GENWORTH FINANCIAL INC, 10-Q filed on 10/29/2010
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2010
Oct. 25, 2010
Document Type
10-Q 
 
Amendment Flag
FALSE 
 
Document Period End Date
2010-09-30 
 
Document Fiscal Year Focus
2010 
 
Document Fiscal Period Focus
Q3 
 
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
 
489,595,629 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Millions, except Per Share data
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2010
2009
2010
2009
Revenues:
 
 
 
 
Premiums
$ 1,447 
$ 1,492 
$ 4,387 
$ 4,496 
Net investment income
815 
759 
2,403 
2,251 
Net investment gains (losses)
105 
(122)
(104)
(945)
Insurance and investment product fees and other
300 
262 
812 
806 
Total revenues
2,667 
2,391 
7,498 
6,608 
Benefits and expenses:
 
 
 
 
Benefits and other changes in policy reserves
1,502 
1,450 
4,157 
4,450 
Interest credited
212 
225 
636 
763 
Acquisition and operating expenses, net of deferrals
472 
484 
1,446 
1,381 
Amortization of deferred acquisition costs and intangibles
227 
143 
590 
602 
Interest expense
114 
96 
338 
306 
Total benefits and expenses
2,527 
2,398 
7,167 
7,502 
Income (loss) before income taxes
140 
(7)
331 
(894)
Provision (benefit) for income taxes
18 
(52)
(80)
(420)
Net income (loss)
122 
45 
411 
(474)
Less: net income attributable to noncontrolling interests
39 
26 
108 
26 
Net income (loss) available to Genworth Financial, Inc.'s common stockholders
83 
19 
303 
(500)
Net income (loss) available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
 
Basic
0.17 
0.04 
0.62 
(1.14)
Diluted
0.17 
0.04 
0.61 
(1.14)
Weighted-average common shares outstanding:
 
 
 
 
Basic
490 
449 
489 
439 
Diluted
494 
452 
494 
439 
Supplemental disclosures:
 
 
 
 
Total other-than-temporary impairments
(7)
(285)
(108)
(1,358)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
(30)
89 
(60)
413 
Net other-than-temporary impairments
(37)
(196)
(168)
(945)
Other investment gains (losses)
142 
74 
64 
 
Total net investment gains (losses)
$ 105 
$ (122)
$ (104)
$ (945)
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Millions
9 Months Ended
Sep. 30, 2010
Year Ended
Dec. 31, 2009
Investments:
 
 
Fixed maturity securities available-for-sale, at fair value
$ 56,356 
$ 49,752 
Equity securities available-for-sale, at fair value
223 
159 
Commercial mortgage loans
6,929 
7,499 
Restricted commercial mortgage loans related to securitization entities
522 
 
Policy loans
1,480 
1,403 
Other invested assets
5,320 
4,702 
Restricted other invested assets related to securitization entities ($376 at fair value)
378 
 
Total investments
71,208 
63,515 
Cash and cash equivalents
3,598 
5,002 
Accrued investment income
760 
691 
Deferred acquisition costs
7,055 
7,341 
Intangible assets
647 
934 
Goodwill
1,321 
1,324 
Reinsurance recoverable
17,223 
17,332 
Other assets
958 
954 
Deferred tax asset
867 
92 
Separate account assets
11,063 
11,002 
Total assets
114,700 
108,187 
Liabilities:
 
 
Future policy benefits
30,758 
29,469 
Policyholder account balances
27,714 
28,470 
Liability for policy and contract claims
6,448 
6,567 
Unearned premiums
4,492 
4,714 
Other liabilities ($166 and $- other liabilities related to securitization entities)
6,949 
6,298 
Borrowings related to securitization entities ($44 at fair value)
502 
 
Non-recourse funding obligations
3,437 
3,443 
Short-term borrowings
730 
930 
Long-term borrowings
4,373 
3,641 
Deferred tax liability
2,163 
303 
Separate account liabilities
11,063 
11,002 
Total liabilities
98,629 
94,837 
Commitments and contingencies
 
 
Stockholders' equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 578 million and 577 million shares issued as of September 30, 2010 and December 31, 2009, respectively; 490 million and 489 million shares outstanding as of September 30, 2010 and December 31, 2009, respectively
Additional paid-in capital
12,084 
12,034 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
730 
(1,151)
Net unrealized gains (losses) on other-than-temporarily impaired securities
(143)
(247)
Net unrealized investment gains (losses)
587 
(1,398)
Derivatives qualifying as hedges
1,354 
802 
Foreign currency translation and other adjustments
543 
432 
Total accumulated other comprehensive income (loss)
2,484 
(164)
Retained earnings
3,133 
3,105 
Treasury stock, at cost (88 million shares as of September 30, 2010 and December 31, 2009)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
15,002 
12,276 
Noncontrolling interests
1,069 
1,074 
Total stockholders' equity
16,071 
13,350 
Total liabilities and stockholders' equity
$ 114,700 
$ 108,187 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data
Sep. 30, 2010
Dec. 31, 2009
Restricted other invested assets related to securitization entities, fair value
376 
 
Other liabilities, securitization entities
166 
 
Borrowings related to securitization entities, fair value
44 
 
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
578,000,000 
577,000,000 
Class A common stock, shares outstanding
490,000,000 
489,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (USD $)
In Millions
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost
Total Genworth Financial, Inc.'s stockholders' equity
Noncontrolling interests
Total
Beginning Balances at Dec. 31, 2008
11,477 
(3,062)
3,210 
(2,700)
8,926 
 
8,926 
Cumulative effect of change in accounting, net of taxes and other adjustments
 
 
(349)
355 
 
 
Initial sale of subsidiary shares to noncontrolling interests
 
(85)
(60)
 
 
(145)
828 
683 
Additional sale of subsidiary shares to noncontrolling interests
 
(3)
(12)
 
 
(15)
99 
84 
Issuance of common stock
 
622 
 
 
 
622 
 
622 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
(500)
 
(500)
26 
(474)
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
3,027 
 
 
3,027 
19 
3,046 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
(19)
 
 
(19)
 
(19)
Derivatives qualifying as hedges
 
 
(148)
 
 
(148)
 
(148)
Foreign currency translation and other adjustments
 
 
646 
 
 
646 
56 
702 
Total comprehensive income (loss)
 
 
 
 
 
 
 
3,107 
Stock-based compensation expense and exercises and other
 
17 
 
 
 
17 
 
17 
Ending Balances at Sep. 30, 2009
12,028 
23 
3,065 
(2,700)
12,417 
1,028 
13,445 
Beginning Balances at Dec. 31, 2009
12,034 
(164)
3,105 
(2,700)
12,276 
1,074 
13,350 
Cumulative effect of change in accounting, net of taxes and other adjustments
 
 
260 
(275)
 
(15)
 
(15)
Repurchase of subsidiary shares
 
 
 
 
 
