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(1) Formation of Genworth and Basis of Presentation
Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware on October 23, 2003. The accompanying condensed financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting or economic interest, which we refer to as the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.
We have the following three operating segments:
| • |
Retirement and Protection. We offer a variety of protection, wealth management, retirement income and institutional products. Our primary protection products include: life, long-term care and Medicare supplement insurance. Additionally, we offer wellness and care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs, financial planning services and mutual funds, fixed and variable deferred and immediate individual annuities and group variable annuities offered through retirement plans. Most of our variable annuities include a guaranteed minimum death benefit (“GMDB”). Some of our group and individual variable annuity products include guaranteed minimum benefit features such as guaranteed minimum withdrawal benefits (“GMWB”) and certain types of guaranteed annuitization benefits. Institutional products include: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). |
| • |
International. We are a leading provider of mortgage insurance products in Canada, Australia, New Zealand, Mexico and multiple European countries. Our products predominately insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk. We also offer payment protection coverages in multiple European countries, Canada and Mexico. Our lifestyle protection insurance products help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death. |
| • |
U.S. Mortgage Insurance. In the U.S., we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively provide mortgage insurance on a structured, or bulk, basis with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk. |
We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of non-core businesses that are managed outside of our operating segments.
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. These condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2008 Annual Report on Form 10-K. Any material subsequent events have been considered for disclosure through the filing date of this Quarterly Report on Form 10-Q.
(2) Accounting Pronouncements
Recently Adopted
Subsequent Events
On June 30, 2009, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events. This statement establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The adoption of SFAS No. 165 did not have a material impact on our consolidated financial statements.
Recognition and Presentation of Other-Than-Temporary Impairments
On April 1, 2009, we adopted FASB Staff Position (“FSP”) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP amends the other-than-temporary impairment guidance for debt securities and modifies the presentation and disclosure requirements for other-than-temporary impairment disclosures for debt and equity securities. The FSP amends the requirement for management to positively assert the ability and intent to hold a debt security to recovery to determine whether an other-than-temporary impairment exists and replaces this provision with the assertion that we do not intend to sell or it is not more likely than not that we will be required to sell a security prior to recovery. Additionally, the FSP modifies the presentation of other-than-temporary impairments for certain debt securities to only present the impairment loss in net income (loss) that represents the credit loss associated with the other-than-temporary impairment with the remaining impairment loss being presented in other comprehensive income (loss) (“OCI”). As of April 1, 2009, we recorded a net cumulative effect adjustment of $355 million to retained earnings with an offset to accumulated other comprehensive income (loss) of $349 million. The following summarizes the components for the cumulative effect adjustment:
|
(Amounts in millions) |
Accumulated other comprehensive income (loss) |
Retained earnings | Total stockholders’ equity |
|||||||||
|
Investment securities |
$ | (588 | ) | $ | 588 | $ | — | |||||
|
Adjustment to deferred acquisition costs |
33 | (26 | ) | 7 | ||||||||
|
Adjustment to present value of future profits |
9 | (7 | ) | 2 | ||||||||
|
Adjustment to sales inducements |
5 | (5 | ) | — | ||||||||
|
Adjustment to certain benefit reserves |
— | 1 | 1 | |||||||||
|
Provision for income taxes |
192 | (196 | ) | (4 | ) | |||||||
|
Net cumulative effect adjustment |
$ | (349 | ) | $ | 355 | $ | 6 | |||||
Interim Disclosures About Fair Value of Financial Instruments
On April 1, 2009, we adopted the FSP FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value of Financial Instruments. This FSP amends the fair value disclosure requirements for certain financial instruments to require disclosures during interim reporting periods of publicly traded entities in addition to requiring them in annual financial statements. The adoption of FSP FAS 107-1 and APB 28-1 did not have a material impact on our consolidated financial statements.
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly
On April 1, 2009, we adopted FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for determining fair value when the volume or level of activity for an asset or liability has significantly decreased and identifies circumstances that indicate a transaction is not orderly. The adoption of FSP FAS 157-4 did not have a material impact on our consolidated financial statements.
Effective Date of FASB Statement No. 157
On January 1, 2009, we adopted FSP FAS 157-2, Effective Date of FASB Statement No. 157, which adopts SFAS No. 157, Fair Value Measurements, for fair value measurements of certain nonfinancial assets and liabilities, such as impairment testing of goodwill and indefinite-lived intangible assets. The adoption of FSP FAS 157-2 did not have a material impact on our consolidated financial statements.
Disclosures about Derivative Instruments and Hedging Activities
On January 1, 2009, we adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This statement requires enhanced disclosures about an entity’s derivative and hedging activities. The adoption of SFAS No. 161 did not have a material impact on our consolidated financial statements.
Business Combinations
On January 1, 2009, we adopted SFAS No. 141R, Business Combinations. This statement establishes principles and requirements for how an acquirer recognizes and measures certain items in a business combination, as well as disclosures about the nature and financial effects of a business combination. The adoption of SFAS No. 141R did not have a material impact on our consolidated financial statements.
Noncontrolling Interest in Consolidated Financial Statements
On January 1, 2009, we adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This statement establishes accounting and reporting standards for noncontrolling interests in a subsidiary and for deconsolidation of a subsidiary. The adoption of SFAS No. 160 did not have a material impact on our consolidated financial statements.
Not Yet Adopted
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140. The statement amends the current guidance on transfers of financial assets by eliminating the qualifying special-purpose entity concept, providing certain conditions that must be met to qualify for sale accounting, changing the amount of gain or loss recognized on certain transfers and requiring additional disclosures. This statement will be effective for us on January 1, 2010. We have not yet determined the impact the adoption of SFAS No. 166 will have on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This statement provides guidance for determining which enterprise, if any, has a controlling financial interest in a variable interest entity and requires additional disclosures about involvement in variable interest entities. This statement will be effective for us on January 1, 2010. We have not yet determined the impact the adoption of SFAS No. 167 will have on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. This standard establishes two levels of U.S. GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental U.S. GAAP, except for rules and interpretive releases of the SEC, which are also sources of authoritative U.S. GAAP for SEC registrants. All other accounting literature will become nonauthoritative. This statement will be effective for us on July 1, 2009. The adoption will not have any impact on our consolidated financial statements.
(3) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are calculated by dividing net income (loss) 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) |
2009 (1) | 2008 (2) | 2009 (1) | 2008 (2) | |||||||||||
|
Basic earnings (loss) per common share |
$ | (0.11 | ) | $ | (0.25 | ) | $ | (1.20 | ) | $ | 0.02 | ||||
|
Diluted earnings (loss) per common share |
$ | (0.11 | ) | $ | (0.25 | ) | $ | (1.20 | ) | $ | 0.02 | ||||
|
Weighted-average shares used in basic earnings (loss) per common share calculations |
433.2 | 432.9 | 433.2 | 433.3 | |||||||||||
|
Potentially dilutive securities: |
|||||||||||||||
|
Stock options, restricted stock units and stock appreciation rights |
— | — | — | 1.5 | |||||||||||
|
Weighted-average shares used in diluted earnings (loss) per common share calculations |
433.2 | 432.9 | 433.2 | 434.8 | |||||||||||
| (1) |
Under SFAS No. 128, Earnings per Share, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss for the three and six months ended June 30, 2009, the inclusion of 1.2 million and 0.6 million, respectively, of shares for stock options, restricted stock units and stock appreciation rights would have been antidilutive to the calculation. If we had not incurred a net loss for the three and six months ended June 30, 2009, dilutive potential common shares would have been 434.4 million and 433.8 million, respectively. |
| (2) |
Under SFAS No. 128, we were required to use basic weighted-average common shares outstanding in the calculation of the 2008 diluted loss per share as a result of our net loss for the three months ended June 30, 2008. For the three and six months ended June 30, 2008, the inclusion of 2.9 million and 3.0 million, respectively, of shares for stock options, restricted stock units and stock appreciation rights would have been antidilutive to the calculation. If we had not incurred a net loss for the three months ended June 30, 2008, dilutive potential common shares would have been 435.8 million for the three months ended June 30, 2008 and 436.3 million for the six months ended June 30, 2008. |
(4) Investments
Other-Than-Temporary Impairments On Available-For-Sale Securities
As of each balance sheet date, we evaluate securities in an unrealized loss position for other-than-temporary impairments. For debt securities, we consider all available information relevant to the collectability of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected. More specifically for mortgage-backed and asset-backed securities, we also utilize performance indicators of the underlying assets including default or delinquency rates, loan to collateral value ratios, third-party credit enhancements, current levels of subordination, vintage and other relevant characteristics of the security or underlying assets to develop our estimate of cash flows. Estimating the cash flows expected to be collected is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Where possible, this data is benchmarked against third-party sources.
Prior to adoption of FSP FAS 115-2 and FAS 124-2 on April 1, 2009, we generally recognized an other-than-temporary impairment on debt securities in an unrealized loss position when we did not expect full recovery of value or did not have the intent and ability to hold such securities until they had fully recovered their amortized cost. The recognition of other-than-temporary impairments prior to April 1, 2009 represented the entire difference between the amortized cost and fair value with this difference being recorded in net income (loss) as an adjustment to the amortized cost of the security.
Beginning on April 1, 2009, we recognize other-than-temporary impairments on debt securities in an unrealized loss position when one of the following circumstances exists:
| • |
we do not expect full recovery of our amortized cost based on the estimate of cash flows expected to be collected, |
| • |
we intend to sell a security or |
| • |
it is more likely than not that we will be required to sell a security prior to recovery. |
Total other-than-temporary impairments are calculated as the difference between the amortized cost and fair value. 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 recorded 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 recorded as an adjustment to the amortized cost to determine the new amortized cost basis of the securities. 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 OCI and the net other-than-temporary impairments as supplemental disclosure presented on the face of our consolidated statements of income.
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 in OCI until the security is sold or an other-than-temporary impairment is recorded for the entire unrealized loss.
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 by 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 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.
