GENWORTH FINANCIAL INC, 10-Q filed on 4/30/2010
Quarterly Report
Document and Entity Information
Apr. 26, 2010
3 Months Ended
Mar. 31, 2010
Amendment Flag
 
FALSE 
Document Type
 
10-Q 
Document Period End Date
 
03/31/2010 
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
489,079,622 
 
Document Fiscal Year Focus
 
2010 
Document Fiscal Period Focus
 
Q1 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data
3 Months Ended
Mar. 31,
2010
2009
Revenues:
 
 
Premiums
$ 1,470 
$ 1,502 
Net investment income
765 
711 
Net investment gains (losses)
(70)
(770)
Insurance and investment product fees and other
256 
291 
Total revenues
2,421 
1,734 
Benefits and expenses:
 
 
Benefits and other changes in policy reserves
1,315 
1,508 
Interest credited
213 
275 
Acquisition and operating expenses, net of deferrals
475 
441 
Amortization of deferred acquisition costs and intangibles
184 
247 
Interest expense
115 
96 
Total benefits and expenses
2,302 
2,567 
Income (loss) before income taxes
119 
(833)
Benefit for income taxes
(93)
(364)
Net income (loss)
212 
(469)
Less: net income attributable to noncontrolling interests
34 
 
Net income (loss) available to Genworth Financial, Inc.'s common stockholders
178 
(469)
Net income (loss) available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
Basic
0.36 
(1.08)
Diluted
0.36 
(1.08)
Weighted-average common shares outstanding:
 
 
Basic
488.8 
433.2 
Diluted
493.5 
433.2 
Supplemental disclosures:
 
 
Total other-than-temporary impairments
(77)
(597)
Portion of other-than-temporary impairments recognized in other comprehensive income (loss)
(3)
 
Net other-than-temporary impairments
(80)
(597)
Other investments gains (losses)
10 
(173)
Total net investment gains (losses)
$ (70)
$ (770)
Condensed Consolidated Balance Sheets (USD $)
In Millions
Mar. 31, 2010
Dec. 31, 2009
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 52,040 
$ 49,752 
Equity securities available-for-sale, at fair value
179 
159 
Commercial mortgage loans
7,336 
7,499 
Restricted commercial mortgage loans related to securitization entities
552 
 
Policy loans
1,408 
1,403 
Other invested assets
3,972 
4,702 
Restricted other invested assets related to securitization entities ($377 at fair value)
385 
 
Total investments
65,872 
63,515 
Cash and cash equivalents
3,466 
5,002 
Accrued investment income
775 
691 
Deferred acquisition costs
7,252 
7,341 
Intangible assets
863 
934 
Goodwill
1,319 
1,324 
Reinsurance recoverable
17,333 
17,332 
Other assets
934 
954 
Deferred tax asset
18 
92 
Separate account assets
11,261 
11,002 
Total assets
109,093 
108,187 
Liabilities and stockholders' equity
 
 
Future policy benefits
29,686 
29,469 
Policyholder account balances
28,107 
28,470 
Liability for policy and contract claims
6,389 
6,567 
Unearned premiums
4,571 
4,714 
Other liabilities ($135 and $- other liabilities related to securitization entities)
6,185 
6,298 
Borrowings related to securitization entities ($58 at fair value)
551 
 
Non-recourse funding obligations
3,437 
3,443 
Short-term borrowings
930 
930 
Long-term borrowings
3,638 
3,641 
Deferred tax liability
313 
303 
Separate account liabilities
11,261 
11,002 
Total liabilities
95,068 
94,837 
Commitments and contingencies
 
 
Stockholders' equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 577 million shares issued as of March 31, 2010 and December 31, 2009; 489 million shares outstanding as of March 31, 2010 and December 31, 2009
Additional paid-in capital
12,064 
12,034 
Accumulated other comprehensive income (loss):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(652)
(1,151)
Net unrealized gains (losses) on other-than-temporarily impaired securities
(208)
(247)
Net unrealized investment gains (losses)
(860)
(1,398)
Derivatives qualifying as hedges
777 
802 
Foreign currency translation and other adjustments
430 
432 
Total accumulated other comprehensive income (loss)
347 
(164)
Retained earnings
3,179 
3,105 
Treasury stock, at cost (88 million shares as of March 31, 2010 and December 31, 2009)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
12,891 
12,276 
Noncontrolling interests
1,134 
1,074 
Total stockholders' equity
14,025 
13,350 
Total liabilities and stockholders' equity
$ 109,093 
$ 108,187 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Per Share data
3 Months Ended
Mar. 31, 2010
Dec. 31, 2009
Fair value of restricted other invested assets related to securitization entities
$ 377.0 
 
Liabilities related to securitization entities, other
135.0 
 
Fair value of borrowings related to securitization entities
58.0 
 
Class A Common Stock, par value
0.001 
0.001 
Class A Common Stock, shares authorized
1,500 
1,500 
Class A Common Stock, shares issued
577 
577 
Class A Common Stock, shares outstanding
489 
489 
Treasury stock, shares
88 
88 
Condensed Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Millions
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
Total
1/1/2009 - 3/31/2009
 
 
 
 
 
 
 
 
Balances
$ 1 
$ 11,477 
$ (3,062)
$ 3,210 
$ (2,700)
$ 8,926 
 
$ 8,926 
Cumulative effect of change in accounting, net of taxes and other adjustments
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
(469)
 
(469)
 
(469)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on investment securities
 
 
(57)
 
 
(57)
 
