UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20102011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number 001-32195
GENWORTH FINANCIAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 33-1073076 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
6620 West Broad Street Richmond, Virginia | 23230 | |
(Address of Principal Executive Offices) | (Zip Code) |
(804) 281-6000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large | ||||||
Accelerated filer | ¨ | |||||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
AtAs of April 26, 2010, 489,079,62227, 2011, 490,561,211 shares of Class A Common Stock, par value $0.001 per share, were outstanding.
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Condensed Consolidated Balance Sheets as of March 31, | 4 | |||||
5 | ||||||
7 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 8 | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 59 | |||||
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109 | ||||||
Item 6. | 110 | |||||
111 |
Item 1. | Financial Statements |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in millions, except per share amounts)
(Unaudited)
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 1,470 | $ | 1,502 | $ | 1,437 | $ | 1,470 | ||||||||
Net investment income | 765 | 711 | 830 | 765 | ||||||||||||
Net investment gains (losses) | (70 | ) | (770 | ) | (28 | ) | (70 | ) | ||||||||
Insurance and investment product fees and other | 256 | 291 | 329 | 256 | ||||||||||||
Total revenues | 2,421 | 1,734 | 2,568 | 2,421 | ||||||||||||
Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 1,315 | 1,508 | 1,409 | 1,315 | ||||||||||||
Interest credited | 213 | 275 | 201 | 213 | ||||||||||||
Acquisition and operating expenses, net of deferrals | 475 | 441 | 500 | 475 | ||||||||||||
Amortization of deferred acquisition costs and intangibles | 184 | 247 | 185 | 184 | ||||||||||||
Interest expense | 115 | 96 | 127 | 115 | ||||||||||||
Total benefits and expenses | 2,302 | 2,567 | 2,422 | 2,302 | ||||||||||||
Income (loss) before income taxes | 119 | (833 | ) | |||||||||||||
Benefit for income taxes | (93 | ) | (364 | ) | ||||||||||||
Income before income taxes | 146 | 119 | ||||||||||||||
Provision (benefit) for income taxes | 30 | (93 | ) | |||||||||||||
Net income (loss) | 212 | (469 | ) | |||||||||||||
Net income | 116 | 212 | ||||||||||||||
Less: net income attributable to noncontrolling interests | 34 | — | 34 | 34 | ||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 178 | $ | (469 | ) | |||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 82 | $ | 178 | ||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||||||||||
Basic | $ | 0.36 | $ | (1.08 | ) | $ | 0.17 | $ | 0.36 | |||||||
Diluted | $ | 0.36 | $ | (1.08 | ) | $ | 0.17 | $ | 0.36 | |||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | 488.8 | 433.2 | 490.1 | 488.8 | ||||||||||||
Diluted | 493.5 | 433.2 | 494.4 | 493.5 | ||||||||||||
Supplemental disclosures: | ||||||||||||||||
Total other-than-temporary impairments | $ | (77 | ) | $ | (597 | ) | $ | (31 | ) | $ | (77 | ) | ||||
Portion of other-than-temporary impairments recognized in other comprehensive income (loss) | (3 | ) | — | (5 | ) | (3 | ) | |||||||||
Net other-than-temporary impairments | (80 | ) | (597 | ) | (36 | ) | (80 | ) | ||||||||
Other investments gains (losses) | 10 | (173 | ) | 8 | 10 | |||||||||||
Total net investment gains (losses) | $ | (70 | ) | $ | (770 | ) | $ | (28 | ) | $ | (70 | ) | ||||
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share amounts)
March 31, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Investments: | ||||||||||||||||
Fixed maturity securities available-for-sale, at fair value | $ | 52,040 | $ | 49,752 | $ | 54,998 | $ | 55,183 | ||||||||
Equity securities available-for-sale, at fair value | 179 | 159 | 355 | 332 | ||||||||||||
Commercial mortgage loans | 7,336 | 7,499 | 6,600 | 6,718 | ||||||||||||
Restricted commercial mortgage loans related to securitization entities | 552 | — | 485 | 507 | ||||||||||||
Policy loans | 1,408 | 1,403 | 1,480 | 1,471 | ||||||||||||
Other invested assets | 3,972 | 4,702 | 3,752 | 3,854 | ||||||||||||
Restricted other invested assets related to securitization entities ($377 at fair value) | 385 | — | ||||||||||||||
Restricted other invested assets related to securitization entities ($374 and $370 at fair value) | 376 | 372 | ||||||||||||||
Total investments | 65,872 | 63,515 | 68,046 | 68,437 | ||||||||||||
Cash and cash equivalents | 3,466 | 5,002 | 3,742 | 3,132 | ||||||||||||
Accrued investment income | 775 | 691 | 794 | 733 | ||||||||||||
Deferred acquisition costs | 7,252 | 7,341 | 7,334 | 7,256 | ||||||||||||
Intangible assets | 863 | 934 | 713 | 741 | ||||||||||||
Goodwill | 1,319 | 1,324 | 1,331 | 1,329 | ||||||||||||
Reinsurance recoverable | 17,333 | 17,332 | 17,102 | 17,191 | ||||||||||||
Other assets | 934 | 954 | 883 | 810 | ||||||||||||
Deferred tax asset | 18 | 92 | 1,188 | 1,100 | ||||||||||||
Separate account assets | 11,261 | 11,002 | 11,807 | 11,666 | ||||||||||||
Total assets | $ | 109,093 | $ | 108,187 | $ | 112,940 | $ | 112,395 | ||||||||
Liabilities and stockholders’ equity | ||||||||||||||||
Liabilities: | ||||||||||||||||
Future policy benefits | $ | 29,686 | $ | 29,469 | $ | 30,872 | $ | 30,717 | ||||||||
Policyholder account balances | 28,107 | 28,470 | 26,399 | 26,978 | ||||||||||||
Liability for policy and contract claims | 6,389 | 6,567 | 6,959 | 6,933 | ||||||||||||
Unearned premiums | 4,571 | 4,714 | 4,529 | 4,541 | ||||||||||||
Other liabilities ($135 and $— other liabilities related to securitization entities) | 6,185 | 6,298 | ||||||||||||||
Borrowings related to securitization entities ($58 at fair value) | 551 | — | ||||||||||||||
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 | 3,437 | 3,443 | 3,431 | 3,437 | ||||||||||||
Short-term borrowings | 930 | 930 | ||||||||||||||
Long-term borrowings | 3,638 | 3,641 | 5,347 | 4,952 | ||||||||||||
Deferred tax liability | 313 | 303 | 1,689 | 1,621 | ||||||||||||
Separate account liabilities | 11,261 | 11,002 | 11,807 | 11,666 | ||||||||||||
Total liabilities | 95,068 | 94,837 | 97,711 | 97,424 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 577 million shares issued as of March 31, 2010 and December 31, 2009; 489 million shares outstanding as of March 31, 2010 and December 31, 2009 | 1 | 1 | ||||||||||||||
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 | 1 | 1 | ||||||||||||||
Additional paid-in capital | 12,064 | 12,034 | 12,101 | 12,095 | ||||||||||||
Accumulated other comprehensive income (loss): | ||||||||||||||||
Net unrealized investment gains (losses): | ||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | (652 | ) | (1,151 | ) | 77 | 21 | ||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | (208 | ) | (247 | ) | (114 | ) | (121 | ) | ||||||||
Net unrealized investment gains (losses) | (860 | ) | (1,398 | ) | (37 | ) | (100 | ) | ||||||||
Derivatives qualifying as hedges | 777 | 802 | 864 | 924 | ||||||||||||
Foreign currency translation and other adjustments | 430 | 432 | 793 | 668 | ||||||||||||
Total accumulated other comprehensive income (loss) | 347 | (164 | ) | 1,620 | 1,492 | |||||||||||
Retained earnings | 3,179 | 3,105 | 3,055 | 2,973 | ||||||||||||
Treasury stock, at cost (88 million shares as of March 31, 2010 and December 31, 2009) | (2,700 | ) | (2,700 | ) | ||||||||||||
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 | 12,891 | 12,276 | 14,077 | 13,861 | ||||||||||||
Noncontrolling interests | 1,134 | 1,074 | 1,152 | 1,110 | ||||||||||||
Total stockholders’ equity | 14,025 | 13,350 | 15,229 | 14,971 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 109,093 | $ | 108,187 | $ | 112,940 | $ | 112,395 | ||||||||
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in millions)
(Unaudited)
Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Treasury stock, at cost | Total Genworth Financial, Inc.’s stockholders’ equity | Noncontrolling interests | Total stockholders’ equity | Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Treasury stock, at cost | Total Genworth Financial, Inc.’s stockholders’ equity | Noncontrolling interests | Total stockholders’ equity | |||||||||||||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2009 | $ | 1 | $ | 12,034 | $ | (164 | ) | $ | 3,105 | $ | (2,700 | ) | $ | 12,276 | $ | 1,074 | $ | 13,350 | ||||||||||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2010 | $ | 1 | $ | 12,095 | $ | 1,492 | $ | 2,973 | $ | (2,700 | ) | $ | 13,861 | $ | 1,110 | $ | 14,971 | |||||||||||||||||||||||||||||||||||||||||||||
Cumulative effect of change in accounting, net of taxes and other adjustments | — | — | 91 | (104 | ) | — | (13 | ) | — | (13 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | 178 | — | 178 | 34 | 212 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 82 | — | 82 | 34 | 116 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired | — | — | 408 | — | — | 408 | (1 | ) | 407 | — | — | 56 | — | — | 56 | (9 | ) | 47 | ||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities | — | — | 39 | — | — | 39 | — | 39 | — | — | 7 | — | — | 7 | — | 7 | ||||||||||||||||||||||||||||||||||||||||||||||
Derivatives qualifying as hedges | — | — | (25 | ) | — | — | (25 | ) | — | (25 | ) | — | — | (60 | ) | — | — | (60 | ) | — | (60 | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation and other adjustments | — | — | (2 | ) | — | — | (2 | ) | 37 | 35 | — | — | 125 | — | — | 125 | 29 | 154 | ||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) | 668 | 264 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | (10 | ) | (10 | ) | — | — | — | — | — | — | (12 | ) | (12 | ) | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense and exercises and other | — | 10 | — | — | — | 10 | — | 10 | — | 6 | — | — | — | 6 | — | 6 | ||||||||||||||||||||||||||||||||||||||||||||||
Other capital transactions | — | 20 | — | — | — | 20 | — | 20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balances as of March 31, 2010 | $ | 1 | $ | 12,064 | $ | 347 | $ | 3,179 | $ | (2,700 | ) | $ | 12,891 | $ | 1,134 | $ | 14,025 | |||||||||||||||||||||||||||||||||||||||||||||
Balances as of March 31, 2011 | $ | 1 | $ | 12,101 | $ | 1,620 | $ | 3,055 | $ | (2,700 | ) | $ | 14,077 | $ | 1,152 | $ | 15,229 | |||||||||||||||||||||||||||||||||||||||||||||
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY—
(CONTINUED)
(Amounts in millions)
(Unaudited)
Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Treasury stock, at cost | Total stockholders’ equity | Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Treasury stock, at cost | Total Genworth Financial, Inc.’s stockholders’ equity | Noncontrolling interests | Total stockholders’ equity | |||||||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2008 | $ | 1 | $ | 11,477 | $ | (3,062 | ) | $ | 3,210 | $ | (2,700 | ) | $ | 8,926 | ||||||||||||||||||||||||||||||||||||||||
Balances as of December 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 (loss) | — | — | — | (469 | ) | — | (469 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains (losses) on investment securities | — | — | (57 | ) | — | — | (57 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
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 | — | — | (100 | ) | — | — | (100 | ) | — | — | (25 | ) | — | — | (25 | ) | — | (25 | ) | |||||||||||||||||||||||||||||||||||
Foreign currency translation and other adjustments | — | — | (79 | ) | — | — | (79 | ) | — | — | (2 | ) | — | — | (2 | ) | 37 | 35 | ||||||||||||||||||||||||||||||||||||
Total comprehensive income (loss) | (705 | ) | 668 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends to noncontrolling interests | — | — | — | — | — | — | (10 | ) | (10 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense and exercises and other | — | 8 | — | — | — | 8 | — | 10 | — | — | — | 10 | — | 10 | ||||||||||||||||||||||||||||||||||||||||
Other capital transactions | — | 20 | — | — | — | 20 | — | 20 | ||||||||||||||||||||||||||||||||||||||||||||||
Balances as of March 31, 2009 | $ | 1 | $ | 11,485 | $ | (3,298 | ) | $ | 2,741 | $ | (2,700 | ) | $ | 8,229 | ||||||||||||||||||||||||||||||||||||||||
Balances as of March 31, 2010 | $ | 1 | $ | 12,064 | $ | 347 | $ | 3,179 | $ | (2,700 | ) | $ | 12,891 | $ | 1,134 | $ | 14,025 | |||||||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 212 | $ | (469 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash 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 | 24 | 82 | (18 | ) | 24 | |||||||||||
Net investment losses (gains) | 70 | 770 | 28 | 70 | ||||||||||||
Charges assessed to policyholders | (113 | ) | (103 | ) | (159 | ) | (113 | ) | ||||||||
Acquisition costs deferred | (193 | ) | (194 | ) | (229 | ) | (193 | ) | ||||||||
Amortization of deferred acquisition costs and intangibles | 184 | 247 | 185 | 184 | ||||||||||||
Deferred income taxes | (101 | ) | (502 | ) | (37 | ) | (101 | ) | ||||||||
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments | 58 | (56 | ) | |||||||||||||
Net increase in trading securities, held-for-sale investments and derivative instruments | 35 | 58 | ||||||||||||||
Stock-based compensation expense | 11 | 8 | 7 | 11 | ||||||||||||
Change in certain assets and liabilities: | ||||||||||||||||
Accrued investment income and other assets | (43 | ) | (70 | ) | (117 | ) | (43 | ) | ||||||||
Insurance reserves | 576 | 468 | 557 | 576 | ||||||||||||
Current tax liabilities | (163 | ) | 83 | 25 | (163 | ) | ||||||||||
Other liabilities and other policy-related balances | (392 | ) | 519 | (57 | ) | (392 | ) | |||||||||
Net cash from operating activities | 130 | 783 | 336 | 130 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Proceeds from maturities and repayments of investments: | ||||||||||||||||
Fixed maturity securities | 941 | 901 | 1,627 | 941 | ||||||||||||
Commercial mortgage loans | 136 | 239 | 148 | 136 | ||||||||||||
Restricted commercial mortgage loans related to securitization entities | 12 | — | 22 | 12 | ||||||||||||
Proceeds from sales of investments: | ||||||||||||||||
Fixed maturity and equity securities | 1,021 | 947 | 1,009 | 1,021 | ||||||||||||
Purchases and originations of investments: | ||||||||||||||||
Fixed maturity and equity securities | (3,623 | ) | (825 | ) | (2,200 | ) | (3,623 | ) | ||||||||
Commercial mortgage loans | (38 | ) | — | |||||||||||||
Other invested assets, net | 344 | — | (59 | ) | 344 | |||||||||||
Policy loans, net | (5 | ) | (8 | ) | (9 | ) | (5 | ) | ||||||||
Payments for businesses purchased, net of cash acquired | (4 | ) | — | |||||||||||||
Net cash from investing activities | (1,174 | ) | 1,254 | 496 | (1,174 | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||||
Deposits to universal life and investment contracts | 490 | 773 | 560 | 490 | ||||||||||||
Withdrawals from universal life and investment contracts | (913 | ) | (2,803 | ) | (1,115 | ) | (913 | ) | ||||||||
Short-term borrowings and other, net | (37 | ) | (82 | ) | (33 | ) | (37 | ) | ||||||||
Repayment and repurchase of long-term borrowings | — | (79 | ) | |||||||||||||
Redemption of non-recourse funding obligations | (6 | ) | (12 | ) | (6 | ) | (6 | ) | ||||||||
Proceeds from the issuance of long-term debt | 397 | — | ||||||||||||||
Repayment of borrowings related to securitization entities | (11 | ) | — | (12 | ) | (11 | ) | |||||||||
Dividends paid to noncontrolling interests | (10 | ) | — | (12 | ) | (10 | ) | |||||||||
Net cash from financing activities | (487 | ) | (2,203 | ) | (221 | ) | (487 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (5 | ) | (98 | ) | (1 | ) | (5 | ) | ||||||||
Net change in cash and cash equivalents | (1,536 | ) | (264 | ) | 610 | (1,536 | ) | |||||||||
Cash and cash equivalents at beginning of period | 5,002 | 7,328 | 3,132 | 5,002 | ||||||||||||
Cash and cash equivalents at end of period | $ | 3,466 | $ | 7,064 | $ | 3,742 | $ | 3,466 | ||||||||
See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 |
• | 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. |
• | U.S. Mortgage Insurance. In the |
We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of non-core businesses and non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”).
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.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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 20092010 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.
(2) Accounting Pronouncements
Recently Adopted
Accounting for Transfers of Financial Assets
On January 1, 2010,2011, we adopted new accounting guidance related to accounting for transfersgoodwill 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 financial assets. Thisour reporting units with goodwill balances have positive carrying values.
On January 1, 2011, we adopted new accounting guidance amends the previous guidance on transfersrelated to how investments held through separate accounts affect an insurer’s consolidation analysis of financial assets by eliminating the qualifying special-purpose entity concept, providing certain conditions that must be met to qualify for sale accounting, changing the amount of gain or loss recognized on certain transfers and requiring additional disclosures.those investments. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements. The elimination of the qualifying special-purpose entity concept requires that these entities be considered for consolidation as a result of the new guidance related to variable interest entities (“VIEs”) as discussed below.
Improvements to Financial Reporting by Enterprises Involved with VIEs
On January 1, 2010,2011, we adopted new accounting guidance for determining which enterprise, if any, has a controlling financial interest in a VIE and requiresrelated to additional disclosures about involvementpurchases, sales, issuances and settlements in VIEs. Under this new accounting guidance, the primary beneficiaryrollforward of a VIE is the enterprise that has the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance and has the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. Upon adoption of this new accounting guidance, we were required to consolidate certain VIEs, including previously qualifying special-purpose entities and investment structures. We recorded a transition adjustment for the impact upon adoption to reflect the difference between the assets and liabilities of the newly consolidated entities and the amounts recorded for our interests in these entities prior to adoption. On January 1, 2010, we recorded a net cumulative effect adjustment of $104 million to retained earnings with a partial offset to accumulated other comprehensive income (loss) of $91 million related to the adoption of this new accounting guidance.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The assets and liabilities of the newly consolidated entities were as follows as of January 1, 2010:
(Amounts in millions) | Carrying value (1) | Adjustment for election of fair value option(2) | Amounts recorded upon consolidation | ||||||||
Assets | |||||||||||
Restricted commercial mortgage loans | $ | 564 | $ | — | $ | 564 | |||||
Restricted other invested assets | 409 | (30 | ) | 379 | |||||||
Accrued investment income | 2 | — | 2 | ||||||||
Total assets | 975 | (30 | ) | 945 | |||||||
Liabilities | |||||||||||
Other liabilities | 138 | — | 138 | ||||||||
Borrowings related to securitization entities | 644 | (80 | ) | 564 | |||||||
Total liabilities | 782 | (80 | ) | 702 | |||||||
Net assets and liabilities of newly consolidated entities | $ | 193 | $ | 50 | 243 | ||||||
Less: amortized cost of fixed maturity securities previously recorded(3) | 404 | ||||||||||
Cumulative effect adjustment to retained earnings upon adoption, pre-tax | (161 | ) | |||||||||
Tax effect | 57 | ||||||||||
Net cumulative effect adjustment to retained earnings upon adoption | $ | (104 | ) | ||||||||
|
|
|
For commercial mortgage loans, the carrying amounts represent the unpaid principal balance less any reserve. Restricted other invested assets are comprised of trading securities that are recorded at fair value. Trading securities represent asset-backed securities where we elected fair value option. Borrowings related to securitization entities are recorded at unpaid principal except for the borrowings related to entities where we elected fair value option for all assets and liabilities.
For certain entities consolidated upon adoption of the new accounting guidance on January 1, 2010, we elected fair value option to measure all assets and liabilities at current fair value with future changes in fair value being recording in income (loss). We elected fair value option for certain entities as a method to better present the offsetting changes in assets and liabilities related to third-party interests in those entities and eliminated the potential accounting mismatch between the measurement of the assets and derivatives of the entity compared to the borrowings issued by the entity. The entities where we did not elect fair value option did not have the same accounting mismatch since the assets held by the securitization entity and the borrowings of the entity were recorded at cost. See note 7 for additional information related to consolidation of VIEs.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The new accounting guidance related to consolidation of VIEs has been deferred for a reporting entity’s interest in an entity that has all of the attributes of an investment company as long as there is no implicit or explicit obligation to fund losses of the entity. For entities that meet these criteria, the new accounting guidance related to VIE consolidation would not be applicable until further guidance is issued. Accordingly, we did not have any impact upon adoption related to entities that meet the deferral criteria, such as certain limited partnership and fund investments.
Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements
On January 1, 2010, we adopted new accounting guidance requiring additional disclosures for significant transfers between Level 1 and 2 fair value measurements and clarifications to existing fair value disclosures related to the level of disaggregation, inputs and valuation techniques.measurements. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.
Not Yet Adopted
In March 2010,April 2011, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued new accounting guidance clarifying the scope exception for embedded credit derivatives and when those features would be bifurcated from the host contract. Under thetroubled debt restructurings. This new accounting guidance only embedded credit derivative features that are in the form of subordination of one financial instrument to another would not be subject to the bifurcation requirements. Accordingly, entities will be required to bifurcate any embedded credit derivative features that no longer qualify under the amended scope exception, or, for certain investments, an entity can elect fair value option and record the entire investment at fair value. This accounting guidancerelated disclosures will be effective for us on July 1, 2010. Upon adoption, any changes in the carrying value of impacted items will be recorded directly in retained earnings. We have not yet determined the impact this accounting guidance will have on our consolidated financial statements.
In January 2010, the FASB issued new accounting guidance to require additional disclosures about purchases, sales, issuances, and settlements in the rollforward of Level 3 fair value measurements. This new accounting guidance will be effective for us on January 1, 2011. We do not expect the adoption of this new accounting guidance to have a material impact on our consolidated financial statements.
In AprilOctober 2010, the FASB issued new accounting guidance on how investments held through separate accounts affect an insurer’s consolidation analysis of those investments.related to accounting for costs associated with acquiring or renewing insurance contracts. This new accounting guidance will be effective for us on January 1, 2011.2012. 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.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
(3) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted shares outstanding for the periods indicated:
Three months ended March 31, | Three months ended March 31, | ||||||||||||||
(Amounts in millions, except per share amounts) | 2010 | 2009 | 2011 | 2010 | |||||||||||
Net income (loss) | $ | 212 | $ | (469 | ) | ||||||||||
Net income | $ | 116 | $ | 212 | |||||||||||
Less: net income attributable to noncontrolling interests | 34 | — | 34 | 34 | |||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 178 | $ | (469 | ) | ||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 82 | $ | 178 | |||||||||||
Basic per common share: | |||||||||||||||
Net income (loss) | $ | 0.43 | $ | (1.08 | ) | ||||||||||
Net income | $ | 0.24 | $ | 0.43 | |||||||||||
Less: net income attributable to noncontrolling interests | 0.07 | — | 0.07 | 0.07 | |||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders(1) | $ | 0.36 | $ | (1.08 | ) | ||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders(1) | $ | 0.17 | $ | 0.36 | |||||||||||
Diluted per common share: | |||||||||||||||
Net income (loss) | $ | 0.43 | $ | (1.08 | ) | ||||||||||
Net income | $ | 0.23 | $ | 0.43 | |||||||||||
Less: net income attributable to noncontrolling interests | 0.07 | — | 0.07 | 0.07 | |||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders(1) | $ | 0.36 | $ | (1.08 | ) | ||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders(1) | $ | 0.17 | $ | 0.36 | |||||||||||
Weighted-average shares used in basic earnings (loss) per common share calculations | 488.8 | 433.2 | |||||||||||||
Weighted-average shares used in basic earnings per common share calculations | 490.1 | 488.8 | |||||||||||||
Potentially dilutive securities: | |||||||||||||||
Stock options, restricted stock units and stock appreciation rights | 4.7 | — | 4.3 | 4.7 | |||||||||||
Weighted-average shares used in diluted earnings (loss) per common share | 493.5 | 433.2 | |||||||||||||
Weighted-average shares used in diluted earnings per common share calculations | 494.4 | 493.5 | |||||||||||||
(1) | May not total due to whole number calculation. |
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
(4) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the periods indicated:
Three months ended March 31, | ||||||||
(Amounts in millions) | 2010 | 2009 | ||||||
Fixed maturity securities—taxable | $ | 626 | $ | 623 | ||||
Fixed maturity securities—non-taxable | 16 | 30 | ||||||
Commercial mortgage loans | 104 | 114 | ||||||
Restricted commercial mortgage loans related to securitization entities(1) | 10 | — | ||||||
Equity securities | 2 | 3 | ||||||
Other invested assets | (2 | ) | (99 | ) | ||||
Restricted other invested assets related to securitization entities(1) | 1 | — | ||||||
Policy loans | 27 | 44 | ||||||
Cash, cash equivalents and short-term investments | 5 | 17 | ||||||
Gross investment income before expenses and fees | 789 | 732 | ||||||
Expenses and fees | (24 | ) | (21 | ) | ||||
Net investment income | $ | 765 | $ | 711 | ||||
|
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, | Three months ended March 31, | |||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2011 | 2010 | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
Realized gains on sale | $ | 23 | $ | 29 | ||||||||||||
Realized losses on sale | (38 | ) | (63 | ) | ||||||||||||
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 | (77 | ) | (597 | ) | (31 | ) | (77 | ) | ||||||||
Portion of other-than-temporary impairments recognized in other comprehensive income (loss) | (3 | ) | — | (5 | ) | (3 | ) | |||||||||
Net other-than-temporary impairments | (80 | ) | (597 | ) | (36 | ) | (80 | ) | ||||||||
Trading securities | 6 | (12 | ) | 11 | 6 | |||||||||||
Commercial mortgage loans | (4 | ) | (6 | ) | (1 | ) | (4 | ) | ||||||||
Net gains (losses) related to securitization entities(1) | 11 | — | ||||||||||||||
Derivative instruments | (8 | ) | (121 | ) | ||||||||||||
Net gains (losses) related to securitization entities | 10 | 11 | ||||||||||||||
Derivative instruments(1) | (10 | ) | (8 | ) | ||||||||||||
Other | 20 | — | — | 20 | ||||||||||||
Net investment gains (losses) | $ | (70 | ) | $ | (770 | ) | $ | (28 | ) | $ | (70 | ) | ||||
(1) |
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Derivative instruments primarily consist of changes in the fair value of non-qualifying derivatives, including embedded derivatives, changes in fair value of certain derivatives and related hedged items in fair value hedge relationships and hedge ineffectiveness on qualifying derivative instruments. See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (loss) (“OCI”) as of or for the period indicated:three months ended March 31:
(Amounts in millions) | As of or for the three months ended March 31, 2010 | 2011 | 2010 | |||||||||
Cumulative credit loss beginning balance | $ | 1,059 | ||||||||||
Beginning balance | $ | 784 | $ | 1,059 | ||||||||
Additions: | ||||||||||||
Other-than-temporary impairments not previously recognized | 20 | 3 | 20 | |||||||||
Increases related to other-than-temporary impairments previously recognized | 46 | 31 | 46 | |||||||||
Reductions: | ||||||||||||
Securities sold, paid down or disposed | (100 | ) | (63 | ) | (100 | ) | ||||||
Securities where there is intent to sell | — | — | — | |||||||||
Cumulative credit loss ending balance | $ | 1,025 | ||||||||||
Ending balance | $ | 755 | $ | 1,025 | ||||||||
(c) Unrealized Investment Gains and Losses
Net unrealized gains and losses on investment securities classified as available-for-sale and other invested assets are reduced by deferred income taxes and adjustments to present value of future profits, deferred acquisition costs and sales inducements that would have resulted had such gains and losses been realized. Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:
(Amounts in millions) | March 31, 2010 | December 31, 2009 | ||||||
Net unrealized gains (losses) on investment securities: | ||||||||
Fixed maturity securities | $ | (1,245 | ) | $ | (2,245 | ) | ||
Equity securities | 16 | 20 | ||||||
Other invested assets | (26 | ) | (29 | ) | ||||
Subtotal | (1,255 | ) | (2,254 | ) | ||||
Adjustments to present value of future profits, deferred acquisition costs and sales inducements | (21 | ) | 138 | |||||
Income taxes, net | 454 | 757 | ||||||
Net unrealized investment gains (losses) | (822 | ) | (1,359 | ) | ||||
Less: net unrealized investment (gains) losses attributable to noncontrolling interests | 38 | 39 | ||||||
Net unrealized investment gains (losses) attributable to Genworth | $ | (860 | ) | $ | (1,398 | ) | ||
(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 | ) | ||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
The change in net unrealized gains (losses) on available-for-sale securities reported in accumulated other comprehensive income (loss) was as follows as of or for the period indicated:three months ended March 31:
(Amounts in millions) | As of or for the three months ended March 31, 2010 | 2011 | 2010 | |||||||||
Beginning balance | $ | (1,398 | ) | $ | (100 | ) | $ | (1,398 | ) | |||
Impact upon adoption of new accounting guidance | 91 | — | 91 | |||||||||
Unrealized gains (losses) arising during the period: | ||||||||||||
Unrealized gains (losses) on investment securities | 763 | 12 | 763 | |||||||||
Adjustment to deferred acquisition costs | (113 | ) | (21 | ) | (113 | ) | ||||||
Adjustment to present value of future profits | (31 | ) | (1 | ) | (31 | ) | ||||||
Adjustment to sales inducements | (15 | ) | (4 | ) | (15 | ) | ||||||
Adjustment to benefit reserves | 63 | — | ||||||||||
Provision for income taxes | (220 | ) | (20 | ) | (220 | ) | ||||||
Change in unrealized gains (losses) on investment securities | 384 | 29 | 384 | |||||||||
Reclassification adjustments to net investment (gains) losses, net of taxes | 62 | |||||||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(13) and $(34) | 25 | 62 | ||||||||||
Change in net unrealized investment gains (losses) | 537 | 54 | 537 | |||||||||
Less: change in net unrealized investment (gains) losses attributable to noncontrolling interests | 1 | 9 | 1 | |||||||||
Ending balance | $ | (860 | ) | $ | (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 | ||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 | $ | 3,079 | $ | 30 | $ | — | $ | (80 | ) | $ | — | $ | 3,029 | |||||||
Tax-exempt | 1,495 | 35 | — | (94 | ) | — | 1,436 | |||||||||||||
Government—non-U.S. | 2,323 | 103 | — | (12 | ) | — | 2,414 | |||||||||||||
U.S. corporate | 22,108 | 722 | 8 | (583 | ) | (2 | ) | 22,253 | ||||||||||||
Corporate—non-U.S. | 13,019 | 407 | 13 | (288 | ) | — | 13,151 | |||||||||||||
Residential mortgage-backed | 4,445 | 50 | 8 | (402 | ) | (291 | ) | 3,810 | ||||||||||||
Commercial mortgage-backed | 4,243 | 95 | 6 | (577 | ) | (74 | ) | 3,693 | ||||||||||||
Other asset-backed | 2,573 | 12 | — | (310 | ) | (21 | ) | 2,254 | ||||||||||||
Total fixed maturity securities | 53,285 | 1,454 | 35 | (2,346 | ) | (388 | ) | 52,040 | ||||||||||||
Equity securities | 163 | 19 | — | (3 | ) | — | 179 | |||||||||||||
Total available-for-sale securities | $ | 53,448 | $ | 1,473 | $ | 35 | $ | (2,349 | ) | $ | (388 | ) | $ | 52,219 | ||||||
(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 | ||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
As of December 31, 2009, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
(Amounts in millions) | Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||
Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | |||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 2,673 | $ | 25 | $ | — | $ | (96 | ) | $ | — | $ | 2,602 | |||||||
Tax-exempt | 1,606 | 42 | — | (104 | ) | — | 1,544 | |||||||||||||
Government—non-U.S. | 2,310 | 96 | — | (22 | ) | — | 2,384 | |||||||||||||
U.S. corporate | 21,598 | 628 | 3 | (814 | ) | (3 | ) | 21,412 | ||||||||||||
Corporate—non-U.S. | 12,530 | 366 | 11 | (356 | ) | — | 12,551 | |||||||||||||
Residential mortgage-backed | 3,989 | 41 | 7 | (484 | ) | (326 | ) | 3,227 | ||||||||||||
Commercial mortgage-backed | 4,404 | 44 | 4 | (738 | ) | (97 | ) | 3,617 | ||||||||||||
Other asset-backed | 2,887 | 8 | — | (466 | ) | (14 | ) | 2,415 | ||||||||||||
Total fixed maturity securities | 51,997 | 1,250 | 25 | (3,080 | ) | (440 | ) | 49,752 | ||||||||||||
Equity securities | 139 | 23 | — | (3 | ) | — | 159 | |||||||||||||
Total available-for-sale securities | $ | 52,136 | $ | 1,273 | $ | 25 | $ | (3,083 | ) | $ | (440 | ) | $ | 49,911 | ||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of March 31, 2010:2011:
Less than 12 months | 12 months or more | 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 | Number of securities | 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 entities | $ | 1,967 | $ | (77 | ) | 73 | $ | 60 | $ | (3 | ) | 5 | ||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 1,187 | $ | (40 | ) | 56 | $ | — | $ | — | — | $ | 1,187 | $ | (40 | ) | 56 | |||||||||||||||||||||||||||||||||||||
Tax-exempt | 160 | (5 | ) | 47 | 342 | (89 | ) | 108 | 229 | (13 | ) | 81 | 244 | (104 | ) | 91 | 473 | (117 | ) | 172 | ||||||||||||||||||||||||||||||||||
Government—non-U.S. | 488 | (4 | ) | 32 | 73 | (8 | ) | 12 | 312 | (6 | ) | 80 | 39 | (1 | ) | 11 | 351 | (7 | ) | 91 | ||||||||||||||||||||||||||||||||||
U.S. corporate | 3,084 | (62 | ) | 348 | 4,721 | (523 | ) | 403 | 3,883 | (140 | ) | 484 | 2,068 | (250 | ) | 174 | 5,951 | (390 | ) | 658 | ||||||||||||||||||||||||||||||||||
Corporate—non-U.S. | 1,977 | (38 | ) | 185 | 2,160 | (250 | ) | 206 | 2,633 | (82 | ) | 362 | 992 | (90 | ) | 92 | 3,625 | (172 | ) | 454 | ||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 924 | (29 | ) | 164 | 1,170 | (664 | ) | 450 | 454 | (23 | ) | 80 | 964 | (428 | ) | 389 | 1,418 | (451 | ) | 469 | ||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 128 | (12 | ) | 24 | 1,418 | (639 | ) | 306 | 254 | (10 | ) | 37 | 1,105 | (198 | ) | 199 | 1,359 | (208 | ) | 236 | ||||||||||||||||||||||||||||||||||
Other asset-backed | 85 | (1 | ) | 16 | 1,333 | (330 | ) | 169 | 173 | (1 | ) | 30 | 424 | (91 | ) | 46 | 597 | (92 | ) | 76 | ||||||||||||||||||||||||||||||||||
Subtotal, fixed maturity securities | 8,813 | (228 | ) | 889 | 11,277 | (2,506 | ) | 1,659 | 9,125 | (315 | ) | 1,210 | 5,836 | (1,162 | ) | 1,002 | 14,961 | (1,477 | ) | 2,212 | ||||||||||||||||||||||||||||||||||
Equity securities | 17 | (1 | ) | 15 | 12 | (2 | ) | 10 | 71 | (2 | ) | 46 | 6 | (1 | ) | 11 | 77 | (3 | ) | 57 | ||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 8,830 | $ | (229 | ) | 904 | $ | 11,289 | $ | (2,508 | ) | 1,669 | $ | 9,196 | $ | (317 | ) | 1,256 | $ | 5,842 | $ | (1,163 | ) | 1,013 | $ | 15,038 | $ | (1,480 | ) | 2,269 | ||||||||||||||||||||||||
% Below cost—fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | $ | 8,789 | $ | (203 | ) | 829 | $ | 8,747 | $ | (651 | ) | 948 | ||||||||||||||||||||||||||||||||||||||||||
20-50% Below cost | 13 | (7 | ) | 23 | 2,116 | (1,019 | ) | 410 | ||||||||||||||||||||||||||||||||||||||||||||||
>50% Below cost | 11 | (18 | ) | 37 | 414 | (836 | ) | 301 | ||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 8,813 | (228 | ) | 889 | 11,277 | (2,506 | ) | 1,659 | ||||||||||||||||||||||||||||||||||||||||||||||
% Below cost—equity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | 17 | (1 | ) | 15 | 11 | (1 | ) | 7 | ||||||||||||||||||||||||||||||||||||||||||||||
>50% Below cost | — | — | — | 1 | (1 | ) | 3 | |||||||||||||||||||||||||||||||||||||||||||||||
Total equity securities | 17 | (1 | ) | 15 | 12 | (2 | ) | 10 | ||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 8,830 | $ | (229 | ) | 904 | $ | 11,289 | $ | (2,508 | ) | 1,669 | ||||||||||||||||||||||||||||||||||||||||||
Investment grade | $ | 8,562 | $ | (209 | ) | 804 | $ | 9,380 | $ | (1,666 | ) | 1,187 | ||||||||||||||||||||||||||||||||||||||||||
Below investment grade | 268 | (20 | ) | 100 | 1,909 | (842 | ) | 482 | ||||||||||||||||||||||||||||||||||||||||||||||
Not rated—fixed maturity securities | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Not rated—equity securities | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 8,830 | $ | (229 | ) | 904 | $ | 11,289 | $ | (2,508 | ) | 1,669 | ||||||||||||||||||||||||||||||||||||||||||
(1) | Amounts included $218 million of unrealized losses on other-than-temporarily impaired securities. |
(2) | Amounts included $228 million of unrealized losses on other-than-temporarily impaired securities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 ana continuous unrealized loss position, as of March 31, 2010 consisted of 2,573 securities and accounted for unrealized losses of $2,737 million. Of these unrealized losses of $2,737 million, 69% were investment grade (rated “AAA” through “BBB-”) and 31% were less than 20% below cost. 2011:
Less than 20% | 20% to 50% | Greater than 50% | ||||||||||||||||||||||||||||||||||
(Dollar amounts in | 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 | ||||||||||||||||||
(1) | Amounts included $202 million of unrealized losses on other-than-temporarily impaired securities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The securities less than 20% below cost were primarily attributable to widening credit spreads and a depressed marketthat have widened since acquisition for certain structured mortgage securities. Included in these unrealized losses as of March 31, 2010 was $388 million of unrealized losses on other-than-temporarily impaired securities. Of the total unrealized losses on other-than-temporarily impairedmortgage-backed and asset-backed securities $376 million have been in an unrealized loss position for more than 12 months.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Of the unrealized losses of $2,737 million, $1,675 million were related to structured securities and $558 million were related to corporate securities in the finance and insurance sector. Of
Concentration of Gross Unrealized Losses and Other-Than-Temporary Losses by Sector
The following table presents the remainingconcentration of gross unrealized losses of $504 million, $186 million were related to U.S. government, agencies and government-sponsored enterprises, tax-exempt and government—non-U.S. securities and $318 million were primarily related to other corporate securities that were spread evenly across all other sectors with no individualby sector exceeding $57 million.
Of the $1,675 million unrealized losses in structured securities, 41% were in residential mortgage-backed securities and 39% were in commercial mortgage-backed securities with the remainder in other asset-backed securities. Approximately 58% of the total unrealized losses in structured securities were on securities that have retained investment grade ratings. Most of these securities have been in an unrealized loss position for 12 months or more. Given the current market conditions and limited trading on these securities, the fair value of these securities has declined due to widening credit spreads and high premiums for illiquidity. We examined the performance of the underlying collateral and developed our estimate of cash flows expected to be collected. In doing so, we identified certain securities where the non-credit portion of other-than-temporary impairments was recorded in OCI. Based on this evaluation, we determined that the unrealized losses on our mortgage-backed and asset-backed securities represented temporary impairments as of March 31, 2010.2011:
Of the $558 million unrealized losses in the finance and insurance sector, most have been in an unrealized loss position for 12 months or more. Most of these securities have retained a credit rating of investment grade. A portion of the unrealized losses included securities where an other-than-temporary impairment was recorded in OCI. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these securities has declined due to widening credit spreads. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these securities represented temporary impairments as of March 31, 2010. A subset of the securities issued by banks and other financial institutions represent investments in financial hybrid securities on which a debt impairment model was employed. All of these securities retain a credit rating of investment grade. The majority of these securities were issued by foreign financial institutions. The fair value of these securities has been impacted by widening credit spreads which reflect current financial industry events including uncertainty surrounding the level and type of government support of European financial institutions, potential capital restructuring of these institutions, the risk that income payments may be deferred and the risk that these institutions could be nationalized. The remaining unrealized losses in our U.S. and non-U.S. corporate securities were evenly distributed across all other major industry types that comprise our corporate bond holdings.
Of the investment securities in an unrealized loss position for 12 months or more as of March 31, 2010, 714 securities were 20% or more below cost, of which 328 securities were also below investment grade (rated “BB+” and below) and accounted for unrealized losses of $742 million. These securities were primarily structured securities or securities issued by corporations in the finance and insurance sector. Included in this amount are other-than-temporarily impaired securities where the non-credit loss of $289 million was recorded in OCI.
