2 | 4 | Other liabilities | — | — | Other invested assets | 2 | 1 | Other liabilities | 1 | — | ||||||||||||||||||||||||||||||
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Total cash flow hedges | 72 | 241 | 39 | 203 | 51 | 75 | 72 | 25 | ||||||||||||||||||||||||||||||||||
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Total derivativesdesignated as hedges | 72 | 241 | 39 | 203 | 51 | 75 | 72 | 25 | ||||||||||||||||||||||||||||||||||
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Derivatives not designated ashedges | ||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Other invested assets | — | 359 | Other liabilities | — | 146 | ||||||||||||||||||||||||||||||||||||
Interest rate caps and floors | Other invested assets | 1 | — | Other liabilities | — | — | ||||||||||||||||||||||||||||||||||||
Foreign currency swaps | Other invested assets | 10 | — | Other liabilities | — | 5 | Other invested assets | 1 | 11 | Other liabilities | 8 | — | ||||||||||||||||||||||||||||||
Credit default swaps related tosecuritization entities | Restricted other invested assets | — | — | Other liabilities | — | 1 | ||||||||||||||||||||||||||||||||||||
Equity index options | Other invested assets | 81 | 72 | Other liabilities | — | — | Other invested assets | 70 | 80 | Other liabilities | — | — | ||||||||||||||||||||||||||||||
Financial futures | Other invested assets | — | — | Other liabilities | — | — | Other invested assets | — | — | Other liabilities | — | — | ||||||||||||||||||||||||||||||
Equity return swaps | Other invested assets | — | 1 | Other liabilities | 2 | 1 | Other invested assets | 1 | — | Other liabilities | — | 2 | ||||||||||||||||||||||||||||||
Other foreign currencycontracts | Other invested assets | 98 | 35 | Other liabilities | 23 | 27 | Other invested assets | 106 | 110 | Other liabilities | 23 | 20 | ||||||||||||||||||||||||||||||
GMWB embeddedderivatives | Reinsurance recoverable(1) | 14 | 16 | | Policyholder account balances(2) |
| 257 | 303 | Reinsurancerecoverable(1) | 12 | 14 | Policyholderaccount balances(2) | 235 | 250 | ||||||||||||||||||||||||||||
Fixed index annuity embeddedderivatives | Other assets | — | — | | Policyholder account balances(3) |
| 394 | 344 | Other assets | — | — | Policyholderaccount balances(3) | 420 | 419 | ||||||||||||||||||||||||||||
Indexed universal lifeembedded derivatives | Reinsurance recoverable | — | — | | Policyholder account balances(4) |
| 14 | 11 | Reinsurancerecoverable | — | — | Policyholderaccount balances(4) | 13 | 14 | ||||||||||||||||||||||||||||
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Total derivatives notdesignated as hedges | 203 | 483 | 690 | 838 | 191 | 215 | 699 | 705 | ||||||||||||||||||||||||||||||||||
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Total derivatives | $ | 275 | $ | 724 | $ | 729 | $ | 1,041 | $ | 242 | $ | 290 | $ | 771 | $ | 730 | ||||||||||||||||||||||||||
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(1) | Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities. |
(2) | Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(3) | Represents the embedded derivatives associated with our fixed index annuity liabilities. |
(4) | Represents the embedded derivatives associated with our indexed universal life liabilities. |
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 retainedreceived or provided under these agreements.
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB, fixed index annuity embedded derivatives and indexed universal life embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
(Notional in millions) | Measurement | December 31, 2016 | Additions | Maturities/ terminations | September 30, 2017 | |||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||
Interest rate swaps | Notional | $ | 11,570 | $ | — | $ | (306 | ) | $ | 11,264 | ||||||||||
Foreign currency swaps | Notional | 22 | — | — | 22 | |||||||||||||||
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Total cash flow hedges | 11,592 | — | (306 | ) | 11,286 | |||||||||||||||
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Total derivatives designated as hedges | 11,592 | — | (306 | ) | 11,286 | |||||||||||||||
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Derivatives not designated as hedges | ||||||||||||||||||||
Interest rate swaps | Notional | 4,679 | — | — | 4,679 | |||||||||||||||
Foreign currency swaps | Notional | 201 | 95 | (14 | ) | 282 | ||||||||||||||
Credit default swaps | Notional | 39 | — | — | 39 | |||||||||||||||
Credit default swaps related to securitization entities | Notional | 312 | — | (200 | ) | 112 | ||||||||||||||
Equity index options | Notional | 2,396 | 1,584 | (1,484 | ) | 2,496 | ||||||||||||||
Financial futures | Notional | 1,398 | 4,300 | (4,376 | ) | 1,322 | ||||||||||||||
Equity return swaps | Notional | 165 | 186 | (258 | ) | 93 | ||||||||||||||
Other foreign currency contracts | Notional | 3,130 | 2,163 | (691 | ) | 4,602 | ||||||||||||||
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Total derivatives not designated as hedges | 12,320 | 8,328 | (7,023 | ) | 13,625 | |||||||||||||||
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Total derivatives | $ | 23,912 | $ | 8,328 | $ | (7,329 | ) | $ | 24,911 | |||||||||||
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(Notional in millions) | Measurement | December 31, 2017 | Additions | Maturities/ terminations | June 30, 2018 | |||||||||||||||||||||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | $ | 11,155 | $ | 1,436 | $ | (1,672 | ) | $ | 10,919 | ||||||||||||||||||||||||||||||
Foreign currency swaps | Notional | 22 | 39 | — | 61 | |||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Total cash flow hedges | 11,177 | 1,475 | (1,672 | ) | 10,980 | |||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Total derivatives designated as hedges | 11,177 | 1,475 | (1,672 | ) | 10,980 | |||||||||||||||||||||||||||||||||||
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Derivatives not designated as hedges | ||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 4,679 | — | (5 | ) | 4,674 | ||||||||||||||||||||||||||||||||||
Interest rate caps and floors | Notional | — | 805 | — | 805 | |||||||||||||||||||||||||||||||||||
Foreign currency swaps | Notional | 349 | 128 | (23 | ) | 454 | ||||||||||||||||||||||||||||||||||
Credit default swaps | Notional | 39 | — | (19 | ) | 20 | ||||||||||||||||||||||||||||||||||
Equity index options | Notional | 2,420 | 1,246 | (927 | ) | 2,739 | ||||||||||||||||||||||||||||||||||
Financial futures | Notional | 1,283 | 2,660 | (2,680 | ) | 1,263 | ||||||||||||||||||||||||||||||||||
Equity return swaps | Notional | 96 | 1 | (78 | ) | 19 | ||||||||||||||||||||||||||||||||||
Other foreign currency contracts | Notional | 3,264 | 398 | (549 | ) | 3,113 | ||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Total derivatives not designated as hedges | 12,130 | 5,238 | (4,281 | ) | 13,087 | |||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
Total derivatives | $ | 23,307 | $ | 6,713 | $ | (5,953 | ) | $ | 24,067 | |||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
(Number of policies) | Measurement | December 31, 2016 | Additions | Maturities/ terminations | September 30, 2017 | Measurement | December 31, 2017 | Additions | Maturities/ terminations | June 30, 2018 | ||||||||||||||||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||||||||||||||||||||||||
GMWB embedded derivatives | Policies | 33,238 | — | (2,127 | ) | 31,111 | Policies | 30,450 | — | (1,343 | ) | 29,107 | ||||||||||||||||||||||||||||
Fixed index annuity embedded derivatives | Policies | 17,549 | — | (367 | ) | 17,182 | Policies | 17,067 | — | (255 | ) | 16,812 | ||||||||||||||||||||||||||||
Indexed universal life embedded derivatives | Policies | 1,074 | 1 | (66 | ) | 1,009 | Policies | 985 | — | (28 | ) | 957 |
Cash Flow Hedges
Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; (v) forward bond purchase commitments to hedge against the variability in the anticipated cash flows required to purchase future fixed rate bonds; and (vi) other instruments to hedge the cash flows of various forecasted transactions.
The following table provides information about thepre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2017:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI | Classification of gain (loss) reclassified into net income (loss) | Gain (loss) recognized innet income (loss) (1) | Classification of gain (loss) recognized in net income (loss) | |||||||||||||||
Interest rate swaps hedging assets | $ | 17 | $ | 34 | | Net investment income | | $ | — | | Net investment gains (losses) | | ||||||||
Foreign currency swaps | (1 | ) | — | | Net investment income | | — | | Net investment gains (losses) | | ||||||||||
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| |||||||||||||||
Total | $ | 16 | $ | 34 | $ | — | ||||||||||||||
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The following table provides information about thepre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2016:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI | Classification of gain (loss) reclassified into net income (loss) | Gain (loss) recognized innet income (loss) (1) | Classification of gain (loss) recognized in net income (loss) | |||||||||||||||
Interest rate swaps hedging assets | $ | 115 | $ | 27 | | Net investment income | | $ | 2 | | Net investment gains (losses) | | ||||||||
Interest rate swaps hedging liabilities | (2 | ) | — | | Interest expense | | — | | Net investment gains (losses) | | ||||||||||
Foreign currency swaps | (1 | ) | — | | Net investment income | | — | | Net investment gains (losses) | | ||||||||||
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| |||||||||||||||
Total | $ | 112 | $ | 27 | $ | 2 | ||||||||||||||
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|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information about thepre-tax income (loss) effects of cash flow hedges for the ninethree months ended SeptemberJune 30, 2018:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income from OCI | Classification of gain (loss) reclassified into net income | |||||||||
Interest rate swaps hedging assets | $ | (54 | ) | $ | 39 | Net investment income | ||||||
Interest rate swaps hedging liabilities | 5 | — | Interest expense | |||||||||
Foreign currency swaps | 1 | — | Net investment income | |||||||||
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| |||||||||
Total | $ | (48 | ) | $ | 39 | |||||||
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The following table provides information about thepre-tax income effects of cash flow hedges for the three months ended June 30, 2017:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI | Classification of gain (loss) reclassified into net income (loss) | Gain (loss) recognized innet income (loss) (1) | Classification of gain (loss) recognized in net income (loss) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income from OCI | Classification of gain (loss) reclassified into net income | Gain (loss) recognized innet income (1) | Classification of gain (loss) recognized in net income | ||||||||||||||||||||||||||
Interest rate swaps hedging assets | $ | 50 | $ | 95 | | Net investment income | | $ | — | | Net investment gains (losses) | | $ | 82 | $ | 31 | Net investment income | $ | — | Net investment gains (losses) | ||||||||||||||||
Interest rate swaps hedging assets | — | 2 | | Net investment gains (losses) | | — | | Net investment gains (losses) | | — | 1 | Net investment gains (losses) | — | Net investment gains (losses) | ||||||||||||||||||||||
Interest rate swaps hedging liabilities | (2 | ) | — | Interest expense | — | | Net investment gains (losses) | | (6 | ) | — | Interest expense | — | Net investment gains (losses) | ||||||||||||||||||||||
Foreign currency swaps | (2 | ) | — | | Net investment income | | — | | Net investment gains (losses) | | (1 | ) | — | Net investment income | — | Net investment gains (losses) | ||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total | $ | 46 | $ | 97 | $ | — | $ | 75 | $ | 32 | $ | — | ||||||||||||||||||||||||
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(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 thepre-tax income (loss) effects of cash flow hedges for the ninesix months ended SeptemberJune 30, 2016:2018:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI | Classification of gain (loss) reclassified into net income (loss) | Gain (loss) recognized innet income (loss) (1) | Classification of gain (loss) recognized in net income (loss) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income from OCI | Classification of gain (loss) reclassified into net income | ||||||||||||||||||||||
Interest rate swaps hedging assets | $ | 839 | $ | 80 | | Net investment income | | $ | 13 | | Net investment gains (losses) | | $ | (227 | ) | $ | 74 | Net investment income | ||||||||||||
Interest rate swaps hedging assets | — | 1 | | Net investment gains (losses) | | — | | Net investment gains (losses) | | — | 5 | Net investment gains (losses) | ||||||||||||||||||
Interest rate swaps hedging liabilities | (52 | ) | — | Interest expense | — | | Net investment gains (losses) | | 22 | — | Interest expense | |||||||||||||||||||
Inflation indexed swaps | (5 | ) | 2 | | Net investment income | | — | | Net investment gains (losses) | | ||||||||||||||||||||
Inflation indexed swaps | — | 7 | | Net investment gains (losses) | | — | | Net investment gains (losses) | | |||||||||||||||||||||
Foreign currency swaps | (2 | ) | — | | Net investment income | | — | | Net investment gains (losses) | | ||||||||||||||||||||
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Total | $ | 780 | $ | 90 | $ | 13 | $ | (205 | ) | $ | 79 | |||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information about thepre-tax income effects of cash flow hedges for the six months ended June 30, 2017:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income from OCI | Classification of gain (loss) reclassified into net income | Gain (loss) recognized innet income(1) | Classification of gain (loss) recognized in net income | |||||||||||
Interest rate swaps hedging assets | $ | 33 | $ | 61 | Net investment income | $ | — | Net investment gains (losses) | ||||||||
Interest rate swaps hedging assets | — | 2 | Net investment gains (losses) | — | Net investment gains (losses) | |||||||||||
Interest rate swaps hedging liabilities | (2 | ) | — | Interest expense | — | Net investment gains (losses) | ||||||||||
Foreign currency swaps | (1 | ) | — | Net investment income | — | Net investment gains (losses) | ||||||||||
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Total | $ | 30 | $ | 63 | $ | — | ||||||||||
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(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 tables provide a reconciliation of current period changes, net of applicable income taxes, for these designated derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the periods indicated:
Three months ended September 30, | ||||||||
(Amounts in millions) | 2017 | 2016 | ||||||
Derivatives qualifying as effective accounting hedges as of July 1 | $ | 2,064 | $ | 2,439 | ||||
Current period increases (decreases) in fair value, net of deferred taxes of $(6) and $(40) | 10 | 72 | ||||||
Reclassification to net (income), net of deferred taxes of $12 and $9 | (22 | ) | (18 | ) | ||||
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Derivatives qualifying as effective accounting hedges as of September 30 | $ | 2,052 | $ | 2,493 | ||||
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Three months ended June 30, | ||||||||
(Amounts in millions) | 2018 | 2017 | ||||||
Derivatives qualifying as effective accounting hedges as of April 1 | $ | 1,927 | $ | 2,036 | ||||
Current period increases (decreases) in fair value, net of deferred taxes of $9 and $(27) | (39 | ) | 48 | |||||
Reclassification to net (income), net of deferred taxes of $14 and $12 | (25 | ) | (20 | ) | ||||
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Derivatives qualifying as effective accounting hedges as of June 30 | $ | 1,863 | $ | 2,064 | ||||
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Six months ended June 30, | ||||||||
(Amounts in millions) | 2018 | 2017 | ||||||
Derivatives qualifying as effective accounting hedges as of January 1 | $ | 2,065 | $ | 2,085 | ||||
Cumulative effect of changes in accounting: | ||||||||
Stranded tax effects | 12 | — | ||||||
Changes to the hedge accounting model, net of deferred taxes of $(1) and $— | 2 | — | ||||||
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Total cumulative effect of changes in accounting | 14 | — | ||||||
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Current period increases (decreases) in fair value, net of deferred taxes of $43 and $(11) | (165 | ) | 19 | |||||
Reclassification to net (income), net of deferred taxes of $28 and $23 | (51 | ) | (40 | ) | ||||
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Derivatives qualifying as effective accounting hedges as of June 30 | $ | 1,863 | $ | 2,064 | ||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine months ended September 30, | ||||||||
(Amounts in millions) | 2017 | 2016 | ||||||
Derivatives qualifying as effective accounting hedges as of January 1 | $ | 2,085 | $ | 2,045 | ||||
Current period increases (decreases) in fair value, net of deferred taxes of $(17) and $(273) | 29 | 507 | ||||||
Reclassification to net (income), net of deferred taxes of $35 and $31 | (62 | ) | (59 | ) | ||||
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Derivatives qualifying as effective accounting hedges as of September 30 | $ | 2,052 | $ | 2,493 | ||||
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The total of derivatives designated as cash flow hedges of $2,052$1,863 million, net of taxes, recorded in stockholders’ equity as of SeptemberJune 30, 20172018 is expected to be reclassified to net income (loss) in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $95$104 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2057. During the ninesix months ended SeptemberJune 30, 2017, there was approximately $22018, we reclassified $5 million reclassified to net income (loss) in connection with forecasted transactions that were no longer considered probable of occurring.
Derivatives Not Designated As Hedges
We also enter into certainnon-qualifying derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iv) interest rate swaps and interest rate caps and floors where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; (vi) foreign currency swaps, options and forward contracts to mitigate currency risk associated withnon-functional currency investments held by certain foreign subsidiaries and future dividends or other cash flows from certain foreign subsidiaries to our holding company; and (vii) equity index options to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity and indexed universal life products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We also havehad, prior to the fourth quarter of 2017, 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 havehad recourse to the securitization entity. The interest rate swaps used for these entities arewere 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 arewere utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also includeincluded 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.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables provide thepre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Three months ended September 30, | Classification of gain (loss) in net income (loss) | Three months ended June 30, | Classification of gain (loss) | |||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||
Interest rate swaps | $ | 1 | $ | (1 | ) | Net investment gains (losses) | $ | (2 | ) | $ | (1 | ) | Net investment gains (losses) | |||||||
Credit default swaps related to securitization entities | 2 | 2 | Net investment gains (losses) | — | 2 | Net investment gains (losses) | ||||||||||||||
Equity index options | 16 | 9 | Net investment gains (losses) | 8 | 13 | Net investment gains (losses) | ||||||||||||||
Financial futures | (17 | ) | (35 | ) | Net investment gains (losses) | (13 | ) | 9 | Net investment gains (losses) | |||||||||||
Equity return swaps | (5 | ) | (9 | ) | Net investment gains (losses) | 1 | (6 | ) | Net investment gains (losses) | |||||||||||
Other foreign currency contracts | 40 | (2 | ) | Net investment gains (losses) | 1 | 31 | Net investment gains (losses) | |||||||||||||
Foreign currency swaps | 8 | (1 | ) | Net investment gains (losses) | (10 | ) | 2 | Net investment gains (losses) | ||||||||||||
GMWB embedded derivatives | 30 | 60 | Net investment gains (losses) | 13 | 1 | Net investment gains (losses) | ||||||||||||||
Fixed index annuity embedded derivatives | (21 | ) | (16 | ) | Net investment gains (losses) | (15 | ) | (16 | ) | Net investment gains (losses) | ||||||||||
Indexed universal life embedded derivatives | 2 | 3 | Net investment gains (losses) | 2 | 2 | Net investment gains (losses) | ||||||||||||||
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Total derivatives not designated as hedges | $ | 56 | $ | 10 | $ | (15 | ) | $ | 37 | |||||||||||
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Nine months ended September 30, | Classification of gain (loss) in net income (loss) | Six months ended June 30, | Classification of gain (loss) | |||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||
Interest rate swaps | $ | 2 | $ | 7 | Net investment gains (losses) | $ | (3 | ) | $ | 1 | Net investment gains (losses) | |||||||||
Interest rate swaps related to securitization entities | — | (10 | ) | Net investment gains (losses) | ||||||||||||||||
Credit default swaps related to securitization entities | 6 | 16 | Net investment gains (losses) | — | 4 | Net investment gains (losses) | ||||||||||||||
Equity index options | 42 | 5 | Net investment gains (losses) | (7 | ) | 26 | Net investment gains (losses) | |||||||||||||
Financial futures | (25 | ) | (9 | ) | Net investment gains (losses) | (37 | ) | (8 | ) | Net investment gains (losses) | ||||||||||
Equity return swaps | (19 | ) | (2 | ) | Net investment gains (losses) | (4 | ) | (14 | ) | Net investment gains (losses) | ||||||||||
Other foreign currency contracts | 66 | (6 | ) | Net investment gains (losses) | 9 | 26 | Net investment gains (losses) | |||||||||||||
Foreign currency swaps | 13 | 6 | Net investment gains (losses) | (18 | ) | 5 | Net investment gains (losses) | |||||||||||||
GMWB embedded derivatives | 64 | (58 | ) | Net investment gains (losses) | 27 | 34 | Net investment gains (losses) | |||||||||||||
Fixed index annuity embedded derivatives | (57 | ) | (22 | ) | Net investment gains (losses) | (7 | ) | (36 | ) | Net investment gains (losses) | ||||||||||
Indexed universal life embedded derivatives | 5 | 6 | Net investment gains (losses) | 7 | 3 | Net investment gains (losses) | ||||||||||||||
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Total derivatives not designated as hedges | $ | 97 | $ | (67 | ) | $ | (33 | ) | $ | 41 | ||||||||||
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Derivative Counterparty Credit Risk
Most of our derivative arrangements with counterparties require the posting of collateral by the counterparty upon meeting certain net exposure thresholds. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:
September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Derivatives assets (1) | Derivatives liabilities (2) | Net derivatives | Derivatives assets (1) | Derivatives liabilities (2) | Net derivatives | Derivatives assets(1) | Derivatives liabilities(2) | Net derivatives | Derivatives assets(1) | Derivatives liabilities (2) | Net derivatives | ||||||||||||||||||||||||||||||||||||
Amounts presented in the balance sheet: | ||||||||||||||||||||||||||||||||||||||||||||||||
Gross amounts recognized | $ | 262 | $ | 66 | $ | 196 | $ | 724 | $ | 387 | $ | 337 | $ | 234 | $ | 104 | $ | 130 | $ | 278 | $ | 47 | $ | 231 | ||||||||||||||||||||||||
Gross amounts offset in the balance sheet | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
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Net amounts presented in the balance sheet | 262 | 66 | 196 | 724 | 387 | 337 | 234 | 104 | 130 | 278 | 47 | 231 | ||||||||||||||||||||||||||||||||||||
Gross amounts not offset in the balance sheet: | ||||||||||||||||||||||||||||||||||||||||||||||||
Financial instruments (3) | (24 | ) | (24 | ) | — | (172 | ) | (172 | ) | — | (39 | ) | (39 | ) | — | (23 | ) | (23 | ) | — | ||||||||||||||||||||||||||||
Collateral received | (164 | ) | — | (164 | ) | (467 | ) | — | (467 | ) | (125 | ) | — | (125 | ) | (170 | ) | — | (170 | ) | ||||||||||||||||||||||||||||
Collateral pledged | — | (301 | ) | 301 | — | (557 | ) | 557 | — | (427 | ) | 427 | — | (288 | ) | 288 | ||||||||||||||||||||||||||||||||
Over collateralization | 8 | 259 | (251 | ) | 1 | 344 | (343 | ) | 1 | 363 | (362 | ) | — | 264 | (264 | ) | ||||||||||||||||||||||||||||||||
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Net amount | $ | 82 | $ | — | $ | 82 | $ | 86 | $ | 2 | $ | 84 | $ | 71 | $ | 1 | $ | 70 | $ | 85 | $ | — | $ | 85 | ||||||||||||||||||||||||
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(1) | Included |
(2) | Included |
(3) | Amounts represent derivative assets and/or liabilities that are presented gross within the balance sheet but are held with the same counterparty where we have a master netting arrangement. This adjustment results in presenting the net asset and net liability position for each counterparty. |
Except for derivatives related to securitization entities, almost allseveral 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. IfBeginning in 2018, we have renegotiated with many of our counterparties to remove the credit downgrade provisions from the master swap agreements. If the provisions defined in these agreements had been triggered as a result of downgrades of our counterparties,June 30, 2018 and December 31, 2017, we could have claimed upbeen allowed to $82claim $71 million and $86$85 million, as of September 30, 2017 and December 31, 2016, respectively, or have been required to disburse up to $2$1 million as of December 31, 2016. There were no amounts that we would have been required to disburse as of SeptemberJune 30, 2017 .2018. The chart above excludes embedded derivatives and derivatives related to securitization entities as those derivatives are not subject to master netting arrangements.
We actively responded to the risk in our derivatives portfolio arising from our counterparties’ right to terminate their bilateralover-the-counter derivatives transactions with us following the downgrades of our life insurance subsidiaries by Moody’s Investors Service, Inc. and A.M. Best Company, Inc. in February 2018. As of June 30, 2018, no counterparties exercised their rights to terminate or revise the terms of their transactions with us.
Credit Derivatives
We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securitiesa security 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
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
default swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction.
In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we consolidate. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity.
The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||||||||
Investment grade | ||||||||||||||||||||||||
Matures in less than one year | $ | 39 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Matures after one year through five years | — | — | — | 39 | — | — | ||||||||||||||||||
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Total credit default swaps on single name reference entities | $ | 39 | $ | — | $ | — | $ | 39 | $ | — | $ | — | ||||||||||||
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The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||||||||
Customized credit default swap index tranches relatedto securitization entities: | ||||||||||||||||||||||||
Portion backing third-party borrowings maturing 2017 (1) | $ | 12 | $ | — | $ | — | $ | 12 | $ | — | $ | — | ||||||||||||
Portion backing our interest maturing 2017 (2) | 100 | — | 300 | — | 1 | |||||||||||||||||||
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Total customized credit default swap index tranches relatedto securitization entities | 112 | — | — | 312 | — | 1 | ||||||||||||||||||
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Total credit default swaps on index tranches | $ | 112 | $ | — | $ | — | $ | 312 | $ | — | $ | 1 | ||||||||||||
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June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||||||||
Investment grade | ||||||||||||||||||||||||
Matures in less than one year | $ | 20 | $ | — | $ | — | $ | 39 | $ | — | $ | — | ||||||||||||
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Total credit default swaps on single name reference entities | $ | 20 | $ | — | $ | — | $ | 39 | $ | — | $ | — | ||||||||||||
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(6) Fair Value of Financial Instruments
Assets and liabilities that are reflected in the accompanying unaudited condensed consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
cash equivalents, short-term investments, investment securities, separate accounts, securities held as collateral and derivative instruments. Other financial assets and liabilities—those not carried at fair value—are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.
The basis on which we estimate fair value is as follows:
Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.
Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.
Other invested assets.Primarily represents limited partnerships accounted for under the cost method. Limited partnerships are valued based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the underlying instrument. Cost method limited partnerships typically include significant unobservable inputs as a result of being relatively illiquid with limited market activity for similar instruments and are classified as Level 3.
Long-term borrowings.We utilize available market data when determining fair value of long-term borrowings issued in the United States and Canada, which includes data on recent trades for the same or similar financial instruments. Accordingly, these instruments are classified as Level 2 measurements. In cases where market data is not available such as our long-term borrowings in Australia, we use third-party broker provided prices (“broker quotes”) for which we consider the valuation methodology utilized by the third party, but the valuation typically includes significant unobservable inputs. Accordingly, we classify these borrowings where fair value is based on our consideration of broker quotes as Level 3 measurements.
Non-recourse funding obligations. We use an internal model to determine fair value using the current floating rate coupon and expected life/final maturity of the instrument discounted using the floating rate index and current market spread assumption, which is estimated based on recent transactions for these instruments or similar instruments as well as other market information or broker provided data. Given these instruments are private and very little market activity exists, our current market spread assumption is considered to have significant unobservable inputs in calculating fair value and, therefore, results in the fair value of these instruments being classified as Level 3.
Borrowings related to securitization entities.Based on market quotes or comparable market transactions. Some of these borrowings are publicly traded debt securities and are classified as Level 2. Certain borrowings are not publicly traded and are classified as Level 3.
Investment contracts.Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products. Given the significant unobservable inputs associated with policyholder
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
behavior and current market rate assumptions used to discount the expected future cash flows, we classify these instruments as Level 3 except for certain funding agreement-backed notes that are traded in the marketplace as a security and are classified as Level 2.
The following represents our estimated fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:
September 30, 2017 | ||||||||||||||||||||||||
Notional amount | Carrying amount | Fair value | ||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Commercial mortgage loans | $ | (1) | $ | 6,268 | $ | 6,550 | $ | — | $ | — | $ | 6,550 | ||||||||||||
Restricted commercial mortgage loans | (1) | 111 | 122 | — | — | 122 | ||||||||||||||||||
Other invested assets | (1) | 217 | 243 | — | — | 243 | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||
Long-term borrowings | (1) | 4,224 | 3,742 | — | 3,583 | 159 | ||||||||||||||||||
Non-recourse funding obligations | (1) | 310 | 195 | — | — | 195 | ||||||||||||||||||
Borrowings related to securitizationentities | (1) | 47 | 48 | — | 48 | — | ||||||||||||||||||
Investment contracts | (1) | 15,163 | 15,705 | — | 5 | 15,700 | ||||||||||||||||||
Other firm commitments: | ||||||||||||||||||||||||
Commitments to fund limited partnerships | 319 | — | — | — | — | — | ||||||||||||||||||
Ordinary course of business lendingcommitments | 61 | — | — | — | — | — |
December 31, 2016 | June 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notional amount | Carrying amount | Fair value | Notional amount | Carrying amount | Fair value | |||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | $ | (1) | $ | 6,111 | $ | 6,247 | $ | — | $ | — | $ | 6,247 | $ | (1) | $ | 6,480 | $ | 6,514 | $ | — | $ | — | $ | 6,514 | ||||||||||||||||||||||||||||||||
Restricted commercial mortgage loans | (1) | 129 | 141 | — | — | 141 | (1) | 90 | 96 | — | — | 96 | ||||||||||||||||||||||||||||||||||||||||||||
Other invested assets | (1) | 459 | 473 | — | 352 | 121 | (1) | 151 | 151 | — | — | 151 | ||||||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term borrowings | (1) | 4,180 | 3,582 | — | 3,440 | 142 | (1) | 4,047 | 3,727 | — | 3,577 | 150 | ||||||||||||||||||||||||||||||||||||||||||||
Non-recourse funding obligations | (1) | 310 | 186 | — | — | 186 | (1) | 310 | 209 | — | — | 209 | ||||||||||||||||||||||||||||||||||||||||||||
Borrowings related to securitizationentities | (1) | 62 | 65 | — | 65 | — | (1) | 28 | 28 | — | 28 | — | ||||||||||||||||||||||||||||||||||||||||||||
Investment contracts | (1) | 16,437 | 16,993 | — | 5 | 16,988 | (1) | 13,757 | 14,007 | — | — | 14,007 | ||||||||||||||||||||||||||||||||||||||||||||
Other firm commitments: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments to fund limited partnerships | 201 | — | — | — | — | — | 402 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Commitments to fund bank loan investments | 30 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Ordinary course of business lendingcommitments | 73 | — | — | — | — | — | 119 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notional amount | Carrying amount | Fair value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | $ | (1) | $ | 6,341 | $ | 6,573 | $ | — | $ | — | $ | 6,573 | ||||||||||||||||||||||||||||||||||||||||||||
Restricted commercial mortgage loans | (1) | 107 | 116 | — | — | 116 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other invested assets | (1) | 277 | 299 | — | — | 299 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term borrowings | (1) | 4,224 | 3,725 | — | 3,566 | 159 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Non-recourse funding obligations | (1) | 310 | 201 | — | — | 201 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings related to securitization entities | (1) | 40 | 41 | — | 41 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Investment contracts | (1) | 14,700 | 15,123 | — | 5 | 15,118 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other firm commitments: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments to fund limited partnerships | 317 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments to fund bank loan investments | 18 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Ordinary course of business lendingcommitments | 168 | — | — | — | — | — |
(1) | These financial instruments do not have notional amounts. |
Recurring Fair Value Measurements
We have fixed maturity, short-term investments, equity and trading securities, limited partnerships, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are
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carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.
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Limited partnerships
Limited partnerships are valued based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the underlying instrument. We utilize the net asset value (“NAV”) of the underlying fund statements as a practical expedient for fair value.
Fixed maturity, short-term investments equity and tradingequity securities
The fair value of fixed maturity, short-term investments equity and tradingequity securities are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or broker quotes, which use a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. In certain cases where market information is not available for a specific security but is available for similar securities, a security is valued using that market information for similar securities, which is also a market approach. When market information is not available for a specific security or is available but such information is less relevant or reliable, an income approach or a combination of a market and income approach is utilized. For securities with optionality, such as call or prepayment features (including mortgage-backed or asset-backed securities), an income approach may be used. In addition, a combination of the results from market and income approaches may be used to estimate fair value. These valuation techniques may change from period to period, based on the relevance and availability of market data.
We utilize certain third-party data providers when determining fair value. We consider information obtained from pricing services as well as broker quotes in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information. We also use various methods to obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received, including an understanding of the assumptions and inputs utilized to determine the appropriate fair value. For pricing services, we analyze the prices provided by our primary pricing services to other readily available pricing services and perform a detailed review of the assumptions and inputs from each pricing service to determine the appropriate fair value when pricing differences exceed certain thresholds. We evaluate changes in fair value that are greater than certainpre-defined thresholds each month to further aid in our review of the accuracy of fair value measurements and our understanding of changes in fair value, with more detailed reviews performed by the asset managers responsible for the related asset class associated with the security being reviewed. A pricing committee provides additional oversight and guidance in the evaluation and review of the pricing methodologies used to value our investment portfolio.
In general, we first obtain valuations from pricing services. If a price is not supplied by a pricing service, we will typically seek a broker quote for public or private fixed maturity securities. In certain instances, we utilize price caps for broker quoted securities where the estimated market yield results in a valuation that may exceed the amount that we believe would be received in a market transaction. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for identical securities are not readily observable and these securities are not typically valued by pricing services. If prices are unavailable from public pricing services we obtain broker quotes. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models.
For pricing services, we obtain an understanding of the pricing methodologies and procedures for each type of instrument. Additionally, on a monthly basis we review a sample of securities, examining the pricing service’s
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assumptions to determine if we agree with the service’s derived price. When available, we also evaluate the prices sampled as compared to other public prices. If a variance greater than apre-defined threshold is noted, additional review of the price is executed to ensure accuracy. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.
For private fixed maturity securities, we utilize an income approach where we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction and value all private fixed maturity securities at par that have less than 12 months to maturity. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. To evaluate the reasonableness of the internal model, we review a sample of private fixed maturity securities each month. In that review we compare the modeled prices to the prices of similar public securities in conjunction with analysis on current market indicators. If a pricing variance greater than apre-defined threshold is noted, additional review of the price is executed to ensure accuracy. At the end of each month, all internally modeled prices are compared to the prior month prices with an evaluation of all securities with a month-over-month change greater than apre-defined threshold. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating and public bond spread as Level 3. In general, increases (decreases) in credit spreads will decrease (increase) the fair value for our fixed maturity securities.
For broker quotes, we consider the valuation methodology utilized by the third party and analyze a sample each month to assess reasonableness given then-current market conditions. Additionally, for broker quotes on certain structured securities, we validate prices received against other publicly available pricing sources. Broker quotes are typically based on an income approach given the lack of available market data. As the valuation typically includes significant unobservable inputs, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.
For remaining securities priced using internal models, we determine fair value using an income approach. We analyze a sample each month to assess reasonableness given then-current market conditions. We maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.
A summary of the inputs used for our fixed maturity, short-term investments and equity securities based on the level in which instruments are classified is included below. We have combined certain classes of instruments together as the nature of the inputs is similar.
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Level 1 measurements
Equity securities. The primary inputs to the valuation of exchange-traded equity securities include quoted prices for the identical instrument.
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Short-term investments. Short-term investments primarily include commercial paper and other highly liquid debt instruments. The fair value of short-term investments classified as Level 1 is based on quoted prices for the identical instrument.
Separate account assetsassets.
The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.
Level 2 measurements
Fixed maturity securities
• | Third-party pricing services:In estimating the fair value of fixed maturity securities, approximately 91% of our portfolio is priced using third-party pricing sources. These pricing services utilize industry-standard valuation techniques that include market-based approaches, income-based approaches, a combination of market-based and income-based approaches or other proprietary, internally generated models as part of the valuation processes. These third-party pricing vendors maximize the use of publicly available data inputs to generate valuations for each asset class. Priority and type of inputs used may change frequently as certain inputs may be more direct drivers of valuation at the time of pricing. Examples of significant inputs incorporated by third-party pricing services may include sector and issuer spreads, seasoning, capital structure, security optionality, collateral data, prepayment assumptions, default assumptions, delinquencies, debt covenants, benchmark yields, trade data, dealer quotes, credit ratings, maturity and weighted-average life. We conduct regular meetings with our third-party pricing services for the purpose of understanding the methodologies, techniques and inputs used by the third-party pricing providers. |
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The following table presents a summary of the significant inputs used by our third-party pricing services for certain fair value measurements of fixed maturity securities that are classified as Level 2 as of SeptemberJune 30, 2017:2018:
(Amounts in millions) | Fair value | Primary methodologies | Significant inputs | Fair value | Primary methodologies | Significant inputs | ||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 5,669 | Price quotes from trading desk, broker feeds | Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread | $ | 5,353 | Price quotes from trading desk, broker feeds | Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread | ||||||||
State and political subdivisions | $ | 2,816 | Multi-dimensional attribute-based modeling systems, third-party pricing vendors | Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes | $ | 2,803 | Multi-dimensional attribute-based modeling systems, third-party pricing vendors | Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes | ||||||||
Non-U.S. government | $ | 2,210 | Matrix pricing, spread priced to benchmark curves, price quotes from market makers | Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads,bid-offer spread, market research publications, third-party pricing sources | $ | 2,364 | Matrix pricing, spread priced to benchmark curves, price quotes from market makers | Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads,bid-offer spread, market research publications, third-party pricing sources | ||||||||
U.S. corporate | $ | 25,290 | Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, internal models,OAS-based models | Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports | $ | 24,571 | Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, internal models,OAS-based models | Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports | ||||||||
Non-U.S. corporate | $ | 10,711 | Multi-dimensional attribute-based modeling systems,OAS-based models, price quotes from market makers | Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads,bid-offer spread, market research publications, third-party pricing sources | $ | 10,049 | Multi-dimensional attribute-based modeling systems,OAS-based models, price quotes from market makers | Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads,bid-offer spread, market research publications, third-party pricing sources | ||||||||
Residential mortgage-backed | $ | 4,123 | OAS-based models, To Be Announced pricing models, single factor binomial models, internally priced | Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports | $ | 3,533 | OAS-based models, To Be Announced pricing models, single factor binomial models, internally priced | Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports | ||||||||
Commercial mortgage-backed | $ | 3,392 | Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model | Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports | $ | 3,305 | Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model | Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports | ||||||||
Other asset-backed | $ | 2,843 | Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers, internal models | Spreads to daily updated swaps curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports | $ | 2,791 | Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers, internal models | Spreads to daily updated swaps curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports |
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• | Internal models:A portion of our |
Equity securities.The primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active.
Securities lending collateral
The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.
Short-term Investmentsinvestments
Short-termThe fair value of short-term investments primarily include commercial paper and other highly liquid debt instruments and are classified as Level 2. We determine fair value2 is determined after considering prices obtained by third-party pricing services.
Level 3 measurements
Fixed maturity securities
• | Internal models:A portion of our |
• | Broker quotes:A portion of our state and political subdivisions, U.S. corporate,non-U.S. corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are valued using broker quotes. Broker quotes are obtained from third-party providers that have current |
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market knowledge to provide a reasonable price for securities not routinely priced by third-party pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was |
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Equity securities.The primary inputs to the valuation include broker quotes where the underlying inputs are unobservable and for internal models, structure of the security and issuer rating.
Restricted other invested assets related to securitization entities
We previously held trading securities related to securitization entities that were classified as restricted other invested assets and were carried at fair value. The trading securities represented asset-backed securities. In 2017, these trading securities were sold as we repositioned these assets in connection with the maturity of the associated liabilities. The valuation for trading securities was determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there was observable market information for transactions of the same or similar instruments, which was provided to us by a third-party pricing service and was classified as Level 2. For certain securities that are not actively traded, we determined fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classified these valuations as Level 3.
GMWB embedded derivatives
We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. In addition to these inputs, we also consider risk and expense margins when determining the projected cash flows that would be determined by another market participant. While the risk and expense margins are considered in determining fair value, these inputs do not have a significant impact on the valuation. We determine fair value using an internal model based on the various inputs noted above. The resulting fair value measurement from the model is reviewed by the product actuarial, risk and finance professionals each reporting period with changes in fair value also being compared to changes in derivatives and other instruments used to mitigate changes in fair value from certain market risks, such as equity index volatility and interest rates.
For GMWB liabilities,non-performance risk is integrated into the discount rate. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to reflect an adjustment for thenon-performance risk of the GMWB liabilities. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the impact ofnon-performance risk resulted in a lower fair value of our GMWB liabilities of $65$50 million and $73$63 million, respectively.
To determine the appropriate discount rate to reflect thenon-performance risk of the GMWB liabilities, we evaluate thenon-performance risk in our liabilities based on a hypothetical exit market transaction as there is no exit market for these types of liabilities. A hypothetical exit market can be viewed as a hypothetical transfer of the liability to another similarly rated insurance company which would closely resemble a reinsurance transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. In determining the appropriate discount rate to incorporatenon-performance risk of the GMWB liabilities, we also considered the impacts of state guarantees embedded in the related insurance product as a form of inseparable third-party guarantee. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities.
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For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected equity market volatility with more significance being placed on projected near-term
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volatility and recent historical data. Given the different attributes and market characteristics of GMWB liabilities compared to equity index options in the derivative market, the equity index volatility assumption for GMWB liabilities may be different from the volatility assumption for equity index options, especially for the longer dated points on the curve.
Equity index and fund correlations are determined based on historical price observations for the fund and equity index.
For policyholder assumptions, we use our expected lapse, mortality and utilization assumptions and update these assumptions for our actual experience, as necessary. For our lapse assumption, we adjust our base lapse assumption by policy based on a combination of the policyholder’s current account value and GMWB benefit.
We classify the GMWB valuation as Level 3 based on having significant unobservable inputs, with equity index volatility andnon-performance risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase innon-performance risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value.
Fixed index annuity embedded derivatives
We have fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporatenon-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.
Indexed universal life embedded derivatives
We have indexed universal life products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporatenon-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.
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Borrowings related to securitization entities
We record certain borrowings related to securitization entities at fair value. The fair value of these borrowings is determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determine fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may impact the valuation. After considering all relevant inputs, we determine fair value of the borrowings using the net valuation of the underlying assets and derivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 3. Increases in the valuation of the underlying assets or decreases in the derivative liabilities will result in an increase in the fair value of these borrowings.
Derivatives
We consider counterparty collateral arrangements and rights ofset-off when evaluating our net credit risk exposure to our derivative counterparties. Accordingly, we are permitted to include consideration of these arrangements when determining whether any incremental adjustment should be made for both the counterparty’s and ournon-performance risk in measuring fair value for our derivative instruments. As a result of these counterparty arrangements, we determined that any adjustment for credit risk would not be material and we have not recorded any incremental adjustment for ournon-performance risk or thenon-performance risk of the derivative counterparty for our derivative assets or liabilities. We determine fair value for our derivatives using an income approach with internal models based on relevant market inputs for each derivative instrument. We also compare the fair value determined using our internal model to the valuations provided by our derivative counterparties with any significant differences or changes in valuation being evaluated further by our derivatives professionals that are familiar with the instrument and market inputs used in the valuation.
Interest rate swaps.The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2. For certain other swaps, there are features that provide an option to the counterparty to terminate the swap at specified dates. The interest rate volatility input used to value these options would be considered a significant unobservable input and results in the fair value measurement of the derivative being classified as Level 3. These options to terminate the swap by the counterparty are based on forward interest rate swap curves and volatility. As interest rate volatility increases, our valuation of the derivative changes unfavorably.
Interest rate swaps related to securitization entities.caps and floors.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,caps and results in the derivative being classified as Level 2.
Inflation indexed swaps. The valuation of inflation indexed swapsfloors is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, forward interest rate volatility and time value component associated with the optionality in the derivative which are generally considered observable inputs and results in the derivatives being classified as Level 2.
Interest rate swaps related to securitization entities.The valuation of interest rate swaps related to securitization entities was determined using an income approach. The primary input into the valuation represented the forward interest rate swap curve, which was generally considered an observable input, and resulted in the derivative being classified as Level 2.
Inflation indexed swaps. The valuation of inflation indexed swaps was determined using an income approach. The primary inputs into the valuation represented the forward interest rate swap curve, the current consumer price index and the forward consumer price index curve, which arewere generally considered observable inputs, and resultsresulted in the derivative being classified as Level 2.
Foreign currency swaps. The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency
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exchange rates, both of which are considered an observable input, and results in the derivative being classified as Level 2.
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(Unaudited)
Credit default swaps. We have both single name credit default swaps and we previously sold protection under 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 utilizeutilized an income approach that utilizesutilized current market information related to credit spreads and expected defaults and losses associated with the reference entities that comprisecomprised the respective index associated with each derivative. There arewere 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 bewere absorbed by our tranche. Accordingly, the index tranche credit default swaps arewere classified as Level 3. As credit spreads widenwidened for the underlying issuers comprising the index, the change in our valuation of these credit default swaps will bewere unfavorable.
Credit default swaps related to securitization entities.Credit default swaps related to securitization entities representrepresented customized index tranche credit default swaps and arewere valued using a similar methodology as described above for index tranche credit default swaps. We determinedetermined 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 containcontained a feature that permitspermitted 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 iswas dependent upon the valuation of the underlying assets and the timing and amount of any expected loss on the credit default swap, which iswas considered a significant unobservable input. Accordingly, these customized index tranche credit default swaps related to securitization entities arewere classified as Level 3. As credit spreads widenwidened for the underlying issuers comprising the customized index, the change in our valuation of these credit default swaps will bewere unfavorable.
Equity index options. We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest raterates, equity index volatility, equity index and time value component associated with the optionality in the derivative, which are considered significant unobservable inputs in most instances. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3. As equity index volatility increases, our valuation of these options changes favorably.
Financial futures. The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.
Equity return swaps.The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.
Forward bond purchase commitments.The valuation of forward bond purchase commitments is determined using an income approach. The primary input into the valuation represents the current bond prices and interest rates, which are generally considered an observable input, and results in the derivative being classified as Level 2.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, foreign currency exchange rate volatility, foreign equity index volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate, foreign currency exchange rate volatility and foreign equity index volatility inputs, the derivative is classified as Level 3. As foreign currency exchange rate volatility and foreign equity index volatility increases, the change in our valuation of these options will be favorable for purchase options and unfavorable for options sold. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth our assets by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:
September 30, 2017 | June 30, 2018 | |||||||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | NAV (1) | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 5,670 | $ | — | $ | 5,669 | $ | 1 | $ | 5,353 | $ | — | $ | 5,353 | $ | — | $ | — | ||||||||||||||||||
State and political subdivisions | 2,860 | — | 2,823 | 37 | 2,855 | — | 2,803 | 52 | — | |||||||||||||||||||||||||||
Non-U.S. government | 2,226 | — | 2,226 | — | 2,380 | — | 2,380 | — | — | |||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||
Utilities | 4,923 | — | 4,261 | 662 | 4,879 | — | 4,257 | 622 | — | |||||||||||||||||||||||||||
Energy | 2,440 | — | 2,282 | 158 | 2,270 | — | 2,132 | 138 | — | |||||||||||||||||||||||||||
Finance and insurance | 6,587 | — | 5,917 | 670 | 6,275 | — | 5,817 | 458 | — | |||||||||||||||||||||||||||
Consumer—non-cyclical | 4,828 | — | 4,701 | 127 | 4,541 | — | 4,462 | 79 | — | |||||||||||||||||||||||||||
Technology and communications | 2,740 | — | 2,688 | 52 | 2,781 | — | 2,769 | 12 | — | |||||||||||||||||||||||||||
Industrial | 1,346 | — | 1,299 | 47 | 1,283 | — | 1,243 | 40 | — | |||||||||||||||||||||||||||
Capital goods | 2,321 | — | 2,203 | 118 | 2,361 | — | 2,242 | 119 | — | |||||||||||||||||||||||||||
Consumer—cyclical | 1,611 | — | 1,349 | 262 | 1,573 | — | 1,319 | 254 | — | |||||||||||||||||||||||||||
Transportation | 1,306 | — | 1,245 | 61 | 1,252 | — | 1,196 | 56 | — | |||||||||||||||||||||||||||
Other | 380 | — | 210 | 170 | 354 | — | 201 | 153 | — | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Total U.S. corporate | 28,482 | — | 26,155 | 2,327 | 27,569 | — | 25,638 | 1,931 | — | |||||||||||||||||||||||||||
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|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Non-U.S. corporate: | ||||||||||||||||||||||||||||||||||||
Utilities | 1,062 | — | 703 | 359 | 962 | — | 629 | 333 | — | |||||||||||||||||||||||||||
Energy | 1,463 | — | 1,286 | 177 | 1,399 | — | 1,224 | 175 | — | |||||||||||||||||||||||||||
Finance and insurance | 2,696 | — | 2,527 | 169 | 2,537 | — | 2,387 | 150 | — | |||||||||||||||||||||||||||
Consumer—non-cyclical | 716 | — | 587 | 129 | 702 | — | 594 | 108 | — | |||||||||||||||||||||||||||
Technology and communications | 1,014 | — | 985 | 29 | 1,007 | — | 991 | 16 | — | |||||||||||||||||||||||||||
Industrial | 1,058 | — | 919 | 139 | 977 | — | 872 | 105 | — | |||||||||||||||||||||||||||
Capital goods | 587 | — | 437 | 150 | 611 | — | 445 | 166 | — | |||||||||||||||||||||||||||
Consumer—cyclical | 527 | — | 458 | 69 | 522 | — | 474 | 48 | — | |||||||||||||||||||||||||||
Transportation | 718 | — | 537 | 181 | 727 | — | 524 | 203 | — | |||||||||||||||||||||||||||
Other | 2,782 | — | 2,733 | 49 | 2,558 | — | 2,476 | 82 | — | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Totalnon-U.S. corporate | 12,623 | — | 11,172 | 1,451 | 12,002 | — | 10,616 | 1,386 | — | |||||||||||||||||||||||||||
|
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|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Residential mortgage-backed | 4,209 | — | 4,123 | 86 | 3,567 | — | 3,533 | 34 | — | |||||||||||||||||||||||||||
Commercial mortgage-backed | 3,414 | — | 3,392 | 22 | 3,349 | — | 3,305 | 44 | — | |||||||||||||||||||||||||||
Other asset-backed | 3,068 | — | 2,843 | 225 | 2,957 | — | 2,791 | 166 | — | |||||||||||||||||||||||||||
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|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Total fixed maturity securities | 62,552 | — | 58,403 | 4,149 | 60,032 | — | 56,419 | 3,613 | — | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Equity securities | 765 | 644 | 77 | 44 | 758 | 643 | 69 | 46 | — | |||||||||||||||||||||||||||
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|
|
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| ||||||||||||||||||||||||||||
Other invested assets: | ||||||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||||||
Interest rate swaps | 70 | — | 70 | — | 49 | — | 49 | — | — | |||||||||||||||||||||||||||
Interest rate caps and floors | 1 | — | 1 | — | — | |||||||||||||||||||||||||||||||
Foreign currency swaps | 12 | — | 12 | — | 3 | — | 3 | — | — | |||||||||||||||||||||||||||
Equity index options | 81 | — | — | 81 | 70 | — | — | 70 | — | |||||||||||||||||||||||||||
Equity return swaps | 1 | — | 1 | — | — | |||||||||||||||||||||||||||||||
Other foreign currency contracts | 98 | — | 98 | — | 106 | — | 106 | — | — | |||||||||||||||||||||||||||
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|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Total derivative assets | 261 | — | 180 | 81 | 230 | — | 160 | 70 | — | |||||||||||||||||||||||||||
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|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Securities lending collateral | 237 | — | 237 | — | 211 | — | 211 | — | — | |||||||||||||||||||||||||||
Short-term investments | 787 | — | 787 | — | 708 | 1 | 707 | — | — | |||||||||||||||||||||||||||
Limited partnerships | 248 | — | — | — | 248 | |||||||||||||||||||||||||||||||
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|
|
|
|
|
| ||||||||||||||||||||||||||||
Total other invested assets | 1,285 | — | 1,204 | 81 | 1,397 | 1 | 1,078 | 70 | 248 | |||||||||||||||||||||||||||
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|
|
|
|
| ||||||||||||||||||||||||||||
Reinsurance recoverable (1) | 14 | — | — | 14 | ||||||||||||||||||||||||||||||||
Reinsurance recoverable(2) | 12 | — | — | 12 | — | |||||||||||||||||||||||||||||||
Separate account assets | 7,264 | 7,264 | — | — | 6,750 | 6,750 | — | — | — | |||||||||||||||||||||||||||
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|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Total assets | $ | 71,880 | $ | 7,908 | $ | 59,684 | $ | 4,288 | $ | 68,949 | $ | 7,394 | $ | 57,566 | $ | 3,741 | $ | 248 | ||||||||||||||||||
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|
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|
|
(1) | Limited partnerships that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2016 | December 31, 2017 | |||||||||||||||||||||||||||||||
(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 | $ | 6,036 | $ | — | $ | 6,034 | $ | 2 | $ | 5,548 | $ | — | $ | 5,547 | $ | 1 | ||||||||||||||||
State and political subdivisions | 2,647 | — | 2,610 | 37 | 2,926 | — | 2,889 | 37 | ||||||||||||||||||||||||
Non-U.S. government | 2,107 | — | 2,107 | — | 2,233 | — | 2,233 | — | ||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||
Utilities | 4,550 | — | 3,974 | 576 | 4,998 | — | 4,424 | 574 | ||||||||||||||||||||||||
Energy | 2,300 | — | 2,090 | 210 | 2,458 | — | 2,311 | 147 | ||||||||||||||||||||||||
Finance and insurance | 6,097 | — | 5,311 | 786 | 6,528 | — | 5,902 | 626 | ||||||||||||||||||||||||
Consumer—non-cyclical | 4,734 | — | 4,613 | 121 | 4,831 | — | 4,750 | 81 | ||||||||||||||||||||||||
Technology and communications | 2,598 | — | 2,544 | 54 | 2,845 | — | 2,772 | 73 | ||||||||||||||||||||||||
Industrial | 1,223 | — | 1,175 | 48 | 1,346 | — | 1,307 | 39 | ||||||||||||||||||||||||
Capital goods | 2,258 | — | 2,106 | 152 | 2,355 | — | 2,234 | 121 | ||||||||||||||||||||||||
Consumer—cyclical | 1,530 | — | 1,272 | 258 | 1,605 | — | 1,343 | 262 | ||||||||||||||||||||||||
Transportation | 1,190 | — | 1,051 | 139 | 1,291 | — | 1,231 | 60 | ||||||||||||||||||||||||
Other | 348 | — | 205 | 143 | 379 | — | 210 | 169 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Total U.S. corporate | 26,828 | — | 24,341 | 2,487 | 28,636 | — | 26,484 | 2,152 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Non-U.S. corporate: | ||||||||||||||||||||||||||||||||
Utilities | 969 | — | 583 | 386 | 1,017 | — | 674 | 343 | ||||||||||||||||||||||||
Energy | 1,331 | — | 1,125 | 206 | 1,490 | — | 1,314 | 176 | ||||||||||||||||||||||||
Finance and insurance | 2,538 | — | 2,356 | 182 | 2,735 | — | 2,574 | 161 | ||||||||||||||||||||||||
Consumer—non-cyclical | 714 | — | 575 | 139 | 712 | — | 588 | 124 | ||||||||||||||||||||||||
Technology and communications | 987 | — | 920 | 67 | 982 | — | 953 | 29 | ||||||||||||||||||||||||
Industrial | 958 | — | 849 | 109 | 1,044 | — | 928 | 116 | ||||||||||||||||||||||||
Capital goods | 535 | — | 366 | 169 | 645 | — | 454 | 191 | ||||||||||||||||||||||||
Consumer—cyclical | 442 | — | 373 | 69 | 540 | — | 486 | 54 | ||||||||||||||||||||||||
Transportation | 677 | — | 496 | 181 | 721 | — | 551 | 170 | ||||||||||||||||||||||||
Other | 3,144 | — | 3,119 | 25 | 2,725 | — | 2,673 | 52 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Totalnon-U.S. corporate | 12,295 | — | 10,762 | 1,533 | 12,611 | — | 11,195 | 1,416 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Residential mortgage-backed | 4,379 | — | 4,336 | 43 | 4,057 | — | 3,980 | 77 | ||||||||||||||||||||||||
Commercial mortgage-backed | 3,129 | — | 3,075 | 54 | 3,446 | — | 3,416 | 30 | ||||||||||||||||||||||||
Other asset-backed | 3,151 | — | 3,006 | 145 | 3,068 | — | 2,831 | 237 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Total fixed maturity securities | 60,572 | — | 56,271 | 4,301 | 62,525 | — | 58,575 | 3,950 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Equity securities | 632 | 551 | 34 | 47 | 820 | 696 | 80 | 44 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Other invested assets: | ||||||||||||||||||||||||||||||||
Trading securities | 259 | — | 259 | — | ||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 596 | — | 596 | — | 74 | — | 74 | — | ||||||||||||||||||||||||
Foreign currency swaps | 4 | — | 4 | — | 12 | — | 12 | — | ||||||||||||||||||||||||
Equity index options | 72 | — | — | 72 | 80 | — | — | 80 | ||||||||||||||||||||||||
Equity return swaps | 1 | — | 1 | — | ||||||||||||||||||||||||||||
Other foreign currency contracts | 35 | — | 32 | 3 | 110 | — | 110 | — | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Total derivative assets | 708 | — | 633 | 75 | 276 | — | 196 | 80 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Securities lending collateral | 534 | — | 534 | — | 268 | — | 268 | — | ||||||||||||||||||||||||
Short-term investments | 902 | 107 | 795 | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total other invested assets | 1,501 | — | 1,426 | 75 | 1,446 | 107 | 1,259 | 80 | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 312 | — | 181 | 131 | ||||||||||||||||||||||||||||
Reinsurance recoverable(1) | 16 | — | — | 16 | 14 | — | — | 14 | ||||||||||||||||||||||||
Separate account assets | 7,299 | 7,299 | — | — | 7,230 | 7,230 | — | — | ||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||
Total assets | $ | 70,332 | $ | 7,850 | $ | 57,912 | $ | 4,570 | $ | 72,035 | $ | 8,033 | $ | 59,914 | $ | 4,088 | ||||||||||||||||
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|
|
|
|
|
(1) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers between levels at the beginning fair value for the reporting period in which the changes occur. Given the types of assets classified as Level 1, which primarily represents mutual fund investments, we typically do not have any transfers between Level 1 and Level 2 measurement categories and did not have any such transfers during any period presented.
Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing and/or rating, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from third-party pricing sources to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) | Beginning balance as of July 1, 2017 | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 (1) | Transfer out of Level 3 (1) | Ending balance as of September 30, 2017 | Total gains (losses) included in net income (loss) attributable to assets still held | Beginning balance as of April 1, 2018 | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 (1) | Transfer out of Level 3 (1) | Ending balance as of June 30, 2018 | Total gains (losses) included in net income attributable to assets still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Included in net income (loss) | Included in OCI | Included in net income | Included in OCI | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agenciesand government-sponsoredenterprises | $ | 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
State and political subdivisions | 37 | 1 | (1 | ) | — | — | — | — | — | — | 37 | 1 | $ | 53 | $ | — | $ | (1 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 52 | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 638 | — | — | 26 | — | — | (2 | ) | — | — | 662 | — | 553 | (1 | ) | (7 | ) | 66 | (12 | ) | — | (2 | ) | 25 | — | 622 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 160 | — | — | — | — | — | (2 | ) | — | — | 158 | — | 146 | — | — | — | — | — | (1 | ) | — | (7 | ) | 138 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 861 | 3 | (52 | ) | 22 | (14 | ) | — | (157 | ) | 8 | (1 | ) | 670 | 2 | 580 | — | (41 | ) | — | — | — | (74 | ) | — | (7 | ) | 458 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 122 | — | 1 | 4 | — | — | — | — | — | 127 | — | 79 | — | — | — | — | — | — | — | — | 79 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 58 | 1 | (3 | ) | — | — | — | (1 | ) | — | (3 | ) | 52 | 1 | 25 | — | 1 | 4 | — | — | (18 | ) | — | — | 12 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 61 | — | — | — | — | — | — | — | (14 | ) | 47 | — | 39 | — | 1 | — | — | — | — | — | — | 40 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 118 | 1 | — | — | — | — | (1 | ) | — | — | 118 | 1 | 103 | — | (1 | ) | 24 | — | — | — | — | (7 | ) | 119 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 266 | — | — | — | — | — | (2 | ) | — | (2 | ) | 262 | — | 252 | — | (1 | ) | 7 | (3 | ) | — | (1 | ) | — | — | 254 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 100 | 16 | (10 | ) | — | — | — | (45 | ) | — | — | 61 | — | 57 | — | — | — | — | — | (1 | ) | — | — | 56 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 176 | — | — | — | (4 | ) | — | (2 | ) | — | — | 170 | — | 166 | — | — | — | (10 | ) | — | (3 | ) | — | — | 153 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total U.S. corporate | 2,560 | 21 | (64 | ) | 52 | (18 | ) | — | (212 | ) | 8 | (20 | ) | 2,327 | 4 | 2,000 | (1 | ) | (48 | ) | 101 | (25 | ) | — | (100 | ) | 25 | (21 | ) | 1,931 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Non-U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 359 | — | — | — | — | — | — | — | — | 359 | — | 336 | — | (4 | ) | — | — | — | — | 15 | (14 | ) | 333 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 177 | — | 1 | — | — | — | (1 | ) | — | — | 177 | — | 195 | — | (2 | ) | — | — | — | (18 | ) | — | — | 175 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 172 | 1 | 1 | — | — | — | (5 | ) | — | — | 169 | — | 153 | 1 | (3 | ) | 1 | — | — | (1 | ) | — | (1 | ) | 150 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 129 | — | — | — | — | — | — | — | — | 129 | — | 120 | — | (1 | ) | — | — | — | (11 | ) | — | — | 108 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 48 | 1 | 1 | — | (21 | ) | — | — | — | — | 29 | — | 28 | — | 1 | — | — | — | (13 | ) | — | — | 16 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 112 | — | — | 13 | — | — | — | 14 | — | 139 | — | 108 | — | (1 | ) | 3 | — | — | (5 | ) | — | — | 105 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 149 | — | 1 | — | — | — | — | — | — | 150 | — | 186 | 1 | — | — | — | — | (21 | ) | — | — | 166 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 67 | — | — | — | — | — | — | 2 | — | 69 | — | 52 | — | — | — | (1 | ) | — | (3 | ) | — | — | 48 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 190 | — | 1 | — | — | — | (10 | ) | — | — | 181 | — | 166 | — | (2 | ) | 22 | — | — | — | 17 | — | 203 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 41 | (2 | ) | 1 | — | (2 | ) | — | — | 11 | — | 49 | — | 83 | — | (1 | ) | — | — | — | — | — | — | 82 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Totalnon-U.S. corporate | 1,444 | — | 6 | 13 | (23 | ) | — | (16 | ) | 27 | — | 1,451 | — | 1,427 | 2 | (13 | ) | 26 | (1 | ) | — | (72 | ) | 32 | (15 | ) | 1,386 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Residential mortgage-backed | 73 | — | — | 22 | — | — | (1 | ) | — | (8 | ) | 86 | — | 34 | — | 1 | 17 | — | — | (1 | ) | — | (17 | ) | 34 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 52 | (1 | ) | (2 | ) | 14 | — | — | — | — | (41 | ) | 22 | — | 6 | — | — | 28 | — | — | — | 13 | (3 | ) | 44 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 150 | (1 | ) | 1 | 52 | — | — | (5 | ) | 44 | (16 | ) | 225 | — | 172 | — | (1 | ) | 6 | — | — | (24 | ) | 45 | (32 | ) | 166 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total fixed maturity securities | 4,317 | 20 | (60 | ) | 153 | (41 | ) | — | (234 | ) | 79 | (85 | ) | 4,149 | 5 | 3,692 | 1 | (62 | ) | 178 | (26 | ) | — | (197 | ) | 115 | (88 | ) | 3,613 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Equity securities | 48 | — | — | — | (1 | ) | — | — | — | (3 | ) | 44 | — | 45 | — | — | 1 | — | — | — | — | — | 46 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Other invested assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 81 | 16 | — | 15 | — | — | (31 | ) | — | — | 81 | 13 | 60 | 8 | — | 15 | — | — | (13 | ) | — | — | 70 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total derivative assets | 81 | 16 | — | 15 | — | — | (31 | ) | — | — | 81 | 13 | 60 | 8 | — | 15 | — | — | (13 | ) | — | — | 70 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total other invested assets | 81 | 16 | — | 15 | — | — | (31 | ) | — | — | 81 | 13 | 60 | 8 | — | 15 | — | — | (13 | ) | — | — | 70 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Reinsurance recoverable (2) | 15 | (1 | ) | — | — | — | — | — | — | — | 14 | (1 | ) | 13 | (1 | ) | — | — | — | — | — | — | — | 12 | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Level 3 assets | $ | 4,461 | $ | 35 | $ | (60 | ) | $ | 168 | $ | (42 | ) | $ | — | $ | (265 | ) | $ | 79 | $ | (88 | ) | $ | 4,288 | $ | 17 | $ | 3,810 | $ | 8 | $ | (62 | ) | $ | 194 | $ | (26 | ) | $ | — | $ | (210 | ) | $ | 115 | $ | (88 | ) | $ | 3,741 | $ | 9 | ||||||||||||||||||||||||||||||||||||
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(1) | The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions) | Beginning balance as of July 1, 2016 | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 (1) | Transfer out of Level 3 (1) | Ending balance as of September 30, 2016 | Total gains (losses) included in net income (loss) attributable to assets still held | Beginning balance as of April 1, 2017 | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 (1) | Transfer out of Level 3 (1) | Ending balance as of June 30, 2017 | Total gains (losses) included in net income attributable to assets still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Included in net income (loss) | Included in OCI | Included in net income | Included in OCI | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agenciesand government-sponsoredenterprises | $ | 2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2 | $ | — | $ | 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1 | $ | — | ||||||||||||||||||||||||||||||||||||||||||||
State and political subdivisions | 36 | 1 | — | — | — | — | — | — | (1 | ) | 36 | 1 | 37 | — | — | — | — | — | — | — | — | 37 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 552 | 1 | 4 | 54 | (6 | ) | — | (1 | ) | 1 | (43 | ) | 562 | — | 578 | — | 13 | 30 | — | — | — | 30 | (13 | ) | 638 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 208 | — | 3 | — | — | — | (8 | ) | — | (1 | ) | 202 | — | 162 | — | 4 | — | — | — | (7 | ) | 1 | — | 160 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 775 | 4 | 14 | 27 | (5 | ) | — | (32 | ) | 37 | — | 820 | 5 | 818 | 4 | 39 | 24 | (7 | ) | — | (3 | ) | — | (14 | ) | 861 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 102 | — | 1 | 5 | (5 | ) | — | — | — | — | 103 | — | 122 | — | — | — | — | — | — | — | — | 122 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 40 | 1 | — | 12 | — | — | — | — | — | 53 | 1 | 59 | — | 5 | 4 | — | — | — | — | (10 | ) | 58 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 78 | — | — | — | — | — | — | — | — | 78 | — | 47 | — | 1 | 13 | — | — | — | — | — | 61 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 135 | — | 1 | — | — | — | — | — | — | 136 | 1 | 153 | — | 2 | — | — | — | — | — | (37 | ) | 118 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 254 | — | — | 19 | (5 | ) | — | (1 | ) | 1 | (3 | ) | 265 | — | 263 | — | 4 | — | — | — | (1 | ) | — | — | 266 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 129 | — | 1 | — | — | — | (6 | ) | — | — | 124 | — | 97 | — | 4 | — | — | — | (1 | ) | — | — | 100 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 147 | — | — | — | — | — | (1 | ) | 16 | — | 162 | — | 142 | — | — | — | — | — | (3 | ) | 37 | — | 176 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total U.S. corporate | 2,420 | 6 | 24 | 117 | (21 | ) | — | (49 | ) | 55 | (47 | ) | 2,505 | 7 | 2,441 | 4 | 72 | 71 | (7 | ) | — | (15 | ) | 68 | (74 | ) | 2,560 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Non-U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 331 | — | 1 | 52 | (5 | ) | — | — | — | (10 | ) | 369 | — | 386 | — | 3 | — | — | — | — | — | (30 | ) | 359 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 234 | — | 9 | 8 | (9 | ) | — | (17 | ) | — | — | 225 | — | 206 | — | 3 | — | — | — | — | — | (32 | ) | 177 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 201 | — | 3 | 11 | (1 | ) | — | — | — | — | 214 | — | 168 | 1 | 4 | 4 | — | — | (5 | ) | — | — | 172 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 168 | 2 | (1 | ) | 3 | (3 | ) | — | (37 | ) | 12 | — | 144 | — | 129 | — | 1 | — | — | — | (1 | ) | — | — | 129 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 80 | — | 1 | 2 | (2 | ) | — | — | — | — | 81 | — | 48 | — | — | — | — | — | — | — | — | 48 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 95 | — | 2 | 17 | (17 | ) | — | — | 15 | — | 112 | — | 110 | — | 2 | — | — | — | — | — | — | 112 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 212 | 1 | (2 | ) | — | — | — | (5 | ) | — | (33 | ) | 173 | 1 | 170 | — | 1 | — | — | — | (15 | ) | — | (7 | ) | 149 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 71 | — | — | — | — | — | — | — | — | 71 | — | 67 | — | — | — | — | — | — | — | — | 67 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 186 | 1 | (1 | ) | — | — | — | (14 | ) | 1 | — | 173 | — | 193 | — | 1 | 6 | — | — | — | 1 | (11 | ) | 190 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 29 | (2 | ) | 2 | — | (12 | ) | — | — | 10 | — | 27 | (2 | ) | 24 | — | 2 | 15 | — | — | — | — | — | 41 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Totalnon-U.S. corporate | 1,607 | 2 | 14 | 93 | (49 | ) | — | (73 | ) | 38 | (43 | ) | 1,589 | (1 | ) | 1,501 | 1 | 17 | 25 | — | — | (20 | ) | 1 | (81 | ) | 1,444 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Residential mortgage-backed | 96 | — | — | — | (45 | ) | — | (8 | ) | 5 | (11 | ) | 37 | — | 46 | — | 1 | — | — | — | — | 26 | — | 73 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 33 | — | (3 | ) | — | — | — | — | — | (2 | ) | 28 | — | 59 | (1 | ) | 2 | 8 | (9 | ) | — | — | — | (7 | ) | 52 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 198 | (6 | ) | 7 | — | (5 | ) | — | (5 | ) | 25 | (64 | ) | 150 | (6 | ) | 175 | (7 | ) | 10 | 10 | (35 | ) | — | (5 | ) | 9 | (7 | ) | 150 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total fixed maturity securities | 4,392 | 3 | 42 | 210 | (120 | ) | — | (135 | ) | 123 | (168 | ) | 4,347 | 1 | 4,260 | (3 | ) | 102 | 114 | (51 | ) | — | (40 | ) | 104 | (169 | ) | 4,317 | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Equity securities | 44 | — | — | 2 | — | — | — | — | — | 46 | — | 47 | — | — | 1 | — | — | — | — | — | 48 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Other invested assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 57 | 9 | — | 15 | — | — | (20 | ) | — | — | 61 | — | 77 | 13 | �� | — | 9 | — | — | (18 | ) | — | — | 81 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other foreign currencycontracts | 1 | — | — | — | — | — | — | — | — | 1 | — | 1 | (1 | ) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total derivative assets | 58 | 9 | — | 15 | — | — | (20 | ) | — | — | 62 | — | 78 | 12 | — | 9 | — | — | (18 | ) | — | — | 81 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total other invested assets | 58 | 9 | — | 15 | — | — | (20 | ) | — | — | 62 | — | 78 | 12 | — | 9 | — | — | (18 | ) | — | — | 81 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Restricted other invested assetsrelated to securitization entities | 131 | — | — | — | — | — | — | — | — | 131 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable(2) | 26 | (3 | ) | — | — | — | 1 | — | — | — | 24 | (3 | ) | 15 | — | — | — | — | — | — | — | — | 15 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Level 3 assets | $ | 4,651 | $ | 9 | $ | 42 | $ | 227 | $ | (120 | ) | $ | 1 | $ | (155 | ) | $ | 123 | $ | (168 | ) | $ | 4,610 | $ | (2 | ) | $ | 4,400 | $ | 9 | $ | 102 | $ | 124 | $ | (51 | ) | $ | — | $ | (58 | ) | $ | 104 | $ | (169 | ) | $ | 4,461 | $ | 6 | |||||||||||||||||||||||||||||||||||||
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(1) | The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
(Amounts in millions) | Beginning balance as of January 1, 2017 | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 (1) | Transfer out of Level 3 (1) | Ending balance as of September 30, 2017 | Total gains (losses) included in net income (loss) attributable to assets still held | Beginning balance as of January 1, 2018 | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 (1) | Transfer out of Level 3 (1) | Ending balance as of June 30, 2018 | Total gains (losses) included in net income attributable to assets still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Included in net income (loss) | Included in OCI | Included in net income | Included in OCI | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agenciesand government-sponsoredenterprises | $ | 2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1 | ) | $ | — | $ | — | $ | 1 | $ | — | $ | 1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1 | ) | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||
State and political subdivisions | 37 | 2 | (2 | ) | — | — | — | — | — | — | 37 | 2 | 37 | 1 | (4 | ) | — | — | — | — | 18 | — | 52 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 576 | — | 20 | 70 | — | — | (4 | ) | 30 | (30 | ) | 662 | — | 574 | (1 | ) | (25 | ) | 69 | (12 | ) | — | (4 | ) | 25 | (4 | ) | 622 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 210 | (1 | ) | 6 | — | (10 | ) | — | (32 | ) | 1 | (16 | ) | 158 | (1 | ) | 147 | — | (5 | ) | 22 | — | — | (19 | ) | — | (7 | ) | 138 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 786 | 11 | (1 | ) | 75 | (31 | ) | — | (163 | ) | 8 | (15 | ) | 670 | 10 | 626 | 1 | (67 | ) | 26 | — | — | (110 | ) | — | (18 | ) | 458 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 121 | — | 2 | 4 | — | — | — | — | — | 127 | — | 81 | — | (2 | ) | — | — | — | — | — | — | 79 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology and | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
communications | 54 | 2 | 3 | 14 | — | — | (1 | ) | — | (20 | ) | 52 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 73 | — | (5 | ) | 4 | — | — | (60 | ) | — | — | 12 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 48 | — | — | 13 | — | — | — | — | (14 | ) | 47 | — | 39 | — | 1 | — | — | — | — | — | — | 40 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 152 | 1 | 3 | — | — | — | (1 | ) | — | (37 | ) | 118 | 1 | 121 | — | (9 | ) | 24 | — | — | (10 | ) | — | (7 | ) | 119 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 258 | — | 9 | 2 | — | — | (5 | ) | — | (2 | ) | 262 | — | 262 | — | (10 | ) | 17 | (3 | ) | — | (12 | ) | — | — | 254 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 139 | 17 | (5 | ) | — | — | — | (48 | ) | — | (42 | ) | 61 | 1 | 60 | — | (1 | ) | — | — | — | (3 | ) | — | — | 56 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 143 | — | 1 | — | (4 | ) | — | (7 | ) | 37 | — | 170 | — | 169 | — | (1 | ) | — | (10 | ) | — | (5 | ) | — | — | 153 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total U.S. corporate | 2,487 | 30 | 38 | 178 | (45 | ) | — | (261 | ) | 76 | (176 | ) | 2,327 | 13 | 2,152 | — | (124 | ) | 162 | (25 | ) | — | (223 | ) | 25 | (36 | ) | 1,931 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Non-U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 386 | — | 5 | 30 | — | — | — | — | (62 | ) | 359 | — | 343 | — | (13 | ) | 22 | — | — | (20 | ) | 15 | (14 | ) | 333 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 206 | — | 6 | — | (1 | ) | — | (1 | ) | — | (33 | ) | 177 | — | 176 | — | (6 | ) | 23 | — | — | (18 | ) | — | — | 175 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 182 | 4 | 9 | 4 | — | — | (30 | ) | — | — | 169 | 2 | 161 | 2 | (11 | ) | 1 | — | — | (2 | ) | — | (1 | ) | 150 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 139 | — | 2 | — | — | — | (12 | ) | — | — | 129 | — | 124 | — | (4 | ) | — | — | — | (12 | ) | — | — | 108 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology and | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
communications | 67 | 1 | 1 | — | (21 | ) | — | (19 | ) | — | — | 29 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 29 | — | — | — | — | — | (13 | ) | — | — | 16 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 109 | — | 3 | 13 | — | — | — | 14 | — | 139 | — | 116 | — | (4 | ) | 3 | — | — | (10 | ) | — | — | 105 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 169 | — | 3 | — | — | — | (15 | ) | — | (7 | ) | 150 | — | 191 | 1 | (5 | ) | — | — | — | (21 | ) | — | — | 166 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 69 | — | — | — | — | — | (2 | ) | 2 | — | 69 | — | 54 | — | (2 | ) | — | (1 | ) | — | (3 | ) | — | — | 48 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 181 | — | 4 | 6 | — | — | (10 | ) | 11 | (11 | ) | 181 | — | 170 | — | (6 | ) | 22 | — | — | — | 17 | — | 203 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 25 | (2 | ) | 2 | 15 | (2 | ) | — | — | 11 | — | 49 | — | 52 | — | (3 | ) | 33 | — | — | — | — | — | 82 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Totalnon-U.S. corporate | 1,533 | 3 | 35 | 68 | (24 | ) | — | (89 | ) | 38 | (113 | ) | 1,451 | 2 | 1,416 | 3 | (54 | ) | 104 | (1 | ) | — | (99 | ) | 32 | (15 | ) | 1,386 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Residential mortgage-backed | 43 | — | 1 | 26 | — | — | (2 | ) | 26 | (8 | ) | 86 | — | 77 | — | — | 29 | — | — | (1 | ) | — | (71 | ) | 34 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 54 | (2 | ) | 4 | 23 | (9 | ) | — | — | — | (48 | ) | 22 | — | 30 | — | (2 | ) | 35 | — | — | — | 13 | (32 | ) | 44 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 145 | (8 | ) | 11 | 116 | (35 | ) | — | (12 | ) | 58 | (50 | ) | 225 | — | 237 | — | (3 | ) | 61 | — | — | (56 | ) | 48 | (121 | ) | 166 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total fixed maturity securities | 4,301 | 25 | 87 | 411 | (113 | ) | — | (365 | ) | 198 | (395 | ) | 4,149 | 17 | 3,950 | 4 | (187 | ) | 391 | (26 | ) | — | (380 | ) | 136 | (275 | ) | 3,613 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Equity securities | 47 | — | — | 1 | (1 | ) | — | — | — | (3 | ) | 44 | — | 44 | — | — | 5 | (3 | ) | — | — | — | — | 46 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Other invested assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 72 | 42 | — | 36 | — | — | (69 | ) | — | — | 81 | 21 | 80 | (7 | ) | — | 29 | — | — | (32 | ) | — | — | 70 | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other foreign currencycontracts | 3 | (3 | ) | — | — | — | — | — | — | — | — | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total derivative assets | 75 | 39 | — | 36 | — | — | (69 | ) | — | — | 81 | 19 | 80 | (7 | ) | — | 29 | — | — | (32 | ) | — | — | 70 | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total other invested assets | 75 | 39 | — | 36 | — | — | (69 | ) | — | — | 81 | 19 | 80 | (7 | ) | — | 29 | — | — | (32 | ) | — | — | 70 | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Restricted other invested assetsrelated to securitization entities | 131 | — | — | — | (131 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable(2) | 16 | (3 | ) | — | — | — | 1 | — | — | — | 14 | (3 | ) | 14 | (3 | ) | — | — | — | 1 | — | — | — | 12 | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Level 3 assets | $ | 4,570 | $ | 61 | $ | 87 | $ | 448 | $ | (245 | ) | $ | 1 | $ | (434 | ) | $ | 198 | $ | (398 | ) | $ | 4,288 | $ | 33 | $ | 4,088 | $ | (6 | ) | $ | (187 | ) | $ | 425 | $ | (29 | ) | $ | 1 | $ | (412 | ) | $ | 136 | $ | (275 | ) | $ | 3,741 | $ | (2 | ) | |||||||||||||||||||||||||||||||||||
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(1) | The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Beginning balance as of January 1, 2016 | Total realized and unrealized gains (losses) | Transfer into Level 3 (1) | Transfer out of Level 3 (1) | Ending balance as of September 30, 2016 | Total gains (losses) included in net income (loss) attributable to assets still held | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Beginning balance as of January 1, 2017 | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 (1) | Transfer out of Level 3 (1) | Ending balance as of June 30, 2017 | Total gains (losses) included in net income attributable to assets still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance as of January 1, 2016 | Included in net income (loss) | Included in OCI | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 (1) | Transfer out of Level 3 (1) | Ending balance as of September 30, 2016 | Total gains (losses) included in net income (loss) attributable to assets still held | Included in net income | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agenciesand government-sponsoredenterprises | $ | 3 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1 | ) | $ | — | $ | — | $ | 2 | $ | — | $ | 2 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1 | ) | $ | — | $ | — | $ | 1 | $ | — | ||||||||||||||||||||||||||||||||||||||||||
State and political subdivisions | 35 | 2 | (1 | ) | 7 | — | — | — | — | (7 | ) | 36 | 2 | 37 | 1 | (1 | ) | — | — | — | — | — | — | 37 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 449 | 1 | 28 | 101 | (6 | ) | — | (9 | ) | 68 | (70 | ) | 562 | — | 576 | — | 20 | 44 | — | — | (2 | ) | 30 | (30 | ) | 638 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 253 | — | (1 | ) | — | — | — | (10 | ) | 7 | (47 | ) | 202 | — | 210 | (1 | ) | 6 | — | (10 | ) | — | (30 | ) | 1 | (16 | ) | 160 | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 715 | 12 | 58 | 54 | (14 | ) | — | (59 | ) | 72 | (18 | ) | 820 | 11 | 786 | 8 | 51 | 53 | (17 | ) | — | (6 | ) | — | (14 | ) | 861 | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 109 | — | 7 | 5 | (18 | ) | — | — | — | — | 103 | — | 121 | — | 1 | — | — | — | — | — | — | 122 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 35 | 2 | 4 | 12 | — | — | — | — | — | 53 | 2 | 54 | 1 | 6 | 14 | — | — | — | — | (17 | ) | 58 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 61 | — | 5 | — | — | — | — | 12 | — | 78 | — | 48 | — | — | 13 | — | — | — | — | — | 61 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 180 | 1 | 6 | — | (10 | ) | — | — | — | (41 | ) | 136 | 1 | 152 | — | 3 | — | — | — | — | — | (37 | ) | 118 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 239 | 4 | 9 | 44 | (5 | ) | — | (42 | ) | 19 | (3 | ) | 265 | — | 258 | — | 9 | 2 | — | — | (3 | ) | — | — | 266 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 106 | 1 | 9 | 17 | — | — | (14 | ) | 5 | — | 124 | 1 | 139 | 1 | 5 | — | — | — | (3 | ) | — | (42 | ) | 100 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 182 | 1 | 1 | — | — | — | (5 | ) | 16 | (33 | ) | 162 | 1 | 143 | — | 1 | — | — | — | (5 | ) | 37 | — | 176 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total U.S. corporate | 2,329 | 22 | 126 | 233 | (53 | ) | — | (139 | ) | 199 | (212 | ) | 2,505 | 16 | 2,487 | 9 | 102 | 126 | (27 | ) | — | (49 | ) | 68 | (156 | ) | 2,560 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Non-U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 287 | — | 9 | 62 | (5 | ) | — | — | 26 | (10 | ) | 369 | — | 386 | — | 5 | 30 | — | — | — | — | (62 | ) | 359 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Energy | 252 | — | 33 | 8 | (11 | ) | — | (31 | ) | — | (26 | ) | 225 | — | 206 | — | 5 | — | (1 | ) | — | (1 | ) | — | (32 | ) | 177 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Finance and insurance | 191 | 2 | 11 | 11 | (1 | ) | — | — | — | — | 214 | 2 | 182 | 3 | 8 | 4 | — | — | (25 | ) | — | — | 172 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 169 | 2 | 9 | 3 | (3 | ) | — | (48 | ) | 12 | — | 144 | — | 139 | — | 2 | — | — | — | (12 | ) | — | — | 129 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Technology andcommunications | 62 | — | 6 | 18 | (5 | ) | — | — | — | — | 81 | — | 67 | — | — | — | — | — | (19 | ) | — | — | 48 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Industrial | 84 | — | 7 | 17 | (20 | ) | — | — | 24 | — | 112 | — | 109 | — | 3 | — | — | — | — | — | — | 112 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital goods | 213 | 1 | 7 | — | — | — | (15 | ) | — | (33 | ) | 173 | 1 | 169 | — | 2 | — | — | — | (15 | ) | — | (7 | ) | 149 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer—cyclical | 71 | — | 2 | — | — | — | (2 | ) | — | — | 71 | — | 69 | — | — | — | — | — | (2 | ) | — | — | 67 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transportation | 144 | 1 | 3 | — | — | — | (14 | ) | 39 | — | 173 | — | 181 | — | 3 | 6 | — | — | — | 11 | (11 | ) | 190 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 72 | (2 | ) | 4 | — | (12 | ) | — | (7 | ) | 10 | (38 | ) | 27 | (2 | ) | 25 | — | 1 | 15 | — | — | — | — | — | 41 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Totalnon-U.S. corporate | 1,545 | 4 | 91 | 119 | (57 | ) | — | (117 | ) | 111 | (107 | ) | 1,589 | 1 | 1,533 | 3 | 29 | 55 | (1 | ) | — | (73 | ) | 11 | (113 | ) | 1,444 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Residential mortgage-backed | 116 | — | 2 | 51 | (45 | ) | — | (13 | ) | 13 | (87 | ) | 37 | — | 43 | — | 1 | 4 | — | — | (1 | ) | 26 | — | 73 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 10 | — | 1 | 23 | — | — | (4 | ) | — | (2 | ) | 28 | — | 54 | (1 | ) | 6 | 9 | (9 | ) | — | — | — | (7 | ) | 52 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 1,142 | (16 | ) | 3 | 12 | (25 | ) | — | (19 | ) | 66 | (1,013 | ) | 150 | (16 | ) | 145 | (7 | ) | 10 | 64 | (35 | ) | — | (7 | ) | 14 | (34 | ) | 150 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total fixed maturity securities | 5,180 | 12 | 222 | 445 | (180 | ) | — | (293 | ) | 389 | (1,428 | ) | 4,347 | 3 | 4,301 | 5 | 147 | 258 | (72 | ) | — | (131 | ) | 119 | (310 | ) | 4,317 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Equity securities | 38 | — | — | 8 | — | — | — | — | — | 46 | — | 47 | — | — | 1 | — | — | — | — | — | 48 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Other invested assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | 1 | — | — | — | — | — | (1 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 30 | 5 | — | 51 | — | — | (25 | ) | — | — | 61 | (4 | ) | 72 | 26 | — | 21 | — | — | (38 | ) | — | — | 81 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other foreign currencycontracts | 3 | (2 | ) | — | 1 | — | — | (1 | ) | — | — | 1 | (2 | ) | 3 | (3 | ) | — | — | — | — | — | — | — | — | (3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total derivative assets | 34 | 3 | — | 52 | — | — | (27 | ) | — | — | 62 | (6 | ) | 75 | 23 | — | 21 | — | — | (38 | ) | — | — | 81 | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total other invested assets | 34 | 3 | — | 52 | — | — | (27 | ) | — | — | 62 | (6 | ) | 75 | 23 | — | 21 | — | — | (38 | ) | — | — | 81 | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Restricted other invested assetsrelated to securitization entities | 232 | (55 | ) | — | — | — | — | (46 | ) | — | — | 131 | 9 | 131 | — | — | — | (131 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable (2) | 17 | 5 | — | — | — | 2 | — | — | — | 24 | 5 | 16 | (2 | ) | — | — | — | 1 | — | — | — | 15 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Level 3 assets | $ | 5,501 | $ | (35 | ) | $ | 222 | $ | 505 | $ | (180 | ) | $ | 2 | $ | (366 | ) | $ | 389 | $ | (1,428 | ) | $ | 4,610 | $ | 11 | $ | 4,570 | $ | 26 | $ | 147 | $ | 280 | $ | (203 | ) | $ | 1 | $ | (169 | ) | $ | 119 | $ | (310 | ) | $ | 4,461 | $ | 7 | |||||||||||||||||||||||||||||||||||||
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(1) | The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gains and losses included in net income (loss) from assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Total realized and unrealized gains (losses) included in net income (loss): | ||||||||||||||||||||||||||||||||
Total realized and unrealized gains (losses) included in net income: | ||||||||||||||||||||||||||||||||
Net investment income | $ | 7 | $ | 11 | $ | 22 | $ | (33 | ) | $ | 2 | $ | 5 | $ | 5 | $ | 14 | |||||||||||||||
Net investment gains (losses) | 28 | (2 | ) | 39 | (2 | ) | 6 | 4 | (11 | ) | 12 | |||||||||||||||||||||
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Total | $ | 35 | $ | 9 | $ | 61 | $ | (35 | ) | $ | 8 | $ | 9 | $ | (6 | ) | $ | 26 | ||||||||||||||
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Total gains (losses) included in net income (loss) attributable to assets still held: | ||||||||||||||||||||||||||||||||
Total gains (losses) included in net income attributable to assets still held: | ||||||||||||||||||||||||||||||||
Net investment income | $ | 5 | $ | 9 | $ | 18 | $ | 23 | $ | 2 | $ | 6 | $ | 5 | $ | 13 | ||||||||||||||||
Net investment gains (losses) | 12 | (11 | ) | 15 | (12 | ) | 7 | — | (7 | ) | (6 | ) | ||||||||||||||||||||
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Total | $ | 17 | $ | (2 | ) | $ | 33 | $ | 11 | $ | 9 | $ | 6 | $ | (2 | ) | $ | 7 | ||||||||||||||
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The amount presented for unrealized gains (losses) included in net income (loss) foravailable-for-sale securities represents impairments and accretion on certain fixed maturity securities.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents a summary of the significant unobservable inputs used for certain asset fair value measurements that are based on internal models and classified as Level 3 as of SeptemberJune 30, 2017:2018:
(Amounts in millions) | Valuation technique | Fair value | Unobservable input | Range | Weighted- average | Valuation technique | Fair value | Unobservable input | Range | Weighted-average | ||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||
Utilities | Internal models | $ | 647 | Credit spreads | 73bps - 379bps | 135bps | Internal models | $ | 616 | Credit spreads | 67bps - 262bps | 138bps | ||||||||||||||||||||||||||||
Energy | Internal models | 86 | Credit spreads | 80bps - 193bps | 142bps | Internal models | 116 | Credit spreads | 80bps - 278bps | 148bps | ||||||||||||||||||||||||||||||
Finance and insurance | Internal models | 629 | Credit spreads | 70bps - 354bps | 180bps | Internal models | 439 | Credit spreads | 83bps - 290bps | 157bps | ||||||||||||||||||||||||||||||
Consumer—non-cyclical | Internal models | 127 | Credit spreads | 88bps - 247bps | 132bps | Internal models | 79 | Credit spreads | 90bps - 172bps | 122bps | ||||||||||||||||||||||||||||||
Technology andcommunications | Internal models | 52 | Credit spreads | 60bps - 353bps | 299bps | Internal models | 12 | Credit spreads | 63bps - 159bps | 94bps | ||||||||||||||||||||||||||||||
Industrial | Internal models | 20 | Credit spreads | 90bps - 207bps | 162bps | Internal models | 40 | Credit spreads | 109bps - 202bps | 150bps | ||||||||||||||||||||||||||||||
Capital goods | Internal models | 118 | Credit spreads | 90bps - 247bps | 140bps | Internal models | 119 | Credit spreads | 93bps - 241bps | 136bps | ||||||||||||||||||||||||||||||
Consumer—cyclical | Internal models | 236 | Credit spreads | 56bps - 210bps | 129bps | Internal models | 213 | Credit spreads | 74bps - 210bps | 135bps | ||||||||||||||||||||||||||||||
Transportation | Internal models | 54 | Credit spreads | 56bps - 123bps | 89bps | Internal models | 50 | Credit spreads | 59bps - 117bps | 87bps | ||||||||||||||||||||||||||||||
Other | Internal models | 161 | Credit spreads | 64bps - 135bps | 75bps | Internal models | 152 | Credit spreads | 74bps - 124bps | 85bps | ||||||||||||||||||||||||||||||
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Total U.S. corporate | Internal models | $ | 2,130 | Credit spreads | 56bps - 379bps | 146bps | Internal models | $ | 1,836 | Credit spreads | 59bps - 290bps | 136bps | ||||||||||||||||||||||||||||
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Non-U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||
Utilities | Internal models | $ | 358 | Credit spreads | 77bps - 158bps | 116bps | Internal models | $ | 333 | Credit spreads | 83bps - 179bps | 128bps | ||||||||||||||||||||||||||||
Energy | Internal models | 146 | Credit spreads | 90bps - 169bps | 116bps | Internal models | 134 | Credit spreads | 93bps - 254bps | 127bps | ||||||||||||||||||||||||||||||
Finance and insurance | Internal models | 160 | Credit spreads | 69bps - 179bps | 107bps | Internal models | 143 | Credit spreads | 74bps - 235bps | 137bps | ||||||||||||||||||||||||||||||
Consumer—non-cyclical | Internal models | 118 | Credit spreads | 56bps - 191bps | 112bps | Internal models | 108 | Credit spreads | 61bps - 202bps | 128bps | ||||||||||||||||||||||||||||||
Technology andcommunications | Internal models | 29 | Credit spreads | 123bps - 222bps | 171bps | Internal models | 15 | Credit spreads | 144bps - 164bps | 155bps | ||||||||||||||||||||||||||||||
Industrial | Internal models | 130 | Credit spreads | 109bps - 247bps | 146bps | Internal models | 105 | Credit spreads | 107bps - 241bps | 150bps | ||||||||||||||||||||||||||||||
Capital goods | Internal models | 121 | Credit spreads | 88bps - 145bps | 112bps | Internal models | 166 | Credit spreads | 93bps - 248bps | 152bps | ||||||||||||||||||||||||||||||
Consumer—cyclical | Internal models | 69 | Credit spreads | 87bps - 169bps | 112bps | Internal models | 44 | Credit spreads | 84bps - 172bps | 102bps | ||||||||||||||||||||||||||||||
Transportation | Internal models | 161 | Credit spreads | 78bps - 210bps | 115bps | Internal models | 184 | Credit spreads | 80bps - 241bps | 135bps | ||||||||||||||||||||||||||||||
Other | Internal models | 49 | Credit spreads | 101bps - 233bps | 181bps | Internal models | 82 | Credit spreads | 108bps - 248bps | 161bps | ||||||||||||||||||||||||||||||
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Totalnon-U.S. corporate | Internal models | $ | 1,341 | Credit spreads | 56bps - 247bps | 120bps | Internal models | $ | 1,314 | Credit spreads | 61bps - 254bps | 136bps | ||||||||||||||||||||||||||||
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Derivative assets: | ||||||||||||||||||||||||||||||||||||||||
Equity index options | | Discounted cash flows | | $ | 81 | | Equity index volatility | | 6% - 27% | 18 | % | | Discounted cash flows | | $ | 70 | | Equity index volatility | | 6% - 28% | 18% | |||||||||||||||||||
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Certain classes of instruments classified as Level 3 are excluded above as a result of not being material or due to limitations in being able to obtain the underlying inputs used by certain third-party sources, such as broker quotes, used as an input in determining fair value.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth our liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:
September 30, 2017 | June 30, 2018 | |||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Policyholder account balances: | ||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) | $ | 257 | $ | — | $ | — | $ | 257 | $ | 235 | $ | — | $ | — | $ | 235 | ||||||||||||||||
Fixed index annuity embedded derivatives | 394 | — | — | 394 | 420 | — | — | 420 | ||||||||||||||||||||||||
Indexed universal life embedded derivatives | 14 | — | — | 14 | 13 | — | — | 13 | ||||||||||||||||||||||||
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Total policyholder account balances | 665 | — | — | 665 | 668 | — | — | 668 | ||||||||||||||||||||||||
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Derivative liabilities: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 39 | — | 39 | — | 71 | — | 71 | — | ||||||||||||||||||||||||
Equity return swaps | 2 | — | 2 | — | ||||||||||||||||||||||||||||
Foreign currency swaps | 9 | — | 9 | — | ||||||||||||||||||||||||||||
Other foreign currency contracts | 23 | — | 23 | — | 23 | — | 23 | — | ||||||||||||||||||||||||
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Total derivative liabilities | 64 | — | 64 | — | 103 | — | 103 | — | ||||||||||||||||||||||||
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Borrowings related to securitization entities | 12 | — | — | 12 | ||||||||||||||||||||||||||||
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Total liabilities | $ | 741 | $ | — | $ | 64 | $ | 677 | $ | 771 | $ | — | $ | 103 | $ | 668 | ||||||||||||||||
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(1) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
December 31, 2016 | December 31, 2017 | |||||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Policyholder account balances: | ||||||||||||||||||||||||||||||||
GMWB embedded derivatives (1) | $ | 303 | $ | — | $ | — | $ | 303 | $ | 250 | $ | — | $ | — | $ | 250 | ||||||||||||||||
Fixed index annuity embedded derivatives | 344 | — | — | 344 | 419 | — | — | 419 | ||||||||||||||||||||||||
Indexed universal life embedded derivatives | 11 | — | — | 11 | 14 | — | — | 14 | ||||||||||||||||||||||||
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Total policyholder account balances | 658 | — | — | 658 | 683 | — | — | 683 | ||||||||||||||||||||||||
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Derivative liabilities: | ||||||||||||||||||||||||||||||||
Interest rate swaps | 349 | — | 349 | — | 25 | — | 25 | — | ||||||||||||||||||||||||
Foreign currency swaps | 5 | — | 5 | — | ||||||||||||||||||||||||||||
Credit default swaps related to securitization entities | 1 | — | 1 | — | ||||||||||||||||||||||||||||
Equity return swaps | 1 | — | 1 | — | 2 | — | 2 | — | ||||||||||||||||||||||||
Other foreign currency contracts | 27 | — | 27 | — | 20 | — | 20 | — | ||||||||||||||||||||||||
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Total derivative liabilities | 383 | — | 383 | — | 47 | — | 47 | — | ||||||||||||||||||||||||
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Borrowings related to securitization entities | 12 | — | — | 12 | ||||||||||||||||||||||||||||
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Total liabilities | $ | 1,053 | $ | — | $ | 383 | $ | 670 | $ | 730 | $ | — | $ | 47 | $ | 683 | ||||||||||||||||
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(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 July 1, 2017 |
Total realized and | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of September 30, 2017 | Total (gains) losses included in net (income) loss attributable to liabilities still held | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Beginning balance as of April 1, 2018 | Total realized and unrealized (gains) losses | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2018 | Total (gains) losses included in net (income) attributable to liabilities still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance as of July 1, 2017 | Included in net (income) loss | Included in OCI | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of September 30, 2017 | Total (gains) losses included in net (income) loss attributable to liabilities still held | Included in net (income) | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
GMWB embeddedderivatives (1) | $ | 281 | $ | (31 | ) | $ | — | $ | — | $ | — | $ | 7 | $ | — | $ | — | $ | — | $ | 257 | $ | (31 | ) | $ | 242 | $ | (14 | ) | $ | — | $ | — | $ | — | $ | 7 | $ | — | $ | — | $ | — | $ | 235 | $ | (14 | ) | ||||||||||||||||||||||||||||||||||||||||
Fixed index annuityembedded derivatives | 376 | 21 | — | — | — | — | (3 | ) | — | — | 394 | 21 | 408 | 15 | — | — | — | — | (3 | ) | — | — | 420 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indexed universal lifeembedded derivatives | 13 | (2 | ) | — | — | — | 3 | — | — | — | 14 | (2 | ) | 13 | (2 | ) | — | — | — | 2 | — | — | — | 13 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total policyholder accountbalances | 670 | (12 | ) | — | — | — | 10 | (3 | ) | — | — | 665 | (12 | ) | 663 | (1 | ) | — | — | — | 9 | (3 | ) | — | — | 668 | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Borrowings related tosecuritization entities | 12 | — | — | — | — | — | — | — | — | 12 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Level 3 liabilities | $ | 682 | $ | (12 | ) | $ | — | $ | — | $ | — | $ | 10 | $ | (3 | ) | $ | — | $ | — | $ | 677 | $ | (12 | ) | $ | 663 | $ | (1 | ) | $ | — | $ | — | $ | — | $ | 9 | $ | (3 | ) | $ | — | $ | — | $ | 668 | $ | (1 | ) | ||||||||||||||||||||||||||||||||||||||
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(1) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(Amounts in millions) | Beginning balance as of July 1, 2016 |
Total realized and | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of September 30, 2016 | Total (gains) losses included in net (income) loss attributable to liabilities still held | Beginning balance as of April 1, 2017 | Total realized and unrealized (gains) losses | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2017 | Total (gains) losses included in net (income) attributable to liabilities still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Included in net (income) loss | Included in OCI | Included in net (income) | Included in OCI | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
GMWB embeddedderivatives (1) | $ | 494 | $ | (63 | ) | $ | — | $ | — | $ | — | $ | 8 | $ | — | $ | — | $ | — | $ | 439 | $ | (59 | ) | $ | 275 | $ | (1 | ) | $ | — | $ | — | $ | — | $ | 7 | $ | — | $ | — | $ | — | $ | 281 | $ | (2 | ) | ||||||||||||||||||||||||||||||||||||||||
Fixed index annuityembedded derivatives | 351 | 16 | — | — | — | — | (3 | ) | — | — | 364 | 16 | 361 | 16 | — | — | — | — | (1 | ) | — | — | 376 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indexed universal lifeembedded derivatives | 13 | (3 | ) | — | — | — | 3 | — | — | — | 13 | (3 | ) | 12 | (2 | ) | — | — | — | 3 | — | — | — | 13 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total policyholder accountbalances | 858 | (50 | ) | — | — | — | 11 | (3 | ) | — | — | 816 | (46 | ) | 648 | 13 | — | — | — | 10 | (1 | ) | — | — | 670 | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Borrowings related tosecuritization entities | 11 | — | — | — | — | — | — | — | — | 11 | — | 13 | — | — | — | — | — | (1 | ) | — | — | 12 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Level 3 liabilities | $ | 869 | $ | (50 | ) | $ | — | $ | — | $ | — | $ | 11 | $ | (3 | ) | $ | — | $ | — | $ | 827 | $ | (46 | ) | $ | 661 | $ | 13 | $ | — | $ | — | $ | — | $ | 10 | $ | (2 | ) | $ | — | $ | — | $ | 682 | $ | 12 | ||||||||||||||||||||||||||||||||||||||||
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(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, 2017 | Total realized and unrealized (gains) losses | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of September 30, 2017 | Total (gains) losses included in net (income) loss attributable to liabilities still held | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Beginning balance as of January 1, 2018 | Total realized and unrealized (gains) losses | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2018 | Total (gains) losses included in net (income) attributable to liabilities still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance as of January 1, 2017 | Included in net (income) loss | Included in OCI | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of September 30, 2017 | Total (gains) losses included in net (income) loss attributable to liabilities still held | Included in net (income) | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
GMWB embeddedderivatives(1) | $ | 303 | $ | (67 | ) | $ | — | $ | — | $ | — | $ | 21 | $ | — | $ | — | $ | — | $ | 257 | $ | (64 | ) | $ | 250 | $ | (30 | ) | $ | — | $ | — | $ | — | $ | 15 | $ | — | $ | — | $ | — | $ | 235 | $ | (26 | ) | ||||||||||||||||||||||||||||||||||||||||
Fixed index annuityembedded derivatives | 344 | 57 | — | — | — | — | (7 | ) | — | — | 394 | 57 | 419 | 7 | — | — | — | — | (6 | ) | — | — | 420 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indexed universal lifeembedded derivatives | 11 | (5 | ) | — | — | — | 8 | — | — | — | 14 | (5 | ) | 14 | (7 | ) | — | — | — | 6 | — | — | — | 13 | (7 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total policyholder accountbalances | 658 | (15 | ) | — | — | — | 29 | (7 | ) | — | — | 665 | (12 | ) | 683 | (30 | ) | — | — | — | 21 | (6 | ) | — | — | 668 | (26 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Borrowings related tosecuritization entities | 12 | 1 | — | — | — | — | (1 | ) | — | — | 12 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Level 3 liabilities | $ | 670 | $ | (14 | ) | $ | — | $ | — | $ | — | $ | 29 | $ | (8 | ) | $ | — | $ | — | $ | 677 | $ | (11 | ) | $ | 683 | $ | (30 | ) | $ | — | $ | — | $ | — | $ | 21 | $ | (6 | ) | $ | — | $ | — | $ | 668 | $ | (26 | ) | ||||||||||||||||||||||||||||||||||||||
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(1) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
Beginning balance as of January 1, 2016 | Total realized and unrealized (gains) losses | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of September 30, 2016 | Total (gains) losses included in net (income) loss attributable to liabilities still held | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Beginning balance as of January 1, 2017 | Total realized and unrealized (gains) losses | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of June 30, 2017 | Total (gains) losses included in net (income) attributable to liabilities still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance as of January 1, 2016 | Included in net (income) loss | Included in OCI | Purchases | Sales | Issuances | Settlements | Transfer into Level 3 | Transfer out of Level 3 | Ending balance as of September 30, 2016 | Total (gains) losses included in net (income) loss attributable to liabilities still held | Included in net (income) | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
GMWB embeddedderivatives (1) | $ | 352 | $ | 63 | $ | — | $ | — | $ | — | $ | 24 | $ | — | $ | — | $ | — | $ | 439 | $ | 72 | $ | 303 | $ | (36 | ) | $ | — | $ | — | $ | — | $ | 14 | $ | — | $ | — | $ | — | $ | 281 | $ | (33 | ) | ||||||||||||||||||||||||||||||||||||||||||
Fixed index annuityembedded derivatives | 342 | 22 | — | — | — | 10 | (10 | ) | — | — | 364 | 22 | 344 | 36 | — | — | — | — | (4 | ) | — | — | 376 | 36 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indexed universal lifeembedded derivatives | 10 | (6 | ) | — | — | — | 9 | — | — | — | 13 | (6 | ) | 11 | (3 | ) | — | — | — | 5 | — | — | — | 13 | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total policyholderaccount balances | 704 | 79 | — | — | — | 43 | (10 | ) | — | — | 816 | 88 | 658 | (3 | ) | — | — | — | 19 | (4 | ) | — | — | 670 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Derivative liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps relatedto securitization entities | 14 | (13 | ) | — | — | — | — | 2 | — | (3 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total derivative liabilities | 14 | (13 | ) | — | — | — | — | 2 | — | (3 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Borrowings related tosecuritization entities | 81 | (65 | ) | — | — | — | — | (5 | ) | — | — | 11 | — | 12 | 1 | — | — | — | — | (1 | ) | — | — | 12 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total Level 3 liabilities | $ | 799 | $ | 1 | $ | — | $ | — | $ | — | $ | 43 | $ | (13 | ) | $ | — | $ | (3 | ) | $ | 827 | $ | 88 | $ | 670 | $ | (2 | ) | $ | — | $ | — | $ | — | $ | 19 | $ | (5 | ) | $ | — | $ | — | $ | 682 | $ | 1 | ||||||||||||||||||||||||||||||||||||||||
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(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 table presents the gains and losses included in net (income) loss from liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Total realized and unrealized (gains) losses included in net (income) loss: | ||||||||||||||||||||||||||||||||
Total realized and unrealized (gains) losses included in net (income): | ||||||||||||||||||||||||||||||||
Net investment income | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Net investment (gains) losses | (12 | ) | (50 | ) | (14 | ) | 1 | (1 | ) | 13 | (30 | ) | (2 | ) | ||||||||||||||||||
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Total | $ | (12 | ) | $ | (50 | ) | $ | (14 | ) | $ | 1 | $ | (1 | ) | $ | 13 | $ | (30 | ) | $ | (2 | ) | ||||||||||
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Total (gains) losses included in net (income) loss attributable to liabilities still held: | ||||||||||||||||||||||||||||||||
Total (gains) losses included in net (income) attributable to liabilities still held: | ||||||||||||||||||||||||||||||||
Net investment income | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Net investment (gains) losses | (12 | ) | (46 | ) | (11 | ) | 88 | (1 | ) | 12 | (26 | ) | 1 | |||||||||||||||||||
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Total | $ | (12 | ) | $ | (46 | ) | $ | (11 | ) | $ | 88 | $ | (1 | ) | $ | 12 | $ | (26 | ) | $ | 1 | |||||||||||
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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 tradingequity securities and purchases, issuances and settlements of derivative instruments.
Issuances presented for GMWB embedded derivative liabilities are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance. Issuances for fixed index annuity and indexed universal life embedded derivative liabilities represent the amount of the premium received that is attributed to the value of the embedded derivative. Settlements of embedded derivatives are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income) loss”” in the tables presented above.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents a summary of the significant unobservable inputs used for certain liability fair value measurements that are based on internal models and classified as Level 3 as of SeptemberJune 30, 2017:2018:
(Amounts in millions) | Valuation technique | Fair value | Unobservable input | Range | Weighted- average | Valuation technique | Fair value | Unobservable input | Range | Weighted-average | ||||||||||||||||||||||||
Policyholder account balances: | ||||||||||||||||||||||||||||||||||
| Withdrawal utilization rate | | 40% - 84% | 65% | Withdrawal utilization rate | 42% - 86% | 67% | |||||||||||||||||||||||||||
Lapse rate | — % - 8% | 4% | Lapse rate | 2% - 9% | 4% | |||||||||||||||||||||||||||||
| Non-performance risk (credit spreads) | | 26bps - 83bps | 66bp | s | Non-performance risk (credit spreads) | 28bps - 83bps | 69bps | ||||||||||||||||||||||||||
GMWB embeddedderivatives(1) | | Stochastic cash flow model | | $257 | | Equity index volatility | | 13% - 24% | 20% | | Stochastic cash flow model | | $235 | Equity index volatility | 15% - 24% | 21% | ||||||||||||||||||
Fixed index annuity embeddedderivatives | | Option budget method | | $394 | | Expected future interest credited | | — % - 2% | 1% | | Option budget method | | $420 | Expected future interest credited | —% - 3% | 1% | ||||||||||||||||||
Indexed universal life embeddedderivatives | | Option budget method | | $14 | | Expected future interest credited | | 3% - 8% | 5% | | Option budget method | | $13 | Expected future interest credited | 3% - 9% | 6% |
(1) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
(7) Deferred Acquisition Costs
The following table presents the activity impacting deferred acquisition costs (“DAC”) for the dates indicated:
As of or for the nine months ended September 30, | ||||||||
(Amounts in millions) | 2017 | 2016 | ||||||
Unamortized beginning balance | $ | 4,241 | $ | 4,569 | ||||
Impact of foreign currency translation | 12 | 8 | ||||||
Costs deferred | 67 | 124 | ||||||
Amortization, net of interest accretion | (261 | ) | (257 | ) | ||||
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Unamortized ending balance | 4,059 | 4,444 | ||||||
Accumulated effect of net unrealized investment (gains) losses | (1,717 | ) | (462 | ) | ||||
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Ending balance | $ | 2,342 | $ | 3,982 | ||||
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We regularly review DAC to determine if it is recoverable from future income. In 2017 and 2016, we performed loss recognition testing and determined that we had premium deficiencies in our fixed immediate annuity products. As of June 30, 2016, we wrote off the entire DAC balance for our fixed immediate annuity products of $14 million through amortization. In addition, as a result of our fixed immediate annuity loss recognition testing as of September 30, 2017 and 2016, we increased our future policy benefit reserves and recognized expenses of $31 million and $24 million, respectively. The premium deficiency test results were primarily driven by the low interest rate environment. As of September 30, 2017, we believe all of our other businesses had sufficient future income and therefore the related DAC was recoverable.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In addition, we are required to analyze the impacts from net unrealized investment gains and losses on ouravailable-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. These “shadow accounting” adjustments result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses onavailable-for-sale investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, based on changes in net unrealized investment (gains) losses, these shadow adjustments may reverse from period to period. As of September 30, 2017, due primarily to the decline in interest rates increasing unrealized investments gains, we reduced the DAC balance of our long-term care insurance business to zero, a cumulative decrease in the accumulated effect of net unrealized investment gains of approximately $1.3 billion out of the total $1.7 billion in the table above, with an offsetting amount recorded in other comprehensive income (loss). In addition, we increased our future policy benefit reserves in our long-term care insurance business by approximately $333 million as of September 30, 2017, with an offsetting amount recorded in other comprehensive income (loss). There was no impact to net income (loss).
(8) Liability for Policy and Contract Claims
The following table sets forth changes in our liability for policy and contract claims as of the dates indicated:
As of or for the nine months ended September 30, | As of or for the six months ended June 30, | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Beginning balance | $ | 9,256 | $ | 8,095 | $ | 9,594 | $ | 9,256 | ||||||||
Less reinsurance recoverables | (2,409 | ) | (2,122 | ) | (2,419 | ) | (2,409 | ) | ||||||||
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Net beginning balance | 6,847 | 5,973 | 7,175 | 6,847 | ||||||||||||
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Incurred related to insured events of: | ||||||||||||||||
Current year | 2,748 | 2,569 | 1,946 | 1,804 | ||||||||||||
Prior years | (306 | ) | 320 | (244 | ) | (244 | ) | |||||||||
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Total incurred | 2,442 | 2,889 | 1,702 | 1,560 | ||||||||||||
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Paid related to insured events of: | ||||||||||||||||
Current year | (755 | ) | (727 | ) | (434 | ) | (450 | ) | ||||||||
Prior years | (1,746 | ) | (1,646 | ) | (1,266 | ) | (1,224 | ) | ||||||||
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Total paid | (2,501 | ) | (2,373 | ) | (1,700 | ) | (1,674 | ) | ||||||||
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Interest on liability for policy and contract claims | 223 | 188 | 163 | 147 | ||||||||||||
Foreign currency translation | 27 | 14 | (16 | ) | 18 | |||||||||||
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Net ending balance | 7,038 | 6,691 | 7,324 | 6,898 | ||||||||||||
Add reinsurance recoverables | 2,346 | 2,178 | 2,341 | 2,341 | ||||||||||||
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Ending balance | $ | 9,384 | $ | 8,869 | $ | 9,665 | $ | 9,239 | ||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The liability for policy and contract claims represents our current best estimate; however, there may be future adjustments to this estimate and related assumptions. Such adjustments, reflecting any variety of new and
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
adverse trends, could possibly be significant, and result in increases in reserves by an amount that could be material to our results of operations and financial condition and liquidity.
As ofFor the ninesix months ended SeptemberJune 30, 2018 and 2017, the favorable development of $306$244 million for both years related to insured events of prior years was primarily attributable to favorable claim terminations, including pending claims that terminate before becoming an active claim, in our long-term care insurance business. OurThe favorable development for the six months ended June 30, 2018 and 2017, was also impacted by our mortgage insurance businesses, also experienced favorable prior year claim development mostlyprimarily from an improvement in net cures and aging of existing claims, including a favorable reserve adjustment of $26 million in our U.S. mortgage insurance business during the second quarter of 2018.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) Borrowings
(a) Long-Term Borrowings
The following table sets forth total long-term borrowings as wellof the dates indicated:
(Amounts in millions) | June 30, 2018 | December 31, 2017 | ||||||
Genworth Holdings (1) | ||||||||
Floating Rate Senior Secured Term Loan Facility, due 2023 | $ | 448 | $ | — | ||||
6.52% Senior Notes, due 2018 | — | 597 | ||||||
7.70% Senior Notes, due 2020 | 397 | 397 | ||||||
7.20% Senior Notes, due 2021 | 381 | 381 | ||||||
7.625% Senior Notes, due 2021 | 704 | 704 | ||||||
4.90% Senior Notes, due 2023 | 399 | 399 | ||||||
4.80% Senior Notes, due 2024 | 400 | 400 | ||||||
6.50% Senior Notes, due 2034 | 297 | 297 | ||||||
6.15%Fixed-to-Floating Rate Junior Subordinated Notes, due 2066 | 598 | 598 | ||||||
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Subtotal | 3,624 | 3,773 | ||||||
Bond consent fees | (30 | ) | (33 | ) | ||||
Deferred borrowing charges | (23 | ) | (16 | ) | ||||
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Total Genworth Holdings | 3,571 | 3,724 | ||||||
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Canada (2) | ||||||||
5.68% Senior Notes, due 2020 | 209 | 219 | ||||||
4.24% Senior Notes, due 2024 | 122 | 128 | ||||||
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Subtotal | 331 | 347 | ||||||
Deferred borrowing charges | (1 | ) | (1 | ) | ||||
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Total Canada | 330 | 346 | ||||||
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Australia (3) | ||||||||
Floating Rate Junior Notes, due 2025 | 148 | 156 | ||||||
Deferred borrowing charges | (2 | ) | (2 | ) | ||||
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Total Australia | 146 | 154 | ||||||
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Total | $ | 4,047 | $ | 4,224 | ||||
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(1) | We have the option to redeem all or a portion of the senior notes at any time with notice to the noteholders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread. |
(2) | Senior notes issued by Genworth MI Canada Inc. (“Genworth Canada”), our majority-owned subsidiary. |
(3) | Subordinated floating rate notes issued by Genworth Financial Mortgage Insurance Pty Limited, our indirect wholly-owned subsidiary. |
Genworth Holdings
On May 22, 2018, Genworth Holdings redeemed $597 million of its 6.52% senior notes that were issued in May 2008 and matured in May 2018. A cash payment of $616 million comprised of net proceeds of $441 million from the senior secured term loan facility (“Term Loan”), as described below, and $175 million of existing cash on hand was used to fully redeem the principal and accrued interest balance of the May 2018 senior notes.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 7, 2018, Genworth Holdings entered into a $450 million Term Loan, which matures in March 2023 and was issued at a 0.5% discount. Principal payments under the agreement are due quarterly, commencing on June 30, 2018, and are payable in equal amounts of 0.25% per quarter of the original principal amount with the remaining balance due at maturity. At our option, the Term Loan will bear interest at either an adjusted London Interbank Offered Rate (“LIBOR”) no lower delinquenciesthan 1.0% plus a margin of 4.5% per annum or an alternate base rate plus a margin of 3.5% per annum. The interest rate on the Term Loan as of June 30, 2018 was 6.5%. We incurred $7 million of borrowing costs that were deferred. The Term Loan is unconditionally guaranteed by Genworth Financial, and an improvementGenworth Financial International Holdings, LLC (“GFIH”) has provided a limited recourse guarantee to the lenders of Genworth Holdings’ outstanding Term Loan, which is secured by GFIH’s ownership interest in Genworth Canada’s outstanding common shares. GFIH is our indirect wholly-owned subsidiary and owns approximately 40.5% of the outstanding common stock of Genworth Canada. The Term Loan is subject to other terms and conditions, including but not limited to: voluntary prepayments subject to prepayment penalties, mandatory prepayments in the estimated claim severityevent of certain asset sales or amount.the incurrence of further indebtedness by Genworth Financial and various financial covenants.
(9) Income Taxes
The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||
Pre-tax income (loss) | $ | 286 | $ | (125 | ) | $ | 1,019 | $ | 376 | |||||||||||||||||||||||
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Statutory U.S. federal income tax rate | $ | 100 | 35.0 | % | $ | (44 | ) | 35.0 | % | $ | 357 | 35.0 | % | $ | 132 | 35.0 | % | |||||||||||||||
Increase (reduction) in rate resulting from: | ||||||||||||||||||||||||||||||||
State income tax, net of federal income tax effect | 1 | 0.1 | — | — | (2 | ) | (0.2 | ) | 1 | 0.2 | ||||||||||||||||||||||
Tax favored investments | 6 | 1.9 | 1 | (0.7 | ) | 3 | 0.3 | (2 | ) | (0.5 | ) | |||||||||||||||||||||
Effect of foreign operations | (6 | ) | (2.0 | ) | 5 | (3.9 | ) | (14 | ) | (1.3 | ) | (12 | ) | (3.3 | ) | |||||||||||||||||
Non-deductible expenses | — | — | (1 | ) | 0.5 | 1 | 0.1 | (1 | ) | (0.1 | ) | |||||||||||||||||||||
Valuation allowance | — | — | 265 | (212.9 | ) | — | — | 240 | 63.8 | |||||||||||||||||||||||
Stock-based compensation | 1 | 0.5 | 2 | (1.8 | ) | 3 | 0.2 | 5 | 1.4 | |||||||||||||||||||||||
Loss on sale of business | — | — | — | — | — | — | (1 | ) | (0.2 | ) | ||||||||||||||||||||||
Other, net | — | — | (6 | ) | 4.8 | — | — | (7 | ) | (1.8 | ) | |||||||||||||||||||||
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Effective rate | $ | 102 | 35.5 | % | $ | 222 | (179.0 | )% | $ | 348 | 34.1 | % | $ | 355 | 94.5 | % | ||||||||||||||||
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Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Statutory U.S. federal income tax rate | 21.0 | % | 35.0 | % | 21.0 | % | 35.0 | % | ||||||||
Increase (reduction) in rate resulting from: | ||||||||||||||||
TCJA, impact from change in tax rate | 5.4 | — | 3.3 | — | ||||||||||||
Swaps terminated prior to the TCJA | 3.9 | — | 3.2 | — | ||||||||||||
Effect of foreign operations | 3.4 | (2.0 | ) | 3.2 | (1.0 | ) | ||||||||||
Valuation allowance | (2.0 | ) | — | (1.3 | ) | — | ||||||||||
Provision to return adjustments | (1.6 | ) | — | (0.7 | ) | — | ||||||||||
Other, net | 0.7 | (0.5 | ) | 0.9 | (0.4 | ) | ||||||||||
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Effective rate | 30.8 | % | 32.5 | % | 29.6 | % | 33.6 | % | ||||||||
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The decrease in the effective tax rate for the three and ninesix months ended SeptemberJune 30, 20172018 was impactedprimarily attributable to the enactment of the TCJA, which includes a change in the U.S. corporate federal income tax rate from 35% to 21%. This decrease was partially offset by higher tax benefits from lower taxedthe effect of foreign income. Theoperations, which had an overall increase on the effective tax rate foras our primary foreign subsidiaries are now in jurisdictions with higher statutory tax rates than the threeUnited States. The decrease was also partially offset by tax expense in our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA, which are tax effected at 35% as they are amortized into net investment income and nine months ended September 30, 2016 was impacted byfrom a valuation allowanceprovisional tax expense of $265$19 million recorded onin the current year related to a revaluation of deferred tax assets and liabilities on our foreign subsidiaries in light of the TCJA.
As of December 31, 2017, as prescribed by the SEC’s Staff Accounting Bulletin (“SAB”) 118, we recorded provisional estimates of the tax impact of certain changes in tax law under the TCJA. However, for other changes in the tax law where we were unable to record a reasonable estimate, no amounts were recorded.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of June 30, 2018, we are still in the process of completing the accounting of our provisional estimates and refining our computations as follows:
Deferred tax assets and liabilities
We recorded a provisional tax benefit of $154 million in 2017 related to foreign tax credits that we no longer expect to realize. The effective tax rate for the nine months ended September 30, 2016 was also impacted by the reversalremeasurement of a deferred tax valuation allowance related to our mortgage insurance business in Europe due to taxable gains supporting the recognition of thesecertain deferred tax assets and liabilities as a result of the newly enacted tax rate. The Internal Revenue Service has indicated that additional guidance will be forthcoming with respect to several technical areas within the TCJA, which could affect the measurement of these balances or potentially give rise to new deferred tax amounts. During the three months ended June 30, 2018, we recorded a provisional tax expense of $19 million related to a revaluation of deferred tax assets and liabilities on our foreign subsidiaries in light of the TCJA. This amount is considered provisional and additional refinements to the calculation may be required.
Foreign tax effects
We recorded a provisional tax expense of $63 million in 2017 related to theone-time transition tax on mandatory deemed repatriation of earnings and profits (“E&P”). We have not yet completed our calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based, in part, on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of our post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. During the six months ended June 30, 2018, there were no changes to the provisional estimates made in 2017 and no additional measurement period adjustment were recorded.
Insurance reserve transition adjustment
We recorded a provisional reclassification in deferred tax assets and liabilities in the prior year.amount of $134 million in 2017 related to the transition adjustment required under the TCJA with respect to life insurance policyholder reserves. We continue to refine our insurance reserve calculations and apply the new reserving rules under the TCJA on a product level basis. During the six months ended June 30, 2018, we updated our provisional estimate and identified a measurement period increase to this reclassification of $40 million which has been reflected in our consolidated balance sheet as of June 30, 2018. This measurement period adjustment had no impact on net income, and we will continue to refine this estimate throughout the measurement period.
As of June 30, 2018, we are still in the process of completing the accounting for the following areas for which a reasonable estimate could not be made.
Foreign tax effects
We are still in the process of analyzing the impact of the Global Intangible Low Taxed Income (“GILTI”) and Base Erosion Anti-Abuse Tax (“BEAT”), including accounting policy elections. During the six months ended June 30, 2018, we have included the current tax effects of GILTI and BEAT taxes in current year earnings, but we have not yet made a policy election with respect to the accounting for the potential deferred tax effects of the GILTI tax and no measurement period adjustment has been recorded.
State tax effects
We have not analyzed certain areas of state income taxes, including the treatment of theone-time transition tax. Accordingly, no reasonable estimate can be made, and no measurement period adjustment has been recorded.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Further regulatory guidance related to the TCJA is expected to be issued in 2018 which may result in changes to our current estimates. Any revisions to the estimated impacts of the TCJA will be recorded quarterly until the computations are complete which is expected no later than the fourth quarter of 2018.
(10) Segment Information
We have the following five operating business segments: U.S. Mortgage Insurance; Canada Mortgage Insurance; Australia Mortgage Insurance; U.S Life Insurance (which includes our long-term care insurance, life insurance and fixed annuities businesses); and Runoff (which includes the results ofnon-strategic products which have not been actively sold). In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level,
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.
On December 22, 2017, the TCJA was signed into law. The TCJA reduced the U.S. corporate federal income tax rate to 21% effective for taxable years beginning on January 1, 2018 and migrated the worldwide tax system to a territorial international tax system. Therefore, beginning on January 1, 2018 we taxed our international businesses at their local statutory tax rates and our domestic businesses at the new enacted tax rate of 21%. We allocate our consolidated provision for income taxes to our operating segments. Our allocation methodology applies a specific tax rate to thepre-tax income (loss) of each segment, which is then adjusted in each segment to reflect the tax attributes of items unique to that segment such as foreign income. The difference between the consolidated provision for income taxes and the sum of the provision for income taxes in each segment is reflected in Corporate and Other activities.
The annually-determined tax rates and adjustments to each segment’s provision for income taxes are estimates which are subject to review and could change from year to year.
We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income (loss) and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders.” We define adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding theafter-tax effects of income attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions, restructuring costs and infrequent or unusualnon-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment ofnon-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusualnon-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and restructuring costs are also excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders because, in our opinion, they are not indicative of overall operating trends.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Infrequent or unusualnon-operating items are also excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends.
While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders have occurred in the past and could, and in some cases will, recur in the future. Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
definition of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.
AdjustmentsBeginning in the first quarter of 2018, we assumed a tax rate of 21% on certain adjustments to reconcile net income (loss) attributableavailable to Genworth Financial, Inc.’s common stockholders and adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders assume(unless otherwise indicated). In the prior year, we assumed a 35% tax rate (unless otherwise indicated)of 35%, the previous U.S. corporate federal income tax rate prior to the enactment of the TCJA, on certain adjustments to reconcile net income available to Genworth Financial, Inc.’s common stockholders and adjusted operating income available to Genworth Financial, Inc.’s common stockholders. These adjustments are also net of the portion attributable to noncontrolling interests. Netinterests and net investment gains (losses) are also adjusted for DAC and other intangible amortization and certain benefit reserves.
We recorded apre-tax expense of $1 million in both the third and first quartersquarter of 2017 related to restructuring costs as the company continueswe continued to evaluate and appropriately size itsour organizational needs and expenses.
In the third quarter of 2016, we recorded apre-tax expense of $2 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.
In the second quarter of 2016, we completed the sale of our mortgage insurance business in Europe and recorded an additionalpre-tax loss of $2 million; we completed the sale of our term life insurance new business platform and recorded apre-tax gain of $12 million; we settled restricted borrowings related to a securitization entity and recorded a $64 millionpre-tax gain related to the early extinguishment of debt; and we recorded apre-tax expense of $5 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.
In the first quarter of 2016, we recorded apre-tax loss of $7 million and a tax benefit of $27 million related to the planned sale of our mortgage insurance business in Europe; we paid apre-tax make-whole expense of $20 million related to the early redemption of Genworth Holdings’ 2016 notes; we also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for apre-tax gain of $4 million; we completed a life block transaction resulting in apre-tax loss of $9 million in connection with the early extinguishment ofnon-recourse funding obligations; and we recorded apre-tax expense of $15 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.
