GENWORTH FINANCIAL INC, 10-Q filed on 8/3/2012
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2012
Jul. 27, 2012
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
GNW 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
Entity Central Index Key
0001276520 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
491,630,268 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jun. 30, 2012
Dec. 31, 2011
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 59,791 
$ 58,295 
Equity securities available-for-sale, at fair value
431 
361 
Commercial mortgage loans
5,875 
6,092 
Restricted commercial mortgage loans related to securitization entities
382 
411 
Policy loans
1,619 
1,549 
Other invested assets
4,512 
4,819 
Restricted other invested assets related to securitization entities ($392 and $376 at fair value)
391 
377 
Total investments
73,001 
71,904 
Cash and cash equivalents
3,874 
4,488 
Accrued investment income
652 
691 
Deferred acquisition costs
5,023 
5,193 
Intangible assets
519 
580 
Goodwill
1,218 
1,253 
Reinsurance recoverable
17,177 
16,998 
Other assets
1,039 
958 
Separate account assets
10,033 
10,122 
Total assets
112,536 
112,187 
Liabilities and stockholders' equity
 
 
Future policy benefits
32,825 
32,175 
Policyholder account balances
26,160 
26,345 
Liability for policy and contract claims
7,552 
7,620 
Unearned premiums
4,156 
4,223 
Other liabilities ($186 and $210 other liabilities related to securitization entities)
5,790 
6,308 
Borrowings related to securitization entities ($57 and $48 at fair value)
375 
396 
Non-recourse funding obligations
2,598 
3,256 
Long-term borrowings
4,865 
4,726 
Deferred tax liability
1,216 
838 
Separate account liabilities
10,033 
10,122 
Total liabilities
95,570 
96,009 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 580 million and 579 million shares issued as of June 30, 2012 and December 31, 2011, respectively; 492 million shares and 491 million shares outstanding as of June 30, 2012 and December 31, 2011, respectively
Additional paid-in capital
12,156 
12,136 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
2,132 
1,617 
Net unrealized gains (losses) on other-than-temporarily impaired securities
(116)
(132)
Net unrealized investment gains (losses)
2,016 
1,485 
Derivatives qualifying as hedges
2,087 
2,009 
Foreign currency translation and other adjustments
550 
553 
Total accumulated other comprehensive income (loss)
4,653 
4,047 
Retained earnings
1,707 
1,584 
Treasury stock, at cost (88 million shares as of June 30, 2012 and December 31, 2011)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
15,817 
15,068 
Noncontrolling interests
1,149 
1,110 
Total stockholders' equity
16,966 
16,178 
Total liabilities and stockholders' equity
$ 112,536 
$ 112,187 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Jun. 30, 2012
Dec. 31, 2011
Restricted other invested assets related to securitization entities, at fair value
$ 392 
$ 376 
Other liabilities, securitization entities
186 
210 
Borrowings related to securitization entities, at fair value
$ 57 
$ 48 
Class A common stock, par value
$ 0.001 
$ 0.001 
Class A common stock, shares authorized
1,500,000,000 
1,500,000,000 
Class A common stock, shares issued
580,000,000 
579,000,000 
Class A common stock, shares outstanding
492,000,000 
491,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Revenues:
 
 
 
 
Premiums
$ 1,302 
$ 1,455 
$ 2,409 
$ 2,892 
Net investment income
846 
881 
1,678 
1,711 
Net investment gains (losses)
(34)
(40)
(68)
Insurance and investment product fees and other
409 
359 
861 
688 
Total revenues
2,523 
2,655 
4,949 
5,223 
Benefits and expenses:
 
 
 
 
Benefits and other changes in policy reserves
1,382 
1,679 
2,614 
3,092 
Interest credited
194 
204 
389 
405 
Acquisition and operating expenses, net of deferrals
502 
581 
1,032 
1,144 
Amortization of deferred acquisition costs and intangibles
148 
162 
420 
313 
Interest expense
131 
134 
226 
261 
Total benefits and expenses
2,357 
2,760 
4,681 
5,215 
Income (loss) before income taxes
166 
(105)
268 
Provision (benefit) for income taxes
57 
(5)
79 
15 
Net income (loss)
109 
(100)
189 
(7)
Less: net income attributable to noncontrolling interests
33 
36 
66 
70 
Net income (loss) available to Genworth Financial, Inc.'s common stockholders
76 
(136)
123 
(77)
Net income (loss) available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
 
Basic
$ 0.16 1
$ (0.28)1
$ 0.25 1
$ (0.16)1
Diluted
$ 0.16 1
$ (0.28)1
$ 0.25 1
$ (0.16)1
Weighted-average common shares outstanding:
 
 
 
 
Basic
491.5 
490.6 
491.4 
490.4 
Diluted
493.9 2
490.6 2
494.8 2
490.4 2
Supplemental disclosures:
 
 
 
