GENWORTH FINANCIAL INC, 10-Q filed on 5/4/2012
Quarterly Report
Document And Entity Information
3 Months Ended
Mar. 31, 2012
May 1, 2012
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q1 
 
Trading Symbol
GNW 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
Entity Central Index Key
0001276520 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
491,502,704 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 58,532 
$ 58,295 
Equity securities available-for-sale, at fair value
434 
361 
Commercial mortgage loans
6,030 
6,092 
Restricted commercial mortgage loans related to securitization entities
392 
411 
Policy loans
1,555 
1,549 
Other invested assets
3,001 
4,819 
Restricted other invested assets related to securitization entities ($383 and $376 at fair value)
384 
377 
Total investments
70,328 
71,904 
Cash and cash equivalents
4,187 
4,488 
Accrued investment income
759 
691 
Deferred acquisition costs
5,060 
5,193 
Intangible assets
573 
580 
Goodwill
1,256 
1,253 
Reinsurance recoverable
17,193 
16,998 
Other assets
981 
958 
Separate account assets
10,646 
10,122 
Total assets
110,983 
112,187 
Liabilities and stockholders' equity
 
 
Future policy benefits
32,380 
32,175 
Policyholder account balances
26,204 
26,345 
Liability for policy and contract claims
7,663 
7,620 
Unearned premiums
4,209 
4,223 
Other liabilities ($174 and $210 other liabilities related to securitization entities)
5,308 
6,308 
Borrowings related to securitization entities ($55 and $48 at fair value)
383 
396 
Non-recourse funding obligations
2,602 
3,256 
Long-term borrowings
5,095 
4,726 
Deferred tax liability
610 
838 
Separate account liabilities
10,646 
10,122 
Total liabilities
95,100 
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 March 31, 2012 and December 31, 2011, respectively; 491 million shares outstanding as of March 31, 2012 and December 31, 2011
Additional paid-in capital
12,150 
12,136 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,438 
1,617 
Net unrealized gains (losses) on other-than-temporarily impaired securities
(111)
(132)
Net unrealized investment gains (losses)
1,327 
1,485 
Derivatives qualifying as hedges
1,680 
2,009 
Foreign currency translation and other adjustments
649 
553 
Total accumulated other comprehensive income (loss)
3,656 
4,047 
Retained earnings
1,631 
1,584 
Treasury stock, at cost (88 million shares as of March 31, 2012 and December 31, 2011)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
14,738 
15,068 
Noncontrolling interests
1,145 
1,110 
Total stockholders' equity
15,883 
16,178 
Total liabilities and stockholders' equity
$ 110,983 
$ 112,187 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Condensed Consolidated Balance Sheets [Abstract]
 
 
Restricted other invested assets related to securitization entities, at fair value
$ 383 
$ 376 
Other liabilities related to securitization entities
174 
210 
Borrowings related to securitization entities, at fair value
$ 55 
$ 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
491,000,000 
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
Mar. 31, 2012
Mar. 31, 2011
Revenues:
 
 
Premiums
$ 1,107 
$ 1,437 
Net investment income
832 
830 
Net investment gains (losses)
35 
(28)
Insurance and investment product fees and other
452 
329 
Total revenues
2,426 
2,568 
Benefits and expenses:
 
 
Benefits and other changes in policy reserves
1,232 
1,413 
Interest credited
195 
201 
Acquisition and operating expenses, net of deferrals
530 
563 
Amortization of deferred acquisition costs and intangibles
272 
151 
Interest expense
95 
127 
Total benefits and expenses
2,324 
2,455 
Income before income taxes
102 
113 
Provision for income taxes
22 
20 
Net income
80 
93 
Less: net income attributable to noncontrolling interests
33 
34 
Net income available to Genworth Financial, Inc.'s common stockholders
47 
59 
Net income available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
Basic
$ 0.09 1
$ 0.12 1
Diluted
$ 0.09 1
$ 0.12 1
Weighted-average common shares outstanding:
 
 
Basic
491.2 
490.1 
Diluted
495.7 
494.4 
Supplemental disclosures:
 
 
Total other-than-temporary impairments
(16)
(31)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
(1)
(5)
Net other-than-temporary impairments
(17)
(36)
Other investments gains (losses)
52 
Total net investment gains (losses)
$ 35 
$ (28)
Condensed Consolidated Statements Of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Condensed Consolidated Statements Of Comprehensive Income [Abstract]
 