(57)
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
 
 
 
 
 
 
Derivatives qualifying as hedges
 
 
(100)
 
 
(100)
 
(100)
Foreign currency translation and other adjustments
 
 
(79)
 
 
(79)
 
(79)
Total comprehensive income (loss)
 
 
 
 
 
(705)
 
(705)
Dividends to noncontrolling interests
 
 
 
 
 
 
 
 
Stock-based compensation expense and exercises and other
 
 
 
 
 
Other capital transactions
 
 
 
 
 
 
 
 
Balances
11,485 
(3,298)
2,741 
(2,700)
8,229 
 
8,229 
1/1/2010 - 3/31/2010
 
 
 
 
 
 
 
 
Balances
12,034 
(164)
3,105 
(2,700)
12,276 
1,074 
13,350 
Cumulative effect of change in accounting, net of taxes and other adjustments
 
 
91 
(104)
 
(13)
 
(13)
Net income (loss)
 
 
 
178 
 
178 
34 
212 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on investment securities
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
 
 
 
 
 
(652)
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
408 
 
 
408 
(1)
407 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
39 
 
 
39 
 
39 
Derivatives qualifying as hedges
 
 
(25)
 
 
(25)
 
(25)
Foreign currency translation and other adjustments
 
 
(2)
 
 
(2)
37 
35 
Total comprehensive income (loss)
 
 
 
 
 
 
 
668 
Dividends to noncontrolling interests
 
 
 
 
 
 
(10)
(10)
Stock-based compensation expense and exercises and other
 
10 
 
 
 
10 
 
10 
Other capital transactions
 
20 
 
 
 
20 
 
20 
Balances
$ 1 
$ 12,064 
$ 347 
$ 3,179 
$ (2,700)
$ 12,891 
$ 1,134 
$ 14,025 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions
3 Months Ended
Mar. 31,
2010
2009
Cash flows from operating activities:
 
 
Net income (loss)
$ 212 
$ (469)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
Amortization of fixed maturity discounts and premiums
24 
82 
Net investment losses (gains)
70 
770 
Charges assessed to policyholders
(113)
(103)
Acquisition costs deferred
(193)
(194)
Amortization of deferred acquisition costs and intangibles
184 
247 
Deferred income taxes
(101)
(502)
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments
58 
(56)
Stock-based compensation expense
11 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(43)
(70)
Insurance reserves
576 
468 
Current tax liabilities
(163)
83 
Other liabilities and other policy-related balances
(392)
519 
Net cash from operating activities
130 
783 
Cash flows from investing activities:
 
 
Fixed maturity securities
941 
901 
Commercial mortgage loans
136 
239 
Restricted commercial mortgage loans related to securitization entities
12 
 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
1,021 
947 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(3,623)
(825)
Other invested assets, net
344 
 
Policy loans, net
(5)
(8)
Net cash from investing activities
(1,174)
1,254 
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
490 
773 
Withdrawals from universal life and investment contracts
(913)
(2,803)
Short-term borrowings and other, net
(37)
(82)
Repayment and repurchase of long-term borrowings
 
(79)
Redemption of non-recourse funding obligations
(6)
(12)
Repayment of borrowings related to securitization entities
(11)
 
Dividends paid to noncontrolling interests
(10)
 
Net cash from financing activities
(487)
(2,203)
Effect of exchange rate changes on cash and cash equivalents
(5)
(98)
Net change in cash and cash equivalents
(1,536)
(264)
Cash and cash equivalents at beginning of period
5,002 
7,328 
Cash and cash equivalents at end of period
$ 3,466 
$ 7,064 
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 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 three operating segments:

 

   

Retirement and Protection. We offer and manage a variety of protection, wealth management and retirement income products. Our primary protection products include: life, long-term care and Medicare supplement insurance. Additionally, we offer other senior supplemental products, as well as care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs and advisor services, financial planning services, fixed and variable deferred and immediate individual annuities and group variable annuities offered through retirement plans.

 

   

International. We are a leading provider of mortgage insurance products in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk. We 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 and non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”).

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 2009 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

Accounting Pronouncements
Accounting Pronouncements

(2) Accounting Pronouncements

Recently Adopted

Accounting for Transfers of Financial Assets

On January 1, 2010, we adopted new accounting guidance related to accounting for transfers of financial assets. This accounting guidance amends the previous guidance on transfers of financial assets by eliminating the qualifying special-purpose entity concept, providing certain conditions that must be met to qualify for sale accounting, changing the amount of gain or loss recognized on certain transfers and requiring additional disclosures. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements. The elimination of the qualifying special-purpose entity concept requires that these entities be considered for consolidation as a result of the new guidance related to variable interest entities (“VIEs”) as discussed below.

Improvements to Financial Reporting by Enterprises Involved with VIEs

On January 1, 2010, we adopted new accounting guidance for determining which enterprise, if any, has a controlling financial interest in a VIE and requires additional disclosures about involvement in VIEs. Under this new accounting guidance, the primary beneficiary of a VIE is the enterprise that has the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance and has the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. Upon adoption of this new accounting guidance, we were required to consolidate certain VIEs, including previously qualifying special-purpose entities and investment structures. We recorded a transition adjustment for the impact upon adoption to reflect the difference between the assets and liabilities of the newly consolidated entities and the amounts recorded for our interests in these entities prior to adoption. On January 1, 2010, we recorded a net cumulative effect adjustment of $104 million to retained earnings with a partial offset to accumulated other comprehensive income (loss) of $91 million related to the adoption of this new accounting guidance.