 
Total other-than-temporary impairments
(42)
(28)
(58)
(59)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
(3)
Net other-than-temporary impairments
(39)
(26)
(56)
(62)
Other investments gains (losses)
(14)
57 
(6)
Net investment gains (losses)
$ (34)
$ (40)
$ 1 
$ (68)
[2] Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss available to Genworth Financial, Inc.'s common stockholders for the three and six months ended June 30, 2011, we were required to use basic weighted-average common shares outstanding in the calculation for the three and six months ended June 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 3.7 million and 4.0 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.'s common stockholders for the three and six months ended June 30, 2011, dilutive potential common shares would have been 494.3 million and 494.4 million, respectively.
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Net income (loss)
$ 109 
$ (100)
$ 189 
$ (7)
Other comprehensive income (loss), net of taxes:
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
697 
294 
512 
344 
Net unrealized gains (losses) on other-than-temporarily impaired securities
(5)
(2)
16 
Derivatives qualifying as hedges
407 
79 
78 
19 
Foreign currency translation and other adjustments
(119)
97 
(3)
249 
Total other comprehensive income (loss)
980 
468 
603 
617 
Total comprehensive income (loss)
1,089 
368 
792 
610 
Less: comprehensive income attributable to noncontrolling interests
16 
57 
63 
111 
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
$ 1,073 
$ 311 
$ 729 
$ 499 
Condensed Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost
Total Genworth Financial, Inc.'s stockholders' equity
Noncontrolling interests
Balances at Dec. 31, 2010
$ 13,545 
$ 1 
$ 12,107 
$ 1,506 
$ 1,535 
$ (2,700)
$ 12,449 
$ 1,096 
Repurchase of subsidiary shares
(71)
 
 
 
 
 
 
(71)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
(7)
 
 
 
(77)
 
(77)
70 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
344 
 
 
339 
 
 
339 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
 
 
 
Derivatives qualifying as hedges
19 
 
 
19 
 
 
19 
 
Foreign currency translation and other adjustments
249 
 
 
213 
 
 
213 
36 
Total comprehensive income (loss)
610 
 
 
 
 
 
499 
111 
Dividends to noncontrolling interests
(24)
 
 
 
 
 
 
(24)
Stock-based compensation expense and exercises and other
15 
 
15 
 
 
 
15 
 
Balances at Jun. 30, 2011
14,075 
12,122 
2,082 
1,458 
(2,700)
12,963 
1,112 
Balances at Dec. 31, 2011
16,178 
12,136 
4,047 
1,584 
(2,700)
15,068 
1,110 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
189 
 
 
 
123 
 
123 
66 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
512 
 
 
515 
 
 
515 
(3)
Net unrealized gains (losses) on other-than-temporarily impaired securities
16 
 
 
16 
 
 
16 
 
Derivatives qualifying as hedges
78 
 
 
78 
 
 
78 
 
Foreign currency translation and other adjustments
(3)
 
 
(3)
 
 
(3)
 
Total comprehensive income (loss)
792 
 
 
 
 
 
729 
63 
Dividends to noncontrolling interests
(24)
 
 
 
 
 
 
(24)
Stock-based compensation expense and exercises and other
20 
 
20 
 
 
 
20 
 
Balances at Jun. 30, 2012
$ 16,966 
$ 1 
$ 12,156 
$ 4,653 
$ 1,707 
$ (2,700)
$ 15,817 
$ 1,149 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Cash flows from operating activities:
 
 
Net income (loss)
$ 189 
$ (7)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
Amortization of fixed maturity discounts and premiums and limited partnerships
(49)
(53)
Net investment losses (gains)
(1)
68 
Charges assessed to policyholders
(388)
(327)
Acquisition costs deferred
(309)
(319)
Amortization of deferred acquisition costs and intangibles
420 
313 
Deferred income taxes
46 
(94)
Gain on sale of subsidiary
(15)
   
Net increase in trading securities, held-for-sale investments and derivative instruments
93 
79 
Stock-based compensation expense
13 
16 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(83)
Insurance reserves
1,001 
1,292 
Current tax liabilities
(196)
Other liabilities and other policy-related balances
(589)
(48)
Net cash from operating activities
220 
842 
Cash flows from investing activities:
 
 
Fixed maturity securities
2,366 
3,069 
Commercial mortgage loans
391 
411 
Restricted commercial mortgage loans related to securitization entities
25 
49 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
2,538 
1,893 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(5,596)
(5,183)
Commercial mortgage loans
(184)
(142)
Other invested assets, net
378 
(28)
Policy loans, net
(70)
(71)
Proceeds from sale of a subsidiary, net of cash transferred
64 
   
Payments for businesses purchased, net of cash acquired
(18)
(4)
Net cash from investing activities
(106)
(6)
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
1,351 
1,221 
Withdrawals from universal life and investment contracts
(1,506)
(2,123)
Redemption and repurchase of non-recourse funding obligations
(567)
(45)
Proceeds from the issuance of long-term debt
361 
545 
Repayment and repurchase of long-term debt
(222)
(760)
Repayment of borrowings related to securitization entities
(29)
(49)
Repurchase of subsidiary shares
 
(71)
Dividends paid to noncontrolling interests
(24)
(24)
Other, net
(89)
137 
Net cash from financing activities
(725)
(1,169)
Effect of exchange rate changes on cash and cash equivalents
(3)
32 
Net change in cash and cash equivalents
(614)
(301)
Cash and cash equivalents at beginning of period
4,488 
3,132 
Cash and cash equivalents at end of period
$ 3,874 
$ 2,831 
Formation of Genworth and Basis of Presentation
Formation of Genworth and Basis of Presentation

(1) Formation of Genworth and Basis of Presentation

Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware on October 23, 2003. The accompanying condensed financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or where we are the primary beneficiary of a variable interest entity, which we refer to as the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.

