(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware on October 23, 2003. 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 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. upon the completion of the reorganization.

To implement the reorganization, Genworth Holdings formed New Genworth and New Genworth, in turn, formed Sub XLII, Inc. (“Merger Sub”). The holding company structure was implemented pursuant to Section 251(g) of the General Corporation Law of the State of Delaware (“DGCL”) by the merger of Merger Sub with and into Genworth Holdings (the “Merger”). Genworth Holdings survived the Merger as a direct, wholly-owned subsidiary of New Genworth and each share of Genworth Holdings Class A Common Stock, par value $0.001 per share (“Genworth Holdings Class A Common Stock”), issued and outstanding immediately prior to the Merger and each share of Genworth Holdings Class A Common Stock held in the treasury of Genworth Holdings immediately prior to the Merger converted into one issued and outstanding or treasury, as applicable, share of New Genworth Class A Common Stock, par value $0.001 per share, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the Genworth Holdings Class A Common Stock being converted.

Immediately after the consummation of the Merger, New Genworth had the same authorized, outstanding and treasury capital stock as Genworth Holdings immediately prior to the Merger. Each share of New Genworth common stock outstanding immediately prior to the Merger was cancelled.

Pursuant to Section 251(g) of the DGCL, the Merger did not require a vote of the stockholders of Genworth Holdings. Effective upon the consummation of the Merger, New Genworth adopted an amended and restated certificate of incorporation and amended and restated bylaws that were identical to those of Genworth Holdings immediately prior to the consummation of the Merger (other than provisions regarding certain technical matters, as permitted by Section 251(g) of the DGCL). New Genworth’s directors and executive officers immediately after the consummation of the Merger were the same as the directors and executive officers of Genworth Holdings immediately prior to the consummation of the Merger. Immediately after the consummation of the Merger, New Genworth had, on a consolidated basis, the same assets, businesses and operations as Genworth Holdings had immediately prior to the consummation of the Merger.

On April 1, 2013, in connection with the reorganization, immediately following the consummation of the Merger, Genworth Holdings distributed to New Genworth (as its sole stockholder), through a dividend (the “Distribution”), the 84.6% membership interest in one of its subsidiaries (Genworth Mortgage Holdings, LLC (“GMHL”)) that it held directly, and 100% of the shares of another of its subsidiaries (Genworth Mortgage Holdings, Inc. (“GMHI”)), that held the remaining 15.4% of outstanding membership interests of GMHL. At the time of the Distribution, GMHL and GMHI together owned (directly or indirectly) 100% of the shares or other equity interests of all of the subsidiaries that conducted Genworth Holdings’ U.S. mortgage insurance business (these subsidiaries also owned the subsidiaries that conducted Genworth Holdings’ European mortgage insurance business). As part of the comprehensive U.S. mortgage insurance capital plan, on April 1, 2013, immediately prior to the Distribution, Genworth Holdings contributed $100 million to the U.S. mortgage insurance subsidiaries.

The accompanying condensed financial statements include on a consolidated basis the accounts of: (a) for the periods prior to April 1, 2013, Genworth Holdings and the affiliated companies in which it held a majority equity interest or where it was the primary beneficiary of a variable interest entity and (b) for the periods from and after April 1, 2013, New Genworth and the affiliated companies in which it held a majority voting interest or where it was the primary beneficiary of a variable interest entity. All intercompany accounts and transactions have been eliminated in consolidation.

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

 

•

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

 

•

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

We have the following operating segments:

 

•

U.S. Life Insurance. We offer and manage a variety of insurance and fixed annuity products. Our primary insurance products include life insurance, long-term care insurance and fixed annuities.

 

•

International Mortgage Insurance. We are a leading provider of mortgage insurance products and related services in Canada and Australia and also participate in select European and other countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We also selectively provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk.

 

•

U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively provide mortgage insurance on a bulk basis with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk.

 

•

International Protection. We are a leading provider of payment protection coverages (referred to as lifestyle protection) in multiple European countries and have operations in select other countries. Our lifestyle protection insurance products primarily help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death.

 

•

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”). In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business.

We also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings holding company 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.

On March 27, 2013, we announced that we had agreed to sell our wealth management business to AqGen Liberty Acquisition, Inc., a subsidiary of AqGen Liberty Holdings LLC, a partnership of Aquiline Capital Partners and Genstar Capital, for approximately $412 million. Historically, this business had been reported as a separate segment. As a result of the sale agreement, the financial statements and other disclosures herein have been revised to reclassify this business as discontinued operations and report its financial position, results of operations and cash flows separately for all periods presented. The sale closed on August 30, 2013 and we received net proceeds of approximately $360 million. Also included in discontinued operations was our tax and advisor unit, Genworth Financial Investment Services, which was part of our wealth management business until the closing of its sale on April 2, 2012. See note 10 for additional information related to discontinued operations.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our Current Report on Form 8-K filed on May 30, 2013, which reflected the reclassification of our wealth management business as discontinued operations, adjustments to correct an error related to premium refund accrual in our U.S. mortgage insurance business, the addition of a footnote in the notes to the consolidated financial statements that provides required supplemental guarantor financial information related to certain guarantees we gave in connection with the reorganization in which we became the parent company to Genworth Holdings and the addition of certain disclosures about offsetting assets and liabilities required by newly adopted accounting guidance. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On July 17, 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.