There were no infrequent or unusual items excluded from adjusted operating income (loss) during the periods presented other than the following item. We incurred fees during the first quarter of 2016 related to Genworth Holdings’ bond consent solicitation of $18 million for broker, advisor and investment banking fees.presented.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues: | ||||||||||||||||
U.S. Mortgage Insurance segment | $ | 194 | $ | 186 | $ | 570 | $ | 537 | ||||||||
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Canada Mortgage Insurance segment | 220 | 156 | 593 | 463 | ||||||||||||
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Australia Mortgage Insurance segment | 98 | 115 | 317 | 333 | ||||||||||||
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U.S. Life Insurance segment: | ||||||||||||||||
Long-term care insurance | 1,033 | 980 | 3,063 | 3,051 | ||||||||||||
Life insurance | 389 | 418 | 1,217 | 953 | ||||||||||||
Fixed annuities | 190 | 218 | 605 | 613 | ||||||||||||
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U.S. Life Insurance segment | 1,612 | 1,616 | 4,885 | 4,617 | ||||||||||||
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Runoff segment | 90 | 84 | 266 | 218 | ||||||||||||
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Corporate and Other activities | 1 | (7 | ) | (22 | ) | 3 | ||||||||||
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Total revenues | $ | 2,215 | $ | 2,150 | $ | 6,609 | $ | 6,171 | ||||||||
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The increase in total revenues for the nine months ended September 30, 2017 was primarily attributable to our U.S. Life Insurance segment driven mostly by a life block transaction in our life insurance business in the first quarter of 2016, under which we initially ceded $326 million of certain term life insurance premiums.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues: | ||||||||||||||||
U.S. Mortgage Insurance segment | $ | 208 | $ | 189 | $ | 408 | $ | 376 | ||||||||
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Canada Mortgage Insurance segment | 150 | 204 | 308 | 373 | ||||||||||||
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Australia Mortgage Insurance segment | 136 | 97 | 243 | 219 | ||||||||||||
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U.S. Life Insurance segment: | ||||||||||||||||
Long-term care insurance | 1,035 | 1,036 | 2,055 | 2,030 | ||||||||||||
Life insurance | 367 | 411 | 746 | 828 | ||||||||||||
Fixed annuities | 176 | 210 | 358 | 415 | ||||||||||||
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U.S. Life Insurance segment | 1,578 | 1,657 | 3,159 | 3,273 | ||||||||||||
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Runoff segment | 80 | 89 | 148 | 176 | ||||||||||||
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Corporate and Other activities | 7 | (13 | ) | 8 | (23 | ) | ||||||||||
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Total revenues | $ | 2,159 | $ | 2,223 | $ | 4,274 | $ | 4,394 | ||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities and a summary of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities for the periods indicated:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income (loss) available to Genworth Financial, Inc.’scommon stockholders | $ | 107 | $ | (380 | ) | $ | 464 | $ | (155 | ) | ||||||
Add: net income attributable to noncontrolling interests | 68 | 48 | 198 | 151 | ||||||||||||
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Net income (loss) | 175 | (332 | ) | 662 | (4 | ) | ||||||||||
Income (loss) from discontinued operations, net of taxes | (9 | ) | 15 | (9 | ) | (25 | ) | |||||||||
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Income (loss) from continuing operations | 184 | (347 | ) | 671 | 21 | |||||||||||
Less: income from continuing operations attributable tononcontrolling interests | 68 | 48 | 198 | 151 | ||||||||||||
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Income (loss) from continuing operations available to Genworth Financial,Inc.’s common stockholders | 116 | (395 | ) | 473 | (130 | ) | ||||||||||
Adjustments to income (loss) from continuing operations available toGenworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net (1) | (62 | ) | (18 | ) | (161 | ) | (38 | ) | ||||||||
(Gains) losses from sale of businesses | — | — | — | (3 | ) | |||||||||||
(Gains) losses on early extinguishment of debt, net | — | — | — | (48 | ) | |||||||||||
Losses from life block transactions | — | — | — | 9 | ||||||||||||
Expenses related to restructuring | 1 | 2 | 2 | 22 | ||||||||||||
Fees associated with bond consent solicitation | — | — | — | 18 | ||||||||||||
Taxes on adjustments | 21 | 6 | 56 | (9 | ) | |||||||||||
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Adjusted operating income (loss) available to Genworth Financial, Inc.’scommon stockholders | $ | 76 | $ | (405 | ) | $ | 370 | $ | (179 | ) | ||||||
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Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net income available to Genworth Financial, Inc.’scommon stockholders | $ | 190 | $ | 202 | $ | 302 | $ | 357 | ||||||||
Add: net income attributable to noncontrolling interests | 59 | 69 | 112 | 130 | ||||||||||||
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Net income | 249 | 271 | 414 | 487 | ||||||||||||
Loss from discontinued operations, net of taxes | — | — | — | — | ||||||||||||
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Income from continuing operations | 249 | 271 | 414 | 487 | ||||||||||||
Less: income from continuing operations attributable to noncontrolling interests | 59 | 69 | 112 | 130 | ||||||||||||
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Income from continuing operations available to Genworth Financial,Inc.’s common stockholders | 190 | 202 | 302 | 357 | ||||||||||||
Adjustments to income from continuing operations available toGenworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net (1) | 12 | (79 | ) | 29 | (99 | ) | ||||||||||
Expenses related to restructuring | — | — | — | 1 | ||||||||||||
Taxes on adjustments | (2 | ) | 28 | (6 | ) | 35 | ||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders | $ | 200 | $ | 151 | $ | 325 | $ | 294 | ||||||||
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(1) | For the three months ended |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
U.S. Mortgage Insurance segment | $ | 73 | $ | 67 | $ | 237 | $ | 189 | $ | 137 | $ | 91 | $ | 248 | $ | 164 | ||||||||||||||||
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Canada Mortgage Insurance segment | 37 | 36 | 114 | 107 | 46 | 41 | 95 | 77 | ||||||||||||||||||||||||
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Australia Mortgage Insurance segment | 12 | 14 | 37 | 48 | 22 | 12 | 41 | 25 | ||||||||||||||||||||||||
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U.S. Life Insurance segment: | ||||||||||||||||||||||||||||||||
Long-term care insurance | (5 | ) | (270 | ) | 42 | (199 | ) | 22 | 33 | (10 | ) | 47 | ||||||||||||||||||||
Life insurance | (9 | ) | 48 | 6 | 110 | 4 | (1 | ) | 3 | 15 | ||||||||||||||||||||||
Fixed annuities | 13 | 15 | 43 | 28 | 31 | 7 | 59 | 30 | ||||||||||||||||||||||||
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U.S. Life Insurance segment | (1 | ) | (207 | ) | 91 | (61 | ) | 57 | 39 | 52 | 92 | |||||||||||||||||||||
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Runoff segment | 13 | 12 | 38 | 22 | 13 | 11 | 23 | 25 | ||||||||||||||||||||||||
Corporate and Other activities | (58 | ) | (327 | ) | (147 | ) | (484 | ) | (75 | ) | (43 | ) | (134 | ) | (89 | ) | ||||||||||||||||
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 76 | $ | (405 | ) | $ | 370 | $ | (179 | ) | ||||||||||||||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | $ | 200 | $ | 151 | $ | 325 | $ | 294 | ||||||||||||||||||||||||
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The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:
(Amounts in millions) | September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | ||||||||||||
Assets: | ||||||||||||||||
U.S. Mortgage Insurance segment | $ | 3,015 | $ | 2,674 | $ | 3,393 | $ | 3,273 | ||||||||
Canada Mortgage Insurance segment | 5,435 | 4,884 | 5,255 | 5,534 | ||||||||||||
Australia Mortgage Insurance segment | 2,814 | 2,619 | 2,696 | 2,973 | ||||||||||||
U.S. Life Insurance segment | 81,858 | 81,933 | 79,925 | 81,295 | ||||||||||||
Runoff segment | 11,149 | 11,352 | 10,472 | 10,907 | ||||||||||||
Corporate and Other activities | 358 | 1,196 | 736 | 1,315 | ||||||||||||
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Total assets | $ | 104,629 | $ | 104,658 | $ | 102,477 | $ | 105,297 | ||||||||
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(11) Commitments and Contingencies
(a) Litigation and Regulatory Matters
We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases toin-forcelong-termin-force long-term care insurance premiums, payment of contingent or other sales commissions, claims payments and procedures, product design, product disclosure, product administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 or related state anti-inducement laws, and mortgage insurance policy rescissions and curtailments, and breaching fiduciary or other duties to customers, including but not limited to breach of customer information. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships, post-closing obligations associated with previous dispositions and securities lawsuits. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations.
In April 2014, Genworth Financial, Inc., its former chief executive officer and its then current chief financial officer were named in a putative class action lawsuit captionedCity of Hialeah Employees’ Retirement System v. Genworth Financial, Inc.,et al., in the United States District Court for the Southern District of New York. Plaintiff alleges securities law violations involving certain disclosures in 2012 concerning Genworth’s Australian mortgage insurance business, including our plans for an IPO of the business. The lawsuit seeks unspecified damages, costs and attorneys’ fees and such equitable/injunctive relief as the court may deem proper. The United States District Court for the Southern District of New York appointed City of Hialeah Employees’ Retirement System and New Bedford Contributory Retirement System as lead plaintiffs and designated the caption of the action asIn re Genworth Financial, Inc. Securities Litigation. On October 3, 2014, the lead plaintiffs filed an amended complaint. On December 2, 2014, we filed a motion to dismiss plaintiffs’ amended complaint. On March 25, 2015, the United States District Court for the Southern District of New York denied the motion but entered an order dismissing the amended complaint with leave to replead. On April 17, 2015, plaintiffs filed a second amended complaint. We filed a motion to dismiss the second amended complaint and on June 16, 2015, the court denied the motion to dismiss. On January 22, 2016, we filed a motion for reconsideration of the court’s June 16, 2015 order denying our motion to dismiss which the court denied on March 3, 2016. On January 29, 2016, plaintiffs filed a motion for class certification which we opposed. On March 7, 2016, the court granted plaintiffs’ motion for class certification. We have exhausted all coverage under our 2014 executive and organizational liability insurance program applicable to this case; therefore, there is no insurance coverage for Genworth with respect to any settlement or judgment amount related to this litigation. The parties engaged in settlement discussions. On March 21, 2017 in connection with those discussions, we reached an agreement in principle to settle the action, subject to the execution of a stipulation and agreement of settlement that provides a full release of all defendants in connection with the allegations made in the lawsuit, and for a settlement payment to the class of $20 million, inclusive of all plaintiffs’ attorneys fees and expenses and settlement costs, and subject further to the approval of the court. Subsequently, the parties executed a stipulation and agreement of settlement. We believe that the plaintiffs’ claims are without merit, but we are settling the lawsuit to avoid the burden, risk and expense of further litigation. On June 21, 2017, plaintiffs filed the stipulation and agreement of settlement and motion for preliminary approval with the court. On July 28, 2017, the court held a preliminary approval hearing, preliminarily approved the settlement, and set November 15, 2017 for a final approval hearing.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, its former chief financial officer and current and former members of its board of directors were named in a shareholder derivative suit filed by International Union of Operating Engineers Local No. 478 Pension Fund, Richard L. Salberg and David Pinkoski in the Court of Chancery of the State of Delaware. The case was captionedInt’l Union of Operating Engineers Local No. 478 Pension Fund, et al v. McInerney, et al. In February 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, its former chief financial officer and current and former members of its board of directors were named in a second shareholder derivative suit filed by Martin Cohen in the Court of Chancery of the State of Delaware. The case was captionedCohen v. McInerney, et al. On February 23, 2016, the Court of Chancery of the State of Delaware consolidated these derivative suits under the captionGenworth Financial, Inc. Consolidated Derivative Litigation. On March 28, 2016, plaintiffs in the consolidated action filed an amended complaint. The amended complaint alleges breaches of fiduciary duties concerning Genworth’s long-term care insurance reserves and concerning Genworth’s Australian mortgage insurance business, including our plans for an IPO of the business and seeks unspecified damages, costs, attorneys’ fees and such equitable relief as the court may deem proper. The amended consolidated complaint also adds Genworth’s current chief financial officer as a defendant, based on the current chief financial officer’s alleged conduct in her former capacity as Genworth’s controller and principal accounting officer. We moved to dismiss the consolidated action on May 27, 2016. Thereafter, plaintiffs filed a substantially similar second amended complaint which we moved to dismiss on September 16, 2016. The motion is fully briefed and awaiting disposition by the court. The action is stayed pending the completion of the proposed China Oceanwide transaction.
In October 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, its current chief financial officer, its former chief financial officer and current and former members of its board of directors were named in a shareholder derivative suit filed by Esther Chopp in the Court of Chancery of the State of Delaware. The case is captionedChopp v. McInerney, et al. The complaint alleges that Genworth’s board of directors wrongfully refused plaintiff’s demand to commence litigation on behalf of Genworth and asserts claims for breaches of fiduciary duties, waste, contribution and indemnification, and unjust enrichment concerning Genworth’s long-term care insurance reserves and concerning Genworth’s Australian mortgage insurance business, including our plans for an IPO of the business, and seeks unspecified damages, costs, attorneys’ fees and such equitable relief as the court may deem proper. We filed a motion to dismiss on November 14, 2016. The action is stayed pending the completion of the proposed China Oceanwide transaction.
In December 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, two former chief financial officers, and two of its insurance subsidiaries were named as defendants in a putative class action lawsuit captionedLeifer, et al v. Genworth Financial, Inc., et al, in the United States District Court for the Eastern District of Virginia, Richmond Division. Plaintiffs allege that the defendants’ financial disclosures and alleged misrepresentations concerning Genworth’s long-term care insurance reserves caused harm to current and former long-term care insurance policyholders and seek unspecified damages, declaratory and injunctive relief, attorneys’ fees, costs andpre-judgment and post-judgment interest. We filed a motion to dismiss on March 27, 2017. Plaintiffs filed an amended complaint on April 10, 2017. We filed a motion to dismiss on May 22, 2017. On June 20, 2017, plaintiffs filed a notice of voluntary dismissal without prejudice. On June 26, 2017, the court so ordered the notice of withdrawal of first amended complaint and of voluntary dismissal without prejudice against all defendants.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2017, two putative stockholder class action lawsuits, captionedRice v. Genworth Financial Incorporated, et al, andJames v. Genworth Financial, Inc. et al,were filed in the United States District Court for the Eastern District of Virginia, Richmond Division, against Genworth and its board of directors. A third putative stockholder class action lawsuit captionedRosenfeld Family Trust v. Genworth Financial, Inc. et al, was filed in
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the United States District Court for the District of Delaware against Genworth and its board of directors. In February 2017, a fourth putative class action lawsuit captionedChopp v. Genworth Financial, Inc. et al, was filed in the United States District Court for the District of Delaware against Genworth and its board of directors and a fifth putative class action lawsuit captionedRatliff v. Genworth Financial, Inc. et al, was filed in the United States District Court for the Eastern District of Virginia, Richmond Division, against Genworth and its board of directors. The complaints in all five actions allege, among other things, that the preliminary proxy statement filed by Genworth with the SEC on December 21, 2016 contains false and/or materially misleading statements and/or omits material information. The complaints assert claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, and seek equitable relief, including declaratory and injunctive relief, and an award of attorneys’ fees and expenses. On February 2, 2017, the plaintiff inRice filed a motion for a preliminary injunction to enjoin the transaction described in the preliminary proxy. On February 10, 2017, defendants filed an opposition to the preliminary injunction motion in theRice action. Also on February 10, 2017, the plaintiff inRosenfeld Family Trust filed a motion for a preliminary injunction to enjoin the transaction described in the preliminary proxy. On February 14, 2017, defendants filed a motion to transfer theRosenfeld Family Trustaction to the Eastern District of Virginia. On February 15, 2017, defendants filed a motion to transfer theChopp action to the Eastern District of Virginia. On February 21, 2017, the parties to the Eastern District of Virginia actions (Rice, James andRatliff) reached an agreement in principle to resolve the pending preliminary injunction motion in the Eastern District of Virginia through additional disclosure prior to the March 7, 2017 stockholder vote on the proposed merger transaction. On February 22, 2017, the plaintiffs in the Eastern District of Virginia withdrew their preliminary injunction motion in consideration of the agreed disclosures to be filed in a Form8-K by February 24, 2017. Also on February 22, 2017, the court in the District of Delaware suspended briefing on the motion for preliminary injunction in theRosenfeld Family Trust action and entered an order transferring theRosenfeld Family Trust andChopp actions to the Eastern District of Virginia. On February 23, 2017, the court in the Eastern District of Virginia set theRosenfeld Family Trust preliminary injunction motion for a hearing on March 1, 2017. On February 26, 2017, defendants filed an opposition to the preliminary injunction motion in theRosenfeld Family Trustaction. On February 27, 2017, the parties in theRosenfeld Family Trust action reached an agreement in principle to resolve the pending preliminary injunction motion in theRosenfeld Family Trust action through additional disclosure prior to the March 7, 2017 stockholder vote on the proposed merger transaction, and the plaintiff in theRosenfeld Family Trustaction withdrew its preliminary injunction motion in consideration of the agreed disclosures as filed in a Form8-K on February 28, 2017. On March 6, 2017, the court in the Eastern District of Virginia entered an order setting a schedule for proceedings to appoint a lead plaintiff and lead counsel for the purported class action. On March 7, 2017, the court in the Eastern District of Virginia consolidated theRice,James,Ratliff,Rosenfeld Family Trust, andChopp actions. On July 5, 2017, the court in the Eastern District of Virginia heard oral argument on the motion to appoint a lead plaintiff and lead counsel. On August 25, 2017, the court in the Eastern District of Virginia entered an order appointing the plaintiffs Alexander Rice and Brian James as lead plaintiffs and their counsel as lead counsel. In November, 2017, the parties reached an agreement in principle to settle the action based upon the previously provided additional disclosures, subject to confirmatory discovery and court approval. On April 4, 2018, the parties entered into a stipulation of settlement. On April 24, 2018, the court in the Eastern District of Virginia entered an order preliminarily approving the settlement and following a July 3, 2018 hearing, granted final approval of the settlement.
In AprilDecember 2017, one of our insurance subsidiaries, Genworth LifeHoldings and Annuity Insurance Company (“GLAIC”) wasGenworth Financial were named as a defendantdefendants in a putative classan action lawsuit captionedAvazian, et alAXA S.A. v. Genworth Life and Annuity Insurance CompanyFinancial International Holdings, Inc., et al,al., in the United States DistrictHigh Court for the Central District of California. Plaintiff alleges breach of contract and breach of the covenant of good faith and fair dealing based upon GLAIC’s termination of plaintiff’s life insurance policy for nonpayment of premium. Plaintiff alleges that the termination for nonpayment of premium failed to comply with certain notice requirements of the California Insurance Code and seeks certification as a California class action on behalf of all insureds and beneficiaries of life insurance policies issued or delivered by GLAIC in California before January 1, 2013 who lost either their coverage or their ability to make a claim because of the termination of their policies by GLAIC for nonpayment of premium, and further seeks unspecified damages,pre-judgment and post-judgment interest, punitive damages,Justice,
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
fees, costsBusiness and suchProperty Courts of England and Wales. In the action, AXA seeks in excess of £28 million on an indemnity provided for in the 2015 agreement pursuant to which Genworth sold to AXA two insurance companies, Financial Insurance Company Limited and Financial Assurance Company Limited, relating to alleged remediation it has paid to customers who purchased payment protection insurance. AXA also alleges that it is incurring losses on an ongoing basis and therefore that further sums will be demanded. In February 2018, Genworth served a Particulars of Defence and counterclaim against AXA, and also served other relief ascounterclaims against various parties, including Santander Cards UK Limited (“Santander”), alleging that Santander is responsible for any remediation paid to payment protection insurance customers. AXA and Santander have applied to the court deems just and proper. On June 23, 2017, we filed a motion to dismissfor orders dismissing or staying the complaint. On July 10, 2017, the plaintiff filed a notice of voluntary dismissal without prejudice. On July 12, 2017, the court ordered that this action and all claims therein, are dismissed in their entirety without prejudice. In August 2017, plaintiffre-filed a similar putative class action lawsuit, along with another plaintiff, Michael Torres, captionedAvazian, et al v. Genworth Life and Annuity Insurance Company, et al, in the Superior Court for the State of California, County of Los Angeles, naming GLAIC as a defendant. Plaintiffs allege similar causes of action as the previously dismissed lawsuit, and have added a claim for alleged violation of California Business and Professions Code. On August 31, 2017, we filed notice of the removal of this matter to the United States District Court for the Central District of California and on October 6, 2017, filed a motion to dismiss the complaint.counterclaims. We intend to vigorously defend thethis action.
At this time, other than as noted above, we cannot determine or predict the ultimate outcome of any of the pending legal and regulatory matters specifically identified above or the likelihood of potential future legal and regulatory matters against us. Except as disclosed above, we also are not able to provide an estimate or range of reasonably possible losses related to these matters. Therefore, we cannot ensure that the current investigations and proceedings will not have a material adverse effect on our business, financial condition or results of operations. In addition, it is possible that related investigations and proceedings may be commenced in the future, and we could become subject to additional unrelated investigations and lawsuits. Increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal precedents and industry-wide regulations or practices that could adversely affect our business, financial condition and results of operations.
(b) Commitments
As of SeptemberJune 30, 2017,2018, we were committed to fund $319$402 million in limited partnership investments, $40$90 million in U.S. commercial mortgage loan investments and $21$29 million in private placement investments. As of June 30, 2018, we were committed to fund $30 million of bank loan investments which had not yet been drawn.
(12) Changes in Accumulated Other Comprehensive Income
The following tables show the changes in accumulated other comprehensive income (loss), net of taxes, by component as of and for the periods indicated:
(Amounts in millions) | Net unrealized investment gains (losses) (1) | Derivatives qualifying as hedges (2) | Foreign currency translation and other adjustments | Total | Net unrealized investment gains (losses)(1) | Derivatives qualifying as hedges (2) | Foreign currency translation and other adjustments | Total | ||||||||||||||||||||||||
Balances as of July 1, 2017 | $ | 1,180 | $ | 2,064 | $ | (149 | ) | $ | 3,095 | |||||||||||||||||||||||
Balances as of April 1, 2018 | $ | 917 | $ | 1,927 | $ | (217 | ) | $ | 2,627 | |||||||||||||||||||||||
OCI before reclassifications | (70 | ) | 10 | 81 | 21 | (193 | ) | (39 | ) | (98 | ) | (330 | ) | |||||||||||||||||||
Amounts reclassified from (to) OCI | (19 | ) | (22 | ) | — | (41 | ) | 6 | (25 | ) | — | (19 | ) | |||||||||||||||||||
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Current period OCI | (89 | ) | (12 | ) | 81 | (20 | ) | (187 | ) | (64 | ) | (98 | ) | (349 | ) | |||||||||||||||||
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Balances as of September 30, 2017 before noncontrolling interests | 1,091 | 2,052 | (68 | ) | 3,075 | |||||||||||||||||||||||||||
Balances as of June 30, 2018 before noncontrolling interests | 730 | 1,863 | (315 | ) | 2,278 | |||||||||||||||||||||||||||
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Less: change in OCI attributable to noncontrolling interests | (17 | ) | — | 57 | 40 | (6 | ) | — | (43 | ) | (49 | ) | ||||||||||||||||||||
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Balances as of September 30, 2017 | $ | 1,108 | $ | 2,052 | $ | (125 | ) | $ | 3,035 | |||||||||||||||||||||||
Balances as of June 30, 2018 | $ | 736 | $ | 1,863 | $ | (272 | ) | $ | 2,327 | |||||||||||||||||||||||
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(1) | Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information. |
(2) | See note 5 for additional information. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions) | Net unrealized investment gains (losses) (1) | Derivatives qualifying as hedges (2) | Foreign currency translation and other adjustments | Total | Net unrealized investment gains (losses) (1) | Derivatives qualifying as hedges (2) | Foreign currency translation and other adjustments | Total | ||||||||||||||||||||||||
Balances as of July 1, 2016 | $ | 2,789 | $ | 2,439 | $ | (140 | ) | $ | 5,088 | |||||||||||||||||||||||
Balances as of April 1, 2017 | $ | 1,243 | $ | 2,036 | $ | (183 | ) | $ | 3,096 | |||||||||||||||||||||||
OCI before reclassifications | 86 | 72 | (1 | ) | 157 | (32 | ) | 48 | 61 | 77 | ||||||||||||||||||||||
Amounts reclassified from (to) OCI | (9 | ) | (18 | ) | — | (27 | ) | (40 | ) | (20 | ) | — | (60 | ) | ||||||||||||||||||
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Current period OCI | 77 | 54 | (1 | ) | 130 | (72 | ) | 28 | 61 | 17 | ||||||||||||||||||||||
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Balances as of September 30, 2016 before noncontrolling interests | 2,866 | 2,493 | (141 | ) | 5,218 | |||||||||||||||||||||||||||
Balances as of June 30, 2017 before noncontrolling interests | 1,171 | 2,064 | (122 | ) | 3,113 | |||||||||||||||||||||||||||
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Less: change in OCI attributable to noncontrolling interests | 6 | — | 10 | 16 | (9 | ) | — | 27 | 18 | |||||||||||||||||||||||
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| |||||||||||||||||||||||||
Balances as of September 30, 2016 | $ | 2,860 | $ | 2,493 | $ | (151 | ) | $ | 5,202 | |||||||||||||||||||||||
Balances as of June 30, 2017 | $ | 1,180 | $ | 2,064 | $ | (149 | ) | $ | 3,095 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
(1) | Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information. |
(2) | See note 5 for additional information. |
(Amounts in millions) | Net unrealized investment gains (losses) (1) | Derivatives qualifying as hedges (2) | Foreign currency translation and other adjustments | Total | Net unrealized investment gains (losses)(1) | Derivatives qualifying as hedges (2) | Foreign currency translation and other adjustments | Total | ||||||||||||||||||||||||
Balances as of January 1, 2017 | $ | 1,262 | $ | 2,085 | $ | (253 | ) | $ | 3,094 | |||||||||||||||||||||||
Balances as of January 1, 2018 | $ | 1,085 | $ | 2,065 | $ | (123 | ) | $ | 3,027 | |||||||||||||||||||||||
Cumulative effect of changes in accounting | 164 | 14 | (47 | ) | 131 | |||||||||||||||||||||||||||
OCI before reclassifications | (95 | ) | 29 | 261 | 195 | (541 | ) | (165 | ) | (185 | ) | (891 | ) | |||||||||||||||||||
Amounts reclassified from (to) OCI | (77 | ) | (62 | ) | — | (139 | ) | 13 | (51 | ) | — | (38 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Current period OCI | (172 | ) | (33 | ) | 261 | 56 | (528 | ) | (216 | ) | (185 | ) | (929 | ) | ||||||||||||||||||
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| |||||||||||||||||||||||||
Balances as of September 30, 2017 before noncontrolling interests | 1,090 | 2,052 | 8 | 3,150 | ||||||||||||||||||||||||||||
Balances as of June 30, 2018 before noncontrolling interests | 721 | 1,863 | (355 | ) | 2,229 | |||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Less: change in OCI attributable to noncontrolling interests | (18 | ) | — | 133 | 115 | (15 | ) | — | (83 | ) | (98 | ) | ||||||||||||||||||||
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| |||||||||||||||||||||||||
Balances as of September 30, 2017 | $ | 1,108 | $ | 2,052 | $ | (125 | ) | $ | 3,035 | |||||||||||||||||||||||
Balances as of June 30, 2018 | $ | 736 | $ | 1,863 | $ | (272 | ) | $ | 2,327 | |||||||||||||||||||||||
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|
(1) | Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information. |
(2) | See note 5 for additional information. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions) | Net unrealized investment gains (losses) (1) | Derivatives qualifying as hedges (2) | Foreign currency translation and other adjustments | Total | Net unrealized investment gains (losses)(1) | Derivatives qualifying as hedges (2) | Foreign currency translation and other adjustments | Total | ||||||||||||||||||||||||
Balances as of January 1, 2016 | $ | 1,254 | $ | 2,045 | $ | (289 | ) | $ | 3,010 | |||||||||||||||||||||||
Balances as of January 1, 2017 | $ | 1,262 | $ | 2,085 | $ | (253 | ) | $ | 3,094 | |||||||||||||||||||||||
OCI before reclassifications | 1,692 | 507 | 223 | 2,422 | (25 | ) | 19 | 180 | 174 | |||||||||||||||||||||||
Amounts reclassified from (to) OCI | (62 | ) | (59 | ) | — | (121 | ) | (58 | ) | (40 | ) | — | (98 | ) | ||||||||||||||||||
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| |||||||||||||||||||||||||
Current period OCI | 1,630 | 448 | 223 | 2,301 | (83 | ) | (21 | ) | 180 | 76 | ||||||||||||||||||||||
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| |||||||||||||||||||||||||
Balances as of September 30, 2016 before noncontrolling interests | 2,884 | 2,493 | (66 | ) | 5,311 | |||||||||||||||||||||||||||
Balances as of June 30, 2017 before noncontrolling interests | 1,179 | 2,064 | (73 | ) | 3,170 | |||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Less: change in OCI attributable to noncontrolling interests | 24 | — | 85 | 109 | (1 | ) | — | 76 | 75 | |||||||||||||||||||||||
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| |||||||||||||||||||||||||
Balances as of September 30, 2016 | $ | 2,860 | $ | 2,493 | $ | (151 | ) | $ | 5,202 | |||||||||||||||||||||||
Balances as of June 30, 2017 | $ | 1,180 | $ | 2,064 | $ | (149 | ) | $ | 3,095 | |||||||||||||||||||||||
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|
(1) | Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information. |
(2) | See note 5 for additional information. |
The foreign currency translation and other adjustments balance included $(5)$(14) million and $5$(5) million, respectively, net of taxes of $1$5 million and $2$1 million, respectively, related to a net unrecognized postretirement benefit obligation as of SeptemberJune 30, 20172018 and 2016.2017. The amount also includes taxes of $28$(46) million and $37$23 million, respectively, related to foreign currency translation adjustments as of SeptemberJune 30, 20172018 and 2016.2017. These balances include the impact of adopting new accounting guidance related to stranded tax effects.
The following table shows reclassifications in (out) of accumulated other comprehensive income (loss), net of taxes, for the periods presented:
Amount reclassified from accumulated other comprehensive income (loss) | Affected line item | Amount reclassified from accumulated other comprehensive income (loss) | Affected line item in the consolidated statements of income | |||||||||||||||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||||||
Net unrealized investment (gains) losses: | ||||||||||||||||||||||||||||||||||||
Unrealized (gains) losses oninvestments (1) | $ | (29 | ) | $ | (13 | ) | $ | (118 | ) | $ | (95 | ) | Net investment (gains) losses | $ | 8 | $ | (61 | ) | $ | 16 | $ | (89 | ) | Net investment (gains) losses | ||||||||||||
Provision for income taxes | 10 | 4 | 41 | 33 | Provision for income taxes | |||||||||||||||||||||||||||||||
(Provision) benefit for income taxes | (2 | ) | 21 | (3 | ) | 31 | Provision for income taxes | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Total | $ | (19 | ) | $ | (9 | ) | $ | (77 | ) | $ | (62 | ) | $ | 6 | $ | (40 | ) | $ | 13 | $ | (58 | ) | ||||||||||||||
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Derivatives qualifying as hedges: | ||||||||||||||||||||||||||||||||||||
Interest rate swaps hedging assets | $ | (34 | ) | $ | (27 | ) | $ | (95 | ) | $ | (80 | ) | Net investment income | $ | (39 | ) | $ | (31 | ) | $ | (74 | ) | $ | (61 | ) | Net investment income | ||||||||||
Interest rate swaps hedging assets | — | — | (2 | ) | (1 | ) | Net investment (gains) losses | — | (1 | ) | (5 | ) | (2 | ) | Net investment (gains) losses | |||||||||||||||||||||
Inflation indexed swaps | — | — | — | (2 | ) | Net investment income | — | — | — | — | Net investment income | |||||||||||||||||||||||||
Inflation indexed swaps | — | — | — | (7 | ) | Net investment (gains) losses | ||||||||||||||||||||||||||||||
Provision for income taxes | 12 | 9 | 35 | 31 | Provision for income taxes | |||||||||||||||||||||||||||||||
Benefit for income taxes | 14 | 12 | 28 | 23 | Provision for income taxes | |||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Total | $ | (22 | ) | $ | (18 | ) | $ | (62 | ) | $ | (59 | ) | $ | (25 | ) | $ | (20 | ) | $ | (51 | ) | $ | (40 | ) | ||||||||||||
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(1) | Amounts exclude adjustments to DAC, present value of future profits, sales inducements and benefit reserves. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(13) Condensed Consolidating Financial Information
Genworth Financial provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior and subordinated notes and the holders of the senior and subordinated notes, on an unsecured unsubordinated and subordinated basis, respectively, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior notes indenture in respect of such senior notes. Genworth Financial also provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding subordinated notes and the holders of the subordinated notes, on an unsecured subordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, the outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior and subordinated notes indentureindentures in respect of thesuch senior and subordinated notes. Genworth Holdings is a direct, 100% owned subsidiary of Genworth Financial.
The following condensed consolidating financial information of Genworth Financial and its direct and indirect subsidiaries havehas been prepared pursuant to rules regarding the preparation of consolidating financial information ofRegulation S-X.
The condensed consolidating financial information presents the condensed consolidating balance sheet information as of SeptemberJune 30, 20172018 and December 31, 2016,2017, the condensed consolidating income statement information and the condensed consolidating comprehensive income statement information for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 and the condensed consolidating cash flowsflow statement information for the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017.
The condensed consolidating financial information reflects Genworth Financial (“Parent Guarantor”), Genworth Holdings (“Issuer”) and each of Genworth Financial’s other direct and indirect subsidiaries (the “All Other Subsidiaries”) on a combined basis, none of which guarantee the senior notes or subordinated notes, as well as the eliminations necessary to present Genworth Financial’s financial information on a consolidated basis and total consolidated amounts.
The accompanying condensed consolidating financial information is presented based on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries and intercompany activity.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating balance sheet information as of SeptemberJune 30, 2017:2018:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securitiesavailable-for-sale, at fair value | $ | — | $ | — | $ | 62,752 | $ | (200 | ) | $ | 62,552 | $ | — | $ | — | $ | 60,232 | $ | (200 | ) | $ | 60,032 | ||||||||||||||||||
Equity securitiesavailable-for-sale, at fair value | — | — | 765 | — | 765 | |||||||||||||||||||||||||||||||||||
Equity securities, at fair value | — | — | 758 | — | 758 | |||||||||||||||||||||||||||||||||||
Commercial mortgage loans | — | — | 6,268 | — | 6,268 | — | — | 6,480 | — | 6,480 | ||||||||||||||||||||||||||||||
Restricted commercial mortgage loans related to securitization entities | — | — | 111 | — | 111 | — | — | 90 | — | 90 | ||||||||||||||||||||||||||||||
Policy loans | — | — | 1,818 | — | 1,818 | — | — | 1,872 | — | 1,872 | ||||||||||||||||||||||||||||||
Other invested assets | — | 75 | 1,517 | (2 | ) | 1,590 | — | 78 | 1,584 | (12 | ) | 1,650 | ||||||||||||||||||||||||||||
Investments in subsidiaries | 13,191 | 12,459 | — | (25,650 | ) | — | 13,052 | 12,180 | — | (25,232 | ) | — | ||||||||||||||||||||||||||||
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|
|
|
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|
|
| |||||||||||||||||||||||||||||||
Total investments | 13,191 | 12,534 | 73,231 | (25,852 | ) | 73,104 | 13,052 | 12,258 | 71,016 | (25,444 | ) | 70,882 | ||||||||||||||||||||||||||||
Cash and cash equivalents | — | 754 | 2,082 | — | 2,836 | |||||||||||||||||||||||||||||||||||
Cash, cash equivalents and restricted cash | — | 547 | 1,696 | — | 2,243 | |||||||||||||||||||||||||||||||||||
Accrued investment income | — | — | 639 | — | 639 | — | — | 606 | (4 | ) | 602 | |||||||||||||||||||||||||||||
Deferred acquisition costs | — | — | 2,342 | — | 2,342 | — | — | 3,086 | — | 3,086 | ||||||||||||||||||||||||||||||
Intangible assets and goodwill | — | — | 315 | — | 315 | — | — | 354 | — | 354 | ||||||||||||||||||||||||||||||
Reinsurance recoverable | — | — | 17,553 | — | 17,553 | — | — | 17,385 | — | 17,385 | ||||||||||||||||||||||||||||||
Other assets | — | 90 | 470 | (8 | ) | 552 | 5 | 50 | 519 | — | 574 | |||||||||||||||||||||||||||||
Intercompany notes receivable | — | 161 | 33 | (194 | ) | — | — | 165 | 1 | (166 | ) | — | ||||||||||||||||||||||||||||
Deferred tax assets | — | — | 24 | — | 24 | (15 | ) | 918 | (302 | ) | — | 601 | ||||||||||||||||||||||||||||
Separate account assets | — | — | 7,264 | — | 7,264 | — | — | 6,750 | — | 6,750 | ||||||||||||||||||||||||||||||
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|
|
| |||||||||||||||||||||||||||||||
Total assets | $ | 13,191 | $ | 13,539 | $ | 103,953 | $ | (26,054 | ) | $ | 104,629 | $ | 13,042 | $ | 13,938 | $ | 101,111 | $ | (25,614 | ) | $ | 102,477 | ||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Future policy benefits | $ | — | $ | — | $ | 38,022 | $ | — | $ | 38,022 | $ | — | $ | — | $ | 37,913 | $ | — | $ | 37,913 | ||||||||||||||||||||
Policyholder account balances | — | — | 24,531 | — | 24,531 | — | — | 23,366 | — | 23,366 | ||||||||||||||||||||||||||||||
Liability for policy and contract claims | — | — | 9,384 | — | 9,384 | — | — | 9,665 | — | 9,665 | ||||||||||||||||||||||||||||||
Unearned premiums | — | — | 3,512 | — | 3,512 | — | — | 3,669 | — | 3,669 | ||||||||||||||||||||||||||||||
Other liabilities | 8 | 163 | 1,842 | (11 | ) | 2,002 | 7 | 167 | 1,808 | (17 | ) | 1,965 | ||||||||||||||||||||||||||||
Intercompany notes payable | 145 | 232 | 17 | (394 | ) | — | 125 | 200 | 41 | (366 | ) | — | ||||||||||||||||||||||||||||
Borrowings related to securitization entities | — | — | 59 | — | 59 | — | — | 28 | — | 28 | ||||||||||||||||||||||||||||||
Non-recourse funding obligations | — | — | 310 | — | 310 | — | — | 310 | — | 310 | ||||||||||||||||||||||||||||||
Long-term borrowings | — | 3,722 | 502 | — | 4,224 | — | 3,571 | 476 | — | 4,047 | ||||||||||||||||||||||||||||||
Deferred tax liability | (31 | ) | (862 | ) | 1,127 | — | 234 | — | — | 23 | — | 23 | ||||||||||||||||||||||||||||
Separate account liabilities | — | — | 7,264 | — | 7,264 | — | — | 6,750 | — | 6,750 | ||||||||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total liabilities | 122 | 3,255 | 86,570 | (405 | ) | 89,542 | 132 | 3,938 | 84,049 | (383 | ) | 87,736 | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||||||||||||||
Common stock | 1 | — | 3 | (3 | ) | 1 | 1 | — | 3 | (3 | ) | 1 | ||||||||||||||||||||||||||||
Additionalpaid-in capital | 11,973 | 9,096 | 18,381 | (27,477 | ) | 11,973 | 11,981 | 9,095 | 18,420 | (27,515 | ) | 11,981 | ||||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) | 3,035 | 3,040 | 3,057 | (6,097 | ) | 3,035 | 2,327 | 2,414 | 2,338 | (4,752 | ) | 2,327 | ||||||||||||||||||||||||||||
Retained earnings | 760 | (1,852 | ) | (6,376 | ) | 8,228 | 760 | 1,301 | (1,509 | ) | (5,830 | ) | 7,339 | 1,301 | ||||||||||||||||||||||||||
Treasury stock, at cost | (2,700 | ) | — | — | — | (2,700 | ) | (2,700 | ) | — | — | — | (2,700 | ) | ||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total Genworth Financial, Inc.’s stockholders’ equity | 13,069 | 10,284 | 15,065 | (25,349 | ) | 13,069 | 12,910 | 10,000 | 14,931 | (24,931 | ) | 12,910 | ||||||||||||||||||||||||||||
Noncontrolling interests | — | — | 2,318 | (300 | ) | 2,018 | — | — | 2,131 | (300 | ) | 1,831 | ||||||||||||||||||||||||||||
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|
|
|
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|
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| |||||||||||||||||||||||||||||||
Total equity | 13,069 | 10,284 | 17,383 | (25,649 | ) | 15,087 | 12,910 | 10,000 | 17,062 | (25,231 | ) | 14,741 | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 13,191 | $ | 13,539 | $ | 103,953 | $ | (26,054 | ) | $ | 104,629 | $ | 13,042 | $ | 13,938 | $ | 101,111 | $ | (25,614 | ) | $ | 102,477 | ||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating balance sheet information as of December 31, 2016:2017:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securitiesavailable-for-sale, at fair value | $ | — | $ | — | $ | 60,772 | $ | (200 | ) | $ | 60,572 | $ | — | $ | — | $ | 62,725 | $ | (200 | ) | $ | 62,525 | ||||||||||||||||||
Equity securitiesavailable-for-sale, at fair value | — | — | 632 | — | 632 | |||||||||||||||||||||||||||||||||||
Equity securities, at fair value | — | — | 820 | — | 820 | |||||||||||||||||||||||||||||||||||
Commercial mortgage loans | — | — | 6,111 | — | 6,111 | — | — | 6,341 | — | 6,341 | ||||||||||||||||||||||||||||||
Restricted commercial mortgage loans related to securitization entities | — | — | 129 | — | 129 | — | — | 107 | — | 107 | ||||||||||||||||||||||||||||||
Policy loans | — | — | 1,742 | — | 1,742 | — | — | 1,786 | — | 1,786 | ||||||||||||||||||||||||||||||
Other invested assets | — | 105 | 1,966 | — | 2,071 | — | 75 | 1,742 | (4 | ) | 1,813 | |||||||||||||||||||||||||||||
Restricted other invested assets related to securitization entities, at fair value | — | — | 312 | — | 312 | |||||||||||||||||||||||||||||||||||
Investments in subsidiaries | 12,730 | 12,308 | — | (25,038 | ) | — | 13,561 | 12,867 | — | (26,428 | ) | — | ||||||||||||||||||||||||||||
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|
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| |||||||||||||||||||||||||||||||
Total investments | 12,730 | 12,413 | 71,664 | (25,238 | ) | 71,569 | 13,561 | 12,942 | 73,521 | (26,632 | ) | 73,392 | ||||||||||||||||||||||||||||
Cash and cash equivalents | — | 998 | 1,786 | — | 2,784 | |||||||||||||||||||||||||||||||||||
Cash, cash equivalents and restricted cash | — | 795 | 2,080 | — | 2,875 | |||||||||||||||||||||||||||||||||||
Accrued investment income | — | — | 663 | (4 | ) | 659 | — | — | 647 | (3 | ) | 644 | ||||||||||||||||||||||||||||
Deferred acquisition costs | — | — | 3,571 | — | 3,571 | — | — | 2,329 | — | 2,329 | ||||||||||||||||||||||||||||||
Intangible assets and goodwill | — | — | 348 | — | 348 | — | — | 301 | — | 301 | ||||||||||||||||||||||||||||||
Reinsurance recoverable | — | — | 17,755 | — | 17,755 | — | — | 17,569 | — | 17,569 | ||||||||||||||||||||||||||||||
Other assets | 9 | 134 | 530 | — | 673 | 3 | 54 | 397 | (1 | ) | 453 | |||||||||||||||||||||||||||||
Intercompany notes receivable | — | 84 | 67 | (151 | ) | — | — | 155 | 59 | (214 | ) | — | ||||||||||||||||||||||||||||
Deferred tax assets | 28 | — | (28 | ) | — | — | 27 | — | 477 | — | 504 | |||||||||||||||||||||||||||||
Separate account assets | — | — | 7,299 | — | 7,299 | — | — | 7,230 | — | 7,230 | ||||||||||||||||||||||||||||||
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|
|
| |||||||||||||||||||||||||||||||
Total assets | $ | 12,767 | $ | 13,629 | $ | 103,655 | $ | (25,393 | ) | $ | 104,658 | $ | 13,591 | $ | 13,946 | $ | 104,610 | $ | (26,850 | ) | $ | 105,297 | ||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Future policy benefits | $ | — | $ | — | $ | 37,063 | $ | — | $ | 37,063 | $ | — | $ | — | $ | 38,472 | $ | — | $ | 38,472 | ||||||||||||||||||||
Policyholder account balances | — | — | 25,662 | — | 25,662 | — | — | 24,195 | — | 24,195 | ||||||||||||||||||||||||||||||
Liability for policy and contract claims | — | — | 9,256 | — | 9,256 | — | — | 9,594 | — | 9,594 | ||||||||||||||||||||||||||||||
Unearned premiums | — | — | 3,378 | — | 3,378 | — | — | 3,967 | — | 3,967 | ||||||||||||||||||||||||||||||
Other liabilities | 39 | 301 | 2,581 | (5 | ) | 2,916 | 41 | 119 | 1,759 | (9 | ) | 1,910 | ||||||||||||||||||||||||||||
Intercompany notes payable | 84 | 267 | — | (351 | ) | — | 132 | 259 | 23 | (414 | ) | — | ||||||||||||||||||||||||||||
Borrowings related to securitization entities | — | — | 74 | — | 74 | — | — | 40 | — | 40 | ||||||||||||||||||||||||||||||
Non-recourse funding obligations | — | — | 310 | — | 310 | — | — | 310 | — | 310 | ||||||||||||||||||||||||||||||
Long-term borrowings | — | 3,716 | 464 | — | 4,180 | — | 3,724 | 500 | — | 4,224 | ||||||||||||||||||||||||||||||
Deferred tax liability | — | (816 | ) | 869 | — | 53 | — | (807 | ) | 834 | — | 27 | ||||||||||||||||||||||||||||
Separate account liabilities | — | — | 7,299 | — | 7,299 | — | — | 7,230 | — | 7,230 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total liabilities | 123 | 3,468 | 86,956 | (356 | ) | 90,191 | 173 | 3,295 | 86,924 | (423 | ) | 89,969 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||||||||||||||
Common stock | 1 | — | — | — | 1 | 1 | — | 3 | (3 | ) | 1 | |||||||||||||||||||||||||||||
Additionalpaid-in capital | 11,962 | 9,097 | 20,252 | (29,349 | ) | 11,962 | 11,977 | 9,096 | 18,420 | (27,516 | ) | 11,977 | ||||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) | 3,094 | 3,135 | 3,116 | (6,251 | ) | 3,094 | 3,027 | 3,037 | 3,051 | (6,088 | ) | 3,027 | ||||||||||||||||||||||||||||
Retained earnings | 287 | (2,071 | ) | (8,792 | ) | 10,863 | 287 | 1,113 | (1,482 | ) | (5,998 | ) | 7,480 | 1,113 | ||||||||||||||||||||||||||
Treasury stock, at cost | (2,700 | ) | — | — | — | (2,700 | ) | (2,700 | ) | — | — | — | (2,700 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total Genworth Financial, Inc.’s stockholders’ equity | 12,644 | 10,161 | 14,576 | (24,737 | ) | 12,644 | 13,418 | 10,651 | 15,476 | (26,127 | ) | 13,418 | ||||||||||||||||||||||||||||
Noncontrolling interests | — | — | 2,123 | (300 | ) | 1,823 | — | — | 2,210 | (300 | ) | 1,910 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total equity | 12,644 | 10,161 | 16,699 | (25,037 | ) | 14,467 | 13,418 | 10,651 | 17,686 | (26,427 | ) | 15,328 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 12,767 | $ | 13,629 | $ | 103,655 | $ | (25,393 | ) | $ | 104,658 | $ | 13,591 | $ | 13,946 | $ | 104,610 | $ | (26,850 | ) | $ | 105,297 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating income statement information for the three months ended SeptemberJune 30, 2017:2018:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||
Premiums | $ | — | $ | — | $ | 1,135 | $ | — | $ | 1,135 | $ | — | $ | — | $ | 1,136 | $ | — | $ | 1,136 | ||||||||||||||||||||
Net investment income | (1 | ) | 2 | 800 | (4 | ) | 797 | — | 4 | 828 | (4 | ) | 828 | |||||||||||||||||||||||||||
Net investment gains (losses) | — | (4 | ) | 89 | — | 85 | — | (8 | ) | (6 | ) | — | (14 | ) | ||||||||||||||||||||||||||
Policy fees and other income | — | 4 | 195 | (1 | ) | 198 | — | 1 | 209 | (1 | ) | 209 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total revenues | (1 | ) | 2 | 2,219 | (5 | ) | 2,215 | — | (3 | ) | 2,167 | (5 | ) | 2,159 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | — | — | 1,344 | — | 1,344 | — | — | 1,205 | — | 1,205 | ||||||||||||||||||||||||||||||
Interest credited | — | — | 164 | — | 164 | — | — | 152 | — | 152 | ||||||||||||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 20 | (2 | ) | 247 | — | 265 | 7 | — | 246 | — | 253 | |||||||||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | — | — | 83 | — | 83 | — | — | 112 | — | 112 | ||||||||||||||||||||||||||||||
Interest expense | — | 66 | 12 | (5 | ) | 73 | 1 | 70 | 11 | (5 | ) | 77 | ||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total benefits and expenses | 20 | 64 | 1,850 | (5 | ) | 1,929 | 8 | 70 | 1,726 | (5 | ) | 1,799 | ||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes and equity in income of subsidiaries | (21 | ) | (62 | ) | 369 | — | 286 | (8 | ) | (73 | ) | 441 | — | 360 | ||||||||||||||||||||||||||
Provision (benefit) for income taxes | (5 | ) | (21 | ) | 128 | — | 102 | 32 | (14 | ) | 93 | — | 111 | |||||||||||||||||||||||||||
Equity in income of subsidiaries | 123 | 71 | — | (194 | ) | — | 230 | 151 | — | (381 | ) | — | ||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income from continuing operations | 107 | 30 | 241 | (194 | ) | 184 | 190 | 92 | 348 | (381 | ) | 249 | ||||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of taxes | — | 4 | (13 | ) | — | (9 | ) | |||||||||||||||||||||||||||||||||
Loss from discontinued operations, net of taxes | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net income | 107 | 34 | 228 | (194 | ) | 175 | 190 | 92 | 348 | (381 | ) | 249 | ||||||||||||||||||||||||||||
Less: net income attributable to noncontrolling interests | — | — | 68 | — | 68 | — | — | 59 | — | 59 | ||||||||||||||||||||||||||||||
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|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 107 | $ | 34 | $ | 160 | $ | (194 | ) | $ | 107 | $ | 190 | $ | 92 | $ | 289 | $ | (381 | ) | $ | 190 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating income statement information for the three months ended SeptemberJune 30, 2016:2017:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||
Premiums | $ | — | $ | — | $ | 1,108 | $ | — | $ | 1,108 | $ | — | $ | — | $ | 1,111 | $ | — | $ | 1,111 | ||||||||||||||||||||
Net investment income | (2 | ) | 1 | 810 | (4 | ) | 805 | (1 | ) | 2 | 803 | (3 | ) | 801 | ||||||||||||||||||||||||||
Net investment gains (losses) | — | (1 | ) | 21 | — | 20 | — | (5 | ) | 106 | — | 101 | ||||||||||||||||||||||||||||
Policy fees and other income | — | — | 217 | — | 217 | — | (1 | ) | 211 | — | 210 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total revenues | (2 | ) | — | 2,156 | (4 | ) | 2,150 | (1 | ) | (4 | ) | 2,231 | (3 | ) | 2,223 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | — | — | 1,662 | — | 1,662 | — | — | 1,206 | — | 1,206 | ||||||||||||||||||||||||||||||
Interest credited | — | — | 173 | — | 173 | — | — | 163 | — | 163 | ||||||||||||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 13 | — | 256 | — | 269 | 15 | — | 225 | — | 240 | ||||||||||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | — | — | 94 | — | 94 | — | — | 139 | — | 139 | ||||||||||||||||||||||||||||||
Interest expense | — | 69 | 12 | (4 | ) | 77 | — | 66 | 11 | (3 | ) | 74 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total benefits and expenses | 13 | 69 | 2,197 | (4 | ) | 2,275 | 15 | 66 | 1,744 | (3 | ) | 1,822 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Loss from continuing operations before income taxes and equity in loss of subsidiaries | (15 | ) | (69 | ) | (41 | ) | — | (125 | ) | |||||||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes and equity in income of subsidiaries | (16 | ) | (70 | ) | 487 | — | 401 | |||||||||||||||||||||||||||||||||
Provision (benefit) for income taxes | (4 | ) | 155 | 71 | — | 222 | (7 | ) | (24 | ) | 161 | — | 130 | |||||||||||||||||||||||||||
Equity in loss of subsidiaries | (369 | ) | (207 | ) | — | 576 | — | |||||||||||||||||||||||||||||||||
Equity in income of subsidiaries | 211 | 145 | — | (356 | ) | — | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Loss from continuing operations | (380 | ) | (431 | ) | (112 | ) | 576 | (347 | ) | |||||||||||||||||||||||||||||||
Income from discontinued operations, net of taxes | — | 11 | 4 | — | 15 | |||||||||||||||||||||||||||||||||||
Income from continuing operations | 202 | 99 | 326 | (356 | ) | 271 | ||||||||||||||||||||||||||||||||||
Loss from discontinued operations, net of taxes | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net loss | (380 | ) | (420 | ) | (108 | ) | 576 | (332 | ) | |||||||||||||||||||||||||||||||
Net income | 202 | 99 | 326 | (356 | ) | 271 | ||||||||||||||||||||||||||||||||||
Less: net income attributable to noncontrolling interests | — | — | 48 | — | 48 | — | — | 69 | — | 69 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net loss available to Genworth Financial, Inc.’s common stockholders | $ | (380 | ) | $ | (420 | ) | $ | (156 | ) | $ | 576 | $ | (380 | ) | ||||||||||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 202 | $ | 99 | $ | 257 | $ | (356 | ) | $ | 202 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating income statement information for the ninesix months ended SeptemberJune 30, 2017:2018:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||
Premiums | $ | — | $ | — | $ | 3,382 | $ | — | $ | 3,382 | $ | — | $ | — | $ | 2,276 | $ | — | $ | 2,276 | ||||||||||||||||||||
Net investment income | (3 | ) | 5 | 2,397 | (11 | ) | 2,388 | (1 | ) | 7 | 1,633 | (7 | ) | 1,632 | ||||||||||||||||||||||||||
Net investment gains (losses) | — | (12 | ) | 232 | — | 220 | — | (2 | ) | (43 | ) | — | (45 | ) | ||||||||||||||||||||||||||
Policy fees and other income | — | 3 | 617 | (1 | ) | 619 | — | 1 | 412 | (2 | ) | 411 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total revenues | (3 | ) | (4 | ) | 6,628 | (12 | ) | 6,609 | (1 | ) | 6 | 4,278 | (9 | ) | 4,274 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | — | — | 3,796 | — | 3,796 | — | — | 2,516 | — | 2,516 | ||||||||||||||||||||||||||||||
Interest credited | — | — | 494 | — | 494 | — | — | 308 | — | 308 | ||||||||||||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 48 | (2 | ) | 729 | — | 775 | 14 | — | 479 | — | 493 | |||||||||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | — | — | 316 | — | 316 | — | — | 216 | — | 216 | ||||||||||||||||||||||||||||||
Interest expense | — | 187 | 34 | (12 | ) | 209 | 1 | 138 | 23 | (9 | ) | 153 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total benefits and expenses | 48 | 185 | 5,369 | (12 | ) | 5,590 | 15 | 138 | 3,542 | (9 | ) | 3,686 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes and equity in income of subsidiaries | (51 | ) | (189 | ) | 1,259 | — | 1,019 | (16 | ) | (132 | ) | 736 | — | 588 | ||||||||||||||||||||||||||
Provision (benefit) for income taxes | (9 | ) | (65 | ) | 422 | — | 348 | 38 | (31 | ) | 167 | — | 174 | |||||||||||||||||||||||||||
Equity in income of subsidiaries | 506 | 339 | — | (845 | ) | — | 356 | 196 | — | (552 | ) | — | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income from continuing operations | 464 | 215 | 837 | (845 | ) | 671 | 302 | 95 | 569 | (552 | ) | 414 | ||||||||||||||||||||||||||||
Income (loss) from discontinued operations, net of taxes | — | 4 | (13 | ) | — | (9 | ) | |||||||||||||||||||||||||||||||||
Loss from discontinued operations, net of taxes | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net income | 464 | 219 | 824 | (845 | ) | 662 | 302 | 95 | 569 | (552 | ) | 414 | ||||||||||||||||||||||||||||
Less: net income attributable to noncontrolling interests | — | — | 198 | — | 198 | — | — | 112 | — | 112 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 464 | $ | 219 | $ | 626 | $ | (845 | ) | $ | 464 | $ | 302 | $ | 95 | $ | 457 | $ | (552 | ) | $ | 302 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating income statement information for the ninesix months ended SeptemberJune 30, 2016:2017:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||
Premiums | $ | — | $ | — | $ | 3,029 | $ | — | $ | 3,029 | $ | — | $ | — | $ | 2,247 | $ | — | $ | 2,247 | ||||||||||||||||||||
Net investment income | (3 | ) | 1 | 2,386 | (11 | ) | 2,373 | (2 | ) | 3 | 1,597 | (7 | ) | 1,591 | ||||||||||||||||||||||||||
Net investment gains (losses) | — | (14 | ) | 45 | — | 31 | — | (8 | ) | 143 | — | 135 | ||||||||||||||||||||||||||||
Policy fees and other income | — | (6 | ) | 745 | (1 | ) | 738 | — | (1 | ) | 422 | — | 421 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total revenues | (3 | ) | (19 | ) | 6,205 | (12 | ) | 6,171 | (2 | ) | (6 | ) | 4,409 | (7 | ) | 4,394 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | — | — | 3,715 | — | 3,715 | — | — | 2,452 | — | 2,452 | ||||||||||||||||||||||||||||||
Interest credited | — | — | 523 | — | 523 | — | — | 330 | — | 330 | ||||||||||||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 118 | 38 | 834 | — | 990 | 28 | — | 482 | — | 510 | ||||||||||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | — | — | 305 | — | 305 | — | — | 233 | — | 233 | ||||||||||||||||||||||||||||||
Interest expense | 1 | 210 | 63 | (12 | ) | 262 | — | 121 | 22 | (7 | ) | 136 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total benefits and expenses | 119 | 248 | 5,440 | (12 | ) | 5,795 | 28 | 121 | 3,519 | (7 | ) | 3,661 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes and equity in income (loss) of subsidiaries | (122 | ) | (267 | ) | 765 | — | 376 | |||||||||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes and equity in income of subsidiaries | (30 | ) | (127 | ) | 890 | — | 733 | |||||||||||||||||||||||||||||||||
Provision (benefit) for income taxes | (31 | ) | 88 | 298 | — | 355 | (4 | ) | (44 | ) | 294 | — | 246 | |||||||||||||||||||||||||||
Equity in income (loss) of subsidiaries | (62 | ) | 78 | — | (16 | ) | — | |||||||||||||||||||||||||||||||||
Equity in income of subsidiaries | 383 | 268 | — | (651 | ) | — | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Income (loss) from continuing operations | (153 | ) | (277 | ) | 467 | (16 | ) | 21 | ||||||||||||||||||||||||||||||||
Income from continuing operations | 357 | 185 | 596 | (651 | ) | 487 | ||||||||||||||||||||||||||||||||||
Loss from discontinued operations, net of taxes | (2 | ) | (7 | ) | (16 | ) | — | (25 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net income (loss) | (155 | ) | (284 | ) | 451 | (16 | ) | (4 | ) | |||||||||||||||||||||||||||||||
Net income | 357 | 185 | 596 | (651 | ) | 487 | ||||||||||||||||||||||||||||||||||
Less: net income attributable to noncontrolling interests | — | — | 151 | — | 151 | — | — | 130 | — | 130 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | (155 | ) | $ | (284 | ) | $ | 300 | $ | (16 | ) | $ | (155 | ) | ||||||||||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 357 | $ | 185 | $ | 466 | $ | (651 | ) | $ | 357 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating comprehensive income statement information for the three months ended SeptemberJune 30, 2017:2018:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Net income | $ | 107 | $ | 34 | $ | 228 | $ | (194 | ) | $ | 175 | $ | 190 | $ | 92 | $ | 348 | $ | (381 | ) | $ | 249 | ||||||||||||||||||
Other comprehensive income (loss), net of taxes: | ||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | (72 | ) | (71 | ) | (89 | ) | 143 | (89 | ) | (179 | ) | (167 | ) | (185 | ) | 346 | (185 | ) | ||||||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | (2 | ) | (1 | ) | (2 | ) | 3 | (2 | ) | |||||||||||||||||||||||||||||||
Derivatives qualifying as hedges | (12 | ) | (12 | ) | (12 | ) | 24 | (12 | ) | (64 | ) | (64 | ) | (68 | ) | 132 | (64 | ) | ||||||||||||||||||||||
Foreign currency translation and other adjustments | 24 | 12 | 80 | (35 | ) | 81 | (55 | ) | (46 | ) | (97 | ) | 100 | (98 | ) | |||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | (60 | ) | (71 | ) | (21 | ) | 132 | (20 | ) | (300 | ) | (278 | ) | (352 | ) | 581 | (349 | ) | ||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total comprehensive income (loss) | 47 | (37 | ) | 207 | (62 | ) | 155 | |||||||||||||||||||||||||||||||||
Total comprehensive loss | (110 | ) | (186 | ) | (4 | ) | 200 | (100 | ) | |||||||||||||||||||||||||||||||
Less: comprehensive income attributable to noncontrolling interests | — | — | 108 | — | 108 | — | — | 10 | — | 10 | ||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 47 | $ | (37 | ) | $ | 99 | $ | (62 | ) | $ | 47 | ||||||||||||||||||||||||||||
Total comprehensive loss available to Genworth Financial, Inc.’s common stockholders | $ | (110 | ) | $ | (186 | ) | $ | (14 | ) | $ | 200 | $ | (110 | ) | ||||||||||||||||||||||||||
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The following table presents the condensed consolidating comprehensive income statement information for the three months ended SeptemberJune 30, 2016:2017:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Net loss | $ | (380 | ) | $ | (420 | ) | $ | (108 | ) | $ | 576 | $ | (332 | ) | ||||||||||||||||||||||||||
Net income | $ | 202 | $ | 99 | $ | 326 | $ | (356 | ) | $ | 271 | |||||||||||||||||||||||||||||
Other comprehensive income (loss), net of taxes: | ||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | 66 | 63 | 73 | (130 | ) | 72 | (63 | ) | (70 | ) | (71 | ) | 132 | (72 | ) | |||||||||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | 5 | 4 | 4 | (8 | ) | 5 | ||||||||||||||||||||||||||||||||||
Derivatives qualifying as hedges | 54 | 54 | 57 | (111 | ) | 54 | 28 | 28 | 32 | (60 | ) | 28 | ||||||||||||||||||||||||||||
Foreign currency translation and other adjustments | (11 | ) | (3 | ) | — | 13 | (1 | ) | 34 | 29 | 61 | (63 | ) | 61 | ||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | 114 | 118 | 134 | (236 | ) | 130 | (1 | ) | (13 | ) | 22 | 9 | 17 | |||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total comprehensive income (loss) | (266 | ) | (302 | ) | 26 | 340 | (202 | ) | ||||||||||||||||||||||||||||||||
Total comprehensive income | 201 | 86 | 348 | (347 | ) | 288 | ||||||||||||||||||||||||||||||||||
Less: comprehensive income attributable to noncontrolling interests | — | — | 64 | — | 64 | — | — | 87 | — | 87 | ||||||||||||||||||||||||||||||
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Total comprehensive loss available to Genworth Financial, Inc.’s common stockholders | $ | (266 | ) | $ | (302 | ) | $ | (38 | ) | $ | 340 | $ | (266 | ) | ||||||||||||||||||||||||||
Total comprehensive income available to Genworth Financial, Inc.’s common stockholders | $ | 201 | $ | 86 | $ | 261 | $ | (347 | ) | $ | 201 | |||||||||||||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating comprehensive income statement information for the ninesix months ended SeptemberJune 30, 2017:2018:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Net income | $ | 464 | $ | 219 | $ | 824 | $ | (845 | ) | $ | 662 | $ | 302 | $ | 95 | $ | 569 | $ | (552 | ) | $ | 414 | ||||||||||||||||||
Other comprehensive income (loss), net of taxes: | ||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | (155 | ) | (172 | ) | (173 | ) | 327 | (173 | ) | (511 | ) | (462 | ) | (526 | ) | 973 | (526 | ) | ||||||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | 1 | 1 | 1 | (2 | ) | 1 | (2 | ) | (1 | ) | (2 | ) | 3 | (2 | ) | |||||||||||||||||||||||||
Derivatives qualifying as hedges | (33 | ) | (33 | ) | (32 | ) | 65 | (33 | ) | (216 | ) | (217 | ) | (233 | ) | 450 | (216 | ) | ||||||||||||||||||||||
Foreign currency translation and other adjustments | 128 | 109 | 260 | (236 | ) | 261 | (102 | ) | (82 | ) | (185 | ) | 184 | (185 | ) | |||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | (59 | ) | (95 | ) | 56 | 154 | 56 | (831 | ) | (762 | ) | (946 | ) | 1,610 | (929 | ) | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total comprehensive income | 405 | 124 | 880 | (691 | ) | 718 | ||||||||||||||||||||||||||||||||||
Total comprehensive loss | (529 | ) | (667 | ) | (377 | ) | 1,058 | (515 | ) | |||||||||||||||||||||||||||||||
Less: comprehensive income attributable to noncontrolling interests | — | — | 313 | — | 313 | — | — | 14 | — | 14 | ||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total comprehensive income available to Genworth Financial, Inc.’s common stockholders | $ | 405 | $ | 124 | $ | 567 | $ | (691 | ) | $ | 405 | |||||||||||||||||||||||||||||
Total comprehensive loss available to Genworth Financial, Inc.’s common stockholders | $ | (529 | ) | $ | (667 | ) | $ | (391 | ) | $ | 1,058 | $ | (529 | ) | ||||||||||||||||||||||||||
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The following table presents the condensed consolidating comprehensive income statement information for the ninesix months ended SeptemberJune 30, 2016:2017:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Net income (loss) | $ | (155 | ) | $ | (284 | ) | $ | 451 | $ | (16 | ) | $ | (4 | ) | ||||||||||||||||||||||||||
Net income | $ | 357 | $ | 185 | $ | 596 | $ | (651 | ) | $ | 487 | |||||||||||||||||||||||||||||
Other comprehensive income (loss), net of taxes: | ||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | 1,600 | 1,555 | 1,625 | (3,156 | ) | 1,624 | (83 | ) | (101 | ) | (84 | ) | 184 | (84 | ) | |||||||||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | 6 | 5 | 6 | (11 | ) | 6 | 1 | 1 | 1 | (2 | ) | 1 | ||||||||||||||||||||||||||||
Derivatives qualifying as hedges | 448 | 447 | 481 | (928 | ) | 448 | (21 | ) | (21 | ) | (20 | ) | 41 | (21 | ) | |||||||||||||||||||||||||
Foreign currency translation and other adjustments | 138 | 65 | 224 | (204 | ) | 223 | 104 | 97 | 180 | (201 | ) | 180 | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||
Total other comprehensive income (loss) | 2,192 | 2,072 | 2,336 | (4,299 | ) | 2,301 | 1 | (24 | ) | 77 | 22 | 76 | ||||||||||||||||||||||||||||
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Total comprehensive income | 2,037 | 1,788 | 2,787 | (4,315 | ) | 2,297 | 358 | 161 | 673 | (629 | ) | 563 | ||||||||||||||||||||||||||||
Less: comprehensive income attributable to noncontrolling interests | — | — | 260 | — | 260 | — | — | 205 | — | 205 | ||||||||||||||||||||||||||||||
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Total comprehensive income available to Genworth Financial, Inc.’s common stockholders | $ | 2,037 | $ | 1,788 | $ | 2,527 | $ | (4,315 | ) | $ | 2,037 | $ | 358 | $ | 161 | $ | 468 | $ | (629 | ) | $ | 358 | ||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating cash flowsflow statement information for the ninesix months ended SeptemberJune 30, 2017:2018:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||||||||||||||
Cash flows from (used by) operating activities: | ||||||||||||||||||||||||||||||||||||||||
Net income | $ | 464 | $ | 219 | $ | 824 | $ | (845 | ) | $ | 662 | $ | 302 | $ | 95 | $ | 569 | $ | (552 | ) | $ | 414 | ||||||||||||||||||
Less loss from discontinued operations, net of taxes | — | (4 | ) | 13 | — | 9 | ||||||||||||||||||||||||||||||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||||||||||||||||||||||||||||||
Adjustments to reconcile net income to net cash from (used by) operating activities: | ||||||||||||||||||||||||||||||||||||||||
Equity in income from subsidiaries | (506 | ) | (339 | ) | — | 845 | — | (356 | ) | (196 | ) | — | 552 | — | ||||||||||||||||||||||||||
Dividends from subsidiaries | — | 119 | (119 | ) | — | — | 50 | 91 | (141 | ) | — | — | ||||||||||||||||||||||||||||
Amortization of fixed maturity securities discounts and premiums and limited partnerships | — | 4 | (111 | ) | — | (107 | ) | |||||||||||||||||||||||||||||||||
Net investment (gains) losses | — | 12 | (232 | ) | — | (220 | ) | |||||||||||||||||||||||||||||||||
Amortization of fixed maturity securities discounts and premiums | — | 3 | (65 | ) | — | (62 | ) | |||||||||||||||||||||||||||||||||
Net investment losses | — | 2 | 43 | — | 45 | |||||||||||||||||||||||||||||||||||
Charges assessed to policyholders | — | — | (534 | ) | — | (534 | ) | — | — | (359 | ) | — | (359 | ) | ||||||||||||||||||||||||||
Acquisition costs deferred | — | — | (67 | ) | — | (67 | ) | — | — | (40 | ) | — | (40 | ) | ||||||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | — | — | 316 | — | 316 | — | — | 216 | — | 216 | ||||||||||||||||||||||||||||||
Deferred income taxes | 6 | (47 | ) | 275 | — | 234 | 42 | (117 | ) | 158 | — | 83 | ||||||||||||||||||||||||||||
Trading securities,held-for-sale investments and derivative instruments | — | (46 | ) | 762 | — | 716 | ||||||||||||||||||||||||||||||||||
Trading securities, limited partnerships and derivative instruments | — | 22 | (217 | ) | — | (195 | ) | |||||||||||||||||||||||||||||||||
Stock-based compensation expense | 23 | — | 6 | — | 29 | 15 | — | 1 | — | 16 | ||||||||||||||||||||||||||||||
