(1) Nature of Business and Formation of Genworth

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 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, under the name Sub XLVI, Inc., and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

References to “Genworth,” the “Company,” “we” or “our” in the accompanying consolidated financial statements and these notes thereto have the following meanings, unless the context otherwise requires:

 

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For periods prior to April 1, 2013: Genworth Holdings and its subsidiaries

 

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For periods from and after April 1, 2013: Genworth Financial and its subsidiaries

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

We operate our business through the following five operating segments:

 

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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.

 

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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.

 

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

 

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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.

 

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Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). We no longer offer retail and group variable annuities but continue to service our existing blocks of business.

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

 

On December 1, 2015, we completed the sale of our lifestyle protection insurance business, which had previously been designated as a non-core business. Our lifestyle protection insurance business, previously the only business in the International Protection segment, has been reported as discontinued operations and its financial position, results of operations and cash flows are separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 24 for additional information related to discontinued operations.

On October 27, 2015, we announced that Genworth Mortgage Insurance Company (“GMICO”), our wholly-owned indirect subsidiary, entered into an agreement to sell our European mortgage insurance business. As the held-for-sale criteria were satisfied during the fourth quarter of 2015, our European mortgage insurance business, included in Corporate and Other activities, has been reported as held for sale and its financial position is separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 24 for additional information.

(2) Summary of Significant Accounting Policies

Our consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (“U.S. GAAP”). 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. Certain prior year amounts have been reclassified to conform to the current year presentation.

a) Premiums

For traditional long-duration insurance contracts, we report premiums as earned when due. For short-duration insurance contracts, we report premiums as revenue over the terms of the related insurance policies on a pro-rata basis or in proportion to expected claims.

For single premium mortgage insurance contracts, we report premiums over the estimated policy life in accordance with the expected pattern of risk emergence as further described in our accounting policy for unearned premiums. In addition, we have a practice of refunding the post-delinquent premiums in our U.S. mortgage insurance business to the insured party if the delinquent loan goes to claim. We record a liability for premiums received on the delinquent loans where our practice is to refund post-delinquent premiums.

Premiums received under annuity contracts without significant mortality risk and premiums received on investment and universal life insurance products are not reported as revenues but rather as deposits and are included in liabilities for policyholder account balances.

b) Net Investment Income and Net Investment Gains and Losses

Investment income is recognized when earned. Income or losses upon call or prepayment of available-for-sale fixed maturity securities is recognized in net investment income, except for hybrid securities where the income or loss upon call is recognized in net investment gains and losses. Investment gains and losses are calculated on the basis of specific identification on the trade date.

Investment income on mortgage-backed and asset-backed securities is initially based upon yield, cash flow and prepayment assumptions at the date of purchase. Subsequent revisions in those assumptions are recorded using the retrospective or prospective method. Under the retrospective method used for mortgage-backed and asset-backed securities of high credit quality (ratings equal to or greater than “AA” or that are backed by a U.S. agency) which cannot be contractually prepaid in such a manner that we would not recover a substantial portion of the initial investment, amortized cost of the security is adjusted to the amount that would have existed had the revised assumptions been in place at the date of purchase. The adjustments to amortized cost are recorded as a charge or credit to net investment income. Under the prospective method, which is used for all other mortgage-backed and asset-backed securities, future cash flows are estimated and interest income is recognized going forward using the new internal rate of return.

c) Policy Fees and Other Income

Policy fees and other income consists primarily of insurance charges assessed on universal and term universal life insurance contracts and fees assessed against customer account values. For universal and term universal life insurance contracts, charges to policyholder accounts for cost of insurance are recognized as revenue when due. Variable product fees are charged to variable annuity contractholders and variable life insurance policyholders based upon the daily net assets of the contractholder’s and policyholder’s account values and are recognized as revenue when charged. Policy surrender fees are recognized as income when the policy is surrendered.

d) Investment Securities

At the time of purchase, we designate our investment securities as either available-for-sale or trading and report them in our consolidated balance sheets at fair value. Our portfolio of fixed maturity securities comprises primarily investment grade securities. Changes in the fair value of available-for-sale investments, net of the effect on deferred acquisition costs (“DAC”), present value of future profits (“PVFP”), benefit reserves and deferred income taxes, are reflected as unrealized investment gains or losses in a separate component of accumulated other comprehensive income (loss). Realized and unrealized gains and losses related to trading securities are reflected in net investment gains (losses). Trading securities are included in other invested assets in our consolidated balance sheets and primarily represent fixed maturity securities where we utilized the fair value option.

Other-Than-Temporary Impairments On Available-For-Sale Securities

As of each balance sheet date, we evaluate securities in an unrealized loss position for other-than-temporary impairments. For debt securities, we consider all available information relevant to the collectability of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected. More specifically for mortgage-backed and asset-backed securities, we also utilize performance indicators of the underlying assets including default or delinquency rates, loan to collateral value ratios, third-party credit enhancements, current levels of subordination, vintage and other relevant characteristics of the security or underlying assets to develop our estimate of cash flows. Estimating the cash flows expected to be collected is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Where possible, this data is benchmarked against third-party sources.

We recognize other-than-temporary impairments on debt securities in an unrealized loss position when one of the following circumstances exists:

 

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we do not expect full recovery of our amortized cost basis,

 

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the present value of cash flows expected to be collected is less than our amortized cost basis,

 

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we intend to sell a security or

 

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it is more likely than not that we will be required to sell a security prior to recovery.

For other-than-temporary impairments recognized during the period, we present the total other-than-temporary impairments, the portion of other-than-temporary impairments included in other comprehensive income (loss) (“OCI”) and the net other-than-temporary impairments as supplemental disclosure presented on the face of our consolidated statements of income.

Total other-than-temporary impairments that emerged in the current period are calculated as the difference between the amortized cost and fair value. For other-than-temporarily impaired securities where we do not intend to sell the security and it is not more likely than not that we will be required to sell the security prior to recovery, total other-than-temporary impairments are adjusted by the portion of other-than-temporary impairments recognized in OCI (“non-credit”). Net other-than-temporary impairments recorded in net income (loss) represent the credit loss on the other-than-temporarily impaired securities with the offset recognized as an adjustment to the amortized cost to determine the new amortized cost basis of the securities.

For securities that were deemed to be other-than-temporarily impaired and a non-credit loss was recorded in OCI, the amount recorded as an unrealized gain (loss) represents the difference between the current fair value and the new amortized cost for each period presented. The unrealized gain (loss) on an other-than-temporarily impaired security is recorded as a separate component in OCI until the security is sold or until we record an other-than-temporary impairment where we intend to sell the security or will be required to sell the security prior to recovery.

To estimate the amount of other-than-temporary impairment attributed to credit losses on debt securities where we do not intend to sell the security and it is not more likely than not that we will be required to sell the security prior to recovery, we determine our best estimate of the present value of the cash flows expected to be collected from a security using the effective yield on the security prior to recording any other-than-temporary impairment. If the present value of the discounted cash flows is lower than the amortized cost of the security, the difference between the present value and amortized cost represents the credit loss associated with the security with the remaining difference between fair value and amortized cost recorded as a non-credit other-than-temporary impairment in OCI.

The evaluation of other-than-temporary impairments is subject to risks and uncertainties and is intended to determine the appropriate amount and timing for recognizing an impairment charge. The assessment of whether such impairment has occurred is based on management’s best estimate of the cash flows expected to be collected at the individual security level. We regularly monitor our investment portfolio to ensure that securities that may be other-than-temporarily impaired are identified in a timely manner and that any impairment charge is recognized in the proper period.

While the other-than-temporary impairment model for debt securities generally includes fixed maturity securities, there are certain hybrid securities that are classified as fixed maturity securities where the application of a debt impairment model depends on whether there has been any evidence of deterioration in credit of the issuer, such as a downgrade to below investment grade. Under certain circumstances, evidence of deterioration in credit of the issuer may result in the application of the equity securities impairment model.

 

For equity securities, we recognize an impairment charge in the period in which we determine that the security will not recover to book value within a reasonable period. We determine what constitutes a reasonable period on a security-by-security basis based upon consideration of all the evidence available to us, including the magnitude of an unrealized loss and its duration. In any event, this period does not exceed 18 months for common equity securities. We measure other-than-temporary impairments based upon the difference between the amortized cost of a security and its fair value.

e) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value.

Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

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Level 1—Quoted prices for identical instruments in active markets.

 

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Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

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Level 3—Instruments whose significant value drivers are unobservable.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded derivatives and actively traded mutual fund investments.

Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. These models are primarily industry-standard models that consider various inputs, such as interest rate, credit spread and foreign exchange rates for the underlying financial instruments. All significant inputs are observable, or derived from observable, information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed maturity and equity securities; government or agency securities; certain mortgage-backed and asset-backed securities; securities held as collateral; and certain non-exchange-traded derivatives such as interest rate or cross currency swaps.