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 tabletables were considered other-than-temporarily impaired, we expect to recover the new amortized cost based on our estimate of cash flows to be collected. As of March 31, 2010, we expect to recover our amortized cost on the securities included in the chart above andWe do not intend to sell orand it is not more likely than not that we will be required to sell these securities prior to recovering our amortized cost.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2009:2010:
Less than 12 months | 12 months or more | 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 | Number of securities | 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 | $ | 1,759 | $ | (95 | ) | 81 | $ | 6 | $ | (1 | ) | 2 | $ | 545 | $ | (8 | ) | 36 | $ | — | $ | — | — | $ | 545 | $ | (8 | ) | 36 | |||||||||||||||||||||||||
Tax-exempt | 152 | (6 | ) | 48 | 346 | (98 | ) | 113 | 285 | (12 | ) | 101 | 244 | (101 | ) | 90 | 529 | (113 | ) | 191 | ||||||||||||||||||||||||||||||||||
Government—non-U.S. | 341 | (3 | ) | 60 | 105 | (19 | ) | 35 | 431 | (5 | ) | 69 | 21 | (1 | ) | 7 | 452 | (6 | ) | 76 | ||||||||||||||||||||||||||||||||||
U.S. corporate | 2,823 | (81 | ) | 317 | 5,660 | (736 | ) | 510 | 3,615 | (125 | ) | 443 | 2,338 | (323 | ) | 191 | 5,953 | (448 | ) | 634 | ||||||||||||||||||||||||||||||||||
Corporate—non-U.S. | 1,721 | (55 | ) | 221 | 2,245 | (301 | ) | 258 | 2,466 | (53 | ) | 296 | 1,141 | (114 | ) | 102 | 3,607 | (167 | ) | 398 | ||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 941 | (252 | ) | 256 | 1,012 | (558 | ) | 348 | 461 | (23 | ) | 92 | 1,031 | (477 | ) | 416 | 1,492 | (500 | ) | 508 | ||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 714 | (64 | ) | 81 | 1,720 | (771 | ) | 345 | 177 | (8 | ) | 26 | 1,167 | (323 | ) | 225 | 1,344 | (331 | ) | 251 | ||||||||||||||||||||||||||||||||||
Other asset-backed | 329 | (6 | ) | 43 | 1,727 | (474 | ) | 183 | 401 | (2 | ) | 37 | 512 | (94 | ) | 53 | 913 | (96 | ) | 90 | ||||||||||||||||||||||||||||||||||
Subtotal, fixed maturity securities | 8,780 | (562 | ) | 1,107 | 12,821 | (2,958 | ) | 1,794 | 8,381 | (236 | ) | 1,100 | 6,454 | (1,433 | ) | 1,084 | 14,835 | (1,669 | ) | 2,184 | ||||||||||||||||||||||||||||||||||
Equity securities | 2 | (1 | ) | 3 | 12 | (2 | ) | 9 | 77 | (3 | ) | 48 | 5 | (1 | ) | 4 | 82 | (4 | ) | 52 | ||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 8,782 | $ | (563 | ) | 1,110 | $ | 12,833 | $ | (2,960 | ) | 1,803 | $ | 8,458 | $ | (239 | ) | 1,148 | $ | 6,459 | $ | (1,434 | ) | 1,088 | $ | 14,917 | $ | (1,673 | ) | 2,236 | ||||||||||||||||||||||||
% Below cost—fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | $ | 8,437 | $ | (245 | ) | 920 | $ | 9,699 | $ | (762 | ) | 1,055 | ||||||||||||||||||||||||||||||||||||||||||
20-50% Below cost | 267 | (137 | ) | 91 | 2,637 | (1,246 | ) | 455 | ||||||||||||||||||||||||||||||||||||||||||||||
>50% Below cost | 76 | (180 | ) | 96 | 485 | (950 | ) | 284 | ||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 8,780 | (562 | ) | 1,107 | 12,821 | (2,958 | ) | 1,794 | ||||||||||||||||||||||||||||||||||||||||||||||
% Below cost—equity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
<20% Below cost | 2 | (1 | ) | 3 | 11 | (1 | ) | 5 | ||||||||||||||||||||||||||||||||||||||||||||||
>50% Below cost | — | — | — | 1 | (1 | ) | 4 | |||||||||||||||||||||||||||||||||||||||||||||||
Total equity securities | 2 | (1 | ) | 3 | 12 | (2 | ) | 9 | ||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 8,782 | $ | (563 | ) | 1,110 | $ | 12,833 | $ | (2,960 | ) | 1,803 | ||||||||||||||||||||||||||||||||||||||||||
Investment grade | $ | 8,391 | $ | (320 | ) | 891 | $ | 10,897 | $ | (2,122 | ) | 1,390 | ||||||||||||||||||||||||||||||||||||||||||
Below investment grade | 391 | (243 | ) | 219 | 1,936 | (838 | ) | 413 | ||||||||||||||||||||||||||||||||||||||||||||||
Total for securities in an unrealized loss position | $ | 8,782 | $ | (563 | ) | 1,110 | $ | 12,833 | $ | (2,960 | ) | 1,803 | ||||||||||||||||||||||||||||||||||||||||||
(1) | Amounts included $240 million of unrealized losses on other-than-temporarily impaired securities. |
(2) | Amounts included $243 million of unrealized losses on other-than-temporarily impaired securities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
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 | ) | 1 | % | 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 | ||||||||||||||||||
(1) | Amounts included $213 million of unrealized losses on other-than-temporarily impaired securities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The scheduled maturity distribution of fixed maturity securities as of March 31, 20102011 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 | Amortized cost or cost | Fair value | ||||||||||
Due one year or less | $ | 2,634 | $ | 2,660 | $ | 2,360 | $ | 2,379 | ||||||
Due after one year through five years | 12,313 | 12,582 | 11,966 | 12,248 | ||||||||||
Due after five years through ten years | 7,929 | 8,152 | 9,324 | 9,678 | ||||||||||
Due after ten years | 19,148 | 18,889 | 19,722 | 20,086 | ||||||||||
Subtotal | 42,024 | 42,283 | 43,372 | 44,391 | ||||||||||
Residential mortgage-backed | 4,445 | 3,810 | 4,897 | 4,600 | ||||||||||
Commercial mortgage-backed | 4,243 | 3,693 | 3,841 | 3,756 | ||||||||||
Other asset-backed | 2,573 | 2,254 | 2,324 | 2,251 | ||||||||||
Total | $ | 53,285 | $ | 52,040 | $ | 54,434 | $ | 54,998 | ||||||
As of March 31, 2010, $5,4372011, $4,504 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.
As of March 31, 2010,2011, securities issued by finance and insurance, utilities and energy, and consumer—non-cyclical industry groups represented approximately 26%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 U.S.United States and internationally, and is not dependent on the economic stability of one particular region.
As of March 31, 2010,2011, 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.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
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 periodsdates indicated:
March 31, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||||
Property Type | ||||||||||||||||||||||||||||||
Property type: | ||||||||||||||||||||||||||||||
Retail | $ | 2,074 | 28 | % | $ | 2,115 | 28 | % | $ | 1,976 | 30 | % | $ | 1,974 | 29 | % | ||||||||||||||
Office | 1,991 | 27 | 2,025 | 27 | 1,822 | 27 | 1,850 | 27 | ||||||||||||||||||||||
Industrial | 1,955 | 27 | 1,979 | 26 | 1,745 | 26 | 1,788 | 26 | ||||||||||||||||||||||
Apartments | 819 | 11 | 832 | 11 | 700 | 11 | 725 | 11 | ||||||||||||||||||||||
Mixed use/other | 543 | 7 | 590 | 8 | 411 | 6 | 435 | 7 | ||||||||||||||||||||||
Total principal balance | 7,382 | 100 | % | 7,541 | 100 | % | 6,654 | 100 | % | 6,772 | 100 | % | ||||||||||||||||||
Unamortized balance of loan origination fees and costs | 6 | 6 | 4 | 5 | ||||||||||||||||||||||||||
Allowance for losses | (52 | ) | (48 | ) | (58 | ) | (59 | ) | ||||||||||||||||||||||
Total(1) | $ | 7,336 | $ | 7,499 | ||||||||||||||||||||||||||
Total | $ | 6,600 | $ | 6,718 | ||||||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth the aging of past due commercial mortgage loans by property type as |
March 31, 2010 | December 31, 2009 | |||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||||
Geographic Region | ||||||||||||||
Pacific | $ | 1,966 | 27 | % | $ | 2,005 | 27 | % | ||||||
South Atlantic | 1,669 | 23 | 1,711 | 23 | ||||||||||
Middle Atlantic | 987 | 13 | 1,005 | 13 | ||||||||||
East North Central | 714 | 10 | 728 | 10 | ||||||||||
Mountain | 640 | 9 | 650 | 9 | ||||||||||
New England | 486 | 6 | 492 | 6 | ||||||||||
West North Central | 385 | 5 | 389 | 5 | ||||||||||
West South Central | 325 | 4 | 331 | 4 | ||||||||||
East South Central | 210 | 3 | 230 | 3 | ||||||||||
Total principal balance | 7,382 | 100 | % | 7,541 | 100 | % | ||||||||
Unamortized balance of loan origination fees and costs | 6 | 6 | ||||||||||||
Allowance for losses | (52 | ) | (48 | ) | ||||||||||
Total(1) | $ | 7,336 | $ | 7,499 | ||||||||||
|
“Impaired” loans are defined by U.S. GAAP as loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement.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.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
Under these principles, we may have two typesThe following table sets forth the commercial mortgage loans on nonaccrual status by property type as of “impaired” loans: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 requiring specific allowances for losses (none for the three monthsperiod ended March 31, 2010 and $21 million for the year ended December 31, 2009) and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition (none for the three months ended March 31, 2010 and for the year ended December 31, 2009).31:
Average investment in specifically impaired loans was $9 million and $10 million as of March 31, 2010 and December 31, 2009, respectively, and there was no interest income recognized on these loans while they were considered impaired.
(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 duringfor the period ended March 31:
(Amounts in millions) | 2010 | |||
Beginning balance | $ | 48 | ||
Provision | 4 | |||
Release | — | |||
Ending balance | $ | 52 | ||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth our individually impaired commercial mortgage loans by property type as of the dates indicated:
(Amounts in millions) | March 31, 2010 | ||
Beginning balance | $ | 48 | |
Provision | 4 | ||
Release | — | ||
Ending balance | $ | 52 | |
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.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 | 333 | 1,727 | ||||||||||||||||||
Apartments | 7 | 61 | 123 | 296 | 146 | 633 | ||||||||||||||||||
Mixed use/other | 47 | 18 | 11 | 77 | 69 | 222 | ||||||||||||||||||
Total | $ | 614 | $ | 733 | $ | 1,152 | $ | 2,089 | $ | 1,498 | $ | 6,086 | ||||||||||||
% of total | 10 | % | 12 | % | 19 | % | 34 | % | 25 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value | 86 | % | 71 | % | 68 | % | 60 | % | 51 | % | 63 | % | ||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2010 | ||||||||||||||||||||||||
(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 | $ | 125 | $ | 317 | $ | 490 | $ | 512 | $ | 415 | $ | 1,859 | ||||||||||||
Office | 176 | 186 | 238 | 524 | 547 | 1,671 | ||||||||||||||||||
Industrial | 260 | 166 | 292 | 698 | 346 | 1,762 | ||||||||||||||||||
Apartments | 7 | 62 | 160 | 290 | 135 | 654 | ||||||||||||||||||
Mixed use/other | 49 | 12 | 17 | 78 | 94 | 250 | ||||||||||||||||||
Total | $ | 617 | $ | 743 | $ | 1,197 | $ | 2,102 | $ | 1,537 | $ | 6,196 | ||||||||||||
% of total | 10 | % | 12 | % | 19 | % | 34 | % | 25 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value | 90 | % | 71 | % | 68 | % | 62 | % | 50 | % | 64 | % | ||||||||||||
The following tables set forth the debt service coverage ratio for floating 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 | $ | — | $ | — | $ | — | $ | 2 | $ | 113 | $ | 115 | ||||||||||||
Office | — | — | — | 9 | 170 | 179 | ||||||||||||||||||
Industrial | 1 | 5 | — | 1 | 11 | 18 | ||||||||||||||||||
Apartments | — | — | — | 29 | 38 | 67 | ||||||||||||||||||
Mixed use/other | — | 4 | — | — | 185 | 189 | ||||||||||||||||||
Total | $ | 1 | $ | 9 | $ | — | $ | 41 | $ | 517 | $ | 568 | ||||||||||||
% of total | — | % | 2 | % | — | % | 7 | % | 91 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value | 28 | % | 58 | % | — | % | 69 | % | 77 | % | 76 | % | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
(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 | $ | — | $ | — | $ | — | $ | 2 | $ | 113 | $ | 115 | ||||||||||||
Office | — | — | — | 57 | 122 | 179 | ||||||||||||||||||
Industrial | 1 | 5 | — | 1 | 19 | 26 | ||||||||||||||||||
Apartments | — | 4 | — | 21 | 46 | 71 | ||||||||||||||||||
Mixed use/other | — | — | — | — | 185 | 185 | ||||||||||||||||||
Total | $ | 1 | $ | 9 | $ | — | $ | 81 | $ | 485 | $ | 576 | ||||||||||||
% of total | — | % | 2 | % | — | % | 14 | % | 84 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value | 30 | % | 62 | % | — | % | 83 | % | 77 | % | 78 | % | ||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(f) Restricted Commercial Mortgage Loans Related To Securitization Entities
The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the datedates indicated:
March 31, 2010 | March 31, 2011 | December 31, 2010 | |||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | |||||||||||||||||
Property Type | |||||||||||||||||||||||
Property type: | |||||||||||||||||||||||
Retail | $ | 200 | 36 | % | $ | 177 | 36 | % | $ | 182 | 36 | % | |||||||||||
Industrial | 136 | 25 | 120 | 25 | 124 | 24 | |||||||||||||||||
Office | 125 | 22 | 105 | 22 | 117 | 23 | |||||||||||||||||
Apartments | 67 | 12 | 63 | 13 | 64 | 13 | |||||||||||||||||
Mixed use/other | 26 | 5 | 22 | 4 | 22 | 4 | |||||||||||||||||
Total principal balance | 554 | 100 | % | 487 | 100 | % | 509 | 100 | % | ||||||||||||||
Allowance for losses | (2 | ) | (2 | ) | (2 | ) | |||||||||||||||||
Total | $ | 552 | $ | 485 | $ | 507 | |||||||||||||||||
March 31, 2011 | December 31, 2010 | ||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | |||||||||||||||||||
Geographic region: | |||||||||||||||||||||||
South Atlantic | $ | 176 | 36 | % | $ | 189 | 37 | % | |||||||||||||||
Pacific | 88 | 18 | 90 | 18 | |||||||||||||||||||
Middle Atlantic | 68 | 14 | 70 | 14 | |||||||||||||||||||
East North Central | 50 | 10 | 51 | 10 | |||||||||||||||||||
Mountain | 31 | 7 | 32 | 6 | |||||||||||||||||||
East South Central | 31 | 7 | 32 | 6 | |||||||||||||||||||
West North Central | 30 | 6 | 31 | 6 | |||||||||||||||||||
West South Central | 12 | 2 | 13 | 3 | |||||||||||||||||||
New England | 1 | — | 1 | — | |||||||||||||||||||
Total principal balance | 487 | 100 | % | 509 | 100 | % | |||||||||||||||||
Allowance for losses | (2 | ) | (2 | ) | |||||||||||||||||||
Total | $ | 485 | $ | 507 | |||||||||||||||||||
As of March 31, 2011 and December 31, 2010, all restricted commercial mortgage loans were current and there were no restricted commercial mortgage loans on nonaccrual status.
Of the total carrying value of restricted commercial mortgage loans as of March 31, 2011 and December 31, 2010, $485 million and $507 million, respectively, related to loans not individually impaired that were evaluated collectively for impairment. There was no provision for credit losses recorded during the three months ended March 31, 2011 related to restricted commercial mortgage loans. A provision for credit losses of $2 million was recorded during the three months ended March 31, 2010 related to restricted commercial mortgage loans, which reflected our ending allowance for credit losses balance and was required upon consolidation of securitization entities as of January 1, 2010.
In evaluating the credit quality of restricted commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. The risks associated with restricted commercial
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
March 31, 2010 | |||||||
(Amounts in millions) | Carrying value | % of total | |||||
Geographic Region | |||||||
South Atlantic | $ | 198 | 36 | % | |||
Pacific | 100 | 18 | |||||
Middle Atlantic | 74 | 13 | |||||
East North Central | 64 | 12 | |||||
Mountain | 37 | 7 | |||||
East South Central | 34 | 6 | |||||
West North Central | 33 | 6 | |||||
West South Central | 13 | 2 | |||||
New England | 1 | — | |||||
Total principal balance | 554 | 100 | % | ||||
Allowance for losses | (2 | ) | |||||
Total | $ | 552 | |||||
See note 7mortgage loans can typically 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 additional information relatedan amount that would enable us to consolidated securitization entities.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 restricted 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 | $ | 146 | $ | 26 | $ | — | $ | 2 | $ | 3 | $ | 177 | ||||||||||||
Industrial | 105 | 8 | 4 | 2 | 1 | 120 | ||||||||||||||||||
Office | 88 | 7 | 5 | 3 | 2 | 105 | ||||||||||||||||||
Apartments | 35 | 9 | — | 19 | — | 63 | ||||||||||||||||||
Mixed use/other | 16 | 6 | — | — | — | 22 | ||||||||||||||||||
Total | $ | 390 | $ | 56 | $ | 9 | $ | 26 | $ | 6 | $ | 487 | ||||||||||||
% of total | 80 | % | 12 | % | 2 | % | 5 | % | 1 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio | 1.78 | 1.32 | 1.02 | 1.16 | 0.39 | 1.66 | ||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
(Amounts in millions) | 0% – 50% | 51% – 60% | 61% – 75% | 76% – 100% | Greater than 100% | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 141 | $ | 34 | $ | 1 | $ | 3 | $ | 3 | $ | 182 | ||||||||||||
Industrial | 108 | 8 | 4 | 2 | 2 | 124 | ||||||||||||||||||
Office | 90 | 19 | 5 | 3 | — | 117 | ||||||||||||||||||
Apartments | 35 | 9 | — | 20 | — | 64 | ||||||||||||||||||
Mixed use/other | 17 | 5 | — | — | — | 22 | ||||||||||||||||||
Total | $ | 391 | $ | 75 | $ | 10 | $ | 28 | $ | 5 | $ | 509 | ||||||||||||
% of total | 77 | % | 15 | % | 2 | % | 5 | % | 1 | % | 100 | % | ||||||||||||
Weighted-average debt service coverage ratio | 1.82 | 1.35 | 1.05 | 1.18 | 0.52 | 1.69 | ||||||||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth the debt service coverage ratio for fixed rate restricted commercial mortgage loans by property type as of the dates indicated:
March 31, 2011 | ||||||||||||||||||||||||
(Amounts in millions) | Less than 1.00 | 1.01 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 14 | $ | 9 | $ | 43 | $ | 78 | $ | 33 | $ | 177 | ||||||||||||
Industrial | 16 | 5 | 22 | 44 | 33 | 120 | ||||||||||||||||||
Office | 11 | 17 | 24 | 37 | 16 | 105 | ||||||||||||||||||
Apartments | — | 24 | 12 | 18 | 9 | 63 | ||||||||||||||||||
Mixed use/other | — | — | 7 | 10 | 5 | 22 | ||||||||||||||||||
Total | $ | 41 | $ | 55 | $ | 108 | $ | 187 | $ | 96 | $ | 487 | ||||||||||||
% of total | 9 | % | 11 | % | 22 | % | 38 | % | 20 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value | 63 | % | 55 | % | 41 | % | 39 | % | 31 | % | 42 | % | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
(Amounts in millions) | Less than 1.00 | 1.01 – 1.25 | 1.26 – 1.50 | 1.51 – 2.00 | Greater than 2.00 | Total | ||||||||||||||||||
Property type: | ||||||||||||||||||||||||
Retail | $ | 14 | $ | 6 | $ | 52 | $ | 77 | $ | 33 | $ | 182 | ||||||||||||
Industrial | 11 | 9 | 25 | 50 | 29 | 124 | ||||||||||||||||||
Office | 14 | 14 | 23 | 45 | 21 | 117 | ||||||||||||||||||
Apartments | — | 21 | 10 | 26 | 7 | 64 | ||||||||||||||||||
Mixed use/other | — | — | 7 | 11 | 4 | 22 | ||||||||||||||||||
Total | $ | 39 | $ | 50 | $ | 117 | $ | 209 | $ | 94 | $ | 509 | ||||||||||||
% of total | 8 | % | 10 | % | 23 | % | 41 | % | 18 | % | 100 | % | ||||||||||||
Weighted-average loan-to-value | 65 | % | 55 | % | 42 | % | 41 | % | 31 | % | 43 | % | ||||||||||||
There were no floating rate restricted commercial mortgage loans as of March 31, 2011 or December 31, 2010.
(g) Restricted Other Invested Assets Related To Securitization Entities
We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities whereby the changes in fair value are recorded in current period income (loss).income. The trading securities are comprised of asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables. See note 7 for additional information related to consolidated securitization entities.
(5) Derivative Instruments
Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges”hedges�� in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table sets forth our positions in derivative instruments as of the dates indicated:
Asset derivatives | Liability derivatives | Derivative assets | Derivative liabilities | |||||||||||||||||||||||||||||||||||
Balance sheet classification | Fair value | Balance sheet classification | Fair value | |||||||||||||||||||||||||||||||||||
(Amounts in millions) | Balance sheet classification | Fair value | Balance sheet classification | Fair value | ||||||||||||||||||||||||||||||||||
Balance sheet classification | March 31, 2010 | December 31, 2009 | Balance sheet classification | March 31, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Other invested assets | $ | 69 | $ | 72 | Other liabilities | $ | 158 | $ | 114 | Other invested assets | $ | 168 | $ | 222 | Other liabilities | $ | 106 | $ | 56 | ||||||||||||||||||
Inflation indexed swaps | Other invested assets | 1 | — | Other liabilities | 13 | 21 | Other invested assets | — | — | Other liabilities | 35 | 33 | ||||||||||||||||||||||||||
Foreign currency swaps | Other invested assets | 100 | 101 | Other liabilities | — | — | Other invested assets | 192 | 205 | Other liabilities | — | — | ||||||||||||||||||||||||||
Total cash flow hedges | 170 | 173 | 171 | 135 | 360 | 427 | 141 | 89 | ||||||||||||||||||||||||||||||
Fair value hedges: | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Other invested assets | 130 | 132 | Other liabilities | 12 | 15 | Other invested assets | 77 | 95 | Other liabilities | 6 | 8 | ||||||||||||||||||||||||||
Foreign currency swaps | Other invested assets | 22 | 24 | Other liabilities | — | — | Other invested assets | 36 | 35 | Other liabilities | — | — | ||||||||||||||||||||||||||
Total fair value hedges | 152 | 156 | 12 | 15 | 113 | 130 | 6 | 8 | ||||||||||||||||||||||||||||||
Total derivatives designated as hedges | 322 | 329 | 183 | 150 | 473 | 557 | 147 | 97 | ||||||||||||||||||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||||||||||||||||||||||
Interest rate swaps | Other invested assets | 475 | 505 | Other liabilities | 44 | 59 | Other invested assets | 385 | 446 | Other liabilities | 20 | 74 | ||||||||||||||||||||||||||
Interest rate swaps related to | Restricted other invested assets | — | — | Other liabilities | 16 | — | ||||||||||||||||||||||||||||||||
Equity return swaps | Other invested assets | — | — | Other liabilities | 1 | 3 | ||||||||||||||||||||||||||||||||
Interest rate swaps related to securitization entities | Restricted other invested assets | — | — | Other liabilities | 16 | 19 | ||||||||||||||||||||||||||||||||
Interest rate swaptions | Other invested assets | 14 | 54 | Other liabilities | 18 | 67 | Other invested assets | — | — | Other liabilities | — | — | ||||||||||||||||||||||||||
Credit default swaps | Other invested assets | 10 | 11 | Other liabilities | 1 | 3 | Other invested assets | 11 | 11 | Other liabilities | 7 | 7 | ||||||||||||||||||||||||||
Credit default swaps related to securitization entities(1) | Restricted other invested assets | — | — | Other liabilities | 118 | — | ||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities | Restricted other invested assets | — | — | Other liabilities | 120 | 129 | ||||||||||||||||||||||||||||||||
Equity index options | Other invested assets | 34 | 39 | Other liabilities | 4 | 2 | Other invested assets | 32 | 33 | Other liabilities | — | 3 | ||||||||||||||||||||||||||
Financial futures | Other invested assets | — | — | Other liabilities | — | — | Other invested assets | — | — | Other liabilities | — | — | ||||||||||||||||||||||||||
Other foreign currency contracts | Other invested assets | 4 | 8 | Other liabilities | — | — | Other invested assets | — | — | Other liabilities | 8 | — | ||||||||||||||||||||||||||
Reinsurance embedded | Other assets | — | 1 | Other liabilities | — | — | ||||||||||||||||||||||||||||||||
GMWB embedded derivatives | Reinsurance recoverable (2) | (6 | ) | (5 | ) | Policyholder account balances(3) | 145 | 175 | Reinsurance recoverable (2) | (7 | ) | (5 | ) | Policyholder account balances (3) | 69 | 121 | ||||||||||||||||||||||
Total derivatives not designated as hedges | 531 | 612 | 346 | 306 | 421 | 486 | 241 | 356 | ||||||||||||||||||||||||||||||
Total derivatives | $ | 853 | $ | 941 | $ | 529 | $ | 456 | $ | 894 | $ | 1,043 | $ | 388 | $ | 453 | ||||||||||||||||||||||
(1) |
|
(2) | Represents |
(3) | Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements. The amounts recognized for derivative counterparty collateral retained by us was recorded in other invested assets with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us.
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
(Notional in millions) | Measurement | December 31, 2009 | Additions | Maturities/ terminations | March 31, 2010 | Measurement | December 31, 2010 | Additions | Maturities/ terminations | March 31, 2011 | |||||||||||||||||||||||||
Derivatives designated as hedges | |||||||||||||||||||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | $ | 9,479 | $ | 1,182 | $ | (3 | ) | $ | 10,658 | Notional | $ | 12,355 | $ | 995 | $ | (3 | ) | $ | 13,347 | |||||||||||||||
Inflation indexed swaps | Notional | 376 | 157 | — | 533 | Notional | 525 | 9 | — | 534 | |||||||||||||||||||||||||
Foreign currency swaps | Notional | 491 | — | — | 491 | Notional | 491 | — | — | 491 | |||||||||||||||||||||||||
Total cash flow hedges | 10,346 | 1,339 | (3 | ) | 11,682 | 13,371 | 1,004 | (3 | ) | 14,372 | |||||||||||||||||||||||||
Fair value hedges: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 2,366 | — | (74 | ) | 2,292 | Notional | 1,764 | — | (326 | ) | 1,438 | |||||||||||||||||||||||
Foreign currency swaps | Notional | 85 | — | — | 85 | Notional | 85 | — | — | 85 | |||||||||||||||||||||||||
Total fair value hedges | 2,451 | — | (74 | ) | 2,377 | 1,849 | — | (326 | ) | 1,523 | |||||||||||||||||||||||||
Total derivatives designated as hedges | 12,797 | 1,339 | (77 | ) | 14,059 | 15,220 | 1,004 | (329 | ) | 15,895 | |||||||||||||||||||||||||
Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 6,474 | 1,246 | (354 | ) | 7,366 | Notional | 7,681 | 35 | (1,275 | ) | 6,441 | |||||||||||||||||||||||
Equity return swaps | Notional | 208 | 7 | — | 215 | ||||||||||||||||||||||||||||||
Interest rate swaps related to securitization entities | Notional | — | 138 | — | 138 | Notional | 129 | — | (3 | ) | 126 | ||||||||||||||||||||||||
Interest rate swaptions | Notional | 5,100 | — | (3,300 | ) | 1,800 | Notional | 200 | — | (200 | ) | — | |||||||||||||||||||||||
Credit default swaps | Notional | 1,090 | — | — | 1,090 | Notional | 1,195 | 115 | (100 | ) | 1,210 | ||||||||||||||||||||||||
Credit default swaps related to securitization entities | Notional | — | 322 | — | 322 | Notional | 317 | — | — | 317 | |||||||||||||||||||||||||
Equity index options | Notional | 912 | 149 | (81 | ) | 980 | Notional | 744 | 288 | (451 | ) | 581 | |||||||||||||||||||||||
Financial futures | Notional | 5,822 | 2,186 | (2,545 | ) | 5,463 | Notional | 3,937 | 1,372 | (1,806 | ) | 3,503 | |||||||||||||||||||||||
Other foreign currency contracts | Notional | 521 | — | — | 521 | Notional | 521 | 185 | — | 706 | |||||||||||||||||||||||||
Reinsurance embedded derivatives | Notional | 72 | 12 | — | 84 | ||||||||||||||||||||||||||||||
Total derivatives not designated as hedges | 19,919 | 4,041 | (6,280 | ) | 17,680 | 15,004 | 2,014 | (3,835 | ) | 13,183 | |||||||||||||||||||||||||
Total derivatives | $ | 32,716 | $ | 5,380 | $ | (6,357 | ) | $ | 31,739 | $ | 30,224 | $ | 3,018 | $ | (4,164 | ) | $ | 29,078 | |||||||||||||||||
(Number of policies) | Measurement | December 31, 2010 | Additions | Terminations | March 31, 2011 | ||||||||||||||||||||||||||||||
Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||
GMWB embedded derivatives | Policies | 49,566 | 675 | (654 | ) | 49,587 |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Number of policies) | Measurement | December 31, 2009 | Additions | Terminations | March 31, 2010 | ||||||
Derivatives not designated as hedges | |||||||||||
GMWB embedded derivatives | Policies | 47,543 | 1,323 | (461 | ) | 48,405 |
Approximately $1.1 billion of notional value above is related to derivatives with counterparties that can be terminated at the option of the derivative counterparty and represented a net fair value asset of $112$195 million as of March 31, 2010.
GENWORTH FINANCIAL, INC.2011.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Cash Flow Hedges
Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) pay U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure on liabilities denominated in foreign currencies; (v) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed-rate bond purchases and/or interest income; and (vi) other instruments to hedge the cash flows of various forecasted transactions.
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended March 31, 2010:2011:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI (1) | Classification of gain (loss) reclassified into net income (loss) | Gain (loss) recognized in net income (loss) (2) | Classification of gain (loss) recognized in net income (loss) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income from OCI | Classification of gain | Gain (loss) recognized in net income (1) | Classification of gain | ||||||||||||||||||||||
Interest rate swaps hedging assets | $ | (36 | ) | $ | 4 | Net investment income | $ | (3 | ) | Net investment gains (losses) | ||||||||||||||||||||||
Interest rate swaps hedging assets | — | 1 | Net investment gains (losses) | — | Net investment gains (losses) | $ | (101 | ) | $ | (5 | ) | Net investment income | $ | (2 | ) | Net investment gains (losses) | ||||||||||||||||
Foreign currency swaps | 1 | (2 | ) | Interest expense | — | Net investment gains (losses) | 3 | (1 | ) | Interest expense | — | Net investment gains (losses) | ||||||||||||||||||||
Total | $ | (35 | ) | $ | 3 | $ | (3 | ) | $ | (98 | ) | $ | (6 | ) | $ | (2 | ) | |||||||||||||||
(1) |
|
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended March 31, 2009:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income (loss) from OCI (1) | Classification of gain (loss) reclassified into net income (loss) | Gain (loss) recognized in net income (loss) (2) | Classification of gain (loss) recognized in net income (loss) | |||||||||||
Interest rate swaps hedging assets | $ | (145 | ) | $ | 5 | Net investment income | $ | (6 | ) | Net investment gains (losses) | ||||||
Interest rate swaps hedging assets | — | 3 | Net investment gains (losses) | — | Net investment gains (losses) | |||||||||||
Foreign currency swaps | (12 | ) | (3 | ) | Interest expense | — | Net investment gains (losses) | |||||||||
Total | $ | (157 | ) | $ | 5 | $ | (6 | ) | ||||||||
|
Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income effects of cash flow hedges for the three months ended March 31, 2010:
(Amounts in millions) | Gain (loss) recognized in OCI | Gain (loss) reclassified into net income from OCI | Classification of gain | Gain (loss) recognized in net income(1) | Classification of gain | |||||||||||
Interest rate swaps hedging assets | $ | (36 | ) | $ | 4 | Net investment income | $ | (3 | ) | Net investment gains (losses) | ||||||
Interest rate swaps hedging assets | — | 1 | Net investment gains (losses) | — | Net investment gains (losses) | |||||||||||
Foreign currency swaps | 1 | (2 | ) | Interest expense | — | Net investment gains (losses) | ||||||||||
Total | $ | (35 | ) | $ | 3 | $ | (3 | ) | ||||||||
(1) | Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The total of derivatives designated as cash flow hedges of $777$864 million, net of taxes, recorded in stockholders’ equity as of March 31, 20102011 is expected to be reclassified to future net income (loss), concurrently with and primarily offsetting changes in interest expense and interest income on floating-rate instruments and interest income on future fixed-rate bond purchases. Of this amount, $6$18 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2045. No amounts were reclassified to net income (loss) during the three months ended March 31, 20102011 in connection with forecasted transactions that were no longer considered probable of occurring.
Fair Value Hedges
Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income (loss). In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income (loss). We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (iii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iv) other instruments to hedge various fair value exposures of investments.
The following table provides information about the pre-tax income effects of fair value hedges and related hedged items for the three months ended March 31, 2011:
Derivative instrument | Hedged item | |||||||||||||||||||
(Amounts in millions) | Gain (loss) recognized in net income | Classification net income | Other impacts to net income | Classification of other impacts to net income | Gain (loss) recognized in net income | Classification | ||||||||||||||
Interest rate swaps hedging assets | $ | 1 | Net investment gains (losses) | $ | (3 | ) | | Net investment income | | $ | (1 | ) | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities | (22 | ) | Net investment gains (losses) | 20 | Interest credited | 22 | Net investment gains (losses) | |||||||||||||
Foreign currency swaps | — | Net investment gains (losses) | 1 | Interest credited | (1 | ) | Net investment gains (losses) | |||||||||||||
Total | $ | (21 | ) | $ | 18 | $ | 20 | |||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended March 31, 2010:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) | Gain (loss) recognized in net income (loss) | Classification of gain (loss) recognized in net income (loss) | Other impacts to net income (loss) | Classification of other impacts to net income (loss) | Gain (loss) recognized in net income (loss) | Classification of gain (loss) recognized in net income (loss) | ||||||||||||
Interest rate swaps hedging assets | $ | 1 | Net investment gains (losses) | $ | (3 | ) | Net investment income | $ | (1 | ) | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities | (1 | ) | Net investment gains (losses) | 25 | Interest credited | 1 | Net investment gains (losses) | |||||||||||
Foreign currency swaps | (2 | ) | Net investment gains (losses) | 1 | Interest credited | 2 | Net investment gains (losses) | |||||||||||
Total | $ | (2 | ) | $ | 23 | $ | 2 | |||||||||||
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended March 31, 2009:
Derivative instrument | Hedged item | Derivative instrument | Hedged item | ||||||||||||||||||||||||||||||||
(Amounts in millions) | Gain (loss) recognized in net income (loss) | Classification of gain (loss) recognized in net income (loss) | Other impacts to net income (loss) | Classification of other impacts to net income (loss) | Gain (loss) recognized in net income (loss) | Classification of gain (loss) recognized in net income (loss) | Gain (loss) recognized in net income | Classification net income | Other impacts to net income | Classification impacts to net income | Gain (loss) recognized in net income | Classification | |||||||||||||||||||||||
Interest rate swaps hedging assets | $ | (7 | ) | Net investment gains (losses) | $ | (4 | ) | Net investment income | $ | 7 | Net investment gains (losses) | $ | 1 | Net investment gains (losses) | $ | (3 | ) | Net investment income | $ | (1 | ) | Net investment gains (losses) | |||||||||||||
Interest rate swaps hedging liabilities | — | Net investment gains (losses) | 19 | Interest credited | — | Net investment gains (losses) | (1 | ) | Net investment gains (losses) | 25 | Interest credited | 1 | Net investment gains (losses) | ||||||||||||||||||||||
Foreign currency swaps | (11 | ) | Net investment gains (losses) | — | Interest credited | 10 | Net investment gains (losses) | (2 | ) | Net investment gains (losses) | 1 | Interest credited | 2 | Net investment gains (losses) | |||||||||||||||||||||
Total | $ | (18 | ) | $ | 15 | $ | 17 | $ | (2 | ) | $ | 23 | $ | 2 | |||||||||||||||||||||
The difference between the gain (loss) recognized for the derivative instrumentsinstrument and the hedged itemsitem presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the net income (loss) effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged items.item. There were no amounts excluded from the measurement of effectiveness.
Derivatives Not Designated As Hedges
We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps, swaptions and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits; and (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting.accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; and (vi) foreign currency forward contracts to mitigate currency risk associated with future dividends from certain foreign subsidiaries to our holding company. Additionally, we provide GMWBs on certain products that are required to be bifurcated as embedded derivatives and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap. See note 7 for additional information related to consolidated securitization entities.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Three months ended March 31, | Classification of gain (loss) recognized in net income (loss) | Three months ended March 31, | Classification of gain (loss) recognized | |||||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2011 | 2010 | ||||||||||||||||
Interest rate swaps | $ | (6 | ) | $ | 82 | Net investment gains (losses) | $ | 2 | $ | (6 | ) | Net investment gains (losses) | ||||||||
Equity return swaps | (4 | ) | — | Net investment gains (losses) | ||||||||||||||||
Interest rate swaps related to securitization entities | (3 | ) | — | Net investment gains (losses) | 1 | (3 | ) | Net investment gains (losses) | ||||||||||||
Interest rate swaptions | 22 | (242 | ) | Net investment gains (losses) | — | 22 | Net investment gains (losses) | |||||||||||||
Credit default swaps | 5 | (14 | ) | Net investment gains (losses) | 3 | 5 | Net investment gains (losses) | |||||||||||||
Credit default swaps related to securitization entities | 5 | — | Net investment gains (losses) | 9 | 5 | Net investment gains (losses) | ||||||||||||||
Equity index options | (27 | ) | 16 | Net investment gains (losses) | (19 | ) | (27 | ) | Net investment gains (losses) | |||||||||||
Financial futures | (33 | ) | 79 | Net investment gains (losses) | (39 | ) | (33 | ) | Net investment gains (losses) | |||||||||||
Inflation indexed swaps | — | (7 | ) | Net investment gains (losses) | ||||||||||||||||
Other foreign currency contracts | (3 | ) | 8 | Net investment gains (losses) | (9 | ) | (3 | ) | Net investment gains (losses) | |||||||||||
GMWB embedded derivatives | 36 | (39 | ) | Net investment gains (losses) | 59 | 36 | Net investment gains (losses) | |||||||||||||
Total derivatives not designated as hedges | $ | (4 | ) | $ | (117 | ) | $ | 3 | $ | (4 | ) | |||||||||
Derivative Counterparty Credit Risk
As of March 31, 20102011 and December 31, 2009,2010, net fair value assets by counterparty totaled $710$773 million and $739$888 million, respectively. As of March 31, 20102011 and December 31, 2009,2010, net fair value liabilities by counterparty totaled $233$191 million and $74$172 million, respectively. As of March 31, 20102011 and December 31, 2009,2010, we retained collateral of $628$745 million and $647$794 million, respectively, related to these agreements, including over collateralization of $25$53 million and $10$29 million, respectively, from certain counterparties. As of March 31, 2011 and December 31, 2010, we posted $110$67 million and $30 million, respectively, of collateral to derivative counterparties, including over collateralization of $14 million. As of December 31, 2009, we posted $121$16 million of collateral to derivative counterparties, including over collateralization of $46 million.and $11 million, respectively. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.
Except for derivatives related to securitization entities, all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If the downgrade provisions had been triggered as of March 31, 20102011 and December 31, 2009,2010, we
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
could have been allowed to claim up to $107$81 million and $102$123 million, respectively, from counterparties and required to disburse up to $5$4 million and $1$5 million, respectively. This represented the net fair value of gains and losses by counterparty, less available collateral held, and did not include any fair value gains or losses for derivatives related to securitization entities.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit Derivatives
We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit default swaps and the par value of debt instruments with embedded credit derivatives.swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction. For debt instruments with embedded credit derivatives, the security’s principal is typically reduced by the net amount of default for any referenced entity defaults.
In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we were required to consolidateconsolidated in 2010. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity. See note 9 for information on the third-party borrowings related to consolidated securitization entities.
The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:
March 31, 2010 | December 31, 2009 | |||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||
Reference entity credit rating and maturity: | ||||||||||||||||||
AAA | ||||||||||||||||||
Matures after one year through five years | $ | — | $ | — | $ | — | $ | 6 | $ | — | $ | — | ||||||
AA | ||||||||||||||||||
Matures after one year through five years | 11 | — | — | 5 | — | — | ||||||||||||
A | ||||||||||||||||||
Matures after one year through five years | 32 | — | 1 | 32 | 1 | — | ||||||||||||
Matures after five years through ten years | 10 | — | — | 10 | — | — | ||||||||||||
BBB | ||||||||||||||||||
Matures after one year through five years | 73 | 2 | — | 73 | 1 | — | ||||||||||||
Matures after five years through ten years | 29 | — | — | 29 | — | — | ||||||||||||
Total credit default swaps on single name reference entities | $ | 155 | $ | 2 | $ | 1 | $ | 155 | $ | 2 | $ | — | ||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||||||||
Reference entity credit rating and maturity: | ||||||||||||||||||||||||
AAA | ||||||||||||||||||||||||
Matures after one year through five years | $ | 5 | $ | — | $ | — | $ | 5 | $ | — | $ | — | ||||||||||||
AA | ||||||||||||||||||||||||
Matures after one year through five years | 6 | — | — | 6 | — | — | ||||||||||||||||||
Matures after five years through ten years | 5 | — | — | 5 | — | — | ||||||||||||||||||
A | ||||||||||||||||||||||||
Matures after one year through five years | 37 | 1 | — | 37 | 1 | — | ||||||||||||||||||
Matures after five years through ten years | 10 | — | — | 5 | — | — | ||||||||||||||||||
BBB | ||||||||||||||||||||||||
Matures after one year through five years | 68 | 2 | — | 68 | 2 | �� | — | |||||||||||||||||
Matures after five years through ten years | 24 | — | — | 29 | — | — | ||||||||||||||||||
Total credit default swaps on single name reference entities | $ | 155 | $ | 3 | $ | — | $ | 155 | $ | 3 | $ | — | ||||||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:
March 31, 2010 | December 31, 2009 | |||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||
Index tranche attachment/detachment point and maturity: | ||||||||||||||||||
9% – 12% matures after one year through five years (1) | $ | 150 | $ | — | $ | — | $ | 50 | $ | — | $ | — | ||||||
9% – 12% matures after five years through ten years (2) | 150 | 1 | — | 250 | 1 | 1 | ||||||||||||
10% – 15% matures after five years through ten years (3) | 250 | 1 | — | 250 | — | 2 | ||||||||||||
12% – 22% matures after five years through ten years (4) | 248 | 3 | — | 248 | 4 | — | ||||||||||||
15% – 30% matures after five years through ten years (5) | 127 | 3 | — | 127 | 2 | — | ||||||||||||
Total credit default swap index tranches | 925 | 8 | — | 925 | 7 | 3 | ||||||||||||
Customized credit default swap index tranches related to securitization entities: | ||||||||||||||||||
Portion backing third-party borrowings maturing 2017 (6) | 22 | — | 14 | — | — | — | ||||||||||||
Portion backing our interest maturing 2017(7) | 300 | — | 104 | — | — | — | ||||||||||||
Total customized credit default swap index tranches related to securitization entities | 322 | — | 118 | — | — | — | ||||||||||||
Total credit default swaps on index tranches | $ | 1,247 | $ | 8 | $ | 118 | $ | 925 | $ | 7 | $ | 3 | ||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
(Amounts in millions) | Notional value | Assets | Liabilities | Notional value | Assets | Liabilities | ||||||||||||||||||
Original index tranche attachment/detachment point and maturity: | ||||||||||||||||||||||||
9% – 12% matures after one year through five years (1) | $ | 300 | $ | 1 | $ | 3 | $ | 300 | $ | — | $ | 3 | ||||||||||||
10% – 15% matures after one year through five years(2) | 250 | 4 | — | 250 | 4 | — | ||||||||||||||||||
12% – 22% matures after five years through ten years (3) | 248 | — | 4 | 248 | — | 4 | ||||||||||||||||||
15% – 30% matures after five years through ten years(4) | 127 | 1 | — | 127 | 2 | — | ||||||||||||||||||
Total credit default swap index tranches | 925 | 6 | 7 | 925 | 6 | 7 | ||||||||||||||||||
Customized credit default swap index tranches related to securitization entities: | ||||||||||||||||||||||||
Portion backing third-party borrowings maturing 2017 (5) | 17 | — | 7 | 17 | — | 8 | ||||||||||||||||||
Portion backing our interest maturing 2017(6) | 300 | — | 113 | 300 | — | 121 | ||||||||||||||||||
Total customized credit default swap index tranches related to securitization entities | 317 | — | 120 | 317 | — | 129 | ||||||||||||||||||
Total credit default swaps on index tranches | $ | 1,242 | $ | 6 | $ | 127 | $ | 1,242 | $ | 6 | $ | 136 | ||||||||||||
(1) | The current attachment/detachment as of March 31, |
(2) | The current attachment/detachment as of March 31, |
The current attachment/detachment as of March 31, |
The current attachment/detachment as of March 31, |
|
Original notional value was $39 million. |
Original notional value was $300 million. |
The following table sets forth our holding of available-for-sale fixed maturity securities that include embedded credit derivatives and the fair values as of the dates indicated:
March 31, 2010 | December 31, 2009 | |||||||||||||||||
(Amounts in millions) | Par value | Amortized cost | Fair value | Par value | Amortized cost | Fair value | ||||||||||||
Credit rating: | ||||||||||||||||||
AA | ||||||||||||||||||
Matures after five years through ten years | $ | 100 | $ | 100 | $ | 97 | $ | 100 | $ | 100 | $ | 96 | ||||||
BBB | ||||||||||||||||||
Matures after five years through ten years | — | — | — | 100 | 100 | 76 | ||||||||||||
BB | ||||||||||||||||||
Matures after five years through ten years | — | — | — | 200 | 228 | 148 | ||||||||||||
Total available-for-sale fixed maturity securities that include embedded credit derivatives | $ | 100 | $ | 100 | $ | 97 | $ | 400 | $ | 428 | $ | 320 | ||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(6) Fair Value of Financial Instruments
Assets and liabilities that are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and cash equivalents, investment securities, separate accounts, securities held as collateral and derivative instruments. Other financial assets and liabilities—those not carried at fair value—are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The basis on which we estimate fair value is as follows:
Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates.
Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates.
Other invested assets.Based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the related instrument. Primarily represents short-term investments, limited partnerships accounted for under the cost method and bank loans.
Short-term borrowings.Based on carrying value which approximates fair value since the borrowings are based on variable interest rates that are reset monthly.method.
Long-term borrowings.Based on market quotes or comparable market transactions.
Non-recourse funding obligations. Based on the then current coupon, revalued based on the London Interbank Offered Rate (“LIBOR”) rate set and current spread assumption based on commercially available data. The model is a floating rate coupon model using the spread assumption to derive the valuation.
Borrowings related to securitization entities.Based on market quotes or comparable market transactions.
Investment contracts.Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following represents the fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:
(Amounts in millions) | March 31, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | ||||||||||||||||||||||||||||||||||||||||
Notional amount | Carrying amount | Fair value | Notional amount | Carrying amount | Fair value | Notional amount | Carrying amount | Fair value | Notional amount | Carrying amount | Fair value | |||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | $ | (1) | $ | 7,336 | $ | 7,077 | $ | (1) | $ | 7,499 | $ | 7,213 | $ | (1) | $ | 6,600 | $ | 6,827 | $ | (1) | $ | 6,718 | $ | 6,896 | ||||||||||||||||||||
Restricted commercial mortgage loans | (1) | 552 | 554 | (1) | — | — | (1) | 485 | 529 | (1) | 507 | 554 | ||||||||||||||||||||||||||||||||
Other invested assets | (1) | 1,456 | 1,460 | (1) | 1,766 | 1,769 | (1) | 328 | 340 | (1) | 267 | 272 | ||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||
Short-term borrowings(3) | (1) | 930 | 930 | (1) | 930 | 930 | ||||||||||||||||||||||||||||||||||||||
Long-term borrowings(3) | (1) | 3,638 | 3,470 | (1) | 3,641 | 3,291 | ||||||||||||||||||||||||||||||||||||||
Non-recourse funding obligations(3) | (1) | 3,437 | 1,718 | (1) | 3,443 | 1,674 | ||||||||||||||||||||||||||||||||||||||
Borrowings related to securitization | (1) | 493 | 510 | (1) | — | — | ||||||||||||||||||||||||||||||||||||||
Long-term borrowings(2) | (1) | 5,347 | 5,320 | (1) | 4,952 | 4,928 | ||||||||||||||||||||||||||||||||||||||
Non-recourse funding obligations(2) | (1) | 3,431 | 2,175 | (1) | 3,437 | 2,170 | ||||||||||||||||||||||||||||||||||||||
Borrowings related to securitization entities | (1) | 431 | 452 | (1) | 443 | 467 | ||||||||||||||||||||||||||||||||||||||
Investment contracts | (1) | 21,107 | 21,375 | (1) | 21,515 | 21,743 | (1) | 19,106 | 19,671 | (1) | 19,772 | 20,471 | ||||||||||||||||||||||||||||||||
Performance guarantees, principally letters of credit | 77 | — | — | 117 | — | — | ||||||||||||||||||||||||||||||||||||||
Other firm commitments: | ||||||||||||||||||||||||||||||||||||||||||||
Commitments to fund limited partnerships | 187 | — | — | 194 | — | — | 106 | — | — | 110 | — | — | ||||||||||||||||||||||||||||||||
Ordinary course of business lending commitments | 9 | — | — | — | — | — | 39 | — | — | 28 | — | — |
(1) | These financial instruments do not have notional amounts. |
(2) | See note |
|
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recurring Fair Value Measurements
We have fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.
Fixed maturity, equity and trading securities
The valuations of fixed maturity, equity and trading securities are determined using a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information.
We utilize certain third-party data providers when determining fair value. We consider information obtained from third-party pricing services as well as third-party broker provided prices, or broker quotes, in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by third-party pricing services and broker quotes, management determines the fair value of our investment securities after considering all relevant and available information. We also obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received and determine the appropriate fair value.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
In general, we first obtain valuations from pricing services. If a price is not supplied by a pricing service, we will typically seek a broker quote. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for identical securities are not readily observable and these securities are not typically valued by pricing services. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quote valuation is available, we determine fair value using internal models.
For pricing services, we obtain an understanding of the pricing methodologies and procedures for each type of instrument. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs.
For private fixed maturity securities, we utilize an internal model to determine fair value and utilize public bond spreads by sector, rating and maturity to develop the market rate that would be utilized for a similar public bond. We then add an additional premium to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We assign each security an internal rating to determine appropriate public bond spread that should be utilized in the valuation. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds to determine whether the spreads utilized would be considered observable inputs for the private placement being valued. To determine the significance of unobservable inputs, we calculate the impact on the valuation from the unobservable input and will classify a security as Level 3 when the impact on the valuation exceeds 10%.
For broker quotes, we discuss the valuation methodology utilized by the third party but cannot typically obtain sufficient evidence to determine the valuation does not include significant unobservable inputs. Accordingly, we typically classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For remaining securities priced using internal models, we maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table summarizestables summarize the primary sources considered when determining fair value of each class of fixed maturity securities as of March 31, 2010.the dates indicated:
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||
U.S. government, agencies and government-sponsored enterprises: | ||||||||||||
Pricing services | $ | 3,012 | $ | — | $ | 3,012 | $ | — | ||||
Broker quotes | 1 | — | — | 1 | ||||||||
Internal models | 16 | — | 9 | 7 | ||||||||
Total U.S. government, agencies and government-sponsored enterprises | 3,029 | — | 3,021 | 8 | ||||||||
Tax-exempt: | ||||||||||||
Pricing services | 1,434 | — | 1,434 | — | ||||||||
Internal models | 2 | — | — | 2 | ||||||||
Total tax-exempt | 1,436 | — | 1,434 | 2 | ||||||||
Government—non-U.S.: | ||||||||||||
Pricing services | 2,385 | — | 2,385 | — | ||||||||
Internal models | 29 | — | 28 | 1 | ||||||||
Total government—non-U.S. | 2,414 | — | 2,413 | 1 | ||||||||
U.S. corporate: | ||||||||||||
Pricing services | 18,782 | — | 18,782 | — | ||||||||
Broker quotes | 260 | — | — | 260 | ||||||||
Internal models | 3,211 | — | 2,565 | 646 | ||||||||
Total U.S. corporate | 22,253 | — | 21,347 | 906 | ||||||||
Corporate—non-U.S.: | ||||||||||||
Pricing services | 10,867 | — | 10,768 | 99 | ||||||||
Broker quotes | 214 | — | — | 214 | ||||||||
Internal models | 2,070 | — | 1,875 | 195 | ||||||||
Total corporate—non-U.S. | 13,151 | — | 12,643 | 508 | ||||||||
Residential mortgage-backed: | ||||||||||||
Pricing services | 3,639 | — | 3,639 | — | ||||||||
Broker quotes | 29 | — | — | 29 | ||||||||
Internal models | 142 | — | — | 142 | ||||||||
Total residential mortgage-backed | 3,810 | — | 3,639 | 171 | ||||||||
Commercial mortgage-backed: | ||||||||||||
Pricing services | 3,646 | — | 3,646 | — | ||||||||
Broker quotes | 7 | — | — | 7 | ||||||||
Internal models | 40 | — | — | 40 | ||||||||
Total commercial mortgage-backed | 3,693 | — | 3,646 | 47 | ||||||||
Other asset-backed: | ||||||||||||
Pricing services | 1,834 | — | 1,834 | — | ||||||||
Broker quotes | 155 | — | — | 155 | ||||||||
Internal models | 265 | — | 11 | 254 | ||||||||
Total other asset-backed | 2,254 | — | 1,845 | 409 | ||||||||
Total fixed maturity securities | $ | 52,040 | $ | — | $ | 49,988 | $ | 2,052 | ||||
March 31, 2011 | ||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
U.S. government, agencies and government-sponsored enterprises: | ||||||||||||||||
Pricing services | $ | 3,401 | $ | — | $ | 3,401 | $ | — | ||||||||
Internal models | 13 | — | 12 | 1 | ||||||||||||
Total U.S. government, agencies and government-sponsored enterprises | 3,414 | — | 3,413 | 1 | ||||||||||||
Tax-exempt: | ||||||||||||||||
Pricing services | 928 | — | 928 | — | ||||||||||||
Total tax-exempt | 928 | — | 928 | — | ||||||||||||
Government—non-U.S.: | ||||||||||||||||
Pricing services | 2,348 | — | 2,348 | — | ||||||||||||
Internal models | 11 | — | 10 | 1 | ||||||||||||
Total government—non-U.S. | 2,359 | — | 2,358 | 1 | ||||||||||||
U.S. corporate: | ||||||||||||||||
Pricing services | 20,506 | — | 20,506 | — | ||||||||||||
Broker quotes | 232 | — | — | 232 | ||||||||||||
Internal models | 3,015 | — | 2,532 | 483 | ||||||||||||
Total U.S. corporate | 23,753 | — | 23,038 | 715 | ||||||||||||
Corporate—non-U.S.: | ||||||||||||||||
Pricing services | 12,081 | — | 12,081 | — | ||||||||||||
Broker quotes | 87 | — | — | 87 | ||||||||||||
Internal models | 1,769 | — | 1,654 | 115 | ||||||||||||
Total corporate—non-U.S. | 13,937 | — | 13,735 | 202 | ||||||||||||
Residential mortgage-backed: | ||||||||||||||||
Pricing services | 4,465 | — | 4,465 | — | ||||||||||||
Broker quotes | 64 | — | — | 64 | ||||||||||||
Internal models | 71 | — | — | 71 | ||||||||||||
Total residential mortgage-backed | 4,600 | — | 4,465 | 135 | ||||||||||||
Commercial mortgage-backed: | ||||||||||||||||
Pricing services | 3,714 | — | 3,714 | — | ||||||||||||
Broker quotes | 16 | — | — | 16 | ||||||||||||
Internal models | 26 | — | — | 26 | ||||||||||||
Total commercial mortgage-backed | 3,756 | — | 3,714 | 42 | ||||||||||||
Other asset-backed: | ||||||||||||||||
Pricing services | 2,083 | — | 1,985 | 98 | ||||||||||||
Broker quotes | 165 | — | — | 165 | ||||||||||||
Internal models | 3 | — | 3 | — | ||||||||||||
Total other asset-backed | 2,251 | — | 1,988 | 263 | ||||||||||||
Total fixed maturity securities | $ | 54,998 | $ | — | $ | 53,639 | $ | 1,359 | ||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
December 31, 2010 | ||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
U.S. government, agencies and government-sponsored enterprises: | ||||||||||||||||
Pricing services | $ | 3,688 | $ | — | $ | 3,688 | $ | — | ||||||||
Internal models | 17 | — | 6 | 11 | ||||||||||||
Total U.S. government, agencies and government-sponsored enterprises | 3,705 | — | 3,694 | 11 | ||||||||||||
Tax-exempt: | ||||||||||||||||
Pricing services | 1,030 | — | 1,030 | — | ||||||||||||
Total tax-exempt | 1,030 | — | 1,030 | — | ||||||||||||
Government—non-U.S.: | ||||||||||||||||
Pricing services | 2,357 | — | 2,357 | — | ||||||||||||
Internal models | 12 | — | 11 | 1 | ||||||||||||
Total government—non-U.S. | 2,369 | — | 2,368 | 1 | ||||||||||||
U.S. corporate: | ||||||||||||||||
Pricing services | 20,563 | — | 20,563 | — | ||||||||||||
Broker quotes | 235 | — | — | 235 | ||||||||||||
Internal models | 3,169 | — | 2,304 | 865 | ||||||||||||
Total U.S. corporate | 23,967 | — | 22,867 | 1,100 | ||||||||||||
Corporate—non-U.S.: | ||||||||||||||||
Pricing services | 11,584 | — | 11,584 | — | ||||||||||||
Broker quotes | 113 | — | — | 113 | ||||||||||||
Internal models | 1,801 | — | 1,546 | 255 | ||||||||||||
Total corporate—non-U.S. | 13,498 | — | 13,130 | 368 | ||||||||||||
Residential mortgage-backed: | ||||||||||||||||
Pricing services | 4,312 | — | 4,312 | — | ||||||||||||
Broker quotes | 72 | — | — | 72 | ||||||||||||
Internal models | 71 | — | — | 71 | ||||||||||||
Total residential mortgage-backed | 4,455 | — | 4,312 | 143 | ||||||||||||
Commercial mortgage-backed: | ||||||||||||||||
Pricing services | 3,693 | — | 3,693 | — | ||||||||||||
Broker quotes | 16 | — | — | 16 | ||||||||||||
Internal models | 34 | — | — | 34 | ||||||||||||
Total commercial mortgage-backed | 3,743 | — | 3,693 | 50 | ||||||||||||
Other asset-backed: | ||||||||||||||||
Pricing services | 2,241 | — | 2,143 | 98 | ||||||||||||
Broker quotes | 169 | — | — | 169 | ||||||||||||
Internal models | 6 | — | 5 | 1 | ||||||||||||
Total other asset-backed | 2,416 | — | 2,148 | 268 | ||||||||||||
Total fixed maturity securities | $ | 55,183 | $ | — | $ | 53,242 | $ | 1,941 | ||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizestables summarize the primary sources considered when determining fair value of equity securities as of March 31, 2010.the dates indicated:
March 31, 2011 | ||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Pricing services | $ | 112 | $ | 24 | $ | 88 | $ | — | $ | 268 | $ | 262 | $ | 6 | $ | — | ||||||||||||
Broker quotes | 5 | — | — | 5 | 6 | — | — | 6 | ||||||||||||||||||||
Internal models | 62 | — | — | 62 | 81 | — | — | 81 | ||||||||||||||||||||
Total equity securities | $ | 179 | $ | 24 | $ | 88 | $ | 67 | $ | 355 | $ | 262 | $ | 6 | $ | 87 | ||||||||||||
December 31, 2010 | ||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services | $ | 245 | $ | 240 | $ | 5 | $ | — | ||||||||
Broker quotes | 6 | — | — | 6 | ||||||||||||
Internal models | 81 | — | — | 81 | ||||||||||||
Total equity securities | $ | 332 | $ | 240 | $ | 5 | $ | 87 | ||||||||
The following table summarizestables summarize the primary sources considered when determining fair value of trading securities as of March 31, 2010.the dates indicated:
March 31, 2011 | ||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Pricing services | $ | 25 | $ | — | $ | 25 | $ | — | $ | 329 | $ | — | $ | 329 | $ | — | ||||||||||||
Internal models | 238 | — | — | 238 | ||||||||||||||||||||||||
Broker quotes | 142 | — | — | 142 | 100 | — | — | 100 | ||||||||||||||||||||
Total trading securities | $ | 167 | $ | — | $ | 25 | $ | 142 | $ | 667 | $ | — | $ | 329 | $ | 338 | ||||||||||||
December 31, 2010 | ||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Pricing services | $ | 348 | $ | — | $ | 348 | $ | — | ||||||||
Broker quotes | 230 | — | — | 230 | ||||||||||||
Internal models | 99 | — | — | 99 | ||||||||||||
Total trading securities | $ | 677 | $ | — | $ | 348 | $ | 329 | ||||||||
Restricted other invested assets related to securitization entities
We have trading securities related to securitization entities that are classified as restricted other invested assets and are carried at fair value. The trading securities represent asset-backed securities. The valuation for trading securities is determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there is observable market information for transactions of the same or similar instruments and is provided to us by a third-party pricing service and is classified as Level 2. For certain securities that are not actively traded, we determine fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classify these valuations as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Securities lending and derivative counterparty collateral
The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.
Separate account assets
The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.
Derivatives
In determining the fair value of derivatives, we consider the counterparty collateral arrangements and rights of set-off when determining whether any incremental adjustment should be made for both the counterparty’s and our non-performance risk. As a result of these counterparty arrangements, we determined no adjustment for our non-performance risk was required to our derivative liabilities.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Interest rate swaps.The valuation of interest rate swaps is determined using an income approach. The primary inputsinput into the valuation representrepresents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2. For certain other swaps, there are features that provide an option to the counterparty to terminate the swap at specified dates and would be considered a significant unobservable input and results in the fair value measurement of the derivative being classified as Level 3.
Interest rate swaps related to securitization entities.The valuation of interest rate swaps related to securitization entities is determined using an income approach. The primary input into the valuation representrepresents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2.
Inflation indexed swaps. The valuation of inflation indexed swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and consumer price index, which are generally considered observable inputs, and results in the derivative being classified as Level 2.
Interest rate swaptions. The valuation of interest rate swaptions is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, which is generally considered an observable input, forward interest rate volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate volatility input, the derivative is classified as Level 3.
Foreign currency swaps. The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency exchange rates, both of which are considered an observable input, and results in the derivative being classified as Level 2.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit default swaps. We have both single name credit default swaps and index tranche credit default swaps. For single name credit default swaps, we utilize an income approach to determine fair value based on using current market information for the credit spreads of the reference entity, which is considered observable inputs based on the reference entities of our derivatives and results in these derivatives being classified as Level 2. For index tranche credit default swaps, we utilize an income approach that utilizes current market information related to credit spreads and expected defaults and losses associated with the reference entities that comprise the respective index associated with each derivative. There are significant unobservable inputs associated with the timing and amount of losses from the reference entities as well as the timing or amount of losses, if any, that will be absorbed by our tranche. Accordingly, the index tranche credit default swaps are classified as Level 3.
Credit default swaps related to securitization entities.Credit default swaps related to securitization entities represent customized index tranche credit default swaps and are valued using a similar methodology as described above for index tranche credit default swaps. We determine fair value of these credit default swaps after considering both the valuation methodology described above as well as the valuation provided by the derivative counterparty. In addition to the valuation methodology and inputs described for index tranche credit default swaps, these customized credit default swaps contain a feature that permits the securitization entity to provide the par value of underlying assets in the securitization entity to settle any losses under the credit default swap. The valuation of this settlement feature is dependent upon the valuation of the underlying assets and the timing and amount of any expected loss on the credit default swap, which is considered a significant unobservable input. Accordingly, these customized index tranche credit default swaps related to securitization entities are classified as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Equity index options. We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rate volatility and time value component associated with the optionality in the derivative, which are considered significant unobservable inputs in most instances. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3
Financial futures. The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.
Equity return swaps.The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.
Other foreign currency contracts. We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate and foreign currency exchange rate volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate and foreign currency exchange rate volatility input, the derivative is classified as Level 3. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reinsurance embedded derivatives
We have certain reinsurance agreements that result in a reinsurance counterparty holding assets for our benefit where this feature is considered an embedded derivative requiring bifurcation. As a result, we measure the embedded derivatives at fair value with changes in fair value being recorded in income. Fair value is determined by comparing the fair value and cost basis of the underlying assets. The underlying assets are primarily comprised of highly rated investments and result in the fair value of the embedded derivatives being classified as Level 2.
GMWB embedded derivatives
We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. In addition to these inputs, we also consider risk and expense margins when determining the projected cash flows that would be determined by another market participant. While the risk and expense margins are considered in determining fair value, these inputs do not have a significant impact on the valuation.
For GMWB liabilities, non-performance risk is integrated into the discount rate. ThePrior to the third quarter of 2010, the discount rate utilized in our valuation was based on the swap curve, which included the credit risk of an instrument rated “AA” and incorporated the non-performance risk of our GMWB liabilities. In recent periods,Beginning in 2009, the swap curve has been lower thandropped below the U.S. Treasury curve forat certain points on the curve. Forlonger end of the curve, and in 2010, the points where the swap curve is lower thanbelow the U.S. Treasury curve expanded to several points beyond 10 years. For these points on the curve, we utilizeutilized the U.S. Treasury curve as our discount rate.rate through the second quarter of 2010. Beginning in the third quarter of 2010, we revised our discount rate to reflect market credit spreads that represent an adjustment for the non-performance risk of the GMWB liabilities. The credit spreads included in our discount rate range from 60 to 80 basis points over the most relevant points on the U.S. Treasury curve. As of March 31, 20102011 and December 31, 2009,2010, the impact of non-performance risk onresulted in a lower fair value of our GMWB valuation was not material.liabilities of $39 million and $44 million, respectively.
To determine whether the use of the swap curve was the appropriate discount rate to reflect the non-performance risk of the GMWB liabilities, we evaluate the non-performance risk in our liabilities based on a hypothetical exit market transaction as there is no exit market for these types of liabilities. A hypothetical exit market can be viewed as a hypothetical transfer of the liability to another similarly rated insurance company which would closely resemble a reinsurance transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. After considering all relevant factors in assessing whether any additional adjustment to the discount rate for non-performance risk was necessary, including assumptions we expect market participants would utilize in a hypothetical exit market transaction, we determined that no incremental adjustment to the discount rate was necessary for our GMWB liabilities that are recorded at fair value. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities and would not incorporate changes in non-performance risk in the discount rate other than the implied credit spread incorporated in the swap curve.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
liabilities.
For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected near-term equity market volatility with more significance being placed on projected and recent historical data.
Equity index and fund correlations are determined based on historical price observations for the fund and equity index.
For policyholder assumptions, we use our expected lapse, mortality and utilization assumptions and update these assumptions for our actual experience, as necessary. For our lapse assumption, we adjust our base lapse assumption by policy based on a combination of the policyholder’s current account value and GMWB benefit.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We classify the GMWB valuation as Level 3 based on having significant unobservable inputs. We evaluate the inputs and methodologies used to determine fair value based on how we expect a market participant would determine exit value. As stated above, there is no exit market or market participants for the GMWB embedded derivatives. Accordingly, we evaluate our inputs and resulting fair value based on a hypothetical exit market and hypothetical market participants. A hypothetical exit market could be viewed as a transaction that would closely resemble reinsurance. While reinsurance transactions for this type of product are not an observable input, we consider this type of hypothetical exit market, as appropriate, when evaluating our inputs and determining that our inputs are consistent with that of a hypothetical market participant.
Borrowings related to securitization entities
We record certain borrowings related to securitization entities at fair value. The fair value of these borrowings is determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determine fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may impact the valuation. After considering all relevant inputs, we determine fair value of the borrowings using the net valuation of the underlying assets and derivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
The following tables set forth our assets and liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:
March 31, 2010 | March 31, 2011 | |||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 3,029 | $ | — | $ | 3,021 | $ | 8 | $ | 3,414 | $ | — | $ | 3,413 | $ | 1 | ||||||||||||||
Tax-exempt | 1,436 | — | 1,434 | 2 | 928 | — | 928 | — | ||||||||||||||||||||||
Government—non-U.S. | 2,414 | — | 2,413 | 1 | 2,359 | — | 2,358 | 1 | ||||||||||||||||||||||
U.S. corporate | 22,253 | — | 21,347 | 906 | 23,753 | — | 23,038 | 715 | ||||||||||||||||||||||
Corporate—non-U.S. | 13,151 | — | 12,643 | 508 | 13,937 | — | 13,735 | 202 | ||||||||||||||||||||||
Residential mortgage-backed | 3,810 | — | 3,639 | 171 | 4,600 | — | 4,465 | 135 | ||||||||||||||||||||||
Commercial mortgage-backed | 3,693 | — | 3,646 | 47 | 3,756 | — | 3,714 | 42 | ||||||||||||||||||||||
Other asset-backed | 2,254 | — | 1,845 | 409 | 2,251 | — | 1,988 | 263 | ||||||||||||||||||||||
Total fixed maturity securities | 52,040 | — | 49,988 | 2,052 | 54,998 | — | 53,639 | 1,359 | ||||||||||||||||||||||
Equity securities | 179 | 24 | 88 | 67 | 355 | 262 | 6 | 87 | ||||||||||||||||||||||
Other invested assets: | ||||||||||||||||||||||||||||||
Trading securities | 167 | — | 25 | 142 | 667 | — | 329 | 338 | ||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||
Interest rate swaps | 674 | — | 670 | 4 | 630 | — | 627 | 3 | ||||||||||||||||||||||
Inflation indexed swaps | 1 | — | 1 | — | ||||||||||||||||||||||||||
Foreign currency swaps | 122 | — | 122 | — | 228 | — | 228 | — | ||||||||||||||||||||||
Interest rate swaptions | 14 | — | — | 14 | ||||||||||||||||||||||||||
Credit default swaps | 10 | — | 3 | 7 | 11 | — | 5 | 6 | ||||||||||||||||||||||
Equity index options | 34 | — | — | 34 | 32 | — | — | 32 | ||||||||||||||||||||||
Other foreign currency contracts | 4 | — | — | 4 | ||||||||||||||||||||||||||
Total derivative assets | 859 | — | 796 | 63 | 901 | — | 860 | 41 | ||||||||||||||||||||||
Securities lending collateral | 593 | — | 593 | — | 811 | — | 811 | — | ||||||||||||||||||||||
Derivatives counterparty collateral | 137 | — | 137 | — | 605 | — | 605 | — | ||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 377 | — | 203 | 174 | ||||||||||||||||||||||||||
Total other invested assets | 2,133 | — | 1,754 | 379 | 2,984 | — | 2,605 | 379 | ||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 374 | — | 199 | 175 | ||||||||||||||||||||||||||
Reinsurance recoverable(1) | (6 | ) | — | — | (6 | ) | (7 | ) | — | — | (7 | ) | ||||||||||||||||||
Separate account assets | 11,261 | 11,261 | — | — | 11,807 | 11,807 | — | — | ||||||||||||||||||||||
Total assets | $ | 65,607 | $ | 11,285 | $ | 51,830 | $ | 2,492 | $ | 70,511 | $ | 12,069 | $ | 56,449 | $ | 1,993 | ||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||
Policyholder account balances(2) | $ | 145 | $ | — | $ | — | $ | 145 | $ | 69 | $ | — | $ | — | $ | 69 | ||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||||||
Interest rate swaps | 214 | — | 214 | — | 132 | — | 132 | — | ||||||||||||||||||||||
Interest rate swaps related to securitization entities | 16 | — | 16 | — | 16 | — | 16 | — | ||||||||||||||||||||||
Inflation indexed swaps | 13 | — | 13 | — | 35 | — | 35 | — | ||||||||||||||||||||||
Interest rate swaptions | 18 | — | — | 18 | ||||||||||||||||||||||||||
Credit default swaps | 1 | — | — | 1 | 7 | — | — | 7 | ||||||||||||||||||||||
Credit default swaps related to securitization entities | 118 | — | — | 118 | 120 | — | — | 120 | ||||||||||||||||||||||
Equity index options | 4 | — | — | 4 | ||||||||||||||||||||||||||
Equity return swaps | 1 | — | 1 | — | ||||||||||||||||||||||||||
Other foreign currency contracts | 8 | — | 8 | — | ||||||||||||||||||||||||||
Total derivative liabilities | 384 | — | 243 | 141 | 319 | — | 192 | 127 | ||||||||||||||||||||||
Borrowings related to securitization entities | 58 | — | — | 58 | 58 | — | — | 58 | ||||||||||||||||||||||
Total liabilities | $ | 587 | $ | — | $ | 243 | $ | 344 | $ | 446 | $ | — | $ | 192 | $ | 254 | ||||||||||||||
(1) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
(2) | Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
December 31, 2009 | December 31, 2010 | |||||||||||||||||||||||||||||
(Amounts in millions) | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 2,602 | $ | — | $ | 2,586 | $ | 16 | $ | 3,705 | $ | — | $ | 3,694 | $ | 11 | ||||||||||||||
Tax-exempt | 1,544 | — | 1,542 | 2 | 1,030 | — | 1,030 | — | ||||||||||||||||||||||
Government—non-U.S. | 2,384 | — | 2,377 | 7 | 2,369 | — | 2,368 | 1 | ||||||||||||||||||||||
U.S. corporate | 21,412 | — | 20,339 | 1,073 | 23,967 | — | 22,867 | 1,100 | ||||||||||||||||||||||
Corporate—non-U.S. | 12,551 | — | 12,047 | 504 | 13,498 | — | 13,130 | 368 | ||||||||||||||||||||||
Residential mortgage-backed | 3,227 | — | 1,746 | 1,481 | 4,455 | — | 4,312 | 143 | ||||||||||||||||||||||
Commercial mortgage-backed | 3,617 | — | 59 | 3,558 | 3,743 | — | 3,693 | 50 | ||||||||||||||||||||||
Other asset-backed | 2,415 | — | 996 | 1,419 | 2,416 | — | 2,148 | 268 | ||||||||||||||||||||||
Total fixed maturity securities | 49,752 | — | 41,692 | 8,060 | 55,183 | — | 53,242 | 1,941 | ||||||||||||||||||||||
Equity securities | 159 | 42 | 108 | 9 | 332 | 240 | 5 | 87 | ||||||||||||||||||||||
Other invested assets: | ||||||||||||||||||||||||||||||
Trading securities | 174 | — | 29 | 145 | 677 | — | 348 | 329 | ||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||
Interest rate swaps | 709 | — | 706 | 3 | 763 | — | 758 | 5 | ||||||||||||||||||||||
Foreign currency swaps | 125 | — | 125 | — | 240 | — | 240 | — | ||||||||||||||||||||||
Interest rate swaptions | 54 | — | — | 54 | ||||||||||||||||||||||||||
Credit default swaps | 11 | — | 5 | 6 | 11 | — | 5 | 6 | ||||||||||||||||||||||
Equity index options | 39 | — | — | 39 | 33 | — | — | 33 | ||||||||||||||||||||||
Other foreign currency contracts | 8 | — | — | 8 | ||||||||||||||||||||||||||
Total derivative assets | 946 | — | 836 | 110 | 1,047 | — | 1,003 | 44 | ||||||||||||||||||||||
Securities lending collateral | 853 | — | 853 | — | 772 | — | 772 | — | ||||||||||||||||||||||
Derivatives counterparty collateral | 148 | — | 148 | — | 630 | — | 630 | — | ||||||||||||||||||||||
Total other invested assets | 2,121 | — | 1,866 | 255 | 3,126 | — | 2,753 | 373 | ||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 370 | — | 199 | 171 | ||||||||||||||||||||||||||
Other assets(1) | 1 | — | 1 | — | ||||||||||||||||||||||||||
Reinsurance recoverable | (5 | ) | — | — | (5 | ) | (5 | ) | — | — | (5 | ) | ||||||||||||||||||
Separate account assets | 11,002 | 11,002 | — | — | 11,666 | 11,666 | — | — | ||||||||||||||||||||||
Total assets | $ | 63,029 | $ | 11,044 | $ | 43,666 | $ | 8,319 | $ | 70,673 | $ | 11,906 | $ | 56,200 | $ | 2,567 | ||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||
Policyholder account balances | $ | 175 | $ | — | $ | — | $ | 175 | $ | 121 | $ | — | $ | — | $ | 121 | ||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||||||
Interest rate swaps | 188 | — | 186 | 2 | 138 | — | 138 | — | ||||||||||||||||||||||
Interest rate swaps related to securitization entities | 19 | — | 19 | — | ||||||||||||||||||||||||||
Inflation indexed swaps | 21 | — | 21 | — | 33 | — | 33 | — | ||||||||||||||||||||||
Interest rate swaptions | 67 | — | — | 67 | ||||||||||||||||||||||||||
Credit default swap | 3 | — | 3 | — | ||||||||||||||||||||||||||
Credit default swaps | 7 | — | — | 7 | ||||||||||||||||||||||||||
Credit default swaps related to securitization entities | 129 | — | — | 129 | ||||||||||||||||||||||||||
Equity index options | 2 | — | — | 2 | 3 | — | — | 3 | ||||||||||||||||||||||
Equity return swaps | 3 | — | 3 | — | ||||||||||||||||||||||||||
Total derivative liabilities | 281 | — | 210 | 71 | 332 | — | 193 | 139 | ||||||||||||||||||||||
Borrowings related to securitization entities | 51 | — | — | 51 | ||||||||||||||||||||||||||
Total liabilities | $ | 456 | $ | — | $ | 210 | $ | 246 | $ | 504 | $ | — | $ | 193 | $ | 311 | ||||||||||||||
(1) | Represents embedded derivatives associated with certain reinsurance agreements. |
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur. Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from third-party pricing sources to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
Beginning balance as of January 1, 2010 | Total realized and unrealized gains (losses) | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2010 | Total gains (losses) included in net income (loss) attributable to assets still held | Beginning balance as of January 1, 2011 | �� | Total realized and unrealized gains (losses) | Purchases | Sales | Issuances | Settlements | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2011 | Total gains (losses) included in net income attributable to assets still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net income (loss) | Included in OCI | Included in net income | Included in OCI | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 16 | $ | — | $ | — | $ | (1 | ) | $ | 3 | $ | (10 | ) | $ | 8 | $ | — | $ | 11 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (10 | ) | $ | 1 | $ | — | ||||||||||||||||||||||||||||||||||
Tax-exempt | 2 | — | — | — | — | — | 2 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government—non-U.S. | 7 | — | — | — | — | (6 | ) | 1 | — | 1 | — | — | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate | 1,073 | — | 15 | 60 | 25 | (267 | ) | 906 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate—non-U.S. | 504 | 1 | 1 | 9 | 59 | (66 | ) | 508 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate(1) | 1,100 | 4 | (3 | ) | 3 | — | — | (45 | ) | 16 | (360 | ) | 715 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate—non-U.S. (1) | 368 | (12 | ) | (3 | ) | 25 | (25 | ) | — | (5 | ) | 40 | (186 | ) | 202 | (11 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed | 1,481 | — | 3 | 106 | — | (1,419 | ) | 171 | — | 143 | (1 | ) | 2 | — | — | — | (8 | ) | — | (1 | ) | 135 | (1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed | 3,558 | 1 | 4 | (62 | ) | — | (3,454 | ) | 47 | — | 50 | — | — | — | — | — | (8 | ) | — | — | 42 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed | 1,419 | (16 | ) | 21 | (4 | ) | 10 | (1,021 | ) | 409 | (16 | ) | 268 | (1 | ) | 2 | 8 | (8 | ) | — | (21 | ) | 15 | — | 263 | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 8,060 | (14 | ) | 44 | 108 | 97 | (6,243 | ) | 2,052 | (11 | ) | 1,941 | (10 | ) | (2 | ) | 36 | (33 | ) | — | (87 | ) | 71 | (557 | ) | 1,359 | (9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 9 | — | (1 | ) | 7 | 52 | — | 67 | — | 87 | 1 | 1 | — | — | — | (2 | ) | — | — | 87 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other invested assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities | 145 | 8 | — | (11 | ) | — | — | 142 | 8 | 329 | 9 | — | 5 | — | — | (5 | ) | — | — | 338 | 9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 3 | 1 | — | — | — | — | 4 | 2 | 5 | (2 | ) | — | — | — | — | — | — | — | 3 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaptions | 54 | (10 | ) | — | (30 | ) | — | — | 14 | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | 6 | 1 | — | — | — | — | 7 | 1 | 6 | — | — | — | — | — | — | — | — | 6 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 39 | (25 | ) | — | 20 | — | — | 34 | (24 | ) | 33 | (19 | ) | — | 24 | — | — | (6 | ) | — | — | 32 | (19 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other foreign currency contracts | 8 | (4 | ) | — | — | — | — | 4 | (4 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total derivative assets | 110 | (37 | ) | — | (10 | ) | — | — | 63 | (30 | ) | 44 | (21 | ) | — | 24 | — | — | (6 | ) | — | — | 41 | (21 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total other invested assets | 255 | (29 | ) | — | (21 | ) | — | — | 205 | (22 | ) | 373 | (12 | ) | — | 29 | — | — | (11 | ) | — | — | 379 | (12 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted other invested assets related to securitization entities (1) | — | — | — | — | 174 | — | 174 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | 171 | 4 | — | — | — | — | — | — | — | 175 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable(2) | (5 | ) | (1 | ) | — | — | — | — | (6 | ) | (1 | ) | (5 | ) | (3 | ) | — | — | — | 1 | — | — | — | (7 | ) | (3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | 8,319 | $ | (44 | ) | $ | 43 | $ | 94 | $ | 323 | $ | (6,243 | ) | $ | 2,492 | $ | (34 | ) | $ | 2,567 | $ | (20 | ) | $ | (1 | ) | $ | 65 | $ | (33 | ) | $ | 1 | $ | (100 | ) | $ | 71 | $ | (557 | ) | $ | 1,993 | $ | (20 | ) | ||||||||||||||||||||||||||||
(1) |
|
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
Beginning balance as of January 1, 2009 | Total realized and unrealized gains (losses) | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2009 | Total gains (losses) included in net income (loss) attributable to assets still held | Beginning balance as of January 1, 2010 | Total realized and unrealized gains (losses) | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2010 | Total gains (losses) included in net income attributable to assets still held | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net income (loss) | Included in OCI | Included in net income | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities | $ | 10,560 | $ | (292 | ) | $ | 260 | $ | (311 | ) | $ | 2,697 | $ | (1,911 | ) | $ | 11,003 | $ | (296 | ) | ||||||||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 16 | $ | — | $ | — | $ | (1 | ) | $ | 3 | $ | (10 | ) | $ | 8 | $ | — | ||||||||||||||||||||||||||||||||||||||||||
Tax-exempt | 2 | — | — | — | — | — | 2 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Government—non-U.S. | 7 | — | — | — | — | (6 | ) | 1 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. corporate | 1,073 | — | 15 | 60 | 25 | (267 | ) | 906 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate—non-U.S. | 504 | 1 | 1 | 9 | 59 | (66 | ) | 508 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed (1) | 1,481 | — | 3 | 106 | — | (1,419 | ) | 171 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed (1) | 3,558 | 1 | 4 | (62 | ) | — | (3,454 | ) | 47 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed(1) | 1,419 | (16 | ) | 21 | (4 | ) | 10 | (1,021 | ) | 409 | (16 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed maturity securities | 8,060 | (14 | ) | 44 | 108 | 97 | (6,243 | ) | 2,052 | (11 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | 60 | — | — | 1 | — | — | 61 | — | 9 | — | (1 | ) | 7 | 52 | — | 67 | — | |||||||||||||||||||||||||||||||||||||||||||
Other invested assets (1) | 1,058 | (251 | ) | — | (21 | ) | 76 | — | 862 | (271 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable | 18 | 1 | — | (1 | ) | — | — | 18 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other invested assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trading securities | 145 | 8 | — | (11 | ) | — | — | 142 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 3 | 1 | — | — | — | — | 4 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaptions | 54 | (10 | ) | — | (30 | ) | — | — | 14 | (5 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | 6 | 1 | — | — | — | — | 7 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 39 | (25 | ) | — | 20 | — | — | 34 | (24 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other foreign currency contracts | 8 | (4 | ) | — | — | — | — | 4 | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total derivative assets | 110 | (37 | ) | — | (10 | ) | — | — | 63 | (30 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Total other invested assets | 255 | (29 | ) | — | (21 | ) | — | — | 205 | (22 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Restricted other invested assets related to securitization entities | — | — | — | — | 174 | — | 174 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance recoverable(2) | (5 | ) | (1 | ) | — | — | — | — | (6 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 assets | $ | 11,696 | $ | (542 | ) | $ | 260 | $ | (332 | ) | $ | 2,773 | $ | (1,911 | ) | $ | 11,944 | $ | (566 | ) | $ | 8,319 | $ | (44 | ) | $ | 43 | $ | 94 | $ | 323 | $ | (6,243 | ) | $ | 2,492 | $ | (34 | ) | |||||||||||||||||||||
(1) |
|
As included in the Level 3 tables above, the total fixed maturity securities classified as Level 3 measurements decreased by $6.0 billion and increased by $443 million for the three months ended March 31, 2010 and 2009, respectively. The decrease in Level 3 measurements in 2010 was primarily the result of securities where the fair value measurement was classified as Level 3 as of December 31, 2009 but was not classified as Level 3 as of March 31, 2010. The change in classification primarily resulted from a change in the liquidity for mortgage-backed and asset-backed securities. The current market conditions for these securities have improved and we no longer consider the valuation to have significant unobservable inputs as a result of illiquidity. Accordingly, we classified the resulting fair value measurements after considering the pricing source and inputs used in the determination of fair value of the security and determined certain securities should be classified as Level 2.
