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(1) Formation of Genworth and Basis of Presentation
Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering of Genworth’s common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.
The accompanying unaudited condensed financial statements include on a consolidated basis the accounts of Genworth Financial and the affiliate companies in which it holds a majority voting interest or where it is the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.
References to “Genworth,” the “Company,” “we” or “our” in the accompanying unaudited condensed consolidated financial statements and these notes thereto are, unless the context otherwise requires, to Genworth Financial on a consolidated basis.
We operate our business through the following five operating segments:
| • | U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based. |
| • | Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada. |
| • | Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. |
| • | U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States. |
| • | Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold but we continue to service our existing blocks of business. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes and guaranteed investment contracts. |
In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.
On May 9, 2016, Genworth Mortgage Insurance Corporation (“GMICO”), our wholly-owned indirect subsidiary, completed the sale of our European mortgage insurance business. As the held-for-sale criteria were satisfied during the fourth quarter of 2015, our European mortgage insurance business, included in Corporate and Other activities, has been reported as held for sale and its financial position is separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 12 for additional information.
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2015 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.
|
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(2) Accounting Changes
Accounting Pronouncement Recently Adopted
On January 1, 2016, we adopted new accounting guidance related to consolidation. The new guidance primarily impacts limited partnerships and similar legal entities, evaluation of fees paid to a decision maker as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination and certain investment funds. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance related to accounting for credit losses on financial instruments. The guidance requires that entities recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most debt instruments not measured at fair value, which would primarily include our commercial mortgage loans and reinsurance receivables. The new guidance retains most of the existing impairment guidance for available-for-sale debt securities but amends the presentation of credit losses to be presented as an allowance as opposed to a write-down and permits the reversal of credit losses when reassessing changes in the credit losses each reporting period. The new guidance is effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019. Upon adoption, a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption will be recorded. We are in the process of determining the impact from this guidance on our consolidated financial statements.
In March 2016, the FASB issued new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.
In March 2016, the FASB issued new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The guidance is effective for us on January 1, 2017, with early adoption permitted. We do not expect any significant impact from this guidance on our consolidated financial statements.
In March 2016, the FASB issued new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The guidance is effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.
In March 2016, the FASB issued new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The guidance is effective for us on January 1, 2017, with early adoption permitted. This guidance is consistent with our accounting for derivative contract novations and, accordingly, we do not expect any impact on our consolidated financial statements.
In February 2016, the FASB issued new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a right-to-use asset and a corresponding liability on the balance sheet. The guidance is effective for us on January 1, 2019, with early adoption permitted. We are still in the process of evaluating the impact this guidance will have on our consolidated financial statements.
|
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(4) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the periods indicated:
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
|
(Amounts in millions) |
2016 | 2015 | 2016 | 2015 | ||||||||||||
|
Fixed maturity securities—taxable |
$ | 634 | $ | 645 | $ | 1,275 | $ | 1,277 | ||||||||
|
Fixed maturity securities—non-taxable |
3 | 3 | 6 | 6 | ||||||||||||
|
Commercial mortgage loans |
77 | 83 | 158 | 168 | ||||||||||||
|
Restricted commercial mortgage loans related to securitization entities |
3 | 3 | 5 | 7 | ||||||||||||
|
Equity securities |
7 | 4 | 12 | 8 | ||||||||||||
|
Other invested assets |
33 | 37 | 71 | 77 | ||||||||||||
|
Restricted other invested assets related to securitization entities |
1 | 1 | 3 | 2 | ||||||||||||
|
Policy loans |
34 | 35 | 69 | 68 | ||||||||||||
|
Cash, cash equivalents and short-term investments |
6 | 4 | 11 | 7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Gross investment income before expenses and fees |
798 | 815 | 1,610 | 1,620 | ||||||||||||
|
Expenses and fees |
(19 | ) | (22 | ) | (42 | ) | (46 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net investment income |
$ | 779 | $ | 793 | $ | 1,568 | $ | 1,574 | ||||||||
|
|
|
|
|
|
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|
|
|||||||||
(b) Net Investment Gains (Losses)
The following table sets forth net investment gains (losses) for the periods indicated:
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
|
(Amounts in millions) |
2016 | 2015 | 2016 | 2015 | ||||||||||||
|
Available-for-sale securities: |
||||||||||||||||
|
Realized gains |
$ | 150 | $ | 20 | $ | 166 | $ | 35 | ||||||||
|
Realized losses |
(28 | ) | (6 | ) | (51 | ) | (18 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net realized gains (losses) on available-for-sale securities |
122 | 14 | 115 | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Impairments: |
||||||||||||||||
|
Total other-than-temporary impairments |
(22 | ) | — | (33 | ) | (3 | ) | |||||||||
|
Portion of other-than-temporary impairments included in other comprehensive income (loss) |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net other-than-temporary impairments |
(22 | ) | — | (33 | ) | (3 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Trading securities |
16 | (16 | ) | 44 | (10 | ) | ||||||||||
|
Commercial mortgage loans |
1 | 2 | 2 | 4 | ||||||||||||
|
Net gains (losses) related to securitization entities |
(61 | ) | 2 | (53 | ) | 10 | ||||||||||
|
Derivative instruments (1) |
(24 | ) | 6 | (62 | ) | (26 | ) | |||||||||
|
Other |
(2 | ) | — | (2 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net investment gains (losses) |
$ | 30 | $ | 8 | $ | 11 | $ | (8 | ) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses). |
We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended June 30, 2016 and 2015 was $300 million and $144 million, respectively, which was approximately 92% and 96%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2016 and 2015 was $540 million and $284 million, respectively, which was approximately 92% and 94%, respectively, of book value.