Level 3 comprises financial instruments whose fair value is estimated based on industry-standard pricing methodologies and internally developed models utilizing significant inputs not based on, nor corroborated by, readily available market information. In certain instances, this category may also utilize non-binding broker quotes. This category primarily consists of certain less liquid fixed maturity, equity and trading securities and certain derivative instruments or embedded derivatives where we cannot corroborate the significant valuation inputs with market observable data.

As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability, such as the relative impact on the fair value as a result of including a particular input. We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. See note 16 for additional information related to fair value measurements.

f) Commercial Mortgage Loans

The carrying value of commercial mortgage loans is stated at original cost, net of principal payments, amortization and allowance for loan losses. Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs, as well as premiums and discounts, are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are deferred and amortized on an effective yield basis over the term of the loan. Commercial mortgage loans are considered past due when contractual payments have not been received from the borrower by the required payment date.

“Impaired” loans are defined by U.S. GAAP as loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. In determining whether it is probable that we will be unable to collect all amounts due, we consider current payment status, debt service coverage ratios, occupancy levels and current loan-to-value. Impaired loans are carried on a non-accrual status. Loans are placed on non-accrual status when, in management’s opinion, the collection of principal or interest is unlikely, or when the collection of principal or interest is 90 days or more past due. Income on impaired loans is not recognized until the loan is sold or the cash received exceeds the carrying amount recorded.

We evaluate the impairment of commercial mortgage loans first on an individual loan basis. If an individual loan is not deemed impaired, then we evaluate the remaining loans collectively to determine whether an impairment should be recorded.

For individually impaired loans, we record an impairment charge when it is probable that a loss has been incurred. The impairment is recorded as an increase in the allowance for loan losses. All losses of principal are charged to the allowance for loan losses in the period in which the loan is deemed to be uncollectible.

For loans that are not individually impaired where we evaluate the loans collectively, the allowance for loan losses is maintained at a level that we determine is adequate to absorb estimated probable incurred losses in the loan portfolio. Our process to determine the adequacy of the allowance utilizes an analytical model based on historical loss experience adjusted for current events, trends and economic conditions that would result in a loss in the loan portfolio over the next 12 months. Key inputs into our evaluation include debt service coverage ratios, loan-to-value, property-type, occupancy levels, geographic region, and probability weighting of the scenarios generated by the model. The actual amounts realized could differ in the near term from the amounts assumed in arriving at the allowance for loan losses reported in the consolidated financial statements. Additions and reductions to the allowance through periodic provisions or benefits are recorded in net investment gains (losses).

For commercial mortgage loans classified as held-for-sale, each loan is carried at the lower of cost or market and is included in commercial mortgage loans in our consolidated balance sheets. See note 4 for additional disclosures related to commercial mortgage loans.

 

g) Repurchase Agreements

We have a repurchase program in which we sell an investment security at a specified price and agree to repurchase that security at another specified price at a later date. Repurchase agreements are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired, including accrued interest, as specified in the respective agreement. The fair value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities. See note 12 for additional information related to our repurchase agreements.

h) Securities Lending Activity

In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary. See note 12 for additional information related to our securities lending activity.

i) Cash and Cash Equivalents

Certificates of deposit, money market funds and other time deposits with original maturities of 90 days or less are considered cash equivalents in the consolidated balance sheets and consolidated statements of cash flows. Items with maturities greater than 90 days but less than one year at the time of acquisition are considered short-term investments.

j) Deferred Acquisition Costs

Acquisition costs include costs that are directly related to the successful acquisition of new or renewal insurance contracts. Acquisition costs are deferred and amortized to the extent they are recoverable from future profits.

Long-Duration Contracts. Acquisition costs include commissions in excess of ultimate renewal commissions and for contracts issued, certain other costs such as underwriting, medical inspection and issuance expenses. DAC for traditional long-duration insurance contracts, including term life and long-term care insurance, is amortized as a level percentage of premiums based on assumptions, including, investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured life expectancy or longevity, insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses, established when the contract is issued. Amortization is adjusted each period to reflect actual lapse or termination rates.

Amortization for deferred annuity and universal life insurance contracts is based on expected gross profits. Expected gross profits are adjusted quarterly to reflect actual experience to date or for changes in underlying assumptions relating to future gross profits. Estimates of gross profits for DAC amortization are based on assumptions including interest rates, policyholder persistency or lapses, insured life expectancy or longevity and expenses.

Short-Duration Contracts. Acquisition costs primarily consist of commissions and premium taxes and are amortized ratably over the terms of the underlying policies.

 

We regularly review our assumptions and test DAC for recoverability at least annually. For deferred annuity and universal life insurance contracts, if the present value of expected future gross profits is less than the unamortized DAC for a line of business, a charge to income is recorded for additional DAC amortization. For traditional long-duration and short-duration contracts, if the benefit reserve plus anticipated future premiums and interest income for a line of business are less than the current estimate of future benefits and expenses (including any unamortized DAC), a charge to income is recorded for additional DAC amortization or for increased benefit reserves. See note 6 for additional information related to DAC including loss recognition and recoverability.

k) Intangible Assets

Present Value of Future Profits. In conjunction with the acquisition of a block of insurance policies or investment contracts, a portion of the purchase price is assigned to the right to receive future gross profits arising from existing insurance and investment contracts. This intangible asset, called PVFP, represents the actuarially estimated present value of future cash flows from the acquired policies. PVFP is amortized, net of accreted interest, in a manner similar to the amortization of DAC.

We regularly review our PVFP assumptions and periodically test PVFP for recoverability similar to our treatment of DAC. See note 7 for additional information related to PVFP including loss recognition and recoverability.

Deferred Sales Inducements to Contractholders. We defer sales inducements to contractholders for features on variable annuities that entitle the contractholder to an incremental amount to be credited to the account value upon making a deposit, and for fixed annuities with crediting rates higher than the contract’s expected ongoing crediting rates for periods after the inducement. Deferred sales inducements to contractholders are reported as a separate intangible asset and amortized in benefits and other changes in policy reserves using the same methodology and assumptions used to amortize DAC.

Other Intangible Assets. We amortize the costs of other intangibles over their estimated useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows, which requires the use of estimates and judgment, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested at least annually for impairment using a qualitative or quantitative assessment and are written down to fair value as required.

l) Goodwill

Goodwill is not amortized but is tested for impairment annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The determination of fair value requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit is the operating segment, or a business, one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the component level. If the reporting unit’s fair value is below its carrying value, we must determine the amount of implied goodwill that would be established if the reporting unit was hypothetically purchased on the impairment assessment date. We recognize an impairment charge for any amount by which the carrying amount of a reporting unit’s goodwill exceeds the amount of implied goodwill.

See note 7 for additional information related to goodwill and impairments recorded.

 

m) Reinsurance

Premium revenue, benefits and acquisition and operating expenses, net of deferrals, are reported net of the amounts relating to reinsurance ceded to and assumed from other companies. Amounts due from reinsurers for incurred and estimated future claims are reflected in the reinsurance recoverable asset. Amounts received from reinsurers that represent recovery of acquisition costs are netted against DAC so that the net amount is capitalized. The cost of reinsurance is accounted for over the terms of the related treaties using assumptions consistent with those used to account for the underlying reinsured policies. Premium revenue, benefits and acquisition and operating expenses, net of deferrals, for reinsurance contracts that do not qualify for reinsurance accounting are accounted for under the deposit method of accounting.

n) Derivatives

Derivative instruments are used to manage risk through one of four principal risk management strategies including: (i) liabilities; (ii) invested assets; (iii) portfolios of assets or liabilities; and (iv) forecasted transactions.

On the date we enter into a derivative contract, management designates the derivative as a hedge of the identified exposure (fair value, cash flow or foreign currency). If a derivative does not qualify for hedge accounting, the changes in its fair value and all scheduled periodic settlement receipts and payments are reported in income.

We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. In this documentation, we specifically identify the asset, liability or forecasted transaction that has been designated as a hedged item, state how the hedging instrument is expected to hedge the risks related to the hedged item, and set forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method that will be used to measure hedge ineffectiveness. We generally determine hedge effectiveness based on total changes in fair value of the hedged item attributable to the hedged risk and the total changes in fair value of the derivative instrument.

We discontinue hedge accounting prospectively when: (i) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) the derivative is de-designated as a hedge instrument; or (iv) it is no longer probable that the forecasted transaction will occur.

For all qualifying and highly effective cash flow hedges, the effective portion of changes in fair value of the derivative instrument is reported as a component of OCI. The ineffective portion of changes in fair value of the derivative instrument is reported as a component of income. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative continues to be carried in the consolidated balance sheets at its fair value, and gains and losses that were accumulated in OCI are recognized immediately in income. When the hedged forecasted transaction is no longer probable, but is reasonably possible, the accumulated gain or loss remains in OCI and is recognized when the transaction affects income; however, prospective hedge accounting for the transaction is terminated. In all other situations in which hedge accounting is discontinued on a cash flow hedge, amounts previously deferred in OCI are reclassified into income when income is impacted by the variability of the cash flow of the hedged item.