Change in certain assets and liabilities: | ||||||||||||||||||||||||||||||||||||||||
Accrued investment income and other assets | 2 | (2 | ) | (25 | ) | 4 | (21 | ) | (1 | ) | 59 | (147 | ) | — | (89 | ) | ||||||||||||||||||||||||
Insurance reserves | — | — | 1,202 | — | 1,202 | — | — | 691 | — | 691 | ||||||||||||||||||||||||||||||
Current tax liabilities | (6 | ) | (75 | ) | 54 | — | (27 | ) | (27 | ) | 87 | (97 | ) | — | (37 | ) | ||||||||||||||||||||||||
Other liabilities, policy and contract claims and other policy-related balances | (29 | ) | 34 | (259 | ) | (6 | ) | (260 | ) | (15 | ) | (50 | ) | (49 | ) | (8 | ) | (122 | ) | |||||||||||||||||||||
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Net cash from operating activities | (46 | ) | (125 | ) | 2,105 | (2 | ) | 1,932 | ||||||||||||||||||||||||||||||||
Net cash from (used by) operating activities | 10 | (4 | ) | 563 | (8 | ) | 561 | |||||||||||||||||||||||||||||||||
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Cash flows used by investing activities: | ||||||||||||||||||||||||||||||||||||||||
Proceeds from maturities and repayments of investments: | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities | — | — | 3,396 | — | 3,396 | — | — | 1,979 | — | 1,979 | ||||||||||||||||||||||||||||||
Commercial mortgage loans | — | — | 454 | — | 454 | — | — | 350 | — | 350 | ||||||||||||||||||||||||||||||
Restricted commercial mortgage loans related to securitization entities | — | — | 18 | — | 18 | — | — | 16 | — | 16 | ||||||||||||||||||||||||||||||
Proceeds from sales of investments: | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity and equity securities | — | — | 3,269 | — | 3,269 | — | — | 1,920 | — | 1,920 | ||||||||||||||||||||||||||||||
Purchases and originations of investments: | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity and equity securities | — | — | (6,709 | ) | — | (6,709 | ) | — | — | (4,082 | ) | — | (4,082 | ) | ||||||||||||||||||||||||||
Commercial mortgage loans | — | — | (608 | ) | — | (608 | ) | — | — | (489 | ) | — | (489 | ) | ||||||||||||||||||||||||||
Other invested assets, net | — | 25 | (548 | ) | 2 | (521 | ) | — | — | 85 | 8 | 93 | ||||||||||||||||||||||||||||
Policy loans, net | — | — | 28 | — | 28 | — | — | 15 | — | 15 | ||||||||||||||||||||||||||||||
Intercompany notes receivable | — | (77 | ) | 34 | 43 | — | — | (10 | ) | 58 | (48 | ) | — | |||||||||||||||||||||||||||
Capital contributions to subsidiaries | (7 | ) | — | 7 | — | — | (1 | ) | — | 1 | — | — | ||||||||||||||||||||||||||||
Payments for business purchased, net of cash acquired | (7 | ) | — | 2 | — | (5 | ) | |||||||||||||||||||||||||||||||||
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Net cash used by investing activities | (14 | ) | (52 | ) | (657 | ) | 45 | (678 | ) | (1 | ) | (10 | ) | (147 | ) | (40 | ) | (198 | ) | |||||||||||||||||||||
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Cash flows used by financing activities: | ||||||||||||||||||||||||||||||||||||||||
Deposits to universal life and investment contracts | — | — | 902 | — | 902 | — | — | 503 | — | 503 | ||||||||||||||||||||||||||||||
Withdrawals from universal life and investment contracts | — | — | (2,003 | ) | — | (2,003 | ) | — | — | (1,177 | ) | — | (1,177 | ) | ||||||||||||||||||||||||||
Proceeds from the issuance of long-term debt | — | 441 | — | — | 441 | |||||||||||||||||||||||||||||||||||
Repayment and repurchase of long-term debt | — | (597 | ) | — | — | (597 | ) | |||||||||||||||||||||||||||||||||
Repayment of borrowings related to securitization entities | — | — | (16 | ) | — | (16 | ) | — | — | (12 | ) | — | (12 | ) | ||||||||||||||||||||||||||
Repurchase of subsidiary shares | — | — | (31 | ) | — | (31 | ) | — | — | (49 | ) | — | (49 | ) | ||||||||||||||||||||||||||
Dividends paid to noncontrolling interests | — | — | (92 | ) | — | (92 | ) | — | — | (50 | ) | — | (50 | ) | ||||||||||||||||||||||||||
Proceeds from intercompany notes payable | 61 | (35 | ) | 17 | (43 | ) | — | |||||||||||||||||||||||||||||||||
Intercompany notes payable | (7 | ) | (59 | ) | 18 | 48 | — | |||||||||||||||||||||||||||||||||
Other, net | (1 | ) | (32 | ) | 3 | — | (30 | ) | (2 | ) | (19 | ) | 19 | — | (2 | ) | ||||||||||||||||||||||||
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Net cash used by financing activities | 60 | (67 | ) | (1,220 | ) | (43 | ) | (1,270 | ) | (9 | ) | (234 | ) | (748 | ) | 48 | (943 | ) | ||||||||||||||||||||||
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Effect of exchange rate changes on cash and cash equivalents | — | — | 68 | — | 68 | |||||||||||||||||||||||||||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | — | — | (52 | ) | — | (52 | ) | |||||||||||||||||||||||||||||||||
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Net change in cash and cash equivalents | — | (244 | ) | 296 | — | 52 | ||||||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period | — | 998 | 1,786 | — | 2,784 | |||||||||||||||||||||||||||||||||||
Net change in cash, cash equivalents and restricted cash | — | (248 | ) | (384 | ) | — | (632 | ) | ||||||||||||||||||||||||||||||||
Cash, cash equivalents and restricted cash at beginning of period | — | 795 | 2,080 | — | 2,875 | |||||||||||||||||||||||||||||||||||
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Cash and cash equivalents at end of period | $ | — | $ | 754 | $ | 2,082 | $ | — | $ | 2,836 | ||||||||||||||||||||||||||||||
Cash, cash equivalents and restricted cash at end of period | $ | — | $ | 547 | $ | 1,696 | $ | — | $ | 2,243 | ||||||||||||||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating cash flowsflow statement information for the ninesix months ended SeptemberJune 30, 2016:2017:
(Amounts in millions) | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuer | All Other Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | (155 | ) | $ | (284 | ) | $ | 451 | $ | (16 | ) | $ | (4 | ) | ||||||||||||||||||||||||||
Less loss from discontinued operations, net of taxes | 2 | 7 | 16 | — | 25 | |||||||||||||||||||||||||||||||||||
Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||||||||||||||||||||||||||||||||||
Equity in (income) loss from subsidiaries | 62 | (78 | ) | — | 16 | — | ||||||||||||||||||||||||||||||||||
Cash flows from (used by) operating activities: | ||||||||||||||||||||||||||||||||||||||||
Net income | $ | 357 | $ | 185 | $ | 596 | $ | (651 | ) | $ | 487 | |||||||||||||||||||||||||||||
Adjustments to reconcile net income to net cash from (used by) operating activities: | ||||||||||||||||||||||||||||||||||||||||
Equity in income from subsidiaries | (383 | ) | (268 | ) | — | 651 | — | |||||||||||||||||||||||||||||||||
Dividends from subsidiaries | — | 250 | (250 | ) | — | — | — | 64 | (64 | ) | — | — | ||||||||||||||||||||||||||||
(Gain) loss on sale of businesses | — | 1 | (27 | ) | — | (26 | ) | |||||||||||||||||||||||||||||||||
Amortization of fixed maturity securities discounts and premiums and limited partnerships | — | 3 | (115 | ) | — | (112 | ) | |||||||||||||||||||||||||||||||||
Amortization of fixed maturity securities discounts and premiums | — | 3 | (79 | ) | — | (76 | ) | |||||||||||||||||||||||||||||||||
Net investment (gains) losses | — | 14 | (45 | ) | — | (31 | ) | — | 8 | (143 | ) | — | (135 | ) | ||||||||||||||||||||||||||
Charges assessed to policyholders | — | — | (574 | ) | — | (574 | ) | — | — | (365 | ) | — | (365 | ) | ||||||||||||||||||||||||||
Acquisition costs deferred | — | — | (124 | ) | — | (124 | ) | — | — | (44 | ) | — | (44 | ) | ||||||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | — | — | 305 | — | 305 | — | — | 233 | — | 233 | ||||||||||||||||||||||||||||||
Deferred income taxes | 8 | 304 | (139 | ) | — | 173 | 6 | (14 | ) | 174 | — | 166 | ||||||||||||||||||||||||||||
Trading securities,held-for-sale investments and derivative instruments | — | 5 | 754 | — | 759 | |||||||||||||||||||||||||||||||||||
Trading securities, limited partnerships and derivative instruments | — | 1 | 430 | — | 431 | |||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 18 | — | 7 | — | 25 | 14 | — | 4 | — | 18 | ||||||||||||||||||||||||||||||
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Accrued investment income and other assets | (3 | ) | (4 | ) | (246 | ) | (5 | ) | (258 | ) | (6 | ) | (30 | ) | 12 | 1 | (23 | ) | ||||||||||||||||||||||
Insurance reserves | — | — | 691 | — | 691 | — | — | 806 | — | 806 | ||||||||||||||||||||||||||||||
Current tax liabilities | 11 | (4 | ) | 37 | — | 44 | (4 | ) | (88 | ) | 60 | — | (32 | ) | ||||||||||||||||||||||||||
Other liabilities, policy and contract claims and other policy-related balances | (1 | ) | (22 | ) | 928 | — | 905 | (9 | ) | 64 | (210 | ) | (3 | ) | (158 | ) | ||||||||||||||||||||||||
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Net cash from operating activities | (58 | ) | 192 | 1,669 | (5 | ) | 1,798 | |||||||||||||||||||||||||||||||||
Net cash from (used by) operating activities | (25 | ) | (75 | ) | 1,410 | (2 | ) | 1,308 | ||||||||||||||||||||||||||||||||
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Cash flows used by investing activities: | ||||||||||||||||||||||||||||||||||||||||
Proceeds from maturities and repayments of investments: | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities | — | 150 | 2,496 | — | 2,646 | — | — | 2,358 | — | 2,358 | ||||||||||||||||||||||||||||||
Commercial mortgage loans | — | — | 555 | — | 555 | — | — | 307 | — | 307 | ||||||||||||||||||||||||||||||
Restricted commercial mortgage loans related to securitization entities | — | — | 27 | — | 27 | — | — | 11 | — | 11 | ||||||||||||||||||||||||||||||
Proceeds from sales of investments: | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity and equity securities | — | — | 4,064 | — | 4,064 | — | — | 2,587 | — | 2,587 | ||||||||||||||||||||||||||||||
Purchases and originations of investments: | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity and equity securities | — | — | (8,758 | ) | — | (8,758 | ) | — | (46 | ) | (4,687 | ) | — | (4,733 | ) | |||||||||||||||||||||||||
Commercial mortgage loans | — | — | (405 | ) | — | (405 | ) | — | — | (431 | ) | — | (431 | ) | ||||||||||||||||||||||||||
Other invested assets, net | — | — | (143 | ) | 5 | (138 | ) | — | — | (640 | ) | 2 | (638 | ) | ||||||||||||||||||||||||||
Policy loans, net | — | — | (80 | ) | — | (80 | ) | — | — | 21 | — | 21 | ||||||||||||||||||||||||||||
Intercompany notes receivable | — | (58 | ) | (18 | ) | 76 | — | — | (51 | ) | 47 | 4 | — | |||||||||||||||||||||||||||
Proceeds from sale of businesses, net of cash transferred | — | 1 | 38 | — | 39 | |||||||||||||||||||||||||||||||||||
Capital contributions to subsidiaries | (7 | ) | — | 7 | — | — | ||||||||||||||||||||||||||||||||||
Payments for business purchased, net of cash acquired | (7 | ) | — | 2 | — | (5 | ) | |||||||||||||||||||||||||||||||||
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Net cash used by investing activities | — | 93 | (2,224 | ) | 81 | (2,050 | ) | (14 | ) | (97 | ) | (418 | ) | 6 | (523 | ) | ||||||||||||||||||||||||
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Cash flows used by financing activities: | ||||||||||||||||||||||||||||||||||||||||
Cash flows from (used by) financing activities: | ||||||||||||||||||||||||||||||||||||||||
Deposits to universal life and investment contracts | — | — | 1,028 | — | 1,028 | — | — | 429 | — | 429 | ||||||||||||||||||||||||||||||
Withdrawals from universal life and investment contracts | — | — | (1,463 | ) | — | (1,463 | ) | — | — | (1,091 | ) | — | (1,091 | ) | ||||||||||||||||||||||||||
Redemption ofnon-recourse funding obligations | — | — | (1,620 | ) | — | (1,620 | ) | |||||||||||||||||||||||||||||||||
Repayment and repurchase of long-term debt | — | (326 | ) | (36 | ) | — | (362 | ) | ||||||||||||||||||||||||||||||||
Repayment of borrowings related to securitization entities | — | — | (37 | ) | — | (37 | ) | — | — | (12 | ) | — | (12 | ) | ||||||||||||||||||||||||||
Return of capital to noncontrolling interests | — | — | (70 | ) | — | (70 | ) | |||||||||||||||||||||||||||||||||
Dividends paid to noncontrolling interests | — | — | (126 | ) | — | (126 | ) | — | — | (52 | ) | — | (52 | ) | ||||||||||||||||||||||||||
Proceeds from intercompany notes payable | 58 | 18 | — | (76 | ) | — | ||||||||||||||||||||||||||||||||||
Intercompany notes payable | 40 | (47 | ) | 11 | (4 | ) | — | |||||||||||||||||||||||||||||||||
Other, net | — | (36 | ) | (13 | ) | — | (49 | ) | (1 | ) | (21 | ) | (7 | ) | — | (29 | ) | |||||||||||||||||||||||
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Net cash used by financing activities | 58 | (344 | ) | (2,337 | ) | (76 | ) | (2,699 | ) | |||||||||||||||||||||||||||||||
Net cash from (used by) financing activities | 39 | (68 | ) | (722 | ) | (4 | ) | (755 | ) | |||||||||||||||||||||||||||||||
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Effect of exchange rate changes on cash and cash equivalents | — | — | 36 | — | 36 | |||||||||||||||||||||||||||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | — | — | 39 | — | 39 | |||||||||||||||||||||||||||||||||||
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Net change in cash and cash equivalents | — | (59 | ) | (2,856 | ) | — | (2,915 | ) | ||||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period | — | 1,124 | 4,869 | — | 5,993 | |||||||||||||||||||||||||||||||||||
Net change in cash, cash equivalents and restricted cash | — | (240 | ) | 309 | — | 69 | ||||||||||||||||||||||||||||||||||
Cash, cash equivalents and restricted cash at beginning of period | — | 998 | 1,786 | — | 2,784 | |||||||||||||||||||||||||||||||||||
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Cash and cash equivalents at end of period | $ | — | $ | 1,065 | $ | 2,013 | $ | — | $ | 3,078 | ||||||||||||||||||||||||||||||
Cash, cash equivalents and restricted cash at end of period | $ | — | $ | 758 | $ | 2,095 | $ | — | $ | 2,853 | ||||||||||||||||||||||||||||||
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GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our insurance company subsidiaries are restricted by state and foreign laws and regulations as to the amount of dividends they may pay to their parent without regulatory approval in any year, the purpose of which is to protect affected insurance policyholders and contractholders, not stockholders. Any dividends in excess of limits are deemed “extraordinary” and require approval. Based on statutory results as of December 31, 2016,2017, in accordance with applicable dividend restrictions, our subsidiaries could pay dividends of approximately $220$500 million to us in 20172018 without obtaining regulatory approval, and the remaining net assets are considered restricted. While the $220$500 million is unrestricted, we do not expect our insurance subsidiaries tomay not pay dividends to us in 20172018 at this level asif they need to retain capital for growth and to meet capital requirements and desired thresholds. As of SeptemberJune 30, 2017,2018, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $13.0$12.6 billion and $12.2$11.9 billion, respectively.
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 20162017 Annual Report on Form10-K. References herein to “Genworth,” the “Company,” “we” or “our” inherein are, unless the context otherwise requires, to Genworth Financial, Inc. on a consolidated basis.
Cautionary note regarding forward-looking statements
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Examples of forward-looking statements include statements we make relating to the transaction with China Oceanwide transaction.Holdings Group Co., Ltd. (“China Oceanwide”) and our discussions with regulators in connection therewith. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially from those in the forward-looking statements due to global political, economic, business, competitive, market, regulatory and other factors and risks, including, but not limited to, the following:
• | risks related to the proposed transaction with China Oceanwide |
• | strategic risksin the event the proposed transaction with China Oceanwide is not consummatedincluding: our inability to successfully execute alternative strategic plans to effectively address our current business challenges (including with respect to |
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• | risks relating to estimates, assumptions and valuations including: |
• | risks relating to economic, market and political conditions including: downturns and volatility in global economies and equity and credit markets; interest rates and changes in rates (particularly given the historically low interest rate environment) have adversely impacted, and may continue to materially adversely impact, our business and profitability; deterioration in economic conditions or a decline in home prices that adversely affect our loss experience in mortgage insurance; political and economic instability or changes in government policies; and fluctuations in foreign currency exchange rates and international securities markets; |
• | regulatory and legal risks including: extensive regulation of our businesses and changes in applicable laws and regulations (including changes to tax laws and regulations); litigation and regulatory investigations or other actions; dependence on dividends and other distributions from our subsidiaries (particularly our international subsidiaries) and the inability of any subsidiaries to pay dividends or make other distributions to us, including as a result of the performance of our subsidiaries and insurance, regulatory or corporate law restrictions; adverse change in regulatory requirements, including risk-based capital; changes in regulations adversely affecting our international operations; inability to continue to maintain the private mortgage insurer eligibility requirements (“PMIERs”); inability of our U.S. mortgage insurance subsidiaries to meet minimum statutory capital requirements and hazardous financial condition standards; the influence of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and a small number of large mortgage lenders on the U.S. mortgage insurance market and adverse changes to the role or structure of Fannie Mae and Freddie Mac; adverse changes in regulations affecting our mortgage insurance businesses; inability to continue to implement actions to mitigate the impact of statutory reserve requirements; impact of additional regulations pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in tax laws; and changes in accounting and reporting standards; |
• | liquidity, financial strength ratings, credit and counterparty risks including: insufficient internal sources to meet liquidity needs and limited or no access to capital (including the ability to obtain further financing under |
availability and terms of hedging, reinsurance and borrowings; defaults by counterparties to reinsurance arrangements or derivative instruments; defaults or other events impacting the value of our fixed maturity securities portfolio; and defaults on |
our commercial mortgage loans or the mortgage loans underlying our investments in commercial mortgage-backed securities and volatility in performance; |
• | operational risks including: inability to retain, attract and motivate qualified employees or senior management; ineffective or inadequate risk management in identifying, controlling or mitigating risks; reliance on, and loss of, key customer or distribution relationships; |
• | insurance and product-related risks including: our inability to increase sufficiently, and in a timely manner, premiums onin-force long-term care insurance policies and/or reducein-force benefits, and charge higher premiums on new policies, in each case, as currently anticipated and as may be required from time to time in the future (including as a result of our failure to obtain any necessary regulatory approvals or unwillingness or inability of policyholders to pay increased premiums), including to offset any impact on our |
• | other risks including: occurrence of natural orman-made disasters or a pandemic; impairments of or valuation allowances against our deferred tax assets; the possibility that in certain circumstances we will be obligated to make payments to General Electric Company (“GE”) under the tax matters agreement with GE even if our corresponding tax savings are never realized and payments could be accelerated in the event of certain changes in control; and provisions of our certificate of incorporation and bylaws and the tax matters agreement with GE may discourage takeover attempts and business combinations that stockholders might consider in their best interests; and |
• | risks relating to our common stockincluding: the continued suspension of payment of dividends; and stock price fluctuations. |
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
Overview
Our business
We are dedicated to helping meet the homeownership and long-term care needs of our customers. We have the following five operating business segments:
• | U.S. Mortgage Insurance.In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based. |
• | Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada. |
• | Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. |
• | U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States. |
• | Runoff.The Runoff segment includes the results ofnon-strategic products which are no longer actively sold but we continue to service our existing blocks of business. Ournon-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements and funding agreements backing notes (“FABNs”) |
In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings, Inc. (“Genworth Holdings”) level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.
Strategic Update
We continue to focus on improving business performance, addressing financial leverage and increasing financial and strategic flexibility across the organization. Our strategy includes maximizing our opportunities in our mortgage insurance businesses and restructuringstabilizing our U.S. life insurance businesses.
China Oceanwide Transaction
On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”(the “Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent.Parent (the “Merger”). The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”).Oceanwide. China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. The agreement concluded our previously announced strategic review process, which we had undertaken over the previous two years. At a special meeting held on March 7, 2017, Genworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement.
Genworth Financial and China Oceanwide continue to work towards satisfying the closing conditions of their proposed transactionthe Merger as soon as possible. To date, we have announced approvals fromIn June 2018, the Virginia State Corporation Commission BureauCommittee on Foreign Investment in the United States (“CFIUS”) completed its review of Insurance, the North Carolina Departmentproposed transaction and concluded that there are no unresolved national security concerns with respect to the proposed transaction. The completion of Insurance, the South Carolina DepartmentCFIUS review satisfied one of Insurance and the Vermont Insurance Division. However, on October 2, 2017,conditions to closing the proposed transaction. In connection with the CFIUS review of the proposed transaction, Genworth Financial and China Oceanwide withdrew their joint voluntary noticeentered into an agreement to CFIUS, with an intent to refile with additionalimplement a data security risk mitigation approaches. Both parties are actively engaged in developing these approaches, includingplan, which includes, among other things, the potential involvementuse of a U.S. third-party service provider to protect the personal data of Genworth Financial’s policyholders and anticipate refiling a new joint noticecustomers in the United States.
The parties have also had ongoing discussions with CFIUS as soon as the termsDelaware Department of Insurance (“DDOI”) on its review of the additional mitigation approaches are determined.transaction, including the purchase by a Genworth holding company of Genworth Life and Annuity Insurance Company (“GLAIC”) from Genworth Life Insurance Company (“GLIC”), which we refer to as “unstacking.” As part of the transaction, China Oceanwide originally committed in the Merger Agreement to contribute $525 million of cash for the purpose of facilitating the GLAIC unstacking. This contribution combined with $175 million of cash previously committed by Genworth Holdings was intended to enable the Genworth
holding company to purchase GLAIC from GLIC for a purchase price of $700 million and complete the GLAIC unstacking. After extensive discussions with the DDOI on different methodologies for establishing the fair market value for GLAIC, the parties and the DDOI have been unable to agree on the fair market value of GLAIC. As a result, Genworth Financial and China Oceanwide are fully committedworking with the DDOI and other regulators to developing an acceptable solution with CFIUS; however, there can be no assurance that CFIUS will ultimately agree to clearseek approval of the transaction between Genworth Financial andMerger without the GLAIC unstacking. Without the unstacking, China Oceanwide on terms acceptable towill not make the parties or at all. In addition to approval and clearance by CFIUS, theoriginally contemplated $525 million contribution.
The closing of the proposed transactionMerger remains subject to the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions and other closing conditions. Genworth Financial and China Oceanwide also continue to be actively engaged with the other relevant regulators regarding the pending applications.
On August 21, 2017,June 28, 2018, Genworth Financial, the Parent and Merger Sub entered into a fifth waiver and agreement (“Fifth Waiver and AgreementAgreement”) pursuant to which Genworth Financial and the Parent each agreed to among other things, waive until November 30, 2017August 15, 2018 its right to terminate the Merger Agreement and abandon the mergerMerger in accordance with the terms of the Merger Agreement. The Fifth Waiver and Agreement due to a failureextended the previous waiver and agreement extension deadline of July 1, 2018, and allows additional time for regulatory reviews of the merger to have been completed on or before August 31, 2017. Genworth Financial and China Oceanwide are also discussing an additional waiver of each party’s right to terminatetransaction, although we expect the Merger Agreementregulatory review process will extend beyond the November 30, 2017 deadline.this date. If we are unable to reach an agreement as to a further extension of the deadline or are unable to satisfy the closing conditions by the applicable deadline, then either party may terminate the Merger Agreement. Genworth Financial and China Oceanwide remain committed to satisfying the closing conditions under the Merger Agreement as soon as possible.
As part of the transaction, China Oceanwide originally committed in the Merger Agreement to contribute $600 million of cash to Genworth, Financialsubject to the consummation of the Merger, to address our debt maturingsenior unsecured notes due in May 2018 (the “May 2018 senior notes”), on or before its maturity,their maturity. Due to the delays in the completion of the transaction, Genworth completed the $450 million senior secured term loan facility (“Term Loan”), as well as $525discussed below. Instead of the $600 million contribution from China Oceanwide, the proceeds of cash to our U.S. life insurance businesses. This contribution is in addition tothe Term Loan, together with $175 million of cash previously committed by Genworth Holdingson hand, were used to our U.S. life insurance businesses to pursue their restructuring as described below. These contributions, in addition to addressingretire the May 2018 debt maturity, are intended to increasesenior notes. China Oceanwide therefore did not make the likelihood of obtaining regulatory approvalsoriginally contemplated $600 million contribution for the May 2018 senior notes and the $525 million contribution for the GLAIC unstacking, China Oceanwide transaction as well as help achieve our strategic objectivesand Genworth are developing a new capital investment plan whereby China Oceanwide would contribute an aggregate of improving Genworth’s overall financial strength and flexibility and supporting the restructuring of our U.S. life insurance businesses, as described further below. Due$1.5 billion to the delay in the timing ofGenworth over time following the closing of the transaction, we are currently reviewing potential refinancing options,proposed transaction. The $1.5 billion contribution would be used to further improve our financial stability, which maycould include secured indebtedness, to address upcomingretiring debt maturitiesdue in the event the transaction with China Oceanwide cannot be completed in a timely manner2020 and 2021 or at all. We could also utilize holding company cash and/or pursue potential asset sales to address upcoming debt maturities in the event the transaction with China Oceanwide cannot be completed. In the absence of the transaction with China Oceanwide or a refinancing alternative, we believe we would need to pursue asset sales to address our debt maturities, including potential sales of our mortgage insurance businesses in Canada and/or Australia. We are also evaluating options to insulate our U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event a transaction with China Oceanwide cannot be completed.enabling future growth opportunities.
If the China Oceanwide transaction is completed, we will be a standalone subsidiary of China Oceanwide and our senior management team will continue to lead the business from our current headquarters in Richmond, Virginia. Likewise, we intend to maintain our existing portfolio of businesses, including our mortgage insurance businesses in Australia and Canada. Ourday-to-day operations are not expected to change as a result of this transaction.
Restructuring of U.S. Life Insurance Businesses
In February 2016, we announced that oneOne of our strategic objectives was to separate, then isolate, through a series of internal transactions, our long-term care insurance business from our other U.S. life insurance
businesses. We continued to pursue this plan in connection with the China Oceanwide transaction, with some differences from our previously announced restructuring plan. Our goal under the plan hashad been to align substantially all of ournon-New Yorkin-force life insurance and annuity business under Genworth Life and Annuity Insurance Company (“GLAIC”),GLAIC, our Virginia domiciled life insurance company, and substantially all of ournon-New York long-term care insurance business under Genworth Life Insurance Company (“GLIC”),GLIC, our Delaware domiciled life insurance company. As part of this strategic objective, effective April 1, 2017, GLAIC assumed risk on a coinsurance basis for certain blocks of term life insurance, universal life insurance and single premium whole life insurance from GLIC. Effective July 1, 2017, GLIC recaptured certain single premium deferred annuity products previously ceded to GLAIC. In addition, effective July 1, 2017, GLAIC assumed risk on a modified coinsurance basis for certain blocks of fixed annuities, including those single premium deferred annuity products recaptured by GLIC, and certain corporate-owned life insurance policies from GLIC. As a result, there was an adverse impact on GLIC’s risk-based capital ratio of approximately 15 points in the third quarter of 2017. However, the internal transactions had no impact on our consolidated results of operations and financial condition prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) as the financial impact
Because of the intercompany reinsurance was eliminated in consolidation. These transactions complete our goal to align substantially all of our non-New Yorkin-force life insurancerecent decision by Genworth Financial and annuity business under GLAIC and substantially all of our non-New York long-term care insurance business under GLIC. All of these transactions were also required under the Merger Agreement with China Oceanwide. The reinsurance treaties effective July 1, 2017 include provisions that require us to unwind or void these treaties in the event the merger transaction with China Oceanwide is terminated.
In addition, based on China Oceanwide’s $525 million capital commitment undernot to pursue the Merger Agreement, together with the $175 million of cash previously committed by Genworth Holdings, a Genworth holding company would seek,GLAIC unstacking at this time in connection with the completion ofMerger, it is now contemplated that for the China Oceanwide transaction, the purchase of GLAIC from GLIC at fair market value. Together with the internal reinsurance transactions completed in April 2017foreseeable future we
will not separate and July 2017, finalization of the GLAIC sale, if completed, would isolate our non-New York long-term care insurance business from our other non-New York U.S. life insurance businesses and achieve this strategic objective, and regulatory approvalbusinesses. However, we will continue to do so is a conditionwork to stabilize our long-term care insurance business primarily through our multi-year long-term care insurance rate action plan. Increasing premiums and/or implementing benefit modifications on our legacy long-term care insurance policies are critical to support the closingpolicy claims of the China Oceanwide transaction.business. China Oceanwide has no future obligation and has expressed noits intention not to contribute additional capital to support our legacy long-term care insurance business.
SeparatingTerm Loan
Due to the delay in the closing of the China Oceanwide transaction, we entered into the Term Loan with an aggregate principal amount of $450 million that was closed in March 2018. Proceeds of $441 million from the Term Loan were used together with $175 million of cash on hand to retire the principal and isolating our long-term care insurance business has been an important strategic objective, because we believe it would:
Strategic Alternatives
If the China Oceanwide transaction is not completed, we will continue to explore strategic alternatives and financing options to address our ongoing challenges, including our May 2018 debt maturity and other debt service obligations. Prior to the announcement of the China Oceanwide transaction, we previously disclosed that after discussions with regulators, we believed as a first step, we might only be able to distribute a portion of GLAIC from GLIC.challenges. As a result of the recent performance of our long-term care and life insurance businesses and the charges we recorded in the third quarter of 2016 and fourth quarters of 2016 and 2017, absent the China Oceanwide transaction and any alternative commitment of external capital, we believe there would be: considerable doubt as to the feasibility and timing of achieving a partialan unstacking of any portion of GLAIC in the foreseeable future, if at all;future; increased pressure on
and potential further downgrades of our financial strength ratings, particularly for our mortgage insurance businesses, which could affect our ability to maintain our market share of the U.S. mortgage insurance industry; limitationlimitations on our ability to continue to write new long-term care insurance policies; and other limitations on our holding company liquidity and ability to service and/or refinance our holding company debt.
In the absence of the transaction with China Oceanwide, transaction and/or a refinancing alternative, which we can neither predict nor guarantee, we believe we wouldmay need to pursue strategic asset sales to address these challenges,our debt maturities, including potential sales of our mortgage insurance businesses in Canada and/or Australia. We are also evaluating options to insulate our U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event the transaction with China Oceanwide cannot be completed. Asset sales or changes to our financial projections, including changes that anticipate planned asset sales, may negatively impact our ability to realize certain foreign tax credits or other deferred tax assets and have a resulting material adverse effect on our results of operation. We are also evaluating options to insulate our U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event a transaction with China Oceanwide cannot be completed.
Ongoing Priorities
StabilizingAs noted above, stabilizing our long-term careU.S. life insurance businessbusinesses continues to be one of our long-term goal.goals. We will continue to execute against this objective primarily through our multi-year long-term care insurance rate action plan. Increasing premiums and/or implementing benefit modifications on our legacy long-term care insurance policies are critical to our ability to increasesupport the capital levels needed to supportpolicy claims of the business. In addition, reducing debt will remain a high priority. We believe that increased financial support and our strengthened financial foundation resulting from the China Oceanwide transaction would provide us with more options to manage our debt maturities and reduce overall indebtedness, which in turn is intended to improve our credit and ratings profile over time. Finally,
we also believe that the completion of the China Oceanwide transaction would allow us to place greater focus on the future of our long-term care and mortgage insurance businesses while continuing to service our existing policyholders.
Executive Summary of Financial Results
Below is an executive summary of our consolidated financial results for the periods indicated. Amounts below are net of taxes, unless otherwise indicated. Beginning in the first quarter of 2018,after-tax amounts assumed a tax rate of 21% compared to 35% in the prior year.
Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017
The loss ratio in our U.S. Mortgage Insurance segment was zero and 9% for the six months ended June 30, 2018 and 2017, respectively. The current year loss ratio was primarily driven mostly by
improvements in net benefit from cures and aging of existing delinquencies and from higher net earned premiums attributable to higher insurancein-force in the current year. The decrease in the current year was also attributable to apre-tax favorable reserve adjustment of $28 million mostly associated with lower expected claim rates. The current year reserve adjustment reduced the loss ratio by eight percentage points for the six months ended June 30, 2018. |
Significant Developments
The periods under review include, among others, the following significant developments.
DispositionsU.S. Mortgage Insurance
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• | Dividends paid. Our U.S. mortgage insurance business |
U.S. Life Insurance
• | Rate actions in our long-term care insurance business. As part of our strategy for our long-term care insurance business, we have been implementing, and expect to continue to pursue, significant premium rate increases and/or reduced benefits on older generation blocks of business in order to bring those blocks closer to a break-even point over time and reduce the strain on earnings and capital. We are also requesting premium rate increases and/or reduced benefits on newer blocks of business, as needed, some of which may be significant, to help bring their loss ratios back towards their original pricing. For all of these rate action filings, we received |
Liquidity and Capital Resources
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Redemption of Genworth Holdings’ |
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Financial Strength Ratings
Ratings with respect to the financial strength of operating subsidiaries are an important factor in establishing the competitive position of insurance companies. Ratings are important to maintaining public confidence in us and our ability to market our products. Rating organizations review the financial performance and condition of most insurers and provide opinions regarding financial strength, operating performance and ability to meet obligations to policyholders.
As of November 2, 2017, our principal mortgage insurance subsidiaries were rated in terms of financial strength by Standard & Poor’s Financial Services, LLC (“S&P”), Moody’s Investor Service, Inc. (“Moody’s”) and Dominion Bond Rating Service (“DBRS”) as follows:
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As of November 2, 2017, our principal life insurance subsidiaries were rated in terms of financial strength by S&P, Moody’s andOn July 25, 2018, A.M. Best Company, Inc. (“A.M. Best”) as follows:
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The S&P, Moody’s, DBRS and A.M. Bestaffirmed the financial strength ratings of our operating companies are not designed to be,principal life insurance subsidiaries and do not serve as, measuresthe credit rating of protection or valuation offered to investors. These financial strength ratings should not be relied on with respect to making an investment in our securities.
S&P states that insurers rated “A” (Strong), “BB” (Marginal) or “B” (Weak) have strong, marginal or weak financial security characteristics, respectively. The “A,” “BB” and “B” ranges are the third-, fifth- and sixth-highest of nine financial strength rating ranges assigned by S&P, which range from “AAA” to “R.” A plus (+) or minus (-) shows relative standing within a major rating category. These suffixes are not added to ratings in the “AAA” category or to ratings below the “CCC” category. Accordingly, the “A+,” “BB+” and “B+” ratings are the fifth-, eleventh- and fourteenth-highest of S&P’s 21 ratings categories.
On September 18, 2017, based largely on regulatory approval uncertainty pertaining to the China Oceanwide transaction, S&P revised Genworth Financial and Genworth Holding’s CreditWatch status fromHoldings. Likewise, A.M. Best removed the under review with developing implications to negative implications. S&P downgraded the financial strength rating of our principal life insurance subsidiaries; GLIC,status on all existing Genworth Life Insurance Company of New York (“GLICNY”)ratings and GLAIC fromBB- (Marginal) to B+ (Weak), and maintained the CreditWatch status of GLIC and GLICNY at negative implications and GLAIC at developing implications. S&P’s ratingassigned a stable outlook. These actions were also based on their negative viewtaken by A.M. Best primarily from the outcome of the operating performanceCFIUS review and our ability to address our May 2018 senior notes. For a further discussion of our U.S. Life Insurance segment, the ongoing impact of the low interest rate environment and the further need for premium rate increases in our long-term care insurance business. S&P also affirmed the financial strength rating of Genworth Mortgage Insurance Corporation (“GMICO”) at BB+ (Marginal), however, revised GMICO’s CreditWatch status from developing implications to negative implications. The financial strength ratings of Genworth Financial Mortgage Insurance Company Canada and Genworth Financial Mortgage Insurance Pty. Limited (Australia) were also affirmed at A+ (Strong).
Moody’s states that insurance companies rated “Baa” (Adequate) offer adequate financial security and that insurance companies rated “Ba” (Questionable) or “B” (Poor) offer questionable financial security. The “Baa” (Adequate), “Ba” (Questionable) and “B” (Poor) ranges are the fourth-, fifth- and sixth-highest, respectively, of nine financial strength rating ranges assigned by Moody’s, which range from “Aaa” to “C.” Numeric modifiers are used to refer to the ranking within the group, with 1 being the highest and 3 being the lowest. These modifiers are not added to ratings in the “Aaa” category or to ratings below the “Caa” category. Accordingly, the “Baa1,” “Ba1” and “B2” ratings are the eighth-, eleventh- and fifteenth-highest, respectively, of Moody’s 21 ratings categories.
On October 3, 2017, which followed our recent announcement that we had withdrawn our joint voluntary notice with CFIUS with an intent to refile, Moody’s downgraded the credit ratings of Genworth Holdings senior unsecured debt from Ba3 (Questionable) to B2 (Poor), downgraded the financial strength ratings of GLIC and GLICNY from Ba3 (Questionable) to B2 (Poor) and downgraded GLAIC from Baa2 (Adequate) to Ba1 (Questionable). Moody’s downgrade was based principally upon the uncertain financial flexibility at Genworth Holdings to address upcoming debt maturities, execution risk associated with closing the China Oceanwide transaction and continued risk associated with our long-term care insurance business. On September 13, 2017, Moody’s downgraded the financial strength rating of Genworth Financial Mortgage Insurance Pty. Limited (Australia) from A3 (Good) to Baa1 (Adequate). Moody’s downgrade reflects their risk assessment surrounding the Australian housing market, which in their view, has higher risk and lower demand for domestic lenders’ mortgage insurance products. On March 10, 2017, Moody’s downgraded the financial strength rating of GLIC and GLICNY from Ba2 (Questionable) to Ba3 (Questionable). Moody’s downgrade was principally related to a reduction in our long-term care insurance margins, uncertainty related to future long-term care insurance margins and reliance on significant future rate actions, the approval for which varies by state and can take several years.
DBRS states that long-term obligations rated “AA” are of superior credit quality. The capacity for the payment of financial obligations is considered high and unlikely to be significantly vulnerable to future events. Credit quality differs from “AAA” only to a small degree. On July 21, 2017, DBRS confirmed the financial strength rating of Genworth Financial Mortgage Insurance Company Canada at AA (Superior). The financial strength rating confirmation reflects the company’s market position, insurance portfolio and risk analytics, as well as its capital position relative to the capital required to meet insurance claim obligations.
A.M. Best states that the “B++” (Good) rating is assigned to those companies that have, in its opinion, a good ability to meet their ongoing insurance obligations while “B” (Fair) is assigned to those companies that
have, in its opinion, a fair ability to meet their ongoing insurance obligations. The “B++” (Good) and “B” (Fair) ratings are the fifth- and seventh-highest of 15 ratings assigned by A.M. Best, which range from “A++” to “F.”
We also solicit a rating from Fitch for our Australian mortgage insurance subsidiary. Fitch states that “A” (Strong) rated insurance companies are viewed as possessing strong capacity to meet policyholder and contract obligations. The “A” rating category is the third-highest of nine financial strength rating categories, which range from “AAA” to “C.” The symbol (+) or (-) may be appended to a rating to indicate the relative position of a credit within a rating category. These suffixes are not added to ratings in the “AAA” category or to ratings below the “B” category. Accordingly, the “A+” rating is the fifth-highest of Fitch’s 21 ratings categories.
S&P, Moody’s, DBRS, A.M. Best and Fitch review their ratings periodically and we cannot assure you that we will maintain our current ratings in the future. Other agencies may also rate our company or our insurance subsidiaries, on a solicited or an unsolicited basis. We do not provide information to agencies issuing unsolicited ratings and we cannot ensure that any agencies that rate our company or our insurance subsidiaries on an unsolicited basis will continue to do so.
For a discussion of the impacts of the recent rating agency actions on our derivative instruments, see “Item 2—Management’s Discussion and Analysis of 1—Financial Conditions and Results of Operations—Investments and Derivative Instruments.”
For a discussion of the risks associated with ratings actions, see “Item 1A Risk Factors—Recent adverse rating agency actions have resulted in a loss of business and adversely affected our results of operations, financial condition and business and future adverse rating actions could have a further and more significant adverse impact on us”Strength Ratings” in our 20162017 Annual Report on Form10-K.
Consolidated
General Trends and Conditions
The stability of both the financial markets and global economies in which we operate impacts the sales, revenue growth and profitability trends of our businesses as well as value of assets and liabilities. The U.S. and several
international financial markets we operate in have been impacted by concerns regarding regulatory changes, modest global economiesgrowth and the rate and strength of recovery, particularly given recent politicalrecovery. Our mortgage insurance businesses in the U.S. and geographical events in East Asia, Europe and the Middle East. Slower growth and higher debt levels in ChinaCanada have created more uncertainty for global economies, heightened by S&P’s and Moody’s downgrade of the financial strength rating of China in September 2017 and May 2017, respectively. Although some of our businesses have started to realizerealized benefits in their financial results from improvements in the general macroeconomic environment, particularlyenvironment. However, our mortgage insuranceother businesses in the U.S. and Canada, we continue to operate in a challengingvolatile economic environment characterized by slowlow interest rates, modest global growth and fluctuating oil and commodity prices and veryprices. Certain of these trends have begun to ease in 2018, particularly low interest rates. Interest rates, remainwhich have started to rise given actions taken at historically low levels despite the fact the U.S. Federal Reserve has raisedand economic forecasts that other central banks will consider taking similar actions to raise interest rates in 2018. Although the U.S. Federal Reserve increased its benchmark lending rate two times25 basis points in 2017 and market expectations remainJune 2018, long-term interest rates remained at low levels. The U.S. Federal Reserve also revised its forecast for onetwo additional rate increases, which would result in four rate increases in 2018. The median economist forecasts indicate three additional 25 basis point increases in 2019 and one in 2020. Given this robust forecast, we expect interest rates will continue to rise throughout 2018 but we remain uncertain at the pace in which this increase during 2017. Additionally, during the third quarterwill occur and its ultimate impact on our businesses. In terms of 2017,economic projections from the U.S. Federal Reserve, announced that it would begin to normalize monetary policyduring the second quarter of 2018, the unemployment rate outlook was revised lower while near-term growth and scale back quantitative easing. Despite the Federal Reserve’s actions,inflation projections were revised up. The U.S. Treasury yields remained lower throughoutyield curve continued to flatten in the thirdsecond quarter of 2017 but rose significantly in2018 with short-term interest rates rising supported by the last week of September 2017, in responseU.S. Federal Reserve increases, while long-term interest rates increased marginally due to ongoing speculation around tariffs and tensions associated with potential tax reform. However,pro-growth stimulus policies are still uncertain and weaker inflation data has investors more cautious on the direction of longer term interest rates. The U.S. equitytrade wars. Credit markets increased and credit spreads tightened during the third quarter of 2017. Spreads initially widened when geopolitical issues and natural disasters arose, but quickly tightenedexperienced modest spread widening primarily driven by both positive economic dataperiodic supply and corporate profits. U.S.demand imbalances rather than concerns about fundamental credit or macroeconomic issues. Though widely anticipated, the TCJA was not a catalyst for widespread debt reduction and a corresponding reduction in bond supply. Although the TCJA did result in cash-rich multinational companies exiting the debt issuance market, lower supply from such companies was more than offset by debt-financed merger and acquisition-related issuances in investment grade markets. Furthermore, fixed income markets saw reduced issuances, but demand from foreign and domestic investors continuedissuance was slightly lower as compared to support valuations. Global equity markets were generally higher and the economies of the Eurozone countries continue to improve.2017. For a discussion of the risks associated with interest rates, see “Item 1A Risk Factors—Interest rates and changes in rates could materially adversely affect our business and profitability” in our 20162017 Annual Report on Form10-K.
Slow or variedVaried levels of economic growth, coupled with uncertain financial markets and economic outlooks, changes in government policy, regulatory and tax reforms, and other changes in market conditions, influenced, and we believe will continue to influence, investment and spending decisions by consumers and businesses as they adjust their consumption, debt, capital and risk profiles in response to these conditions. These trends change as investor confidence in the markets and the outlook for some consumers and businesses shift. As a result, our sales, revenues and profitability trends of certain insurance and investment products as well as the value of assets and liabilities have been and could be further impacted going forward. In particular, factors such as government spending, monetary policies, the volatility and strength of the capital markets, anticipatedfurther changes in tax policy changesand/or in U.S. tax legislation under the TCJA, international trade and the impact of global financial regulation reform will continue to affect economic and business outlooks, level of interest rates and consumer behaviors moving forward.
The U.S. and international governments, the U.S. Federal Reserve, other central banks and other legislative and regulatory bodies have taken certain actions in past years to support the economy and capital markets, influence interest rates, influence housing markets and mortgage servicing and provide liquidity to promote economic growth. These include various mortgage restructuring programs implemented or under consideration by the GSEs, lenders, servicers and the U.S. government. Outside of the United States, various governments and central banks have taken actions to stimulate economies, stabilize financial systems and improve market liquidity. InFor example, in Canada, actions in certain regions have been taken to stabilize rising home prices to mitigate the potential for inflation on real estate values. This has had a negative impact on sales and has slowed home price appreciation in those regions. However, in aggregate, these actions had a positive effect in the short term, on the economies of these countries and their markets; however, there can be no assurance as to the future impact these types of actions may have on the economic and financial markets, including levels of interest rates and volatility. A delayed economic recovery period, a U.S. or global recession or regional or global financial crisis could materially and adversely affect our business, financial condition and results of operations.
Consolidated Results of Operations
The following is a discussion of our consolidated results of operations. For a discussion of our segment results, see “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.”
Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
The following table sets forth the consolidated results of operations for the periods indicated:
Three months ended September 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 1,135 | $ | 1,108 | $ | 27 | 2 | % | ||||||||
Net investment income | 797 | 805 | (8 | ) | (1 | )% | ||||||||||
Net investment gains (losses) | 85 | 20 | 65 | NM | (1) | |||||||||||
Policy fees and other income | 198 | 217 | (19 | ) | (9 | )% | ||||||||||
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Total revenues | 2,215 | 2,150 | 65 | 3 | % | |||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 1,344 | 1,662 | (318 | ) | (19 | )% | ||||||||||
Interest credited | 164 | 173 | (9 | ) | (5 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | 265 | 269 | (4 | ) | (1 | )% | ||||||||||
Amortization of deferred acquisition costs and intangibles | 83 | 94 | (11 | ) | (12 | )% | ||||||||||
Interest expense | 73 | 77 | (4 | ) | (5 | )% | ||||||||||
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Total benefits and expenses | 1,929 | 2,275 | (346 | ) | (15 | )% | ||||||||||
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Income (loss) from continuing operations before income taxes | 286 | (125 | ) | 411 | NM | (1) | ||||||||||
Provision for income taxes | 102 | 222 | (120 | ) | (54 | )% | ||||||||||
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Income (loss) from continuing operations | 184 | (347 | ) | 531 | 153 | % | ||||||||||
Income (loss) from discontinued operations, net of taxes | (9 | ) | 15 | (24 | ) | (160 | )% | |||||||||
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Net income (loss) | 175 | (332 | ) | 507 | 153 | % | ||||||||||
Less: net income attributable to noncontrolling interests | 68 | 48 | 20 | 42 | % | |||||||||||
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Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 107 | $ | (380 | ) | $ | 487 | 128 | % | |||||||
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Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 vs. 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 1,136 | $ | 1,111 | $ | 25 | 2 | % | ||||||||
Net investment income | 828 | 801 | 27 | 3 | % | |||||||||||
Net investment gains (losses) | (14 | ) | 101 | (115 | ) | (114 | )% | |||||||||
Policy fees and other income | 209 | 210 | (1 | ) | — | % | ||||||||||
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Total revenues | 2,159 | 2,223 | (64 | ) | (3 | )% | ||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 1,205 | 1,206 | (1 | ) | — | % | ||||||||||
Interest credited | 152 | 163 | (11 | ) | (7 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | 253 | 240 | 13 | 5 | % | |||||||||||
Amortization of deferred acquisition costs and intangibles | 112 | 139 | (27 | ) | (19 | )% | ||||||||||
Interest expense | 77 | 74 | 3 | 4 | % | |||||||||||
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Total benefits and expenses | 1,799 | 1,822 | (23 | ) | (1 | )% | ||||||||||
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Income from continuing operations before income taxes | 360 | 401 | (41 | ) | (10 | )% | ||||||||||
Provision for income taxes | 111 | 130 | (19 | ) | (15 | )% | ||||||||||
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Income from continuing operations | 249 | 271 | (22 | ) | (8 | )% | ||||||||||
Loss from discontinued operations, net of taxes | — | — | — | — | % | |||||||||||
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Net income | 249 | 271 | (22 | ) | (8 | )% | ||||||||||
Less: net income attributable to noncontrolling interests | 59 | 69 | (10 | ) | (14 | )% | ||||||||||
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Net income available to Genworth Financial, Inc.’s common stockholders | $ | 190 | $ | 202 | $ | (12 | ) | (6 | )% | |||||||
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Premiums.Premiums consist primarily of premiums earned on insurance products for mortgage, long-term care, life and accident and health insurance, single premium immediate annuities and structured settlements with life contingencies.
Our Australia Mortgage Insurance segment increased $28 million largely due to higher policy cancellations resulting from an initiative implemented in the second quarter of 2018 to more promptly identify loans that have been discharged or refinanced using newly available data and from updated premium recognition factors from the review of our premium earnings pattern in the fourth quarter of 2017, which resulted in higher earned premiums in the current year on our existing insurancein-force.
Our U.S. Mortgage Insurance segment increased $14 million mainly attributable to higher insurancein-force, partially offset by lower average rates on our mortgage insurancein-force in the current year.
Our Canada Mortgage Insurance segment increased $5 million primarily from changes in foreign exchange rates, partially offset by updated premium recognition factors from the review of our premium earnings pattern in the current year. The three months ended June 30, 2018 included an increase of $6 million attributable to changes in foreign exchange rates.
Net investment income.Net investment income represents the income earned on our investments. For discussion of the change in net investment income, see the comparison for this line item under “—Investments and Derivative Instruments.”
Net investment gains (losses).Net investment gains (losses) consist primarily of realized gains and losses from the sale or impairment of our investments, unrealized and realized gains and losses from our equity and trading securities and derivative instruments. For discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”
Policy fees and other income. Policy fees and other income consists primarily of fees assessed against policyholder and contractholder account values, surrender charges, cost of insurance assessed on universal and term universal life insurance policies, advisory and administration service fees assessed on investment contractholder account values, broker/dealer commission revenues and other fees. Our U.S. Life Insurance segment decreased $21 million mostly attributable to our life insurance business primarily as a result of suspending sales of these products on March 7, 2016 and a decline in our term universal and universal life insurancein-force blocks in the current year. The decrease was also driven by an $8 million unfavorable model refinement in the current year.
Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of claim costs incurred related to mortgage insurance products and benefits paid and reserve activity related to current claims and future policy benefits on insurance and investment products for long-term care, life and accident and health insurance, structured settlements and single premium immediate annuities with life contingencies.
Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances. Our U.S. Life Insurance segment decreased $12$13 million primarily related to our fixed annuities business predominantly from lowera decline in average account values and lower crediting rates in the current year.
Acquisition and operating expenses, net of deferrals. Acquisition and operating expenses, net of deferrals, represent costs and expenses related to the acquisition and ongoing maintenance of insurance and investment
contracts, including commissions, policy issuance expenses and other underwriting and general operating costs. These costs and expenses are net of amounts that are capitalized and deferred, which are costs and expenses that are related directly to the successful acquisition of new or renewal insurance policies and investment contracts, such as first-year commissions in excess of ultimate renewal commissions and other policy issuance expenses.
Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costsDAC and intangibles consists primarily of the amortization of acquisition costs that are capitalized, PVFP and capitalized software.
Interest expense. Interest expense represents interest related to our borrowings that are incurred at Genworth Holdings or subsidiaries and ournon-recourse funding obligations and interest expense related to the Tax Matters Agreement and certain reinsurance arrangements being accounted for as deposits. Corporate and Other activities decreasedincreased $4 million largely driven by a contractual changethe Term Loan entered into by Genworth Holdings in March 2018 and from our junior subordinated notes related to anwhich had a higher floating rate of interest rate change from fixed to floating rates in the current year.year, partially offset by lower interest expense associated with the redemption of $597 million of Genworth Holdings’ senior notes in May 2018.
Provision for income taxes. The effective tax rate was 35.5%decreased to 30.8% for the three months ended SeptemberJune 30, 2017 compared to (179.0)%2018 from 32.5% for the three months ended SeptemberJune 30, 2016.2017. The decrease in the effective tax rate for the three months ended SeptemberJune 30, 20172018 was impactedprimarily attributable to the enactment of the TCJA, which included a change in the U.S. corporate federal income tax rate from 35% to 21%. This decrease was partially offset by higher tax benefits from lower taxedthe effect of foreign income. Theoperations, which had an overall increase on the effective tax rate foras our primary foreign subsidiaries are now in jurisdictions with higher statutory tax rates than the three months ended September 30, 2016United States. The decrease was impactedalso partially offset by tax expense of $6 million in our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA, which are tax effected at 35% as they are amortized into net investment income and from a valuation allowanceprovisional tax expense of $265$19 million recorded onin the current year related to a revaluation of deferred tax assets related toand liabilities on our foreign tax credits that we no longer expect to realize.subsidiaries in light of the TCJA.
Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portion of equity in a subsidiary attributable to third parties.
NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017
The following table sets forth the consolidated results of operations for the periods indicated:
Nine months ended September 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 3,382 | $ | 3,029 | $ | 353 | 12 | % | ||||||||
Net investment income | 2,388 | 2,373 | 15 | 1 | % | |||||||||||
Net investment gains (losses) | 220 | 31 | 189 | NM | (1) | |||||||||||
Policy fees and other income | 619 | 738 | (119 | ) | (16 | )% | ||||||||||
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Total revenues | 6,609 | 6,171 | 438 | 7 | % | |||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 3,796 | 3,715 | 81 | 2 | % | |||||||||||
Interest credited | 494 | 523 | (29 | ) | (6 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | 775 | 990 | (215 | ) | (22 | )% | ||||||||||
Amortization of deferred acquisition costs and intangibles | 316 | 305 | 11 | 4 | % | |||||||||||
Interest expense | 209 | 262 | (53 | ) | (20 | )% | ||||||||||
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Total benefits and expenses | 5,590 | 5,795 | (205 | ) | (4 | )% | ||||||||||
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Income from continuing operations before income taxes | 1,019 | 376 | 643 | 171 | % | |||||||||||
Provision for income taxes | 348 | 355 | (7 | ) | (2 | )% | ||||||||||
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Income from continuing operations | 671 | 21 | 650 | NM | (1) | |||||||||||
Loss from discontinued operations, net of taxes | (9 | ) | (25 | ) | 16 | 64 | % | |||||||||
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Net income (loss) | 662 | (4 | ) | 666 | NM | (1) | ||||||||||
Less: net income attributable to noncontrolling interests | 198 | 151 | 47 | 31 | % | |||||||||||
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Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 464 | $ | (155 | ) | $ | 619 | NM | (1) | |||||||
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Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 vs. 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 2,276 | $ | 2,247 | $ | 29 | 1 | % | ||||||||
Net investment income | 1,632 | 1,591 | 41 | 3 | % | |||||||||||
Net investment gains (losses) | (45 | ) | 135 | (180 | ) | (133 | )% | |||||||||
Policy fees and other income | 411 | 421 | (10 | ) | (2 | )% | ||||||||||
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Total revenues | 4,274 | 4,394 | (120 | ) | (3 | )% | ||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 2,516 | 2,452 | 64 | 3 | % | |||||||||||
Interest credited | 308 | 330 | (22 | ) | (7 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | 493 | 510 | (17 | ) | (3 | )% | ||||||||||
Amortization of deferred acquisition costs and intangibles | 216 | 233 | (17 | ) | (7 | )% | ||||||||||
Interest expense | 153 | 136 | 17 | 13 | % | |||||||||||
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Total benefits and expenses | 3,686 | 3,661 | 25 | 1 | % | |||||||||||
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Income from continuing operations before income taxes | 588 | 733 | (145 | ) | (20 | )% | ||||||||||
Provision for income taxes | 174 | 246 | (72 | ) | (29 | )% | ||||||||||
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Income from continuing operations | 414 | 487 | (73 | ) | (15 | )% | ||||||||||
Loss from discontinued operations, net of taxes | — | — | — | — | % | |||||||||||
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Net income | 414 | 487 | (73 | ) | (15 | )% | ||||||||||
Less: net income attributable to noncontrolling interests | 112 | 130 | (18 | ) | (14 | )% | ||||||||||
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Net income available to Genworth Financial, Inc.’s common stockholders | $ | 302 | $ | 357 | $ | (55 | ) | (15 | )% | |||||||
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Premiums
Our U.S. Life Insurance segment decreased $5$60 million. Our long-term care insurance business increased $6 million largely related tofrom $35 million of increased premiums in the sale of our European mortgage insurance business in May 2016.current year fromin-force
rate actions approved and implemented, partially offset by policy terminations in the current year. Our life insurance business decreased $66 million mainly attributable to higher ceded premiums in the current year from new reinsurance treaties effective in December 2017 and the continued runoff of our term life insurance products in the current year. |
Net investment income.For discussion of the change in net investment income, see the comparison for this line item under “—Investments and Derivative Instruments.”
Net investment gains (losses).For discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”
Policy fees and other incomeincome.
Benefits and other changes in policy reserves
Interest creditedcredited.
Acquisition and operating expenses, net of deferrals
Amortization of deferred acquisition costs and intangibles
. Our U.S. Life Insurance segment decreased $10 million. Our long-term care insurance business decreased $8$22 million principally from a smallerin-force block in the current year as a result of lower
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Interest expense
Provision for income taxes. The effective tax rate decreased to 34.1%29.6% for the ninesix months ended SeptemberJune 30, 20172018 from 94.5%33.6% for the ninesix months ended SeptemberJune 30, 2016.2017. The decrease in the effective tax rate for the ninesix months ended SeptemberJune 30, 20172018 was impactedprimarily attributable to the enactment of the TCJA, which included a change in the U.S. corporate federal income tax rate from 35% to 21%. This decrease was partially offset by higher tax benefits from lower taxedthe effect of foreign income. Theoperations, which had an overall increase on the effective tax rate foras our primary foreign subsidiaries are now in jurisdictions with higher statutory tax rates than the nine months ended September 30, 2016United States. The decrease was impactedalso partially offset by tax expense of $11 million in our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA, which are tax effected at 35% as they are amortized into net investment income and from a valuation allowanceprovisional tax expense of $265$19 million recorded onin the current year related to a revaluation of deferred tax assets related toand liabilities on our foreign tax credits that we no longer expect to realize. The effective tax rate forsubsidiaries in light of the nine months ended September 30, 2016 was also impacted by the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe due to taxable gains supporting the recognition of these deferred tax assets in the prior year.TCJA.