The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (loss) (“OCI”) as of and for the periods indicated:
|
As of or for the three months ended June 30, |
As of or for the six months ended June 30, |
|||||||||||||||
|
(Amounts in millions) |
2016 | 2015 | 2016 | 2015 | ||||||||||||
|
Beginning balance |
$ | 63 | $ | 78 | $ | 64 | $ | 83 | ||||||||
|
Additions: |
||||||||||||||||
|
Other-than-temporary impairments not previously recognized |
1 | — | 1 | — | ||||||||||||
|
Reductions: |
||||||||||||||||
|
Securities sold, paid down or disposed |
(2 | ) | (3 | ) | (3 | ) | (8 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Ending balance |
$ | 62 | $ | 75 | $ | 62 | $ | 75 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
(c) Unrealized Investment Gains and Losses
Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:
|
(Amounts in millions) |
June 30, 2016 | December 31, 2015 | ||||||
|
Net unrealized gains (losses) on investment securities: |
||||||||
|
Fixed maturity securities |
$ | 6,419 | $ | 3,140 | ||||
|
Equity securities |
(15 | ) | (10 | ) | ||||
|
|
|
|
|
|||||
|
Subtotal |
6,404 | 3,130 | ||||||
|
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves |
(1,944 | ) | (1,070 | ) | ||||
|
Income taxes, net |
(1,558 | ) | (711 | ) | ||||
|
|
|
|
|
|||||
|
Net unrealized investment gains (losses) |
2,902 | 1,349 | ||||||
|
Less: net unrealized investment gains (losses) attributable to noncontrolling interests |
113 | 95 | ||||||
|
|
|
|
|
|||||
|
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc. |
$ | 2,789 | $ | 1,254 | ||||
|
|
|
|
|
|||||
The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:
| As of or for the three months ended June 30, |
||||||||
|
(Amounts in millions) |
2016 | 2015 | ||||||
|
Beginning balance |
$ | 2,057 | $ | 2,748 | ||||
|
Unrealized gains (losses) arising during the period: |
||||||||
|
Unrealized gains (losses) on investment securities |
1,760 | (2,406 | ) | |||||
|
Adjustment to deferred acquisition costs |
(132 | ) | 168 | |||||
|
Adjustment to present value of future profits |
5 | 70 | ||||||
|
Adjustment to sales inducements |
(21 | ) | 18 | |||||
|
Adjustment to benefit reserves |
(357 | ) | 411 | |||||
|
Provision for income taxes |
(440 | ) | 608 | |||||
|
|
|
|
|
|||||
|
Change in unrealized gains (losses) on investment securities |
815 | (1,131 | ) | |||||
|
Reclassification adjustments to net investment (gains) losses, net of taxes of $35 and $5 |
(65 | ) | (9 | ) | ||||
|
|
|
|
|
|||||
|
Change in net unrealized investment gains (losses) |
750 | (1,140 | ) | |||||
|
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests |
18 | (20 | ) | |||||
|
|
|
|
|
|||||
|
Ending balance |
$ | 2,789 | $ | 1,628 | ||||
|
|
|
|
|
|||||
| As of or for the six months ended June 30, |
||||||||
|
(Amounts in millions) |
2016 | 2015 | ||||||
|
Beginning balance |
$ | 1,254 | $ | 2,453 | ||||
|
Unrealized gains (losses) arising during the period: |
||||||||
|
Unrealized gains (losses) on investment securities |
3,356 | (1,463 | ) | |||||
|
Adjustment to deferred acquisition costs |
(274 | ) | 70 | |||||
|
Adjustment to present value of future profits |
(29 | ) | 50 | |||||
|
Adjustment to sales inducements |
(40 | ) | 3 | |||||
|
Adjustment to benefit reserves |
(531 | ) | 88 | |||||
|
Provision for income taxes |
(876 | ) | 446 | |||||
|
|
|
|
|
|||||
|
Change in unrealized gains (losses) on investment securities |
1,606 | (806 | ) | |||||
|
Reclassification adjustments to net investment (gains) losses, net of taxes of $29 and $5 |
(53 | ) | (9 | ) | ||||
|
|
|
|
|
|||||
|
Change in net unrealized investment gains (losses) |
1,553 | (815 | ) | |||||
|
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests |
18 | 10 | ||||||
|
|
|
|
|
|||||
|
Ending balance |
$ | 2,789 | $ | 1,628 | ||||
|
|
|
|
|
|||||
(d) Fixed Maturity and Equity Securities
As of June 30, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
| Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
|
(Amounts in millions) |
Amortized cost or cost |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Fair value |
||||||||||||||||||
|