 
(131)
(131)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
303 
 
303 
108 
411 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
1,621 
 
 
1,621 
28 
1,649 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
104 
 
 
104 
 
104 
Derivatives qualifying as hedges
 
 
552 
 
 
552 
 
552 
Foreign currency translation and other adjustments
 
 
111 
 
 
111 
22 
133 
Total comprehensive income (loss)
 
 
 
 
 
 
 
2,849 
Dividends to noncontrolling interests
 
 
 
 
 
 
(32)
(32)
Stock-based compensation expense and exercises and other
 
30 
 
 
 
30 
 
30 
Other capital transactions
 
20 
 
 
 
20 
 
20 
Ending Balances at Sep. 30, 2010
$ 1 
$ 12,084 
$ 2,484 
$ 3,133 
$ (2,700)
$ 15,002 
$ 1,069 
$ 16,071 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions
9 Months Ended
Sep. 30,
2010
2009
Cash flows from operating activities:
 
 
Net income (loss)
$ 411 
$ (474)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
Amortization of fixed maturity discounts and premiums
(11)
103 
Net investment losses (gains)
104 
945 
Charges assessed to policyholders
(367)
(332)
Acquisition costs deferred
(610)
(540)
Amortization of deferred acquisition costs and intangibles
590 
602 
Deferred income taxes
(111)
(634)
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments
113 
(4)
Gain on sale of subsidiary
 
(4)
Stock-based compensation expense
31 
17 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(31)
(135)
Insurance reserves
1,767 
2,153 
Current tax liabilities
(313)
55 
Other liabilities and other policy-related balances
(597)
102 
Net cash from operating activities
976 
1,854 
Proceeds from maturities and repayments of investments:
 
 
Fixed maturity securities
3,302 
3,157 
Commercial mortgage loans
493 
519 
Restricted commercial mortgage loans related to securitization entities
40 
 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
3,329 
3,343 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(10,223)
(5,091)
Commercial mortgage loans
(35)
 
Other invested assets, net
1,483 
122 
Policy loans, net
(77)
426 
Net cash transferred related to the sale of a subsidiary
 
(90)
Net cash from investing activities
(1,688)
2,386 
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
1,832 
1,801 
Withdrawals from universal life and investment contracts
(2,950)
(6,669)
Short-term borrowings and other, net
(86)
(363)
Repayment and repurchase of long-term borrowings
(6)
(809)
Proceeds from the issuance of long-term borrowings
660 
 
Redemption of non-recourse funding obligations
(6)
(12)
Repayment of borrowings related to securitization entities
(46)
 
Proceeds from issuance of common stock
 
622 
Proceeds from the sale of subsidiary shares to noncontrolling interests
 
771 
Repurchase of subsidiary shares
(131)
 
Dividends paid to noncontrolling interests
(32)
 
Net cash from financing activities
(765)
(4,659)
Effect of exchange rate changes on cash and cash equivalents
73 
235 
Net change in cash and cash equivalents
(1,404)
(184)
Cash and cash equivalents at beginning of period
5,002 
7,328 
Cash and cash equivalents at end of period
$ 3,598 
$ 7,144 
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 three operating segments:

 

   

Retirement and Protection. We offer and manage a variety of protection, wealth management and retirement income products. Our primary protection products include life and long-term care insurance. Additionally, we offer other Medicare supplement insurance products, as well as care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs and advisor services, financial planning services, fixed and variable deferred and immediate individual annuities and group variable annuities offered through retirement plans.

 

   

International. We offer mortgage and lifestyle protection insurance products and related services in multiple markets. We are a leading provider of mortgage insurance products 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. We are a leading provider of payment protection coverages (referred to as lifestyle protection) in multiple European countries, Canada and Mexico. 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.

 

   

U.S. Mortgage Insurance. In the U.S., 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 structured, or 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.

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 non-core businesses and non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist of funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”).

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 2009 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

Accounting Pronouncements
Accounting Pronouncements

(2) Accounting Pronouncements

Recently Adopted

Scope Exception for Embedded Credit Derivatives

On July 1, 2010, we adopted new accounting guidance related to embedded credit derivatives. This accounting guidance clarified the scope exception for embedded credit derivatives and when those features would be bifurcated from the host contract. Under the new accounting guidance, only embedded credit derivative features that are in the form of subordination of one financial instrument to another would not be subject to the bifurcation requirements. Accordingly, upon adoption, we were required to bifurcate embedded credit derivatives that no longer qualified under the amended scope exception. In conjunction with our adoption, we elected fair value option for certain fixed maturity securities. On July 1, 2010, we recorded a net cumulative effect adjustment of $171 million to retained earnings with an offset to accumulated other comprehensive income (loss) of $169 million. The following summarizes the components for the cumulative effect adjustment:

 

(Amounts in millions)

   Accumulated other
comprehensive
income (loss)
    Retained
earnings
    Total stockholders’
equity
 

Investment securities

   $ 267      $ (267   $ —     

Adjustment to deferred acquisition costs

     (4     1        (3

Adjustment to sales inducements

     (1     1        —     

Provision for income taxes

     (93     94        1   
                        

Net cumulative effect adjustment

   $ 169      $ (171   $ (2
                        

For certain securities where the embedded credit derivative would require bifurcation, we elected the fair value option to carry the entire instrument at fair value to reduce the cost of calculating and recording the fair value of the embedded derivative feature separate from the debt security. Additionally, we elected the fair value option for a portion of our other asset-backed securities for operational ease and to record and present the securities at fair value in future periods. Upon electing fair value option on July 1, 2010, these securities were reclassified into the trading category included in other invested assets and had a fair value of $407 million. Prior to electing fair value option, these securities were classified as available-for-sale fixed maturity securities.

Accounting for Transfers of Financial Assets

On January 1, 2010, we adopted new accounting guidance related to accounting for transfers of financial assets. This accounting guidance amended the previous guidance on transfers of financial assets by eliminating the qualifying special-purpose entity concept, providing certain conditions that must be met to qualify for sale accounting, changing the amount of gain or loss recognized on certain transfers and requiring additional disclosures. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements. The elimination of the qualifying special-purpose entity concept required that these entities be considered for consolidation as a result of the new guidance related to variable interest entities (“VIEs”) as discussed below.

 

Improvements to Financial Reporting by Enterprises Involved with VIEs

On January 1, 2010, we adopted new accounting guidance for determining which enterprise, if any, has a controlling financial interest in a VIE and required additional disclosures about involvement in VIEs. Under this new accounting guidance, the primary beneficiary of a VIE is the enterprise that has the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance and has the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. Upon adoption of this new accounting guidance, we were required to consolidate certain VIEs, including previously qualifying special-purpose entities and investment structures. We recorded a transition adjustment for the impact upon adoption to reflect the difference between the assets and liabilities of the newly consolidated entities and the amounts recorded for our interests in these entities prior to adoption. On January 1, 2010, we recorded a net cumulative effect adjustment of $104 million to retained earnings with a partial offset to accumulated other comprehensive income (loss) of $91 million related to the adoption of this new accounting guidance.