On January 1, 2013, we adopted new accounting guidance for disclosures about offsetting assets and liabilities. This guidance requires an entity to disclose information about offsetting and related arrangements to enable users to understand the effect of those arrangements on its financial position. The adoption of this accounting guidance impacted our disclosures only and did not impact our consolidated results.

On January 1, 2013, we adopted new accounting guidance related to the presentation of the reclassification of items out of accumulated other comprehensive income into net income. The adoption of this accounting guidance impacted our disclosures only and did not impact our consolidated results.

Accounting Pronouncements Not Yet Adopted

In June 2013, the Financial Accounting Standards Board issued new accounting guidance on the scope, measurement and disclosure requirements for investment companies. The new guidance clarifies the characteristics of an investment company, provides comprehensive guidance for assessing whether an entity is an investment company, requires investment companies to measure noncontrolling ownership interest in other investment companies at fair value rather than using the equity method of accounting and requires additional disclosures. These new requirements will be effective for us on January 1, 2014 and are not expected to have a material impact on our consolidated financial statements.

(3) Earnings Per Share

Basic and diluted earnings per share are calculated by dividing each income category presented below by the weighted-average basic and diluted shares outstanding for the periods indicated:

 

		Three months ended September 30,								Nine months ended September 30,
(Amounts in millions, except per share amounts)		2013				2012				2013				2012
Weighted-average shares used in basic earnings per common share calculations			494.0				491.7				493.3				491.5
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights			5.3				2.2				4.6				3.0
Weighted-average shares used in diluted earnings per common share calculations			499.3				493.9				497.9				494.5
Income from continuing operations:
Income from continuing operations		$	146			$	59			$	481			$	208
Less: income from continuing operations attributable to noncontrolling interests			40				36				117				102
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders		$	106			$	23			$	364			$	106
Basic per common share		$	0.21			$	0.05			$	0.74			$	0.22
Diluted per common share		$	0.21			$	0.05			$	0.73			$	0.22
Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of taxes		$	2			$	12			$	(12	)		$	51
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		$	2			$	12			$	(12	)		$	51
Basic per common share		$	—			$	0.02			$	(0.02	)		$	0.10
Diluted per common share		$	—			$	0.02			$	(0.02	)		$	0.10
Net income:
Income from continuing operations		$	146			$	59			$	481			$	208
Income (loss) from discontinued operations, net of taxes			2				12				(12	)			51
Net income			148				71				469				259
Less: net income attributable to noncontrolling interests			40				36				117				102
Net income available to Genworth Financial, Inc.’s common stockholders		$	108			$	35			$	352			$	157
Basic per common share		$	0.22			$	0.07			$	0.71			$	0.32
Diluted per common share		$	0.22			$	0.07			$	0.71			$	0.32

(4) Investments

(a) Net Investment Income

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

 

		Three months ended September 30,								Nine months ended September 30,
(Amounts in millions)		2013				2012				2013				2012
Fixed maturity securities—taxable		$	651			$	659			$	1,979			$	1,988
Fixed maturity securities—non-taxable			3				2				7				9
Commercial mortgage loans			81				87				244				256
Restricted commercial mortgage loans related to securitization entities			8				8				22				24
Equity securities			3				4				13				14
Other invested assets			41				48				128				157
Policy loans			33				31				97				93
Cash, cash equivalents and short-term investments			4				8				16				28
Gross investment income before expenses and fees			824				847				2,506				2,569
Expenses and fees			(23	)			(22	)			(70	)			(66	)
Net investment income		$	801			$	825			$	2,436			$	2,503

(b) Net Investment Gains (Losses)

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

 

		Three months ended September 30,								Nine months ended September 30,
(Amounts in millions)		2013				2012				2013				2012
Available-for-sale securities:
Realized gains		$	26			$	28			$	144			$	112
Realized losses			(38	)			(14	)			(151	)			(79	)
Net realized gains (losses) on available-for-sale securities			(12	)			14				(7	)			33
Impairments:
Total other-than-temporary impairments			(3	)			(26	)			(17	)			(84	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)			(2	)			(3	)			(5	)			(1	)
Net other-than-temporary impairments			(5	)			(29	)			(22	)			(85	)
Trading securities			(6	)			14				(15	)			21
Commercial mortgage loans			1				2				5				7
Net gains (losses) related to securitization entities			21				18				43				48
Derivative instruments (1)			(19	)			(2	)			(63	)			(4	)
Contingent consideration adjustment			—				(8	)			—				(7	)
Other			(3	)			—				(4	)			—
Net investment gains (losses)		$	(23	)		$	9			$	(63	)		$	13

 

(1)	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 three months ended September 30, 2013 and 2012 was $407 million and $228 million, respectively, which was approximately 93% and 96%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2013 and 2012 was $1,293 million and $911 million, respectively, which was approximately 90% and 93%, respectively, of book value.

