UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-Q

 

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 20162017

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                     

Commission file number001-32195

 

 

 

LOGOLOGO

GENWORTH FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware 80-0873306

(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 ofRegulationS-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, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitionsdefinition of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x  Accelerated filer ¨
Non-accelerated filer ¨  Smaller reporting company ¨
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).     Yes  ¨    No  x

As of October 28, 2016, 498,369,89426, 2017, 499,158,848 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

 

 

 


TABLE OF CONTENTS

 

      Page 

PART I—FINANCIAL INFORMATION

   3 

Item 1.

  

Financial Statements

   3 

Condensed Consolidated Balance Sheets as of September  30, 20162017 (Unaudited) and December 31, 20152016

   3 

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 20162017 and 20152016 (Unaudited)

   4 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 20162017 and 20152016 (Unaudited)

   5 

Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 20162017 and 20152016 (Unaudited)

   6 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20162017 and 20152016 (Unaudited)

   7 

Notes to Condensed Consolidated Financial Statements (Unaudited)

   8 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   9988 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   191173 

Item 4.

  

Controls and Procedures

   194174 

PART II—OTHER INFORMATION

   194174 

Item 1.

  

Legal Proceedings

   194174 

Item 1A.

  

Risk Factors

   194174 

Item 6.

  

Exhibits

   200175 

Signatures

   201176 

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

  September 30,
2016
 December 31,
2015
   September 30,
2017
 December 31,
2016
 
  (Unaudited)     (Unaudited)   

Assets

      

Investments:

      

Fixed maturity securities available-for-sale, at fair value

  $63,780  $58,197   $62,552  $60,572 

Equity securities available-for-sale, at fair value

   590  310    765 632

Commercial mortgage loans

   6,017  6,170    6,268  6,111 

Restricted commercial mortgage loans related to securitization entities

   134  161    111 129

Policy loans

   1,751  1,568    1,818  1,742 

Other invested assets

   2,676  2,309    1,590  2,071 

Restricted other invested assets related to securitization entities, at fair value

   312  413    —    312
  

 

  

 

   

 

  

 

 

Total investments

   75,260  69,128    73,104  71,569 

Cash and cash equivalents

   3,078  5,965    2,836  2,784 

Accrued investment income

   677  653    639 659

Deferred acquisition costs

   3,982  4,398    2,342  3,571 

Intangible assets and goodwill

   258  357    315 348

Reinsurance recoverable

   17,542  17,245    17,553  17,755 

Other assets

   570  520    552 673

Deferred tax asset

   —    155    24  —   

Separate account assets

   7,485  7,883    7,264  7,299 

Assets held for sale

   —    127 
  

 

  

 

   

 

  

 

 

Total assets

  $108,852  $106,431   $104,629  $104,658 
  

 

  

 

   

 

  

 

 

Liabilities and equity

      

Liabilities:

      

Future policy benefits

  $37,405  $36,475   $38,022  $37,063 

Policyholder account balances

   25,867  26,209    24,531  25,662 

Liability for policy and contract claims

   8,869  8,095    9,384  9,256 

Unearned premiums

   3,464  3,308    3,512  3,378 

Other liabilities ($2 and $46 of other liabilities are related to securitization entities)

   3,280  3,004 

Borrowings related to securitization entities ($11 and $81 are at fair value)

   78  179 

Other liabilities ($1 of other liabilities are related to securitization entities in each period)

   2,002  2,916 

Borrowings related to securitization entities ($12 are carried at fair value in each period)

   59 74

Non-recourse funding obligations

   310  1,920    310 310

Long-term borrowings

   4,194  4,570    4,224  4,180 

Deferred tax liability

   1,151  24    234 53

Separate account liabilities

   7,485  7,883    7,264  7,299 

Liabilities held for sale

   —    127 
  

 

  

 

   

 

  

 

 

Total liabilities

   92,103  91,794    89,542  90,191 
  

 

  

 

   

 

  

 

 

Commitments and contingencies

      

Equity:

      

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 587 million and 586 million shares issued as of September 30, 2016 and December 31, 2015, respectively; 498 million shares outstanding as of September 30, 2016 and December 31, 2015

   1  1 

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 588 million and 587 million shares issued as of September 30, 2017 and December 31, 2016, respectively; 499 million and 498 million shares outstanding as of September 30, 2017 and December 31, 2016, respectively

   1 1

Additional paid-in capital

   11,959  11,949    11,973  11,962 
  

 

  

 

   

 

  

 

 

Accumulated other comprehensive income (loss):

      

Net unrealized investment gains (losses):

      

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

   2,836  1,236    1,098  1,253 

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

   24  18    10 9
  

 

  

 

   

 

  

 

 

Net unrealized investment gains (losses)

   2,860  1,254    1,108  1,262 
  

 

  

 

   

 

  

 

 

Derivatives qualifying as hedges

   2,493  2,045    2,052  2,085 

Foreign currency translation and other adjustments

   (151 (289   (125 (253
  

 

  

 

   

 

  

 

 

Total accumulated other comprehensive income (loss)

   5,202  3,010    3,035  3,094 

Retained earnings

   409  564    760 287

Treasury stock, at cost (88 million shares as of September 30, 2016 and December 31, 2015)

   (2,700 (2,700

Treasury stock, at cost (88 million shares as of September 30, 2017 and December 31, 2016)

   (2,700 (2,700
  

 

  

 

   

 

  

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

   14,871  12,824    13,069  12,644 

Noncontrolling interests

   1,878  1,813    2,018  1,823 
  

 

  

 

   

 

  

 

 

Total equity

   16,749  14,637    15,087  14,467 
  

 

  

 

   

 

  

 

 

Total liabilities and equity

  $108,852  $106,431   $104,629  $104,658 
  

 

  

 

   

 

  

 

 

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)

 

  Three months ended
September 30,
 Nine months ended
September 30,
   Three months ended
September 30,
 Nine months ended
September 30,
 
    2016     2015   2016 2015   2017 2016 2017 2016 

Revenues:

          

Premiums

  $1,108  $1,145  $3,029  $3,422   $1,135  $1,108  $3,382  $3,029 

Net investment income

   805  783  2,373  2,357    797 805 2,388  2,373 

Net investment gains (losses)

   20  (51 31  (59   85 20 220 31

Policy fees and other income

   217  223  738  672    198 217 619 738
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total revenues

   2,150  2,100  6,171  6,392    2,215  2,150  6,609  6,171 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Benefits and expenses:

          

Benefits and other changes in policy reserves

   1,662  1,290  3,715  3,714    1,344  1,662  3,796  3,715 

Interest credited

   173  179  523  540    164 173 494 523

Acquisition and operating expenses, net of deferrals

   269  314  990  876    265 269 775 990

Amortization of deferred acquisition costs and intangibles

   94  563  305  759    83 94 316 305

Interest expense

   77  105  262  315    73 77 209 262
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total benefits and expenses

   2,275  2,451  5,795  6,204    1,929  2,275  5,590  5,795 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income (loss) from continuing operations before income taxes

   (125 (351 376  188    286 (125 1,019  376

Provision (benefit) for income taxes

   222  (134 355  27 

Provision for income taxes

   102 222 348 355
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income (loss) from continuing operations

   (347 (217 21  161    184 (347 671 21

Income (loss) from discontinued operations, net of taxes

   15  (21 (25 (334   (9 15 (9 (25
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net loss

   (332 (238 (4 (173

Net income (loss)

   175 (332 662 (4

Less: net income attributable to noncontrolling interests

   48  46  151  150    68 48 198 151
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

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

  $(380 $(284 $(155 $(323

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

  $107  $(380 $464  $(155
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income (loss) from continuing operations available to Genworth Financial, Inc.‘s common stockholders per common share:

     

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:

     

Basic

  $(0.79 $(0.53 $(0.26 $0.02   $0.23  $(0.79 $0.95  $(0.26
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted

  $(0.79 $(0.53 $(0.26 $0.02   $0.23  $(0.79 $0.94  $(0.26
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

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

     

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

     

Basic

  $(0.76 $(0.57 $(0.31 $(0.65  $0.21  $(0.76 $0.93  $(0.31
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted

  $(0.76 $(0.57 $(0.31 $(0.65  $0.21  $(0.76 $0.93  $(0.31
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Weighted-average common shares outstanding:

          

Basic

   498.3  497.4  498.3  497.3    499.1  498.3  498.9  498.3 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Diluted

   498.3  497.4  498.3  499.0    501.6  498.3  501.2  498.3 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Supplemental disclosures:

          

Total other-than-temporary impairments

  $(2 $(10 $(35 $(13  $(1 $(2 $(4 $(35

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

   —    1   —    1    —     —     —     —   
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net other-than-temporary impairments

   (2 (9 (35 (12   (1 (2 (4 (35

Other investments gains (losses)

   22  (42 66  (47   86 22 224 66
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total net investment gains (losses)

  $20  $(51 $31  $(59  $85  $20  $220  $31 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

  Three months ended Nine months ended   Three months
ended
September 30,
 Nine months
ended
September 30,
 
  September 30, September 30,   2017 2016 2017 2016 
    2016     2015   2016 2015 

Net loss

  $(332 $(238 $(4 $(173

Net income (loss)

  $175  $(332 $662  $(4

Other comprehensive income (loss), net of taxes:

          

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

   72  87  1,624  (728   (89 72 (173 1,624 

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

   5   —    6   —      —    5 1 6

Derivatives qualifying as hedges

   54  217  448  60    (12 54 (33 448

Foreign currency translation and other adjustments

   (1 (302 223  (619   81 (1 261 223
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total other comprehensive income (loss)

   130  2  2,301  (1,287   (20 130 56 2,301 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total comprehensive income (loss)

   (202 (236 2,297  (1,460   155 (202 718 2,297 

Less: comprehensive income (loss) attributable to noncontrolling interests

   64  (121 260  (145

Less: comprehensive income attributable to noncontrolling interests

   108 64 313 260
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

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

  $(266 $(115 $2,037  $(1,315  $47  $(266 $405  $2,037 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN 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
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
equity
 

Balances as of December 31, 2016

 $1  $11,962  $3,094  $287  $(2,700 $12,644  $1,823  $14,467 

Cumulative effect of change in accounting, net of taxes

  —     —     —    9  —    9  —    9

Repurchase of subsidiary shares

  —     —     —     —     —     —    (31 (31

Comprehensive income (loss):

        

Net income

  —     —     —    464  —    464 198 662

Other comprehensive income (loss) net of taxes

  —     —    (59  —     —    (59 115 56
      

 

  

 

  

 

 

Total comprehensive income

      405 313 718

Dividends to noncontrolling interests

  —     —     —     —     —     —    (92 (92

Stock-based compensation expense and exercises and other

  —    11  —     —     —    11 5 16
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of September 30, 2017

 $1  $11,973  $3,035  $760  $(2,700 $13,069  $2,018  $15,087 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of December 31, 2015

 $1  $11,949  $3,010  $564  $(2,700 $12,824  $1,813  $14,637  $1  $11,949  $3,010  $564  $(2,700 $12,824  $1,813  $14,637 

Return of capital to noncontrolling interests

  —     —     —     —     —     —    (70 (70

Comprehensive income:

        

Net income (loss)

  —     —     —    (155  —    (155 151 (4

Other comprehensive income, net of taxes

  —     —    2,192   —     —    2,192  109 2,301 
        

 

       

 

  

 

  

 

 

Return of capital to noncontrolling interests

  —      —      —      —      ���      —     (70 (70

Comprehensive income (loss):

        

Net income (loss)

  —      —      —     (155  —     (155 151  (4

Other comprehensive income (loss), net of taxes

  —      —     2,192   —      —     2,192  109  2,301 
      

 

  

 

  

 

 

Total comprehensive income (loss)

      2,037  260  2,297 

Total comprehensive income

      2,037  260 2,297 

Dividends to noncontrolling interests

  —      —      —      —      —      —     (126 (126  —     —     —     —     —     —    (126 (126

Stock-based compensation expense and exercises and other

  —     10   —      —      —     10  1  11   —    10  —     —     —    10 1 11
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of September 30, 2016

 $1  $11,959  $5,202  $409  $(2,700 $14,871  $1,878  $16,749  $1  $11,959  $5,202  $409  $(2,700 $14,871  $1,878  $16,749 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of December 31, 2014

 $1  $11,997  $4,446  $1,179  $(2,700 $14,923  $1,874  $16,797 
        

 

 

Additional sale of subsidiary shares to noncontrolling interests

  —     (65 24   —      —     (41 267  226 

Repurchase of subsidiary shares

  —      —      —      —      —      —     (17 (17

Comprehensive income (loss):

        

Net income (loss)

  —      —      —     (323  —     (323 150  (173

Other comprehensive income (loss), net of taxes

  —      —     (992  —      —     (992 (295 (1,287
      

 

  

 

  

 

 

Total comprehensive income (loss)

      (1,315 (145 (1,460

Dividends to noncontrolling interests

  —      —      —      —      —      —     (145 (145

Stock-based compensation expense and exercises and other

  —     12   —      —      —     12  3  15 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balances as of September 30, 2015

 $1  $11,944  $3,478  $856  $(2,700 $13,579  $1,837  $15,416 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

  Nine months ended
September 30,
   Nine months
ended
September 30,
 
      2016         2015       2017 2016 

Cash flows from operating activities:

      

Net loss

  $(4 $(173

Net income (loss)

  $662  $(4

Less loss from discontinued operations, net of taxes

   25  334    9 25

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

   

Gain on sale of businesses

   (26  —   

Adjustments to reconcile net income (loss) to net cash from operating activities:

   

Gain on sale of business

   —    (26

Amortization of fixed maturity securities discounts and premiums and limited partnerships

   (112 (80   (107 (112

Net investment losses (gains)

   (31 59 

Net investment gains

   (220 (31

Charges assessed to policyholders

   (574 (586   (534 (574

Acquisition costs deferred

   (124 (226   (67 (124

Amortization of deferred acquisition costs and intangibles

   305  759    316 305

Deferred income taxes

   173  (117   234 173

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

   759  (247

Trading securities,held-for-sale investments and derivative instruments

   716 759

Stock-based compensation expense

   25  14    29 25

Change in certain assets and liabilities:

      

Accrued investment income and other assets

   (258 (133   (21 (258

Insurance reserves

   691  1,270    1,202  691

Current tax liabilities

   44  (71   (27 44

Other liabilities, policy and contract claims and other policy-related balances

   905  352    (260 905

Cash from operating activities—held for sale

   —    3 
  

 

  

 

   

 

  

 

 

Net cash from operating activities

   1,798  1,158    1,932  1,798 
  

 

  

 

   

 

  

 

 

Cash flows from investing activities:

   

Cash flows used by investing activities:

   

Proceeds from maturities and repayments of investments:

      

