GENWORTH FINANCIAL INC, 10-Q filed on 5/4/2011
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2011
Apr. 27, 2011
Document and Entity Information
 
 
Document Type
10-Q 
 
Amendment Flag
FALSE 
 
Document Period End Date
2011-03-31 
 
Document Fiscal Year Focus
2011 
 
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 Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
490,561,211 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data
3 Months Ended
Mar. 31,
2011
2010
Revenues:
 
 
Premiums
$ 1,437 
$ 1,470 
Net investment income
830 
765 
Net investment gains (losses)
(28)
(70)
Insurance and investment product fees and other
329 
256 
Total revenues
2,568 
2,421 
Benefits and expenses:
 
 
Benefits and other changes in policy reserves
1,409 
1,315 
Interest credited
201 
213 
Acquisition and operating expenses, net of deferrals
500 
475 
Amortization of deferred acquisition costs and intangibles
185 
184 
Interest expense
127 
115 
Total benefits and expenses
2,422 
2,302 
Income before income taxes
146 
119 
Provision (benefit) for income taxes
30 
(93)
Net income
116 
212 
Less: net income attributable to noncontrolling interests
34 
34 
Net income available to Genworth Financial, Inc.'s common stockholders
82 
178 
Net income available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
Basic
0.17 1
0.36 1
Diluted
0.17 1
0.36 1
Weighted-average common shares outstanding:
 
 
Basic
490 
489 
Diluted
494 
494 
Supplemental disclosures:
 
 
Total other-than-temporary impairments
(31)
(77)
Portion of other-than-temporary impairments recognized in other comprehensive income (loss)
(5)
(3)
Net other-than-temporary impairments
(36)
(80)
Other investments gains (losses)
10 
Total net investment gains (losses)
$ (28)
$ (70)
Condensed Consolidated Balance Sheets (USD $)
In Millions
3 Months Ended
Mar. 31, 2011
3 Months Ended
Dec. 31, 2010
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 54,998 
$ 55,183 
Equity securities available-for-sale, at fair value
355 
332 
Commercial mortgage loans
6,600 
6,718 
Restricted commercial mortgage loans related to securitization entities
485 
507 
Policy loans
1,480 
1,471 
Other invested assets
3,752 
3,854 
Restricted other invested assets related to securitization entities ($374 and $370 at fair value)
376 
372 
Total investments
68,046 
68,437 
Cash and cash equivalents
3,742 
3,132 
Accrued investment income
794 
733 
Deferred acquisition costs
7,334 
7,256 
Intangible assets
713 
741 
Goodwill
1,331 
1,329 
Reinsurance recoverable
17,102 
17,191 
Other assets
883 
810 
Deferred tax asset
1,188 
1,100 
Separate account assets
11,807 
11,666 
Total assets
112,940 
112,395 
Liabilities and stockholders' equity
 
 
Future policy benefits
30,872 
30,717 
Policyholder account balances
26,399 
26,978 
Liability for policy and contract claims
6,959 
6,933 
Unearned premiums
4,529 
4,541 
Other liabilities ($139 and $150 other liabilities related to securitization entities)
6,189 
6,085 
Borrowings related to securitization entities ($58 and $51 at fair value)
489 
494 
Non-recourse funding obligations
3,431 
3,437 
Long-term borrowings
5,347 
4,952 
Deferred tax liability
1,689 
1,621 
Separate account liabilities
11,807 
11,666 
Total liabilities
97,711 
97,424 
Commitments and contingencies
 
 
Stockholders' equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 579 million and 578 million shares issued as of March 31, 2011 and December 31, 2010, respectively; 491 million and 490 million shares outstanding as of March 31, 2011 and December 31, 2010, respectively
Additional paid-in capital
12,101 
12,095 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
77 
21 
Net unrealized gains (losses) on other-than-temporarily impaired securities
(114)
(121)
Net unrealized investment gains (losses)
(37)
(100)
Derivatives qualifying as hedges
864 
924 
Foreign currency translation and other adjustments
793 
668 
Total accumulated other comprehensive income (loss)
1,620 
1,492 
Retained earnings
3,055 
2,973 
Treasury stock, at cost (88 million shares as of March 31, 2011 and December 31, 2010)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
14,077 
13,861 
Noncontrolling interests
1,152 
1,110 
Total stockholders' equity
15,229 
14,971 
Total liabilities and stockholders' equity
$ 112,940 
$ 112,395 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data
Mar. 31, 2011
Dec. 31, 2010
Condensed Consolidated Balance Sheets
 