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

 

		As of or for the three months ended September 30,								As of or for the nine months ended September 30,
(Amounts in millions)		2013				2012				2013				2012
Beginning balance		$	179			$	588			$	387			$	646
Additions:
Other-than-temporary impairments not previously recognized			1				5				3				13
Increases related to other-than-temporary impairments previously recognized			2				10				9				42
Reductions:
Securities sold, paid down or disposed			(76	)			(66	)			(293	)			(164	)
Ending balance		$	106			$	537			$	106			$	537

 

(c) Unrealized Investment Gains and Losses

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

 

(Amounts in millions)		September 30, 2013				December 31, 2012
Net unrealized gains (losses) on investment securities:
Fixed maturity securities		$	2,786			$	6,086
Equity securities			13				34
Other invested assets			(6	)			(8	)
Subtotal			2,793				6,112
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves			(1,008	)			(1,925	)
Income taxes, net			(622	)			(1,457	)
Net unrealized investment gains (losses)			1,163				2,730
Less: net unrealized investment gains (losses) attributable to noncontrolling interests			54				92
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.		$	1,109			$	2,638

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

 

		As of or for the three months ended September 30,
(Amounts in millions)		2013				2012
Beginning balance		$	1,294			$	2,016
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities			(411	)			1,040
Adjustment to deferred acquisition costs			23				(39	)
Adjustment to present value of future profits			9				11
Adjustment to sales inducements			3				(17	)
Adjustment to benefit reserves			68				(171	)
Provision for income taxes			111				(288	)
Change in unrealized gains (losses) on investment securities			(197	)			536
Reclassification adjustments to net investment (gains) losses, net of taxes of $(6)			11				9
Change in net unrealized investment gains (losses)			(186	)			545
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests			(1	)			8
Ending balance		$	1,109			$	2,553

 

		As of or for the nine months ended September 30,
(Amounts in millions)		2013				2012
Beginning balance		$	2,638			$	1,485
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities			(3,348	)			2,157
Adjustment to deferred acquisition costs			241				(138	)
Adjustment to present value of future profits			80				(11	)
Adjustment to sales inducements			41				(31	)
Adjustment to benefit reserves			555				(384	)
Provision for income taxes			845				(553	)
Change in unrealized gains (losses) on investment securities			(1,586	)			1,040
Reclassification adjustments to net investment (gains) losses, net of taxes of $(10) and $(19)			19				33
Change in net unrealized investment gains (losses)			(1,567	)			1,073
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests			(38	)			5
Ending balance		$	1,109			$	2,553

(d) Fixed Maturity and Equity Securities

As of September 30, 2013, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

(Amounts in millions)		Amortized cost or cost				Gross unrealized gains								Gross unrealized losses								Fair value
						Not other- than- temporarily impaired				Other-than- temporarily impaired				Not other- than- temporarily impaired				Other-than- temporarily impaired
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	5,007			$	495			$	—			$	(177	)		$	—			$	5,325
Tax-exempt			287				7				—				(31	)			—				263
Government—non-U.S.			2,119				124				—				(11	)			—				2,232
U.S. corporate			23,249				1,872				18				(357	)			—				24,782
Corporate—non-U.S.			14,703				751				—				(178	)			—				15,276
Residential mortgage-backed			5,145				321				8				(65	)			(12	)			5,397
Commercial mortgage-backed			2,762				90				1				(60	)			(3	)			2,790
Other asset-backed			3,047				33				—				(57	)			(2	)			3,021
Total fixed maturity securities			56,319				3,693				27				(936	)			(17	)			59,086
Equity securities			366				29				—				(16	)			—				379
Total available-for-sale securities		$	56,685			$	3,722			$	27			$	(952	)		$	(17	)		$	59,465

 