For all qualifying and highly effective fair value hedges, the changes in fair value of the derivative instrument are reported in income. In addition, changes in fair value attributable to the hedged portion of the underlying instrument are reported in income. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative continues to be carried in the consolidated balance sheets at its fair value, but the hedged asset or liability will no longer be adjusted for changes in fair value. In all other situations in which hedge accounting is discontinued, the derivative is carried at its fair value in the consolidated balance sheets, with changes in its fair value recognized in current period income.

We may enter into contracts that are not themselves derivative instruments but contain embedded derivatives. For each contract, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to those of the host contract and determine whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument.

If it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and accounted for as a stand-alone derivative. Such embedded derivatives are recorded in the consolidated balance sheets at fair value and are classified consistent with their host contract. Changes in their fair value are recognized in current period income. If we are unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried in the consolidated balance sheets at fair value, with changes in fair value recognized in current period income.

Changes in the fair value of non-qualifying derivatives, including embedded derivatives, changes in fair value of certain derivatives and related hedged items in fair value hedge relationships and hedge ineffectiveness on cash flow hedges are reported in net investment gains (losses).

The majority of our derivative arrangements require the posting of collateral upon meeting certain net exposure thresholds. The amounts recognized for derivative counterparty collateral received by us was recorded in cash and cash equivalents with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us. We also receive non-cash collateral that is not recognized in our balance sheet unless we exercise our right to sell or re-pledge the underlying asset. As of December 31, 2015 and 2014, the fair value of non-cash collateral received was $86 million and $287 million, respectively, and the underlying assets were not sold or re-pledged. Additionally, we have pledged $263 million and $49 million of fixed maturity securities as of December 31, 2015 and 2014, respectively. We have not pledged any cash as collateral to derivative counterparties. Fixed maturity securities that we pledge as collateral remain on our balance sheet within fixed maturity securities available-for-sale. Any cash collateral pledged to a derivative counterparty is derecognized with a receivable recorded in other assets for the right to receive our cash collateral back from the counterparty.

o) Separate Accounts and Related Insurance Obligations

Separate account assets represent funds for which the investment income and investment gains and losses accrue directly to the contractholders and are reflected in our consolidated balance sheets at fair value, reported as summary total separate account assets with an equivalent summary total reported for liabilities. Amounts assessed against the contractholders for mortality, administrative and other services are included in revenues. Changes in liabilities for minimum guarantees are included in benefits and other changes in policy reserves. Net investment income, net investment gains (losses) and the related liability changes associated with the separate account are offset within the same line item in the consolidated statements of income. There were no gains or losses on transfers of assets from the general account to the separate account.

 

We offer certain minimum guarantees associated with our variable annuity contracts. Our variable annuity contracts usually contain a basic guaranteed minimum death benefit (“GMDB”) which provides a minimum benefit to be paid upon the annuitant’s death equal to the larger of account value and the return of net deposits. Some variable annuity contracts permit contractholders to purchase through riders, at an additional charge, enhanced death benefits such as the highest contract anniversary value (“ratchets”), accumulated net deposits at a stated rate (“rollups”), or combinations thereof.

Additionally, some of our variable annuity contracts provide the contractholder with living benefits such as a guaranteed minimum withdrawal benefit (“GMWB”) or certain types of guaranteed annuitization benefits. The GMWB allows contractholders to withdraw a pre-defined percentage of account value or benefit base each year, either for a specified period of time or for life. The guaranteed annuitization benefit generally provides for a guaranteed minimum level of income upon annuitization accompanied by the potential for upside market participation.

Most of our reserves for additional insurance and annuitization benefits are calculated by applying a benefit ratio to accumulated contractholder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past and anticipated future experience. The projections utilize stochastic scenarios of separate account returns incorporating reversion to the mean, as well as assumptions for mortality and lapses. Some of our minimum guarantees, mainly GMWBs, are accounted for as embedded derivatives; see notes 5 and 16 for additional information on these embedded derivatives and related fair value measurement disclosures.

p) Insurance Reserves

Future Policy Benefits

The liability for future policy benefits is equal to the present value of expected benefits and expenses less the present value of expected future net premiums based on assumptions, including, investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured life expectancy or longevity, insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses, all of which are locked-in at the time the policies are issued or acquired. Claim termination rates refer to the expected rates at which claims end. Benefit utilization rates estimate how much of the available policy benefits are expected to be used.

The liability for future policy benefits is evaluated at least annually to determine if a premium deficiency exists. Loss recognition testing is generally performed at the line of business level, with acquired blocks and certain reinsured blocks tested separately. If the liability for future policy benefits plus the current present value of expected future premiums are less than the current present value of expected future benefits and expenses (including any unamortized DAC), a charge to income is recorded for accelerated DAC amortization and, if necessary, a premium deficiency reserve is established. If a charge is recorded, DAC amortization and the liability for future policy benefits are measured using updated assumptions, which become the new locked-in assumptions utilized going forward unless another premium deficiency charge is recorded. Our estimates of future premiums used in loss recognition testing for our long-term care insurance business include assumptions for significant premium rate increases that have been filed and approved or are anticipated to be approved. Beginning in the fourth quarter of 2014, estimates of future premiums also include significant anticipated (but not yet filed) future rate increases or benefit reductions. These anticipated future increases are based on our best estimate of the rate increases we expect to obtain, considering, among other factors, our historical experience from prior rate increase approvals and based on our best estimate of expected claim costs.

 

We are also required to accrue additional future policy benefit reserves when the overall reserve is adequate, but profits are projected in early periods followed by losses projected in later periods. When this pattern of profits followed by losses exists, we ratably accrue this additional profits followed by losses liability over time, increasing reserves in the profitable periods to offset estimated losses expected during the periods that follow. We calculate and adjust the additional reserves using our current best estimate of the amount necessary to offset the losses in future periods, based on the pattern of expected income and current best estimate assumptions consistent with our loss recognition testing. We adjust the accrual rate prospectively, going forward over the remaining profit periods, without any catch-up adjustment.

For long-term care insurance products, benefit reductions are treated as partial lapse of coverage with the balance of our future policy benefits and DAC both reduced in proportion to the reduced coverage. For level premium term life insurance products, we floor the liability for future policy benefits on each policy at zero.

Estimates and actuarial assumptions used for establishing the liability for future policy benefits and in loss recognition testing involve the exercise of significant judgment, and changes in assumptions or deviations of actual experience from assumptions can have material impacts on our liability for future policy benefits and net income (loss). Because these assumptions relate to factors that 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. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition. The risk that our claims experience may differ significantly from our pricing and valuation assumptions is particularly significant for our long-term care insurance products. Long-term care insurance policies provide for long-duration coverage and, therefore, our actual claims experience will emerge over many years after pricing and locked-in valuation assumptions have been established.

Policyholder Account Balances

The liability for policyholder account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date for investment-type and universal life insurance contracts. We are also required to establish additional benefit reserves for guarantees or product features in addition to the contract value where the additional benefit reserves are calculated by applying a benefit ratio to accumulated contractholder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past and anticipated future experience.

Investment-type contracts are broadly defined to include contracts without significant mortality or morbidity risk. Payments received from sales of investment contracts are recognized by providing a liability equal to the current account value of the policyholders’ contracts. Interest rates credited to investment contracts are guaranteed for the initial policy term with renewal rates determined as necessary by management.

q) Liability for Policy and Contract Claims

The liability for policy and contract claims, or claim reserves, represents the amount needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the end of the respective reporting period. The estimated liability includes requirements for future payments of: (a) claims that have been reported to the insurer; (b) claims related to insured events that have occurred but that have not been reported to the insurer as of the date the liability is estimated; and (c) claim adjustment expenses. Claim adjustment expenses include costs incurred in the claim settlement process such as legal fees and costs to record, process and adjust claims.

Our liability for policy and contract claims is reviewed regularly, with changes in our estimates of future claims recorded through net income (loss). Estimates and actuarial assumptions used for establishing the liability for policy and contract claims involve the exercise of significant judgment, and changes in assumptions or deviations of actual experience from assumptions can have material impacts on our liability for policy and contract claims and net income (loss). Because these assumptions relate to factors that 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. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition.

The liability for policy and contract claims for our long-term care insurance products represents the present value of the amount needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the end of the respective reporting period. Key assumptions include investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured mortality (i.e., life expectancy or longevity), insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses. Claim termination rates refer to the expected rates at which claims end. Benefit utilization rates estimate how much of the available policy benefits are expected to be used. Both claim termination rates and benefit utilization rates are influenced by, among other things, gender, age at claim, diagnosis, type of care needed, benefit period, and daily benefit amount. Because these assumptions relate to factors that 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. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition.

