GENWORTH FINANCIAL INC, 10-K filed on 3/3/2014
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Feb. 12, 2014
Jun. 28, 2013
Document Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2013 
 
 
Document Fiscal Year Focus
2013 
 
 
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
 
495,357,422 
 
Entity Public Float
 
 
$ 5,600,000,000 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Assets
 
 
 
 
Fixed maturity securities available-for-sale, at fair value
$ 58,629 
$ 62,161 
 
 
Equity securities available-for-sale, at fair value
341 
518 
 
 
Commercial mortgage loans
5,899 
5,872 
 
 
Restricted commercial mortgage loans related to securitization entities
233 
341 
 
 
Policy loans
1,434 
1,601 
 
 
Other invested assets
1,686 
3,493 
 
 
Restricted other invested assets related to securitization entities, at fair value
391 
393 
 
 
Total investments
68,613 
74,379 
 
 
Cash and cash equivalents
4,214 
3,632 
4,443 
 
Accrued investment income
678 
715 
 
 
Deferred acquisition costs
5,278 
5,036 
5,193 
 
Intangible assets
399 
366 
 
 
Goodwill
867 
868 
958 
 
Reinsurance recoverable
17,219 
17,230 
 
 
Other assets
639 
710 
 
 
Separate account assets
10,138 
9,937 
 
 
Assets associated with discontinued operations
439 
 
 
Total assets
108,045 
113,312 
 
 
Liabilities and stockholders' equity
 
 
 
 
Future policy benefits
33,705 
33,505 
 
 
Policyholder account balances
25,528 
26,262 
 
 
Liability for policy and contract claims
7,204 
7,509 
7,620 
6,933 
Unearned premiums
4,107 
4,333 
 
 
Other liabilities ($50 and $133 other liabilities related to securitization entities)
4,096 
5,239 
 
 
Borrowings related to securitization entities ($75 and $62 carried at fair value)
242 
336 
 
 
Non-recourse funding obligations
2,038 
2,066 
 
 
Long-term borrowings
5,161 
4,776 
 
 
Deferred tax liability
206 
1,507 
 
 
Separate account liabilities
10,138 
9,937 
 
 
Liabilities associated with discontinued operations
61 
 
 
Total liabilities
92,425 
95,531 
 
 
Commitments and contingencies
   
   
 
 
Stockholders' equity:
 
 
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 583 million and 580 million shares issued as of December 31, 2013 and 2012, respectively; 495 million and 492 million shares outstanding as of December 31, 2013 and 2012, respectively
 
 
Additional paid-in capital
12,127 
12,127 
 
 
Net unrealized investment gains (losses):
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
914 
2,692 
 
 
Net unrealized gains (losses) on other-than-temporarily impaired securities
12 
(54)
 
 
Net unrealized investment gains (losses)
926 1
2,638 1
1,485 1
(80)1
Derivatives qualifying as hedges
1,319 2
1,909 2
2,009 2
924 2
Foreign currency translation and other adjustments
297 
655 
 
 
Total accumulated other comprehensive income (loss)
2,542 
5,202 
4,047 
1,506 
Retained earnings
2,423 
1,863 
 
 
Treasury stock, at cost (88 million shares as of December 31, 2013 and 2012)
(2,700)
(2,700)
 
 
Total Genworth Financial, Inc.'s stockholders' equity
14,393 
16,493 
 
 
Noncontrolling interests
1,227 
1,288 
 
 
Total stockholders' equity
15,620 
17,781 
16,132 
13,510 
Total liabilities and stockholders' equity
$ 108,045 
$ 113,312 
 
 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Other liabilities, securitization entities
$ 50 
$ 133 
Borrowings related to securitization entities, at fair value
$ 75 1
$ 62 1
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
583,000,000 
580,000,000 
Class A Common Stock, shares outstanding
495,000,000 
492,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Revenues:
 
 
 
Premiums
$ 5,148 
$ 5,041 
$ 5,688 
Net investment income
3,271 
3,343 
3,380 
Net investment gains (losses)
(37)
27 
(195)
Insurance and investment product fees and other
1,021 
1,229 
1,050 
Total revenues
9,403 
9,640 
9,923 
Benefits and expenses:
 
 
 
Benefits and other changes in policy reserves
4,895 
5,378 
5,941 
Interest credited
738 
775 
794 
Acquisition and operating expenses, net of deferrals
1,659 
1,594 
1,930 
Amortization of deferred acquisition costs and intangibles
569 
722 
593 
Goodwill impairment
89 
29 
Interest expense
492 
476 
506 
Total benefits and expenses
8,353 
9,034 
9,793 
Income from continuing operations before income taxes
1,050 
606 
130 
Provision (benefit) for income taxes
324 
138 
(11)
Income from continuing operations
726 
468 
141 
Income (loss) from discontinued operations, net of taxes
(12)
57 
36 
Net income
714 
525 
177 
Less: net income attributable to noncontrolling interests
154 
200 
139 
Net income available to Genworth Financial, Inc.'s common stockholders
560 
325 
38 
Income from continuing operations available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
Basic
$ 1.16 
$ 0.55 
$ 0.00 
Diluted
$ 1.15 
$ 0.54 
$ 0.00 
Net income available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
Basic
$ 1.13 
$ 0.66 
$ 0.08 
Diluted
$ 1.12 
$ 0.66 
$ 0.08 
Weighted-average common shares outstanding:
 
