GENWORTH FINANCIAL INC, 10-K filed on 2/25/2011
Annual Report
Document and Entity Information
In Billions, except Share data
Year Ended
Dec. 31, 2010
Feb. 10, 2011
Jun. 30, 2010
Document and Entity Information
 
 
 
Document Type
10-K 
 
 
Amendment Flag
FALSE 
 
 
Document Period End Date
2010-12-31 
 
 
Document Fiscal Year Focus
2010 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
GNW 
 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
 
Entity Central Index Key
0001276520 
 
 
Current Fiscal Year End Date
12/31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
489,888,154 
 
Entity Public Float
 
 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data
Year Ended
Dec. 31,
2010
2009
2008
Revenues:
 
 
 
Premiums
$ 5,854 
$ 6,019 
$ 6,777 
Net investment income
3,266 
3,033 
3,730 
Net investment gains (losses)
(143)
(1,041)
(1,709)
Insurance and investment product fees and other
1,112 
1,058 
1,150 
Total revenues
10,089 
9,069 
9,948 
Benefits and expenses:
 
 
 
Benefits and other changes in policy reserves
5,994 
5,818 
5,806 
Interest credited
841 
984 
1,293 
Acquisition and operating expenses, net of deferrals
1,965 
1,884 
2,160 
Amortization of deferred acquisition costs and intangibles
756 
782 
884 
Goodwill impairment
277 
Interest expense
457 
393 
470 
Total benefits and expenses
10,013 
9,861 
10,890 
Income (loss) before income taxes
76 
(792)
(942)
Benefit for income taxes
(209)
(393)
(370)
Net income (loss)
285 
(399)
(572)
Less: net income attributable to noncontrolling interests
143 
61 
 
Net income (loss) available to Genworth Financial, Inc.'s common stockholders
142 
(460)
(572)
Net income (loss) available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
Basic
0.29 1
(1.02)1
(1.32)1
Diluted
0.29 1
(1.02)1
(1.32)1
Weighted-average common shares outstanding:
 
 
 
Basic
489 
451 
433 
Diluted
494 2
451 2
433 2
Supplemental disclosures:
 
 
 
Total other-than-temporary impairments
(122)
(1,499)
(2,131)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
(86)
441 
 
Net other-than-temporary impairments
(208)
(1,058)
(2,131)
Other investment gains (losses)
65 
17 
422 
Total net investment gains (losses)
$ (143)
$ (1,041)
$ (1,709)
Consolidated Balance Sheets (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 55,183 
$ 49,752 
Equity securities available-for-sale, at fair value
332 
159 
Commercial mortgage loans
6,718 
7,499 
Restricted commercial mortgage loans related to securitization entities
507 
 
Policy loans
1,471 
1,403 
Other invested assets
3,854 
4,702 
Restricted other invested assets related to securitization entities ($370 at fair value)
372 
 
Total investments
68,437 
63,515 
Cash and cash equivalents
3,132 
5,002 
Accrued investment income
733 
691 
Deferred acquisition costs
7,256 1
7,341 2
Intangible assets
741 
934 
Goodwill
1,329 
1,324 
Reinsurance recoverable
17,191 
17,332 
Other assets
810 
954 
Deferred tax asset
1,100 
92 
Separate account assets
11,666 
11,002 
Total assets
112,395 
108,187 
Liabilities and stockholders' equity
 
 
Future policy benefits
30,717 
29,469 
Policyholder account balances
26,978 
28,470 
Liability for policy and contract claims
6,933 3
6,567 
Unearned premiums
4,541 
4,714 
Other liabilities ($150 and $- other liabilities related to securitization entities)
6,085 
6,298 
Borrowings related to securitization entities ($51 at fair value)
494 
 
Non-recourse funding obligations
3,437 
3,443 
Short-term borrowings
 
930 
Long-term borrowings
4,952 
3,641 
Deferred tax liability
1,621 
303 
Separate account liabilities
11,666 
11,002 
Total liabilities
97,424 
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 December 31, 2010 and 2009, respectively; 490 million and 489 million shares outstanding as of December 31, 2010 and 2009, respectively
Additional paid-in capital
12,095 
12,034 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
21 
(1,151)
Net unrealized gains (losses) on other-than-temporarily impaired securities
(121)
(247)
Net unrealized investment gains (losses)
(100)
(1,398)
Derivatives qualifying as hedges
924 
802 
Foreign currency translation and other adjustments
668 
432 
Total accumulated other comprehensive income (loss)
1,492 
(164)
Retained earnings
2,973 
3,105 
Treasury stock, at cost (88 million shares as of December 31, 2010 and 2009)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
13,861 
12,276 
Noncontrolling interests
1,110 
1,074 
Total stockholders' equity
14,971 
13,350 
Total liabilities and stockholders' equity
$ 112,395 
$ 108,187 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data
Dec. 31, 2010
Dec. 31, 2009
Consolidated Balance Sheets
 
 
Restricted other invested assets related to securitization entities, fair value
370 
 
Other liabilities related to securitization entities
150 
 
Borrowings related to securitization entities, fair value
51 
 
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 
Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Millions
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Retained Earnings [Member]
Treasury Stock, at Cost [Member]
Total Genworth Financial, Inc.'s Stockholders' Equity [Member]
Noncontrolling Interests [Member]
Total
Balances at Dec. 31, 2007
11,461 
727 
3,913 
(2,624)
 
 
13,478 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
(572)
 
 
 
(572)
Net unrealized gains (losses) on investment securities
 
 
(3,512)
 
 
 