The liabilities for our mortgage insurance policies represent our best estimates of the liabilities at the time based on known facts, trends and other external factors, including economic conditions, housing prices and employment rates. For our mortgage insurance policies, reserves for losses and loss adjustment expenses are based on notices of mortgage loan defaults and estimates of defaults that have been incurred but have not been reported by loan servicers, using assumptions of claim rates for loans in default and the average amount paid for loans that result in a claim. As is common accounting practice in the mortgage insurance industry and in accordance with U.S. GAAP, we begin to provide for the ultimate claim payment relating to a potential claim on a defaulted loan when the status of that loan first goes delinquent. Over time, as the status of the underlying delinquent loans move toward foreclosure and the likelihood of the associated claim loss increases, the amount of the loss reserves associated with the potential claims may also increase.

Management considers the liability for policy and contract claims provided to be satisfactory to cover the losses that have occurred. Management monitors actual experience, and where circumstances warrant, will revise its assumptions. The methods of determining such estimates and establishing the reserves are reviewed periodically and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses greater or less than the liability for policy and contract claims provided.

 

r) Unearned Premiums

For single premium insurance contracts, we recognize premiums over the policy life in accordance with the expected pattern of risk emergence. We recognize a portion of the revenue in premiums earned in the current period, while the remaining portion is deferred as unearned premiums and earned over time in accordance with the expected pattern of risk emergence. If single premium policies are cancelled and the premium is non-refundable, then the remaining unearned premium related to each cancelled policy is recognized to earned premiums upon notification of the cancellation. Expected pattern of risk emergence on which we base premium recognition is inherently judgmental and is based on actuarial analysis of historical experience. We periodically review our premium earnings recognition models with any adjustments to the estimates reflected in current period income. For the years ended December 31, 2015, 2014 and 2013, we updated our premium recognition factors for our international mortgage insurance businesses. These updates included the consideration of recent and projected loss experience, policy cancellation experience and refinement of actuarial methods. In 2015, 2014 and 2013, adjustments associated with this update resulted in an increase in earned premiums of $8 million, $6 million and $12 million, respectively.

s) Stock-Based Compensation

We determine a grant date fair value and recognize the related compensation expense, adjusted for expected forfeitures, through the income statement over the respective vesting period of the awards.

t) Employee Benefit Plans

We provide employees with a defined contribution pension plan and recognize expense throughout the year based on the employee’s age, service and eligible pay. We make an annual contribution to the plan. We also provide employees with defined contribution savings plans. We recognize expense for our contributions to the savings plans at the time employees make contributions to the plans.

Some employees participate in defined benefit pension and postretirement benefit plans. We recognize expense for these plans based upon actuarial valuations performed by external experts. We estimate aggregate benefits by using assumptions for employee turnover, future compensation increases, rates of return on pension plan assets and future health care costs. We recognize an expense for differences between actual experience and estimates over the average future service period of participants. We recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in our consolidated balance sheets and recognize changes in that funded status in the year in which the changes occur through OCI.

u) Income Taxes

We determine deferred tax assets and/or liabilities by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled if there is no change in law. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances on deferred tax assets are estimated based on our assessment of the realizability of such amounts.

We do not record U.S. deferred taxes on foreign income that we do not expect to remit or repatriate to U.S. corporations within our consolidated group. Under U.S. GAAP, we are generally required to record U.S. deferred taxes on the anticipated repatriation of foreign income as the income is recognized for financial reporting purposes. An exception under certain accounting guidance permits us not to record a U.S. deferred tax liability for foreign income that we expect to reinvest in our foreign operations and for which remittance will be postponed indefinitely. If it becomes apparent that we cannot positively assert that some or all undistributed income will be reinvested indefinitely, the related deferred taxes are recorded in that period. In determining indefinite reinvestment, we regularly evaluate the capital needs of our domestic and foreign operations considering all available information, including operating and capital plans, regulatory capital requirements, parent company financing and cash flow needs, as well as the applicable tax laws to which our domestic and foreign subsidiaries are subject. Our estimates are based on our historical experience and our expectation of future performance. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future capital needs, which are impacted by such things as regulatory requirements, policyholder behavior, competitor pricing, new product introductions, and specific industry and market conditions.

Similarly, under another exception to the recognition of deferred taxes under U.S. GAAP, we do not record deferred taxes on U.S. domestic subsidiary entities for the excess of the financial statement carrying amount over the tax basis in the stock of the subsidiary (commonly referred to as “outside basis difference”) if we have the ability under the tax law and intent to recover the basis difference in a tax free manner. Deferred taxes would be recognized in the period of a change to our ability or intent.

Our companies have elected to file a single U.S. consolidated income tax return (the “life/non-life consolidated return”). All companies domesticated in the United States and our Bermuda and Guernsey subsidiaries, which have elected to be taxed as U.S. domestic companies, are included in the life/non-life consolidated return as allowed by the tax law and regulations. We have a tax sharing agreement (the “life/non-life tax sharing agreement”) in place and all intercompany balances related to this agreement are settled at least annually.

Our subsidiaries based in Bermuda and Guernsey are treated as U.S. insurance companies under provisions of the U.S. Internal Revenue Code, are included in the life/non-life consolidated return, and have adopted the life-non/life tax sharing agreement. Jurisdictions outside the United States in which our various subsidiaries incur significant taxes include Australia and Canada.

v) Foreign Currency Translation

The determination of the functional currency is made based on the appropriate economic and management indicators. The assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Translation adjustments are included as a separate component of accumulated other comprehensive income (loss). Revenues and expenses of the foreign operations are translated into U.S. dollars at the average rates of exchange during the period of the transaction. Gains and losses from foreign currency transactions are reported in income and have not been material in any years presented in our consolidated statements of income.

w) Variable Interest Entities

We are involved in certain entities that are considered VIEs as defined under U.S. GAAP, and, accordingly, we evaluate the VIE to determine whether we are the primary beneficiary and are required to consolidate the assets and liabilities of the entity. The primary beneficiary of a VIE is the enterprise that has the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance and has the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. The determination of the primary beneficiary for a VIE can be complex and requires management judgment regarding the expected results of the entity and how those results are absorbed by beneficial interest holders, as well as which party has the power to direct activities that most significantly impact the performance of the VIEs.

 

Our primary involvement related to VIEs includes securitization transactions, certain investments and certain mortgage insurance policies.

We have retained interests in VIEs where we are the servicer and transferor of certain assets that were sold to a newly created VIE. Additionally, for certain securitization transactions, we were the transferor of certain assets that were sold to a newly created VIE but did not retain any beneficial interest in the VIE other than acting as the servicer of the underlying assets.

We hold investments in certain structures that are considered VIEs. Our investments represent beneficial interests that are primarily in the form of structured securities or alternative investments. Our involvement in these structures typically represent a passive investment in the returns generated by the VIE and typically do not result in having significant influence over the economic performance of the VIE.

We also provide mortgage insurance on certain residential mortgage loans originated and securitized by third parties using VIEs to issue mortgage-backed securities. While we provide mortgage insurance on the underlying loans, we do not typically have any ongoing involvement with the VIE other than our mortgage insurance coverage and do not act in a servicing capacity for the underlying loans held by the VIE.

See note 17 for additional information related to these consolidated entities.

x) Accounting Changes

Debt Issuance Costs

On December 31, 2015, we early adopted new accounting guidance related to the presentation of debt issuance costs. The new guidance requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance was applied on a retrospective basis. Upon adoption, in our consolidated balance sheet as of December 31, 2014, we recorded a reduction in other assets and total assets of $42 million, with a related reduction in long-term debt of $27 million, a reduction in non-recourse funding obligations of $15 million and a reduction in total liabilities of $42 million. We also adopted new guidance that allows debt issuance costs related to revolving credit facilities to be presented as either an asset or as a direct deduction from the carrying amount of that debt liability. We elected to continue to present debt issuance costs related to revolving credit facilities in other assets in our consolidated balance sheet. See note 12 for more information related to our long-term debt and non-recourse funding obligations.

Financial Assets and Liabilities of a Collateralized Financing Entity

On January 1, 2015, we early adopted new accounting guidance related to measuring the financial assets and financial liabilities of a consolidated collateralized financing entity. The guidance addresses the accounting for the measurement difference between the fair value of financial assets and the fair value of financial liabilities of a collateralized financing entity. The new guidance provides an alternative whereby a reporting entity could measure the financial assets and financial liabilities of the collateralized financing entity in its consolidated financial statements using the more observable of the fair values. There was no impact on our consolidated financial statements.

Repurchase Financings

On January 1, 2015, we adopted new accounting guidance related to the accounting for repurchase-to-maturity transactions and repurchase financings. The new guidance changed the accounting for repurchase-to-maturity transactions and repurchase financing such that they were consistent with secured borrowing accounting. In addition, the guidance required new disclosures for all repurchase agreements and securities lending transactions which were effective beginning in the second quarter of 2015. We do not have repurchase-to-maturity transactions, but have repurchase agreements and securities lending transactions that are subject to additional disclosures. This new guidance did not have an impact on our consolidated financial statements but did impact our disclosures.