(2) | Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities. |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
(Unaudited)
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
Beginning balance as of January 1, 2010 | Total realized and unrealized (gains) losses | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2010 | Total (gains) losses included in net (income) loss attributable to liabilities still held | Beginning balance as of January 1, 2011 | Total realized and unrealized (gains) losses | Settlements | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2011 | Total (gains) losses included in net (income) attributable to liabilities still held | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net (income) loss | Included in OCI | Included in net (income) | Included in OCI | Purchases | Sales | Issuances | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances (1) | $ | 175 | $ | (39 | ) | $ | 9 | $ | — | $ | — | $ | — | $ | 145 | $ | (37 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances (1) | $ | 121 | $ | (62 | ) | $ | — | $ | — | $ | — | $ | 10 | $ | — | $ | — | $ | — | $ | 69 | $ | (61 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Derivative liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 2 | (2 | ) | — | — | — | — | — | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaptions | 67 | (32 | ) | — | (17 | ) | — | — | 18 | (15 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | — | 1 | — | — | — | — | 1 | 1 | 7 | (2 | ) | — | 3 | — | — | (1 | ) | — | — | 7 | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities(2) | — | (5 | ) | — | 2 | 121 | — | 118 | (5 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities | 129 | (9 | ) | — | — | — | — | — | — | — | 120 | (9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 2 | 3 | — | (1 | ) | — | — | 4 | 3 | 3 | — | — | — | — | — | (3 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total derivative liabilities | 71 | (35 | ) | — | (16 | ) | 121 | — | 141 | (18 | ) | 139 | (11 | ) | — | 3 | — | — | (4 | ) | — | — | 127 | (11 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Borrowings related to securitization entities(2) | — | (2 | ) | — | — | 60 | — | 58 | (2 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowings related to securitization entities | 51 | 7 | — | — | — | — | — | — | — | 58 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | 246 | $ | (76 | ) | $ | 9 | $ | (16 | ) | $ | 181 | $ | — | $ | 344 | $ | (57 | ) | $ | 311 | $ | (66 | ) | $ | — | $ | 3 | $ | — | $ | 10 | $ | (4 | ) | $ | — | $ | — | $ | 254 | $ | (65 | ) | |||||||||||||||||||||||||||
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
|
Beginning balance as of January 1, 2009 | Total realized and unrealized (gains) losses | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2009 | Total (gains) losses included in net (income) loss attributable to liabilities still held | Beginning balance as of January 1, 2010 | Total realized and unrealized (gains) losses | Purchases, sales, issuances and settlements, net | Transfer in Level 3 | Transfer out of Level 3 | Ending balance as of March 31, 2010 | Total (gains) losses included in net (income) attributable to liabilities still held | |||||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Included in net (income) loss | Included in OCI | Included in net (income) | Included in OCI | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account balances | $ | 878 | $ | 39 | $ | — | $ | 6 | $ | — | $ | — | $ | 923 | $ | 44 | ||||||||||||||||||||||||||||||||||||||||
Other liabilities(1) | 68 | 5 | — | — | — | — | 73 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||||
Policyholder account | $ | 175 | $ | (39 | ) | $ | 9 | $ | — | $ | — | $ | — | $ | 145 | $ | (37 | ) | ||||||||||||||||||||||||||||||||||||||
Derivative liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | 2 | (2 | ) | — | — | — | — | — | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaptions | 67 | (32 | ) | — | (17 | ) | — | — | 18 | (15 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps | — | 1 | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Credit default swaps related to securitization entities | — | (5 | ) | — | 2 | 121 | — | 118 | (5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Equity index options | 2 | 3 | — | (1 | ) | — | — | 4 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||
Total derivative liabilities | 71 | (35 | ) | — | (16 | ) | 121 | — | 141 | (18 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Borrowings related to securitization entities | — | (2 | ) | — | — | 60 | — | 58 | (2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Total Level 3 liabilities | $ | 946 | $ | 44 | $ | — | $ | 6 | $ | — | $ | — | $ | 996 | $ | 49 | $ | 246 | $ | (76 | ) | $ | 9 | $ | (16 | ) | $ | 181 | $ | — | $ | 344 | $ | (57 | ) | |||||||||||||||||||||
Represents |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either net investment gains (losses) within the consolidated statements of income or OCI within stockholders’ equity based on the appropriate accounting treatment for the instrument.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Purchases, sales, issuances and settlements net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases, sales and salessettlements of fixed maturity, equity and trading securities and purchases, issuances and settlements of derivative instruments.
Purchases, sales, issuancesIssuances and settlements net, presented for policyholder account balances represent the issuances and settlements of embedded derivatives associated with our GMWB liabilities where: issuances are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance and settlements are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income) loss”” in the tables presented above.
The amount presented for unrealized gains (losses) for assets and liabilities still held as of the reporting date primarily represents impairments for available-for-sale securities, accretion on certain fixed maturity securities, changes in fair value of trading securities and certain derivatives and changes in fair value of embedded derivatives associated with our GMWB liabilities that existed as of the reporting date, which were recorded in net investment gains (losses).
Non-Recurring Fair Value Measurements
We hold investments in bank loans that are recorded at the lower of cost or fair value, and are recorded in other invested assets. As of March 31, 2010, no bank loans were recorded at fair value as cost was lower than their respective fair values; therefore, there were no fair value loss adjustments for the three months ended March 31, 2010.
(7) Variable Interest and Securitization Entities
VIEs are generally entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. We evaluate VIEs to determine whether we are the primary beneficiary and are required to consolidate the assets and liabilities of the entity. The determination of the primary beneficiary for a VIE can be complex and requires management judgment regarding the expected results of the entity and who directs the activities of the entity that most significantly impact the economic results of the VIE. Our primary involvement related to VIEs includes:
asset securitization transactions,
certain investments and
certain mortgage insurance policies.
(a) Asset securitizations
We have used former affiliates and third-party entities to facilitate asset securitizations. Disclosure requirements related to off-balance sheet arrangements encompass a broader array of arrangements than those at risk for consolidation. These arrangements include transactions with term securitization entities, as well as transactions with conduits that are sponsored by third parties.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table summarizes the total securitized assets as of the dates indicated:
(Amounts in millions) | March 31, 2010 | December 31, 2009 | ||||
Receivables secured by: | ||||||
Commercial mortgage loans | $ | — | $ | 574 | ||
Fixed maturity securities | 110 | 123 | ||||
Other assets | 169 | 236 | ||||
Total securitized assets not required to be consolidated | 279 | 933 | ||||
Total securitized assets required to be consolidated | 631 | — | ||||
Total securitized assets | $ | 910 | $ | 933 | ||
Financial support for certain securitization entities was provided under credit support agreements, in which we provided limited recourse for a maximum of $117 million of credit losses as of March 31, 2010. These agreements will remain in place throughout the life of the related entities. Included in this amount was $40 million for the limited recourse related to one of our commercial mortgage loan entities that was required to be consolidated with assets of $129 million as of March 31, 2010. There were no amounts recorded for these limited recourse liabilities as of March 31, 2010 and December 31, 2009.
(b) Securitization and Variable Interest Entities Not Required To Be Consolidated
We are involved in certain securitization and VIEs where we are not required to consolidate the securitization entity.
Asset securitizations.We transferred assets to securitization entities that would be considered VIEs but we were not required to consolidate the securitization entities. These securitization entities were designed to have significant limitationsaccretion on the types of assets owned and the types and extent of permitted activities and decision making rights. We evaluated our involvement in the entities’ design and our decision making ability regarding the assets held by the securitization entity and determined we would generally not be the party with power to direct the activities that significantly impact the economic performance of the entity.
In certain instances, we determined we were the party with power but did not have a variable interest in the entity. Our interest in the entities included servicer fees and excess interest, where our benefit from our excess interest holding is subordinated to third-party holdings. Based on the composition of the assets in the securitization entity, there were no reasonable scenarios that would result in our interest receiving any significant benefit for the entity. As a result, our interest would not be considered a variable interest in the entity as a result of meeting certain requirements in the accounting guidance.
Amounts recognized in our consolidated financial statements related to our involvement with entities used to facilitate asset securitization transactions where the securitization entity was not required to be consolidated as of the dates indicated:
March 31, 2010 | December 31, 2009 | |||||||||||
(Amounts in millions) | Cost | Fair value | Cost | Fair value | ||||||||
Retained interests—assets | $ | 3 | $ | 4 | $ | 79 | $ | 44 | ||||
Total | $ | 3 | $ | 4 | $ | 79 | $ | 44 | ||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The decrease in the amounts presented above were primarily a result of having to consolidate certain securitization entities as discussed above.
In certain securitization transactions, we retained an interest in transferred assets. Those interests take various forms and may be subject to credit, prepayment and interest rate risks. When we securitized receivables, we determined the fair value based on discounted cash flow models that incorporate, among other things, assumptions including credit losses, prepayment speeds and discount rates. These assumptions were based on our experience, market trends and anticipated performance related to the particular assets securitized. Our retained interests are reflected as fixed maturity securities available-for-sale.
Following a securitization transaction, we retained the responsibility for servicing the receivables, and as such, were entitled to receive an ongoing fee based on the outstanding principal balances of the receivables. There were no servicing assets nor liabilities recorded as the benefits of servicing the assets were adequate to compensate an independent servicer for its servicing responsibilities.
There has been no new asset securitization activity in 2010 or 2009.
Investments.We hold investments in certain structures that are considered VIEs. Our investments represent beneficial interests that are primarily in the form of structured securities. Our involvement in these structures typically represent a passive investment in the returns generated by the VIE and typically do not result in having significant influence over the economic performance of the VIE. See note 4 for additional information related to our investments, which includes information related to structured securities, such as asset-backed and mortgage-backed securities. Our maximum exposure to loss represents our cost basis in the investments.
Mortgage insurance.We also provide mortgage insurance on certain residential mortgage loans originated and securitized by third parties using VIEs to issue mortgage-backed securities. While we provide mortgage insurance on the underlying loans, we do not typically have any ongoing involvement with the VIE other than our mortgage insurance coverage and do not act in a servicing or decision making capacity for the underlying loans held by the VIE.
(c) Securitization and Variable Interest Entities Required To Be Consolidated
As a result of adopting new accounting guidance for VIE consolidation on January 1, 2010, we were required to consolidate certain VIEs. Our involvement with VIEs that were required to be consolidated related to asset securitization transactions and certain investments, both of which are described in more detail below. Prior to being required to consolidate these entities, our interest in these entities werewas recorded in our consolidated financial statements as fixed maturity securities available-for-sale.net investment income.
Asset securitizations.For VIEs related to asset securitization transactions, we were required to consolidate three securitization entities as a result of our involvement in the entities’ design or having certain decision making ability regarding the assets held by the securitization entity. These securitization entities were designed to have significant limitations on the types of assets owned and the types and extent of permitted activities and decision making rights. The three securitization entities that were required to be consolidated are comprised of two securitization entities backed by commercial mortgage loans and one backed by residual interests in certain policy loan securitization entities.
For one of our commercial mortgage loan securitization entities with assets of $129 million as of March 31, 2010, our economic interest represents the excess interest received on the loans compared to the interest paid on
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
the entity’s obligation. We also act as the servicer for the underlying mortgage loans and have the ability to direct certain activities in accordance with the agreements related to the securitization entity.
For the other commercial mortgage loan securitization entity with assets of $423 million as of March 31, 2010, our economic interest represents the excess interest of the commercial mortgage loans and the subordinated notes of the securitization entity. The commercial mortgage loans are serviced by a third-party servicer and special servicer. However, we have the right to replace the special servicer without cause at any time. This right is recognized under accounting guidance as resulting in our effective control of the activities directed by the special servicer.
Our economic interest in the policy loan securitization entity represents the excess interest received from the residual interest in certain policy loan securitization entities and the floating rate obligation issued by the securitization entity. The securitization entity also contains an interest rate swap to mitigate the difference between the effective fixed receipt on the assets and the floating rate obligation issued by the securitization entity. Since there are no significant ongoing activities in the securitization entity, we evaluated the design of the entity upon inception when we transferred the residual interests in the securitization entity. Prior to 2010, we fully impaired our investment in this securitization entity as a result of not expecting any future economic benefits from our investment under any reasonable scenario. However, there are certain remote interest rate and mortality scenarios that would result in our residual interest receiving significant economic benefits in relation to benefits received by the securitization entity. In accordance with the relevant accounting guidance, the use of probability is not permitted when determining whether we would have the ability to receive significant benefits from the securitization entity.
Investments.For VIEs related to certain investments, we were required to consolidate three securitization entities as a result of having certain decision making rights related to instruments held by the entities. These securitization entities were designed as synthetic collateralized debt obligations whereby the entities purchased highly rated asset-backed securities and entered into credit default swaps to generate income that would be passed to the noteholders of the entities. The entities also have the ability to settle any losses incurred on the credit default swap by providing the derivative counterparty asset-backed securities with a par amount equal to the loss incurred on the credit default swap. We hold the majority of the notes issued by the securitization entity and also have certain decision making rights related to the instruments held by the entity. Previously, we were not required to consolidate the securitization entity as a result of other noteholders absorbing the majority of expected losses from the entity.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table shows the activity presented in our consolidated statement of income related to the consolidated securitization entities for the period indicated:
(Amounts in millions) | Three months ended March 31, 2010 | ||
Revenues: | |||
Net investment income: | |||
Restricted commercial mortgage loans | $ | 10 | |
Restricted other invested assets | 1 | ||
Total net investment income | 11 | ||
Net investment gains (losses): | |||
Trading securities | 7 | ||
Derivatives | 2 | ||
Borrowings related to securitization entities recorded at fair value | 2 | ||
Total net investment gains (losses) | 11 | ||
Total revenues | 22 | ||
Expenses: | |||
Interest expense | 8 | ||
Total expenses | 8 | ||
Income before income taxes | 14 | ||
Provision for income taxes | 5 | ||
Net income | $ | 9 | |
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table shows the assets and liabilities that were recorded for the consolidated securitization entities as of the date indicated:
(Amounts in millions) | March 31, 2010 | ||
Assets | |||
Investments: | |||
Restricted commercial mortgage loans | $ | 552 | |
Restricted other invested assets: | |||
Trading securities | 377 | ||
Other | 8 | ||
Total restricted other invested assets | 385 | ||
Total investments | 937 | ||
Cash and cash equivalents | 1 | ||
Accrued investment income | 1 | ||
Total assets | $ | 939 | |
Liabilities | |||
Other liabilities: | |||
Derivative liabilities | $ | 134 | |
Other liabilities | 1 | ||
Total other liabilities | 135 | ||
Borrowings related to securitization entities | 551 | ||
Total liabilities | $ | 686 | |
The assets and other instruments held by the securitization entities are restricted and can only be used to fulfill the obligations of the securitization entity. Additionally, the obligations of the securitization entities do not have any recourse to the general credit of any other consolidated subsidiaries, except $40 million of limited recourse related to a consolidated commercial mortgage loan securitization entity.
(8)(7) Commitments and Contingencies
(a) Litigation
We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, bidding practices in connection with our management and administration of a third party’sthird-party’s municipal guaranteed investment contract business, claims payments and procedures, cancellation or rescission of coverage, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 or related state anti-inducement laws, and breaching fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships. WeIn addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations. At this time, it is not feasible to predict, nor to determine the ultimate outcomes of allany pending investigations and legal proceedings, nor to provide reasonable ranges of potentialpossible losses.
As previously disclosed, in December 2009, one of our non-insurance subsidiaries, one of the subsidiary’s officers and Genworth Financial, Inc. were named in a putative class action lawsuit captionedMichael J. Goodman and Linda Brown v. Genworth Financial Wealth Management, Inc., et al, in the United States District Court for the Eastern District of New York. In response to our motion to dismiss the complaint in its entirety, the Court granted on March 30, 2011 the motion to dismiss the state law fiduciary duty claim and denied the motion to dismiss the remaining federal claims. We continue to vigorously defend this action.
As previously disclosed, we and one of our mortgage insurance subsidiaries were named in a putative class action lawsuit filed in November 2010 captionedArchie Moses and Violet M. Moses v. SunTrust Banks, Inc., et al,in the United States District Court for the District of Columbia. On March 10, 2011, plaintiffs voluntarily dismissed the action without prejudice as to Genworth Financial, Inc. and our mortgage insurance subsidiary.
(b) Commitments
As of March 31, 2010,2011, we were committed to fund $187$106 million in limited partnership investments and $9$39 million in U.S. commercial mortgage loan investments.
(9)(8) Borrowings and Other Financings
Revolving Credit Facilities
We have two five-year revolving credit facilities that mature in May 2012 and August 2012. These facilities bear variable interest rates based on one-month LIBOR plus a margin. Each of these facilities originally had $1.0 billion available for borrowings. Lehman Commercial Paper Inc. (“LCP”) had committed $70 million under the August 2012 credit facilitymargin and Lehman Brothers Bank, FSB (“Lehman FSB”) had committed $70 million under the May 2012 credit facility. On October 5, 2008, LCP filed for protection under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. LCP was unable to fulfill its commitments under the August 2012 credit facility and Lehman FSB declined to fulfill its commitment under the May 2012 credit facility. Therefore, as of March 31, 2010, we only hadhave access to $1.9 billion under these facilities. On April 1, 2010, a consent and waiver agreement was entered into which releases the Lehman Brothers-related entities from their commitments under the facilities and reduces the remaining commitments by those respective amounts.
As of March 31, 2010,2011, we had no borrowings of $930 million under these facilities andfacilities; however, we utilized $404$280 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our life insurance subsidiaries. As of December 31, 2009,2010, we had no borrowings of $930under these facilities; however, we utilized $56 million under these facilities and we utilized $407 million under these facilitiesprimarily for the issuance of letters of credit for the benefit of one of our lifelifestyle protection insurance subsidiaries.
Long-Term Senior Notes
In March 2011, we issued senior notes having an aggregate principal amount of $400 million, with an interest rate equal to 7.625% per year payable semi-annually, and maturing in September 2021 (“2021 Notes”). The 2021 Notes are our direct, unsecured obligations and will rank equally with all of our existing and future unsecured and unsubordinated obligations. We have the option to redeem all or a portion of the 2021 Notes at any time with proper notice to the note holders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread. The net proceeds of $397 million from the issuance of the 2021 Notes were used for general corporate purposes.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Non-Recourse Funding Obligations
As of March 31, 2010,2011, we had $3.4 billion of fixed and floating rate non-recourse funding obligations outstanding backing additional statutory reserves. As of March 31, 20102011 and December 31, 2009,2010, the weighted-average interest rates on our non-recourse funding obligations were 1.40%1.41% and 1.49%1.44%, respectively.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Borrowings Related To Securitization Entities
Borrowings related to securitization entities were as follows as of March 31, 2010:
(Amounts in millions) | Principal amount | Carrying value | ||||
GFCM LLC, due 2035, 5.2541% | $ | 250 | $ | 250 | ||
GFCM LLC, due 2035, 5.7426% | 113 | 113 | ||||
Genworth Special Purpose Two, LLC, due 2023, 6.0175% | 130 | 130 | ||||
Marvel Finance 2007-1 LLC, due 2017(1) | 9 | 1 | ||||
Marvel Finance 2007-3 LLC, due 2017(1) | 1 | — | ||||
Marvel Finance 2007-4 LLC, due 2017(1) | 12 | 7 | ||||
Genworth Special Purpose Five, LLC, due 2040(1) | 50 | 50 | ||||
Total | $ | 565 | $ | 551 | ||
|
These borrowings are required to be paid down as principal is collected on the restricted investments held by the securitization entities and accordingly the repayment of these borrowings follows the maturity or prepayment, as permitted, of the restricted investments. See note 7 for additional information on consolidated securitization entities.
(10)(9) Income Taxes
The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:
Three months ended March 31, | Three months ended March 31, | |||||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||||
Statutory U.S. federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase (reduction) in rate resulting from: | ||||||||||||||
State income tax, net of federal income tax effect | (3.4 | ) | 0.5 | 1.2 | (3.4 | ) | ||||||||
Benefit on tax favored investments | (6.6 | ) | 4.3 | (2.7 | ) | (6.6 | ) | |||||||
Effect of foreign operations | (13.7 | ) | 4.8 | (14.4 | ) | (13.7 | ) | |||||||
Non-deductible expenses | (0.5 | ) | (0.5 | ) | 0.6 | (0.5 | ) | |||||||
Interest on uncertain tax positions | (2.2 | ) | (0.3 | ) | — | (2.2 | ) | |||||||
Tax benefits related to separation from our former parent | (89.5 | ) | — | — | (89.5 | ) | ||||||||
Other, net | 2.7 | (0.1 | ) | 0.8 | 2.7 | |||||||||
Effective rate | (78.2 | )% | 43.7 | % | 20.5 | % | (78.2 | )% | ||||||
The effective tax rate decreasedincreased significantly from the prior year due to uncertain tax benefits related to separation from our former parent lower taxed foreign income and tax favored investments.
in the prior year that did not recur. In connection with our 2004 separation from our former parent, General Electric (“GE”), we made certain joint tax elections and realized certain tax benefits. During the first quarter of 2010, the Internal Revenue Service (“IRS”) completed an examination of GE’s 2004 tax return, including these tax impacts. Therefore, $106 million of previously uncertain tax benefits related to separation became certain and we recognized those in the first quarter of 2010. Additionally, we recorded $20 million as additional paid-in capital related to our 2004 separation.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(11)(10) Segment Information
We conduct our operations in three operating business segments: (1) Retirement and Protection, which includes our life insurance, long-term care insurance, wealth management products and services and retirement income products; (2) International, which includes international mortgage and lifestyle protection insurance; and (3) U.S. Mortgage Insurance, which includes mortgage-related products and services that facilitate homeownership by enabling borrowers to buy homes with low-down-payment mortgages.Insurance.
We also have Corporate and Other activities which include interest and other debt financing expenses, other corporate income and expenses not allocated to the segments, the results of non-core businesses and non-strategic products that are managed outside of our operating segments, and eliminations of inter-segment transactions.
We allocate net investment gains (losses) from Corporate and Other activities to our Retirement and Protection segment using an approach based principally upon the investment portfolio established to support the segment’s products and targeted capital levels. We do not allocate net investment gains (losses) from Corporate and Other activities to our International and U.S. Mortgage Insurance segments, because they have their own separate investment portfolios, and net investment gains (losses) from those portfolios are reflected in the International and U.S. Mortgage Insurance segment results, respectively.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income (loss) and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “net operating income (loss) available to Genworth Financial, Inc.’s common stockholders.” We define net operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding net income attributable to noncontrolling interests, after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A significant component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are oftencan be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that net operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate net operating income (loss) available to Genworth Financial, Inc.’s common stockholders, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. However, net operating income (loss) available to Genworth Financial, Inc.’s common stockholders is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.
There were no infrequent or unusual non-operating items excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders during the periods presented other than a $106 million tax benefit related to separation from our former parent recorded in the first quarter of 2010.
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2011 | 2010 | ||||||||||||
Revenues: | ||||||||||||||||
Retirement and Protection | $ | 1,593 | $ | 987 | $ | 1,738 | $ | 1,593 | ||||||||
International | 651 | 590 | 632 | 651 | ||||||||||||
U.S. Mortgage Insurance | 181 | 188 | 177 | 181 | ||||||||||||
Corporate and Other | (4 | ) | (31 | ) | 21 | (4 | ) | |||||||||
Total revenues | $ | 2,421 | $ | 1,734 | $ | 2,568 | $ | 2,421 | ||||||||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities and a reconciliation of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities to net income (loss) for the periods indicated:
Three months ended March 31, | ||||||||
(Amounts in millions) | 2010 | 2009 | ||||||
Retirement and Protection | $ | 122 | $ | 38 | ||||
International | 91 | 101 | ||||||
U.S. Mortgage Insurance | (36 | ) | (135 | ) | ||||
Corporate and Other | (63 | ) | 10 | |||||
Net operating income | 114 | 14 | ||||||
Net investment gains (losses), net of taxes and other adjustments | (42 | ) | (483 | ) | ||||
Net tax benefit related to separation from our former parent | 106 | — | ||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | 178 | (469 | ) | |||||
Add: net income attributable to noncontrolling interests | 34 | — | ||||||
Net income (loss) | $ | 212 | $ | (469 | ) | |||
Three months ended March 31, | ||||||||
(Amounts in millions) | 2011 | 2010 | ||||||
Retirement and Protection’s net operating income | $ | 127 | $ | 122 | ||||
International’s net operating income | 124 | 91 | ||||||
U.S. Mortgage Insurance’s net operating loss | (81 | ) | (36 | ) | ||||
Corporate and Other’s net operating loss | (72 | ) | (63 | ) | ||||
Net operating income | 98 | 114 | ||||||
Net investment gains (losses), net of taxes and other adjustments | (16 | ) | (42 | ) | ||||
Net tax benefit related to separation from our former parent | — | 106 | ||||||
Net income available to Genworth Financial, Inc.’s common stockholders | 82 | 178 | ||||||
Add: net income attributable to noncontrolling interests | 34 | 34 | ||||||
Net income | $ | 116 | $ | 212 | ||||
The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:
(Amounts in millions) | March 31, 2010 | December 31, 2009 | ||||
Assets: | ||||||
Retirement and Protection | $ | 81,881 | $ | 81,497 | ||
International | 12,050 | 12,143 | ||||
U.S. Mortgage Insurance | 3,982 | 4,247 | ||||
Corporate and Other | 11,180 | 10,300 | ||||
Total assets | $ | 109,093 | $ | 108,187 | ||
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(12) Noncontrolling Interests
In July 2009, Genworth MI Canada Inc. (“Genworth Canada”), our indirect subsidiary, completed the initial public offering (the “Offering”) of its common shares. Of the 49.7 million common shares of Genworth Canada that were sold in the Offering, 5.1 million common shares were sold by Genworth Canada and 44.6 million common shares were sold by Brookfield Life Assurance Company Limited, our indirect wholly-owned subsidiary. Following completion of the Offering, we beneficially own 57.5% of the common shares of Genworth Canada.
In March 2010, a dividend of $10 million was paid to the noncontrolling interests.
(Amounts in millions) | March 31, 2011 | December 31, 2010 | ||||||
Assets: | ||||||||
Retirement and Protection | $ | 86,622 | $ | 86,352 | ||||
International | 12,838 | 12,422 | ||||||
U.S. Mortgage Insurance | 3,989 | 3,875 | ||||||
Corporate and Other | 9,491 | 9,746 | ||||||
Total assets | $ | 112,940 | $ | 112,395 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included herein.herein and with our 2010 Annual Report on Form 10-K.
Cautionary note regarding forward-looking statements
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to global political, economic, business, competitive, market, regulatory and other factors and risks, including the following:
• | Risks relating to our businesses, including downturns and volatility in global economies and equity and credit markets, downgrades in our financial strength or credit ratings, interest rate fluctuations and levels, adverse capital and credit market conditions, the valuation of fixed maturity, equity and trading securities, defaults, downgrade or other events impacting the value of our fixed maturity securities portfolio, defaults on our commercial mortgage loans or the mortgage loans underlying our investments in commercial mortgage-backed securities and volatility in performance, goodwill impairments, |
• | Risks relating to our Retirement and Protection segment, including changes in morbidity and mortality, accelerated amortization of deferred acquisition costs and present value of future profits, reputational risks as a result of rate increases on certain in-force long-term care insurance products, medical advances, such as genetic research and diagnostic imaging, and related legislation, unexpected changes in persistency rates, ability to continue to implement actions to mitigate the impact of statutory reserve requirements and the failure of demand for long-term care insurance to increase; |
• | Risks relating to our International segment, including political and economic instability or changes in government policies, foreign exchange rate fluctuations, unexpected changes in unemployment rates, unexpected increases in mortgage insurance default rates or severity of defaults, the significant portion of high loan-to-value insured international mortgage loans which generally result in more and larger claims than lower loan-to-value |
• | Risks relating to our U.S. Mortgage Insurance segment, including increases in mortgage insurance default rates, failure to meet, or |
Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), competition with government-owned and government-sponsored enterprises offering mortgage insurance, changes in regulations that affect |
the use of reinsurance with reinsurance companies affiliated with mortgage lending customers, legal actions under the Real Estate Settlement Procedures Act of 1974 (“RESPA”) and potential liabilities in connection with our U.S. contract underwriting services; |
• | Other risks, including the possibility that in certain circumstances we will be obligated to make payments to General Electric Company (“GE”) under the tax matters agreement with GE even if our corresponding tax savings are never realized and payments could be accelerated in the event of certain changes in control and provisions of |
• | Risks relating to our common stock, including the suspension of dividends and stock price |
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
Overview
Our business
We are a leading financial security company dedicated to providing insurance, wealth management, investment and financial solutions to more than 15 million customers, with a presence in more than 25 countries. We have three operating segments: Retirement and Protection, International and U.S. Mortgage Insurance.
• | Retirement and Protection. We offer |
• | 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. |
• | U.S. Mortgage Insurance. In the |
We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of non-core businesses and non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). For the three months ended March 31, 2010, our2011, Corporate and Other activities’activities had a net incomeloss available to Genworth Financial, Inc.’s common stockholders was $32 million and a net operating loss available to Genworth Financial, Inc.’s common stockholders was $63 million.of $76 million and $72 million, respectively.
Business trends and conditions
Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions. The following discussion of business trends and conditions should be read together with the trends discussed in our 20092010 Annual Report on Form 10-K, which described additional business trends and conditions.
General conditions and trends affecting our businesses
Financial and economic environment. As a financial security company, theThe stability of both the financial markets and global economies in which we operate impacts ourthe sales, revenue growth and profitability trends of our businesses. BeginningImprovements in 2008, we saw slowing economies, rising unemployment, falling real estate valuesequity markets, credit markets, interest rate spreads and reduced consumer spending in virtually all the markets in which we operate. However, in the second half of 2009 and into 2010, Canadian and Australian economies improved and real estate values rose leading to stabilization and improvements in their housing markets. Globalglobal financial markets alsoseen during 2010 continued to improve duringin the first quarter of 2011. In Canada, the housing market continued to improve while unemployment levels remained relatively in line with the fourth quarter of 2010. In Australia, the housing market has remained stable and unemployment levels remained consistent with the fourth quarter of 2010 with solid performance, lower volatility in equity markets, narrowing spreads and better credit performance in many sectors ofdespite recent natural disasters though these disasters could impact regional economies over the debt markets. Despite continued stress in themedium-term. The U.S. housing market reflected continuing stress, growing levels of foreclosures and variations in performance by sub-market, the earlyincluding continued signs of stabilization in housing prices in the third and fourth quarters of 2009 continued into 2010.
Adverse market conditions combinedwithin certain regions. Europe remained a slow growth environment with slow economic growth influenced, and may continue to influence, investment and spending decisions by both consumers and businesses as they adjust their consumption, debt and risk profiles in response to these conditions. As a result, our sales, revenues and profitability trends of certain insurance and investment products were adversely impacted during 2009. However, in the second half of 2009 and into the first quarter of 2010, we saw improvement in these trends as investor confidence in the markets increased and the outlook for some consumers and businesses improved. Other factors such as government spending, monetary policies, regulatory initiatives, the volatility and strength of the capital markets, anticipated tax policy changes and the impact of U.S. healthcare reform can continue to affect economic and business outlooks andlower consumer behaviors moving forward.
In response to market conditions, we adjusted our investment and asset-liability management strategies in an attempt to reduce risk during strained economic and financial market conditions. In addition, we refined our product and distribution management strategies to best fit with our strengths, profitability targets and risk tolerance. These and other company actions were made to enhance our competitive position as well as our capital flexibility and liquidity.lending activity. See “—Trends and conditions affecting our segments” below for a discussion regarding the impacts the financial markets and global economies have on our businesses.
Since late 2008,Slow or varied levels of economic growth, coupled with uncertain financial markets and economic outlooks, changes in government policy, regulatory reforms and other changes in market conditions, influenced, and we believe will continue to influence, investment and spending decisions by consumers and businesses as they adjust their consumption, debt, capital and risk profiles in response to these conditions. Although these trends have generally improved as investor confidence in the markets and the outlook for some consumers and businesses strengthened, our sales, revenues and profitability trends of certain insurance and investment products have been and could be further adversely impacted going forward. In particular, factors such as government spending, monetary policies, the volatility and strength of the capital markets, anticipated tax policy changes and the impact of U.S. healthcare and financial regulation reform will continue to affect economic and business outlooks and consumer behaviors moving forward.
The U.S. government, Federal Reserve and other legislative and regulatory bodies have takencontinue to take a variety of other actions to support the economy and capital markets, influence interest rates, stabilize the capitalhousing markets and provide needed liquidity to promote economic growth. These include various mortgage restructuring programs
implemented or under consideration by the government-sponsored enterprises (“GSEs”),GSEs, lenders, servicers and the U.S. government. Outside of the U.S.,United States, various governments took actions to stimulate economies, stabilize financial systems and improve market liquidity. In general, these actions have positively affected these countries and their markets; however, there can
be no assurance as to the future level of impact of any of these actions on the economic and financial markets, including levels of volatility. A prolongeddelayed economic recovery period or a U.S. or global recessionary or debt crisis setback could materially and adversely affect our business, financial condition and results of operations.
We evaluate our product offerings, investment and asset-liability management strategies to moderate risk especially during periods of strained economic and financial market conditions. In addition, we continue to review our product and distribution management strategies to align with our strengths, profitability targets and risk tolerance. These and other company actions should enhance our competitive position as well as our capital flexibility and liquidity.
Volatility in credit and investment markets. Market conditions showed continued signs of improvement inDuring the first quarter of 2010 resulting in greater investor confidence and positive, though inconsistent, equity and credit market performance. Continued strong demand for fixed-income products during the first quarter of 2010 resulted in credit spread compression. However, during the first quarter of 2010, there was higher2011, markets were characterized by rising volatility in selectthe U.S. Treasury market due to external events in Europe, North Africa and the Middle East and due to the earthquake in Japan. Credit spreads were generally less volatile and ended the quarter tighter. Macroeconomic conditions, improving company fundamentals, declining corporate default rates, reduced net supply of spread product and continued strong investor demand drove the tightening in both credit and securitized products. Fears regarding systemic risk were largely contained this quarter, despite European sovereign bondsconcerns and related securities as concerns grew overpolitical instability in North Africa and the refinancing needs of Greece and certain other European countries. TheMiddle East. For securitized products, the market for asset-backed securities also improved as risk sensitivity declinedcontinued to see shrinking supply, though issuance did improve in commercial mortgage-backed securities. Asset valuations in securitized sectors continued to improve given a strong supply and demand for higher-yielding short-term investments increased. As a result, liquidity premiums were lowerimbalance, stable credit performance and the structural protections embedded in many sectors and a clear differentiation between the performance of individual credits returned. Although financial sector performance improved during the first quarter of 2010, high levels of unemployment and continued global economic uncertainty still weigh on certain real estate markets.transactions brought to market.
WhileCertain segments of the marketplace isare still experiencing a declinedeclines in the performance of collateral underlying certain structured securities, corporatebut impairments in our investment portfolio remained consistent with the moderate duringlevels recorded in the first quarterthird and fourth quarters of 2010. We recorded net other-than-temporary impairments of $80$36 million duringin the three months ended March 31, 2010first quarter of 2011 which were lower than recentprior year levels experienced as market improvements have continued and we expect losses to moderate further or potentially trend down. Additionally, in the first quarter of 2010, losses related to limited partnerships decreased $73 million as compared to the first quarter of 2009 but were slightly higher compared to the fourth quarter of 2009.further. Although economic conditions may continue to negatively impact ourcertain investment valuation,valuations, the underlying collateral associated with assetssecurities that have not been impaired continues to perform.
Looking ahead, we believe that the current credit environment provides us with opportunities to invest across a variety of asset classes to meet our yield requirements, as well as to continue ourexecution of various risk management disciplines involving further diversification and efforts to minimize risk within the investment portfolio. See “—Investments and Derivative Instruments” for additional information on our investment portfolio.
Trends and conditions affecting our segments
Retirement and Protection
Life insurance. Results of our life insurance business are impacted by sales, mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements. Additionally, sales of our products and persistency of our insurance in-force are dependent on competitive product features and pricing, effective distribution and customer service.
The increase in lifeLife insurance sales we experienced during the second half of 2009 continued intoincreased in the first quarterhalf of 2010 in large part the result ofdue to strong adoption of our new term universal life insurance product. As anticipated,product and remained stable through the second half of 2010 and into the first quarter of 2011 with sales of our term universal life insurance product up 29% in the first quarter of 2011 versus the traditional term and term universal life insurance sales in the prior year. We believe our term universal life insurance product offers a better value proposition to the consumer when compared to our traditional term life insurance product have declined given the introduction late in 2009 ofproducts which we no longer sell. Based on recent sales trends, we believe our new term universal life insurance product that was designed to replace our traditional term life insurance product. Our new term universal life insurance product is capital efficient and we believe offers a similar or better value proposition to the consumer as our traditional term life insurance product, and is competitively priced for the main street market. We have experienced strong initial adoption of the product; however, the growth rate will ultimately depend upon the timing of both distributor (existing brokerage general agents (“BGAs”)middle and other distributors)emerging affluent markets. Throughout 2010 and consumer adoption. In our universal life insurance products, sales for the first quarter of 2010 were relatively stable given product changes made in 2009 to our new universal life insurance product that result in a more capital efficient product that is priced to achieve targeted returns. New premium sales may decline, remain flat or return to a growth profile depending upon the timing of distributor and consumer adoption and overall market conditions.
Throughout 2009,into 2011, we experienced favorable mortality results in our term life insurance products as compared to priced
mortality and this continued into 2010.assumptions. Additionally, while less severe in the first quarter of 2011 than in prior quarters, we continue to experiencehave experienced lower persistency inas compared to pricing assumptions for 10-year term life insurance policies going intowritten in 1999 and 2000 as they go through their post-level rate period. We expect this trend in persistency to continue as these 10-year term life insurance policies go through their post-level rate period (10 and 15 years after policy issue) and expect this trend to continue as certain blocks of business reach the post-level rate period.then moderate thereafter.
Regulations XXX and AXXX require insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and certain universal life insurance policies with secondary guarantees, which increaseguarantees. This increases the capital required to write these products beyond economic requirements. The solutionsalternatives available to reduce the impact for the increased reserve requirements on some of our in-force books of business have over time become more limited and expensive; however, we havemore expensive. Despite this, committed funding sources are in place for approximately 95% of our anticipated peak level reserves required under Regulations XXX and AXXX, soand therefore we believe unfunded reserve exposure is minimal. Additionally, we have made product modifications and introduced new products designed to reduce capital requirements and limit financing costs associated with existing products and thereby improve the profitability of new business. The new term universal life insurance product, discussed above, offers death benefit guarantee premiums that are competitive with traditional term insurance premiums for comparable durations and provides greater consumer flexibility typically associated with universal life coverage. We have also introduced product modifications to our universal life insurance products which provide shorter guarantee periods thereby reducing capital requirements.
Long-term care insurance. Results of our long-term care insurance business are influenced by morbidity, mortality, persistency, investment yields, new product sales, expenses and reinsurance.reinsurance as well as the relative competitiveness of our offerings.
In recent years, industry-wide first-year annualized premiums of individual long-term care insurance have either declined or grown moderately. While our overall sales in 2009 were adversely impacted primarily byduring the general economic conditionsrecession and lower sales through our independent distribution and career force channels, inrebounded as the second half of 2009 and continuing intoeconomy stabilized. This positive trend continued during the first quarter of 2010, we experienced an improvement in2011. Sales of our individual long-term care insurance sales. The declineproduct have increased 48% in overall sales experiencedthe first quarter of 2011 versus the prior year due in 2009 from our independent distributionpart to growth in the market and career sales force channels was partially mitigated bycompetitor actions combined with the breadthimpacts of our distribution and we have experiencedthe progress acrossmade on multiple growth initiatives with an emphasis onrelating to distribution effectiveness and broadening of our offerings, including additionalindividual and group offerings. We have experienced, and may continue to experience, higher claims than priced for in older issued policies which negatively impact our results of operations.
In the fourth quarter of 2010, one of our competitors announced its intent to exit the long-term care insurance market effective January 1, 2011. In addition, several competitors have announced their intent to seek rate actions on their individual and certain group long-term care insurance participationproducts. These announcements by competitors could disrupt the market and linked-benefits products.
In the first half of 2009, termination rates increased on the new and old blocks of business resulting in lower benefits and other changes in policy reserves that contributed to higher results of operations. However, during the second half of 2009 and continuing into the first quarter of 2010, termination rates have decreased to levels experienced historically resulting in higher benefits and other changes in policy reserves that contributed to lower results of operations. We have also experienced higher claims in older issued policies in recent periods which have negatively impactedimpact our results of operations.sales going forward.
We continue pursuing multiple growth initiatives including: new product issuance and service offerings; investing in case management,care coordination capabilities; maintaining tight expense management,management; actively exploring alternative reinsurance strategies,strategies; executing effective investment strategiesstrategies; and considering other actions to improve business profitability and the performance of the overall block,block. These efforts include evaluating the need for future in-force rate increases, where warranted. In this connection, we began filing for a rate increase of 18% on two blocks of older long-term care insurance policies in November 2010. The state approval process of an in-force rate increase varies, and in particular our older blockscertain states can take up to two years to obtain approval. Upon approval, premium increases may only occur on an insured’s policy anniversary date. Therefore, the benefits of business, including potential futureany rate increases. increase may not be fully realized until the implementation is complete over the next several years.
In addition, changes in regulations or government programs, including certain aspects of healthcare reform, such as the Community Living Assistance Services and Supports (“CLASS”) Act, could impact our long-term care insurance business positively or negatively. As such, we continue to actively monitor regulatory developments.
Wealth management.Results of our wealth management business are impacted by the demand for asset management products and related support services, investment performance and equity market conditions.
The decline and volatility in the equity markets that began in 2008 negatively impacted the asset management industry overall, as well as our assets under management, net flows, the performance of certain mutual funds we offer and associated fee income. The recovery of equity and fixed income markets began inmarket improvements since the second quarter of 2009, and continued throughout 2009 and into 2010. This market improvement, in addition to our introduction of new investment strategies, the expansion of products and services we offer to our advisors and an increase in the
number of advisors that do business with us collectively contributed to our higher sales, net flows and assets under management in the last three quarters of 2009 and the first quarter of 2010.management. Depending upon the direction of equity and fixed income markets in the future, we could see a correlated impact on sales, net flows and assets under management.
On December 31, 2010, we purchased the operating assets of Altegris Capital, LLC (“Altegris”). This acquisition provided a platform of alternative investments including hedge funds and managed futures products and had approximately $2.2 billion in client assets as of December 31, 2010.
Retirement income.Results of our retirement income business are affected by investment performance, interest rate levels, slope of the interest rate yield curve, net interest spreads, equity market conditions, mortality, policyholder lapses, and new product sales.sales and relative competitiveness of our offerings. Our competitive position within many of our distribution channels and our ability to grow this business depends on many factors, including product featuresofferings and company ratings. Product featuresOur product offerings include current and minimum crediting rates on our spread-based products and surrender charges and guaranteedcharges. Guaranteed benefit features inof our in-force variable annuity products which provide guaranteed death or living benefits to the consumer.
RecentRefinements of product changesofferings and sales of annuity productsrelated pricing and investment strategies reflect a more targeted growth strategy in orderplans to achieve appropriate risk adjusted returns. In January 2011, we discontinued sales of our individual and group variable annuities; however, we will continue to service our existing block of business and accept additional deposits on existing contracts.
In fixed annuities, sales may fluctuate as interest rates change and as we offer these products using a disciplined approach to meet targeted returns. We have scaled back certain product features to reduce risk in our variableintroduced new market value adjustment deferred annuity products in the brokerage general agency (“BGA”) channel and we have more selectively chosenre-priced immediate annuities to maintain spreads and targeted returns. Early in 2010, we reinvested a significant portion of the excess cash and achieved improvements in spread-related income as a result of higher yields. Looking ahead, we will continue to actively evaluate marketing and investment strategies in the event that interest rates increase. We have targeted distributors and producers and maintained sales personnel supporting our annuity productscapabilities that align with this more targetedour focused strategy.
Beginning in the second half of 2009, we We have expanded our distribution relationships with new financial institutions, independent financial planners and BGAs and we expect to continue to further expand these distribution relationships and to introduce newwhile selectively adding additional product offerings.
In fixed annuities, sales may fluctuate as we offer these products with a disciplined approach to meeting targeted returns. We have introduced a new deferred annuity product offering and may also adjust crediting rates on deferred annuities. In addition, we have re-priced immediate annuities to maintain spreads and targeted returns. In 2009, spreads on fixed annuity products declined in connection with lower short-term rates and from holding higher cash balances to manage through challenging market conditions. We have achieved and anticipate improvements in spreads as excess cash is reinvested at higher yields.