 
(3,512)
Derivatives qualifying as hedges
 
 
688 
 
 
 
 
688 
Foreign currency translation and other adjustments
 
 
(965)
 
 
 
 
(965)
Total comprehensive income (loss)
 
 
 
 
 
 
 
(4,361)
Acquisition of treasury stock
 
 
 
 
(76)
 
 
(76)
Dividends to stockholders
 
 
 
(131)
 
 
 
(131)
Stock-based compensation expense and exercises and other
 
16 
 
 
 
 
 
16 
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)
 
 
 
(460)
 
(460)
61 
(399)
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
2,997 
 
 
2,997 
17 
3,014 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
14 
 
 
14 
 
14 
Derivatives qualifying as hedges
 
 
(359)
 
 
(359)
 
(359)
Foreign currency translation and other adjustments
 
 
667 
 
 
667 
79 
746 
Total comprehensive income (loss)
 
 
 
 
 
 
 
3,016 
Dividends to noncontrolling interests
 
 
 
 
 
 
(10)
(10)
Stock-based compensation expense and exercises and other
 
23 
 
 
 
23 
 
23 
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)
 
 
 
142 
 
142 
143 
285 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
912 
 
 
912 
11 
923 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
126 
 
 
126 
 
126 
Derivatives qualifying as hedges
 
 
122 
 
 
122 
 
122 
Foreign currency translation and other adjustments
 
 
236 
 
 
236 
56 
292 
Total comprehensive income (loss)
 
 
 
 
 
 
 
1,748 
Dividends to noncontrolling interests
 
 
 
 
 
 
(43)
(43)
Stock-based compensation expense and exercises and other
 
38 
 
 
 
38 
 
38 
Other capital transactions
 
23 
 
 
24 
 
24 
Balances at Dec. 31, 2010
$ 1 
$ 12,095 
$ 1,492 
$ 2,973 
$ (2,700)
$ 13,861 
$ 1,110 
$ 14,971 
Consolidated Statements of Cash Flows (USD $)
In Millions
Year Ended
Dec. 31,
2010
2009
2008
Cash flows from operating activities:
 
 
 
Net income (loss)
$ 285 
$ (399)
$ (572)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
Amortization of fixed maturity discounts and premiums
(55)
84 
58 
Net investment losses (gains)
143 
1,041 
1,709 
Charges assessed to policyholders
(506)
(442)
(409)
Acquisition costs deferred
(839)
(707)
(1,191)
Amortization of deferred acquisition costs and intangibles
756 
782 
884 
Goodwill impairment
277 
Deferred income taxes
(294)
(476)
(430)
Gain on sale of subsidiary
 
(4)
 
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments
(100)
(59)
1,302 
Stock-based compensation expense
44 
26 
23 
Change in certain assets and liabilities:
 
 
 
Accrued investment income and other assets
(33)
(90)
52 
Insurance reserves
2,406 
2,763 
3,034 
Current tax liabilities
(173)
(119)
(138)
Other liabilities and other policy-related balances
(298)
(469)
844 
Net cash from operating activities
1,336 
1,931 
5,443 
Cashflows from investing activities
 
 
 
Fixed maturity securities
4,589 
4,105 
4,787 
Commercial mortgage loans
769 
710 
857 
Restricted commercial mortgage loans related to securitization entities
52 
 
 
Proceeds from sales of investments:
 
 
 
Fixed maturity and equity securities
4,643 
5,808 
4,940 
Purchases and originations of investments:
 
 
 
Purchases of fixed maturity and equity securities
(13,237)
(9,869)
(6,977)
Commercial mortgage loans
(105)
 
(211)
Other invested assets, net
1,579 
(314)
(1,226)
Policy loans, net
(68)
431 
(183)
Net cash transferred related to the sale of a subsidiary
 
(51)
 
Payments for businesses purchased, net of cash acquired
(37)
 
(22)
Net cash from investing activities
(1,815)
820 
1,965 
Cash flows from financing activities:
 
 
 
Deposits to universal life and investment contracts
2,737 
2,271 
7,604 
Withdrawals from universal life and investment contracts
(4,429)
(7,975)
(11,522)
Short-term borrowings and other, net
(777)
(375)
973 
Redemption of non-recourse funding obligations
(6)
(12)
 
Repayment and repurchase of long-term debt
(6)
(898)
(319)
Proceeds from the issuance of long-term debt
1,204 
298 
597 
Dividends paid to stockholders
 
 
(175)
Stock-based compensation awards exercised
 
 
Acquisition of treasury stock
 
 
(76)
Proceeds from issuance of common stock
 
622 
 
Repayment of borrowings related to securitization entities
(61)
 
 
Repurchase of subsidiary shares
(131)
 
 
Dividends paid to noncontrolling interests
(43)
(10)
 
Proceeds from the sale of subsidiary shares to noncontrolling interests
 
770 
 
Net cash from financing activities
(1,512)
(5,309)
(2,913)
Effect of exchange rate changes on cash and cash equivalents
121 
232 
(258)
Net change in cash and cash equivalents
(1,870)
(2,326)
4,237 
Cash and cash equivalents at beginning of year
5,002 
7,328 
3,091 
Cash and cash equivalents at end of year
$ 3,132 
$ 5,002 
$ 7,328 
Nature of Business and Formation of Genworth
Nature of Business and Formation of Genworth

(1) Nature of Business and Formation of Genworth

Genworth Financial, Inc. ("Genworth") was incorporated in Delaware on October 23, 2003 as an indirect subsidiary of General Electric Company ("GE") in preparation for the initial public offering ("IPO") of Genworth's common stock, which was completed on May 28, 2004. In connection with our IPO, Genworth acquired substantially all of the assets and liabilities of GE Financial Assurance Holdings, Inc. ("GEFAHI"). The transaction was accounted for at book value as a transfer between entities under common control and is referred to as our corporate formation.