Use ofnon-GAAPnon-Generally Accepted Accounting Principles (“GAAP”) measures
Reconciliation of net income (loss) to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders
We usenon-GAAP financial measures entitled “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders” and “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share.” Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share is derived from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. We define adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding theafter-tax effects of income attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions, restructuring costs and infrequent or unusualnon-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment ofnon-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusualnon-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and
timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as
well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and restructuring costs are also excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders because, in our opinion, they are not indicative of overall operating trends. Infrequent or unusualnon-operating items are also excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends.
While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, including adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share on a basic and diluted basis, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders have occurred in the past and could, and in some cases will, recur in the future. Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share on a basic and diluted basis are not substitutes for net income (loss) available to Genworth Financial, Inc.’s common stockholders or net income (loss) available to Genworth Financial, Inc.’s common stockholders per share on a basic and diluted basis determined in accordance with U.S. GAAP. In addition, our definition of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.
AdjustmentsOn December 22, 2017, the TCJA was signed into law. The TCJA reduced the U.S. corporate federal income tax rate to 21% effective for taxable years beginning on January 1, 2018. Therefore, beginning in the first quarter of 2018, we assumed a tax rate of 21% on certain adjustments to reconcile net income (loss) available to Genworth Financial, Inc.’s common stockholders and adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders assumeand in the explanation of specific variances of operating performance (unless otherwise indicated). In the prior year, we assumed a 35% tax rate (unless otherwise indicated)of 35%, the previous U.S. corporate federal income tax rate prior to the enactment of the TCJA, on certain adjustments to reconcile net income available to Genworth Financial, Inc.’s common stockholders and adjusted operating income available to Genworth Financial, Inc.’s common stockholders and in the explanation of specific variances of operating performance. These adjustments are also net of the portion attributable to noncontrolling interests. Netinterests and net investment gains (losses) are also adjusted for DAC and other intangible amortization and certain benefit reserves.
The following table includes a reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the periods indicated:
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(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income (loss) available to Genworth Financial, Inc.’scommon stockholders | $ | 107 | $ | (380 | ) | $ | 464 | $ | (155 | ) | ||||||
Add: net income attributable to noncontrolling interests | 68 | 48 | 198 | 151 | ||||||||||||
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Net income (loss) | 175 | (332 | ) | 662 | (4 | ) | ||||||||||
Income (loss) from discontinued operations, net of taxes | (9 | ) | 15 | (9 | ) | (25 | ) | |||||||||
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Income (loss) from continuing operations | 184 | (347 | ) | 671 | 21 | |||||||||||
Less: income from continuing operations attributable to noncontrollinginterests | 68 | 48 | 198 | 151 | ||||||||||||
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Income (loss) from continuing operations available to GenworthFinancial, Inc.’s common stockholders | 116 | (395 | ) | 473 | (130 | ) | ||||||||||
Adjustments to income (loss) from continuing operations available toGenworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net (1) | (62 | ) | (18 | ) | (161 | ) | (38 | ) | ||||||||
(Gains) losses on sale of businesses | — | — | — | (3 | ) | |||||||||||
(Gains) losses on early extinguishment of debt, net | — | — | — | (48 | ) | |||||||||||
Losses from life block transactions | — | — | — | 9 | ||||||||||||
Expenses related to restructuring | 1 | 2 | 2 | 22 | ||||||||||||
Fees associated with bond consent solicitation | — | — | — | 18 | ||||||||||||
Taxes on adjustments | 21 | 6 | 56 | (9 | ) | |||||||||||
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Adjusted operating income (loss) available to Genworth Financial, Inc.’scommon stockholders | $ | 76 | $ | (405 | ) | $ | 370 | $ | (179 | ) | ||||||
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Net income available to Genworth Financial, Inc.’scommon stockholders | $ | 190 | $ | 202 | $ | 302 | $ | 357 | ||||||||
Add: net income attributable to noncontrolling interests | 59 | 69 | 112 | 130 | ||||||||||||
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Net income | 249 | 271 | 414 | 487 | ||||||||||||
Loss from discontinued operations, net of taxes | — | — | — | — | ||||||||||||
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Income from continuing operations | 249 | 271 | 414 | 487 | ||||||||||||
Less: income from continuing operations attributable to noncontrolling interests | 59 | 69 | 112 | 130 | ||||||||||||
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Income from continuing operations available to GenworthFinancial, Inc.’s common stockholders | 190 | 202 | 302 | 357 | ||||||||||||
Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net(1) | 12 | (79 | ) | 29 | (99 | ) | ||||||||||
Expenses related to restructuring | — | — | — | 1 | ||||||||||||
Taxes on adjustments | (2 | ) | 28 | (6 | ) | 35 | ||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders | $ | 200 | $ | 151 | $ | 325 | $ | 294 | ||||||||
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We recorded apre-tax expense of $1 million in both the third and first quartersquarter of 2017 related to restructuring costs as the company continuescontinued to evaluate and appropriately size its organizational needs and expenses.
In the third quarter of 2016, we recorded apre-tax expense of $2 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.
In the second quarter of 2016, we completed the sale of our mortgage insurance business in Europe and recorded an additionalpre-tax loss of $2 million; we completed the sale of our term life insurance new business platform and recorded apre-tax gain of $12 million; we settled restricted borrowings related to a securitization entity and recorded a $64 millionpre-tax gain related to the early extinguishment of debt; and we recorded apre-tax expense of $5 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.
In the first quarter of 2016, we recorded apre-tax loss of $7 million and a tax benefit of $27 million related to the planned sale of our mortgage insurance business in Europe; we paid apre-tax make-whole expense of $20 million related to the early redemption of Genworth Holdings’ 2016 notes; we also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for apre-tax gain of $4 million; we completed a life block transaction resulting in apre-tax loss of $9 million in connection with the early extinguishment ofnon-recourse funding obligations; and we recorded apre-tax expense of $15 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.
There were no infrequent or unusual items excluded from adjusted operating income (loss) during the periods presented other than the following item. We incurred fees during the first quarter of 2016 related to Genworth Holdings’ bond consent solicitation of $18 million for broker, advisor and investment banking fees.presented.
Earnings (loss) per share
Basic and diluted earnings (loss) per share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted common shares outstanding for the periods indicated:
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(Amounts in millions, except per share amounts) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Income (loss) from continuing operations available to GenworthFinancial, Inc.’s common stockholders per share: | ||||||||||||||||
Basic | $ | 0.23 | $ | (0.79 | ) | $ | 0.95 | $ | (0.26 | ) | ||||||
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Diluted | $ | 0.23 | $ | (0.79 | ) | $ | 0.94 | $ | (0.26 | ) | ||||||
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Net income (loss) available to Genworth Financial, Inc.’s commonstockholders per share: | ||||||||||||||||
Basic | $ | 0.21 | $ | (0.76 | ) | $ | 0.93 | $ | (0.31 | ) | ||||||
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Diluted | $ | 0.21 | $ | (0.76 | ) | $ | 0.93 | $ | (0.31 | ) | ||||||
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Adjusted operating income (loss) available to Genworth Financial,Inc.’s common stockholders per share: | ||||||||||||||||
Basic | $ | 0.15 | $ | (0.81 | ) | $ | 0.74 | $ | (0.36 | ) | ||||||
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Diluted | $ | 0.15 | $ | (0.81 | ) | $ | 0.74 | $ | (0.36 | ) | ||||||
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Basic | 499.1 | 498.3 | 498.9 | 498.3 | ||||||||||||
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Diluted (1) | 501.6 | 498.3 | 501.2 | 498.3 | ||||||||||||
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Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share: | ||||||||||||||||
Basic | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.72 | ||||||||
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Net income available to Genworth Financial, Inc.’s commonstockholders per share: | ||||||||||||||||
Basic | $ | 0.38 | $ | 0.40 | $ | 0.60 | $ | 0.72 | ||||||||
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Adjusted operating income available to Genworth Financial,Inc.’s common stockholders per share: | ||||||||||||||||
Basic | $ | 0.40 | $ | 0.30 | $ | 0.65 | $ | 0.59 | ||||||||
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Basic | 500.6 | 499.0 | 500.1 | 498.8 | ||||||||||||
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Diluted weighted-average common shares outstanding reflect the effects of potentially dilutive securities including stock options, restricted stock units and other equity-based compensation.
Results of Operations and Selected Financial and Operating Performance Measures by Segment
Our chief operating decision maker evaluates segment performance and allocates resources on the basis of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. See note 10 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for a reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income available to Genworth Financial, Inc.’s common stockholders and a summary of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders offor our segments and Corporate and Other activities.
On December 22, 2017, the TCJA was signed into law. The TCJA reduced the U.S. corporate federal income tax rate to 21% effective for taxable years beginning on January 1, 2018 and migrated the worldwide tax system to a territorial international tax system. Therefore, beginning on January 1, 2018 we taxed our international businesses at their local statutory tax rates and our domestic businesses at the new enacted tax rate of 21%. We allocate our consolidated provision for income taxes to our operating segments. Our allocation methodology applies a specific tax rate to thepre-tax income (loss) of each segment, which is then adjusted in each segment to reflect the tax attributes of items unique to that segment such as foreign income. The difference between the consolidated provision for income taxes and the sum of the provision for income taxes in each segment is reflected in Corporate and Other activities.
The annually-determined tax rates and adjustments to each segment’s provision for income taxes are estimates which are subject to review and could change from year to year. The effective tax rates disclosed herein are calculated using whole dollars. As a result, the percentages shown may differ from an effective tax rate calculated using rounded numbers.
Management’s discussion and analysis by segment contains selected operating performance measures including “sales” and “insurancein-force” or “riskin-force” which are commonly used in the insurance industry as measures of operating performance.
Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refer to: (1) new insurance written for mortgage insurance; (2)insurance and annualized first-year premiums for long-term care and term life insurance products; (3) annualized first-year deposits plus 5% of excess deposits for universal and term universal life insurance products; (4) 10% of premium deposits for linked-benefits products; and (5) new and additional premiums/deposits for fixed annuities.products. Sales do not include renewal premiums on policies or contracts written during prior periods. We consider new insurance written and annualized first-year premiums/deposits, premium equivalents and new premiums/depositspremiums 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 insurancein-force and riskin-force. Insurancein-force for our mortgage insurance businesses is a measure of the aggregate original loan balance for outstanding insurance policies as of the respective reporting date. Riskin-force for our U.S. mortgage insurance business is based on the coverage percentage applied to the estimated current outstanding loan balance. For riskin-force in our mortgage insurance businesses in Canada and Australia, we have computed an “effective” riskin-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 riskin-force has been calculated by applying to insurancein-force a factor of 35% that represents the highest expected averageper-claim payment for any one underwriting year over the life of our mortgage insurance businesses in Canada and Australia. In Australia, we have certain risk share arrangements where we providepro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicablepro-rata coverage amount provided is used when applying the factor. We consider insurancein-force and riskin-force to be measures of our operating performance because they represent measures of the size of our business at a specific date which will generate revenues and profits in a future period, rather than measures of our revenues or profitability during that period.
Management also regularly monitors and reports a loss ratio for our businesses. For our mortgage insurance businesses, the loss ratio is the ratio of incurred lossesbenefits and loss adjustment expensesother changes in policy reserves to net earned premiums. For
our long-term care insurance business, the loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums. We consider the loss ratio to be a measure of underwriting performance in these businesses and help to enhance the understanding of the operating performance of our businesses.
An assumed tax rate of 35% is utilized in certain adjustments to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and in the explanation of specific variances of operating performance.
These operating performance measures enable us to compare our operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources.
U.S. Mortgage Insurance segment
Trends and conditions
Results of our U.S. mortgage insurance business are affected primarily by the following factors: competitor actions; unemployment or underemployment levels; other economic and housing market trends, including interest rates, home prices, the number of first-time homebuyers, and mortgage origination volume mix and practices; the levels and aging of mortgage delinquencies; the effect of seasonal variations; the inventory of unsold homes; loan modification and other servicing efforts; and litigation, among other items. Our results are subject to the performance of the U.S. housing market and the extent of the adverse impact of seasonality that we experience historically in the second half of the year.
The level of private mortgage insurance market penetration and eventual market size is affected in part by actions taken by the GSEs and the U.S. government, including the Federal Housing Administration (“FHA”), the Federal Housing Finance Agency, and the U.S. Congress, which impact housing or housing finance policy. In the
past, these actions have included announced changes, or potential changes, to underwriting standards, FHA pricing, GSE guaranty fees and loan limits as well aslow-down-payment programs available through the FHA or GSEs. In the first quarter of 2018, Freddie Mac introduced to certain lenders a pilot program, Integrated Mortgage Insurance, commonly referred to as “IMAGIN,” as an alternative to private mortgage insurance, which transfers default risk on highloan-to-value mortgages to a panel of reinsurers approved by Freddie Mac. In July 2018, Fannie Mae introduced a similar pilot program, Enterprise Paid Mortgage Insurance (“EPMI”). As currently designed and implemented, we believe these pilot programs are targeted towards approximately 2% of the total aggregate private mortgage insurance available market in 2018 and compete with lender paid private mortgage insurance, which represented approximately 8% of our new insurance written in the second quarter of 2018. For more information about the potential future impact, see Item 1A—Risk Factors—“Fannie Mae and Freddie Mac exert significant influence over the U.S. mortgage insurance market and changes to the role or structure of Freddie Mac or Fannie Mae could have a material adverse impact on our U.S. mortgage insurance business”; and “The amount of mortgage insurance we write could decline significantly if alternatives to private mortgage insurance are used or lower coverage levels of mortgage insurance are selected” in our 2017 Annual Report on Form10-K.
Mortgage origination volume decreasedincreased during the thirdsecond quarter of 2018 compared to the second quarter of 2017, compared to the third quarter of 2016, primarily due to declinesan increase in purchase originations, partially offset by a decline in refinance mortgage originations. The decline in refinance mortgage originations was driven by increases in interest rates. Our flow persistency was 83% during the thirdsecond quarter of 2018 compared to 82% in the second quarter of 2017, compared to 77%due in the third quarter of 2016, in part due to the increase in interest rates. Our U.S. mortgage insurance estimated market share for the thirdsecond quarter of 20172018 decreased modestly compared to the thirdfirst quarter of 2016. This decrease in2018 and increased modestly compared to the second quarter of 2017. Our market share was primarily duecontinues to competitor pricing,be pressured by the negative ratings differential relative to our competitors, concerns expressed about Genworth’s financial condition and the proposed transaction with China Oceanwide. The decline was partially offsetIn addition, the recent increase in customer concentration that we have experienced with our top ten lenders could lead to incremental volatility in future market share. For more information on the potential impacts due to competition and increased customer concentration, see Item 1A—Risk Factors—“Competitors could negatively affect our ability to maintain or increase our market share and profitability”; and “Our reliance on key customer or distribution relationships could cause us to lose significant sales if one or more of those relationships terminate or are reduced” in our 2017 Annual Report on Form10-K.
During the second quarter, in reaction to price changes in the marketplace, we introduced new pricing for our national borrower-paid monthly and borrower-paid single premium rate plans. Our new pricing included two new rate adjustors,co-borrower anddebt-to-income, which more closely align price to the performance of the loans that we insure. We believe our new rate plans reduce the weighted average price by business gains fromapproximately 10% for borrower-paid monthly and by approximately 12% for borrower-paid singles rate plans while maintaining aggregate pricing returns in the addition of new customers as well as growth within our existing customer base driven, in part, by competitive pricing and differentiated service levels.mid-teens.
New insurance written decreased 12%increased 16% during the thirdsecond quarter of 2018 compared to the second quarter of 2017 primarily due to a larger purchase originations market. In the second quarter of 2018, we experienced an increase in the percentage of 97%loan-to-value new insurance written as well as the percentage of loans withdebt-to-income ratios greater than 45% compared to the thirdsecond quarter of 2016 due2017, as the result of GSE changes in underwriting guidelines for purchase transactions. The percentage of single premium new insurance written decreased in the second quarter of 2018 compared to a declinethe second quarter of 2017, reflecting our selective participation in this market. Future volumes of these products will vary depending in part on our estimated market share.evaluation of their risk return profile. We continue to manage the quality of new business through our underwriting guidelines, which we modify from time to time when circumstances warrant. InAt the thirdend of the first quarter of 2017,2018, we experienced an increaseimplemented a guideline limit on loans withdebt-to-income ratios greater than 45% with Fair Isaac Company (“FICO”) scores less than 700, which led to a reduction in the percentageconcentration of 97%loan-to-valuethis business in our new insurance written compared to the third quarter of 2016, as the result of GSE changes in underwriting guidelines for purchase transactions. The percentage of single premium new insurance written increased in the third quarter of 2017 compared to the third quarter of 2016 and the second quarter of 2017, reflecting our selective participation in this market. There was also a higher refinance originations market compared to the second quarter of 2017. Future volumes of these products will vary depending in part on our evaluation of their risk return profile.2018.
Our loss ratio was 20% during(8)% for the third quarter of 2017three months ended June 30, 2018 compared to 21% during2% for the third quarter of 2016. In the third quarter of 2016, we made a favorable adjustment of $10 million to our loss reserves. This adjustment favorably impacted thethree months ended June 30, 2017. The loss ratio during the third quarter of 2016 by six points. Additionally, the 2017 loss ratio declined due todecreased primarily from improvements in the net benefit from cures and
aging of existing delinquencies and an increasefrom higher net earned premiums attributable to higher insurancein-force in earned premiums. Newthe current year. The decrease was also attributable to a favorable reserve adjustment of $28 million mostly associated with lower expected claim rates. This adjustment reduced our loss ratio by 15 percentage points for the three months ended June 30, 2018. The prior year also included a $15 million favorable reserve adjustment, which reduced our loss ratio by eight percentage points for the three months ended June 30, 2017. The new delinquencies decreased duringreported in the thirdfourth quarter of 2017 comparedin the areas impacted by hurricanes Harvey and Irma continued to perform consistent with our prior expected claim frequency for these delinquencies. As a result, there were no incremental incurred losses from these delinquencies in the third quarterfirst half of 2016 due to improvements in unemployment rates and housing values and the declining volume of new delinquencies from our 2005 through 2008 book years.2018. Foreclosure starts decreased duringin the thirdsecond quarter of 20172018 as compared to the thirdsecond quarter of 2016.2017. Additionally, we have seen a reduction in loans that have been subject to a modification or workout. We expect our level of loan modifications to continue to decline going forward in line with the expected reduction in delinquent loans and the continuing aging of delinquencies. As
In the second quarter of September 30, 2017, we have not experienced any material impact from2018, our U.S. mortgage insurance business paid a $50 million dividend to a Genworth holding company. We expect this will be the recent hurricanes affectingonly dividend paid by our U.S. mortgage insurance business in 2018, however, the South Central and Southeast regionsevaluation of the United States. We will continuefuture dividend plans is subject to monitor these affected areas and support the measures enacted by the GSEs restricting foreclosure actions and providingcurrent market conditions, among other forms of mortgage relief for those dealing with damage in the affected areas.factors, which are subject to change.
As of SeptemberJune 30, 2017, GMICO’s2018, Genworth Mortgage Insurance Corporation’s (“GMICO”)risk-to-capital ratio under the current regulatory framework as established under North Carolina law and enforced by the North Carolina Department of Insurance (“NCDOI”), GMICO’s domestic insurance regulator, was approximately 12.9:12.8:1, compared with arisk-to-capital ratio of approximately 13.1:12.7:1 as of June 30, 2017March 31, 2018 and approximately 14.5:12.9:1 as of December 31, 2016.2017. Thisrisk-to-capital ratio remains below the NCDOI’s maximumrisk-to-capital ratio of 25:1. GMICO’s ongoingrisk-to-capital ratio will depend principally on the magnitude of future losses incurred by GMICO, the effectiveness of ongoing loss mitigation activities, new business volume and profitability, the amount of policy lapses, changes in the value of affiliated assets and the amount of additional capital that is generated within the business or capital support (if any) that we provide.
Effective December 31, 2015, each GSE adopted revised PMIERs, which set forth operational and financial requirements that mortgage insurers must meet in order to remain eligible. Each approved mortgage insurer is required to provide the GSEs with an annual certification and a quarterly report as to its compliance with PMIERs. As of SeptemberJune 30, 2017,2018, we estimate our U.S. mortgage insurance business had available assets of approximately 122%129% of the required assets under PMIERs compared to approximately 122%124% as of June 30, 2017March 31, 2018 and 115%121% as of December 31, 2016.2017. As of September 30, 2017, June 30, 2017,2018, March 31, 2018 and December 31, 2016,2017, the PMIERs sufficiency ratios were in excess of $500$700 million, $500$600 million and $350$550 million, respectively, of available assets above the PMIERs requirements. The increase duringin the thirdsecond quarter of 2017 as compared to December 31, 20162018 was driven, in part, by positive operating cash flows and the reduction in delinquent loans. The new delinquencies reported in the fourth quarter of 2017 in the areas impacted by hurricanes Harvey and Irma continue to cure in line with our original loss expectations. This cure performance has reduced the negative impact to the PMIERs sufficiency ratio from four points to two points in the second quarter of 2018. The increase in the PMIERs sufficiency ratio was partially offset by growththe $50 million dividend paid by our U.S. mortgage insurance business in new insurance written.the second quarter of 2018. The reinsurance transactions covering our 2014 through 2017 book years provided an aggregate of approximately $510$585 million of PMIERs capital credit as of SeptemberJune 30, 2017. Previously, the2018. The GSEs informed us that they expecthave recently shared a new draft summary and timeline of proposed revisions to review and revise the existing PMIERs, financial requirements for all eligible insurers. The GSEsreferred to as “PMIERs 2.0”. We do not anticipate any new PMIERs financial requirements becoming effective before the fourthfirst quarter of 2018. In addition,2019. If PMIERs 2.0 is adopted in the GSEsform we have stated they plan to solicit feedback from eligible insurers on proposed PMIERs revisions and provide at least 180 days written notice prior to thereviewed with an effective date of March 31, 2019, we estimate our U.S. mortgage insurance business would continue to have an excess of available assets relative to required assets under the new requirements.revised standard, however, this amount would be significantly lower than under existing PMIERs.Non-disclosure agreements are in place with both GSEs and we cannot comment on specific provisions within PMIERs 2.0 at this time.
As of SeptemberJune 30, 2017,2018, loans modified through the Home Affordable Refinance Program (“HARP”) accounted for approximately $13.2$11.5 billion of insurancein-force, with approximately $12.5$10.9 billion of those loans from our
2005 through 2008 book years. The volume of new HARP modifications continues to decrease as the number of loans that would benefit from a HARP modification decreases. Loans modified through HARP have extended amortization periods and reduced interest rates, which reduce borrower’s monthly payments. Over time, we expect these modified loans to result in extended premium streams and a lower incidence of default. On August 17, 2017, the U.S. government extended HARP through December 31, 2018. For financial reporting purposes, we report HARP modified loans as a modification of the coverage on existing insurancein-force rather than new insurance written.
Segment results of operations
Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:
Three months ended September 30, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 175 | $ | 169 | $ | 6 | 4 | % | $ | 184 | $ | 170 | $ | 14 | 8 | % | ||||||||||||||||
Net investment income | 18 | 16 | 2 | 13 | % | 23 | 18 | 5 | 28 | % | ||||||||||||||||||||||
Net investment gains (losses) | — | — | — | — | % | — | — | — | — | % | ||||||||||||||||||||||
Policy fees and other income | 1 | 1 | — | — | % | 1 | 1 | — | — | % | ||||||||||||||||||||||
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Total revenues | 194 | 186 | 8 | 4 | % | 208 | 189 | 19 | 10 | % | ||||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 35 | 36 | (1 | ) | (3 | )% | (14 | ) | 3 | (17 | ) | NM | (1) | |||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 43 | 45 | (2 | ) | (4 | )% | 45 | 41 | 4 | 10 | % | |||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 3 | 3 | — | — | % | 3 | 3 | — | — | % | ||||||||||||||||||||||
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Total benefits and expenses | 81 | 84 | (3 | ) | (4 | )% | 34 | 47 | (13 | ) | (28 | )% | ||||||||||||||||||||
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Income from continuing operations before income taxes | 113 | 102 | 11 | 11 | % | 174 | 142 | 32 | 23 | % | ||||||||||||||||||||||
Provision for income taxes | 40 | 36 | 4 | 11 | % | 37 | 51 | (14 | ) | (27 | )% | |||||||||||||||||||||
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Income from continuing operations | 73 | 66 | 7 | 11 | % | 137 | 91 | 46 | 51 | % | ||||||||||||||||||||||
Adjustments to income from continuing operations: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses | — | — | — | — | % | — | — | — | — | % | ||||||||||||||||||||||
Expenses related to restructuring | — | 1 | (1 | ) | (100 | )% | ||||||||||||||||||||||||||
Taxes on adjustments | — | — | — | — | % | — | — | — | — | % | ||||||||||||||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | $ | 73 | $ | 67 | $ | 6 | 9 | % | $ | 137 | $ | 91 | $ | 46 | 51 | % | ||||||||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly dueattributable to a $22 million favorable reserve adjustment in the current year mostly driven by lower expected claim rates. The increase was also driven by lower taxes and higher premiums resulting from higherprincipally related to an increase in insurancein-force, partially offset by lower average rates on our mortgage insurancein-force in the current year. The prior year also included a $10 million favorable reserve adjustment.
Revenues
Premiums increased mainly attributable to higher average flow insurancein-force, partially offset by lower average rates on our mortgage insurancein-force in the current year.
Net investment income increased primarily from higher average invested assets in the current year.
Benefits and expenses
Benefits and other changes in policy reserves decreased primarily dueattributable to lower new delinquencies anda $28 million favorable net cures and aging of existing delinquencies,reserve adjustment mostly offsetdriven by a favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offsetin the current year. The decrease was also driven by higher claim severity on late stagelower new delinquencies in the current year. The prior year that did not recur.also included a $15 million favorable reserve adjustment.
Acquisition and operating expenses, net of deferrals, decreasedincreased primarily from lower operating costshigher compensation expenses and professional fees in the current year.
Provision for income taxes. The effective tax rate increased slightlydecreased to 35.9%21.3% for the three months ended SeptemberJune 30, 20172018 from 35.8%36.0% for the three months ended SeptemberJune 30, 2016.2017. The increasedecrease in the effective tax rate was primarily attributable to decreaseda reduction in the U.S. corporate federal income tax benefits relatedrate from 35% to tax favored investments in relation topre-tax income, partially offset by state taxes.21%.
NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:
Nine months ended September 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 514 | $ | 489 | $ | 25 | 5 | % | $ | 363 | $ | 339 | $ | 24 | 7 | % | ||||||||||||||||
Net investment income | 53 | 46 | 7 | 15 | % | 44 | 35 | 9 | 26 | % | ||||||||||||||||||||||
Net investment gains (losses) | — | (1 | ) | 1 | (100 | )% | — | — | — | — | % | |||||||||||||||||||||
Policy fees and other income | 3 | 3 | — | — | % | 1 | 2 | (1 | ) | (50 | )% | |||||||||||||||||||||
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Total revenues | 570 | 537 | 33 | 6 | % | 408 | 376 | 32 | 9 | % | ||||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 67 | 112 | (45 | ) | (40 | )% | 2 | 32 | (30 | ) | (94 | )% | ||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 124 | 125 | (1 | ) | (1 | )% | 84 | 81 | 3 | 4 | % | |||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 10 | 8 | 2 | 25 | % | 7 | 7 | — | — | % | ||||||||||||||||||||||
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Total benefits and expenses | 201 | 245 | (44 | ) | (18 | )% | 93 | 120 | (27 | ) | (23 | )% | ||||||||||||||||||||
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Income from continuing operations before income taxes | 369 | 292 | 77 | 26 | % | 315 | 256 | 59 | 23 | % | ||||||||||||||||||||||
Provision for income taxes | 132 | 104 | 28 | 27 | % | 67 | 92 | (25 | ) | (27 | )% | |||||||||||||||||||||
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Income from continuing operations | 237 | 188 | 49 | 26 | % | 248 | 164 | 84 | 51 | % | ||||||||||||||||||||||
Adjustments to income from continuing operations: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses | — | 1 | (1 | ) | (100 | )% | — | — | — | — | % | |||||||||||||||||||||
Expenses related to restructuring | — | 1 | (1 | ) | (100 | )% | ||||||||||||||||||||||||||
Taxes on adjustments | — | (1 | ) | 1 | 100 | % | — | — | — | — | % | |||||||||||||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | $ | 237 | $ | 189 | $ | 48 | 25 | % | $ | 248 | $ | 164 | $ | 84 | 51 | % | ||||||||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly attributable tofrom higher premiums resulting from an increase in mortgage insurancein-force and lower taxes and losses in the current year. The increase was also attributable to lower losses froma $22 million favorable net cures and aging of existing delinquenciesreserve adjustment in the current year.year mostly driven by lower expected claim rates. The prior year also included a $10 million favorable reserve adjustment.
Revenues
Premiums increased mainly attributable to higher average flow insurancein-force, partially offset by lower average rates on our mortgage insurancein-force in the current year. The prior year included the reversal of an accrual for premium refunds related to policy cancellations that did not recur.
Net investment income increased primarily from higher average invested assets in the current year.
Benefits and expenses
Benefits and other changes in policy reserves decreased primarily duefrom a $28 million favorable reserve adjustment in the current year mostly driven by lower expected claim rates. The decrease was also attributable to favorable net cures and aging of existing delinquencies and lower new delinquencies and fromin the current year. The prior year also included a $5$15 million higher favorable reserve adjustmentadjustment.
Acquisition and operating expenses, net of deferrals, increased primarily from higher compensation expenses and professional fees in the current year.
Provision for income taxes. The effective tax rate increased slightlydecreased to 21.2% for the six months ended June 30, 2018 from 35.9% for the ninesix months ended SeptemberJune 30, 2017 from 35.8% for the nine months ended September 30, 2016.2017. The increasedecrease in the effective tax rate was primarily attributable to decreaseda reduction in the U.S. corporate federal income tax benefits relatedrate from 35% to tax favored investments in relation topre-tax income, partially offset by state taxes.21%.
U.S. Mortgage Insurance selected operating performance measures
The following tables set forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:
As of September 30, | Increase (decrease) and percentage change | As of June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Primary insurancein-force (1) | $ | 148,000 | $ | 133,700 | $ | 14,300 | 11 | % | $ | 159,500 | $ | 143,000 | $ | 16,500 | 12 | % | ||||||||||||||||
Riskin-force | 35,900 | 32,500 | 3,400 | 10 | % | $ | 38,700 | $ | 34,600 | $ | 4,100 | 12 | % |
(1) | Primary insurancein-force represents the aggregate original loan balance for outstanding insurance policies and is used to determine premiums. Original loan balances are presented for policies with level renewal premiums. Amortized loan balances are presented for policies with annual, amortizing renewal premiums. |
Three months ended September 30, | Increase (decrease) and percentage change | Nine months ended September 30, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
New insurance written | $ | 11,300 | $ | 12,800 | $ | (1,500 | ) | (12 | )% | $ | 28,700 | $ | 31,600 | $ | (2,900 | ) | (9 | )% | $ | 11,400 | $ | 9,800 | $ | 1,600 | 16 | % | $ | 20,400 | $ | 17,400 | $ | 3,000 | 17 | % | ||||||||||||||||||||||||||||||
Net premiums written | 200 | 193 | 7 | 4 | % | 561 | 559 | 2 | — | % | $ | 191 | $ | 186 | $ | 5 | 3 | % | $ | 376 | $ | 361 | $ | 15 | 4 | % |
Primary insurancein-force and riskin-force
Primary insurancein-force increased largely from $14.8$17.0 billion in higher flow insurancein-force, which increased from $131.6$141.2 billion as of SeptemberJune 30, 20162017 to $146.4$158.2 billion as of SeptemberJune 30, 20172018 as a result of new insurance written, partially offset by lapses during the current year. The increase in flow insurancein-force was partially offset by a decline of $0.5 billion in bulk insurancein-force, which decreased from $2.1$1.8 billion as of SeptemberJune 30, 20162017 to $1.6$1.3 billion as of SeptemberJune 30, 20172018 from cancellations and lapses. In addition, riskin-force increased primarily as a result of higher flow insurancein-force. Flow persistency was 83% and 78% for the ninesix months ended SeptemberJune 30, 20172018 and 2016, respectively.2017.
New insurance written
For the three and ninesix months ended SeptemberJune 30, 2017,2018, new insurance written decreased due toincreased primarily driven by a declinelarger purchase originations market in our estimated market share.the current year.
Net premiums written
Net premiums written for the three and six months ended SeptemberJune 30, 20172018 increased primarily from higher insurancein-force, partially offset by lower average flowrates on our mortgage insurancein-force in the current year.
Loss and expense ratios
The following table sets forth the loss and expense ratios for our U.S. Mortgage Insurance segment for the dates indicated:
Three months ended September 30, | Increase (decrease) | Nine months ended September 30, | Increase (decrease) | Three months ended June 30, | Increase (decrease) | Six months ended June 30, | Increase (decrease) | |||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 vs. 2016 | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | 2018 | 2017 | 2018 vs. 2017 | |||||||||||||||||||||||||||||||||||||
Loss ratio | 20 | % | 21 | % | (1 | )% | 13 | % | 23 | % | (10 | )% | (8 | )% | 2 | % | (10 | )% | — | % | 9 | % | (9 | )% | ||||||||||||||||||||||||
Expense ratio (net earned premiums) | 26 | % | 28 | % | (2 | )% | 26 | % | 27 | % | (1 | )% | 26 | % | 26 | % | — | % | 25 | % | 26 | % | (1 | )% | ||||||||||||||||||||||||
Expense ratio (net premiums written) | 23 | % | 24 | % | (1 | )% | 24 | % | 24 | % | — | % | 25 | % | 24 | % | 1 | % | 24 | % | 24 | % | — | % |
The loss ratio is the ratio of incurred lossesbenefits and loss adjustment expensesother changes in policy reserves to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of DAC and intangibles.
The loss ratio for the three and ninesix months ended SeptemberJune 30, 20172018 decreased primarily from improvements in net benefit from cures and aging of existing delinquencies and lower new delinquencies in the current year. The decrease in the loss ratio was also driven byfrom higher net earned premiums attributable to higher average flow insurancein-force in the current year. The decrease in the loss ratio for the three months ended September 30, 2017current year was mostly offset byalso attributable to a prior year favorable reserve adjustment of $10$28 million to our loss reservesmostly associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies that did not recur.rates. The decrease incurrent year reserve adjustment reduced the loss ratio by 15 percentage points and 8 percentage points for the ninethree and six months ended SeptemberJune 30, 2017 was2018, respectively. The prior year also attributable toincluded a $5$15 million higher favorable reserve adjustment in the current year, partially offset by the reversal of an accrual for premium refunds related to policy cancellations in the prior year.adjustment.
The expense ratio (net earned premiums) for the three and ninesix months ended SeptemberJune 30, 20172018 decreased slightly driven primarily by higher net earned premiums in the current year.
The expense ratio (net premiums written) for the three months ended SeptemberJune 30, 2017 decreased2018 increased slightly fromdriven predominantly by higher operating expenses, partially offset by higher net premiums written and lower amortization and production costs in the in the current year.
Delinquent loans
The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our U.S. mortgage insurance portfolio as of the dates indicated:
September 30, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||||||||||||
Primary insurance: | ||||||||||||||||||||||||
Insured loansin-force | 730,174 | 699,841 | 686,789 | 762,727 | 742,094 | 714,254 | ||||||||||||||||||
Delinquent loans | 20,508 | 25,709 | 25,803 | 18,051 | 23,188 | 20,677 | ||||||||||||||||||
Percentage of delinquent loans (delinquency rate) | 2.81 | % | 3.67 | % | 3.76 | % | 2.37 | % | 3.12 | % | 2.89 | % | ||||||||||||
Flow loanin-force | 712,848 | 678,168 | 665,821 | 748,497 | 725,748 | 695,383 | ||||||||||||||||||
Flow delinquent loans | 19,765 | 24,631 | 24,720 | 17,505 | 22,483 | 19,733 | ||||||||||||||||||
Percentage of flow delinquent loans (delinquency rate) | 2.77 | % | 3.63 | % | 3.71 | % | 2.34 | % | 3.10 | % | 2.84 | % | ||||||||||||
Bulk loansin-force | 17,326 | 21,673 | 20,968 | 14,230 | 16,346 | 18,871 | ||||||||||||||||||
Bulk delinquent loans (1) | 743 | 1,078 | 1,083 | 546 | 705 | 944 | ||||||||||||||||||
Percentage of bulk delinquent loans (delinquency rate) | 4.29 | % | 4.97 | % | 5.17 | % | 3.84 | % | 4.31 | % | 5.00 | % | ||||||||||||
A minus andsub-prime loansin-force | 19,828 | 23,063 | 24,281 | 16,928 | 18,912 | 20,797 | ||||||||||||||||||
A minus andsub-prime delinquent loans | 4,080 | 5,252 | 5,306 | 3,058 | 4,054 | 4,148 | ||||||||||||||||||
Percentage of A minus andsub-prime delinquent loans (delinquency rate) | 20.58 | % | 22.77 | % | 21.85 | % | 18.06 | % | 21.44 | % | 19.95 | % | ||||||||||||
Pool insurance: | ||||||||||||||||||||||||
Insured loansin-force | 5,145 | 5,742 | 5,896 | 4,774 | 5,039 | 5,406 | ||||||||||||||||||
Delinquent loans | 252 | 325 | 343 | 204 | 249 | 276 | ||||||||||||||||||
Percentage of delinquent loans (delinquency rate) | 4.90 | % | 5.66 | % | 5.82 | % | 4.27 | % | 4.94 | % | 5.11 | % |
(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 2005 through 2008 book years have declined as the United States has continued to experience improvement in its residential real estate market. We havemarket in the United States stabilized and improved during the current and prior year, and we also seen a further decline in new delinquencies andhad lower foreclosure starts in the third quarter of 2017 compared to the third quarter of 2016.current year.
The following tables set forth flow delinquencies, direct case reserves and riskin-force by aged missed payment status in our U.S. mortgage insurance portfolio as of the dates indicated:
September 30, 2017 | June 30, 2018 | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Delinquencies | Direct case reserves(1) | Risk in-force | Reserves as % of risk in-force | Delinquencies | Direct case reserves(1) | Risk in-force | Reserves as % of riskin-force | ||||||||||||||||||||||||
Payments in default: | ||||||||||||||||||||||||||||||||
3 payments or less | 8,268 | $ | 40 | $ | 350 | 11 | % | 7,318 | $ | 29 | $ | 318 | 9 | % | ||||||||||||||||||
4 - 11 payments | 5,273 | 116 | 228 | 51 | % | 5,556 | 104 | 260 | 40 | % | ||||||||||||||||||||||
12 payments or more | 6,224 | 256 | 306 | 84 | % | 4,631 | 181 | 232 | 78 | % | ||||||||||||||||||||||
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Total | 19,765 | $ | 412 | $ | 884 | 47 | % | 17,505 | $ | 314 | $ | 810 | 39 | % | ||||||||||||||||||
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(1) | Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves. |
December 31, 2016 | December 31, 2017 | |||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Delinquencies | Direct case reserves (1) | Risk in-force | Reserves as % of risk in-force | Delinquencies | Direct case reserves(1) | Risk in-force | Reserves as % of riskin-force | ||||||||||||||||||||||||
Payments in default: | ||||||||||||||||||||||||||||||||
3 payments or less | 9,355 | $ | 49 | $ | 382 | 13 | % | 10,594 | $ | 46 | $ | 474 | 10 | % | ||||||||||||||||||
4 - 11 payments | 6,364 | 147 | 268 | 55 | % | 6,178 | 125 | 279 | 45 | % | ||||||||||||||||||||||
12 payments or more | 8,912 | 383 | 434 | 88 | % | 5,711 | 237 | 281 | 84 | % | ||||||||||||||||||||||
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Total | 24,631 | $ | 579 | $ | 1,084 | 53 | % | 22,483 | $ | 408 | $ | 1,034 | 39 | % | ||||||||||||||||||
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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 10 largest states by our riskin-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.
Percent of primary riskin-force as of September 30, 2017 | Percent of total reserves as of September 30, 2017 (1) | Delinquency rate | ||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||||||||||
By Region: | ||||||||||||||||||||
Southeast (2) | 18 | % | 21 | % | 3.28 | % | 4.28 | % | 4.44 | % | ||||||||||
South Central (3) | 15 | 10 | 2.63 | % | 3.20 | % | 3.12 | % | ||||||||||||
Pacific (4) | 15 | 8 | 1.52 | % | 2.02 | % | 2.08 | % | ||||||||||||
Northeast (5) | 13 | 33 | 4.94 | % | 6.72 | % | 6.96 | % | ||||||||||||
North Central (6) | 12 | 9 | 2.30 | % | 3.00 | % | 2.97 | % | ||||||||||||
Great Lakes (7) | 11 | 6 | 2.11 | % | 2.70 | % | 2.78 | % | ||||||||||||
New England (8) | 6 | 6 | 2.83 | % | 3.62 | % | 3.70 | % | ||||||||||||
Mid-Atlantic (9) | 6 | 5 | 2.92 | % | 3.80 | % | 3.84 | % | ||||||||||||
Plains (10) | 4 | 2 | 2.27 | % | 2.94 | % | 3.09 | % | ||||||||||||
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Total | 100 | % | 100 | % | 2.81 | % | 3.67 | % | 3.76 | % | ||||||||||
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Percent of primary riskin-force as of June 30, 2018 | Percent of total reserves as of June 30, 2018 (1) | Delinquency rate | ||||||||||||||||||
June 30, 2018 | December 31, 2017 | June 30, 2017 | ||||||||||||||||||
By Region: | ||||||||||||||||||||
Southeast(2) | 18 | % | 23 | % | 3.15 | % | 4.60 | % | 3.42 | % | ||||||||||
South Central(3) | 16 | 11 | 2.30 | % | 3.30 | % | 2.57 | % | ||||||||||||
Pacific(4) | 16 | 8 | 1.30 | % | 1.56 | % | 1.54 | % | ||||||||||||
Northeast(5) | 12 | 30 | 3.74 | % | 4.67 | % | 5.20 | % | ||||||||||||
North Central(6) | 11 | 9 | 1.96 | % | 2.34 | % | 2.37 | % | ||||||||||||
Great Lakes(7) | 11 | 6 | 1.72 | % | 2.09 | % | 2.11 | % | ||||||||||||
Mid-Atlantic(8) | 6 | 5 | 2.19 | % | 2.79 | % | 3.07 | % | ||||||||||||
New England(9) | 6 | 6 | 2.27 | % | 2.75 | % | 2.98 | % | ||||||||||||
Plains(10) | 4 | 2 | 1.88 | % | 2.36 | % | 2.39 | % | ||||||||||||
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Total | 100 | % | 100 | % | 2.37 | % | 3.12 | % | 2.89 | % | ||||||||||
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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) | Alaska, California, Hawaii, Nevada, Oregon and Washington. |
(5) | New Jersey, New York and Pennsylvania. |
(6) | Illinois, Minnesota, Missouri and Wisconsin. |
(7) | Indiana, Kentucky, Michigan and Ohio. |
(8) | Delaware, Maryland, Virginia, Washington D.C. and West Virginia. |
(9) | Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. |
(10) | Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming. |
Percent of primary riskin-force as of September 30, 2017 | Percent of total reserves as of September 30, 2017 (1) | Delinquency rate | Percent of primary riskin-force as of June 30, 2018 | Percent of total reserves as of June 30, 2018 (1) | Delinquency rate | |||||||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||||||||||||||||||||||||||||
By State: | ||||||||||||||||||||||||||||||||||||||||
California | 8 | % | 3 | % | 1.35 | % | 1.56 | % | 1.59 | % | 9 | % | 4 | % | 1.21 | % | 1.45 | % | 1.29 | % | ||||||||||||||||||||
Texas | 7 | % | 4 | % | 2.94 | % | 3.33 | % | 3.33 | % | 7 | % | 5 | % | 2.77 | % | 4.41 | % | 2.71 | % | ||||||||||||||||||||
Florida | 6 | % | 11 | % | 3.54 | % | 4.89 | % | 5.33 | % | 6 | % | 13 | % | 4.57 | % | 7.99 | % | 3.76 | % | ||||||||||||||||||||
Illinois | 6 | % | 6 | % | 2.27 | % | 2.70 | % | 2.71 | % | ||||||||||||||||||||||||||||||
New York | 6 | % | 17 | % | 5.09 | % | 6.88 | % | 7.12 | % | 5 | % | 16 | % | 3.99 | % | 4.77 | % | 5.36 | % | ||||||||||||||||||||
Illinois | 6 | % | 6 | % | 2.70 | % | 3.45 | % | 3.42 | % | ||||||||||||||||||||||||||||||
Washington | 4 | % | 2 | % | 1.20 | % | 1.79 | % | 1.86 | % | 5 | % | 2 | % | 1.05 | % | 1.19 | % | 1.27 | % | ||||||||||||||||||||
Michigan | 4 | % | 1 | % | 1.26 | % | 1.51 | % | 1.46 | % | ||||||||||||||||||||||||||||||
Pennsylvania | 4 | % | 4 | % | 3.59 | % | 4.70 | % | 4.83 | % | 4 | % | 4 | % | 2.80 | % | 3.50 | % | 3.66 | % | ||||||||||||||||||||
Michigan | 4 | % | 1 | % | 1.47 | % | 1.79 | % | 1.91 | % | ||||||||||||||||||||||||||||||
Ohio | 4 | % | 2 | % | 2.44 | % | 3.30 | % | 3.38 | % | 4 | % | 2 | % | 1.98 | % | 2.43 | % | 2.58 | % | ||||||||||||||||||||
North Carolina | 3 | % | 2 | % | 2.80 | % | 3.65 | % | 3.79 | % | 3 | % | 2 | % | 2.15 | % | 2.67 | % | 2.91 | % |
(1) | Total reserves were |
The following table sets forth the dispersion of our total reserves and primary insurancein-force and riskin-force by year of policy origination and average annual mortgage interest rate as of SeptemberJune 30, 2017:2018:
(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 | ||||||||||||||||||||||||||||||||||||||||||||||||
2004 and prior | 6.01 | % | 10.3 | % | $ | 2,361 | 1.6 | % | $ | 463 | 1.3 | % | 6.02 | % | 9.7 | % | $ | 1,900 | 1.2 | % | $ | 361 | 0.9 | % | ||||||||||||||||||||||||
2005 | 5.60 | % | 10.0 | 2,206 | 1.5 | 531 | 1.5 | 5.57 | % | 8.6 | 1,784 | 1.1 | 422 | 1.1 | ||||||||||||||||||||||||||||||||||
2006 | 5.73 | % | 15.6 | 4,018 | 2.7 | 942 | 2.6 | 5.71 | % | 14.0 | 3,383 | 2.1 | 791 | 2.0 | ||||||||||||||||||||||||||||||||||
2007 | 5.66 | % | 33.4 | 10,423 | 7.0 | 2,431 | 6.8 | 5.64 | % | 30.3 | 8,870 | 5.5 | 2,060 | 5.3 | ||||||||||||||||||||||||||||||||||
2008 | 5.20 | % | 15.9 | 8,676 | 5.9 | 2,017 | 5.6 | 5.16 | % | 15.0 | 7,355 | 4.6 | 1,693 | 4.4 | ||||||||||||||||||||||||||||||||||
2009 | 4.93 | % | 0.6 | 851 | 0.6 | 183 | 0.5 | 4.91 | % | 0.5 | 644 | 0.4 | 136 | 0.4 | ||||||||||||||||||||||||||||||||||
2010 | 4.68 | % | 0.5 | 1,178 | 0.8 | 270 | 0.8 | 4.64 | % | 0.6 | 755 | 0.5 | 175 | 0.5 | ||||||||||||||||||||||||||||||||||
2011 | 4.54 | % | 0.7 | 1,712 | 1.2 | 403 | 1.1 | 4.54 | % | 0.6 | 1,284 | 0.8 | 300 | 0.8 | ||||||||||||||||||||||||||||||||||
2012 | 3.84 | % | 0.8 | 4,544 | 3.1 | 1,111 | 3.1 | 3.85 | % | 0.9 | 3,468 | 2.2 | 838 | 2.2 | ||||||||||||||||||||||||||||||||||
2013 | 4.05 | % | 1.7 | 8,250 | 5.6 | 2,041 | 5.7 | 4.07 | % | 1.8 | 6,587 | 4.1 | 1,626 | 4.2 | ||||||||||||||||||||||||||||||||||
2014 | 4.43 | % | 3.5 | 12,556 | 8.5 | 3,067 | 8.6 | 4.44 | % | 3.9 | 10,472 | 6.6 | 2,548 | 6.6 | ||||||||||||||||||||||||||||||||||
2015 | 4.12 | % | 4.0 | 23,726 | 16.0 | 5,807 | 16.2 | 4.13 | % | 5.5 | 20,401 | 12.8 | 4,972 | 12.9 | ||||||||||||||||||||||||||||||||||
2016 | 3.86 | % | 2.7 | 39,291 | 26.5 | 9,545 | 26.6 | 3.87 | % | 5.6 | 35,993 | 22.6 | 8,704 | 22.5 | ||||||||||||||||||||||||||||||||||
2017 | 4.26 | % | 0.3 | 28,197 | 19.0 | 7,008 | 19.6 | 4.24 | % | 2.9 | 36,477 | 22.9 | 8,974 | 23.2 | ||||||||||||||||||||||||||||||||||
2018 | 4.59 | % | 0.1 | 20,165 | 12.6 | 5,028 | 13.0 | |||||||||||||||||||||||||||||||||||||||||
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Total portfolio | 4.46 | % | 100.0 | % | $ | 147,989 | 100.0 | % | $ | 35,819 | 100.0 | % | 4.44 | % | 100.0 | % | $ | 159,538 | 100.0 | % | $ | 38,628 | 100.0 | % | ||||||||||||||||||||||||
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(1) | Total reserves were |
Canada Mortgage Insurance segment
Trends and conditions
Results of our mortgage insurance business in Canada are affected primarily by changes in the regulatory environment, employment levels, consumer borrowing behavior, lender mortgage-related strategies, including lender servicing practices, and other economic and housing market influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels and aging of mortgage delinquencies and movements in foreign currency exchange rates. During the thirdsecond quarter of 2017,2018, the Canadian dollar strengthened against the U.S. dollar as compared to both the third quarter of 2016 and the second quarter of 2017, which positivelyfavorably impacted the results of our mortgage insurance business in Canada as reported in U.S. dollars. However, the Canadian dollar weakened against the U.S. dollar compared to the first quarter of 2018, which unfavorably impacted our results. Any future movement in foreign exchange rates could impact future results.
The Canadian gross domestic product is expected to have experienced moderatean increase in growth in the third quarter of 2017, although slightly lower than in the second quarter of 2017,2018 compared to the first quarter of 2018, reflecting normalizationexpansion in oil productionbusiness investments and strong residential investment.exports. The overnight interest rate in Canada was 1.0%increased to 1.50% in July 2018, up from 1.25% at September 30, 2017 as compared tothe end of the first quarter of 2018 and 0.50% at the end of the second quarter of 2017. Canada’s unemployment rate decreasedincreased slightly to 6.2% at the end of the third quarter of 2017 compared to 6.5%6.0% at the end of the second quarter of 2017 due in part2018 compared to a decrease5.8% at the end of the first quarter of 2018 as an increase in workforce participation.participation outpaced job creation.
National home prices increased in the thirdsecond quarter of 2018 by approximately 3% compared to the second quarter of 2017 by approximately 11% compared to the third quarter of 2016 largely driven by the strong housing marketsmarket in Ontario and British Columbia.Columbia, partially offset by home price declines in Toronto. The increase was approximately 2% compared to the secondfirst quarter of 2017, mostly2018 due to a rebound of home prices in Toronto and continued strength in the British Columbia market, while Ontario prices remained relatively flat.Columbia. Home sales in Canada decreased in the thirdsecond quarter of 20172018 by approximately 9% compared to the third quarter of 2016 and 6%14% compared to the second quarter of 2017.2017 and 3% compared to the first quarter of 2018. This was largely due to a slowdown in sales in both British Columbia and Ontario, particularly in the Greater Toronto Area (“GTA”). The slowdown in these areas was primarily driven by regulatory and housing policy changes, including the October 2017 release of GuidelineB-20 Residential Mortgage Underwriting Practices and Procedures (the“B-20 Guideline”), as discussed below. The GTA sales decline was most pronounced following the release of the Ontario Provincial Government’s Fair Housing Plan in April 2017. The plan2017, which was designed to temper the real estate market and contained numerous measures, including anon-resident speculation tax that targets affordability in the purchase and rental housing markets in the GTA and surrounding areas. On February 20, 2018, the British Columbia Government released a plan to address housing affordability in the province. Among other measures, the plan included an increase and expansion of the existing foreign buyers’ tax and the introduction of a speculation tax applicable to both foreign and domestic buyers.
Our mortgage insurance business in Canada experienced lowerhigher losses in the thirdsecond quarter of 2018 compared to the second quarter of 2017 compared to the third quarter of 2016 primarily due to lowerfrom less favorable development in our loss reserves and higher new delinquencies, net of cures, resulting from strong or improving regional economic conditions and frompartially offset by a lower average reserve per delinquency in the current year.delinquency. Our loss ratio in Canada was 15% for the second quarter of 2018 and 13% for the first quarter of 2018, resulting in a loss ratio of 14% for the third quarterfirst half of 2017 and 11% for the nine months ended September 30, 2017. Given the2018. As a result of our loss ratio performance thus far in 2017the first half of 2018 and the economic forecast for the balance of the year, we expect our full year 20172018 loss ratio to be lowerhigher than our full year 20162017 loss ratio of 22%10%.
On October 3, 2016, the Minister of Finance announced changes intended to reinforce the Canadian housing finance system. These changes primarily included more restrictive qualification guidelines on homebuyers seeking mortgage insurance and new requirements on insured mortgage loans using bulk or other discretionary lowloan-to-value mortgage insurance that previously only applied to highloan-to-value insured mortgages. These changes in regulatory requirements have resulted in a smaller flow mortgage insurance market and lower demand for bulk insurance.
In the thirdsecond quarter of 2017,2018, flow new insurance written volumes decreasedremained flat in our mortgage insurance business in Canada compared to the thirdsecond quarter of 20162017 primarily resulting from a smaller originations market due to a smaller flow mortgage insuranceregulatory changes, offset by changes in foreign exchange rates and higher estimated market sizeshare. Earned premiums were higher as a result of the aforementioned regulatory changes in foreign exchange rates, partially offset by updated premium recognition factors from the fourth quarterreview of 2016. However, earned premiums were higherour premium earnings pattern in the third quarter of 2017 compared to the third quarter of 2016 from seasoning of our larger, more recent blocks of business and price increases in recent years.current year.
Bulk new insurance written levels were lowerslightly higher in the thirdsecond quarter of 2018 compared to the second quarter of 2017 comparedprimarily attributable to the third quarter of 2016 primarily due tochanges in foreign exchange rates, partially offset by lower demand as a result of regulatory changes that took effect in 2016 and a substantial increase in bulk insurance premium rates on mortgage applications received after December 31, 2016 in response to higher regulatory capital requirements. New insurance written from bulk mortgage insurance varies from period to period based on a number of factors, including the amount of bulk mortgages lenders seek to insure, the competitiveness of our pricing and our risk appetite for such mortgage insurance. Effective July 1, 2016, bulk mortgage insurance is only available on mortgages used in the Canada Mortgage and Housing Corporation securitization programs and is prohibited on mortgages used in private securitizations after aphase-in period. In addition, effective November 30, 2016, additional regulatory changes were implemented that prohibit insuring bulk refinances and most investor mortgages. While there was aone-time increase in bulk insurance volumes in the first quarter of 2017 primarily due to the closing of several large bulk insurance transactions on applications received in the fourth quarter of 2016, we anticipate a decrease for the full year 2017 as a result of the aforementioned changes.
We are subject to regulation under the Protection of Residential Mortgage or Hypothecary Insurance Act (Canada) (“PRMHIA”). Under PRMHIA and the Insurance Companies Act (Canada), under which our mortgage insurance business in Canada is required to meet a minimum capital test (“MCT”) to support its outstanding mortgage insurancein-force. The MCT ratio is calculated based on a methodology prescribed by the Office of the Superintendent of Financial Institutions (“OSFI”). On January 1, 2017, the capital advisory titled “Capital Requirements for Federally Regulated Mortgage Insurers” became effective. The advisory provides a new standard framework for determining the capital requirements for residential mortgage insurance companies. Under this new regulatory capital framework, the holding target of 220% was recalibrated to the updated OSFI Supervisory MCT Target and PRMHIA requirement ofare both 150%. As of SeptemberJune 30, 2017,2018, our MCT ratio under the new framework was approximately 165%170%, which was above the supervisory target.
The newCompared to the prior capital framework, released by OSFI in December 2016this framework is more risk sensitive and incorporates additional risk attributes, including credit score, remaining amortization and outstanding loan balance. The advisory
includes supplementary capital requirements on new business in areas where home prices are high relative to borrower incomes upon origination. As a result of these higher regulatory capital requirements, our mortgage insurance business in Canada implemented an increase in premium rates of approximately 20% on flow new business effective March 17, 2017. Similarly, the business also increased its premium rates for bulk insurance. OSFI continues its review of the current capital framework and is expected to make refinements to take effect on January 1, 2019. It is still too early to determine the impact of any changes to the framework.
On October 17, 2017, OSFI released the final version of GuidelinetheB-20 “Residential Mortgage Underwriting Practices and Procedures,”Guideline, which applies to all federally-regulated financial institutions that are engaged in residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada. The guideline takes effectwas effective January 1, 2018, and will requirerequires enhanced underwriting practices for all uninsured mortgages, including the application of a qualifying stress test. TheB-20 Guideline does not directly impact the regulatory requirements for our mortgage insurance business in Canada, as it is governed by OSFI’s GuidelineB-21 “ResidentialResidential Mortgage Insurance Underwriting Practices and Procedures.” We believe the Guideline will not have a material impact on the highloan-to-value market in Canada. However, Although it is still too early to determine the potential impact this Guidelineguideline will have on the Canadian mortgage and housing market.market, we believe that theB-20 Guideline will modestly reduce the highloan-to-value market size in Canada in 2018 even though qualifying insured mortgages have been subject to a mortgage rate stress test since November 30, 2016.
Segment results of operations
Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to our Canada Mortgage Insurance segment for the periods indicated:
Three months ended September 30, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 131 | $ | 124 | $ | 7 | 6 | % | $ | 131 | $ | 126 | $ | 5 | 4 | % | ||||||||||||||||
Net investment income | 33 | 33 | — | — | % | 34 | 31 | 3 | 10 | % | ||||||||||||||||||||||
Net investment gains (losses) | 55 | — | 55 | NM | (1) | (15 | ) | 47 | (62 | ) | (132 | )% | ||||||||||||||||||||
Policy fees and other income | 1 | (1 | ) | 2 | 200 | % | ||||||||||||||||||||||||||
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Total revenues | 220 | 156 | 64 | 41 | % | 150 | 204 | (54 | ) | (26 | )% | |||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 18 | 30 | (12 | ) | (40 | )% | 19 | 4 | 15 | NM | (1) | |||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 20 | 21 | (1 | ) | (5 | )% | 20 | 16 | 4 | 25 | % | |||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 11 | 10 | 1 | 10 | % | 11 | 11 | — | — | % | ||||||||||||||||||||||
Interest expense | 4 | 5 | (1 | ) | (20 | )% | 4 | 5 | (1 | ) | (20 | )% | ||||||||||||||||||||
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Total benefits and expenses | 53 | 66 | (13 | ) | (20 | )% | 54 | 36 | 18 | 50 | % | |||||||||||||||||||||
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Income from continuing operations before income taxes | 167 | 90 | 77 | 86 | % | 96 | 168 | (72 | ) | (43 | )% | |||||||||||||||||||||
Provision for income taxes | 55 | 24 | 31 | 129 | % | 24 | 56 | (32 | ) | (57 | )% | |||||||||||||||||||||
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Income from continuing operations | 112 | 66 | 46 | 70 | % | 72 | 112 | (40 | ) | (36 | )% | |||||||||||||||||||||
Less: income from continuing operations attributable to noncontrollinginterests | 54 | 30 | 24 | 80 | % | 32 | 54 | (22 | ) | (41 | )% | |||||||||||||||||||||
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Income from continuing operations available to Genworth Financial, Inc.’scommon stockholders | 58 | 36 | 22 | 61 | % | 40 | 58 | (18 | ) | (31 | )% | |||||||||||||||||||||
Adjustments to income from continuing operations available to GenworthFinancial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses, net (2) | (32 | ) | — | (32 | ) | NM | (1) | 8 | (27 | ) | 35 | 130 | % | |||||||||||||||||||
Expenses related to restructuring | 1 | — | 1 | NM | (1) | |||||||||||||||||||||||||||
Taxes on adjustments | 10 | — | 10 | NM | (1) | (2 | ) | 10 | (12 | ) | (120 | )% | ||||||||||||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | $ | 37 | $ | 36 | $ | 1 | 3 | % | $ | 46 | $ | 41 | $ | 5 | 12 | % | ||||||||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
(2) | For the three months ended |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased primarily from lower income taxes, partially offset by higher losses in the current year.
Revenues
Premiums increased primarily from changes in foreign exchange rates, partially offset by updated premium recognition factors from the review of our premium earnings pattern in the current year. The three months ended June 30, 2018 included an increase of $6 million attributable to changes in foreign exchange rates.
Net investment income increased largely from changes in foreign exchange rates in the current year.
We had net investment losses in the current year compared to gains in the prior year. Net investment losses in the current year were primarily attributable to derivative losses largely from hedgingnon-functional currency transactions and from changes in the fair value of equity securities, partially offset by derivative gains on interest rate swaps. Net investment gains in the prior year were predominantly from derivative gains on interest rate swaps and foreign exchange gains on the sale ofnon-functional currency investment securities.
Benefits and expenses
Benefits and other changes in policy reserves increased largely from less favorable development in our loss reserves and higher new delinquencies, net of cures, partially offset by a lower average reserve per delinquency in the current year.
Acquisition and operating expenses, net of deferrals, increased mainly driven by higher stock-based compensation expense in the current year.
Provision for income taxes.The effective tax rate decreased to 25.5% for the three months ended June 30, 2018 from 33.0% for the three months ended June 30, 2017. The decrease in the effective tax rate was primarily attributable to the change from a worldwide tax system to a territorial system under the TCJA. As a result, we are now generally taxed at our jurisdictional rate of 27%.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
The following table sets forth the results of operations relating to our Canada Mortgage Insurance segment for the periods indicated:
Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 vs. 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 270 | $ | 252 | $ | 18 | 7 | % | ||||||||
Net investment income | 68 | 63 | 5 | 8 | % | |||||||||||
Net investment gains (losses) | (30 | ) | 58 | (88 | ) | (152 | )% | |||||||||
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Total revenues | 308 | 373 | (65 | ) | (17 | )% | ||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 37 | 24 | 13 | 54 | % | |||||||||||
Acquisition and operating expenses, net of deferrals | 37 | 37 | — | — | % | |||||||||||
Amortization of deferred acquisition costs and intangibles | 21 | 21 | — | — | % | |||||||||||
Interest expense | 9 | 9 | — | — | % | |||||||||||
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Total benefits and expenses | 104 | 91 | 13 | 14 | % | |||||||||||
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Income from continuing operations before income taxes | 204 | 282 | (78 | ) | (28 | )% | ||||||||||
Provision for income taxes | 54 | 92 | (38 | ) | (41 | )% | ||||||||||
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Income from continuing operations | 150 | 190 | (40 | ) | (21 | )% | ||||||||||
Less: income from continuing operations attributable to noncontrolling interests | 68 | 92 | (24 | ) | (26 | )% | ||||||||||
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Income from continuing operations available to Genworth Financial, Inc.’scommon stockholders | 82 | 98 | (16 | ) | (16 | )% | ||||||||||
Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net(1) | 17 | (33 | ) | 50 | 152 | % | ||||||||||
Taxes on adjustments | (4 | ) | 12 | (16 | ) | (133 | )% | |||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s commonstockholders | $ | 95 | $ | 77 | $ | 18 | 23 | % | ||||||||
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(1) | For the six months ended June 30, 2018 and 2017, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $(13) million and $25 million, respectively. |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly driven by lower losses and higher premiums mostlyand lower income taxes, partially offset by lower tax benefitshigher losses in the current year.
Revenues
Premiums increased principallyprimarily from changes in foreign exchange rates, from the seasoning of our larger, more recentin-force blocks of business.business and from updated premium recognition factors from the review of our premium earnings pattern in the current year. The six months ended June 30, 2018 included an increase of $13 million attributable to changes in foreign exchange rates.
Net investment income increased largely from changes in foreign exchange rates in the current year.