The assets and liabilities of the newly consolidated entities were as follows as of January 1, 2010:

 

(Amounts in millions)

   Carrying value  (1)    Adjustment for election
of fair value option
(2)
    Amounts
recorded upon
consolidation
 

Assets

       

Restricted commercial mortgage loans

   $ 564    $ —        $ 564  

Restricted other invested assets

     409      (30     379   

Accrued investment income

     2      —          2  
                       

Total assets

     975      (30     945   
                       

Liabilities

       

Other liabilities

     138      —          138  

Borrowings related to securitization entities

     644      (80     564  
                       

Total liabilities

     782      (80     702  
                       

Net assets and liabilities of newly consolidated entities

   $ 193    $ 50        243  
                 

Less: amortized cost of fixed maturity securities previously recorded (3)

          404  
             

Cumulative effect adjustment to retained earnings upon adoption, pre-tax

          (161

Tax effect

          57  
             

Net cumulative effect adjustment to retained earnings upon adoption

        $ (104
             

(1)

Carrying value represents the amounts that would have been recorded in the consolidated financial statements on January 1, 2010 had we recorded the assets and liabilities in our financial statements from the date we first met the conditions for consolidation based on the criteria in the new accounting guidance.

( 2 )

Amount represents the difference between book value and fair value of the investments and borrowings related to consolidated securitization entities where we have elected fair value option.

( 3 )

Fixed maturity securities that were previously recorded had net unrealized investment losses of $91 million included in accumulated other comprehensive income (loss) as of December 31, 2009.

For commercial mortgage loans, the carrying amounts represent the unpaid principal balance less any reserve. Restricted other invested assets are comprised of trading securities that are recorded at fair value. Trading securities represent asset-backed securities where we elected fair value option. Borrowings related to securitization entities are recorded at unpaid principal except for the borrowings related to entities where we elected fair value option for all assets and liabilities.

For certain entities consolidated upon adoption of the new accounting guidance on January 1, 2010, we elected fair value option to measure all assets and liabilities at current fair value with future changes in fair value being recording in income (loss). We elected fair value option for certain entities as a method to better present the offsetting changes in assets and liabilities related to third-party interests in those entities and eliminated the potential accounting mismatch between the measurement of the assets and derivatives of the entity compared to the borrowings issued by the entity. The entities where we did not elect fair value option did not have the same accounting mismatch since the assets held by the securitization entity and the borrowings of the entity were recorded at cost. See note 7 for additional information related to consolidation of VIEs.

The new accounting guidance related to consolidation of VIEs has been deferred for a reporting entity’s interest in an entity that has all of the attributes of an investment company as long as there is no implicit or explicit obligation to fund losses of the entity. For entities that meet these criteria, the new accounting guidance related to VIE consolidation would not be applicable until further guidance is issued. Accordingly, we did not have any impact upon adoption related to entities that meet the deferral criteria, such as certain limited partnership and fund investments.

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

On January 1, 2010, we adopted new accounting guidance requiring additional disclosures for significant transfers between Level 1 and 2 fair value measurements and clarifications to existing fair value disclosures related to the level of disaggregation, inputs and valuation techniques. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Not Yet Adopted

In March 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance clarifying the scope exception for embedded credit derivatives and when those features would be bifurcated from the host contract. Under the new accounting guidance, only embedded credit derivative features that are in the form of subordination of one financial instrument to another would not be subject to the bifurcation requirements. Accordingly, entities will be required to bifurcate any embedded credit derivative features that no longer qualify under the amended scope exception, or, for certain investments, an entity can elect fair value option and record the entire investment at fair value. This accounting guidance will be effective for us on July 1, 2010. Upon adoption, any changes in the carrying value of impacted items will be recorded directly in retained earnings. We have not yet determined the impact this accounting guidance will have on our consolidated financial statements.

In January 2010, the FASB issued new accounting guidance to require additional disclosures about purchases, sales, issuances, and settlements in the rollforward of Level 3 fair value measurements. This new accounting guidance will be effective for us on January 1, 2011. We do not expect the adoption of this new accounting guidance to have a material impact on our consolidated financial statements.

In April 2010, the FASB issued new accounting guidance on how investments held through separate accounts affect an insurer’s consolidation analysis of those investments. This new accounting guidance will be effective for us on January 1, 2011. We have not yet determined the impact this accounting guidance will have 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
March  31,
 

(Amounts in millions, except per share amounts)

       2010            2009      

Net income (loss)

   $ 212    $ (469

Less: net income attributable to noncontrolling interests

     34      —     
               

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

   $ 178    $ (469
               

Basic per common share:

     

Net income (loss)

   $ 0.43    $ (1.08

Less: net income attributable to noncontrolling interests

     0.07      —     
               

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

   $ 0.36    $ (1.08
               

Diluted per common share:

     

Net income (loss)

   $ 0.43    $ (1.08

Less: net income attributable to noncontrolling interests

     0.07      —     
               

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

   $ 0.36    $ (1.08
               

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

     488.8      433.2   

Potentially dilutive securities:

     

Stock options, restricted stock units and stock appreciation rights

     4.7      —     
               

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

     493.5      433.2   
               

(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 for the three months ended March 31, 2009, we were required to use basic weighted-average common shares outstanding in the calculation of the 2009 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 53,858 would have been antidilutive to the calculation. If we had not incurred a net loss in 2009, dilutive potential common shares would have remained at 433.2 million.