Net Investment Income
Sources of net investment income for the periods indicated were as follows:
| Three
months ended June 30, |
Six
months ended June 30, |
|||||||||||||||
|
(Amounts in millions) |
2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Fixed maturity securities—taxable |
$ | 604 | $ | 715 | $ | 1,227 | $ | 1,479 | ||||||||
|
Fixed maturity securities—non-taxable |
28 | 26 | 58 | 51 | ||||||||||||
|
Commercial mortgage loans |
109 | 136 | 223 | 279 | ||||||||||||
|
Equity securities |
3 | 10 | 6 | 20 | ||||||||||||
|
Other invested assets |
(7 | ) | 12 | (106 | ) | 36 | ||||||||||
|
Policy loans |
52 | 40 | 96 | 79 | ||||||||||||
|
Cash, cash equivalents and short-term investments |
14 | 41 | 31 | 66 | ||||||||||||
|
Gross investment income before expenses and fees |
803 | 980 | 1,535 | 2,010 | ||||||||||||
|
Expenses and fees |
(22 | ) | (27 | ) | (43 | ) | (55 | ) | ||||||||
|
Net investment income |
$ | 781 | $ | 953 | $ | 1,492 | $ | 1,955 | ||||||||
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) |
2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Available-for-sale securities: |
||||||||||||||||
|
Realized gains on sale |
$ | 21 | $ | 49 | $ | 50 | $ | 63 | ||||||||
|
Realized losses on sale |
(48 | ) | (25 | ) | (111 | ) | (35 | ) | ||||||||
|
Impairments: |
||||||||||||||||
|
Total other-than-temporary impairments |
(476 | ) | (552 | ) | (1,073 | ) | (739 | ) | ||||||||
|
Portion of other-than-temporary impairments included in OCI |
324 | — | 324 | — | ||||||||||||
|
Net other-than-temporary impairments |
(152 | ) | (552 | ) | (749 | ) | (739 | ) | ||||||||
|
Trading securities |
11 | 2 | (1 | ) | (5 | ) | ||||||||||
|
Commercial mortgage loans |
(5 | ) | (2 | ) | (11 | ) | — | |||||||||
|
Derivative instruments |
114 | 8 | (7 | ) | (26 | ) | ||||||||||
|
Other |
6 | 2 | 6 | (2 | ) | |||||||||||
|
Net investment gains (losses) |
$ | (53 | ) | $ | (518 | ) | $ | (823 | ) | $ | (744 | ) | ||||
See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).
The aggregate fair value of securities sold at a loss during the three months ended June 30, 2009 and 2008 was $367 million and $680 million, respectively, which was approximately 89% and 96%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2009 and 2008 was $737 million and $1,071 million, respectively, which was approximately 87% and 97%, respectively, of book value.
The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in OCI as of the periods indicated:
|
(Amounts in millions) |
As of or for the three and six months ended June 30, 2009 |
|||
|
Cumulative credit loss beginning balance |
$ | — | ||
|
Adoption of FSP FAS 115-2 and FAS 124-2 |
1,204 | |||
|
Additions: |
||||
|
Other-than-temporary impairments not previously recognized |
56 | |||
|
Increases related to other-than-temporary impairments previously recognized |
95 | |||
|
Reductions: |
||||
|
Securities sold, paid down or disposed |
(270 | ) | ||
|
Cumulative credit loss ending balance |
$ | 1,085 | ||
Unrealized Investment Gains and Losses
Net unrealized gains and losses on investment securities classified as available-for-sale and other invested assets are reduced by deferred income taxes and adjustments to present value of future profits, deferred acquisition costs and sales inducements that would have resulted had such gains and losses been realized. Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) as of the dates indicated were as follows:
|
(Amounts in millions) |
June 30, 2009 | December 31, 2008 | ||||||
|
Net unrealized gains (losses) on investment securities: |
||||||||
|
Fixed maturity securities |
$ | (5,236 | ) | $ | (7,006 | ) | ||
|
Equity securities |
(18 | ) | (67 | ) | ||||
|
Other invested assets |
(39 | ) | (1 | ) | ||||
|
Subtotal |
(5,293 | ) | (7,074 | ) | ||||
|
Adjustments to present value of future profits, deferred acquisition costs and sales inducements |
608 | 815 | ||||||
|
Income taxes, net |
1,662 | 2,221 | ||||||
|
Net unrealized investment gains (losses) |
$ | (3,023 | ) | $ | (4,038 | ) | ||
The change in net unrealized gains (losses) on available-for-sale securities reported in accumulated other comprehensive income (loss) for the periods indicated was as follows:
|
(Amounts in millions) |
As of or for the three months ended June 30, 2009 |
As of or for the six months ended June 30, 2009 |
||||||
|
Beginning balance |
$ | (4,095 | ) | $ | (4,038 | ) | ||
|
Cumulative effect of change in accounting |
(349 | ) | (349 | ) | ||||
|
Activity during the period: |
||||||||
|
Unrealized gains (losses) on securities |
2,261 | 1,558 | ||||||
|
Adjustment to deferred acquisition costs |
(164 | ) | (184 | ) | ||||
|
Adjustment to present value of future profits |
(79 | ) | (70 | ) | ||||
|
Adjustment to sales inducements |
1 | — | ||||||
|
Provision for income taxes |
(714 | ) | (467 | ) | ||||
|
Change in unrealized gains (losses) |
1,305 | 837 | ||||||
|
Reclassification adjustments to net investment (gains) losses, net of taxes of $(63) and $(284) |
116 | 527 | ||||||
|
Ending balance |
$ | (3,023 | ) | $ | (3,023 | ) | ||
Fixed Maturity and Equity Securities
As of June 30, 2009, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
| Gross unrealized gains on securities | Gross unrealized losses on securities | |||||||||||||||||||
|
(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 entities |
$ | 1,239 | $ | 33 | $ | — | $ | (23 | ) | $ | — | $ | 1,249 | |||||||
|
Tax exempt |
2,479 | 80 | — | (153 | ) | — | 2,406 | |||||||||||||
|
Government—non-U.S. |
1,809 | 81 | — | (36 | ) | — | 1,854 | |||||||||||||
|
U.S. corporate |
21,341 | 292 | 6 | (1,936 | ) | (12 | ) | 19,691 | ||||||||||||
|
Corporate—non-U.S. |
11,465 | 189 | 7 | (784 | ) | (3 | ) | 10,874 | ||||||||||||
|
Residential mortgage-backed |
3,753 | 50 | 9 | (777 | ) | (391 | ) | 2,644 | ||||||||||||
|
Commercial mortgage-backed |
5,111 | 34 | 2 | (1,443 | ) | (72 | ) | 3,632 | ||||||||||||
|
Other asset-backed |
2,361 | 8 | — | (391 | ) | (6 | ) | 1,972 | ||||||||||||
|
Total fixed maturity securities |
49,558 | 767 | 24 | (5,543 | ) | (484 | ) | 44,322 | ||||||||||||
|
Equity securities |
270 | 15 | — | (33 | ) | — | 252 | |||||||||||||
|
Total available-for-sale securities |
$ | 49,828 | $ | 782 | $ | 24 | $ | (5,576 | ) | $ | (484 | ) | $ | 44,574 | ||||||
As of December 31, 2008, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
|
(Amounts in millions) |
Amortized cost or cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
|||||||||
|
Fixed maturity securities: |
|||||||||||||
|
U.S. government, agencies and government sponsored entities |
$ | 764 | $ | 141 | $ | — | $ | 905 | |||||
|
Tax exempt |
2,529 | 70 | (228 | ) | 2,371 | ||||||||
|
Government—non-U.S. |
1,724 | 103 | (67 | ) | 1,760 | ||||||||
|
U.S. corporate |
21,789 | 253 | (2,968 | ) | 19,074 | ||||||||
|
Corporate—non-U.S. |
11,439 | 118 | (1,581 | ) | 9,976 | ||||||||
|
Residential mortgage-backed |
3,721 | 69 | (853 | ) | 2,937 | ||||||||
|
Commercial mortgage-backed |
5,198 | 56 | (1,496 | ) | 3,758 | ||||||||
|
Other asset-backed |
2,713 | 41 | (664 | ) | 2,090 | ||||||||
|
Total fixed maturity securities |
49,877 | 851 | (7,857 | ) | 42,871 | ||||||||
|
Equity securities |
301 | 4 | (71 | ) | 234 | ||||||||
|
Total available-for-sale securities |
$ | 50,178 | $ | 855 | $ | (7,928 | ) | $ | 43,105 | ||||
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, 2009:
| Less than 12 months | 12 months or more | |||||||||||||||||
|
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
# of securities |
Fair value |
Gross unrealized losses |
# of securities |
||||||||||||
|
Description of Securities |
||||||||||||||||||
|
Fixed maturity securities: |
||||||||||||||||||
|
U.S. government, agencies and government sponsored entities |
$ | 594 | $ | (23 | ) | 34 | $ | — | $ | — | — | |||||||
|
Tax exempt |
363 | (17 | ) | 101 | 444 | (136 | ) | 150 | ||||||||||
|
Government—non-U.S. |
219 | (14 | ) | 63 | 128 | (22 | ) | 55 | ||||||||||
|
U.S. corporate |
2,787 | (204 | ) | 337 | 9,421 | (1,744 | ) | 876 | ||||||||||
|
Corporate—non-U.S. |
1,297 | (79 | ) | 214 | 4,307 | (708 | ) | 483 | ||||||||||
|
Residential mortgage-backed |
677 | (455 | ) | 296 | 1,019 | (713 | ) | 326 | ||||||||||
|
Commercial mortgage-backed |
400 | (96 | ) | 115 | 2,862 | (1,419 | ) | 462 | ||||||||||
|
Other asset-backed |
105 | (20 | ) | 22 | 1,707 | (377 | ) | 120 | ||||||||||
|
Subtotal, fixed maturity securities |
6,442 | (908 | ) | 1,182 | 19,888 | (5,119 | ) | 2,472 | ||||||||||
|
Equity securities |
38 | (17 | ) | 7 | 54 | (16 | ) | 11 | ||||||||||
|
Total for securities in an unrealized loss position |
$ | 6,480 | $ | (925 | ) | 1,189 | $ | 19,942 | $ | (5,135 | ) | 2,483 | ||||||
|
% Below cost—fixed maturity securities: |
||||||||||||||||||
|
<20% Below cost |
$ | 5,757 | $ | (245 | ) | 842 | $ | 14,263 | $ | (1,174 | ) | 1,487 | ||||||
|
20-50% Below cost |
517 | (244 | ) | 162 | 4,797 | (2,316 | ) | 613 | ||||||||||
|
>50% Below cost |
168 | (419 | ) | 178 | 828 | (1,629 | ) | 372 | ||||||||||
|
Total fixed maturity securities |
6,442 | (908 | ) | 1,182 | 19,888 | (5,119 | ) | 2,472 | ||||||||||
|
% Below cost—equity securities: |
||||||||||||||||||
|
<20% Below cost |
— | — | — | 18 | (2 | ) | 1 | |||||||||||
|
20-50% Below cost |
38 | (15 | ) | 6 | 36 | (14 | ) | 10 | ||||||||||
|
>50% Below cost |
— | (2 | ) | 1 | — | — | — | |||||||||||
|
Total equity securities |
38 | (17 | ) | 7 | 54 | (16 | ) | 11 | ||||||||||
|
Total for securities in an unrealized loss position |
$ | 6,480 | $ | (925 | ) | 1,189 | $ | 19,942 | $ | (5,135 | ) | 2,483 | ||||||
|
Investment grade |
$ | 5,742 | $ | (448 | ) | 830 | $ | 18,118 | $ | (4,244 | ) | 2,088 | ||||||
|
Below investment grade |
738 | (477 | ) | 359 | 1,824 | (891 | ) | 395 | ||||||||||
|
Total for securities in an unrealized loss position |
$ | 6,480 | $ | (925 | ) | 1,189 | $ | 19,942 | $ | (5,135 | ) | 2,483 | ||||||
The investment securities in an unrealized loss position as of June 30, 2009 consisted of 3,672 securities and accounted for unrealized losses of $6,060 million. Of these unrealized losses of $6,060 million, 77% were investment grade (rated AAA through BBB-) and 23% were less than 20% below cost. The securities less than 20% below cost were primarily attributable to widening credit spreads and a depressed market for certain structured mortgage securities. Included in these unrealized losses as of June 30, 2009 was $484 million of unrealized losses on other-than-temporarily impaired securities. Of the total unrealized losses on other-than-temporarily impaired securities, $66 million have been in an unrealized loss position for more than 12 months.