In variable annuities, the improvement in the equity markets during the second half of 2009 favorably impacted our results. In the future, equity market performance and volatility could result in additional gains or losses in our variable annuity products andalthough associated hedging program which would impact our resultsactivities are expected to mitigate these impacts. As this is a closed block of operations. In addition,business, we continue to offer variable annuity products with living benefit featureswill see limited new deposits as described above. However, in response to the volatility in equity markets, certain product features have been scaled back to reduce risk and costs to the consumer have been increased. These product changes are similar to actions taken by many of our competitors. We believe the benefits offered by these products remain attractive to consumers within our target markets.we will only accept additional deposits on existing contracts.
International
International mortgage insurance.Results of our international mortgage insurance business are affected by changes in regulatory environments, employment levels and other economic and housing market trends, including interest rate trends, home price appreciation, mortgage origination volume, levels of mortgage delinquencies and movements in foreign currency exchange rates.
Throughout 2009, we observed increased stability in international housing markets following the effects of the economic downturn in late 2008, with notable improvements in Canada and Australia, as lower mortgage rates, improved housing affordability, certain government programs and improved consumer confidence resulted in increased home sales activity. As a result, home prices increased in these markets during 2009 and into the first quarter of 2010. Additionally, while unemployment increased during the first half of 2009, we have seen a modest decline in unemployment rates in these two markets during the second half of 2009 and into the first quarter of 2010. In certain of our European mortgage insurance markets, we have observed early signs of stabilization as unemployment growth and declines in home prices have moderated.
Canada and Australia comprise approximately 97% of our international mortgage insurance risk in-force with an estimated average effective loan-to-value ratio of 66%62% as of March 31, 2010.2011. We expect that these established markets will continue to be key drivers of revenues and earnings in our international mortgage insurance business. Our entry and growth in developing international markets will remain selective.selective and disciplined.
During 2010, we continued to observe increased stability in international housing markets, particularly in Canada and Australia, as the economic recovery which began in 2009 gained momentum. As a result of improving economic and employment outlooks, relatively low mortgage rates, improved housing affordability
and consumer confidence, home sales activity remained strong and home prices increased at the start of 2010 in these two markets. During the second half of 2010, home price appreciation moderated after a sustained period of growth. During the first quarter of 2011, home prices increased modestly in Canada and remained relatively flat in Australia. During the remainder of 2011, we expect home prices to remain consistent with current levels in both Canada and Australia. Additionally, we observed a decline in unemployment rates in these two markets during 2010 with rates remaining fairly stable during the first quarter of 2011. However, in Australia, with the combined impact of higher mortgage interest rates, increases in the cost of living and January flooding, the Queensland economy is pressured which could adversely impact our results of operations.
In many of our European mortgage insurance markets, we have observed early signs of stabilization as unemployment rates appear to be peaking and declines in home prices have moderated. The overall economic environment in Europe, however, continues to be dominated by concerns about the fiscal health of the region, which has created uncertainty about the timing and speed of economic recovery.
Since the beginning of 2010, the Bank of Canada increased the overnight rate by 75 basis points to 1.0% and we expect the Bank of Canada to maintain the overnight rate at current levels at least through the first half of 2011. In Australia, as a sign of the relative health and stability of that economy, the Reserve Bank of Australia increased the cash rate by 100175 basis points to 4.75% between September 30, 2009 and March 31, 2010. It is anticipated that2011. We also expect the Reserve Bank of Australia will increase rates further in 2010 and has already implemented a 25 basis point increase in April 2010. In Canada, the Bank of Canada has indicated that it willto maintain the overnightcash rate at current levels through mid-2010 but will likely increase the overnight rate modestly in the secondfirst half of 2010.2011.
In Australia, as a resultCanada, we experienced higher than anticipated levels of flow new insurance written during 2010. A low mortgage interest rate environment in 2010 and improved consumer confidence contributed to these higher levels. During the first quarter of 2011, favorable economic conditions persisted with housing affordability benefiting from low interest rates duringand historically low unemployment levels. As of March 31, 2011, our 2010 book of business represents 12% of our insurance in-force while our 2007 and 2008 book years, the first nine months of 2009 and specific government programs, there was an increase in mortgage originations by first-time home buyers and an associated increasetwo largest in our flow newportfolio, together represent 33% of our insurance written. The Australian government extended its enhanced first-time home buyer program benefits through the end of 2009, although at reduced levels, and eliminated these enhanced benefits altogether effective January 1, 2010.in-force. As a result of lower levelsour large 2007 and 2008 book years and subsequent smaller books seasoning during 2011, earned premiums in Canada are expected to decline moderately relative to 2010 levels. In January 2011, the Canadian government announced new mortgage rules that became effective in March and April of 2011. These changes may reduce the amount of net premiums written in 2011. This decline may be offset by modest growth in flow new insurance written in 2011 if economic conditions in Canada continue to be favorable and we are able to continue to gradually increase our market share.
In Australia, total mortgage market activity slowed during 2010 as the incremental government supportstimulus and incentives for first-time homebuyers implemented during the economic downturn were eliminated. Additionally, high loan-to-value mortgage originations, particularly above 90% loan-to-value, declined significantly in 2010 as banks allocated less capital to first-time home buyershigh loan-to-value lending and consumers became cautious of rising personal debt levels. This trend continued during the first quarter of 2011. These factors, combined with increased interest rates beginning in the fourth quarter of 2009, there has beenled to a decrease in mortgage originations and an associated decrease in our flow new insurance written induring 2010 compared to 2009 levels. Our flow new insurance written further decreased during the first quarter of 2010. As an early sign of a return to liquidity2011 compared to the securitizationfourth quarter of 2010 reflecting smaller mortgage originations market in Australia,as well as the economic impact of recent natural disasters. For the remainder of 2011, we insured some bulk transactions in the quarter for the first time since 2008. We expect to continue to write modest levels of bulkflow new insurance written throughout 2010.to remain flat compared to 2010 levels.
During 2009,Over the past two years, we significantly expanded our focus on, and the resources devoted to, loss mitigation initiatives, including programs that actively partner with our lenders to find solutions that cure delinquencies through actions such as loan modifications andthat keep borrowers in their homes. Thesehomes, asset management strategies such as arranged and facilitated sales and pursuing recoveries. Loan modification programs benefit all parties as borrowers are able to remain in their homes, lenders maintain their relationship with the borrower and an earning asset, and we mitigate claim payments under the terms of our mortgage insurance policies. Additionally, in cases where no solution is found to cure the delinquency and keep the borrower in their home, we are actively partnering with our lenders to optimize the transition process, including taking early possession of properties, and mitigate claim payments. As a result of our expanded focus, there was an increase in the
number of loans subject to our loss mitigation initiatives, which we believe had a favorable impact on our results of operations. We have also seen improvements in our total losses as economies continue to improve, home prices continueprice appreciation transitions to increasea stable rate of growth and unemployment levels decline. With continuedongoing improvement in the Canadian and Australian economies and stable housing markets, as well as the success we experiencedare experiencing with our loss mitigation initiatives outlined above, we expect our overall loss levels to continue to improve from themodestly over time compared with levels experienced during 2009.in 2010. These loss levels will vary quarterly based on seasonal or event-driven fluctuations.
Lifestyle protection insuranceinsurance.. Growth and performance of our lifestyle protection insurance business is dependent in part on economic conditions, including consumer lending levels, unemployment trends, client account penetration and mortality and morbidity trends. Additionally, the types and mix of our products will vary based on regulatory and consumer acceptance of our products.
ForThe profitability of our lifestyle protection insurance business improved during 2010 and in the three months ended March 31,first quarter of 2011 and has been driven by lower new claim registrations from stabilizing European unemployment levels and the impact of our policy re-pricing and distribution contract restructuring initiatives. Sales during 2010 sales decreased primarily as a result of slow or slowingstagnating economies across Europe, which resulted in a decline in consumer lending where most of our insurance coverages attach as banks tightened lending criteria and consumer demand declined. Additionally, our continued focus on risk management led us to exit certain relationships or concentrationSales in the first quarter of coverages.2011 remained consistent with the fourth quarter of 2010 levels. We are actively pursuing various growth initiatives to offset these market conditions; however,expand our distribution channels and our product offerings which have begun to help to mitigate lower consumer lending levels. However, depending on the severity and length of these conditions, we maycould experience additional declines in sales declines.
In contrastor the inability to the first half of 2009, when unemployment rates increased rapidly, we have seen a slowdown in the rate of increase in unemployment over the past several quarters broadly across Europe with regional variation. Consequently, we experienced a continued declinegenerate targeted growth in new sales.
New claim registrations on unemployment-related policies particularly in Irelanddeclined throughout 2010 and the U.K.first quarter of 2011 and are at the lowest levels since March 2009.the third quarter of 2008. This, combined with stabilizing claim durations, has led to a decrease in our loss ratio. The improvement in our loss ratio has been most notable in the Nordic and Western Europe regions. We continue to expect unemployment rates in Europe to increase slowly and peak indecline over the second half of 2010. The reduction innext several quarters with regional variation. Additionally, we expect slow but positive European gross domestic product growth, which could positively impact consumer lending demand as well as reduce claim pressures through new unemployment claim registrations was offset by increasing claims duration pressure from longer periods of persistent unemployment and accident and sickness claims.job creation.
During 20092010 and into 2010,2011, significant progress was made in improving profitability through pricing, coverage or distribution contract changes on both new and eligible in-force policies. Collectively,With most of these contract restructuring projects complete, we are focusing on increasing sales through improved product offerings and expanded distribution channels. We expect these strategies willto continue to improve profitability and help to offset the impact of continued high unemployment as well as expected continued contractedlower levels of consumer lending.
U.S. Mortgage Insurance
Results of our U.S. mortgage insurance business are affected by unemployment, underemployment and other economic and housing market trends, including interest rates, home prices, mortgage origination volume mix and practices, and product mix, as well as the levels and aging of mortgage delinquencies including seasonal variations.variations, the inventory of unsold homes and lender modification efforts. These economic and housing market trends are in turn continuing to be adversely affected by the ongoing weakweakness in the domestic economy and related levels of unemployment. However,This has resulted in numerous outcomes including rising foreclosures, more borrowers seeking loan modifications and elevated housing inventories which place downward pressure on home values. At the same time, home prices are beginningcontinuing to stabilizeshow signs of stabilizing or improveimproving in manyseveral U.S. markets after a significant decline from their peak levels. Overall, we anticipate some additional modest declines in home values in 2010during 2011 and we expect unemployment and underemployment levels to increase modestly by the end of 2010.stabilize and gradually decline over time though remain elevated for an extended period.
ADuring 2010, a weak housing market, tightened lending standards, the lack of consumer confidence and the lack of liquidity in some mortgage securitization markets, along with volatility in mortgage interest rates,
continued to drive a smaller mortgage origination market. However, in this smaller originationWithin the private mortgage insurance market, we have seen an increase in our market share in recent quarters. Thethe mortgage insurance penetration rate and overall market size have beenwas driven down by growth in Federal Housing Administration (“FHA”) originations, associated with multiple pricing, underwriting and loan size factors, and the negative impact of GSE market fees and loan level pricing which made private mortgage insurance solutions less competitive with the FHA solution. Given ongoing FHA risk management actions, we have seen the private mortgage insurance penetration rate increase somewhat in the first quarter of 2011 and expect this to continue given the additional FHA pricing changes effective in April 2011. This increase has been mitigated in part by increased GSE loan level pricing.fees which can make private mortgage insurance less attractive. Going forward, this trend mayfurther fees could limit the demand for or competitiveness of private mortgage insurance. Alternatively, given potential adjustments in FHA policies and pricing, GSE pricing and housing and financial reform involving the GSEs and government programs,Considering both of these trends, the industry couldcontinues to expect to regain some market share over time. Specifically, ourThe mortgage insurance industry level of market penetration and eventual market size couldwill continue to be affected by any actions taken by the GSEs, the FHA or the U.S. government impacting housing policy, underwriting standards or related reforms. The Housing and Economic Recovery Act of 2008 providesprovided for changes to, among other things, the regulatory authority and oversight of the GSEs and the authority of the FHA including with respect to premium pricing, maximum loan limits and down payment requirements. The FHA is seeking legislative authority to increase its annual premium rates. Such an increase could in turn increase the industry’s market share compared to that of the FHA. In addition, Fannie Mae and Freddie Mac remain the largest purchasers and guarantors of mortgage loans in the United States.
We continue to controlmanage the quality of our new business through tightprudent underwriting guidelines, which we modify from time to time when circumstances warrant such changes. For example, we announced in early 2010 the prudent expansion of certain underwriting guidelines.warrant. We are also seeingexpect to continue realizing the benefit of previously implemented rate increases along with other pricing-related actions. In addition, we regularly monitor competitor pricing and underwriting changes and their potential market impact.
While we are currently experiencing a decrease in the previously announced rate increaselevel of 20% on average for our flow products and a reduction in captive cession which equates to an effective pricing improvement of approximately 15%. We previously exited certain product lines, such as A minus, Alt-A and 100% loan-to-value products. We also continue to monitor our declining market policy, which among various restrictions, limited coverages to loans with 90% loan-to-value and below and to adjust those markets accordingly as areas of the U.S. housing market begin to stabilize or improve. Recently, we reduced the number of markets subject to our declining market policy to allow coverage of loans up to 95% loan-to-value in additional markets given improving housing market conditions, which should result in increased new business written.
Overalldelinquencies, overall pressure on the housing market hascontinues to adversely affectedaffect the performance of our portfolio, particularly our 2005, 2006, 2007 and 2007 booksfirst half of business2008 book years that we believe peaked in their delinquency development during the first quarter of 2010. Delinquencies for these book years continue to drive the level of new delinquencies being reported. While the impact was originally concentrated in certain states and alternative product types, during 2009,the last few years, the impact has shifted to more traditional products reflecting the elevated unemployment and underemployment levels throughout the country. We have also seenBeginning mid-2010, we saw an increase in the number of foreclosure starts andas well as an increase in the rate at which foreclosures progress to claim. As theseour paid claims as late stage delinquency loans go through foreclosure. We expect this trend to continue at least through the second quarter of 2011. Suspensions of foreclosure our paid claims will increase.
However, asactions in response to problems associated with lender and servicer foreclosure process defects have caused, and could further cause, claim payments to be deferred to later periods and potentially have an adverse impact on a resultrecovery of the residential mortgage market.
The recent stabilization of home prices and unemployment levels andin certain markets, expanded efforts in the mortgage market to modify loans we experiencedand improved performance of our second half of 2008, 2009 and 2010 book years, resulted in a decrease in delinquencies induring the first quarter of 2010.2011. This decrease reflected a reduction in new delinquencies combined with a higher number of paid claims and increased cures from government and lender loan modification programs and other loss mitigation activities.activities through the first half of 2010. However, agedaging of delinquencies continued to increase through the remainder of 2010 and through the first quarter of 2011; moreover, foreclosures increased fromcontinued increasing and liquidations remained elevated through the prior quarter, both of which continue to pressure home prices in certain marketssame period, thereby resulting in higher levels of default.claims. If home values continue toexperience further decline, and credit liquidity remains tight and interest rates increase, the ability to cure a delinquent loan willcould be more difficult to achieve. In addition, while we continue to execute on our loan modification strategy, during the first quarter of 2011, we have seen the level of loan modification actions remain consistent with the level we experienced during the fourth quarter of 2010. Further reduction of loan modifications would have an adverse impact on the ability of borrowers to cure a delinquent loan.
Our loss mitigation activities, including those relating to workouts, loan modifications, pre-sales, rescissions and rescissions, havetargeted settlements, net of reinstatements, which occurred during the first quarter of 2011 resulted in a reduction of expected losses of approximately$122 million compared to $233 million in the first quarter of 2010.
Workouts and loan modifications, which related to loans representing 1% of our primary risk in-force as of March 31, 2011, and occurred during the three monthsperiod then ended, March 31, 2010 as compared to $145 million during the three months ended March 31, 2009. In the process, workouts, loan modifications and pre-sales during this period resulted in a reduction of loss exposureexpected losses of approximately $126$94 million for the three months ended March 31, 2010 compared to $57$113 million forin the three months ended March 31, 2009.first quarter of 2010. Our workout and loan modification programs with various lenders and servicers are designed to help borrowers in default regain current repayment status on their mortgage loans, which ultimately allowed many of these borrowers to remain in their homes. During the first quarter of 2011, we executed loan restructurings and modifications with our lender partners that resulted in reduced monthly mortgage loan repayment amounts through reductions of the underlying loans’ interest rates or debt forgiveness by lenders, or through a lengthening of the loans’ principal amortization period, or through some combination thereof. The loans that are subject to workouts and loan modifications that were completed could be subject to potential re-default by the underlying borrowers.borrower at some future date. In addition, aspre-sales and other non-cure workouts that occurred during the first quarter of 2011 resulted in a reduction of expected losses of $17 million compared to $13 million that occurred during the first quarter of 2010.
As a result of investigation activities on certain insured delinquent loans, we found significantcertain levels of misrepresentation and non-compliance with certainspecific terms and conditions of our underlying master insurance policies, as well as fraud. These findings separately resulted in rescission actions that occurred during the first quarter of 2011 which reduced our loss exposureexpected losses at the time of rescission by approximately$11 million compared to $107 million forthat occurred during the three months ended March 31,first quarter of 2010.
During 2010, compared to $88 million for the three months ended March 31, 2009. Benefitsbenefits from loss mitigation activities are beginning to shiftbegan shifting from rescissions to loan modifications. In January 2010, we also reached an agreement with a counterparty that further reduced our bulk risk in-force exposure, leaving a small bulk portfolio related principally to Federal Home Loan Bank business. Our investigations process and rescission actions, along with expanded loan modification efforts given various related lender and government programs, have had a significant benefit and are expected to continue; however, going forward, there is no assurance regarding what specific level of benefits will result.
There are several programs related to the U.S. housing market being implemented by the U.S. government, GSEs, servicers and various lenders thatmodifications where we expect will mitigate losses on loans we insure. We are actively participating in and supporting these various programs. These programs are expecteda majority of our loss mitigation benefits to limit increases in paid claims and webe achieved going forward. Although loan servicers continue to pursue waysa wide range of approaches to supportexecute appropriate loan modifications, government-sponsored programs such as Home Affordable Modification Program (“HAMP”) continue to decline as alternative programs have begun to gain momentum. With lower benefits from government-sponsored programs and the servicers in their efforts to increase thelimited impact from ouralternative programs to date, we have experienced higher levels of paid claims. Depending upon the mix of loss mitigation activities.activity, market trends and employment levels in future periods, we could see additional adverse loss reserve changes going forward.
We also participate in reinsurance programs in which we share portions of our premiums associated with flow insurance written on loans originated or purchased by lenders with captive insurance entities of these lenders in exchange for an agreed upon level of loss coverage above a specified attachment point. For the three months ended March 31, 2010,2011, we recorded reinsurance recoveries of $34$21 million where cumulative losses have exceeded the attachment points in captive reinsurance arrangements, primarily related to our 2005, 2006, 2007 and 2007 books of business.2008 book years. We have exhausted certain captive reinsurance tiers for these book years based on loss development trends. Once the captive reinsurance or trust assets are exhausted, we are responsible for additional losses incurred. We have begun to experience constraints on the recognition of captive benefit recovery due to the amount of funds held in certain captive trusts and the exhaustion of captive loss tiers for certain reinsurers. As of January 1, 2009, we no longer participate inenter into excess loss of captive reinsurance transactions and, we willtherefore, only participate in quota share reinsurance arrangements. The majority of our excess of loss captive reinsurance arrangements are in runoff with no new books of business being added going forward; however, we will continue to benefit from captive reinsurance on our 2005, 2006, 2007 and 2007 books2008 book years.
As of March 31, 2011, Genworth Mortgage Insurance Corporation (“GEMICO”) exceeded the maximum risk-to-capital requirement of 25:1. GEMICO is authorized and continues to write new business in North Carolina under a revocable two-year waiver of that state’s maximum 25:1 risk-to-capital requirement limitation, which the North Carolina Department of Insurance (“NCDOI”) approved in a letter dated January 31, 2011. By extension, GEMICO also remains authorized and continues to write business in 34 additional states that do not have a maximum risk-to-capital requirement. Ten additional states have granted GEMICO the authority to continue to write new business by a waiver (or other communication) regarding their relative state’s risk-to-capital requirements, subject to varying terms and conditions. Consequently, GEMICO is authorized to write new business in 45 states as of March 31, 2011. While we continue to seek this regulatory flexibility through additional state waivers, where available, we expect to manage our capital and business operations so as
to maintain capacity to write new profitable business. Currently, we utilize another one of our U.S. mortgage insurance subsidiaries, Genworth Residential Mortgage Insurance Corporation of North Carolina (“GRMIC-NC”), to write business in those five states where GEMICO is restricted under risk-to-capital requirements and where no waiver has been granted to date. We have also taken steps to be able to utilize another one of our U.S. mortgage insurance subsidiaries, Genworth Residential Mortgage Assurance Corporation (“GRMAC”), for similar purposes. In this regard, Fannie Mae has approved both our use of GRMIC-NC and our request that GRMAC be recognized as an eligible insurer. Fannie Mae’s approvals allow either entity to write business in lieu of GEMICO subject to specified conditions, including that we refrain from utilizing either entity, except in states where GEMICO is prohibited from writing business due to a breach of its maximum risk-to-capital requirement and has not obtained the applicable waiver of such breach. We remain in ongoing consultation with our state regulators and the GSEs regarding our ongoing use of these alternative arrangements, as necessary.
Consolidated Results of Operations
The following is a discussion of our consolidated results of operations and should be read in conjunction with “—Business trends and conditions.” For a discussion of our segment results, see “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.”
Three Months Ended March 31, 20102011 Compared to Three Months Ended March 31, 20092010
The following table sets forth the consolidated results of operations for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||||||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||
Premiums | $ | 1,470 | $ | 1,502 | $ | (32 | ) | (2 | )% | $ | 1,437 | $ | 1,470 | $ | (33 | ) | (2 | )% | |||||||||||||
Net investment income | 765 | 711 | 54 | 8 | % | 830 | 765 | 65 | 8 | % | |||||||||||||||||||||
Net investment gains (losses) | (70 | ) | (770 | ) | 700 | 91 | % | (28 | ) | (70 | ) | 42 | 60 | % | |||||||||||||||||
Insurance and investment product fees and other | 256 | 291 | (35 | ) | (12 | )% | 329 | 256 | 73 | 29 | % | ||||||||||||||||||||
Total revenues | 2,421 | 1,734 | 687 | 40 | % | 2,568 | 2,421 | 147 | 6 | % | |||||||||||||||||||||
Benefits and expenses: | |||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 1,315 | 1,508 | (193 | ) | (13 | )% | 1,409 | 1,315 | 94 | 7 | % | ||||||||||||||||||||
Interest credited | 213 | 275 | (62 | ) | (23 | )% | 201 | 213 | (12 | ) | (6 | )% | |||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 475 | 441 | 34 | 8 | % | 500 | 475 | 25 | 5 | % | |||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 184 | 247 | (63 | ) | (26 | )% | 185 | 184 | 1 | 1 | % | ||||||||||||||||||||
Interest expense | 115 | 96 | 19 | 20 | % | 127 | 115 | 12 | 10 | % | |||||||||||||||||||||
Total benefits and expenses | 2,302 | 2,567 | (265 | ) | (10 | )% | 2,422 | 2,302 | 120 | 5 | % | ||||||||||||||||||||
Income (loss) before income taxes | 119 | (833 | ) | 952 | 114 | % | |||||||||||||||||||||||||
Benefit for income taxes | (93 | ) | (364 | ) | 271 | 74 | % | ||||||||||||||||||||||||
Income before income taxes | 146 | 119 | 27 | 23 | % | ||||||||||||||||||||||||||
Provision (benefit) for income taxes | 30 | (93 | ) | 123 | 132 | % | |||||||||||||||||||||||||
Net income (loss) | 212 | (469 | ) | 681 | 145 | % | |||||||||||||||||||||||||
Net income | 116 | 212 | (96 | ) | (45 | )% | |||||||||||||||||||||||||
Less: net income attributable to noncontrolling interests | 34 | — | 34 | NM | (1) | 34 | 34 | — | — | % | |||||||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | 178 | $ | (469 | ) | $ | 647 | 138 | % | ||||||||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | $ | 82 | $ | 178 | $ | (96 | ) | (54 | )% | ||||||||||||||||||||||
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Premiums.Premiums consist primarily of premiums earned on insurance products for life, long-term care and Medicare supplement insurance, single premium immediate annuities and structured settlements with life contingencies, lifestyle protection insurance and mortgage insurance.
Our Retirement and Protection segment decreased $11$6 million primarily related to a $14$16 million decrease in our retirement income business and a $7 million decrease in our life insurance business, and an $11 million decrease in our retirement income business, partially offset by a $14$17 million increase in our long-term care insurance business.
Our International segment increased $8decreased $27 million as a result of a $32decrease of $43 million in our lifestyle protection insurance business, partially offset by a $16 million increase in our international mortgage insurance business, partially offset by a decrease of $24 million in our lifestyle protection insurance business. The three months ended March 31, 20102011 included an increase of $68$10 million attributable to changes in foreign exchange rates.
Our U.S. Mortgage Insurance segment decreased $28 million.was flat.
Net investment income. Net investment income represents the income earned on our investments.
Weighted-average investment yields increased to 4.8% for the three months ended March 31, 2011 from 4.4% for the three months ended March 31, 2010 from 4.1% for the three months ended March 31, 2009.2010. The increase in weighted-average investment yields was primarily attributable to lower losses onthe improved performance of limited partnerships.partnerships accounted for under the equity method and the reinvestment of cash balances. Net investment income for the three months ended March 31, 20102011 included $73$4 million of lowergains related to limited partnerships as compared to $34 million of losses related to limited partnerships accounted for under the equity method as compared to the three months ended March 31, 2009.2010.
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The three months ended March 31, 20102011 included an increase of $21$5 million attributable to changes in foreign exchange rates in our International segment.
Net investment gains (losses).Net investment gains (losses) consist of realized gains and losses from the sale or impairment of our investments and unrealized and realized gains and losses from our trading securities and derivative instruments. For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”
We recorded $80$36 million of net other-than-temporary impairments for the three months ended March 31, 20102011 as compared to $597$80 million for the three months ended March 31, 2009.2010. Of total impairments for the three months ended March 31, 2011 and 2010, and 2009, $62$21 million and $280$62 million, respectively, related to structured securities, including $36$15 million and $202$36 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Impairments related to corporate securities as a result of bankruptcies, receivership or concerns about the issuer’s ability to continue to make contractual payments or where we have intent to sell were $5$14 million and $58$5 million for the three months ended March 31, 20102011 and 2009,2010, respectively. We also recorded impairments of $6 million and $240 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlands$7 million related to limited partnership investments during the three months ended March 31, 2010 and 2009, respectively. For the three months ended March 31, 2010, we recorded $7 million of impairments related to limited partnership investments.2010.
Net investment losses related to derivatives of $10 million in the first quarter of 2011 were primarily related to $8 million of losses associated with derivative instruments used to hedge foreign currency risk, $4 million of losses from the change in the value of derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”) exceeding the change in value of the embedded derivative liabilities and $2 million of losses due to hedge ineffectiveness. These losses were partially offset by $3 million of gains from credit default swaps due to narrowing credit spreads and $1 million of gains related to a derivative strategy to mitigate interest rate risk associated with our statutory capital position. Net investment losses related to derivatives of $8 million in the first quarter of 2010 were primarily related to $14 million of losses in derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”)GMWBs exceeding the change in value of the embedded derivative liabilities and $3 million of losses from foreign currency options. These losses were partially offset by $5 million of gains from credit default swaps utilized to improve our diversification and portfolio yield and $5 million of gains in non-qualified interest rate swaps related to our institutional products. Net investment losses related to derivatives of $121 million in the first quarter of 2009 were primarily related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position and losses in embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of derivative instruments used for mitigating this risk.
currency options. These losses were partially offset by $5 million of gains from credit default swaps utilized to improve our diversification and portfolio yield and $5 million of gains in non-qualified interest rate swaps. |
Net losses related to the sale of available-for-sale securities were $2 million in the first quarter of 2011 compared to $15 million in the first quarter of 2010 compared to $34 million in the first quarter of 2009.2010. We also recorded $11 million of net gains related to securitization entities and $16 million from the recovery of a counterparty receivable in the first quarter of 2010.
Insurance and investment product fees and other. Insurance and investment product fees and other consist primarily of fees assessed against policyholder and contractholder account values, surrender charges, cost of insurance assessed on universal and term universal life insurance policies, advisory and administration service fees assessed on investment contractholder account values, broker/dealer commission revenues and other fees.
Our Retirement and Protection segment increased $35$78 million largely driven by an increase of $17$39 million in our life insurance business, an increase of $29 million in our wealth management business, an increase of $11 million in our life insurance business and an increase of $8 million in our retirement income business.
Corporate and other activities decreased $72 million.
Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of benefits paid and reserve activity related to current claims and future policy benefits on insurance
and investment products for life, long-term care and Medicare supplement insurance, structured settlements and single premium immediate annuities with life contingencies, paymentlifestyle protection insurance and claim costs incurred related to mortgage insurance products.
Our Retirement and Protection segment increased $32$44 million primarily attributable to a $46$34 million increase in our long-term care insurance business and a $6$30 million increase in our life insurance business, partially offset by a $20 million decrease in our retirement income business.
Our International segment decreased $18$33 million as a result of a decrease of $15$36 million in our lifestyle protection insurance business, and a decreasepartially offset by an increase of $3 million in our international mortgage insurance business. The three months ended March 31, 20102011 included an increase of $25$6 million attributable to changes in foreign exchange rates.
Our U.S. Mortgage Insurance segment decreased $207increased $83 million.
Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances.
Our Retirement and Protection segment decreased $12$6 million principally related to our retirement income business.
Corporate and Other activities decreased $50$6 million.
Acquisition and operating expenses, net of deferrals. Acquisition and operating expenses, net of deferrals, represent costs and expenses related to the acquisition and ongoing maintenance of insurance and investment contracts, including commissions, policy issuance expenses and other underwriting and general operating costs. These costs and expenses are net of amounts that are capitalized and deferred, which are primarily costs and expenses that vary with and are primarily related to the sale and issuance of our insurance policies and investment contracts, such as first-year commissions in excess of ultimate renewal commissions and other policy issuance expenses.
Our Retirement and Protection segment increased $27$43 million primarily attributable to a $14$26 million increase in our wealth management business, a $6$14 million increase in our retirement income business and an $11 million increase in our long-term care insurance business, a $4partially offset by an $8 million increasedecrease in our life insurance business and a $3 million increase in our retirement income business.
Our International segment increased $8decreased $5 million primarily related to a $7$6 million increase in our international mortgage insurance business and a $1 million increasedecrease in our lifestyle protection insurance business. The three months ended March 31, 20102011 included an increasea decrease of $19$2 million attributable to changes in foreign exchange rates.
Corporate and Other activities decreased $13 million.
Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles consists primarily of the amortization of acquisition costs that are capitalized, present value of future profits and capitalized software.
Our Retirement and Protection segment decreased $58increased $6 million primarily attributable to a $60an $18 million decreaseincrease in our retirement income business, andpartially offset by a $7 million decrease in our long-term carelife insurance business partially offset byand a $9$5 million increasedecrease in our lifelong-term care insurance business.
Our International segment decreased $2$5 million primarily related to an $8a $10 million decrease in our lifestyle protection insurance business, partially offset by a $6$5 million increase in our international mortgage insurance business. The three months ended March 31, 20102011 included an increase of $8$1 million attributable to changes in foreign exchange rates.
Interest expense. Interest expense represents interest related to our borrowings that are incurred at our holding company or subsidiary level and our non-recourse funding obligations and interest expense related to certain reinsurance arrangements being accounted for as deposits.
Our Retirement and Protection segment decreasedincreased $4 million primarily related to our life insurance business.
Our International segment increased $15decreased $4 million primarily related to a decrease of $10 million in our lifestyle protection insurance business, partially offset by a $6 million increase in our international mortgage insurance business. The three months ended March 31, 20102011 included an increasea decrease of $2$1 million attributable to changes in foreign exchange rates.
Corporate and other activities increased $8$12 million.
BenefitProvision (benefit) for income taxes.The effective tax rate decreasedincreased to 20.5% for the three months ended March 31, 2011 from (78.2)% for the three months ended March 31, 2010 from 43.7% for the three months ended March 31, 2009.2010. This decreaseincrease in the effective tax rate was primarily attributable to changes in uncertain tax benefits in the prior year related to separation from our former parent, partially offset by lower taxed foreign income and tax favored investments. The three months ended March 31, 20102011 included an increase of $12$3 million attributable to changes in foreign exchange rates.
Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portion of equity in a subsidiary attributable to third parties. The increase related to the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5%. The three months ended March 31, 20102011 included an increase of $5$2 million attributable to changes in foreign exchange rates.
Net income (loss) available to Genworth Financial, Inc.’s common stockholders. We reported lower net income available to Genworth Financial, Inc.’s common stockholders in the current year compared to a net loss available to Genworth Financial, Inc.’s common stockholders in the prior year primarily related to additionala $106 million tax benefits recognizedbenefit related to separation from our former parent recorded in the first quarter of 2010 and a higher net operating loss in our U.S. Mortgage Insurance segment in the current year. For a discussion of our Retirement and Protection, International and U.S. Mortgage Insurance segments and Corporate and Other activities, see the “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.” Included in net income available to Genworth Financial, Inc.’s common stockholders was an increase of $20$6 million, net of tax, attributable to changes in foreign exchange rates.
Reconciliation of net income (loss) to net operating income available to Genworth Financial, Inc.’s common stockholders
Net operating income available to Genworth Financial, Inc.’s common stockholders for the three months ended March 31, 2011 and 2010 and 2009 was $114$98 million and $14$114 million, respectively. We define net operating income available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding net income attributable to noncontrolling interests, after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. We exclude net investment gains (losses) and
infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A significant component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are oftencan be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends. There were no infrequent or unusual non-operating items excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders during the periods presented other than a $106 million tax benefit related to separation from our former parent recorded in the first quarter of 2010.
While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP,generally accepted accounting principles (“U.S. GAAP”), we believe that net operating income available to Genworth Financial, Inc.’s common stockholders and measures that are derived from or incorporate
net operating income available to Genworth Financial, Inc.’s common stockholders, including net operating income available to Genworth Financial, Inc.’s common stockholders per common share on a basic and diluted basis, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. However, net operating income available to Genworth Financial, Inc.’s common stockholders is not a substitute forand net operating income (loss) available to Genworth Financial, Inc.’s common stockholders per common share on a basic and diluted basis are not substitutes for net income available to Genworth Financial, Inc.’s common stockholders or net income available to Genworth Financial, Inc.’s common stockholders per common share on a basic and diluted basis determined in accordance with U.S. GAAP. In addition, our definition of net operating income available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.
The following table includes a reconciliation of net income (loss) to net operating income available to Genworth Financial, Inc.’s common stockholders for the periods indicated:
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2011 | 2010 | ||||||||||||
Net income (loss) | $ | 212 | $ | (469 | ) | |||||||||||
Net income | $ | 116 | $ | 212 | ||||||||||||
Less: net income attributable to noncontrolling interests | 34 | — | 34 | 34 | ||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | 178 | (469 | ) | |||||||||||||
Adjustments to net income (loss) available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | 82 | 178 | ||||||||||||||
Adjustments to net income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | 42 | 483 | 16 | 42 | ||||||||||||
Net tax benefit related to separation from our former parent | (106 | ) | — | — | (106 | ) | ||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 114 | $ | 14 | $ | 98 | $ | 114 | ||||||||
Earnings (loss) per share
The following table provides basic and diluted net income (loss) available to Genworth Financial, Inc.’s common stockholderstockholders and net operating income available to Genworth Financial, Inc.’s common stockholders per common share for the periods indicated:
Three months ended March 31, | |||||||
(Amounts in millions, except per share amounts) | 2010 | 2009 | |||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share: | |||||||
Basic | $ | 0.36 | $ | (1.08 | ) | ||
Diluted | $ | 0.36 | $ | (1.08 | ) | ||
Weighted-average common shares outstanding: | |||||||
Basic | 488.8 | 433.2 | |||||
Diluted(1) | 493.5 | 433.2 | |||||
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Three months ended March 31, | ||||||||
(Amounts in millions, except per share amounts) | 2011 | 2010 | ||||||
Net income available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||
Basic | $ | 0.17 | $ | 0.36 | ||||
Diluted | $ | 0.17 | $ | 0.36 | ||||
Net operating income available to Genworth Financial, Inc.’s common stockholders per common share: | ||||||||
Basic | $ | 0.20 | $ | 0.23 | ||||
Diluted | $ | 0.20 | $ | 0.23 | ||||
Weighted-average common shares outstanding: | ||||||||
Basic | 490.1 | 488.8 | ||||||
Diluted | 494.4 | 493.5 | ||||||
Diluted weighted-average shares outstanding for 2010 reflect the effects of potentially dilutive securities including stock options, restricted stock units and other equity-based compensation.
Results of Operations and Selected Financial and Operating Performance Measures by Segment
Our chief operating decision maker evaluates segment performance and allocates resources on the basis of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders. See note 1110 in our “—Notes to Condensed Consolidated Financial Statements” for a reconciliation of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders of our segments and Corporate and Other activities to net income (loss) available to Genworth Financial, Inc.’s common stockholders.
Management’s discussion and analysis by segment also contains selected operating performance measures including “sales,” “assets under management” and “insurance in-force” or “risk in-force” which are commonly used in the insurance and investment industries as measures of operating performance.
Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refersrefer to: (1) annualized first-year premiums for term life, long-term care and Medicare supplement insurance; (2) new and additional premiums/deposits for universal and term universal life insurance, linked-benefits, spread-based and variable products; (3) gross flows and net flows, which represent gross flows less redemptions, for our wealth management business; (4) written premiums and deposits, gross of ceded reinsurance and cancellations, and premium equivalents, where we earn a fee for administrative services only business, for our lifestyle protection insurance;insurance business; (5) new insurance written for mortgage insurance; and (6) written premiums net of cancellations for our Mexican insurance operations, which in each case reflects the amount of business we generated during each period presented; and (6) written premiums net of cancellations for our Mexican insurance operations.presented. Sales do not include renewal premiums on policies or contracts written during prior periods. We consider annualized first-year premiums, new premiums/deposits, gross and net flows, written premiums, premium equivalents and new insurance written to be a measure of our operating performance because they represent a measure of new sales of insurance policies or contracts during a specified period, rather than a measure of our revenues or profitability during that period.
Management regularly monitors and reports assets under management for our wealth management business, insurance in-force and risk in-force. Assets under management for our wealth management business represent third-party assets under management that are not consolidated in our financial statements. Insurance in-force for our life, insurance, international mortgage insurance and U.S. mortgage insurance businesses is a measure of the aggregate face value of outstanding insurance policies as of the respective reporting date. RiskFor our risk in-force forin our international and U.S. mortgage insurance businesses is a measure thatbusiness, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular mortgage loan will be reduced by the net proceeds received upon sale of the underlying property. Effective risk in-force has been calculated by applying to insurance in-force a factor of 35% that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Canada, Australia and New Zealand. Risk in-force for our U.S. mortgage insurance business is our obligation that is limited under contractual terms to the amounts less than 100% of the mortgage loan value. We consider assets under management for our wealth management business, insurance in-force and risk in-force to be a measure of our operating performance because they represent a measure of the size of our business at a specific date which will generate revenues and profits in a future period, rather than a measure of our revenues or profitability during that period.
We also include information related to loss mitigation activities for our U.S. mortgage insurance business. We define loss mitigation activities as rescissions, cancellations, borrower loan modifications, repayment plans, lender- and borrower-titled presales and other loan workouts and claim mitigation actions. Estimated savings related to rescissions are the reduction in carried loss reserves, net of premium refunds and reinstatement of prior rescissions. Estimated savings related to loan modifications and other cure related loss mitigation actions represent the reduction in carried loss reserves. For non-cure related actions, including presales, the estimated savings represent the difference between the full claim obligation and the actual amount paid. We believe that this information helps to enhance the understanding of the operating performance of our U.S. mortgage insurance business.business as they specifically impact current and future loss reserves and level of claim payments.
These operating measures enable us to compare our operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources.
The following discussions of our segment results of operations should be read in conjunction with the “—Business trends and conditions.”
Retirement and Protection segment
Segment results of operations
Three Months Ended March 31, 20102011 Compared to Three Months Ended March 31, 20092010
The following table sets forth the results of operations relating to our Retirement and Protection segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | ||||||||||||
Revenues: | |||||||||||||||
Premiums | $ | 824 | $ | 835 | $ | (11 | ) | (1 | )% | ||||||
Net investment income | 594 | 519 | 75 | 14 | % | ||||||||||
Net investment gains (losses) | (67 | ) | (574 | ) | 507 | 88 | % | ||||||||
Insurance and investment product fees and other | 242 | 207 | 35 | 17 | % | ||||||||||
Total revenues | 1,593 | 987 | 606 | 61 | % | ||||||||||
Benefits and expenses: | |||||||||||||||
Benefits and other changes in policy reserves | 945 | 913 | 32 | 4 | % | ||||||||||
Interest credited | 174 | 186 | (12 | ) | (6 | )% | |||||||||
Acquisition and operating expenses, net of deferrals | 230 | 203 | 27 | 13 | % | ||||||||||
Amortization of deferred acquisition costs and intangibles | 105 | 163 | (58 | ) | (36 | )% | |||||||||
Interest expense | 22 | 26 | (4 | ) | (15 | )% | |||||||||
Total benefits and expenses | 1,476 | 1,491 | (15 | ) | (1 | )% | |||||||||
Income (loss) before income taxes | 117 | (504 | ) | 621 | 123 | % | |||||||||
Provision (benefit) for income taxes | 33 | (188 | ) | 221 | 118 | % | |||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | 84 | (316 | ) | 400 | 127 | % | |||||||||
Adjustment to net income (loss) available to Genworth Financial, Inc.’s common stockholders: | |||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | 38 | 354 | (316 | ) | (89 | )% | |||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 122 | $ | 38 | $ | 84 | NM | (1) | |||||||
|
Three months ended March 31, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Revenues: | ||||||||||||||||
Premiums | $ | 818 | $ | 824 | $ | (6 | ) | (1 | )% | |||||||
Net investment income | 628 | 594 | 34 | 6 | % | |||||||||||
Net investment gains (losses) | (28 | ) | (67 | ) | 39 | 58 | % | |||||||||
Insurance and investment product fees and other | 320 | 242 | 78 | 32 | % | |||||||||||
Total revenues | 1,738 | 1,593 | 145 | 9 | % | |||||||||||
Benefits and expenses: | ||||||||||||||||
Benefits and other changes in policy reserves | 989 | 945 | 44 | 5 | % | |||||||||||
Interest credited | 168 | 174 | (6 | ) | (3 | )% | ||||||||||
Acquisition and operating expenses, net of deferrals | 273 | 230 | 43 | 19 | % | |||||||||||
Amortization of deferred acquisition costs and intangibles | 111 | 105 | 6 | 6 | % | |||||||||||
Interest expense | 26 | 22 | 4 | 18 | % | |||||||||||
Total benefits and expenses | 1,567 | 1,476 | 91 | 6 | % | |||||||||||
Income before income taxes | 171 | 117 | 54 | 46 | % | |||||||||||
Provision for income taxes | 59 | 33 | 26 | 79 | % | |||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | 112 | 84 | 28 | 33 | % | |||||||||||
Adjustment to net income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | 15 | 38 | (23 | ) | (61 | )% | ||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 127 | $ | 122 | $ | 5 | 4 | % | ||||||||
The following table sets forth net operating income available to Genworth Financial, Inc.’s common stockholders for the businesses included in our Retirement and Protection segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | |||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | |||||||||||
Net operating income available to Genworth Financial, Inc.’s common | ||||||||||||||
Life insurance | $ | 37 | $ | 38 | $ | (1 | ) | (3 | )% | |||||
Long-term care insurance | 40 | 41 | (1 | ) | (2 | )% | ||||||||
Wealth management | 11 | 6 | 5 | 83 | % | |||||||||
Retirement income | 34 | (47 | ) | 81 | 172 | % | ||||||||
Total net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 122 | $ | 38 | $ | 84 | NM | (1) | ||||||
|
Three months ended March 31, | Increase (decrease) and percentage change | |||||||||||||||
(Amounts in millions) | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders: | ||||||||||||||||
Life insurance | $ | 52 | $ | 37 | $ | 15 | 41 | % | ||||||||
Long-term care insurance | 40 | 40 | — | — | % | |||||||||||
Wealth management | 10 | 11 | (1 | ) | (9 | )% | ||||||||||
Retirement income | 25 | 34 | (9 | ) | (26 | )% | ||||||||||
Total net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 127 | $ | 122 | $ | 5 | 4 | % | ||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders
Our life insurance business remained relatively flat primarily asincreased $15 million from growth in our universal life and term universal life insurance products, an $8 million favorable cumulative impact from a recent change in premium taxes in Virginia and a favorable tax settlement wasinvestment income, partially offset by less favorable mortality in our term life insurance products in the current year compared to the prior year. The prior year included an unfavorable reinsurance adjustment of $5 million and lessa favorable mortality in the current year.tax settlement that did not recur.