We had net investment losses in the current year compared to gains in the prior year. Net investment gainslosses in the current year were primarily drivenattributable to derivative losses largely from hedgingnon-functional currency transactions and from changes in the fair value of equity securities, partially offset by derivative gains on interest rate swaps, foreign currency forward contracts and cross currency interest rate swaps.
Benefits and expenses
Benefits and other changes in policy reserves decreased largely from lower new delinquencies, net of cures, and from a lower average reserve per delinquency in the current year.
Provision for income taxes.The effective tax rate increased to 32.9% for the three months ended September 30, 2017 from 26.7% for the three months ended September 30, 2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income in the current year.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
The following table sets forth the results of operations relating to our Canada Mortgage Insurance segment for the periods indicated:
Nine months ended September 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 383 | $ | 357 | $ | 26 | 7 | % | ||||||||
Net investment income | 96 | 94 | 2 | 2 | % | |||||||||||
Net investment gains (losses) | 113 | 12 | 101 | NM | (1) | |||||||||||
Policy fees and other income | 1 | — | 1 | NM | (1) | |||||||||||
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Total revenues | 593 | 463 | 130 | 28 | % | |||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 42 | 81 | (39 | ) | (48 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | 57 | 58 | (1 | ) | (2 | )% | ||||||||||
Amortization of deferred acquisition costs and intangibles | 32 | 29 | 3 | 10 | % | |||||||||||
Interest expense | 13 | 13 | — | — | % | |||||||||||
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Total benefits and expenses | 144 | 181 | (37 | ) | (20 | )% | ||||||||||
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Income from continuing operations before income taxes | 449 | 282 | 167 | 59 | % | |||||||||||
Provision for income taxes | 147 | 76 | 71 | 93 | % | |||||||||||
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Income from continuing operations | 302 | 206 | 96 | 47 | % | |||||||||||
Less: income from continuing operations attributable to noncontrollinginterests | 146 | 94 | 52 | 55 | % | |||||||||||
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Income from continuing operations available to Genworth Financial, Inc.’scommon stockholders | 156 | 112 | 44 | 39 | % | |||||||||||
Adjustments to income from continuing operations available to GenworthFinancial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net (2) | (65 | ) | (7 | ) | (58 | ) | NM | (1) | ||||||||
Expenses related to restructuring | 1 | — | 1 | NM | (1) | |||||||||||
Taxes on adjustments | 22 | 2 | 20 | NM | (1) | |||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s commonstockholders | $ | 114 | $ | 107 | $ | 7 | 7 | % | ||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly driven by lower losses and higher premiums, partially offset by lower tax benefits in the current year.
Revenues
Premiums increased primarily from the seasoning of our larger, more recentin-force blocks of business.
Net investment gains in the currentprior year were primarily driven bypredominantly from derivative gains on interest rate swaps foreign currency forward contracts and cross currency interest rate swaps, as well as foreign exchange gains on the sale ofnon-functional currency investment securities.
Benefits and expenses
Benefits and other changes in policy reserves decreasedincreased largely from lowerless favorable development in our loss reserves and higher new delinquencies, net of cures, as well as frompartially offset by a lower average reserve per delinquency and from favorable loss reserve development related to incurred but not reported delinquencies as of December 31, 2016.in the current year.
Provision for income taxes.The effective tax rate increaseddecreased to 32.7%26.5% for the ninesix months ended SeptemberJune 30, 20172018 from 27.1%32.6% for the ninesix months ended SeptemberJune 30, 2016.2017. The increasedecrease in the effective tax rate was primarily attributable to decreasedthe change from a worldwide tax benefits from lowersystem to a territorial system under the TCJA. As a result, we are now generally taxed foreign income in the current year.at our jurisdictional rate of 27%.
Canada Mortgage Insurance selected operating performance measures
The following tables set forth selected operating performance measures regarding our Canada Mortgage Insurance segment as of or for the dates indicated:
As of September 30, | Increase (decrease) and percentage change | As of June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Primary insurancein-force | $ | 390,700 | $ | 347,300 | $ | 43,400 | 12 | % | $ | 380,200 | $ | 371,500 | $ | 8,700 | 2 | % | ||||||||||||||||
Riskin-force | 136,700 | 121,500 | 15,200 | 13 | % | $ | 133,100 | $ | 130,000 | $ | 3,100 | 2 | % |
Three months ended September 30, | Increase (decrease) and percentage change | Nine months ended September 30, | 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) | 2017 | 2016 | 2017 vs. 2016 | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
New insurance written | $ | 5,000 | $ | 10,400 | $ | (5,400 | ) | (52 | )% | $ | 19,800 | $ | 40,200 | $ | (20,400 | ) | (51 | )% | $ | 4,600 | $ | 4,500 | $ | 100 | 2 | % | $ | 8,000 | $ | 14,800 | $ | (6,800 | ) | (46 | )% | |||||||||||||||||||||||||||||
Net premiums written | 156 | 172 | (16 | ) | (9 | )% | 378 | 447 | (69 | ) | (15 | )% | $ | 133 | $ | 126 | $ | 7 | 6 | % | $ | 225 | $ | 222 | $ | 3 | 1 | % |
Primary insurancein-force and riskin-force
Our mortgage insurance business in Canada currently provides 100% coverage on the majority of the loans we insure in that market. For the purpose of representing our riskin-force, we have computed an “effective” riskin-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 riskin-force has been calculated by applying to insurancein-force a factor that represents our highest expected averageper-claim payment for any one underwriting year over the life of our business in Canada. For the three and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, this factor was 35%.
Primary insurancein-force and riskin-force increased primarily as a result of flow new insurance written and bulk mortgage insurance activity.written. Insurancein-force and riskin-force included increasesdecreases of $19.2$5.6 billion and $6.7$1.9 billion, respectively, attributable to changes in foreign exchange rates.
New insurance written
Excluding the impacts of changes in foreign exchange rates, new insurance written decreased for the three months ended June 30, 2018 primarily as a result of lower flow mortgage insurance written primarily from a
smaller market size, due in part to the impact of regulatory changes and higher interest rates, partially offset by our higher estimated market share. New insurance written decreased for the three and ninesix months ended SeptemberJune 30, 2017 primarily as2018 predominantly from a resultdecrease of lower$7.0 billion in bulk mortgage insurance activity and flow new insurance written. For the three and nine months ended September 30, 2017, bulk mortgage insurance activity decreased by $4.5 billion and $18.6 billion, respectively, driven by increased demand in the prior year preceding regulatory changes that became effective on July 1, 2016 and from lower demandwritten in the current year due to a higher average premium rate as a resultyear. The first quarter of higher regulatory capital requirements and additional regulatory changes that became effective on November 30, 2016. Flow new2017 included an increase in bulk insurance written decreased $900 million and $1.8 billion for the three and nine months ended September 30, 2017, respectively,volumes primarily due to a smaller market size resulting fromthe closing of several large bulk insurance transactions on applications received in the fourth quarter of 2016 ahead of regulatory changes effective October 17, 2016.changes. New insurance written for the three and ninesix months ended SeptemberJune 30, 20172018 included increases of $100$300 million and $400 million, respectively, attributable to changes in foreign exchange rates.
Net premiums written
Our mortgage insurance policies in Canada provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premiums earned over time in accordance with the expected pattern of risk emergence. As of September 30, 2017, ourOur unearned premium reserves were $1,713 million, compared to $1,628 million$1.6 billion as of SeptemberJune 30, 2016. The change in unearned premium reserves included2018 and June 30, 2017.
Net premiums written increased for the three months ended June 30, 2018 primarily from an increase of $84$6 million attributable to changes in foreign exchange rates and from an increase in flow premium rates.
Net premiums written, excluding the effects of changes in foreign exchange rates, decreased for the three and ninesix months ended SeptemberJune 30, 20172018 primarily from lower bulk mortgage insurance activity and lower flow volumewritten due to regulatory changes, partially offset by an increase in flow premium rate increases.rates. The six months ended June 30, 2018 included an increase of $11 million attributable to changes in foreign exchange rates.
Loss and expense ratios
The following table sets forth the loss and expense ratios for our Canada Mortgage Insurance segment for the periods indicated:
Three months ended September 30, | Increase (decrease) | Nine months ended September 30, | Increase (decrease) | Three months ended June 30, | Increase (decrease) | Six months ended June 30, | Increase (decrease) | |||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 vs. 2016 | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | 2018 | 2017 | 2018 vs. 2017 | |||||||||||||||||||||||||||||||||||||
Loss ratio | 14 | % | 24 | % | (10 | )% | 11 | % | 23 | % | (12 | )% | 15 | % | 4 | % | 11 | % | 14 | % | 10 | % | 4 | % | ||||||||||||||||||||||||
Expense ratio (net earned premiums) | 23 | % | 24 | % | (1 | )% | 23 | % | 24 | % | (1 | )% | 23 | % | 21 | % | 2 | % | 21 | % | 23 | % | (2 | )% | ||||||||||||||||||||||||
Expense ratio (net premiums written) | 20 | % | 18 | % | 2 | % | 23 | % | 19 | % | 4 | % | 23 | % | 21 | % | 2 | % | 26 | % | 26 | % | — | % |
The loss ratio is the ratio of incurred lossesbenefits and loss adjustment expensesother changes in policy reserves to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our mortgage insurance business in Canada, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of DAC and intangibles.
The loss ratio decreasedincreased for the three and ninesix months ended SeptemberJune 30, 20172018 primarily from a decreaselower favorable development in the number ofour loss reserves and higher new flow delinquencies, net of cures, and fromas overall favorable regional macroeconomic conditions began to normalize in 2018 after experiencing considerable strength in 2017. These increases were partially offset by a lower average reserve per delinquency as a result of improvement inoil-producing regions, home price appreciation, particularly in Ontario, and overall improving regional macroeconomic conditions in the current year.
The expenseincrease in the loss ratio (net earned premiums) decreased for the three and ninesix months ended SeptemberJune 30, 2017 primarily attributable to2018 was also partially offset by higher earned premiums largely from the seasoning of our larger, more recentin-force blocks of business.business and from a favorable adjustment of $3 million relating to updated premium recognition factors from the review of our premium earnings pattern in the current year.
The expense ratio (net earned premiums) increased for the three months ended June 30, 2018 primarily from higher stock-based compensation expense in the current year and decreased for the six months ended June 30, 2018 mainly from higher earned premiums in the current year.
The expense ratio (net premiums written) increased for the three and nine months ended SeptemberJune 30, 2017 primarily attributable to lower2018 largely from higher stock-based compensation expense, partially offset by higher net premiums written in the current year.
Delinquent loans
The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our Canada mortgage insurance portfolio as of the dates indicated:
September 30, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||||||||||||
Primary insured loansin-force | 2,098,771 | 2,029,400 | 2,006,484 | 2,137,221 | 2,110,324 | 2,082,586 | ||||||||||||||||||
Delinquent loans | 1,759 | 2,070 | 2,027 | 1,742 | 1,718 | 1,809 | ||||||||||||||||||
Percentage of delinquent loans (delinquency rate) | 0.08 | % | 0.10 | % | 0.10 | % | 0.08 | % | 0.08 | % | 0.09 | % | ||||||||||||
Flow loansin-force | 1,434,662 | 1,394,067 | 1,379,020 | 1,470,826 | 1,447,794 | 1,418,076 | ||||||||||||||||||
Flow delinquent loans | 1,434 | 1,693 | 1,715 | 1,406 | 1,369 | 1,476 | ||||||||||||||||||
Percentage of flow delinquent loans (delinquency rate) | 0.10 | % | 0.12 | % | 0.12 | % | 0.10 | % | 0.09 | % | 0.10 | % | ||||||||||||
Bulk loansin-force | 664,109 | 635,333 | 627,464 | 666,395 | 662,530 | 664,510 | ||||||||||||||||||
Bulk delinquent loans | 325 | 377 | 312 | 336 | 349 | 333 | ||||||||||||||||||
Percentage of bulk delinquent loans (delinquency rate) | 0.05 | % | 0.06 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % |
Flow mortgage loansin-force increased from new policies written and bulk mortgage loansin-force increased from new bulk activity.written. The number of delinquent loans of our flow mortgage insurance decreased primarily fromincreased compared to December 31, 2017 as overall favorable regional housing market improvement, particularlymacroeconomic conditions began to normalize inoil-producing regions 2018 after experiencing considerable strength in the current year.2017.
Primary insurance delinquency rates differ by the various provinces and territories of Canada at any one time depending upon economic conditions and cyclical growth patterns. The table below sets forth our primary delinquency rates for the various provinces and territories of Canada by our riskin-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.
Percent of primary riskin-force as of September 30, 2017 | Delinquency rate | Percent of primary riskin-force as of June 30, 2018 | Delinquency rate | |||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||||||||||||||||||||
By province and territory: | ||||||||||||||||||||||||||||||||
Ontario | 47 | % | 0.03 | % | 0.04 | % | 0.04 | % | 47 | % | 0.03 | % | 0.03 | % | 0.03 | % | ||||||||||||||||
Alberta | 16 | 0.18 | % | 0.22 | % | 0.22 | % | 16 | 0.17 | % | 0.17 | % | 0.19 | % | ||||||||||||||||||
British Columbia | 15 | 0.05 | % | 0.06 | % | 0.07 | % | 14 | 0.04 | % | 0.05 | % | 0.06 | % | ||||||||||||||||||
Quebec | 13 | 0.12 | % | 0.15 | % | 0.15 | % | 13 | 0.10 | % | 0.11 | % | 0.13 | % | ||||||||||||||||||
Saskatchewan | 3 | 0.25 | % | 0.28 | % | 0.27 | % | 3 | 0.28 | % | 0.28 | % | 0.26 | % | ||||||||||||||||||
Nova Scotia | 2 | 0.16 | % | 0.18 | % | 0.20 | % | 2 | 0.15 | % | 0.16 | % | 0.17 | % | ||||||||||||||||||
Manitoba | 2 | 0.09 | % | 0.07 | % | 0.08 | % | 2 | 0.10 | % | 0.08 | % | 0.08 | % | ||||||||||||||||||
New Brunswick | 1 | 0.15 | % | 0.19 | % | 0.15 | % | 1 | 0.15 | % | 0.16 | % | 0.12 | % | ||||||||||||||||||
All other | 1 | 0.16 | % | 0.17 | % | 0.14 | % | 2 | 0.20 | % | 0.17 | % | 0.16 | % | ||||||||||||||||||
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Total | 100 | % | 0.08 | % | 0.10 | % | 0.10 | % | 100 | % | 0.08 | % | 0.08 | % | 0.09 | % | ||||||||||||||||
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Delinquency rates decreased slightly compared to June 30, 2017 reflecting regional housing market improvement, primarily in Quebec and Alberta, and Quebec due to improvingdriven mostly by continued favorable macroeconomic conditions that began in those regions in the current year.2017, mostly offset by normalizing macroeconomic conditions within other regions.
As a part of enhanced lender reporting, we receive updated outstanding loansin-force in Canada from almost all of our customers. Based on the data provided by lenders, the delinquency rate as of SeptemberJune 30, 20172018 was 0.18%0.19%, reflecting a lower number of outstanding loans and related policiesin-force compared to our reported policiesin-force.
Australia Mortgage Insurance segment
Trends and conditions
Results of our mortgage insurance business in Australia are affected primarily by changes in regulatory environments, employment levels, consumer borrowing behavior, lender mortgage-related strategies, including lender servicing practices, and other economic and housing market influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels and aging of mortgage delinquencies and movements in foreign currency exchange rates. During the thirdsecond quarter of 2017,2018, the Australian dollar strengthened against the U.S. dollar as compared to both the third quarter of 2016 and the second quarter of 2017, which favorably impacted the results of our mortgage insurance business in Australia as reported in U.S. dollars. However, the Australian dollar weakened against the U.S. dollar compared to the first quarter of 2018, which unfavorably impacted our results. Any future movement in foreign exchange rates could impact future results.
The Australian gross domestic product is expected to have hadexperienced moderate growth in the thirdsecond quarter of 2017,2018, supported by sustained low interest rates, business investment and an ongoing rise in resource exports.consumption growth. The cash rate remained flat at 1.50% in the thirdsecond quarter of 2017.2018. The September 2017June 2018 unemployment rate improveddecreased slightly to 5.5%5.4% from 5.6% at the end of the secondfirst quarter of 2017.2018.
Home prices in Australia continued to appreciatedecline in the thirdsecond quarter of 2017, with September 30, 20172018, following consistent growth throughout most of 2017. June 2018 home values were approximately 9% higher2% lower than a year ago, andwith the main driver being the Sydney housing market at approximately 1% higher than at5% lower annual home price growth as of the end of the second quarter of 2017. The Sydney and Melbourne housing markets continue to be2018.
Our mortgage insurance business in Australia completed a review of its premium earnings pattern in the major driver with annual home price growth of approximately 11% and 12%, respectively, as of the end of the thirdfourth quarter of 2017. The review indicated an observed and expected continuation of a longer duration between policy inception and first loss event. This was primarily attributable to the economic downturn in mining regions, which comprised a large proportion of incurred losses in 2017, and a prolonged low interest rate environment resulting in robust housing markets in other parts of the country. The review resulted in a refinement of premium recognition factors and a cumulative adjustment that was applied retrospectively as of October 1, 2017. As a result of these changes, earned premiums and amortization of DAC are expected to increase over the next several years on our existing insurancein-force as compared to 2017, but normalize thereafter as the premiums will be earned over a longer period of time. The application of the new premium earnings pattern only impacts the timing of our premium recognition, as the amount of total earned premiums recognized over the lifetime of the policies is unchanged. As discussed above, the adjustment to our premium earnings pattern was applied on a retrospective basis under U.S. GAAP. However, under local Australian Accounting Standards this adjustment was applied on a prospective basis. Due to this divergence in accounting application, the financial results and certain metrics, such as the loss ratio and expense ratios, for our mortgage insurance business in Australia were materially different between the two accounting standards in 2017 and in the first and second quarters of 2018 and will be materially different in future periods.
Our mortgage insurance business in Australia had lowerhigher losses in the thirdsecond quarter of 2018 compared to the second quarter of 2017 comparedprimarily due to favorablenon-reinsurance recoveries on paid claims in the third quarterprior year and aging of 2016 due toexisting delinquencies, partially offset by lower new delinquencies, net of cures, as well as improved aging of existing delinquencies, primarily in commodity-dependent regions.the current year. The loss ratio in Australia for the three months ended SeptemberJune 30, 2018 was 28%. The 2017 full year loss ratio was 37%.(79)%, due primarily to the review of our premium earnings pattern. This adjustment reduced the loss ratio by 112% for the full year 2017. We expect continued regional loss pressures and lower expectedhigher earned premiums to drive ourthe total year loss ratio higher forlower in 2018 than it would have been in 2017 without the full year 2017 as compared toadjustment from the full year 2016 loss ratioreview of 34%. our premium earnings pattern.
In addition, during the fourthsecond quarter of 2017, our mortgage insurance business in Australia will complete its annual review of its premium earnings pattern. The outcome of this review could impact our results of operations, including our loss ratio.
In the third quarter of 2017,2018, our mortgage insurance business in Australia experienced a decrease in new insurance written volumes compared to the third quarter of 2016 and the second quarter of 2017 primarily due to lower market penetration from a change in customer mix, as well ascustomers’ lower market share and the Australian Prudential Regulation Authority’s (“APRA”) continued focus on lending standards, investment lending and serviceability. The decrease was partially offset by an increase in bulk transactions in the current year.
Gross premiums written in the thirdsecond quarter of 2018 were flat compared to the second quarter of 2017 were lower compared toprimarily driven by new structured insurance transactions and bulk deals completed in the third quarter of 2016 primarily drivencurrent year, offset by a decrease in primary flow volumes, particularly from a reduction in highloan-to-value mortgage origination volumemostly resulting from regulatory measures to slow the growth in investment lending and limit the flow of new interest-only lending. Earned premiums in the second quarter of 2018 were higher compared to the second quarter of 2017 largely due to higher policy cancellations and updated premium recognition factors from the review of our premium earnings pattern in the fourth quarter of 2017. Policy cancellations were higher due to an initiative implemented in the second quarter of 2018 to more promptly identify loans that have been discharged or refinanced using newly available data.
In November 2016, we entered into a new contract with our largest customer, effective January 1, 2017, with a term of three years. DuringIn the first three quartershalf of 2017,2018, this customer represented 39%46% of our new insurance written.written, excluding structured insurance transactions where we are in a secondary loss position. The contract with another largeour current second largest customer was set to expire in November 2017 but was recently extended through November 2018 under similar terms.terms as the previous contract. This customer represented 12%17% of our new insurance written duringin the first three quartershalf of 2017.2018. The contract with our former second largest customer was terminated by the customer effective April 8, 2017.
Our mortgage insurance business in Australia evaluates its capital position in relation to the Prescribed Capital Amount (“PCA”) as determined by APRA, utilizing the Internal Capital Adequacy Assessment Process as the framework to ensure that our Australia group of companies as a whole, and each regulated entity, are independently capitalized to meet regulatory requirements. As of SeptemberJune 30, 2017,2018, the estimated PCA ratio of
our mortgage insurance business in Australia was approximately 184%190%, representing an increase from 181%184% as of June 30, 2017,March 31, 2018, largely resulting from lower production volumes, portfolio seasoning and cancellations, partially offset by dividends paidreduced reinsurance credit and share repurchase activity in the third quarter of 2017.activity.
In March 2017, APRA announced changes to reinforce sound mortgage lending practices, focusing on slowing investor growth and limiting the flow of new interest-only lending. These changes could impact future new insurance written volumes in our Australian mortgage insurance business.
Segment results of operations
Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated:
Three months ended September 30, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 78 | $ | 88 | $ | (10 | ) | (11 | )% | $ | 106 | $ | 78 | $ | 28 | 36 | % | |||||||||||||||
Net investment income | 19 | 23 | (4 | ) | (17 | )% | 18 | 17 | 1 | 6 | % | |||||||||||||||||||||
Net investment gains (losses) | 1 | 4 | (3 | ) | (75 | )% | 12 | 2 | 10 | NM | (1) | |||||||||||||||||||||
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Total revenues | 98 | 115 | (17 | ) | (15 | )% | 136 | 97 | 39 | 40 | % | |||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 29 | 37 | (8 | ) | (22 | )% | 29 | 27 | 2 | 7 | % | |||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 18 | 23 | (5 | ) | (22 | )% | 17 | 9 | 8 | 89 | % | |||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 10 | 4 | 6 | 150 | % | 12 | 17 | (5 | ) | (29 | )% | |||||||||||||||||||||
Interest expense | 3 | 2 | 1 | 50 | % | 2 | 2 | — | — | % | ||||||||||||||||||||||
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Total benefits and expenses | 60 | 66 | (6 | ) | (9 | )% | 60 | 55 | 5 | 9 | % | |||||||||||||||||||||
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Income from continuing operations before income taxes | 38 | 49 | (11 | ) | (22 | )% | 76 | 42 | 34 | 81 | % | |||||||||||||||||||||
Provision for income taxes | 12 | 16 | (4 | ) | (25 | )% | 23 | 14 | 9 | 64 | % | |||||||||||||||||||||
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Income from continuing operations | 26 | 33 | (7 | ) | (21 | )% | 53 | 28 | 25 | 89 | % | |||||||||||||||||||||
Less: income from continuing operations attributable to noncontrollinginterests | 14 | 18 | (4 | ) | (22 | )% | 27 | 15 | 12 | 80 | % | |||||||||||||||||||||
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Income from continuing operations available to Genworth Financial, Inc.’scommon stockholders | 12 | 15 | (3 | ) | (20 | )% | 26 | 13 | 13 | 100 | % | |||||||||||||||||||||
Adjustments to income from continuing operations available to GenworthFinancial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses, net | (1 | ) | (2 | ) | 1 | 50 | % | (6 | ) | — | (6 | ) | NM | (1) | ||||||||||||||||||
Taxes on adjustments | 1 | 1 | — | — | % | 2 | (1 | ) | 3 | NM | (1) | |||||||||||||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders | $ | 12 | $ | 14 | $ | (2 | ) | (14 | )% | $ | 22 | $ | 12 | $ | 10 | 83 | % | |||||||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
(2) | For the three months ended |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreasedincreased primarily driven by higher premiums largely related to higher policy cancellations and from updated premium recognition factors from the review of our premium earnings pattern in the fourth quarter of 2017, which resulted in higher earned premiums on our existing insurancein-force in the current year. The increase was also attributable to lower premiums and investment income partially offset by lower lossestaxes in the current year.
Revenues
Premiums decreasedincreased largely due to higher policy cancellations resulting from an initiative implemented in the seasoningsecond quarter of 2018 to more promptly identify loans that have been discharged or refinanced using newly available data and from updated premium recognition factors from the review of our smaller prior yearin-force blockspremium earnings pattern in the fourth quarter of business and lower policy cancellations2017, which resulted in higher earned premiums in the current year. The three months ended September 30, 2017 included an increase of $3 million attributable to changes in foreign exchange rates.
Net investment income decreased primarily from lower yields in the current year.year on our existing insurancein-force.
Net investment gains decreased predominantlyincreased principally from lowerhigher net gains from the sale of investment securities, partially offset bychanges in the fair value of equity securities and from impairments in the current year.prior year that did not recur.
Benefits and expenses
Benefits and other changes in policy reserves decreasedincreased largely attributable to $6 million of favorablenon-reinsurance recoveries on paid claims in the prior year that did not recur and aging of existing delinquencies, partially offset by lower new delinquencies, net of cures, and from improved aging of existing delinquencies primarily in commodity-dependent regions in the current year.
Acquisition and operating expenses, net of deferrals, decreasedincreased primarily from a change in the classificationan $8 million reclass of contract fees amortization expense which we began recording to amortization of DAC and intangibles as ofin the second quarter of 2017.prior year that did not recur.
Amortization of DAC and intangibles increaseddecreased principally as a result of a change in the classificationan $8 million prior year reclass of contract fees amortization expense that was previously recorded tofrom acquisition and operating expenses, net of deferrals, as discussed above. The decrease was partially offset by higher contract fees amortization in the current year.
Provision for income taxes. The effective tax rate increaseddecreased to 33.1%30.0% for the three months ended SeptemberJune 30, 20172018 from 32.2%33.2% for the three months ended SeptemberJune 30, 2016.2017. The increasedecrease in the effective tax rate was primarily attributable to decreasedthe change from a worldwide tax benefits from lowersystem to a territorial system under the TCJA. As a result, we are now generally taxed foreign income in the current year.at our jurisdictional rate of 30%.
NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated:
Nine months ended September 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 237 | $ | 255 | $ | (18 | ) | (7 | )% | $ | 204 | $ | 159 | $ | 45 | 28 | % | |||||||||||||||
Net investment income | 57 | 72 | (15 | ) | (21 | )% | 35 | 38 | (3 | ) | (8 | )% | ||||||||||||||||||||
Net investment gains (losses) | 23 | 6 | 17 | NM | (1) | 3 | 22 | (19 | ) | (86 | )% | |||||||||||||||||||||
Policy fees and other income | 1 | — | 1 | NM | (1) | |||||||||||||||||||||||||||
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Total revenues | 317 | 333 | (16 | ) | (5 | )% | 243 | 219 | 24 | 11 | % | |||||||||||||||||||||
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Benefits and other changes in policy reserves | 84 | 89 | (5 | ) | (6 | )% | 59 | 55 | 4 | 7 | % | |||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 50 | 67 | (17 | ) | (25 | )% | 34 | 32 | 2 | 6 | % | |||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 31 | 11 | 20 | 182 | % | 23 | 21 | 2 | 10 | % | ||||||||||||||||||||||
Interest expense | 7 | 8 | (1 | ) | (13 | )% | 4 | 4 | — | — | % | |||||||||||||||||||||
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Total benefits and expenses | 172 | 175 | (3 | ) | (2 | )% | 120 | 112 | 8 | 7 | % | |||||||||||||||||||||
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Income from continuing operations before income taxes | 145 | 158 | (13 | ) | (8 | )% | 123 | 107 | 16 | 15 | % | |||||||||||||||||||||
Provision for income taxes | 48 | 51 | (3 | ) | (6 | )% | 37 | 36 | 1 | 3 | % | |||||||||||||||||||||
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Income from continuing operations | 97 | 107 | (10 | ) | (9 | )% | 86 | 71 | 15 | 21 | % | |||||||||||||||||||||
Less: income from continuing operations attributable to noncontrollinginterests | 52 | 57 | (5 | ) | (9 | )% | 44 | 38 | 6 | 16 | % | |||||||||||||||||||||
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Income from continuing operations available to Genworth Financial, Inc.’scommon stockholders | 45 | 50 | (5 | ) | (10 | )% | 42 | 33 | 9 | 27 | % | |||||||||||||||||||||
Adjustments to income from continuing operations available to GenworthFinancial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses, net(2) | (12 | ) | (3 | ) | (9 | ) | NM | (1) | (2 | ) | (11 | ) | 9 | 82 | % | |||||||||||||||||
Taxes on adjustments | 4 | 1 | 3 | NM | (1) | 1 | 3 | (2 | ) | (67 | )% | |||||||||||||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s commonstockholders | $ | 37 | $ | 48 | $ | (11 | ) | (23 | )% | $ | 41 | $ | 25 | $ | 16 | 64 | % | |||||||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
(2) | For the |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreasedincreased primarily driven by updated premium recognition factors from the review of our premium earnings pattern in the fourth quarter of 2017, which resulted in higher earned premiums on our existing insurance in-force in the current year and from higher premiums largely related to higher policy cancellations. The increase was also attributable to lower premiums and investment income partially offset by lower lossestaxes in the current year.
Revenues
Premiums decreased predominantlyincreased largely due to updated premium recognition factors from the seasoningreview of our smaller priorpremium earnings pattern in the fourth quarter of 2017, which resulted in higher earned premiums in the current year on our existing insurancein-force blocksand from higher policy cancellations resulting from an initiative implemented in the second quarter of business.2018 to more promptly identify loans that have been discharged or refinanced using newly available data. The nineincrease was also attributable to a new structured insurance transaction completed in the first quarter of 2018. The six months ended SeptemberJune 30, 20172018 included an increase of $7$6 million attributable to changes in foreign exchange rates.
Net investment income decreased primarily from lower yields and lower average invested assets in the current year.
Net investment gains increased predominantlydecreased primarily from higherlower net gains from the sale of investment securities due toand from changes in the rebalancingfair value of our portfolio,equity securities, partially offset by impairmentsderivatives losses and derivative lossesimpairments in the current year.prior year that did not recur.
Benefits and expenses
Benefits and other changes in policy reserves decreasedincreased largely attributable to $6 million of favorablenon-reinsurance recoveries on paid claims in the second quarter of 2017 and a higher net benefit from curesprior year that did not recur and aging of existing delinquencies, partially offset by higherlower new delinquencies, primarily in commodity-dependent regions in the current year. The nine months ended September 30, 2017 included an increase of $3 million attributable to changes in foreign exchange rates.
Acquisition and operating expenses, net of deferrals, decreased primarily from a change in the classification of contract fees amortization expense, which we began recording to amortization of DAC and intangibles in the second quarter of 2017, as well as lower employee compensation and benefit expenses and a decrease in professional feescures, in the current year.
Amortization of DAC and intangibles increased as a result of a change in the classification oflargely from higher contract fees amortization expense that was previously recorded to acquisition and operating expenses, net of deferrals, as discussed above, and higher contract fees being amortized in the current year.
Provision for income taxes. The effective tax rate increaseddecreased to 33.5%30.0% for the ninesix months ended SeptemberJune 30, 20172018 from 32.4%33.6% for the ninesix months ended SeptemberJune 30, 2016.2017. The increasedecrease in the effective tax rate was primarily attributable to decreasedthe change from a worldwide tax benefits from lowersystem to a territorial system under the TCJA. As a result, we are now generally taxed foreign income in the current year.at our jurisdictional rate of 30%.
Australia Mortgage Insurance selected operating performance measures
Our mortgage insurance business in Australia currently has structured insurance transactions with two lenders where it is in a secondary loss position. The insurance portfolio metrics associated with these transactions, which include insurancein-force, riskin-force, new insurance written, loansin-force and delinquent loans, are excluded from the following tables. These arrangements represented approximately $159 million of riskin-force of our mortgage insurance business as of June 30, 2018.
The following tables set forth selected operating performance measures regarding our Australia Mortgage Insurance segment as of or for the dates indicated:
As of September 30, | Increase (decrease) and percentage change | As of June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Primary insurancein-force | $ | 252,200 | $ | 247,900 | $ | 4,300 | 2 | % | $ | 229,400 | $ | 247,700 | $ | (18,300 | ) | (7 | )% | |||||||||||||||
Riskin-force | 87,700 | 86,300 | 1,400 | 2 | % | $ | 79,900 | $ | 86,200 | $ | (6,300 | ) | (7 | )% |
Three months ended September 30, | Increase (decrease) and percentage change | Nine months ended September 30, | 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) | 2017 | 2016 | 2017 vs. 2016 | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
New insurance written | $ | 4,300 | $ | 4,600 | $ | (300 | ) | (7 | )% | $ | 14,100 | $ | 14,800 | $ | (700 | ) | (5 | )% | $ | 4,600 | $ | 4,700 | $ | (100 | ) | (2 | )% | $ | 8,000 | $ | 9,800 | $ | (1,800 | ) | (18 | )% | ||||||||||||||||||||||||||||
Net premiums written | 56 | 57 | (1 | ) | (2 | )% | 168 | 169 | (1 | ) | (1 | )% | $ | 56 | $ | 58 | $ | (2 | ) | (3 | )% | $ | 116 | $ | 112 | $ | 4 | 4 | % |
Primary insurancein-force and riskin-force
Our mortgage insurance business in Australia currently provides 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our riskin-force, we have computed an “effective” riskin-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 riskin-force has been calculated by applying to insurancein-force a factor that represents our highest expected averageper-claim payment for any one underwriting year over the life of our business in Australia. For the three and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, this factor was
35%. We also have certain risk share arrangements where we providepro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicablepro-rata coverage amount provided is used when applying the factor. In addition, Australia currently providesexcess-of-loss reinsurance coverage with one lender. The insurancein-force and riskin-force associated with this reinsurance agreement are excluded from the above metrics as they are insignificant in relation to the rest of the portfolio.
Primary insurancein-force and riskin-force increaseddecreased primarily from increasesdue to portfolio seasoning and lower production volumes over the past year. Primary insurancein-force and riskin-force included decreases of $5.8$8.9 billion and $2.0$3.1 billion, respectively, from changes in foreign exchange rates.
New insurance written
New insurance written decreased for the three and ninesix months ended SeptemberJune 30, 20172018 mainly attributable to lower market penetration from a change in customer mix, partially offset by higher bulk mortgage insurance written.customers’ lower market share and continued regulatory changes focused on lending standards, investment lending and serviceability. The three and ninesix months ended SeptemberJune 30, 20172018 included increasesan increase of $200 million and $500 million, respectively, attributable to changes in foreign exchange rates.
Net premiums written
Most of our Australian mortgage insurance policies provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premiums earned over time in accordance with the expected pattern of risk emergence. As of SeptemberJune 30, 2017,2018, our unearned premium reserves were $852 million,$1.1 billion, compared to $922$856 million as of SeptemberJune 30, 2016.2017. The increase in unearned premiums was primarily related to a review of our premium earnings pattern in the fourth quarter of 2017, which resulted in higher unearned premiums of $468 million. The change in unearned premium reserves included an increasea decrease of $19$45 million attributable to changes in foreign exchange rates.
Net premiums written decreased slightly for the three and nine months ended SeptemberJune 30, 20172018 primarily from lower market penetration from a change in customer mix. The three and nineNet premiums written increased for the six months ended SeptemberJune 30, 2017 included increases2018 from a new structured insurance transaction completed in the first quarter of $2 million and $5 million, respectively, attributable to changes2018, partially offset by lower market penetration from a change in foreign exchange rates.customer mix.
Loss and expense ratios
The following table sets forth the loss and expense ratios for our Australia Mortgage Insurance segment for the periods indicated:
Three months ended September 30, | Increase (decrease) | Nine months ended September 30, | Increase (decrease) | Three months ended June 30, | Increase (decrease) | Six months ended June 30, | Increase (decrease) | |||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 vs. 2016 | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | 2018 | 2017 | 2018 vs. 2017 | |||||||||||||||||||||||||||||||||||||
Loss ratio | 37 | % | 42 | % | (5 | )% | 35 | % | 35 | % | — | % | 28 | % | 34 | % | (6 | )% | 29 | % | 34 | % | (5 | )% | ||||||||||||||||||||||||
Expense ratio (net earned premiums) | 37 | % | 31 | % | 6 | % | 35 | % | 31 | % | 4 | % | 27 | % | 34 | % | (7 | )% | 28 | % | 34 | % | (6 | )% | ||||||||||||||||||||||||
Expense ratio (net premiums written) | 51 | % | 48 | % | 3 | % | 49 | % | 46 | % | 3 | % | 50 | % | 46 | % | 4 | % | 48 | % | 48 | % | — | % |
The loss ratio is the ratio of incurred lossesbenefits and loss adjustment expensesother changes in policy reserves to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our mortgage insurance business in Australia, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of DAC and intangibles.
The loss ratio decreased for the three and six months ended SeptemberJune 30, 2018 primarily from higher earned premiums from updated premium recognition factors from the review of our premium earnings pattern in the fourth quarter of 2017 largely attributable to lower new delinquencies, net of cures, and improved aging of existing delinquencies primarily in commodity-dependent regionsfrom higher policy cancellations, partially offset by higher losses in the current year. The loss ratioincrease in losses was flat for the nine months ended September 30, 2017 as higher new delinquencies predominantly in commodity-dependent regions and lower net earned premiums were offset bylargely attributable to $6 million of favorablenon-reinsurance recoveries on paid claims and higher net benefits from curesin the prior year that did not recur and aging of existing delinquencies, partially offset by lower new delinquencies, net of cures, in the current year.
The expense ratio (net earned premiums) increaseddecreased for the three and six months ended SeptemberJune 30, 20172018 primarily from lowerhigher net earned premiums and for the nine months ended September 30, 2017 primarily from lower net earned premiums and fromas discussed above, partially offset by higher contract fees being amortizedamortization in the current year.
The expense ratio (net premiums written) increased for the three and nine months ended SeptemberJune 30, 20172018 primarily due to higher contract fees being amortized andfrom lower net premiums written as discussed above and higher contract fees amortization in the current year. The expense ratio (net premiums written) remained flat for the six months ended June 30, 2018 as higher net premiums written were offset by higher contract fees amortization in the current year.
Delinquent loans
The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our Australia mortgage insurance portfolio as of the dates indicated:
September 30, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||||||||||||
Primary insured loansin-force | 1,422,501 | 1,464,139 | 1,470,302 | 1,354,614 | 1,416,525 | 1,438,100 | ||||||||||||||||||
Delinquent loans | 7,146 | 6,731 | 6,844 | 7,306 | 6,696 | 7,285 | ||||||||||||||||||
Percentage of delinquent loans (delinquency rate) | 0.50 | % | 0.46 | % | 0.47 | % | 0.54 | % | 0.47 | % | 0.51 | % | ||||||||||||
Flow loansin-force | 1,308,998 | 1,354,616 | 1,358,286 | 1,247,229 | 1,303,928 | 1,325,477 | ||||||||||||||||||
Flow delinquent loans | 6,912 | 6,451 | 6,574 | 7,076 | 6,476 | 7,007 | ||||||||||||||||||
Percentage of flow delinquent loans (delinquency rate) | 0.53 | % | 0.48 | % | 0.48 | % | 0.57 | % | 0.50 | % | 0.53 | % | ||||||||||||
Bulk loansin-force | 113,503 | 109,523 | 112,016 | 107,385 | 112,597 | 112,623 | ||||||||||||||||||
Bulk delinquent loans | 234 | 280 | 270 | 230 | 220 | 278 | ||||||||||||||||||
Percentage of bulk delinquent loans (delinquency rate) | 0.21 | % | 0.26 | % | 0.24 | % | 0.21 | % | 0.20 | % | 0.25 | % |
Flow loansin-force decreased primarily from policy cancellations. Flow delinquent loans increased primarily from higher new delinquencies primarily as a result of economic pressureslower cures in commodity-dependent regions.the current year.
Primary insurance delinquency rates differ by the various states and territories of Australia at any one time depending upon economic conditions and cyclical growth patterns. The table below sets forth our primary delinquency rates for the states and territories of Australia by our riskin-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.
Percent of primary riskin-force as of September 30, 2017 | Delinquency rate | Percent of primary riskin-force as of June 30, 2018 | Delinquency rate | |||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||||||||||||||||||||
By state and territory: | ||||||||||||||||||||||||||||||||
New South Wales | 28 | % | 0.31 | % | 0.30 | % | 0.32 | % | 28 | % | 0.37 | % | 0.31 | % | 0.32 | % | ||||||||||||||||
Queensland | 23 | 0.72 | % | 0.66 | % | 0.67 | % | 23 | 0.73 | % | 0.67 | % | 0.72 | % | ||||||||||||||||||
Victoria | 23 | 0.39 | % | 0.38 | % | �� | 0.39 | % | 23 | 0.42 | % | 0.37 | % | 0.41 | % | |||||||||||||||||
Western Australia | 12 | 0.88 | % | 0.74 | % | 0.69 | % | 12 | 0.99 | % | 0.83 | % | 0.86 | % | ||||||||||||||||||
South Australia | 6 | 0.65 | % | 0.61 | % | 0.62 | % | 6 | 0.67 | % | 0.60 | % | 0.65 | % | ||||||||||||||||||
Australian Capital Territory | 3 | 0.19 | % | 0.17 | % | 0.20 | % | 3 | 0.18 | % | 0.14 | % | 0.20 | % | ||||||||||||||||||
Tasmania | 2 | 0.38 | % | 0.35 | % | 0.37 | % | 2 | 0.34 | % | 0.32 | % | 0.37 | % | ||||||||||||||||||
New Zealand | 2 | 0.06 | % | 0.07 | % | 0.10 | % | 2 | 0.06 | % | 0.04 | % | 0.08 | % | ||||||||||||||||||
Northern Territory | 1 | 0.50 | % | 0.36 | % | 0.33 | % | 1 | 0.61 | % | 0.48 | % | 0.44 | % | ||||||||||||||||||
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Total | 100 | % | 0.50 | % | 0.46 | % | 0.47 | % | 100 | % | 0.54 | % | 0.47 | % | 0.51 | % | ||||||||||||||||
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Delinquency rates increased in the current year compared to December 31, 20162017 and SeptemberJune 30, 2016 primarily2017 mainly from decreased flow loansin-force as a result of higher new delinquencies attributable to economic pressures, particularlypolicy cancellations and lower cure rates in commodity-dependent regions.the current year.
U.S. Life Insurance segment
Trends and conditions
Results of our U.S. life insurance businesses depend significantly upon the extent to which our actual future experience is consistent with assumptions and methodologies we have used in calculating our reserves. Many factors can affect the reserves in our U.S. life insurance businesses. Because these factors are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. We will continue to monitor our experience and assumptions closely and make changes to our assumptions and methodologies, as appropriate, for our U.S. life insurance products. Even small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our DAC amortization, reserve levels, results of operations and financial condition.
We perform loss recognition testing to ensure that the current reserves along with the present value of future gross premiums are sufficient to cover the present value of future expected claims and expense, as well as recover the unamortized portion of DAC and, if any, PVFP. If the loss recognition test indicates a deficiency in the ability to pay all future claims and expenses, including the amortization of DAC and PVFP, a loss is recognized in earnings as an impairment of the DAC and/or PVFP balance and, if the loss is greater than the DAC and/or PVFP balance, by an increase in reserves. Our liability for policy and contract claims is reviewed quarterly and we conduct a review of our claim reserve assumptions for our long-term care insurance business annually typically during the third quarter of each year. We plan to perform our annual review of claim reserve assumptions for our long-term care insurance business in the third or fourth quarter of 2018. See “Long-term care insurance” below for more details. Our liability for future policy benefits is reviewed at least annually as a part of our loss recognition testing typically performed in the third or fourth quarter of each year. As part of loss recognition testing, we also review the recoverability of DAC and PVFP at least annually. In addition, we perform cash flow testing separately for each of our U.S. life insurance companies on a statutory accounting basis annually. We performed our annual review of claim reserve assumptions for our long-term care insurance business in the third quarter of 2017. In the fourth quarter of 2017,2018, we will perform assumption reviews for our universal and term universal life insurance products as well as for our other U.S. life insurance products, including our long-term care insurance products, and complete our loss recognition testing. For our acquired block of long-term care insurance business and our fixed immediate annuity products, we monitor these blocks more frequently than annually given the premium deficiencies that existed in previous periods. In addition, given the low margin of our term and whole life insurance products, excluding our acquired block, as of December 31, 2017, we monitor this block more frequently than annually.
Our U.S. Life Insurance segment will continue to migrate to a new valuation and projection platform for certain lines of business, while we upgrade platforms for other lines of business. The migration and upgrades are part of our ongoing efforts to improve the infrastructure and capabilities of our information systems and our routine assessment and refinement of financial, actuarial, investment and risk management capabilities and processes enterprise wide. These efforts will also provide our U.S. Life Insurance segment with improved platforms to support emerging accounting guidance and ongoing changes in capital regulations. Concurrently, valuationactuarial processes and methodologies will be reviewed, and may result in additional refinements to our models and/or assumptions. Any material changes in balances, margins or income trends that may result from these activities will be disclosed accordingly. In addition, weWe intend to continue to enhancedeveloping our modeling capabilities ofin our various businesses, including for our long-term care insurance projections where we migrated to a new modeling system for the majority of ourlong-term care insurance business in the fourth quarter of 2016. We anticipate migrating substantially all of our retained long-term care insurance business to this new modeling system by the end ofin 2016 and 2017. The new modeling system will valuevalues and forecastforecasts associated liability cash flows and policyholder behavior at a more granular level than our currentprevious system.
One of our strategic objectives is to separate, then isolate, through a series of internal transactions, ourlong-term care insurance business from our other U.S. life insurance businesses. Our goal under the plan has been to align substantially all of our non-New Yorkin-force life insurance and annuity business under GLAIC, our Virginia domiciled life insurance company, and substantially all of our non-New York long-term care insurance business under GLIC, our Delaware domiciled life insurance company. As part of this strategic objective, effective April 1, 2017, GLAIC assumed risk on a coinsurance basis for certain blocks of term life insurance, universal life insurance and single premium whole life insurance from GLIC. Effective July 1, 2017, GLIC recaptured certain single premium deferred annuity products previously ceded to GLAIC. In addition,
effective July 1, 2017, GLAIC assumed risk on a modified coinsurance basis for certain blocks of fixed annuities, including those single premium deferred annuity products recaptured by GLIC, and certain corporate-owned life insurance policies from GLIC. As a result, there was an adverse impact on GLIC’s risk-based capital ratio of approximately 15 points in the third quarter of 2017. However, the internal transactions had no impact on our consolidated results of operations and financial condition prepared in accordance with U.S. GAAP as the financial impact of the intercompany reinsurance was eliminated in consolidation. These transactions complete our goal to align substantially all of our non-New Yorkin-force life insurance and annuity business under GLAIC and substantially all of our non-New York long-term care insurance business under GLIC. All of these transactions were also required under the Merger Agreement with China Oceanwide. The reinsurance treaties effective July 1, 2017 include provisions that require us to unwind or void these treaties in the event the merger transaction with China Oceanwide is terminated.
In addition, a Genworth holding company will pursue the purchase of GLAIC from GLIC at fair market value, subject to applicable regulatory approvals. Together with the internal reinsurance transactions completed in April 2017 and July 2017, finalization of the GLAIC sale, if completed, would isolate our non-New York long-term care insurance business from our other non-New York U.S. life insurance businesses and achieve this strategic objective.
Results of our U.S. life insurance businesses are also impacted by interest rates. The continued low interest rate environment puts pressure on the profitability and returns of these businesses as higher yielding investments have matured and been replaced with lower-yielding investments. We seek to manage the impact of low interest rates through asset-liability management as well as interest rate hedging strategies for a portion of our long-term care insurance product cash flows. Additionally, certain products have implicit and explicit rate guarantees or
optionality that are significantly impacted by changes in interest rates. For a further discussion of the impact of interest rates on our U.S. life insurance businesses, see “Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in our 20162017 Annual Report on Form10-K.
As previously disclosed, the TCJA effective in December 2017 had an immediate impact on the capital of our life insurance subsidiaries through a reduction in the statutory admitted deferred tax assets and an impact to certain cash flow scenario testing included in the risk-based capital (“RBC”) calculation of those subsidiaries in 2017. On June 28, 2018, the National Association of Insurance Commissioners (“NAIC”) Capital Adequacy Task Force adopted proposed changes to the RBC calculation effective for the year ending December 31, 2018 as a result of tax reform which will negatively impact the RBC ratio for our life insurance subsidiaries. Any future revisions to the factors used for calculating the RBC ratio of insurance companies could increase the RBC amount and result in a further reduction in our life insurance subsidiaries’ RBC ratios. Additionally, any future increases in our statutory reserves, including as a result of Actuarial Guideline 38 or cash flow testing results, could decrease the RBC ratio of our life insurance subsidiaries. Further declines in the RBC ratio of our life insurance subsidiaries could adversely affect their financial strength ratings.
Long-term care insurance
Results of our long-term care insurance business are influenced primarily by sales,our ability to achievein-force rate actions, morbidity, mortality, persistency, investment yields, expenses, ability to achieve rate actions,sales, changes in regulations and reinsurance. Sales of our products are impacted by the relative competitiveness of our ratings, product features, pricing and commission levels and the impact ofin-force rate actions on distribution and consumer demand. Changes in regulations or government programs, including long-term care insurance rate action legislation, could impact our long-term care insurance business either positively or negatively.
Our liability for policy and contract claims is reviewed quarterly and we conduct a detailed review of our claim reserve assumptions for our long-term care insurance business annually typically during the third quarter of each year. DuringWe plan to perform our annual review of claim reserve assumptions for our long-term care insurance business in the third or fourth quarter of 2018. We expect our quarterly long-term care insurance results for the remainder of 2018 to be pressured by less favorable claim termination rates, benefit utilization trends and new claims as the blocks continue to age. The claims utilization developments of policyholders using more of their daily benefits than previously expected will likely impact our claim reserves. However, the work on this assumption, as well as other assumptions, is not yet complete, and we plan to finish this work in the third or fourth quarter. Accordingly, we will not have an estimate of any impact on the claim reserves until the work is finalized. As previously disclosed, during the third quarter of 2017, we reviewed our assumptions and methodologies relating to our claim reserves of our long-term care insurance business but did not make any significant changes to the assumptions or methodologies, other than routine updates to investment returns and benefit utilization rates as we typically do each quarter. TheseThe updates in the third quarter of 2017 did not have a significant impact on claim reserve levels. During the third quarter of 2016, we completed our annual review of assumptions and methodologies related to our long-term care insurance claim reserves, which resulted
As previously disclosed, in recording higher claim reserves of $460 million and reinsurance recoverables of $25 million. We updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves.
In the fourth quarter of 2016,2017, we performed assumption reviews and completed our loss recognition and cash flow testing. We incorporated the assumption and methodology changes made in the third quarter of 2016 into these tests. These changes had a material negative impact on the margins of our long-term care insurance block, excluding the acquired block. The acquired block has a higher percentage of indemnity policies and was positively affected by the new claim assumptions. As a part of the process, we considered incremental benefits from expected future rate actions that helped mitigate the impact of these changes. As part of the annual testing, we also reviewed assumptions for
incidence and interest rates, among other assumptions.assumptions, and considered incremental benefits from expected futurein-force rate actions. As of December 31, 2017, our loss recognition testing margins for our long-term care insurance business, excluding the acquired block, were positive but were reduced from the 2016 levels as a result of higher costs relating primarily to higher expected future incidence of claims, partially offset by the higher modeled benefit of planned futurein-force rate actions. We continue to test our acquired block of long-term care insurance separately. In 2017, our loss recognition testing margin for the acquired block was positive and consistent with 2016 levels. In the first half of 2018, seasonally higher claim terminations have been offset by higher benefit payments with unfavorable benefit utilization experience, driven in part by older duration claims with lifetime benefits. We will continue to regularly review our methodologies and assumptions in light of emerging experience and may be required to make further adjustments to our long-term care insurance claim reserves in the future, which could also impact our loss recognition and cash flow testing results. As of December 31, 2016, our loss recognition testing margins for our long-term care insurance business were positive but were significantly reduced from the 2015 levels. In the fourth quarter of 2017, we will perform assumption reviews and complete our loss recognition testing for our long-term care insurance products. We have observed a higher incidence of claim on policies with lifetime, or unlimited, benefits and will consider this as we complete our 2017 loss recognition testing.
Our assumptions are sensitive to slight variability in actual experience and small changes in assumptions could result in decreases in the margin of our long-term care insurance block, excluding the acquired block to decreaseblocks to at/or below zero in future years. To the extent, based on reviews, the margin of our marginlong-term care insurance block, excluding the acquired block, is negative, we would be required to recognize a loss, by amortizing more DAC and/or establishing additional benefit reserves, the impact of which may be material.reserves. In the event a loss is recognized, we would increase reserves to offset such losses that would be recognized in later years. For our acquired block of long-term care insurance, the impacts of adverse changes in assumptions would also be reflected as a loss if our margin for this block is reduced below zero by establishing additional benefit reserves. A significant decrease in our loss recognition testing margin the need to amortize a significant amount of DAC and/or the need to significantly increase reservesour long-term care insurance blocks could have a material adverse effect on our business, results of operations and financial condition.
As a result of our annual statutory cash flow testing in the fourth quarter of 2016, GLICNY, our insurance subsidiary domiciled in New York, did not require any additional statutory reserves. However, in the second quarter of 2017, the New York Department of Financial Services required GLICNY to record an additional $58 million of statutory long-term care insurance reserves related to cash flow testing. GLICNY now currently expects to record an aggregate of approximately $178 million of additional statutory reserves over the next 15 months.
In connection with the updated assumptions and methodologies that increased claim reserves on existing claims in our 2016 review, we now establish higher claim reserves on new claims, which decreased earnings in 2017 and the first half of 2018 and we expect will decrease earnings in future periods in which thegoing forward as higher reserves are recorded. Additionally, average claim reserves for new claims are higher as the mix of claims continues to evolve, with an increasing number of policies with higher daily benefit amounts, unlimited benefit pools and higher inflation factors going on claim. Also, we expect growth in new claims as our blocks of business continue to age. In addition, premiums will declinebe negatively impacted as policies terminate from mortality and lapses.
We experience volatility in our loss ratios caused by variances in policy terminations, claim terminations, claim severity and claim counts. Our approved premiumin-force rate actions may also cause fluctuations in our loss ratios during the period when reserves are adjusted to reflect policyholders taking reduced benefits ornon-forfeiture options within their policy coverage. In addition, we periodically review our reserve assumptions and methodologies based upon developing experience, which may result in changes to claim reserves and loss recognition testing results, causing volatility in our operating results and loss ratios. Our loss ratio for the ninesix months ended SeptemberJune 30, 2018 and 2017 was 74% compared to 94% for the nine months ended September 30, 2016. The loss ratio for the nine months ended September 30, 2016 reflected the updated assumptions79% and methodologies from our annual review72%, respectively.
As a result of claim reserve assumptions completed in the third quarter of 2016.
Our long-term care insurance sales decreased 50% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Sales decreased primarily due to our lower ratings. We expect that our sales will continue to be adversely impacted by our current ratings. Future adverse ratings announcements or actions could negatively impact our sales levels further.
Despite our low sales levelsongoing challenges in our long-term care insurance business, givenwe continue pursuing initiatives to improve the risk and profitability profile of our business including: premium rate increases and associated benefit reductions on ourin-force policies; product refinements; changes to our current ratings,product offerings in certain states; new distribution strategies; refining underwriting requirements; managing expense levels; actively exploring additional reinsurance strategies; executing investment strategies targeting higher returns; enhancing our financial and actuarial analytical capabilities; and considering other actions to improve the performance of the overall business. These efforts include a plan for significant futurein-force premium rate increases. For an update on rate actions, refer to “—Significant Developments—U.S. Life Insurance.” As of June 30, 2018, we have suspended sales in Hawaii, Massachusetts, New Hampshire, Vermont and Montana, and will consider taking similar actions in the future, in other states where we are unable to obtain satisfactory rate increases onin-force policies and/or unable to obtain approval for new products. We will also consider litigation against states that decline actuarially justified rate increases. As of June 30, 2018, we were in litigation with one state that has refused to approve actuarially justifiedin-force rate actions. The approval process forin-force premium rate increases and the amount and timing of the rate increases approved vary by state. In certain states, the decision to approve or disapprove a rate increase can take a significant amount of time. After approval, insureds are provided with written notice of the increase and increases are generally applied on the insured’s next policy anniversary date. As a result, the benefits of any rate increase are not fully realized until the implementation cycle is complete and are, therefore, expected to be realized over time.
The TCJA signed into law on December 22, 2017 reduced the U.S. corporate federal income tax rate to 21% effective for taxable years beginning on January 1, 2018. Therefore, beginning on January 1, 2018, our U.S. Life Insurance segment is taxed at the new enacted tax rate of 21%. However, gains on forward starting swaps settled prior to the enactment of the TCJA will continue to evaluate new products. For example, we previously launched an enhanced product to improve competitiveness, while meetingbe taxed at 35% as they are amortized into net investment income. This will negatively impact our targeted returns, by, among other things, reducing premium rates, benefit levels and adjusting other coverage options. In support of this product, we are investing in targeted distribution and marketing initiatives to increase long-term care insurance sales. In addition, webusiness given the majority of our forward starting swaps are evaluating market trends and sales and investing in the development of products and distribution strategies that we believe will help expand the long-term care insurance market over time and meet broader consumer needs.this business.
We also manage risk and capital allocated to our long-term care insurance business through utilization of external reinsurance in the form of coinsurance. We executed external reinsurance agreements to reinsure 20% of all sales of our individual long-term care insurance products that have been introduced since early 2013. External new business reinsurance levels vary and areis dependent on a number of factors, including price, availability, risk tolerance and capital levels. Over time, there can be no assurance that affordable, or any, reinsurance will continue to be available. We also have external reinsurance on some older blocks of business which includes a treaty on a yearly renewable term basis on business that was written between 1998 and 2003. This yearly renewable term reinsurance provides coverage for claims on those policies for 15 years after the policy was written. After 15 years, reinsurance coverage ends for policies not on claim, while reinsurance coverage continues for policies on claim until the claim ends. The15-year coverage on the policies written in 2003 will expire in 2018; therefore, any new claims will not have reinsurance coverage under this treaty. Since 2013, we have seen, and may continue to see, an increase in our benefit costs as policies with reinsurance coverage exhaust their benefits or terminate and policies which are not covered by reinsurance go on claim.
As a resultSales of ongoing challengesour long-term care insurance business remain low due to our current ratings. Additionally, effective April 1, 2018, we suspended sales of our long-term care insurance products in Florida which could reduce sales levels further.
Despite our low sales levels in our long-term care insurance business and our current ratings, we continue pursuingto evaluate new products. For example, we previously launched an enhanced product to improve competitiveness, while meeting our targeted returns, by, among other things, reducing premium rates, benefit levels and adjusting other coverage options. In support of this product, we are investing in targeted distribution and marketing initiatives to improve the riskincrease long-term care insurance sales. In addition, we are evaluating market trends and profitability profile of our business including: premium rate increasessales and associated benefit reductions on ourin-force policies; product refinements; changes to our current product offerings in certain states; new distribution strategies; refining underwriting requirements; managing expense levels; actively exploring additional reinsurance strategies; executing investment strategies targeting higher returns; enhancing our financial and actuarial analytical capabilities; and considering other actions to improve the performance of the overall business. These efforts include a plan for significant futurein-force premium rate increases on issued policies. For an update on rate actions, refer to “—Significant Developments—U.S. Life Insurance.” We have suspended sales in Hawaii, Massachusetts, New Hampshire and Vermont, and will consider taking similar actionsinvesting in the future, in other states wheredevelopment of products and distribution strategies that we are unable to obtain satisfactory rate increases onin-force policies and/or unable to obtain approval for new products. Webelieve will also consider litigation against states that decline actuarially justified rate increases. We are currently in litigation with one state that has refused to approve actuarially justified rate actions. The approval process forin-force premium rate increases andhelp expand the amount and timing of the rate increases approved vary by state. In certain states, the decision to approve or disapprove a rate increase can take several years. Upon approval, insureds are provided with written notice of the increase and increases are generally applied on the insured’s next policy anniversary date. As a result, the benefits of any rate increase are not fully realized until the implementation cycle is complete and are, therefore, expected to be realized over time. We previously expected the remaining quarterly income benefits of our in-force rate actions, in aggregate, to be lower in 2017 than the levels we experienced in 2016 as the implementation of certain rate increase approvals were largely completed in the third quarter of 2016. However, during 2017, quarterly income benefits of our in-force rate actions have increased sequentially each quarter. We now expect the 2017 income benefits of the in-force rate actions, in aggregate, to be above those recognized in 2016.
The Pennsylvania Insurance Commissioner (the “Commissioner”) previously placed long-term care insurer Penn Treaty in rehabilitation, an intermediate action before insolvency,insurance market over time and subsequently petitioned a state court to convert the rehabilitation into a liquidation. On November 9, 2016, the state court held a hearing on the Commissioner’s petition to convert the rehabilitation into liquidation with no objections. As of December 31, 2016, the liquidation order had not been entered and as a result, we were unable to estimate when or to what extent Penn Treaty would ultimately be declared insolvent, or the amount of the insolvency and we did not establish an accrual for guaranty fund assessments associated with Penn Treaty as of December 31, 2016. However, on March 1, 2017, the Pennsylvania Commonwealth Court approved petitions to liquidate Penn Treaty due to financial difficulties that could not be resolved through rehabilitation. In the first quarter of 2017, we received guaranty fund assessments related to Penn Treaty and recorded an accrual of $21 million.meet broader consumer needs.
Life insurance
Results of our life insurance business are impacted primarily by mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements, among other factors. As previously disclosed,Effective March 7, 2016, we suspended sales of our traditional life insurance products on March 7, 2016.products.
We review our life insurance assumptions at least annually typically in the third or fourth quarter of each year. In the fourth quarter of 2017, we performed assumption reviews and completed our loss recognition testing for our universal and term universal life insurance products. As part of our annualassumption review of assumptions in the fourth quarter of 2016, we reviewed our assumptions, including interest rate assumptions, with the benefit of updated experience and comparisons to industry experience, where appropriate. As part of this review, we implemented an updated mortality table for our life insurance products. This updated table improved our mortality rates in younger ages but deteriorated mortality rates in older ages. Mortality levels may deviate each period from historical trends. As a result of the updated assumptions,2017, we recorded $196$74 million ofafter-tax charges in our universal and term universal life insurance products in the fourth quarter of 2016 primarily reflecting thedriven by assumption changes due to emerging mortality experience deterioration in older age populations. We have also experienced a higher mortality trend in 2017 as policies have aged.well as adjustments from continued low interest rates. We will continue to regularly review our mortality assumptions as well as all of our other assumptions in light of emerging experience and may be required to make further adjustments to our universal and term universal life insurance reserves in the future, which could also impact our loss recognition testing results. Mortality levels may deviate each period from historical experience. In the fourth quarterfirst half of 2017,2018, we will perform assumption reviews and complete our loss recognition testing forexperienced higher mortality in our universal and term universal life insurance products.products than our current assumptions used for loss recognition testing. Any further materially adverse changes to our assumptions, including mortality, may have a materially negative impact on our results of operations, financial condition and business. In connection with the updated assumptions from our reviews in prior years, we expect to establish higher reserves, which will decrease earnings in future periods.
Between 1999 and 2009, we had a significant increase in term life insurance sales, as compared to 1998 and prior years. As our15-year term life insurance policies written in 1999 and 2000 transitionhave transitioned to their post-levelpost guaranteed level premium rate period, we have experienced lower persistency compared to our pricing and valuation assumptions. The blocks of business issued since 2000 vary in size as compared to the 1999 and 2000 blocks of business. Accordingly, in the future, as additional10-,15- and20-year level premium period blocks
enter their post-levelpost guaranteed level premium rate period, we may experience volatility in DAC amortization, premiums and mortality experience, which may reduce profitability or create losses in our term life insurance products, in amounts that could be material, if persistency iscontinues to be lower than our original assumptions as it has been on our10- and15-year business written in 1999 and 2000. In 2017 and the first half of 2018, we have experienced higher lapses and accelerated DAC amortization associated with our large15-year and20-year term life insurance blocks entering their post-levelpost guaranteed level premium rate periods. We anticipate this trend will continue with accompanying higher DAC amortization and lower profitability as larger blocks reach the end of their level premium periods through 2020.2020, especially for our 2000 block, and will continue as our other blocks reach their post guaranteed level premium rate period. As of SeptemberJune 30, 2017,2018, our term life insurance products had a DAC balance of $1.4$1.3 billion. We have also taken actions to mitigate potentially unfavorable impacts through the use of reinsurance, particularly for certain term life insurance policies issued between 2001 and 2004.