 
Net income
$ 80 
$ 93 
Other comprehensive income (loss), net of taxes:
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(185)
50 
Net unrealized gains (losses) on other-than-temporarily impaired securities
21 
Derivatives qualifying as hedges
(329)
(60)
Foreign currency translation and other adjustments
116 
152 
Total other comprehensive income (loss)
(377)
149 
Total comprehensive income (loss)
(297)
242 
Less: comprehensive income attributable to noncontrolling interests
47 
54 
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
$ (344)
$ 188 
Condensed Consolidated Statements Of Changes In Stockholders' Equity (USD $)
In Millions, unless otherwise specified
Common Stock [Member]
Additional Paid-In Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Retained Earnings [Member]
Treasury Stock, At Cost [Member]
Total Genworth Financial, Inc.'s Stockholders' Equity [Member]
Noncontrolling Interests [Member]
Total
Balances at Dec. 31, 2010
$ 1 
$ 12,107 
$ 1,506 
$ 1,535 
$ (2,700)
$ 12,449 
$ 1,096 
$ 13,545 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
 
 
 
59 
 
59 
34 
93 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
59 
 
 
59 
(9)
50 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
 
 
 
Derivatives qualifying as hedges
 
 
(60)
 
 
(60)
 
(60)
Foreign currency translation and other adjustments
 
 
123 
 
 
123 
29 
152 
Total comprehensive income (loss)
 
 
 
 
 
188 
 
188 
Comprehensive Income (Loss), Net of Tax, Attributable to Noncontrolling Interest
 
 
 
 
 
 
54 
54 
Total comprehensive income (loss)
 
 
 
 
 
 
 
242 
Dividends to noncontrolling interests
   
   
   
   
   
   
(12)
(12)
Stock-based compensation expense and exercises and other
 
 
 
 
 
Balances at Mar. 31, 2011
12,113 
1,635 
1,594 
(2,700)
12,643 
1,138 
13,781 
Balances at Dec. 31, 2011
12,136 
4,047 
1,584 
(2,700)
15,068 
1,110 
16,178 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
 
 
 
47 
 
47 
33 
80 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
(179)
 
 
(179)
(6)
(185)
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
21 
 
 
21 
 
21 
Derivatives qualifying as hedges
 
 
(329)
 
 
(329)
 
(329)
Foreign currency translation and other adjustments
 
 
96 
 
 
96 
20 
116 
Total comprehensive income (loss)
 
 
 
 
 
(344)
 
(344)
Comprehensive Income (Loss), Net of Tax, Attributable to Noncontrolling Interest
 
 
 
 
 
 
47 
47 
Total comprehensive income (loss)
 
 
 
 
 
 
 
(297)
Dividends to noncontrolling interests
   
   
   
   
   
   
(12)
(12)
Stock-based compensation expense and exercises and other
 
14 
 
 
 
14 
 
14 
Balances at Mar. 31, 2012
$ 1 
$ 12,150 
$ 3,656 
$ 1,631 
$ (2,700)
$ 14,738 
$ 1,145 
$ 15,883 
Condensed Consolidated Statements Of Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Cash flows from operating activities:
 
 
Net income
$ 80 
$ 93 
Adjustments to reconcile net income to net cash from operating activities:
 
 
Amortization of fixed maturity discounts and premiums and limited partnerships
(19)
(18)
Net investment losses (gains)
(35)
28 
Charges assessed to policyholders
(187)
(159)
Acquisition costs deferred
(154)
(166)
Amortization of deferred acquisition costs and intangibles
272 
151 
Deferred income taxes
26 
(47)
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments
(45)
35 
Stock-based compensation expense
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(112)
(117)
Insurance reserves
369 
561 
Current tax liabilities
(86)
25 
Other liabilities and other policy-related balances
(370)
(57)
Net cash from operating activities
(252)
336 
Cash flows from investing activities:
 