Our long-term care insurance business remained relativelywas flat as the favorable performance of newer issued policies and higher investment incomespread in the current year was offset by higher claims in older issued policiesas a result of the aging and lower terminations.growth of the in-force block.
Our wealth management business increased $5 million fromwas relatively flat as higher average assets under management from favorable market impactsgrowth and positive net flows andwere offset by a $2 million favorable tax adjustment in the current year.prior year that did not recur.
Our retirement income business increased $81decreased $9 million. Our fee-based products increased $44decreased $6 million mainly attributable to improved market performance and an $8 million favorable adjustment to amortization of deferred acquisition costs in the current year.prior year that did not recur and a $7 million charge in the first quarter of 2011 from the discontinuance of our variable annuity offerings announced in 2011, partially offset by favorable market performance. Our spread-based products increased $37decreased $3 million primarily from an increase in net investment income from lower lossesan accrual related to limited partnerships accounted for underguarantee funds in the equity method.current year.
Revenues
Premiums
Our life insurance business decreased $14$7 million mainlyprimarily as a result of the runoff of our term life insurance products, partially offset by an unfavorable reinsurance adjustment of $8 million and lower persistency on policies enteringin the post-level rate period. The decrease was also attributable to the introduction of our term universal life productprior year that is designed to replace new sales of our existing term life insurance products with deposits of the new product reflected in insurance and investment product fees and other.did not recur.
Our long-term care insurance business increased $14$17 million mainly attributable to growth in the in-force block from new sales, renewal premiums and rate actions.sales.
Our retirement income business decreased $11$16 million primarily driven by lower life contingent sales of our spread-based products in the current market environment.products.
Net investment income
Our life insurance business increased $3$24 million mainly related to $12 million of lower losseshigher average invested assets, an increase in the current year related toincome from limited partnerships accounted for under the equity method. This increase was partially offset by lower yields onmethod and reinvestment of cash balances. Net investment income included $2 million of gains related to limited partnerships in the assets backing our non-recourse funding obligations supporting certain term and universal life insurance reserves.first quarter of 2011 as compared to losses related to limited partnerships of $5 million in the first quarter of 2010.
Our long-term care insurance business increased $32$19 million largely as a result of an increase in average invested assets due to growth inof our long-term care insurance in-force block. Additionally, net investment income in the current yearfirst quarter of 2011 included $11 million of lower losses of $3 million related to limited partnerships accounted for under the equity method as compared to the first quarter of 2010. These increases were partially offset by an unfavorable adjustment of $6 million related to the accounting for interest rate swaps in the current year.
Our retirement income business decreased $9 million primarily attributable to a decline in average invested assets, partially offset by an increase in income from limited partnerships accounted for under the equity method. Net investment income also benefited fromin the reinvestmentfirst quarter of the high cash balances we were holding during 2009.
Our retirement income business increased $402011 included gains of $1 million primarily attributablerelated to $57 million of lowerlimited partnerships as compared to losses related to limited partnerships accounted for underof $4 million in the equity method. Net investment income also benefited from the reinvestmentfirst quarter of the high cash balances we were holding during 2009. These increases were partially offset by a decline in average invested assets.2010.
Net investment gains (losses).For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”
Net investment losses in our life insurance business decreased $134$26 million primarily driven by lower lossesimpairments and higher gains from the sale of investment securities related to portfolio repositioning and impairments recorded in the current year.
Our long-term care insurance business had net investment gainslosses of $8 million in the current year mainly from the sale of investment securities related to portfolio repositioning asimpairments compared to net investment lossesgains of $2 million in the prior year primarily from derivative losses related to our derivative strategy to mitigate interest rate risk associated with our statutory capital position.gains, partially offset by impairments.
Net investment losses in our retirement income business decreased $154$23 million primarily related to lower losses from the sale of investment securities related to portfolio repositioning and impairments in the current year. This was partially offset by higher lossesgains related to embedded derivatives associated with our variable annuity products with GMWBs.GMWBs, partially offset by higher losses from the sale of investment securities related to portfolio repositioning.
Insurance and investment product fees and other
Our life insurance business increased $11$39 million primarily from growth inof our new term universal and universal life insurance product that is designed to replace sales of our traditional term life insurance products and an increase in surrender fee income.products.
Our wealth management business increased $17$29 million primarily attributable to higher average assets under management from favorable market impacts andthe purchase of Altegris in the fourth quarter of 2010, positive net flows as gross flows exceeded redemptions.and market growth.
Our retirement income business increased $8 million mainly due to theas a result of higher average account values in our fee-based products from favorable market impact on our fee-based products.performance.
Benefits and expenses
Benefits and other changes in policy reserves
Our life insurance business increased $6$30 million principally related to growth of our term universal life insurance product and less favorable mortality in our term and universallife insurance products in the current year as compared to the prior year, partially offset by the runoff of our term life insurance products.
Our long-term care insurance business increased $46$34 million primarily as a result of higher claims in older issued policiesthe aging and lower terminations in the current year.growth of our long-term care insurance in-force block.
Our retirement income business decreased $20 million largely attributable to a decrease of $13$17 million from our fee-based products related to our guaranteed minimum benefit liabilities for our variable annuity contracts driven by improved market performance and a decrease in guaranteed minimum death benefit claims. Our life-contingent spread-based products decreased $7 million driven byas a result of a decline in sales in the current market environment, partially offsetyear. Our fee-based products decreased $3 million driven by higher amortization of sales inducements as a result of lower net investment lossesdecline in the current year.our guaranteed minimum death benefit claims.
Interest credited. Interest credited decreased $12$6 million primarily related to our retirement income business from lower account values on fixed annuities and lower crediting rates as the fixed annuities reach the end of their initial crediting rate guarantee period.
Acquisition and operating expenses, net of deferrals
Our life insurance business increased $4decreased $8 million primarily related to a $13 million favorable cumulative impact from a recent change in premium taxes in Virginia in the current year, partially offset by higher expenses from growth of our term universal life insurance products.product.
Our long-term care insurance business increased $6$11 million relatedlargely attributable to growth inof our long-term care insurance in-force block.
Our wealth management business increased $14$26 million primarily from increased asset-based expenses as assets under management increased from favorable market impacts andthe acquisition of Altegris in the fourth quarter of 2010, positive net flows.flows and market growth.
Our retirement income business increased $3$14 million largely driven by a $9 million charge in the first quarter of 2011 from the discontinuance of our variable annuity offerings announced in 2011 and an increase in costs associated with sales of our fee-based products. This increase was also due to$4 million from an increase in non-recoverable acquisition expenses mainlyaccrual related to lower salesguarantee funds in the current year.
Amortization of deferred acquisition costs and intangibles
Our life insurance business increased $9decreased $7 million primarily attributable to lower amortization related to our term life insurance policies coming out of their post-level rate period and a decrease in amortization of present value of future profits driven by higher mortality in our universal life insurance products. These decreases were partially offset by an increase in amortization relateddue to lower persistency ingrowth of our termuniversal life insurance products entering the post-level rate period.products.
Our long-term care insurance business decreased $7$5 million primarily from lower terminations,deferring costs associated with the sale of joint policies that were incorrectly expensed in prior years as a result of a system conversion in late 2008 that was identified and corrected in the fourth quarter of 2010. This decrease was partially offset by growth of our long-term care insurance in-force block.
Our retirement income business decreased $60increased $18 million primarily related to a decreasean increase of $78$13 million in our fee-based products principally from improved equity market performance and a $12 million favorable adjustment recorded in the current year. The prior year included additional amortization of deferred acquisition costs of $54 million from loss recognition testing that did not recur. This decrease wasOur spread-based products increased $5 million mainly from less favorable adjustments related to lapses in the current year, partially offset by an increase of $18 million in our spread-based products mainly from higher amortization of deferred acquisition costs attributable to lower net investment lossesa decrease in the current year.account values of these products.
Interest expense. Interest expense decreasedincreased $4 million primarily related to our life insurance business from a decrease in average floating rates paid on our non-recourse funding obligations reflecting the declinehigher letter of credit fees in the underlying index rate.current year.
Provision (benefit) for income taxes.The effective tax rate decreasedincreased to 34.5% for the three months ended March 31, 2011 from 28.2% for the three months ended March 31, 2010 from 37.3% for the three months ended March 31, 2009. This decrease2010. The increase in the effective tax rate was primarily attributable to changesthe proportion of tax favored investment benefits to pre-tax results in the current year compared to the prior year and a change in uncertain tax positions and tax favored investments in the currentprior year.
Retirement and Protection selected financial and operating performance measures
Life insurance
The following table sets forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:
As of or for the three months ended March 31, | Increase (decrease) and percentage change | As of or for the three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||
Term life insurance | |||||||||||||||||||||||||||||
Net earned premiums | $ | 224 | $ | 237 | $ | (13 | ) | (5 | )% | $ | 219 | $ | 224 | $ | (5 | ) | (2 | )% | |||||||||||
Annualized first-year premiums | 14 | 19 | (5 | ) | (26 | )% | — | 14 | (14 | ) | (100 | )% | |||||||||||||||||
Life insurance in-force, net of reinsurance | 472,696 | 489,723 | (17,027 | ) | (3 | )% | 452,116 | 472,696 | (20,580 | ) | (4 | )% | |||||||||||||||||
Life insurance in-force before reinsurance | 620,108 | 625,503 | (5,395 | ) | (1 | )% | 587,545 | 620,108 | (32,563 | ) | (5 | )% | |||||||||||||||||
Term universal life insurance | |||||||||||||||||||||||||||||
Net deposits | $ | 5 | $ | — | $ | 5 | NM | (1) | $ | 35 | $ | 5 | $ | 30 | NM | (1) | |||||||||||||
Term universal life annualized first-year deposits | 10 | — | 10 | NM | (1) | ||||||||||||||||||||||||
Annualized first-year deposits | 31 | 10 | 21 | NM | (1) | ||||||||||||||||||||||||
Life insurance in-force, net of reinsurance | 5,453 | — | 5,453 | NM | (1) | 58,371 | 5,453 | 52,918 | NM | (1) | |||||||||||||||||||
Life insurance in-force before reinsurance | 5,456 | — | 5,456 | NM | (1) | 58,811 | 5,456 | 53,355 | NM | (1) | |||||||||||||||||||
Universal and whole life insurance | |||||||||||||||||||||||||||||
Net earned premiums and deposits | $ | 118 | $ | 124 | $ | (6 | ) | (5 | )% | $ | 162 | $ | 118 | $ | 44 | 37 | % | ||||||||||||
Universal life annualized first-year deposits | 7 | 9 | (2 | ) | (22 | )% | 11 | 7 | 4 | 57 | % | ||||||||||||||||||
Universal life excess deposits | 20 | 28 | (8 | ) | (29 | )% | 36 | 20 | 16 | 80 | % | ||||||||||||||||||
Linked-benefits(2) | 23 | — | 23 | NM | (1) | ||||||||||||||||||||||||
Life insurance in-force, net of reinsurance | 43,712 | 43,901 | (189 | ) | — | % | 44,131 | 43,712 | 419 | 1 | % | ||||||||||||||||||
Life insurance in-force before reinsurance | 50,655 | 51,201 | (546 | ) | (1 | )% | 50,855 | 50,655 | 200 | — | % | ||||||||||||||||||
Total life insurance | |||||||||||||||||||||||||||||
Net earned premiums and deposits | $ | 347 | $ | 361 | $ | (14 | ) | (4 | )% | $ | 416 | $ | 347 | $ | 69 | 20 | % | ||||||||||||
Annualized first-year premiums | 14 | 19 | (5 | ) | (26 | )% | — | 14 | (14 | ) | (100 | )% | |||||||||||||||||
Annualized first-year deposits | 17 | 9 | 8 | 89 | % | 42 | 17 | 25 | 147 | % | |||||||||||||||||||
Excess deposits | 20 | 28 | (8 | ) | (29 | )% | |||||||||||||||||||||||
Universal life excess deposits | 36 | 20 | 16 | 80 | % | ||||||||||||||||||||||||
Linked-benefits(2) | 23 | — | 23 | NM | (1) | ||||||||||||||||||||||||
Life insurance in-force, net of reinsurance | 521,861 | 533,624 | (11,763 | ) | (2 | )% | 554,618 | 521,861 | 32,757 | 6 | % | ||||||||||||||||||
Life insurance in-force before reinsurance | 676,219 | 676,704 | (485 | ) | — | % | 697,211 | 676,219 | 20,992 | 3 | % |
(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
(2) | In the first quarter of 2011, we began reporting the results of the linked-benefits product for universal life insurance in our life insurance business. The linked-benefits product for universal life insurance was previously reported in our long-term care insurance business. The amounts associated with this product were not material and the prior period amounts were not re-presented. |
Term life insurance
Net earned premiums decreased mainly as a result of the runoff of our term life insurance products, partially offset by an unfavorable reinsurance adjustment of $8 million and lower persistency on policies entering the post-level rate period. The decrease was also attributable to lower sales in the currentprior year from the introduction of our term universal life product that is designeddid not recur. The in-force block also decreased due to replace new sales of our existing term life insurance products. Annualized first-year premiums decreased as we focus on sales of our new term universal life insurance product.runoff.
Term universal life insurance
InNet deposits increased due to growth of this product since its introduction in late 2009, we introduced a new term universal life insurance product that is designed to replace new sales of our existing term life insurance products. This new product provides greater flexibility typically associated with universal life insurance coverage.2009.
Universal and whole life insurance
Annualized first-yearNet earned premiums and deposits decreased as we maintainedincreased due primarily to the growth of our focus on smaller face amounts.universal life insurance products. The in-force block was relatively flat as the growth in our universal life insurance products was offset by the continued runoff of our closed block of the whole life insurance.insurance product.
Long-term care insurance
The following table sets forth selected financial and operating performance measures regarding our long-term care insurance business, which includes individual and group long-term care insurance, Medicare supplement insurance, linked-benefits products, as well as several runoff blocks of accident and health insurance for the periods indicated:
(Amounts in millions) | Three months ended March 31, | Increase (decrease) and percentage change | Three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||||||||||||||
2010 | 2009 | 2010 vs. 2009 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||
Net earned premiums: | ||||||||||||||||||||||||||||
Long-term care | $ | 479 | $ | 475 | $ | 4 | 1 | % | $ | 492 | $ | 479 | $ | 13 | 3 | % | ||||||||||||
Medicare supplement and other | 80 | 70 | 10 | 14 | % | 84 | 80 | 4 | 5 | % | ||||||||||||||||||
Total | $ | 559 | $ | 545 | $ | 14 | 3 | % | $ | 576 | $ | 559 | $ | 17 | 3 | % | ||||||||||||
Annualized first-year premiums and deposits | $ | 67 | $ | 47 | $ | 20 | 43 | % | $ | 65 | $ | 67 | $ | (2 | ) | (3 | )% | |||||||||||
Net earned premiums increased mainly attributable to growth in our in-force block from new sales, renewal premiums and rate actions. sales.
The increasedecrease in annualized first-year premiums and deposits was primarily attributable to our linked-benefits products. In the first quarter of 2011, we began reporting the results of the linked-benefits products for universal life insurance and single premium deferred annuity products in our life insurance and spread-based retirement income businesses, respectively. The linked-benefits products were previously reported in our long-term care insurance business. This decrease was partially offset by growth in our individual and group long-term care insurance and linked-benefits products.
Wealth management
The following table sets forth selected financial performance measures regarding our wealth management business as of or for the dates indicated:
As of or for the three months ended March 31, | As of or for the three months ended March 31, | |||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2011 | 2010 | ||||||||||||
Assets under management, beginning of period | $ | 18,865 | $ | 15,447 | $ | 24,740 | $ | 18,865 | ||||||||
Gross flows | 1,475 | 796 | 2,058 | 1,475 | ||||||||||||
Redemptions | (971 | ) | (1,274 | ) | (1,703 | ) | (971 | ) | ||||||||
Net flows | 504 | (478 | ) | 355 | 504 | |||||||||||
Market performance | 668 | (759 | ) | 456 | 668 | |||||||||||
Assets under management, end of period | $ | 20,037 | $ | 14,210 | $ | 25,551 | $ | 20,037 | ||||||||
Wealth managementManagement results represent Genworth Financial Wealth Management, Inc., Genworth Financial Investment Services, Inc., Genworth Financial Trust Company, and QuantuvisCenturion Financial Advisers, Inc., Quantavis Consulting, Inc. and the Altegris companies.
The increase in assets under management was primarily attributable to favorable equity market performance andthe acquisition of Altegris on December 31, 2010, positive net flows.flows and market growth.
Retirement income
Fee-based products
The following table sets forth selected operating performance measures regarding our fee-based products as of or for the dates indicated:
As of or for the three months ended March 31, | As of or for the three months ended March 31, | |||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2011 | 2010 | ||||||||||||
Income Distribution Series (1) | ||||||||||||||||
Account value, net of reinsurance, beginning of period | $ | 5,943 | $ | 5,234 | ||||||||||||
Account value, beginning of period | $ | 6,590 | $ | 5,943 | ||||||||||||
Deposits | 173 | 125 | 117 | 173 | ||||||||||||
Surrenders, benefits and product charges | (127 | ) | (106 | ) | (185 | ) | (127 | ) | ||||||||
Net flows | 46 | 19 | (68 | ) | 46 | |||||||||||
Interest credited and investment performance | 146 | (160 | ) | 165 | 146 | |||||||||||
Account value, net of reinsurance, end of period | $ | 6,135 | $ | 5,093 | ||||||||||||
Account value, end of period | $ | 6,687 | $ | 6,135 | ||||||||||||
Traditional variable annuities | ||||||||||||||||
Account value, net of reinsurance, beginning of period | $ | 2,016 | $ | 1,756 | $ | 2,078 | $ | 2,016 | ||||||||
Deposits | 27 | 19 | 17 | 27 | ||||||||||||
Surrenders, benefits and product charges | (65 | ) | (63 | ) | (88 | ) | (65 | ) | ||||||||
Net flows | (38 | ) | (44 | ) | (71 | ) | (38 | ) | ||||||||
Interest credited and investment performance | 70 | (70 | ) | 89 | 70 | |||||||||||
Account value, net of reinsurance, end of period | $ | 2,048 | $ | 1,642 | $ | 2,096 | $ | 2,048 | ||||||||
Variable life insurance | ||||||||||||||||
Account value, beginning of period | $ | 298 | $ | 266 | $ | 313 | $ | 298 | ||||||||
Deposits | 3 | 4 | 3 | 3 | ||||||||||||
Surrenders, benefits and product charges | (10 | ) | (11 | ) | (11 | ) | (10 | ) | ||||||||
Net flows | (7 | ) | (7 | ) | (8 | ) | (7 | ) | ||||||||
Interest credited and investment performance | 12 | (11 | ) | 14 | 12 | |||||||||||
Account value, end of period | $ | 303 | $ | 248 | $ | 319 | $ | 303 | ||||||||
(1) | The Income Distribution Series products are comprised of our deferred and immediate variable annuity products, including those variable annuity products with rider options that provide guaranteed income benefits, including GMWBs and certain types of guaranteed annuitization benefits. These products do not include fixed single premium immediate annuities or deferred annuities, which may also serve income distribution needs. |
Income Distribution Series
Account value related to our Income Distribution Series products increased from the prior year mainly attributable to improved equity market performancegrowth, partially offset by surrenders outpacing sales. Beginning in the first quarter of 2011, we no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and positive net flows.accept additional deposits on existing contracts.
Traditional variable annuities
In our traditional variable annuities, the increase in account value from the prior year was principally theas a result of improved equity market performance,growth, partially offset by surrenders outpacing sales. Beginning in the first quarter of 2011, we no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts.
Variable life insurance
We no longer solicit sales of this product; however, we continue to service our existing block of business.
Spread-based products
The following table sets forth selected operating performance measures regarding our spread-based products as of or for the dates indicated:
As of or for the three months ended March 31, | As of or for the three months ended March 31, | |||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2011 | 2010 | ||||||||||||
Fixed annuities | ||||||||||||||||
Account value, net of reinsurance, beginning of period | $ | 11,409 | $ | 11,996 | ||||||||||||
Account value, beginning of period | $ | 10,819 | $ | 11,409 | ||||||||||||
Deposits | 41 | 242 | 120 | 41 | ||||||||||||
Surrenders, benefits and product charges | (312 | ) | (508 | ) | (368 | ) | (312 | ) | ||||||||
Net flows | (271 | ) | (266 | ) | (248 | ) | (271 | ) | ||||||||
Interest credited | 96 | 103 | 89 | 96 | ||||||||||||
Account value, net of reinsurance, end of period | $ | 11,234 | $ | 11,833 | ||||||||||||
Account value, end of period | $ | 10,660 | $ | 11,234 | ||||||||||||
Single premium immediate annuities | ||||||||||||||||
Account value, net of reinsurance, beginning of period | $ | 6,675 | $ | 6,957 | ||||||||||||
Account value, beginning of period | $ | 6,528 | $ | 6,675 | ||||||||||||
Premiums and deposits | 95 | 111 | 85 | 95 | ||||||||||||
Surrenders, benefits and product charges | (265 | ) | (236 | ) | (256 | ) | (265 | ) | ||||||||
Net flows | (170 | ) | (125 | ) | (171 | ) | (170 | ) | ||||||||
Interest credited | 88 | 93 | 83 | 88 | ||||||||||||
Effect of accumulated net unrealized investment gains (losses) | (29 | ) | — | |||||||||||||
Account value, net of reinsurance, end of period | $ | 6,593 | $ | 6,925 | ||||||||||||
Account value, end of period | $ | 6,411 | $ | 6,593 | ||||||||||||
Structured settlements | ||||||||||||||||
Account value, net of reinsurance, beginning of period | $ | 1,115 | $ | 1,106 | $ | 1,113 | $ | 1,115 | ||||||||
Premiums and deposits | — | 4 | ||||||||||||||
Surrenders, benefits and product charges | (14 | ) | (23 | ) | (15 | ) | (14 | ) | ||||||||
Net flows | (14 | ) | (19 | ) | (15 | ) | (14 | ) | ||||||||
Interest credited | 14 | 14 | 15 | 14 | ||||||||||||
Account value, net of reinsurance, end of period | $ | 1,115 | $ | 1,101 | $ | 1,113 | $ | 1,115 | ||||||||
Total premiums from spread-based products | $ | 36 | $ | 47 | $ | 20 | $ | 36 | ||||||||
Total deposits on spread-based products | $ | 100 | $ | 310 | $ | 185 | $ | 100 | ||||||||
Fixed annuities
Account value of our fixed annuities decreased as surrenders exceeded deposits. Sales have slowed significantlyincreased over the prior year but remain at lower levels given the low interest rate environment and other market conditions and as a result of company actions related to future risk, profitability and capital considerations.conditions.
Single premium immediate annuities
Account value of our single premium immediate annuities decreased as surrenders exceeded depositspremiums and premiums.deposits. Sales have slowed significantly given the low interest rate environment and other market conditions and as a result of company actions related to future risk, profitability and capital considerations.conditions.
Structured settlements
We no longer solicit sales of this product; however, we continue to service our existing block of business.
International segment
Segment results of operations
Three Months Ended March 31, 20102011 Compared to Three Months Ended March 31, 20092010
The following table sets forth the results of operations relating to our International segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | ||||||||||||
Revenues: | |||||||||||||||
Premiums | $ | 504 | $ | 496 | $ | 8 | 2 | % | |||||||
Net investment income | 132 | 104 | 28 | 27 | % | ||||||||||
Net investment gains (losses) | 9 | (15 | ) | 24 | 160 | % | |||||||||
Insurance and investment product fees and other | 6 | 5 | 1 | 20 | % | ||||||||||
Total revenues | 651 | 590 | 61 | 10 | % | ||||||||||
Benefits and expenses: | |||||||||||||||
Benefits and other changes in policy reserves | 174 | 192 | (18 | ) | (9 | )% | |||||||||
Acquisition and operating expenses, net of deferrals | 203 | 195 | 8 | 4 | % | ||||||||||
Amortization of deferred acquisition costs and intangibles | 72 | 74 | (2 | ) | (3 | )% | |||||||||
Interest expense | 23 | 8 | 15 | 188 | % | ||||||||||
Total benefits and expenses | 472 | 469 | 3 | 1 | % | ||||||||||
Income before income taxes | 179 | 121 | 58 | 48 | % | ||||||||||
Provision for income taxes | 50 | 30 | 20 | 67 | % | ||||||||||
Net income | 129 | 91 | 38 | 42 | % | ||||||||||
Less: net income attributable to noncontrolling interests | 34 | — | 34 | NM | (1) | ||||||||||
Net income available to Genworth Financial, Inc.’s common stockholders | 95 | 91 | 4 | 4 | % | ||||||||||
Adjustment to net income available to Genworth Financial, Inc.’s common stockholders: | |||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | (4 | ) | 10 | (14 | ) | (140 | )% | ||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 91 | $ | 101 | $ | (10 | ) | (10 | )% | ||||||
|
(Amounts in millions) Revenues: Premiums Net investment income Net investment gains (losses) Insurance and investment product fees and other Total revenues Benefits and expenses: Benefits and other changes in policy reserves Acquisition and operating expenses, net of deferrals Amortization of deferred acquisition costs and intangibles Interest expense Total benefits and expenses Income before income taxes Provision for income taxes Net income Less: net income attributable to noncontrolling interests Net income available to Genworth Financial, Inc.’s common stockholders Adjustment to net income available to Genworth Financial, Inc.’s common stockholders: Net investment (gains) losses, net of taxes and other adjustments Net operating income available to Genworth Financial, Inc.’s common stockholders Three months ended
March 31, Increase
(decrease) and
percentage
change 2011 2010 2011 vs. 2010 $ 477 $ 504 $ (27 ) (5 )% 143 132 11 8 % 6 9 (3 ) (33 )% 6 6 — — % 632 651 (19 ) (3 )% 141 174 (33 ) (19 )% 198 203 (5 ) (2 )% 67 72 (5 ) (7 )% 19 23 (4 ) (17 )% 425 472 (47 ) (10 )% 207 179 28 16 % 46 50 (4 ) (8 )% 161 129 32 25 % 34 34 — — % 127 95 32 34 % (3 ) (4 ) 1 25 % $ 124 $ 91 $ 33 36 %
The following table sets forth net operating income available to Genworth Financial, Inc.’s common stockholders for the businesses included in our International segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders: | |||||||||||||||||||||||||||||
International mortgage insurance | $ | 79 | $ | 90 | $ | (11 | ) | (12 | )% | $ | 99 | $ | 79 | $ | 20 | 25 | % | ||||||||||||
Lifestyle protection insurance | 12 | 11 | 1 | 9 | % | 25 | 12 | 13 | 108 | % | |||||||||||||||||||
Total net operating income available to Genworth Financial, Inc.’s common stockholders | $ | 91 | $ | 101 | $ | (10 | ) | (10 | )% | $ | 124 | $ | 91 | $ | 33 | 36 | % | ||||||||||||
Net operating income available to Genworth Financial, Inc.’s common stockholders
The three months ended March 31, 20102011 included an increase of $19$7 million and a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance business.businesses, respectively.
The decrease in our international mortgage insurance business was primarily driven by the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5% resulting in lower net operating income of $33 million, which included $5 million attributable to changes in foreign exchange rates, in the first quarter of 2010. Excluding the impact related to noncontrolling interests, netNet operating income for our international mortgage insurance business was relatively flat asincreased from overall lower losses wereand taxes, partially offset by lower premiums and higher taxes.interest expense.
Net operating income for our lifestyle protection insurance business was relatively flat as a decrease inincreased attributable to lower new claim registrations from improving economic conditions and a favorable impact from our re-pricing actions taken in the second half of 2009 were2010, partially offset by reduced levels of consumer lending.
Revenues
Premiums
Our international mortgage insurance business increased $32$16 million and our lifestyle protection insurance business decreased $24$43 million.
The three months ended March 31, 20102011 included increasesan increase of $46$17 million and $22a decrease of $7 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, our international mortgage insurance business was relatively flat. In both Canada and Australia, lower premiums were attributable to seasoning of our in-force blocks of business. This decrease was offset by lower ceded affiliated reinsurance in Australia in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year and ongoing loss mitigation activities.
The decrease in our lifestyle protection insurance business was primarily attributable to our runoff block of business and a decrease in premium volume driven by reduced levels of consumer lending. Additionally, there was a favorable premium adjustment related to the timing of receiving client data which was partially offset by an unfavorable reinsurance adjustment in the first quarter of 2010 both of which were offset in expenses. These decreases were partially offset by re-pricing actions taken during 2010.
Net investment income
Our international mortgage insurance business increased $10 million and our lifestyle protection insurance business increased $1 million.
The three months ended March 31, 2011 included an increase of $7 million and a decrease of $2 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
The increase in our international mortgage insurance business was primarily as a result of higher average invested assets in Canada and Australia.
The increase in our lifestyle protection insurance business was principally attributable to reinsurance arrangements accounted for under the deposit method as these arrangements were in a gain position.
Benefits and expenses
Benefits and other changes in policy reserves
Our international mortgage insurance business increased $3 million and our lifestyle protection insurance business decreased $36 million.
The three months ended March 31, 2011 included an increase of $7 million and a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, the decrease in our international mortgage insurance business was primarily driven by lower losses in Europe related to rescissions and other terminations related to loss mitigation activities in Europe, particularly in Spain. In Canada, premiums decreased as seasoning of our in-force block of business was more than offset by lower policy cancellations. In Australia, premiums decreased as seasoning of our in-force block of business was more than offset by increased ceded reinsurance premiumslender settlements in the first quarter of 2010prior year and lower new business volumes.
The decrease in our lifestyle protection insurance business was primarily attributable to our runoff block of business. Reduced levels of consumer lending and lower single premium sales related to new business regulations in the U.K. also contributed to the decrease. These decreases were partially offset by a favorable impact from our re-pricing actions taken in the second half of 2009. Additionally, there was a favorable premium adjustment related to the timing of receiving client data which was partially offset by an unfavorable reinsurance adjustment in the first quarter of 2010. These adjustments were offset in expenses.
Net investment income
Our international mortgage insurance business increased $13 million and our lifestyle protection insurance business increased $15 million.
The three months ended March 31, 2010 included increases of $17 million and $4 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, the decrease in our international mortgage insurance business was a result of lower yields, partially offset by an increase in invested assets.
The increase in our lifestyle protection insurance business was principally attributable to reinsurance arrangements accounted for under the deposit method. In 2010, the reinsurance arrangements that were in a loss position were reflected in interest expense. However, in 2009, the reinsurance arrangements that were in a loss position were reflected in net investment income. Partially offsetting this increase was lower yields as a result of holding higher cash balances.
Benefits and expenses
Benefits and other changes in policy reserves
Our international mortgage insurance business decreased $3 million and our lifestyle protection insurance business decreased $15 million.
The three months ended March 31, 2010 included increases of $19 million and $6 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
In Australia, losses decreased as a result of lower reserves per delinquency primarily from an improving economy. Losses in Europe declined primarily related to ongoing loss mitigation activities. In Canada, losses declinedAustralia was relatively flat as an increase in reserves driven by the economic impact of recent flooding was offset by lower paid claims. Losses in Canada were flat as lower severity from overall economic improvement in the current year was offset by higher new delinquencies from an improving economy and increased loss mitigation activities.in Alberta which have a higher average reserve per delinquency.
The decrease in our lifestyle protection insurance business was largely attributable to a decrease in claim reserves from slowingdeclining claim registrations as a resultdriven by continued stabilization of improving economic conditions in Europe and a favorable reserve adjustment in the current year. These decreases were partially offset by higher paid claims, particularly in Spain and Ireland, as a result of increasing unemployment rates.Europe.
Acquisition and operating expenses, net of deferrals.Acquisition and operating expenses, net of deferrals,
Our international mortgage insurance business increased $7 decreased $5 million andlargely attributable to our lifestyle protection insurance business increased $1 million.
The three months ended March 31, 2010 included increases of $6 million and $13 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Excluding the effects of foreign exchange, our international mortgage insurance business was relatively flat as the impact from canceling our capital maintenance agreement with our U.S. mortgage insurance business in the second quarter of 2009 was offset by higher expenses in Canada.
Excluding the effects of foreign exchange, the decrease in our lifestyle protection insurance business was largely attributable to a decrease in paid commissions related to a decline in new business, partially offset by an increase in profit commissions driven by decreasedlower claims. Additionally, there was a favorable commission adjustment in the first quarter of 2010 that was offset in premiumspremiums. The three months ended March 31, 2011 included an increase of $2 million and a favorable impact fromdecrease of $4 million attributable to changes in foreign exchange rates for our re-pricing actions taken in the second half of 2009.international mortgage and lifestyle protection insurance businesses, respectively.
Amortization of deferred acquisition costs and intangibles
Our international mortgage insurance business increased $6$5 million and our lifestyle protection insurance business decreased $8$10 million.
The three months ended March 31, 20102011 included increasesan increase of $4$2 million and a decrease of $1 million attributable to changes in foreign exchange rates in each offor our international mortgage and lifestyle protection insurance businesses.businesses, respectively.
The increase in our international mortgage insurance business was as a result ofresulted primarily from an increase inrelated to software and higher amortization of deferred acquisition costs fromdriven by the seasoning of our in-force blocks of business.
The decrease in our lifestyle protection insurance business was primarily attributable to a decrease in the U.K. from lower single premium sales related to new business regulations and a decrease from our runoff block of business. Additionally, there was an unfavorable adjustment in the first quarter of 2010 related to the timing of receiving client data that was offset in premiums.
Interest expense.expenseInterest expense
Our international mortgage insurance business increased $15$6 million primarily related toand our lifestyle protection insurance business decreased $10 million.
The three months ended March 31, 2011 included a decrease of $1 million attributable to changes in foreign exchange rates in our lifestyle protection insurance business.
The increase in our international mortgage insurance business was related to Canada from the issuance of debt by our majority-owned subsidiary in June and December 2010.
The decrease in our lifestyle protection insurance business was due to reinsurance arrangements accounted for under the deposit method of accounting as these arrangements were in a loss position. In 2009, the reinsurance arrangements that were in alower loss position were reflected in net investment income. The three months ended March 31, 2010 included an increase of $2 million attributable to changes in foreign exchange rates.the current year.
Provision for income taxes.The effective tax rate increaseddecreased to 22.2% for the three months ended March 31, 2011 from 27.9% for the three months ended March 31, 2010 from 24.8% for the three months ended March 31, 2009.2010. This increasedecrease in the effective tax rate was primarily attributable to the tax impact of local structural changes to comply with revised local regulations in Australia.lower taxed foreign income. The three months ended March 31, 2010 also2011 included increasesan increase of $10$4 million and $2a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.
Net income attributable to noncontrolling interests. The increase related to the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5%. The three months ended March 31, 2010 included an increase of $5 million attributable to changes in foreign exchange rates.
International selected operating performance measures
International mortgage insurance
The following table sets forth selected operating performance measures regarding our international mortgage insurance business as of or for the dates indicated:
As of or for the three months ended March 31, | Increase (decrease) and percentage change | As of or for the three months ended March 31, | Increase (decrease) and percentage change | |||||||||||||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||
Primary insurance in-force | $ | 515,500 | $ | 400,600 | $ | 114,900 | 29 | % | $ | 577,500 | $ | 515,500 | $ | 62,000 | 12 | % | ||||||||||||
Risk in-force | 172,900 | 130,300 | 42,600 | 33 | % | 194,700 | 172,900 | 21,800 | 13 | % | ||||||||||||||||||
New insurance written | 13,900 | 10,300 | 3,600 | 35 | % | 12,700 | 13,900 | (1,200 | ) | (9 | )% | |||||||||||||||||
Net premiums written | 163 | 138 | 25 | 18 | % | 172 | 163 | 9 | 6 | % | ||||||||||||||||||
Net earned premiums | 246 | 214 | 32 | 15 | % | 262 | 246 | 16 | 7 | % |
Primary insurance in-force and risk in-force
Our businesses in Australia, New Zealand and Canada currently provide 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our risk in-force, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net
proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Australia, New Zealand and Canada. For the three months ended March 31, 20102011 and 2009,2010, this factor was 35%.
Primary insurance in-force and risk in-force increased primarily as a result of new insurance written in Canada and Australia, partially offset by cancellations in Australia and loss mitigation activities in Europe.Europe during 2010. Primary insurance in-force and risk in-force included increases of $106.8$45.8 billion and $37.1$15.7 billion, respectively, attributable to changes in foreign exchange rates as of March 31, 2010.2011.
New insurance written
New insurance written increasedwas lower primarily as a result of growth in bulk new insurance written in Canada and Australia as some liquidity returned to the securitization market in Australia and as select lenders look for capital relief in Canada. Also contributing to the increase was flow new insurance written in Canada, driven by growth in the mortgage origination markets as consumer confidence improved. Partially offsetting these increases was a decreasedecreases in flow new insurance written in Australia reflecting higher interest ratesdue to a smaller mortgage originations market and lower mortgage originations primarilybulk transactions volume in Canada. These decreases were partially offset by higher flow new insurance written in Canada from first-time homebuyersan estimated increase in our market share and bulk transactions in Australia and Europe where we have taken actions to selectively reduce new business including exiting selected distribution relationships.in the current year. The three months ended March 31, 20102011 included an increase of $2.9$1.0 billion attributable to changes in foreign exchange rates.
Net premiums written and net earned premiums earned
Most of our international mortgage insurance policies provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premiums earned over time in accordance with the expected pattern of risk emergence. As of March 31, 2010,2011, our unearned premium reserves increased towere $3.1 billion, including an increase of $649 million$0.2 billion attributable to changes in foreign exchange rates, from $2.6compared to $3.1 billion as of March 31, 2009.2010. Excluding the effects of foreign exchange, our unearned premium reserves decreased primarily related to seasoning of our in-force block of business.
Excluding the effects of foreign exchange, net premiums written decreased primarily driven by a decrease infrom lower flow new insurance written in Australia and a decrease in average price driven by a decline in new business volume with loan-to-value ratios of more than 90%. The decrease was partially offset by an increase inbulk new insurance written in Canada. Partially offsetting this decrease was higher flow new insurance written in Canada and lower ceded affiliated reinsurance premiums in Australia. The three months ended March 31, 20102011 included an increase of $31$11 million attributable to changes in foreign exchange rates.
Excluding the effects of foreign exchange, net earned premiums earned decreased primarily relatedwere relatively flat. In both Canada and Australia, lower premiums were attributable to rescissions and other terminations related to loss mitigation activities in Europe, particularly in Spain. In Canada, premiums decreased as seasoning of our in-force block of businessbusiness. This decrease was more than offset by lower policy cancellations.ceded affiliated reinsurance in Australia in the current year. In Australia,Europe, premiums decreased as seasoninga result of our in-force block of business was more than offset by increased ceded reinsurance premiumslender settlements in the first quarter of 2010prior year and lower new business volumes.ongoing loss mitigation activities. The three months ended March 31, 20102011 included an increase of $46$17 million attributable to changes in foreign exchange rates.
Loss and expense ratios
The following table sets forth the loss and expense ratios for our international mortgage insurance business for the dates indicated:
Three months ended March 31, | Increase (decrease) | ||||||||
2010 | 2009 | 2010 vs. 2009 | |||||||
Loss ratio | 43 | % | 51 | % | (8 | )% | |||
Expense ratio | 44 | % | 42 | % | 2 | % |
Loss ratio Expense ratio Three months ended March 31, Increase (decrease) 2011 2010 2011 vs. 2010 42 % 43 % (1 )% 45 % 44 % 1 %
The loss ratio is the ratio of incurred losses and loss adjustment expenses to net premiums earned.earned premiums. The expense ratio is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition costs and intangibles.
The decrease in the loss ratio was primarily attributable to lower losses in Australia as a result of lower reserves per delinquency and lower losses in Canada from a decrease in delinquencies. There were also decreased losses in Europe related to lender settlements in the prior year and ongoing loss mitigation activities in Spain. Partially offsetting the decrease inactivities. In Australia, the loss ratio was a declineincreased primarily from an increase in net earned premiums.reserves driven by the economic impact of recent flooding.
The increase in the expense ratio was primarily attributable to a decrease inAustralia from lower net premiums written.
Delinquent loans
The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our international mortgage insurance portfolio as of the dates indicated:
March 31, 2010 | December 31, 2009 | March 31, 2009 | March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||
Primary insurance | |||||||||||||||||||||
Primary insurance: | |||||||||||||||||||||
Insured loans in-force | 2,937,992 | 2,911,605 | 2,897,483 | 2,983,530 | 2,986,059 | 2,937,992 | |||||||||||||||
Delinquent loans | 24,015 | 22,821 | 22,257 | 21,615 | 21,082 | 24,015 | |||||||||||||||
Percentage of delinquent loans (delinquency rate) | 0.82 | % | 0.78 | % | 0.77 | % | 0.72 | % | 0.71 | % | 0.82 | % | |||||||||
Flow loans in-force | 2,442,408 | 2,418,144 | 2,369,292 | 2,477,736 | 2,468,354 | 2,442,408 | |||||||||||||||
Flow delinquent loans | 20,931 | 19,652 | 19,602 | 18,218 | 17,684 | 20,931 | |||||||||||||||
Percentage of flow delinquent loans (delinquency rate) | 0.86 | % | 0.81 | % | 0.83 | % | 0.74 | % | 0.72 | % | 0.86 | % | |||||||||
Bulk loans in-force | 495,584 | 493,461 | 528,191 | 505,794 | 517,705 | 495,584 | |||||||||||||||
Bulk delinquent loans | 3,084 | 3,169 | 2,655 | 3,397 | 3,398 | 3,084 | |||||||||||||||
Percentage of bulk delinquent loans (delinquency rate) | 0.62 | % | 0.64 | % | 0.50 | % | 0.67 | % | 0.66 | % | 0.62 | % |
(1) |
|
Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 3,374 as of March 31, 2011, 3,376 as of December 31, 2010 and 3,072 as of March 31, |
Primary
Flow loans in-force increased primarily from flow andnew insurance written in Canada during the current year while bulk loans in-force remained relatively flat sequentially.decreased from higher cancellations in Australia. Delinquent loans increased from higher delinquencies in all of our international mortgage insurance businessesAustralia and Europe as a result of the seasoning of our insurance in-force.in-force, partially offset by lower delinquencies in Mexico.