Fixed annuities
Results of our fixed annuities business are affected primarily by investment performance, interest rate levels, the slope of the interest rate yield curve, net interest spreads, equity market conditions, mortality, persistency, and expense and commission levels, and competitor actions. As previously disclosed,levels. Effective March 7, 2016, we suspended sales of our traditional fixed annuity products on March 7, 2016.products.
We monitor and change crediting rates on fixed annuities on a regular basis to maintain spreads and targeted returns.returns, if applicable. However, if interest rates remain at current levels or decrease further, we could see declines in spreads which impact the margins on our products, particularly our fixed immediate annuity products. Beginning in the second quarter of 2016, our loss recognition testing resulted in a premium deficiency on our fixed immediate annuity products driven by the low interest rate environment. Due to the premium deficiency that existed in 2016 and the current low interest rate environment, we continue to monitor our fixed immediate annuity products more frequently than annually and have recorded additional charges in each quarter ofduring 2017. However, for the six months ended June 30, 2018, we have not recorded any additional charges. If interest rates remain at the current levels or increase at a slower pace than we assumed, we could incur additional charges in the future. The impacts of future adverse changes in our assumptions would result in the establishment of additional future policy benefit reserves and would be immediately reflected in net income (loss)as a loss if our margin for this block is again reduced below zero. Any favorable variation would result in additional margin but no immediate benefit to income (loss), and would result in higher income recognition over the remaining duration of thein-force block.
For fixed indexed annuities, equity market performance and volatility could also result in additional gains or losses, although associated hedging activities are expected to partially mitigate these impacts.
Segment results of operations
Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:
Three months ended September 30, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 748 | $ | 725 | $ | 23 | 3 | % | $ | 712 | $ | 736 | $ | (24 | ) | (3 | )% | |||||||||||||||
Net investment income | 683 | 695 | (12 | ) | (2 | )% | 707 | 694 | 13 | 2 | % | |||||||||||||||||||||
Net investment gains (losses) | 27 | 21 | 6 | 29 | % | (10 | ) | 57 | (67 | ) | (118 | )% | ||||||||||||||||||||
Policy fees and other income | 154 | 175 | (21 | ) | (12 | )% | 169 | 170 | (1 | ) | (1 | )% | ||||||||||||||||||||
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Total revenues | 1,612 | 1,616 | (4 | ) | — | % | 1,578 | 1,657 | (79 | ) | (5 | )% | ||||||||||||||||||||
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Benefits and other changes in policy reserves | 1,255 | 1,556 | (301 | ) | (19 | )% | 1,163 | 1,163 | — | — | % | |||||||||||||||||||||
Interest credited | 128 | 140 | (12 | ) | (9 | )% | 116 | 129 | (13 | ) | (10 | )% | ||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 149 | 149 | — | — | % | 146 | 144 | 2 | 1 | % | ||||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 50 | 69 | (19 | ) | (28 | )% | 78 | 101 | (23 | ) | (23 | )% | ||||||||||||||||||||
Interest expense | 3 | 2 | 1 | 50 | % | 4 | 3 | 1 | 33 | % | ||||||||||||||||||||||
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Total benefits and expenses | 1,585 | 1,916 | (331 | ) | (17 | )% | 1,507 | 1,540 | (33 | ) | (2 | )% | ||||||||||||||||||||
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Income (loss) from continuing operations before income taxes | 27 | (300 | ) | 327 | 109 | % | ||||||||||||||||||||||||||
Provision (benefit) for income taxes | 10 | (106 | ) | 116 | 109 | % | ||||||||||||||||||||||||||
Income from continuing operations before income taxes | 71 | 117 | (46 | ) | (39 | )% | ||||||||||||||||||||||||||
Provision for income taxes | 21 | 41 | (20 | ) | (49 | )% | ||||||||||||||||||||||||||
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Income (loss) from continuing operations | 17 | (194 | ) | 211 | 109 | % | ||||||||||||||||||||||||||
Adjustments to income (loss) from continuing operations: | ||||||||||||||||||||||||||||||||
Income from continuing operations | 50 | 76 | (26 | ) | (34 | )% | ||||||||||||||||||||||||||
Adjustments to income from continuing operations: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses, net (1) | (28 | ) | (21 | ) | (7 | ) | (33 | )% | 9 | (57 | ) | 66 | 116 | % | ||||||||||||||||||
Expenses related to restructuring | — | 1 | (1 | ) | (100 | )% | ||||||||||||||||||||||||||
Taxes on adjustments | 10 | 7 | 3 | 43 | % | (2 | ) | 20 | (22 | ) | (110 | )% | ||||||||||||||||||||
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Adjusted operating loss available to Genworth Financial,Inc.’s common stockholders | $ | (1 | ) | $ | (207 | ) | $ | 206 | 100 | % | ||||||||||||||||||||||
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | $ | 57 | $ | 39 | $ | 18 | 46 | % | ||||||||||||||||||||||||
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(1) | For the three months ended |
The following table sets forth adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the businesses included in our U.S. Life Insurance segment for the periods indicated:
Three months ended September 30, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Long-term care insurance | $ | (5 | ) | $ | (270 | ) | $ | 265 | 98 | % | $ | 22 | $ | 33 | $ | (11 | ) | (33 | )% | |||||||||||||
Life insurance | (9 | ) | 48 | (57 | ) | (119 | )% | 4 | (1 | ) | 5 | NM | (1) | |||||||||||||||||||
Fixed annuities | 13 | 15 | (2 | ) | (13 | )% | 31 | 7 | 24 | NM | (1) | |||||||||||||||||||||
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Total adjusted operating loss available to Genworth Financial, Inc.’s common stockholders | $ | (1 | ) | $ | (207 | ) | $ | 206 | 100 | % | ||||||||||||||||||||||
Total adjusted operating income available to Genworth Financial, Inc.’s common stockholders | $ | 57 | $ | 39 | $ | 18 | 46 | % | ||||||||||||||||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders
Our long-term care insurance business decreased $11 million predominantly from higher severity and frequency of new claims and $13 million of favorable reserve corrections, net of an adjustment for profits followed by loss reserves, associated with recorded initial claim dates in the prior year that did not recur. These decreases were partially offset by higher earnings from our acquired block of long-term care insurance business and an increase in investment income in the current year.
Our life insurance business had adjusted operating lossincome available to Genworth Financial, Inc.’s common stockholders for ourlong-term care insurance decreased $265of $4 million predominantly attributable to higher claim reserves of $283 million as a result of the completion of our annual review of our claim reserves conducted during the third quarter of 2016, partially offset by higher severity on new claims in the current year. The current year also included $8 million of higher premiums and reduced benefits fromin-force rate actions approved and implemented.
Our fixed annuities business decreased $2increased $24 million predominantly frommainly attributable to higher reserves of $10 million related to loss recognition testing in our fixed immediate annuity products in the prior year that did not recur, favorable mortality, and lower investment income,interest credited and taxes, partially offset by lower interest creditedinvestment income in the current year. The prior year included an $8 million unfavorable correction related to state guaranty funds that did not recur.
Revenues
Premiums
Our long-term care insurance business increased $31$9 million largely from $21$16 million of increased premiums in the current year fromin-force rate actions approved and implemented.implemented, partially offset by policy terminations in the current year.
Our life insurance business decreased $8$33 million mainly driven byattributable to higher ceded premiums in the current year from new reinsurance treaties effective in December 2017 and the continued runoff of our term life insurance products including higher lapses primarily from our large15-year and20-year term life insurance blocks entering their post-level guaranteed premium rate periods, partially offset by lower reinsurance ceded in the current year.
Net investment income
Our long-term care insurance business increased $16$30 million largely from higher average invested assets due to growth of ourin-force block partially offset by lower reinvestment yields and $4 million of lower income related to inflation-driven volatility on U.S. Government Treasury Inflation Protected Securities (“TIPS”) in the current year.
Net investment gains (losses). The increase was driven largely by
Net investment gains in our long-term care insurance business predominantly from higherdecreased $41 million primarily related to lower net gains from the sale of investment securities in the current year.
Policy fees and other income. The decrease was mostly attributable to our
Our life insurance business primarily as a resulthad net investment losses of suspending sales$2 million in the current year compared to net investment gains of these products$5 million in the prior year. The current year net investment losses were mainly driven by losses from the sale of investment securities, partially offset by gains on March 7, 2016 and a decline inembedded derivatives associated with our term universal andindexed universal life insurancein-force blocks products. The prior year net investment gains related primarily to gains from the sale of investment securities.
Our fixed annuities business had net investment losses of $11 million in the current year. The decrease was also driven by anyear compared to gains of $8 million unfavorable model refinementin the prior year. Net investment losses in the current year.year were related to losses on
embedded derivatives associated with our fixed indexed annuity products, partially offset by derivative gains. Net investment gains in the prior year were driven predominantly by derivative gains and gains from the sale of investment securities, partially offset by losses on embedded derivatives associated with our fixed indexed annuity products. |
Benefits and expenses
Benefits and other changes in policy reserves
Our long-term care insurance business decreased $366increased $53 million principallymainly from aging and growth of thein-force block, higher severity and frequency of new claims, higher utilization of available benefits and a less favorable impact of $12 million from reduced benefits in the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher
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Interest credited. Interest credited decreased mostly driven by our fixed annuities business predominantly from lowera decline in average account values and lower crediting rates in the current year.
Acquisition and operating expenses, net of deferrals
Amortization of deferred acquisition costs and intangibles.The decrease in amortizationAmortization of DAC and intangibles was primarily relateddecreased mainly due to our life insurance business principally aslargely related to a result of a net $15$41 million favorable model refinementunfavorable term conversion mortality assumption correction in the prior year that did not recur and lower lapses in the current year. The decrease wasThese decreases were partially offset by higher amortizationan $11 million favorable refinement related to reinsurance rates in our term universal life insurance product reflecting previously updated lapse assumptions. In the currentprior year we have also experienced higher lapses and accelerated DAC amortization associated with our large15-year and20-year term life insurance blocks entering their post-level guaranteed level premium rate periods.that did not recur.
Provision for income taxes. The effective tax rate was 28.9% and 35.3% for the three months ended SeptemberJune 30, 2018 and 2017, and 2016.respectively. The decrease in the effective tax rate was primarily attributable to a reduction in the U.S. corporate federal income tax rate from 35% to 21%, partially offset by tax expense of $6 million in our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA, which will continue to be tax effected at 35% as they are amortized into net investment income.
NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:
Nine months ended September 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 2,242 | $ | 1,917 | $ | 325 | 17 | % | $ | 1,434 | $ | 1,494 | $ | (60 | ) | (4 | )% | |||||||||||||||
Net investment income | 2,058 | 2,049 | 9 | — | % | 1,395 | 1,375 | 20 | 1 | % | ||||||||||||||||||||||
Net investment gains (losses) | 91 | 119 | (28 | ) | (24 | )% | (2 | ) | 64 | (66 | ) | (103 | )% | |||||||||||||||||||
Policy fees and other income | 494 | 532 | (38 | ) | (7 | )% | 332 | 340 | (8 | ) | (2 | )% | ||||||||||||||||||||
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Total revenues | 4,885 | 4,617 | 268 | 6 | % | 3,159 | 3,273 | (114 | ) | (3 | )% | |||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 3,582 | 3,403 | 179 | 5 | % | 2,401 | 2,327 | 74 | 3 | % | ||||||||||||||||||||||
Interest credited | 389 | 427 | (38 | ) | (9 | )% | 235 | 261 | (26 | ) | (10 | )% | ||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 450 | 513 | (63 | ) | (12 | )% | 287 | 301 | (14 | ) | (5 | )% | ||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 221 | 231 | (10 | ) | (4 | )% | 149 | 171 | (22 | ) | (13 | )% | ||||||||||||||||||||
Interest expense | 9 | 35 | (26 | ) | (74 | )% | 8 | 6 | 2 | 33 | % | |||||||||||||||||||||
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Total benefits and expenses | 4,651 | 4,609 | 42 | 1 | % | 3,080 | 3,066 | 14 | — | % | ||||||||||||||||||||||
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Income from continuing operations before income taxes | 234 | 8 | 226 | NM | (1) | 79 | 207 | (128 | ) | (62 | )% | |||||||||||||||||||||
Provision for income taxes | 83 | 3 | 80 | NM | (1) | 27 | 73 | (46 | ) | (63 | )% | |||||||||||||||||||||
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Income from continuing operations | 151 | 5 | 146 | NM | (1) | 52 | 134 | (82 | ) | (61 | )% | |||||||||||||||||||||
Adjustments to income from continuing operations: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses, net | (93 | ) | (129 | ) | 36 | 28 | % | — | (65 | ) | 65 | 100 | % | |||||||||||||||||||
(Gains) losses from life block transactions | — | 9 | (9 | ) | (100 | )% | ||||||||||||||||||||||||||
Expenses related to restructuring | — | 19 | (19 | ) | (100 | )% | ||||||||||||||||||||||||||
(Gains) losses on sale of businesses | — | (1 | ) | 1 | 100 | % | ||||||||||||||||||||||||||
Taxes on adjustments | 33 | 36 | (3 | ) | (8 | )% | — | 23 | (23 | ) | (100 | )% | ||||||||||||||||||||
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Adjusted operating income (loss) available to Genworth Financial,Inc.’s common stockholders | $ | 91 | $ | (61 | ) | $ | 152 | NM | (1) | |||||||||||||||||||||||
Adjusted operating income available to Genworth Financial,Inc.’s common stockholders | $ | 52 | $ | 92 | $ | (40 | ) | (43 | )% | |||||||||||||||||||||||
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For the |
The following table sets forth adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the businesses included in our U.S. Life Insurance segment for the periods indicated:
Nine months ended September 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||||||||||||||||||
Long-term care insurance | $ | 42 | $ | (199 | ) | $ | 241 | 121 | % | $ | (10 | ) | $ | 47 | $ | (57 | ) | (121 | )% | |||||||||||||
Life insurance | 6 | 110 | (104 | ) | (95 | )% | 3 | 15 | (12 | ) | (80 | )% | ||||||||||||||||||||
Fixed annuities | 43 | 28 | 15 | 54 | % | 59 | 30 | 29 | 97 | % | ||||||||||||||||||||||
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Total adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 91 | $ | (61 | ) | $ | 152 | NM | (1) | |||||||||||||||||||||||
Total adjusted operating income available to Genworth Financial, Inc.’s common stockholders | $ | 52 | $ | 92 | $ | (40 | ) | (43 | )% | |||||||||||||||||||||||
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Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders
Our long-term care insurance business had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $42 million in the current year compared to an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $199$10 million in the current year compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $47 million in the prior year. The changedecrease to a loss in the current year from income in the prior year was predominantly attributable to higher claim reservesutilization of $283available benefits and higher severity and frequency of new claims in the current year. These decreases were partially offset by higher investment income in the current year.
Our life insurance business decreased $12 million asprimarily from higher ceded reinsurance, unfavorable mortality in our universal and term universal life insurance products, less favorable reserve releases and a result of the completion of our annual review of our claim reserves conducted during the third quarter of 2016. The increase was also attributable to $44net $6 million of unfavorable adjustments which included refinements to the calculations of reservesfavorable refinement in the prior year that did not recur and higher incremental premiums and reduced benefits of $18 million fromin-force rate actions approved and implemented.recur. These increasesdecreases were partially offset by higher severity on new claims and higher incremental reserves of $42 million recordedfavorable mortality in connection with an accrual for profits followed by losses as a result of higher profitability driven by favorable claim terminations in the current year.
Our fixed annuities business increased $29 million mainly attributable to higher reserves of $14 million related to loss recognition testing in our fixed immediate annuity products in the prior year that did not recur, favorable mortality, and lower interest credited and taxes, partially offset by lower investment income in the current year.
Revenues
Premiums
Our long-term care insurance business increased $34$6 million largely from $71$35 million of increased premiums in the current year fromin-force rate actions approved and implemented, partially offset by policy terminations in the current year.
Our life insurance business increased $294decreased $66 million mainly attributable to the impact of a reinsurance treaty under which we initiallyhigher ceded $326 million of certain term life insurance premiums as part of a life block transaction in the first quarter of 2016, partially offset bycurrent year from new reinsurance treaties effective in December 2017 and the continued runoff of our term life insurance products in the current year.
Net investment income
Our long-term care insurance business increased $68$56 million largely from higher average invested assets due to growth of ourin-force block partially offset by lower yields in the current year.
Our fixed annuities business decreased $56$34 million largely due to lower average invested assets in the current year.
Net investment gains (losses)
Net investment gains in our long-term care insurance business decreased $90$38 million primarily related to net gains of $130 millionlosses from the sale of TIPSinvestment securities in the current year compared to net gains in the prior year, that did not recur and lowerpartially offset by higher derivative gains in the current year.
Net investment gains in our life insurance business increased $10decreased $5 million largely from higher net gainslosses from the sale of investment securities and lower impairmentsin the current year compared to net gains in the prior year, partially offset by higher gains on embedded derivatives associated with our indexed universal life insurance products in the current year.
Our fixed annuities business had net investment gainslosses of $6$14 million in the current year compared to net investment lossesgains of $46$9 million in the prior year. NetThe current year net investment losses were principally from losses on embedded derivatives associated with our fixed indexed annuity products and from losses from the sale of investment securities. The prior year net investment gains in the current year resultedwere predominantly from derivative gains and net gains from the sale of investment securities, partially offset by losses on embedded derivatives related toassociated with our fixed indexed annuities. Net investment losses in the prior year related to impairments, losses on embedded derivatives related to our fixed indexed annuities and net losses from the sale of investment securities, partially offset by derivative gains.annuity products.
Policy fees and other income. The decrease was mostly attributable to our life insurance business primarily as a result of suspending sales of these products on March 7, 2016 anddriven by a decline in our term universal and universal life insurancein-force blocks in the current year. The decrease was also related to an $8 million unfavorable model refinement in the current year.
Benefits and expenses
Benefits and other changes in policy reserves
Our long-term care insurance business decreased $292increased $146 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $435 million, net of reinsurance. The decrease was also attributable to $68 million of unfavorable adjustments which included refinements to the calculations of reserves in the prior year that did not recur and favorable claim terminations in the current year. These decreases were partially offset by aging and growth of thein-force block, higher utilization of available benefits, higher severity onand frequency of new claims higher incremental reserves of $64 million recorded in connection with an accrual for profits followed by losses and a $38 million less favorable impact of $20 million from reduced benefits in the current year related toin-force rate actions approved and implemented.
Our life insurance business increased $429decreased $37 million principally relatedprimarily attributable to higher ceded benefits in the impactcurrent year from new reinsurance treaties effective in December 2017. The decrease was also the result of a reinsurance treaty under which we initially ceded $331 million of certainfavorable mortality in our term life insurance reserves as part of a life block transactionproducts, partially offset by unfavorable mortality in the first quarter of 2016. The increase was also attributable to higherour universal and term universal life insurance products and less favorable reserve releases in our term life insurance products in the current year.
Our fixed annuities business decreased $35 million largely attributable to higher reserves reflectingof $22 million related to loss recognition testing in our previously updated assumptionsfixed immediate annuity products in the prior year that did not recur and from the fourth quarter of 2016 and unfavorablefavorable mortality in the current year. The current year also included a $30 million unfavorable model refinement.
Acquisition and operating expenses, net of deferrals.The decrease was mostly driven by $21 million of lower assumed reinsuranceguaranty fund assessments in our long-term care insurance business in connection with the recapture of certain life-contingent products by a third partyPenn Treaty liquidation in the prior year that did not recur, partially offset by favorable mortalityhigher premium taxes in the current year.
Interest credited. Interest credited decreased driven mostly by our fixed annuities business predominantly from lower average account values and a decrease in crediting rates in the current year.
Acquisition and operating expenses, net of deferrals
Amortization of deferred acquisition costs and intangibles.Amortization of DAC and intangibles
Interest expense. Interest expense decreased driven by our life insurance business principally as a result of the life block transaction in the first quarter of 2016 which included the redemption of certainnon-recourse funding obligations and thewrite-off of $9 million of deferred borrowing costs associated with ournon-recourse funding obligations as well as the restructuring of a captive reinsurance entity.
Provision for income taxes.The effective tax rate was 34.6% and 35.3% for the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016.respectively. The decrease in the effective tax rate was primarily attributable to the reduction in the U.S. corporate federal income tax rate from 35% to 21%, mostly offset by tax expense of $11 million in our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA, which will continue to be tax effected at 35% as they are amortized into net investment income.
U.S. Life Insurance selected operating performance measures
Long-term care insurance
The following table sets forth selected operating performance measures regarding our long-term care insurance business as of or for the dates indicated:
Three months ended September 30, | Increase (decrease) and percentage change | Nine months ended September 30, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net earned premiums: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual long-term care insurance | $ | 613 | $ | 591 | $ | 22 | 4 | % | $ | 1,815 | $ | 1,792 | $ | 23 | 1 | % | $ | 604 | $ | 596 | $ | 8 | 1 | % | $ | 1,207 | $ | 1,202 | $ | 5 | — | % | ||||||||||||||||||||||||||||||||
Group long-term care insurance | 28 | 19 | 9 | 47 | % | 83 | 72 | 11 | 15 | % | 28 | 27 | 1 | 4 | % | 56 | 55 | 1 | 2 | % | ||||||||||||||||||||||||||||||||||||||||||||
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Total | $ | 641 | $ | 610 | $ | 31 | 5 | % | $ | 1,898 | $ | 1,864 | $ | 34 | 2 | % | $ | 632 | $ | 623 | $ | 9 | 1 | % | $ | 1,263 | $ | 1,257 | $ | 6 | — | % | ||||||||||||||||||||||||||||||||
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Annualized first-year premiums and deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual long-term care insurance | $ | 2 | $ | 2 | $ | — | — | % | $ | 6 | $ | 11 | $ | (5 | ) | (45 | )% | |||||||||||||||||||||||||||||||||||||||||||||||
Group long-term care insurance | 1 | 3 | (2 | ) | (67 | )% | 3 | 7 | (4 | ) | (57 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total | $ | 3 | $ | 5 | $ | (2 | ) | (40 | )% | $ | 9 | $ | 18 | $ | (9 | ) | (50 | )% | ||||||||||||||||||||||||||||||||||||||||||||||
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Loss ratio | 79 | % | 146 | % | (67 | )% | 74 | % | 94 | % | (20 | )% | 75 | % | 71 | % | 4 | % | 79 | % | 72 | % | 7 | % |
The loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums.
Net earned premiums increased for the three and six months ended SeptemberJune 30, 2017 mostly2018 largely from $21$16 million and $35 million, respectively, of increased premiums in the current year fromin-force rate actions approved and implemented. Net earned premiums increased for the nine months ended September 30, 2017 mostly from $71 million of increased premiums in the current year fromin-force rate actions approved and implemented, partially offset by policy terminations in the current year.
Annualized first-year premiums and deposits decreased principally from lower sales due to our current ratings.
The loss ratio decreasedincreased for the three and ninesix months ended SeptemberJune 30, 20172018 largely related to the decreaseincrease in benefits and other changes in reserves, and the increase inpartially offset by higher premiums as discussed above.
Life insurance
The following tables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:
Three months ended September 30, | Increase (decrease) and percentage change | Nine months ended September 30, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Term and whole life insurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net earned premiums | $ | 107 | $ | 115 | $ | (8 | ) | (7 | )% | $ | 344 | $ | 50 | $ | 294 | NM | (1) | $ | 80 | $ | 113 | $ | (33 | ) | (29 | )% | $ | 171 | $ | 237 | $ | (66 | ) | (28 | )% | |||||||||||||||||||||||||||||
Sales | — | — | — | — | % | — | 7 | (7 | ) | (100 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Term universal life insurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net deposits | $ | 59 | $ | 62 | $ | (3 | ) | (5 | )% | $ | 184 | $ | 191 | $ | (7 | ) | (4 | )% | $ | 61 | $ | 63 | $ | (2 | ) | (3 | )% | $ | 122 | $ | 125 | $ | (3 | ) | (2 | )% | ||||||||||||||||||||||||||||
Universal life insurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net deposits | $ | 81 | $ | 86 | $ | (5 | ) | (6 | )% | $ | 250 | $ | 297 | $ | (47 | ) | (16 | )% | $ | 126 | $ | 81 | $ | 45 | 56 | % | $ | 258 | $ | 169 | $ | 89 | 53 | % | ||||||||||||||||||||||||||||||
Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Universal life insurance | 1 | 1 | — | — | % | 2 | 4 | (2 | ) | (50 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Linked-benefits | — | — | — | — | % | — | 3 | (3 | ) | (100 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total life insurance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net earned premiums and deposits | $ | 247 | $ | 263 | $ | (16 | ) | (6 | )% | $ | 778 | $ | 538 | $ | 240 | 45 | % | $ | 267 | $ | 257 | $ | 10 | 4 | % | $ | 551 | $ | 531 | $ | 20 | 4 | % | |||||||||||||||||||||||||||||||
Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Term life insurance | — | — | — | — | % | — | 7 | (7 | ) | (100 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Universal life insurance | 1 | 1 | — | — | % | 2 | 4 | (2 | ) | (50 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Linked-benefits | — | — | — | — | % | — | 3 | (3 | ) | (100 | )% |
As of June 30, | Percentage change | |||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 vs. 2017 | |||||||||
Term and whole life insurance | ||||||||||||
Life insurancein-force, net of reinsurance | $ | 100,475 | $ | 199,028 | (50 | )% | ||||||
Life insurancein-force before reinsurance | $ | 447,429 | $ | 474,899 | (6 | )% | ||||||
Term universal life insurance | ||||||||||||
Life insurancein-force, net of reinsurance | $ | 117,141 | $ | 120,264 | (3 | )% | ||||||
Life insurancein-force before reinsurance | $ | 117,957 | $ | 121,132 | (3 | )% | ||||||
Universal life insurance | ||||||||||||
Life insurancein-force, net of reinsurance | $ | 36,054 | $ | 37,842 | (5 | )% | ||||||
Life insurancein-force before reinsurance | $ | 41,136 | $ | 43,328 | (5 | )% | ||||||
Total life insurance | ||||||||||||
Life insurancein-force, net of reinsurance | $ | 253,670 | $ | 357,134 | (29 | )% | ||||||
Life insurancein-force before reinsurance | $ | 606,522 | $ | 639,359 | (5 | )% |
We no longer solicit sales of our traditional life insurance products; however, we continue to service our existing blocks of business.
As of September 30, | Percentage change | |||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | |||||||||
Term and whole life insurance | ||||||||||||
Life insurancein-force, net of reinsurance | $ | 196,872 | $ | 204,549 | (4 | )% | ||||||
Life insurancein-force before reinsurance | 467,821 | 494,642 | (5 | )% | ||||||||
Term universal life insurance | ||||||||||||
Life insurancein-force, net of reinsurance | $ | 119,442 | $ | 123,770 | (3 | )% | ||||||
Life insurancein-force before reinsurance | 120,291 | 124,670 | (4 | )% | ||||||||
Universal life insurance | ||||||||||||
Life insurancein-force, net of reinsurance | $ | 37,335 | $ | 40,237 | (7 | )% | ||||||
Life insurancein-force before reinsurance | 42,726 | 46,038 | (7 | )% | ||||||||
Total life insurance | ||||||||||||
Life insurancein-force, net of reinsurance | $ | 353,649 | $ | 368,556 | (4 | )% | ||||||
Life insurancein-force before reinsurance | 630,838 | 665,350 | (5 | )% |
Term and whole life insurance
Net earned premiums decreased during the three months ended September 30, 2017 primarily from continued runoff of our termand life insurance products, includingin-force, net of reinsurance, decreased mainly attributable to higher lapses primarily from our large15-year and20-year term life insurance blocks entering their post-level guaranteed premium rate periods, partially offset by lower reinsurance ceded premiums in the current year.
Net earned premiums increased during the nine months ended September 30,year from new reinsurance treaties that were effective in December 2017 primarily related to the impact of a reinsurance treaty under which we initially ceded $326 million of certain term life insurance
premiums as part of a life block transaction in the first quarter of 2016, partially offset byand from the continued runoff of our term life insurance products in the current year.
Sales of our term life insurance products decreased from the suspension of sales of our traditional life insurance products on March 7, 2016. While we no longer solicit sales of these products, we continue to service our existing block of business.
Term universal life insurance
We no longer solicit sales of term universal life insurance products; however, we continue to service our existing block of business.
Universal life insurance
Net deposits increased during the three and six months ended June 30, 2018 primarily attributable to $50 million and $100 million, respectively, of our universal life insurance products decreased fromnew funding agreements with the suspensionFederal Home Loan Bank of Atlanta, partially offset by the runoff of the block and lower sales of our traditional life insurance products on March 7, 2016. While we no longer solicit sales of these products, we continue to service our existing block of business.in the current year.
Fixed annuities
The following table sets forth selected operating performance measures regarding our fixed annuities business as of or for the dates indicated:
As of or for the three months ended September 30, | As of or for the nine months ended September 30, | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Single Premium Deferred Annuities | ||||||||||||||||
Account value, beginning of period | $ | 11,321 | $ | 12,191 | $ | 11,806 | $ | 12,480 | ||||||||
Deposits | 3 | 3 | 7 | 175 | ||||||||||||
Surrenders, benefits and product charges | (383 | ) | (270 | ) | (1,031 | ) | (879 | ) | ||||||||
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Net flows | (380 | ) | (267 | ) | (1,024 | ) | (704 | ) | ||||||||
Interest credited and investment performance | 79 | 86 | 238 | 234 | ||||||||||||
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Account value, end of period | $ | 11,020 | $ | 12,010 | $ | 11,020 | $ | 12,010 | ||||||||
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Single Premium Immediate Annuities | ||||||||||||||||
Account value, beginning of period | $ | 4,752 | $ | 5,198 | $ | 4,853 | $ | 5,180 | ||||||||
Premiums and deposits | 24 | 25 | 64 | 75 | ||||||||||||
Surrenders, benefits and product charges | (151 | ) | (173 | ) | (474 | ) | (572 | ) | ||||||||
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Net flows | (127 | ) | (148 | ) | (410 | ) | (497 | ) | ||||||||
Interest credited | 52 | 56 | 159 | 173 | ||||||||||||
Effect of accumulated net unrealized investment gains (losses) | 9 | 23 | 84 | 273 | ||||||||||||
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Account value, end of period | $ | 4,686 | $ | 5,129 | $ | 4,686 | $ | 5,129 | ||||||||
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Structured Settlements | ||||||||||||||||
Account value, net of reinsurance, beginning of period | $ | 1,055 | $ | 1,061 | $ | 1,061 | $ | 1,066 | ||||||||
Surrenders, benefits and product charges | (17 | ) | (11 | ) | (51 | ) | (44 | ) | ||||||||
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Net flows | (17 | ) | (11 | ) | (51 | ) | (44 | ) | ||||||||
Interest credited | 14 | 14 | 42 | 42 | ||||||||||||
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Account value, net of reinsurance, end of period | $ | 1,052 | $ | 1,064 | $ | 1,052 | $ | 1,064 | ||||||||
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| |||||||||
Total premiums from fixed annuities | $ | — | $ | — | $ | — | $ | 3 | ||||||||
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Total deposits from fixed annuities | $ | 27 | $ | 28 | $ | 71 | $ | 247 | ||||||||
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As of or for the three months ended June 30, | As of or for the six months ended June 30, | |||||||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Account value, beginning of period | $ | 15,881 | $ | 17,425 | $ | 16,401 | $ | 17,720 | ||||||||
Premiums and deposits | 22 | 21 | 44 | 44 | ||||||||||||
Surrenders, benefits and product charges | (593 | ) | (509 | ) | (1,129 | ) | (1,005 | ) | ||||||||
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| |||||||||
Net flows | (571 | ) | (488 | ) | (1,085 | ) | (961 | ) | ||||||||
Interest credited and investment performance | 128 | 144 | 234 | 294 | ||||||||||||
Effect of accumulated net unrealized investment gains (losses) | (66 | ) | 47 | (178 | ) | 75 | ||||||||||
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Account value, end of period | $ | 15,372 | $ | 17,128 | $ | 15,372 | $ | 17,128 | ||||||||
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We no longer solicit sales of our traditional fixed annuity products; however, we continue to service our existing block of business.
Single Premium Deferred Annuities
Account value of our single premium deferred annuities decreased ascompared to March 31, 2018 and December 31, 2017 principally from surrenders and benefits outpaced interest credited. Deposits decreased primarily related to the suspension of sales of our traditional fixed annuity products on March 7, 2016.
Single Premium Immediate Annuities
Account value of our single premium immediate annuities decreased as benefits exceededexceeding interest credited and deposits. The decrease was also attributable to a decline in net unrealized investment gains and premiums. Sales decreased predominantly related todriven by an increase in interest rates in the suspension of sales of our traditional fixed annuity products on March 7, 2016.current year.
Runoff segment
Trends and conditions
Results of our Runoff segment are affected primarily by investment performance, interest rate levels, net interest spreads, equity market conditions, mortality, policyholder loan activity, policyholder surrenders and scheduled maturities. In addition, the results of our Runoff segment can significantly impact our operating performance, regulatory capital requirements, distributable earnings and liquidity.
We discontinued sales of our individual and group variable annuities in 2011; however, we continue to service our existing blocks of variable annuity business and accept additional deposits on existing contracts. Equity market volatility has caused fluctuations in the results of our variable annuity products and regulatory capital requirements. In the future, equity and interest rate market performance and volatility could result in additional gains or losses in our variable annuity products although associated hedging activities are expected to partially mitigate these impacts. Volatility in the results of our variable annuity products can result in favorable or unfavorable impacts on earnings and statutory capital. In addition to the use of hedging activities to help mitigate impacts related to equity market volatility and interest rate risks, in the future, we may consider reinsurance opportunities to further mitigate volatility in results and manage capital.
The results of our institutional products are impacted by scheduled maturities of the liabilities, credit and interest income performance on assets, as well as liquidity levels. However, we believe our liquidity planning and our asset-liability management will mitigate this risk. While we do not actively sell institutional products, we may periodically issue funding agreements for asset-liability matching purposes.
Several factors may impact the time period for these products to runoff including the specific policy types, economic conditions and management strategies.
Segment results of operations
Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:
Three months ended September 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Net investment income | $ | 40 | $ | 37 | $ | 3 | 8 | % | ||||||||
Net investment gains (losses) | 9 | 4 | 5 | 125 | % | |||||||||||
Policy fees and other income | 41 | 43 | (2 | ) | (5 | )% | ||||||||||
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Total revenues | 90 | 84 | 6 | 7 | % | |||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 5 | 2 | 3 | 150 | % | |||||||||||
Interest credited | 36 | 33 | 3 | 9 | % | |||||||||||
Acquisition and operating expenses, net of deferrals | 16 | 20 | (4 | ) | (20 | )% | ||||||||||
Amortization of deferred acquisition costs and intangibles | 7 | 7 | — | — | % | |||||||||||
Interest expense | — | 1 | (1 | ) | (100 | )% | ||||||||||
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Total benefits and expenses | 64 | 63 | 1 | 2 | % | |||||||||||
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Income from continuing operations before income taxes | 26 | 21 | 5 | 24 | % | |||||||||||
Provision for income taxes | 8 | 6 | 2 | 33 | % | |||||||||||
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Income from continuing operations | 18 | 15 | 3 | 20 | % | |||||||||||
Adjustments to income from continuing operations: | ||||||||||||||||
Net investment (gains) losses, net(1) | (8 | ) | (4 | ) | (4 | ) | (100 | )% | ||||||||
Taxes on adjustments | 3 | 1 | 2 | 200 | % | |||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders | $ | 13 | $ | 12 | $ | 1 | 8 | % | ||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholdersincreased slightly as lower operating expenses were mostly offset by higher tax expenses in the current year.
Revenues
Net investment gains increased predominantly from higher derivative gains and lower net losses from the sale of investment securities, partially offset by lower gains on embedded derivatives associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”) in the current year.
Benefits and expenses
Acquisition and operating expenses, net of deferrals, decreased mostly from lower state guaranty fund assessments in the current year.
Provision for income taxes. The effective tax rate increased to 30.7% for the three months ended September 30, 2017 from 29.1% for the three months ended September 30, 2016. The increase in the effective tax rate is primarily attributable to changes in tax favored investments in relation topre-tax results in the current year compared to the prior year.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:
Nine months ended September 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Net investment income | $ | 119 | $ | 108 | $ | 11 | 10 | % | ||||||||
Net investment gains (losses) | 24 | (17 | ) | 41 | NM | (1) | ||||||||||
Policy fees and other income | 123 | 127 | (4 | ) | (3 | )% | ||||||||||
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Total revenues | 266 | 218 | 48 | 22 | % | |||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 18 | 26 | (8 | ) | (31 | )% | ||||||||||
Interest credited | 105 | 96 | 9 | 9 | % | |||||||||||
Acquisition and operating expenses, net of deferrals | 47 | 54 | (7 | ) | (13 | )% | ||||||||||
Amortization of deferred acquisition costs and intangibles | 20 | 25 | (5 | ) | (20 | )% | ||||||||||
Interest expense | 1 | 1 | — | — | % | |||||||||||
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Total benefits and expenses | 191 | 202 | (11 | ) | (5 | )% | ||||||||||
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Income from continuing operations before income taxes | 75 | 16 | 59 | NM | (1) | |||||||||||
Provision for income taxes | 23 | 2 | 21 | NM | (1) | |||||||||||
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Income from continuing operations | 52 | 14 | 38 | NM | (1) | |||||||||||
Adjustments to income from continuing operations: | ||||||||||||||||
Net investment (gains) losses, net(2) | (22 | ) | 12 | (34 | ) | NM | (1) | |||||||||
Taxes on adjustments | 8 | (4 | ) | 12 | NM | (1) | ||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders | $ | 38 | $ | 22 | $ | 16 | 73 | % | ||||||||
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Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 vs. 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Net investment income | $ | 43 | $ | 41 | $ | 2 | 5 | % | ||||||||
Net investment gains (losses) | (1 | ) | 7 | (8 | ) | (114 | )% | |||||||||
Policy fees and other income | 38 | 41 | (3 | ) | (7 | )% | ||||||||||
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Total revenues | 80 | 89 | (9 | ) | (10 | )% | ||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 7 | 9 | (2 | ) | (22 | )% | ||||||||||
Interest credited | 36 | 34 | 2 | 6 | % | |||||||||||
Acquisition and operating expenses, net of deferrals | 14 | 16 | (2 | ) | (13 | )% | ||||||||||
Amortization of deferred acquisition costs and intangibles | 8 | 7 | 1 | 14 | % | |||||||||||
Interest expense | — | 1 | (1 | ) | (100 | )% | ||||||||||
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Total benefits and expenses | 65 | 67 | (2 | ) | (3 | )% | ||||||||||
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Income from continuing operations before income taxes | 15 | 22 | (7 | ) | (32 | )% | ||||||||||
Provision for income taxes | 3 | 7 | (4 | ) | (57 | )% | ||||||||||
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Income from continuing operations | 12 | 15 | (3 | ) | (20 | )% | ||||||||||
Adjustments to income from continuing operations: | ||||||||||||||||
Net investment (gains) losses, net | 1 | (7 | ) | 8 | 114 | % | ||||||||||
Taxes on adjustments | — | 3 | (3 | ) | (100 | )% | ||||||||||
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Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders | $ | 13 | $ | 11 | $ | 2 | 18 | % | ||||||||
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Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased primarily drivenpredominantly from lower taxes and unfavorable mortality in our corporate-owned life insurance in the prior year that did not recur, partially offset by an increase in GMDB reserves in our variable annuity products due to less favorable equity market performance in the current year.
Revenues
Net investment income increased mainly driven by higher policy loan income in our corporate-owned life insurance products in the current year.
Net investment gainslosses in the current year were primarily related tofrom derivative losses, mostly offset by gains on embedded derivatives associated with our variable annuity products with GMWBs, partially offset by derivative losses.guaranteed minimum withdrawal benefits (“GMWBs”). Net investment lossesgains in the prior year were largelyprincipally related to losses on embedded derivatives associated withderivative gains.
Policy fees and other income decreased principally from lower fee income driven mostly by a decline in the average account values in our variable annuity products with GMWBs, partially offset by net gains fromin the sale of investment securities and derivative gains.current year.
Benefits and expenses
Benefits and other changes in policy reserves decreased primarily attributable to lowerunfavorable mortality in our corporate-owned life insurance in the prior year that did not recur, partially offset by an increase in GMDB reserves in our variable annuity products due to less favorable equity market performance in the current year.
Interest credited increased largely related to higher cash values in our corporate-owned life insurance products in the current year.
Acquisition and operating expenses, net of deferrals, decreased largely driven bymainly from lower state guaranty fund assessmentscommissions in the current year.
Amortization of DAC and intangibles decreased related to our variable annuity products principally from favorable equity market performance in the current year.
Provision for income taxes. The effective tax rate increaseddecreased to 30.4%18.9% for the ninethree months ended SeptemberJune 30, 20172018 from 12.1%29.7% for the ninethree months ended SeptemberJune 30, 2016.2017. The increasedecrease in the effective tax rate was primarily attributable to a reduction in the U.S. corporate federal income tax rate from 35% to 21%, partially offset by lower tax favored investmentsitems in relationthe current year.
Six Months Ended June 30, 2018 Compared topre-tax Six Months Ended June 30, 2017
The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:
Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 vs. 2017 | |||||||||||||
Revenues: | ||||||||||||||||
Net investment income | $ | 85 | $ | 79 | $ | 6 | 8 | % | ||||||||
Net investment gains (losses) | (15 | ) | 15 | (30 | ) | (200 | )% | |||||||||
Policy fees and other income | 78 | 82 | (4 | ) | (5 | )% | ||||||||||
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Total revenues | 148 | 176 | (28 | ) | (16 | )% | ||||||||||
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Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 15 | 13 | 2 | 15 | % | |||||||||||
Interest credited | 73 | 69 | 4 | 6 | % | |||||||||||
Acquisition and operating expenses, net of deferrals | 29 | 31 | (2 | ) | (6 | )% | ||||||||||
Amortization of deferred acquisition costs and intangibles | 15 | 13 | 2 | 15 | % | |||||||||||
Interest expense | — | 1 | (1 | ) | (100 | )% | ||||||||||
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Total benefits and expenses | 132 | 127 | 5 | 4 | % | |||||||||||
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Income from continuing operations before income taxes | 16 | 49 | (33 | ) | (67 | )% | ||||||||||
Provision for income taxes | 3 | 15 | (12 | ) | (80 | )% | ||||||||||
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Income from continuing operations | 13 | 34 | (21 | ) | (62 | )% | ||||||||||
Adjustments to income from continuing operations: | ||||||||||||||||
Net investment (gains) losses, net (1) | 13 | (14 | ) | 27 | 193 | % | ||||||||||
Taxes on adjustments | (3 | ) | 5 | (8 | ) | (160 | )% | |||||||||
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Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders | $ | 23 | $ | 25 | $ | (2 | ) | (8 | )% | |||||||
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(1) | For the six months ended June 30, 2018 and 2017, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(2) million and $1 million, respectively. |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased driven principally by less favorable equity market performance and higher interest credited, partially offset by lower taxes and higher investment income in the current year.
Revenues
Net investment income increased mainly driven by higher policy loan income in our corporate-owned life insurance products in the current year.
Net investment losses in the current year comparedwere largely related to derivative losses, partially offset by gains on embedded derivatives associated with our variable annuity products with GMWBs. Net investment gains in the prior year were primarily related to gains on embedded derivatives associated with our variable annuity products with GMWBs, partially offset by derivative losses.
Policy fees and other income decreased principally from lower fee income driven mostly by a decrease in the average account values in our variable annuity products in the current year.
Benefits and expenses
Provision for income taxes. The effective tax rate decreased to 16.6% for the six months ended June 30, 2018 from 30.3% for the six months ended June 30, 2017. The decrease in the effective tax rate was primarily attributable to a reduction in the U.S. corporate federal income tax rate from 35% to 21%, partially offset by lower tax favored items in the current year.
Runoff selected operating performance measures
Variable annuity and variable life insurance products
The following table sets forth selected operating performance measures regarding our variable annuity and variable life insurance products as of or for the dates indicated:
As of or for the three months ended September 30, | As of or for the nine months ended September 30, | |||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Variable Annuities—Income Distribution Series(1) | ||||||||||||||||
Account value, beginning of period | $ | 4,526 | $ | 4,849 | $ | 4,581 | $ | 4,942 | ||||||||
Deposits | 5 | 6 | 13 | 17 | ||||||||||||
Surrenders, benefits and product charges | (132 | ) | (151 | ) | (425 | ) | (431 | ) | ||||||||
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Net flows | (127 | ) | (145 | ) | (412 | ) | (414 | ) | ||||||||
Interest credited and investment performance | 98 | 90 | 328 | 266 | ||||||||||||
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Account value, end of period | $ | 4,497 | $ | 4,794 | $ | 4,497 | $ | 4,794 | ||||||||
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Traditional Variable Annuities | ||||||||||||||||
Account value, net of reinsurance, beginning of period | $ | 1,149 | $ | 1,177 | $ | 1,167 | $ | 1,241 | ||||||||
Deposits | 2 | 2 | 6 | 6 | ||||||||||||
Surrenders, benefits and product charges | (52 | ) | (47 | ) | (162 | ) | (154 | ) | ||||||||
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Net flows | (50 | ) | (45 | ) | (156 | ) | (148 | ) | ||||||||
Interest credited and investment performance | 41 | 49 | 129 | 88 | ||||||||||||
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Account value, net of reinsurance, end of period | $ | 1,140 | $ | 1,181 | $ | 1,140 | $ | 1,181 | ||||||||
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Variable Life Insurance | ||||||||||||||||
Account value, beginning of period | $ | 295 | $ | 283 | $ | 283 | $ | 291 | ||||||||
Deposits | 1 | 1 | 5 | 5 | ||||||||||||
Surrenders, benefits and product charges | (10 | ) | (7 | ) | (27 | ) | (24 | ) | ||||||||
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Net flows | (9 | ) | (6 | ) | (22 | ) | (19 | ) | ||||||||
Interest credited and investment performance | 10 | 8 | 35 | 13 | ||||||||||||
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Account value, end of period | $ | 296 | $ | 285 | $ | 296 | $ | 285 | ||||||||
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As of or for the three months ended June 30, | As of or for the six months ended June 30, | |||||||||||||||
(Amounts in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Account value, beginning of period | $ | 5,619 | $ | 6,013 | $ | 5,884 | $ | 6,031 | ||||||||
Deposits | 5 | 7 | 12 | 16 | ||||||||||||
Surrenders, benefits and product charges | (203 | ) | (196 | ) | (411 | ) | (420 | ) | ||||||||
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Net flows | (198 | ) | (189 | ) | (399 | ) | (404 | ) | ||||||||
Interest credited and investment performance | 48 | 146 | (16 | ) | 343 | |||||||||||
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Account value, end of period | $ | 5,469 | $ | 5,970 | $ | 5,469 | $ | 5,970 | ||||||||
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We no longer solicit sales of our variable annuity or variable life insurance products; however, we continue to service our existing blocks of business and accept additional deposits on existing contracts and policies.
Variable Annuities—Income Distribution SeriesAnnuities and Variable Life Insurance
Account value related to our Income Distribution Series products decreased compared to June 30, 2017March 31, 2018 and December 31, 20162017 primarily related to surrenders outpacing favorable equity market performance.
Traditional Variable Annuities
In our traditional variable annuities, the decrease in account values compared to June 30, 2017deposits and December 31, 2016 was primarily the result of surrenders outpacing favorable equity market performance.interest credited.
Institutional products
The following table sets forth selected operating performance measures regarding our institutional products as of or for the dates indicated:
As of or for the three months ended September 30, | As of or for the nine months ended September 30, | As of or for the three months ended June 30, | As of or for the six months ended June 30, | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
GICs, FABNs and Funding Agreements | ||||||||||||||||||||||||||||||||
FABNs and Funding Agreements | ||||||||||||||||||||||||||||||||
Account value, beginning of period | $ | 460 | $ | 561 | $ | 560 | $ | 410 | $ | 185 | $ | 560 | $ | 260 | $ | 560 | ||||||||||||||||
Deposits | — | — | — | 150 | ||||||||||||||||||||||||||||
Surrenders and benefits | (102 | ) | (2 | ) | (206 | ) | (4 | ) | (6 | ) | (102 | ) | (82 | ) | (104 | ) | ||||||||||||||||
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Net flows | (102 | ) | (2 | ) | (206 | ) | 146 | (6 | ) | (102 | ) | (82 | ) | (104 | ) | |||||||||||||||||
Interest credited | 2 | 2 | 6 | 5 | 1 | 2 | 2 | 4 | ||||||||||||||||||||||||
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Account value, end of period | $ | 360 | $ | 561 | $ | 360 | $ | 561 | $ | 180 | $ | 460 | $ | 180 | $ | 460 | ||||||||||||||||
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Account value related to our institutional products decreased compared to June 30, 2017March 31, 2018 and December 31, 20162017 mainly attributable to scheduled maturities of certain products in the current year. Deposits in the prior year related to funding agreements for asset-liability management and yield enhancement.agreements.
Corporate and Other Activities
Results of operations
Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:
Three months ended September 30, | Increase (decrease) and percentage change | Three months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 3 | $ | 2 | $ | 1 | 50 | % | $ | 3 | $ | 1 | $ | 2 | 200 | % | ||||||||||||||||
Net investment income | 4 | 1 | 3 | NM | (1) | 3 | — | 3 | NM | (1) | ||||||||||||||||||||||
Net investment gains (losses) | (7 | ) | (9 | ) | 2 | 22 | % | — | (12 | ) | 12 | 100 | % | |||||||||||||||||||
Policy fees and other income | 1 | (1 | ) | 2 | 200 | % | 1 | (2 | ) | 3 | 150 | % | ||||||||||||||||||||
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Total revenues | 1 | (7 | ) | 8 | 114 | % | 7 | (13 | ) | 20 | 154 | % | ||||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 2 | 1 | 1 | 100 | % | 1 | — | 1 | NM | (1) | ||||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 19 | 11 | 8 | 73 | % | 11 | 14 | (3 | ) | (21 | )% | |||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 2 | 1 | 1 | 100 | % | |||||||||||||||||||||||||||
Interest expense | 63 | 67 | (4 | ) | (6 | )% | 67 | 63 | 4 | 6 | % | |||||||||||||||||||||
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Total benefits and expenses | 86 | 80 | 6 | 8 | % | 79 | 77 | 2 | 3 | % | ||||||||||||||||||||||
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Loss from continuing operations before income taxes | (85 | ) | (87 | ) | 2 | 2 | % | (72 | ) | (90 | ) | 18 | 20 | % | ||||||||||||||||||
Provision (benefit) for income taxes | (23 | ) | 246 | (269 | ) | (109 | )% | 3 | (39 | ) | 42 | 108 | % | |||||||||||||||||||
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Loss from continuing operations | (62 | ) | (333 | ) | 271 | 81 | % | (75 | ) | (51 | ) | (24 | ) | (47 | )% | |||||||||||||||||
Adjustments to loss from continuing operations: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses | 7 | 9 | (2 | ) | (22 | )% | — | 12 | (12 | ) | (100 | )% | ||||||||||||||||||||
Taxes on adjustments | (3 | ) | (3 | ) | — | — | % | — | (4 | ) | 4 | 100 | % | |||||||||||||||||||
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Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders | $ | (58 | ) | $ | (327 | ) | $ | 269 | 82 | % | $ | (75 | ) | $ | (43 | ) | $ | (32 | ) | (74 | )% | |||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders
The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders decreasedincreased primarily related to tax charges of $265 million in the prior year that did not recur and lower interest expense in the current year partially offset by unfavorablecompared to a tax charges related to prior period tax returns recordedbenefit in the third quarter of 2017.prior year.
Revenues
NetThe increase in net investment income increased primarily related towas mainly from higher yields in the current year.
The decrease in netNet investment losses wasin the prior year were primarily related to lowernet losses from derivativesthe sale of investment securities and derivative losses.
Policy fees and other income increased primarily from net gains on remeasurement ofnon-functional currency transactions attributable to changes in foreign exchange rates in the current year compared with net losses in the prior year.
Benefits and expenses
Acquisition and operating expenses, net of deferrals, increaseddecreased mainly driven by higherlower consulting fees and lower net expenses after allocations in the current year. These decreases were partially offset by a reversal of a legal settlement accrual in the prior year that did not recur.
Interest expense decreasedincreased largely driven by a contractual changethe Term Loan entered into by Genworth Holdings in March 2018 and from our junior subordinated notes relatedwhich had a higher floating rate of interest in the current year. These increases were partially offset by lower interest expense associated with the redemption of $597 million of Genworth Holdings’ senior notes in May 2018.
The effective tax rate decreased to an interest(4.8)% for the three months ended June 30, 2018 from 42.3% for the three months ended June 30, 2017. The decrease in the effective tax rate was primarily attributable to changes resulting from the implementation of the TCJA, which included a U.S. federal tax rate change from fixed35% to floating rates in21%. The decrease was also attributable to the current year.
The incomeeffect of foreign operations, which included a provisional tax benefitexpense of $19 million in the current year was principally from lower taxed foreign income. The income tax provision in the prior year was largely attributablerelated to a valuation allowancerevaluation of $265 million recorded on deferred tax assets that did not recur.and liabilities on our foreign subsidiaries in light of the TCJA.
NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017
The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:
Nine months ended September 30, | Increase (decrease) and percentage change | Six months ended June 30, | Increase (decrease) and percentage change | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Premiums | $ | 6 | $ | 11 | $ | (5 | ) | (45 | )% | $ | 5 | $ | 3 | $ | 2 | 67 | % | |||||||||||||||
Net investment income | 5 | 4 | 1 | 25 | % | 5 | 1 | 4 | NM | (1) | ||||||||||||||||||||||
Net investment gains (losses) | (31 | ) | (88 | ) | 57 | 65 | % | (1 | ) | (24 | ) | 23 | 96 | % | ||||||||||||||||||
Policy fees and other income | (2 | ) | 76 | (78 | ) | (103 | )% | (1 | ) | (3 | ) | 2 | 67 | % | ||||||||||||||||||
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Total revenues | (22 | ) | 3 | (25 | ) | NM | (1) | 8 | (23 | ) | 31 | 135 | % | |||||||||||||||||||
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Benefits and expenses: | ||||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 3 | 4 | (1 | ) | (25 | )% | 2 | 1 | 1 | 100 | % | |||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 47 | 173 | (126 | ) | (73 | )% | 22 | 28 | (6 | ) | (21 | )% | ||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 2 | 1 | 1 | 100 | % | 1 | — | 1 | NM | (1) | ||||||||||||||||||||||
Interest expense | 179 | 205 | (26 | ) | (13 | )% | 132 | 116 | 16 | 14 | % | |||||||||||||||||||||
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Total benefits and expenses | 231 | 383 | (152 | ) | (40 | )% | 157 | 145 | 12 | 8 | % | |||||||||||||||||||||
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Loss from continuing operations before income taxes | (253 | ) | (380 | ) | 127 | 33 | % | (149 | ) | (168 | ) | 19 | 11 | % | ||||||||||||||||||
Provision (benefit) for income taxes | (85 | ) | 119 | (204 | ) | (171 | )% | |||||||||||||||||||||||||
Benefit for income taxes | (14 | ) | (62 | ) | 48 | 77 | % | |||||||||||||||||||||||||
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Loss from continuing operations | (168 | ) | (499 | ) | 331 | 66 | % | (135 | ) | (106 | ) | (29 | ) | (27 | )% | |||||||||||||||||
Adjustments to loss from continuing operations: | ||||||||||||||||||||||||||||||||
Net investment (gains) losses | 31 | 88 | (57 | ) | (65 | )% | 1 | 24 | (23 | ) | (96 | )% | ||||||||||||||||||||
(Gains) losses on sale of businesses | — | (2 | ) | 2 | 100 | % | ||||||||||||||||||||||||||
(Gains) losses on early extinguishment of debt | — | (48 | ) | 48 | 100 | % | ||||||||||||||||||||||||||
Expenses related to restructuring | 1 | 2 | (1 | ) | (50 | )% | — | 1 | (1 | ) | (100 | )% | ||||||||||||||||||||
Fees associated with bond consent solicitation | — | 18 | (18 | ) | (100 | )% | ||||||||||||||||||||||||||
Taxes on adjustments | (11 | ) | (43 | ) | 32 | 74 | % | — | (8 | ) | 8 | 100 | % | |||||||||||||||||||
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Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders | $ | (147 | ) | $ | (484 | ) | $ | 337 | 70 | % | $ | (134 | ) | $ | (89 | ) | $ | (45 | ) | (51 | )% | |||||||||||
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(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders
The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders decreasedincreased primarily related to lower tax charges of $265 million in the prior year that did not recurbenefits and lower operating andhigher interest expense in the current year.
Revenues
Premiums decreased largely related toNet investment income increased mainly driven by higher yields in the sale of our European mortgage insurance business in May 2016.current year.
The decrease in net investment losses was primarily relatedfrom derivative gains in the current year compared to a $64 million loss from thewrite-off of our residual interest in certain policy loan securitization entitiesderivative losses in the prior year, that did not recur and fromas well as lower derivative losses in the current year. These decreases were partially offset by net losses from the sale of investment securities in the current year compared to net gains in the prior year.
Policy fees and other income in the prior year included a gain of $64 million from the early extinguishment of debt related to the redemption of a securitization entity and a gain of $11 million attributable to the sale of assets to Pac Life that did not recur.
Benefits and expenses
Acquisition and operating expenses, net of deferrals, decreased mainly driven by lower consulting fees and lower net expenses after allocations in the current year. These decreases were partially offset by a reversal of a legal settlement accrual in the prior year that did not recur. The prior year expenses included $79 million of a litigation settlement and related legal expenses, $20 million of expenses related to the early redemption of debt, $18 million of bond consent fees and a $9 million loss related to the sale of our European mortgage insurance business. These decreases were partially offset by higher consulting fees in the current year.
Interest expense decreasedincreased largely driven by a favorable correction of $11 million related to our Tax Matters Agreement liability in the prior year that did not recur, higher interest expense related to the Term Loan entered into by Genworth Holdings in March 2018 and a contractual change infrom our junior subordinated notes relatedwhich had a higher floating rate of interest in the current year. These increases were partially offset by lower interest expense associated with the redemption of $597 million of Genworth Holdings’ senior notes in May 2018.
The effective tax rate decreased to an interest9.2% for the six months ended June 30, 2018 from 36.6% for the six months ended June 30, 2017. The decrease in the effective tax rate was primarily attributable to changes resulting from the implementation of the TCJA, which included a U.S. federal tax rate change from fixed35% to floating rates.
21%. The incomedecrease was also attributable to the effect of foreign operations, which included a provisional tax benefitexpense of $19 million in the current year was principally from lower taxed foreign income. The income tax provision in the prior year was largely attributablerelated to a valuation allowancerevaluation of $265 million recorded on deferred tax assets that did not recur.and liabilities on our foreign subsidiaries in light of the TCJA.
Investments and Derivative Instruments
Trends and conditions
Investments—credit and investment markets
During the third quarterThe U.S. Federal Reserve increased its benchmark lending rate 25 basis points in June 2018 and revised its forecast for two additional rate increases, which would result in four rate increases in 2018. The median economist forecasts indicate three additional 25 basis point increases in 2019 and one in 2020. In terms of 2017,economic projections from the U.S. Federal Reserve, announced that it would beginduring the second quarter of 2018, the unemployment rate outlook was revised lower while near-term growth and inflation projections were revised up. The U.S. Treasury yield curve continued to normalize monetary policy and scale back quantitative easing. Interestflatten in the second quarter of 2018 with short-term interest rates remain at historically low levels despite the factrising supported by the U.S. Federal Reserve has raised its benchmark lending rate two times in 2017increases, while long-term interest rates increased marginally due to ongoing speculation around tariffs and market expectations remain for one additional rate increase during 2017. Despite the Federal Reserve’s actions, U.S. Treasury yields remained lower throughout the third quarter of 2017 but rose significantly in the last week of September 2017, in response totensions associated with potential tax reform. However,pro-growth stimulus policies are still uncertain and weaker inflation data has investors more cautious on the direction of longer term interest rates. The U.S. equitytrade wars. Credit markets increased and credit spreads tightened during the third quarter of 2017. Spreads initially widened when geopolitical issues and natural disasters arose, but quickly tightenedexperienced modest spread widening primarily driven by both positive economic dataperiodic supply and corporate profits. U.S.demand imbalances rather than concerns about fundamental credit or macroeconomic issues. Though widely anticipated, the TCJA was not a catalyst for widespread debt reduction and a corresponding reduction in bond supply. Although the TCJA did result in cash-rich multinational companies exiting the debt issuance market, lower supply from such companies was more than offset by debt-financed merger and acquisition-related issuances in investment grade markets. Furthermore, fixed income markets saw reduced issuances, but demand from foreign and domestic investors continuedissuance was slightly lower as compared to support valuations. Global equity markets were generally higher and the economies of the Eurozone countries continue to improve.2017.
As of SeptemberJune 30, 2017,2018, our fixed maturities securities portfolio, which was 96% investment grade, comprised 86%85% of our total investment portfolio. Our $3.9$3.7 billion energy portfolio was predominantly investment grade and our metals and mining sector holdings were less than 1% of our total cash, cash equivalents and invested assetsinvestment portfolio as of SeptemberJune 30, 2017.2018. We believe our energy portfolio is well-diversified and would expect manageable capital impact on our U.S. life insurance subsidiaries.
Derivatives
We actively responded to the risk in our derivatives portfolio arising from our counterparties’ right to terminate their bilateralover-the-counter (“OTC”) derivatives transactions with us following the downgrades of our life insurance subsidiaries by S&PMoody’s Investors Service, Inc. and A.M. Best in September 2017 and by Moody’sFebruary 2018. These actions included, beginning in October 2017. We notified our counterparties2018, the removal of the downgrades to determine whether they would exercisecredit downgrade provisions from the master swap agreements with many of our counterparties. As of June 30, 2018, no counterparties exercised their rights to terminate or revise the transactions, agree to maintain theterms of their transactions with us under revised terms or permit us to move the transactions to clearing through the Chicago Mercantile Exchange (“CME”). Although some counterparties have indicated
that they reserve their rights to take action against us, only one counterparty has done so. During October 2017, this counterparty terminated approximately $800 million notional with us, which we have re-hedged using financial futures. We also continue to discuss the downgrades with the other counterparties.us.
As of SeptemberJune 30, 2017, $14.22018, $12.2 billion notional of our derivatives portfolio was cleared through the CME.Chicago Mercantile Exchange (“CME”). The customer swap agreements that govern our cleared derivatives contain provisions that enable our clearing agents to request initial margin in excess of CME requirements. As of SeptemberJune 30, 2017,2018, we posted initial margin of $314$253 million to our clearing agents, which represented approximately $77$76 million more than was otherwise required by the clearinghouse. Because our clearing agents serve as guarantors of our
obligations to the CME, the customer agreements contain broad termination provisions that are not specifically dependent on ratings and may be more easily terminated for other reasons.ratings. As of SeptemberJune 30, 2017, $5.92018, $8 billion notional of our derivatives portfolio was in bilateral OTC derivativesderivative transactions pursuant to which we have posted aggregate independent amounts of $261$334 million and are holding collateral from counterparties in the amount of $187$144 million. We have notional of $3.7 billion inno bilateral OTC derivatives where the counterparty has the right to terminate its transactions with us based on our current ratings. Given our current ratings, our ability to enter into new derivatives transactions is limited.