Investments In Affordable Housing Projects

On January 1, 2015, we adopted new accounting guidance related to the accounting for investments in affordable housing projects that qualify for the low-income housing tax credit. The new guidance permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects by amortizing the initial cost of the investment in proportion to the tax benefits received and recognize the net investment performance as a component of income tax expense (called the proportional amortization method) if certain conditions are met. The new guidance requires use of the equity method or cost method for investments in qualified affordable housing projects not accounted for using the proportional amortization method. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Share-Based Payment Awards

On January 1, 2015, we early adopted new accounting guidance related to the accounting for share-based payment awards when the terms of an award provide that a performance target can be achieved after the requisite service period. The guidance requires that such performance targets should not be reflected in estimating the grant-date fair value of an award, and that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. We have performance stock unit grants where awards for employees who are retirement eligible can vest on a pro-rata basis upon retirement even if retirement occurs before the performance target is achieved. There was no impact on our consolidated financial statements from the adoption of this accounting guidance.

Investment Companies

On January 1, 2014, we adopted new accounting guidance on the scope, measurement and disclosure requirements for investment companies. The new guidance clarified the characteristics of an investment company, provided comprehensive guidance for assessing whether an entity is an investment company, required investment companies to measure noncontrolling ownership interest in other investment companies at fair value rather than using the equity method of accounting and required additional disclosures. The adoption of this accounting guidance did not have any impact on our consolidated financial statements.

Benchmarking Interest Rates Used When Applying Hedge Accounting

In July 2013, we adopted new accounting guidance to provide additional flexibility in the benchmark interest rates used when applying hedge accounting. The new guidance permits the use of the Federal Funds Effective Swap Rate as a benchmark interest rate for hedge accounting purposes and removes certain restrictions on being able to apply hedge accounting for similar hedges using different benchmark interest rates. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

y) Accounting Pronouncements Not Yet Adopted

In January 2016, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Changes to the current financial instruments accounting primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, will be measured at fair value with changes in fair value recognized in net income. The new guidance also clarifies that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with other deferred tax assets. This new guidance will be effective for us on January 1, 2018. We are still in process of evaluating the impact the guidance may have on our consolidated financial statements.

In May 2015, the FASB issued new disclosure requirements for short-duration insurance contracts. The new guidance requires additional disclosures on short-duration policy and contract claims liabilities for incurred and paid claims development, unpaid claims and claims frequency. These new disclosures will be effective for us on December 31, 2016 with early adoption permitted and will only impact our disclosures.

In February 2015, the FASB issued new accounting guidance related to consolidation. This guidance primarily impacts limited partnerships and similar legal entities, evaluation of fees paid to a decision maker as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination and certain investment funds. This guidance is effective for us on January 1, 2016, with early adoption permitted. We do not expect any significant impact on our consolidated financial statements.

In May 2014, the FASB issued new accounting guidance related to revenue from contracts with customers, effective for us on January 1, 2018. The key principle of the new guidance is 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. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method. Insurance contracts are specifically excluded from this new guidance. The FASB has proposed a technical correction to clarify the scope that both insurance and investment contracts are excluded from the scope of this new guidance. In addition, we believe that mortgage insurance, although excluded from insurance revenue guidance, is not within scope of the new revenue recognition rules and will continue to follow existing industry revenue practices. As such, while we are still evaluating the full impact, at this time we do not expect any significant impacts from this new guidance on our consolidated financial statements.

z) Cash Flow Statement Reclassification

We have revised our consolidated statements of cash flows previously reported in our 2014 Annual Report on Form 10-K for the years ended December 31, 2014 and 2013 to reflect a correction related to the calculation of the change in reinsurance recoverable that impacted the lines “insurance reserves” and “other liabilities, policy and contract claims and other policy-related balances.” As a result, the change in insurance reserves decreased by $720 million and $613 million, respectively, and the change in other liabilities, policy and contract claims and other policy-related balances increased by $720 million and $613 million, respectively, for the years ended December 31, 2014 and 2013. The revisions had no impact on net cash flows from operating activities or the total change in cash and cash equivalents within our consolidated statements of cash flows. Additionally, there was no impact on our consolidated balance sheets or consolidated statements of income.

 

(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 years ended December 31:

 

(Amounts in millions, except per share amounts)		2015				2014				2013
Weighted-average common shares used in basic earnings (loss) per common share calculations			497.4				496.4				493.6
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights			—				—				5.1
Weighted-average common shares used in diluted earnings (loss) per common share calculations (1)			497.4				496.4				498.7
Income (loss) from continuing operations:
Income (loss) from continuing operations		$	(6	)		$	(1,205	)		$	680
Less: income from continuing operations attributable to noncontrolling interests			202				196				154
Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders		$	(208	)		$	(1,401	)		$	526
Basic per common share		$	(0.42	)		$	(2.82	)		$	1.07
Diluted per common share		$	(0.42	)		$	(2.82	)		$	1.05
Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of taxes		$	(407	)		$	157			$	34
Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests			—				—				—
Income (loss) from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders		$	(407	)		$	157			$	34
Basic per common share		$	(0.82	)		$	0.32			$	0.07
Diluted per common share		$	(0.82	)		$	0.32			$	0.07
Net income (loss):
Income (loss) from continuing operations		$	(6	)		$	(1,205	)		$	680
Income (loss) from discontinued operations, net of taxes			(407	)			157				34
Net income (loss)			(413	)			(1,048	)			714
Less: net income attributable to noncontrolling interests			202				196				154
Net income (loss) available to Genworth Financial, Inc.’s common stockholders		$	(615	)		$	(1,244	)		$	560
Basic per common share		$	(1.24	)		$	(2.51	)		$	1.13
Diluted per common share		$	(1.24	)		$	(2.51	)		$	1.12

 

(1)

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders and net loss available to Genworth Financial, Inc.’s common stockholders for the years ended December 31, 2015 and 2014, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share for the years ended December 31, 2015 and 2014, as the inclusion of shares for stock options, restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) of 1.6 million and 5.6 million, respectively, would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders and net loss available to Genworth Financial, Inc.’s common stockholders for the years ended December 31, 2015 and 2014, dilutive potential weighted-average common shares outstanding would have been 499.0 million and 502.0 million, respectively.

(4) Investments

(a) Net Investment Income

Sources of net investment income were as follows for the years ended December 31:

 

(Amounts in millions)		2015				2014				2013
Fixed maturity securities—taxable		$	2,558			$	2,598			$	2,603
Fixed maturity securities—non-taxable			12				12				9
Commercial mortgage loans			337				333				335
Restricted commercial mortgage loans related to securitization entities (1)			14				14				23
Equity securities			15				14				17
Other invested assets (2)			135				105				108
Restricted other invested assets related to securitization entities (1)			5				5				4
Policy loans			137				129				129
Cash, cash equivalents and short-term investments			13				24				19
Gross investment income before expenses and fees			3,226				3,234				3,247
Expenses and fees			(88	)			(92	)			(92	)
Net investment income		$	3,138			$	3,142			$	3,155

 

(1)	See note 17 for additional information related to consolidated securitization entities.

(2)	Included in other invested assets was $9 million, $8 million and $13 million of net investment income related to trading securities for the years ended December 31, 2015, 2014 and 2013, respectively.

 

(b) Net Investment Gains (Losses)

The following table sets forth net investment gains (losses) for the years ended December 31:

 

(Amounts in millions)		2015				2014				2013
Available-for-sale securities:
Realized gains		$	102			$	72			$	149
Realized losses			(82	)			(46	)			(184	)
Net realized gains (losses) on available-for-sale securities			20				26				(35	)
Impairments:
Total other-than-temporary impairments			(28	)			(9	)			(16	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)			1				—				(9	)
Net other-than-temporary impairments			(27	)			(9	)			(25	)
Trading securities			(7	)			39				(23	)
Commercial mortgage loans			7				11				4
Net gains (losses) related to securitization entities (1)			5				16				69
Derivative instruments (2)			(76	)			(103	)			(49	)
Contingent consideration adjustment			2				(2	)			—
Other			1				—				(5	)
Net investment gains (losses)		$	(75	)		$	(22	)		$	(64	)

 

(1)	See note 17 for additional information related to consolidated securitization entities.