Fixed maturity securities

   2,646  3,389    3,396  2,646 

Commercial mortgage loans

   555  640    454 555

Restricted commercial mortgage loans related to securitization entities

   27  27    18 27

Proceeds from sales of investments:

      

Fixed maturity and equity securities

   4,064  1,333    3,269  4,064 

Purchases and originations of investments:

      

Fixed maturity and equity securities

   (8,758 (6,836   (6,709 (8,758

Commercial mortgage loans

   (405 (678   (608 (405

Other invested assets, net

   (138 (39   (521 (138

Policy loans, net

   (80 23    28 (80

Proceeds from sale of businesses, net of cash transferred

   39   —      —    39

Cash from investing activities—held for sale

   —    (22

Payments for business purchased, net of cash acquired

   (5  —   
  

 

  

 

   

 

  

 

 

Net cash from investing activities

   (2,050 (2,163

Net cash used by investing activities

   (678 (2,050
  

 

  

 

   

 

  

 

 

Cash flows from financing activities:

   

Cash flows used by financing activities:

   

Deposits to universal life and investment contracts

   1,028  1,693    902 1,028 

Withdrawals from universal life and investment contracts

   (1,463 (1,677   (2,003 (1,463

Redemption of non-recourse funding obligations

   (1,620 (45   —    (1,620

Proceeds from issuance of long-term debt

   —    150 

Repayment and repurchase of long-term debt

   (362 (120   —    (362

Repayment of borrowings related to securitization entities

   (37 (26   (16 (37

Proceeds from sale of subsidiary shares to noncontrolling interests

   —    226 

Repurchase of subsidiary shares

   —    (17   (31  —   

Return of capital to noncontrolling interests

   (70  —      —    (70

Dividends paid to noncontrolling interests

   (126 (145   (92 (126

Other, net

   (49 (25   (30 (49

Cash from financing activities—held for sale

   —    (33
  

 

  

 

   

 

  

 

 

Net cash from financing activities

   (2,699 (19

Net cash used by financing activities

   (1,270 (2,699
  

 

  

 

   

 

  

 

 

Effect of exchange rate changes on cash and cash equivalents (includes $— and $(8) related to businesses held for sale)

   36  (86

Effect of exchange rate changes on cash and cash equivalents

   68 36
  

 

  

 

   

 

  

 

 

Net change in cash and cash equivalents

   (2,915 (1,110   52 (2,915

Cash and cash equivalents at beginning of period

   5,993  4,918    2,784  5,993 
  

 

  

 

   

 

  

 

 

Cash and cash equivalents at end of period

   3,078  3,808   $2,836  $3,078 

Less cash and cash equivalents held for sale at end of period

   —    142 
  

 

  

 

   

 

  

 

 

Cash and cash equivalents of continuing operations at end of period

  $3,078  $3,666 
  

 

  

 

 

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering (“IPO”) of Genworth’s common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth’s stockholders voted on and approved a proposal to adopt the Merger Agreement.

The transaction remains subject to closing conditions, including the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions. Both parties are engaging with the relevant regulators regarding the applications and the pending transaction.

The accompanying unaudited condensed financial statements include on a consolidated basis the accounts of Genworth Financial and the affiliate companies in which it holds a majority voting interest or where it is the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.

References to “Genworth,” the “Company,” “we” or “our” in the accompanying unaudited condensed consolidated financial statements and these notes thereto are, unless the context otherwise requires, to Genworth Financial on a consolidated basis.

We operate our business through the following five operating segments:

 

  U.S. Mortgage Insurance.In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.

 

  Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada.

 

  Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.

 

  Runoff.The Runoff segment includes the results ofnon-strategic products which are no longerhave not been actively sold but we continue to service our existing blocks of business. Ournon-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes and guaranteed investment contracts.

In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.

On May 9, 2016, Genworth Mortgage Insurance Corporation (“GMICO”), our wholly-owned indirect subsidiary, completed the sale of our European mortgage insurance business. As the held-for-sale criteria were

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

satisfied during the fourth quarter of 2015, our European mortgage insurance business, included in Corporate and Other activities, has been reported as held for sale and its financial position is separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 14 for additional information.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring 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 unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 20152016 Annual Report on Form10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

On October 21, 2016, we entered into a definitive agreement with China Oceanwide Holdings Group Co., Ltd. (“China Oceanwide”) under which China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. The acquisition will be completed through Asia Pacific Global Capital Co. Ltd., one of China Oceanwide’s investment platforms. The transaction is subject to approval by our stockholders as well as other closing conditions, including the receipt of required regulatory approvals.

(2) Accounting Changes

Accounting PronouncementPronouncements Recently Adopted

On January 1, 2016,2017, we adopted new accounting guidance related to consolidation.the accounting for stock compensation. The new guidance primarily impacts limited partnershipssimplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classifications of awards as either equity or liabilities, and similar legal entities, evaluationclassification on the statement of fees paidcash flows. We adopted this new accounting guidance on a modified retrospective basis and recorded a previously disallowed deferred tax asset of $9 million with a corresponding increase to a decision maker as a variable interest, thecumulative effect of fee arrangements andchange in accounting within retained earnings at adoption.

On January 1, 2017, we adopted new accounting guidance related parties onto transition to the primary beneficiary determination and certainequity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has anavailable-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment funds. The adoptionbecomes qualified for use of this new guidancethe equity method. We did not have a materialany significant impact from this guidance on our consolidated financial statements.

On January 1, 2017, we adopted new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance is consistent with our previous accounting practices and, accordingly, did not have any impact on our consolidated financial statements.

On January 1, 2017, we adopted new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is consistent with our previous accounting for derivative contract novations and, accordingly, did not have any impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In September 2016,August 2017, the Financial Accounting Standards Board (the “FASB”(“the FASB”) issued new guidance relatedintended to enable entities to better portray the statementeconomics of cash flows classificationtheir derivative risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In certain cash payments and cash receipts.situations, the amendments also simplify the application of hedge accounting. The guidance will reduce diversity in practice related to eight specific cash flow issues. The new guidance is currently effective for us on January 1, 2018,2019, with early adoption permitted. We are in the process of determiningevaluating adopting this new guidance early and the impact it may have on our consolidated financial statements.

In May 2017, the FASB issued new guidance to clarify when to account for a change to share-based compensation as a modification. The new guidance requires modification accounting only if there are changes to the fair value, vesting conditions or classification, as a liability or equity, of the share-based compensation. The guidance is effective, prospectively, for us on January 1, 2018, accordingly, the guidance will not have any impact at adoption.

In March 2017, the FASB issued new guidance shortening the amortization period for the premium component of callable debt securities purchased at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements.

In February 2017, the FASB issued new guidance to clarify the accounting for gains and losses from the derecognition of nonfinancial assets and accounting for partial sales of nonfinancial assets. The new guidance clarifies when transferring ownership interests in a consolidated subsidiary holding nonfinancial assets is within scope. It also states that the reporting entity should identify each distinct nonfinancial asset and derecognize when a counterparty obtains control, and clarifies the accounting for partial sales. The new guidance is currently effective for us on January 1, 2018. We do not expect any significant impacts from this guidance on our consolidated financial statements.

In June 2016,January 2017, the FASB issued new guidance related to accountingsimplifying the test for credit losses on financial instruments. The guidance requires that entities recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most debt instruments not measured at fair value, which would primarily include our commercial mortgage loans and reinsurance receivables.goodwill impairment. The new guidance retains moststates goodwill impairment is equal to the difference between the carrying value and fair value of the existing impairmentreporting unit up to the amount of recorded goodwill. The new guidance is currently effective for available-for-sale debt securities but amends the presentation of credit losses to be presented as an allowance as opposed to a write-down and permits the reversal of credit losses when reassessingus on January 1, 2020, with early adoption permitted for testing dates after January 1, 2017. We do not expect any significant impacts from this new guidance on our consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

changes inIn October 2016, the credit losses each reporting period.FASB issued new guidance related to the income tax effects of intra-entity transfers of assets other than inventory. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is currently effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019. Upon adoption, a2018. We are still in process of evaluating the impact the guidance may have on our consolidated financial statements, including any cumulative effect adjustment inthat will be recorded directly to retained earnings as of the beginning of the yearperiod of adoption will be recorded. We are in the process of determining the impact from this guidance on our consolidated financial statements.adoption.

In MarchJanuary 2016, the FASB issued new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Changes to the current financial instruments accounting primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for stock compensation.financial instruments. Under the new guidance, equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, will be measured at fair value with changes in fair value recognized in net income (loss). As of September 30, 2017, we have approximately $45 million of cumulative unrealized gains related to equity securities included in accumulated other comprehensive income as well as approximately $25 million of gains related to limited partnership investments currently recorded at cost, that will be reclassed to cumulative effect of change in accounting within retained earnings upon adoption of this new accounting guidance. The new guidance primarily simplifiesalso clarifies that the accountingneed for employee share-based payment transactions, including a valuation allowance on a deferred tax asset related toavailable-for-sale securities should be evaluated in combination with other deferred tax assets. This new requirement to record all of the income tax effects at settlement or expiration through the income statement, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance iswill be effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The guidance is effective for us on January 1, 2017, with early adoption permitted. We do not expect any significant impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The guidance is effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The guidance is effective for us on January 1, 2017, with early adoption permitted. This guidance is consistent with our accounting for derivative contract novations and, accordingly, we do not expect any impact on our consolidated financial statements.

In February 2016, the FASB issued new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a right-to-use asset and a corresponding liability on the balance sheet. The guidance is effective for us on January 1, 2019, with early adoption permitted.2018. We are still in the process of evaluating the full impact thisthe guidance willmay have on our consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 common shares outstanding for the periods indicated:

 

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

(Amounts in millions, except per share amounts)

     2016        2015     2016  2015 

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

   498.3   497.4   498.3   497.3 

Potentially dilutive securities:

     

Stock options, restricted stock units and stock appreciation rights

   —     —     —     1.7 
  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted-average common shares used in diluted earnings (loss) per common share calculations (1)

   498.3   497.4   498.3   499.0 
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations:

     

Income (loss) from continuing operations

  $(347 $(217 $21  $161 

Less: income from continuing operations attributable to noncontrolling interests

   48   46   151   150 
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders

  $(395 $(263 $(130 $11 
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic per common share

  $(0.79 $(0.53 $(0.26 $0.02 
  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted per common share

  $(0.79 $(0.53 $(0.26 $0.02 
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from discontinued operations:

     

Income (loss) from discontinued operations, net of taxes

  $15  $(21 $(25 $(334

Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests

   —     —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders

  $15  $(21 $(25 $(334
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic per common share

  $0.03  $(0.04 $(0.05 $(0.67
  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted per common share

  $0.03  $(0.04 $(0.05 $(0.67
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss:

     

Income (loss) from continuing operations

  $(347 $(217 $21  $161 

Income (loss) from discontinued operations, net of taxes

   15   (21  (25  (334
  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

   (332  (238  (4  (173

Less: net income attributable to noncontrolling interests

   48   46   151   150 
  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $(380 $(284 $(155 $(323
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic per common share

  $(0.76 $(0.57 $(0.31 $(0.65
  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted per common share

  $(0.76 $(0.57 $(0.31 $(0.65
  

 

 

  

 

 

  

 

 

  

 

 

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

(Amounts in millions, except per share amounts)

  2017  2016  2017  2016 

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

   499.1   498.3   498.9   498.3 

Potentially dilutive securities:

     

Stock options, restricted stock units and stock appreciation rights

   2.5   —     2.3   —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted-average shares used in diluted earnings (loss) per share calculations (1)

   501.6   498.3   501.2   498.3 
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations:

     

Income (loss) from continuing operations

  $184  $(347 $671  $21 

Less: income from continuing operations attributable to noncontrolling interests

   68  48  198  151
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations available to Genworth Financial, Inc.’scommon stockholders

  $116  $(395 $473  $(130
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic per share

  $0.23  $(0.79 $0.95  $(0.26
  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted per share

  $0.23  $(0.79 $0.94  $(0.26
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from discontinued operations:

     

Income (loss) from discontinued operations, net of taxes

  $(9 $15  $(9 $(25

Less: income from discontinued operations, net of taxes, attributable tononcontrolling interests

   —     —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from discontinued operations, net of taxes, available to GenworthFinancial, Inc.’s common stockholders

  $(9 $15  $(9 $(25
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic per share

  $(0.02 $0.03  $(0.02 $(0.05
  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted per share

  $(0.02 $0.03  $(0.02 $(0.05
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss):

     

Income (loss) from continuing operations

  $184  $(347 $671  $21 

Income (loss) from discontinued operations, net of taxes

   (9  15  (9  (25
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

   175  (332  662  (4

Less: net income attributable to noncontrolling interests

   68  48  198  151
  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $107  $(380 $464  $(155
  

 

 

  

 

 

  

 

 

  

 

 

 

Basic per share

  $0.21  $(0.76 $0.93  $(0.31
  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted per share

  $0.21  $(0.76 $0.93  $(0.31
  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share, for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million, 1.3 million and 1.8 million, respectively, would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million 498.7 million and 500.1 million, respectively.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4) Investments

(a) Net Investment Income

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

 

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

(Amounts in millions)

      2016          2015          2016          2015     

Fixed maturity securities—taxable

  $655  $647  $1,930  $1,924 

Fixed maturity securities—non-taxable

   3   3   9   9 

Commercial mortgage loans

   79   84   237   252 

Restricted commercial mortgage loans related to securitization entities

   3   3   8   10 

Equity securities

   8   3   20   11 

Other invested assets

   34   26   105   103 

Restricted other invested assets related to securitization entities

   —     1   3   3 

Policy loans

   38   33   107   101 

Cash, cash equivalents and short-term investments

   5   3   16   10 
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross investment income before expenses and fees

   825   803   2,435   2,423 

Expenses and fees

   (20  (20  (62  (66
  

 

 

  

 

 

  

 

 

  

 

 

 

Net investment income

  $805  $783  $2,373  $2,357 
  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(Amounts in millions)

  2017  2016  2017  2016 

Fixed maturity securities—taxable

  $640  $655  $1,930   1,930 

Fixed maturitysecurities—non-taxable

   3  3  9  9

Commercial mortgage loans

   78  79  231  237

Restricted commercial mortgage loans related to securitization entities

   3  3  7  8

Equity securities

   9  8  26  20

Other invested assets

   39  34  106  105

Restricted other invested assets related to securitization entities

   —     —     1  3

Policy loans

   39  38  120  107

Cash, cash equivalents and short-term investments

   10  5  26  16
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross investment income before expenses and fees

   821  825  2,456   2,435 

Expenses and fees

   (24  (20  (68  (62
  

 

 

  

 

 

  

 

 

  

 

 

 

Net investment income

  $797  $805  $2,388  $2,373 
  

 