 
Fixed maturity securities
969 
1,627 
Commercial mortgage loans
142 
148 
Restricted commercial mortgage loans related to securitization entities
14 
22 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
1,717 
1,009 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(3,049)
(2,200)
Commercial mortgage loans
(81)
(38)
Other invested assets, net
436 
(59)
Policy loans, net
(6)
(9)
Payments for businesses purchased, net of cash acquired
(18)
(4)
Net cash from investing activities
124 
496 
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
662 
560 
Withdrawals from universal life and investment contracts
(600)
(1,115)
Redemption and repurchase of non-recourse funding obligations
(563)
(6)
Proceeds from the issuance of long-term debt
361 
397 
Repayment of borrowings related to securitization entities
(19)
(12)
Dividends paid to noncontrolling interests
(12)
(12)
Other, net
(18)
(33)
Net cash from financing activities
(189)
(221)
Effect of exchange rate changes on cash and cash equivalents
16 
(1)
Net change in cash and cash equivalents
(301)
610 
Cash and cash equivalents at beginning of period
4,488 
3,132 
Cash and cash equivalents at end of period
$ 4,187 
$ 3,742 
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 2011 Annual Report on Form 10-K. 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.

 

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
Adjusted
 

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 March 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
Adjusted
 

Revenues:

                               

Premiums

  $ 1,437      $ —        $ —        $ 1,437   

Net investment income

    830        —          —          830   

Net investment gains (losses)

    (28     —          —          (28

Insurance and investment product fees and other

    329        —          —          329   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    2,568        —          —          2,568   
   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

                               

Benefits and other changes in policy reserves

    1,409        —          4        1,413   

Interest credited

    201        —          —          201   

Acquisition and operating expenses, net of deferrals

    500        63        —          563   

Amortization of deferred acquisition costs and intangibles

    185        (34     —          151   

Interest expense

    127        —          —          127   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

    2,422        29        4        2,455   
   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    146        (29     (4     113   

Provision for income taxes

    30        (9     (1     20   
   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    116        (20     (3     93   

Less: net income attributable to noncontrolling interests

    34        —          —          34   
   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 82      $ (20   $ (3   $ 59   
   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the cash flows from operating activities for the three months ended March 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
Adjusted
 

Cash flows from operating activities:

                               

Net income

  $ 116      $ (20   $ (3   $ 93   

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

                               

Amortization of fixed maturity discounts and premiums and limited partnerships

    (18     —          —          (18

Net investment losses

    28        —          —          28   

Charges assessed to policyholders

    (159     —          —          (159

Acquisition costs deferred

    (229     63        —          (166

Amortization of deferred acquisition costs and intangibles

    185        (34     —          151   

Deferred income taxes

    (37     (9     (1     (47

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

    35        —          —          35   

Stock-based compensation expense

    7        —          —          7   

Change in certain assets and liabilities:

                               

Accrued investment income and other assets

    (117     —          —          (117

Insurance reserves

    557        —          4        561   

Current tax liabilities

    25        —          —          25   

Other liabilities and policy-related balances

    (57     —          —          (57
   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from operating activities

  $ 336      $ —        $ —        $ 336   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the balance sheet as of March 31, 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

   $ 70,328      $ 70,328      $ —     

Cash and cash equivalents

     4,187        4,187        —     

Accrued investment income

     759        759        —     

Deferred acquisition costs

     5,060        5,060        —     

Intangible assets

     573        573        —     

Goodwill

     1,256        1,256        —     

Reinsurance recoverable

     17,193        17,177        16  

Other assets

     981        981        —     

Separate account assets

     10,646        10,646        —     
    

 

 

   

 

 

   

 

 

 

Total assets

   $ 110,983      $ 110,967      $ 16  
    

 

 

   

 

 

   

 

 

 

Liabilities and stockholders' equity

                        

Liabilities:

                        

Future policy benefits

   $ 32,380      $ 32,172      $ 208  

Policyholder account balances

     26,204        26,204        —     

Liability for policy and contract claims

     7,663        7,663        —     

Unearned premiums

     4,209        4,209        —     

Other liabilities

     5,308        5,308        —     

Borrowings related to securitization entities

     383        383        —     

Non-recourse funding obligations

     2,602        2,602        —     

Long-term borrowings

     5,095        5,095        —     

Deferred tax liability

     610        677        (67 )  

Separate account liabilities

     10,646        10,646        —     
    

 

 

   

 

 

   

 

 

 

Total liabilities

     95,100        94,959        141  
    

 

 

   

 

 

   

 

 

 

Stockholders' equity:

                        

