GENWORTH FINANCIAL INC, 10-Q filed on 11/2/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 26, 2012
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
GNW 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
Entity Central Index Key
0001276520 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
491,831,925 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 62,214 
$ 58,295 
Equity securities available-for-sale, at fair value
524 
361 
Commercial mortgage loans
5,861 
6,092 
Restricted commercial mortgage loans related to securitization entities
359 
411 
Policy loans
1,626 
1,549 
Other invested assets
3,916 
4,819 
Restricted other invested assets related to securitization entities ($393 and $376 at fair value)
393 
377 
Total investments
74,893 
71,904 
Cash and cash equivalents
3,741 
4,488 
Accrued investment income
746 
691 
Deferred acquisition costs
5,020 
5,193 
Intangible assets
488 
580 
Goodwill
1,128 
1,253 
Reinsurance recoverable
17,195 
16,998 
Other assets
1,010 
958 
Separate account assets
10,166 
10,122 
Total assets
114,387 
112,187 
Liabilities and stockholders' equity
 
 
Future policy benefits
33,221 
32,175 
Policyholder account balances
26,449 
26,345 
Liability for policy and contract claims
7,545 
7,620 
Unearned premiums
4,291 
4,223 
Other liabilities ($167 and $210 other liabilities related to securitization entities)
6,073 
6,308 
Borrowings related to securitization entities ($60 and $48 at fair value)
353 
396 
Non-recourse funding obligations
2,325 
3,256 
Long-term borrowings
4,880 
4,726 
Deferred tax liability
1,437 
838 
Separate account liabilities
10,166 
10,122 
Total liabilities
96,740 
96,009 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 580 million and 579 million shares issued as of September 30, 2012 and December 31, 2011, respectively; 492 million and 491 million shares outstanding as of September 30, 2012 and December 31, 2011, respectively
Additional paid-in capital
12,162 
12,136 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
2,641 
1,617 
Net unrealized gains (losses) on other-than-temporarily impaired securities
(88)
(132)
Net unrealized investment gains (losses)
2,553 
1,485 
Derivatives qualifying as hedges
2,011 
2,009 
Foreign currency translation and other adjustments
659 
553 
Total accumulated other comprehensive income (loss)
5,223 
4,047 
Retained earnings
1,741 
1,584 
Treasury stock, at cost (88 million shares as of September 30, 2012 and December 31, 2011)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
16,427 
15,068 
Noncontrolling interests
1,220 
1,110 
Total stockholders' equity
17,647 
16,178 
Total liabilities and stockholders' equity
$ 114,387 
$ 112,187 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Restricted other invested assets related to securitization entities, at fair value
$ 393 
$ 376 
Other liabilities, securitization entities
167 
210 
Borrowings related to securitization entities, at fair value
$ 60 
$ 48 
Class A common stock, par value
$ 0.001 
$ 0.001 
Class A common stock, shares authorized
1,500,000,000 
1,500,000,000 
Class A common stock, shares issued
580,000,000 
579,000,000 
Class A common stock, shares outstanding
492,000,000 
491,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Revenues:
 
 
 
 
Premiums
$ 1,311 
$ 1,461 
$ 3,720 
$ 4,353 
Net investment income
825 
842 
2,503 
2,553 
Net investment gains (losses)
(157)
10 
(225)
Insurance and investment product fees and other
391 
375 
1,252 
1,063 
Total revenues
2,536 
2,521 
7,485 
7,744 
Benefits and expenses:
 
 
 
 
Benefits and other changes in policy reserves
1,363 
1,457 
3,977 
4,549 
Interest credited
193 
194 
582 
599 
Acquisition and operating expenses, net of deferrals
504 
581 
1,536 
1,725 
Amortization of deferred acquisition costs and intangibles
162 
152 
582 
465 
Goodwill impairment
89 
 
89 
 
Interest expense
126 
124 
352 
385 
Total benefits and expenses
2,437 
2,508 
7,118 
7,723 
Income before income taxes
99 
13 
367 
21 
Provision (benefit) for income taxes
29 
(7)
108 
Net income
70 
20 
259 
13 
Less: net income attributable to noncontrolling interests
36 
36 
102 
106 
Net income (loss) available to Genworth Financial, Inc.'s common stockholders
34 
(16)
157 
(93)
Net income (loss) available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
 
Basic
$ 0.07 1
$ (0.03)1
$ 0.32 1
$ (0.19)1
Diluted
$ 0.07 1
$ (0.03)1
$ 0.32 1
$ (0.19)1
Weighted-average common shares outstanding:
 
 
 
 
Basic
491.7 
490.8 
491.5 
490.5 
Diluted
493.9 2
490.8 2
494.5 2
490.5 2
Supplemental disclosures:
 
 
 
 
Total other-than-temporary impairments
(26)
(39)
(84)
(98)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
(3)
(13)
(1)
(16)
Net other-than-temporary impairments
(29)
(52)
(85)
(114)
Other investments gains (losses)
38 
(105)
95 
(111)
Net investment gains (losses)
$ 9 
$ (157)
$ 10 
$ (225)
[2] Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss available to Genworth Financial, Inc.'s common stockholders for the three and nine months ended September 30, 2011, we were required to use basic weighted-average common shares outstanding in the calculation for the three and nine months ended September 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.7 million and 3.2 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.'s common stockholders for the three and nine months ended September 30, 2011, dilutive potential common shares would have been 492.5 million and 493.7 million, respectively.
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Net income
$ 70 
$ 20 
$ 259 
$ 13 
Other comprehensive income (loss), net of taxes:
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
517 
1,256 
1,029 
1,600 
Net unrealized gains (losses) on other-than-temporarily impaired securities
28 
(10)
44 
(5)
Derivatives qualifying as hedges
(76)
1,017 
1,036 
Foreign currency translation and other adjustments
148 
(508)
145 
(259)
Total other comprehensive income (loss)
617 
1,755 
1,220 
2,372 
Total comprehensive income (loss)
687 
1,775 
1,479 
2,385 
Less: comprehensive income attributable to noncontrolling interests
83 
(25)
146 
86 
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
$ 604 
$ 1,800 
$ 1,333 
$ 2,299 
Condensed Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost
Total Genworth Financial, Inc.'s stockholders' equity
Noncontrolling interests
Balances at Dec. 31, 2010
$ 13,545 
$ 1 
$ 12,107 
$ 1,506 
$ 1,535 
$ (2,700)
$ 12,449 
$ 1,096 
Repurchase of subsidiary shares
(71)
 