 
Restricted other invested assets related to securitization entities, fair value
$ 374 
$ 370 
Other liabilities related to securitization entities
139 
150 
Borrowings related to securitization entities, fair value
58 
51 
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
579,000,000 
578,000,000 
Class A common stock, shares outstanding
491,000,000 
490,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
Condensed Consolidated Statements of Changes in Stockholders' Equity (USD $)
In Millions
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, 2009
$ 1 
$ 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)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
 
 
 
178 
 
178 
34 
212 
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 at Mar. 31, 2010
12,064 
347 
3,179 
(2,700)
12,891 
1,134 
14,025 
Balances at Dec. 31, 2010
12,095 
1,492 
2,973 
(2,700)
13,861 
1,110 
14,971 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
 
 
 
82 
 
82 
34 
116 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
56 
 
 
56 
(9)
47 
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
 
 
 
Derivatives qualifying as hedges
 
 
(60)
 
 
(60)
 
(60)
Foreign currency translation and other adjustments
 
 
125 
 
 
125 
29 
154 
Total comprehensive income (loss)
 
 
 
 
 
 
 
264 
Dividends to noncontrolling interests
 
 
 
 
 
 
(12)
(12)
Stock-based compensation expense and exercises and other
 
 
 
 
 
Balances at Mar. 31, 2011
$ 1 
$ 12,101 
$ 1,620 
$ 3,055 
$ (2,700)
$ 14,077 
$ 1,152 
$ 15,229 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions
3 Months Ended
Mar. 31,
2011
2010
Cash flows from operating activities:
 
 
Net income
$ 116 
$ 212 
Adjustments to reconcile net income to net cash from operating activities:
 
 
Amortization of fixed maturity discounts and premiums
(18)
24 
Net investment losses (gains)
28 
70 
Charges assessed to policyholders
(159)
(113)
Acquisition costs deferred
(229)
(193)
Amortization of deferred acquisition costs and intangibles
185 
184 
Deferred income taxes
(37)
(101)
Net increase in trading securities, held-for-sale investments and derivative instruments
35 
58 
Stock-based compensation expense
11 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(117)
(43)
Insurance reserves
557 
576 
Current tax liabilities
25 
(163)
Other liabilities and other policy-related balances
(57)
(392)
Net cash from operating activities
336 
130 
Cash flows from investing activities
 
 
Fixed maturity securities
1,627 
941 
Commercial mortgage loans
148 
136 
Restricted commercial mortgage loans related to securitization entities
22 
12 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
1,009 
1,021 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(2,200)
(3,623)
Commercial mortgage loans
(38)
 
Other invested assets, net
(59)
344 
Policy loans, net
(9)
(5)
Payments for businesses purchased, net of cash acquired
(4)
 
Net cash from investing activities
496 
(1,174)
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
560 
490 
Withdrawals from universal life and investment contracts
(1,115)
(913)
Short-term borrowings and other, net
(33)
(37)
Redemption of non-recourse funding obligations
(6)
(6)
Proceeds from the issuance of long-term debt
397 
 
Repayment of borrowings related to securitization entities
(12)
(11)
Dividends paid to noncontrolling interests
(12)
(10)
Net cash from financing activities
(221)
(487)
Effect of exchange rate changes on cash and cash equivalents
(1)
(5)
Net change in cash and cash equivalents
610 
(1,536)
Cash and cash equivalents at beginning of period
3,132 
5,002 
Cash and cash equivalents at end of period
$ 3,742 
$ 3,466 
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 three operating segments:

 

   

Retirement and Protection. We offer and/or manage a variety of protection, wealth management and retirement income products. Our primary insurance products include life and long-term care insurance. Additionally, we offer other Medicare supplement insurance 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 immediate individual annuities. We previously offered variable deferred and group variable annuities offered through retirement plans.

 

   

International. We offer mortgage and lifestyle protection insurance products and related services in multiple markets. 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. We are a leading provider of protection coverages primarily associated with certain financial obligations (referred to as lifestyle protection) in multiple European countries. These 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.

 

   

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 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 capital and 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-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").

In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business. We continue to offer fixed annuities.

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 2010 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

On January 1, 2011, we adopted new accounting guidance related to goodwill impairment testing when a reporting unit's carrying value is zero or negative. This guidance did not impact our consolidated financial statements upon adoption, as all of our reporting units with goodwill balances have positive carrying values.