 

  

 

 

  

 

 

  

 

 

 

(b) Net Investment Gains (Losses)

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

 

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

(Amounts in millions)

      2016         2015         2016         2015       2017 2016 2017 2016 

Available-for-sale securities:

          

Realized gains

  $39  $14  $205  $49   $40  $39  $177  $205 

Realized losses

   (24 (18 (75 (36   (10 (24 (55 (75
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

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

   15  (4 130  13    30 15 122 130
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Impairments:

          

Total other-than-temporary impairments

   (2 (10 (35 (13   (1 (2 (4 (35

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

   —    1   —    1    —     —     —     —   
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net other-than-temporary impairments

   (2 (9 (35 (12   (1 (2 (4 (35
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Trading securities

   (4 12  40  2    —    (4 1 40

Commercial mortgage loans

   (1 1  1  5    1 (1 3 1

Net gains (losses) related to securitization entities

   2  (1 (51 9    1 2 5 (51

Derivative instruments(1)

   10  (53 (52 (79   54 10 93 (52

Contingent consideration adjustment

   —    2  (2 2    —     —     —    (2

Other

   —    1   —    1 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net investment gains (losses)

  $20  $(51 $31  $(59  $85  $20  $220  $31 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1)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 three months ended September 30, 2017 and 2016 and 2015 was $293$286 million and $186$293 million, respectively, which was approximately 95%97% and 93%95%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2017 and 2016 and 2015 was $833$1,390 million and $470$833 million, respectively, which was approximately 93%96% and 94%93%, respectively, of book value.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 and for the periods indicated:

 

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

(Amounts in millions)

     2016       2015      2016     2015     2017 2016 2017 2016 

Beginning balance

  $62  $75  $64  $83   $38  $62  $42  $64 

Additions:

          

Other-than-temporary impairments not previously recognized

   —     —    1   —      —     —     —    1

Reductions:

          

Securities sold, paid down or disposed

   (8 (9 (11 (17   (5 (8 (9 (11
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Ending balance

  $54  $66  $54  $66   $33  $54  $33  $54 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

(c) Unrealized Investment Gains and Losses

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

 

(Amounts in millions)

 September 30, 2016 December 31, 2015   September 30, 2017 December 31, 2016 

Net unrealized gains (losses) on investment securities:

     

Fixed maturity securities

 $6,621  $3,140   $4,878  $3,656 

Equity securities

 (2 (10   49 12
 

 

  

 

   

 

  

 

 

Subtotal(1)

 6,619  3,130    4,927  3,668 

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

 (2,045 (1,070   (3,134 (1,611

Income taxes, net

 (1,595 (711   (619 (711
 

 

  

 

   

 

  

 

 

Net unrealized investment gains (losses)

 2,979  1,349    1,174  1,346 

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

 119  95    66 84
 

 

  

 

   

 

  

 

 

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

 $2,860  $1,254   $1,108  $1,262 
 

 

  

 

   

 

  

 

 

(1)Excludes foreign exchange.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

(Amounts in millions)

  2016 2015   2017 2016 

Beginning balance

  $2,789  $1,628   $1,180  $2,789 

Unrealized gains (losses) arising during the period:

      

Unrealized gains (losses) on investment securities

   228  70    (10 228

Adjustment to deferred acquisition costs

   (17 32    (1 (17

Adjustment to present value of future profits

   3  (5   (3 3

Adjustment to sales inducements

   (6 9    —    (6

Adjustment to benefit reserves

   (81 23    (92 (81

Provision for income taxes

   (41 (50   36 (41
  

 

  

 

   

 

  

 

 

Change in unrealized gains (losses) on investment securities

   86  79    (70 86

Reclassification adjustments to net investment (gains) losses, net of taxes of $4 and $(5)

   (9 8 

Reclassification adjustments to net investment (gains) losses, net of taxes of $10 and $4

   (19 (9
  

 

  

 

   

 

  

 

 

Change in net unrealized investment gains (losses)

   77  87    (89 77

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

   6  (16   (17 6
  

 

  

 

   

 

  

 

 

Ending balance

  $2,860  $1,731   $1,108  $2,860 
  

 

  

 

   

 

  

 

 

 

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

(Amounts in millions)

  2016 2015   2017 2016 

Beginning balance

  $1,254  $2,453   $1,262  $1,254 

Unrealized gains (losses) arising during the period:

      

Unrealized gains (losses) on investment securities

   3,584  (1,393   1,377  3,584 

Adjustment to deferred acquisition costs

   (291 102    (1,047 (291

Adjustment to present value of future profits

   (26 45    (36 (26

Adjustment to sales inducements

   (46 12    (11 (46

Adjustment to benefit reserves

   (612 111    (429 (612

Provision for income taxes

   (917 396    51 (917
  

 

  

 

   

 

  

 

 

Change in unrealized gains (losses) on investment securities

   1,692  (727   (95 1,692 

Reclassification adjustments to net investment (gains) losses, net of taxes of $33 and $—

   (62 (1

Reclassification adjustments to net investment (gains) losses, net of taxes of $41 and $33

   (77 (62
  

 

  

 

   

 

  

 

 

Change in net unrealized investment gains (losses)

   1,630  (728   (172 1,630 

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

   24  (6   (18 24
  

 

  

 

   

 

  

 

 

Ending balance

  $2,860  $1,731   $1,108  $2,860 
  

 

  

 

   

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(d) Fixed Maturity and Equity Securities

As of September 30, 2017, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified asavailable-for-sale were as follows:

     Gross unrealized gains  Gross unrealized losses    

(Amounts in millions)

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

Fixed maturity securities:

      

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

 $4,893  $784  $—    $(7 $—    $5,670 

State and political subdivisions

  2,639   247  —     (26  —     2,860 

Non-U.S. government

  2,143   107  —     (24  —     2,226 

U.S. corporate:

      

Utilities

  4,382   556  —     (15  —     4,923 

Energy

  2,243   207  —     (10  —     2,440 

Finance and insurance

  6,051   547  —     (11  —     6,587 

Consumer—non-cyclical

  4,330   508  —     (10  —     4,828 

Technology and communications

  2,558   193  —     (11  —     2,740 

Industrial

  1,247   102  —     (3  —     1,346 

Capital goods

  2,067   263  —     (9  —     2,321 

Consumer—cyclical

  1,506   111  —     (6  —     1,611 

Transportation

  1,188   124  —     (6  —     1,306 

Other

  358  24  —     (2  —     380
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  25,930   2,635   —     (83  —     28,482 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

      

Utilities

  1,022   45  —     (5  —     1,062 

Energy

  1,330   140  —     (7  —     1,463 

Finance and insurance

  2,524   177  —     (5  —     2,696 

Consumer—non-cyclical

  692  27  —     (3  —     716

Technology and communications

  945  71  —     (2  —     1,014 

Industrial

  979  81  —     (2  —     1,058 

Capital goods

  556  33  —     (2  —     587

Consumer—cyclical

  518  10  —     (1  —     527

Transportation

  650  71  —     (3  —     718

Other

  2,594   193  —     (5  —     2,782 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate

  11,810   848  —     (35  —     12,623 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  3,950��  255  14  (10  —     4,209 

Commercial mortgage-backed

  3,346   105  2  (39  —     3,414 

Other asset-backed

  3,052   20  1  (5  —     3,068 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturity securities

  57,763   5,001   17  (229  —     62,552 

Equity securities

  720  59  —     (14  —     765
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total available-for-sale securities

 $58,483  $5,060  $17  $(243 $—    $63,317 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified asavailable-for-sale were as follows:

 

   Gross unrealized gains Gross unrealized losses      Gross unrealized gains Gross unrealized losses   

(Amounts in millions)

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

Fixed maturity securities:

            

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

 $5,416  $1,288  $—    $(1 $—    $6,703  $5,439  $647  $—    $(50 $—    $6,036 

State and political subdivisions

 2,491  350   —    (17  —    2,824  2,515  182  —    (50  —    2,647 

Non-U.S. government

 2,052  175   —     —     —    2,227  2,024  101  —    (18  —    2,107 

U.S. corporate:

            

Utilities

 4,073  678   —    (2  —    4,749  4,137  454  —    (41  —    4,550 

Energy

 2,124  177   —    (22  —    2,279  2,167  157  —    (24  —    2,300 

Finance and insurance

 5,711  615  23  (9  —    6,340  5,719  424  —    (46  —    6,097 

Consumer—non-cyclical

 4,190  689   —    (1  —    4,878  4,335  433  —    (34  —    4,734 

Technology and communications

 2,486  248   —    (8  —    2,726  2,473  157  —    (32  —    2,598 

Industrial

 1,181  114   —    (4  —    1,291  1,161  76  —    (14  —    1,223 

Capital goods

 1,876  319   —     —     —    2,195  2,043  228  —    (13  —    2,258 

Consumer—cyclical

 1,506  158   —    (4  —    1,660  1,455  92  —    (17  —    1,530 

Transportation

 1,077  138   —     —     —    1,215  1,121  86  —    (17  —    1,190 

Other

 335  27   —     —     —    362  332 17  —    (1  —    348
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total U.S. corporate

 24,559  3,163  23  (50  —    27,695  24,943  2,124   —    (239  —    26,828 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Non-U.S. corporate:

            

Utilities

 899  64   —    (2  —    961  940 40  —    (11  —    969

Energy

 1,281  129   —    (15  —    1,395  1,234  109  —    (12  —    1,331 

Finance and insurance

 2,458  201   —    (1  —    2,658  2,413  134  —    (9  —    2,538 

Consumer—non-cyclical

 768  55   —    (1  —    822  711 17  —    (14  —    714

Technology and communications

 968  80   —    (1  —    1,047  953 44  —    (10  —    987

Industrial

 955  68   —    (5  —    1,018  928 39  —    (9  —    958

Capital goods

 545  36   —    (1  —    580  518 21  —    (4  —    535

Consumer—cyclical

 490  15   —     —     —    505  434 10  —    (2  —    442

Transportation

 605  81   —    (3  —    683  619 65  —    (7  —    677

Other

 3,039  305   —    (5  —    3,339  2,967  190  —    (13  —    3,144 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total non-U.S. corporate

 12,008  1,034   —    (34  —    13,008  11,717  669  —    (91  —    12,295 
 

 

  

 

  

��

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Residential mortgage-backed

 4,418  396  11  (2  —    4,823  4,122  259 10 (12  —    4,379 

Commercial mortgage-backed

 2,983  192  2  (4  —    3,173  3,084  98 3 (56  —    3,129 

Other asset-backed

 3,324  28  1  (26  —    3,327  3,170  15 1 (35  —    3,151 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total fixed maturity securities

 57,251  6,626  37  (134  —    63,780  57,014  4,095  14 (551  —    60,572 

Equity securities

 599  26   —    (35  —    590  628 31  —    (27  —    632
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total available-for-sale securities

 $57,850  $6,652  $37  $(169 $—    $64,370  $57,642  $4,126  $14  $(578 $—    $61,204 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2015, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

     Gross unrealized gains  Gross unrealized losses    

(Amounts in millions)

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

Fixed maturity securities:

      

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

 $5,487  $732  $—    $(16 $—    $6,203 

State and political subdivisions

  2,287   181   —     (30  —     2,438 

Non-U.S. government

  1,910   110   —     (5  —     2,015 

U.S. corporate:

      

Utilities

  3,355   364   —     (26  —     3,693 

Energy

  2,560   103   —     (162  —     2,501 

Finance and insurance

  5,268   392   15   (43  —     5,632 

Consumer—non-cyclical

  3,755   371   —     (30  —     4,096 

Technology and communications

  2,108   123   —     (38  —     2,193 

Industrial

  1,164   53   —     (44  —     1,173 

Capital goods

  1,774   188   —     (12  —     1,950 

Consumer—cyclical

  1,602   95   —     (22  —     1,675 

Transportation

  1,023   75   —     (12  —     1,086 

Other

  385   22   —     (5  —     402 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  22,994   1,786   15   (394  —     24,401 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

      

Utilities

  815   37   —     (9  —     843 

Energy

  1,700   64   —     (78  —     1,686 

Finance and insurance

  2,327   152   2   (8  —     2,473 

Consumer—non-cyclical

  746   24   —     (18  —     752 

Technology and communications

  978   36   —     (26  —     988 

Industrial

  1,063   19   —     (96  —     986 

Capital goods

  602   19   —     (17  —     604 

Consumer—cyclical

  522   8   —     (4  —     526 

Transportation

  559   52   —     (6  —     605 

Other

  2,574   187   —     (25  —     2,736 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-U.S. corporate

  11,886   598   2   (287  —     12,199 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  4,777   330   11   (17  —     5,101 

Commercial mortgage-backed

  2,492   84   3   (20  —     2,559 

Other asset-backed

  3,328   11   1   (59  —     3,281 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturity securities

  55,161   3,832   32   (828  —     58,197 

Equity securities

  325   8   —     (23  —     310 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total available-for-sale securities

 $55,486  $3,840  $32  $(851 $—    $58,507 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 September 30, 2016:2017:

 

 Less than 12 months 12 months or more Total  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
 Number
of
securities
 Fair
value
 Gross
unrealized
losses
 Number
of
securities
 Fair
value
 Gross
unrealized
losses
 Number
of
securities
 

Description of Securities

                  

Fixed maturity securities:

                  

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

 $300  $(1 6  $—    $—      —    $300  $(1 6  $283  $(6 22 $31  $(1)  4 $314  $(7)  26

State and political subdivisions

 92  (1 14  143  (16 12  235  (17 26  213 (5 45 230  (21)  23 443  (26)  68

Non-U.S. government

 922 (23 36 24  (1)  14 946  (24)  50

U.S. corporate

 808  (18 120  693  (32 104  1,501  (50 224  2,335  (47 333 766  (36)  106 3,101   (83)  439

Non-U.S. corporate

 261  (6 48  414  (28 56  675  (34 104  1,562  (22 222 261  (13)  36 1,823   (35)  258

Residential mortgage-backed

 67  (1 22  57  (1 30  124  (2 52  656 (9 80 33  (1)  28 689  (10)  108

Commercial mortgage-backed

 234  (3 34  27  (1 10  261  (4 44  837 (25 120 201  (14)  30 1,038   (39)  150

Other asset-backed

 433  (4 70  356  (22 68  789  (26 138  736 (4 131 173  (1)  40 909  (5)  171
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal, fixed maturity securities

 2,195  (34 314  1,690  (100 280  3,885  (134 594  7,544  (141 989 1,719   (88)  281 9,263   (229)  1,270 

Equity securities

 94  (5 191  123  (30 47  217  (35 238  82 (5 142 111  (9)  89 193  (14)  231
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total for securities in an unrealized loss position

 $2,289  $(39 505  $1,813  $(130 327  $4,102  $(169 832  $7,626  $(146 1,131  $1,830  $(97)  370 $9,456  $(243)  1,501 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