The assets and liabilities of the newly consolidated entities were as follows as of January 1, 2010:

 

(Amounts in millions)

   Carrying value  (1)      Adjustment for election
of fair value option 
(2)
    Amounts
recorded upon
consolidation
 

Assets

       

Restricted commercial mortgage loans

   $ 564       $ —        $ 564   

Restricted other invested assets

     409         (30     379   

Accrued investment income

     2         —          2   
                         

Total assets

     975         (30     945   
                         

Liabilities

       

Other liabilities

     138         —          138   

Borrowings related to securitization entities

     644         (80     564   
                         

Total liabilities

     782         (80     702   
                         

Net assets and liabilities of newly consolidated entities

   $ 193       $ 50        243   
                   

Less: amortized cost of fixed maturity securities previously recorded (3)

          404   
             

Cumulative effect adjustment to retained earnings upon adoption, pre-tax

          (161

Tax effect

          57   
             

Net cumulative effect adjustment to retained earnings upon adoption

        $ (104
             

 

(1)

Carrying value represents the amounts that would have been recorded in the consolidated financial statements on January 1, 2010 had we recorded the assets and liabilities in our financial statements from the date we first met the conditions for consolidation based on the criteria in the new accounting guidance.

(2)

Amount represents the difference between book value and fair value of the investments and borrowings related to consolidated securitization entities where we have elected fair value option.

(3)

Fixed maturity securities that were previously recorded had net unrealized investment losses of $91 million included in accumulated other comprehensive income (loss) as of December 31, 2009.

 

For commercial mortgage loans, the carrying amounts represent the unpaid principal balance less any reserve. Restricted other invested assets are comprised of trading securities that are recorded at fair value. Trading securities represent asset-backed securities where we elected fair value option. Borrowings related to securitization entities are recorded at unpaid principal except for the borrowings related to entities where we elected fair value option for all assets and liabilities.

For certain entities consolidated upon adoption of the new accounting guidance on January 1, 2010, we elected fair value option to measure all assets and liabilities at current fair value with future changes in fair value being recorded in income (loss). We elected fair value option for certain entities as a method to better present the offsetting changes in assets and liabilities related to third-party interests in those entities and eliminated the potential accounting mismatch between the measurement of the assets and derivatives of the entity compared to the borrowings issued by the entity. The entities where we did not elect fair value option did not have the same accounting mismatch since the assets held by the securitization entity and the borrowings of the entity were recorded at cost. See note 7 for additional information related to consolidation of VIEs.

The new accounting guidance related to consolidation of VIEs has been deferred for a reporting entity’s interest in an entity that has all of the attributes of an investment company as long as there is no implicit or explicit obligation to fund losses of the entity. For entities that meet these criteria, the new accounting guidance related to VIE consolidation would not be applicable until further guidance is issued. Accordingly, we did not have any impact upon adoption related to entities that meet the deferral criteria, such as certain limited partnership and fund investments.

Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements

On January 1, 2010, we adopted new accounting guidance requiring additional disclosures for significant transfers between Level 1 and 2 fair value measurements and clarifications to existing fair value disclosures related to the level of disaggregation, inputs and valuation techniques. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Not Yet Adopted

In October 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This new accounting guidance will be effective for us on January 1, 2012. When adopted, we expect to defer fewer costs. The new guidance is effective prospectively with retrospective adoption allowed. We have not yet determined the method nor impact this accounting guidance will have on our consolidated financial statements.

In July 2010, the FASB issued new accounting guidance that will require additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain additional disclosures in this new accounting guidance will be effective for us on December 31, 2010 with certain other additional disclosures that will be effective for us on March 31, 2011. We do not expect the adoption of this new accounting guidance to have a material impact on our consolidated financial statements.

In April 2010, the FASB issued new accounting guidance on how investments held through separate accounts affect an insurer’s consolidation analysis of those investments. This new accounting guidance will be effective for us on January 1, 2011. We do not expect the adoption of this new accounting guidance to have a material impact on our consolidated financial statements.

 

In January 2010, the FASB issued new accounting guidance to require additional disclosures about purchases, sales, issuances and settlements in the rollforward of Level 3 fair value measurements. This new accounting guidance will be effective for us on January 1, 2011. We do not expect the adoption of this new accounting guidance 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
September 30,
     Nine months ended
September 30,
 

(Amounts in millions, except per share amounts)

       2010              2009              2010              2009      

Net income (loss)

   $ 122       $ 45       $ 411       $ (474

Less: net income attributable to noncontrolling interests

     39         26         108         26  
                                   

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

   $ 83       $ 19       $ 303       $ (500
                                   

Basic per common share:

           

Net income (loss)

   $ 0.25       $ 0.10       $ 0.84       $ (1.08

Less: net income attributable to noncontrolling interests

     0.08         0.06         0.22         0.06   
                                   

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

   $ 0.17       $ 0.04       $ 0.62       $ (1.14
                                   

Diluted per common share:

           

Net income (loss)

   $ 0.25       $ 0.10       $ 0.83       $ (1.08

Less: net income attributable to noncontrolling interests

     0.08         0.06         0.22         0.06   
                                   

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

   $ 0.17       $ 0.04       $ 0.61       $ (1.14
                                   

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

     489.5         448.9         489.1         438.5   

Potentially dilutive securities:

           

Stock options, restricted stock units and stock appreciation rights

     4.4         2.7        4.8         —     
                                   

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

     493.9         451.6         493.9         438.5   
                                   

 

(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 for the nine months ended September 30, 2009, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share for the nine months ended September 30, 2009, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.3 million would have been antidilutive to the calculation. If we had not incurred a net loss for the nine months ended September 30, 2009, dilutive potential common shares would have been 439.8 million.

 

Investments
Investments

(4) Investments

(a) Net Investment Income

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

 

    Three months ended
September 30,
    Nine months ended
September 30,
 

(Amounts in millions)

      2010             2009             2010             2009      

Fixed maturity securities—taxable

  $ 658      $ 610      $ 1,930      $ 1,837   

Fixed maturity securities—non-taxable

    14        27        46        85   

Commercial mortgage loans

    95        106        298        329   

Restricted commercial mortgage loans related to securitization entities (1)

    10        —          30        —     

Equity securities

    4        6        11        12   

Other invested assets

    24        4        61        (102

Restricted other invested assets related to securitization entities (1)

    1        —          2        —     

Policy loans

    28        19        83        115   

Cash, cash equivalents and short-term investments

    6        9        15        40   
                               

Gross investment income before expenses and fees

    840        781        2,476        2,316   

Expenses and fees

    (25     (22     (73     (65
                               

Net investment income

  $ 815      $ 759      $ 2,403      $ 2,251   
                               

 

(1)

See note 7 for additional information related to consolidated securitization entities.