 
 
Basic
493.6 
491.6 
490.6 
Diluted
498.7 
494.4 
493.5 
Supplemental disclosures:
 
 
 
Total other-than-temporary impairments
(16)
(62)
(118)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
(9)
(44)
(14)
Net other-than-temporary impairments
(25)
(106)
(132)
Other investment gains (losses)
(12)
133 
(63)
Net investment gains (losses)
$ (37)
$ 27 
$ (195)
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2012
Sep. 30, 2012
Jun. 30, 2012
Mar. 31, 2012
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Net income
$ 245 
$ 148 
$ 180 
$ 141 
$ 266 1
$ 71 1
$ 109 1
$ 79 1
$ 714 
$ 525 
$ 177 
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
 
 
 
 
 
 
(1,817)
1,078 
1,615 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
 
 
 
 
 
 
66 
78 
(11)
Derivatives qualifying as hedges
 
 
 
 
 
 
 
 
(590)2
(100)2
1,085 2
Foreign currency translation and other adjustments
 
 
 
 
 
 
 
 
(442)
126 
(135)
Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
(2,783)
1,182 
2,554 
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
(2,069)
1,707 
2,731 
Less: comprehensive income attributable to noncontrolling interests
 
 
 
 
 
 
 
 
31 
227 
152 
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
 
 
 
 
 
 
 
 
$ (2,100)
$ 1,480 
$ 2,579 
Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost
Total Genworth Financial, Inc.'s stockholders' equity
Noncontrolling interests
Balances at Dec. 31, 2010
$ 13,510 
$ 1 
$ 12,107 
$ 1,506 
$ 1,500 
$ (2,700)
$ 12,414 
$ 1,096 
Repurchase of subsidiary shares
(71)
(71)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
177 
38 
38 
139 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,615 
1,576 
1,576 
39 
Net unrealized gains (losses) on other-than-temporarily impaired securities
(11)
(11)
(11)
Derivatives qualifying as hedges
1,085 1
1,085 
1,085 
Foreign currency translation and other adjustments
(135)
(109)
(109)
(26)
Total comprehensive income (loss)
2,731 
 
 
 
 
 
2,579 
152 
Dividends to noncontrolling interests
(67)
(67)
Stock-based compensation expense and exercises and other
29 
29 
29 
Balances at Dec. 31, 2011
16,132 
12,136 
4,047 
1,538 
(2,700)
15,022 
1,110 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
525 
325 
325 
200 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,078 
1,075 
1,075 
Net unrealized gains (losses) on other-than-temporarily impaired securities
78 
78 
78 
Derivatives qualifying as hedges
(100)1
(100)
(100)
Foreign currency translation and other adjustments
126 
102 
102 
24 
Total comprehensive income (loss)
1,707 
 
 
 
 
 
1,480 
227 
Dividends to noncontrolling interests
(50)
(50)
Stock-based compensation expense and exercises and other
(8)
(9)
(9)
Balances at Dec. 31, 2012
17,781 
12,127 
5,202 
1,863 
(2,700)
16,493 
1,288 
Repurchase of subsidiary shares
(43)
(43)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
714 
560 
560 
154 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(1,817)
(1,778)
(1,778)
(39)
Net unrealized gains (losses) on other-than-temporarily impaired securities
66 
66 
66 
Derivatives qualifying as hedges
(590)1
(590)
(590)
Foreign currency translation and other adjustments
(442)
(358)
(358)
(84)
Total comprehensive income (loss)
(2,069)
 
 
 
 
 
(2,100)
31 
Dividends to noncontrolling interests
(52)
(52)
Stock-based compensation expense and exercises and other
Balances at Dec. 31, 2013
$ 15,620 
$ 1 
$ 12,127 
$ 2,542 
$ 2,423 
$ (2,700)
$ 14,393 
$ 1,227 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Cash flows from operating activities:
 
 
 
Net income
$ 714 
$ 525 
$ 177 
Less (income) loss from discontinued operations, net of taxes
12 
(57)
(36)
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Amortization of fixed maturity discounts and premiums and limited partnerships
(97)
(88)
(77)
Net investment (gains) losses
37 
(27)
195 
Charges assessed to policyholders
(812)
(801)
(690)
Acquisition costs deferred
(457)
(611)
(637)
Amortization of deferred acquisition costs and intangibles
569 
722 
593 
Goodwill impairment
89 
29 
Deferred income taxes
(79)
82 
(350)
Gain on sale of subsidiary
(36)
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments
(59)
191 
1,451 
Stock-based compensation expense
41 
26 
31 
Change in certain assets and liabilities:
 
 
 
Accrued investment income and other assets
(43)
(68)
(174)
Insurance reserves
2,256 
2,330 
2,507 
Current tax liabilities
288 
(234)
145 
Other liabilities and other policy-related balances
(1,039)
(1,166)
(73)
Cash from operating activities-discontinued operations
68 
49 
70 
Net cash from operating activities
1,399 
962 
3,125 
Cash flows from investing activities:
 
 
 