As of December 31, 2012, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

(Amounts in millions)		Amortized cost or cost				Gross unrealized gains								Gross unrealized losses								Fair value
						Not other- than- temporarily impaired				Other-than- temporarily impaired				Not other- than- temporarily impaired				Other-than- temporarily impaired
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	4,484			$	1,025			$	—			$	(18	)		$	—			$	5,491
Tax-exempt			308				16				—				(30	)			—				294
Government—non-U.S.			2,173				250				—				(1	)			—				2,422
U.S. corporate			22,873				3,317				19				(104	)			—				26,105
Corporate—non-U.S.			14,577				1,262				—				(47	)			—				15,792
Residential mortgage-backed			5,744				549				13				(124	)			(101	)			6,081
Commercial mortgage-backed			3,253				178				5				(82	)			(21	)			3,333
Other asset-backed			2,660				50				—				(65	)			(2	)			2,643
Total fixed maturity securities			56,072				6,647				37				(471	)			(124	)			62,161
Equity securities			483				41				—				(6	)			—				518
Total available-for-sale securities		$	56,555			$	6,688			$	37			$	(477	)		$	(124	)		$	62,679

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of September 30, 2013:

 

		Less than 12 months												12 months or more												Total
(Dollar amounts in millions)		Fair value				Gross unrealized losses				Number of securities				Fair value				Gross unrealized losses (1)				Number of securities				Fair value				Gross unrealized losses (2)				Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	769			$	(134	)			43			$	134			$	(43	)			1			$	903			$	(177	)			44
Tax-exempt			36				(2	)			19				101				(29	)			9				137				(31	)			28
Government—non-U.S.			461				(11	)			53				—				—				—				461				(11	)			53
U.S. corporate			4,655				(280	)			683				470				(77	)			45				5,125				(357	)			728
Corporate—non-U.S.			3,180				(155	)			393				248				(23	)			22				3,428				(178	)			415
Residential mortgage-backed			808				(36	)			128				196				(41	)			119				1,004				(77	)			247
Commercial mortgage-backed			656				(38	)			82				360				(25	)			63				1,016				(63	)			145
Other asset-backed			896				(16	)			126				146				(43	)			16				1,042				(59	)			142
Subtotal, fixed maturity securities			11,461				(672	)			1,527				1,655				(281	)			275				13,116				(953	)			1,802
Equity securities			133				(16	)			72				—				—				—				133				(16	)			72
Total for securities in an unrealized loss position		$	11,594			$	(688	)			1,599			$	1,655			$	(281	)			275			$	13,249			$	(969	)			1,874
% Below cost—fixed maturity securities:
<20% Below cost		$	11,201			$	(595	)			1,506			$	1,294			$	(125	)			196			$	12,495			$	(720	)			1,702
20%-50% Below cost			260				(77	)			21				344				(127	)			49				604				(204	)			70
>50% Below cost			—				—				—				17				(29	)			30				17				(29	)			30
Total fixed maturity securities			11,461				(672	)			1,527				1,655				(281	)			275				13,116				(953	)			1,802
% Below cost—equity securities:
<20% Below cost			132				(15	)			69				—				—				—				132				(15	)			69
20%-50% Below cost			1				(1	)			3				—				—				—				1				(1	)			3
Total equity securities			133				(16	)			72				—				—				—				133				(16	)			72
Total for securities in an unrealized loss position		$	11,594			$	(688	)			1,599			$	1,655			$	(281	)			275			$	13,249			$	(969	)			1,874
Investment grade		$	10,978			$	(653	)			1,435			$	1,145			$	(203	)			149			$	12,123			$	(856	)			1,584
Below investment grade (3)			616				(35	)			164				510				(78	)			126				1,126				(113	)			290
Total for securities in an unrealized loss position		$	11,594			$	(688	)			1,599			$	1,655			$	(281	)			275			$	13,249			$	(969	)			1,874

 

(1)	Amounts included $16 million of unrealized losses on other-than-temporarily impaired securities.

(2)	Amounts included $17 million of unrealized losses on other-than-temporarily impaired securities.

(3)	Amounts that have been in a continuous loss position for 12 months or more included $16 million of unrealized losses on other-than-temporarily impaired securities.

 

As indicated in the table 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 lower credit ratings since acquisition for corporate securities across various industry sectors. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 6% as of September 30, 2013.

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

Of the $125 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 66% of the unrealized losses were related to investment grade securities as of September 30, 2013. These unrealized losses were attributable to the lower credit ratings for these securities since acquisition, primarily associated with corporate and structured securities in the finance and insurance sector. The average fair value percentage below cost for these securities was approximately 9% as of September 30, 2013. See below for additional discussion related to fixed maturity securities that have been in a continuous loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by asset class as of September 30, 2013:

 