 
 
 
 
 
(71)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
13 
 
 
 
(93)
 
(93)
106 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,600 
 
 
1,566 
 
 
1,566 
34 
Net unrealized gains (losses) on other-than-temporarily impaired securities
(5)
 
 
(5)
 
 
(5)
 
Derivatives qualifying as hedges
1,036 
 
 
1,036 
 
 
1,036 
 
Foreign currency translation and other adjustments
(259)
 
 
(205)
 
 
(205)
(54)
Total comprehensive income (loss)
2,385 
 
 
 
 
 
2,299 
86 
Dividends to noncontrolling interests
(35)
 
 
 
 
 
 
(35)
Stock-based compensation expense and exercises and other
22 
 
22 
 
 
 
22 
 
Balances at Sep. 30, 2011
15,846 
12,129 
3,898 
1,442 
(2,700)
14,770 
1,076 
Balances at Dec. 31, 2011
16,178 
12,136 
4,047 
1,584 
(2,700)
15,068 
1,110 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
259 
 
 
 
157 
 
157 
102 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,029 
 
 
1,024 
 
 
1,024 
Net unrealized gains (losses) on other-than-temporarily impaired securities
44 
 
 
44 
 
 
44 
 
Derivatives qualifying as hedges
 
 
 
 
 
Foreign currency translation and other adjustments
145 
 
 
106 
 
 
106 
39 
Total comprehensive income (loss)
1,479 
 
 
 
 
 
1,333 
146 
Dividends to noncontrolling interests
(36)
 
 
 
 
 
 
(36)
Stock-based compensation expense and exercises and other
26 
 
26 
 
 
 
26 
 
Balances at Sep. 30, 2012
$ 17,647 
$ 1 
$ 12,162 
$ 5,223 
$ 1,741 
$ (2,700)
$ 16,427 
$ 1,220 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Cash flows from operating activities:
 
 
Net income
$ 259 
$ 13 
Adjustments to reconcile net income to net cash from operating activities:
 
 
Amortization of fixed maturity discounts and premiums and limited partnerships
(59)
(71)
Net investment losses (gains)
(10)
225 
Charges assessed to policyholders
(590)
(507)
Acquisition costs deferred
(456)
(485)
Amortization of deferred acquisition costs and intangibles
582 
465 
Goodwill impairment
89 
 
Deferred income taxes
14 
(155)
Gain on sale of subsidiary
(15)
   
Net increase in trading securities, held-for-sale investments and derivative instruments
66 
795 
Stock-based compensation expense
20 
23 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(160)
(152)
Insurance reserves
1,672 
1,953 
Current tax liabilities
(190)
Other liabilities and other policy-related balances
(795)
(80)
Net cash from operating activities
427 
2,032 
Cash flows from investing activities:
 
 
Fixed maturity securities
3,619 
4,075 
Commercial mortgage loans
559 
633 
Restricted commercial mortgage loans related to securitization entities
48 
77 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
3,956 
3,446 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(8,942)
(7,798)
Commercial mortgage loans
(339)
(202)
Other invested assets, net
531 
(56)
Policy loans, net
(8)
(85)
Proceeds from sale of a subsidiary, net of cash transferred
64 
 
Payments for businesses purchased, net of cash acquired
(18)
(4)
Net cash from investing activities
(530)
86 
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
2,248 
2,016 
Withdrawals from universal life and investment contracts
(2,057)
(3,034)
Redemption and repurchase of non-recourse funding obligations
(801)
(112)
Proceeds from the issuance of long-term debt
361 
545 
Repayment and repurchase of long-term debt
(222)
(760)
Repayment of borrowings related to securitization entities
(53)
(77)
Repurchase of subsidiary shares
 
(71)
Dividends paid to noncontrolling interests
(36)
(35)
Other, net
(103)
21 
Net cash from financing activities
(663)
(1,507)
Effect of exchange rate changes on cash and cash equivalents
19 
(95)
Net change in cash and cash equivalents
(747)
516 
Cash and cash equivalents at beginning of period
4,488 
3,132 
Cash and cash equivalents at end of period
$ 3,741 
$ 3,648 
Formation of Genworth and Basis of Presentation
Formation of Genworth and Basis of Presentation

(1) Formation of Genworth and Basis of Presentation

Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware on October 23, 2003. The accompanying condensed financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or where we are the primary beneficiary of a variable interest entity, which we refer to as the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.

We have the following operating segments:

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

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

Wealth Management. We offer and manage a variety of wealth management services, including investments, advisor support and practice management services.

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

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

Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and Medicare supplement insurance products. Institutional products consist of funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business. Effective October 1, 2011, we completed the sale of our Medicare supplement insurance business.

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 other 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. 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 Current Report on Form 8-K filed on June 11, 2012 which reflected retrospective changes in accounting for costs associated with acquiring or renewing insurance contracts and changes in the treatment of future policy benefits for level premium term life insurance products. Certain prior year amounts have been reclassified to conform to the current year presentation.

Accounting Changes
Accounting Changes

(2) Accounting Changes

On January 1, 2012, we adopted new accounting guidance requiring presentation of the components of net income (loss), the components of other comprehensive income (loss) (“OCI”) and total comprehensive income either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. We chose to present two separate but consecutive statements and adopted this new guidance retrospectively. The Financial Accounting Standards Board (“FASB”) issued an amendment relating to this new guidance for presentation of the reclassification of items out of accumulated other comprehensive income into net income that removed this requirement until further guidance is issued. The adoption of this new accounting guidance did not have any impact on our consolidated financial results.

On January 1, 2012, we adopted new accounting guidance related to fair value measurements. This new accounting guidance clarified existing fair value measurement requirements and changed certain fair value measurement principles and disclosure requirements. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

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

On January 1, 2012, we adopted new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. Acquisition costs include costs that are related directly to the successful acquisition of our insurance policies and investment contracts, which are deferred and amortized over the estimated life of the related insurance policies. These costs include commissions in excess of ultimate renewal commissions and for contracts and policies issued some support costs, such as underwriting, medical inspection and issuance expenses. Deferred acquisition costs (“DAC”) are subsequently amortized to expense over the lives of the underlying contracts, in relation to the anticipated recognition of premiums or gross profits. We adopted this new guidance retrospectively, which reduced retained earnings and stockholders’ equity by $1.3 billion as of January 1, 2011, and reduced net income (loss) by $63 million, $86 million and $12 million for the years ended December 31, 2011, 2010 and 2009, respectively. This new guidance results in lower amortization and fewer deferred costs, specifically related to underwriting, inspection and processing for contracts that are not issued, as well as marketing and customer solicitation.