 

On January 1, 2011, we adopted new accounting guidance related to how investments held through separate accounts affect an insurer's consolidation analysis of those investments. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2011, we adopted new accounting guidance related to additional disclosures about purchases, sales, issuances and settlements in the rollforward of Level 3 fair value measurements. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Not Yet Adopted

In April 2011, the Financial Accounting Standards Board (the "FASB") issued new accounting guidance for troubled debt restructurings. This new accounting guidance and related disclosures will be effective for us on July 1, 2011. We do not expect the adoption of this accounting guidance to have a material impact on our consolidated financial statements.

In October 2010, the FASB issued new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This new accounting guidance will be effective for us on January 1, 2012. When adopted, we expect to defer fewer costs. The new guidance is effective prospectively with retrospective adoption allowed. We have not yet determined the method nor impact this accounting guidance will have 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)

   2011     2010  

Fixed maturity securities—taxable

   $ 670      $ 626   

Fixed maturity securities—non-taxable

     11        16   

Commercial mortgage loans

     92        104   

Restricted commercial mortgage loans related to securitization entities

     10        10   

Equity securities

     3        2   

Other invested assets

     34        (2

Restricted other invested assets related to securitization entities

     —          1   

Policy loans

     29        27   

Cash, cash equivalents and short-term investments

     6        5   
                

Gross investment income before expenses and fees

     855        789   

Expenses and fees

     (25     (24
                

Net investment income

   $ 830      $ 765   
                

(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)

   2011     2010  

Available-for-sale securities:

    

Realized gains

   $ 29      $ 23   

Realized losses

     (31     (38
                

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

     (2     (15
                

Impairments:

    

Total other-than-temporary impairments

     (31     (77

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

     (5     (3
                

Net other-than-temporary impairments

     (36     (80
                

Trading securities

     11        6   

Commercial mortgage loans

     (1     (4

Net gains (losses) related to securitization entities

     10        11   

Derivative instruments (1)

     (10     (8

Other

     —          20   
                

Net investment gains (losses)

   $ (28   $ (70
                

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, 2011 and 2010 was $397 million and $558 million, respectively, which was approximately 94% of book value for both periods.

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

 

(Amounts in millions)

   2011     2010  

Beginning balance

   $ 784      $ 1,059  

Additions:

    

Other-than-temporary impairments not previously recognized

     3        20   

Increases related to other-than-temporary impairments previously recognized

     31        46   

Reductions:

    

Securities sold, paid down or disposed

     (63     (100

Securities where there is intent to sell

     —          —     
                

Ending balance

   $ 755      $ 1,025   
                

(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, 2011     December 31, 2010  

Net unrealized gains (losses) on investment securities:

    

Fixed maturity securities

   $ 548      $ 511   

Equity securities

     20        9   

Other invested assets

     (20     (22
                

Subtotal

     548        498   

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

     (546     (583

Income taxes, net

     2        35   
                

Net unrealized investment gains (losses)

     4        (50

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

     41        50   
                

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

   $ (37   $ (100
                

 

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 three months ended March 31:

 

(Amounts in millions)

   2011     2010  

Beginning balance

   $ (100   $ (1,398

Impact upon adoption of new accounting guidance

     —          91   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     12        763   

Adjustment to deferred acquisition costs

     (21     (113

Adjustment to present value of future profits

     (1     (31

Adjustment to sales inducements

     (4     (15

Adjustment to benefit reserves

     63        —     

Provision for income taxes

     (20     (220
                

Change in unrealized gains (losses) on investment securities

     29        384   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(13) and $(34)

     25        62   
                

Change in net unrealized investment gains (losses)

     54        537   

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

     9        1   
                

Ending balance

   $ (37   $ (860
                

(d) Fixed Maturity and Equity Securities

As of March 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:

 

(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

   $ 3,352       $ 102       $ —         $ (40   $ —        $ 3,414   

Tax-exempt

     1,029         16         —           (117     —          928   

Government—non-U.S.

     2,267         99         —           (7     —          2,359   

U.S. corporate

     23,069         1,062         12         (390     —          23,753   

Corporate—non-U.S.