		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. government, agencies and government-sponsored enterprises		$	134			$	(43	)			4	%			1			$	—			$	—				—	%			—
Tax-exempt			58				(20	)			2				6				—				—				—				—
U.S. corporate			23				(7	)			1				2				—				—				—				—
Corporate—non-U.S.			32				(11	)			1				7				—				—				—				—
Structured securities:
Residential mortgage-backed			2				(2	)			—				3				5				(6	)			1				7
Commercial mortgage-backed			2				(1	)			—				2				—				(1	)			—				1
Other asset-backed			60				(29	)			3				4				—				—				—				—
Total structured securities			64				(32	)			3				9				5				(7	)			1				8
Total		$	311			$	(113	)			11	%			25			$	5			$	(7	)			1	%			8

 

		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		$	2			$	(1	)			—	%			1			$	—			$	—				—	%			—
Structured securities:
Residential mortgage-backed			21				(9	)			1				19				3				(12	)			1				19
Commercial mortgage-backed			10				(4	)			—				4				1				(1	)			—				1
Other asset-backed			—				—				—				—				8				(9	)			1				2
Total structured securities			31				(13	)			1				23				12				(22	)			2				22
Total		$	33			$	(14	)			1	%			24			$	12			$	(22	)			2	%			22

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of cash flows to be collected. We do not intend to sell and it is not more likely than not that we will be required to sell these securities prior to recovering our amortized cost. See the following for further discussion of gross unrealized losses by asset class.

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

As indicated in the table above, $43 million of gross unrealized losses were related to a U.S. government, agencies and government-sponsored enterprises security that has been in a continuous loss position for more than 12 months and was greater than 20% below cost. The unrealized losses for the U.S. government, agencies and government-sponsored enterprises security represents a long-term, zero coupon Treasury bond. An increase in Treasury yields since the bond was purchased resulted in a decrease in the market value of this security. We expect that this security will accrete up to par value over time.

Corporate Debt Securities

The following tables present the concentration of gross unrealized losses and fair values related to corporate debt fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by industry as of September 30, 2013:

 

		Investment Grade
		20% to 50%																Greater than 50%
(Dollar amounts in millions)		Fair value				Gross unrealized losses				% of total gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				% of total gross unrealized losses				Number of securities
Industry:
Finance and insurance		$	55			$	(18	)			2	%			9			$	—			$	—				—	%			—
Total		$	55			$	(18	)			2	%			9			$	—			$	—				—	%			—

 

		Below Investment Grade
		20% to 50%																Greater than 50%
(Dollar amounts in millions)		Fair value				Gross unrealized losses				% of total gross unrealized losses				Number of securities				Fair value				Gross unrealized losses				% of total gross unrealized losses				Number of securities
Industry:
Finance and insurance		$	2			$	(1	)			—	%			1			$	—			$	—				—	%			—
Total		$	2			$	(1	)			—	%			1			$	—			$	—				—	%			—

The total unrealized losses of $19 million for corporate fixed maturity securities presented in the tables above related to issuers in the finance and insurance sector that were 20% below cost on average. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of September 30, 2013. Of the $19 million of unrealized losses related to the finance and insurance industry, $18 million related to financial hybrid securities on which a debt impairment model was employed. Most of our hybrid securities retained a credit rating of investment grade. The fair value of these hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred. We continue to receive our contractual payments and expect to fully recover our amortized cost.

We expect that our investments in 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 at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of corporate securities in the future.

Structured Securities

Of the $74 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, $11 million related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to the ongoing concern and uncertainty about the residential and commercial real estate market and unemployment, resulting in credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been significantly impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. housing market.

While we considered the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of the underlying collateral. Our examination of the historical performance of the securitization trust included consideration of the following factors for each class of securities issued by the trust: i) the payment history, including failure to make scheduled payments; ii) current payment status; iii) current and historical outstanding balances; iv) current levels of subordination and losses incurred to date; and v) characteristics of the underlying collateral. Our examination of the historical performance of the underlying collateral included: i) historical default rates, delinquency rates, voluntary and 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 September 30, 2013.

Despite the considerable analysis and rigor employed on our structured securities, it is at least 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, 2012:

 