Securities that were greater than 20% below cost represented 77% of unrealized losses, of which approximately 37% were U.S. and non-U.S. corporate securities and approximately 59% were mortgage-backed and asset-backed securities. The following provides additional information regarding these securities that were more than 20% below cost.
| • |
Of the U.S. and non-U.S. corporate securities, the majority were issued by banks and other financial institutions, most of which have been in an unrealized loss position for 12 months or more. Virtually all of these securities retain a credit rating of investment grade. A portion of the unrealized losses included securities where an other-than-temporary impairment was recorded in OCI. The remaining unrealized losses in our U.S. and non-U.S. corporate securities were evenly distributed across all other major industry types that comprise our corporate bond holdings. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these securities has declined due to widening credit spreads. 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. A subset of the securities issued by banks and other financial institutions represent investments in financial hybrid securities on which a debt impairment model was employed. All of these securities retain a credit rating of investment grade. The majority of these securities were issued by foreign financial institutions. The fair value of these securities has been impacted by widening credit spreads which reflect current financial industry events including uncertainty surrounding the level and type of government support of European financial institutions, potential capital restructuring of these institutions, the risk that income payments may be deferred and the risk that these institutions could be nationalized. Based on this evaluation, we determined that the unrealized losses on these securities represented temporary impairments as of June 30, 2009. |
| • |
Most of the unrealized losses related to mortgage-backed and asset-backed securities have been in an unrealized loss position for 12 months or more. Given the current market conditions and limited trading on these securities, the fair value of these securities has declined due to widening credit spreads and high premiums for illiquidity. We examined the performance of the underlying collateral and developed our estimate of cash flows expected to be collected. In doing so, we identified certain securities where the non-credit portion of other-than-temporary impairments was recorded in OCI. Based on this evaluation, we determined that the unrealized losses on our mortgage-backed and asset-backed securities represented temporary impairments as of June 30, 2009. |
Of the investment securities in an unrealized loss position for 12 months or more as of June 30, 2009, 995 securities were 20% or more below cost, of which 227 securities were also below investment grade (rated BB+ and below) and accounted for unrealized losses of $785 million. These securities were primarily structured securities or securities issued by corporations in the finance and insurance sector. Included in this amount are other-than-temporarily impaired securities where the non-credit loss of $18 million was recorded in OCI.
While certain securities included in the chart above were considered other-than-temporarily impaired, we expected to recover the new amortized cost based on our estimate of cash flows expected to be collected. As of June 30, 2009, we expect to recover our amortized cost on the securities included in the chart above and do not intend to sell or it is not more likely than not that we will be required to sell these securities prior to recovering our amortized cost.
Despite the considerable analysis and rigor employed on our structured securities, it is at least reasonably possible that the underlying collateral of these investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of asset-backed and mortgage-backed securities and potential future write-downs within our portfolio of asset-backed and mortgage-backed securities. We expect our investments in corporate securities will continue to perform in accordance with our conclusions about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities.
The preceding table includes unrealized losses of approximately $60 million on securities related to a financial services company for which market activity indicated that such securities may have become other-than-temporarily impaired subsequent to June 30, 2009. Due to these activities, in July 2009, we subsequently changed our intent and began reducing our exposure to these securities for which we will recognize losses in the third quarter of 2009.
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, 2008:
| Less than 12 months | 12 months or more | |||||||||||||||||
|
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
# of securities |
Fair value |
Gross unrealized losses |
# of securities |
||||||||||||
|
Description of Securities |
||||||||||||||||||
|
Fixed maturity securities: |
||||||||||||||||||
|
Tax exempt |
$ | 915 | $ | (78 | ) | 281 | $ | 262 | $ | (150 | ) | 100 | ||||||
|
Government—non-U.S. |
287 | (49 | ) | 120 | 34 | (18 | ) | 34 | ||||||||||
|
U.S. corporate |
7,583 | (956 | ) | 926 | 6,901 | (2,012 | ) | 683 | ||||||||||
|
Corporate—non-U.S. |
4,003 | (570 | ) | 648 | 3,004 | (1,011 | ) | 411 | ||||||||||
|
Residential mortgage-backed |
690 | (186 | ) | 155 | 1,005 | (667 | ) | 320 | ||||||||||
|
Commercial mortgage-backed |
847 | (183 | ) | 166 | 2,411 | (1,313 | ) | 403 | ||||||||||
|
Other asset-backed |
281 | (72 | ) | 50 | 1,703 | (592 | ) | 140 | ||||||||||
|
Subtotal, fixed maturity securities |
14,606 | (2,094 | ) | 2,346 | 15,320 | (5,763 | ) | 2,091 | ||||||||||
|
Equity securities |
62 | (45 | ) | 15 | 52 | (26 | ) | 6 | ||||||||||
|
Total for securities in an unrealized loss position |
$ | 14,668 | $ | (2,139 | ) | 2,361 | $ | 15,372 | $ | (5,789 | ) | 2,097 | ||||||
|
% Below cost—fixed maturity securities: |
||||||||||||||||||
|
<20% Below cost |
$ | 12,427 | $ | (1,031 | ) | 1,831 | $ | 8,518 | $ | (948 | ) | 912 | ||||||
|
20-50% Below cost |
2,059 | (888 | ) | 442 | 5,603 | (2,759 | ) | 818 | ||||||||||
|
>50% Below cost |
120 | (175 | ) | 73 | 1,199 | (2,056 | ) | 361 | ||||||||||
|
Total fixed maturity securities |
14,606 | (2,094 | ) | 2,346 | 15,320 | (5,763 | ) | 2,091 | ||||||||||
|
% Below cost—equity securities: |
||||||||||||||||||
|
20-50% Below cost |
41 | (20 | ) | 11 | 52 | (26 | ) | 6 | ||||||||||
|
>50% Below cost |
21 | (25 | ) | 4 | — | — | — | |||||||||||
|
Total equity securities |
62 | (45 | ) | 15 | 52 | (26 | ) | 6 | ||||||||||
|
Total for securities in an unrealized loss position |
$ | 14,668 | $ | (2,139 | ) | 2,361 | $ | 15,372 | $ | (5,789 | ) | 2,097 | ||||||
|
Investment grade |
$ | 13,719 | $ | (1,908 | ) | 2,026 | $ | 14,628 | $ | (5,437 | ) | 1,908 | ||||||
|
Below investment grade |
949 | (231 | ) | 335 | 744 | (352 | ) | 189 | ||||||||||
|
Total for securities in an unrealized loss position |
$ | 14,668 | $ | (2,139 | ) | 2,361 | $ | 15,372 | $ | (5,789 | ) | 2,097 | ||||||
The scheduled maturity distribution of fixed maturity securities as of June 30, 2009 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 |
$ | 1,781 | $ | 1,764 | ||
|
Due after one year through five years |
11,648 | 11,429 | ||||
|
Due after five years through ten years |
7,608 | 7,334 | ||||
|
Due after ten years |
17,296 | 15,547 | ||||
|
Subtotal |
38,333 | 36,074 | ||||
|
Residential mortgage-backed |
3,753 | 2,644 | ||||
|
Commercial mortgage-backed |
5,111 | 3,632 | ||||
|
Other asset-backed |
2,361 | 1,972 | ||||
|
Total |
$ | 49,558 | $ | 44,322 | ||
As of June 30, 2009, $5,374 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.
As of June 30, 2009, securities issued by finance and insurance, utilities and energy, and consumer—non-cyclical industry groups represented approximately 29%, 22% 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 U.S. and internationally, and is not dependent on the economic stability of one particular region.
As of June 30, 2009, 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.
(5) Derivative Instruments
Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibition on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.