We have the following operating segments:

 

   

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

 

   

International Protection. We are a leading provider of payment protection coverages (referred to as lifestyle protection) in multiple European 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.

 

   

Wealth Management. We offer and manage a variety of wealth management services, including investments, advisor support and practice management services.

 

   

International Mortgage Insurance. We are a leading provider of mortgage insurance products and related services in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. 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.

 

   

Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and Medicare supplement 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. Effective October 1, 2011, we completed the sale of our Medicare supplement insurance business.

We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other non-core businesses that are managed outside of our operating segments.

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 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 June 11, 2012 which reflected retrospective changes in accounting for costs associated with acquiring or renewing insurance contracts and changes in the treatment of future policy benefits for level premium term life insurance products. Certain prior year amounts have been reclassified to conform to the current year presentation.

Accounting Changes
Accounting Changes

(2) Accounting Changes

On January 1, 2012, we adopted new accounting guidance requiring presentation of the components of net income (loss), the components of other comprehensive income (loss) (“OCI”) and total comprehensive income either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. We chose to present two separate but consecutive statements and adopted this new guidance retrospectively. The Financial Accounting Standards Board (“FASB”) issued an amendment relating to this new guidance for presentation of the reclassification of items out of accumulated other comprehensive income into net income that removed this requirement until further guidance is issued. The adoption of this new accounting guidance did not have any impact on our consolidated financial results.

On January 1, 2012, we adopted new accounting guidance related to fair value measurements. This new accounting guidance clarified existing fair value measurement requirements and changed certain fair value measurement principles and disclosure requirements. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2012, we adopted new accounting guidance related to repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removed the requirement to consider a transferor’s ability to fulfill its contractual rights from the criteria used to determine effective control and was effective for us prospectively for any transactions occurring on or after January 1, 2012. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2012, we adopted new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. Acquisition costs include costs that are related directly to the successful acquisition of our insurance policies and investment contracts, which are deferred and amortized over the estimated life of the related insurance policies. These costs include commissions in excess of ultimate renewal commissions and for contracts and policies issued some support costs, such as underwriting, medical inspection and issuance expenses. Deferred acquisition costs (“DAC”) are subsequently amortized to expense over the lives of the underlying contracts, in relation to the anticipated recognition of premiums or gross profits. We adopted this new guidance retrospectively, which reduced retained earnings and stockholders’ equity by $1.3 billion as of January 1, 2011, and reduced net income (loss) by $63 million, $86 million and $12 million for the years ended December 31, 2011, 2010 and 2009, respectively. This new guidance results in lower amortization and fewer deferred costs, specifically related to underwriting, inspection and processing for contracts that are not issued, as well as marketing and customer solicitation.

Effective January 1, 2012, we changed our treatment of the liability for future policy benefits for our level premium term life insurance products when the liability for a policy falls below zero. Previously, the total liability for future policy benefits included negative reserves calculated at an individual policy level. Through 2010, we issued level premium term life insurance policies whose premiums are contractually determined to be level through a period of time and then increase thereafter. Our previous accounting policy followed the accounting for traditional, long-duration insurance contracts where the reserves are calculated as the present value of expected benefit payments minus the present value of net premiums based on assumptions determined on the policy issuance date including mortality, interest, and lapse rates. This accounting has the effect of causing profits to emerge as a level percentage of premiums, subject to differences in assumed versus actual experience which flow through income as they occur, and for products with an increasing premium stream, such as the level premium term life insurance product, may result in negative reserves for a given policy.

More recent insurance-specific accounting guidance reflects a different accounting philosophy, emphasizing the balance sheet over the income statement, or matching, focus which was the philosophy in place when the traditional, long-duration insurance contract guidance was issued (the accounting model for traditional, long-duration insurance contracts draws upon the principles of matching and conservatism originating in the 1970’s, and does not specifically address negative reserves). More recent accounting models for long-duration contracts specifically prohibit negative reserves, e.g., non-traditional contracts with annuitization benefits and certain participating contracts. These recent accounting models do not impact the reserving for our level premium term life insurance products.

We believe that industry accounting practices for level premium term life insurance product reserving is mixed with some companies “flooring” reserves at zero and others applying our previous accounting policy described above. In 2010, we stopped issuing new level premium term life insurance policies. Thus, as the level premium term policies reach the end of their level premium term periods, the portion of policies with negative reserves in relation to the reserve for all level premium term life insurance products will continue to increase. Our new method of accounting floors the liability for future policy benefits on each level premium term life insurance policy at zero. We believe that flooring reserves at zero is preferable in our circumstances as this alternative accounting policy will not allow negative reserves to accumulate on the balance sheet for this closed block of insurance policies. In implementing this change in accounting, no changes were made to the assumptions that were locked-in at policy inception. We implemented this accounting change retrospectively, which reduced retained earnings and stockholders’ equity by $110 million as of January 1, 2011, and reduced net income (loss) by $10 million, $4 million and $32 million for the years ended December 31, 2011, 2010 and 2009, respectively.