Investments
Investments

(4) Investments

(a) Net Investment Income

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

 

     Three months ended
March 31,
 

(Amounts in millions)

       2010             2009      

Fixed maturity securities—taxable

   $ 626      $ 623   

Fixed maturity securities—non-taxable

     16        30   

Commercial mortgage loans

     104        114   

Restricted commercial mortgage loans related to securitization entities (1)

     10        —     

Equity securities

     2        3   

Other invested assets

     (2     (99

Restricted other invested assets related to securitization entities (1)

     1        —     

Policy loans

     27        44   

Cash, cash equivalents and short-term investments

     5        17   
                

Gross investment income before expenses and fees

     789        732   

Expenses and fees

     (24     (21
                

Net investment income

   $ 765      $ 711   
                

(1)

See note 7 for additional information related to consolidated securitization entities.

(b) Net Investment Gains (Losses)

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

 

     Three months ended
March 31,
 

(Amounts in millions)

       2010             2009      

Available-for-sale securities:

    

Realized gains on sale

   $ 23      $ 29   

Realized losses on sale

     (38     (63

Impairments:

    

Total other-than-temporary impairments

     (77 )     (597 )

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

     (3 )     —     
                

Net other-than-temporary impairments

     (80     (597
                

Trading securities

     6        (12

Commercial mortgage loans

     (4     (6

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

     11        —     

Derivative instruments

     (8     (121

Other

     20        —     
                

Net investment gains (losses)

   $ (70   $ (770
                

(1)

See note 7 for additional information related to consolidated securitization entities.

Derivative instruments primarily consist of changes in the fair value of non-qualifying derivatives, including embedded derivatives, changes in fair value of certain derivatives and related hedged items in fair value hedge relationships and hedge ineffectiveness on qualifying derivative instruments. See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).

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 other comprehensive income (loss) (“OCI”) as of the period indicated:

 

(Amounts in millions)

   As of or for  the
three months ended
March 31, 2010
 

Cumulative credit loss beginning balance

   $ 1,059   

Additions:

  

Other-than-temporary impairments not previously recognized

     20   

Increases related to other-than-temporary impairments previously recognized

     46   

Reductions:

  

Securities sold, paid down or disposed

     (100

Securities where there is intent to sell

     —     
        

Cumulative credit loss ending balance

   $ 1,025   
        

(c) 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) were as follows as of the dates indicated:

 

(Amounts in millions)

   March 31, 2010     December 31, 2009  

Net unrealized gains (losses) on investment securities:

    

Fixed maturity securities

   $ (1,245   $ (2,245

Equity securities

     16        20   

Other invested assets

     (26     (29
                

Subtotal

     (1,255     (2,254

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

     (21     138   

Income taxes, net

     454        757   
                

Net unrealized investment gains (losses)

     (822     (1,359

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

     38       39  
                

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

   $ (860   $ (1,398
                

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

 

(Amounts in millions)

   As of or for  the
three months ended
March 31, 2010
 

Beginning balance

   $ (1,398

Impact upon adoption of new accounting guidance

     91   

Unrealized gains (losses) arising during the period:

  

Unrealized gains (losses) on investment securities

     763   

Adjustment to deferred acquisition costs

     (113

Adjustment to present value of future profits

     (31

Adjustment to sales inducements

     (15

Provision for income taxes

     (220
        

Change in unrealized gains (losses) on investment securities

     384   

Reclassification adjustments to net investment (gains) losses, net of taxes
of $(34)

     62   
        

Change in net unrealized investment gains (losses)

     537   

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

     1   
        

Ending balance

   $ (860
        

(d) Fixed Maturity and Equity Securities

As of March 31, 2010, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

(Amounts in millions)

  Amortized
cost or
cost
  Gross unrealized gains   Gross unrealized losses     Fair
value
    Not  other-than-
temporarily
impaired
  Other-than-
temporarily
impaired
  Not  other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
   

Fixed maturity securities:

           

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

  $ 3,079   $ 30   $ —     $ (80   $ —        $ 3,029

Tax-exempt

    1,495     35     —       (94     —          1,436

Government—non-U.S.

    2,323     103     —       (12     —          2,414

U.S. corporate

    22,108     722     8     (583     (2     22,253

Corporate—non-U.S.

    13,019     407     13     (288     —          13,151

Residential mortgage-backed

    4,445     50     8     (402     (291     3,810

Commercial mortgage-backed

    4,243     95     6     (577     (74     3,693

Other asset-backed

    2,573     12     —       (310     (21     2,254
                                       

Total fixed maturity securities

    53,285     1,454     35     (2,346     (388     52,040

Equity securities

    163     19     —       (3     —          179
                                       

Total available-for-sale securities

  $ 53,448   $ 1,473   $ 35   $ (2,349   $ (388   $ 52,219
                                       

As of December 31, 2009, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

(Amounts in millions)

  Amortized
cost or
cost
  Gross unrealized gains   Gross unrealized losses     Fair
value
    Not  other-than-
temporarily
impaired
  Other-than-
temporarily
impaired
  Not  other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
   

Fixed maturity securities:

           

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

  $ 2,673   $ 25   $ —     $ (96   $ —        $ 2,602

Tax-exempt

    1,606     42     —       (104     —          1,544

Government—non-U.S.

    2,310     96     —       (22     —          2,384

U.S. corporate

    21,598     628     3     (814     (3     21,412

Corporate—non-U.S.