Effective January 1, 2012, we changed our treatment of the liability for future policy benefits for our level premium term life insurance products when the liability for a policy falls below zero. Previously, the total liability for future policy benefits included negative reserves calculated at an individual policy level. Through 2010, we issued level premium term life insurance policies whose premiums are contractually determined to be level through a period of time and then increase thereafter. Our previous accounting policy followed the accounting for traditional, long-duration insurance contracts where the reserves are calculated as the present value of expected benefit payments minus the present value of net premiums based on assumptions determined on the policy issuance date including mortality, interest, and lapse rates. This accounting has the effect of causing profits to emerge as a level percentage of premiums, subject to differences in assumed versus actual experience which flow through income as they occur, and for products with an increasing premium stream, such as the level premium term life insurance product, may result in negative reserves for a given policy.

More recent insurance-specific accounting guidance reflects a different accounting philosophy, emphasizing the balance sheet over the income statement, or matching, focus which was the philosophy in place when the traditional, long-duration insurance contract guidance was issued (the accounting model for traditional, long-duration insurance contracts draws upon the principles of matching and conservatism originating in the 1970’s, and does not specifically address negative reserves). More recent accounting models for long-duration contracts specifically prohibit negative reserves, e.g., non-traditional contracts with annuitization benefits and certain participating contracts. These recent accounting models do not impact the reserving for our level premium term life insurance products.

We believe that industry accounting practices for level premium term life insurance product reserving is mixed with some companies “flooring” reserves at zero and others applying our previous accounting policy described above. In 2010, we stopped issuing new level premium term life insurance policies. Thus, as the level premium term policies reach the end of their level premium term periods, the portion of policies with negative reserves in relation to the reserve for all level premium term life insurance products will continue to increase. Our new method of accounting floors the liability for future policy benefits on each level premium term life insurance policy at zero. We believe that flooring reserves at zero is preferable in our circumstances as this alternative accounting policy will not allow negative reserves to accumulate on the balance sheet for this closed block of insurance policies. In implementing this change in accounting, no changes were made to the assumptions that were locked-in at policy inception. We implemented this accounting change retrospectively, which reduced retained earnings and stockholders’ equity by $110 million as of January 1, 2011, and reduced net income (loss) by $10 million, $4 million and $32 million for the years ended December 31, 2011, 2010 and 2009, respectively.

On October 22, 2012, we announced the launch of a new traditional term life insurance product, along with other changes to our life insurance portfolio designed to update and expand our product offerings and further adjust pricing. We will floor the liability for future policy benefits on these level premium term insurance policies at zero, consistent with our accounting for our existing level premium term insurance business.

The following table presents the balance sheet as of December 31, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

(Amounts in millions)

As Originally
Reported
Effect of
DAC Change
Effect of
Reserve Change
As Currently
Reported

Assets

Total investments

$ 71,904 $ $ $ 71,904

Cash and cash equivalents

4,488 4,488

Accrued investment income

691 691

Deferred acquisition costs

7,327 (2,134 ) 5,193

Intangible assets

577 3 580

Goodwill

1,253 1,253

Reinsurance recoverable

16,982 16 16,998

Other assets

958 958

Separate account assets

10,122 10,122

Total assets

$ 114,302 $ (2,131 ) $ 16 $ 112,187

Liabilities and stockholders’ equity

Liabilities:

Future policy benefits

$ 31,971 $ 3 $ 201 $ 32,175

Policyholder account balances

26,345 26,345

Liability for policy and contract claims

7,620 7,620

Unearned premiums

4,257 (34 ) 4,223

Other liabilities

6,308 6,308

Borrowings related to securitization entities

396 396

Non-recourse funding obligations

3,256 3,256

Long-term borrowings

4,726 4,726

Deferred tax liability

1,636 (733 ) (65 ) 838

Separate account liabilities

10,122 10,122

Total liabilities

96,637 (764 ) 136 96,009

Stockholders’ equity:

Class A common stock

1 1

Additional paid-in capital

12,124 12 12,136

Accumulated other comprehensive income (loss):

Net unrealized investment gains (losses):

Net unrealized gains (losses) on securities not other-than-temporarily impaired

1,586 31 1,617

Net unrealized gains (losses) on other-than-temporarily impaired securities

(132 ) (132 )

Net unrealized investment gains (losses)

1,454 31 1,485

Derivatives qualifying as hedges

2,009 2,009

Foreign currency translation and other adjustments

558 (5 ) 553

Total accumulated other comprehensive income (loss)

4,021 26 4,047

Retained earnings

3,095 (1,391 ) (120 ) 1,584

Treasury stock, at cost

(2,700 ) (2,700 )

Total Genworth Financial, Inc.’s stockholders’ equity

16,541 (1,353 ) (120 ) 15,068

Noncontrolling interests

1,124 (14 ) 1,110

Total stockholders’ equity

17,665 (1,367 ) (120 ) 16,178

Total liabilities and stockholders’ equity

$ 114,302 $ (2,131 ) $ 16 $ 112,187

The following table presents the income statement for the three months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

(Amounts in millions)

As Originally
Reported
Effect of
DAC Change
Effect of
Reserve Change
As Currently
Reported

Revenues:

Premiums

$ 1,461 $ $ $ 1,461

Net investment income

842 842

Net investment gains (losses)

(157 ) (157 )

Insurance and investment product fees and other

375 375

Total revenues

2,521 2,521

Benefits and expenses:

Benefits and other changes in policy reserves

1,457 1,457

Interest credited

194 194

Acquisition and operating expenses, net of deferrals

510 71 581

Amortization of deferred acquisition costs and
intangibles

190 (38 ) 152

Interest expense

124 124

Total benefits and expenses

2,475 33 2,508

Income before income taxes

46 (33 ) 13

Benefit for income taxes

(19 ) 12 (7 )

Net income

65 (45 ) 20

Less: net income attributable to noncontrolling interests

36 36

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

$ 29 $ (45 ) $ $ (16 )

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

Basic (1)

$ 0.06 $ (0.09 ) $ $ (0.03 )

Diluted (1)

$ 0.06 $ (0.09 ) $ $ (0.03 )

(1)

May not total due to whole number calculation.