 

The following table presents the balance sheet as of December 31, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

 

(Amounts in millions)

  As Originally
Reported
    Effect of
DAC Change
    Effect of
Reserve Change
    As Currently
Reported
 

Assets

       

Total investments

  $ 71,904      $ —        $ —        $ 71,904   

Cash and cash equivalents

    4,488        —          —          4,488   

Accrued investment income

    691        —          —          691   

Deferred acquisition costs

    7,327        (2,134     —          5,193   

Intangible assets

    577        3        —          580   

Goodwill

    1,253        —          —          1,253   

Reinsurance recoverable

    16,982        —          16        16,998   

Other assets

    958        —          —          958   

Separate account assets

    10,122        —          —          10,122   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 114,302      $ (2,131   $ 16      $ 112,187   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and stockholders’ equity

       

Liabilities:

       

Future policy benefits

  $ 31,971      $ 3      $ 201      $ 32,175   

Policyholder account balances

    26,345        —          —          26,345   

Liability for policy and contract claims

    7,620        —          —          7,620   

Unearned premiums

    4,257        (34     —          4,223   

Other liabilities

    6,308        —          —          6,308   

Borrowings related to securitization entities

    396        —          —          396   

Non-recourse funding obligations

    3,256        —          —          3,256   

Long-term borrowings

    4,726        —          —          4,726   

Deferred tax liability

    1,636        (733     (65     838   

Separate account liabilities

    10,122        —          —          10,122   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    96,637        (764     136        96,009   
 

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

       

Class A common stock

    1        —          —          1   

Additional paid-in capital

    12,124        12        —          12,136   

Accumulated other comprehensive income (loss):

       

Net unrealized investment gains (losses):

       

Net unrealized gains (losses) on securities not other-than-temporarily impaired

    1,586        31        —          1,617   

Net unrealized gains (losses) on other-than-temporarily impaired securities

    (132     —          —          (132
 

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized investment gains (losses)

    1,454        31        —          1,485   
 

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives qualifying as hedges

    2,009        —          —          2,009   

Foreign currency translation and other adjustments

    558        (5     —          553   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

    4,021        26        —          4,047   

Retained earnings

    3,095        (1,391     (120     1,584   

Treasury stock, at cost

    (2,700     —          —          (2,700
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

    16,541        (1,353     (120     15,068   

Noncontrolling interests

    1,124        (14     —          1,110   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    17,665        (1,367     (120     16,178   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 114,302      $ (2,131   $ 16      $ 112,187   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the income statement for the three months ended June 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

 

(Amounts in millions)

  As Originally
Reported
    Effect of
DAC Change
    Effect of
Reserve Change
    As Currently
Reported
 

Revenues:

       

Premiums

  $ 1,455      $ —        $ —        $ 1,455   

Net investment income

    881        —          —          881   

Net investment gains (losses)

    (40     —          —          (40

Insurance and investment product fees and other

    359        —          —          359   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    2,655        —          —          2,655   
 

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

       

Benefits and other changes in policy reserves

    1,672        —          7        1,679   

Interest credited

    204        —          —          204   

Acquisition and operating expenses, net of deferrals

    514        67        —          581   

Amortization of deferred acquisition costs and
intangibles

    197        (35     —          162   

Interest expense

    134        —          —          134   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

    2,721        32        7        2,760   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (66     (32     (7     (105

Benefit for income taxes

    (6     4        (3     (5
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (60     (36     (4     (100

Less: net income attributable to noncontrolling interests

    36        —          —          36   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to Genworth Financial, Inc.’s common stockholders

  $ (96   $ (36   $ (4   $ (136
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to Genworth Financial, Inc.’s common stockholders per common share:

       

Basic(1)

  $ (0.20   $ (0.07   $ (0.01   $ (0.28
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted (1)

  $ (0.20   $ (0.07   $ (0.01   $ (0.28
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

May not total due to whole number calculation.

 

The following table presents the income statement for the six months ended June 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

 

(Amounts in millions)

  As Originally
Reported
    Effect of
DAC Change
    Effect of
Reserve Change
    As Currently
Reported
 

Revenues:

       

Premiums

  $ 2,892      $ —        $ —        $ 2,892   

Net investment income

    1,711        —          —          1,711   

Net investment gains (losses)

    (68     —          —          (68

Insurance and investment product fees and other

    688        —          —          688   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    5,223        —          —          5,223   
 

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

       

Benefits and other changes in policy reserves

    3,081        —          11        3,092   

Interest credited

    405        —          —          405   

Acquisition and operating expenses, net of deferrals

    1,014        130        —          1,144   

Amortization of deferred acquisition costs and
intangibles

    382        (69     —          313   

Interest expense

    261        —          —          261   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

    5,143        61        11        5,215   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    80        (61     (11     8   

Provision for income taxes

    24        (5     (4     15   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    56        (56     (7     (7

Less: net income attributable to noncontrolling interests

    70        —          —          70   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to Genworth Financial, Inc.’s common stockholders

  $ (14   $ (56   $ (7   $ (77
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to Genworth Financial, Inc.’s common stockholders per common share:

       

Basic(1)

  $ (0.03   $ (0.11   $ (0.01   $ (0.16
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted (1)

  $ (0.03   $ (0.11   $ (0.01   $ (0.16
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

May not total due to whole number calculation.