Fixed maturity securities: |
||||||||||||||||||||||||
|
U.S. government, agencies and government-sponsored enterprises |
$ | 5,485 | $ | 1,321 | $ | — | $ | — | $ | — | $ | 6,806 | ||||||||||||
|
State and political subdivisions |
2,395 | 371 | — | (15 | ) | — | 2,751 | |||||||||||||||||
|
Non-U.S. government |
1,947 | 167 | — | (1 | ) | — | 2,113 | |||||||||||||||||
|
U.S. corporate: |
||||||||||||||||||||||||
|
Utilities |
3,941 | 677 | — | (2 | ) | — | 4,616 | |||||||||||||||||
|
Energy |
2,156 | 153 | — | (43 | ) | — | 2,266 | |||||||||||||||||
|
Finance and insurance |
5,609 | 592 | 19 | (14 | ) | — | 6,206 | |||||||||||||||||
|
Consumer—non-cyclical |
4,035 | 655 | — | (1 | ) | — | 4,689 | |||||||||||||||||
|
Technology and communications |
2,333 | 237 | — | (13 | ) | — | 2,557 | |||||||||||||||||
|
Industrial |
1,152 | 105 | — | (8 | ) | — | 1,249 | |||||||||||||||||
|
Capital goods |
1,870 | 317 | — | (1 | ) | — | 2,186 | |||||||||||||||||
|
Consumer—cyclical |
1,495 | 151 | — | (4 | ) | — | 1,642 | |||||||||||||||||
|
Transportation |
1,077 | 134 | — | (1 | ) | — | 1,210 | |||||||||||||||||
|
Other |
336 | 27 | — | — | — | 363 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total U.S. corporate |
24,004 | 3,048 | 19 | (87 | ) | — | 26,984 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Non-U.S. corporate: |
||||||||||||||||||||||||
|
Utilities |
909 | 60 | — | (4 | ) | — | 965 | |||||||||||||||||
|
Energy |
1,282 | 110 | — | (30 | ) | — | 1,362 | |||||||||||||||||
|
Finance and insurance |
2,399 | 181 | — | (2 | ) | — | 2,578 | |||||||||||||||||
|
Consumer—non-cyclical |
770 | 52 | — | (2 | ) | — | 820 | |||||||||||||||||
|
Technology and communications |
979 | 74 | — | (3 | ) | — | 1,050 | |||||||||||||||||
|
Industrial |
946 | 55 | — | (16 | ) | — | 985 | |||||||||||||||||
|
Capital goods |
547 | 34 | — | (1 | ) | — | 580 | |||||||||||||||||
|
Consumer—cyclical |
514 | 14 | — | — | — | 528 | ||||||||||||||||||
|
Transportation |
604 | 81 | — | (5 | ) | — | 680 | |||||||||||||||||
|
Other |
3,004 | 291 | — | (10 | ) | — | 3,285 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total non-U.S. corporate |
11,954 | 952 | — | (73 | ) | — | 12,833 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Residential mortgage-backed |
4,602 | 448 | 9 | (4 | ) | — | 5,055 | |||||||||||||||||
|
Commercial mortgage-backed |
2,790 | 189 | 2 | (2 | ) | — | 2,979 | |||||||||||||||||
|
Other asset-backed |
3,324 | 23 | 1 | (41 | ) | — | 3,307 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total fixed maturity securities |
56,501 | 6,519 | 31 | (223 | ) | — | 62,828 | |||||||||||||||||
|
Equity securities |
504 | 19 | — | (42 | ) | — | 481 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total available-for-sale securities |
$ | 57,005 | $ | 6,538 | $ | 31 | $ | (265 | ) | $ | — | $ | 63,309 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
As of December 31, 2015, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
| Gross unrealized gains | Gross unrealized losses | |||||||||||||||||||||||
|
(Amounts in millions) |
Amortized cost or cost |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Fair value |
||||||||||||||||||
|
Fixed maturity securities: |
||||||||||||||||||||||||
|
U.S. government, agencies and government-sponsored enterprises |
$ | 5,487 | $ | 732 | $ | — | $ | (16 | ) | $ | — | $ | 6,203 | |||||||||||
|
State and political subdivisions |
2,287 | 181 | — | (30 | ) | — | 2,438 | |||||||||||||||||
|
Non-U.S. government |
1,910 | 110 | — | (5 | ) | — | 2,015 | |||||||||||||||||
|
U.S. corporate: |
||||||||||||||||||||||||
|
Utilities |
3,355 | 364 | — | (26 | ) | — | 3,693 | |||||||||||||||||
|
Energy |
2,560 | 103 | — | (162 | ) | — | 2,501 | |||||||||||||||||
|
Finance and insurance |
5,268 | 392 | 15 | (43 | ) | — | 5,632 | |||||||||||||||||
|
Consumer—non-cyclical |
3,755 | 371 | — | (30 | ) | — | 4,096 | |||||||||||||||||
|
Technology and communications |
2,108 | 123 | — | (38 | ) | — | 2,193 | |||||||||||||||||
|
Industrial |
1,164 | 53 | — | (44 | ) | — | 1,173 | |||||||||||||||||
|
Capital goods |