The accompanying financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or power to direct activities of certain variable interest entities ("VIEs"), which we refer to as the "Company," "we," "us" or "our" unless the context otherwise requires.

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. 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 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 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").

In January 2011, we announced we are discontinuing new sales of retail and group variable annuities while continuing to service our existing blocks of business. However, we will continue to offer fixed annuities.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

(2) Summary of Significant Accounting Policies

Our consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles ("U.S. GAAP"). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.

a) Premiums

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

For single premium mortgage insurance contracts, we report premiums over the estimated policy life in accordance with the expected pattern of risk emergence as further described in our accounting policy for unearned premiums.

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

b) Net Investment Income and Net Investment Gains and Losses

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

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

c) Insurance and Investment Product Fees and Other

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

 

d) Investment Securities

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

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

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

Prior to adoption of new accounting guidance related to the recognition and presentation of other-than-temporary impairments on April 1, 2009, we recognized an other-than-temporary impairment on debt securities in an unrealized loss position when we did not expect full recovery of value or did not have the intent and ability to hold such securities until they had fully recovered their amortized cost. The recognition of other-than-temporary impairments prior to April 1, 2009 represented the entire difference between the amortized cost and fair value with this difference being recorded in net income (loss) as an adjustment to the amortized cost of the security.

Beginning on April 1, 2009, we recognize other-than-temporary impairments on debt securities in an unrealized loss position when one of the following circumstances exists:

 

   

we do not expect full recovery of our amortized cost based on the estimate of cash flows expected to be collected,

 

   

we intend to sell a security or

 

   

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

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

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

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

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

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

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

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

e) Fair Value Measurements

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

 

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

 

   

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

 

   

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

 

   

Level 3—Instruments whose significant value drivers are unobservable.

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

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

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

As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability, such as the relative impact on the fair value as a result of including a particular input. We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. See note 17 for additional information related to fair value measurements.

f) Commercial Mortgage Loans

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

 

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

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

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

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

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

g) Securities Lending Activity and Repurchase Agreements

In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio, which require the borrower to provide collateral, consisting of cash and government securities, on a daily basis in amounts equal to or exceeding 102% in the United States and 105% in Canada of the fair value of the applicable securities loaned. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. Cash and non-cash collateral, such as a security, received by us on securities lending transactions is reflected in other invested assets with an offsetting liability recognized in other liabilities for the obligation to return the collateral. Any cash collateral received is reinvested by our custodian based upon the investment guidelines provided within our agreement. In the United States, the reinvested cash collateral is primarily invested in a money market fund approved by the National Association of Insurance Commissioners ("NAIC"), U.S. and foreign government securities, U.S. government agency securities, asset-backed securities and corporate debt securities. In Canada, the lending institution must be included on the approved Securities Lending Borrowers List with the Canadian regulator and the intermediary must be rated at least "AA-" by Standard & Poor's Financial Services LLC. We are currently fully indemnified against counterparty credit risk by the intermediary. As of December 31, 2010 and 2009, the fair value of securities loaned under the securities lending program was $0.8 billion and $0.9 billion, respectively, consisting of $0.5 billion and $0.6 billion, respectively, in the United States and $0.3 billion and $0.3 billion, respectively, in Canada. As of December 31, 2010 and 2009, the fair value of collateral held under the securities lending program was $0.8 billion and $0.9 billion, respectively, and the offsetting obligation to return collateral of $0.8 billion and $0.9 billion, respectively, was included in other liabilities in the consolidated balance sheets. We had non-cash collateral of $0.3 billion as of December 31, 2010 and 2009.

We also have a repurchase program in which we sell an investment security at a specified price and agree to repurchase that security at another specified price at a later date. Repurchase agreements are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired, including accrued interest, as specified in the respective agreement. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities. As of December 31, 2010 and 2009, the fair value of securities pledged under the repurchase program was $1.7 billion and $2.1 billion, respectively, and the repurchase obligation of $1.7 billion and $2.1 billion, respectively, was included in other liabilities in the consolidated balance sheets.

h) Cash and Cash Equivalents

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

i) Deferred Acquisition Costs

Acquisition costs include costs that vary with and are primarily related to the acquisition of insurance and investment contracts. Such costs are deferred and amortized as follows:

Long-Duration Contracts. Acquisition costs include commissions in excess of ultimate renewal commissions, solicitation and printing costs, sales material and some support costs, such as underwriting and contract and policy issuance expenses. Amortization for traditional long-duration insurance products is determined as a level proportion of premium based on commonly accepted actuarial methods and reasonable assumptions about mortality, morbidity, lapse rates, expenses and future yield on related investments established when the contract or policy is issued. Amortization is adjusted each period to reflect policy lapse or termination rates as compared to anticipated experience. Amortization for annuity contracts without significant mortality risk and for investment and universal life insurance products is based on estimated gross profits. Estimated gross profits are adjusted quarterly to reflect actual experience to date or for the unlocking of underlying key assumptions relating to future gross profits based on experience studies.