% Below cost—fixed maturity securities:

                  

<20% Below cost

 $2,195  $(34 314  $1,604  $(69 270  $3,799  $(103 584  $7,544  $(141 989 $1,719  $(88 281 $9,263  $(229)  1,270 

20%-50% Below cost

  —     —     —    86  (31 10  86  (31 10 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total fixed maturity securities

 2,195  (34 314  1,690  (100 280  3,885  (134 594  7,544  (141 989 1,719   (88)  281 9,263   (229)  1,270 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

% Below cost—equity securities:

                  

<20% Below cost

 93  (4 181  55  (10 22  148  (14 203  79 (4 139 111  (9)  89 190  (13)  228

20%-50% Below cost

 1  (1 10  68  (20 25  69  (21 35  3 (1 3  —     —     —    3  (1)  3
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total equity securities

 94  (5 191  123  (30 47  217  (35 238  82 (5 142 111  (9)  89 193  (14)  231
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total for securities in an unrealized loss position

 $2,289  $(39 505  $1,813  $(130 327  $4,102  $(169 832  $7,626  $(146 1,131  $1,830  $(97)  370 $9,456  $(243)  1,501 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Investment grade

 $2,098  $(25 297  $1,351  $(100 245  $3,449  $(125 542  $7,437  $(139 984 $1,656  $(90)  287 $9,093  $(229 1,271 

Below investment grade

 191  (14 208  462  (30 82  653  (44 290  189 (7 147 174  (7)  83 363  (14)  230
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total for securities in an unrealized loss position

 $2,289  $(39 505  $1,813  $(130 327  $4,102  $(169 832  $7,626  $(146 1,131  $1,830  $(97)  370 $9,456  $(243)  1,501 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of September 30, 2016:2017:

 

 Less than 12 months 12 months or more Total  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
 Number of
securities
 Fair
value
 Gross
unrealized
losses
 Number of
securities
 Fair
value
 Gross
unrealized
losses
 Number of
securities
 

Description of Securities

                  

U.S. corporate:

                  

Utilities

 $113  $(1 22  $23  $(1 4  $136  $(2 26  $468  $(10 69 $104  $(5 17 $572  $(15 86

Energy

 112  (7 13  290  (15 46  402  (22 59  123 (1 22 146 (9 16 269 (10 38

Finance and insurance

 227  (3 32  108  (6 16  335  (9 48  542 (7 75 154 (4 21 696 (11 96

Consumer—non-cyclical

 108  (1 15   —     —     —    108  (1 15  325 (7 50 84 (3 12 409 (10 62

Technology and communications

 101  (2 15  138  (6 19  239  (8 34  208 (4 30 127 (7 19 335 (11 49

Industrial

 34  (1 6  108  (3 13  142  (4 19  55 (1 12 56 (2 8 111 (3 20

Capital goods

 274 (8 31 8 (1 2 282 (9 33

Consumer—cyclical

 113  (3 17  26  (1 6  139  (4 23  127 (2 18 70 (4 9 197 (6 27

Transportation

 190 (5 24 17 (1 2 207 (6 26

Other

 23 (2 2  —     —     —    23 (2 2
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal, U.S. corporate securities

 808  (18 120  693  (32 104  1,501  (50 224  2,335  (47 333 766 (36 106 3,101  (83 439
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Non-U.S. corporate:

                  

Utilities

 16  (1 2  14  (1 1  30  (2 3  227 (4 31 19 (1 2 246 (5 33

Energy

 72  (1 11  122  (14 22  194  (15 33  142 (3 21 69 (4 11 211 (7 32

Finance and insurance

 72  (1 15   —     —     —    72  (1 15  324 (3 49 50 (2 9 374 (5 58

Consumer—non-cyclical

 49  (1 5   —     —     —    49  (1 5  131 (2 16 34 (1 4 165 (3 20

Technology and communications

  —     —     —    28  (1 3  28  (1 3  80 (1 17 12 (1 2 92 (2 19

Industrial

 26  (1 6  103  (4 15  129  (5 21  67 (1 10 11 (1 2 78 (2 12

Capital goods

  —     —     —    34  (1 3  34  (1 3  34 (1 6 34 (1 3 68 (2 9

Consumer—cyclical

 101 (1 15  —     —     —    101 (1 15

Transportation

  —     —     —    49  (3 4  49  (3 4  61 (1 13 32 (2 3 93 (3 16

Other

 26  (1 9  64  (4 8  90  (5 17  395 (5 44  —     —     —    395 (5 44
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal, non-U.S. corporate securities

 261  (6 48  414  (28 56  675  (34 104  1,562  (22 222 261 (13 36 1,823  (35 258
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total for corporate securities in an unrealized loss position

 $1,069  $(24 168  $1,107  $(60 160  $2,176  $(84 328  $3,897  $(69 555 $1,027  $(49 142 $4,924  $(118 697
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to increased market volatility,increase in interest rates, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 2% as of September 30, 2016.2017.

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

Of the $69$88 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB-”“A” and approximately 65%

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

92% of the unrealized losses were related to investment grade securities as of September 30, 2016.2017. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

securities was approximately 4%5% as of September 30, 2016. See below for additional discussion related to2017. As of September 30, 2017, the company did not have any fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of September 30, 2016:

  Investment Grade 
  20% to 50%  Greater than 50% 

(Dollar amounts in millions)

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

Fixed maturity securities:

        

State and political subdivisions

 $9  $(3  2  1  $—    $—     —    —   

U.S. corporate:

        

Energy

  13   (4  2   1   —     —     —     —   

Finance and insurance

  12   (3  2   1   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  25   (7  4   2   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Structured securities:

        

Other asset-backed

  43   (17  10   4   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total structured securities

  43   (17  10   4   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $77  $(27  16  7  $—    $—     —    —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

(Dollar amounts in millions)

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

Fixed maturity securities:

        

U.S. corporate:

        

Energy

 $4  $(2  1  1  $—    $—     —    —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  4   (2  1   1   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

        

Energy

  3   (1  1   1   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-U.S. corporate

  3   (1  1   1   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Structured securities:

        

Other asset-backed

  2   (1  1   1   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total structured securities

  2   (1  1   1   —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $9  $(4  3  3  $—    $—     —    —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.

U.S. corporate

As indicated above, $9 million of gross unrealized losses were related to U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for U.S. corporate fixed maturity securities, $6 million, or 67%, related to the energy sector and $3 million, or 33%, related to the finance and insurance sector. Ongoing low oil prices and market volatility adversely impacted the fair value of these securities.

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

Structured Securities

Of the $18 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, none related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. economy.

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

We use our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of September 30, 2016.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 December 31, 2015:2016:

 

 Less than 12 months 12 months or more Total  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
 Number of
securities
 Fair
value
 Gross
unrealized
losses
 Number of
securities
 Fair
value
 Gross
unrealized
losses
 Number of
securities
 

Description of Securities

                  

Fixed maturity securities:

                  

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

 $883  $(16 32  $—    $—      —    $883  $(16 32  $1,074  $(50 37 $—    $—     —    $1,074  $(50)  37

State and political subdivisions

 464  (15 81  163  (15 17  627  (30 98  644 (32 109 142  (18)  12 786  (50)  121

Non-U.S. government

 366  (5 49   —     —      —    366  (5 49  497 (18 51  —     —     —    497  (18)  51

U.S. corporate

 5,836  (332 817  466  (62 83  6,302  (394 900  5,221  (190 711 662  (49)  94 5,883   (239)  805

Non-U.S. corporate

 3,016  (170 400  486  (117 87  3,502  (287 487  2,257  (66 330 408  (25)  57 2,665   (91)  387

Residential mortgage-backed

 756  (10 88  103  (7 38  859  (17 126  725 (11 100 58  (1)  35 783  (12)  135

Commercial mortgage-backed

 780  (19 116  39  (1 13  819  (20 129  1,091  (55 168 25  (1)  9 1,116   (56)  177

Other asset-backed

 1,944  (22 349  336  (37 55  2,280  (59 404  1,069  (13 184 328  (22)  68 1,397   (35)  252
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Subtotal, fixed maturity securities

 14,045  (589 1,932  1,593  (239 293  15,638  (828 2,225  12,578  (435 1,690  1,623   (116)  275 14,201   (551)  1,965 

Equity securities

 153  (23 64   —     —      —    153  (23 64  119 (9 182 114  (18)  47 233  (27)  229
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total for securities in an unrealized loss position

 $14,198  $(612 1,996  $1,593  $(239 293  $15,791  $(851 2,289  $12,697  $(444 1,872  $1,737  $(134)   322 $14,434  $(578)  2,194 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

% Below cost—fixed maturity securities:

                  

<20% Below cost

 $13,726  $(472 1,877  $1,259  $(78 238  $14,985  $(550 2,115  $12,578  $(435 1,690  $1,543  $(90)  267 $14,121  $(525)  1,957 

20%-50% Below cost

 319  (116 54  316  (139 50  635  (255 104   —     —     —    80  (26)  8 80  (26)  8

>50% Below cost

  —    (1 1  18  (22 5  18  (23 6 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total fixed maturity securities

 14,045  (589 1,932  1,593  (239 293  15,638  (828 2,225  12,578  (435 1,690  1,623   (116)  275 14,201   (551)  1,965 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

% Below cost—equity securities:

                  

<20% Below cost

 133  (18 56   —     —      —    133  (18 56  118 (8 167 101  (14)  38 219  (22)  205

20%-50% Below cost

 20  (5 8   —     —      —    20  (5 8  1 (1 15 13  (4)  9 14  (5)  24
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total equity securities

 153  (23 64   —     —      —    153  (23 64  119 (9 182 114  (18)  47 233  (27)  229
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total for securities in an unrealized loss position

 $14,198  $(612 1,996  $1,593  $(239 293  $15,791  $(851 2,289  $12,697  $(444 1,872  $1,737  $(134)  322 $14,434  $(578)  2,194 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Investment grade

 $13,342  $(524 1,834  $1,245  $(135 225  $14,587  $(659 2,059  $12,339  $(432 1,657  $1,354  $(108)  250 $13,693  $(540)  1,907 

Below investment grade

 856  (88 162  348  (104 68  1,204  (192 230  358 (12 215 383  (26)  72 741  (38)  287
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total for securities in an unrealized loss position

 $14,198  $(612 1,996  $1,593  $(239 293  $15,791  $(851 2,289  $12,697  $(444 1,872  $1,737  $(134)  322 $14,434  $(578)  2,194 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of December 31, 2015:2016:

 

 Less than 12 months 12 months or more Total  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
 Number
of
securities
 Fair
value
 Gross
unrealized
losses
 Number
of
securities
 Fair
value
   Gross
unrealized
losses
 Number
of
securities
 

Description of Securities

                   

U.S. corporate:

                   

Utilities

 $485  $(25 74  $14  $(1 7  $499  $(26 81  $855  $(39 130 $21  $(2 5 $876   $(41 135

Energy

 1,162  (134 163  131  (28 22  1,293  (162 185  190 (5 30 276 (19 38 466   (24 68

Finance and insurance

 1,142  (35 160  94  (8 15  1,236  (43 175  1,438  (38 177 113 (8 15 1,551    (46 192

Consumer—non-cyclical

 836  (26 107  51  (4 10  887  (30 117  921 (34 117  —     —     —    921   (34 117

Technology and communications

 658  (36 95  23  (2 5  681  (38 100  507 (22 70 126 (10 17 633   (32 87

Industrial

 476  (33 64  44  (11 9  520  (44 73  226 (7 38 77 (7 10 303   (14 48

Capital goods

 293  (10 48  26  (2 4  319  (12 52  322 (12 50 6 (1 1 328   (13 51

Consumer—cyclical

 427  (18 60  63  (4 10  490  (22 70  431 (16 56 26 (1 6 457   (17 62

Transportation

 273  (10 38  20  (2 1  293  (12 39  302 (16 41 17 (1 2 319   (17 43

Other

 84  (5 8   —     —     —    84  (5 8  29 (1 2  —     —     —    29   (1 2
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

 

Subtotal, U.S. corporate securities

 5,836  (332 817  466  (62 83  6,302  (394 900  5,221  (190 711 662 (49 94 5,883    (239 805
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

 

Non-U.S. corporate:

                   

Utilities

 130  (6 20  32  (3 6  162  (9 26  240 (10 32 14 (1 1 254   (11 33

Energy

 589  (48 71  127  (30 20  716  (78 91  105 (3 18 91 (9 16 196   (12 34

Finance and insurance

 478  (7 77  30  (1 8  508  (8 85  474 (8 79 71 (1 16 545   (9 95

Consumer—non-cyclical

 261  (14 27  37  (4 4  298  (18 31  308 (14 30  —     —     —    308   (14 30

Technology and communications

 324  (15 37  33  (11 9  357  (26 46  232 (9 34 28 (1 2 260   (10 36

Industrial

 495  (54 67  110  (42 18  605  (96 85  165 (5 21 91 (4 10 256   (9 31

Capital goods

 154  (8 22  41  (9 9  195  (17 31  104 (2 14 28 (2 2 132   (4 16

Consumer—cyclical

 155  (4 20   —     —     —    155  (4 20  90 (2 17  —     —     —    90   (2 17

Transportation

 147  (6 17   —     —     —    147  (6 17  106 (5 16 25 (2 2 131   (7 18

Other

 283  (8 42  76  (17 13  359  (25 55  433 (8 69 60 (5 8 493   (13 77
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

 

Subtotal, non-U.S. corporate securities

 3,016  (170 400  486  (117 87  3,502  (287 487  2,257  (66 330 408 (25 57 2,665    (91 387
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

 

Total for corporate securities in an unrealized loss position

 $8,852  $(502 1,217  $952  $(179 170  $9,804  $(681 1,387  $7,478  $(256 1,041  $1,070  $(74 151 $8,548   $(330 1,192 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The scheduled maturity distribution of fixed maturity securities as of September 30, 20162017 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

  $1,752   $1,775   $1,943   $1,966 

Due after one year through five years

   10,704    11,309    10,901    11,333 

Due after five years through ten years

   12,300    13,129    12,363    12,933 

Due after ten years

   21,770    26,244    22,208    25,629 
  

 

   

 

   

 

   

 

 

Subtotal

   46,526    52,457    47,415    51,861 

Residential mortgage-backed

   4,418    4,823    3,950    4,209 

Commercial mortgage-backed

   2,983    3,173    3,346    3,414 

Other asset-backed

   3,324    3,327    3,052    3,068 
  

 

   

 

   

 

   

 

 

Total

  $57,251   $63,780   $57,763   $62,552 
  

 

   

 

   

 

   

 

 