1,774 | 188 | — | (12 | ) | — | 1,950 | |||||||||||||||||
|
Consumer—cyclical |
1,602 | 95 | — | (22 | ) | — | 1,675 | |||||||||||||||||
|
Transportation |
1,023 | 75 | — | (12 | ) | — | 1,086 | |||||||||||||||||
|
Other |
385 | 22 | — | (5 | ) | — | 402 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total U.S. corporate |
22,994 | 1,786 | 15 | (394 | ) | — | 24,401 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Non-U.S. corporate: |
||||||||||||||||||||||||
|
Utilities |
815 | 37 | — | (9 | ) | — | 843 | |||||||||||||||||
|
Energy |
1,700 | 64 | — | (78 | ) | — | 1,686 | |||||||||||||||||
|
Finance and insurance |
2,327 | 152 | 2 | (8 | ) | — | 2,473 | |||||||||||||||||
|
Consumer—non-cyclical |
746 | 24 | — | (18 | ) | — | 752 | |||||||||||||||||
|
Technology and communications |
978 | 36 | — | (26 | ) | — | 988 | |||||||||||||||||
|
Industrial |
1,063 | 19 | — | (96 | ) | — | 986 | |||||||||||||||||
|
Capital goods |
602 | 19 | — | (17 | ) | — | 604 | |||||||||||||||||
|
Consumer—cyclical |
522 | 8 | — | (4 | ) | — | 526 | |||||||||||||||||
|
Transportation |
559 | 52 | — | (6 | ) | — | 605 | |||||||||||||||||
|
Other |
2,574 | 187 | — | (25 | ) | — | 2,736 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total non-U.S. corporate |
11,886 | 598 | 2 | (287 | ) | — | 12,199 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Residential mortgage-backed |
4,777 | 330 | 11 | (17 | ) | — | 5,101 | |||||||||||||||||
|
Commercial mortgage-backed |
2,492 | 84 | 3 | (20 | ) | — | 2,559 | |||||||||||||||||
|
Other asset-backed |
3,328 | 11 | 1 | (59 | ) | — | 3,281 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total fixed maturity securities |
55,161 | 3,832 | 32 | (828 | ) | — | 58,197 | |||||||||||||||||
|
Equity securities |
325 | 8 | — | (23 | ) | — | 310 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total available-for-sale securities |
$ | 55,486 | $ | 3,840 | $ | 32 | $ | (851 | ) | $ | — | $ | 58,507 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of June 30, 2016:
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
|
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
Number of securities |
|||||||||||||||||||||||||||
|
Description of Securities |
||||||||||||||||||||||||||||||||||||
|
Fixed maturity securities: |
||||||||||||||||||||||||||||||||||||
|
State and political subdivisions |
$ | 40 | $ | (1 | ) | 6 | $ | 144 | $ | (14 | ) | 12 | $ | 184 | $ | (15 | ) | 18 | ||||||||||||||||||
|
Non-U.S. government |
— | — | — | 10 | (1 | ) | 10 | 10 | (1 | ) | 10 | |||||||||||||||||||||||||
|
U.S. corporate |
630 | (22 | ) | 93 | 1,080 | (65 | ) | 159 | 1,710 | (87 | ) | 252 | ||||||||||||||||||||||||
|
Non-U.S. corporate |
352 | (8 | ) | 49 | 752 | (65 | ) | 112 | 1,104 | (73 | ) | 161 | ||||||||||||||||||||||||
|
Residential mortgage-backed |
118 | (1 | ) | 24 | 99 | (3 | ) | 36 | 217 | (4 | ) | 60 | ||||||||||||||||||||||||
|
Commercial mortgage-backed |
107 | (1 | ) | 15 | 94 | (1 | ) | 25 | 201 | (2 | ) | 40 | ||||||||||||||||||||||||
|
Other asset-backed |
842 | (12 | ) | 164 | 393 | (29 | ) | 79 | 1,235 | (41 | ) | 243 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Subtotal, fixed maturity securities |
2,089 | (45 | ) | 351 | 2,572 | (178 | ) | 433 | 4,661 | (223 | ) | 784 | ||||||||||||||||||||||||
|
Equity securities |
80 | (6 | ) | 198 | 124 | (36 | ) | 44 | 204 | (42 | ) | 242 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Total for securities in an unrealized loss position |
$ | 2,169 | $ | (51 | ) | 549 | $ | 2,696 | $ | (214 | ) | 477 | $ | 4,865 | $ | (265 | ) | 1,026 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
% Below cost—fixed maturity securities: |
||||||||||||||||||||||||||||||||||||
|
<20% Below cost |
$ | 2,082 | $ | (42 | ) | 349 | $ | 2,400 | $ | (108 | ) | 411 | $ | 4,482 | $ | (150 | ) | 760 | ||||||||||||||||||
|
20%-50% Below cost |
7 | (3 | ) | 2 | 172 | (70 | ) | 22 | 179 | (73 | ) | 24 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Total fixed maturity securities |
2,089 | (45 | ) | 351 | 2,572 | (178 | ) | 433 | 4,661 | (223 | ) | 784 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