     13,655         454         —           (163     (9     13,937   

Residential mortgage-backed

     4,897         134         20         (270     (181     4,600   

Commercial mortgage-backed

     3,841         120         3         (172     (36     3,756   

Other asset-backed

     2,324         19         —           (90     (2     2,251   
                                                   

Total fixed maturity securities

     54,434         2,006         35         (1,249     (228     54,998   

Equity securities

     334         24         —           (3     —          355   
                                                   

Total available-for-sale securities

   $ 54,768       $ 2,030       $ 35       $ (1,252   $ (228   $ 55,353   
                                                   

 

As of December 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

   $ 3,568       $ 145       $ —         $ (8   $ —        $ 3,705   

Tax-exempt

     1,124         19         —           (113     —          1,030   

Government—non-U.S.

     2,257         118         —           (6     —          2,369   

U.S. corporate

     23,282         1,123         10         (448     —          23,967   

Corporate—non-U.S.

     13,180         485         —           (167     —          13,498   

Residential mortgage-backed

     4,821         116         18         (304     (196     4,455   

Commercial mortgage-backed

     3,936         132         6         (286     (45     3,743   

Other asset-backed

     2,494         18         —           (94     (2     2,416   
                                                   

Total fixed maturity securities

     54,662         2,156         34         (1,426     (243     55,183   

Equity securities

     323         13         —           (4     —          332   
                                                   

Total available-for-sale securities

   $ 54,985       $ 2,169       $ 34       $ (1,430   $ (243   $ 55,515   
                                                   

 

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, 2011:

 

     Less than 12 months      12 months or more      Total  

(Dollar amounts in millions)

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

Description of Securities

                       

Fixed maturity securities:

                       

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

   $ 1,187       $ (40     56       $ —         $ —          —         $ 1,187       $ (40     56   

Tax-exempt

     229         (13     81         244         (104     91         473         (117     172   

Government—non-U.S.

     312         (6     80         39         (1     11         351         (7     91   

U.S. corporate

     3,883         (140     484         2,068         (250     174         5,951         (390     658   

Corporate—non- U.S.

     2,633         (82     362         992         (90     92         3,625         (172     454   

Residential mortgage-backed

     454         (23     80         964         (428     389         1,418         (451     469   

Commercial mortgage-backed

     254         (10     37         1,105         (198     199         1,359         (208     236   

Other asset-backed

     173         (1     30         424         (91     46         597         (92     76   
                                                                             

Subtotal, fixed maturity securities

     9,125         (315     1,210         5,836         (1,162     1,002         14,961         (1,477     2,212   

Equity securities

     71         (2     46         6         (1     11         77         (3     57   
                                                                             

Total for securities in an unrealized loss position

   $ 9,196       $ (317     1,256       $ 5,842       $ (1,163     1,013       $ 15,038       $ (1,480     2,269   
                                                                             

 

Aging of Gross Unrealized Losses and Other-Than-Temporary Losses

The following table presents the gross unrealized losses and number of 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, 2011:

 

     Less than 20%      20% to 50%      Greater than 50%  

(Dollar amounts in millions)

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

Fixed maturity securities:

                    

Less than 12 months:

                    

Investment grade

   $ (278     19     1,143       $ (24     2     8       $ —          —       —     

Below investment grade

     (11     1        50         (1     —          3         (1     —          6   
                                                                          

Total

     (289     20        1,193         (25     2        11         (1     —          6   
                                                                          

12 months or more:

                    

Investment grade

     (279     19        437         (246     16        128         (63     4        24   

Below investment grade (1)

     (86     6        149         (293     20        155         (195     13        109   
                                                                          

Total

     (365     25        586         (539     36        283         (258     17        133   
                                                                          

Equity securities:

                    

Less than 12 months:

                    

Investment grade

     (1     —          24         —          —          —           —          —          —     

Below investment grade

     (1     —          22         —          —          —           —          —          —     
                                                                          

Total

     (2     —          46         —          —          —           —          —          —     
                                                                          

12 months or more:

                    

Investment grade

     (1     —          11         —          —          —           —          —          —     

Below investment grade

     —          —          —           —          —          —           —          —          —     

Total

     (1     —          11         —          —          —           —          —          —     
                                                                          

Total

   $ (657     45     1,836       $ (564     38     294       $ (259     17     139   
                                                                          

The securities less than 20% below cost were primarily attributable to credit spreads that have widened since acquisition for certain mortgage-backed and asset-backed securities and corporate securities in the finance and insurance sector.