As of September 30, 2016, $10,2602017, $12,426 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2016,2017, securities issued by finance and insurance, utilities andconsumer—non-cyclical industry groups represented approximately 22%23%, 14%15% and 14%13%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of September 30, 2016,2017, 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 principal payments, amortization and allowance for loan losses.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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 dates indicated:

 

  September 30,
2016
 December 31,
2015
   September 30, 2017 December 31, 2016 

(Amounts in millions)

  Carrying
value
   % of
total
 Carrying
value
   % of
total
   Carrying
value
 % of
total
 Carrying
value
 % of
total
 

Property type:

            

Retail

  $2,099    35 $2,116    34  $2,220  35 $2,178  36

Industrial

   1,544    26  1,562    25    1,608  26 1,533  25

Office

   1,421    23  1,516    24    1,465  23 1,430  23

Apartments

   449    7  465    8    489 8 455 7

Mixed use

   232    4  234    4    222 4 245 4

Other

   287    5  294    5    277 4 284 5
  

 

   

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Subtotal

   6,032    100 6,187    100   6,281  100 6,125  100
    

 

    

 

    

 

   

 

 

Unamortized balance of loan origination fees and costs

   (2   (2     (3  (2 

Allowance for losses

   (13   (15     (10  (12 
  

 

    

 

     

 

   

 

  

Total

  $6,017    $6,170     $6,268   $6,111  
  

 

    

 

     

 

   

 

  

 

  September 30,
2016
 December 31,
2015
   September 30, 2017 December 31, 2016 

(Amounts in millions)

  Carrying
value
   % of
total
 Carrying
value
   % of
total
   Carrying
value
 % of
total
 Carrying
value
 % of
total
 

Geographic region:

            

South Atlantic

  $1,620  26 $1,546  25

Pacific

  $1,563    27 $1,581    26   1,600  26 1,567  27

South Atlantic

   1,506    25  1,574    25 

Middle Atlantic

   886    15  890    14    904 14 915 15

Mountain

   549    9  585    10    556 9 554 9

West North Central

   443    7  416    7    441 7 435 7

East North Central

   382    6  386    6    386 6 388 6

West South Central

   305    5  294    5    327 5 311 5

New England

   208    3  268    4    237 4 206 3

East South Central

   190    3  193    3    210 3 203 3
  

 

   

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Subtotal

   6,032    100 6,187    100   6,281  100 6,125  100
    

 

    

 

    

 

   

 

 

Unamortized balance of loan origination fees and costs

   (2   (2     (3  (2 

Allowance for losses

   (13   (15     (10  (12 
  

 

    

 

     

 

   

 

  

Total

  $6,017    $6,170     $6,268   $6,111  
  

 

    

 

     

 

   

 

  

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 of the dates indicated:

 

  September 30, 2016   September 30, 2017 

(Amounts in millions)

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

Property type:

              

Retail

  $—    $—    $5  $5  $2,094  $2,099   $—    $—    $—    $—    $2,220  $2,220 

Industrial

   —     —    12  12  1,532  1,544    —     —     —     —    1,608  1,608 

Office

   —     —    4  4  1,417  1,421    6  —     —    6 1,459  1,465 

Apartments

   —     —     —     —    449  449    —     —     —     —    489 489

Mixed use

   —     —     —     —    232  232    —     —     —     —    222 222

Other

   —     —     —     —    287  287    —     —     —     —    277 277
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total recorded investment

  $—    $—    $21  $21  $6,011  $6,032   $6  $—    $—    $6  $6,275  $6,281 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

% of total commercial mortgage loans

   —   —   —   —   100 100   —   —   —   —   100 100
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

  December 31, 2015   December 31, 2016 

(Amounts in millions)

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

Property type:

              

Retail

  $—    $—    $—    $—    $2,116  $2,116   $—    $—    $—    $—    $2,178  $2,178 

Industrial

   —     —     —     —    1,562  1,562    1  —    12 13 1,520  1,533 

Office

   6   —    5  11  1,505  1,516    —     —     —     —    1,430  1,430 

Apartments

   —     —     —     —    465  465    —     —     —     —    455 455

Mixed use

   —     —     —     —    234  234    —     —     —     —    245 245

Other

   —     —     —     —    294  294    —     —     —     —    284 284
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total recorded investment

  $6  $—    $5  $11  $6,176  $6,187   $1  $—    $12  $13  $6,112  $6,125 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

% of total commercial mortgage loans

   —   —   —   —   100 100   —   —   —   —   100 100
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

As of September 30, 20162017 and December 31, 2015,2016, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. As of September 30, 2017, we had one commercial mortgage loan past due for less than 90 days onnon-accrual status due to the borrower filing for bankruptcy in September 2017. We also did not have any commercial mortgage loans that were past due for less than 90 days onnon-accrual status as of September 30, 2016 and December 31, 2015.2016.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of September 30, 2016,2017, none of our commercial mortgage loans were greater than 90 days past due included loans with appraised values in excess of the recorded investment and the current recorded investment of the loans was expected to be recoverable.due.

During the nine months ended September 30, 20162017 and the year ended December 31, 2015,2016, we modified or extended 107 and 2116 commercial mortgage loans, respectively, with a total carrying value of $63$19 million and $110$85 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower, butexcept during the year ended December 31, 2016, one loan with a carrying value $1 million at the time of modification was considered a troubled debt restructuring. This loan was impairedsold in the thirdfourth quarter and the recorded investment was less than $1 million as of September 30, 2016.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

(Amounts in millions)

    2016       2015   2016 2015       2017           2016           2017         2016     

Allowance for credit losses:

             

Beginning balance

  $13   $18  $15  $22   $10   $13   $12  $15 

Charge-offs

   —      (1 (4 (4   —      —      —    (4

Recoveries

   —      —      —     —   

Provision

   —      —    2  (1   —      —      (2 2
  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

 

Ending balance

  $13   $17  $13  $17   $10   $13   $10  $13 
  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

 

Ending allowance for individually impaired loans

  $—     $—    $—    $—     $—     $—     $—    $—   
  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

 

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

  $13   $17  $13  $17   $10   $13   $10  $13 
  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

 

Recorded investment:

             

Ending balance

  $6,032   $6,151  $6,032  $6,151   $6,281   $6,032   $6,281  $6,032 
  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

 

Ending balance of individually impaired loans

  $17   $19  $17  $19   $—     $17   $—    $17 
  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

 

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

  $6,015   $6,132  $6,015  $6,132   $6,281   $6,015   $6,281  $6,015 
  

 

   

 

  

 

  

 

   

 

   

 

   

 

  

 

 

As of September 30, 2017, we had no individually impaired commercial mortgage loans. As of September 30, 2016, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $7 million, charge-offs of $2 million and an average recorded investment of $3 million.

As of December 31, 2015,2016, we had an individually impaired commercial mortgage loan included within the industrial property type with a recorded investment of $14 million, an unpaid principal balance of $15 million and charge-offs of $1 million, which were recorded in the first quarter of 2014. As of December 31, 2015, this loan had interest income of $1 million. In the second quarter of 2016, we recorded additional charge-offs of $2 million related to this loan. As of September 30, 2016, theone individually impaired loan within the industrial property type hadwith a recorded investment of $12 million, an unpaid principal balance of $15 million and total charge-offs of $3 million.

As of December 31, 2015, we had an individually impaired commercial mortgage loan included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, which were recorded in the third quarter of 2015.

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 mortgage loans can be evaluated by reviewing both theloan-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 averageloan-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 lowerloan-to-value indicates that our loan value is more likely to be

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 annualone-time events such as capital expenditures, prepaid or late real estate tax payments ornon-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 theloan-to-value of commercial mortgage loans by property type as of the dates indicated:

 

  September 30, 2016 

(Amounts in millions)

 0% - 50%  51% - 60%  61% - 75%  76% - 100%  Greater
than 100% 
(1)
  Total 

Property type:

      

Retail

 $763  $495  $812  $29  $—     $2,099 

Industrial

  631   436   451   24   2    1,544 

Office

  420   315   645   31   10    1,421 

Apartments

  194   75   175   5   —      449 

Mixed use

  68   88   76   —     —      232 

Other

  61   30   196   —     —      287 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recorded investment

 $2,137  $1,439  $2,355  $89  $12   $6,032 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of total

  36  24  39  1  —    100
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted-average debt service coverage ratio

  2.22   1.87   1.61   0.91   0.07    1.87 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Included $12 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 112%.

 December 31, 2015   September 30, 2017 

(Amounts in millions)

 0% - 50% 51% - 60% 61% - 75% 76% - 100% Greater
than 100% 
(1)
 Total   0% - 50% 51% - 60% 61% - 75% 76% - 100% Greater
than 100% (1)
 Total 

Property type:

             

Retail

 $785  $417  $800  $103  $11   $2,116   $933  $499  $788  $—    $—    $2,220 

Industrial

 515  478  499  65  5   1,562    747  356  503  2  —     1,608 

Office

 493  341  580  83  19   1,516    583  393  473  14  2   1,465 

Apartments

 196  66  182  21   —     465    236  105  143  5  —     489

Mixed use

 56  48  124  3  3   234    101  59  62  —     —     222

Other

 54  55  185   —     —     294    68  29  180  —     —     277
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total recorded investment

 $2,099  $1,405  $2,370  $275  $38   $6,187   $2,668  $1,441  $2,149  $21  $2  $6,281 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

% of total

 34%�� 23 38 4 1 100   43  23  34  —    —    100
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Weighted-average debt service coverage ratio

 2.13  1.82  1.57  1.12  0.55   1.79    2.65   1.85   1.60   0.63   1.04   2.10 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)Included $38a loan with a recorded investment of $2 million of loans in good standing, where borrowersthe borrower continued to make timely payments, with a total weighted-average loan-to-value of 123%103%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.

   December 31, 2016 

(Amounts in millions)

  0% - 50%  51% - 60%  61% - 75%  76% - 100%  Greater
than 100% (1)
  Total 

Property type:

       

Retail

  $743  $511  $913  $11  $—    $2,178 

Industrial

   605  430  484  14  —     1,533 

Office

   431  310  656  26  7   1,430 

Apartments

   188  89  173  5  —     455

Mixed use

   67  87  91  —     —     245

Other

   60  30  194  —     —     284
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recorded investment

  $2,094  $1,457  $2,511  $56  $7  $6,125 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of total

   34  24  41  1  —    100
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted-average debt service coverage ratio

   2.20   1.88   1.61   0.80   (0.07)   1.87 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Included a loan with a recorded investment of $7 million in good standing, where the borrower continued to make timely payments, with aloan-to-value of 105%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

  September 30, 2016   September 30, 2017 

(Amounts in millions)

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

Property type:

              

Retail

  $73  $200  $420  $827  $579  $2,099   $43  $242  $298  $999  $638  $2,220 

Industrial

   86  126  246  578  508  1,544    24 63 180 679 662 1,608 

Office

   103  79  172  620  447  1,421    72 67 151 521 654 1,465 

Apartments

   19  19  43  216  152  449    —    20 75 193 201 489

Mixed use

   2  9  20  113  88  232    2 4 26 86 104 222

Other

   1  148  57  58  23  287    1 149 15 72 40 277
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total recorded investment

  $284  $581  $958  $2,412  $1,797  $6,032   $142  $545  $745  $2,550  $2,299  $6,281 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

% of total

   5 10 15 40 30 100   2 9 12 40 37 100
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Weighted-average loan-to-value

   64 62 60 57 45 55   57 60 58 57 41 52
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

  December 31, 2015   December 31, 2016 

(Amounts in millions)

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

Property type:

              

Retail

  $67  $221  $433  $882  $513  $2,116   $67  $204  $425  $899  $583  $2,178 

Industrial

   94  181  208  672  407  1,562    71 113 236 599 514 1,533 

Office

   85  114  265  699  346  1,509    91 117 172 609 441 1,430 

Apartments

   6  41  74  199  145  465    19 22 44 217 153 455

Mixed use

   3  11  28  135  57  234    2 9 19 128 87 245

Other

   —    58  146  60  30  294    1 148 60 55 20 284
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total recorded investment

  $255  $626  $1,154  $2,647  $1,498  $6,180   $251  $613  $956  $2,507  $1,798  $6,125 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

% of total

   4 10 19 43 24 100   4 10 16 41 29 100
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Weighted-average loan-to-value

   74 64 58 58 43 56   61 60 59 58 45 55
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

As of September 30, 2017 and December 31, 2016, we did not have any floating rate commercial mortgage loans. As of December 31, 2015, we had floating rate commercial mortgage loans of $7 million.

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to securitization entities.

(g) Restricted Other Invested Assets Related To Securitization Entities

We havepreviously had consolidated securitization entities that holdheld certain investments that arewere recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities holdheld certain investments as trading securities and whereby the changes in fair value arewere recorded in current period income (loss). The trading securities comprise asset-backed securities, including highly rated bonds that are primarily backed by credit card receivables.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

income (loss). The trading securities comprised asset-backed securities, including highly rated bonds that were primarily backed by credit card receivables. In June 2016,2017, these trading securities were sold as we amended and exercised a clean-up call on our consolidated securitization entity writing off our residual interest and settlingrepositioned these assets in connection with the outstanding debtmaturity of $70 million. As a result of this transaction, we recorded $64 million of realized investment losses related to the write-off of our residual interest in those entities and a $64 million gain related to the early extinguishment of debt which was included in other income. There was no impact to net income.

In addition, the policy loan securitization entities in which we previously held a residual interest were not required to be consolidated in our balance sheets. In June 2016, we repurchased $134 million of policy loans from those entities. The policy loans are now included in our consolidated balance sheet.associated liabilities.

(h) Limited Partnerships or Similar Entities

Investments in partnerships or similar entities are generally considered VIEs when the equity group lacks sufficient financial control. Generally, these investments are limited partner ornon-managing member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of September 30, 20162017 and December 31, 2015,2016, the total carrying value of these investments was $171$208 million and $165$178 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.