The following table presents the income statement for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

(Amounts in millions)

As Originally
Reported
Effect of
DAC Change
Effect of
Reserve Change
As Currently
Reported

Revenues:

Premiums

$ 4,353 $ $ $ 4,353

Net investment income

2,553 2,553

Net investment gains (losses)

(225 ) (225 )

Insurance and investment product fees and other

1,063 1,063

Total revenues

7,744 7,744

Benefits and expenses:

Benefits and other changes in policy reserves

4,538 11 4,549

Interest credited

599 599

Acquisition and operating expenses, net of deferrals

1,524 201 1,725

Amortization of deferred acquisition costs and
intangibles

572 (107 ) 465

Interest expense

385 385

Total benefits and expenses

7,618 94 11 7,723

Income before income taxes

126 (94 ) (11 ) 21

Provision for income taxes

5 7 (4 ) 8

Net income

121 (101 ) (7 ) 13

Less: net income attributable to noncontrolling interests

106 106

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

$ 15 $ (101 ) $ (7 ) $ (93 )

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

Basic (1)

$ 0.03 $ (0.21 ) $ (0.01 ) $ (0.19 )

Diluted (1)

$ 0.03 $ (0.21 ) $ (0.01 ) $ (0.19 )

(1)

May not total due to whole number calculation.

The following table presents the cash flows from operating activities for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

(Amounts in millions)

As Originally
Reported
Effect of
DAC Change
Effect of
Reserve Change
As Currently
Reported

Cash flows from operating activities:

Net income

$ 121 $ (101 ) $ (7 ) $ 13

Adjustments to reconcile net income to net cash from operating activities:

Amortization of fixed maturity discounts and premiums and limited partnerships

(71 ) (71 )

Net investment losses

225 225

Charges assessed to policyholders

(507 ) (507 )

Acquisition costs deferred

(686 ) 201 (485 )

Amortization of deferred acquisition costs and intangibles

572 (107 ) 465

Deferred income taxes

(158 ) 7 (4 ) (155 )

Net increase in trading securities, held-for-sale investments and derivative instruments

795 795

Stock-based compensation expense

23 23

Change in certain assets and liabilities:

Accrued investment income and other assets

(152 ) (152 )

Insurance reserves

1,942 11 1,953

Current tax liabilities

8 8

Other liabilities and policy-related balances

(80 ) (80 )

Net cash from operating activities

$ 2,032 $ $ $ 2,032

The following table presents the balance sheet as of September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

(Amounts in millions)

As Reported
Under New
Policy
As Computed
Under Previous
Policy
Effect of
Change

Assets

Total investments

$ 74,893 $ 74,893 $

Cash and cash equivalents

3,741 3,741

Accrued investment income

746 746

Deferred acquisition costs

5,020 5,020

Intangible assets

488 488

Goodwill

1,128 1,128

Reinsurance recoverable

17,195 17,172 23

Other assets

1,010 1,010

Separate account assets

10,166 10,166

Total assets

$ 114,387 $ 114,364 $ 23

Liabilities and stockholders’ equity

Liabilities:

Future policy benefits

$ 33,221 $ 32,997 $ 224

Policyholder account balances

26,449 26,449

Liability for policy and contract claims

7,545 7,545

Unearned premiums

4,291 4,291

Other liabilities

6,073 6,073

Borrowings related to securitization entities

353 353

Non-recourse funding obligations

2,325 2,325

Long-term borrowings

4,880 4,880

Deferred tax liability

1,437 1,508 (71 )

Separate account liabilities

10,166 10,166

Total liabilities

96,740 96,587 153

Stockholders’ equity:

Class A common stock

1 1

Additional paid-in capital

12,162 12,162

Accumulated other comprehensive income (loss):

Net unrealized investment gains (losses):

Net unrealized gains (losses) on securities not other-than-temporarily impaired

2,641 2,641

Net unrealized gains (losses) on other-than-temporarily impaired securities

(88 ) (88 )

Net unrealized investment gains (losses)

2,553 2,553

Derivatives qualifying as hedges

2,011 2,011

Foreign currency translation and other adjustments

659 659

Total accumulated other comprehensive income (loss)

5,223 5,223

Retained earnings

1,741 1,871 (130 )

Treasury stock, at cost

(2,700 ) (2,700 )

Total Genworth Financial, Inc.’s stockholders’ equity

16,427 16,557 (130 )

Noncontrolling interests

1,220 1,220

Total stockholders’ equity

17,647 17,777 (130 )

Total liabilities and stockholders’ equity

$ 114,387 $ 114,364 $ 23

The following table presents the income statement for the three months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

(Amounts in millions)

As Reported
Under New
Policy
As Computed
Under Previous
Policy
Effect of
Change

Revenues:

Premiums

$ 1,311 $ 1,311 $

Net investment income

825 825

Net investment gains (losses)

9 9

Insurance and investment product fees and other

391 391

Total revenues

2,536 2,536

Benefits and expenses:

Benefits and other changes in policy reserves

1,363 1,356 7

Interest credited

193 193

Acquisition and operating expenses, net of deferrals

504 504

Amortization of deferred acquisition costs and intangibles

162 162

Goodwill impairment

89 89

Interest expense

126 126

Total benefits and expenses

2,437 2,430 7

Income before income taxes

99 106 (7 )

Provision for income taxes

29 32 (3 )

Net income

70 74 (4 )

Less: net income attributable to noncontrolling interests

36 36

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

$ 34 $ 38 $ (4 )

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

Basic

$ 0.07 $ 0.08 $ (0.01 )

Diluted

$ 0.07 $ 0.08 $ (0.01 )

The following table presents the income statement for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

(Amounts in millions)

As Reported
Under New
Policy
As Computed
Under Previous
Policy
Effect of
Change

Revenues:

Premiums

$ 3,720 $ 3,720 $

Net investment income

2,503 2,503

Net investment gains (losses)

10 10

Insurance and investment product fees and other

1,252 1,252

Total revenues

7,485 7,485

Benefits and expenses:

Benefits and other changes in policy reserves

3,977 3,961 16

Interest credited

582 582

Acquisition and operating expenses, net of deferrals

1,536 1,536

Amortization of deferred acquisition costs and intangibles

582 582

Goodwill impairment

89 89

Interest expense

352 352

Total benefits and expenses

7,118 7,102 16

Income before income taxes

367 383 (16 )

Provision for income taxes

108 114 (6 )

Net income

259 269 (10 )

Less: net income attributable to noncontrolling interests

102 102

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

$ 157 $ 167 $ (10 )

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

Basic

$ 0.32 $ 0.34 $ (0.02 )

Diluted

$ 0.32 $ 0.34 $ (0.02 )

The following table presents the net cash flows from operating activities for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

(Amounts in millions)

As Reported
Under New
Policy
As Computed
Under Previous
Policy
Effect of
Change

Cash flows from operating activities:

Net income

$ 259 $ 269 $ (10 )

Adjustments to reconcile net income to net cash from operating activities:

Amortization of fixed maturity discounts and premiums and limited partnerships

(59 ) (59 )

Net investment gains

(10 ) (10 )

Charges assessed to policyholders

(590 ) (590 )

Acquisition costs deferred

(456 ) (456 )

Amortization of deferred acquisition costs and intangibles

582 582

Goodwill impairment

89 89

Deferred income taxes

14 20 (6 )

Gain on sale of subsidiary

(15 ) (15 )

Net increase in trading securities, held-for-sale investments and derivative instruments

66 66

Stock-based compensation expense

20 20

Change in certain assets and liabilities:

Accrued investment income and other assets

(160 ) (160 )

Insurance reserves

1,672 1,656 16

Current tax liabilities

(190 ) (190 )

Other liabilities and policy-related balances

(795 ) (795 )

Net cash from operating activities

$ 427 $ 427 $

Accounting Pronouncements Not Yet Adopted

In July 2012, the FASB issued new accounting guidance on testing indefinite-lived intangible assets for impairment. The new guidance permits the use of a qualitative assessment prior to, and potentially instead of, the quantitative impairment test for indefinite-lived intangible assets. This new accounting guidance has an effective date of January 1, 2013, with early adoption permitted in certain circumstances. We do not expect the adoption of this accounting guidance to have an impact on our consolidated financial statements.

In December 2011, the FASB issued new accounting guidance for disclosures about offsetting assets and liabilities. The new guidance requires an entity to disclose information about offsetting and related arrangements to enable users to understand the effect of those arrangements on its financial position. These new disclosure requirements will be effective for us on January 1, 2013 and are not expected to have a material impact on our consolidated financial statements.

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

(3) Earnings (Loss) Per Share

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

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

(Amounts in millions, except per share amounts)

2012 2011 2012 2011

Net income

$ 70 $ 20 $ 259 $ 13

Less: net income attributable to noncontrolling interests

36 36 102 106

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

$ 34 $ (16 ) $ 157 $ (93 )

Basic per common share:

Net income

$ 0.14 $ 0.04 $ 0.53 $ 0.03

Less: net income attributable to noncontrolling interests

0.07 0.07 0.21 0.22

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

$ 0.07 $ (0.03 ) $ 0.32 $ (0.19 )

Diluted per common share:

Net income

$ 0.14 $ 0.04 $ 0.52 $ 0.03

Less: net income attributable to noncontrolling interests

0.07 0.07 0.21 0.22

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

$ 0.07 $ (0.03 ) $ 0.32 $ (0.19 )

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

491.7 490.8 491.5 490.5

Potentially dilutive securities:

Stock options, restricted stock units and stock appreciation rights

2.2 3.0

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

493.9 490.8 494.5 490.5

(1)

May not total due to whole number calculation.

(2)

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2011, we were required to use basic weighted-average common shares outstanding in the calculation for the three and nine months ended September 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.7 million and 3.2 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2011, dilutive potential common shares would have been 492.5 million and 493.7 million, respectively.

Investments
Investments

(4) Investments

(a) Net Investment Income

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

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

(Amounts in millions)

2012 2011 2012 2011

Fixed maturity securities—taxable

$ 659 $ 669 $ 1,988 $ 2,032

Fixed maturity securities—non-taxable

2 8 9 29

Commercial mortgage loans

87 89 256 273

Restricted commercial mortgage loans related to securitization entities

8 11 24 30

Equity securities

4 3 14 16

Other invested assets

48 42 157 131

Policy loans

31 30 93 89

Cash, cash equivalents and short-term investments

8 12 28 24

Gross investment income before expenses and fees

847 864 2,569 2,624

Expenses and fees

(22 ) (22 ) (66 ) (71 )

Net investment income

$ 825 $ 842 $ 2,503 $ 2,553

(b) Net Investment Gains (Losses)

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

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

(Amounts in millions)

2012 2011 2012 2011

Available-for-sale securities:

Realized gains

$ 28 $ 59 $ 112 $ 113

Realized losses

(14 ) (23 ) (79 ) (88 )

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

14 36 33 25

Impairments:

Total other-than-temporary impairments

(26 ) (39 ) (84 ) (98 )

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

(3 ) (13 ) (1 ) (16 )

Net other-than-temporary impairments

(29 ) (52 ) (85 ) (114 )

Trading securities

14 11 21 36

Commercial mortgage loans

2 3 7 4

Net gains (losses) related to securitization entities

18 (57 ) 48 (52 )

Derivative instruments (1)

(2 ) (76 ) (4 ) (101 )

Contingent consideration adjustment

(8 ) (22 ) (10 ) (23 )

Net investment gains (losses)

$ 9 $ (157 ) $ 10 $ (225 )

(1)

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

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended September 30, 2012 and

2011 was $228 million and $263 million, respectively, which was approximately 96% and 93%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2012 and 2011 was $911 million and $954 million, respectively, which was approximately 93% of book value for both periods.