Fixed maturity securities
5,040 
5,176 
5,233 
Commercial mortgage loans
896 
891 
912 
Restricted commercial mortgage loans related to securitization entities
60 
67 
96 
Proceeds from sales of investments:
 
 
 
Fixed maturity and equity securities
4,436 
5,735 
6,284 
Purchases and originations of investments:
 
 
 
Fixed maturity and equity securities
(10,805)
(12,322)
(11,885)
Commercial mortgage loans
(873)
(692)
(300)
Other invested assets, net
89 
416 
(529)
Policy loans, net
242 
(29)
(79)
Proceeds from sale of a subsidiary, net of cash transferred
365 
77 
211 
Payments for businesses purchased, net of cash acquired
(3)
Cash from investing activities-discontinued operations
(30)
(41)
Net cash from investing activities
(580)
(722)
(59)
Cash flows from financing activities:
 
 
 
Deposits to universal life and investment contracts
2,999 
2,810 
2,664 
Withdrawals from universal life and investment contracts
(3,269)
(2,781)
(3,688)
Redemption and repurchase of non-recourse funding obligations
(28)
(1,056)
(130)
Proceeds from the issuance of long-term debt
793 
361 
545 
Repayment and repurchase of long-term debt
(365)
(322)
(760)
Repayment of borrowings related to securitization entities
(108)
(72)
(96)
Repurchase of subsidiary shares
(43)
(71)
Dividends paid to noncontrolling interests
(52)
(50)
(67)
Other, net
(73)
54 
26 
Cash from financing activities-discontinued operations
(3)
(45)
(64)
Net cash from financing activities
(149)
(1,101)
(1,641)
Effect of exchange rate changes on cash and cash equivalents
(109)
26 
(69)
Net change in cash and cash equivalents
561 
(835)
1,356 
Cash and cash equivalents at beginning of period
3,653 
4,488 
3,132 
Cash and cash equivalents at end of period
4,214 
3,653 
4,488 
Less cash and cash equivalents of discontinued operations at end of period
21 
45 
Cash and cash equivalents at end of year
$ 4,214 
$ 3,632 
$ 4,443 
Nature of Business and Formation of Genworth
Nature of Business and Formation of Genworth

(1) Nature of Business and Formation of Genworth

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering (“IPO”) of Genworth common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, under the name Sub XLVI, Inc., and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

To implement the reorganization, Genworth Holdings formed Genworth Financial and Genworth Financial, in turn, formed Sub XLII, Inc. (“Merger Sub”). The holding company structure was implemented pursuant to Section 251(g) of the General Corporation Law of the State of Delaware (“DGCL”) by the merger of Merger Sub with and into Genworth Holdings (the “Merger”). Genworth Holdings survived the Merger as a direct, 100% owned subsidiary of Genworth Financial and each share of Genworth Holdings Class A Common Stock, par value $0.001 per share (“Genworth Holdings Class A Common Stock”), issued and outstanding immediately prior to the Merger and each share of Genworth Holdings Class A Common Stock held in the treasury of Genworth Holdings immediately prior to the Merger converted into one issued and outstanding or treasury, as applicable, share of Genworth Financial Class A Common Stock, par value $0.001 per share, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the Genworth Holdings Class A Common Stock being converted.

Immediately after the consummation of the Merger, Genworth Financial had the same authorized, outstanding and treasury capital stock as Genworth Holdings immediately prior to the Merger. Each share of Genworth Financial common stock outstanding immediately prior to the Merger was cancelled. Effective upon the consummation of the Merger, Genworth Financial adopted an amended and restated certificate of incorporation and amended and restated bylaws that were identical to those of Genworth Holdings immediately prior to the consummation of the Merger (other than provisions regarding certain technical matters, as permitted by Section 251(g) of the DGCL). Genworth Financial’s directors and executive officers immediately after the consummation of the Merger were the same as the directors and executive officers of Genworth Holdings immediately prior to the consummation of the Merger. Immediately after the consummation of the Merger, Genworth Financial had, on a consolidated basis, the same assets, businesses and operations as Genworth Holdings had immediately prior to the consummation of the Merger.

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

 

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

 

   

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

 

   

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

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 where we are the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.

We have the following operating segments:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business.

We also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including discontinued operations. See note 25 for additional information related to discontinued operations.

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. 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. In addition, we have a practice of refunding the post-delinquent premiums in our U.S. mortgage insurance business to the insured party if the delinquent loan goes to claim. We record a liability for premiums received on the delinquent loans where our practice is to refund post-delinquent 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 in such a manner that we would not recover a substantial portion of the initial investment, 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 and term universal life insurance contracts and fees assessed against customer account values. For universal and term 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 comprises primarily 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 and primarily represent fixed maturity securities where we utilized the fair value option.

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.

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 comprises 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 or embedded derivatives 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 12 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

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. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary.

Under the securities lending program in the United States, the borrower is required to provide collateral, which can consist of cash or government securities, on a daily basis in amounts equal to or exceeding 102% of the applicable securities loaned. Currently, we only accept cash collateral from borrowers under the program. Cash collateral 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. As of December 31, 2013 and 2012, the fair value of securities loaned under our securities lending program in the United States was $191 million and $194 million, respectively. As of December 31, 2013 and 2012, the fair value of collateral held under our securities lending program in the United States was $187 million and the offsetting obligation to return collateral of $199 million and $203 million, respectively, was included in other liabilities in the consolidated balance sheets. We did not have any non-cash collateral provided by the borrower in our securities lending program in the United States as of December 31, 2013 and 2012.