(5) Derivative Instruments

Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table sets forth our positions in derivative instruments as of the dates indicated:

 

  

Derivative assets

   

Derivative liabilities

 
     Fair value      Fair value 

(Amounts in millions)

 

Balance sheet
classification

  September 30,
2016
  December 31,
2015
   

Balance sheet
classification

  September 30,
2016
   December 31,
2015
 

Derivatives designated as hedges

          

Cash flow hedges:

          

Interest rate swaps

 Other invested assets  $735  $629   Other liabilities  $89   $37 

Inflation indexed swaps

 Other invested assets   —     —     Other liabilities   —      33 

Foreign currency swaps

 Other invested assets   6   8   Other liabilities   —      —   
   

 

 

  

 

 

     

 

 

   

 

 

 

Total cash flow hedges

    741   637      89    70 
   

 

 

  

 

 

     

 

 

   

 

 

 

Total derivatives designated as hedges

    741   637      89    70 
   

 

 

  

 

 

     

 

 

   

 

 

 

Derivatives not designated as hedges

          

Interest rate swaps

 Other invested assets   525   425   Other liabilities   308    183 

Interest rate swaps related to securitization entities

 Restricted other invested assets   —     —     Other liabilities   —      30 

Foreign currency swaps

 Other invested assets   —     —     Other liabilities   5    27 

Credit default swaps

 Other invested assets   —     1   Other liabilities   —      —   

Credit default swaps related to securitization entities

 Restricted other invested assets   —     —     Other liabilities   2    14 

Equity index options

 Other invested assets   61   30   Other liabilities   —      —   

Financial futures

 Other invested assets   —     —     Other liabilities   —      —   

Equity return swaps

 Other invested assets   —     2   Other liabilities   5    1 

Other foreign currency contracts

 Other invested assets   4   17   Other liabilities   32    34 

GMWB embedded derivatives

 Reinsurance recoverable(1)   24   17   Policyholder account balances(2)   439    352 

Fixed index annuity embedded derivatives

 Other assets   —     —     Policyholder account balances(3)   364    342 

Indexed universal life embedded derivatives

 Reinsurance recoverable   —     —     Policyholder account balances (4)   13    10 
   

 

 

  

 

 

     

 

 

   

 

 

 

Total derivatives not designated as hedges

    614   492      1,168    993 
   

 

 

  

 

 

     

 

 

   

 

 

 

Total derivatives

   $1,355  $1,129     $1,257   $1,063 
   

 

 

  

 

 

     

 

 

   

 

 

 
  Derivative assets  Derivative liabilities 
    Fair value     Fair value 

(Amounts in millions)

 Balance
sheet classification
 September 30,
2017 (5)
  December 31,
2016
  Balance
sheet classification
  September 30,
2017 (5)
  December 31,
2016
 

Derivatives designated ashedges

      

Cash flow hedges:

      

Interest rate swaps

 Other invested
assets
 $70  $237   Other liabilities  $39  $203 

Foreign currency swaps

 Other invested
assets
  2   4  Other liabilities   —     —   
  

 

 

  

 

 

   

 

 

  

 

 

 

Total cash flow hedges

   72   241   39   203
  

 

 

  

 

 

   

 

 

  

 

 

 

Total derivativesdesignated as hedges

   72   241   39   203
  

 

 

  

 

 

   

 

 

  

 

 

 

Derivatives not designated ashedges

      

Interest rate swaps

 Other invested
assets
  —     359  Other liabilities   —     146

Foreign currency swaps

 Other invested
assets
  10   —     Other liabilities   —     5

Credit default swaps related tosecuritization entities

 Restricted other

invested assets

  —     —     Other liabilities   —     1

Equity index options

 Other
invested assets
  81   72  Other liabilities   —     —   

Financial futures

 Other
invested assets
  —     —     Other liabilities   —     —   

Equity return swaps

 Other
invested assets
  —     1  Other liabilities   2   1

Other foreign currencycontracts

 Other invested
assets
  98   35  Other liabilities   23   27

GMWB embeddedderivatives

 Reinsurance

recoverable(1)

  14   16  

Policyholder

account balances(2)

 

 

  257   303

Fixed index annuity embeddedderivatives

 Other assets  —     —     

Policyholder

account balances(3)

 

 

  394   344

Indexed universal lifeembedded derivatives

 Reinsurance

recoverable

  —     —     

Policyholder

account balances(4)

 

 

  14   11
  

 

 

  

 

 

   

 

 

  

 

 

 

Total derivatives notdesignated as hedges

   203   483   690   838
  

 

 

  

 

 

   

 

 

  

 

 

 

Total derivatives

  $275  $724   $729  $1,041 
  

 

 

  

 

 

   

 

 

  

 

 

 

 

(1)Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.
(2)Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
(3)Represents the embedded derivatives associated with our fixed index annuity liabilities.
(4)Represents the embedded derivatives associated with our indexed universal life liabilities.
(5)In the third quarter of 2017, recent central clearing parties rule changes impacted our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and is now treated as daily settlements of the derivative contract. The change reduced the value of our derivative assets and derivative liabilities by $509 million and $274 million, respectively, in the third quarter of 2017.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB, fixed index annuity embedded derivatives and indexed universal life 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,
2015
 Additions Maturities/
terminations
 September 30,
2016
   Measurement   December 31,
2016
   Additions   Maturities/
terminations
 September 30,
2017
 

Derivatives designated as hedges

              

Cash flow hedges:

              

Interest rate swaps

 Notional   $11,214  $9,414  $(9,587 $11,041    Notional   $11,570   $—     $(306 $11,264 

Inflation indexed swaps

 Notional   571  1  (572  —   

Foreign currency swaps

 Notional   35   —     —    35    Notional    22   —      —    22
  

 

  

 

  

 

  

 

     

 

   

 

   

 

  

 

 

Total cash flow hedges

  11,820  9,415  (10,159 11,076      11,592    —      (306 11,286 
  

 

  

 

  

 

  

 

     

 

   

 

   

 

  

 

 

Total derivatives designated as hedges

  11,820  9,415  (10,159 11,076      11,592    —      (306 11,286 
  

 

  

 

  

 

  

 

     

 

   

 

   

 

  

 

 

Derivatives not designated as hedges

              

Interest rate swaps

 Notional   4,932   —    (253 4,679    Notional    4,679    —      —    4,679 

Interest rate swaps related to securitization entities

 Notional   67   —    (67  —   

Foreign currency swaps

 Notional   162  133  (97 198    Notional    201   95   (14 282

Credit default swaps

 Notional   144   —    (5 139    Notional    39   —      —    39

Credit default swaps related to securitization entities

 Notional   312   —     —    312    Notional    312   —      (200 112

Equity index options

 Notional   1,080  2,346  (1,097 2,329    Notional    2,396    1,584    (1,484 2,496 

Financial futures

 Notional   1,331  5,393  (5,255 1,469    Notional    1,398    4,300    (4,376 1,322 

Equity return swaps

 Notional   134  211  (184 161    Notional    165   186   (258 93

Other foreign currency contracts

 Notional   1,656  1,551  (535 2,672    Notional    3,130    2,163    (691 4,602 
  

 

  

 

  

 

  

 

     

 

   

 

   

 

  

 

 

Total derivatives not designated as hedges

  9,818  9,634  (7,493 11,959      12,320    8,328    (7,023 13,625 
  

 

  

 

  

 

  

 

     

 

   

 

   

 

  

 

 

Total derivatives

  $21,638  $19,049  $(17,652 $23,035     $23,912   $8,328   $(7,329 $24,911 
  

 

  

 

  

 

  

 

     

 

   

 

   

 

  

 

 

(Number of policies)

 Measurement December 31,
2015
 Additions Maturities/
terminations
 September 30,
2016
 

Derivatives not designated as hedges

     

GMWB embedded derivatives

 Policies   36,146   —    (2,179 33,967 

Fixed index annuity embedded derivatives

 Policies   17,482  647  (462 17,667 

Indexed universal life embedded derivatives

 Policies   982  167  (48 1,101 

(Number of policies)

  Measurement   December 31,
2016
   Additions   Maturities/
terminations
  September 30,
2017
 

Derivatives not designated as hedges

         

GMWB embedded derivatives

   Policies    33,238    —      (2,127  31,111 

Fixed index annuity embedded derivatives

   Policies    17,549    —      (367  17,182 

Indexed universal life embedded derivatives

   Policies    1,074    1   (66  1,009 

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) forward starting interest rate

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; (v) forward bond purchase commitments to hedge against the variability in the anticipated cash flows required to purchase future fixed rate bonds; and (vi) other instruments to hedge the cash flows of various forecasted transactions.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about thepre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2016:2017:

 

(Amounts in millions)

 Gain (loss)
recognized in OCI
  Gain (loss)
reclassified into
net income (loss)
from OCI
  Classification of gain
(loss) reclassified into
net income (loss)
  Gain (loss)
recognized in
net income (loss) 
(1)
  

Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

 $115  $27   
 
Net investment
income
  
  
 $2   Net investment gains (losses)

Interest rate swaps hedging liabilities

  (2  —     Interest expense       Net investment gains (losses)

Foreign currency swaps

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

 

 

  

 

 

   

 

 

  

Total

 $112  $27   $2   
 

 

 

  

 

 

   

 

 

  

(1)Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2015:

(Amounts in millions)

 Gain (loss)
recognized in OCI
  Gain (loss)
reclassified into
net income (loss)
from OCI
  Classification of gain
(loss) reclassified into
net income (loss)
  Gain (loss)
recognized in
net income (loss)
 (1)
  

Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

 $344  $22   
 
Net investment
income
  
  
 $4   Net investment gains (losses)

Interest rate swaps hedging liabilities

  (23  —     Interest expense    —     Net investment gains (losses)

Inflation indexed
swaps

  32   (5  
 
Net investment
income
  
  
  1   Net investment gains (losses)

Forward bond purchase commitments

  —     1   
 
Net investment
income
  
  
     Net investment gains (losses)
 

 

 

  

 

 

   

 

 

  

Total

 $353  $18   $5   
 

 

 

  

 

 

   

 

 

  

(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 following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2016:

(Amounts in millions)

 Gain (loss)
recognized in OCI
 Gain (loss)
reclassified into
net income (loss)
from OCI
 

Classification of gain
(loss) reclassified into
net income (loss)

 Gain (loss)
recognized in
net income (loss) 
(1)
 

Classification of gain
(loss) recognized in
net income (loss)

  Gain (loss)
recognized in OCI
 Gain (loss)
reclassified
into net
income
(loss) from
OCI
   Classification of
gain (loss)
reclassified into
net income (loss)
   Gain (loss)
recognized
innet
income
(loss) (1)
   Classification of
gain (loss)
recognized in net
income (loss)
 

Interest rate swaps hedging assets

 $839  $80  Net investment income $13   Net investment gains (losses)  $17  $34    
Net investment
income
 
 
  $—      
Net investment
gains (losses)
 
 

Interest rate swaps hedging assets

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

Interest rate swaps hedging liabilities

 (52  —    Interest expense  —     Net investment gains (losses)

Inflation indexed swaps

 (5 2  Net investment income  —     Net investment gains (losses)

Inflation indexed swaps

  —    7  Net investment gains (losses)  —     Net investment gains (losses)

Foreign currency swaps

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

 

  

 

   

 

    

 

  

 

     

 

   

Total

 $780  $90   $13     $16  $34     $—     
 

 

  

 

   

 

    

 

  

 

     

 

   

 

(1)Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about thepre-tax income (loss) effects of cash flow hedges for the ninethree months ended September 30, 2015:2016:

 

(Amounts in millions)

 Gain (loss)
recognized in OCI
 Gain (loss)
reclassified into
net income (loss)
from OCI
 

Classification of gain
(loss) reclassified into
net income (loss)

 Gain (loss)
recognized in
net income (loss) 
(1)
 

Classification of gain
(loss) recognized in
net income (loss)

  Gain (loss)
recognized in OCI
 Gain (loss)
reclassified
into net
income
(loss) from
OCI
   Classification of
gain (loss)
reclassified into
net income (loss)
   Gain (loss)
recognized
innet
income
(loss) (1)
   Classification of
gain (loss)
recognized in net
income (loss)
 

Interest rate swaps hedging assets

 $135  $61  Net investment income $1   Net investment gains (losses)  $115  $27    
Net investment
income
 
 
  $2    
Net investment
gains (losses)
 
 

Interest rate swaps hedging liabilities

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

Inflation indexed swaps

 29  (2 Net investment income 1   Net investment gains (losses)

Foreign currency swaps

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

Forward bond purchase commitments

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

 

  

 

   

 

    

 

  

 

     

 

   

Total

 $152  $60   $2     $112  $27     $2   
 

 

  

 

   

 

    

 

  

 

     

 

   

 

(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 following table provides information about thepre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2017:

(Amounts in millions)

  Gain (loss)
recognized in
OCI
  Gain (loss)
reclassified
into net
income
(loss) from
OCI
   Classification of
gain (loss)
reclassified into
net income (loss)
   Gain (loss)
recognized
innet
income
(loss) (1)
   Classification of
gain (loss)
recognized in net
income (loss)
 

Interest rate swaps hedging assets

  $50  $95    
Net investment
income
 
 
  $—      
Net investment
gains (losses)
 
 

Interest rate swaps hedging assets

   —     2   
Net investment
gains (losses)
 
 
   —      
Net investment
gains (losses)
 
 

Interest rate swaps hedging liabilities

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

Foreign currency swaps

   (2  —      
Net investment
income
 
 
   —      
Net investment
gains (losses)
 
 
  

 

 

  

 

 

     

 

 

   

Total

  $46  $97     $—     
  

 

 

  

 

 

     

 

 

   

(1)Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about thepre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2016:

(Amounts in millions)

  Gain (loss)
recognized in
OCI
  Gain (loss)
reclassified
into net
income (loss)
from OCI
   Classification of
gain (loss)
reclassified into
net income (loss)
   Gain (loss)
recognized
innet
income
(loss) (1)
   Classification of
gain (loss)
recognized in net
income (loss)
 

Interest rate swaps hedging assets

  $839  $80    
Net investment
income
 
 
  $13    
Net investment
gains (losses)
 
 

Interest rate swaps hedging assets

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

Interest rate swaps hedging liabilities

   (52  —      Interest expense    —      
Net investment
gains (losses)
 
 

Inflation indexed swaps

   (5  2   
Net investment
income
 
 
   —      
Net investment
gains (losses)
 
 

Inflation indexed swaps

   —     7   
Net investment
gains (losses)
 
 
   —      
Net investment
gains (losses)
 
 

Foreign currency swaps

   (2  —      
Net investment
income
 
 
   —      
Net investment
gains (losses)
 
 
  

 

 

  

 

 

     

 

 

   

Total

  $780  $90     $13   
  

 

 

  

 

 

     

 

 

   

(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 following tables provide a reconciliation of current period changes, net of applicable income taxes, for these designated derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the periods indicated:

 

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

(Amounts in millions)

    2016     2015     2017 2016 

Derivatives qualifying as effective accounting hedges as of July 1

  $2,439  $1,913   $2,064  $2,439 

Current period increases (decreases) in fair value, net of deferred taxes of $(40) and $(124)

   72  229 

Reclassification to net (income) loss, net of deferred taxes of $9 and $6

   (18 (12

Current period increases (decreases) in fair value, net of deferred taxes of $(6) and $(40)

   10 72

Reclassification to net (income), net of deferred taxes of $12 and $9

   (22 (18
  

 

  

 

   

 

  

 

 

Derivatives qualifying as effective accounting hedges as of September 30

  $2,493  $2,130   $2,052  $2,493 
  

 

  

 

   

 

  

 

 

 

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

(Amounts in millions)

    2016     2015     2017 2016 

Derivatives qualifying as effective accounting hedges as of January 1

  $2,045  $2,070   $2,085  $2,045 

Current period increases (decreases) in fair value, net of deferred taxes of $(273) and $(53)

   507  99 

Reclassification to net (income) loss, net of deferred taxes of $31 and $21

   (59 (39

Current period increases (decreases) in fair value, net of deferred taxes of $(17) and $(273)

   29 507

Reclassification to net (income), net of deferred taxes of $35 and $31

   (62 (59
  

 

  

 

   

 

  

 

 

Derivatives qualifying as effective accounting hedges as of September 30

  $2,493  $2,130   $2,052  $2,493 
  

 

  

 

   

 

  

 

 

The total of derivatives designated as cash flow hedges of $2,493$2,052 million, net of taxes, recorded in stockholders’ equity as of September 30, 20162017 is expected to be reclassified to net income (loss) in the future, 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, $83$95 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 2047.2057. During the threenine months ended September 30, 2016,2017, there were immaterial amountswas approximately $2 million reclassified to net income (loss) in connection with forecasted transactions that were no longer considered probable of occurring. During the nine months ended September 30, 2016, we reclassified $6 million to net income (loss) 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 liabilities into floating rate liabilities; (ii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iii) other instruments to hedge various fair value exposures of investments.