    12,530     366     11     (356     —          12,551

Residential mortgage-backed

    3,989     41     7     (484     (326     3,227

Commercial mortgage-backed

    4,404     44     4     (738     (97     3,617

Other asset-backed

    2,887     8     —       (466     (14     2,415
                                       

Total fixed maturity securities

    51,997     1,250     25     (3,080     (440     49,752

Equity securities

    139     23     —       (3     —          159
                                       

Total available-for-sale securities

  $ 52,136   $ 1,273   $ 25   $ (3,083   $ (440   $ 49,911
                                       

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of March 31, 2010:

 

    Less than 12 months   12 months or more

(Dollar amounts in millions)

  Fair
value
  Gross
unrealized
losses
    Number of
securities
  Fair
value
  Gross
unrealized
losses
    Number of
securities

Description of Securities

           

Fixed maturity securities:

           

U.S. government, agencies and government sponsored entities

  $ 1,967   $ (77 )   73   $ 60   $ (3   5

Tax-exempt

    160     (5   47     342     (89   108

Government—non-U.S.

    488     (4   32     73     (8   12

U.S. corporate

    3,084     (62   348     4,721     (523   403

Corporate—non-U.S.

    1,977     (38   185     2,160     (250   206

Residential mortgage-backed

    924     (29   164     1,170     (664   450

Commercial mortgage-backed

    128     (12   24     1,418     (639   306

Other asset-backed

    85     (1   16     1,333     (330   169
                                   

Subtotal, fixed maturity securities

    8,813     (228   889     11,277     (2,506   1,659

Equity securities

    17     (1   15     12     (2   10
                                   

Total for securities in an unrealized loss position

  $ 8,830   $ (229   904   $ 11,289   $ (2,508   1,669
                                   

% Below cost—fixed maturity securities:

           

<20% Below cost

  $ 8,789   $ (203   829   $ 8,747   $ (651   948

20-50% Below cost

    13     (7   23     2,116     (1,019   410

>50% Below cost

    11     (18   37     414     (836   301
                                   

Total fixed maturity securities

    8,813     (228   889     11,277     (2,506   1,659
                                   

% Below cost—equity securities:

           

<20% Below cost

    17     (1   15     11     (1 )   7

>50% Below cost

    —       —        —       1     (1 )   3
                                   

Total equity securities

    17     (1   15     12     (2   10
                                   

Total for securities in an unrealized loss position

  $ 8,830   $ (229   904   $ 11,289   $ (2,508   1,669
                                   

Investment grade

  $ 8,562   $ (209   804   $ 9,380   $ (1,666   1,187

Below investment grade

    268     (20   100     1,909     (842   482

Not rated—fixed maturity securities

    —       —        —       —       —        —  

Not rated—equity securities

    —       —        —       —       —        —  
                                   

Total for securities in an unrealized loss position

  $ 8,830   $ (229   904   $ 11,289   $ (2,508   1,669
                                   

The investment securities in an unrealized loss position as of March 31, 2010 consisted of 2,573 securities and accounted for unrealized losses of $2,737 million. Of these unrealized losses of $2,737 million, 69% were investment grade (rated “AAA” through “BBB-”) and 31% 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 March 31, 2010 was $388 million of unrealized losses on other-than-temporarily impaired securities. Of the total unrealized losses on other-than-temporarily impaired securities, $376 million have been in an unrealized loss position for more than 12 months.

Of the unrealized losses of $2,737 million, $1,675 million were related to structured securities and $558 million were related to corporate securities in the finance and insurance sector. Of the remaining gross unrealized losses of $504 million, $186 million were related to U.S. government, agencies and government-sponsored enterprises, tax-exempt and government—non-U.S. securities and $318 million were primarily related to other corporate securities that were spread evenly across all other sectors with no individual sector exceeding $57 million.

Of the $1,675 million unrealized losses in structured securities, 41% were in residential mortgage-backed securities and 39% were in commercial mortgage-backed securities with the remainder in other asset-backed securities. Approximately 58% of the total unrealized losses in structured securities were on securities that have retained investment grade ratings. Most of these 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 March 31, 2010.

Of the $558 million unrealized losses in the finance and insurance sector, most have been in an unrealized loss position for 12 months or more. Most of these securities have retained a credit rating of investment grade. A portion of the unrealized losses included securities where an other-than-temporary impairment was recorded in OCI. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these 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. Based on this evaluation, we determined that the unrealized losses on these securities represented temporary impairments as of March 31, 2010. A subset of the securities issued by banks and other financial institutions represent investments in financial hybrid securities on which a debt impairment model was employed. 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. 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.

Of the investment securities in an unrealized loss position for 12 months or more as of March 31, 2010, 714 securities were 20% or more below cost, of which 328 securities were also below investment grade (rated “BB+” and below) and accounted for unrealized losses of $742 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 $289 million was recorded in OCI.

While certain securities included in the preceding table were considered other-than-temporarily impaired, we expect to recover the new amortized cost based on our estimate of cash flows to be collected. As of March 31, 2010, 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 mortgage-backed and asset-backed securities. We expect our investments in corporate securities will continue to perform in accordance with our conclusions about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities.

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2009:

 

     Less than 12 months    12 months or more

(Dollar amounts in millions)

   Fair
value
   Gross
unrealized
losses
    Number of
securities
   Fair
value
   Gross
unrealized
losses
    Number of
securities

Description of Securities

               

Fixed maturity securities:

               

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

   $ 1,759    $ (95   81    $ 6    $ (1   2

Tax-exempt

     152      (6   48      346      (98   113

Government—non-U.S.