(b) Net Investment Gains (Losses)

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

 

    Three months ended
September 30,
    Nine months ended
September 30,
 

(Amounts in millions)

      2010             2009             2010             2009      

Available-for-sale securities:

       

Realized gains on sale

  $ 38      $ 122      $ 114      $ 172   

Realized losses on sale

    (35     (81     (109     (192
                               

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

    3        41        5        (20
                               

Impairments:

       

Total other-than-temporary impairments

    (7     (285     (108     (1,358

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

    (30     89        (60     413   
                               

Net other-than-temporary impairments

    (37     (196     (168     (945
                               

Trading securities

    23        16        25        15   

Commercial mortgage loans

    (9     (8     (31     (19

Net gains (losses) related to securitization entities (1)

    30        —          (6     —     

Derivative instruments (2)

    94        19        48        12   

Other

    1        6        23        12   
                               

Net investment gains (losses)

  $ 105      $ (122   $ (104   $ (945
                               

 

(1)

See note 7 for additional information related to consolidated securitization entities.

(2)

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

 

The aggregate fair value of securities sold at a loss during the three months ended September 30, 2010 and 2009 was $275 million and $354 million, respectively, which was approximately 89% and 84%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2010 and 2009 was $1,691 million and $1,091 million, respectively, which was approximately 94% and 86%, 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 or for the periods indicated:

 

     As of or for the
three months ended
September 30,
 

(Amounts in millions)

       2010             2009      

Cumulative credit loss beginning balance

   $ 978      $ 1,085   

Additions:

    

Other-than-temporary impairments not previously recognized

     13        25   

Increases related to other-than-temporary impairments previously recognized

     22        74   

Reductions:

    

Securities sold, paid down or disposed

     (126     (103

Securities where there is intent to sell

     —          (5
                

Cumulative credit loss ending balance

   $ 887      $ 1,076   
                

 

     As of or for the
nine months ended
September 30,
 

(Amounts in millions)

       2010             2009      

Cumulative credit loss beginning balance

   $ 1,059      $ —     

Impact upon adoption of new accounting guidance

     —          1,204   

Additions:

    

Other-than-temporary impairments not previously recognized

     44        81   

Increases related to other-than-temporary impairments previously recognized

     100        169   

Reductions:

    

Securities sold, paid down or disposed

     (316     (373

Securities where there is intent to sell

     —          (5
                

Cumulative credit loss ending balance

   $ 887      $ 1,076   
                

 

(c) Unrealized Investment Gains and Losses

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

 

(Amounts in millions)

   September 30,
2010
    December 31,
2009
 

Net unrealized gains (losses) on investment securities:

    

Fixed maturity securities

   $ 2,075      $ (2,245

Equity securities

     15        20   

Other invested assets

     (27     (29
                

Subtotal

     2,063        (2,254

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

     (1,057     138   

Income taxes, net

     (352     757   
                

Net unrealized investment gains (losses)

     654        (1,359

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

     67        39   
                

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

   $ 587      $ (1,398
                

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

 

     As of or for the
three months ended
September 30,
 

(Amounts in millions)

   2010     2009  

Beginning balance

   $ 29      $ (3,023

Cumulative effect of change in accounting

     169        —     

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     1,486        2,796   

Adjustment to deferred acquisition costs

     (187     (264

Adjustment to present value of future profits

     (101     (93

Adjustment to sales inducements

     (21     (13

Adjustment to benefit reserves

     (581     —     

Provision for income taxes

     (210     (863
                

Change in unrealized gains (losses) on investment securities

     386        1,563   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(12) and $(51)

     22        100   
                

Change in net unrealized investment gains (losses)

     577        1,663   

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

     (19     (41
                

Ending balance

   $ 587      $ (1,401
                

 

     As of or for the
nine months ended
September 30,
 

(Amounts in millions)

   2010     2009  

Beginning balance

   $ (1,398   $ (4,038

Cumulative effect of change in accounting

     260        (349

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     3,747        4,352   

Adjustment to deferred acquisition costs

     (381     (448

Adjustment to present value of future profits

     (182     (164

Adjustment to sales inducements

     (46     (12

Adjustment to benefit reserves

     (581     —     

Provision for income taxes

     (910     (1,328
                

Change in unrealized gains (losses) on investment securities

     1,647        2,400   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(57) and $(337)

     106        627   
                

Change in net unrealized investment gains (losses)

     2,013        2,678   

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

     (28     (41
                

Ending balance

   $ 587      $ (1,401
                

(d) Fixed Maturity and Equity Securities

As of September 30, 2010, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

(Amounts in millions)

  Amortized
cost or
cost
    Gross unrealized gains     Gross unrealized losses     Fair
value
 
    Not  other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not  other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
   

Fixed maturity securities:

           

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

  $ 3,508      $ 414      $ —        $ —        $ —        $ 3,922   

Tax-exempt

    1,288        55        —          (72     —          1,271   

Government—non-U.S.

    2,188        169        —          (5     —          2,352   

U.S. corporate

    22,979        1,858        10        (322     —          24,525   

Corporate—non-U.S.

    13,282        730        15        (209     (3     13,815   

Residential mortgage-backed

    4,629        228        14        (312     (225     4,334   

Commercial mortgage-backed

    4,011        188        5        (389     (58     3,757   

Other asset-backed

    2,391        25        —          (34     (2     2,380   
                                               

Total fixed maturity securities

    54,276        3,667        44        (1,343     (288     56,356   

Equity securities

    208        18        —          (3     —          223   
                                               

Total available-for-sale securities

  $ 54,484      $ 3,685      $ 44      $ (1,346   $ (288   $ 56,579   
                                               

 

As of December 31, 2009, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

(Amounts in millions)

  Amortized
cost or
cost
    Gross unrealized gains     Gross unrealized losses     Fair
value
 
    Not  other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not  other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
   

Fixed maturity securities:

           

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

  $ 2,673      $ 25      $ —        $ (96   $ —        $ 2,602   

Tax-exempt

    1,606        42        —          (104     —          1,544   

Government—non-U.S.

    2,310        96        —          (22     —          2,384   

U.S. corporate

    21,598        628        3        (814     (3     21,412   

Corporate—non-U.S.

    12,530        366        11        (356     —          12,551   

Residential mortgage-backed

    3,989        41        7        (484     (326     3,227   

Commercial mortgage-backed

    4,404        44        4        (738     (97     3,617   

Other asset-backed

    2,887        8        —          (466     (14     2,415   
                                               

Total fixed maturity securities

    51,997        1,250        25        (3,080     (440     49,752   

Equity securities

    139        23        —          (3     —          159   
                                               

Total available-for-sale securities

  $ 52,136      $ 1,273      $ 25      $ (3,083   $ (440   $ 49,911   
                                               

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of September 30, 2010:

 

    Less than 12 months     12 months or more  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number  of
securities
    Fair
value
    Gross
unrealized
losses
    Number  of
securities
 

Description of Securities

           

Fixed maturity securities:

           

Tax-exempt

  $ —        $ —          —        $ 277      $ (72     92   

Government—non-U.S.