 

Concentration of Gross Unrealized Losses and Other-Than-Temporary Losses by Sector

The following table presents the concentration of gross unrealized losses by sector as of March 31, 2011:

 

     Investment grade     Below investment grade  

(Amounts in millions)

   Gross
unrealized
losses
    % of gross
unrealized
losses
    Gross
unrealized
losses
    % of gross
unrealized
losses
 

Fixed maturity securities:

        

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

   $ (40     3   $ —          —  

Tax-exempt

     (115     8        (2     —     

Government—non-U.S.

     (7     1        —          —     

U.S. corporate

     (360     24        (30     2   

Corporate—non-U.S.

     (158     11        (14     1   

Residential mortgage-backed

     (95     6        (356     24   

Commercial mortgage-backed

     (93     6        (115     8   

Other asset-backed

     (22     1        (70     5   
                                

Subtotal, fixed maturity securities

     (890     60        (587     40   

Equity securities

     (2     —          (1     —     
                                

Total

   $ (892     60   $ (588     40
                                

While certain securities included in the preceding tables were considered other-than-temporarily impaired, we expect to recover the new 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.

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.

Structured Securities

The following table presents the concentration of gross unrealized losses related to structured securities as of March 31, 2011:

 

     Investment grade     Below investment grade  

(Amounts in millions)

   Gross
unrealized
losses
    % of gross
unrealized
losses
    Gross
unrealized
losses
    % of gross
unrealized
losses
 

Structured securities:

        

Residential mortgage-backed

   $ (95     13   $ (356     48

Commercial mortgage-backed

     (93     12        (115     15   

Other asset-backed

     (22     3        (70     9   
                                

Total structured securities

   $ (210     28   $ (541     72
                                

Most of the structured securities have been in an unrealized loss position for 12 months or more. Given ongoing concern about the housing market and unemployment, the fair value of these securities has declined due to credit spreads that have widened since acquisition. 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, 2011.

 

Corporate Securities

The following table presents the concentration of gross unrealized losses related to corporate debt and equity securities by industry as of March 31, 2011:

 

     Investment grade     Below investment grade  

(Amounts in millions)

   Less than
12 months
    12 months
or more
    Less than
12 months
    12 months
or more
 

Industry:

        

Finance and insurance

   $ (45   $ (216   $ (9   $ (15

Utilities and energy

     (64     (9     —          —     

Consumer – non-cyclical

     (23     (7     —          (3

Consumer – cyclical

     (4     (6     (1     (2

Capital goods

     (6     (7     —          (7

Industrial

     (15     (13     —          (2

Technology and communications

     (19     (6     —          (2

Transportation

     (3     (27     —          —     

Other

     (33     (17     (2     (2
                                

Total

   $ (212   $ (308   $ (12   $ (33
                                

A portion of the unrealized losses in the finance and insurance sector included debt 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 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, 2011. 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. The majority of hybrid securities retain a credit rating of investment grade and were issued by foreign financial institutions. The fair value of the 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.

 

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, 2010:

 

     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

   $ 545       $ (8     36       $ —         $ —          —         $ 545       $ (8     36   

Tax-exempt

     285         (12     101         244         (101     90         529         (113     191   

Government—non-U.S.

     431         (5     69         21         (1     7         452         (6     76   

U.S. corporate

     3,615         (125     443         2,338         (323     191         5,953         (448     634   

Corporate—non- U.S.

     2,466         (53     296         1,141         (114     102         3,607         (167     398   

Residential mortgage-backed

     461         (23     92         1,031         (477     416         1,492         (500     508   

Commercial mortgage-backed

     177         (8     26         1,167         (323     225         1,344         (331     251   

Other asset-backed

     401         (2     37         512         (94     53         913         (96     90   
                                                                             

Subtotal, fixed maturity securities

     8,381         (236     1,100         6,454         (1,433     1,084         14,835         (1,669     2,184   

Equity securities

     77         (3     48         5         (1     4         82         (4     52   
                                                                             

Total for securities in an unrealized loss position

   $ 8,458       $ (239     1,148       $ 6,459       $ (1,434     1,088       $ 14,917       $ (1,673     2,236   
                                                                             

 

The following table presents the gross unrealized losses and number of 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, 2010:

 

     Less than 20%      20% to 50%      Greater than 50%  

(Dollar amounts in millions)

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

Fixed maturity securities:

                    

Less than 12 months:

                    