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

As of or for the
three months ended
September 30,
As of or for the
nine months ended
September 30,

(Amounts in millions)

2012 2011 2012 2011

Beginning balance

$ 588 $ 726 $ 646 $ 784

Additions:

Other-than-temporary impairments not previously recognized

5 27 13 31

Increases related to other-than-temporary impairments previously recognized

10 24 42 72

Reductions:

Securities sold, paid down or disposed

(66 ) (58 ) (164 ) (168 )

Ending balance

$ 537 $ 719 $ 537 $ 719

(c) Unrealized Investment Gains and Losses

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

(Amounts in millions)

September 30, 2012 December 31, 2011

Net unrealized gains (losses) on investment securities:

Fixed maturity securities

$ 5,925 $ 3,742

Equity securities

24 5

Other invested assets

(23 ) (30 )

Subtotal

5,926 3,717

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

(1,867 ) (1,303 )

Income taxes, net

(1,412 ) (840 )

Net unrealized investment gains (losses)

2,647 1,574

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

94 89

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

$ 2,553 $ 1,485

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

As of or for the
three months ended
September 30,

(Amounts in millions)

2012 2011

Beginning balance

$ 2,016 $ 264

Unrealized gains (losses) arising during the period:

Unrealized gains (losses) on investment securities

1,040 2,365

Adjustment to deferred acquisition costs

(39 ) (41 )

Adjustment to present value of future profits

11 (61 )

Adjustment to sales inducements

(17 ) 6

Adjustment to benefit reserves

(171 ) (369 )

Provision for income taxes

(288 ) (665 )

Change in unrealized gains (losses) on investment securities

536 1,235

Reclassification adjustments to net investment (gains) losses, net of taxes of $(6) and $(5)

9 11

Change in net unrealized investment gains (losses)

545 1,246

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

8 29

Ending balance

$ 2,553 $ 1,481

As of or for the
nine months ended
September 30,

(Amounts in millions)

2012 2011

Beginning balance

$ 1,485 $ (80 )

Unrealized gains (losses) arising during the period:

Unrealized gains (losses) on investment securities

2,157 2,932

Adjustment to deferred acquisition costs

(138 ) (89 )

Adjustment to present value of future profits

(11 ) (77 )

Adjustment to sales inducements

(31 ) (1 )

Adjustment to benefit reserves

(384 ) (400 )

Provision for income taxes

(553 ) (828 )

Change in unrealized gains (losses) on investment securities

1,040 1,537

Reclassification adjustments to net investment (gains) losses, net of taxes of $(19) and $(31)

33 58

Change in net unrealized investment gains (losses)

1,073 1,595

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

5 34

Ending balance

$ 2,553 $ 1,481

(d) Fixed Maturity and Equity Securities

As of September 30, 2012, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

Gross unrealized gains Gross unrealized losses

(Amounts in millions)

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

Fixed maturity securities:

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

$ 4,448 $ 1,060 $ $ (5 ) $ $ 5,503

Tax-exempt

328 17 (43 ) 302

Government—non-U.S.

2,315 260 (1 ) 2,574

U.S. corporate

23,062 3,368 20 (144 ) 26,306

Corporate—non-U.S.

14,256 1,190 (78 ) 15,368

Residential mortgage-backed

5,837 562 12 (150 ) (142 ) 6,119

Commercial mortgage-backed

3,240 185 4 (112 ) (31 ) 3,286

Other asset-backed

2,799 44 (86 ) (1 ) 2,756

Total fixed maturity securities

56,285 6,686 36 (619 ) (174 ) 62,214

Equity securities

499 32 (7 ) 524

Total available-for-sale securities

$ 56,784 $ 6,718 $ 36 $ (626 ) $ (174 ) $ 62,738

As of December 31, 2011, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

Gross unrealized gains Gross unrealized losses

(Amounts in millions)

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

Fixed maturity securities:

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

$ 3,946 $ 918 $ $ (1 ) $ $ 4,863

Tax-exempt

564 15 (76 ) 503

Government—non-U.S.

2,017 196 (2 ) 2,211

U.S. corporate

23,024 2,542 18 (325 ) (1 ) 25,258

Corporate—non-U.S.

13,156 819 (218 ) 13,757

Residential mortgage-backed

5,695 446 9 (252 ) (203 ) 5,695

Commercial mortgage-backed

3,470 157 4 (179 ) (52 ) 3,400

Other asset-backed

2,686 18 (95 ) (1 ) 2,608

Total fixed maturity securities

54,558 5,111 31 (1,148 ) (257 ) 58,295

Equity securities

356 19 (14 ) 361

Total available-for-sale securities

$ 54,914 $ 5,130 $ 31 $ (1,162 ) $ (257 ) $ 58,656

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of September 30, 2012:

Less than 12 months 12 months or more Total

(Dollar amounts in millions)

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

Description of Securities

Fixed maturity securities:

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

$ 303 $ (5 ) 7 $ $ $ 303 $ (5 ) 7

Tax-exempt

129 (43 ) 15 129 (43 ) 15

Government—non-U.S.

57 (1 ) 10 57 (1 ) 10

U.S. corporate

382 (11 ) 72 938 (133 ) 91 1,320 (144 ) 163

Corporate—non-U.S.

468 (13 ) 90 625 (65 ) 61 1,093 (78 ) 151

Residential mortgage-backed

120 (2 ) 22 577 (290 ) 304 697 (292 ) 326

Commercial mortgage-backed

830 (143 ) 150 830 (143 ) 150

Other asset-backed

141 (1 ) 31 185 (86 ) 20 326 (87 ) 51

Subtotal, fixed maturity securities

1,414 (32 ) 222 3,341 (761 ) 651 4,755 (793 ) 873

Equity securities

91 (5 ) 40 31 (2 ) 20 122 (7 ) 60

Total for securities in an unrealized loss position

$ 1,505 $ (37 ) 262 $ 3,372 $ (763 ) 671 $ 4,877 $ (800 ) 933

% Below cost—fixed maturity securities:

<20% Below cost

$ 1,405 $ (30 ) 216 $ 2,434 $ (198 ) 371 $ 3,839 $ (228 ) 587

20%-50% Below cost

9 (2 ) 6 842 (385 ) 188 851 (387 ) 194

>50% Below cost

65 (178 ) 92 65 (178 ) 92

Total fixed maturity securities

1,414 (32 ) 222 3,341 (761 ) 651 4,755 (793 ) 873

% Below cost—equity securities:

<20% Below cost

87 (4 ) 39 28 (1 ) 19 115 (5 ) 58

20%-50% Below cost

4 (1 ) 1 3 (1 ) 1 7 (2 ) 2

Total equity securities

91 (5 ) 40 31 (2 ) 20 122 (7 ) 60

Total for securities in an unrealized loss position

$ 1,505 $ (37 ) 262 $ 3,372 $ (763 ) 671 $ 4,877 $ (800 ) 933

Investment grade

$ 1,283 $ (22 ) 203 $ 2,173 $ (293 ) 308 $ 3,456 $ (315 ) 511

Below investment grade (3)

222 (15 ) 59 1,199 (470 ) 363 1,421 (485 ) 422

Total for securities in an unrealized loss position

$ 1,505 $ (37 ) 262 $ 3,372 $ (763 ) 671 $ 4,877 $ (800 ) 933

(1)

Amounts included $174 million of unrealized losses on other-than-temporarily impaired securities.