 

The following table presents the cash flows from operating activities for the six months ended June 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

 

(Amounts in millions)

   As Originally
Reported
    Effect of
DAC Change
    Effect of
Reserve Change
    As Currently
Reported
 

Cash flows from operating activities:

        

Net income (loss)

   $ 56      $ (56   $ (7   $ (7

Adjustments to reconcile net income (loss) to net cash from operating activities:

        

Amortization of fixed maturity discounts and premiums and limited partnerships

     (53     —          —          (53

Net investment losses

     68        —          —          68   

Charges assessed to policyholders

     (327     —          —          (327

Acquisition costs deferred

     (449     130        —          (319

Amortization of deferred acquisition costs and intangibles

     382        (69     —          313   

Deferred income taxes

     (85     (5     (4     (94

Net increase in trading securities, held-for-sale investments and derivative instruments

     79        —          —          79   

Stock-based compensation expense

     16        —          —          16   

Change in certain assets and liabilities:

        

Accrued investment income and other assets

     (83     —          —          (83

Insurance reserves

     1,281        —          11        1,292   

Current tax liabilities

     5        —          —          5   

Other liabilities and policy-related balances

     (48     —          —          (48
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from operating activities

   $ 842      $ —        $ —        $ 842   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the balance sheet as of June 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

 

(Amounts in millions)

   As Reported
Under New
Policy
    As Computed
Under Previous
Policy
    Effect of
Change
 

Assets

      

Total investments

   $ 73,001      $ 73,001      $ —     

Cash and cash equivalents

     3,874        3,874        —     

Accrued investment income

     652        652        —     

Deferred acquisition costs

     5,023        5,023        —     

Intangible assets

     519        519        —     

Goodwill

     1,218        1,218        —     

Reinsurance recoverable

     17,177        17,157        20   

Other assets

     1,039        1,039        —     

Separate account assets

     10,033        10,033        —     
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 112,536      $ 112,516      $ 20   
  

 

 

   

 

 

   

 

 

 

Liabilities and stockholders’ equity

      

Liabilities:

      

Future policy benefits

   $ 32,825      $ 32,611      $ 214   

Policyholder account balances

     26,160        26,160        —     

Liability for policy and contract claims

     7,552        7,552        —     

Unearned premiums

     4,156        4,156        —     

Other liabilities

     5,790        5,790        —     

Borrowings related to securitization entities

     375        375        —     

Non-recourse funding obligations

     2,598        2,598        —     

Long-term borrowings

     4,865        4,865        —     

Deferred tax liability

     1,216        1,284        (68

Separate account liabilities

     10,033        10,033        —     
  

 

 

   

 

 

   

 

 

 

Total liabilities

     95,570        95,424        146   
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Class A common stock

     1        1        —     

Additional paid-in capital

     12,156        12,156        —     

Accumulated other comprehensive income (loss):

      

Net unrealized investment gains (losses):

      

Net unrealized gains (losses) on securities not other-than-temporarily impaired

     2,132        2,132        —     

Net unrealized gains (losses) on other-than-temporarily impaired securities

     (116     (116     —     
  

 

 

   

 

 

   

 

 

 

Net unrealized investment gains (losses)

     2,016        2,016        —     
  

 

 

   

 

 

   

 

 

 

Derivatives qualifying as hedges

     2,087        2,087        —     

Foreign currency translation and other adjustments

     550        550        —     
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     4,653        4,653        —     

Retained earnings

     1,707        1,833        (126

Treasury stock, at cost

     (2,700     (2,700     —     
  

 

 

   

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

     15,817        15,943        (126

Noncontrolling interests

     1,149        1,149        —     
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     16,966        17,092        (126
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 112,536      $ 112,516      $ 20   
  

 

 

   

 

 

   

 

 

 

 

The following table presents the income statement for the three months ended June 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

 

(Amounts in millions)

   As Reported
Under New
Policy
    As Computed
Under Previous
Policy
    Effect of
Change
 

Revenues:

      

Premiums

   $ 1,302      $ 1,302      $ —     

Net investment income

     846        846        —     

Net investment gains (losses)

     (34     (34     —     

Insurance and investment product fees and other

     409        409        —     
  

 

 

   

 

 

   

 

 

 

Total revenues

     2,523        2,523        —     
  

 

 

   

 

 

   

 

 

 

Benefits and expenses:

      

Benefits and other changes in policy reserves

     1,382        1,380        2   

Interest credited

     194        194        —     

Acquisition and operating expenses, net of deferrals

     502        502        —     

Amortization of deferred acquisition costs and intangibles

     148        148        —     

Interest expense

     131        131        —     
  

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     2,357        2,355        2   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     166        168        (2

Provision for income taxes

     57        58        (1
  

 

 

   

 

 

   

 

 

 

Net income

     109        110        (1

Less: net income attributable to noncontrolling interests

     33        33        —     
  

 

 

   

 

 

   

 

 

 

Net income available to Genworth Financial, Inc.’s common stockholders

   $ 76      $ 77      $ (1
  

 

 

   

 

 

   

 

 

 

Net income available to Genworth Financial, Inc.’s common stockholders per common share:

      

Basic

   $ 0.16      $ 0.16      $ —     
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.16      $ 0.16      $ —     
  

 

 

   

 

 

   

 

 

 

 

The following table presents the income statement for the six months ended June 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

 

(Amounts in millions)