% Below cost—equity securities: |
||||||||||||||||||||||||||||||||||||
|
<20% Below cost |
76 | (5 | ) | 181 | 32 | (3 | ) | 12 | 108 | (8 | ) | 193 | ||||||||||||||||||||||||
|
20%-50% Below cost |
4 | (1 | ) | 17 | 92 | (33 | ) | 32 | 96 | (34 | ) | 49 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Total equity securities |
80 | (6 | ) | 198 | 124 | (36 | ) | 44 | 204 | (42 | ) | 242 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Total for securities in an unrealized loss position |
$ | 2,169 | $ | (51 | ) | 549 | $ | 2,696 | $ | (214 | ) | 477 | $ | 4,865 | $ | (265 | ) | 1,026 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Investment grade |
$ | 1,738 | $ | (29 | ) | 306 | $ | 2,192 | $ | (142 | ) | 380 | $ | 3,930 | $ | (171 | ) | 686 | ||||||||||||||||||
|
Below investment grade |
431 | (22 | ) | 243 | 504 | (72 | ) | 97 | 935 | (94 | ) | 340 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Total for securities in an unrealized loss position |
$ | 2,169 | $ | (51 | ) | 549 | $ | 2,696 | $ | (214 | ) | 477 | $ | 4,865 | $ | (265 | ) | 1,026 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of June 30, 2016:
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
|
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
Number of securities |
|||||||||||||||||||||||||||
|
Description of Securities |
||||||||||||||||||||||||||||||||||||
|
U.S. corporate: |
||||||||||||||||||||||||||||||||||||
|
Utilities |
$ | 34 | $ | (1 | ) | 9 | $ | 36 | $ | (1 | ) | 5 | $ | 70 | $ | (2 | ) | 14 | ||||||||||||||||||
|
Energy |
231 | (14 | ) | 30 | 382 | (29 | ) | 57 | 613 | (43 | ) | 87 | ||||||||||||||||||||||||
|
Finance and insurance |
158 | (1 | ) | 24 | 188 | (13 | ) | 23 | 346 | (14 | ) | 47 | ||||||||||||||||||||||||
|
Consumer—non-cyclical |
— | — | — | 72 | (1 | ) | 10 | 72 | (1 | ) | 10 | |||||||||||||||||||||||||
|
Technology and communications |
95 | (4 | ) | 13 | 111 | (9 | ) | 23 | 206 | (13 | ) | 36 | ||||||||||||||||||||||||
|
Industrial |
41 | (1 | ) | 5 | 137 | (7 | ) | 19 | 178 | (8 | ) | 24 | ||||||||||||||||||||||||
|
Capital goods |
— | — | — | 24 | (1 | ) | 4 | 24 | (1 | ) | 4 | |||||||||||||||||||||||||
|
Consumer—cyclical |
71 | (1 | ) | 12 | 88 | (3 | ) | 14 | 159 | (4 | ) | 26 | ||||||||||||||||||||||||
|
Transportation |
— | — | — | 42 | (1 | ) | 4 | 42 | (1 | ) | 4 | |||||||||||||||||||||||||
|
Other |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Subtotal, U.S. corporate securities |
630 | (22 | ) | 93 | 1,080 | (65 | ) | 159 | 1,710 | (87 | ) | 252 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Non-U.S. corporate: |
||||||||||||||||||||||||||||||||||||
|
Utilities |
— | — | — | 26 | (4 | ) | 3 | 26 | (4 | ) | 3 | |||||||||||||||||||||||||
|
Energy |
58 | (3 | ) | 8 | 177 | (27 | ) | 28 | 235 | (30 | ) | 36 | ||||||||||||||||||||||||
|
Finance and insurance |
188 | (1 | ) | 26 | 94 | (1 | ) | 19 | 282 | (2 | ) | 45 | ||||||||||||||||||||||||
|
Consumer—non-cyclical |
— | — | — | 41 | (2 | ) | 5 | 41 | (2 | ) | 5 | |||||||||||||||||||||||||
|
Technology and communications |
48 | (1 | ) | 4 | 55 | (2 | ) | 8 | 103 | (3 | ) | 12 | ||||||||||||||||||||||||
|
Industrial |
34 | (1 | ) | 8 | 141 | (15 | ) | 21 | 175 | (16 | ) | 29 | ||||||||||||||||||||||||
|
Capital goods |
— | — | — | 54 | (1 | ) | 7 | 54 | (1 | ) | 7 | |||||||||||||||||||||||||
|
Consumer—cyclical |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Transportation |
24 | (2 | ) | 3 | 53 | (3 | ) | 6 | 77 | (5 | ) | 9 | ||||||||||||||||||||||||
|
Other |
— | — | — | 111 | (10 | ) | 15 | 111 | (10 | ) | 15 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Subtotal, non-U.S. corporate securities |
352 | (8 | ) | 49 | 752 | (65 | ) | 112 | 1,104 | (73 | ) | 161 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
|
Total for corporate securities in an unrealized loss position |
$ | 982 | $ | (30 | ) | 142 | $ | 1,832 | $ | (130 | ) | 271 | $ | 2,814 | $ | (160 | ) | 413 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to increased market volatility, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 2% as of June 30, 2016.