		Less than 12 months												12 months or more												Total
(Dollar amounts in millions)		Fair value				Gross unrealized losses				Number of securities				Fair value				Gross unrealized losses (1)				Number of securities				Fair value				Gross unrealized losses (2)				Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	655			$	(18	)			19			$	—			$	—				—			$	655			$	(18	)			19
Tax-exempt			—				—				—				137				(30	)			13				137				(30	)			13
Government—non-U.S.			103				(1	)			21				—				—				—				103				(1	)			21
U.S. corporate			859				(19	)			154				646				(85	)			65				1,505				(104	)			219
Corporate—non-U.S.			665				(9	)			105				436				(38	)			41				1,101				(47	)			146
Residential mortgage- backed			152				(1	)			32				494				(224	)			278				646				(225	)			310
Commercial mortgage-backed			183				(1	)			20				749				(102	)			130				932				(103	)			150
Other asset-backed			282				(1	)			42				185				(66	)			18				467				(67	)			60
Subtotal, fixed maturity securities			2,899				(50	)			393				2,647				(545	)			545				5,546				(595	)			938
Equity securities			52				(4	)			32				14				(2	)			13				66				(6	)			45
Total for securities in an unrealized loss position		$	2,951			$	(54	)			425			$	2,661			$	(547	)			558			$	5,612			$	(601	)			983
% Below cost—fixed maturity securities:
<20% Below cost		$	2,899			$	(50	)			393			$	2,151			$	(194	)			337			$	5,050			$	(244	)			730
20%-50% Below cost			—				—				—				445				(218	)			128				445				(218	)			128
>50% Below cost			—				—				—				51				(133	)			80				51				(133	)			80
Total fixed maturity securities			2,899				(50	)			393				2,647				(545	)			545				5,546				(595	)			938
% Below cost—equity securities:
<20% Below cost			47				(2	)			29				12				(1	)			11				59				(3	)			40
20%-50% Below cost			5				(2	)			3				2				(1	)			2				7				(3	)			5
Total equity securities			52				(4	)			32				14				(2	)			13				66				(6	)			45
Total for securities in an unrealized loss position		$	2,951			$	(54	)			425			$	2,661			$	(547	)			558			$	5,612			$	(601	)			983
Investment grade		$	2,761			$	(43	)			356			$	1,616			$	(209	)			235			$	4,377			$	(252	)			591
Below investment grade (3)			190				(11	)			69				1,045				(338	)			323				1,235				(349	)			392
Total for securities in an unrealized loss position		$	2,951			$	(54	)			425			$	2,661			$	(547	)			558			$	5,612			$	(601	)			983

 

(1)	Amounts included $123 million of unrealized losses on other-than-temporarily impaired securities.

(2)	Amounts included $124 million of unrealized losses on other-than-temporarily impaired securities.

(3)	Amounts that have been in a continuous loss position for 12 months or more included $119 million of unrealized losses on other-than-temporarily impaired securities.

 

The scheduled maturity distribution of fixed maturity securities as of September 30, 2013 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		$	2,744			$	2,772
Due after one year through five years			10,019				10,563
Due after five years through ten years			12,142				12,570
Due after ten years			20,460				21,973
Subtotal			45,365				47,878
Residential mortgage-backed			5,145				5,397
Commercial mortgage-backed			2,762				2,790
Other asset-backed			3,047				3,021
Total		$	56,319			$	59,086

As of September 30, 2013, $5,529 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2013, securities issued by utilities and energy, finance and insurance, and consumer—non-cyclical industry groups represented approximately 24%, 19% and 12%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States and internationally, and is not dependent on the economic stability of one particular region.

As of September 30, 2013, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

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

 

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

 

		September 30, 2013								December 31, 2012
(Amounts in millions)		Carrying value				% of total				Carrying value				% of total
Property type:
Retail		$	2,005				34	%		$	1,895				32	%
Office			1,610				27				1,580				27
Industrial			1,571				27				1,603				27
Apartments			473				8				552				9
Mixed use/other			234				4				282				5
Subtotal			5,893				100	%			5,912				100	%
Unamortized balance of loan origination fees and costs			1								2
Allowance for losses			(36	)							(42	)
Total		$	5,858							$	5,872

 

		September 30, 2013								December 31, 2012
(Amounts in millions)		Carrying value				% of total				Carrying value				% of total
Geographic region:
Pacific		$	1,624				28	%		$	1,553				26	%
South Atlantic			1,558				26				1,587				27
Middle Atlantic			792				13				739				13
Mountain			462				8				463				8
East North Central			384				7				468				8
West North Central			366				6				353				6
New England			327				6				343				6
West South Central			237				4				265				4
East South Central			143				2				141				2
Subtotal			5,893				100	%			5,912				100	%
Unamortized balance of loan origination fees and costs			1								2
Allowance for losses			(36	)							(42	)
Total		$	5,858							$	5,872

 

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

 

		September 30, 2013
(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		$	—			$	—			$	10			$	10			$	1,995			$	2,005
Office			—				—				9				9				1,601				1,610
Industrial			—				16				1				17				1,554				1,571
Apartments			—				—				—				—				473				473
Mixed use/other			—				—				—				—				234				234
Total recorded investment		$	—			$	16			$	20			$	36			$	5,857			$	5,893
% of total commercial mortgage loans			—	%			—	%			1	%			1	%			99	%			100	%

 

		December 31, 2012
(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		$	—			$	3			$	—			$	3			$	1,892			$	1,895
Office			2				—				—				2				1,578				1,580
Industrial			—				—				—				—				1,603				1,603
Apartments			—				—				4				4				548				552
Mixed use/other			66				—				—				66				216				282
Total recorded investment		$	68			$	3			$	4			$	75			$	5,837			$	5,912
% of total commercial mortgage loans			1	%			—	%			—	%			1	%			99	%			100	%

As of September 30, 2013 and December 31, 2012, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of September 30, 2013 and December 31, 2012.