The following table sets forth our positions in derivative instruments as of the dates indicated:
| Asset derivatives | Liability derivatives | |||||||||||||||
| Balance sheet classification |
Fair value | Balance sheet classification |
Fair value | |||||||||||||
|
(Amounts in millions) |
June 30, 2009 |
December 31, 2008 |
June 30, 2009 |
December 31, 2008 |
||||||||||||
|
Derivatives designated as hedges |
||||||||||||||||
|
Cash flow hedges: |
||||||||||||||||
|
Interest rate swaps |
Other invested assets |
$ | 188 | $ | 501 | Other liabilities |
$ | 11 | $ | 54 | ||||||
|
Inflation indexed swaps |
Other invested assets |
— | — | Other liabilities |
2 | — | ||||||||||
|
Foreign currency swaps |
Other invested assets |
76 | 120 | Other liabilities |
— | 1 | ||||||||||
|
Total cash flow hedges |
264 | 621 | 13 | 55 | ||||||||||||
|
Fair value hedges: |
||||||||||||||||
|
Interest rate swaps |
Other invested assets |
150 | 231 | Other liabilities |
19 | 36 | ||||||||||
|
Foreign currency swaps |
Other invested assets |
20 | 46 | Other liabilities |
— | — | ||||||||||
|
Total fair value hedges |
170 | 277 | 19 | 36 | ||||||||||||
|
Total derivatives designated as hedges |
434 | 898 | 32 | 91 | ||||||||||||
|
Derivatives not designated as hedges |
||||||||||||||||
|
Interest rate swaps |
Other invested assets |
475 | 384 | Other liabilities |
34 | 95 | ||||||||||
|
Interest rate swaptions |
Other invested assets |
161 | 780 | Other liabilities |
156 | 60 | ||||||||||
|
Credit default swaps |
Other invested assets |
2 | 1 | Other liabilities |
9 | 27 | ||||||||||
|
Equity index options |
Other invested assets |
110 | 152 | Other liabilities |
— | — | ||||||||||
|
Financial futures |
Other invested assets |
— | — | Other liabilities |
— | — | ||||||||||
|
Inflation indexed swaps |
Other invested assets |
— | — | Other liabilities |
4 | — | ||||||||||
|
Other foreign currency contracts |
Other invested assets |
8 | — | Other liabilities |
2 | — | ||||||||||
|
GMWB embedded derivatives |
Reinsurance recoverable (1) |
2 | 18 | Policyholder account balances (2) |
435 | 878 | ||||||||||
|
Total derivatives not designated as hedges |
758 | 1,335 | 640 | 1,060 | ||||||||||||
|
Total derivatives |
$ | 1,192 | $ | 2,233 | $ | 672 | $ | 1,151 | ||||||||
| (1) |
Represents the embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
| (2) |
Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements. The amounts recognized for the obligation to return collateral retained by us and the right to reclaim collateral from counterparties was recorded in other liabilities and other invested assets, respectively.
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for equity index options, the change between periods is best illustrated by the number of contracts, and for GMWB embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
|
(Notional in millions) |
Measurement | December 31, 2008 | Additions | Maturities/ terminations |
June 30, 2009 | |||||||||
|
Derivatives designated as hedges |
||||||||||||||
|
Cash flow hedges: |
||||||||||||||
|
Interest rate swaps |
Notional | $ | 4,001 | $ | 1,726 | $ | 505 | $ | 5,222 | |||||
|
Inflation indexed swaps |
Notional | — | 128 | — | 128 | |||||||||
|
Foreign currency swaps |
Notional | 559 | 491 | 559 | 491 | |||||||||
|
Total cash flow hedges |
4,560 | 2,345 | 1,064 | 5,841 | ||||||||||
|
Fair value hedges: |
||||||||||||||
|
Interest rate swaps |
Notional | 3,098 | — | 321 | 2,777 | |||||||||
|
Foreign currency swaps |
Notional | 187 | — | 96 | 91 | |||||||||
|
Total fair value hedges |
3,285 | — | 417 | 2,868 | ||||||||||
|
Total derivatives designated as hedges |
7,845 | 2,345 | 1,481 | 8,709 | ||||||||||
|
Derivatives not designated as hedges |
||||||||||||||
|
Interest rate swaps |
Notional | 6,460 | 745 | 1,872 | 5,333 | |||||||||
|
Interest rate swaptions |
Notional | 12,000 | — | 4,500 | 7,500 | |||||||||
|
Credit default swaps |
Notional | 610 | — | 20 | 590 | |||||||||
|
Financial futures |
Notional | 2,194 | 1,846 | 2,194 | 1,846 | |||||||||
|
Inflation indexed swaps |
Notional | — | 128 | — | 128 | |||||||||
|
Other foreign currency contracts |
Notional | — | 534 | — | 534 | |||||||||
|
Total derivatives not designated as hedges |
21,264 | 3,253 | 8,586 | 15,931 | ||||||||||
|
Total derivatives |
$ | 29,109 | $ | 5,598 | $ | 10,067 | $ | 24,640 | ||||||
|
(Number of contracts or policies) |
Measurement | December 31, 2008 | Additions | Terminations | June 30, 2009 | |||||||||
|
Derivatives not designated as hedges |
||||||||||||||
|
Equity index options |
Contracts | 532,000 | 1,333,000 | 175,000 | 1,690,000 | |||||||||
|
GMWB embedded derivatives |
Policies | 43,677 | 2,341 | 799 | 45,219 | |||||||||
Cash Flow Hedges
Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) pay U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure on liabilities denominated in foreign currencies; (v) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed-rate bond purchases and/or interest income; and (vi) other instruments to hedge the cash flows of various forecasted transactions.
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended June 30, 2009:
|
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain
(loss) reclassified into net income (loss) from OCI (1) |
Classification of gain (loss) reclassified into net income (loss) |
Gain
(loss) recognized in net income (loss) (2) |
Classification of gain (loss) recognized in net income (loss) |
|||||||||||
|
Interest rate swaps hedging assets |
$ | (177 | ) | $ | 3 | Net investment income |
$ | (4 | ) | Net investment gains (losses) |
||||||
|
Interest rate swaps hedging assets |
— | 2 | Net investment gains (losses) |
— | Net investment gains (losses) |
|||||||||||
|
Foreign currency swaps |
(1 | ) | (5 | ) | Interest expense | — | Net investment gains (losses) |
|||||||||
|
Total |
$ | (178 | ) | $ | — | $ | (4 | ) | ||||||||
| (1) |
Amounts include $2 million of gains reclassified into net income (loss) for cash flow hedges that were terminated or de-designated where the effective portion is reclassified into net income (loss) when the underlying hedge item affects net income (loss). |
| (2) |
Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the six months ended June 30, 2009:
|
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain
(loss) reclassified into net income (loss) from OCI (1) |
Classification of gain (loss) reclassified into net income (loss) |
Gain
(loss) recognized in net income (loss) (2) |
Classification of gain (loss) recognized in net income (loss) |
|||||||||||
|
Interest rate swaps hedging assets |
$ | (322 | ) | $ | 8 | Net investment income |
$ | (10 | ) | Net investment gains (losses) |
||||||
|
Interest rate swaps hedging assets |
— | 5 | Net investment gains (losses) |
— | Net investment gains (losses) |
|||||||||||
|
Foreign currency swaps |
(13 | ) | (8 | ) | Interest expense | — | Net investment gains (losses) |
|||||||||
|
Total |
$ | (335 | ) | $ | 5 | $ | (10 | ) | ||||||||
| (1) |
Amounts include $5 million of gains reclassified into net income (loss) for cash flow hedges that were terminated or de-designated where the effective portion is reclassified into net income (loss) when the underlying hedge item affects net income (loss). |
| (2) |
Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness. |
The total of derivatives designated as cash flow hedges of $948 million, net of taxes, recorded in stockholders’ equity as of June 30, 2009 is expected to be reclassified to future net income (loss), concurrently with and primarily offsetting changes in interest expense and interest income on floating-rate instruments and interest income on future fixed-rate bond purchases. Of this amount, $(1) million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2045. No amounts were reclassified to net income (loss) during the six months ended June 30, 2009 in connection with forecasted transactions that were no longer considered probable of occurring. During 2008, we terminated a large portion of our forward starting interest rate swaps, which were designated as cash flow hedges, related to our long-term care insurance business to reduce our counterparty credit exposure and increase liquidity. The respective balance in OCI related to these derivatives will be reclassified into net income (loss) when the forecasted transactions affect net income (loss), as the forecasted transactions are still probable of occurring.
Fair Value Hedges
Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income (loss). In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income (loss). We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (iii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iv) other instruments to hedge various fair value exposures of investments.
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended June 30, 2009:
| Derivative instrument | Hedged item | |||||||||||||||||
|
(Amounts in millions) |
Gain
(loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain
(loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) |
||||||||||||
|
Interest rate swaps hedging assets |
$ | 4 | Net investment gains (losses) |
$ | (4 | ) | Net investment income |
$ | (6 | ) | Net investment gains (losses) |
|||||||
|
Interest rate swaps hedging liabilities |
(50 | ) | Net investment gains (losses) |
23 | Interest credited | 51 | Net investment gains (losses) |
|||||||||||
|
Foreign currency swaps |
(2 | ) | Net investment gains (losses) |
— | Interest credited | 1 | Net investment gains (losses) |
|||||||||||
|
Total |
$ | (48 | ) | $ | 19 | $ | 46 | |||||||||||
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the six months ended June 30, 2009:
| Derivative instrument | Hedged item | |||||||||||||||||
|
(Amounts in millions) |
Gain
(loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain
(loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) |
||||||||||||
|
Interest rate swaps hedging assets |
$ | 6 | Net investment gains (losses) |
$ | (8 | ) | Net investment income |
$ | (10 | ) | Net investment gains (losses) |
|||||||
|
Interest rate swaps hedging liabilities |
(59 | ) | Net investment gains (losses) |
42 | Interest credited | 62 | Net investment gains (losses) |
|||||||||||
|
Foreign currency swaps |
(13 | ) | Net investment gains (losses) |
1 | Interest credited | 11 | Net investment gains (losses) |
|||||||||||
|
Total |
$ | (66 | ) | $ | 35 | $ | 63 | |||||||||||
The difference between the gain (loss) recognized for the derivative instrument and the hedged item presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the net income (loss) effects of the derivative instruments that are presented in the same location as the income activity from the hedged item. There were no amounts excluded from the measurement of effectiveness.
Derivatives Not Designated As Hedges
We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps, swaptions and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; and (iii) equity index options, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits. Additionally, we provide GMWBs on certain products that are required to be bifurcated as embedded derivatives.