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

We regularly review all of these assumptions and periodically test DAC for recoverability. For deposit products, if the current present value of estimated future gross profits is less than the unamortized DAC for a line of business, a charge to income is recorded for additional DAC amortization, and for certain products, an increase in benefit reserves may be required. For other products, if the benefit reserve plus anticipated future premiums and interest income for a line of business are less than the current estimate of future benefits and expenses (including any unamortized DAC), a charge to income is recorded for additional DAC amortization or for increased benefit reserves. See note 6 for additional information related to DAC including loss recognition and recoverability.

j) Intangible Assets

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

We regularly review all of these assumptions and periodically test PVFP for recoverability. For deposit products, if the current present value of estimated future gross profits is less than the unamortized PVFP for a line of business, a charge to income is recorded for additional PVFP amortization. For other products, if the benefit reserve plus anticipated future premiums and interest income for a line of business are less than the current estimate of future benefits and expenses (including any unamortized PVFP), a charge to income is recorded for additional PVFP amortization or for increased benefit reserves. For the years ended December 31, 2010, 2009 and 2008, no charges to income were recorded as a result of our PVFP recoverability or loss recognition testing.

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

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

k) Goodwill

Goodwill is not amortized but is tested for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. We test goodwill using a fair value approach, which requires the use of estimates and judgment, at the "reporting unit" level. A reporting unit is the operating segment, or a business one level below that operating segment (the "component" level) if discrete financial information is prepared and regularly reviewed by management at the component level. We recognize an impairment charge for any amount by which the carrying amount of a reporting unit's goodwill exceeds its fair value.

The determination of fair value for our reporting units is primarily based on an income approach whereby we use discounted cash flows for each reporting unit. When available and as appropriate, we use market approaches or other valuation techniques to corroborate discounted cash flow results. The discounted cash flow model used for each reporting unit is based on either: operating income or statutory distributable income, depending on the reporting unit being valued.

The cash flows used to determine fair value are dependent on a number of significant management assumptions based on our historical experience, our expectations of future performance, and expected economic environment. Our estimates are subject to change given the inherent uncertainty in predicting future performance and cash flows, which are impacted by such things as policyholder behavior, competitor pricing, new product introductions and specific industry and market conditions. Additionally, the discount rate used in our discounted cash flow approach is based on management's judgment of the appropriate rate for each reporting unit based on the relative risk associated with the projected cash flows.

See note 8 for additional information related to goodwill and impairments recorded.

l) Reinsurance

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

m) Derivatives

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

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

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

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

 

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

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

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

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

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

n) Separate Accounts

The separate account assets represent funds for which the investment income and investment gains and losses accrue directly to the variable annuity contractholders and variable life insurance policyholders. We assess mortality and expense risk fees and administration charges on the assets allocated to the separate accounts. The separate account assets are carried at fair value and are equal to the liabilities that represent the contractholders' and policyholders' equity in those assets.

 

o) Insurance Reserves

Future Policy Benefits

We include insurance-type contracts, such as traditional life insurance, in the liability for future policy benefits. Insurance-type contracts are broadly defined to include contracts with significant mortality and/or morbidity risk. The liability for future benefits of insurance contracts is the present value of such benefits less the present value of future net premiums based on mortality, morbidity and other assumptions, which are appropriate at the time the policies are issued or acquired. These assumptions are periodically evaluated for potential reserve deficiencies. Reserves for cancelable accident and health insurance are based upon unearned premiums, claims incurred but not reported and claims in the process of settlement. This estimate is based on our historical experience and that of the insurance industry, adjusted for current trends. Any changes in the estimated liability are reflected in income as the estimates are revised.

Policyholder Account Balances

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

p) Liability for Policy and Contract Claims

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

For our mortgage insurance policies, reserves for losses and loss adjustment expenses are based on notices of mortgage loan defaults and estimates of defaults that have been incurred but have not been reported by loan servicers, using assumptions of claim rates for loans in default and the average amount paid for loans that result in a claim. As is common accounting practice in the mortgage insurance industry and in accordance with U.S. GAAP, we begin to provide for the ultimate claim payment relating to a potential claim on a defaulted loan when the status of that loan first goes delinquent. Over time, as the status of the underlying delinquent loans move toward foreclosure and the likelihood of the associated claim loss increases, the amount of the loss reserves associated with the potential claims may also increase. The loss reserve factor assumptions related to our U.S. mortgage insurance business are reviewed quarterly. The loss reserve factors are adjusted when required to reflect changes in current and projected market and economic conditions that affect the underlying loss reserve factor assumptions.

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

q) Unearned Premiums

For single premium insurance contracts, we recognize premiums over the policy life in accordance with the expected pattern of risk emergence. We recognize a portion of the revenue in premiums earned in the current period, while the remaining portion is deferred as unearned premiums and earned over time in accordance with the expected pattern of risk emergence. If single premium policies are cancelled and the premium is non-refundable, then the remaining unearned premium related to each cancelled policy is recognized to earned premiums upon notification of the cancellation. Expected pattern of risk emergence on which we base premium recognition is inherently judgmental and is based on actuarial analysis of historical experience. We periodically review our premium earnings recognition models with any adjustments to the estimates reflected in current period income. For the years ended December 31, 2010, 2009 and 2008, we updated our premium recognition factors for our international mortgage insurance business. These updates included the consideration of recent and projected loss experience, policy cancellation experience and refinement of actuarial methods. In 2010, 2009 and 2008, adjustments associated with this update resulted in an increase in earned premiums of $52 million, $49 million and $53 million, respectively.

r) Stock-Based Compensation

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

s) Employee Benefit Plans

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

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

u) Foreign Currency Translation

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

v) Variable Interest Entities

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

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

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

 

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

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

On January 1, 2010, we were required to consolidate certain VIEs. See note 18 for additional information related to these consolidated entities. As of December 31, 2009, we were not required to consolidate any VIEs where there were third-party beneficial interest holders.

w) Accounting Changes

Disclosures Related To Financing Receivables

On December 31, 2010, we adopted new accounting guidance related to additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain other additional disclosures will be effective for us on March 31, 2011. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

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. The following summarizes the components for the cumulative effect adjustment recorded on July 1, 2010 related to the adoption of this new accounting guidance:

 

(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 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 amends 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 requires that these entities be considered for consolidation as a result of the new guidance related to 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 requires 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:

 

 

For commercial mortgage loans, the carrying amounts represent the unpaid principal balance less any allowance for losses. 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 recording 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 18 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.