(2)

Amounts included $174 million of unrealized losses on other-than-temporarily impaired securities.

(3)

Amounts that have been in a continuous loss position for 12 months or more included $171 million of unrealized losses on other-than-temporarily impaired securities.

As indicated in the table above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to lower credit ratings since acquisition for corporate securities across various industry sectors. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 2% as of September 30, 2012.

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

Of the $198 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB-” and approximately 62% of the unrealized losses were related to investment grade securities as of September 30, 2012. These unrealized losses were attributable to lower credit ratings for these securities since acquisition, primarily associated with corporate securities in the finance and insurance sector as well as mortgage-backed and asset-backed securities. The average fair value percentage below cost for these securities was approximately 7% as of September 30, 2012. See below for additional discussion related to fixed maturity securities that have been in a continuous loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by asset class as of September 30, 2012:

Investment Grade
20% to 50% Greater than 50%

(Dollar amounts in millions)

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

Fixed maturity securities:

Tax-exempt

$ 114 $ (40 ) 5 % 10 $ $ %

U.S. corporate

138 (44 ) 6 7

Corporate—non-U.S.

29 (17 ) 2 8 2 (2 ) 1

Structured securities:

Residential mortgage-backed

38 (22 ) 3 17 6 (12 ) 2 10

Commercial mortgage-backed

18 (7 ) 1 6 (1 ) 1

Other asset-backed

38 (26 ) 3 4

Total structured securities

94 (55 ) 7 27 6 (13 ) 2 11

Total

$ 375 $ (156 ) 20 % 52 $ 8 $ (15 ) 2 % 12

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

(Dollar amounts in millions)

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

Fixed maturity securities:

U.S. corporate

$ 80 $ (32 ) 4 % 7 $ $ %

Structured securities:

Residential mortgage-backed

221 (112 ) 14 95 40 (124 ) 16 67

Commercial mortgage-backed

117 (49 ) 6 31 7 (23 ) 3 10

Other asset-backed

49 (36 ) 5 3 10 (16 ) 2 3

Total structured securities

387 (197 ) 25 129 57 (163 ) 21 80

Total

$ 467 $ (229 ) 29 % 136 $ 57 $ (163 ) 21 % 80

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

Tax-Exempt Securities

As indicated in the table above, $40 million of gross unrealized losses were related to tax-exempt securities that have been in a continuous unrealized loss position for more than 12 months and were more than 20% below cost. The unrealized losses for tax-exempt securities represent municipal bonds that were diversified by state as well as municipality or political subdivision within those states. Of these tax-exempt securities, the average unrealized loss was approximately $4 million which represented an average of 26% below cost. The unrealized losses continue to persist due to a combination of below market spreads, very low coupons, along with economic uncertainty related to special revenues supporting these obligations, as well as certain securities having longer duration that may be viewed as less desirable in the current market place. Additionally, certain of these securities have been negatively impacted as a result of ratings downgrades of certain bond insurers associated with the security. In our analysis of impairment for these securities, we expect to recover our amortized cost from the cash flows of the underlying securities before any guarantee support. However, the existence of these guarantees may negatively impact the value of the debt security in certain instances. We performed an analysis of these securities and the underlying activities that are expected to support the cash flows and determined we expect to recover our amortized cost.

Corporate Debt Securities

The following tables present the concentration of gross unrealized losses and fair values related to corporate debt fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by industry as of September 30, 2012:

Investment Grade
20% to 50% Greater than 50%

(Dollar amounts in millions)

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

Industry:

Finance and insurance

$ 136 $ (52 ) 7 % 14 $ 2 $ (2 ) % 1

Consumer-non-cyclical

31 (9 ) 1 1

Total

$ 167 $ (61 ) 8 % 15 $ 2 $ (2 ) % 1

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

(Dollar amounts in millions)

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

Industry:

Finance and insurance

$ 66 $ (23 ) 3 % 4 $ $ %

Consumer-non-cyclical

11 (8 ) 1 2

Transportation

3 (1 ) 1

Total

$ 80 $ (32 ) 4 % 7 $ $ %

Of the total unrealized losses of $95 million for corporate fixed maturity securities presented in the preceding tables, $77 million, or 81%, of the unrealized losses related to issuers in the finance and insurance sector that were 50% below cost on average. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of September 30, 2012. Of the $77 million of unrealized losses related to the finance and insurance industry, $71 million related to financial hybrid securities on which a debt impairment model was employed. Most of our hybrid securities retained a credit rating of investment grade. The fair value of these hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred. We continue to receive our contractual payments and expect to fully recover our amortized cost.

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

Structured Securities

Of the $428 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, $148 million related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to the ongoing concern and uncertainty about the residential and commercial real estate market and unemployment, resulting in credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been significantly impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. housing market.

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

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

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of September 30, 2012.

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

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2011:

Less than 12 months 12 months or more Total

(Dollar amounts in millions)

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

Description of Securities

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

$ 160 $ (1 ) 2 $ $ $ 160 $ (1 ) 2

Tax-exempt

230 (76 ) 72 230 (76 ) 72

Government—non-U.S.

90 (1 ) 25 8 (1 ) 8 98 (2 ) 33

U.S. corporate

1,721 (68 ) 175 1,416 (258 ) 136 3,137 (326 ) 311

Corporate—non-U.S.