The following table provides information about the pre-tax income (loss) effects of derivatives not designated as hedges for the periods indicated:
| Gain (loss) recognized in net income (loss) |
||||||||||
|
(Amounts in millions) |
Three months ended June 30, 2009 |
Six months ended June 30, 2009 |
Classification of gain (loss) recognized in net income (loss) |
|||||||
|
Interest rate swaps |
$ | 164 | $ | 246 | Net investment gains (losses) | |||||
|
Interest rate swaptions |
(338 | ) | (579 | ) | Net investment gains (losses) | |||||
|
Credit default swaps |
35 | 21 | Net investment gains (losses) | |||||||
|
Equity index options |
(71 | ) | (55 | ) | Net investment gains (losses) | |||||
|
Financial futures |
(163 | ) | (84 | ) | Net investment gains (losses) | |||||
|
Inflation indexed swaps |
4 | (4 | ) | Net investment gains (losses) | ||||||
|
Foreign currency swaps |
— | 6 | Net investment gains (losses) | |||||||
|
Other foreign currency contracts |
8 | 10 | Net investment gains (losses) | |||||||
|
GMWB embedded derivatives |
479 | 440 | Net investment gains (losses) | |||||||
|
Total derivatives not designated as hedges |
$ | 118 | $ | 1 | ||||||
Derivative Counterparty Credit Risk
As of June 30, 2009 and December 31, 2008, net fair value assets by counterparty totaled $966 million and $1,946 million, respectively. As of June 30, 2009 and December 31, 2008, net fair value liabilities by counterparty totaled $13 million and $4 million, respectively. As of June 30, 2009 and December 31, 2008, we retained collateral of $833 million and $1,605 million, respectively, related to these agreements, including over collateralization of $23 million and $66 million, respectively, from certain counterparties. As of June 30, 2009, we provided $14 million of collateral to derivative counterparties, including over collateralization of $2 million. As of December 31, 2008, we provided no collateral to derivative counterparties.
All of our master swap agreements contain credit downgrade provisions that allow a party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If the downgrade provisions had been triggered as of June 30, 2009 and December 31, 2008, we could have been allowed to claim up to $156 million and $407 million, respectively, from counterparties and required to disburse up to $1 million and $4 million, respectively. This represents the net fair value of gains and losses by counterparty, less available collateral held.
As a result of rating agency actions taken in April 2009, credit downgrade provisions were triggered in our master swap agreements with certain derivative counterparties and we terminated $6.9 billion notional value, of which $2.3 billion was replaced or renegotiated. Approximately $1.1 billion of notional value remained with counterparties that can be terminated at the option of the derivative counterparty and represented a net fair value asset of $94 million as of June 30, 2009. Additionally, we terminated $1.7 billion in derivatives that were not directly impacted by the credit downgrade provisions but were offsetting certain terminated derivatives.
Credit Derivatives
We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to reproduce characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit default swaps and the par value of debt instruments with embedded credit derivatives. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction. For debt instruments with embedded credit derivatives, the security’s principal is typically reduced by the net amount of default for any referenced entity defaults.
The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:
| June 30, 2009 | December 31, 2008 | |||||||||||||||||
|
(Amounts in millions) |
Notional value |
Assets | Liabilities | Notional value |
Assets | Liabilities | ||||||||||||
|
Reference entity credit rating and maturity: |
||||||||||||||||||
|
AAA |
||||||||||||||||||
|
Matures after one year through five years |
$ | 6 | $ | — | $ | — | $ | 6 | $ | — | $ | 1 | ||||||
|
AA |
||||||||||||||||||
|
Matures after one year through five years |
5 | — | — | 5 | — | — | ||||||||||||
|
A |
||||||||||||||||||
|
Matures after one year through five years |
32 | — | 2 | 52 | — | 5 | ||||||||||||
|
Matures after five years through ten years |
15 | — | — | 15 | — | 2 | ||||||||||||
|
BBB |
||||||||||||||||||
|
Matures after one year through five years |
73 | 1 | 2 | 73 | — | 7 | ||||||||||||
|
Matures after five years through ten years |
24 | — | — | 24 | — | 4 | ||||||||||||
|
Total credit default swaps on single name reference entities |
$ | 155 | $ | 1 | $ | 4 | $ | 175 | $ | — | $ | 19 | ||||||
The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:
| June 30, 2009 | December 31, 2008 | |||||||||||||||||
|
(Amounts in millions) |
Notional value |
Assets | Liabilities | Notional value |
Assets | Liabilities | ||||||||||||
|
Index tranche attachment/detachment point and maturity: |
||||||||||||||||||
|
15% – 30% matures after five years through ten years (1) |
$ | 177 | $ | 1 | $ | 3 | $ | 177 | $ | 1 | $ | 2 | ||||||
|
12% – 22% matures after five years through ten years (2) |
248 | — | 2 | 248 | — | 6 | ||||||||||||
|
Total credit default swaps on index tranches |
$ | 425 | $ | 1 | $ | 5 | $ | 425 | $ | 1 | $ | 8 | ||||||
| (1) |
The current attachment/detachment as of June 30, 2009 and December 31, 2008 was 14.9% – 30.3%. |
| (2) |
The current attachment/detachment as of June 30, 2009 and December 31, 2008 was 12% – 22%. |
The following table sets forth our holding of available-for-sale fixed maturity securities that include embedded credit derivatives and the fair values as of the dates indicated:
| June 30, 2009 | December 31, 2008 | |||||||||||||||||
|
(Amounts in millions) |
Par value |
Amortized cost |
Fair value |
Par value |
Amortized cost |
Fair value |
||||||||||||
|
Credit rating: |
||||||||||||||||||
|
AAA |
||||||||||||||||||
|
Matures after one year through five years |
$ | 100 | $ | 100 | $ | 65 | $ | 100 | $ | 100 | $ | 51 | ||||||
|
Matures after five years through ten years |
200 | 232 | 120 | 300 | 332 | 105 | ||||||||||||
|
AA |
||||||||||||||||||
|
Matures after five years through ten years |
100 | 100 | 80 | — | — | — | ||||||||||||
|
Total available-for-sale fixed maturity securities that include embedded credit derivatives |
$ | 400 | $ | 432 | $ | 265 | $ | 400 | $ | 432 | $ | 156 | ||||||
(6) Fair Value Measurements
Assets and liabilities that are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosure of fair value; such items include cash and cash equivalents, investment securities, separate accounts, securities held as collateral and derivative financial instruments. Other financial assets and liabilities—those not carried at fair value—are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the financial instrument.
The basis on which we estimate fair value is as follows:
Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates.
Other invested assets. Based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the related instrument. Primarily represents short-term investments, limited partnerships accounted for under the cost method and bank loans.
Borrowings and related instruments. Based on market quotes or comparable market transactions.
Investment contracts. Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products.
The following represents the fair value of financial assets and liabilities as of the periods indicated:
|
(Amounts in millions) |
June 30, 2009 | December 31, 2008 | ||||||||||||||||||
| Notional amount |
Carrying amount |
Fair value |
Notional amount |
Carrying amount |
Fair value |
|||||||||||||||
|
Assets: |
||||||||||||||||||||
|
Commercial mortgage loans |
$ | (1) | $ | 7,872 | $ | 7,003 | $ | (1) | $ | 8,262 | $ | 7,536 | ||||||||
|
Other invested assets |
(1) | 1,668 | 1,656 | (1) | 1,316 | 1,326 | ||||||||||||||
|
Liabilities: |
||||||||||||||||||||
|
Borrowings and related instruments (2): |
||||||||||||||||||||
|
Short-term borrowings |
(1) | 930 | 930 | (1) | 1,133 | 1,133 | ||||||||||||||
|
Long-term borrowings |
(1) | 3,484 | 2,236 | (1) | 4,261 | 2,012 | ||||||||||||||
|
Non-recourse funding obligations |
(1) | 3,443 | 1,522 | (1) | 3,455 | 2,671 | ||||||||||||||
|
Investment contracts |
(1) | 23,414 | 22,813 | (1) | 26,824 | 24,250 | ||||||||||||||
|
Performance guarantees, principally letters of credit |
119 | — | — | 119 | — | — | ||||||||||||||
|
Other firm commitments: |
||||||||||||||||||||
|
Commitments to fund limited partnerships |
290 | — | — | 366 | — | — | ||||||||||||||
| (1) |
These financial instruments do not have notional amounts. |
| (2) |
See note 8. |
Recurring Fair Value Measurements
We hold fixed maturity and equity securities, trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value.
The vast majority of our fixed maturity and equity securities use Level 2 inputs for the determination of fair value. These fair values are obtained primarily from industry-standard pricing methodologies based on market observable information. Certain structured securities valued using industry-standard pricing methodologies utilize significant unobservable inputs to estimate fair value, resulting in the fair value measurements being classified as Level 3. We also utilize internally developed pricing models to produce estimates of fair value primarily utilizing Level 2 inputs along with certain Level 3 inputs. The internally developed models include matrix pricing where we discount expected cash flows utilizing market interest rates obtained from market sources based on the credit quality and duration of the instrument to determine fair value. For securities that may not be reliably priced using internally developed pricing models, we estimate fair value using indicative market prices. These prices are indicative of an exit price, but the assumptions used to establish the fair value may not be observable, or corroborated by market observable information, and represent Level 3 inputs.
The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.
The fair value of derivative instruments primarily utilizes Level 2 inputs. Certain derivative instruments are valued using significant unobservable inputs and are classified as Level 3 measurements. The classification of fair value measurements for derivative instruments, including embedded derivatives requiring bifurcation, was determined based on consideration of several inputs including: closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options; foreign exchange rates; market interest rates; and non-performance risk. For product-related embedded derivatives, we also include certain policyholder assumptions in the determination of fair value.
For assets carried at fair value, the non-performance of the counterparties is considered in the determination of fair value measurement for those assets. Similarly, the fair value measurement of a liability must reflect the entity’s own non-performance risk. Therefore, the impact of non-performance risk, as well as any potential credit enhancements (e.g., collateral), has been considered in the fair value measurement of both assets and liabilities. The liabilities recorded at fair value include derivative and GMWB liabilities.
For derivative liabilities, we consider the counterparty collateral arrangements and rights of set-off when determining whether any incremental adjustment should be made for our non-performance risk. As a result of these counterparty arrangements, we determined no adjustment was required to the $237 million and $273 million derivative liability to adjust for our non-performance risk as of June 30, 2009 and December 31, 2008, respectively.
For GMWB liabilities recorded at fair value of $435 million and $878 million as of June 30, 2009 and December 31, 2008, respectively, non-performance risk is integrated into the discount rate. The discount rate utilized in our valuation was based on the swap curve, which included the credit risk of an instrument rated AA and incorporated the non-performance risk of our GMWB liabilities. The impact of non-performance risk on our GMWB valuation was $6 million and $29 million as of June 30, 2009 and December 31, 2008, respectively, as a result of our discount rate being higher than the U.S. treasury curve.
To determine whether the use of the swap curve was the appropriate discount rate to reflect the non-performance risk of the GMWB liabilities, we evaluate the non-performance risk in our liabilities based on a hypothetical exit market transaction as there is no exit market for these types of liabilities. A hypothetical exit market can be viewed as a hypothetical transfer of the liability to another similarly rated insurance company which would closely resemble a reinsurance transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. After considering all relevant factors in assessing whether any additional adjustment to the discount rate for non-performance risk was necessary, including assumptions we expect market participants would utilize in a hypothetical exit market transaction, we determined that no incremental adjustment to the discount rate was necessary for our GMWB liabilities that are recorded at fair value. We believe that a hypothetical exit market participant would use a similar discount rate to value the liabilities and would not incorporate changes in non-performance risk in the discount rate other than the implied credit spread incorporated in the swap curve.