     341      (3   60      105      (19   35

U.S. corporate

     2,823      (81   317      5,660      (736   510

Corporate—non-U.S.

     1,721      (55   221      2,245      (301   258

Residential mortgage-backed

     941      (252   256      1,012      (558   348

Commercial mortgage-backed

     714      (64   81      1,720      (771   345

Other asset-backed

     329      (6   43      1,727      (474   183
                                       

Subtotal, fixed maturity securities

     8,780      (562   1,107      12,821      (2,958   1,794

Equity securities

     2      (1   3      12      (2   9
                                       

Total for securities in an unrealized loss position

   $ 8,782    $ (563   1,110    $ 12,833    $ (2,960   1,803
                                       

% Below cost—fixed maturity securities:

               

<20% Below cost

   $ 8,437    $ (245   920    $ 9,699    $ (762   1,055

20-50% Below cost

     267      (137   91      2,637      (1,246   455

>50% Below cost

     76      (180   96      485      (950   284
                                       

Total fixed maturity securities

     8,780      (562   1,107      12,821      (2,958   1,794
                                       

% Below cost—equity securities:

               

<20% Below cost

     2      (1   3      11      (1   5

>50% Below cost

     —        —        —        1      (1   4
                                       

Total equity securities

     2      (1   3      12      (2   9
                                       

Total for securities in an unrealized loss position

   $ 8,782    $ (563   1,110    $ 12,833    $ (2,960   1,803
                                       

Investment grade

   $ 8,391    $ (320   891    $ 10,897    $ (2,122   1,390

Below investment grade

     391      (243   219      1,936      (838   413
                                       

Total for securities in an unrealized loss position

   $ 8,782    $ (563   1,110    $ 12,833    $ (2,960   1,803
                                       

The scheduled maturity distribution of fixed maturity securities as of March 31, 2010 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Amounts in millions)

   Amortized
cost or
cost
   Fair
value

Due one year or less

   $ 2,634    $ 2,660

Due after one year through five years

     12,313      12,582

Due after five years through ten years

     7,929      8,152

Due after ten years

     19,148      18,889
             

Subtotal

     42,024      42,283

Residential mortgage-backed

     4,445      3,810

Commercial mortgage-backed

     4,243      3,693

Other asset-backed

     2,573      2,254
             

Total

   $ 53,285    $ 52,040
             

As of March 31, 2010, $5,437 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of March 31, 2010, securities issued by finance and insurance, utilities and energy, and consumer—non-cyclical industry groups represented approximately 26%, 22% and 11% of our domestic and foreign corporate fixed maturity securities portfolio, respectively. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the U.S. and internationally, and is not dependent on the economic stability of one particular region.

As of March 31, 2010, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(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 periods indicated:

 

     March 31, 2010     December 31, 2009  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property Type

        

Retail

   $ 2,074      28   $ 2,115      28

Office

     1,991      27        2,025      27   

Industrial

     1,955      27        1,979      26   

Apartments

     819      11        832      11   

Mixed use/other

     543      7        590      8   
                            

Total principal balance

     7,382      100     7,541      100
                

Unamortized balance of loan origination fees and costs

     6          6     

Allowance for losses

     (52       (48  
                    

Total (1)

   $ 7,336        $ 7,499     
                    

(1)

Included $17 million of held-for-sale mortgage loans as of December 31, 2009. In the first quarter of 2010, we began reporting held-for-sale mortgages in other invested assets.

 

     March 31, 2010     December 31, 2009  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Geographic Region

        

Pacific

   $ 1,966      27   $ 2,005      27

South Atlantic

     1,669      23        1,711      23   

Middle Atlantic

     987      13        1,005      13   

East North Central

     714      10        728      10   

Mountain

     640      9        650      9   

New England

     486      6        492      6   

West North Central

     385      5        389      5   

West South Central

     325      4        331      4   

East South Central

     210      3        230      3   
                            

Total principal balance

     7,382      100     7,541      100
                

Unamortized balance of loan origination fees and costs

     6          6     

Allowance for losses

     (52       (48  
                    

Total (1)

   $ 7,336        $ 7,499     
                    

(1)

Included $17 million of held-for-sale mortgage loans as of December 31, 2009. In the first quarter of 2010, we began reporting held-for-sale mortgages in other invested assets.

“Impaired” loans are defined by U.S. GAAP as loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement.

Under these principles, we may have two types of “impaired” loans: loans requiring specific allowances for losses (none for the three months ended March 31, 2010 and $21 million for the year ended December 31, 2009) and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition (none for the three months ended March 31, 2010 and for the year ended December 31, 2009).

Average investment in specifically impaired loans was $9 million and $10 million as of March 31, 2010 and December 31, 2009, respectively, and there was no interest income recognized on these loans while they were considered impaired.

The following table presents the activity in the allowance for losses during the period indicated:

 

(Amounts in millions)

   March 31, 2010

Beginning balance

   $ 48

Provision

     4

Release

     —  
      

Ending balance

   $ 52
      

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the date indicated:

 

     March 31, 2010  

(Amounts in millions)

   Carrying
value
    % of
total
 

Property Type

    

Retail

   $ 200      36

Industrial

     136      25   

Office

     125      22   

Apartments

     67      12   

Mixed use/other

     26      5   
              

Total principal balance

     554      100
        

Allowance for losses

     (2  
          

Total 

   $ 552     
          

     March 31, 2010  

(Amounts in millions)

   Carrying
value
    % of
total
 

Geographic Region

    

South Atlantic

   $ 198      36

Pacific

     100      18   

Middle Atlantic

     74      13   

East North Central

     64      12   

Mountain

     37      7   

East South Central

     34      6   

West North Central

     33      6   

West South Central

     13      2   

New England

     1      —     
              

Total principal balance

     554      100
        

Allowance for losses

     (2  
          

Total

   $ 552     
          

See note 7 for additional information related to consolidated securitization entities.