1,475 (86 ) 188 705 (132 ) 75 2,180 (218 ) 263

Residential mortgage-backed

276 (5 ) 68 727 (450 ) 359 1,003 (455 ) 427

Commercial mortgage-backed

282 (36 ) 49 831 (195 ) 159 1,113 (231 ) 208

Other asset-backed

623 (3 ) 83 309 (93 ) 35 932 (96 ) 118

Subtotal, fixed maturity securites

4,627 (200 ) 590 4,226 (1,205 ) 844 8,853 (1,405 ) 1,434

Equity securities

92 (11 ) 39 25 (3 ) 13 117 (14 ) 52

Total for securities in an unrealized loss position

$ 4,719 $ (211 ) 629 $ 4,251 $ (1,208 ) 857 $ 8,970 $ (1,419 ) 1,486

% Below cost—fixed maturity securities:

<20% Below cost

$ 4,545 $ (156 ) 548 $ 2,758 $ (252 ) 435 $ 7,303 $ (408 ) 983

20%-50% Below cost

78 (30 ) 27 1,335 (653 ) 283 1,413 (683 ) 310

>50% Below cost

4 (14 ) 15 133 (300 ) 126 137 (314 ) 141

Total fixed maturity securities

4,627 (200 ) 590 4,226 (1,205 ) 844 8,853 (1,405 ) 1,434

% Below cost—equity securities:

<20% Below cost

80 (6 ) 36 21 (1 ) 12 101 (7 ) 48

20%-50% Below cost

12 (5 ) 3 4 (2 ) 1 16 (7 ) 4

Total equity securities

92 (11 ) 39 25 (3 ) 13 117 (14 ) 52

Total for securities in an unrealized loss position

$ 4,719 $ (211 ) 629 $ 4,251 $ (1,208 ) 857 $ 8,970 $ (1,419 ) 1,486

Investment grade

$ 4,292 $ (165 ) 502 $ 3,066 $ (577 ) 479 $ 7,358 $ (742 ) 981

Below investment grade (3)

427 (46 ) 127 1,185 (631 ) 378 1,612 (677 ) 505

Total for securities in an unrealized loss position

$ 4,719 $ (211 ) 629 $ 4,251 $ (1,208 ) 857 $ 8,970 $ (1,419 ) 1,486

(1)

Amounts included $248 million of unrealized losses on other-than-temporarily impaired securities.

(2)

Amounts included $257 million of unrealized losses on other-than-temporarily impaired securities.

(3)

Amounts that have been in a continuous loss position for 12 months or more included $235 million of unrealized losses on other-than-temporarily impaired securities.

The scheduled maturity distribution of fixed maturity securities as of September 30, 2012 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

$ 3,058 $ 3,097

Due after one year through five years

10,639 11,162

Due after five years through ten years

10,916 12,009

Due after ten years

19,796 23,785

Subtotal

44,409 50,053

Residential mortgage-backed

5,837 6,119

Commercial mortgage-backed

3,240 3,286

Other asset-backed

2,799 2,756

Total

$ 56,285 $ 62,214

As of September 30, 2012, $4,782 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2012, securities issued by utilities and energy, finance and insurance, and consumer—non-cyclical industry groups represented approximately 23%, 20% and 12% of our domestic and foreign corporate fixed maturity securities portfolio, respectively. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States and internationally, and is not dependent on the economic stability of one particular region.

As of September 30, 2012, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

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

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

September 30, 2012 December 31, 2011

(Amounts in millions)

Carrying
value
% of
total
Carrying
value
% of
total

Property type:

Retail

$ 1,882 32 % $ 1,898 31 %

Industrial

1,633 27 1,707 28

Office

1,533 26 1,590 26

Apartments

578 10 641 10

Mixed use/other

277 5 304 5

Subtotal

5,903 100 % 6,140 100 %

Unamortized balance of loan origination fees and costs

2 3

Allowance for losses

(44 ) (51 )

Total

$ 5,861 $ 6,092

September 30, 2012 December 31, 2011

(Amounts in millions)

Carrying
value
% of
total
Carrying
value
% of
total

Geographic region:

South Atlantic

$ 1,619 27 % $ 1,631 27 %

Pacific

1,526 26 1,539 25

Middle Atlantic

710 12 734 12

East North Central

513 9 557 9

Mountain

442 7 497 8

New England

342 6 388 6

West North Central

339 6 337 5

West South Central

260 4 298 5

East South Central

152 3 159 3

Subtotal

5,903 100 % 6,140 100 %

Unamortized balance of loan origination fees and costs

2 3

Allowance for losses

(44 ) (51 )

Total

$ 5,861 $ 6,092

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

September 30, 2012

(Amounts in millions)

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

Property type:

Retail

$ 7 $ 3 $ 3 $ 13 $ 1,869 $ 1,882

Industrial

1,633 1,633

Office

4 4 1,529 1,533

Apartments

2 2 576 578

Mixed use/other

67 67 210 277

Total recorded investment

$ 74 $ 3 $ 9 $ 86 $ 5,817 $ 5,903

% of total commercial mortgage loans

1 % % % 1 % 99 % 100 %

December 31, 2011

(Amounts in millions)

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

Property type:

Retail

$ 107 $ $ $ 107 $ 1,791 $ 1,898

Industrial

3 3 1,704 1,707

Office

4 3 15 22 1,568 1,590

Apartments

641 641

Mixed use/other

1 1 303 304

Total recorded investment

$ 115 $ 3 $ 15 $ 133 $ 6,007 $ 6,140

% of total commercial mortgage loans

2 % % % 2 % 98 % 100 %

As of September 30, 2012 and December 31, 2011, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on nonaccrual status as of September 30, 2012 and December 31, 2011.

As of and for the nine months ended September 30, 2012 and the year ended December 31, 2011, we modified or extended 30 and 39 commercial mortgage loans, respectively, with a total carrying value of $197 million and $252 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings. As of and for the year ended December 31, 2011, we modified or extended one commercial mortgage loan with a total carrying value of $3 million that was considered a troubled debt restructuring. As part of this troubled debt restructuring, we forgave default penalties and fees. This troubled debt restructuring did not result in any forgiveness in the outstanding principal amount owed by the borrower or a change to the original contractual interest rate.

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

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

(Amounts in millions)

2012 2011 2012 2011

Allowance for credit losses:

Beginning balance

$ 46 $ 57 $ 51 $ 59

Charge-offs

(3 ) (4 ) (5 )

Recoveries

Provision

1 (3 ) (3 )

Ending balance

$ 44 $ 54 $ 44 $ 54

Ending allowance for individually impaired loans

$