    141        (4     32        21        (1     2   

U.S. corporate

    631        (17     89        2,572        (305     199   

Corporate—non-U.S.

    836        (20     130        1,443        (192     109   

Residential mortgage-backed

    170        (2     46        1,051        (535     432   

Commercial mortgage-backed

    78        (1     16        1,135        (446     239   

Other asset-backed

    287        (1     19        470        (35     53   
                                               

Subtotal, fixed maturity securities

    2,143        (45     332        6,969        (1,586     1,126   

Equity securities

    34        (3     18        —          —          —     
                                               

Total for securities in an unrealized loss position

  $ 2,177      $ (48     350      $ 6,969      $ (1,586     1,126   
                                               

% Below cost—fixed maturity securities:

           

<20% Below cost

  $ 2,139      $ (42     311      $ 5,128      $ (375     603   

20-50% Below cost

    3        (1     8        1,593        (714     310   

>50% Below cost

    1        (2     13        248        (497     213   
                                               

Total fixed maturity securities

    2,143        (45     332        6,969        (1,586     1,126   
                                               

% Below cost—equity securities:

           

<20% Below cost

    28        (1     17        —          —          —     

20-50% Below cost

    6        (2     1        —          —          —     
                                               

Total equity securities

    34        (3     18        —          —          —     
                                               

Total for securities in an unrealized loss position

  $ 2,177      $ (48     350      $ 6,969      $ (1,586     1,126   
                                               

Investment grade

  $ 2,070      $ (43     294      $ 5,224      $ (796     689   

Below investment grade

    107        (5     56        1,745        (790     437   

Not rated—fixed maturity securities

    —          —          —          —          —          —     

Not rated—equity securities

    —          —          —          —          —          —     
                                               

Total for securities in an unrealized loss position

  $ 2,177      $ (48     350      $ 6,969      $ (1,586     1,126   
                                               

The investment securities in an unrealized loss position as of September 30, 2010 consisted of 1,476 securities and accounted for unrealized losses of $1,634 million. Of these unrealized losses of $1,634 million, 51% were investment grade (rated “AAA” through “BBB-”) and 26% were less than 20% below cost. The securities less than 20% below cost were primarily attributable to credit spreads that have widened since acquisition for certain mortgage-backed and asset-backed securities and corporate securities in the finance and insurance sector. Included in these unrealized losses as of September 30, 2010 was $288 million of unrealized losses on other-than-temporarily impaired securities. Of the total unrealized losses on other-than-temporarily impaired securities, $286 million have been in an unrealized loss position for more than 12 months.

 

Of the unrealized losses of $1,634 million, $1,020 million were related to structured securities and $395 million were related to corporate securities in the finance and insurance sector. Of the remaining gross unrealized losses of $219 million, $77 million were related to tax-exempt and government—non-U.S. securities and $142 million were primarily related to other corporate securities that were spread evenly across all other sectors with no individual sector exceeding $28 million.

Of the $1,020 million unrealized losses in structured securities, 53% were in residential mortgage-backed securities and 44% were in commercial mortgage-backed securities with the remainder in other asset-backed securities. Approximately 39% of the total unrealized losses in structured securities were on securities that have retained investment grade ratings. Most of these securities have been in an unrealized loss position for 12 months or more. Given ongoing concern about the housing market and unemployment, the fair value of these securities has declined due to credit spreads that have widened since acquisition. We examined the performance of the underlying collateral and developed our estimate of cash flows expected to be collected. In doing so, we identified certain securities where the non-credit portion of other-than-temporary impairments was recorded in OCI. Based on this evaluation, we determined that the unrealized losses on our mortgage-backed and asset-backed securities represented temporary impairments as of September 30, 2010.

Of the $395 million unrealized losses in the finance and insurance sector, most have been in an unrealized loss position for 12 months or more. Most of these securities have retained a credit rating of investment grade. A portion of the unrealized losses included securities where an other-than-temporary impairment was recorded in OCI. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these securities represented temporary impairments as of September 30, 2010. A subset of the securities issued by banks and other financial institutions represent investments in financial hybrid securities on which a debt impairment model was employed. Most of these securities retain a credit rating of investment grade. The majority of these securities were issued by foreign financial institutions. The fair value of these securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred. The remaining unrealized losses in our U.S. and non-U.S. corporate securities were evenly distributed across all other major industry types that comprise our corporate bond holdings.

Of the investment securities in an unrealized loss position for 12 months or more as of September 30, 2010, 523 securities were 20% or more below cost, of which 323 securities were also below investment grade (rated “BB+” and below) and accounted for unrealized losses of $701 million. These securities were primarily structured securities or securities issued by corporations in the finance and insurance sector. Included in this amount are other-than-temporarily impaired securities where the non-credit loss of $228 million was recorded in OCI.

While certain securities included in the preceding table were considered other-than-temporarily impaired, we expect to recover the new 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.

Despite the considerable analysis and rigor employed on our structured securities, it is at least reasonably possible that the underlying collateral of these investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of asset-backed and mortgage-backed securities and potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. We expect our investments in corporate securities will continue to perform in accordance with our conclusions about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate 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, 2009:

 

     Less than 12 months      12 months or more  

(Dollar amounts in millions)

   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

   $ 1,759       $ (95     81       $ 6       $ (1     2   

Tax-exempt

     152         (6     48         346         (98     113   

Government—non-U.S.

     341         (3     60         105         (19     35   

U.S. corporate

     2,823         (81     317         5,660         (736     510   

Corporate—non-U.S.

     1,721         (55     221         2,245         (301     258   

Residential mortgage-backed

     941         (252     256         1,012         (558     348   

Commercial mortgage-backed

     714         (64     81         1,720         (771     345   

Other asset-backed

     329         (6     43         1,727         (474     183   
                                                   

Subtotal, fixed maturity securities

     8,780         (562     1,107         12,821         (2,958     1,794   

Equity securities

     2         (1     3         12         (2     9   
                                                   

Total for securities in an unrealized loss position

   $ 8,782       $ (563     1,110       $ 12,833       $ (2,960     1,803   
                                                   

% Below cost—fixed maturity securities:

               

<20% Below cost

   $ 8,437       $ (245     920       $ 9,699       $ (762     1,055   

20-50% Below cost

     267         (137     91         2,637         (1,246     455   

>50% Below cost

     76         (180     96         485         (950     284   
                                                   

Total fixed maturity securities

     8,780         (562     1,107         12,821         (2,958     1,794   
                                                   

% Below cost—equity securities:

               