Class A common stock

     1        1        —     

Additional paid-in capital

     12,150        12,150        —     

Accumulated other comprehensive income (loss):

                        

Net unrealized investment gains (losses):

                        

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

     1,438        1,438        —     

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

     (111     (111     —     
    

 

 

   

 

 

   

 

 

 

Net unrealized investment gains (losses)

     1,327        1,327        —     
    

 

 

   

 

 

   

 

 

 

Derivatives qualifying as hedges

     1,680        1,680        —     

Foreign currency translation and other adjustments

     649        649        —     
    

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     3,656        3,656        —     

Retained earnings

     1,631        1,756        (125 )  

Treasury stock, at cost

     (2,700     (2,700     —     
    

 

 

   

 

 

   

 

 

 

Total Genworth Financial, Inc.'s stockholders' equity

     14,738        14,863        (125 )  

Noncontrolling interests

     1,145        1,145        —     
    

 

 

   

 

 

   

 

 

 

Total stockholders' equity

     15,883        16,008        (125 )  
    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders' equity

   $ 110,983      $ 110,967      $ 16  
    

 

 

   

 

 

   

 

 

 

 

The following table presents the income statement for the three months ended March 31, 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

  $ 1,107      $ 1,107      $ —     

Net investment income

    832        832        —     

Net investment gains (losses)

    35        35        —     

Insurance and investment product fees and other

    452        452        —     
   

 

 

   

 

 

   

 

 

 

Total revenues

    2,426        2,426        —     
   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

                       

Benefits and other changes in policy reserves

    1,232        1,225        (7

Interest credited

    195        195        —     

Acquisition and operating expenses, net of deferrals

    530        530        —     

Amortization of deferred acquisition costs and intangibles

    272        272        —     

Interest expense

    95        95        —     
   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

    2,324        2,317        (7
   

 

 

   

 

 

   

 

 

 

Income before income taxes

    102        109        (7

Provision for income taxes

    22        24        2   
   

 

 

   

 

 

   

 

 

 

Net income

    80        85        (5

Less: net income attributable to noncontrolling interests

    33        33        —     
   

 

 

   

 

 

   

 

 

 

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

  $ 47      $ 52      $ (5
   

 

 

   

 

 

   

 

 

 

The following table presents the net cash flows from operating activities for the three months ended March 31, 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

  $ 80      $ 85      $ (5 )  

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

                       

Amortization of fixed maturity discounts and premiums and limited partnerships

    (19     (19     —     

Net investment losses

    (35     (35     —     

Charges assessed to policyholders

    (187     (187     —     

Acquisition costs deferred

    (154     (154     —     

Amortization of deferred acquisition costs and intangibles

    272        272        —     

Deferred income taxes

    26        28        (2 )  

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

    (45     (45     —     

Stock-based compensation expense

    9        9        —     

Change in certain assets and liabilities:

                       

Accrued investment income and other assets

    (112     (112     —     

Insurance reserves

    369        362        7  

Current tax liabilities

    (86     (86     —     

Other liabilities and policy-related balances

    (370     (370     —     
   

 

 

   

 

 

   

 

 

 

Net cash from operating activities

  $ (252   $ (252   $ —     
   

 

 

   

 

 

   

 

 

 

 

Accounting Pronouncements Not Yet Adopted

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 Per Share
Earnings Per Share

(3) Earnings Per Share

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

 

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)

   2012     2011  

Fixed maturity securities—taxable

   $ 660      $ 670   

Fixed maturity securities—non-taxable

     4        11   

Commercial mortgage loans

     84        92   

Restricted commercial mortgage loans related to securitization entities

     9        10   

Equity securities

     4        3   

Other invested assets

     53        34   

Policy loans

     31        29   

Cash, cash equivalents and short-term investments

     10        6   
  

 

 

   

 

 

 

Gross investment income before expenses and fees

     855        855   

Expenses and fees

     (23     (25
  

 

 

   

 

 

 

Net investment income

   $ 832      $ 830   
  

 

 

   

 

 

 

(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)

   2012     2011  

Available-for-sale securities:

    

Realized gains

   $ 63      $ 29   

Realized losses

     (46     (31
  

 

 

   

 

 

 

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

     17        (2
  

 

 

   

 

 

 

Impairments:

    

Total other-than-temporary impairments

     (16     (31

Portion of other-than-temporary impairments included in

    

other comprehensive income (loss)