Fair Value Measurements and Disclosures—Measuring Liabilities At Fair Value

On October 1, 2009, we adopted new accounting guidance related to measuring liabilities at fair valueThis accounting guidance clarified techniques for measuring the fair value of liabilities when quoted market prices for the identical liability are not available. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Fair Value Measurements and Disclosures—Investments In Certain Entities That Calculate Net Asset Value Per Share

On October 1, 2009, we adopted new accounting guidance related to fair value measurements and disclosures that provided guidance on the fair value measurement in certain entities that calculate net asset value per share. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles

On July 1, 2009, we adopted new accounting guidance related to the codification of accounting standards and the hierarchy of U.S. GAAP established by the Financial Accounting Standards Board (the "FASB"). This accounting guidance established two levels of U.S. GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification (the "Codification") is the source of authoritative, nongovernmental U.S. GAAP, except for rules and interpretive releases of the United States Securities and Exchange Commission ("SEC"), which are also sources of authoritative U.S. GAAP for SEC registrants. All other accounting literature is nonauthoritative. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Recognition and Presentation of Other-Than-Temporary Impairments

On April 1, 2009, we adopted new accounting guidance related to the recognition and presentation of other-than-temporary impairments. This accounting guidance amended the other-than-temporary impairment guidance for debt securities and modified the presentation and disclosure requirements for other-than-temporary impairment disclosures for debt and equity securities. This accounting guidance also amended the requirement for management to positively assert the ability and intent to hold a debt security to recovery to determine whether an other-than-temporary impairment exists and replaced this provision with the assertion that we do not intend to sell or it is not more likely than not that we will be required to sell a security prior to recovery. Additionally, this accounting guidance modified the presentation of other-than-temporary impairments for certain debt securities to only present the impairment loss in net income (loss) that represents the credit loss associated with the other-than-temporary impairment with the remaining impairment loss being presented in OCI. The following summarizes the components for the cumulative effect adjustment recorded on April 1, 2009 related to the adoption of this new accounting guidance:

 

(Amounts in millions)

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

Investment securities

   $ (588   $ 588      $ —     

Adjustment to DAC

     33        (26     7   

Adjustment to PVFP

     9        (7     2   

Adjustment to sales inducements

     5        (5     —     

Adjustment to certain benefit reserves

     —          1        1   

Provision for income taxes

     192        (196     (4
                        

Net cumulative effect adjustment

   $ (349   $ 355      $ 6   
                        

Interim Disclosures About Fair Value of Financial Instruments

On April 1, 2009, we adopted new accounting guidance related to interim disclosures about fair value of financial instruments. This accounting guidance amended the fair value disclosure requirements for certain financial instruments to require disclosures during interim reporting periods of publicly traded entities in addition to requiring them in annual financial statements. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

 

Determining Fair Value When the Volume and Level of Activity For the Asset Or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

On April 1, 2009, we adopted new accounting guidance related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This accounting guidance provided additional guidance for determining fair value when the volume or level of activity for an asset or liability has significantly decreased and identified circumstances that indicate a transaction is not orderly. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Fair Value Measurements of Certain Nonfinancial Assets and Liabilities

On January 1, 2009, we adopted new accounting guidance related to fair value measurements of certain nonfinancial assets and liabilities, such as impairment testing of goodwill and indefinite-lived intangible assets. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Disclosures About Derivative Instruments and Hedging Activities

On January 1, 2009, we adopted new accounting guidance related to disclosures about derivative instruments and hedging activities. This statement required enhanced disclosures about an entity's derivative and hedging activities. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Business Combinations

On January 1, 2009, we adopted new accounting guidance related to business combinations. This accounting guidance established principles and requirements for how an acquirer recognizes and measures certain items in a business combination, as well as disclosures about the nature and financial effects of a business combination. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Noncontrolling Interests In Consolidated Financial Statements

On January 1, 2009, we adopted new accounting guidance related to noncontrolling interests in consolidated financial statements. This accounting guidance established accounting and reporting standards for noncontrolling interests in a subsidiary and for deconsolidation of a subsidiary. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Transfers of Financial Assets and Interests In Variable Interest Entities

On December 31, 2008, we adopted new accounting guidance related to disclosures by public entities about transfers of financial assets and interests in VIEs. This new accounting guidance amends the disclosure requirements regarding transfers of financial assets and involvement in VIEs to require additional disclosures for public entities. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

 

Credit Derivatives and Certain Guarantees

On December 31, 2008, we adopted new accounting guidance related to disclosures about credit derivatives and certain guarantees. This accounting guidance requires certain disclosures by sellers of credit derivatives and requires additional disclosure about the current status of the payment/performance risk of guarantees. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

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

On October 14, 2008, the Office of the Chief Accountant at the SEC, issued a letter to the FASB that stated, given the debt characteristics of hybrid securities, they would not object to the application of a debt impairment model to hybrid investments provided there has been no evidence of deterioration in credit of the issuer. A debt impairment model could be used for filings subsequent to October 14, 2008, until the FASB further addresses the appropriate impairment model. As a result, management began using and will continue to use the debt impairment model as long as there has been no evidence of deterioration in credit of the issuer as of the balance sheet date.