<20% Below cost

     2         (1     3         11         (1     5   

>50% Below cost

     —           —          —           1         (1     4   
                                                   

Total equity securities

     2         (1     3         12         (2     9   
                                                   

Total for securities in an unrealized loss position

   $ 8,782       $ (563     1,110       $ 12,833       $ (2,960     1,803   
                                                   

Investment grade

   $ 8,391       $ (320     891       $ 10,897       $ (2,122     1,390   

Below investment grade

     391         (243     219         1,936         (838     413   
                                                   

Total for securities in an unrealized loss position

   $ 8,782       $ (563     1,110       $ 12,833       $ (2,960     1,803   
                                                   

 

The scheduled maturity distribution of fixed maturity securities as of September 30, 2010 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Amounts in millions)

   Amortized
cost or
cost
     Fair
value
 

Due one year or less

   $ 2,591       $ 2,613   

Due after one year through five years

     12,156         12,562   

Due after five years through ten years

     8,818         9,454   

Due after ten years

     19,680         21,256   
                 

Subtotal

     43,245         45,885   

Residential mortgage-backed

     4,629         4,334   

Commercial mortgage-backed

     4,011         3,757   

Other asset-backed

     2,391         2,380   
                 

Total

   $ 54,276       $ 56,356   
                 

As of September 30, 2010, $4,985 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2010, securities issued by finance and insurance, utilities and energy, and consumer—non-cyclical industry groups represented approximately 24%, 22% and 12% of our domestic and foreign corporate fixed maturity securities portfolio, respectively. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the U.S. and internationally, and is not dependent on the economic stability of one particular region.

As of September 30, 2010, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

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

 

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

 

     September 30, 2010     December 31, 2009  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property Type

        

Retail

   $ 2,015        29   $ 2,115        28

Office

     1,897        27        2,025        27   

Industrial

     1,861        27        1,979        26   

Apartments

     776        11        832        11   

Mixed use/other

     437        6        590        8   
                                

Total principal balance

     6,986        100     7,541        100
                    

Unamortized balance of loan origination fees and costs

     5          6     

Allowance for losses

     (62       (48  
                    

Total (1)

   $ 6,929        $ 7,499     
                    

 

(1)

Included held-for-sale mortgage loans of $17 million as of December 31, 2009. The held-for-sale mortgage loans as of December 31, 2009 represented interests in reverse mortgage loans. In the first quarter of 2010, we began reporting held-for-sale reverse mortgage loans in other invested assets.

 

     September 30, 2010     December 31, 2009  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Geographic Region

        

Pacific

   $ 1,857        27   $ 2,005        27

South Atlantic

     1,593        23        1,711        23   

Middle Atlantic

     935        13        1,005        13   

East North Central

     657        9        728        10   

Mountain

     591        9        650        9   

New England

     484        7        492        6   

West North Central

     374        5        389        5   

West South Central

     306        4        331        4   

East South Central

     189        3        230        3   
                                

Total principal balance

     6,986        100     7,541        100
                                

Unamortized balance of loan origination fees and costs

     5          6     

Allowance for losses

     (62       (48  
                    

Total (1)

   $ 6,929        $ 7,499     
                    

 

(1)

Included held-for-sale mortgage loans of $17 million as of December 31, 2009. The held-for-sale mortgage loans as of December 31, 2009 represented interests in reverse mortgage loans. In the first quarter of 2010, we began reporting held-for-sale reverse mortgage loans in other invested assets.

“Impaired” loans are defined by U.S. GAAP as loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement.

 

Under these principles, we may have two types of “impaired” loans: loans requiring specific allowances for losses ($14 million for the nine months ended September 30, 2010 and $21 million for the year ended December 31, 2009) and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition (none for the nine months ended September 30, 2010 and for the year ended December 31, 2009).

Average investment in specifically impaired loans was $5 million and $10 million as of September 30, 2010 and December 31, 2009, respectively, and there was no interest income recognized on these loans while they were considered impaired.

The following table presents the activity in the allowance for losses during the periods indicated:

 

(Amounts in millions)

   Three months ended
September 30, 2010
    Nine months ended
September 30, 2010
 

Beginning balance

   $ 70      $ 48   

Provision

     5        27   

Release (1)

     (13     (13
                

Ending balance

   $ 62      $ 62   
                

 

  (1)

Included $13 million related to held-for-sale commercial mortgage loans that were sold in the third quarter of 2010.

( f ) Restricted Commercial Mortgage Loans Related To Securitization Entities

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

 

     September 30, 2010  

(Amounts in millions)

   Carrying
value
    % of
total
 

Property Type

    

Retail

   $ 190        36

Industrial

     128        25   

Office

     120        23   

Apartments

     64        12   

Mixed use/other

     22        4   
                

Total principal balance

     524        100
          

Allowance for losses

     (2  
          

Total 

   $ 522     
          

 

     September 30, 2010  

(Amounts in millions)

   Carrying
value
    % of
total
 

Geographic Region

    

South Atlantic

   $ 193        37

Pacific

     92        18   

Middle Atlantic

     71        14   

East North Central

     54        10   

Mountain

     36        7   

East South Central

     32        6   

West North Central

     32        6   

West South Central

     13        2   

New England

     1        —     
                

Total principal balance

     524        100
          

Allowance for losses

     (2  
          

Total

   $ 522     
          

See note 7 for additional information related to consolidated securitization entities.

(g) Restricted Other Invested Assets Related To Securitization Entities

Our consolidated securitization entities hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities whereby the changes in fair value are recorded in current period income (loss). The trading securities are comprised of asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables. See note 7 for additional information related to consolidated securitization entities.

Derivative Instruments
Derivative Instruments

(5) Derivative Instruments

Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.

 

The following table sets forth our positions in derivative instruments as of the dates indicated:

 

    Derivative assets     Derivative liabilities  
    Balance
sheet
classification
    Fair value     Balance
sheet
classification
    Fair value  

(Amounts in millions)

    September 30,
2010
    December 31,
2009
      September 30,
2010
    December 31,
2009
 

Derivatives designated as hedges

           

Cash flow hedges:

           

Interest rate swaps

   
 
Other invested
assets
  
  
  $ 821      $ 72       
 
Other
liabilities
 
  
  $ 5      $ 114   

Inflation indexed swaps

   
 
Other invested
assets
  
  
    7        —         
 
Other
liabilities
 
  
    5        21   

Foreign currency swaps

   

 

Other invested

assets

  

  

    180        101       
 
Other
liabilities
 
  
    —          —     
                                   

Total cash flow hedges

      1,008        173          10        135   
                                   

Fair value hedges:

           

Interest rate swaps

   
 
Other invested
assets
 
  
    117        132       
 
Other
liabilities
 
  
    10        15   

Foreign currency swaps

   
 
Other invested
assets
 
  
    31        24       
 
Other
liabilities
 
  
    —          —     
                                   

Total fair value hedges

      148        156          10        15   
                                   

Total derivatives designated as hedges

      1,156        329          20        150   
                                   

Derivatives not designated as hedges

           

Interest rate swaps

   
 