   As Reported
Under New
Policy
     As Computed
Under Previous
Policy
     Effect of
Change
 

Revenues:

        

Premiums

   $ 2,409       $ 2,409       $ —     

Net investment income

     1,678         1,678         —     

Net investment gains (losses)

     1         1         —     

Insurance and investment product fees and other

     861         861         —     
  

 

 

    

 

 

    

 

 

 

Total revenues

     4,949         4,949         —     
  

 

 

    

 

 

    

 

 

 

Benefits and expenses:

        

Benefits and other changes in policy reserves

     2,614         2,605         9   

Interest credited

     389         389         —     

Acquisition and operating expenses, net of deferrals

     1,032         1,032         —     

Amortization of deferred acquisition costs and intangibles

     420         420         —     

Interest expense

     226         226         —     
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     4,681         4,672         9   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     268         277         (9

Provision for income taxes

     79         82         (3
  

 

 

    

 

 

    

 

 

 

Net income

     189         195         (6

Less: net income attributable to noncontrolling interests

     66         66         —     
  

 

 

    

 

 

    

 

 

 

Net income available to Genworth Financial, Inc.’s common stockholders

   $ 123       $ 129       $ (6
  

 

 

    

 

 

    

 

 

 

Net income available to Genworth Financial, Inc.’s common stockholders per common share:

        

Basic

   $ 0.25       $ 0.26       $ (0.01
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.25       $ 0.26       $ (0.01
  

 

 

    

 

 

    

 

 

 

 

The following table presents the net cash flows from operating activities for the six months ended June 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

 

(Amounts in millions)

   As Reported
Under New
Policy
    As Computed
Under Previous
Policy
    Effect of
Change
 

Cash flows from operating activities:

      

Net income

   $ 189      $ 195      $ (6

Adjustments to reconcile net income to net cash from operating activities:

      

Amortization of fixed maturity discounts and premiums and limited partnerships

     (49     (49     —     

Net investment losses

     (1     (1     —     

Charges assessed to policyholders

     (388     (388     —     

Acquisition costs deferred

     (309     (309     —     

Amortization of deferred acquisition costs and intangibles

     420        420        —     

Deferred income taxes

     46        49        (3

Gain on sale of subsidiary

     (15     (15     —     

Net increase in trading securities, held-for-sale investments and derivative instruments

     93        93        —     

Stock-based compensation expense

     13        13        —     

Change in certain assets and liabilities:

      

Accrued investment income and other assets

     5        5        —     

Insurance reserves

     1,001        992        9   

Current tax liabilities

     (196     (196     —     

Other liabilities and policy-related balances

     (589     (589     —     
  

 

 

   

 

 

   

 

 

 

Net cash from operating activities

   $ 220      $ 220      $ —     
  

 

 

   

 

 

   

 

 

 

Accounting Pronouncements Not Yet Adopted

In December 2011, the FASB issued new accounting guidance for disclosures about offsetting assets and liabilities. The new 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. These new disclosure requirements will be effective for us on January 1, 2013 and are not expected to have a material impact on our consolidated financial statements.

Earnings (Loss) Per Share
Earnings (Loss) Per Share

(3) Earnings (Loss) Per Share

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

 

      Three months ended
June 30,
    Six months ended
June 30,
 

(Amounts in millions, except per share amounts)

       2012              2011             2012              2011      

Net income (loss)

   $ 109       $ (100   $ 189       $ (7

Less: net income attributable to noncontrolling interests

     33         36        66         70   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) available to Genworth Financial, Inc.’s common stockholders

   $ 76       $ (136   $ 123       $ (77
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic per common share:

          

Net income (loss)

   $ 0.22       $ (0.20   $ 0.39       $ (0.01

Less: net income attributable to noncontrolling interests

     0.07         0.07        0.14         0.14   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) available to Genworth Financial, Inc.’s common stockholders (1)

   $ 0.16       $ (0.28   $ 0.25       $ (0.16
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted per common share:

          

Net income (loss)

   $ 0.22       $ (0.20   $ 0.38       $ (0.01

Less: net income attributable to noncontrolling interests

     0.07         0.07        0.13         0.14   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) available to Genworth Financial, Inc.’s common stockholders (1)

   $ 0.16       $ (0.28   $ 0.25       $ (0.16
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares used in basic earnings per common share calculations

     491.5         490.6        491.4         490.4   

Potentially dilutive securities:

          

Stock options, restricted stock units and stock appreciation rights

     2.4         —          3.4         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares used in diluted earnings per common share calculations (2)

     493.9         490.6        494.8         490.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

May not total due to whole number calculation.

(2)

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss available to Genworth Financial, Inc.’s common stockholders for the three and six months ended June 30, 2011, we were required to use basic weighted-average common shares outstanding in the calculation for the three and six months ended June 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 3.7 million and 4.0 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.’s common stockholders for the three and six months ended June 30, 2011, dilutive potential common shares would have been 494.3 million and 494.4 million, respectively.