Under our securities lending program in Canada, the borrower is required to provide collateral consisting of government securities on a daily basis in amounts equal to or exceeding 105% of the fair value of the applicable securities loaned. Securities received from counterparties as collateral are not recorded on our consolidated balance sheet given that the risk and rewards of ownership is not transferred from the counterparties to us in the course of such transactions. Additionally, there was no cash collateral as cash collateral is not permitted as an acceptable form of collateral under the program. 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. As of December 31, 2013 and 2012, the fair value of securities loaned under our securities lending program in Canada was $229 million and $210 million, respectively.

h) Repurchase Agreements

We 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, 2013 and 2012, the fair value of securities pledged under the repurchase program was $890 million and $1,616 million, respectively, and the repurchase obligation of $919 million and $1,534 million, respectively, was included in other liabilities in the consolidated balance sheets.

i) 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.

j) Deferred Acquisition Costs

Acquisition costs include costs that are related directly to the successful acquisition of new and renewal insurance policies and investment contracts. Such costs are deferred and amortized as follows:

Long-Duration Contracts. Acquisition costs include commissions in excess of ultimate renewal commissions and for contracts and policies issued, some other costs such as underwriting, medical inspection and 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 expected gross profits. Expected 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 primarily consist 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 expected 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.

k) 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, 2013, 2012 and 2011, 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 using a qualitative or quantitative assessment and are written down to fair value as required.

l) Goodwill

Goodwill is not amortized but is tested for impairment annually or 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 are permitted to utilize a qualitative impairment assessment if the fair value of the reporting unit is not more likely than not lower than its carrying value. If a qualitative impairment assessment is not performed, we are required to determine the fair value of the reporting unit. The determination of fair value 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. If the reporting unit’s fair value is below its carrying value, we must determine the amount of implied goodwill that would be established if the reporting unit was hypothetically purchased on the impairment assessment date. We recognize an impairment charge for any amount by which the carrying amount of a reporting unit’s goodwill exceeds the amount of implied goodwill.

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.

m) 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. Amounts received from reinsurers that represent recovery of acquisition costs are netted against DAC so that the net amount is capitalized. 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.

 

n) 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 current period 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 current period 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 current period 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).

o) Separate Accounts and Related Insurance Obligations

Separate account assets represent funds for which the investment income and investment gains and losses accrue directly to the contractholders and are reflected in our consolidated balance sheets at fair value, reported as summary total separate account assets with an equivalent summary total reported for liabilities. Amounts assessed against the contractholders for mortality, administrative and other services are included in revenues. Changes in liabilities for minimum guarantees are included in benefits and other changes in policy reserves. Net investment income, net investment gains (losses) and the related liability changes associated with the separate account are offset within the same line item in the consolidated statements of income. There were no gains or losses on transfers of assets from the general account to the separate account.

We offer certain minimum guarantees associated with our variable annuity contracts. Our variable annuity contracts usually contain a basic guaranteed minimum death benefit (“GMDB”) which provides a minimum benefit to be paid upon the annuitant’s death equal to the larger of account value and the return of net deposits. Some variable annuity contracts permit contractholders to purchase through riders, at an additional charge, enhanced death benefits such as the highest contract anniversary value (“ratchets”), accumulated net deposits at a stated rate (“rollups”), or combinations thereof.

Additionally, some of our variable annuity contracts provide the contractholder with living benefits such as a guaranteed minimum withdrawal benefit (“GMWB”) or certain types of guaranteed annuitization benefits. The GMWB allows contractholders to withdraw a pre-defined percentage of account value or benefit base each year, either for a specified period of time or for life. The guaranteed annuitization benefit generally provides for a guaranteed minimum level of income upon annuitization accompanied by the potential for upside market participation.

Most of our reserves for additional insurance and annuitization benefits are calculated by applying a benefit ratio to accumulated contractholder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past and anticipated future experience. The projections utilize stochastic scenarios of separate account returns incorporating reversion to the mean, as well as assumptions for mortality and lapses. Some of our minimum guarantees, mainly GMWBs, are accounted for as embedded derivatives; see notes 5 and 17 for additional information on these embedded derivatives and related fair value measurement disclosures.

 

p) 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. For long-term care insurance products, benefit reductions are treated as partial lapse of coverage with the balance of our future policy benefits and deferred acquisition costs both reduced in proportion to the reduced coverage. For level premium term life insurance products, we floor the liability for future policy benefits on each policy at zero. 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.

q) 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.

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.

r) 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, 2013, 2012 and 2011, 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 2013, 2012 and 2011, adjustments associated with this update resulted in an increase in earned premiums of $12 million, $36 million and $46 million, respectively.

s) 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.

t) 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) Income Taxes

We determine deferred tax assets and/or liabilities by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled if there is no change in law. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances on deferred tax assets are estimated based on our assessment of the realizability of such amounts.