(g) Restricted Other Invested Assets Related To Securitization Entities

We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities whereby the changes in fair value are recorded in current period income (loss). The trading securities are comprised of asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables. See note 7 for additional information related to consolidated securitization entities.

Derivative Instruments
Derivative Instruments

(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 prohibitions 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)

     March 31,
2010
    December 31,
2009
      March 31,
2010
  December 31,
2009

Derivatives designated as hedges

            

Cash flow hedges:

            

Interest rate swaps

   Other invested
assets
  $ 69      $ 72      Other
liabilities
  $ 158   $ 114

Inflation indexed swaps

   Other invested
assets
    1        —        Other
liabilities
    13     21

Foreign currency swaps

   Other invested
assets
    100        101      Other
liabilities
    —       —  
                                

Total cash flow hedges

       170        173          171     135
                                

Fair value hedges:

            

Interest rate swaps

   Other invested
assets
    130        132      Other
liabilities
    12     15

Foreign currency swaps

   Other invested
assets
    22        24      Other
liabilities
    —       —  
                                

Total fair value hedges

       152        156          12     15
                                

Total derivatives designated as hedges

       322        329          183     150
                                

Derivatives not designated as hedges

            

Interest rate swaps

   Other invested
assets
    475        505      Other
liabilities
    44     59

Interest rate swaps related to
securitization entities
(1)

   Restricted
other invested
assets
    —          —        Other
liabilities
    16     —  

Interest rate swaptions

   Other invested
assets
    14        54      Other
liabilities
    18     67

Credit default swaps

   Other invested
assets
    10        11      Other
liabilities
    1     3

Credit default swaps related to securitization entities (1)

   Restricted
other invested
assets
    —          —        Other
liabilities
    118     —  

Equity index options

   Other invested
assets
    34        39      Other
liabilities
    4     2

Financial futures

   Other invested
assets
    —          —        Other
liabilities
    —       —  

Other foreign currency contracts

   Other invested
assets
    4        8      Other
liabilities
    —       —  

GMWB embedded derivatives

   Reinsurance
recoverable 
(2 )
    (6     (5   Policyholder
account
balances
(3 )
    145     175
                                

Total derivatives not designated as hedges

       531        612          346     306
                                

Total derivatives

     $ 853      $ 941        $ 529   $ 456
                                

(1)

See note 7 for additional information related to consolidated securitization entities.

(2)

Represents the embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.

(3)

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 derivative counterparty collateral retained by us was recorded in other invested assets with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us.

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, 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, 2009    Additions    Maturities/
terminations
    March 31, 2010

Derivatives designated as hedges

             

Cash flow hedges:

             

Interest rate swaps

   Notional    $ 9,479    $ 1,182    $ (3   $ 10,658

Inflation indexed swaps

   Notional      376      157      —          533

Foreign currency swaps

   Notional      491      —        —          491
                               

Total cash flow hedges

        10,346      1,339      (3     11,682
                               

Fair value hedges:

             

Interest rate swaps

   Notional      2,366      —        (74     2,292

Foreign currency swaps

   Notional      85      —        —          85
                               

Total fair value hedges

        2,451      —        (74     2,377
                               

Total derivatives designated as hedges

        12,797      1,339      (77     14,059
                               

Derivatives not designated as hedges

             

Interest rate swaps

   Notional      6,474      1,246      (354     7,366

Interest rate swaps related to securitization entities

   Notional      —        138      —          138

Interest rate swaptions

   Notional      5,100      —        (3,300     1,800

Credit default swaps

   Notional      1,090      —        —          1,090

Credit default swaps related to securitization entities

   Notional      —        322      —          322

Equity index options

   Notional      912      149      (81     980

Financial futures

   Notional      5,822      2,186      (2,545     5,463

Other foreign currency contracts

   Notional      521      —        —          521
                               

Total derivatives not designated as hedges

        19,919      4,041      (6,280     17,680
                               

Total derivatives

      $ 32,716    $ 5,380    $ (6,357   $ 31,739
                               

 

(Number of policies)

   Measurement    December 31, 2009    Additions    Terminations     March 31, 2010

Derivatives not designated as hedges

             

GMWB embedded derivatives

   Policies    47,543    1,323    (461   48,405

Approximately $1.1 billion of notional value above is related to derivatives with counterparties that can be terminated at the option of the derivative counterparty and represented a net fair value asset of $112 million as of March 31, 2010.