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

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 years ended December 31, 2015, 2014 and 2013 was $1,827 million, $857 million and $1,743 million, respectively, which was approximately 96%, 95% and 91%, 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 OCI as of and for the years ended December 31:

 

(Amounts in millions)		2015				2014				2013
Beginning balance		$	83			$	101			$	387
Additions:
Other-than-temporary impairments not previously recognized			—				1				4
Increases related to other-than-temporary impairments previously recognized			—				1				11
Reductions:
Securities sold, paid down or disposed			(19	)			(20	)			(301	)
Ending balance		$	64			$	83			$	101

 

(c) Unrealized Investment Gains and Losses

Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of December 31:

 

(Amounts in millions)		2015				2014				2013
Net unrealized gains (losses) on investment securities:
Fixed maturity securities		$	3,140			$	5,560			$	2,346
Equity securities			(10	)			32				23
Other invested assets			—				(2	)			(4	)
Subtotal			3,130				5,590				2,365
Adjustments to DAC, PVFP, sales inducements and benefit reserves			(1,070	)			(1,656	)			(869	)
Income taxes, net			(711	)			(1,372	)			(517	)
Net unrealized investment gains (losses)			1,349				2,562				979
Less: net unrealized investment gains (losses) attributable to noncontrolling interests			95				109				53
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.		$	1,254			$	2,453			$	926

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

 

(Amounts in millions)		2015				2014				2013
Beginning balance		$	2,453			$	926			$	2,638
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities			(2,467	)			3,244				(3,780	)
Adjustment to DAC			177				(172	)			248
Adjustment to PVFP			89				(66	)			95
Adjustment to sales inducements			30				(15	)			40
Adjustment to benefit reserves			290				(534	)			673
Provision for income taxes			663				(862	)			952
Change in unrealized gains (losses) on investment securities			(1,218	)			1,595				(1,772	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $(2), $7 and $(12)			5				(12	)			21
Change in net unrealized investment gains (losses)			(1,213	)			1,583				(1,751	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests			(14	)			56				(39	)
Ending balance		$	1,254			$	2,453			$	926

 

(d) Fixed Maturity and Equity Securities

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

 

		Amortized cost or cost				Gross unrealized gains								Gross unrealized losses								Fair value
(Amounts in millions)						Not other-than- temporarily impaired				Other-than- temporarily impaired				Not other-than- temporarily impaired				Other-than- temporarily impaired
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	5,487			$	732			$	—			$	(16	)		$	—			$	6,203
State and political subdivisions			2,287				181				—				(30	)			—				2,438
Non-U.S. government			1,910				110				—				(5	)			—				2,015
U.S. corporate:
Utilities			3,355				364				—				(26	)			—				3,693
Energy			2,560				103				—				(162	)			—				2,501
Finance and insurance			5,268				392				15				(43	)			—				5,632
Consumer—non-cyclical			3,755				371				—				(30	)			—				4,096
Technology and communications			2,108				123				—				(38	)			—				2,193
Industrial			1,164				53				—				(44	)			—				1,173
Capital goods			1,774				188				—				(12	)			—				1,950
Consumer—cyclical			1,602				95				—				(22	)			—				1,675
Transportation			1,023				75				—				(12	)			—				1,086
Other			385				22				—				(5	)			—				402
Total U.S. corporate			22,994				1,786				15				(394	)			—				24,401
Non-U.S. corporate:
Utilities			815				37				—				(9	)			—				843
Energy			1,700				64				—				(78	)			—				1,686
Finance and insurance			2,327				152				2				(8	)			—				2,473
Consumer—non-cyclical			746				24				—				(18	)			—				752
Technology and communications			978				36				—				(26	)			—				988
Industrial			1,063				19				—				(96	)			—				986
Capital goods			602				19				—				(17	)			—				604
Consumer—cyclical			522				8				—				(4	)			—				526
Transportation			559				52				—				(6	)			—				605
Other			2,574				187				—				(25	)			—				2,736
Total non-U.S. corporate			11,886				598				2				(287	)			—				12,199
Residential mortgage-backed			4,777				330				11				(17	)			—				5,101
Commercial mortgage-backed			2,492				84				3				(20	)			—				2,559
Other asset-backed			3,328				11				1				(59	)			—				3,281
Total fixed maturity securities			55,161				3,832				32				(828	)			—				58,197
Equity securities			325				8				—				(23	)			—				310
Total available-for-sale securities		$	55,486			$	3,840			$	32			$	(851	)		$	—			$	58,507

 

As of December 31, 2014, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

		Amortized cost or cost				Gross unrealized gains								Gross unrealized losses								Fair value
(Amounts in millions)						Not other-than- temporarily impaired				Other-than- temporarily impaired				Not other-than- temporarily impaired				Other-than- temporarily impaired
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	5,006			$	995			$	—			$	(1	)		$	—			$	6,000
State and political subdivisions			2,013				236				—				(27	)			—				2,222
Non-U.S. government			1,761				143				—				(2	)			—				1,902
U.S. corporate:
Utilities			3,292				577				—				(5	)			—				3,864
Energy			2,498				265				—				(21	)			—				2,742
Finance and insurance			5,102				537				20				(13	)			—				5,646
Consumer—non-cyclical			3,483				538				—				(8	)			—				4,013
Technology and communications			2,112				217				—				(4	)			—				2,325
Industrial			1,195				100				—				(8	)			—				1,287
Capital goods			1,748				263				—				(5	)			—				2,006
Consumer—cyclical			1,750				158				—				(8	)			—				1,900
Transportation			929				114				—				(4	)			—				1,039
Other			370				31				—				—				—				401
Total U.S. corporate			22,479				2,800				20				(76	)			—				25,223
Non-U.S. corporate:
Utilities			857				48				—				(2	)			—				903
Energy			1,911				163				—				(38	)			—				2,036
Finance and insurance			2,757				203				—				(3	)			—				2,957
Consumer—non-cyclical			764				41				—				(9	)			—				796
Technology and communications			986				71				—				(4	)			—				1,053
Industrial			1,166				65				—				(18	)			—				1,213
Capital goods			592				31				—				(5	)			—				618
Consumer—cyclical			520				14				—				—				—				534
Transportation			521				70				—				(1	)			—				590
Other			3,153				257				—				(15	)			—				3,395
Total non-U.S. corporate			13,227				963				—				(95	)			—				14,095
Residential mortgage-backed			4,871				362				13				(17	)			(1	)			5,228
Commercial mortgage-backed			2,564				143				4				(9	)			—				2,702
Other asset-backed			3,735				23				1				(54	)			—				3,705
Total fixed maturity securities			55,656				5,665				38				(281	)			(1	)			61,077
Equity securities			250				32				—				(7	)			—				275
Total available-for-sale securities		$	55,906			$	5,697			$	38			$	(288	)		$	(1	)		$	61,352

 

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

 

		Less than 12 months												12 months or more												Total
(Dollar amounts in millions)		Fair value				Gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	883			$	(16	)			32			$	—			$	—				—			$	883			$	(16	)			32
State and political subdivisions			464				(15	)			81				163				(15	)			17				627				(30	)			98
Non-U.S. government			366				(5	)			49				—				—				—				366				(5	)			49
U.S. corporate			5,836				(332	)			817				466				(62	)			83				6,302				(394	)			900
Non-U.S. corporate			3,016				(170	)			400				486				(117	)			87				3,502				(287	)			487
Residential mortgage-backed			756				(10	)			88				103				(7	)			38				859				(17	)			126
Commercial mortgage-backed			780				(19	)			116				39				(1	)			13				819				(20	)			129
Other asset-backed			1,944				(22	)			349				336				(37	)			55				2,280				(59	)			404
Subtotal, fixed maturity securities			14,045				(589	)			1,932				1,593				(239	)			293				15,638				(828	)			2,225
Equity securities			153				(23	)			64				—				—				—				153				(23	)			64
Total for securities in an unrealized loss position		$	14,198			$	(612	)			1,996			$	1,593			$	(239	)			293			$	15,791			$	(851	)			2,289
% Below cost—fixed maturity securities:
<20% Below cost		$	13,726			$	(472	)			1,877			$	1,259			$	(78	)			238			$	14,985			$	(550	)			2,115
20%-50% Below cost			319				(116	)			54				316				(139	)			50				635				(255	)			104
>50% Below cost			—				(1	)			1				18				(22	)			5				18				(23	)			6
Total fixed maturity securities			14,045				(589	)			1,932				1,593				(239	)			293				15,638				(828	)			2,225
% Below cost—equity securities:
<20% Below cost			133				(18	)			56				—				—				—				133				(18	)			56
20%-50% Below cost			20				(5	)			8				—				—				—				20				(5	)			8
Total equity securities			153				(23	)			64				—				—				—				153				(23	)			64
Total for securities in an unrealized loss position		$	14,198			$	(612	)			1,996			$	1,593			$	(239	)			293			$	15,791			$	(851	)			2,289
Investment grade		$	13,342			$	(524	)			1,834			$	1,245			$	(135	)			225			$	14,587			$	(659	)			2,059
Below investment grade			856				(88	)			162				348				(104	)			68				1,204				(192	)			230
Total for securities in an unrealized loss position		$	14,198			$	(612	)			1,996			$	1,593			$	(239	)			293			$	15,791			$	(851	)			2,289

 

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

 