Other-Than-Temporary Impairments of Certain Structured Securities

On October 1, 2008, we adopted new accounting guidance related to impairment guidance. This accounting guidance amends the impairment guidance to require all available information be used to produce our best estimate of cash flows rather than relying exclusively upon what a market participant would use to determine the current fair value. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Determining Fair Value When A Market Is Not Active

On September 30, 2008, we adopted new accounting guidance related to determining the fair value of a financial asset when the market for that asset is not active. The accounting guidance provides guidance and clarification on how management's internal assumptions, observable market information and market quotes are considered in inactive markets. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Fair Value Measurements

On January 1, 2008, we adopted new accounting guidance related to fair value measurements. This accounting guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements. Additionally, on January 1, 2008, we elected the partial adoption of this accounting guidance to allow an entity to delay the application until January 1, 2009 for certain non-financial assets and liabilities. Under the provisions of the accounting guidance, we will delay the application for fair value measurements used in the impairment testing of goodwill and indefinite-lived intangible assets and eligible non-financial assets and liabilities included within a business combination. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Fair Value Option For Financial Assets and Financial Liabilities

On January 1, 2008, we adopted new accounting guidance related to the fair value option for financial assets and financial liabilities. This accounting guidance provides an option, on specified election dates, to report selected financial assets and liabilities, including insurance contracts, at fair value. Subsequent changes in fair value for designated items are reported in income in the current period. The adoption of this new accounting guidance did not impact our consolidated financial statements as no items were elected for measurement at fair value upon initial adoption. We will continue to evaluate eligible financial assets and liabilities on their election dates. Any future elections will be disclosed in accordance with the provisions outlined in the accounting guidance.

Amendment To Guidance For Offsetting of Amounts Related To Certain Contracts

On January 1, 2008, we adopted new accounting guidance for offsetting of amounts related to certain contracts. This accounting guidance allows fair value amounts recognized for collateral to be offset against fair value amounts recognized for derivative instruments that are executed with the same counterparty under certain circumstances. It also requires an entity to disclose the accounting policy decision to offset, or not to offset, fair value amounts. We do not, and have not previously, offset the fair value amounts recognized for derivatives with the amounts recognized as collateral.

x) Accounting Pronouncements Not Yet Adopted

In December 2010, the FASB issued new accounting guidance related to goodwill impairment testing when a reporting unit's carrying value is zero or negative. This new accounting guidance will be effective for us on January 1, 2011. This guidance did not impact our consolidated financial statements upon adoption, as all of our reporting units with goodwill balances have positive carrying values.

In October 2010, the 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 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. The adoption of this new accounting guidance did not 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. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

 

 

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

(3) Earnings (Loss) Per Share

The following table presents the weighted-average shares used in calculating basic earnings per common share and those used in calculating diluted earnings per common share for each income category presented below for the years ended December 31:

 

(Amounts in millions, except per share amounts)

   2010      2009     2008  

Net income (loss)

   $ 285       $ (399   $ (572

Less: net income attributable to noncontrolling interests

     143         61        —     
                         

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

   $ 142       $ (460   $ (572
                         

Basic per common share:

       

Net income (loss)

   $ 0.58       $ (0.88   $ (1.32

Less: net income attributable to noncontrolling interests

     0.29         0.14        —     
                         

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

   $ 0.29       $ (1.02   $ (1.32
                         

Diluted per common share:

       

Net income (loss)

   $ 0.58       $ (0.88   $ (1.32

Less: net income attributable to noncontrolling interests

     0.29         0.14        —     
                         

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

   $ 0.29       $ (1.02   $ (1.32
                         

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

     489.3         451.1        433.2   

Potentially dilutive securities:

       

Stock options, restricted stock units and stock appreciation rights

     4.6         —          —     
                         

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

     493.9         451.1        433.2   
                         

On September 21, 2009, we completed the public offering of 55.2 million shares of our Class A Common Stock, par value $0.001 per share (including the exercise in full of the underwriters' option to purchase up to an additional 7.2 million shares of our Class A Common Stock). Net proceeds were $622 million.

Investments
Investments

(4) Investments

(a) Net Investment Income

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

 

(Amounts in millions)

   2010     2009     2008  

Fixed maturity securities—taxable

   $ 2,619      $ 2,458      $ 2,878   

Fixed maturity securities—non-taxable

     59        107        109   

Commercial mortgage loans

     391        432        523   

Restricted commercial mortgage loans related to securitization entities (1)

     39        —          —     

Equity securities

     14        16        29   

Other invested assets (2)

     104        (82     (2

Restricted other invested assets related to securitization entities (1)

     2        —          —     

Policy loans

     112        143        162   

Cash, cash equivalents and short-term investments

     21        49        132   
                        

Gross investment income before expenses and fees

     3,361        3,123        3,831   

Expenses and fees

     (95     (90     (101
                        

Net investment income

   $ 3,266      $ 3,033      $ 3,730   
                        

(b) Net Investment Gains (Losses)

Net investment gains (losses) were as follows for the years ended December 31:

 

(Amounts in millions)

   2010     2009     2008  

Available-for-sale securities:

      

Realized gains

   $ 156      $ 255      $ 133   

Realized losses

     (151     (226     (250
                        

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

     5        29        (117
                        

Impairments:

      

Total other-than-temporary impairments

     (122     (1,499     (2,131

Portion of other-than-temporary impairments included in OCI

     (86     441        —     
                        

Net other-than-temporary impairments

     (208     (1,058     (2,131
                        

Trading securities

     19        22        (43

Commercial mortgage loans

     (29     (28     (2

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

     (3     —          —     

Derivative instruments (2)

     50        21        611   

Other

     23        (27     (27
                        

Net investment gains (losses)

   $ (143   $ (1,041   $ (1,709
                        

(1)

See note 18 for additional information related to consolidated securitization entities.