Other invested
assets
 
  
    454        505       
 
Other
liabilities
 
  
    57        59   

Equity return swaps

   
 
Other invested
assets
 
  
    —          —         
 
Other
liabilities
 
  
    6        —     

Interest rate swaps related to securitization entities (1)

   
 
 
 
Restricted
other
invested
assets
 
  
 
  
    —          —         
 
Other
liabilities
 
  
    34        —     

Interest rate swaptions

   
 
Other invested
assets
 
  
    8        54       
 
Other
liabilities
 
  
    —          67   

Credit default swaps

   
 
Other invested
assets
 
  
    4        11       
 
Other
liabilities
 
  
    9        3   

Credit default swaps related to securitization entities (1)

   
 
 
 
Restricted
other
invested
assets
 
  
 
  
    —          —         
 
Other
liabilities
 
  
    130        —     

Equity index options

   
 
Other invested
assets
 
  
    61        39       
 
Other
liabilities
 
  
    —          2   

Financial futures

   
 
Other invested
assets
 
  
    —          —         
 
Other
liabilities
 
  
    —          —     

Other foreign currency contracts

   
 
Other invested
assets
 
  
    —          8       
 
Other
liabilities
 
  
    3       —     

Reinsurance embedded derivatives (2)

    Other assets        4        —         
 
Other
liabilities
 
  
    —          —     

GMWB embedded derivatives

   

 

Reinsurance

recoverable (3)

  

  

    4        (5    

 

 

Policyholder

account

balances (4)

  

  

  

    316        175   
                                   

Total derivatives not designated as hedges

      535        612          555        306   
                                   

Total derivatives

    $ 1,691      $ 941        $ 575      $ 456   
                                   

 

(1)

See note 7 for additional information related to consolidated securitization entities.

(2)

Represents embedded derivatives associated with certain reinsurance agreements.

(3)

Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.

(4)

Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

 

The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements. The amounts recognized for derivative counterparty collateral retained by us was recorded in other invested assets with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us.

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:

 

(Notional in millions)

  Measurement     December 31, 2009     Additions     Maturities/
terminations
    September 30, 2010  

Derivatives designated as hedges

         

Cash flow hedges:

         

Interest rate swaps

    Notional      $ 9,479      $ 1,382      $ (209   $ 10,652   

Inflation indexed swaps

    Notional        376        157        (10     523   

Foreign currency swaps

    Notional        491        —          —          491   
                                 

Total cash flow hedges

      10,346        1,539        (219     11,666   
                                 

Fair value hedges:

         

Interest rate swaps

    Notional        2,366        —          (281     2,085   

Foreign currency swaps

    Notional        85        —          —          85   
                                 

Total fair value hedges

      2,451        —          (281     2,170   
                                 

Total derivatives designated as hedges

      12,797        1,539        (500     13,836   
                                 

Derivatives not designated as hedges

         

Interest rate swaps

    Notional        6,474        4,057        (2,569     7,962   

Equity return swaps

    Notional        —          200        —          200   

Interest rate swaps related to securitization entities

    Notional        —          138        (6     132   

Interest rate swaptions

    Notional        5,100        200        (5,100     200   

Credit default swaps

    Notional        1,090        100        —          1,190   

Credit default swaps related to securitization entities

    Notional        —          322        (5     317   

Equity index options

    Notional        912        564        (614     862   

Financial futures

    Notional        5,822        5,579        (6,817     4,584   

Other foreign currency contracts

    Notional        521        132       (73     580   

Reinsurance embedded derivatives

    Notional        —          52        —          52   
                                 

Total derivatives not designated as hedges

      19,919        11,344        (15,184     16,079   
                                 

Total derivatives

    $ 32,716      $ 12,883      $ (15,684   $ 29,915   
                                 

 

(Number of policies)

  Measurement     December 31, 2009     Additions     Terminations     September 30, 2010  

Derivatives not designated as hedges

         

GMWB embedded derivatives

    Policies        47,543        3,089        (1,882     48,750   

Approximately $1.1 billion of notional value above is related to derivatives with counterparties that can be terminated at the option of the derivative counterparty and represented a net fair value asset of $186 million as of September 30, 2010.

 

Cash Flow Hedges

Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) pay U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure on liabilities denominated in foreign currencies; (v) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed-rate bond purchases and/or interest income; and (vi) other instruments to hedge the cash flows of various forecasted transactions.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2010:

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income (loss)
from OCI 
   

Classification of gain
(loss) reclassified into
net income (loss)

  Gain (loss)
recognized in
net income (loss) 
(1)
   

Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

  $ 299      $ 4      Net investment income   $ 8      Net investment gains (losses)

Interest rate swaps hedging assets

    —          1      Net investment gains (losses)     —        Net investment gains (losses)

Interest rate swaps hedging liabilities

    —          —        Interest expense     —        Net investment gains (losses)

Foreign currency swaps

    2        (1   Interest expense     —        Net investment gains (losses)
                           

Total

  $ 301      $ 4        $ 8     
                           

 

(1)

Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2009:

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income (loss)

from OCI (1)
   

Classification of gain
(loss) reclassified into
net income (loss)

  Gain (loss)
recognized in
net income (loss) 
(2)
   

Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

  $ 99      $ 2     

Net investment

income

  $ (2  

Net investment

gains (losses)

Interest rate swaps hedging assets

    —          —       

Net investment

gains (losses)

    —       

Net investment

gains (losses)

Foreign currency swaps

    —          (1  

Net investment

gains (losses)

    —       

Net investment

gains (losses)

Foreign currency swaps

    3        —        Interest expense     1     

Net investment

gains (losses)

                           

Total

  $ 102      $ 1       $ (1  
                           

 

(1)

Amounts include $(1) million of gains reclassified into net income (loss) for cash flow hedges that were terminated or de-designated where the effective portion is reclassified into net income (loss) when the underlying hedge item affects net income (loss).

(2)

Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness.

 

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2010:

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income (loss)
from OCI 
   

Classification of gain
(loss) reclassified into
net income (loss)

  Gain (loss)
recognized in
net income (loss) 
(1)
   

Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

  $ 862      $ 12      Net investment income   $ 20      Net investment gains (losses)

Interest rate swaps hedging assets

    —          2      Net investment gains (losses)     —        Net investment gains (losses)

Interest rate swaps hedging liabilities

    (3     1      Interest expense     —        Net investment gains (losses)

Foreign currency swaps

    9        (5   Interest expense     —        Net investment gains (losses)
                           

Total

  $ 868      $ 10        $ 20     
                           

 

(1)

Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2009:

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income
(loss) from OCI 
(1)
   

Classification of gain
(loss) reclassified into
net income (loss)

  Gain (loss)
recognized in
net income (loss) 
(2)
   

Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

  $ (223   $ 10      Net investment income   $ (12  

Net investment

gains (losses)

Interest rate swaps hedging assets

    —          5     

Net investment

gains (losses)

    —       

Net investment

gains (losses)

Foreign currency swaps

    —          (1  

Net investment

gains (losses)

    —       

Net investment

gains (losses)

Foreign currency swaps

    (10     (8   Interest expense     1     

Net investment

gains (losses)

                           

Total

  $ (233   $ 6        $ (11  
                           

 

(1)

Amounts include $4 million of gains reclassified into net income (loss) for cash flow hedges that were terminated or de-designated where the effective portion is reclassified into net income (loss) when the underlying hedge item affects net income (loss).