As of and for the nine months ended September 30, 2013 and the year ended December 31, 2012, we modified or extended 26 and 38 commercial mortgage loans, respectively, with a total carrying value of $146 million and $279 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 periods indicated:

 

		Three months ended September 30,								Nine months ended September 30,
(Amounts in millions)		2013				2012				2013				2012
Allowance for credit losses:
Beginning balance		$	38			$	46			$	42			$	51
Charge-offs			(1	)			(3	)			(3	)			(4	)
Recoveries			—				—				—				—
Provision			(1	)			1				(3	)			(3	)
Ending balance		$	36			$	44			$	36			$	44
Ending allowance for individually impaired loans		$	—			$	—			$	—			$	—
Ending allowance for loans not individually impaired that were evaluated collectively for impairment		$	36			$	44			$	36			$	44
Recorded investment:
Ending balance		$	5,893			$	5,903			$	5,893			$	5,903
Ending balance of individually impaired loans		$	2			$	8			$	2			$	8
Ending balance of loans not individually impaired that were evaluated collectively for impairment		$	5,891			$	5,895			$	5,891			$	5,895

As of September 30, 2013, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $1 million, an unpaid principal balance of $3 million, charge-offs of $2 million and an average recorded investment of $1 million. As of September 30, 2013, we also had individually impaired commercial mortgage loans included within the industrial property type with a recorded investment of $1 million, an unpaid principal balance of $2 million, charge-offs of $1 million and an average recorded investment of $1 million. As of December 31, 2012, we had no individually impaired commercial mortgage loans.

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 the dates indicated:

 

		September 30, 2013
(Amounts in millions)		0% - 50%				51% - 60%				61% - 75%				76% - 100%				Greater than 100% (1)				Total
Property type:
Retail		$	557			$	360			$	957			$	105			$	26			$	2,005
Office			385				199				768				190				68				1,610
Industrial			444				215				740				151				21				1,571
Apartments			190				100				146				36				1				473
Mixed use/other			57				56				109				6				6				234
Total recorded investment		$	1,633			$	930			$	2,720			$	488			$	122			$	5,893
% of total			28	%			16	%			46	%			8	%			2	%			100	%
Weighted-average debt service coverage ratio			2.19				1.77				1.72				1.11				0.64				1.78

 

(1)	Included $2 million of impaired loans, $10 million of loans past due and not individually impaired and $110 million of loans in good standing where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 118%.

 

		December 31, 2012
(Amounts in millions)		0% - 50%				51% - 60%				61% - 75%				76% - 100%				Greater than 100% (1)				Total
Property type:
Retail		$	548			$	280			$	874			$	162			$	31			$	1,895
Office			323				237				688				288				44				1,580
Industrial			462				242				671				188				40				1,603
Apartments			167				140				201				29				15				552
Mixed use/other			68				24				103				81				6				282
Total recorded investment		$	1,568			$	923			$	2,537			$	748			$	136			$	5,912
% of total			27	%			16	%			42	%			13	%			2	%			100	%
Weighted-average debt service coverage ratio			2.13				1.73				2.09				1.18				2.48				1.95

 

(1)	Included $136 million of loans in good standing where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 144%.

 

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

 

		September 30, 2013
(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		$	107			$	297			$	371			$	735			$	393			$	1,903
Office			138				183				211				632				370				1,534
Industrial			167				118				267				709				305				1,566
Apartments			12				25				105				168				163				473
Mixed use/other			22				2				38				122				50				234
Total recorded investment		$	446			$	625			$	992			$	2,366			$	1,281			$	5,710
% of total			8	%			11	%			17	%			42	%			22	%			100	%
Weighted-average loan-to-value			80	%			68	%			64	%			60	%			43	%			59	%

 

		December 31, 2012
(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		$	87			$	295			$	391			$	634			$	384			$	1,791
Office			148				174				312				559				303				1,496
Industrial			164				148				311				629				345				1,597
Apartments			9				62				90				279				112				552
Mixed use/other			32				21				49				64				50				216
Total recorded investment		$	440			$	700			$	1,153			$	2,165			$	1,194			$	5,652
% of total			8	%			12	%			20	%			39	%			21	%			100	%
Weighted-average loan-to-value			81	%			71	%			66	%			61	%			45	%			61	%

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

 

		September 30, 2013
(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		$	—			$	—			$	—			$	—			$	102			$	102
Office			—				—				8				—				68				76
Industrial			—				—				—				—				5				5
Apartments			—				—				—				—				—				—
Mixed use/other			—				—				—				—				—				—
Total recorded investment		$	—			$	—			$	8			$	—			$	175			$	183
% of total			—	%			—	%			4	%			—	%			96	%			100	%
Weighted-average loan-to-value			—	%			—	%			77	%			—	%			62	%			63	%