There were no pre-tax income (loss) effects of fair value hedges and related hedged items for the three and nine months ended September 30, 2016 and 2015.

Derivatives Not Designated As Hedges

We also enter into certainnon-qualifying derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, fixed index annuities and indexed universal life; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; (vi) foreign currency swaps, options and forward contracts to mitigate currency risk associated withnon-functional currency investments held by certain foreign subsidiaries and future dividends or other cash flows from certain foreign subsidiaries to our holding company; and (vii) equity index options to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity and indexed universal life products 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

(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.

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

 

  Three months ended September 30,  

Classification of gain (loss) recognized

in net income (loss)

(Amounts in millions)

   2016      2015    

Interest rate swaps

 $(1 $(12 Net investment gains (losses)

Interest rate swaps related to securitization entities

  —     (5 Net investment gains (losses)

Credit default swaps related to securitization entities

  2   (1 Net investment gains (losses)

Equity index options

  9   6  Net investment gains (losses)

Financial futures

  (35  13  Net investment gains (losses)

Equity return swaps

  (9  11  Net investment gains (losses)

Other foreign currency contracts

  (2  4  Net investment gains (losses)

Foreign currency swaps

  (1  (9 Net investment gains (losses)

Forward bond purchase commitments

  —     13  Net investment gains (losses)

GMWB embedded derivatives

  60   (117 Net investment gains (losses)

Fixed index annuity embedded derivatives

  (16  31  Net investment gains (losses)

Indexed universal life embedded derivatives

  3   2  Net investment gains (losses)
 

 

 

  

 

 

  

Total derivatives not designated as hedges

 $10  $(64 
 

 

 

  

 

 

  

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   Three months
ended
September 30,
  

Classification of gain (loss)
recognized

in net income (loss)

(Amounts in millions)

  2017  2016  

Interest rate swaps

  $1  $(1 Net investment gains (losses)

Credit default swaps related to securitization entities

   2  2 Net investment gains (losses)

Equity index options

   16  9 Net investment gains (losses)

Financial futures

   (17  (35 Net investment gains (losses)

Equity return swaps

   (5  (9 Net investment gains (losses)

Other foreign currency contracts

   40  (2 Net investment gains (losses)

Foreign currency swaps

   8  (1 Net investment gains (losses)

GMWB embedded derivatives

   30  60 Net investment gains (losses)

Fixed index annuity embedded derivatives

   (21  (16 Net investment gains (losses)

Indexed universal life embedded derivatives

   2  3 Net investment gains (losses)
  

 

 

  

 

 

  

Total derivatives not designated as hedges

  $56  $10  
  

 

 

  

 

 

  

 

 Nine months ended September 30, 

Classification of gain (loss) recognized

in net income (loss)

  Nine months
ended
September 30,
 

Classification of gain (loss)
recognized

in net income (loss)

(Amounts in millions)

   2016     2015     2017 2016 

Interest rate swaps

 $7  $(13 Net investment gains (losses)  $2  $7  Net investment gains (losses)

Interest rate swaps related to securitization entities

 (10 (5 Net investment gains (losses)   —    (10 Net investment gains (losses)

Credit default swaps

  —    1  Net investment gains (losses)

Credit default swaps related to securitization entities

 16  10  Net investment gains (losses)   6 16 Net investment gains (losses)

Equity index options

 5  (11 Net investment gains (losses)   42 5 Net investment gains (losses)

Financial futures

 (9 (18 Net investment gains (losses)   (25 (9 Net investment gains (losses)

Equity return swaps

 (2 3  Net investment gains (losses)   (19 (2 Net investment gains (losses)

Other foreign currency contracts

 (6 10  Net investment gains (losses)   66 (6 Net investment gains (losses)

Foreign currency swaps

 6  (17 Net investment gains (losses)   13 6 Net investment gains (losses)

Forward bond purchase commitments

  —    13  Net investment gains (losses)

GMWB embedded derivatives

 (58 (68 Net investment gains (losses)   64 (58 Net investment gains (losses)

Fixed index annuity embedded derivatives

 (22 14  Net investment gains (losses)   (57 (22 Net investment gains (losses)

Indexed universal life embedded derivatives

 6  5  Net investment gains (losses)   5 6 Net investment gains (losses)
 

 

  

 

    

 

  

 

  

Total derivatives not designated as hedges

 $(67 $(76   $97  $(67 
 

 

  

 

    

 

  

 

  

Derivative Counterparty Credit Risk

Most of our derivative arrangements require the posting of collateral by the counterparty upon meeting certain net exposure thresholds. 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:

 

 September 30, 2016 December 31, 2015   September 30, 2017 December 31, 2016 

(Amounts in millions)

 Derivatives
assets
(1)
 Derivatives
liabilities
(2)
 Net
derivatives
 Derivatives
assets
(1)
 Derivatives
liabilities
(2)
 Net
derivatives
   Derivatives
assets (1)
 Derivatives
liabilities (2)
 Net
derivatives
 Derivatives
assets (1)
 Derivatives
liabilities (2)
 Net
derivatives
 

Amounts presented in the balance sheet:

             

Gross amounts recognized

 $1,368   $462   $906  $1,135   $320   $815   $262  $66  $196  $724  $387  $337 

Gross amounts offset in the balance sheet

  —      —      —     —      —      —      —     —     —     —     —     —   
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Net amounts presented in the balance sheet

 1,368   462   906  1,135   320   815    262   66  196  724   387  337

Gross amounts not offset in the balance sheet:

             

Financial instruments(3)

 (338 (338  —    (231 (231  —      (24)   (24)   —     (172)   (172)   —   

Collateral received

 (1,005  —     (1,005 (642  —     (642   (164)   —    (164  (467)   —    (467

Collateral pledged

  —     (354 354   —     (263 263    —     (301)  301  —     (557)  557

Over collateralization

 64   231   (167 3   174   (171   8   259  (251  1   344  (343
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Net amount

 $89   $1   $88  $265   $—     $265   $82  $—    $82  $86  $2  $84 
 

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)Included $37$1 million and $24$16 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives as of September 30, 20162017 and December 31, 2015,2016, respectively.
(2)Included $23$2 million and $6$5 million of accruals on derivatives classified as other liabilities and does not include amounts related to embedded derivatives and derivatives related to securitization entities as of September 30, 20162017 and December 31, 2015,2016, respectively.
(3)Amounts represent derivative assets and/or liabilities that are presented gross within the balance sheet but are held with the same counterparty where we have a master netting arrangement. This adjustment results in presenting the net asset and net liability position for each counterparty.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Except for derivatives related to securitization entities, almost 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 downgrade provisions had been triggered as a result of downgrades of our counterparties, we could have claimed up to $89$82 million and $265$86 million as of September 30, 20162017 and December 31, 2015,2016, respectively, or have been required to disburse up to $1$2 million as of September 30,December 31, 2016. There were no amounts that we would have been required to disburse as a result of our credit rating downgrades as of December 31, 2015.September 30, 2017 . The chart above excludes embedded derivatives and derivatives related to securitization entities as those derivatives are not subject to master netting arrangements.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

default 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.

In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we consolidate. 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.

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:

 

  September 30, 2016  December 31, 2015 

(Amounts in millions)

 Notional
value
  Assets  Liabilities  Notional
value
  Assets  Liabilities 

Investment grade

      

Matures in less than one year

 $—    $—    $—    $—    $—    $—   

Matures after one year through five years

  39   —     —     39   —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total credit default swaps on single name reference entities

 $39  $—    $—    $39  $—    $—   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   September 30, 2017   December 31, 2016 

(Amounts in millions)

  Notional
value
   Assets   Liabilities   Notional
value
   Assets   Liabilities 

Investment grade

            

Matures in less than one year

  $39   $—     $—     $—     $—     $—   

Matures after one year through five years

   —      —      —      39   —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit default swaps on single name reference entities

  $39   $—     $—     $39   $—     $—   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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:

 

  September 30, 2016  December 31, 2015 
  Notional     Notional       

(Amounts in millions)

 value  Assets  Liabilities  value  Assets  Liabilities 

Original index tranche attachment/detachment point and maturity:

      

7% - 15% matures in less than one year (1)

 $100  $—    $—    $100  $1  $—   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total credit default swap index tranches

  100   —     —     100   1   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Customized credit default swap index tranches related to securitization entities:

      

Portion backing third-party borrowings maturing 2017 (2)

  12   —     1   12   —     2 

Portion backing our interest maturing 2017 (3)

  300   —     1   300   —     12 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total customized credit default swap index tranches related to securitization entities

  312   —     2   312   —     14 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total credit default swaps on index tranches

 $412  $—    $2  $412  $1  $14 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   September 30, 2017   December 31, 2016 

(Amounts in millions)

  Notional
value
   Assets   Liabilities   Notional
value
   Assets   Liabilities 

Customized credit default swap index tranches relatedto securitization entities:

            

Portion backing third-party borrowings maturing 2017 (1)

  $12   $—     $—     $12   $—     $—   

Portion backing our interest maturing 2017 (2)

   100   —        300   —      1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total customized credit default swap index tranches relatedto securitization entities

   112   —      —      312   —      1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit default swaps on index tranches

  $112   $—     $—     $312   $—     $1 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)The current attachment/detachment as of September 30, 2016 and December 31, 2015 was 7% – 15%.
(2)Original notional value was $39 million.
(3)(2)Original notional value was $300 million.

(6) Fair Value of Financial Instruments

Assets and liabilities that are reflected in the accompanying unaudited condensed consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

cash equivalents, short-term investments, 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.

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. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.

Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other invested assets.Primarily represents short-term investments and limited partnerships accounted for under the cost method. The fair value of short-term investments typically does not include significant unobservable inputs and approximate our amortized cost basis. As a result, short-term investments are classified as Level 2. Limited partnerships are valued based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the underlying instrument. Cost method limited partnerships typically include significant unobservable inputs as a result of being relatively illiquid with limited market activity for similar instruments and are classified as Level 3.

Long-term borrowings.We utilize available market data when determining fair value of long-term borrowings issued in the United States and Canada, which includes data on recent trades for the same or similar financial instruments. Accordingly, these instruments are classified as Level 2 measurements. In cases where market data is not available such as our long-term borrowings in Australia, we use third-party broker quotesprovided prices (“broker quotes”) for which we consider the valuation methodology utilized by the third party, but the valuation typically includes significant unobservable inputs. Accordingly, we classify these borrowings where fair value is based on our consideration of broker quotes as Level 3 measurements.

Non-recourse funding obligations. We use an internal model to determine fair value using the current floating rate coupon and expected life/final maturity of the instrument discounted using the floating rate index and current market spread assumption, which is estimated based on recent transactions for these instruments or similar instruments as well as other market information or broker provided data. Given these instruments are private and very little market activity exists, our current market spread assumption is considered to have significant unobservable inputs in calculating fair value and, therefore, results in the fair value of these instruments being classified as Level 3.

Borrowings related to securitization entities.Based on market quotes or comparable market transactions. Some of these borrowings are publicly traded debt securities and are classified as Level 2. Certain borrowings are not publicly traded and are classified as Level 3.

Investment contracts.Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products. Given the significant unobservable inputs associated with policyholder

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

behavior and current market rate assumptions used to discount the expected future cash flows, we classify these instruments as Level 3 except for certain funding agreement-backed notes that are traded in the marketplace as a security and are classified as Level 2.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following represents our estimated fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:

 

  September 30, 2016   September 30, 2017 
  Notional
amount
  Carrying
amount
  Fair value   Notional
amount
  Carrying
amount
   Fair value 

(Amounts in millions)

   Total Level 1 Level 2 Level 3      Total   Level 1   Level 2   Level 3 

Assets:

                  

Commercial mortgage loans

  $        (1)  $6,017  $6,491  $—    $—    $6,491   $(1)  $6,268   $6,550   $—     $—     $6,550 

Restricted commercial mortgage loans

           (1)  134  151   —     —    151      (1)  111   122   —      —      122

Other invested assets

           (1)  429  442   —    342  100      (1)  217   243   —      —      243

Liabilities:

                  

Long-term borrowings(2)

           (1)  4,194  3,661   —    3,511  150      (1)  4,224    3,742    —      3,583    159

Non-recourse funding obligations(2)

           (1)  310  181   —     —    181      (1)  310   195   —      —      195

Borrowings related to securitization entities

           (1)  67  69   —    69   —        (1)  47   48   —      48   —   

Investment contracts

           (1)  16,792  18,027   —    5  18,022      (1)  15,163    15,705    —      5   15,700 

Other firm commitments:

                  

Commitments to fund limited partnerships

   188    —     —     —     —     —      319   —      —      —      —      —   

Ordinary course of business lending commitments

   149    —     —     —     —     —      61   —      —      —      —      —   

 

  December 31, 2015   December 31, 2016 
  Notional
amount
  Carrying
amount
  Fair value   Notional
amount
  Carrying
amount
   Fair value 

(Amounts in millions)

   Total Level 1 Level 2 Level 3      Total   Level 1   Level 2   Level 3 

Assets:

                  

Commercial mortgage loans

  $    (1)  $6,170  $6,476  $—    $—    $6,476   $(1)  $6,111   $6,247   $—     $—     $6,247 

Restricted commercial mortgage loans

       (1)  161  179   —     —    179      (1)  129   141   —      —      141

Other invested assets

       (1)  273  279   —    197  82      (1)  459   473   —      352   121

Liabilities:

                  

Long-term borrowings(2)

       (1)  4,570  3,518   —    3,343  175      (1)  4,180    3,582    —      3,440    142

Non-recourse funding obligations(2)

       (1)  1,920  1,401   —     —    1,401      (1)  310   186   —      —      186

Borrowings related to securitization entities

       (1)  98  104   —    104   —        (1)  62   65   —      65   —   

Investment contracts

       (1)  17,258  17,910   —    5  17,905      (1)  16,437    16,993    —      5   16,988 

Other firm commitments:

                  

Commitments to fund limited partnerships

   131    —     —     —     —     —      201   —      —      —      —      —   

Ordinary course of business lending commitments

   40    —     —     —     —     —      73   —      —      —      —      —   

 

(1)These financial instruments do not have notional amounts.
(2)See note 9 for additional information related to borrowings.