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the years ended December 31, 2010, 2009 and 2008 was $1,932 million, $1,513 million and $2,285 million, respectively, which was approximately 93%, 88% and 93%, respectively, of book value.

The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in OCI as of and for the years ended December 31:

 

(Amounts in millions)

   2010     2009  

Beginning balance

   $ 1,059      $ —     

Adoption of new accounting guidance related to other-than-temporary impairments

     —          1,204   

Adoption of new accounting guidance related to securitization entities

     (36     —     

Additions:

    

Other-than-temporary impairments not previously recognized

     63        120   

Increases related to other-than-temporary impairments previously recognized

     117        227   

Reductions:

    

Securities sold, paid down or disposed

     (419     (485

Securities where there is intent to sell

     —          (7
                

Ending balance

   $ 784      $ 1,059   
                

(c) Unrealized Investment Gains and Losses

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

 

(Amounts in millions)

   2010     2009     2008  

Net unrealized gains (losses) on investment securities:

      

Fixed maturity securities

   $ 511      $ (2,245   $ (7,006

Equity securities

     9        20        (67

Other invested assets

     (22     (29     (1
                        

Subtotal

     498        (2,254     (7,074

Adjustments to DAC, PVFP, sales inducements and benefit reserves

     (583     138        815   

Income taxes, net

     35        757        2,221   
                        

Net unrealized investment gains (losses)

     (50     (1,359     (4,038

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

     50        39        —     
                        

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

   $ (100   $ (1,398   $ (4,038
                        

 

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

 

(Amounts in millions)

   2010     2009     2008  

Beginning balance

   $ (1,398   $ (4,038   $ (526

Cumulative effect of changes in accounting

     260        (349     —     

Unrealized gains (losses) arising during the period:

      

Unrealized gains (losses) on investment securities

     2,141        4,379        (8,431

Adjustment to DAC

     (274     (526     476   

Adjustment to PVFP

     (134     (178     202   

Adjustment to sales inducements

     (35     (20     9   

Adjustment to benefit reserves

     (273     —          —     

Provision for income taxes

     (509     (1,296     2,736   
                        

Change in unrealized gains (losses) on investment securities

     916        2,359        (5,008

Reclassification adjustments to net investment (gains) losses, net of taxes of $(71), $(360) and $(806)

     133        669        1,496   
                        

Change in net unrealized investment gains (losses)

     1,309        2,679        (4,038

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

     (11     (39     —     
                        

Ending balance

   $ (100   $ (1,398   $ (4,038
                        

(d) Fixed Maturity and Equity Securities

As of December 31, 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

   $ 3,568       $ 145       $ —         $ (8   $ —        $ 3,705   

Tax-exempt

     1,124         19         —           (113     —          1,030   

Government—non-U.S.

     2,257         118         —           (6     —          2,369   

U.S. corporate

     23,282         1,123         10         (448     —          23,967   

Corporate—non-U.S.

     13,180         485         —           (167     —          13,498   

Residential mortgage-backed

     4,821         116         18         (304     (196     4,455   

Commercial mortgage-backed

     3,936         132         6         (286     (45     3,743   

Other asset-backed

     2,494         18         —           (94     (2     2,416   
                                                   

Total fixed maturity securities

     54,662         2,156         34         (1,426     (243     55,183   

Equity securities

     323         13         —           (4     —          332   
                                                   

Total available-for-sale securities

   $ 54,985       $ 2,169       $ 34       $ (1,430   $ (243   $ 55,515   
                                                   

 

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 December 31, 2010:

 

    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

  $ 545      $ (8     36      $ —        $ —          —        $ 545      $ (8     36   

Tax-exempt

    285        (12     101        244        (101     90        529        (113     191   

Government—non-U.S.

    431        (5     69        21        (1     7        452        (6     76   

U.S. corporate

    3,615        (125     443        2,338        (323     191        5,953        (448     634   

Corporate—non-U.S.

    2,466        (53     296        1,141        (114     102        3,607        (167     398   

Residential mortgage-backed

    461        (23     92        1,031        (477     416        1,492        (500     508   

Commercial mortgage-backed

    177        (8     26        1,167        (323     225        1,344        (331     251   

Other asset-backed

    401        (2     37        512        (94     53        913        (96     90   
                                                                       

Subtotal, fixed maturity securities

    8,381        (236     1,100        6,454        (1,433     1,084        14,835        (1,669     2,184   

Equity securities

    77        (3     48        5        (1     4        82        (4     52   
                                                                       

Total for securities in an unrealized loss position

  $ 8,458      $ (239     1,148      $ 6,459      $ (1,434     1,088      $ 14,917      $ (1,673     2,236   
                                                                       

 

Aging of Gross Unrealized Losses and Other-Than-Temporary Losses

The following table presents the gross unrealized losses and number of 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, 2010:

 

    Less than 20%     20% to 50%     Greater than 50%  

(Dollar amounts in millions)

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

Fixed maturity securities:

                 