Lifestyle protection insurance
The following table sets forth selected operating performance measures regarding our lifestyle protection insurance business and other related consumer protection insurance products for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | ||||||||||
Lifestyle protection insurance gross written premiums, premium equivalents and deposits | $ | 437 | $ | 407 | $ | 30 | 7 | % | |||||
Mexico operations gross written premiums | — | 16 | (16 | ) | (100 | )% | |||||||
Net earned premiums | 258 | 282 | (24 | ) | (9 | )% |
(Amounts in millions) Lifestyle protection insurance gross written premiums, premium equivalents and deposits Net earned premiums Three months ended
March 31, Increase
(decrease) and
percentage
change 2011 2010 2011 vs. 2010 $ 423 $ 437 $ (14 ) (3 )% 215 258 (43 ) (17 )%
Gross written premiums, premium equivalents and deposits
The three months ended March 31, 2010 included an increase of $38 million attributable to changes in foreign exchange rates. Excluding the effects of foreign exchange, grossGross written premiums, premium equivalents and deposits, gross of ceded reinsurance and cancellations, decreased mainly attributable towere relatively flat as our re-pricing initiatives were offset by reduced levels of consumer lending. In the third quarterThe three months ended March 31, 2011 included a decrease of 2009, we sold our Mexico operations; therefore, there were no sales$13 million attributable to changes in 2010.foreign exchange rates.
Net earned premiums
For the three months ended March 31, 2010,2011, the decrease was primarily attributable to our runoff block of business. Reducedbusiness and a decrease in premium volume driven by reduced levels of consumer lending and lower single premium sales related to new business regulations in the U.K. also contributed to the decrease. These decreases were partially offset by a favorable impact from our re-pricing actions taken in the second half of 2009.lending. Additionally, there was a favorable premium adjustment related to the timing of receiving client data which was partially offset by an unfavorable reinsurance adjustment in the first quarter of 2010. The three months ended March 31, 20102011 included an increasea decrease of $22$7 million attributable to changes in foreign exchange rates.
U.S. Mortgage Insurance segment
Segment results of operations
Three Months Ended March 31, 20102011 Compared to Three Months Ended March 31, 20092010
The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||||||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||
Premiums | $ | 142 | $ | 170 | $ | (28 | ) | (16 | )% | $ | 142 | $ | 142 | $ | — | — | % | ||||||||||||||
Net investment income | 30 | 33 | (3 | ) | (9 | )% | 33 | 30 | 3 | 10 | % | ||||||||||||||||||||
Net investment gains (losses) | 4 | (19 | ) | 23 | 121 | % | 1 | 4 | (3 | ) | (75 | )% | |||||||||||||||||||
Insurance and investment product fees and other | 5 | 4 | 1 | 25 | % | 1 | 5 | (4 | ) | (80 | )% | ||||||||||||||||||||
Total revenues | 181 | 188 | (7 | ) | (4 | )% | 177 | 181 | (4 | ) | (2 | )% | |||||||||||||||||||
Benefits and expenses: | |||||||||||||||||||||||||||||||
Benefits and other changes in policy reserves | 196 | 403 | (207 | ) | (51 | )% | 279 | 196 | 83 | 42 | % | ||||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 34 | 32 | 2 | 6 | % | 34 | 34 | — | — | % | |||||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 3 | 5 | (2 | ) | (40 | )% | 4 | 3 | 1 | 33 | % | ||||||||||||||||||||
Total benefits and expenses | 233 | 440 | (207 | ) | (47 | )% | 317 | 233 | 84 | 36 | % | ||||||||||||||||||||
Loss before income taxes | (52 | ) | (252 | ) | 200 | 79 | % | (140 | ) | (52 | ) | (88 | ) | (169 | )% | ||||||||||||||||
Benefit for income taxes | (19 | ) | (104 | ) | 85 | 82 | % | (59 | ) | (19 | ) | (40 | ) | NM | (1) | ||||||||||||||||
Net loss available to Genworth Financial, Inc.’s common stockholders | (33 | ) | (148 | ) | 115 | 78 | % | (81 | ) | (33 | ) | (48 | ) | (145 | )% | ||||||||||||||||
Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders: | |||||||||||||||||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | (3 | ) | 13 | (16 | ) | (123 | )% | — | (3 | ) | 3 | 100 | % | ||||||||||||||||||
Net operating loss available to Genworth Financial, Inc.’s common stockholders | $ | (36 | ) | $ | (135 | ) | $ | 99 | 73 | % | $ | (81 | ) | $ | (36 | ) | $ | (45 | ) | (125 | )% | ||||||||||
(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Net operating loss available to Genworth Financial, Inc.’s common stockholders
The decreaseincrease in the net operating loss available to Genworth Financial, Inc.’s common stockholders was as a result of moderating losseslower benefits from a decrease in delinquencies and increasing loss mitigation activities and an increase in 2010 and additional incomethe aging of $3 million, net of taxes, from a settlement with a counterparty regarding our GSE Alt-A business in 2010.existing delinquencies, partially offset by lower new delinquencies.
Revenues
Premiums decreasedremained flat as lower premium refunds related to rescission activity were offset by both lower average primary insurance in-force and lower premiums assumed from an affiliate under an intercompany reinsurance agreement.
Net investment income increased primarily related to a preferred stock dividend in the current year, partially offset by lower invested assets.
The decrease in net investment gains was primarily driven by lower new insurance written as a result of a smaller mortgage insurance market and policy coverage rescission activity, partially offset by the favorable impact of rate increases and an increase in flow persistency from 83% for the three months ended March 31, 2009 to 86% for the three months ended March 31, 2010.
Net investment income decreased primarily from lower average invested assets. Net investment income in 2010 included $4 million of lower losses related to limited partnerships accounted for under the equity method.
Net investment gains in 2010 were as a result of gains on salesthe sale of investments from portfolio repositioning activities. Net
Insurance and investment lossesproduct fees and other income decreased from the commutation of a captive trust in 2009 were as a result of impairments recorded.the prior year that did not recur.
Benefits and expenses
Benefits and other changes in policy reserves decreasedincreased due to a decreasean increase in change in reserves of $437$258 million and an increasea decrease in net paid claims of $230$175 million. This included a settlement with a counterparty related to our GSE Alt-A business in 2010 of $5 million, consisting of net paid claims of $180 million and a decrease in change in reserves of $185 million. The remaining decreasemillion in changethe first quarter of 2010. Excluding the settlement in reservesthe prior year, the increase in incurred losses in the current year was primarily driven by a decrease in delinquencieslower benefits from the fourth quarter of 2009 and increasing loss mitigation effortsactivities and policy coverage rescissions.an increase in the aging of existing delinquencies, partially offset by lower new delinquencies. The increase in paid claims was attributable to an increasehigher claim counts offset by a decrease in average claim payments reflecting higherlower loan balances in more recent book years and higher claim counts. Benefits and other changes in reserves included a reinsurance credit under certain of our captive reinsurance arrangements of $34 million and $119 million for the three months ended March 31, 2010 and 2009, respectively.balances.
Benefit for income taxes.The effective tax rate decreasedincreased to 42.1% for the three months ended March 31, 2011 from 36.5% for the three months ended March 31, 2010 from 41.3% for the three months ended March 31, 2009.2010. This decreaseincrease in the effective tax rate was primarily attributable to the proportion ofchanges in tax favored investment income compared toand a pre-tax loss, partially offset by an unfavorable state income tax adjustment in the current year.prior year that did not recur.
U.S. Mortgage Insurance selected operating performance measures
The following table sets forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:
As of or for the three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | ||||||||||
Primary insurance in-force | $ | 134,800 | $ | 159,800 | $ | (25,000 | ) | (16 | )% | ||||
Risk in-force | 31,100 | 35,200 | (4,100 | ) | (12 | )% | |||||||
New insurance written | 1,700 | 3,700 | (2,000 | ) | (54 | )% | |||||||
Net premiums written | 142 | 171 | (29 | ) | (17 | )% |
(Amounts in millions) Primary insurance in-force Risk in-force New insurance written Net premiums written As of or for the three
months ended March 31, Increase
(decrease) and
percentage
change 2011 2010 2011 vs. 2010 $ 123,300 $ 134,800 $ (11,500 ) (9 )% 28,800 31,100 (2,300 ) (7 )% 2,400 1,700 700 41 % 142 142 — — %
Primary insurance in-force and risk in-force
Primary insurance in-force decreased primarily as a result of a settlement regarding certain bulk transactions in the third quarter of 2009rescission and a settlement reached with a counterparty regarding our GSE Alt-A business effective in the first quarter of 2010. Also contributing to theother loss mitigation actions. This decrease was a declinepartially offset by an increase in flow new insurance written due to a tightening of domestic credit markets and lending guidelines negatively impactingfrom an increase in the overall mortgage originations.insurance market. In addition, risk in-force decreased due to tighter mortgage insurance guidelines and mortgage lender underwriting standards as well as a weak housing market and reduced mortgage credit liquidity. Partially offsetting the decreases in primary insurance in-force and risk in-forceFlow persistency was an increase in flow persistency from 83%86% for the three months ended March 31, 2009 to 86% for the three months ended March 31,2011 and 2010.
New insurance written
New insurance written decreasedincreased during the three months ended March 31, 20102011 primarily driven by an increase in the overall mortgage insurance market, partially offset by a decline in overallour mortgage originations as a result of a weak housinginsurance market and reduced mortgage credit liquidity. In addition,share due to tighter mortgage insurance guidelines and mortgage lender underwriting standards have contributed to a smaller mortgage insurance market.standards.
Net premiums written
Net premiums written decreased principally fromremained flat as lower reinsurance premiums were offset by higher new insurance written as a result of an increase in the current economic recession and a smalleroverall mortgage insurance market.
Loss and expense ratios
The following table sets forth the loss and expense ratios for our U.S. Mortgage Insurance segment for the dates indicated:
Three months ended March 31, | Increase (decrease) | Three months ended March 31, | Increase (decrease) | ||||||||||||||||||
2010 | 2009 | 2010 vs. 2009 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||
Loss ratio | 138 | % | 237 | % | (99 | )% | 197 | % | 138 | % | 59 | % | |||||||||
Expense ratio | 26 | % | 22 | % | 4 | % | 27 | % | 26 | % | 1 | % |
The loss ratio is the ratio of incurred losses and loss adjustment expenses to net premiums earned.earned premiums. The expense ratio is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition costs and intangibles.
The decrease in the loss ratio was primarily attributable to a decrease in change in reserves which was partially offset by an increase in paid claims. Thisthree months ended March 31, 2010 included a settlement with a counterparty related to our GSE Alt-A business in 2010 of $5 million, consisting of net paid claims of $180 million and a decrease in change in reserves of $185 million. The remaining decrease in change in reserves was primarily driven by a decrease in delinquencies from the fourth quarter of 2009 and increasing loss mitigation efforts and policy coverage rescissions. The increase in paid claims was attributable to an increase in average claim payments reflecting higher loan balances in more recent book years and higher claim counts. Partially offsetting the decrease in the loss ratio was a decline in net earned premiums. Excluding the settlement in the first quarter of 2010, the loss ratio for the three months ended March 31, 2010 would have been 141%.
The expenseincrease in the loss ratio was primarily attributable to an increase in change in reserves largely driven by lower benefits from loss mitigation activities and an increase in the aging of existing delinquencies, partially offset by lower new delinquencies. In addition, the loss ratio increased as a result ofnet paid claims increased from higher claim counts, partially offset by a decrease in net premiums written.average claim payments reflecting lower loan balances.
Delinquent loans
The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our U.S. mortgage insurance portfolio as of the dates indicated:
March 31, 2010 | December 31, 2009 | March 31, 2009 | March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||||||||
Primary insurance: | |||||||||||||||||||||
Insured loans in-force | 840,618 | 890,730 | 973,988 | 763,439 | 781,024 | 840,618 | |||||||||||||||
Delinquent loans | 107,104 | 122,279 | 92,964 | 89,018 | 95,395 | 107,104 | |||||||||||||||
Percentage of delinquent loans (delinquency rate) | 12.74 | % | 13.73 | % | 9.54 | % | 11.66 | % | 12.21 | % | 12.74 | % | |||||||||
Flow loans in-force | 735,564 | 753,370 | 826,663 | 673,276 | 687,964 | 735,564 | |||||||||||||||
Flow delinquent loans | 102,389 | 107,495 | 79,349 | 85,758 | 92,225 | 102,389 | |||||||||||||||
Percentage of flow delinquent loans (delinquency rate) | 13.92 | % | 14.27 | % | 9.60 | % | 12.74 | % | 13.41 | % | 13.92 | % | |||||||||
Bulk loans in-force | 105,054 | 137,360 | 147,325 | 90,163 | 93,060 | 105,054 | |||||||||||||||
Bulk delinquent loans(1) | 4,715 | 14,784 | 13,615 | 3,260 | 3,170 | 4,715 | |||||||||||||||
Percentage of bulk delinquent loans (delinquency rate) | 4.49 | % | 10.76 | % | 9.24 | % | 3.62 | % | 3.41 | % | 4.49 | % | |||||||||
A minus and sub-prime loans in-force | 86,185 | 89,678 | 101,413 | 75,421 | 77,822 | 86,185 | |||||||||||||||
A minus and sub-prime delinquent loans | 26,387 | 29,238 | 23,448 | 20,656 | 22,827 | 26,387 | |||||||||||||||
Percentage of A minus and sub-prime delinquent loans (delinquency rate) | 30.62 | % | 32.60 | % | 23.12 | % | 27.39 | % | 29.33 | % | 30.62 | % | |||||||||
Pool insurance: | |||||||||||||||||||||
Insured loans in-force | 19,907 | 20,370 | 21,870 | 17,421 | 17,880 | 19,907 | |||||||||||||||
Delinquent loans | 783 | 781 | 586 | 913 | 989 | 783 | |||||||||||||||
Percentage of delinquent loans (delinquency rate) | 3.93 | % | 3.83 | % | 2.68 | % | 5.24 | % | 5.53 | % | 3.93 | % |
(1) | Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 1,814 as of March 31, 2011, 1,713 as of December 31, 2010 and 2,155 as of March 31, |
Delinquency and foreclosure levels that developed principally in our 2006, 2007 and 2008 book years have increased significantly since the first quarter of 2009remained high as the U.S.United States continues to experience an economic recession and weakness in its housing markets. There has also been a continued increase in delinquencies and foreclosures in our 2005, 2006 and 2007 books of business. These trends continue to be especially evident in Florida, California, Arizona and Nevada, as well as in our A minus, Alt-A, ARMsadjustable rate mortgages (“ARMs”) and certain 100% loan-to-value products. However, we have seen delinquencies decrease in our primary insurance in-force since the fourth quarter of 2009 as a result of the settlement reached in the first quarter of 2010 with a counterparty regarding our GSE Alt-A business, a decline in new flow delinquencies and increased cures from loan modification programs.delinquencies.
Primary insurance delinquency rates differ from region to region in the U.S.United States at any one time depending upon economic conditions and cyclical growth patterns. The tables below set forth our primary delinquency rates for the various regions of the U.S.United States and the ten largest states by our risk in-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.
Percent of primary risk in-force as of March 31, 2010 | Delinquency rate | Delinquency rate | ||||||||||||||||||||||||||||||
March 31, 2010 | December 31, 2009 | March 31, 2009 | Percent of primary risk in-force as of March 31, 2011 | Percent of total reserves as of March 31, 2011 (1) | March 31, 2011 | December 31, 2010 | March 31, 2010 | |||||||||||||||||||||||||
By Region: | ||||||||||||||||||||||||||||||||
Southeast | 23 | % | 17.28 | % | 18.36 | % | 13.34 | % | 22% | 34% | 16.26 | % | 16.79 | % | 17.28 | % | ||||||||||||||||
South Central | 16 | 11.81 | % | 12.42 | % | 8.07 | % | 16 | 13 | 10.01 | % | 11.00 | % | 11.81 | % | |||||||||||||||||
Northeast | 14 | 11.13 | % | 11.60 | % | 7.61 | % | 14 | 11 | 11.44 | % | 11.66 | % | 11.13 | % | |||||||||||||||||
North Central | 11 | 11.66 | % | 12.20 | % | 7.78 | % | 12 | 12 | 11.06 | % | 11.51 | % | 11.66 | % | |||||||||||||||||
Pacific | 11 | 16.66 | % | 19.43 | % | 13.66 | % | 11 | 14 | 13.64 | % | 14.39 | % | 16.66 | % | |||||||||||||||||
Great Lakes | 9 | 9.47 | % | 10.20 | % | 8.22 | % | 9 | 7 | 8.44 | % | 8.92 | % | 9.47 | % | |||||||||||||||||
Plains | 6 | 7.72 | % | 8.29 | % | 5.27 | % | 6 | 3 | 7.73 | % | 8.14 | % | 7.72 | % | |||||||||||||||||
Mid-Atlantic(8) | 5 | 11.85 | % | 13.08 | % | 8.25 | % | |||||||||||||||||||||||||
New England(9) | 5 | 11.67 | % | 12.48 | % | 8.10 | % | 5 | 3 | 10.43 | % | 10.71 | % | 11.67 | % | |||||||||||||||||
Mid-Atlantic(10) | 5 | 3 | 10.09 | % | 10.67 | % | 11.85 | % | ||||||||||||||||||||||||
Total | 100 | % | 12.74 | % | 13.73 | % | 9.54 | % | 100% | 100% | 11.66 | % | 12.21 | % | 12.74 | % | ||||||||||||||||
(1) | Total reserves were $2,220 million as of March 31, 2011. |
(2) | Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee. |
Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah. |
New Jersey, New York and Pennsylvania. |
Illinois, Minnesota, Missouri and Wisconsin. |
Alaska, California, Hawaii, Nevada, Oregon and Washington. |
Indiana, Kentucky, Michigan and Ohio. |
Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming. |
|
(9) | Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. |
(10) | Delaware, Maryland, Virginia, Washington D.C. and West Virginia. |
Percent of primary risk in-force as of March 31, 2010 | Delinquency rate | Delinquency rate | ||||||||||||||||||||||||||||||
March 31, 2010 | December 31, 2009 | March 31, 2009 | Percent of primary risk in-force as of March 31, 2011 | Percent of total reserves as of March 31, 2011 (1) | March 31, 2011 | December 31, 2010 | March 31, 2010 | |||||||||||||||||||||||||
By State: | ||||||||||||||||||||||||||||||||
Florida | 8 | % | 29.07 | % | 30.77 | % | 24.49 | % | 7% | 23% | 28.09 | % | 28.31 | % | 29.07 | % | ||||||||||||||||
Texas | 7 | % | 9.10 | % | 9.49 | % | 6.10 | % | 7% | 3% | 7.63 | % | 8.71 | % | 9.10 | % | ||||||||||||||||
New York | 6 | % | 9.12 | % | 9.42 | % | 6.04 | % | 7% | 4% | 9.59 | % | 9.76 | % | 9.12 | % | ||||||||||||||||
California | 5 | % | 17.72 | % | 21.87 | % | 16.70 | % | 5% | 7% | 12.89 | % | 13.99 | % | 17.72 | % | ||||||||||||||||
Illinois | 5 | % | 16.09 | % | 16.40 | % | 10.27 | % | 5% | 8% | 15.44 | % | 15.79 | % | 16.09 | % | ||||||||||||||||
Georgia | 4 | % | 17.40 | % | 17.62 | % | 11.33 | % | 4% | 4% | 15.12 | % | 16.16 | % | 17.40 | % | ||||||||||||||||
North Carolina | 4 | % | 11.50 | % | 11.73 | % | 7.37 | % | 4% | 2% | 10.73 | % | 11.23 | % | 11.50 | % | ||||||||||||||||
New Jersey | 4% | 4% | 17.53 | % | 17.30 | % | 16.68 | % | ||||||||||||||||||||||||
Pennsylvania | 4 | % | 10.66 | % | 11.13 | % | 7.29 | % | 4% | 2% | 10.32 | % | 10.94 | % | 10.66 | % | ||||||||||||||||
New Jersey | 4 | % | 16.68 | % | 17.35 | % | 11.63 | % | ||||||||||||||||||||||||
Ohio | 3 | % | 8.11 | % | 8.47 | % | 7.06 | % | 3% | 2% | 7.97 | % | 8.19 | % | 8.11 | % |
(1) | Total reserves were $2,220 million as of March 31, 2011. |
The following table sets forth the dispersion of our total reserves and primary insurance in-force and risk in-force by year of policy origination and average annual mortgage interest rate as of March 31, 2011:
(Amounts in millions) | Average rate | Percent of total reserves(1) | Primary insurance in-force | Percent of total | Primary risk in-force | Percent of total | ||||||||||||||||||
Policy Year | ||||||||||||||||||||||||
2000 and prior | 7.86 | % | 0.8 | % | $ | 1,995 | 1.6 | % | $ | 512 | 1.8 | % | ||||||||||||
2001 | 7.56 | % | 0.5 | 1,037 | 0.8 | 261 | 0.9 | |||||||||||||||||
2002 | 6.64 | % | 1.0 | 2,559 | 2.1 | 629 | 2.2 | |||||||||||||||||
2003 | 5.65 | % | 2.3 | 10,225 | 8.3 | 1,762 | 6.2 | |||||||||||||||||
2004 | 5.88 | % | 2.6 | 6,245 | 5.1 | 1,416 | 5.0 | |||||||||||||||||
2005 | 5.98 | % | 13.5 | 10,088 | 8.2 | 2,589 | 9.1 | |||||||||||||||||
2006 | 6.49 | % | 22.4 | 13,590 | 11.0 | 3,316 | 11.6 | |||||||||||||||||
2007 | 6.57 | % | 48.8 | 29,931 | 24.3 | 7,377 | 25.8 | |||||||||||||||||
2008 | 6.16 | % | 7.9 | 27,807 | 22.5 | 6,894 | 24.1 | |||||||||||||||||
2009 | 5.08 | % | 0.1 | 8,254 | 6.7 | 1,421 | 5.0 | |||||||||||||||||
2010 | 4.66 | % | 0.1 | 9,248 | 7.5 | 1,901 | 6.7 | |||||||||||||||||
2011 | 4.50 | % | — | 2,343 | 1.9 | 465 | 1.6 | |||||||||||||||||
Total portfolio | 6.10 | % | 100.0 | % | $ | 123,322 | 100.0 | % | $ | 28,543 | 100.0 | % | ||||||||||||
(1) | Total reserves were $2,220 million as of March 31, 2011. |
Corporate and Other
Results of Operations
Three Months Ended March 31, 20102011 Compared to Three Months Ended March 31, 20092010
The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:
Three months ended March 31, | Increase (decrease) and percentage change | Three months ended March 31, | Increase (decrease) and percentage change | ||||||||||||||||||||||||||||
(Amounts in millions) | 2010 | 2009 | 2010 vs. 2009 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||
Premiums | $ | — | $ | 1 | $ | (1 | ) | (100 | )% | $ | — | $ | — | $ | — | — | % | ||||||||||||||
Net investment income | 9 | 55 | (46 | ) | (84 | )% | 26 | 9 | 17 | 189 | % | ||||||||||||||||||||
Net investment gains (losses) | (16 | ) | (162 | ) | 146 | 90 | % | (7 | ) | (16 | ) | 9 | 56 | % | |||||||||||||||||
Insurance and investment product fees and other | 3 | 75 | (72 | ) | (96 | )% | 2 | 3 | (1 | ) | (33 | )% | |||||||||||||||||||
Total revenues | (4 | ) | (31 | ) | 27 | 87 | % | 21 | (4 | ) | 25 | NM | (1) | ||||||||||||||||||
Benefits and expenses: | |||||||||||||||||||||||||||||||
Interest credited | 39 | 89 | (50 | ) | (56 | )% | 33 | 39 | (6 | ) | (15 | )% | |||||||||||||||||||
Acquisition and operating expenses, net of deferrals | 8 | 11 | (3 | ) | (27 | )% | (5 | ) | 8 | (13 | ) | (163 | )% | ||||||||||||||||||
Amortization of deferred acquisition costs and intangibles | 4 | 5 | (1 | ) | (20 | )% | 3 | 4 | (1 | ) | (25 | )% | |||||||||||||||||||
Interest expense | 70 | 62 | 8 | 13 | % | 82 | 70 | 12 | 17 | % | |||||||||||||||||||||
Total benefits and expenses | 121 | 167 | (46 | ) | (28 | )% | 113 | 121 | (8 | ) | (7 | )% | |||||||||||||||||||
Loss before income taxes | (125 | ) | (198 | ) | 73 | 37 | % | (92 | ) | (125 | ) | 33 | 26 | % | |||||||||||||||||
Benefit for income taxes | (157 | ) | (102 | ) | (55 | ) | (54 | )% | (16 | ) | (157 | ) | 141 | 90 | % | ||||||||||||||||
Net income (loss) available to Genworth Financial, Inc.’s common stockholders | 32 | (96 | ) | 128 | 133 | % | (76 | ) | 32 | (108 | ) | NM | (1) | ||||||||||||||||||
Adjustments to net income (loss) available to Genworth Financial, Inc.’s common stockholders: | |||||||||||||||||||||||||||||||
Net investment (gains) losses, net of taxes and other adjustments | 11 | 106 | (95 | ) | (90 | )% | 4 | 11 | (7 | ) | (64 | )% | |||||||||||||||||||
Net tax benefit related to separation from our former parent | (106 | ) | — | (106 | ) | NM | (1) | — | (106 | ) | 106 | 100 | % | ||||||||||||||||||
Net operating income (loss) available to Genworth Financial, Inc.’s common stockholders | $ | (63 | ) | $ | 10 | $ | (73 | ) | NM | (1) | |||||||||||||||||||||
Net operating loss available to Genworth Financial, Inc.’s common stockholders | $ | (72 | ) | $ | (63 | ) | $ | (9 | ) | (14 | )% | ||||||||||||||||||||
(1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Net operating income (loss)loss available to Genworth Financial, Inc.’s common stockholders
We reported a higher net operating loss available to Genworth Financial, Inc.’s common stockholders in the current year compared to net operating income available to Genworth Financial, Inc.’s common stockholders in the prior year primarily as the prior year included income from the early retirementa result of institutional contracts at a discount to contract values that did not recur.
Revenues
Lower investment income was primarily driven by a decrease in policy loans from a bankruptcy-related lapse in 2009lower tax benefits and an $11 million increase in losses related to limited partnership investments accounted for under the equity method in 2010. The decreases were also attributable to lower yields on floating rate investments and a decline in average invested assets. These decreases werehigher interest expense, partially offset by an increase in net investment income and higher allocated expenses.
Revenues
Higher investment income was primarily driven by the improved performance of limited partnership investments accounted for under the equity method. Net investment income included $1 million of gains related to limited partnerships in the consolidationfirst quarter of certain securitization entities as2011 compared to $21 million of January 1,losses related to limited partnerships in the first quarter of 2010.
Insurance and investment product fees and other decreased primarily as The increase was partially offset by a result of income from the early retirement of institutional contracts at a discount to contract valuesdecline in 2009 that did not recur.average invested assets.
Benefits and expenses
The decrease in interest credited was attributable to lower interest rates on interest paid on our floating rate policyholder liabilities and a decrease in average outstanding liabilities.
Operating expenses decreased as a result of higher allocated expenses to the operating segments in the current year.
Interest expense increased related to the consolidationdebt issuances in the second half of certain securitization entities as of January 1, 2010.
The increasedecrease in the income tax benefit was primarily related to changes in uncertain tax benefits in the prior year related to separation from our former parent.
Investments and Derivative Instruments
Investment results
The following table sets forth information about our investment income, excluding net investment gains (losses), for each component of our investment portfolio for the periods indicated:
Three months ended March 31, | Increase (decrease) | ||||||||||||||||||||
2010 | 2009 | 2010 vs. 2009 | |||||||||||||||||||
(Amounts in millions) | Yield | Amount | Yield | Amount | Yield | Amount | |||||||||||||||
Fixed maturity securities—taxable | 4.9 | % | $ | 626 | 5.4 | % | $ | 623 | (0.5 | )% | $ | 3 | |||||||||
Fixed maturity securities—non-taxable | 4.3 | % | 16 | 4.6 | % | 30 | (0.3 | )% | (14 | ) | |||||||||||
Commercial mortgage loans | 5.8 | % | 104 | 5.6 | % | 114 | 0.2 | % | (10 | ) | |||||||||||
Restricted commercial mortgage loans related to securitization entities(1) | 7.3 | % | 10 | — | % | — | 7.3 | % | 10 | ||||||||||||
Equity securities | 6.6 | % | 2 | 4.6 | % | 3 | 2.0 | % | (1 | ) | |||||||||||
Other invested assets | (0.7 | )% | (2 | ) | (15.8 | )% | (99 | ) | 15.1 | % | 97 | ||||||||||
Restricted other invested assets related to securitization entities(1) | 1.0 | % | 1 | — | % | — | 1.0 | % | 1 | ||||||||||||
Policy loans | 7.7 | % | 27 | 9.6 | % | 44 | (1.9 | )% | (17 | ) | |||||||||||
Cash, cash equivalents and short-term investments | 0.4 | % | 5 | 0.8 | % | 17 | (0.4 | )% | (12 | ) | |||||||||||
Gross investment income before expenses and fees | 4.6 | % | 789 | 4.2 | % | 732 | 0.4 | % | 57 | ||||||||||||
Expenses and fees | (0.2 | )% | (24 | ) | (0.1 | )% | (21 | ) | (0.1 | )% | (3 | ) | |||||||||
Net investment income | 4.4 | % | $ | 765 | 4.1 | % | $ | 711 | 0.3 | % | $ | 54 | |||||||||
|
Three months ended March 31, | Increase (decrease) | |||||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||||||
(Amounts in millions) | Yield | Amount | Yield | Amount | Yield | Amount | ||||||||||||||||||
Fixed maturity securities—taxable | 5.0 | % | $ | 670 | 4.9 | % | $ | 626 | 0.1 | % | $ | 44 | ||||||||||||
Fixed maturity securities—non-taxable | 4.2 | % | 11 | 4.3 | % | 16 | (0.1 | )% | (5 | ) | ||||||||||||||
Commercial mortgage loans | 5.5 | % | 92 | 5.8 | % | 104 | (0.3 | )% | (12 | ) | ||||||||||||||
Restricted commercial mortgage loans related to securitization entities | 7.6 | % | 10 | 7.3 | % | 10 | 0.3 | % | — | |||||||||||||||
Equity securities | 3.2 | % | 3 | 6.6 | % | 2 | (3.4 | )% | 1 | |||||||||||||||
Other invested assets | 10.1 | % | 34 | (0.7 | )% | (2 | ) | 10.8 | % | 36 | ||||||||||||||
Restricted other invested assets related to securitization entities | 0.3 | % | — | 1.0 | % | 1 | (0.7 | )% | (1 | ) | ||||||||||||||
Policy loans | 8.0 | % | 29 | 7.7 | % | 27 | 0.3 | % | 2 | |||||||||||||||
Cash, cash equivalents and short-term investments | 0.7 | % | 6 | 0.4 | % | 5 | 0.3 | % | 1 | |||||||||||||||
Gross investment income before expenses and fees | 5.0 | % | 855 | 4.6 | % | 789 | 0.4 | % | 66 | |||||||||||||||
Expenses and fees | (0.2 | )% | (25 | ) | (0.2 | )% | (24 | ) | — | % | (1 | ) | ||||||||||||
Net investment income | 4.8 | % | $ | 830 | 4.4 | % | $ | 765 | 0.4 | % | $ | 65 | ||||||||||||
Yields for fixed maturity and equity securities are based on weighted-average amortized cost or cost, respectively. Yields for other invested assets, which include securities lending activity, are calculated net of the corresponding securities lending liability. All other yields are based on average carrying values.
For the three months ended March 31, 2010,2011, the increase in overall weighted-average investment yields was primarily attributable to lower losses onthe improved performance of limited partnerships.partnerships accounted for under the equity method
and the reinvestment of cash balances. Net investment income for the three months ended March 31, 20102011 included $73$4 million of lowergains related to limited partnerships as compared to $34 million of losses related to limited partnerships accounted for under the equity method as compared to the three months ended March 31, 2009. Additionally, there was an increase in net investment income related to the consolidation of certain securitization entities as of January 1, 2010. These increases were partially offset by a decrease in policy loans from a bankruptcy-related lapse in 2009 and lower yields on floating rate investments.
The following table sets forth net investment gains (losses) for the periods indicated:
Three months ended March 31, | ||||||||
(Amounts in millions) | 2010 | 2009 | ||||||
Available-for-sale securities: | ||||||||
Realized gains on sale | $ | 23 | $ | 29 | ||||
Realized losses on sale | (38 | ) | (63 | ) | ||||
Impairments: | ||||||||
Total other-than-temporary impairments | (77 | ) | (597 | ) | ||||
Portion of other-than-temporary impairments recognized in other comprehensive income (loss) | (3 | ) | — | |||||
Net other-than-temporary impairments | (80 | ) | (597 | ) | ||||
Trading securities | 6 | (12 | ) | |||||
Commercial mortgage loans | (4 | ) | (6 | ) | ||||
Net gains (losses) related to securitization entities(1) | 11 | — | ||||||
Derivative instruments | (8 | ) | (121 | ) | ||||
Other | 20 | — | ||||||
Net investment gains (losses) | $ | (70 | ) | $ | (770 | ) | ||
|
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 | (10 | ) | (8 | ) | ||||
Other | — | 20 | ||||||
Net investment gains (losses) | $ | (28 | ) | $ | (70 | ) | ||
Three Months Ended March 31, 20102011 Compared to Three Months Ended March 31, 20092010
We recorded $80$36 million of net other-than-temporary impairments for the three months ended March 31, 20102011 as compared to $597$80 million for the three months ended March 31, 2009.2010. Of total impairments for the three months ended March 31, 2011 and 2010, and 2009, $62$21 million and $280$62 million, respectively, related to structured securities, including $36$15 million and $202$36 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Impairments related to corporate securities as a result of bankruptcies, receivership or concerns about the issuer’s ability to continue to make contractual payments or where we have intent to sell were $5$14 million and $58$5 million for the three months ended March 31, 20102011 and 2009,2010, respectively. We also recorded impairments of $6 million and $240 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlands$7 million related to limited partnership investments during the three months ended March 31, 2010 and 2009, respectively. For the three months ended March 31, 2010, we recorded $7 million of impairments related to limited partnership investments.2010.
Net investment losses related to derivatives of $10 million in the first quarter of 2011 were primarily related to $8 million of losses associated with derivative instruments used to hedge foreign currency risk, $4 million of losses from the change in the value of derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of the embedded derivative liabilities and $2 million of losses due to hedge ineffectiveness. These losses were partially offset by $3 million of gains from credit default swaps due to narrowing credit spreads and $1 million of gains related to a derivative strategy to mitigate interest rate risk associated with our statutory capital position. Net investment losses related to derivatives of $8 million in the first quarter of 2010 were primarily related to $14 million of losses in derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of the embedded derivative liabilities and $3 million of losses from foreign currency options. These losses were partially offset by $5 million of gains from credit default swaps utilized to improve our diversification and portfolio yield and $5 million of gains in non-qualified interest rate swaps. Net investment losses related to derivatives of $121 million in the first quarter of 2009 were primarily related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position and losses in embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of derivative instruments used for mitigating this risk.
Net losses related to the sale of available-for-sale securities were $2 million in the first quarter of 2011 compared to $15 million in the first quarter of 2010 compared to $34 million in the first quarter of 2009.2010. We also recorded $11 million of net gains related to securitization entities and $16 million from the recovery of a counterparty receivable in the first quarter of 2010.
The aggregate fair value of securities sold at a loss during the three months ended March 31, 2011 and 2010 was $397 million from the sale of 74 securities and 2009 was $558 million from the sale of 128 securities, and $373 million from the sale of 118 securities, respectively, which was approximately 94% and 86%, respectively, of book value.value for both 2011 and 2010. The loss on sales of securities in the three months ended March 31, 20102011 was primarily driven by widening credit spreads. Generally, securities that are sold at a loss represent either small dollar amounts or percentage losses upon disposition. However, in certain circumstances, events may occur that change our intent to hold specific securities and thus result in our disposition of the security at a loss. Examples of these events include unforeseen issuer-specific events or conditions and shifts in risk or uncertainty of certain securities. Of the securities that were sold at a loss during the three months ended March 31, 2011, the average period of time those securities had been continuously in an unrealized loss position was approximately 13 months. The securities sold at a loss in the first quarter of 2011 included two U.S. corporate securities that were sold for a total loss of $11 million related to portfolio repositioning activities. Of the securities that were sold at a loss during the three months ended March 31, 2010, the average period of time those securities had been continuously in an unrealized loss position was approximately 16 months. The securities sold at a loss in the first quarter of 2010 included one non-U.S. government security that was sold for a total loss of $7 million related to portfolio repositioning activities. Of the securities that were sold at a loss during the first quarter of 2009, the average period of time those securities had been continuously in an unrealized loss position was approximately nine months. The securities sold at a loss in the first quarter of 2009 included one in the financial services sector totaling $10 million.
Investment portfolio
The following table sets forth our cash, cash equivalents and invested assets as of the dates indicated:
March 31, 2010 | December 31, 2009 | |||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||
Fixed maturity securities, available-for-sale: | ||||||||||||
Public | $ | 39,323 | 57 | % | $ | 37,158 | 54 | % | ||||
Private | 12,717 | 18 | 12,594 | 19 | ||||||||
Commercial mortgage loans | 7,336 | 10 | 7,499 | 11 | ||||||||
Other invested assets | 3,972 | 6 | 4,702 | 7 | ||||||||
Policy loans | 1,408 | 2 | 1,403 | 2 | ||||||||
Restricted commercial mortgage loans related to securitization entities(1) | 552 | 1 | — | — | ||||||||
Restricted other invested assets related to securitization entities(1) | 385 | 1 | — | — | ||||||||
Equity securities, available-for-sale | 179 | — | 159 | — | ||||||||
Cash and cash equivalents | 3,466 | 5 | 5,002 | 7 | ||||||||
Total cash, cash equivalents and invested assets | $ | 69,338 | 100 | % | $ | 68,517 | 100 | % | ||||
|
March 31, 2011 | December 31, 2010 | |||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | ||||||||||||
Fixed maturity securities, available-for-sale: | ||||||||||||||||
Public | $ | 42,385 | 59 | % | $ | 42,526 | 59 | % | ||||||||
Private | 12,613 | 18 | 12,657 | 18 | ||||||||||||
Commercial mortgage loans | 6,600 | 9 | 6,718 | 9 | ||||||||||||
Other invested assets | 3,752 | 5 | 3,854 | 5 | ||||||||||||
Policy loans | 1,480 | 2 | 1,471 | 2 | ||||||||||||
Restricted commercial mortgage loans related to securitization entities | 485 | 1 | 507 | 1 | ||||||||||||
Restricted other invested assets related to securitization entities | 376 | 1 | 372 | 1 | ||||||||||||
Equity securities, available-for-sale | 355 | — | 332 | 1 | ||||||||||||
Cash and cash equivalents | 3,742 | 5 | 3,132 | 4 | ||||||||||||
Total cash, cash equivalents and invested assets | $ | 71,788 | 100 | % | $ | 71,569 | 100 | % | ||||||||
For a discussion of the change in cash, cash equivalents and invested assets, see the comparison for this line item under “—Consolidated Balance Sheets.” See note 4 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to our investment portfolio.
We hold fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral and certain other financial instruments, which are carried at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. As of March 31, 2010,2011, approximately 5%3% of our investment holdings recorded at fair value was based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 6 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to fair value.
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(1) | 4,897 | 134 | 20 | (270 | ) | (181 | ) | 4,600 | ||||||||||||||||
Commercial mortgage-backed | 3,841 | 120 | 3 | (172 | ) | (36 | ) | 3,756 | ||||||||||||||||
Other asset-backed (1) | 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 | ||||||||||
(1) | Fair value included $457 million collateralized by sub-prime residential mortgage loans and $344 million collateralized by Alt-A residential mortgage loans. |
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:
Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||||||||||||||||||||||||||||||
(Amounts in millions) | Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||||||||||||||||||||||||||
Amortized cost or cost | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | Fair value | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | |||||||||||||||||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 3,079 | $ | 30 | $ | — | $ | (80 | ) | $ | — | $ | 3,029 | $ | 3,568 | $ | 145 | $ | — | $ | (8 | ) | $ | — | $ | 3,705 | ||||||||||||||||||
Tax-exempt | 1,495 | 35 | — | (94 | ) | — | 1,436 | 1,124 | 19 | — | (113 | ) | — | 1,030 | ||||||||||||||||||||||||||||||
Government—non-U.S. | 2,323 | 103 | — | (12 | ) | — | 2,414 | 2,257 | 118 | — | (6 | ) | — | 2,369 | ||||||||||||||||||||||||||||||
U.S. corporate | 22,108 | 722 | 8 | (583 | ) | (2 | ) | 22,253 | 23,282 | 1,123 | 10 | (448 | ) | — | 23,967 | |||||||||||||||||||||||||||||
Corporate—non-U.S. | 13,019 | 407 | 13 | (288 | ) | — | 13,151 | 13,180 | 485 | — | (167 | ) | — | 13,498 | ||||||||||||||||||||||||||||||
Residential mortgage-backed(1) | 4,445 | 50 | 8 | (402 | ) | (291 | ) | 3,810 | 4,821 | 116 | 18 | (304 | ) | (196 | ) | 4,455 | ||||||||||||||||||||||||||||
Commercial mortgage-backed | 4,243 | 95 | 6 | (577 | ) | (74 | ) | 3,693 | 3,936 | 132 | 6 | (286 | ) | (45 | ) | 3,743 | ||||||||||||||||||||||||||||
Other asset-backed(1) | 2,573 | 12 | — | (310 | ) | (21 | ) | 2,254 | 2,494 | 18 | — | (94 | ) | (2 | ) | 2,416 | ||||||||||||||||||||||||||||
Total fixed maturity securities | 53,285 | 1,454 | 35 | (2,346 | ) | (388 | ) | 52,040 | 54,662 | 2,156 | 34 | (1,426 | ) | (243 | ) | 55,183 | ||||||||||||||||||||||||||||
Equity securities | 163 | 19 | — | (3 | ) | — | 179 | 323 | 13 | — | (4 | ) | — | 332 | ||||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 53,448 | $ | 1,473 | $ | 35 | $ | (2,349 | ) | $ | (388 | ) | $ | 52,219 | $ | 54,985 | $ | 2,169 | $ | 34 | $ | (1,430 | ) | $ | (243 | ) | $ | 55,515 | ||||||||||||||||
(1) | Fair value included |
As of December 31, 2009, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||||||
(Amounts in millions) | Not other-than- temporarily impaired | Other-than- temporarily impaired | Not other-than- temporarily impaired | Other-than- temporarily impaired | ||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises | $ | 2,673 | $ | 25 | $ | — | $ | (96 | ) | $ | — | $ | 2,602 | |||||||
Tax-exempt | 1,606 | 42 | — | (104 | ) | — | 1,544 | |||||||||||||
Government—non-U.S. | 2,310 | 96 | — | (22 | ) | — | 2,384 | |||||||||||||
U.S. corporate | 21,598 | 628 | 3 | (814 | ) | (3 | ) | 21,412 | ||||||||||||
Corporate—non-U.S. | 12,530 | 366 | 11 | (356 | ) | — | 12,551 | |||||||||||||
Residential mortgage-backed(1) | 3,989 | 41 | 7 | (484 | ) | (326 | ) | 3,227 | ||||||||||||
Commercial mortgage-backed | 4,404 | 44 | 4 | (738 | ) | (97 | ) | 3,617 | ||||||||||||
Other asset-backed(1) | 2,887 | 8 | — | (466 | ) | (14 | ) | 2,415 | ||||||||||||
Total fixed maturity securities | 51,997 | 1,250 | 25 | (3,080 | ) | (440 | ) | 49,752 | ||||||||||||
Equity securities | 139 | 23 | — | (3 | ) | — | 159 | |||||||||||||
Total available-for-sale securities | $ | 52,136 | $ | 1,273 | $ | 25 | $ | (3,083 | ) | $ | (440 | ) | $ | 49,911 | ||||||
|
Fixed maturity securities increased $2.3 billion primarily attributable to an increase indecreased $185 million as maturities exceeded purchases of fixed maturity securities as we continue to reinvest cash and from lower unrealized losses primarily as a result of an improvement in market performance.during the period.