Fixed Maturity Securities In A Continuous Unrealized Loss Position For 12 Months Or More
Of the $108 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB-” and approximately 65% of the unrealized losses were related to investment grade securities as of June 30, 2016. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 4% as of June 30, 2016. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.
The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of June 30, 2016:
| Investment Grade | ||||||||||||||||||||||||||||||||
| 20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
|
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
|
Fixed maturity securities: |
||||||||||||||||||||||||||||||||
|
State and political subdivisions |
$ | 9 | $ | (3 | ) | 1 | % | 1 | $ | — | $ | — | — | % | — | |||||||||||||||||
|
U.S. corporate: |
||||||||||||||||||||||||||||||||
|
Energy |
13 | (4 | ) | 1 | 1 | — | — | — | — | |||||||||||||||||||||||
|
Finance and insurance |
10 | (5 | ) | 2 | 1 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total U.S. corporate |
23 | (9 | ) | 3 | 2 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Non-U.S. corporate: |
||||||||||||||||||||||||||||||||
|
Utilities |
11 | (4 | ) | 2 | 1 | — | — | — | — | |||||||||||||||||||||||
|
Energy |
23 | (8 | ) | 3 | 3 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total non-U.S. corporate |
34 | (12 | ) | 5 | 4 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Structured securities: |
||||||||||||||||||||||||||||||||
|
Other asset-backed |
43 | (18 | ) | 7 | 4 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total structured securities |
43 | (18 | ) | 7 | 4 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total |
$ | 109 | $ | (42 | ) | 16 | % | 11 | $ | — | $ | — | — | % | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Below Investment Grade | ||||||||||||||||||||||||||||||||
| 20% to 50% | Greater than 50% | |||||||||||||||||||||||||||||||
|
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
% of total gross unrealized losses |
Number of securities |
||||||||||||||||||||||||
|
Fixed maturity securities: |
||||||||||||||||||||||||||||||||
|
U.S. corporate: |
||||||||||||||||||||||||||||||||
|
Energy |
$ | 11 | $ | (5 | ) | 2 | % | 3 | $ | — | $ | — | — | % | — | |||||||||||||||||
|
Finance and insurance |
7 | (3 | ) | 1 | 1 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total U.S. corporate |
18 | (8 | ) | 3 | 4 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Non-U.S. corporate: |
||||||||||||||||||||||||||||||||
|
Energy |
29 | (10 | ) | 4 | 3 | — | — | — | — | |||||||||||||||||||||||
|
Industrial |
9 | (4 | ) | 1 | 3 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total non-U.S. corporate |
38 | (14 | ) | 5 | 6 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Structured securities: |
||||||||||||||||||||||||||||||||
|
Other asset-backed |
7 | (6 | ) | 2 | 1 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total structured securities |
7 | (6 | ) | 2 | 1 | — | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Total |
$ | 63 | $ | (28 | ) | 10 | % | 11 | $ | — | $ | — | — | % | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.
U.S. corporate
As indicated above, $17 million of gross unrealized losses were related to U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for U.S. corporate fixed maturity securities, $9 million, or 53%, related to the energy sector and $8 million, or 47%, related to the finance and insurance sector. Ongoing low oil prices and market volatility adversely impacted the fair value of these securities.
We expect that our investments in U.S. corporate securities will continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in U.S. corporate securities may perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of U.S. corporate securities in the future.
Non-U.S. corporate
As indicated above, $26 million of gross unrealized losses were related to non-U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for non-U.S. corporate fixed maturity securities, $18 million, or 69%, related to the energy sector. Ongoing low oil prices have adversely impacted the fair value of these securities.
We expect that our investments in non-U.S. corporate securities will continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in non-U.S. corporate securities may perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of non-U.S. corporate securities in the future.
Structured Securities
Of the $24 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, none related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. economy.
While we consider the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of the underlying collateral. Our examination of the historical performance of the securitization trust included consideration of the following factors for each class of securities issued by the trust: (i) the payment history, including failure to make scheduled payments; (ii) current payment status; (iii) current and historical outstanding balances; (iv) current levels of subordination and losses incurred to date; and (v) characteristics of the underlying collateral. Our examination of the historical performance of the underlying collateral included: (i) historical default rates, delinquency rates, voluntary and involuntary prepayments and severity of losses, including recent trends in this information; (ii) current payment status; (iii) loan to collateral value ratios, as applicable; (iv) vintage; and (v) other underlying characteristics such as current financial condition.
We use our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.
Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of June 30, 2016.
Despite the considerable analysis and rigor employed on our structured securities, it is reasonably possible that the underlying collateral of these investments may perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.
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 | ||||||||||||||||||
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|||||||||||||||||||
The scheduled maturity distribution of fixed maturity securities as of June 30, 2016 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
|
(Amounts in millions) |
Amortized cost or cost |
Fair value |
||||||
|
Due one year or less |
$ | 1,827 | $ | 1,851 | ||||
|
Due after one year through five years |
10,429 | 11,024 | ||||||
|
Due after five years through ten years |
11,969 | 12,708 | ||||||
|
Due after ten years |
21,560 | 25,904 | ||||||
|
|
|
|
|
|||||
|
Subtotal |
45,785 | 51,487 | ||||||
|
Residential mortgage-backed |
4,602 | 5,055 | ||||||
|
Commercial mortgage-backed |
2,790 | 2,979 | ||||||
|
Other asset-backed |
3,324 | 3,307 | ||||||
|
|
|
|
|
|||||
|
Total |
$ | 56,501 | $ | 62,828 | ||||
|
|
|
|
|
|||||
As of June 30, 2016, $9,489 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.
As of June 30, 2016, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 22%, 14% and 14%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.
As of June 30, 2016, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.
(e) Commercial Mortgage Loans
Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of principal payments, amortization and allowance for loan losses.
We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:
| June 30, 2016 | December 31, 2015 | |||||||||||||||
|
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
|
Property type: |
||||||||||||||||
|
Retail |
$ | 2,132 | 35 | % | $ | 2,116 | 34 | % | ||||||||
|
Industrial |
1,563 | 25 | 1,562 | 25 | ||||||||||||
|
Office |
1,479 | 24 | 1,516 | 24 | ||||||||||||
|
Apartments |
441 | 7 | 465 | 8 | ||||||||||||
|
Mixed use |
232 | 4 | 234 | 4 | ||||||||||||
|
Other |
289 | 5 | 294 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Subtotal |
6,136 | 100 | % | 6,187 | 100 | % | ||||||||||
|
|
|
|
|
|||||||||||||
|
Unamortized balance of loan origination fees and costs |
(2 | ) | (2 | ) | ||||||||||||
|
Allowance for losses |
(13 | ) | (15 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
|
Total |
$ | 6,121 | $ | 6,170 | ||||||||||||
|
|
|
|
|
|||||||||||||
| June 30, 2016 | December 31, 2015 | |||||||||||||||
|
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||||
|
Geographic region: |
||||||||||||||||
|
Pacific |
$ | 1,563 | 26 | % | $ | 1,581 | 26 | % | ||||||||
|
South Atlantic |
1,522 | 25 | 1,574 | 25 | ||||||||||||
|
Middle Atlantic |
894 | 15 | 890 | 14 | ||||||||||||
|
Mountain |
562 | 9 | 585 | 10 | ||||||||||||
|
West North Central |
450 | 7 | 416 | 7 | ||||||||||||
|
East North Central |
377 | 6 | 386 | 6 | ||||||||||||
|
West South Central |
309 | 5 | 294 | 5 | ||||||||||||
|
New England |
266 | 4 | 268 | 4 | ||||||||||||
|
East South Central |
193 | 3 | 193 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Subtotal |
6,136 | 100 | % | 6,187 | 100 | % | ||||||||||
|
|
|
|
|
|||||||||||||
|
Unamortized balance of loan origination fees and costs |
(2 | ) | (2 | ) | ||||||||||||
|
Allowance for losses |
(13 | ) | (15 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
|
Total |
$ | 6,121 | $ | 6,170 | ||||||||||||
|
|
|
|
|
|||||||||||||
The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:
| June 30, 2016 | ||||||||||||||||||||||||
|
(Amounts in millions) |
31 - 60 days past due |
61 - 90 days past due |
Greater than 90 days past due |
Total past due |
Current | Total | ||||||||||||||||||
|
Property type: |
||||||||||||||||||||||||
|
Retail |
$ | 8 | $ | — | $ | — | $ | 8 | $ | 2,124 | $ | 2,132 | ||||||||||||
|
Industrial |
— | — | 13 | 13 | 1,550 | 1,563 | ||||||||||||||||||
|
Office |
5 | — | 5 | 10 | 1,469 | 1,479 | ||||||||||||||||||
|
Apartments |
— | — | — | — | 441 | 441 | ||||||||||||||||||
|
Mixed use |
— | — | — | — | 232 | 232 | ||||||||||||||||||
|
Other |
— | — | — | — | 289 | 289 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total recorded investment |
$ | 13 | $ | — | $ | 18 | $ | 31 | $ | 6,105 | $ | 6,136 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
% of total commercial mortgage loans |
— | % | — | % | — | % | — | % | 100 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||
|
(Amounts in millions) |
31 - 60 days past due |
61 - 90 days past due |
Greater than 90 days past due |
Total past due |
Current | Total | ||||||||||||||||||
|
Property type: |
||||||||||||||||||||||||
|
Retail |
$ | — | $ | — | $ | — | $ | — | $ | 2,116 | $ | 2,116 | ||||||||||||
|
Industrial |
— | — | — | — | 1,562 | 1,562 | ||||||||||||||||||
|
Office |
6 | — | 5 | 11 | 1,505 | 1,516 | ||||||||||||||||||
|
Apartments |
— | — | — | — | 465 | 465 | ||||||||||||||||||
|
Mixed use |
— | — | — | — | 234 | 234 | ||||||||||||||||||
|
Other |
— | — | — | — | 294 | 294 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total recorded investment |
$ | 6 | $ | — | $ | 5 | $ | 11 | $ | 6,176 | $ | 6,187 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
% of total commercial mortgage loans |
— | % | — | % | — | % | — | % | 100 | % | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
As of June 30, 2016 and December 31, 2015, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of June 30, 2016 and December 31, 2015.
We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of June 30, 2016, our commercial mortgage loans greater than 90 days past due included loans with appraised values in excess of the recorded investment and the current recorded investment of the loans was expected to be recoverable.
During the six months ended June 30, 2016 and the year ended December 31, 2015, we modified or extended 7 and 21 commercial mortgage loans, respectively, with a total carrying value of $56 million and $110 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower, but one loan with a carrying value $1 million was considered a troubled debt restructuring.
The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans as of or for the periods indicated:
|
Three months ended June 30, |
Six
months ended June 30, |
|||||||||||||||
|
(Amounts in millions) |
2016 | 2015 | 2016 | 2015 | ||||||||||||
|
Allowance for credit losses: |
||||||||||||||||
|
Beginning balance |
$ | 15 | $ | 20 | $ | 15 | $ | 22 | ||||||||
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Charge-offs |
(4 | ) | — | (4 | ) | (3 | ) | |||||||||
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Provision |
2 | (2 | ) | 2 | (1 | ) | ||||||||||
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Ending balance |
$ | 13 | $ | 18 | $ | 13 | $ | 18 | ||||||||
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Ending allowance for individually impaired loans |
$ | — | $ | — | $ | — | $ | — | ||||||||
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Ending allowance for loans not individually impaired that were evaluated collectively for impairment |
$ | 13 | $ | 18 | $ | 13 | $ | 18 | ||||||||
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Recorded investment: |
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Ending balance |
$ | 6,136 | $ | 6,194 | $ | 6,136 | $ | 6,194 | ||||||||
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Ending balance of individually impaired loans |
$ | 23 | $ | 18 | $ | 23 | $ | 18 | ||||||||
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Ending balance of loans not individually impaired that were evaluated collectively for impairment |
$ | 6,113 | $ | 6,176 | $ | 6,113 | $ | 6,176 | ||||||||
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As of June 30, 2016, we had an individually impaired commercial mortgage loan included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, which were recorded in the second quarter of 2016.
As of June 30, 2016 and December 31, 2015, we had an individually impaired commercial mortgage loan included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, which were recorded in the third quarter of 2015.
As of December 31, 2015, we had an individually impaired commercial mortgage loan included within the industrial property type with a recorded investment of $14 million, an unpaid principal balance of $15 million and charge-offs of $1 million, which were recorded in the first quarter of 2014. As of December 31, 2015, this loan had interest income of $1 million. In the second quarter of 2016, we recorded additional charge-offs of $2 million related to this loan. As of June 30, 2016, the individually impaired loan within the industrial property type had a recorded investment of $13 million, an unpaid principal balance of $16 million and total charge-offs of $3 million.
In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.
The following tables set forth the loan-to-value of commercial mortgage loans by property type as of the dates indicated:
| June 30, 2016 | ||||||||||||||||||||||||
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(Amounts in millions) |
0% - 50% | 51% - 60% | 61% - 75% | 76% - 100% | Greater than 100% (1) |
Total | ||||||||||||||||||
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Property type: |
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Retail |
$ | 755 | $ | 417 | $ | 877 | $ | 82 | $ | 1 | $ | 2,132 | ||||||||||||
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Industrial |
578 | 448 | 470 | 63 | 4 | 1,563 | ||||||||||||||||||
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Office |
458 | 290 | 651 | 66 | 14 | 1,479 | ||||||||||||||||||
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Apartments |
176 | 63 | 192 | 10 | — | 441 | ||||||||||||||||||
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Mixed use |
56 | 43 | 130 | 3 | — | 232 | ||||||||||||||||||
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Other |
61 | 61 | 167 | — | — | 289 | ||||||||||||||||||
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Total recorded investment |
$ | 2,084 | $ | 1,322 | $ | 2,487 | $ | 224 | $ | |||||||||||||||