 

Effective with the period beginning January 1, 2011, our companies elected to file a single U.S. consolidated income tax return (the “life/non-life consolidated return”). The election was made with the filing of the first life/non-life consolidated return, which was filed in September 2012. All companies domesticated in the United States and our Bermuda and Guernsey subsidiaries which have elected to be taxed as U.S. domestic companies were included in the life/non-life consolidated return as allowed by the tax law and regulations. The tax sharing agreement previously applicable only to the U.S. life insurance entities was terminated with the filing of the life/non-life consolidated return and those entities adopted the tax sharing agreement previously applicable to only the non-life entities (hereinafter the “life/non-life tax sharing agreement”). The two agreements were identical in all material respects. The life/non-life tax sharing agreement was provided to the appropriate state insurance regulators for approval. Intercompany balances relating to the impacts of the life/non-life tax sharing agreement were settled with the insurance companies after approval was received from the insurance regulators. Intercompany balances under all agreements are settled at least annually. For years before 2011, our U.S. non-life insurance entities were included in the consolidated federal income tax return of Genworth and subject to a tax sharing arrangement that allocated tax on a separate company basis but provided benefit for current utilization of losses and credits. Also, our U.S. life insurance entities filed a consolidated life insurance federal income tax return, and were subject to a separate tax sharing agreement, as approved by state insurance regulators, which allocated taxes on a separate company basis but provided benefit for current utilization of losses and credits.

Our subsidiaries based in Bermuda and Guernsey are treated as U.S. insurance companies under provisions of the U.S. Internal Revenue Code, are included in the life/non-life consolidated return, and have adopted the life/non-life tax sharing agreement. Jurisdictions outside the United States in which our various subsidiaries incur significant taxes include Australia, Canada and the United Kingdom.

v) 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 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.

w) 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 ongoing 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.

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

x) Accounting Changes

Benchmarking Interest Rates Used When Applying Hedge Accounting

On July 17, 2013, we adopted new accounting guidance to provide additional flexibility in the benchmark interest rates used when applying hedge accounting. The new guidance permits the use of the Federal Funds Effective Swap Rate as a benchmark interest rate for hedge accounting purposes and removes certain restrictions on being able to apply hedge accounting for similar hedges using different benchmark interest rates. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

Offsetting Assets And Liabilities

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

Reclassification Of Items Out Of Accumulated Other Comprehensive Income

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

Testing Indefinite-Lived Intangible Assets For Impairment

In July 2012, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance on testing indefinite-lived intangible assets for impairment. The new guidance permits the use of a qualitative assessment prior to, and potentially instead of, the quantitative impairment test for indefinite-lived intangible assets. We elected to early adopt this new accounting guidance effective October 1, 2012. The adoption of this accounting guidance did not have an impact on our consolidated financial statements.

 

Fair Value Measurements

On January 1, 2012, we adopted new accounting guidance related to fair value measurements. This new accounting guidance clarified existing fair value measurement requirements and changed certain fair value measurement principles and disclosure requirements. The adoption of this accounting guidance impacted our disclosures only and did not impact our consolidated results.

Repurchase Agreements and Other Agreements

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

Testing Goodwill For Impairment

In September 2011, the FASB issued new accounting guidance related to goodwill impairment testing. The new guidance permits the use of a qualitative assessment prior to, and potentially instead of, the two step quantitative goodwill impairment test. We elected to early adopt this new guidance effective on July 1, 2011 in order to apply the new guidance in our annual goodwill impairment testing performed during the third quarter. The adoption of this new accounting guidance did not have an impact on our consolidated financial statements.

A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring

On July 1, 2011, we adopted new accounting guidance related to additional disclosures for troubled debt restructurings. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

When to Perform Step 2 of the Goodwill Impairment Test For Reporting Units With Zero or Negative Carrying Value

On January 1, 2011, we adopted new accounting guidance related to goodwill impairment testing when a reporting unit’s carrying value is zero or negative. This guidance did not impact our consolidated financial statements upon adoption, as all of our reporting units with goodwill balances have positive carrying values.

How Investments Held Through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments

On January 1, 2011, we adopted new accounting guidance related to how investments held through separate accounts affect an insurer’s consolidation analysis of those investments. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

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

On January 1, 2011, we adopted new accounting guidance related to additional disclosures about purchases, sales, issuances and settlements in the rollforward of Level 3 fair value measurements. The adoption of this accounting guidance impacted our disclosures only and did not impact our consolidated results.

 

y) Accounting Pronouncements Not Yet Adopted

In January 2014, the FASB issued new accounting guidance related to the accounting for investments in affordable housing projects that qualify for the low-income housing tax credit. The new guidance permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects by amortizing the initial cost of the investment in proportion to the tax benefits received and recognize the net investment performance as a component of income tax expense (called the proportional amortization method) if certain conditions are met. The new guidance requires use of the equity method or cost method for investments in qualified affordable housing projects not accounted for using the proportional amortization method. This new guidance will be effective for us on January 1, 2015 with early adoption permitted. We have not yet determined whether this new guidance will have a material impact on our consolidated financial statements.

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

Earnings Per Share
Earnings Per Share

(3) Earnings Per Share

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

 

(Amounts in millions, except per share amounts)

   2013     2012      2011  

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

     493.6        491.6         490.6   

Potentially dilutive securities:

       

Stock options, restricted stock units and stock appreciation rights

     5.1        2.8         2.9   
  

 

 

   

 

 

    

 

 

 

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

     498.7        494.4         493.5   
  

 

 

   

 

 

    

 

 

 

Income from continuing operations:

       

Income from continuing operations

   $ 726      $ 468       $ 141   

Less: income from continuing operations attributable to noncontrolling interests

     154        200         139   
  

 

 

   

 

 

    

 

 

 

Income from continuing operations available to Genworth Financial, Inc.’s
common stockholders

   $ 572      $ 268       $ 2   
  

 

 

   

 

 

    

 

 

 

Basic per common share

   $ 1.16      $ 0.55       $ —    
  

 

 

   

 

 

    

 

 

 

Diluted per common share

   $ 1.15      $ 0.54       $ —    
  

 

 

   

 

 

    

 

 

 

Income (loss) from discontinued operations:

       

Income (loss) from discontinued operations, net of taxes

   $ (12   $ 57       $ 36   

Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests

     —         —          —    
  

 

 

   

 

 

    

 

 

 

Income (loss) from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders

   $ (12   $ 57       $ 36   
  

 

 

   

 

 

    

 

 

 

Basic per common share

   $ (0.02   $ 0.12       $ 0.07   
  

 

 

   

 

 

    

 

 

 

Diluted per common share

   $ (0.02   $ 0.12       $ 0.07   
  

 

 

   

 

 

    

 

 

 

Net income:

       

Income from continuing operations

   $ 726      $ 468       $ 141   

Income (loss) from discontinued operations, net of taxes

     (12     57         36   
  

 

 

   

 

 

    

 

 

 

Net income

     714        525         177   

Less: net income attributable to noncontrolling interests

     154        200         139   
  

 

 

   

 

 

    

 

 

 

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

   $ 560      $ 325       $ 38   
  

 

 

   

 

 

    

 

 

 

Basic per common share

   $ 1.13      $ 0.66       $ 0.08   
  

 

 

   

 

 

    

 

 

 

Diluted per common share

   $ 1.12      $ 0.66       $ 0.08   
  

 

 

   

 

 

    

 

 

 

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)

   2013      2012      2011  

Fixed maturity securities—taxable

   $ 2,642       $ 2,666       $ 2,697   

Fixed maturity securities—non-taxable

     9         11         35   

Commercial mortgage loans

     335         340         365   

Restricted commercial mortgage loans related to securitization entities (1)

     23         32         40   

Equity securities

     17         19         19   

Other invested assets (2)

     185         206         162   

Restricted other invested assets related to securitization entities (1)

     4         1         —    

Policy loans

     129         123         120   

Cash, cash equivalents and short-term investments

     20         35         37   
  

 

 

    

 

 

    

 

 

 

Gross investment income before expenses and fees

     3,364         3,433         3,475   

Expenses and fees

     (93      (90      (95
  

 

 

    

 

 

    

 

 

 

Net investment income

   $ 3,271       $ 3,343       $ 3,380   
  

 

 

    

 

 

    

 

 

 

 

(1) 

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

(2)

Included in other invested assets was $13 million, $21 million and $15 million of net investment income related to trading securities for the years ended December 31, 2013, 2012 and 2011, respectively.

 

(b) Net Investment Gains (Losses)

The following table sets forth net investment gains (losses) for the years ended December 31:

 

(Amounts in millions)

   2013      2012      2011  

Available-for-sale securities:

        

Realized gains

   $ 176       $ 172       $ 210   

Realized losses

     (184      (143      (160
  

 

 

    

 

 

    

 

 

 

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

     (8      29         50   
  

 

 

    

 

 

    

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (16      (62      (118

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

     (9      (44      (14
  

 

 

    

 

 

    

 

 

 

Net other-than-temporary impairments

     (25      (106      (132
  

 

 

    

 

 

    

 

 

 

Trading securities

     (23      21         27   

Commercial mortgage loans

     4         4         6   

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

     69         81         (47

Derivative instruments (2)

     (49      4         (99

Contingent consideration adjustment

     —          (6      —    

Other

     (5      —          —    
  

 

 

    

 

 

    

 

 

 

Net investment gains (losses)

   $ (37    $ 27       $ (195
  

 

 

    

 

 

    

 

 

 

 

(1)

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

(2)

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

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, 2013, 2012 and 2011 was $1,794 million, $1,491 million and $1,884 million, respectively, which was approximately 91%, 92% and 93%, respectively, of book value.

 

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

 

(Amounts in millions)

   2013     2012     2011  

Beginning balance

   $ 387      $ 646      $ 784   

Additions:

      

Other-than-temporary impairments not previously recognized

     4        16        39   

Increases related to other-than-temporary impairments previously recognized

     11        55        82   

Reductions:

      

Securities sold, paid down or disposed

     (301     (330     (259
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 101      $ 387      $ 646   
  

 

 

   

 

 

   

 

 

 

(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)

   2013     2012     2011  

Net unrealized gains (losses) on investment securities:

      

Fixed maturity securities

   $ 2,346      $ 6,086      $ 3,742   

Equity securities

     23        34        5   

Other invested assets

     (4     (8     (30
  

 

 

   

 

 

   

 

 

 