We allocate net unrealized investment gains (losses) from Corporate and Other activities to our Retirement and Protection segment using an approach based principally upon the investment portfolio established to support the segment’s products and targeted capital levels. We do not allocate net unrealized investment gains (losses) from Corporate and Other activities to our International and U.S. Mortgage Insurance segments because they have their own separate investment portfolios, and net unrealized investment gains (losses) from those portfolios are reflected in the International and U.S. Mortgage Insurance segment balance sheets, respectively. The majority of our unrealized losses were related to securities held within our Retirement and Protection segment. Our U.S. Mortgage Insurance segment had gross unrealized losses of $108$131 million and $134$128 million as of March 31, 20102011 and December 31, 2009,2010, respectively.
Our sub-prime securities were principally backed by first lien mortgages. We did not have any exposure to interest margin deals, highly leveraged transactions or collateralized debt obligation-squared investments. The fair value of our mortgage-backed and asset-backed securities collateralized by sub-prime residential mortgage loans by rating and vintage was as follows as of March 31, 2010:
(Amounts in millions) | 2004 and prior | 2005 | 2006 | 2007 | Total | ||||||||||
Ratings(1): | |||||||||||||||
AAA | $ | 43 | $ | 10 | $ | — | $ | — | $ | 53 | |||||
AA | 21 | 20 | — | 19 | 60 | ||||||||||
A | 12 | 50 | 4 | — | 66 | ||||||||||
BBB | 16 | 6 | 1 | — | 23 | ||||||||||
BB | 11 | 13 | 14 | — | 38 | ||||||||||
B | 4 | 28 | 41 | — | 73 | ||||||||||
CCC and lower | 24 | 24 | 63 | 14 | 125 | ||||||||||
Total sub-prime securities | $ | 131 | $ | 151 | $ | 123 | $ | 33 | $ | 438 | |||||
|
The fair value of our mortgage-backed and asset-backed securities collateralized by sub-prime residential mortgage loans by rating and vintage was as follows as of December 31, 2009:
(Amounts in millions) | 2004 and prior | 2005 | 2006 | 2007 | Total | ||||||||||
Ratings(1): | |||||||||||||||
AAA | $ | 42 | $ | 12 | $ | — | $ | — | $ | 54 | |||||
AA | 23 | 20 | 1 | 19 | 63 | ||||||||||
A | 17 | 47 | 4 | — | 68 | ||||||||||
BBB | 11 | 6 | 1 | — | 18 | ||||||||||
BB | 8 | 13 | 27 | — | 48 | ||||||||||
B | 6 | 24 | 25 | — | 55 | ||||||||||
CCC and lower | 24 | 16 | 62 | 14 | 116 | ||||||||||
Total sub-prime securities | $ | 131 | $ | 138 | $ | 120 | $ | 33 | $ | 422 | |||||
|
The fair value of our mortgage-backed and asset-backed securities collateralized by Alt-A residential mortgage loans by rating and vintage was as follows as of March 31, 2010:
(Amounts in millions) | 2004 and prior | 2005 | 2006 | 2007 | Total | ||||||||||
Ratings(1): | |||||||||||||||
AAA | $ | 44 | $ | — | $ | 1 | $ | — | $ | 45 | |||||
AA | 8 | 27 | 1 | — | 36 | ||||||||||
A | 18 | 23 | 1 | 7 | 49 | ||||||||||
BBB | 23 | 1 | 3 | — | 27 | ||||||||||
BB | — | 4 | — | 4 | 8 | ||||||||||
B | 3 | 20 | 29 | 5 | 57 | ||||||||||
CCC and lower | 4 | 70 | 33 | 29 | 136 | ||||||||||
Total Alt-A securities | $ | 100 | $ | 145 | $ | 68 | $ | 45 | $ | 358 | |||||
|
The fair value of our mortgage-backed and asset-backed securities collateralized by Alt-A residential mortgage loans by rating and vintage was as follows as of December 31, 2009:
(Amounts in millions) | 2004 and prior | 2005 | 2006 | 2007 | Total | ||||||||||
Ratings(1): | |||||||||||||||
AAA | $ | 43 | $ | — | $ | 1 | $ | — | $ | 44 | |||||
AA | 9 | 26 | 1 | — | 36 | ||||||||||
A | 17 | 23 | 1 | 8 | 49 | ||||||||||
BBB | 26 | 1 | 3 | — | 30 | ||||||||||
BB | 2 | 25 | — | 4 | 31 | ||||||||||
B | 2 | 19 | 32 | 6 | 59 | ||||||||||
CCC and lower | 5 | 55 | 36 | 24 | 120 | ||||||||||
Total Alt-A securities | $ | 104 | $ | 149 | $ | 74 | $ | 42 | $ | 369 | |||||
|
Our investments in sub-prime and Alt-A residential mortgage-backed and asset-backed securities decreased primarily as a result of principal payment activity coupled with widening spreads. Gross unrealized losses in our sub-prime and Alt-A residential mortgage-backed and asset-backed securities as of March 31, 2010 were primarily a result of widening spreads as a result of marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans, partially offset by lower asset balances.
The fair value of our commercial mortgage-backed securities by rating and vintage was as follows as of March 31, 2010:
(Amounts in millions) | 2004 and prior | 2005 | 2006 | 2007 | 2008 | 2009 | Total | ||||||||||||||
Ratings(1): | |||||||||||||||||||||
AAA | $ | 1,960 | $ | 337 | $ | 349 | $ | 119 | $ | — | $ | 25 | $ | 2,790 | |||||||
AA | 40 | 46 | 114 | 68 | — | — | 268 | ||||||||||||||
A | 41 | 27 | 68 | 100 | — | — | 236 | ||||||||||||||
BBB | 49 | 18 | 25 | 71 | — | — | 163 | ||||||||||||||
BB | 33 | 6 | 44 | 54 | — | — | 137 | ||||||||||||||
B | 15 | — | 8 | 21 | — | — | 44 | ||||||||||||||
CCC and lower | 12 | 5 | 38 | — | — | — | 55 | ||||||||||||||
Total commercial mortgage-backed securities | $ | 2,150 | $ | 439 | $ | 646 | $ | 433 | $ | — | $ | 25 | $ | 3,693 | |||||||
|
The fair value of our commercial mortgage-backed securities by rating and vintage was as follows as of December 31, 2009:
(Amounts in millions) | 2004 and prior | 2005 | 2006 | 2007 | 2008 | 2009 | Total | ||||||||||||||
Ratings(1): | |||||||||||||||||||||
AAA | $ | 1,943 | $ | 338 | $ | 336 | $ | 120 | $ | — | $ | 20 | $ | 2,757 | |||||||
AA | 52 | 63 | 85 | 127 | — | — | 327 | ||||||||||||||
A | 69 | 36 | 54 | 54 | — | — | 213 | ||||||||||||||
BBB | 50 | 12 | 41 | 33 | — | — | 136 | ||||||||||||||
BB | 30 | 6 | 33 | 52 | — | — | 121 | ||||||||||||||
B | 17 | — | 10 | 11 | — | — | 38 | ||||||||||||||
CCC and lower | 10 | 4 | 11 | — | — | — | 25 | ||||||||||||||
Total commercial mortgage-backed securities | $ | 2,171 | $ | 459 | $ | 570 | $ | 397 | $ | — | $ | 20 | $ | 3,617 | |||||||
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Commercial mortgage loans
The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:
March 31, 2010 | March 31, 2011 | ||||||||||||||||||||||||||||||||
(Loan amounts in millions) | Total loan balance | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(1) | ||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total loan balance (1) | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(2) | ||||||||||||||||||||||||||||
Loan Year | |||||||||||||||||||||||||||||||||
2004 and prior | $ | 2,561 | $ | 17 | 1,016 | 6 | 49 | % | $ | 2,103 | $ | 35 | 886 | 8 | 50 | % | |||||||||||||||||
2005 | 1,577 | — | 319 | — | 64 | % | 1,440 | 3 | 310 | 1 | 64 | % | |||||||||||||||||||||
2006 | 1,508 | 21 | 289 | 4 | 72 | % | 1,397 | — | 281 | — | 72 | % | |||||||||||||||||||||
2007 | 1,442 | 11 | 200 | 4 | 82 | % | 1,293 | — | 191 | — | 77 | % | |||||||||||||||||||||
2008 | 294 | 2 | 60 | 1 | 78 | % | 281 | 11 | 58 | 2 | 77 | % | |||||||||||||||||||||
2009 | — | — | — | — | — | % | |||||||||||||||||||||||||||
2010 | 103 | — | 17 | — | 64 | % | |||||||||||||||||||||||||||
2011 | 38 | — | 9 | — | 70 | % | |||||||||||||||||||||||||||
Total | $ | 7,382 | $ | 51 | 1,884 | 15 | 65 | % | $ | 6,655 | $ | 49 | 1,752 | 11 | 65 | % | |||||||||||||||||
(1) | Excludes $1 million of net premium discount on commercial mortgage loans acquired from third parties. |
(2) | Represents loan-to-value as of March 31, |
December 31, 2009 | December 31, 2010 | ||||||||||||||||||||||||||||||||
(Loan amounts in millions) | Total loan balance | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(1) | ||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total loan balance (1) | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(2) | ||||||||||||||||||||||||||||
Loan Year | |||||||||||||||||||||||||||||||||
2004 and prior | $ | 2,644 | $ | 5 | 1,039 | 2 | 49 | % | $ | 2,169 | $ | 21 | 908 | 6 | 51 | % | |||||||||||||||||
2005 | 1,607 | — | 320 | — | 63 | % | 1,458 | — | 312 | — | 65 | % | |||||||||||||||||||||
2006 | 1,521 | 15 | 290 | 4 | 70 | % | 1,418 | 9 | 283 | 1 | 73 | % | |||||||||||||||||||||
2007 | 1,458 | 76 | 203 | 3 | 80 | % | 1,345 | 9 | 193 | 2 | 79 | % | |||||||||||||||||||||
2008 | 295 | — | 61 | — | 77 | % | 282 | 11 | 58 | 2 | 77 | % | |||||||||||||||||||||
2009 | 16 | — | 518 | — | — | % | — | — | — | — | — | % | |||||||||||||||||||||
2010 | 104 | — | 17 | — | 58 | % | |||||||||||||||||||||||||||
Total | $ | 7,541 | $ | 96 | 2,431 | 9 | 63 | % | $ | 6,776 | $ | 50 | 1,771 | 11 | 65 | % | |||||||||||||||||
(1) | Excludes $4 million of net premium discount on commercial mortgage loans acquired from third parties. |
(2) | Represents loan-to-value as of December 31, |
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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 duringfor the period indicated:ended March 31:
(Amounts in millions) | March 31, 2010 | 2010 | |||||
Beginning balance | $ | 48 | $ | 48 | |||
Provision | 4 | 4 | |||||
Release | — | — | |||||
Ending balance | $ | 52 | $ | 52 | |||
The increase in the provisioncharge-offs during 2010 was2011 were related to a change in reserving assumptions to reflect the current market environment.individually impaired commercial mortgage loans.
Restricted commercial mortgage loans related to securitization entities
The following table setstables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the datedates indicated:
March 31, 2010 | March 31, 2011 | ||||||||||||||||||||||||||||||||
(Loan amounts in millions) | Total loan balance | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(1) | ||||||||||||||||||||||||||||
(Dollar amounts in millions) | Total loan balance | Delinquent loan balance | Number of loans | Number of delinquent loans | Average loan- to-value(1) | ||||||||||||||||||||||||||||
Loan Year | |||||||||||||||||||||||||||||||||
2004 and prior | $ | 554 | $ | 2 | 214 | 1 | 44 | % | $ | 487 | $ | — | 198 | — | 42 | % | |||||||||||||||||
Total | $ | 554 | $ | 2 | 214 | 1 | 44 | % | $ | 487 | $ | — | 198 | — | 42 | % | |||||||||||||||||
(1) | Represents loan-to-value as of March 31, 2011. |
(Dollar amounts in millions) Loan Year 2004 and prior Total December 31, 2010 Total loan
balance Delinquent
loan balance Number of
loans Number of
delinquent
loans Average loan-
to-value(1) $ 509 $ — 202 — 43 % $ 509 $ — 202 — 43 %
(1) | Represents loan-to-value as of December 31, 2010. |
See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.
Other invested assets
The following table sets forth the carrying values of our other invested assets as of the dates indicated:
March 31, 2010 | December 31, 2009 | March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||
(Amounts in millions) | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | Carrying value | % of total | ||||||||||||||||||||
Derivatives | $ | 901 | 24 | % | $ | 1,047 | 27 | % | ||||||||||||||||||||
Securities lending collateral | 811 | 22 | 772 | 20 | ||||||||||||||||||||||||
Derivatives counterparty collateral | 745 | 20 | 794 | 21 | ||||||||||||||||||||||||
Trading securities | 667 | �� | 18 | 677 | 18 | |||||||||||||||||||||||
Limited partnerships | 339 | 9 | 340 | 9 | ||||||||||||||||||||||||
Short-term investments | $ | 1,297 | 33 | % | $ | 1,590 | 34 | % | 198 | 5 | 139 | 3 | ||||||||||||||||
Derivatives | 859 | 22 | 946 | 20 | ||||||||||||||||||||||||
Derivatives counterparty collateral | 628 | 16 | 647 | 14 | ||||||||||||||||||||||||
Securities lending collateral | 593 | 15 | 853 | 18 | ||||||||||||||||||||||||
Limited partnerships | 371 | 9 | 430 | 9 | ||||||||||||||||||||||||
Trading securities | 167 | 4 | 174 | 4 | ||||||||||||||||||||||||
Other investments | 57 | 1 | 62 | 1 | 91 | 2 | 85 | 2 | ||||||||||||||||||||
Total other invested assets | $ | 3,972 | 100 | % | $ | 4,702 | 100 | % | $ | 3,752 | 100 | % | $ | 3,854 | 100 | % | ||||||||||||
The decrease in short-term investments was attributable to portfolio repositioning activities in the first quarter of 2010. Our investments in derivatives and derivative counterparty collateral decreased primarily as a result of an increase in long-term interest rates. Securities lending collateral decreasedincreased primarily from our decisionincreased program demand. The increase in short-term investments was attributable to decreasepurchases during the program size. Limited partnership investments decreased primarily from sales and unrealized depreciation and returned capital, partially offset by calls on outstanding commitments.first quarter of 2011.
Derivatives
The following table sets forth our positions in derivative instruments as of the dates indicated:
Derivative assets | Derivative liabilities | |||||||||||||||||
Balance sheet classification | Fair value | Balance sheet classification | Fair value | |||||||||||||||
(Amounts in millions) | March 31, 2010 | December 31, 2009 | March 31, 2010 | December 31, 2009 | ||||||||||||||
Derivatives designated as hedges | ||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||
Interest rate swaps | Other invested assets | $ | 69 | $ | 72 | Other liabilities | $ | 158 | $ | 114 | ||||||||
Inflation indexed swaps | Other invested assets | 1 | — | Other liabilities | 13 | 21 | ||||||||||||
Foreign currency swaps | Other invested assets | 100 | 101 | Other liabilities | — | — | ||||||||||||
Total cash flow hedges | 170 | 173 | 171 | 135 | ||||||||||||||
Fair value hedges: | ||||||||||||||||||
Interest rate swaps | Other invested assets | 130 | 132 | Other liabilities | 12 | 15 | ||||||||||||
Foreign currency swaps | Other invested assets | 22 | 24 | Other liabilities | — | — | ||||||||||||
Total fair value hedges | 152 | 156 | 12 | 15 | ||||||||||||||
Total derivatives designated as hedges | 322 | 329 | 183 | 150 | ||||||||||||||
Derivatives not designated as hedges | ||||||||||||||||||
Interest rate swaps | Other invested assets | 475 | 505 | Other liabilities | 44 | 59 | ||||||||||||
Interest rate swaps related to securitization entities(1) | Restricted other invested assets | — | — | Other liabilities | 16 | — | ||||||||||||
Interest rate swaptions | Other invested assets | 14 | 54 | Other liabilities | 18 | 67 | ||||||||||||
Credit default swaps | Other invested assets | 10 | 11 | Other liabilities | 1 | 3 | ||||||||||||
Credit default swaps related to securitization entities(1) | Restricted other invested assets | — | — | Other liabilities | 118 | — | ||||||||||||
Equity index options | Other invested assets | 34 | 39 | Other liabilities | 4 | 2 | ||||||||||||
Financial futures | Other invested assets | — | — | Other liabilities | — | — | ||||||||||||
Other foreign currency contracts | Other invested assets | 4 | 8 | Other liabilities | — | — | ||||||||||||
GMWB embedded derivatives | Reinsurance recoverable (2) | (6 | ) | (5 | ) | Policyholder account balances(3) | 145 | 175 | ||||||||||
Total derivatives not designated as hedges | 531 | 612 | 346 | 306 | ||||||||||||||
Total derivatives | $ | 853 | $ | 941 | $ | 529 | $ | 456 | ||||||||||
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The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
(Notional in millions) | Measurement | December 31, 2009 | Additions | Maturities/ terminations | March 31, 2010 | Measurement | December 31, 2010 | Additions | Maturities/ terminations | March 31, 2011 | |||||||||||||||||||||||||
Derivatives designated as hedges | |||||||||||||||||||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | $ | 9,479 | $ | 1,182 | $ | (3 | ) | $ | 10,658 | Notional | $ | 12,355 | $ | 995 | $ | (3 | ) | $ | 13,347 | |||||||||||||||
Inflation indexed swaps | Notional | 376 | 157 | — | 533 | Notional | 525 | 9 | — | 534 | |||||||||||||||||||||||||
Foreign currency swaps | Notional | 491 | — | — | 491 | Notional | 491 | — | — | 491 | |||||||||||||||||||||||||
Total cash flow hedges | 10,346 | 1,339 | (3 | ) | 11,682 | 13,371 | 1,004 | (3 | ) | 14,372 | |||||||||||||||||||||||||
Fair value hedges: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 2,366 | — | (74 | ) | 2,292 | Notional | 1,764 | — | (326 | ) | 1,438 | |||||||||||||||||||||||
Foreign currency swaps | Notional | 85 | — | — | 85 | Notional | 85 | — | — | 85 | |||||||||||||||||||||||||
Total fair value hedges | 2,451 | — | (74 | ) | 2,377 | 1,849 | — | (326 | ) | 1,523 | |||||||||||||||||||||||||
Total derivatives designated as hedges | 12,797 | 1,339 | (77 | ) | 14,059 | 15,220 | 1,004 | (329 | ) | 15,895 | |||||||||||||||||||||||||
Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||
Interest rate swaps | Notional | 6,474 | 1,246 | (354 | ) | 7,366 | Notional | 7,681 | 35 | (1,275 | ) | 6,441 | |||||||||||||||||||||||
Equity return swaps | Notional | 208 | 7 | — | 215 | ||||||||||||||||||||||||||||||
Interest rate swaps related to securitization entities | Notional | — | 138 | — | 138 | Notional | 129 | — | (3 | ) | 126 | ||||||||||||||||||||||||
Interest rate swaptions | Notional | 5,100 | — | (3,300 | ) | 1,800 | Notional | 200 | — | (200 | ) | — | |||||||||||||||||||||||
Credit default swaps | Notional | 1,090 | — | — | 1,090 | Notional | 1,195 | 115 | (100 | ) | 1,210 | ||||||||||||||||||||||||
Credit default swaps related to securitization entities | Notional | — | 322 | — | 322 | Notional | 317 | — | — | 317 | |||||||||||||||||||||||||
Equity index options | Notional | 912 | 149 | (81 | ) | 980 | Notional | 744 | 288 | (451 | ) | 581 | |||||||||||||||||||||||
Financial futures | Notional | 5,822 | 2,186 | (2,545 | ) | 5,463 | Notional | 3,937 | 1,372 | (1,806 | ) | 3,503 | |||||||||||||||||||||||
Other foreign currency contracts | Notional | 521 | — | — | 521 | Notional | 521 | 185 | — | 706 | |||||||||||||||||||||||||
Reinsurance embedded derivatives | Notional | 72 | 12 | — | 84 | ||||||||||||||||||||||||||||||
Total derivatives not designated as hedges | 19,919 | 4,041 | (6,280 | ) | 17,680 | 15,004 | 2,014 | (3,835 | ) | 13,183 | |||||||||||||||||||||||||
Total derivatives | $ | 32,716 | $ | 5,380 | $ | (6,357 | ) | $ | 31,739 | $ | 30,224 | $ | 3,018 | $ | (4,164 | ) | $ | 29,078 | |||||||||||||||||
(Number of policies) | Measurement | December 31, 2009 | Additions | Terminations | March 31, 2010 | Measurement | December 31, 2010 | Additions | Terminations | March 31, 2011 | |||||||||||||||||||||
Derivatives not designated as hedges | |||||||||||||||||||||||||||||||
GMWB embedded derivatives | Policies | 47,543 | 1,323 | (461 | ) | 48,405 | Policies | 49,566 | 675 | (654 | ) | 49,587 |
The decrease in the notional value of derivatives was primarily attributable to a $2.1$1.1 billion notional decrease in interest rate swaps and swaptions related to a derivative strategy to mitigate interest rate risk associated with our statutory capital position, a $0.4$0.6 billion notional decrease in non-qualifying futures and interest rate swaps and financial futures used to hedge liabilities related to our institutional products and a $0.3$0.5 billion notional decrease in interest rate swaps associatedderivatives used to hedge our variable annuity products with our GMWB hedging strategy. TheGMWBs. These decreases were partially offset by a $1.2$1.0 billion notional increase in qualifying cash flow hedges related to our interest rate hedging strategy associated with our long-term care insurance products, a $0.5 billion notional increase in credit default swaps and interest rate swaps related to securitization entities and a $0.2 billion notional increase in inflation indexed swaps.products.
Consolidated Balance Sheets
Total assets. Total assets increased $0.9$0.5 billion from $108.2$112.4 billion as of December 31, 20092010 to $109.1$112.9 billion as of March 31, 2010.2011.
Cash, cash equivalents and invested assets increased $0.8$0.2 billion primarily from an increase of $2.3 billion in our fixed maturity securities portfolio resulting primarily from improved market performance and an increase in purchases of fixed maturity securities which resulted in a decrease of $1.5$0.6 billion in cash and cash equivalents. Restricted commercialequivalents, partially offset by a decrease of $0.4 billion in invested assets. The increase in cash was primarily attributable to our debt issuance in March 2011. Our fixed maturity securities portfolio decreased $0.2 billion resulting primarily from maturities exceeding purchases during the first quarter of 2011. Commercial mortgage loans and restricted other invested assets increased $0.9decreased $0.1 billion fromas collections exceeded originations during the consolidationfirst quarter of certain securitization entities as of January 1, 2010.2011. Other invested assets decreased $0.7$0.1 billion primarily driven by a decrease in short-term investments, derivatives and derivatives counterparty collateral.collateral, partially offset by an increase in our securities lending program and short-term investments.
Separate account assets increased $0.3$0.1 billion primarily as a result of favorable market performance of the underlying securities.
Total liabilities. Total liabilities increased $0.3 billion from $94.8$97.4 billion as of December 31, 20092010 to $95.1$97.7 billion as of March 31, 2010.2011.
Our policyholder-related liabilities decreased $0.5$0.4 billion largely attributable to a decrease in our U.S. mortgage insurance business primarily from a settlement in the first quarter of 2010 and a decline in delinquencies, a decrease in our spread-based businessproducts from benefit payments and scheduled maturities and the early retirement of our institutional contracts.products. These decreases were partially offset by an increase in our long-term care insurance business from growth of our in-force block.
Borrowings related to securitization entitiesOther liabilities increased $0.6$0.1 billion primarily as a result of the timing of payments and an increase in our securities lending program, partially offset by a decrease in our repurchase program.
Long-term borrowings increased $0.4 billion principally from the consolidationissuance of certain securitization entities as of January 1, 2010.senior notes in March 2011.
Separate account liabilities increased $0.3$0.1 billion primarily as a result of favorable market performance of the underlying securities.
Total stockholders’ equity. Total stockholders’ equity increased $0.6$0.2 billion from $13.4$15.0 billion as of December 31, 20092010 to $14.0$15.2 billion as of March 31, 2010.2011.
We reported net income available to Genworth Financial, Inc.’s common stockholders of $0.2$0.1 billion for the three months ended March 31, 2010.2011.
We recorded a cumulative effect adjustment that reduced retained earnings by $104 million with a partial offset to accumulatedAccumulated other comprehensive income (loss) of $91 million relatedincreased $0.1 billion predominately attributable to the consolidationweakening of certain securitization entities as of January 1, 2010.
We had accumulatedthe U.S. dollar against other comprehensive income of $0.3 billion as of March 31, 2010 compared to accumulated other comprehensive loss of $0.2 billion as of December 31, 2009. The changecurrencies resulting in accumulated other comprehensive income was primarily attributable to a decrease of $0.5 billion in net unrealized investment losses from improved market performance during the first quarter of 2010.higher foreign currency translation adjustments.
Liquidity and Capital Resources
Liquidity and capital resources represent our overall financial strength and our ability to generate cash flows from our businesses, borrow funds at competitive rates and raise new capital to meet our operating and growth needs.
Genworth Financial and subsidiaries
The following table sets forth our condensed consolidated cash flows for the three months ended March 31:
(Amounts in millions) | 2010 | 2009 | 2011 | 2010 | ||||||||||||
Net cash from operating activities | $ | 130 | $ | 783 | $ | 336 | $ | 130 | ||||||||
Net cash from investing activities | (1,174 | ) | 1,254 | 496 | (1,174 | ) | ||||||||||
Net cash from financing activities | (487 | ) | (2,203 | ) | (221 | ) | (487 | ) | ||||||||
Net decrease in cash before foreign exchange effect | $ | (1,531 | ) | $ | (166 | ) | ||||||||||
Net increase (decrease) in cash before foreign exchange effect | $ | 611 | $ | (1,531 | ) | |||||||||||
Our principal sources of cash include sales of our products and services, income from our investment portfolio and proceeds from sales of investments. As an insurance business, we typically generate positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed policy acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. The decreaseincrease in cash inflows from operating activities in the first quarter of 20102011 compared to the first quarter of 20092010 was primarily as a result of higherlower tax settlements in the first quarter of 2010, higher paid claims in our U.S. mortgage insurance business, including a settlement that was paid in the first quarter of 2010,2011 and a decreasean increase from other liabilities and policy-related balances associated with the timing of payments.
In analyzing our cash flow, we focus on the change in the amount of cash available and used in investing activities. We had net cash outflowsinflows from investing activities in the first quarter of 20102011 as purchases of investments exceeded proceeds from maturities and sales of fixed maturity securities. In early 2009, we were holding excess cash balances. In the second halfsecurities exceeded purchases of 2009 and into 2010, we began reinvesting this excess cash.investments.
Changes in cash from financing activities primarily relate to the issuance of, and redemptions and benefit payments on, universal life insurance and investment contracts; the issuance and acquisition of debt and equity securities; the issuance and repayment of borrowings and non-recourse funding obligations; and dividends to our stockholders and other capital transactions. We had net cash outflows from financing activities in the first quarter of 20102011 related to redemptions of our investment contracts primarily from scheduled maturities and surrenders which exceeded deposits received on these contracts. In 2009, redemptions were significantly higher dueNet cash from financing activities increased related to scheduled maturities andnet proceeds received from the early retirementissuance of institutional contracts.senior notes during the first quarter of 2011.
In the U.S.United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio, which require the borrower to provide collateral, consisting of cash and government securities, on a daily basis in amounts equal to or exceeding 102% in the U.S.United States and 105% in Canada of the fair value of the applicable securities loaned. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. Cash and non-cash collateral, such as a security, received by us on securities lending transactions is reflected in other invested assets with an offsetting liability recognized in other liabilities for the obligation to return the collateral. Any cash collateral received is reinvested by our custodian based upon the investment guidelines provided within our agreement. In the U.S.,United States, the reinvested cash collateral is primarily invested in a money market fund approved by the National Association of Insurance Commissioners (“NAIC”), U.S. and foreign government securities, U.S. government agency securities, asset-backed securities and corporate debt securities, all of which have scheduled maturities of less than three years.securities. In Canada, the lending institution must be included on the approved Securities Lending Borrowers List with the Canadian regulator and the intermediary must be rated at least “AA-” by Standard & Poor’s Financial Services LLC (“S&P”).LLC. We are currently fully indemnified against counterparty credit risk by the intermediary. As of March 31, 20102011 and December 31, 2009,2010, the fair value of securities loaned under the securities lending program was $0.6$0.8 billion, and $0.9 billion, respectively, consisting of $0.3$0.5 billion and $0.6 billion, respectively, in the U.S.United States and $0.3 billion in Canada for both periods.Canada. As of March 31, 20102011 and December 31, 2009,2010, the fair value of collateral held under the securities
lending program was $0.6$0.8 billion and $0.9 billion, respectively, and the offsetting obligation to return collateral of $0.6$0.8 billion and $0.9 billion, respectively, was included in other liabilities in the consolidated balance sheets. We had non-cash collateral of $273 million and $326 million$0.3 billion as of March 31, 20102011 and December 31, 2009, respectively.2010.
We also have a repurchase program in which we sell an investment security at a specified price and agree to repurchase that security at another specified price at a later date. Repurchase agreements are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired, including accrued interest, as specified in the respective agreement. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities. As of March 31, 20102011 and December 31, 2009,2010, the fair value of securities pledged under the repurchase program was $2.1$1.6 billion and $1.7 billion, respectively, and the repurchase obligation of $2.1$1.6 billion and $1.7 billion, respectively, was included in other liabilities in the consolidated balance sheets.
Genworth Financial, Inc.—holding company
We conduct all our operations through our operating subsidiaries. Dividends from our subsidiaries and permitted payments to us under our tax sharing arrangements with our subsidiaries are our principal sources of cash to pay stockholder dividends and to meet our holding company obligations, including payments of principal and interest on our outstanding indebtedness. Other principal sources of cash include proceeds from the issuance of debt and equity securities, including borrowings pursuant to our credit facilities, and sales of assets.
Our primary uses of funds at our holding company level include payment of general operating expenses, payment of principal, interest and other expenses related to holding company debt, payment of stockholder dividends on our common and preferred stock, amounts we owe to GE under the Tax Matters Agreement, contributions to subsidiaries, repurchase of stock, and, potentially, acquisitions.
Our holding company had $841$1,140 million and $1,298$813 million of cash and cash equivalents as of March 31, 20102011 and December 31, 2009,2010, respectively. During the first quarter of 2010, we contributed $200 million to one of our life insurance subsidiaries to fund growth and investedOur holding company also had $200 million in highly liquid U.S. government bonds.bonds as of March 31, 2011 and December 31, 2010.
In November 2008, our Board of Directors decided to suspend the payment of dividends on our common stock indefinitely. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will be dependent on many factors including the receipt of dividends from our operating subsidiaries, our financial condition and operating results, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, our credit and financial strength ratings and such other factors as the Board of Directors deems relevant.
Regulated insurance subsidiaries
The liquidity requirements of our regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to us, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements.
Our insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. Our insurance subsidiaries’ principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income, including
commissions, cost of insurance, mortality, expense and surrender charges, contract underwriting fees, investment management fees and dividends and distributions from their subsidiaries. The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets.
Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar estimated lives such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. As of March 31, 2010,2011, our total cash, cash equivalents and invested assets were $69.3$71.8 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership interests and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 33%31% of the carrying value of our total cash, cash equivalents and invested assets as of March 31, 2010.2011.
As of March 31, 2010,2011, we had approximately $881$444 million of GICs outstanding. Substantially all of these contracts allow for the payment of benefits at contract value to Employee Retirement Income Security Act of 1974 (“ERISA”) plans prior to contract maturity in the event of death, disability, retirement or change in investment election. ContractsThese contracts also provide for early termination by the contractholder but are subject to an adjustment to the contract value for changes in the level of interest rates from the time the GIC was issued plus an early withdrawal penalty. We carefully underwrite these risks before issuing a GIC to a plan and historically have been able to effectively manage our exposure to these benefit payments. Our GICs typically credit interest at a fixed interest rate and have a fixed maturity generally ranging from two to six years.
During 2005, certain of our domestic life insurance subsidiaries transferred primarily foreign-issued investment securities to an affiliated special-purpose entity (“SPE”) that is consolidated in our financial statements and whose sole purpose is to securitize these investment securities and issue secured notes to various affiliated insurance companies. The securitized investments are owned in their entirety by the SPE and are not available to satisfy the claims of our creditors. These securitized investments provide collateral to the notes issued by the SPE to the insurance companies. The value of those securities as of March 31, 2010 was $876 million.
Capital resources and financing activities
We have two five-year revolving credit facilities that mature in May 2012 and August 2012. These facilities bear variable interest rates based on a one-month London Interbank Offered Rate (“LIBOR”) plus a margin. Each of these facilities originally had $1.0 billion available for borrowings. Lehman Commercial Paper Inc. (“LCP”) had committed $70 million under the August 2012 credit facilitymargin and Lehman Brothers Bank, FSB (“Lehman FSB”) had committed $70 million under the May 2012 credit facility. On October 5, 2008, LCP filed for protection under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. LCP was unable to fulfill its commitments under the August 2012 credit facility and Lehman FSB declined to fulfill its commitment under the May 2012 credit facility. Therefore, as of March 31, 2010, we only hadhave access to $1.9 billion under these facilities. As of March 31, 2010,2011, we had no borrowings of $930 million under these facilities andfacilities; however, we utilized $404$280 million of the commitment under these facilities primarily for the issuance of a letterletters of credit for the benefit of one of our life insurance subsidiaries. As of MarchDecember 31, 2010, we have an unused credit capacityhad no borrowings under our revolving creditthese facilities; however, we utilized $56 million under these facilities of $526 million. These two facilities contain minimum consolidated net worth requirements. Consolidated net worth, as defined in these agreements, means all amounts that would be included on a consolidated balance sheet ofprimarily for the borrower and its subsidiaries
under stockholders’ equity, excluding accumulated other comprehensive income (loss). On April 1, 2010, a consent and waiver agreement was entered into which releases the Lehman Brothers-related commitments under the facilities and reduces the remaining commitments by those respective amounts. On April 29, 2010, we terminated $350 millionissuance of letters of credit under these facilities for the benefit of one of our lifelifestyle protection insurance subsidiaries. As
In March 2011, we issued senior notes having an aggregate principal amount of $400 million, with an interest rate equal to 7.625% per year payable semi-annually, and maturing in September 2021 (“2021 Notes”). The 2021 Notes are our direct, unsecured obligations and will rank equally with all of our existing and future unsecured and unsubordinated obligations. We have the option to redeem all or a result, unused credit capacity under our credit facilities is $876 million.portion of the 2021 Notes at any time with proper notice to the note holders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread. The net proceeds of $397 million from the issuance of the 2021 Notes were used for general corporate purposes.
We believe our revolving credit facilities and anticipated cash flows from operations will provide us with sufficient capital flexibility and liquidity to meet our future operating requirements, as well as optimize our capital structure. In addition, we actively monitor our liquidity position, liquidity generation options and the credit markets given changing market conditions. However, we cannot predict with any certainty the impact to us from any further disruptions in the credit markets or further downgrades by one or more of the rating agencies of the financial strength ratings of our insurance company subsidiaries and/or the credit ratings of our holding company. The availability of additional funding will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, the overall availability of credit to the financial services industry, the level of activity and availability of reinsurers, our credit ratings and credit capacity and the performance of and outlook for our business.
On April 29, 2010,
Genworth MI Canada Inc. (“Genworth Canada”), our majority owned, publicly tradedmajority-owned subsidiary, announced plans to add debt torepurchase approximately CAD$160 million of its capital structure. The debt to capital ratio is initially targeted at approximately 10%. For purposes of this ratio, capital is defined as Genworth Canada stockholders’ equity, excluding accumulated other comprehensive income and includingexisting common shares, with the proposed debt. The ultimate sizeamount and timing of any financing as well as its impact on dividends and/or return of capital will be dependent upon Genworth Canada’s capital requirements, generalsubject to market conditions and receipt of customary approvals, including approval by Genworth Canada’s board of directors.approvals. We expect to receive approximately CAD$82 million after-tax in net proceeds, with no percentage change in ownership.
Contractual obligations and commercial commitments
We enter into obligations to third parties in the ordinary course of our operations. However, we do not believe that our cash flow requirements can be assessed based upon analysis of these obligations as the funding of these future cash obligations will be from future cash flows from premiums, deposits, fees and investment income that are not reflected herein. Future cash outflows, whether they are contractual obligations or not, also will vary based upon our future needs. Although some outflows are fixed, others depend on future events. Examples of fixed obligations include our obligations to pay principal and interest on fixed-rate borrowings. Examples of obligations that will vary include obligations to pay interest on variable-rate borrowings and insurance liabilities that depend on future interest rates and market performance. Many of our obligations are linked to cash-generating contracts. These obligations include payments to contractholders that assume those contractholders will continue to make deposits in accordance with the terms of their contracts. In addition, our operations involve significant expenditures that are not based upon “commitments.”
There have been no material additions or changes to our contractual obligations and commercial commitments as set forth in our 20092010 Annual Report on Form 10-K filed on February 26, 2010.25, 2011, except as discussed above under “—Capital resources and financing activities.” However, we announced in March 2011 that we intend to redeem all outstanding shares of our Series A Preferred Stock on June 1, 2011, in accordance with their terms.
Securitization Entities
There were no off-balance sheet securitization transactions in the three months ended March 31, 20102011 or 2009. See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.2010.
New Accounting Standards
For a discussion of recently adopted and not yet adopted accounting standards, see note 2 in our “—Notes to Condensed Consolidated Financial Statements.”
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. The following is a discussion of our market risk exposures and our risk management practices.
Credit markets have continued to show signs of improvement across most asset classes in the first quarter of 2010.2011. See “—Business trends and conditions” and “—Investments and Derivative Instruments” in “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of recent market conditions.
In the first quarter of 2010,2011, the currencies in our principal international locations (Canada,Canada and Australia and Europe) have strengthened against the U.S. dollar, fromwhile in Europe, the currencies weakened against the U.S. dollar, as compared to the first quarter of 20092010 and remained relatively flat from the fourth quarter of 2009.2010. This has generally resulted in higher levels of reported revenues and net income, (loss), with nominal changes in assets, liabilities and accumulated other comprehensive income (loss) in our U.S. dollar consolidated financial statements. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact changes in foreign currency exchange rates have had during the year.rates.
There were no other material changes in these risks since December 31, 2009.2010.
Item 4. Controls and Procedures
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of March 31, 2010,2011, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of theseour disclosure controls and procedures were effective.effective as of March 31, 2011.
Changes in Internal Control Over Financial Reporting During the Quarter Ended March 31, 20102011
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 20102011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. | Legal Proceedings |
We face a significantthe risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, bidding practices in connection with our management and administration of a third party’sthird-party’s municipal guaranteed investment contract business, claims payments and procedures, cancellation or rescission of coverage, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting
services, violations of RESPA or related state anti-inducement laws, and breaching fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts including punitive and treble damages, which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships. WeIn addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition andor results of operations.
ThereExcept as disclosed below, there were no material developments during the quarterthree months ended March 31, 2011 in any of the legal proceedings identified in Part I, Item 3 of our 20092010 Annual Report on Form 10-K. In addition, there were no new material legal proceedings during the quarter.three months ended March 31, 2011.
As previously disclosed, in December 2009, one of our non-insurance subsidiaries, one of the subsidiary’s officers and Genworth Financial, Inc. were named in a putative class action lawsuit captionedMichael J. Goodman and Linda Brown v. Genworth Financial Wealth Management, Inc., et al, in the United States District Court for the Eastern District of New York. In response to our motion to dismiss the complaint in its entirety, the Court granted on March 30, 2011 the motion to dismiss the state law fiduciary duty claim and denied the motion to dismiss the remaining federal claims. We continue to vigorously defend this action.
As previously disclosed, we and one of our mortgage insurance subsidiaries were named in a putative class action lawsuit filed in November 2010 captionedArchie Moses and Violet M. Moses v. SunTrust Banks, Inc., et al,in the United States District Court for the District of Columbia. On March 10, 2011, plaintiffs voluntarily dismissed the action without prejudice as to Genworth Financial, Inc. and our mortgage insurance subsidiary.
We cannot ensure that the current investigations and proceedings will not have a material adverse effect on our business, financial condition or results of operations. In addition, it is possible that related investigations and proceedings may be commenced in the future, and we could become subject to furtheradditional unrelated investigations and have lawsuits filed against us.lawsuits. Increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal precedents and industry-wide regulations or practices that could adversely affect our business, financial condition and results of operations.
Item 1A. | Risk Factors |
The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our 20092010 Annual Report on Form 10-K which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. As of March 31, 2010,2011, there have been no material changes to the risk factors set forth in the above-referenced filing.
Item | Exhibits |
10 | Form of | |
12 | Statement of Ratio of Income to Fixed Charges | |
31.1 | Certification of Michael D. Fraizer | |
31.2 | Certification of Patrick B. Kelleher | |
32.1 | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Michael D. Fraizer | |
32.2 | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Patrick B. Kelleher | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GENWORTH FINANCIAL, INC. (Registrant) | ||||
Date: | ||||
By: | / | |||
Amy R. Corbin Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) |
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