We continually assess the non-performance risk on our liabilities recorded at fair value and will make adjustments in future periods as additional information is obtained that would indicate such an adjustment is necessary to accurately present the fair value measurement in accordance with U.S. GAAP.
The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated:
| June 30, 2009 | ||||||||||||
|
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||
|
Assets |
||||||||||||
|
Investments: |
||||||||||||
|
Fixed maturity securities: |
||||||||||||
|
U.S. government, agencies and government sponsored entities |
$ | 1,249 | $ | — | $ | 892 | $ | 357 | ||||
|
Tax exempt |
2,406 | — | 2,404 | 2 | ||||||||
|
Government—non-U.S. |
1,854 | — | 1,832 | 22 | ||||||||
|
U.S. corporate |
19,691 | — | 18,283 | 1,408 | ||||||||
|
Corporate—non-U.S. |
10,874 | — | 10,107 | 767 | ||||||||
|
Residential mortgage-backed |
2,644 | — | 1,021 | 1,623 | ||||||||
|
Commercial mortgage-backed |
3,632 | — | 504 | 3,128 | ||||||||
|
Other asset-backed |
1,972 | — | 909 | 1,063 | ||||||||
|
Total fixed maturity securities |
44,322 | — | 35,952 | 8,370 | ||||||||
|
Equity securities |
252 | 46 | 145 | 61 | ||||||||
|
Other invested assets: |
||||||||||||
|
Trading securities |
163 | — | 30 | 133 | ||||||||
|
Derivative assets |
1,190 | — | 904 | 286 | ||||||||
|
Securities lending collateral |
958 | — | 958 | — | ||||||||
|
Derivatives counterparty collateral |
54 | — | 54 | — | ||||||||
|
Total other invested assets |
2,365 | — | 1,946 | 419 | ||||||||
|
Reinsurance recoverable (1) |
2 | — | — | 2 | ||||||||
|
Separate account assets |
9,605 | 9,605 | — | — | ||||||||
|
Total assets |
$ | 56,546 | $ | 9,651 | $ | 38,043 | $ | 8,852 | ||||
|
Liabilities |
||||||||||||
|
Policyholder account balances (2) |
$ | 435 | $ | — | $ | — | $ | 435 | ||||
|
Derivative liabilities |
237 | — | 76 | 161 | ||||||||
|
Total liabilities |
$ | 672 | $ | — | $ | 76 | $ | 596 | ||||
| (1) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
| (2) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
| December 31, 2008 | ||||||||||||
|
(Amounts in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||
|
Assets |
||||||||||||
|
Investments: |
||||||||||||
|
Fixed maturity securities: |
||||||||||||
|
U.S. government, agencies and government sponsored entities |
$ | 905 | $ | — | $ | 880 | $ | 25 | ||||
|
Tax exempt |
2,371 | — | 2,371 | — | ||||||||
|
Government—non-U.S. |
1,760 | — | 1,729 | 31 | ||||||||
|
U.S. corporate |
19,074 | — | 16,340 | 2,734 | ||||||||
|
Corporate—non-U.S. |
9,976 | — | 8,416 | 1,560 | ||||||||
|
Residential mortgage-backed |
2,937 | — | 980 | 1,957 | ||||||||
|
Commercial mortgage-backed |
3,758 | — | 539 | 3,219 | ||||||||
|
Other asset-backed |
2,090 | — | 1,056 | 1,034 | ||||||||
|
Total fixed maturity securities |
42,871 | — | 32,311 | 10,560 | ||||||||
|
Equity securities |
234 | 37 | 137 | 60 | ||||||||
|
Other invested assets: |
||||||||||||
|
Trading securities |
169 | — | 44 | 125 | ||||||||
|
Derivative assets |
2,215 | — | 1,282 | 933 | ||||||||
|
Securities lending collateral |
1,469 | — | 1,469 | — | ||||||||
|
Derivatives counterparty collateral |
786 | — | 786 | — | ||||||||
|
Total other invested assets |
4,639 | — | 3,581 | 1,058 | ||||||||
|
Reinsurance recoverable (1) |
18 | — | — | 18 | ||||||||
|
Separate account assets |
9,215 | 9,215 | — | — | ||||||||
|
Total assets (2) |
$ | 56,977 | $ | 9,252 | $ | 36,029 | $ | 11,696 | ||||
|
Liabilities |
||||||||||||
|
Policyholder account balances (3) |
$ | 878 | $ | — | $ | — | $ | 878 | ||||
|
Derivative liabilities |
273 | — | 205 | 68 | ||||||||
|
Total liabilities |
$ | 1,151 | $ | — | $ | 205 | $ | 946 | ||||
| (1) |
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. The balance as of December 31, 2008 has been revised to include this amount. |
| (2) |
Total assets have been revised to include the reinsured portion of our GMWB liabilities. |
| (3) |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. The balance as of December 31, 2008 has been revised to exclude the impact of reinsurance. |
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
| Total
realized and unrealized gains (losses) |
|||||||||||||||||||||||||||||
| Beginning balance as of April 1, 2009 |
Included in net income (loss) |
Included in OCI |
Purchases, sales issuances and settlements, net |
Transfer in Level 3 |
Transfer out of Level 3 |
Ending balance as of June 30, 2009 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
||||||||||||||||||||||
|
Fixed maturity securities: |
|||||||||||||||||||||||||||||
|
U.S. government, agencies and government sponsored entities |
$ | 19 | $ | — | $ | (37 | ) | $ | 4 | $ | 389 | $ | (18 | ) | $ | 357 | $ | — | |||||||||||
|
Tax exempt |
5 | — | — | — | 2 | (5 | ) | 2 | — | ||||||||||||||||||||
|
Government—non-U.S. |
35 | — | 2 | 3 | — | (18 | ) | 22 | — | ||||||||||||||||||||
|
U.S. corporate |
1,658 | (14 | ) | 140 | (70 | ) | 240 | (546 | ) | 1,408 | 6 | ||||||||||||||||||
|
Corporate—non-U.S. |
1,136 | (10 | ) | 25 | (23 | ) | 204 | (565 | ) | 767 | 1 | ||||||||||||||||||
|
Residential mortgage-backed |
2,602 | (106 | ) | 66 | (44 | ) | 4 | (899 | ) | 1,623 | (88 | ) | |||||||||||||||||
|
Commercial mortgage-backed |
3,647 | (10 | ) | 7 | (27 | ) | 27 | (516 | ) | 3,128 | (11 | ) | |||||||||||||||||
|
Other asset-backed |
1,901 | (8 | ) | 137 | (98 | ) | 8 | (877 | ) | 1,063 | (4 | ) | |||||||||||||||||
|
Total fixed maturity securities |
11,003 | (148 | ) | 340 | (255 | ) | 874 | (3,444 | ) | 8,370 | (96 | ) | |||||||||||||||||
|
Equity securities |
61 | — | — | — | — | — | 61 | — | |||||||||||||||||||||
|
Other invested assets: |
|||||||||||||||||||||||||||||
|
Trading securities |
156 | 15 | — | (5 | ) | — | (33 | ) | 133 | 13 | |||||||||||||||||||
|
Derivative assets |
706 | (256 | ) | — | (164 | ) | — | — | 286 | (237 | ) | ||||||||||||||||||
|
Total other invested assets |
862 | (241 | ) | — | (169 | ) | — | (33 | ) | 419 | (224 | ) | |||||||||||||||||
|
Reinsurance recoverable |
18 | (16 | ) | — | — | — | — | 2 | (16 | ) | |||||||||||||||||||
|
Total Level 3 assets |
$ | 11,944 | $ | (405 | ) | $ | 340 | $ | (424 | ) | $ | 874 | $ | (3,477 | ) | $ | 8,852 | $ | (336 | ) | |||||||||
| Total
realized and unrealized gains (losses) |
||||||||||||||||||||||||||||
| Beginning balance as of April 1, 2008 |
Included in net income (loss) |
Included in OCI |
Purchases, sales issuances and settlements, net |
Transfer in Level 3 |
Transfer out of Level 3 |
Ending balance as of June 30, 2008 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
|||||||||||||||||||||
|
Fixed maturity securities |
$ | 4,770 | $ | (403 | ) | $ | 214 | $ | (233 | ) | $ | 1,613 | $ | (1,280 | ) | $ | 4,681 | $ | (404 | ) | ||||||||
|
Equity securities |
28 | — | 2 | (21 | ) | — | — | 9 | — | |||||||||||||||||||
|
Other invested assets (1) |
401 | (19 | ) | — | 27 | — | — | 409 | (20 | ) | ||||||||||||||||||
|
Total Level 3 assets |
$ | 5,199 | $ | (422 | ) | $ | 216 | $ | (227 | ) | $ | 1,613 | $ | (1,280 | ) | $ | 5,099 | $ | (424 | ) | ||||||||
| (1) |
Includes certain trading securities and derivatives. |
| Total
realized and unrealized gains (losses) |
|||||||||||||||||||||||||||||
| Beginning balance as of January 1, 2009 |
Included in net income (loss) |
Included in OCI |
Purchases, sales issuances and settlements, net |
Transfer in Level 3 |
Transfer out of Level 3 |
Ending balance as of June 30, 2009 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
||||||||||||||||||||||
|
Fixed maturity securities: |
|||||||||||||||||||||||||||||
|
U.S. government, agencies and government sponsored entities |
$ | 25 | $ | — | $ | (38 | ) | $ | 13 | $ | 389 | $ | (32 | ) | $ | 357 | $ | — | |||||||||||
|
Tax exempt |
— | — | — | 5 | 2 | (5 | ) | 2 | — | ||||||||||||||||||||
|
Government—non-U.S. |
31 | — | — | 9 | — | (18 | ) | 22 | — | ||||||||||||||||||||
|
U.S. corporate |
2,734 | (16 | ) | 111 | (111 | ) | 377 | (1,687 | ) | 1,408 | 5 | ||||||||||||||||||
|
Corporate—non-U.S. |
1,560 | (33 | ) | 142 | 11 | 404 | (1,317 | ) | 767 | (27 | ) | ||||||||||||||||||
|
Residential mortgage-backed |
1,957 | (331 | ) | 164 | (154 | ) | 885 | (898 | ) | 1,623 | (313 | ) | |||||||||||||||||
|
Commercial mortgage-backed |
3,219 | (39 | ) | 43 | (106 | ) | 532 | (521 | ) | 3,128 | (39 | ) | |||||||||||||||||
|
Other asset-backed |
1,034 | (22 | ) | 180 | (232 | ) | 981 | (878 | ) | 1,063 | (18 | ) | |||||||||||||||||
|
Total fixed maturity securities |
10,560 | (441 | ) | 602 | (565 | ) | 3,570 | (5,356 | ) | 8,370 | (392 | ) | |||||||||||||||||
|
Equity securities |
60 | — | — | 1 | — | — | 61 | — | |||||||||||||||||||||
|
Other invested assets: |
|||||||||||||||||||||||||||||
|
Trading securities |
125 | 1 | — | (15 | ) | 54 | (32 | ) | 133 | — | |||||||||||||||||||
|
Derivative assets |
933 | (494 | ) | — | (175 | ) | 22 | — | 286 | (474 | ) | ||||||||||||||||||
|
Total other invested assets |
1,058 | (493 | ) | — | (190 | ) | 76 | (32 | ) | 419 | (474 | ) | |||||||||||||||||
|
Reinsurance recoverable |
18 | (17 | ) | — | 1 | — | — | 2 | (17 | ) | |||||||||||||||||||
|
Total Level 3 assets |
$ | 11,696 | $ | (951 | ) | $ | 602 | $ | (753 | ) | $ | 3,646 | $ | (5,388 | ) | $ | 8,852 | $ | (883 | ) | |||||||||
| Total
realized and unrealized gains (losses) |
|||||||||||||||||||||||||||||