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 March 31, 2010:

 

(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

  $ (36   $ 4      Net investment
income
  $ (3   Net investment
gains (losses)

Interest rate swaps hedging assets

    —          1      Net investment
gains (losses)
    —        Net investment
gains (losses)

Foreign currency swaps

    1       (2   Interest expense     —        Net investment
gains (losses)
                           

Total

  $ (35   $ 3        $ (3  
                           

(1)

No amounts were 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 three months ended March 31, 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

  $ (145   $ 5      Net investment
income
  $ (6   Net investment
gains (losses)

Interest rate swaps hedging assets

    —          3      Net investment
gains (losses)
    —        Net investment
gains (losses)

Foreign currency swaps

    (12     (3   Interest expense     —        Net investment
gains (losses)
                           

Total

  $ (157   $ 5        $ (6  
                           

(1)

Amounts included $3 million of gains reclassified into income (loss) for cash flow hedges that were terminated or de-designated where the effective portion is reclassified into 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 $777 million, net of taxes, recorded in stockholders’ equity as of March 31, 2010 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, $6 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 three months ended March 31, 2010 in connection with forecasted transactions that were no longer considered 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 March 31, 2010:

 

    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

  $ 1      Net investment
gains (losses)
  $ (3   Net investment
income
  $ (1   Net investment
gains (losses)

Interest rate swaps hedging liabilities

    (1   Net investment
gains (losses)
    25      Interest credited     1     Net investment
gains (losses)

Foreign currency swaps

    (2   Net investment
gains (losses)
    1      Interest credited     2      Net investment
gains (losses)
                             

Total

  $ (2     $ 23        $ 2     
                             

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 March 31, 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

  $ (7   Net investment
gains (losses)
  $ (4   Net investment
income
  $ 7   Net investment
gains (losses)

Interest rate swaps hedging liabilities

    —        Net investment
gains (losses)
    19      Interest credited     —     Net investment
gains (losses)

Foreign currency swaps

    (11   Net investment
gains (losses)
    —        Interest credited     10   Net investment
gains (losses)
                           

Total

  $ (18     $ 15        $ 17  
                           

The difference between the gain (loss) recognized for the derivative instruments and the hedged items presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the income (loss) effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged items. 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; (iii) equity index options, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits; and (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting. Additionally, we provide GMWBs on certain products that are required to be bifurcated as embedded derivatives.

We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap. See note 7 for additional information related to consolidated securitization entities.

The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:

 

     Three months ended March 31,     Classification of gain (loss) recognized
in net income (loss)

(Amounts in millions)

   2010     2009    

Interest rate swaps

   $ (6   $ 82      Net investment gains (losses)

Interest rate swaps related to securitization entities

     (3     —        Net investment gains (losses)

Interest rate swaptions

     22        (242   Net investment gains (losses)

Credit default swaps

     5        (14   Net investment gains (losses)

Credit default swaps related to securitization entities

     5        —        Net investment gains (losses)

Equity index options

     (27     16      Net investment gains (losses)

Financial futures

     (33     79      Net investment gains (losses)

Inflation indexed swaps

     —          (7   Net investment gains (losses)

Other foreign currency contracts

     (3     8      Net investment gains (losses)

GMWB embedded derivatives

     36        (39   Net investment gains (losses)
                  

Total derivatives not designated as hedges

   $ (4   $ (117  
                  

Derivative Counterparty Credit Risk

As of March 31, 2010 and December 31, 2009, net fair value assets by counterparty totaled $710 million and $739 million, respectively. As of March 31, 2010 and December 31, 2009, net fair value liabilities by counterparty totaled $233 million and $74 million, respectively. As of March 31, 2010 and December 31, 2009, we retained collateral of $628 million and $647 million, respectively, related to these agreements, including over collateralization of $25 million and $10 million, respectively, from certain counterparties. As of March 31, 2010, we posted $110 million of collateral to derivative counterparties, including over collateralization of $14 million. As of December 31, 2009, we posted $121 million of collateral to derivative counterparties, including over collateralization of $46 million. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.

Except for derivatives related to securitization entities, all of our master swap agreements contain credit downgrade provisions that allow either 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 March 31, 2010 and December 31, 2009, we could have been allowed to claim up to $107 million and $102 million, respectively, from counterparties and required to disburse up to $5 million and $1 million, respectively. This represented the net fair value of gains and losses by counterparty, less available collateral held, and did not include any fair value gains or losses for derivatives related to securitization entities.

Credit Derivatives

We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate 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.

In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we were required to consolidate in 2010. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity. See note 9 for information on the third-party borrowings related to consolidated securitization entities.

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:

 

     March 31, 2010    December 31, 2009

(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    $ —      $ —  

AA

                 

Matures after one year through five years

     11      —        —        5      —        —  

A

                 

Matures after one year through five years

     32      —        1      32      1      —  

Matures after five years through ten years

     10      —        —        10      —        —  

BBB

                 

Matures after one year through five years

     73      2      —        73      1      —  

Matures after five years through ten years

     29      —        —        29      —        —  
                                         

Total credit default swaps on single name reference entities

   $ 155    $ 2    $ 1    $ 155    $ 2    $ —  
                                         

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:

 

    March 31, 2010   December 31, 2009

(Amounts in millions)

  Notional
value
  Assets   Liabilities   Notional
value
  Assets   Liabilities

Index tranche attachment/detachment point and maturity:

           

9% – 12% matures after one year through five years   (1)

  $ 150   $ —     $ —     $ 50   $ —     $ —  

9% – 12% matures after five years through ten years   (2)

    150     1     —       250     1     1

10% – 15% matures after five years through ten years   (3)

    250     1     —       250     —       2

12% – 22% matures after five years through ten years   (4)

    248     3     —       248     4     —  

15% – 30% matures after five years through ten years   (5)

    127     3     —       127     2     —  
                                   

Total credit default swap index tranches

    925     8     —       925     7     3
                                   

Customized credit default swap index tranches related to securitization entities:

           

Portion backing third-party borrowings maturing 2017   (6)

    22     —       14     —       —       —  

Portion backing our interest maturing 2017 (7)

    300