Investments
Investments

(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)

       2012             2011             2012             2011      

Fixed maturity securities—taxable

   $ 669      $ 693      $ 1,329      $ 1,363   

Fixed maturity securities—non-taxable

     3        10        7        21   

Commercial mortgage loans

     85        92        169        184   

Restricted commercial mortgage loans related to securitization entities

     7        9        16        19   

Equity securities

     6        10        10        13   

Other invested assets

     56        55        109        89   

Policy loans

     31        30        62        59   

Cash, cash equivalents and short-term investments

     10        6        20        12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     867        905        1,722        1,760   

Expenses and fees

     (21     (24     (44     (49
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 846      $ 881      $ 1,678      $ 1,711   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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)

       2012             2011             2012             2011      

Available-for-sale securities:

        

Realized gains

   $ 21      $ 25      $ 84      $ 54   

Realized losses

     (19     (34     (65     (65
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on available-for-sale securities

     2        (9     19        (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (42     (28     (58     (59

Portion of other-than-temporary impairments included in other comprehensive income
(loss)

     3        2        2        (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (39     (26     (56     (62
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     32        14        7        25   

Commercial mortgage loans

     3        2        5        1   

Net gains (losses) related to securitization entities

     (4     (5     30        5   

Derivative instruments (1)

     (28     (15     (2     (25

Contingent consideration adjustment

     —          —          (2     —     

Other

     —          (1     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ (34   $ (40   $ 1      $ (68
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, 2012 and 2011 was $326 million and $294 million, respectively, which was approximately 95% and 91%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2012 and 2011 was $683 million and $691 million, respectively, which was approximately 93% of book value for both periods.

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

       2012             2011             2012             2011      

Beginning balance

   $ 610      $ 755      $ 646      $ 784   

Additions:

        

Other-than-temporary impairments not previously recognized

     6        1        8        4   

Increases related to other-than-temporary impairments previously recognized

     19        17        32        48   

Reductions:

        

Securities sold, paid down or disposed

     (47     (47     (98     (110
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 588      $ 726      $ 588      $ 726   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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, 2012     December 31, 2011  

Net unrealized gains (losses) on investment securities:

   

Fixed maturity securities

  $ 4,889      $ 3,742   

Equity securities

    8        5   

Other invested assets

    (26     (30
 

 

 

   

 

 

 

Subtotal

    4,871        3,717   

Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves

    (1,651     (1,303

Income taxes, net

    (1,118     (840
 

 

 

   

 

 

 

Net unrealized investment gains (losses)

    2,102        1,574   

Less: net unrealized investment gains (losses) attributable to noncontrolling interests

    86        89   
 

 

 

   

 

 

 

Net unrealized investment gains (losses) attributable to Genworth
Financial, Inc.

  $ 2,016      $ 1,485   
 

 

 

   

 

 

 

 

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)

       2012             2011      

Beginning balance

   $ 1,327      $ (14

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     1,329        555   

Adjustment to deferred acquisition costs

     (52     (31

Adjustment to present value of future profits

     (33     (15

Adjustment to sales inducements

     (4     (3

Adjustment to benefit reserves

     (214     (94

Provision for income taxes

     (358     (142
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     668        270   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(13) and $(13)

     24        22   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     692        292   

Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests

     3        14   
  

 

 

   

 

 

 

Ending balance

   $ 2,016      $ 264   
  

 

 

   

 

 

 

 

     As of or for the
six months ended
June 30,
 

(Amounts in millions)

       2012             2011      

Beginning balance

   $ 1,485      $ (80

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     1,117        567   

Adjustment to deferred acquisition costs

     (99     (48

Adjustment to present value of future profits

     (22     (16

Adjustment to sales inducements

     (14     (7

Adjustment to benefit reserves

     (213     (31

Provision for income taxes

     (265     (163
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     504        302   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(13) and $(26)

     24        47   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     528        349   

Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests

     (3     5   
  

 

 

   

 

 

 

Ending balance

   $ 2,016      $ 264   
  

 

 

   

 

 

 

 

(d) Fixed Maturity and Equity Securities

As of June 30, 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:

 

          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

  $ 3,915      $ 1,071      $ —        $ (1   $ —        $ 4,985   

Tax-exempt

    348        13        —          (51     —          310   

Government—non-U.S.

    2,278        228        —          (1     —          2,505   

U.S. corporate

    22,840        2,891        16        (201     (1     25,545   

Corporate—non-U.S.

    13,764        958        —          (137     —          14,585   

Residential mortgage-backed

    5,792        547        8        (196     (175     5,976   

Commercial mortgage-backed

    3,297        152        3        (146     (38     3,268   

Other asset-backed

    2,678        31        —          (90     (2     2,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    54,912        5,891        27        (823     (216     59,791   

Equity securities

    422        21        —          (12     —          431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 55,334      $ 5,912      $ 27      $ (835   $ (216   $ 60,222   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2011, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          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

  $ 3,946      $ 918      $ —        $ (1   $ —        $ 4,863   

Tax-exempt

    564        15        —          (76     —          503   

Government—non-U.S.

    2,017        196        —          (2     —          2,211   

U.S. corporate

    23,024        2,542        18        (325     (1     25,258   

Corporate—non-U.S.

    13,156        819        —          (218     —          13,757   

Residential mortgage-backed

    5,695        446        9        (252     (203     5,695   

Commercial mortgage-backed

    3,470        157        4        (179     (52     3,400   

Other asset-backed

    2,686        18        —          (95     (1     2,608   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    54,558        5,111        31        (1,148     (257     58,295   

Equity securities

    356        19        —          (14     —          361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 54,914      $ 5,130      $ 31      $ (1,162   $ (257   $ 58,656   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 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

  $ 247      $ (1     4      $ —        $ —          —        $ 247      $ (1 )       4   

Tax-exempt

    —          —          —          148        (51 )       30        148        (51 )       30   

Government—non-U.S.