| Beginning balance as of January 1, 2008 |
Included in net income (loss) |
Included in OCI |
Purchases, sales issuances and settlements, net |
Transfer in Level 3 |
Transfer out of Level 3 |
Ending balance as of June 30, 2008 |
Total
gains (losses) included in net income (loss) attributable to assets still held |
||||||||||||||||||||||
|
Fixed maturity securities |
$ | 4,794 | $ | (498 | ) | $ | (190 | ) | $ | (258 | ) | $ | 2,824 | $ | (1,991 | ) | $ | 4,681 | $ | (499 | ) | ||||||||
|
Equity securities |
30 | 1 | — | (23 | ) | 4 | (3 | ) | 9 | — | |||||||||||||||||||
|
Other invested assets (1) |
319 | 16 | — | 62 | 12 | — | 409 | 16 | |||||||||||||||||||||
|
Total Level 3 assets |
$ | 5,143 | $ | (481 | ) | $ | (190 | ) | $ | (219 | ) | $ | 2,840 | $ | (1,994 | ) | $ | 5,099 | $ | (483 | ) | ||||||||
| (1) |
Includes certain trading securities and derivatives. |
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
| Total
realized and unrealized (gains) losses |
|||||||||||||||||||||||||||
| Beginning balance as of April 1, 2009 |
Included in net (income) loss |
Included in OCI |
Purchases, sales issuances and settlements, net |
Transfer in Level 3 |
Transfer out of Level 3 |
Ending balance as of June 30, 2009 |
Total (gains) losses included in net (income) loss attributable to liabilities still held |
||||||||||||||||||||
|
Policyholder account balances (1) |
$ | 923 | $ | (495 | ) | $ | — | $ | 7 | $ | — | $ | — | $ | 435 | $ | (490 | ) | |||||||||
|
Other liabilities ( 2) |
73 | 137 | — | (49 | ) | — | — | 161 | 105 | ||||||||||||||||||
|
Total Level 3 liabilities |
$ | 996 | $ | (358 | ) | $ | — | $ | (42 | ) | $ | — | $ | — | $ | 596 | $ | (385 | ) | ||||||||
| (1) |
Represents embedded derivatives associated with our GMWB liabilities. |
| (2) |
Represents derivatives. |
| Total
realized and unrealized (gains) losses |
||||||||||||||||||||||||||
| Beginning balance as of April 1, 2008 |
Included in net (income) loss |
Included in OCI |
Purchases, sales issuances and settlements, net |
Transfer in Level 3 |
Transfer out of Level 3 |
Ending balance as of June 30, 2008 |
Total (gains) losses included in net (income) loss attributable to liabilities still held |
|||||||||||||||||||
|
Policyholder account balances (1) |
$ | 115 | $ | (40 | ) | $ | — | $ | 3 | $ | — | $ | — | $ | 78 | $ | (40 | ) | ||||||||
|
Total Level 3 liabilities |
$ | 115 | $ | (40 | ) | $ | — | $ | 3 | $ | — | $ | — | $ | 78 | $ | (40 | ) | ||||||||
| (1) |
Represents embedded derivatives associated with our GMWB liabilities. |
| Total
realized and unrealized (gains) losses |
|||||||||||||||||||||||||||
| Beginning balance as of January 1, 2009 (3) |
Included in net (income) loss |
Included in OCI |
Purchases, sales issuances and settlements, net |
Transfer in Level 3 |
Transfer out of Level 3 |
Ending balance as of June 30, 2009 |
Total (gains) losses included in net (income) loss attributable to liabilities still held |
||||||||||||||||||||
|
Policyholder account balances (1) |
$ | 878 | $ | (456 | ) | $ | — | $ | 13 | $ | — | $ | — | $ | 435 | $ | (445 | ) | |||||||||
|
Other liabilities ( 2) |
68 | 142 | — | (49 | ) | — | — | 161 | 110 | ||||||||||||||||||
|
Total Level 3 liabilities |
$ | 946 | $ | (314 | ) | $ | — | $ | (36 | ) | $ | — | $ | — | $ | 596 | $ | (335 | ) | ||||||||
| (1) |
Represents embedded derivatives associated with our GMWB liabilities. |
| (2) |
Represents derivatives. |
| (3) |
The policyholder account balances as of January 1, 2009 have been revised to exclude the impact of reinsurance. |
| Total
realized and unrealized (gains) losses |
||||||||||||||||||||||||
| Beginning balance as of January 1, 2008 |
Included in net (income) loss |
Included in OCI |
Purchases, sales issuances and settlements, net |
Transfer in Level 3 |
Transfer out of Level 3 |
Ending balance as of June 30, 2008 |
Total (gains) losses included in net (income) loss attributable to liabilities still held |
|||||||||||||||||
|
Policyholder account balances (1) |
$ | 34 | $ | 38 | $ | — | $ | 6 | $ | — | $ | — | $ | 78 | $ | 39 | ||||||||
|
Total Level 3 liabilities |
$ | 34 | $ | 38 | $ | — | $ | 6 | $ | — | $ | — | $ | 78 | $ | 39 | ||||||||
| (1) |
Represents embedded derivatives associated with our GMWB liabilities. |
Realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either net investment gains (losses) within the condensed consolidated statements of income or OCI within stockholders’ equity based on the appropriate accounting treatment for the instrument.
Purchases, sales, issuances and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases and sales of fixed maturity, equity and trading securities and purchases and settlements of derivative instruments.
Purchases, sales, issuances and settlements, net, presented for policyholder account balances represents the issuances and settlements of embedded derivatives associated with our GMWB liabilities where: issuances are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance; and settlements are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income) loss” in the tables presented above.
The amount presented for unrealized gains (losses) for assets and liabilities still held as of the reporting date primarily represents impairments for available-for-sale securities, accretion on certain fixed maturity securities, changes in fair value of trading securities and certain derivatives and changes in fair value of embedded derivatives associated with our GMWB liabilities that existed as of the reporting date, which were recorded in net investment gains (losses).
Non-Recurring Fair Value Measurements
We hold investments in bank loans that are recorded at the lower of cost or fair value and are recorded in other invested assets. As of June 30, 2009, no bank loans were recorded at fair value as cost was lower than their respective fair values. As of December 31, 2008, we recorded $78 million of bank loans at fair value which was lower than their respective cost. In the three and six months ended June 30, 2009, there were no fair value loss adjustments. In the three months ended June 30, 2008, there were no fair value loss adjustments. In the six months ended June 30, 2008, we recorded $3 million of fair value loss adjustments which were included in net investment gains (losses) in the condensed consolidated statements of income. Fair value for bank loans is determined using inputs based on market observable information and is classified as Level 2.
(7) Commitments and Contingencies
(a) Litigation
We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. Plaintiffs in class action and other lawsuits against us may seek indeterminate amounts which may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer reputational harm, which could have an adverse effect on our business, financial condition or results of operations. At this time, it is not feasible to predict, nor to determine the ultimate outcomes of all pending investigations and legal proceedings, nor to provide reasonable ranges of potential losses.
As previously identified, one of our subsidiaries was named along with several other GIC industry participants as a defendant in several class action and non-class action lawsuits alleging antitrust and other violations involving the sale of GICs to municipalities. The putative class action initiated in December 2008, which case was removed to the United States District Court for Central California, Fresno County Financing Authority, et al. v. AIG Financial Products Corp., et al, has now been fully transferred by the United States Judicial Panel on Multi-District Litigation to the Southern District of New York for consolidation into In re Municipal Derivatives Antitrust Litigation. Also, as previously identified, certain plaintiffs filed a consolidated amended class action complaint, which our subsidiary (along with many other defendants) moved to dismiss. In April 2009, the court dismissed all the claims from that complaint, but provided the plaintiffs twenty days to amend their complaint. In June 2009, plaintiffs filed a Second Consolidated Amended Complaint, which did not name any Genworth entity as a defendant. In addition, as previously disclosed, beginning in July 2008, and ending in December 2008, one of our subsidiaries was named along with several other GIC industry participants as a defendant in several separate California class and non-class action lawsuits brought by municipalities alleging fraud and violations of California’s antitrust laws relating to the sale of GICs to each municipality and seeking monetary damages. These lawsuits were removed to the appropriate federal courts. By April 2009, the Judicial Panel on Multidistrict Litigation had transferred all of these actions to the United States District Court for the Southern District of New York. These actions are still pending.
As previously reported, one of our U.S. mortgage insurance subsidiaries is involved in an arbitration proceeding with a lender regarding five bulk transactions (reflecting approximately $531 million of risk in-force) that, until their rescission by us in December 2008, had insured certain of such lender’s payment option adjustable rate loans. The arbitration hearing is scheduled to begin in September 2009, with a non-binding mediation of the dispute currently in process.