Investment results
The following tables set forth information about our investment income, excluding net investment gains (losses), for each component of our investment portfolio for the periods indicated:
Three months ended June 30, | Increase (decrease) | |||||||||||||||||||||||||||||||||||||||||||||||
Three months ended September 30, | Increase (decrease) | 2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 vs. 2016 | Yield | Amount | Yield | Amount | Yield | Amount | |||||||||||||||||||||||||||||||||||||||
Yield | Amount | Yield | Amount | Yield | Amount | |||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities—taxable | 4.5 | % | $ | 640 | 4.6 | % | $ | 655 | (0.1 | )% | $ | (15 | ) | 4.5 | % | $ | 651 | 4.6 | % | $ | 649 | (0.1 | )% | $ | 2 | |||||||||||||||||||||||
Fixed maturitysecurities—non-taxable | 3.7 | % | 3 | 3.7 | % | 3 | — | % | — | 3.8 | % | 3 | 3.7 | % | 3 | 0.1 | % | — | ||||||||||||||||||||||||||||||
Equity securities | 5.1 | % | 10 | 5.3 | % | 9 | (0.2 | )% | 1 | |||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | 5.0 | % | 78 | 5.2 | % | 79 | (0.2 | )% | (1 | ) | 4.8 | % | 77 | 4.9 | % | 76 | (0.1 | )% | 1 | |||||||||||||||||||||||||||||
Restricted commercial mortgage loans related tosecuritization entities | 10.5 | % | 3 | 7.4 | % | 3 | 3.1 | % | — | 8.4 | % | 2 | 6.7 | % | 2 | 1.7 | % | — | ||||||||||||||||||||||||||||||
Equity securities | 5.1 | % | 9 | 5.8 | % | 8 | (0.7 | )% | 1 | |||||||||||||||||||||||||||||||||||||||
Other invested assets | 61.6 | % | 39 | 24.7 | % | 34 | 36.9 | % | 5 | |||||||||||||||||||||||||||||||||||||||
Policy loans | 8.6 | % | 39 | 8.7 | % | 38 | (0.1 | )% | 1 | 9.0 | % | 41 | 8.7 | % | 39 | 0.3 | % | 2 | ||||||||||||||||||||||||||||||
Cash, cash equivalents and short-term investments | 1.1 | % | 10 | 0.6 | % | 5 | 0.5 | % | 5 | |||||||||||||||||||||||||||||||||||||||
Other invested assets (1) | 49.3 | % | 53 | 55.6 | % | 35 | (6.3 | )% | 18 | |||||||||||||||||||||||||||||||||||||||
Restricted other invested assets related tosecuritization entities | — | % | — | 4.8 | % | 1 | (4.8 | )% | (1 | ) | ||||||||||||||||||||||||||||||||||||||
Cash, cash equivalents, restricted cash and short-term investments | 1.7 | % | 14 | 1.0 | % | 10 | 0.7 | % | 4 | |||||||||||||||||||||||||||||||||||||||
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Gross investment income before expenses and fees | 4.7 | % | 821 | 4.7 | % | 825 | — | % | (4 | ) | 4.8 | % | 851 | 4.7 | % | 824 | 0.1 | % | 27 | |||||||||||||||||||||||||||||
Expenses and fees | (0.2 | )% | (24 | ) | (0.1 | )% | (20 | ) | (0.1 | )% | (4 | ) | (0.1 | )% | (23 | ) | (0.1 | )% | (23 | ) | — | % | — | |||||||||||||||||||||||||
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Net investment income | 4.5 | % | $ | 797 | 4.6 | % | $ | 805 | (0.1 | )% | $ | (8 | ) | 4.7 | % | $ | 828 | 4.6 | % | $ | 801 | 0.1 | % | $ | 27 | |||||||||||||||||||||||
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Average invested assets and cash | $ | 70,400 | $ | 69,825 | $ | 575 | $ | 70,466 | $ | 69,982 | $ | 484 | ||||||||||||||||||||||||||||||||||||
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2018 | 2017 | 2018 vs. 2017 | ||||||||||||||||||||||
(Amounts in millions) | Yield | Amount | Yield | Amount | Yield | Amount | ||||||||||||||||||
Fixed maturity securities—taxable | 4.5 | % | $ | 1,286 | 4.6 | % | $ | 1,290 | (0.1 | )% | $ | (4 | ) | |||||||||||
Fixed maturitysecurities—non-taxable | 3.8 | % | 6 | 3.7 | % | 6 | 0.1 | % | — | |||||||||||||||
Equity securities | 5.2 | % | 20 | 5.1 | % | 17 | 0.1 | % | 3 | |||||||||||||||
Commercial mortgage loans | 5.0 | % | 159 | 5.0 | % | 153 | — | % | 6 | |||||||||||||||
Restricted commercial mortgage loans related tosecuritization entities | 8.1 | % | 4 | 6.5 | % | 4 | 1.6 | % | — | |||||||||||||||
Policy loans | 9.3 | % | 84 | 9.1 | % | 81 | 0.2 | % | 3 | |||||||||||||||
Other invested assets(1) | 44.0 | % | 92 | 42.3 | % | 67 | 1.7 | % | 25 | |||||||||||||||
Restricted other invested assets related tosecuritization entities | — | % | — | 1.3 | % | 1 | (1.3 | )% | (1 | ) | ||||||||||||||
Cash, cash equivalents, restricted cash and short-term investments | 1.5 | % | 26 | 0.9 | % | 16 | 0.6 | % | 10 | |||||||||||||||
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Gross investment income before expenses and fees | 4.8 | % | 1,677 | 4.7 | % | 1,635 | 0.1 | % | 42 | |||||||||||||||
Expenses and fees | (0.2 | )% | (45 | ) | (0.1 | )% | (44 | ) | (0.1 | )% | (1 | ) | ||||||||||||
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Net investment income | 4.6 | % | $ | 1,632 | 4.6 | % | $ | 1,591 | — | % | $ | 41 | ||||||||||||
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Average invested assets and cash | $ | 70,529 | $ | 69,828 | $ | 701 | ||||||||||||||||||
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(1) | Investment income for other invested assets includes amortization of terminated cash flow hedges, which have no corresponding book value within the yield calculation. |
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2017 | 2016 | 2017 vs. 2016 | ||||||||||||||||||||||
(Amounts in millions) | Yield | Amount | Yield | Amount | Yield | Amount | ||||||||||||||||||
Fixed maturity securities—taxable | 4.5 | % | $ | 1,930 | 4.6 | % | $ | 1,930 | (0.1 | )% | $ | — | ||||||||||||
Fixed maturitysecurities—non-taxable | 3.7 | % | 9 | 3.6 | % | 9 | 0.1 | % | — | |||||||||||||||
Commercial mortgage loans | 5.0 | % | 231 | 5.2 | % | 237 | (0.2 | )% | (6 | ) | ||||||||||||||
Restricted commercial mortgage loans related tosecuritization entities | 7.8 | % | 7 | 7.2 | % | 8 | 0.6 | % | (1 | ) | ||||||||||||||
Equity securities | 5.1 | % | 26 | 5.7 | % | 20 | (0.6 | )% | 6 | |||||||||||||||
Other invested assets | 45.7 | % | 106 | 24.0 | % | 105 | 21.7 | % | 1 | |||||||||||||||
Restricted other invested assets related tosecuritization entities | 1.1 | % | 1 | 1.1 | % | 3 | — | % | (2 | ) | ||||||||||||||
Policy loans | 9.0 | % | 120 | 8.6 | % | 107 | 0.4 | % | 13 | |||||||||||||||
Cash, cash equivalents and short-term investments | 1.0 | % | 26 | 0.5 | % | 16 | 0.5 | % | 10 | |||||||||||||||
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Gross investment income before expenses and fees | 4.7 | % | 2,456 | 4.6 | % | 2,435 | 0.1 | % | 21 | |||||||||||||||
Expenses and fees | (0.2 | )% | (68 | ) | (0.1 | )% | (62 | ) | (0.1 | )% | (6 | ) | ||||||||||||
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Net investment income | 4.5 | % | $ | 2,388 | 4.5 | % | $ | 2,373 | — | % | $ | 15 | ||||||||||||
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Average invested assets and cash | $ | 70,018 | $ | 69,837 | $ | 181 | ||||||||||||||||||
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Yields are based on net investment income as reported under U.S. GAAP and are consistent with how the company measures itswe measure our investment performance for management purposes. Yields are annualized, for interim periods, and are calculated as net investment income as a percentage of average quarterly asset carrying values except for fixed maturity and equity securities, derivatives and derivative counterparty collateral, which exclude unrealized fair value adjustments and securities lending activity, which is included in other invested assets and is calculated net of the corresponding securities lending liability.
For the three months ended SeptemberJune 30, 2017,2018, annualized weighted-average investment yields decreasedincreased primarily attributable to lowerhigher investment income on higher average invested assets. Net investment income included $7$6 million of lower favorablehigher limited partnership income, $3 million higher income related to inflation-driven volatility on U.S. Government Treasury Inflation Protected Securities (“TIPS”) and $4 million of higher unfavorable prepayment speed adjustments on structured securities and $4 million of lower bond call and prepayment income as compared to the prior year.
The following table sets forth net investment gains (losses) for the periods indicated:
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
(Amounts in millions) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
Realized gains | $ | 40 | $ | 39 | $ | 177 | $ | 205 | $ | 13 | $ | 74 | $ | 20 | $ | 137 | ||||||||||||||||
Realized losses | (10 | ) | (24 | ) | (55 | ) | (75 | ) | (21 | ) | (11 | ) | (37 | ) | (45 | ) | ||||||||||||||||
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Net realized gains (losses) onavailable-for-sale securities | 30 | 15 | 122 | 130 | (8 | ) | 63 | (17 | ) | 92 | ||||||||||||||||||||||
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Impairments: | ||||||||||||||||||||||||||||||||
Total other-than-temporary impairments | (1 | ) | (2 | ) | (4 | ) | (35 | ) | — | (2 | ) | — | (3 | ) | ||||||||||||||||||
Portion of other-than-temporary impairments included in other comprehensive income (loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Net other-than-temporary impairments | (1 | ) | (2 | ) | (4 | ) | (35 | ) | — | (2 | ) | — | (3 | ) | ||||||||||||||||||
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Net realized gains (losses) on equity securities sold | 8 | — | 10 | — | ||||||||||||||||||||||||||||
Net unrealized gains (losses) on equity securities still held | 3 | — | (15 | ) | — | |||||||||||||||||||||||||||
Trading securities | — | (4 | ) | 1 | 40 | — | 1 | — | 1 | |||||||||||||||||||||||
Limited partnerships | (2 | ) | — | 5 | — | |||||||||||||||||||||||||||
Commercial mortgage loans | 1 | (1 | ) | 3 | 1 | — | 1 | — | 2 | |||||||||||||||||||||||
Net gains (losses) related to securitization entities | 1 | 2 | 5 | (51 | ) | — | 2 | — | 4 | |||||||||||||||||||||||
Derivative instruments | 54 | 10 | 93 | (52 | ) | (15 | ) | 36 | (28 | ) | 39 | |||||||||||||||||||||
Contingent consideration adjustment | — | — | — | (2 | ) | |||||||||||||||||||||||||||
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Net investment gains (losses) | $ | 85 | $ | 20 | $ | 220 | $ | 31 | $ | (14 | ) | $ | 101 | $ | (45 | ) | $ | 135 | ||||||||||||||
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Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017
Net investment losses related to derivatives of $15 million of lower net other-than-temporary impairments during the three months ended SeptemberJune 30, 2017. The total impairments of $1 million2018 were primarily associated with various hedging programs that support our Canada Mortgage Insurance segment and $2 million recorded during the three months ended September 30, 2017 and September 30, 2016, respectively, relatedderivatives that support our fixed indexed annuity products. These losses were partially offset by gains from derivatives used to equity securities.hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries.
and hedging programs for our runoff variable annuity products. These gains were partially offset by losses related to hedging programs for our fixed indexed annuity products and derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries.
Net investment gains related to derivatives of $10 million during the three months ended September 30, 2016 were primarily associated with hedging programs for our runoff variable annuity products and gains related to hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to a decrease in long-term interest rates. These gains were partially offset by losses in derivatives used to hedge foreign currency risk associated with assets held and expected dividend payments from certain foreign subsidiaries.
We recorded $15net realized losses of $8 million of higher net gains related to the sale ofavailable-for-sale securities during the three months ended SeptemberJune 30, 2018 compared to $63 million of net realized gains during the three months ended June 30, 2017. We also recorded $4$3 million of lowernet unrealized gains on equity securities and $2 million of losses on limited partnerships primarily from unrealized losses included in net income during the three months ended SeptemberJune 30, 20172018 from adopting new accounting guidance related to trading securities primarily from a decline in our trading portfolio in the current year.recognition and measurement of financial assets and financial liabilities on January 1, 2018.
NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017
Net investment losses related to derivatives of $28 million of lower net other-than-temporary impairments during the ninesix months ended SeptemberJune 30, 2017. Of the total impairments recorded during the nine months ended September 30, 20172018 were primarily associated with various hedging programs that support our Canada Mortgage Insurance segment and 2016, $1 million and $24 million, respectively, relatedderivatives that support our runoff variable annuity products. We also had losses associated with hedging programs for our fixed indexed annuity products. These losses were partially offset by gains from derivatives used to corporate securities, $1 million and $3 million, respectively, related to limited partnerships, and $2 million in each period related to equity securities. During the nine months ended September 30, 2016, we also recorded impairments of $4 million related to commercial mortgage loans.hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries.
Net investment losses related to derivatives of $52 million during the nine months ended September 30, 2016 were primarily associated with hedging programs for our runoff variable annuity products. We also had losses associated with hedging programs for our fixed indexed annuity products. These losses were partially offset by gains related to hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business.
We recorded $8net realized losses of $17 million of lower net gains related to the sale ofavailable-for-sale securities during the ninesix months ended SeptemberJune 30, 2018 compared to $92 million of net realized gains during the six months ended June 30, 2017. We also recorded $39$15 million of lower net gains related to tradingunrealized losses on equity securities during the nine months ended September 30, 2017 principally from a decline in our trading portfolio in the current year. We recordedand $5 million of gains on limited partnerships primarily from unrealized gains included in net income during the ninesix months ended SeptemberJune 30, 2017 compared to $51 million of losses2018 from adopting new accounting guidance related to securitization entities during the nine months ended September 30, 2016 primarily related to a $64 million loss from thewrite-offrecognition and measurement of our residual interest in certain policy loan securitization entities in the prior year that did not recur.financial assets and financial liabilities on January 1, 2018.
Investment portfolio
The following table sets forth our cash, cash equivalents, restricted cash and invested assets as of the dates indicated:
September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||
(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 | $ | 45,882 | 61 | % | $ | 45,131 | 61 | % | $ | 43,175 | 59 | % | $ | 45,665 | 61 | % | ||||||||||||||||
Private | 16,670 | 22 | 15,441 | 21 | 16,857 | 23 | 16,860 | 22 | ||||||||||||||||||||||||
Equity securities,available-for-sale | 765 | 1 | 632 | 1 | ||||||||||||||||||||||||||||
Equity securities | 758 | 1 | 820 | 1 | ||||||||||||||||||||||||||||
Commercial mortgage loans | 6,268 | 8 | 6,111 | 8 | 6,480 | 9 | 6,341 | 8 | ||||||||||||||||||||||||
Restricted commercial mortgage loans related to securitization entities | 111 | — | 129 | — | 90 | — | 107 | — | ||||||||||||||||||||||||
Policy loans | 1,818 | 2 | 1,742 | 2 | 1,872 | 3 | 1,786 | 2 | ||||||||||||||||||||||||
Other invested assets | 1,590 | 2 | 2,071 | 3 | 1,650 | 2 | 1,813 | 2 | ||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | — | — | 312 | — | ||||||||||||||||||||||||||||
Cash and cash equivalents | 2,836 | 4 | 2,784 | 4 | ||||||||||||||||||||||||||||
Cash, cash equivalents and restricted cash | 2,243 | 3 | 2,875 | 4 | ||||||||||||||||||||||||||||
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Total cash, cash equivalents and invested assets | $ | 75,940 | 100 | % | $ | 74,353 | 100 | % | ||||||||||||||||||||||||
Total cash, cash equivalents, restricted cash and invested assets | $ | 73,125 | 100 | % | $ | 76,267 | 100 | % | ||||||||||||||||||||||||
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For a discussion of the change in cash, cash equivalents, restricted cash and invested assets, see the comparison for this line item under “—Consolidated Balance Sheets.” See note 4 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to our investment portfolio.
We hold fixed maturity equity and tradingequity 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 SeptemberJune 30, 2017,2018, approximately 7%6% of our investment holdings recorded at fair value were based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 6 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to fair value.
Fixed maturity and equity securities
As of SeptemberJune 30, 2018, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified asavailable-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
(Amounts in millions) | Amortized cost or cost | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Fair value | ||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
U.S. government, agencies andgovernment-sponsored enterprises | $ | 4,733 | $ | 632 | $ | — | $ | (12 | ) | $ | — | $ | 5,353 | |||||||||||
State and political subdivisions | 2,699 | 195 | — | (39 | ) | — | 2,855 | |||||||||||||||||
Non-U.S. government (1) | 2,347 | 69 | — | (36 | ) | — | 2,380 | |||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||
Utilities | 4,550 | 395 | — | (66 | ) | — | 4,879 | |||||||||||||||||
Energy | 2,160 | 139 | — | (29 | ) | — | 2,270 | |||||||||||||||||
Finance and insurance | 6,095 | 288 | — | (108 | ) | — | 6,275 | |||||||||||||||||
Consumer—non-cyclical | 4,298 | 323 | — | (80 | ) | — | 4,541 | |||||||||||||||||
Technology and communications | 2,709 | 133 | — | (61 | ) | — | 2,781 | |||||||||||||||||
Industrial | 1,244 | 59 | — | (20 | ) | — | 1,283 | |||||||||||||||||
Capital goods | 2,216 | 185 | — | (40 | ) | — | 2,361 | |||||||||||||||||
Consumer—cyclical | 1,538 | 66 | — | (31 | ) | — | 1,573 | |||||||||||||||||
Transportation | 1,200 | 83 | — | (31 | ) | — | 1,252 | |||||||||||||||||
Other | 337 | 18 | — | (1 | ) | — | 354 | |||||||||||||||||
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Total U.S. corporate (1) | 26,347 | 1,689 | — | (467 | ) | — | 27,569 | |||||||||||||||||
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Non-U.S. corporate: | ||||||||||||||||||||||||
Utilities | 962 | 22 | — | (22 | ) | — | 962 | |||||||||||||||||
Energy | 1,316 | 101 | — | (18 | ) | — | 1,399 | |||||||||||||||||
Finance and insurance | 2,471 | 102 | — | (36 | ) | — | 2,537 | |||||||||||||||||
Consumer—non-cyclical | 709 | 11 | — | (18 | ) | — | 702 | |||||||||||||||||
Technology and communications | 992 | 30 | — | (15 | ) | — | 1,007 | |||||||||||||||||
Industrial | 943 | 46 | — | (12 | ) | — | 977 | |||||||||||||||||
Capital goods | 603 | 15 | — | (7 | ) | — | 611 | |||||||||||||||||
Consumer—cyclical | 527 | 2 | — | (7 | ) | — | 522 | |||||||||||||||||
Transportation | 690 | 48 | — | �� | (11 | ) | — | 727 | ||||||||||||||||
Other | 2,454 | 128 | — | (24 | ) | — | 2,558 | |||||||||||||||||
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Totalnon-U.S. corporate (1) | 11,667 | 505 | — | (170 | ) | — | 12,002 | |||||||||||||||||
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Residential mortgage-backed (2) | 3,426 | 156 | 13 | (28 | ) | — | 3,567 | |||||||||||||||||
Commercial mortgage-backed | 3,387 | 46 | — | (84 | ) | — | 3,349 | |||||||||||||||||
Other asset-backed (2) | 2,966 | 7 | 1 | (17 | ) | — | 2,957 | |||||||||||||||||
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Totalavailable-for-sale fixedmaturity securities | $ | 57,572 | $ | 3,299 | $ | 14 | $ | (853 | ) | $ | — | $ | 60,032 | |||||||||||
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(1) | Fair value included European periphery exposure of $514 million in Ireland, $250 million in Spain, $115 million in Italy and $37 million in Portugal. |
(2) | Fair value included $21 million collateralized byAlt-A residential mortgage loans and $23 million collateralized bysub-prime residential mortgage loans. |
As of December 31, 2017, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified asavailable-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Amortized cost or cost | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Fair value | Amortized cost or cost | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Fair value | ||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies andgovernment-sponsoredenterprises | $ | 4,893 | $ | 784 | $ | — | $ | (7 | ) | $ | — | $ | 5,670 | $ | 4,681 | $ | 870 | $ | — | $ | (3 | ) | $ | — | $ | 5,548 | ||||||||||||||||||||||
State and political subdivisions | 2,639 | 247 | — | (26 | ) | — | 2,860 | 2,678 | 270 | — | (22 | ) | — | 2,926 | ||||||||||||||||||||||||||||||||||
Non-U.S. government (1) | 2,143 | 107 | — | (24 | ) | — | 2,226 | 2,147 | 106 | — | (20 | ) | — | 2,233 | ||||||||||||||||||||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 4,382 | 556 | — | (15 | ) | — | 4,923 | 4,396 | 611 | — | (9 | ) | — | 4,998 | ||||||||||||||||||||||||||||||||||
Energy | 2,243 | 207 | — | (10 | ) | — | 2,440 | 2,239 | 227 | — | (8 | ) | — | 2,458 | ||||||||||||||||||||||||||||||||||
Finance and insurance | 6,051 | 547 | — | (11 | ) | — | 6,587 | 5,984 | 556 | — | (12 | ) | — | 6,528 | ||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 4,330 | 508 | — | (10 | ) | — | 4,828 | 4,314 | 530 | — | (13 | ) | — | 4,831 | ||||||||||||||||||||||||||||||||||
Technology and communications | 2,558 | 193 | — | (11 | ) | — | 2,740 | 2,665 | 192 | — | (12 | ) | — | 2,845 | ||||||||||||||||||||||||||||||||||
Industrial | 1,247 | 102 | — | (3 | ) | — | 1,346 | 1,241 | 106 | — | (1 | ) | — | 1,346 | ||||||||||||||||||||||||||||||||||
Capital goods | 2,067 | 263 | — | (9 | ) | — | 2,321 | 2,087 | 273 | — | (5 | ) | — | 2,355 | ||||||||||||||||||||||||||||||||||
Consumer—cyclical | 1,506 | 111 | — | (6 | ) | — | 1,611 | 1,493 | 116 | — | (4 | ) | — | 1,605 | ||||||||||||||||||||||||||||||||||
Transportation | 1,188 | 124 | — | (6 | ) | — | 1,306 | 1,160 | 134 | — | (3 | ) | — | 1,291 | ||||||||||||||||||||||||||||||||||
Other | 358 | 24 | — | (2 | ) | — | 380 | 355 | 25 | — | (1 | ) | — | 379 | ||||||||||||||||||||||||||||||||||
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Total U.S. corporate (1) | 25,930 | 2,635 | — | (83 | ) | — | 28,482 | 25,934 | 2,770 | — | (68 | ) | — | 28,636 | ||||||||||||||||||||||||||||||||||
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Non-U.S. corporate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Utilities | 1,022 | 45 | — | (5 | ) | — | 1,062 | 979 | 42 | — | (4 | ) | — | 1,017 | ||||||||||||||||||||||||||||||||||
Energy | 1,330 | 140 | — | (7 | ) | — | 1,463 | 1,337 | 158 | — | (5 | ) | — | 1,490 | ||||||||||||||||||||||||||||||||||
Finance and insurance | 2,524 | 177 | — | (5 | ) | — | 2,696 | 2,567 | 174 | — | (6 | ) | — | 2,735 | ||||||||||||||||||||||||||||||||||
Consumer—non-cyclical | 692 | 27 | — | (3 | ) | — | 716 | 686 | 30 | — | (4 | ) | — | 712 | ||||||||||||||||||||||||||||||||||
Technology and communications | 945 | 71 | — | (2 | ) | — | 1,014 | 913 | 71 | — | (2 | ) | — | 982 | ||||||||||||||||||||||||||||||||||
Industrial | 979 | 81 | — | (2 | ) | — | 1,058 | 958 | 88 | — | (2 | ) | — | 1,044 | ||||||||||||||||||||||||||||||||||
Capital goods | 556 | 33 | — | (2 | ) | — | 587 | 614 | 33 | — | (2 | ) | — | 645 | ||||||||||||||||||||||||||||||||||
Consumer—cyclical | 518 | 10 | — | (1 | ) | — | 527 | 532 | 9 | — | (1 | ) | — | 540 | ||||||||||||||||||||||||||||||||||
Transportation | 650 | 71 | — | (3 | ) | — | 718 | 656 | 68 | — | (3 | ) | — | 721 | ||||||||||||||||||||||||||||||||||
Other | 2,594 | 193 | — | (5 | ) | — | 2,782 | 2,536 | 193 | — | (4 | ) | — | 2,725 | ||||||||||||||||||||||||||||||||||
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Totalnon-U.S. corporate (1) | 11,810 | 848 | — | (35 | ) | — | 12,623 | 11,778 | 866 | — | (33 | ) | — | 12,611 | ||||||||||||||||||||||||||||||||||
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Residential mortgage-backed (2) | 3,950 | 255 | 14 | (10 | ) | — | 4,209 | 3,831 | 223 | 14 | (11 | ) | — | 4,057 | ||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 3,346 | 105 | 2 | (39 | ) | — | 3,414 | 3,387 | 94 | 2 | (37 | ) | — | 3,446 | ||||||||||||||||||||||||||||||||||
Other asset-backed (2) | 3,052 | 20 | 1 | (5 | ) | — | 3,068 | 3,056 | 17 | 1 | (6 | ) | — | 3,068 | ||||||||||||||||||||||||||||||||||
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Total fixed maturitysecurities | 57,763 | 5,001 | 17 | (229 | ) | — | 62,552 | 57,492 | 5,216 | 17 | (200 | ) | — | 62,525 | ||||||||||||||||||||||||||||||||||
Equity securities | 720 | 59 | — | (14 | ) | — | 765 | 756 | 72 | — | (8 | ) | — | 820 | ||||||||||||||||||||||||||||||||||
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Totalavailable-for-salesecurities | $ | 58,483 | $ | 5,060 | $ | 17 | $ | (243 | ) | $ | — | $ | 63,317 | $ | 58,248 | $ | 5,288 | $ | 17 | $ | (208 | ) | $ | — | $ | 63,345 | ||||||||||||||||||||||
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(1) | Fair value included European periphery exposure of |
(2) | Fair value included |
As of December 31, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified asavailable-for-sale were as follows:
Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
(Amounts in millions) | Amortized cost or cost | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Fair value | ||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||
U.S. government, agencies andgovernment-sponsoredenterprises | $ | 5,439 | $ | 647 | $ | — | $ | (50 | ) | $ | — | $ | 6,036 | |||||||||||
State and political subdivisions | 2,515 | 182 | — | (50 | ) | — | 2,647 | |||||||||||||||||
Non-U.S. government (1) | 2,024 | 101 | — | (18 | ) | — | 2,107 | |||||||||||||||||
U.S. corporate: | ||||||||||||||||||||||||
Utilities | 4,137 | 454 | — | (41 | ) | — | 4,550 | |||||||||||||||||
Energy | 2,167 | 157 | — | (24 | ) | — | 2,300 | |||||||||||||||||
Finance and insurance | 5,719 | 424 | — | (46 | ) | — | 6,097 | |||||||||||||||||
Consumer—non-cyclical | 4,335 | 433 | — | (34 | ) | — | 4,734 | |||||||||||||||||
Technology and communications | 2,473 | 157 | — | (32 | ) | — | 2,598 | |||||||||||||||||
Industrial | 1,161 | 76 | — | (14 | ) | — | 1,223 | |||||||||||||||||
Capital goods | 2,043 | 228 | — | (13 | ) | — | 2,258 | |||||||||||||||||
Consumer—cyclical | 1,455 | 92 | — | (17 | ) | — | 1,530 | |||||||||||||||||
Transportation | 1,121 | 86 | — | (17 | ) | — | 1,190 | |||||||||||||||||
Other | 332 | 17 | — | (1 | ) | — | 348 | |||||||||||||||||
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Total U.S. corporate (1) | 24,943 | 2,124 | — | (239 | ) | — | 26,828 | |||||||||||||||||
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Non-U.S. corporate: | ||||||||||||||||||||||||
Utilities | 940 | 40 | — | (11 | ) | — | 969 | |||||||||||||||||
Energy | 1,234 | 109 | — | (12 | ) | — | 1,331 | |||||||||||||||||
Finance and insurance | 2,413 | 134 | — | (9 | ) | — | 2,538 | |||||||||||||||||
Consumer—non-cyclical | 711 | 17 | — | (14 | ) | — | 714 | |||||||||||||||||
Technology and communications | 953 | 44 | — | (10 | ) | — | 987 | |||||||||||||||||
Industrial | 928 | 39 | — | (9 | ) | — | 958 | |||||||||||||||||
Capital goods | 518 | 21 | — | (4 | ) | — | 535 | |||||||||||||||||
Consumer—cyclical | 434 | 10 | — | (2 | ) | — | 442 | |||||||||||||||||
Transportation | 619 | 65 | — | (7 | ) | — | 677 | |||||||||||||||||
Other | 2,967 | 190 | — | (13 | ) | — | 3,144 | |||||||||||||||||
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Totalnon-U.S. corporate (1) | 11,717 | 669 | — | (91 | ) | — | 12,295 | |||||||||||||||||
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Residential mortgage-backed (2) | 4,122 | 259 | 10 | (12 | ) | — | 4,379 | |||||||||||||||||
Commercial mortgage-backed | 3,084 | 98 | 3 | (56 | ) | — | 3,129 | |||||||||||||||||
Other asset-backed (2) | 3,170 | 15 | 1 | (35 | ) | — | 3,151 | |||||||||||||||||
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Total fixed maturitysecurities | 57,014 | 4,095 | 14 | (551 | ) | — | 60,572 | |||||||||||||||||
Equity securities | 628 | 31 | — | (27 | ) | — | 632 | |||||||||||||||||
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Totalavailable-for-salesecurities | $ | 57,642 | $ | 4,126 | $ | 14 | $ | (578 | ) | $ | — | $ | 61,204 | |||||||||||
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Fixed maturity securities increased $2.0decreased $2.5 billion compared to December 31, 2016,2017 principally from higherlower net unrealized gains attributable to a decreasean increase in treasury yields as well as changes in foreign exchangeinterest rates from the weakening of the U.S. dollar in the current year.
Our exposure in peripheral European countries consists of fixed maturity securities in Portugal, Ireland, Italy and Spain. Investments in these countries are primarily made to diversify our U.S. corporate fixed maturity securities with European bonds denominated in U.S. dollars. During the ninesix months ended SeptemberJune 30, 2017,2018, our exposure to the peripheral European countries increaseddecreased by $154$23 million to $943$916 million with unrealized gains of $72$24 million. Our exposure as of SeptemberJune 30, 20172018 was diversified with direct exposure to local economies of $199$187 million, indirect exposure through debt issued by subsidiaries outside of the European periphery of $141$146 million and exposure to multinational companies where the majority of revenues come from outside of the country of domicile of $603$583 million.
Commercial mortgage loans
The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:
September 30, 2017 | June 30, 2018 | |||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total recorded investment | Number of loans | Loan-to-value (1) | Delinquent principal balance | Number of delinquent loans | Total recorded investment | Number of loans | Loan-to-value (1) | Delinquent principal balance | Number of delinquent loans | ||||||||||||||||||||||||||||||
Loan Year | ||||||||||||||||||||||||||||||||||||||||
2004 and prior | $ | 457 | 266 | 28 | % | $ | — | — | ||||||||||||||||||||||||||||||||
2005 | 428 | 128 | 41 | % | 6 | 1 | ||||||||||||||||||||||||||||||||||
2006 | 392 | 101 | 47 | % | — | — | ||||||||||||||||||||||||||||||||||
2006 and prior | $ | 1,084 | 436 | 38 | % | $ | 6 | 1 | ||||||||||||||||||||||||||||||||
2007 | 314 | 81 | 49 | % | — | — | 277 | 75 | 48 | % | — | — | ||||||||||||||||||||||||||||
2008 | 131 | 25 | 51 | % | — | — | 113 | 21 | 49 | % | — | — | ||||||||||||||||||||||||||||
2009 | — | — | — | % | — | — | — | — | — | % | — | — | ||||||||||||||||||||||||||||
2010 | 77 | 15 | 42 | % | — | — | 55 | 12 | 41 | % | — | — | ||||||||||||||||||||||||||||
2011 | 208 | 47 | 43 | % | — | — | 201 | 47 | 44 | % | — | — | ||||||||||||||||||||||||||||
2012 | 564 | 85 | 45 | % | — | — | 532 | 84 | 47 | % | — | — | ||||||||||||||||||||||||||||
2013 | 740 | 132 | 49 | % | — | — | 683 | 126 | 50 | % | — | — | ||||||||||||||||||||||||||||
2014 | 848 | 141 | 54 | % | — | — | 794 | 135 | 56 | % | — | — | ||||||||||||||||||||||||||||
2015 | 913 | 142 | 62 | % | — | — | 890 | 140 | 61 | % | — | — | ||||||||||||||||||||||||||||
2016 | 605 | 100 | 61 | % | — | — | 587 | 98 | 64 | % | — | — | ||||||||||||||||||||||||||||
2017 | 604 | 108 | 68 | % | — | — | 789 | 146 | 68 | % | — | — | ||||||||||||||||||||||||||||
2018 | 487 | 83 | 67 | % | — | — | ||||||||||||||||||||||||||||||||||
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Total | $ | 6,281 | 1,371 | 52 | % | $ | 6 | 1 | $ | 6,492 | 1,403 | 54 | % | $ | 6 | 1 | ||||||||||||||||||||||||
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(1) | Represents weighted-averageloan-to-value as of |
December 31, 2016 | December 31, 2017 | |||||||||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total recorded investment | Number of loans | Loan-to-value (1) | Delinquent principal balance | Number of delinquent loans | Total recorded investment | Number of loans | Loan-to-value (1) | Delinquent principal balance | Number of delinquent loans | ||||||||||||||||||||||||||||||
Loan Year | ||||||||||||||||||||||||||||||||||||||||
2004 and prior | $ | 521 | 304 | 31 | % | $ | — | — | ||||||||||||||||||||||||||||||||
2005 | 469 | 135 | 43 | % | — | — | ||||||||||||||||||||||||||||||||||
2006 | 434 | 105 | 52 | % | 15 | 1 | ||||||||||||||||||||||||||||||||||
2006 and prior | $ | 1,226 | 480 | 38 | % | $ | 6 | 1 | ||||||||||||||||||||||||||||||||
2007 | 452 | 126 | 54 | % | 1 | 1 | 289 | 76 | 49 | % | 5 | 1 | ||||||||||||||||||||||||||||
2008 | 135 | 25 | 54 | % | — | — | 125 | 23 | 50 | % | — | — | ||||||||||||||||||||||||||||
2009 | — | — | — | % | — | — | — | — | — | % | — | — | ||||||||||||||||||||||||||||
2010 | 89 | 17 | 48 | % | — | — | 76 | 15 | 42 | % | — | — | ||||||||||||||||||||||||||||
2011 | 215 | 47 | 47 | % | — | — | 206 | 47 | 43 | % | — | — | ||||||||||||||||||||||||||||
2012 | 588 | 88 | 52 | % | — | — | 559 | 85 | 45 | % | — | — | ||||||||||||||||||||||||||||
2013 | 781 | 136 | 54 | % | — | — | 737 | 132 | 48 | % | — | — | ||||||||||||||||||||||||||||
2014 | 892 | 147 | 61 | % | — | — | 835 | 139 | 54 | % | — | — | ||||||||||||||||||||||||||||
2015 | 932 | 143 | 65 | % | — | — | 904 | 141 | 61 | % | — | — | ||||||||||||||||||||||||||||
2016 | 617 | 100 | 69 | % | — | — | 599 | 99 | 60 | % | — | — | ||||||||||||||||||||||||||||
2017 | 797 | 146 | 68 | % | — | — | ||||||||||||||||||||||||||||||||||
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Total | $ | 6,125 | 1,373 | 55 | % | $ | 16 | 2 | $ | 6,353 | 1,383 | 52 | % | $ | 11 | 2 | ||||||||||||||||||||||||
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(1) | Represents weighted-averageloan-to-value as of December 31, |
Other invested assets
The following table sets forth the carrying values of our other invested assets as of the dates indicated:
September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||||||
Short-term investments | $ | 787 | 49 | % | $ | 352 | 17 | % | $ | 708 | 43 | % | $ | 902 | 50 | % | ||||||||||||||||
Limited partnerships | 335 | 20 | 258 | 14 | ||||||||||||||||||||||||||||
Derivatives | 261 | 16 | 708 | 34 | 230 | 14 | 276 | 15 | ||||||||||||||||||||||||
Limited partnerships | 244 | 15 | 199 | 10 | ||||||||||||||||||||||||||||
Securities lending collateral | 237 | 15 | 534 | 25 | 211 | 13 | 268 | 15 | ||||||||||||||||||||||||
Trading securities | — | — | 259 | 13 | ||||||||||||||||||||||||||||
Bank loan investments | 151 | 9 | 91 | 5 | ||||||||||||||||||||||||||||
Other investments | 61 | 5 | 19 | 1 | 15 | 1 | 18 | 1 | ||||||||||||||||||||||||
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Total other invested assets | $ | 1,590 | 100 | % | $ | 2,071 | 100 | % | $ | 1,650 | 100 | % | $ | 1,813 | 100 | % | ||||||||||||||||
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Derivatives decreased primarily attributable to recent central clearing parties rule changes impacting our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and is now treated as daily settlements of the derivative contract. Securities lending collateral decreased driven by market demand. Our investments in trading securities decreased from higher net sales. Short-term investments increaseddecreased principally from higherdue to net purchasessales in our Australia Mortgage Insurance segment, partially offset by net purchases in our Canada Mortgage Insurance segment in the current year. Limited partnerships increased from additional capital investments and U.S. Life Insurance segmentsfrom net unrealized gains, partially offset by return of capital on our investments in the current year.
Derivatives
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB and fixed index annuity embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
(Notional in millions) | Measurement | December 31, 2016 | Additions | Maturities/ terminations | September 30, 2017 | Measurement | December 31, 2017 | Additions | Maturities/ terminations | June 30, 2018 | ||||||||||||||||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | $ | 11,570 | $ | — | $ | (306 | ) | $ | 11,264 | Notional | $ | 11,155 | $ | 1,436 | $ | (1,672 | ) | $ | 10,919 | ||||||||||||||||||||
Foreign currency swaps | Notional | 22 | — | — | 22 | Notional | 22 | 39 | — | 61 | ||||||||||||||||||||||||||||||
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Total cash flow hedges | 11,592 | — | (306 | ) | 11,286 | 11,177 | 1,475 | (1,672 | ) | 10,980 | ||||||||||||||||||||||||||||||
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Total derivatives designated as hedges | 11,592 | — | (306 | ) | 11,286 | 11,177 | 1,475 | (1,672 | ) | 10,980 | ||||||||||||||||||||||||||||||
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Derivatives not designated as hedges | ||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 4,679 | — | — | 4,679 | Notional | 4,679 | — | (5 | ) | 4,674 | |||||||||||||||||||||||||||||
Interest rate caps and floors | Notional | — | 805 | — | 805 | |||||||||||||||||||||||||||||||||||
Foreign currency swaps | Notional | 201 | 95 | (14 | ) | 282 | Notional | 349 | 128 | (23 | ) | 454 | ||||||||||||||||||||||||||||
Credit default swaps | Notional | 39 | — | — | 39 | Notional | 39 | — | (19 | ) | 20 | |||||||||||||||||||||||||||||
Credit default swaps related to securitization entities | Notional | 312 | — | (200 | ) | 112 | ||||||||||||||||||||||||||||||||||
Equity index options | Notional | 2,396 | 1,584 | (1,484 | ) | 2,496 | Notional | 2,420 | 1,246 | (927 | ) | 2,739 | ||||||||||||||||||||||||||||
Financial futures | Notional | 1,398 | 4,300 | (4,376 | ) | 1,322 | Notional | 1,283 | 2,660 | (2,680 | ) | 1,263 | ||||||||||||||||||||||||||||
Equity return swaps | Notional | 165 | 186 | (258 | ) | 93 | Notional | 96 | 1 | (78 | ) | 19 | ||||||||||||||||||||||||||||
Other foreign currency contracts | Notional | 3,130 | 2,163 | (691 | ) | 4,602 | Notional | 3,264 | 398 | (549 | ) | 3,113 | ||||||||||||||||||||||||||||
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Total derivatives not designated as hedges | 12,320 | 8,328 | (7,023 | ) | 13,625 | 12,130 | 5,238 | (4,281 | ) | 13,087 | ||||||||||||||||||||||||||||||
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Total derivatives | $ | 23,912 | $ | 8,328 | $ | (7,329 | ) | $ | 24,911 | $ | 23,307 | $ | 6,713 | $ | (5,953 | ) | $ | 24,067 | ||||||||||||||||||||||
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(Number of policies) | Measurement | December 31, 2016 | Additions | Maturities/ terminations | September 30, 2017 | Measurement | December 31, 2017 | Additions | Maturities/ terminations | June 30, 2018 | ||||||||||||||||||||||||||||||
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GMWB embedded derivatives | Policies | 33,238 | — | (2,127 | ) | 31,111 | Policies | 30,450 | — | (1,343 | ) | 29,107 | ||||||||||||||||||||||||||||
Fixed index annuity embedded derivatives | Policies | 17,549 | — | (367 | ) | 17,182 | Policies | 17,067 | — | (255 | ) | 16,812 | ||||||||||||||||||||||||||||
Indexed universal life embedded derivatives | Policies | 1,074 | 1 | (66 | ) | 1,009 | Policies | 985 | — | (28 | ) | 957 |
The $1.0 billion increase in the notional value of derivatives was primarily attributable to an increase in ournon-qualified foreign currency interest rate swapscaps and floors related to anon-qualified derivativeour hedging strategy to mitigate interest rate risk associated with our regulatory capital position.
The number of policies related to our GMWB embedded derivatives decreased as variable annuity products are no longer being offered.
Consolidated Balance Sheets
Total assets. Total assets decreased $29$2,820 million from $104,658$105,297 million as of December 31, 20162017 to $104,629$102,477 million as of SeptemberJune 30, 2017.2018.
Cash, and cash equivalents, restricted cash and invested assets increased $1,587decreased $3,142 million primarily from an increasea decrease of $1,980$2,493 million in fixed maturity securities, a decrease of cash, cash equivalents and an increaserestricted cash of $157$632 million and a decrease of $163 million in commercial mortgage loans.other invested assets. The increasedecrease in fixed maturity securities was predominantly related to a decreasedecline in treasury yields and from the weakeningmarket values as a result of the U.S. dollar compared to the balance sheet rate at December 31, 2016. Thean increase in equity securities was primarily related to higher unrealized gains on preferred securities and from purchases mostly in our Canada and Australia mortgage insurance businesses. These increases were partially offset by a decrease of $481 million in other invested assets mostly related to derivative assets, securities lending and trading securities. The decrease in derivative assets was principally driven by recent central clearing parties rule changes impacting our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and is now treated as daily settlements of the derivative contract. The change reduced the value of our derivative assets by $509 millioninterest rates in the third quarter of 2017. The increase was also partially offset by a decrease of $312 million incurrent year. Cash, cash equivalents and restricted other invested assets related to securitization entities driven mostly by proceeds from sales and maturities, as we reposition these assets in connection with the maturity of the associated liabilities.cash decreased
primarily from the redemption of Genworth Holdings’ May 2018 senior notes, net withdrawals from our investment contracts and investing cash outflows principally from purchases of fixed maturity and equity securities outpacing maturities and sales, partially offset by net proceeds from Genworth Holdings’ Term Loan. The decrease in other invested assets was primarily related to net sales of short-term investments, mostly in our Canada and Australia mortgage insurance businesses. |
DAC decreased $1,229increased $757 million predominantly related to our long-term care insurance business.U.S. Life Insurance segment. We are required to analyze the impacts from net unrealized investment gains and losses on ouravailable-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. As of SeptemberJune 30, 2017,2018, due primarily to the declineincrease in interest rates increasingdecreasing unrealized investments gains, we reducedincreased the DAC balance of our long-term care insurance business to zero, a cumulative decrease in the accumulated effect of net unrealized investment (gains) losses of approximately $1.3 billion,U.S. Life Insurance segment by $896 million with an offsetting amount recorded in other comprehensive income (loss). The decreaseincrease was also attributable to lowerpartially offset by amortization, net of interest and deferrals, driven mostly by lower production in our U.S. Life Insurance segment in the current year. See note 7 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to DAC.
Reinsurance recoverable decreased $202$184 million mainly attributable to the runoff of our structured settlement products ceded to Union Fidelity Life Insurance Company, an affiliate of our former parent, GE.
Separate account assets decreased $121$480 million principally from lower derivative collateral receivable primarily due to cash outflows from surrenders and benefits as the change described above within other invested assets relatedbusiness continues to variation margin.run off.
Total liabilities. Total liabilities decreased $649$2,233 million from $90,191$89,969 million as of December 31, 20162017 to $89,542$87,736 million as of SeptemberJune 30, 2017.2018.
Future policy benefits increased $959decreased $559 million primarily driven by ana decrease in our U.S Life Insurance segment. As discussed above, the increase in interest rates decreased our unrealized investments gains. As a result, we decreased future policy benefits by $846 million, mostly in our long-term care insurance business, largely from the aging and growth of thein-force block in the current year. In addition, as discussed above, due primarily to the decline in interest rates increasing unrealized investments gains, we reduced the DAC balance of our long-term care insurance business to zero and established additional reserves of $333 million, with an offsetting amount recorded in other comprehensive income (loss)., referred to as “shadow accounting” adjustments. This decrease was partially offset by aging and growth of our long-term care insurancein-force block in the current year.
Policyholder account balances decreased $1,131$829 million largely as a result of surrenders and benefits in our fixed annuities business and from scheduled maturities of certain institutional products in the current year.
Other liabilitiesUnearned premiums decreased $914$298 million largely from changes in foreign currency from the strengthening of the U.S. dollar compared to the currencies in Canada and Australia. In our international mortgage insurance businesses, the decrease was also driven by earned premiums outpacing written premiums due mostly to lower securities lending liabilities and derivative counterparty collateral as a result of changesnew insurance written in the interest rate environment, along withcurrent year.
Long-term borrowings decreased $177 million principally from the redemption of $597 million of senior notes that matured in May 2018, partially offset by the $450 million Term Loan Genworth Holdings closed in March 2018.
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Total equity. Total equity increased $620decreased $587 million from $14,467$15,328 million as of December 31, 20162017 to $15,087$14,741 million as of SeptemberJune 30, 2017.2018.
We reported net income available to Genworth Financial, Inc.’s common stockholders of $464$302 million during the ninesix months ended SeptemberJune 30, 2017.2018. On January 1, 2018, we adopted new accounting guidance on a modified retrospective basis and recorded $114 million to cumulative effect of change in accounting within retained earnings. See note 2 in our unaudited condensed consolidated financial statements for additional information.
Foreign currency translation and other adjustments increased $128decreased $149 million principally from the weakeningstrengthening of the U.S. dollar compared to the currencies in Canada and Australia in the current year.
Noncontrolling interests increased $195decreased $79 million predominantly related to net income attributable to noncontrolling interest of $198 million and foreign currency translation adjustments of $133$83 million, partially offset by dividends to noncontrolling interests of $92$50 million, and from the repurchase of shares of $31
shares of $49 million and net unrealized investments losses, partially offset by net income attributable to noncontrolling interests of $112 million in the current year. |
Net unrealized gains (losses) decreased $349 million primarily from an increase in interest rates in the current year.
Derivatives qualifying as hedges decreased $202 million largely from an increase in interest rates in the current year.
Liquidity and Capital Resources
Liquidity and capital resources represent our overall financial strength and our ability to generate cash flows from our businesses, borrow funds at competitive rates and raise new capital to meet our operating and growth needs.
Genworth and subsidiaries
The following table sets forth our unaudited condensed consolidated cash flows for the ninesix months ended SeptemberJune 30:
(Amounts in millions) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Net cash from operating activities | $ | 1,932 | $ | 1,798 | $ | 561 | $ | 1,308 | ||||||||
Net cash used by investing activities | (678 | ) | (2,050 | ) | (198 | ) | (523 | ) | ||||||||
Net cash used by financing activities | (1,270 | ) | (2,699 | ) | (943 | ) | (755 | ) | ||||||||
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Net decrease in cash before foreign exchange effect | $ | (16 | ) | $ | (2,951 | ) | ||||||||||
Net increase (decrease) in cash before foreign exchange effect | $ | (580 | ) | $ | 30 | |||||||||||
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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. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. Positive cash flows from operating activities are then invested to support the obligations of our insurance and investment products and required capital supporting these products. In analyzing our cash flow, we focus on the change in the amount of cash available and used in investing activities. Changes in cash from financing activities primarily relate to the issuance of, and redemptions and benefit payments on, universal life insurance and investment contracts; the issuance and acquisition of debt and equity securities; the issuance and repayment or repurchase of borrowings andnon-recourse funding obligations; and other capital transactions.
We had higherlower cash inflows from operating activities during the current year mainly attributable to higher net sales of trading securities as well as higher amounts paid in the prior year related to a reinsurance agreement in our life insurance business that did not recur. These amounts were partially offset byrecur and higher cash outflows in the current year compared to cash inflows in the prior year as a result of the change in collateral related to derivative positions.
We had lower cash outflows from investing activities primarily from lower purchases and higher maturitiesdriven by net sales of fixed maturity securitiesshort-term investments in the current year. These amounts were partially offset by lower sales of fixed maturity securities as well as higheryear compared to net purchases of short-term investments primarily fromin the prior year, largely driven by the decision to manage the interest rate risk and reposition our portfolios, particularly in our Australian mortgage insurance businessbusiness. This was partially offset by net purchases of fixed maturity securities in the current year compared to net proceeds in the prior year.
We had lower cash outflows from financing activities during the current year primarily from prior year transactions that did not recur, consisting of the redemption of $1,620 million ofnon-recourse funding obligations and the repayment and repurchase of $326$597 million of Genworth Holdings’ May 2018 senior notes partially offset by higherand from net withdrawals from our investment contracts, partially offset by $441 million net proceeds from the Term Loan closed in March 2018. We had cash outflows in the current year.prior year primarily driven by net withdrawals from our investment contracts.
In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary.
We previously had a repurchase program in which we sold an investment security at a specified price and agreed to repurchase that security at another specified price at a later date. In the first half of 2017 we repaid $75$42 million the entire amount due at maturity related to these repurchase agreements.
Genworth—holding company
Genworth Financial and Genworth Holdings each actsact as a holding company for their respective subsidiaries and do not have any significant operations of their own. Dividends from their respective subsidiaries, payments to them under tax sharing and expense reimbursement arrangements with their subsidiaries and proceeds from borrowings or securities issuances are their principal sources of cash to meet their obligations. Insurance laws and regulations regulate the payment of dividends and other distributions to Genworth Financial and Genworth Holdings by their insurance subsidiaries. We expect dividends paid by the insurance subsidiaries will vary depending on strategic objectives, regulatory requirements and business performance.
The primary uses of funds at Genworth Financial and Genworth Holdings include payment of holding company general operating expenses (including taxes), payment of principal, interest and other expenses on current and any future borrowings, payments under current and any future guarantees (including guarantees of certain subsidiary obligations), payment of amounts owed to GE under the Tax Matters Agreement, payments to subsidiaries (and, in the case of Genworth Holdings, to Genworth Financial) under tax sharing agreements, contributions to subsidiaries, repurchases of debt securities and, in the case of Genworth Holdings, loans, dividends or other distributions to Genworth Financial. In deploying future capital, important current priorities include focusing on our operating businesses so they remain appropriately capitalized, and accelerating progress on reducing overall indebtedness of Genworth Holdings. We may from time to time seek to repurchase or redeem outstanding notes for cash (with cash on hand, proceeds from the issuance of new debt and/or the proceeds from asset or stock sales) in open market purchases, tender offers, privately negotiated transactions or otherwise. We currently seek to reduceaddress our indebtedness over time through repurchases, redemptions and/or repayments at maturity.
Our Board of Directors has suspended the payment of stockholder dividends on our Genworth Financial common stock indefinitely. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will be dependent on many factors including the receipt of dividends from our operating subsidiaries, our financial condition and operating results, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, our credit and financial strength ratings and such other factors as the Board of Directors deems relevant. In addition, our Board of Directors has suspended repurchases of our Genworth Financial common stock under our stock repurchase program indefinitely. The resumption of our stock repurchase program will be at the discretion of our Board of Directors.
Genworth Holdings had $754$547 million and $998$795 million of cash, and cash equivalents and restricted cash as of June 30, 2018 and December 31, 2017, respectively, which included approximately $52$16 million and $85$4 million of restricted assets, comprised primarily of cash, and cash equivalents, as of September 30, 2017 and December 31, 2016, respectively. Genworth Holdings also held $75 million and $100 million in U.S. government securities as of SeptemberJune 30, 20172018 and December 31, 2016, respectively.2017, which included approximately $36 million and $41 million, respectively, of restricted assets.
During the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016, weGenworth Holdings received common stock dividends from our international subsidiaries of $119$91 million and $250$64 million, respectively. Dividends in 2017 included $16Our U.S. mortgage insurance business also paid a $50 million from our participation in the share buyback programs in Genworth Mortgage Insurance Australia Limited (“Genworth Australia”) and Genworth Canada, as discussed below. Dividends in 2016 included $76 million for our portion of the AUD$202 million capital reduction in Genworth Australia individend during the second quarter of 2016.2018. We expect this will be the only dividend paid by our U.S. mortgage insurance business in 2018, however, the evaluation of future dividend plans is subject to current market conditions, among other factors, which are subject to change.
Regulated insurance subsidiaries
The liquidity requirements of our regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to us, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements.
Our insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. Our insurance subsidiaries’ principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income, including commissions, cost of insurance, mortality, expense and surrender charges, contract underwriting fees, investment management fees and dividends and distributions from their subsidiaries. The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets.
Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar duration such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. As of SeptemberJune 30, 2017,2018, our total cash, cash equivalents, restricted cash and invested assets were $75.9$73.1 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership investments and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 33%35% of the carrying value of our total cash, cash equivalents, restricted cash and invested assets as of SeptemberJune 30, 2017.2018.
Effective December 31, 2015, each GSE adopted revisedAs of June 30, 2018, our U.S. mortgage insurance business was compliant with the PMIERs which set forth operational and financialcapital requirements, that mortgage insurers must meet in order to remain eligible. Each approved mortgage insurer is required to provide the GSEs with an annual certification and a quarterly report as to its compliance with PMIERs.prudent buffer. The reinsurance transactionstransaction covering our 2014 through 2017 book years provided an aggregate of approximately $510$585 million of PMIERs capital credit as of SeptemberJune 30, 2017.2018. Our U.S. mortgage insurance business may execute future capital transactions to maintain a prudent level of financial flexibility in excess of the PMIERs capital requirements given the dynamic nature of asset valuations and requirement changes over time. These future capital transactions could includetime, including additional reinsurance transactions and contributions of holding company cash.
In August 2017,May 2018, Genworth Mortgage Insurance Australia Limited (“Genworth Australia”) announced its intention to commence anon-market sharebuy-back program for shares up to a maximum aggregate amount of AUD$100 million. The total number of shares to be purchased by Genworth Australia under the program dependswill depend on business and market conditions, the prevailing share price, market volumes and other considerations. Pursuant to the program, in August 2017 and September 2017, Genworth Australia repurchased approximately 15.114 million of its shares for AUD$4535 million. As the majority shareholder, we participated inon-market sales transactions during thebuy-back period to maintain our ownership position of approximately 52.0% and received $18$14 million in cash. Of the $18$14 million of cash proceeds received, $4$7 million was paid as a dividend to Genworth Holdings in the thirdsecond quarter of 20172018 and we expect the remaining amount of $14 millionremainder to be paid to Genworth Holdings as a dividend in the fourththird quarter of 2017.2018.
Genworth Australia began a previous sharebuy-back program in 2017 and completed it in February 2018, repurchasing approximately 19 million shares for AUD$49 million in the first quarter of 2018. As the majority shareholder, we participated inon-market sales transactions during thebuy-back period to maintain our ownership position of approximately 52.0% and received $20 million in cash, which was paid to Genworth Holdings as dividends.
In May 2017,2018, Genworth Canada announced acceptance by the Toronto Stock Exchange of its Notice of Intention to Make a Normal Course Issuer Bid (“NCIB”). Pursuant to the NCIB, Genworth Canada may, if considered advisable, purchase from time to time through May 4, 2018,6, 2019, up to an aggregate of approximately 4.64.5 million of its issued and outstanding common shares. If Genworth Canada decides to repurchase shares through the NCIB, we intend to participate in the NCIB in order to maintain our overall ownership at its current level.
In August 2017 and September 2017,March 2018, Genworth Canada repurchased approximately 1.11.2 million of its shares for CAD$4050 million through a previous NCIB. As the NCIB. Wemajority shareholder, we participated in the NCIB in order to maintain our ownership position at its current level of approximately 57.1%57.0% and received $18$22 million in cash. Of the $18$22 million of cash proceeds received, $12$16 million was paid as dividendsa dividend to Genworth Holdings in the third quarter of 2017 and $6 million was retained by GMICO.
Capital resources and financing activities
On September 29, 2017,May 22, 2018, Genworth Canada, our majority-owned subsidiary,Holdings redeemed $597 million of its 6.52% senior notes that were issued in May 2008 and matured in May 2018. A cash payment of $616 million comprising net proceeds of $441 million from the Term Loan, as described below, and $175 million of existing cash on hand was used to fully redeem the principal and accrued interest balance of the May 2018 senior notes.
On March 7, 2018, Genworth Holdings entered into a CAD$200$450 million syndicated senior unsecured revolving credit facility,Term Loan, which matures in March 2023 and was issued at a 0.5% discount. Principal payments under the agreement are due quarterly, commencing on September 29, 2022. Any borrowings under Genworth Canada’s credit facilityJune 30, 2018, and are payable in equal amounts of 0.25% per quarter of the original principal amount with the remaining balance due at maturity. At our option, the Term Loan will bear interest at either an adjusted LIBOR rate no lower than 1.0% plus a ratemargin of 4.5% per annum equalor an alternate base rate plus a margin of 3.5% per annum. The interest rate on the Term Loan as of June 30, 2018 was 6.5%. We incurred $7 million of borrowing costs that were deferred. The Term Loan is unconditionally guaranteed by Genworth Financial, and GFIH has provided a limited recourse guarantee to at the optionlenders of Genworth Canada, either a fixed rate or a variable rate pursuant to the termsHoldings’ outstanding Term Loan, which is secured by GFIH’s ownership interest in Genworth Canada’s outstanding common shares. GFIH is our indirect wholly-owned subsidiary and owns approximately 40.5% of the credit agreement.outstanding common stock of Genworth Canada. The credit facility includes customary representations, warranties, covenants,Term Loan is subject to other terms and conditions. This syndicated credit facility replaced an existing CAD$100 million senior unsecured revolving credit facility which was cancelled on September 29, 2017. Asconditions, including but not limited to: voluntary prepayments subject to prepayment penalties, mandatory prepayments in the event of September 30, 2017, there was no amount outstanding undercertain asset sales or the incurrence of further indebtedness by Genworth Canada’s credit facilityFinancial and all of the covenants were fully met.various financial covenants.
We believe existing cash held at Genworth Holdings combined with dividends from operating subsidiaries, payments under tax sharing and expense reimbursement arrangements with subsidiaries, proceeds from borrowings or securities issuances and, if necessary, sales of assets, as described below, will provide us with sufficient capital flexibility and liquidity to meet our projected future operating and financing requirements. We actively monitor our liquidity position, liquidity generation options and the credit markets given changing market conditions. Due to the delay in the closing of the China Oceanwide transaction, the proceeds of the Term Loan, as described above, were used, together with cash on hand, to retire our May 2018 senior notes. During the first quarter of 2018, given the proceeds from the Term Loan were dedicated to pay the May 2018 senior notes and we have no additional debt maturities due until 2020, we reduced our cash buffer modestly to two times expected annual debt interest payments. We targetpreviously managed liquidity at Genworth Holdings to maintain a minimum balance of one andone-half times expected annual debt interest payments plus an additional $350 million. As of September 30, 2017, Genworth Holdings was above this target due in part to intercompany tax payments of approximately $300 million received from its subsidiaries in 2016. Subject to the completion of the China Oceanwide transaction, China Oceanwide has committed in the Merger Agreement to contribute $600 million of cash to us to address our debt maturing in May 2018, on or before its maturity. We will continue to evaluate our target level of liquidity as circumstances warrant and may move above or below the target for a period of time given future actions and due to the timing of cash inflows and outflows. Additionally, we will continue to evaluate market influences on the valuation of our senior debt, and may consider additional opportunities to repurchase our debt over time. We cannot predict with any certainty the impact to us from any future disruptions in the credit markets or the recent or any further downgrades by one or more of the rating agencies of the financial strength ratings of our insurance company subsidiaries and/or the credit ratings of our holding companies. We are currently reviewing potential refinancing options, which may include secured indebtedness,to address upcoming debt maturitiesin the event the transaction with China Oceanwide cannot be completed in a timely manner or at all. We could also utilize holding company cash and/or pursue potential asset sales to address upcoming debt maturities in the event the transaction with China Oceanwide cannot be completed. In the absence of the transaction with China Oceanwide, or a refinancing alternative, we believe we wouldmay need to pursue asset sales
to address our debt maturities, including potential sales of our mortgage insurance businesses in
Canada and/orand Australia. We are also evaluating options to insulate our U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event the transaction with China Oceanwide cannot be completed. The availability of additional funding will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, the overall availability of credit to the financial services industry, the level of activity and availability of reinsurance, our credit ratings and credit capacity and the performance of and outlook for our business. For a discussion of certain risks associated with our liquidity, see “ItemItem 1A—Risk Factors)—Factors—“Our internal sources of liquidity may be insufficient to meet our needs and our access to capital may be limited or unavailable. Under such conditions, we may seek additional capital but may be unable to obtain it” in our 20162017 Annual Report on Form10-K.
Contractual obligations and commercial commitments
Except as disclosed above, there have been no material additions or changes to our contractual obligations and commercial commitments as set forth in our 20162017 Annual Report on Form10-K filed on February 27, 2017.28, 2018.
Securitization Entities
There were nooff-balance sheet securitization transactions during the ninesix months ended SeptemberJune 30, 20172018 or 2016.2017.
New Accounting Standards
For a discussion of recently adopted accounting standards, see note 2 in our consolidated financial statements under “Item 1—Financial Statements.”
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. Except as disclosed below, there were no other material changes in our market risks since December 31, 2016.2017.
InterestThe U.S. Federal Reserve increased its benchmark lending rate 25 basis points in June 2018 and revised its forecast for two additional rate increases, which would result in four rate increases in 2018. The median economist forecasts indicate three additional 25 basis point increases in 2019 and one in 2020. Given this robust forecast, we expect interest rates will continue to rise throughout 2018 but we remain uncertain at historically low levels despite the factpace in which this increase will occur and its ultimate impact on our businesses. In terms of economic projections from the U.S. Federal Reserve, has raised its benchmark lendingduring the second quarter of 2018, the unemployment rate two times in 2017outlook was revised lower while near-term growth and market expectations remain for an additional rate increase during 2017. Despite the Federal Reserve’s actions,inflation projections were revised up. The U.S. Treasury yields were lower throughoutyield curve continued to flatten in the thirdsecond quarter of 2017 but rose significantly2018 with short-term interest rates rising supported by the U.S. Federal Reserve increases, while long-term interest rates increased marginally due to ongoing speculation around tariffs and tensions associated with potential trade wars. Credit markets experienced modest spread widening primarily driven by periodic supply and demand imbalances rather than concerns about fundamental credit or macroeconomic issues. Though widely anticipated, the TCJA was not a catalyst for widespread debt reduction and a corresponding reduction in bond supply. Although the last week of September 2017,TCJA did result in responsecash-rich multinational companies exiting the debt issuance market, lower supply from such companies was more than offset by debt-financed merger and acquisition-related issuances in investment grade markets. Furthermore, fixed income issuance was slightly lower as compared to potential tax reform. However,pro-growth stimulus policies are still uncertain and weaker inflation data has investors more cautious on the direction of longer term interest rates.2017. See “—Business trends and conditions” and “—Investments and Derivative Instruments” in “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of recent market conditions.
We are exposed to foreign currency exchange risks associated with fluctuations in foreign currency exchange rates against the U.S. dollar resulting from our international operations andnon-U.S.-denominated securities. Our primary international operations are located in Canada and Australia. The assets and liabilities of our international operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date, while revenues and expenses of our international operations are translated into U.S. dollars at the average rates of exchange during the period of the transaction. In general, the weakening of the U.S. dollar results in higher levels of reported assets, liabilities, revenues and net income (loss).income. As of SeptemberJune 30, 2017,2018, the U.S. dollar weakenedstrengthened against the currencies in Canada and Australia compared to the balance sheet rate as of December 31, 2016.2017 and June 30, 2017. In the thirdsecond quarter of 2017,2018, the U.S. dollar weakened against the currencies in Canada and Australia compared to the average rate in the thirdsecond quarter of 2016.2017. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact of changes in foreign currency exchange rates.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2017,2018, 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 Rules13a-15(e) and15d-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 SeptemberJune 30, 2017.2018.
Changes in Internal Control Over Financial Reporting During the Quarter Ended SeptemberJune 30, 20172018
During the three months ended SeptemberJune 30, 2017,2018, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. | Legal Proceedings |
See note 11 in our unaudited condensed consolidated financial statements under “Part 1—Item 1—Financial Statements” for a description of material pending litigation and regulatory matters affecting us.
Item 1A. | Risk Factors |
The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our 20162017 Annual Report on Form10-K, which together describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. There have been no material changes to the risk factors set forth in the above-referenced filing as of SeptemberJune 30, 2017.2018.
Item 6. | Exhibits |
§ | Management contract or compensatory plan or arrangement. |
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: | / | |||||
Matthew D. Farney | ||||||
Vice President and Controller (Principal Accounting Officer) |
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