    —          —          —          63        (1 )       15        63        (1 )       15   

U.S. corporate

    707        (21     115        1,164        (181     110        1,871        (202 )       225   

Corporate—non-U.S.

    1,022        (34     124        722        (103     66        1,744        (137 )       190   

Residential mortgage-
backed

    177        (2     39        681        (369     351        858        (371 )       390   

Commercial mortgage-backed

    161        (6     26        911        (178     164        1,072        (184 )       190   

Other asset-backed

    282        (2     50        223        (90 )       25        505        (92 )       75   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    2,596        (66     358        3,912        (973     761        6,508        (1,039     1,119   

Equity securities

    133        (10     56        22        (2 )       21        155        (12 )       77   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,729      $ (76     414      $ 3,934      $ (975     782      $ 6,663      $ (1,051     1,196   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 2,572      $ (55     343      $ 2,706      $ (240     419      $ 5,278      $ (295 )       762   

20%-50% Below cost

    23        (8     10        1,111        (499     235        1,134        (507 )       245   

>50% Below cost

    1        (3     5        95        (234     107        96        (237 )       112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    2,596        (66     358        3,912        (973     761        6,508        (1,039     1,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    127        (7     54        18        (1 )       16        145        (8 )       70   

20%-50% Below cost

    6        (3     2        4        (1 )       5        10        (4 )       7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    133        (10     56        22        (2 )       21        155        (12 )       77   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,729      $ (76     414      $ 3,934      $ (975     782      $ 6,663      $ (1,051     1,196   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 2,334      $ (44     302      $ 2,694      $ (396     380      $ 5,028      $ (440 )       682   

Below investment grade (3)

    395        (32     112        1,240        (579     402        1,635        (611 )       514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,729      $ (76     414      $ 3,934      $ (975     782      $ 6,663      $ (1,051     1,196   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts included $213 million of unrealized losses on other-than-temporarily impaired securities.

(2) 

Amounts included $216 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 $206 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 credit spreads that have widened since acquisition for corporate securities across various industry sectors, including finance and insurance as well as consumer–non-cyclical. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 3% as of June 30, 2012.

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

Of the $240 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 70% of the unrealized losses were related to investment grade securities as of June 30, 2012. These unrealized losses were attributable to the widening of credit spreads for these securities since acquisition, primarily associated with corporate securities in the finance and insurance sector as well as mortgage-backed and asset-backed securities. The average fair value percentage below cost for these securities was approximately 8% as of June 30, 2012. See below for additional discussion related to fixed maturity securities that have been in a continuous loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by asset class as of June 30, 2012:

 

    Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
 

Fixed maturity securities:

               

Tax-exempt

  $ 114      $ (47     4     11      $ —        $ —          —       —     

U.S. corporate

    217        (74     7        13        —          —          —          —     

Corporate—non-U.S.

    150        (55     5        14        —          —          —          —     

Structured securities:

               

Residential mortgage-backed

    40        (24     2        20        5        (12     1        9   

Commercial mortgage-backed

    24        (9     1        8        —          (1     —          1   

Other asset-backed

    18        (7     1        3        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    82        (40     4        31        5        (13     1        10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 563      $ (216     20     69      $ 5      $ (13     1     10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    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

  $ 76      $ (34     3     10      $ —        $ —          —       —     

Corporate—non-U.S.

    38        (13     1        3        —          —          —          —     

Structured securities:

               

Residential mortgage-
backed

    231        (123     12        112        73        (180     17        83   

Commercial mortgage-
backed

    138        (62     6        37        8        (25     2        11   

Other asset-backed

    65        (51     5        4        9        (16     2        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    434        (236     23        153        90        (221     21        97   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 548      $ (283     27     166      $ 90      $ (221     21     97   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 below for further discussion of gross unrealized losses by asset class.

Tax-Exempt Securities

As indicated in the table above, $47 million of gross unrealized losses were related to tax-exempt securities that have been in a continuous unrealized loss position for more than 12 months and were more than 20% below cost. The unrealized losses for tax-exempt securities represent municipal bonds that were diversified by state as well as municipality or political subdivision within those states. Of these tax-exempt securities, the average unrealized loss was approximately $4 million which represented an average of 29% below cost. The unrealized losses primarily related to widening of credit spreads on these securities since acquisition as a result of higher risk premiums being attributed to these securities from uncertainty in many political subdivisions related to special revenues supporting these obligations as well as certain securities having longer duration that may be viewed as less desirable in the current market place. Additionally, certain of these securities have been negatively impacted as a result of having certain bond insurers associated with the security. In our analysis of impairment for these securities, we expect to recover our amortized cost from the cash flows of the underlying securities before any guarantee support. However, the existence of these guarantees may negatively impact the value of the debt security in certain instances. We performed an analysis of these securities and the underlying activities that are expected to support the cash flows and determined we expect to recover our amortized cost.

 

Corporate Debt Securities

The following tables present the concentration of gross unrealized losses and fair values related to corporate debt fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by industry as of June 30, 2012:

 

    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: