GENWORTH FINANCIAL INC, 10-Q filed on 8/1/2013
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2013
Jul. 24, 2013
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
GNW 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
Entity Central Index Key
0001276520 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
493,730,387 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 58,008 
$ 62,161 
Equity securities available-for-sale, at fair value
411 
518 
Commercial mortgage loans
5,831 
5,872 
Restricted commercial mortgage loans related to securitization entities
309 
341 
Policy loans
1,671 
1,601 
Other invested assets
1,976 
3,493 
Restricted other invested assets related to securitization entities, at fair value
392 
393 
Total investments
68,598 
74,379 
Cash and cash equivalents
3,613 
3,632 
Accrued investment income
639 
715 
Deferred acquisition costs
5,237 
5,036 
Intangible assets
433 
366 
Goodwill
867 
868 
Reinsurance recoverable
17,236 
17,230 
Other assets
704 
710 
Separate account assets
9,806 
9,937 
Assets associated with discontinued operations
443 
439 
Total assets
107,576 
113,312 
Liabilities and stockholders' equity
 
 
Future policy benefits
33,437 
33,505 
Policyholder account balances
24,935 
26,262 
Liability for policy and contract claims
7,302 
7,509 
Unearned premiums
4,022 
4,333 
Other liabilities ($100 and $133 other liabilities related to securitization entities)
4,629 
5,239 
Borrowings related to securitization entities ($74 and $62 at fair value)
317 
336 
Non-recourse funding obligations
2,054 
2,066 
Long-term borrowings
4,720 
4,776 
Deferred tax liability
369 
1,507 
Separate account liabilities
9,806 
9,937 
Liabilities associated with discontinued operations
83 
61 
Total liabilities
91,674 
95,531 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 582 million and 580 million shares issued as of June 30, 2013 and December 31, 2012, respectively; 494 million and 492 million shares outstanding as of June 30, 2013 and December 31, 2012, respectively
Additional paid-in capital
12,139 
12,127 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,296 
2,692 
Net unrealized gains (losses) on other-than-temporarily impaired securities
(2)
(54)
Net unrealized investment gains (losses)
1,294 1
2,638 1
Derivatives qualifying as hedges
1,581 2
1,909 2
Foreign currency translation and other adjustments
267 
655 
Total accumulated other comprehensive income (loss)
3,142 
5,202 
Retained earnings
2,107 
1,863 
Treasury stock, at cost (88 million shares as of June 30, 2013 and December 31, 2012)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
14,689 
16,493 
Noncontrolling interests
1,213 
1,288 
Total stockholders' equity
15,902 
17,781 
Total liabilities and stockholders' equity
$ 107,576 
$ 113,312 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
Other liabilities, securitization entities
$ 100 
$ 133 
Borrowings related to securitization entities, at fair value
$ 74 
$ 62 
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
582,000,000 
580,000,000 
Class A Common Stock, shares outstanding
494,000,000 
492,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Revenues:
 
 
 
 
Premiums
$ 1,286 
$ 1,302 
$ 2,547 
$ 2,408 
Net investment income
821 
846 
1,635 
1,678 
Net investment gains (losses)
21 
(33)
(40)
Insurance and investment product fees and other
243 
287 
532 
627 
Total revenues
2,371 
2,402 
4,674 
4,717 
Benefits and expenses:
 
 
 
 
Benefits and other changes in policy reserves
1,269 
1,382 
2,470 
2,614 
Interest credited
184 
194 
368 
389 
Acquisition and operating expenses, net of deferrals
413 
439 
846 
879 
Amortization of deferred acquisition costs and intangibles
137 
147 
259 
418 
Interest expense
121 
131 
247 
226 
Total benefits and expenses
2,124 
2,293 
4,190 
4,526 
Income from continuing operations before income taxes
247 
109 
484 
191 
Provision for income taxes
73 
27 
149 
42 
Income from continuing operations
174 
82 
335 
149 
Income (loss) from discontinued operations, net of taxes
27 
(14)
39 
Net income
180 
109 
321 
188 
Less: net income attributable to noncontrolling interests
39 
33 
77 
66 
Net income available to Genworth Financial, Inc.'s common stockholders
141 
76 
244 
122 
Income from continuing operations available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
 
Basic
$ 0.27 
$ 0.10 
$ 0.52 
$ 0.17 
Diluted
$ 0.27 
$ 0.10 
$ 0.52 
$ 0.17 
Net income available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
 
Basic
$ 0.29 
$ 0.16 
$ 0.49 
$ 0.25 
Diluted
$ 0.28 
$ 0.16 
$ 0.49 
$ 0.25 
Weighted-average common shares outstanding:
 
 
 
 
Basic
493.4 
491.5 
492.9 
491.4 
Diluted
497.5 
493.9 
497.2 
494.8 
Supplemental disclosures:
 
 
 
 
Total other-than-temporary impairments
(2)
(42)
(14)
(58)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
(3)
(3)
Net other-than-temporary impairments
(5)
(39)
(17)
(56)
Other investments gains (losses)
26 
(23)
60 
Net investment gains (losses)
$ 21 
$ (33)
$ (40)
$ 4 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Net income
$ 180 
$ 109 
$ 321 
$ 188 
Other comprehensive income (loss), net of taxes:
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(1,216)
697 
(1,433)
512 
Net unrealized gains (losses) on other-than-temporarily impaired securities
26 
(5)
52 
16 
Derivatives qualifying as hedges
(218)1
407 1
(328)1
78 1
Foreign currency translation and other adjustments
(353)
(119)
(457)
(3)
Total other comprehensive income (loss)
(1,761)
980 
(2,166)
603 
Total comprehensive income (loss)
(1,581)
1,089 
(1,845)
791 
Less: comprehensive income attributable to noncontrolling interests
(40)
16 
(29)
63 
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
$ (1,541)
$ 1,073 
$ (1,816)
$ 728 
Condensed Consolidated Statement 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, 2011
$ 16,132 
$ 1 
$ 12,136 
$ 4,047 
$ 1,538 
$ (2,700)
$ 15,022 
$ 1,110 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
188 
122 
122 
66 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
512 
515 
515 
(3)
Net unrealized gains (losses) on other-than-temporarily impaired securities
16 
16 
16 
Derivatives qualifying as hedges
78 1
78 
78 
Foreign currency translation and other adjustments
(3)
(3)
(3)
Total comprehensive income (loss)
791 
 
 
 
 
 
728 
63 
Dividends to noncontrolling interests
(24)
(24)
Stock-based compensation expense and exercises and other
20 
20 
20 
Balances at Jun. 30, 2012
16,919 
12,156 
4,653 
1,660 
(2,700)
15,770 
1,149 
Balances at Dec. 31, 2012
17,781 
12,127 
5,202 
1,863 
(2,700)
16,493 
1,288 
Repurchase of subsidiary shares
(21)
(21)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
321 
244 
244 
77 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(1,433)
(1,396)
(1,396)
(37)
Net unrealized gains (losses) on other-than-temporarily impaired securities
52 
52 
52 
Derivatives qualifying as hedges
(328)1
(328)
(328)
Foreign currency translation and other adjustments
(457)
(388)
(388)
(69)
Total comprehensive income (loss)
(1,845)
 
 
 
 
 
(1,816)
(29)
Dividends to noncontrolling interests
(26)
(26)
Stock-based compensation expense and exercises and other
13 
12 
12 
Balances at Jun. 30, 2013
$ 15,902 
$ 1 
$ 12,139 
$ 3,142 
$ 2,107 
$ (2,700)
$ 14,689 
$ 1,213 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Cash flows from operating activities:
 
 
Net income
$ 321 
$ 188 
Less (income) loss from discontinued operations, net of taxes
14 
(39)
Adjustments to reconcile net income to net cash from operating activities:
 
 
Amortization of fixed maturity discounts and premiums and limited partnerships
(40)
(49)
Net investment losses (gains)
40 
(4)
Charges assessed to policyholders
(404)
(388)
Acquisition costs deferred
(212)
(309)
Amortization of deferred acquisition costs and intangibles
259 
418 
Deferred income taxes
(213)
47 
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments
35 
93 
Stock-based compensation expense
17 
13 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
21 
Insurance reserves
1,183 
1,001 
Current tax liabilities
260 
(197)
Other liabilities and other policy-related balances
(638)
(605)
Cash from operating activities-discontinued operations
42 
Net cash from operating activities
646 
220 
Cash flows from investing activities:
 
 
Fixed maturity securities
2,820 
2,366 
Commercial mortgage loans
474 
391 
Restricted commercial mortgage loans related to securitization entities
31 
25 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
2,245 
2,538 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(4,558)
(5,586)
Commercial mortgage loans
(431)
(184)
Other invested assets, net
113 
378 
Policy loans, net
(1)
(70)
Proceeds from sale of a subsidiary, net of cash transferred
25 
77 
Cash from investing activities-discontinued operations
(41)
Net cash from investing activities
718 
(106)
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
920 
1,351 
Withdrawals from universal life and investment contracts
(2,059)
(1,506)
Redemption and repurchase of non-recourse funding obligations
(12)
(567)
Proceeds from the issuance of long-term debt
361 
Repayment and repurchase of long-term debt
(15)
(222)
Repayment of borrowings related to securitization entities
(32)
(29)
Repurchase of subsidiary shares
(21)
Dividends paid to noncontrolling interests
(26)
(24)
Other, net
(17)
(63)
Cash from financing activities-discontinued operations
(26)
Net cash from financing activities
(1,262)
(725)
Effect of exchange rate changes on cash and cash equivalents
(118)
(3)
Net change in cash and cash equivalents
(16)
(614)
Cash and cash equivalents at beginning of period
3,653 
4,488 
Cash and cash equivalents at end of period
3,637 
3,874 
Less cash and cash equivalents of discontinued operations at end of period
24 
20 
Cash and cash equivalents of continuing operations at end of period
$ 3,613 
$ 3,854 
Formation of Genworth and Basis of Presentation
Formation of Genworth and Basis of Presentation

(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware on October 23, 2003. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, wholly-owned subsidiary of a new public holding company 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. upon the completion of the reorganization.

To implement the reorganization, Genworth Holdings formed New Genworth and New Genworth, 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, wholly-owned subsidiary of New Genworth 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 New Genworth 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, New Genworth had the same authorized, outstanding and treasury capital stock as Genworth Holdings immediately prior to the Merger. Each share of New Genworth common stock outstanding immediately prior to the Merger was cancelled.

Pursuant to Section 251(g) of the DGCL, the Merger did not require a vote of the stockholders of Genworth Holdings. Effective upon the consummation of the Merger, New Genworth 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). New Genworth’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, New Genworth 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 New Genworth (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.

The accompanying condensed financial statements include on a consolidated basis the accounts of: (a) for the periods prior to April 1, 2013, Genworth Holdings and the affiliated companies in which it held a majority equity interest or where it was the primary beneficiary of a variable interest entity and (b) for the periods from and after April 1, 2013, New Genworth and the affiliated companies in which it held a majority voting interest or where it was the primary beneficiary of a variable interest entity. All intercompany accounts and transactions have been eliminated in consolidation.

References to “Genworth,” the “Company,” “we” or “our” in the accompanying condensed 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: New Genworth and its subsidiaries

We have the following operating segments:

 

   

U.S. Life Insurance. We offer and manage a variety of insurance and fixed annuity products. Our primary insurance products include life 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 holding company 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.

On March 27, 2013, we announced that we had agreed to sell our wealth management business to AqGen Liberty Acquisition, Inc., a subsidiary of AqGen Liberty Holdings LLC, a partnership of Aquiline Capital Partners and Genstar Capital, for approximately $412 million. Historically, this business has been reported as a separate segment. As a result of the sale agreement, the financial statements and other disclosures herein have been revised to reclassify this business as discontinued operations and report its financial position, results of operations and cash flows separately for all periods presented. The sale is expected to close in the third quarter of 2013, subject to customary closing conditions, including requisite regulatory approvals. Also included in discontinued operations was our tax and advisor unit, Genworth Financial Investment Services, which was part of our wealth management business until the closing of its sale on April 2, 2012. See note 10 for additional information related to discontinued operations.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our Current Report on Form 8-K filed on May 30, 2013, which reflected the reclassification of our wealth management business as discontinued operations, adjustments to correct an error related to premium refund accrual in our U.S. mortgage insurance business, the addition of a footnote in the notes to the consolidated financial statements that provides required supplemental guarantor financial information related to certain guarantees we gave in connection with the reorganization in which we became the parent company to Genworth Holdings and the addition of certain disclosures about offsetting assets and liabilities required by newly adopted accounting guidance. Certain prior year amounts have been reclassified to conform to the current year presentation.

Accounting Changes
Accounting Changes

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

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.

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.

Accounting Pronouncements Not Yet Adopted

In July 2013, the Financial Accounting Standards Board (the “FASB”) issued 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. These new requirements are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The new guidance will not have a material impact on our consolidated financial statements upon adoption but may impact our selection of benchmark interest rates for hedging relationships in the future.

 

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:

 

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

(Amounts in millions, except per share amounts)

      2013             2012             2013             2012      

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

    493.4        491.5        492.9        491.4   

Potentially dilutive securities:

       

Stock options, restricted stock units and stock appreciation rights

    4.1        2.4        4.3        3.4   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    497.5        493.9        497.2        494.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations:

       

Income from continuing operations

  $ 174      $ 82      $ 335      $ 149   

Less: income from continuing operations attributable to noncontrolling interests

    39        33        77        66   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 135      $ 49      $ 258      $ 83   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

  $ 0.27      $ 0.10      $ 0.52      $ 0.17   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

  $ 0.27      $ 0.10      $ 0.52      $ 0.17   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations:

       

Income (loss) from discontinued operations, net of taxes

  $ 6      $ 27      $ (14   $ 39   

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

  $ 6      $ 27      $ (14   $ 39   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

  $ 0.01      $ 0.05      $ (0.03   $ 0.08   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

  $ 0.01      $ 0.05      $ (0.03   $ 0.08   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income:

       

Income from continuing operations

  $ 174      $ 82      $ 335      $ 149   

Income (loss) from discontinued operations, net of taxes

    6        27        (14     39   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    180        109        321        188   

Less: net income attributable to noncontrolling interests

    39        33        77        66   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 141      $ 76      $ 244      $ 122   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

  $ 0.29      $ 0.16      $ 0.49      $ 0.25   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

  $ 0.28      $ 0.16      $ 0.49      $ 0.25   
 

 

 

   

 

 

   

 

 

   

 

 

 
Investments
Investments

(4) Investments

(a) Net Investment Income

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

 

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

(Amounts in millions)

       2013             2012             2013             2012      

Fixed maturity securities—taxable

   $ 672      $ 669      $ 1,328      $ 1,329   

Fixed maturity securities—non-taxable

     2        3        4        7   

Commercial mortgage loans

     81        85        163        169   

Restricted commercial mortgage loans related to securitization entities

     7        7        14        16   

Equity securities

     6        6        10        10   

Other invested assets

     39        56        87        109   

Policy loans

     32        31        64        62   

Cash, cash equivalents and short-term investments

     5        10        12        20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     844        867        1,682        1,722   

Expenses and fees

     (23     (21     (47     (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 821      $ 846      $ 1,635      $ 1,678   
  

 

 

   

 

 

   

 

 

   

 

 

 

(b) Net Investment Gains (Losses)

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

 

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

(Amounts in millions)

       2013             2012             2013             2012      

Available-for-sale securities:

        

Realized gains

   $ 78      $ 21      $ 118      $ 84   

Realized losses

     (47     (19     (113     (65
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     31        2        5        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (2     (42     (14     (58

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

     (3     3        (3     2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (5     (39     (17     (56
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     (19     32        (9     7   

Commercial mortgage loans

     2        3        4        5   

Net gains (losses) related to securitization entities

     15        (4     22        30   

Derivative instruments (1)

     (2     (28     (44     (2

Contingent consideration adjustment

     (1     1        —         1   

Other

     —         —         (1     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ 21      $ (33   $ (40   $ 4   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended June 30, 2013 and 2012 was $308 million and $326 million, respectively, which was approximately 87% and 95%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2013 and 2012 was $885 million and $683 million, respectively, which was approximately 89% 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 other comprehensive income (loss) (“OCI”) as of and for the periods indicated:

 

     As of or for the
three months ended
June 30,
    As of or for the
six months ended
June 30,
 

(Amounts in millions)

     2013         2012         2013         2012    

Beginning balance

   $ 251      $ 610      $ 387      $ 646   

Additions:

        

Other-than-temporary impairments not previously recognized

     —         6        2        8   

Increases related to other-than-temporary impairments previously recognized

     3        19        7        32   

Reductions:

        

Securities sold, paid down or disposed

     (75     (47     (217     (98
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 179      $ 588      $ 179      $ 588   
  

 

 

   

 

 

   

 

 

   

 

 

 

(c) Unrealized Investment Gains and Losses

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

 

(Amounts in millions)

   June 30, 2013     December 31, 2012  

Net unrealized gains (losses) on investment securities:

    

Fixed maturity securities

   $ 3,173      $ 6,086   

Equity securities

     19        34   

Other invested assets

     (5     (8
  

 

 

   

 

 

 

Subtotal

     3,187        6,112   

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

     (1,111     (1,925

Income taxes, net

     (727     (1,457
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     1,349        2,730   

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

     55        92   
  

 

 

   

 

 

 

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

   $ 1,294      $ 2,638   
  

 

 

   

 

 

 

 

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

 

     As of or for the
three months ended
June 30,
 

(Amounts in millions)

   2013     2012  

Beginning balance

   $ 2,443      $ 1,327   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     (2,510     1,329   

Adjustment to deferred acquisition costs

     202        (52

Adjustment to present value of future profits

     70        (33

Adjustment to sales inducements

     41        (4

Adjustment to benefit reserves

     396        (214

Provision for income taxes

     628        (358
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (1,173     668   

Reclassification adjustments to net investment (gains) losses, net of taxes of $9 and $(13)

     (17     24   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (1,190     692   

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

     (41     3   
  

 

 

   

 

 

 

Ending balance

   $ 1,294      $ 2,016   
  

 

 

   

 

 

 

 

     As of or for the
six months ended
June 30,
 

(Amounts in millions)

   2013     2012  

Beginning balance

   $ 2,638      $ 1,485   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     (2,937     1,117   

Adjustment to deferred acquisition costs

     218        (99

Adjustment to present value of future profits

     71        (22

Adjustment to sales inducements

     38        (14

Adjustment to benefit reserves

     487        (213

Provision for income taxes

     734        (265
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (1,389     504   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(4) and $(13)

     8        24   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (1,381     528   

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

     (37     (3
  

 

 

   

 

 

 

Ending balance

   $ 1,294      $ 2,016   
  

 

 

   

 

 

 

 

(d) Fixed Maturity and Equity Securities

As of June 30, 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

  $ 4,605      $ 578      $ —       $ (135   $ —       $ 5,048   

Tax-exempt

    278        8        —         (24     —         262   

Government—non-U.S.

    2,130        129        —         (12     —         2,247   

U.S. corporate

    23,032        2,004        20        (314     —         24,742   

Corporate—non-U.S.

    14,004        772        —         (158     —         14,618   

Residential mortgage-backed

    5,312        366        11        (73     (26     5,590   

Commercial mortgage-backed

    2,792        94        2        (67     (7     2,814   

Other asset-backed

    2,706        38        —         (55     (2     2,687   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    54,859        3,989        33        (838     (35     58,008   

Equity securities

    392        29        —         (10     —         411   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 55,251      $ 4,018      $ 33      $ (848   $ (35   $ 58,419   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30, 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 (2)
    Number of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

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

  $ 848      $ (135     44      $ —       $ —         —       $ 848      $ (135     44   

Tax-exempt

    23        (1     12        110        (23     10        133        (24     22   

Government—non-U.S.

    560        (12     56        —         —         —         560        (12     56   

U.S. corporate

    4,466        (253     642        408        (61     38        4,874        (314     680   

Corporate—non-U.S.

    2,868        (133     375        196        (25     19        3,064        (158     394   

Residential mortgage-backed

    609        (28     103        252        (71     158        861        (99     261   

Commercial mortgage-backed

    641        (40     80        404        (34     72        1,045        (74     152   

Other asset-backed

    604        (11     95        123        (46     14        727        (57     109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    10,619        (613     1,407        1,493        (260     311        12,112        (873     1,718   

Equity securities

    133        (10     69        —         —         —         133        (10     69   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 10,752      $ (623     1,476      $ 1,493      $ (260     311      $ 12,245      $ (883     1,787   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 10,526      $ (581     1,396      $ 1,277      $ (127     210      $ 11,803      $ (708     1,606   

20%-50% Below cost

    93        (32     11        192        (88     58        285        (120     69   

>50% Below cost

    —         —         —         24        (45     43        24        (45     43   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    10,619        (613     1,407        1,493        (260     311        12,112        (873     1,718   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    131        (9     65        —         —         —         131        (9     65   

20%-50% Below cost

    2        (1     4        —         —         —         2        (1     4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    133        (10     69        —         —         —         133        (10     69   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 10,752      $ (623     1,476      $ 1,493      $ (260     311      $ 12,245      $ (883     1,787   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 10,173      $ (587     1,315      $ 925      $ (149     148      $ 11,098      $ (736     1,463   

Below investment grade (3)

    579        (36     161        568        (111     163        1,147        (147     324   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 10,752      $ (623     1,476      $ 1,493      $ (260     311      $ 12,245      $ (883     1,787   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts included $32 million of unrealized losses on other-than-temporarily impaired securities.