One of our insurance subsidiaries was named as a defendant in a lawsuit captioned Peisner v. Genworth Life Insurance Company, United States District Court for the Central District of California. The complaint was filed in May 2009 as a putative class action on behalf of California residents who purchased certain long-term care insurance policies issued by our insurance subsidiary. The plaintiff alleges that our insurance subsidiary breached express and implied contract terms, and violated California statutory requirements for fair and lawful business practices, by securing a rate increase on certain long-term care insurance policies. The plaintiff does not specify the amount of damages he seeks to recover. We intend to vigorously defend this action but cannot predict its outcome.
(b) Commitments
As of June 30, 2009, we were committed to fund $290 million in limited partnership investments.
(8) Borrowings and Other Financings
Commercial Paper Facility
We have a $1.0 billion commercial paper program whereby notes are offered pursuant to an exemption from registration under the Securities Act of 1933 and may have a maturity of up to 364 days from the date of issue. However, during the second half of 2008, the unfavorable liquidity environment impacted our ability to issue commercial paper and the downgrade of our holding company resulted in us being ineligible to participate in the Federal Reserve’s Commercial Paper Funding Facility (“CPFF”) which went into effect in October 2008. The $203 million of outstanding commercial paper as of December 31, 2008 was held by CPFF until maturity and was fully repaid in February 2009. In the current market environment, we do not anticipate issuing commercial paper.
Revolving Credit Facilities
We have a $1.0 billion five-year revolving credit facility that matures in May 2012 and a $1.0 billion five-year revolving credit facility that matures in August 2012. These facilities bear variable interest rates based on one-month London Interbank Offered Rate (“LIBOR”) plus a margin. Lehman Commercial Paper Inc. (“LCP”) had committed $70 million under the August 2012 credit facility and Lehman Brothers Bank, FSB (“Lehman FSB”) had committed $70 million under the May 2012 credit facility. On October 5, 2008, LCP filed for protection under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. LCP was unable to fulfill its commitments under the August 2012 credit facility and Lehman FSB declined to fulfill its commitment under the May 2012 credit facility. Therefore, we only have access to $1.9 billion under these facilities.
As of June 30, 2009 and December 31, 2008, we had borrowings of $930 million under these facilities. As of June 30, 2009, we utilized $105 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our life insurance subsidiaries. As of December 31, 2008, we utilized $184 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our U.S. mortgage insurance subsidiaries.
Long-Term Senior Notes
During the second quarter of 2009, we repaid principal of $329 million of our 5.23% senior notes that matured in May 2009, plus accrued interest. During the first quarter of 2009, we repurchased principal of $79 million of our 4.75% senior notes, plus accrued interest. During the second quarter of 2009, we repaid the remaining principal of $331 million of our 4.75% senior notes that matured in June 2009, plus accrued interest. We have no additional long-term senior notes maturing until 2011.
Non-Recourse Funding Obligations
As of June 30, 2009, we had $3.4 billion of fixed and floating rate non-recourse funding obligations outstanding backing additional statutory reserves. Of these obligations, $1.7 billion were guaranteed by third-party financial guaranty insurance companies and the interest rates on these obligations are subject to rate resets triggered by negative rating agency actions on the third-party financial guaranty insurance companies that guarantee these obligations. During 2008, the rates on those $1.7 billion of non-recourse funding obligations were contractually reset to the highest margin to the related underlying index rates.
On March 25, 2009, River Lake Insurance Company IV Limited, our wholly-owned subsidiary, repaid $12 million of its total outstanding $40 million Class B Floating Rate Subordinated Notes due May 25, 2028 following an early redemption event, in accordance with the priority of payments.
As of June 30, 2009 and December 31, 2008, the weighted-average interest rates on our non-recourse funding obligations were 1.48% and 3.76%, respectively, reflecting the decline in the underlying index rate.
(9) Income Taxes
The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:
| Three months ended June 30, |
Six
months ended June 30, |
|||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
|
Statutory U.S. federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||
|
Increase (reduction) in rate resulting from: |
||||||||||||
|
State income tax, net of federal income tax effect |
(5.1 | ) | 0.3 | 0.2 | (1.1 | ) | ||||||
|
Benefit on tax favored investments |
(3.5 | ) | (5.7 | ) | 3.8 | (30.6 | ) | |||||
|
Effect of foreign operations |
(18.6 | ) | (0.1 | ) | 3.3 | 43.8 | ||||||
|
Interest on uncertain tax positions |
(1.8 | ) | 9.0 | (0.4 | ) | 100.3 | ||||||
|
Other, net |
1.4 | 0.3 | (0.4 | ) | 2.6 | |||||||
|
Effective rate |
7.4 | % | 38.8 | % | 41.5 | % | 150.0 | % | ||||
The effective tax rate decreased significantly from the prior year due to favorable examination developments recognized in the prior year, partially offset by the timing of tax benefits related to lower taxed foreign income and tax favored investments recognized in the current year pursuant to Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting.
(10) Segment Information
We conduct our operations in three operating business segments: (1) Retirement and Protection, which includes our life insurance, long-term care insurance, wealth management products and services, retirement income products and institutional products; (2) International, which includes international mortgage and lifestyle protection insurance; and (3) U.S. Mortgage Insurance, which includes mortgage-related products and services that facilitate homeownership by enabling borrowers to buy homes with low-down-payment mortgages. We also have Corporate and Other activities which include interest and other debt financing expenses, other corporate income and expenses not allocated to the segments, the results of non-core businesses that are managed outside of our operating segments and eliminations of inter-segment transactions.
We allocate net investment gains (losses) from Corporate and Other activities to our Retirement and Protection segment using an approach based principally upon the investment portfolio established to support the segment’s products and targeted capital levels. We do not allocate net investment gains (losses) from Corporate and Other activities to our International and U.S. Mortgage Insurance segments, because they have their own separate investment portfolios, and net investment gains (losses) from those portfolios are reflected in the International and U.S. Mortgage Insurance segment results, respectively.
We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income (loss) and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “net operating income (loss).” We define net operating income (loss) as income (loss) from continuing operations excluding after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A significant component of our net investment gains (losses) is the result of impairments, the timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are often subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income (loss) if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income (loss) in accordance with U.S. GAAP, we believe that net operating income (loss), and measures that are derived from or incorporate net operating income (loss), are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. However, net operating income (loss) is not a substitute for net income (loss) determined in accordance with U.S. GAAP. In addition, our definition of net operating income (loss) may differ from the definitions used by other companies.
In 2009, we began reporting our equity access business in our long-term care insurance business included in our Retirement and Protection segment. Our equity access business includes our wholly-owned subsidiary that originates reverse mortgage loans and was previously reported in Corporate and Other activities. The amounts associated with this business were not material and the prior period amounts have not been re-presented.
The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:
| Three months ended June 30, |
Six
months ended June 30, |
||||||||||||||
|
(Amounts in millions) |
2009 | 2008 | 2009 | 2008 | |||||||||||
|
Revenues: |
|||||||||||||||
|
Retirement and Protection |
$ | 1,663 | $ | 1,363 | $ | 2,635 | $ | 3,119 | |||||||
|
International |
639 | 808 | 1,229 | 1,559 | |||||||||||
|
U.S. Mortgage Insurance |
196 | 238 | 384 | 467 | |||||||||||
|
Corporate and Other |
(15 | ) | (11 | ) | (31 | ) | 6 | ||||||||
|
Total revenues |
$ | 2,483 | $ | 2,398 | $ | 4,217 | $ | 5,151 | |||||||
The following table reflects net operating income (loss) of our segments and Corporate and Other activities determined in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, and a reconciliation of net operating income (loss) of our segments and Corporate and Other activities to net income (loss) for the periods indicated:
| Three months ended June 30, |
Six
months ended June 30, |
|||||||||||||||
|
(Amounts in millions) |
2009 | 2008 | 2009 | 2008 | ||||||||||||
|
Retirement and Protection |
$ | 127 | $ | 150 | $ | 190 | $ | 312 | ||||||||
|
International |
87 | 183 | 188 | 343 | ||||||||||||
|
U.S. Mortgage Insurance |
(134 | ) | (59 | ) | (269 | ) | (95 | ) | ||||||||
|
Corporate and Other |
(71 | ) | (62 | ) | (86 | ) | (104 | ) | ||||||||
|
Net operating income |
9 | 212 | 23 | 456 | ||||||||||||
|
Net investment gains (losses), net of taxes and other adjustments |
(59 | ) | (321 | ) | (542 | ) | (449 | ) | ||||||||
|
Net income (loss) |
$ | (50 | ) | $ | (109 | ) | $ | (519 | ) | $ | 7 | |||||
The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:
|
(Amounts in millions) |
June 30, 2009 |
December 31, 2008 |
||||
|
Assets: |
||||||
|
Retirement and Protection |
$ | 86,327 | $ | 88,117 | ||
|
International |
11,230 | 10,498 | ||||
|
U.S. Mortgage Insurance |
4,436 | 3,978 | ||||
|
Corporate and Other |
2,833 | 4,796 | ||||
|
Total assets |
$ | 104,826 | $ | 107,389 | ||
(11) Canadian Initial Public Offering
On July 7, 2009, Genworth MI Canada Inc. (“Genworth Canada”), our indirect subsidiary, completed the initial public offering (the “Offering”) of its common shares. Of the 44.7 million common shares of Genworth Canada that were sold in the Offering, 5.1 million common shares were sold by Genworth Canada and 39.6 million common shares were sold by Brookfield Life Assurance Company Limited (the “Selling Shareholder”), our indirect wholly-owned subsidiary. Following completion of the Offering, we beneficially owned 61.8% of the common shares of Genworth Canada. In addition, the Selling Shareholder granted to the underwriters of the Offering an option (the “Over-Allotment Option”), that was exercisable for a period of 30 days after the closing of the Offering, to purchase up to an additional 6.7 million common shares from the Selling Shareholder. On July 30, 2009, 5.0 million common shares were sold by the Selling Shareholder pursuant to the Over-Allotment Option. Following the exercise and closing of the Over-Allotment Option, we beneficially own 57.5% of the common shares of Genworth Canada.
At an exchange rate of 0.88 United States dollar to 1 Canadian dollar, the Offering and the Over-Allotment Option generated net proceeds of approximately US$705 million (net of expenses directly related to the transaction, including underwriting commissions, taxes and other items) which excludes US$22 million remaining in Genworth Canada.
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