		Less than 12 months												12 months or more												Total
(Dollar amounts in millions)		Fair value				Gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				Number of securities
Description of Securities
U.S. corporate:
Utilities		$	485			$	(25	)			74			$	14			$	(1	)			7			$	499			$	(26	)			81
Energy			1,162				(134	)			163				131				(28	)			22				1,293				(162	)			185
Finance and insurance			1,142				(35	)			160				94				(8	)			15				1,236				(43	)			175
Consumer—non-cyclical			836				(26	)			107				51				(4	)			10				887				(30	)			117
Technology and communications			658				(36	)			95				23				(2	)			5				681				(38	)			100
Industrial			476				(33	)			64				44				(11	)			9				520				(44	)			73
Capital goods			293				(10	)			48				26				(2	)			4				319				(12	)			52
Consumer—cyclical			427				(18	)			60				63				(4	)			10				490				(22	)			70
Transportation			273				(10	)			38				20				(2	)			1				293				(12	)			39
Other			84				(5	)			8				—				—				—				84				(5	)			8
Subtotal, U.S. corporate securities			5,836				(332	)			817				466				(62	)			83				6,302				(394	)			900
Non-U.S. corporate:
Utilities			130				(6	)			20				32				(3	)			6				162				(9	)			26
Energy			589				(48	)			71				127				(30	)			20				716				(78	)			91
Finance and insurance			478				(7	)			77				30				(1	)			8				508				(8	)			85
Consumer—non-cyclical			261				(14	)			27				37				(4	)			4				298				(18	)			31
Technology and communications			324				(15	)			37				33				(11	)			9				357				(26	)			46
Industrial			495				(54	)			67				110				(42	)			18				605				(96	)			85
Capital goods			154				(8	)			22				41				(9	)			9				195				(17	)			31
Consumer—cyclical			155				(4	)			20				—				—				—				155				(4	)			20
Transportation			147				(6	)			17				—				—				—				147				(6	)			17
Other			283				(8	)			42				76				(17	)			13				359				(25	)			55
Subtotal, non-U.S. corporate securities			3,016				(170	)			400				486				(117	)			87				3,502				(287	)			487
Total for corporate securities in an unrealized loss position		$	8,852			$	(502	)			1,217			$	952			$	(179	)			170			$	9,804			$	(681	)			1,387

As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to the 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 4% as of December 31, 2015.

 

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

Of the $78 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB+” and approximately 75% of the unrealized losses were related to investment grade securities as of December 31, 2015. These unrealized losses were predominantly attributable to corporate securities and state and political subdivision securities including fixed rate securities purchased in a lower rate environment and variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 6% as of December 31, 2015. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of December 31, 2015:

 

		Investment Grade
		20% to 50%																Greater than 50%
(Dollar amounts in millions)		Fair value				Gross unrealized losses				% of total gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				% of total gross unrealized losses				Number of securities
Fixed maturity securities:
State and political subdivisions		$	9			$	(3	)			—	%			1			$	—			$	—				—	%			—
U.S. corporate:
Energy			23				(8	)			1				4				—				—				—				—
Industrial			18				(9	)			1				3				—				—				—				—
Total U.S. corporate			41				(17	)			2				7				—				—				—				—
Non-U.S. corporate:
Utilities			8				(2	)			—				1				—				—				—				—
Energy			21				(8	)			1				2				—				—				—				—
Industrial			29				(14	)			2				4				—				—				—				—
Capital goods			6				(5	)			1				2				—				—				—				—
Other			5				(2	)			—				1				—				—				—				—
Total non-U.S. corporate			69				(31	)			4				10				—				—				—				—
Structured securities:
Other asset-backed			66				(25	)			3				4				—				—				—				—
Total structured securities			66				(25	)			3				4				—				—				—				—
Total		$	185			$	(76	)			9	%			22			$	—			$	—				—	%			—

 

		Below Investment Grade
		20% to 50%																Greater than 50%
(Dollar amounts in millions)		Fair value				Gross unrealized losses				% of total gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				% of total gross unrealized losses				Number of securities
Fixed maturity securities:
U.S. corporate:
Energy		$	21			$	(9	)			1	%			6			$	—			$	—				—	%			—
Finance and insurance			7				(3	)			1				1				—				—				—				—
Technology and communications			5				(2	)			—				1				—				—				—				—
Industrial			4				(1	)			—				1				—				—				—				—
Total U.S. corporate			37				(15	)			2				9				—				—				—				—
Non-U.S. corporate:
Energy			44				(20	)			2				8				—				—				—				—
Technology and communications			5				(4	)			1				2				4				(5	)			1				1
Industrial			10				(6	)			1				2				14				(17	)			2				4
Capital goods			3				(2	)			1				1				—				—				—				—
Other			24				(10	)			—				5				—				—				—				—
Total non-U.S. corporate			86				(42	)			5				18				18				(22	)			3				5
Structured securities:
Other asset-backed			8				(6	)			1				1				—				—				—				—
Total structured securities			8				(6	)			1				1				—				—				—				—
Total		$	131			$	(63	)			8	%			28			$	18			$	(22	)			3	%			5

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

Non-U.S. corporate

As indicated above, $95 million of gross unrealized losses were related to non-U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for non-U.S. corporate fixed maturity securities, $37 million, or 39%, related to the industrial sector and $28 million, or 29%, related to the energy sector. Reduced overseas demand for metals, particularly copper and oil, has led to a decline in commodities pricing, adversely impacting the fair value of these securities.

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

 

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

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

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of December 31, 2015.

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

 

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, 2014:

 

		Less than 12 months												12 months or more												Total
(Dollar amounts in millions)		Fair value				Gross unrealized losses				Number of securities				Fair value				Gross unrealized losses (1)				Number of securities				Fair value				Gross unrealized losses (1)				Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	—			$	—				—			$	75			$	(1	)			10			$	75			$	(1	)			10
State and political subdivision			9				—				7				267				(27	)			45				276				(27	)			52
Non-U.S. government			64				(1	)			15				22				(1	)			4				86				(2	)			19
U.S. corporate			1,639				(33	)			231				1,201				(43	)			174				2,840				(76	)			405
Non-U.S. corporate			1,456				(67	)			199				504				(28	)			67				1,960				(95	)			266
Residential mortgage-backed			180				(1	)			24				249				(17	)			87				429				(18	)			111
Commercial mortgage-backed			163				—				21				362				(9	)			49				525				(9	)			70
Other asset-backed			1,551				(12	)			215				487				(42	)			55				2,038				(54	)			270
Subtotal, fixed maturity securities			5,062				(114	)			712				3,167				(168	)			491				8,229				(282	)			1,203
Equity securities			30				(3	)			46				48				(4	)			6				78				(7	)			52
Total for securities in an unrealized loss position		$	5,092			$	(117	)			758			$	3,215			$	(172	)			497			$	8,307			$	(289	)			1,255
% Below cost—fixed maturity securities:
<20% Below cost		$	5,025			$	(103	)			708			$	3,036			$	(114	)			470			$	8,061			$	(217	)			1,178
20%-50% Below cost			37				(11	)			4				131				(53	)			15				168				(64	)			19
>50% Below cost			—				—				—				—				(1	)			6				—				(1	)			6
Total fixed maturity securities			5,062				(114	)			712				3,167				(168	)			491				8,229				(282	)			1,203
% Below cost—equity securities:
<20% Below cost			26				(2	)			40				48				(4	)			6				74				(6	)			46
20%-50% Below cost			4				(1	)			6				—				—				—				4				(1	)			6
Total equity securities			30				(3	)			46				48				(4	)			6				78				(7	)			52
Total for securities in an unrealized loss position		$	5,092			$	(117	)			758			$	3,215			$	(172	)			497			$	8,307			$	(289	)			1,255
Investment grade		$	4,501			$	(75	)			631			$	2,918			$	(145	)			424			$	7,419			$	(220	)			1,055
Below investment grade (2)			591				(42	)			127				297				(27	)			73				888				(69	)			200
Total for securities in an unrealized loss position		$	5,092			$	(117	)			758			$	3,215			$	(172	)			497			$	8,307			$	(289	)			1,255

 

(1)	Amounts included $1 million of unrealized losses on other-than-temporarily impaired securities.

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

 

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, 2014:

 

		Less than 12 months												12 months or more												Total
(Dollar amounts in millions)		Fair value				Gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				Number of securities
Description of Securities
U.S. corporate:
Utilities		$	55			$	—				10			$	164			$	(5	)			23			$	219			$	(5	)			33
Energy			404				(16	)			56				96				(5	)			15				500				(21	)			71
Finance and insurance			399				(3	)			56				257				(10	)			35				656				(13	)			91
Consumer—non-cyclical			160				(3	)			20				182				(5	)			32				342				(8	)			52
Technology and communications			181				(3	)			27				97				(1	)			15				278				(4	)			42
Industrial			151				(4	)			21				80				(4	)			11				231				(8	)			32
Capital goods			85				—				13				122				(5	)			18				207				(5	)			31
Consumer—cyclical			132				(2	)			17				139				(6	)			18				271				(8	)			35
Transportation			52				(2	)			9				57				(2	)			6				109				(4	)			15
Other			20				—				2				7				—				1				27				—				3
Subtotal, U.S. corporate securities			1,639				(33	)			231				1,201				(43	)			174				2,840				(76	)			405
Non-U.S. corporate:
Utilities			79				—				13				43				(2	)			5				122				(2	)			18
Energy			442				(33	)			57				58				(5	)			13				500				(38	)			70
Finance and insurance			237				(2	)			32				29				(1	)			6				266				(3	)			38
Consumer—non-cyclical			134				(6	)			10				83				(3	)			9				217				(9	)			19
Technology and communications			77				(2	)			13				81				(2	)			8				158				(4	)			21
Industrial			214				(9	)			30				116				(9	)			15				330				(18	)			45
Capital goods			63				(2	)			7				38				(3	)			4				101				(5	)			11
Consumer—cyclical			8				—				1				—				—				—				8				—				1
Transportation			30				—				6				14				(1	)			1				44				(1	)			7
Other			172				(13	)			30				42				(2	)			6				214				(15	)			36
Subtotal, non-U.S. corporate securities			1,456				(67	)			199				504				(28	)			67				1,960				(95	)			266
Total for corporate securities in an unrealized loss position		$	3,095			$	(100	)			430			$	1,705			$	(71	)			241			$	4,800			$	(171	)			671