(2) 

Amounts included $35 million of unrealized losses on other-than-temporarily impaired securities.

(3) 

Amounts that have been in a continuous loss position for 12 months or more included $32 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 June 30, 2013.

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

Of the $127 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 63% of the unrealized losses were related to investment grade securities as of June 30, 2013. These unrealized losses were attributable to the lower credit ratings for these securities since acquisition, primarily associated with corporate and structured securities in the finance and insurance sector. The average fair value percentage below cost for these securities was approximately 9% as of June 30, 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 June 30, 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:

               

Tax-exempt

  $ 32      $ (9     1     3      $ —       $ —         —       —    

U.S. corporate

    8        (2     —         1        —         —         —         —    

Corporate—non-U.S.

    31        (12     1        7        —         —         —         —    

Structured securities:

               

Residential mortgage-backed

    7        (4     —         5        7        (8     1        8   

Commercial mortgage-backed

    3        (1     —         2        —         (1     —         1   

Other asset-backed

    58        (32     4        4        —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    68        (37     4        11        7        (9     1        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 139      $ (60     6     22      $ 7      $ (9     1     9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(Dollar amounts in millions)

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

Fixed maturity securities:

               

U.S. corporate

  $ 2      $ (1     —       3      $ —       $ —         —       —    

Structured securities:

               

Residential mortgage-backed

    35        (18     2        25        8        (25     3        30   

Commercial mortgage-backed

    16        (9     1        8        2        (2     —         2   

Other asset-backed

    —         —         —         —         7        (9     1        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    51        (27     3        33        17        (36     4        34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 53      $ (28     3     36      $ 17      $ (36     4     34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

Corporate Debt Securities

The following tables present the concentration of gross unrealized losses and fair values related to corporate debt fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by industry as of June 30, 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       $ (14     1     8       $ —        $ —          —       —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 39       $ (14     1     8       $ —        $ —          —       —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     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
 

Industry:

                    

Consumer-cyclical

   $ 2       $ (1     —       3       $ —        $ —          —       —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2       $ (1     —       3       $ —        $ —          —       —    
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

Of the total unrealized losses of $15 million for corporate fixed maturity securities presented in the preceding tables, $14 million, or 93%, of the unrealized losses related to issuers in the finance and insurance sector that were 26% 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 June 30, 2013. The $14 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 $109 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, $24 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 June 30, 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

                 

Fixed maturity 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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 2,761      $ (43     356      $ 1,616      $ (209     235      $ 4,377      $ (252     591   

Below investment grade (3)

    190        (11     69        1,045        (338     323        1,235        (349     392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts included $123 million of unrealized losses on other-than-temporarily impaired securities.

(2) 

Amounts included $124 million of unrealized losses on other-than-temporarily impaired securities.

(3) 

Amounts that have been in a continuous loss position for 12 months or more included $119 million of unrealized losses on other-than-temporarily impaired securities.

 

The scheduled maturity distribution of fixed maturity securities as of June 30, 2013 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Amounts in millions)

   Amortized
cost or
cost
     Fair
value
 

Due one year or less

   $ 2,643       $ 2,670   

Due after one year through five years

     9,815         10,313   

Due after five years through ten years

     11,369         11,880   

Due after ten years

     20,222         22,054   
  

 

 

    

 

 

 

Subtotal

     44,049         46,917   

Residential mortgage-backed

     5,312         5,590   

Commercial mortgage-backed

     2,792         2,814   

Other asset-backed

     2,706         2,687   
  

 

 

    

 

 

 

Total

   $ 54,859       $ 58,008   
  

 

 

    

 

 

 

As of June 30, 2013, $5,237 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of June 30, 2013, securities issued by utilities and energy, finance and insurance, and consumer—non-cyclical industry groups represented approximately 24%, 19% and 12%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States and internationally, and is not dependent on the economic stability of one particular region.