     (1     (5
  

 

 

   

 

 

 

Net other-than-temporary impairments

     (17     (36
  

 

 

   

 

 

 

Trading securities

     (25     11   

Commercial mortgage loans

     2        (1

Net gains (losses) related to securitization entities

     34        10   

Derivative instruments (1)

     26        (10

Contingent purchase price valuation change

     (2     —     
  

 

 

   

 

 

 

Net investment gains (losses)

   $ 35      $ (28
  

 

 

   

 

 

 

(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 periods ended March 31, 2012 and 2011 was $357 million and $397 million, respectively, which was approximately 90% and 94%, respectively, of book value.

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

 

                 

(Amounts in millions)

   2012     2011  

Beginning balance

   $ 646      $ 784   

Additions:

                

Other-than-temporary impairments not previously recognized

     2        3   

Increases related to other-than-temporary impairments previously recognized

     13        31   

Reductions:

                

Securities sold, paid down or disposed

     (51     (63
    

 

 

   

 

 

 

Ending balance

   $ 610      $ 755   
    

 

 

   

 

 

 

(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)

   March 31, 2012     December 31, 2011  

Net unrealized gains (losses) on investment securities:

                

Fixed maturity securities

   $ 3,515      $ 3,742   

Equity securities

     14        5   

Other invested assets

     (24     (30
    

 

 

   

 

 

 

Subtotal

     3,505        3,717   

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

     (1,348     (1,303

Income taxes, net

     (747     (840
    

 

 

   

 

 

 

Net unrealized investment gains (losses)

     1,410        1,574   

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

     83        89   
    

 

 

   

 

 

 

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

   $ 1,327      $ 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 three months ended March 31:

 

                 

(Amounts in millions)

   2012     2011  

Beginning balance

   $ 1,485      $ (80

Unrealized gains (losses) arising during the period:

                

Unrealized gains (losses) on investment securities

     (212     12   

Adjustment to deferred acquisition costs

     (47     (17

Adjustment to present value of future profits

     11        (1

Adjustment to sales inducements

     (10     (4

Adjustment to benefit reserves

     1        63   

Provision for income taxes

     93        (21
    

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (164     32   

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

     —          25   
    

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (164     57   

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

     6        9   
    

 

 

   

 

 

 

Ending balance

   $ 1,327      $ (14
    

 

 

   

 

 

 

(d) Fixed Maturity and Equity Securities

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

 

            Gross unrealized gains      Gross unrealized losses        

(Amounts in millions)

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

Fixed maturity securities:

               

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

   $ 3,893       $ 687       $ —         $ (6   $ —        $ 4,574   

Tax-exempt

     379         13         —           (51     —          341   

Government—non-U.S.

     2,103         189         —           (1     —          2,291   

U.S. corporate

     23,121         2,283         17         (213     (1     25,207   

Corporate—non-U.S.

     13,760         807         —           (125     —          14,442   

Residential mortgage-backed

     5,807         436         9         (235     (165     5,852   

Commercial mortgage-backed

     3,407         137         5         (161     (42     3,346   

Other asset-backed

     2,544         25         —           (88     (2     2,479   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

     55,014         4,577         31         (880     (210     58,532   

Equity securities

     419         22         —           (7     —          434   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

   $ 55,433       $ 4,599       $ 31       $ (887   $ (210   $ 58,966   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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 March 31, 2012:

 

     Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

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

Description of Securities

                 

Fixed maturity securities:

                 

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

  $ 247      $ (6     19      $ —        $ —          —        $ 247      $ (6 )       19   

Tax-exempt

    —          —          —          152        (51 )       31        152        (51 )       31   

Government—non-U.S.

    131        (1     29        —          —          —          131        (1 )       29   

U.S. corporate

    1,428        (36     170        1,274        (178     113        2,702        (214 )       283   

Corporate—non-U.S.