(2)

Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness.

 

The total of derivatives designated as cash flow hedges of $1.4 billion, net of taxes, recorded in stockholders’ equity as of September 30, 2010 is expected to be reclassified to future net income (loss), concurrently with and primarily offsetting changes in interest expense and interest income on floating-rate instruments and interest income on future fixed-rate bond purchases. Of this amount, $6 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2045. No amounts were reclassified to net income (loss) during the nine months ended September 30, 2010 in connection with forecasted transactions that were no longer considered probable of occurring.

Fair Value Hedges

Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income (loss). In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income (loss). We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (iii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iv) other instruments to hedge various fair value exposures of investments.

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended September 30, 2010:

 

    Derivative instrument   Hedged item

(Amounts in millions)

  Gain (loss)
recognized in
net income
(loss)
   

Classification
of gain (loss)
recognized in
net income (loss)

  Other impacts
to net
income (loss)
   

Classification
of other
impacts to
net income (loss)

  Gain (loss)
recognized in
net income
(loss)
   

Classification
of gain (loss)
recognized in

net income (loss)

Interest rate swaps hedging assets

  $ —        Net investment gains (losses)   $ (4   Net investment income   $ (1   Net investment gains (losses)

Interest rate swaps hedging liabilities

    (4   Net investment gains (losses)     25      Interest credited     4      Net investment gains (losses)

Foreign currency swaps

    11      Net investment gains (losses)     —        Interest credited     (10   Net investment gains (losses)
                             

Total

  $ 7        $ 21        $ (7  
                             

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended September 30, 2009:

 

    Derivative instrument   Hedged item

(Amounts in millions)

  Gain (loss)
recognized in
net income
(loss)
   

Classification
of gain (loss)
recognized in
net income (loss)

  Other impacts
to net
income (loss)
   

Classification
of other
impacts to
net income (loss)

  Gain (loss)
recognized in
net income
(loss)
   

Classification
of gain (loss)
recognized in
net income (loss)

Interest rate swaps hedging assets

  $ 1     

Net investment

gains (losses)

  $ (4   Net investment income   $ —        Net investment gains (losses)

Interest rate swaps hedging liabilities

    14     

Net investment

gains (losses)

    26      Interest credited     (14   Net investment gains (losses)

Foreign currency swaps

    3      Net investment gains (losses)     —        Interest credited     (4   Net investment gains (losses)
                             

Total

  $ 18        $ 22        $ (18  
                             

 

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the nine months ended September 30, 2010:

 

    Derivative instrument   Hedged item

(Amounts in millions)

  Gain (loss)
recognized in
net income
(loss)
   

Classification
of gain (loss)
recognized in
net income (loss)

  Other impacts
to net
income (loss)
   

Classification
of other
impacts to
net income (loss)

  Gain (loss)
recognized in
net income
(loss)
   

Classification
of gain (loss)
recognized in

net income (loss)

Interest rate swaps hedging assets

  $ 2      Net investment gains (losses)   $ (10   Net investment income   $ (3   Net investment gains (losses)

Interest rate swaps hedging liabilities

    (11   Net investment gains (losses)     75      Interest credited     11      Net investment gains (losses)

Foreign currency swaps

    7      Net investment gains (losses)     2      Interest credited     (6   Net investment gains (losses)
                             

Total

  $ (2     $ 67        $ 2     
                             

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the nine months ended September 30, 2009:

 

    Derivative instrument   Hedged item

(Amounts in millions)

  Gain (loss)
recognized in
net income
(loss)
   

Classification
of gain (loss)
recognized in
net income (loss)

  Other impacts
to net
income (loss)
   

Classification
of other
impacts to
net income (loss)

  Gain (loss)
recognized in
net income
(loss)
   

Classification
of gain (loss)
recognized in
net income (loss)

Interest rate swaps hedging assets

  $ 7      Net investment gains (losses)   $ (12   Net investment income   $ (10   Net investment gains (losses)

Interest rate swaps hedging liabilities

    (45   Net investment gains (losses)     68      Interest credited     48      Net investment gains (losses)

Foreign currency swaps

    (10   Net investment gains (losses)     1      Interest credited     7      Net investment gains (losses)
                             

Total

  $ (48     $ 57        $ 45     
                             

The difference between the gain (loss) recognized for the derivative instruments and the hedged items presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the income (loss) effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged items. There were no amounts excluded from the measurement of effectiveness.

Derivatives Not Designated As Hedges

We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps, swaptions and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; and (vi) foreign currency forward contracts to mitigate certain currency risk. Additionally, we provide GMWBs on certain products that are required to be bifurcated as embedded derivatives and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

 

We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap. See note 7 for additional information related to consolidated securitization entities.

The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:

 

     Three months ended September 30,    

Classification of gain (loss) recognized

in net income (loss)

(Amounts in millions)

       2010             2009        

Interest rate swaps

   $ 36      $ (52   Net investment gains (losses)

Interest rate swaps related to securitization entities (1)

     (12     —        Net investment gains (losses)

Interest rate swaptions

     4        85      Net investment gains (losses)

Credit default swaps

     22        15      Net investment gains (losses)

Credit default swaps related to securitization entities (1)

     30        —        Net investment gains (losses)

Equity index options

     (55     (49   Net investment gains (losses)

Equity return swaps

     (6     —        Net investment gains (losses)

Financial futures

     (43     (106   Net investment gains (losses)

Inflation indexed swaps

     —          —        Net investment gains (losses)

Other foreign currency contracts

     (8     (5   Net investment gains (losses)

Reinsurance embedded derivatives

     2        —        Net investment gains (losses)

GMWB embedded derivatives

     133        133      Net investment gains (losses)
                  

Total derivatives not designated as hedges

   $ 103      $ 21     
                  

 

(1)

See note 7 for additional information related to consolidated securitization entities.

 

The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:

 

     Nine months ended September 30,    

Classification of gain (loss) recognized

in net income (loss)

(Amounts in millions)

       2010             2009        

Interest rate swaps

   $ 93      $ 194      Net investment gains (losses)

Interest rate swaps related to securitization entities (1)

     (24     —        Net investment gains (losses)

Interest rate swaptions

     61        (494   Net investment gains (losses)

Credit default swaps

     (5     36      Net investment gains (losses)

Credit default swaps related to securitization entities (1)

     (11     —        Net investment gains (losses)

Equity index options

     (32     (104   Net investment gains (losses)