Less than 12 months:

                 

Investment grade

  $ (222     13     1,031      $ (7         8      $ —          —       —     

Below investment grade

    (4     —          45        (1     —          10        (2     —          6   
                                                                       

Total

    (226     13        1,076        (8     1       18        (2     —          6   
                                                                       

12 months or more:

                 

Investment grade

    (330     20        473        (328     20        166        (105     6        40   

Below investment grade (1)

    (88     5        115        (324     19        162        (258     16        128   
                                                                       

Total

    (418     25        588        (652     39        328        (363     22        168   
                                                                       

Equity securities:

                 

Less than 12 months:

                 

Investment grade

    (1     —          20        (1     —          1        —          —          —     

Below investment grade

    (1     —          27        —          —          —          —          —          —     
                                                                       

Total

    (2     —          47        (1     —          1        —          —          —     
                                                                       

12 months or more:

                 

Investment grade

    (1     —          4        —          —          —          —          —          —     

Below investment grade

    —          —          —          —          —          —          —          —          —     
                                                                       

Total

    (1     —          4        —          —          —          —          —          —     
                                                                       

Total

  $ (647     38     1,715      $ (661     40     347      $ (365     22     174   
                                                                       

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.

 

Concentration of Gross Unrealized Losses and Other-Than-Temporary Losses by Sector

The following table presents the concentration of gross unrealized losses by sector as of December 31, 2010:

 

     Investment grade     Below investment grade  

(Amounts in millions)

   Gross
unrealized
losses
    % of gross
unrealized
losses
    Gross
unrealized
losses
    % of gross
unrealized
losses
 

Fixed maturity securities:

        

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

   $ (8     1   $ —          —  

Tax-exempt

     (111     7        (2     —     

Government—non-U.S.

     (6     —          —          —     

U.S. corporate

     (386     23        (62     4   

Corporate—non-U.S.

     (159     10        (8     —     

Residential mortgage-backed

     (133     8        (367     22   

Commercial mortgage-backed

     (166     10        (165     10   

Other asset-backed

     (23     1        (73     4   
                                

Subtotal, fixed maturity securities

     (992     60        (677     40   

Equity securities

     (3     —          (1     —     
                                

Total

   $ (995     60   $ (678     40
                                

While certain securities included in the preceding tables 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.

 

Structured Securities

The following table presents the concentration of gross unrealized losses related to structured securities of December 31, 2010:

 

     Investment grade     Below investment grade  

(Amounts in millions)

   Gross
unrealized
losses
    % of  gross
unrealized

losses
    Gross
unrealized
losses
    % of gross
unrealized

losses
 

Structured securities:

        

Residential mortgage-backed

   $ (133     14   $ (367     39

Commercial mortgage-backed

     (166     18        (165     18   

Other asset-backed

     (23     3        (73     8   
                                

Total structured securities

   $ (322     35   $ (605     65
                                

Most of the structured 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 December 31, 2010.

Corporate Securities

The following table presents the concentration of gross unrealized losses related to corporate debt and equity securities by industry as of December 31, 2010:

 

     Investment grade     Below investment grade  

(Amounts in millions)

   Less than
12 months
    12 months
or more
    Less than
12 months
    12 months
or more
 

Industry:

        

Finance and insurance

   $ (41   $ (261   $ (1   $ (34

Utilities and energy

     (34     (11     —          (1

Consumer – non-cyclical

     (16     (8     —          (8

Consumer – cyclical

     (3     (6     (1     (5

Capital goods

     (12     (7     —          (11

Industrial

     (14     (13     —          (4

Technology and communications

     (17     (8     —          (2

Transportation

     (2     (26     —          —     

Other

     (38     (31     (2 )     (2
                                

Total

   $ (177   $ (371   $ (4   $ (67
                                

A portion of the unrealized losses in the finance and insurance sector included debt 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 debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers' financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of December 31, 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 hybrid securities retain a credit rating of investment grade. The majority of these securities were issued by foreign financial institutions. The fair value of these hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred.

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 December 31, 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

   $ 2,694       $ 2,707   

Due after one year through five years

     12,110         12,423   

Due after five years through ten years

     8,863         9,232   

Due after ten years

     19,744         20,207   
                 

Subtotal

     43,411         44,569   

Residential mortgage-backed

     4,821         4,455   

Commercial mortgage-backed

     3,936         3,743   

Other asset-backed

     2,494         2,416   
                 

Total

   $ 54,662       $ 55,183   
                 

As of December 31, 2010, $4,658 million of our investments (excluding mortgage and asset-backed securities) were subject to certain call provisions.

As of December 31, 2010, securities issued by finance and insurance, utilities and energy, and consumer—non-cyclical industry groups represented approximately 23%, 22% and 11% 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 United States and internationally, and is not dependent on the economic stability of one particular region.

As of December 31, 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.

As of December 31, 2010 and 2009, $857 million and $727 million, respectively, of securities were on deposit with various state or foreign government insurance departments in order to comply with relevant insurance regulations.

 

(e) Commercial Mortgage Loans

Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of 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 December 31:

 

     2010     2009  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property Type

        

Retail

   $ 1,974        29   $ 2,115        28

Office

     1,850        27        2,025        27   

Industrial

     1,788        26        1,979        26   

Apartments

     725        11        832        11   

Mixed use/other

     435        7        590        8   
                                

Total principal balance

     6,772        100     7,541        100
                    

Unamortized balance of loan origination fees and costs

     5          6     

Allowance for losses

     (59       (48  
                    

Total (1)

   $ 6,718        $ 7,499