 

		December 31, 2012
(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		$	—			$	—			$	1			$	—			$	103			$	104
Office			—				—				8				—				76				84
Industrial			—				—				—				—				6				6
Apartments			—				—				—				—				—				—
Mixed use/other			—				—				—				—				66				66
Total recorded investment		$	—			$	—			$	9			$	—			$	251			$	260
% of total			—	%			—	%			3	%			—	%			97	%			100	%
Weighted-average loan-to-value			—	%			—	%			55	%			—	%			79	%			78	%

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the dates indicated:

 

		September 30, 2013								December 31, 2012
(Amounts in millions)		Carrying value				% of total				Carrying value				% of total
Property type:
Retail		$	118				41	%		$	140				42	%
Industrial			68				23				81				24
Office			52				18				63				18
Apartments			50				17				53				15
Mixed use/other			3				1				5				1
Subtotal			291				100	%			342				100	%
Allowance for losses			(1	)							(1	)
Total		$	290							$	341

 

		September 30, 2013								December 31, 2012
(Amounts in millions)		Carrying value				% of total				Carrying value				% of total
Geographic region:
South Atlantic		$	106				36	%		$	126				37	%
Pacific			54				19				60				18
Middle Atlantic			49				17				55				16
East North Central			21				7				31				9
Mountain			20				7				21				6
West North Central			18				6				22				6
East South Central			13				5				16				5
West South Central			10				3				11				3
Subtotal			291				100	%			342				100	%
Allowance for losses			(1	)							(1	)
Total		$	290							$	341

 

As of September 30, 2013, the total recorded investment of our restricted commercial mortgage loans of $291 million was current. Of our restricted commercial mortgage loans as of December 31, 2012, $337 million were current and $5 million were past due for more than 90 days and still accruing interest.

As of September 30, 2013 and December 31, 2012, the total recorded investment of restricted commercial mortgage loans of $291 million and $342 million, respectively, related to loans not individually impaired that were evaluated collectively for impairment. There was no provision for credit losses recorded during the three or nine months ended September 30, 2013 or 2012 related to restricted commercial mortgage loans.

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

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

 

		September 30, 2013
(Amounts in millions)		0% - 50%				51% - 60%				61% - 75%				76% - 100%				Greater than 100%				Total
Property type:
Retail		$	116			$	—			$	—			$	—			$	2			$	118
Industrial			68				—				—				—				—				68
Office			50				—				2				—				—				52
Apartments			40				—				10				—				—				50
Mixed use/other			3				—				—				—				—				3
Total recorded investment		$	277			$	—			$	12			$	—			$	2			$	291
% of total			95	%			—	%			4	%			—	%			1	%			100	%
Weighted-average debt service coverage ratio			1.75				—				1.21				—				0.44				1.71

 

		December 31, 2012
(Amounts in millions)		0% - 50%				51% - 60%				61% - 75%				76% - 100%				Greater than 100%				Total
Property type:
Retail		$	126			$	4			$	7			$	—			$	3			$	140
Industrial			77				—				3				1				—				81
Office			54				3				—				6				—				63
Apartments			28				4				21				—				—				53
Mixed use/other			5				—				—				—				—				5
Total recorded investment		$	290			$	11			$	31			$	7			$	3			$	342
% of total			85	%			3	%			9	%			2	%			1	%			100	%
Weighted-average debt service coverage ratio			1.78				1.38				1.14				0.86				0.54				1.68

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

 

		September 30, 2013
(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		$	6			$	6			$	28			$	32			$	46			$	118
Industrial			2				5				14				29				18				68
Office			9				10				15				13				5				52
Apartments			—				5				22				13				10				50
Mixed use/other			—				—				—				—				3				3
Total recorded investment		$	17			$	26			$	79			$	87			$	82			$	291
% of total			6	%			9	%			27	%			30	%			28	%			100	%
Weighted-average loan-to-value			55	%			31	%			39	%			29	%			25	%			32	%

 

		December 31, 2012
(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		$	5			$	16			$	34			$	36			$	49			$	140
Industrial			9				4				14				37				17				81
Office			4				22				14				12				11				63
Apartments			—				20				11				21				1				53
Mixed use/other			—				—				—				2				3				5
Total recorded investment		$	18			$	62			$	73			$	108			$	81			$	342
% of total			5	%			18	%			21	%			32	%			24	%			100	%
Weighted-average loan-to-value			51	%			53	%			37	%			31	%			29	%			37	%

 

There were no floating rate restricted commercial mortgage loans as of September 30, 2013 or December 31, 2012.

(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.