Investment grade

   $ (222     13     1,031       $ (7         8       $ —          —       —     

Below investment grade

     (4     —          45         (1     —          10         (2     —          6   
                                                                          

Total

     (226     13        1,076         (8     1        18         (2     —          6   
                                                                          

12 months or more:

                    

Investment grade

     (330     20        473         (328     20        166         (105     6        40   

Below investment grade (1)

     (88     5        115         (324     19        162         (258     16        128   
                                                                          

Total

     (418     25        588         (652     39        328         (363     22        168   
                                                                          

Equity securities:

                    

Less than 12 months:

                    

Investment grade

     (1     —          20         (1     —          1         —          —          —     

Below investment grade

     (1     —          27         —          —          —           —          —          —     
                                                                          

Total

     (2     —          47         (1     —          1         —          —          —     
                                                                          

12 months or more:

                    

Investment grade

     (1     —          4         —          —          —           —          —          —     

Below investment grade

     —          —          —           —          —          —           —          —          —     
                                                                          

Total

     (1     —          4         —          —          —           —          —          —     
                                                                          

Total

   $ (647     38     1,715       $ (661     40     347       $ (365     22     174   
                                                                          

 

The scheduled maturity distribution of fixed maturity securities as of March 31, 2011 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

   $ 2,360       $ 2,379   

Due after one year through five years

     11,966         12,248   

Due after five years through ten years

     9,324         9,678   

Due after ten years

     19,722         20,086   
                 

Subtotal

     43,372         44,391   

Residential mortgage-backed

     4,897         4,600   

Commercial mortgage-backed

     3,841         3,756   

Other asset-backed

     2,324         2,251   
                 

Total

   $ 54,434       $ 54,998   
                 

As of March 31, 2011, $4,504 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of March 31, 2011, securities issued by finance and insurance, utilities and energy, and consumer—non-cyclical industry groups represented approximately 23%, 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 United States and internationally, and is not dependent on the economic stability of one particular region.

As of March 31, 2011, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders' equity.

(e) Commercial Mortgage Loans

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

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

 

     March 31, 2011     December 31, 2010  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property type:

        

Retail

   $ 1,976        30   $ 1,974        29

Office

     1,822        27        1,850        27   

Industrial

     1,745        26        1,788        26   

Apartments

     700        11        725        11   

Mixed use/other

     411        6        435        7   
                                

Total principal balance

     6,654        100     6,772        100
                    

Unamortized balance of loan origination fees and costs

     4          5     

Allowance for losses

     (58       (59  
                    

Total

   $ 6,600        $ 6,718     
                    

Geographic region:

        

Pacific

   $ 1,746        26   $ 1,769        26

South Atlantic

     1,577        24        1,583        23   

Middle Atlantic

     880        13        937        14   

East North Central

     603        9        612        9   

Mountain

     527        8        540        8   

New England

     480        7        482        7   

West North Central

     355        5        369        6   

West South Central

     305        5        297        4   

East South Central

     181        3        183        3   
                                

Total principal balance

     6,654        100     6,772        100
                    

Unamortized balance of loan origination fees and costs

     4          5     

Allowance for losses

     (58       (59  
                    

Total

   $ 6,600        $ 6,718     
                    

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

 

     March 31, 2011  

(Amounts in millions)

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

Property type:

            

Retail

   $ 3      $ 3      $ —        $ 6      $ 1,970      $ 1,976   

Office

     —          —          10        10        1,812        1,822   

Industrial

     —          4        12        16        1,729        1,745   

Apartments

     —          —          —          —          700        700   

Mixed use/other

     —          —          —          —          411        411   
                                                

Total principal balance

   $ 3      $ 7      $ 22      $ 32      $ 6,622      $ 6,654   
                                                

% of total commercial mortgage loans

     —       —       —       —       100     100
                                                
     December 31, 2010  

(Amounts in millions)

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

Property type:

            

Retail

   $ —        $ —        $ —        $ —        $ 1,974      $ 1,974   

Office

     —          —          12        12        1,838        1,850   

Industrial

     —          6        27        33        1,755        1,788   

Apartments

     —          —          —          —          725        725   

Mixed use/other

     —          —          —          —          435        435   
                                                

Total principal balance

   $ —        $ 6      $ 39      $ 45      $ 6,727      $ 6,772   
                                                

% of total commercial mortgage loans

     —       —       1     1     99     100
                                                

As of March 31, 2011 and December 31, 2010, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest.