Subtotal

     2,365        6,112        3,717   

Adjustments to DAC, PVFP, sales inducements and benefit reserves

     (869     (1,925     (1,303

Income taxes, net

     (517     (1,457     (840
  

 

 

   

 

 

   

 

 

 

Net unrealized investment gains (losses)

     979        2,730        1,574   

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

     53        92        89   
  

 

 

   

 

 

   

 

 

 

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

   $ 926      $ 2,638      $ 1,485   
  

 

 

   

 

 

   

 

 

 

 

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

 

(Amounts in millions)

   2013      2012      2011  

Beginning balance

   $ 2,638       $ 1,485       $ (80

Unrealized gains (losses) arising during the period:

        

Unrealized gains (losses) on investment securities

     (3,780      2,318         3,137   

Adjustment to DAC

     248         (159      (101

Adjustment to PVFP

     95         (6      (86

Adjustment to sales inducements

     40         (33      (3

Adjustment to benefit reserves

     673         (424      (560

Provision for income taxes

     952         (590      (836
  

 

 

    

 

 

    

 

 

 

Change in unrealized gains (losses) on investment securities

     (1,772      1,106         1,551   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(12), $(27) and $(29)

     21         50         53   
  

 

 

    

 

 

    

 

 

 

Change in net unrealized investment gains (losses)

     (1,751      1,156         1,604   

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

     (39      3         39   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 926       $ 2,638       $ 1,485   
  

 

 

    

 

 

    

 

 

 

(d) Fixed Maturity and Equity Securities

As of December 31, 2013, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

 

Amortized
cost or
cost

    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

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

  $ 4,710      $ 331      $ —        $ (231   $ —        $ 4,810   

Tax-exempt

    324        7        —          (36     —          295   

Government—non-U.S.

    2,057        104        —          (15     —          2,146   

U.S. corporate

    23,614        1,761        19        (359     —          25,035   

Corporate—non-U.S.

    14,489        738        —          (156     —          15,071   

Residential mortgage-backed

    5,058        232        9        (70     (4     5,225   

Commercial mortgage-backed

    2,886        75        2        (62     (3     2,898   

Other asset-backed

    3,171        35        —          (57     —          3,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    56,309        3,283        30        (986     (7     58,629   

Equity securities

    318        36        —          (13     —          341   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 56,627      $ 3,319      $ 30      $ (999   $ (7   $ 58,970   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

  Amortized
cost or
cost
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

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

  $ 4,484      $ 1,025      $ —        $ (18   $ —        $ 5,491   

Tax-exempt

    308        16        —          (30     —          294   

Government—non-U.S.

    2,173        250        —          (1     —          2,422   

U.S. corporate

    22,873        3,317        19        (104     —          26,105   

Corporate—non-U.S.

    14,577        1,262        —          (47     —          15,792   

Residential mortgage-backed

    5,744        549        13        (124     (101     6,081   

Commercial mortgage-backed

    3,253        178        5        (82     (21     3,333   

Other asset-backed

    2,660        50        —          (65     (2     2,643   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    56,072        6,647        37        (471     (124     62,161   

Equity securities

    483        41        —          (6     —          518   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 56,555      $ 6,688      $ 37      $ (477   $ (124   $ 62,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2013:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses 
(1)
    Number of
securities
    Fair
value
    Gross
unrealized
losses 
(1)
    Number of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

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

  $ 796      $ (109     32      $ 335      $ (122     13      $ 1,131      $ (231     45   

Tax-exempt

    82        (3     26        97        (33     9        179        (36     35   

Government—non-U.S.

    479        (15     60        —          —          —          479        (15     60   

U.S. corporate

    4,774        (260     707        663        (99     82        5,437        (359     789   

Corporate—non-U.S.

    3,005        (127     379        287        (29     34        3,292        (156     413   

Residential mortgage-backed

    1,052        (55     139        157        (19     92        1,209        (74     231   

Commercial mortgage-backed

    967        (42     107        370        (23     62        1,337        (65     169   

Other asset-backed

    1,089        (17     133        145        (40     17        1,234        (57     150   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    12,244        (628     1,583        2,054        (365     309        14,298        (993     1,892   

Equity securities

    95        (13     41        —          —          —          95        (13     41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,339      $ (641     1,624      $ 2,054      $ (365     309      $ 14,393      $ (1,006     1,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 12,009      $ (547     1,571      $ 1,575      $ (163     238      $ 13,584      $ (710     1,809   

20%-50% Below cost

    235        (81     12        466        (187     51        701        (268     63   

>50% Below cost

    —          —          —          13        (15     20        13        (15     20   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    12,244        (628     1,583        2,054        (365     309        14,298        (993     1,892   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    87        (11     40        —          —          —          87        (11     40   

20%-50% Below cost

    8        (2     1        —          —          —          8        (2     1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    95        (13     41        —          —          —          95        (13     41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,339      $ (641     1,624      $ 2,054      $ (365     309      $ 14,393      $ (1,006     1,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 11,896      $ (616     1,515      $ 1,631      $ (315     208      $ 13,527      $ (931     1,723   

Below investment grade (2)

    443        (25     109        423        (50     101        866        (75     210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,339      $ (641     1,624      $ 2,054      $ (365     309      $ 14,393      $ (1,006     1,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts included $7 million of unrealized losses on other-than-temporarily impaired securities.