As of June 30, 2013, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

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

 

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

 

     June 30, 2013     December 31, 2012  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property type:

        

Retail

   $ 2,000        34   $ 1,895        32

Office

     1,585        27        1,580        27   

Industrial

     1,565        27        1,603        27   

Apartments

     490        8        552        9   

Mixed use/other

     228        4        282        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     5,868        100     5,912        100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     1          2     

Allowance for losses

     (38       (42  
  

 

 

     

 

 

   

Total

   $ 5,831        $ 5,872     
  

 

 

     

 

 

   

 

     June 30, 2013     December 31, 2012  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Geographic region:

        

Pacific

   $ 1,621        28   $ 1,553        26

South Atlantic

     1,515        26        1,587        27   

Middle Atlantic

     780        13        739        13   

Mountain

     466        8        463        8   

East North Central

     389        7        468        8   

West North Central

     368        6        353        6   

New England

     340        6        343        6   

West South Central

     247        4        265        4   

East South Central

     142        2        141        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     5,868        100     5,912        100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     1          2     

Allowance for losses

     (38       (42  
  

 

 

     

 

 

   

Total

   $ 5,831        $ 5,872     
  

 

 

     

 

 

   

 

The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:

 

     June 30, 2013  

(Amounts in millions)

   31 - 60  days
past due
    61 - 90 days
past due
    Greater than
90 days past

due
    Total
past due
    Current     Total  

Property type:

            

Retail

   $ 5      $ —        $ 10      $ 15      $ 1,985      $ 2,000   

Office

     —          3        7        10        1,575        1,585   

Industrial

     —          —          2        2        1,563        1,565   

Apartments

     7        —          —          7        483        490   

Mixed use/other

     —          —          —          —          228        228   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 12      $ 3      $ 19      $ 34      $ 5,834      $ 5,868   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       1     1     99     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2012  

(Amounts in millions)

   31 - 60  days
past due
    61 - 90 days
past due
    Greater than
90 days past

due
    Total
past due
    Current     Total  

Property type:

            

Retail

   $ —        $ 3      $ —        $ 3      $ 1,892      $ 1,895   

Office

     2        —          —          2        1,578        1,580   

Industrial

     —          —          —          —          1,603        1,603   

Apartments

     —          —          4        4        548        552   

Mixed use/other

     66        —          —          66        216        282   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 68      $ 3      $ 4      $ 75      $ 5,837      $ 5,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     1     —       —       1     99     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2013 and December 31, 2012, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of June 30, 2013 and December 31, 2012.

As of and for the six months ended June 30, 2013 and the year ended December 31, 2012, we modified or extended 19 and 38 commercial mortgage loans, respectively, with a total carrying value of $106 million and $279 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.

 

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans as of or for the periods indicated:

 

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

(Amounts in millions)

   2013     2012     2013     2012  

Allowance for credit losses:

        

Beginning balance

   $ 40      $ 49      $ 42      $ 51   

Charge-offs

     (2     —          (2     (1

Recoveries

     —          —          —          —     

Provision

     —          (3     (2     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 38      $ 46      $ 38      $ 46   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance for individually impaired loans

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance for loans not individually impaired that were evaluated collectively for impairment

   $ 38      $ 46      $ 38      $ 46   
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment:

        

Ending balance

   $ 5,868      $ 5,918      $ 5,868      $ 5,918   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of individually impaired loans

   $ 1      $ —        $ 1      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of loans not individually impaired that were evaluated collectively for impairment

   $ 5,867      $ 5,918      $ 5,867      $ 5,918   
  

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2013, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $1 million, an unpaid principal balance of $3 million, charge-offs of $2 million and an average recorded investment of $1 million. As of December 31, 2012, we had no individually impaired commercial mortgage loans.

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

 

The following tables set forth the loan-to-value of commercial mortgage loans by property type as of the dates indicated:

 

     June 30, 2013  

(Amounts in millions)

   0% - 50%     51% - 60%     61% - 75%     76% - 100%     Greater
than 100% 
(1)
    Total  

Property type:

            

Retail

   $ 565      $ 361      $ 938      $ 110      $ 26      $ 2,000   

Office

     374        217        733        197        64        1,585   

Industrial

     451        215        723        154        22        1,565   

Apartments

     199        93        169        28        1        490   

Mixed use/other

     79        49        88        —          12        228   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 1,668      $ 935      $ 2,651      $ 489      $ 125      $ 5,868   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     29     16     45     8     2     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.38        1.75        1.72        1.11        0.63        1.84   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Included $1 million of impaired loans, $11 million of loans past due and not individually impaired and $113 million of loans in good standing where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 117%.

 

     December 31, 2012  

(Amounts in millions)

   0% - 50%     51% - 60%     61% - 75%     76% - 100%     Greater
than 100% 
(1)