    1,040        (35     132        691        (90 )       59        1,731        (125 )       191   

Residential mortgage-backed

    261        (3     58        716        (397     352        977        (400 )       410   

Commercial mortgage-backed

    277        (18     42        857        (185     159        1,134        (203 )       201   

Other asset-backed

    257        (3     38        273        (87 )       30        530        (90 )       68   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity
securities

    3,641        (102     488        3,963        (988     744        7,604        (1,090     1,232   

Equity securities

    110        (6     52        18        (1 )       17        128        (7 )       69   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 3,751      $ (108     540      $ 3,981      $ (989     761      $ 7,732      $ (1,097     1,301   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 3,619      $ (87     465      $ 2,767      $ (255     399      $ 6,386      $ (342 )       864   

20%-50% Below cost

    21        (9     12        1,084        (474     228        1,105        (483 )       240   

>50% Below cost

    1        (6     11        112        (259     117        113        (265 )       128   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    3,641        (102     488        3,963       
 
(988
 

  
    744        7,604       
 
(1,090
 

  
    1,232   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    93        (2     48        18        (1 )       17        111        (3 )       65   

20%-50% Below cost

    17        (4     4        —          —          —          17        (4 )       4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    110        (6     52        18        (1 )       17        128        (7 )       69   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 3,751      $ (108     540      $ 3,981      $ (989     761      $ 7,732      $ (1,097     1,301   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 3,414      $ (84     416      $ 2,726      $ (407     372      $ 6,140      $ (491 )       788   

Below investment grade (3)

    337        (24     124        1,255        (582     389        1,592        (606 )       513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 3,751      $ (108     540      $ 3,981      $ (989     761      $ 7,732      $ (1,097     1,301   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1) 

Amounts included $202 million of unrealized losses on other-than-temporarily impaired securities.

(2) 

Amounts included $210 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 $195 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 credit spreads that have widened since acquisition for corporate securities across various industry sectors, including finance and insurance as well as consumer–non-cyclical. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 3% as of March 31, 2012.

 

         

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

Of the $255 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 75% of the unrealized losses were related to investment grade securities as of March 31, 2012. These unrealized losses were attributable to the widening of credit spreads 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 8% as of March 31, 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 March 31, 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

  $ 118      $ (46     4     13      $ —        $ —          —       —     

U.S. corporate

    203        (63     6        10        —          —          —          —     

Corporate—non-U.S.

    104        (40     3        13        —          —          —          —     

Structured securities:

               

Residential mortgage-backed

    35        (17     2        16        11        (25     2        12   

Commercial mortgage-backed

    43        (16     1        12        1        (1     —          1   

Other asset-backed

    18        (7     1        3        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    96        (40     4        31        12        (26     2        13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 521      $ (189     17     67      $ 12      $ (26     2     13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    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

  $ 108      $ (39     4     12      $ —        $ —          —       —     

Structured securities:

               

Residential mortgage-backed

    256        (141     13        110        71        (183     17        87   

Commercial mortgage-backed

    129        (55     5        35        19        (34     3        14   

Other asset-backed

    70        (50     4        4        10        (16     1        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    455        (246     22        149        100        (233     21        104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 563      $ (285     26     161      $ 100      $ (233     21     104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 below for further discussion of gross unrealized losses by asset class.

 

Tax-Exempt Securities

As indicated in the table above, $46 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 28% below cost. The unrealized losses primarily related to widening of credit spreads on these securities since acquisition as a result of higher risk premiums being attributed to these securities from uncertainty in many political subdivisions 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, the fair value of certain of these securities has been negatively impacted as a result of having 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 March 31, 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

   $ 262       $ (90     8     20       $ —         $ —           —       —     

Consumer—non-cyclical

     31         (9     1        1         —           —           —          —     

Capital goods

     10         (3     —          1         —           —           —          —     

Technology and communications

     4         (1     —          1         —           —           —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 307       $ (103     9     23       $ —         $ —           —       —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     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

   $ 62       $ (24     2     3       $ —         $ —           —       —     

Consumer—non-cyclical

     12         (6     1        1         —           —           —          —     

Consumer-cyclical

     2         (1     —          6         —           —           —          —     

Capital goods

     29         (7     1        1         —           —           —          —     

Transportation

     3         (1     —          1         —           —           —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 108       $ (39     4     12       $ —         $ —           —       —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Of the total unrealized losses of $142 million for corporate fixed maturity securities presented in the preceding tables, $114 million, or 80%, of the unrealized losses related to issuers in the finance and insurance sector that were 26% below cost on average. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers' financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of March 31, 2012. Of the $114 million of unrealized losses related to the finance and insurance industry, $92 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 $545 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, $174 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 is 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 March 31, 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)