 

The scheduled maturity distribution of fixed maturity securities as of December 31, 2015 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Amounts in millions)		Amortized cost or cost				Fair value
Due one year or less		$	1,729			$	1,744
Due after one year through five years			9,814				10,192
Due after five years through ten years			11,772				11,917
Due after ten years			21,249				23,403
Subtotal			44,564				47,256
Residential mortgage-backed			4,777				5,101
Commercial mortgage-backed			2,492				2,559
Other asset-backed			3,328				3,281
Total		$	55,161			$	58,197

As of December 31, 2015, $7,730 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of December 31, 2015, securities issued by finance and insurance, consumer—non-cyclical , utilities and energy industry groups represented approximately 22%, 13%, 12% and 11%, 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 December 31, 2015, 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.

As of December 31, 2015 and 2014, $44 million and $49 million, respectively, of securities were on deposit with various state or foreign government insurance departments in order to comply with relevant insurance regulations.

(e) Commercial Mortgage Loans

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

 

We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of December 31:

 

		2015								2014
(Amounts in millions)		Carrying value				% of total				Carrying value				% of total
Property type:
Retail		$	2,355				38	%		$	2,150				35	%
Industrial			1,562				25				1,597				26
Office			1,516				24				1,643				27
Apartments			465				8				494				8
Mixed use/other			289				5				239				4
Subtotal			6,187				100	%			6,123				100	%
Unamortized balance of loan origination fees and costs			(2	)							(1	)
Allowance for losses			(15	)							(22	)
Total		$	6,170							$	6,100

 

		2015								2014
(Amounts in millions)		Carrying value				% of total				Carrying value				% of total
Geographic region:
Pacific		$	1,581				26	%		$	1,636				27	%
South Atlantic			1,574				25				1,673				27
Middle Atlantic			890				14				826				14
Mountain			585				10				536				9
West North Central			416				7				382				6
East North Central			386				6				397				7
West South Central			294				5				268				4
New England			268				4				264				4
East South Central			193				3				141				2
Subtotal			6,187				100	%			6,123				100	%
Unamortized balance of loan origination fees and costs			(2	)							(1	)
Allowance for losses			(15	)							(22	)
Total		$	6,170							$	6,100

 

The following tables set forth the aging of past due commercial mortgage loans by property type as of December 31:

 

		2015
(Amounts in millions)		31 - 60 days past due				61 - 90 days past due				Greater than 90 days past due				Total past due				Current				Total
Property type:
Retail		$	—			$	—			$	—			$	—			$	2,355			$	2,355
Industrial			—				—				—				—				1,562				1,562
Office			6				—				5				11				1,505				1,516
Apartments			—				—				—				—				465				465
Mixed use/other			—				—				—				—				289				289
Total recorded investment		$	6			$	—			$	5			$	11			$	6,176			$	6,187
% of total commercial mortgage loans			—	%			—	%			—	%			—	%			100	%			100	%

 

		2014
(Amounts in millions)		31 - 60 days past due				61 - 90 days past due				Greater than 90 days past due				Total past due				Current				Total
Property type:
Retail		$	—			$	—			$	—			$	—			$	2,150			$	2,150
Industrial			—				—				2				2				1,595				1,597
Office			—				—				6				6				1,637				1,643
Apartments			—				—				—				—				494				494
Mixed use/other			—				—				—				—				239				239
Total recorded investment		$	—			$	—			$	8			$	8			$	6,115			$	6,123
% of total commercial mortgage loans			—	%			—	%			—	%			—	%			100	%			100	%

As of December 31, 2015 and 2014, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of December 31, 2015 and 2014.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of December 31, 2015 and 2014, our commercial mortgage loans greater than 90 days past due included loans with appraised values in excess of the recorded investment and the current recorded investment of these loans was expected to be recoverable.

During the years ended December 31, 2015 and 2014, we modified or extended 21 and 28 commercial mortgage loans, respectively, with a total carrying value of $110 million and $254 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.

 

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans as of or for the years ended December 31:

 

(Amounts in millions)		2015				2014				2013
Allowance for credit losses:
Beginning balance		$	22			$	33			$	42
Charge-offs			(4	)			(1	)			(2	)
Recoveries			—				—				—
Provision			(3	)			(10	)			(7	)
Ending balance		$	15			$	22			$	33
Ending allowance for individually impaired loans		$	—			$	—			$	—
Ending allowance for loans not individually impaired that were evaluated collectively for impairment		$	15			$	22			$	33
Recorded investment:
Ending balance		$	6,187			$	6,123			$	5,932
Ending balance of individually impaired loans		$	19			$	15			$	2
Ending balance of loans not individually impaired that were evaluated collectively for impairment		$	6,168			$	6,108			$	5,930

As of December 31, 2015, we had an individually impaired commercial mortgage loan included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million. As of December 31, 2014, we had an individually impaired commercial mortgage loan included within the industrial property type with a recorded investment of $15 million, an unpaid principal balance of $16 million and charge-offs of $1 million. As of December 31, 2015, this loan had a recorded investment of $14 million, an unpaid principal balance of $15 million and interest income of $1 million.

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

 

The following tables set forth the loan-to-value of commercial mortgage loans by property type as of December 31:

 

		2015
(Amounts in millions)		0%-50%				51%-60%				61%-75%				76%-100%				Greater than 100% (1)				Total
Property type:
Retail		$	846			$	465			$	924			$	106			$	14			$	2,355
Industrial			515				478				499				65				5				1,562
Office			493				341				580				83				19				1,516
Apartments			196				66				182				21				—				465
Mixed use/other			49				55				185				—				—				289
Total recorded investment		$	2,099			$	1,405			$	2,370			$	275			$	38			$	6,187
% of total			34	%			23	%			38	%			4	%			1	%			100	%
Weighted-average debt service coverage ratio			2.13				1.82				1.57				1.12				0.55				1.79

 

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

 

		2014
(Amounts in millions)		0%-50%				51%-60%				61%-75%				76%-100%				Greater than 100% (1)				Total
Property type:
Retail		$	671			$	419			$	967			$	75			$	18			$	2,150
Industrial			451				285				778				60				23				1,597
Office			383				278				782				164				36				1,643
Apartments			211				76				199				8				—				494
Mixed use/other			45				43				145				6				—				239
Total recorded investment		$	1,761			$	1,101			$	2,871			$	313			$	77			$	6,123
% of total			29	%			18	%			47	%			5	%			1	%			100	%
Weighted-average debt service coverage ratio			2.27				1.75				1.61				1.02				0.72				1.78

 

(1)	Included $15 million of impaired loans, $6 million of loans past due and not individually impaired and $56 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 120%.

 

The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of December 31:

 

		2015
(Amounts in millions)		Less than 1.00				1.00-1.25				1.26-1.50				1.51-2.00				Greater than 2.00				Total
Property type:
Retail		$	70			$	232			$	466			$	1,017			$	570			$	2,355
Industrial			94				181				208				672				407				1,562
Office			85				114				265				699				346				1,509
Apartments			6				41				74				199				145				465
Mixed use/other			—				58				141				60				30				289
Total recorded investment		$	255			$	626			$	1,154			$	2,647			$	1,498			$	6,180
% of total			4	%			10	%			19	%			43	%			24	%			100	%
Weighted-average loan-to-value			74	%			64	%			58	%			58	%			43	%			56	%

 

		2014
(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		$	80			$	253			$	524			$	870			$	423			$	2,150
Industrial			158				142				246				706				343				1,595
Office			119				101				247				780				389				1,636
Apartments			1				48				88				186				171				494
Mixed use/other			6				1				61				135				36				239
Total recorded investment		$	364			$	545			$	1,166			$	2,677			$	1,362			$	6,114
% of total			6	%			9	%			19	%			44	%			22	%			100	%
Weighted-average loan-to-value			77	%			64	%			64	%			59	%			45	%			59	%

As of December 31, 2015 and 2014, we had floating rate commercial mortgage loans of $7 million and $9 million, respectively.

(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. See note 17 for additional information related to consolidated securitization entities.

(g) Restricted Other Invested Assets Related To Securitization Entities

We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities whereby the changes in fair value are recorded in current period income (loss). The trading securities comprise asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables. See note 17 for additional information related to consolidated securitization entities.