The following table sets forth the commercial mortgage loans on nonaccrual status by property type as of the dates indicated:

 

(Amounts in millions)

   March 31,
2011
     December 31,
2010
 

Property type:

     

Retail

   $ —         $ —     

Office

     10         12   

Industrial

     12         27   

Apartments

     —           —     

Mixed use/other

     —           —     
                 

Total principal balance

   $ 22       $ 39   
                 

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans for the period ended March 31:

 

(Amounts in millions)

   2011  

Allowance for credit losses:

  

Beginning balance

   $ 59   

Charge-offs

     (1

Recoveries

     —     

Provision

     —     
        

Ending balance

   $ 58   
        

Ending allowance for individually impaired loans

   $ —     
        

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

   $ 58   
        

Principal balance:

  

Ending balance

   $ 6,654   
        

Ending balance of individually impaired loans

   $ 14   
        

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

   $ 6,640   
        

The following table presents the activity in the allowance for losses for the period ended March 31:

 

(Amounts in millions)

   2010  

Beginning balance

   $ 48   

Provision

     4   

Release

     —     
        

Ending balance

   $ 52   
        

The following tables set forth our individually impaired commercial mortgage loans by property type as of the dates indicated:

 

     March 31, 2011  

(Amounts in millions)

   Recorded
investment
     Unpaid
principal
balance
     Charge-
offs
     Related
allowance
     Average
recorded
investment
     Interest
income
recognized
 

Property type:

                 

Retail

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

Office

     9         10           1         —         $ 3         —     

Industrial

      4           6            2         —         $  4          —     

Apartments

     —           —           —           —         $ —           —     

Mixed use/other

     —           —           —           —         $ —           —     
                                               

Total

   $ 14       $ 18       $ 4       $ —         $ 3       $ —     
                                               
     December 31, 2010  

(Amounts in millions)

   Recorded
investment
     Unpaid
principal
balance
     Charge-
offs
     Related
allowance
     Average
recorded
investment
     Interest
income
recognized
 

Property type:

                 

Retail

   $ 5       $ 8       $ 3       $ —         $ 2       $ —     

Office

     6         8         2         —         $ 2         —     

Industrial

     19         24         5         —         $ 3         —     

Apartments

     —           —           —           —         $ —           —     

Mixed use/other

     —           —           —           —         $ —           —     
                                               

Total

   $ 30       $ 40       $ 10       $ —         $ 3       $ —     
                                               

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

 

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

 

     March 31, 2011  

(Amounts in millions)

   0% – 50%     51% – 60%     61% –75%     76% – 100%     Greater
than 100%
    Total  

Property type:

            

Retail

   $ 477      $ 268      $ 845      $ 347      $ 39      $ 1,976   

Office

     318        308        702        364        130        1,822   

Industrial

     418        372        624        260        71        1,745   

Apartments

     125        188        265        107        15        700   

Mixed use/other

     99        19        143        141        9        411   
                                                

Total

   $ 1,437      $ 1,155      $ 2,579      $ 1,219      $ 264      $ 6,654   
                                                

% of total

     22     17     39     18     4     100
                                                

Weighted-average debt service coverage ratio

     2.24        1.98        2.42        1.83        1.02        2.14   
                                                
     December 31, 2010  

(Amounts in millions)

   0% – 50%     51% – 60%     61% –75%     76% – 100%     Greater
than 100%
    Total  

Property type:

            

Retail

   $ 477      $ 287      $ 805      $ 363      $ 42      $ 1,974   

Office

     320        327        612        446        145        1,850   

Industrial

     431        361        625        284        87        1,788   

Apartments

     99        172        321        133        —          725   

Mixed use/other

     123        10        63        221        18        435   
                                                

Total

   $ 1,450      $ 1,157      $ 2,426      $ 1,447      $ 292      $ 6,772   
                                                

% of total

     22     17     36     21     4     100
                                                

Weighted-average debt service coverage ratio

     2.24        1.99        1.79        2.42        0.75        2.01   
                                                

The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:

 

     March 31, 2011  

(Amounts in millions)

   Less than 1.00     1.00 – 1.25     1.26 – 1.50     1.51 – 2.00     Greater
than 2.00
    Total  

Property type:

            

Retail

   $ 119      $ 309      $ 499      $ 522      $ 412      $ 1,861   

Office

     196        182        241        486        538        1,643   

Industrial

     245        163        278        708