(2) 

Amounts that have been in a continuous loss position for 12 months or more included $7 million of unrealized losses on other-than-temporarily impaired securities.

As indicated in the table above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to lower credit ratings since acquisition for corporate securities across various industry sectors. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 5% as of December 31, 2013.

 

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

Of the $163 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB+” and approximately 81% of the unrealized losses were related to investment grade securities as of December 31, 2013. These unrealized losses were attributable to the lower credit ratings for these securities since acquisition, primarily associated with structured securities and corporate securities in the finance and insurance sector. The average fair value percentage below cost for these securities was approximately 9% as of December 31, 2013. See below for additional discussion related to fixed maturity securities that have been in a continuous loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by asset class as of December 31, 2013:

 

    Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

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

unrealized
losses
    Number of
securities
 

Fixed maturity securities:

               

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

  $ 264      $ (106     11     10      $ —        $ —          —       —     

Tax-exempt

    67        (26     3        7        —          —          —          —     

U.S. corporate

    30        (9     1        3        —          —          —          —     

Corporate—non-U.S.

    20        (7     1        4        —          —          —          —     

Structured securities:

               

Residential mortgage-backed

    6        (3 )     —          4        3        (3     —          6   

Other asset-backed

    60        (29     3        5        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    66        (32     3        9        3        (3     —          6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 447      $ (180     19     33      $ 3      $ (3     —       6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Below Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

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

unrealized
losses
    Number of
securities
 

Fixed maturity securities:

  

Structured securities:

               

Residential mortgage-backed

  $ 4      $ (2     —       13      $ 2      $ (4     —       12   

Commercial mortgage-backed

    15        (5     —          5        1        (1 )     —          1   

Other asset-backed

    —          —          —          —         7        (7     1        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    19        (7     —          18        10        (12     1        14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 19      $ (7     —       18      $ 10      $ (12     1     14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

As indicated in the table above, $106 million of gross unrealized losses were related to U.S. government, agencies and government-sponsored enterprises securities that have been in a continuous loss position for more than 12 months and were greater than 20% below cost. The unrealized losses for U.S. government, agencies and government-sponsored enterprises securities represent long-term, zero coupon Treasury bonds. An increase in Treasury yields since the bonds were purchased resulted in a decrease in the market value of these securities. We expect that these securities will accrete up to par value over time.

Corporate Debt Securities

The following tables present the concentration of gross unrealized losses and fair values related to corporate debt fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by industry as of December 31, 2013:

 

    Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

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

Industry:

               

Finance and insurance

  $ 39      $ (13     2     5      $ —        $ —          —       —     

Utilities and energy

    4       (1     —          1       —          —          —          —     

Industrial

    7       (2     —          1       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 50      $ (16     2     7      $  —        $  —          —       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Of the total unrealized losses of $16 million for corporate fixed maturity securities presented in the tables above, $13 million, or 81%, related to issuers in the finance and insurance sector that were 24% below cost on average. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of December 31, 2013. The $13 million of unrealized losses related to the finance and insurance industry related to financial hybrid securities on which a debt impairment model was employed. Most of our hybrid securities retained a credit rating of investment grade. The fair value of these hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred. We continue to receive our contractual payments and expect to fully recover our amortized cost.

We expect that our investments in corporate securities will continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of corporate securities in the future.

 

Structured Securities

Of the $54 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, $5 million related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to the ongoing concern and uncertainty about the residential and commercial real estate market and unemployment, resulting in credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been significantly impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. housing market.

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

We used our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of December 31, 2013.

Despite the considerable analysis and rigor employed on our structured securities, it is at least reasonably possible that the underlying collateral of these investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2012:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses 
(1)
    Number of
securities
    Fair
value
    Gross
unrealized
losses 
(2)
    Number of
securities
 

Description of Securities

                 

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

  $ 655      $ (18     19      $ —        $ —          —        $ 655      $ (18     19   

Tax-exempt

    —          —          —          137        (30     13        137        (30     13   

Government—non-U.S.

    103        (1     21        —          —          —          103        (1     21   

U.S. corporate

    859        (19     154        646        (85     65        1,505        (104     219   

Corporate—non-U.S.

    665        (9     105        436        (38     41        1,101        (47     146   

Residential mortgage-backed

    152        (1     32        494        (224     278        646        (225     310   

Commercial mortgage-backed

    183        (1     20        749        (102     130        932        (103     150   

Other asset-backed

    282        (1     42        185        (66     18        467        (67     60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    2,899        (50     393        2,647        (545     545        5,546        (595     938   

Equity securities

    52        (4     32        14        (2     13        66        (6     45   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,951      $ (54     425      $ 2,661      $ (547     558      $ 5,612      $ (601     983   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 2,899      $ (50     393      $ 2,151      $ (194     337      $ 5,050      $ (244     730   

20%-50% Below cost

    —          —          —          445        (218     128        445        (218     128   

>50% Below cost

    —          —          —          51        (133     80        51        (133     80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    2,899        (50     393        2,647        (545     545        5,546        (595     938   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    47        (2     29        12        (1     11        59        (3     40   

20%-50% Below cost

    5        (2     3        2        (1     2        7        (3     5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    52        (4     32        14        (2     13        66        (6     45