Recurring Fair Value Measurements

We have fixed maturity, short-term investments, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, short-term investments, equity and trading securities

The fair value of fixed maturity, short-term investments, equity and trading securities are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or third-party broker provided

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

prices (“broker quotes”),quotes, which use a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. In certain cases where market information is not available for a specific security but is available for similar securities, a security is valued using that market information for similar securities, which is also a market approach. When market information is not available for a specific security or is available but such information is less relevant or reliable, an income approach or a combination of a market and income approach is utilized. For securities with optionality, such as call or prepayment features (including mortgage-backed or asset-backed securities), an income approach may be used. In addition, a combination of the results from market and income approaches may be used to estimate fair value. These valuation techniques may change from period to period, based on the relevance and availability of market data.

We utilize certain third-party data providers when determining fair value. We consider information obtained from pricing services as well as 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 pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information. We also use various methods to 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, including an understanding of the assumptions and inputs utilized to determine the appropriate fair value. For pricing services, we analyze the prices provided by our primary pricing services to other readily available pricing services and perform a detailed review of the assumptions and inputs from each pricing service to determine the appropriate fair value when pricing differences exceed certain thresholds. We evaluate changes in fair value that are greater than certainpre-defined thresholds each month to further aid in our review of the accuracy of fair value measurements and our understanding of changes in fair value, with more detailed reviews performed by the asset managers responsible for the related asset class associated with the security being reviewed. A pricing committee provides additional oversight and guidance in the evaluation and review of the pricing methodologies used to value our investment portfolio.

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 public or private fixed maturity securities. In certain instances, we utilize price caps for broker quoted securities where the estimated market yield results in a valuation that may exceed the amount that we believe would be received in a market transaction. 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 quotes 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. Additionally, on a monthly basis we review a sample of securities, examining the pricing service’s

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

assumptions to determine if we agree with the service’s derived price. When available, we also evaluate the prices sampled as compared to other public prices. If a variance greater than apre-defined threshold is noted, additional review of the price is executed to ensure accuracy. 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, which would result in the valuation being classified as Level 3.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For private fixed maturity securities, we utilize an income approach where we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium, which represents an unobservable input, 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 utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction and value all private fixed maturity securities at par that have less than 12 months to maturity. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. To evaluate the reasonableness of the internal model, we review a sample of private fixed maturity securities each month. In that review we compare the modeled prices to the prices of similar public securities in conjunction with analysis on current market indicators. If a pricing variance greater than apre-defined threshold is noted, additional review of the price is executed to ensure accuracy. At the end of each month, all internally modeled prices are compared to the prior month prices with an evaluation of all securities with a month-over-month change greater than apre-defined threshold. 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, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating and public bond spread as Level 3. In general, increases (decreases) in credit spreads will decrease (increase) the fair value for our fixed maturity securities.

For broker quotes, we consider the valuation methodology utilized by the third party and analyze a sample each month to assess reasonableness given then-current market conditions. Additionally, for broker quotes on certain structured securities, we validate prices received against other publicly available pricing sources. Broker quotes are typically based on an income approach given the lack of available market data. As the valuation typically includes significant unobservable inputs, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.

For remaining securities priced using internal models, we determine fair value using an income approach. We analyze a sample each month to assess reasonableness given then-current market conditions. 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.

A summary of the inputs used for our fixed maturity, equity and trading securities based on the level in which instruments are classified is included below. We have combined certain classes of instruments together as the nature of the inputs is similar.

Level 1 measurements

Equity securities. The primary inputs to the valuation of exchange-traded equity securities include quoted prices for the identical instrument.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

Level 2 measurements

Fixed maturity securities

 

  

Third-party pricing servicesservices:: In estimating the fair value of fixed maturity securities, approximately 92%91% of our portfolio is priced using third-party pricing sources. These pricing services utilize industry-standard valuation techniques that include market-based approaches, income-based approaches, a combination of market-based and income-based approaches or other proprietary, internally generated

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

models as part of the valuation processes. These third-party pricing vendors maximize the use of publicly available data inputs to generate valuations for each asset class. Priority and type of inputs used may change frequently as certain inputs may be more direct drivers of valuation at the time of pricing. Examples of significant inputs incorporated by third-party pricing services may include sector and issuer spreads, seasoning, capital structure, security optionality, collateral data, prepayment assumptions, default assumptions, delinquencies, debt covenants, benchmark yields, trade data, dealer quotes, credit ratings, maturity and weighted-average life. We conduct regular meetings with our third-party pricing services for the purpose of understanding the methodologies, techniques and inputs used by the third-party pricing providers.

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The following table presents a summary of the significant inputs used by our third-party pricing services for certain fair value measurements of fixed maturity securities that are classified as Level 2 as of September 30, 2016:2017:

 

(Amounts in millions)

 Fair value 

Primary methodologies

 

Significant inputs

  Fair value   

Primary methodologies

  

Significant inputs

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

 

 

 

 

$

 

 

 

6,701

 

 

 

 

 Price quotes from trading desk, broker feeds Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread  $5,669   Price quotes from trading desk, broker feeds  Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread

State and political subdivisions

 $2,780  Multi-dimensional attribute-based modeling systems, third-party pricing vendors Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes  $2,816   Multi-dimensional attribute-based modeling systems, third-party pricing vendors  Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes

Non-U.S. government

 $2,210  Matrix pricing, spread priced to benchmark curves, price quotes from market makers Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources  $2,210   Matrix pricing, spread priced to benchmark curves, price quotes from market makers  Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads,bid-offer spread, market research publications, third-party pricing sources

U.S. corporate

 $24,564  Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, internal models, OAS-based models Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports  $25,290   Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, internal models,OAS-based models  Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports

Non-U.S. corporate

 $11,093  Multi-dimensional attribute-based modeling systems, OAS-based models, price quotes from market makers Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources  $10,711   Multi-dimensional attribute-based modeling systems,OAS-based models, price quotes from market makers  Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads,bid-offer spread, market research publications, third-party pricing sources

Residential mortgage-backed

 $4,786  OAS-based models, To Be Announced pricing models, single factor binomial models, internally priced Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports  $4,123   OAS-based models, To Be Announced pricing models, single factor binomial models, internally priced  Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports

Commercial mortgage-backed

 $3,145  Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports  $3,392   Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model  Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports

Other asset-backed

 $3,177  Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers, internal models Spreads to daily updated swaps curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports  $2,843   Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers, internal models  Spreads to daily updated swaps curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  Internal modelsmodels:: A portion of our state and political subdivisions,non-U.S. government, U.S. corporate andnon-U.S. corporate securities are valued using internal models. The fair value of these fixed maturity securities were $8$7 million, $17$16 million, $626$865 million and $326$461 million, respectively, as of September 30, 2016.2017. Internally modeled securities are primarily private fixed maturity securities where we use market observable inputs such as an interest rate yield curve, published credit spreads for similar securities based on the external ratings of the instrument and related industry sector of the issuer. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps and liquidity premiums are established using inputs from market participants.

Equity securities.The primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active.

Securities lending 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.

Short-term Investments

Short-term investments primarily include commercial paper and other highly liquid debt instruments and are classified as Level 2. We determine fair value after considering prices obtained by third-party pricing services.

Level 3 measurements

Fixed maturity securities

 

  Internal modelsmodels:: A portion of our U.S. government, agencies and government-sponsored enterprises, non-U.S. government, U.S. corporate,non-U.S. corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are valued using internal models. The primary inputs to the valuation of the bond population include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, duration, call provisions, issuer rating, benchmark yields and credit spreads. Certain private fixed maturity securities are valued using an internal model using market observable inputs such as interest rate yield curve, as well as published credit spreads for similar securities where there are no external ratings of the instrument and include a significant unobservable input. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps are established using inputs from market participants. For structured securities, the primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, weighted-average coupon, weighted-average maturity, issuer rating, structure of the security, expected prepayment speeds and volumes, collateral type, current and forecasted loss severity, average delinquency rates, vintage of the loans, geographic region, debt service coverage ratios, payment priority with the tranche, benchmark yields and credit spreads. The fair value of our Level 3 fixed maturity securities priced using internal models was $3,618$3,521 million as of September 30, 2016.2017.

 

  

Broker quotesquotes:: A portion of our state and political subdivisions, U.S. corporate,non-U.S. corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are valued using broker quotes. Broker quotes are obtained from third-party providers that have current

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

market knowledge to provide a reasonable price for securities not routinely priced by third-party pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was $729$628 million as of September 30, 2016.2017.

Equity securities.The primary inputs to the valuation include broker quotes where the underlying inputs are unobservable and for internal models, structure of the security and issuer rating.

Restricted other invested assets related to securitization entities

We havepreviously held trading securities related to securitization entities that arewere classified as restricted other invested assets and arewere carried at fair value. The trading securities representrepresented asset-backed securities. In 2017, these trading securities were sold as we repositioned these assets in connection with the maturity of the associated liabilities. The valuation for

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

trading securities iswas determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there iswas observable market information for transactions of the same or similar instruments, which iswas provided to us by a third-party pricing service and iswas classified as Level 2. For certain securities that are not actively traded, we determinedetermined fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classifyclassified these valuations as Level 3.

Securities lending collateralGMWB 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. We determine fair value using an internal model based on the various inputs noted above. The resulting fair value measurement from the model is reviewed by the product actuarial, risk and finance professionals each reporting period with changes in fair value also being compared to changes in derivatives and other instruments used to mitigate changes in fair value from certain market risks, such as equity index volatility and interest rates.

For GMWB liabilities,non-performance risk is integrated into the discount rate. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to reflect an adjustment for thenon-performance risk of the GMWB liabilities. As of September 30, 2017 and December 31, 2016, the impact ofnon-performance risk resulted in a lower fair value of our GMWB liabilities of $65 million and $73 million, respectively.

To determine the appropriate discount rate to reflect thenon-performance risk of the GMWB liabilities, we evaluate thenon-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. In determining the appropriate discount rate to incorporatenon-performance risk of the GMWB liabilities, we also considered the impacts of state guarantees embedded in the related insurance product as a form of inseparable third-party guarantee. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected equity market volatility with more significance being placed on projected near-term volatility and recent historical data. Given the different attributes and market characteristics of GMWB liabilities compared to equity index options in the derivative market, the equity index volatility assumption for GMWB liabilities may be different from the volatility assumption for equity index options, especially for the longer dated points on the curve.

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.

We classify the GMWB valuation as Level 3 based on having significant unobservable inputs, with equity index volatility andnon-performance risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase innon-performance risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value.

Fixed index annuity embedded derivatives

We have fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporatenon-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

Indexed universal life embedded derivatives

We have indexed universal life products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporatenon-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Borrowings related to securitization entities

We record certain borrowings related to securitization entities at fair value. The fair value of securities heldthese 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 collateral is primarily based on Level 2 inputs from market information forwell as the collateral that is held on our behalf by the custodian. Welack of comparable instruments, we determine fair value after considering prices obtainedthe valuation of the underlying assets held by third-party pricing services.

Separate account assets

Thethe 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 separate account assets is based on the quoted pricesborrowings using the net valuation of the underlying fund investmentsassets and therefore, representsderivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 1 pricing.3. Increases in the valuation of the underlying assets or decreases in the derivative liabilities will result in an increase in the fair value of these borrowings.

Derivatives

We consider counterparty collateral arrangements and rights ofset-off when evaluating our net credit risk exposure to our derivative counterparties. Accordingly, we are permitted to include consideration of these arrangements when determining whether any incremental adjustment should be made for both the counterparty’s and ournon-performance risk in measuring fair value for our derivative instruments. As a result of these counterparty arrangements, we determined that any adjustment for credit risk would not be material and we have not recorded any incremental adjustment for ournon-performance risk or thenon-performance risk of the derivative counterparty for our derivative assets or liabilities. We determine fair value for our derivatives using an income approach with internal models based on relevant market inputs for each derivative instrument. We also compare the fair value determined using our internal model to the valuations provided by our derivative counterparties with any significant differences or changes in valuation being evaluated further by our derivatives professionals that are familiar with the instrument and market inputs used in the valuation.

Interest rate swaps.The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents 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. The interest rate volatility input used to value these options would be considered a significant unobservable input and results in the fair value measurement of the derivative being classified as Level 3. These options to terminate the swap by the counterparty are based on forward interest rate swap curves and volatility. As interest rate volatility increases, our valuation of the derivative changes unfavorably.

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 represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, the current consumer price index and the forward consumer price index curve, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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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. As credit spreads widen for the underlying issuers comprising the index, the change in our valuation of these credit default swaps will be unfavorable.

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. As credit spreads widen for the underlying issuers comprising the customized index, the change in our valuation of these credit default swaps will be unfavorable.

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. As equity index volatility increases, our valuation of these options changes favorably.

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.

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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.

Forward bond purchase commitments.The valuation of forward bond purchase commitments is determined using an income approach. The primary input into the valuation represents the current bond prices and interest rates, which are generally considered an observable input, 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

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primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, foreign currency exchange rate volatility, foreign equity index 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, foreign currency exchange rate volatility and foreign equity index volatility inputs, the derivative is classified as Level 3. As foreign currency exchange rate volatility and foreign equity index volatility increases, the change in our valuation of these options will be favorable for purchase options and unfavorable for options sold. 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.

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. We determine fair value using an internal model based on the various inputs noted above. The resulting fair value measurement from the model is reviewed by the product actuarial, risk and finance professionals each reporting period with changes in fair value also being compared to changes in derivatives and other instruments used to mitigate changes in fair value from certain market risks, such as equity index volatility and interest rates.

For GMWB liabilities, non-performance risk is integrated into the discount rate. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to reflect an adjustment for the non-performance risk of the GMWB liabilities. As of September 30, 2016 and December 31, 2015, the impact of non-performance risk resulted in a lower fair value of our GMWB liabilities of $88 million and $79 million, respectively.

To determine 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. In determining the appropriate discount rate to incorporate non-performance risk of the GMWB liabilities, we also considered the impacts of state guarantees embedded in the related insurance product as a form of inseparable third-party guarantee. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities.

For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected equity market volatility with more significance being placed on projected near-term volatility and recent historical data. Given the different attributes and market characteristics of GMWB liabilities compared to equity index options in the derivative market, the equity index volatility assumption for GMWB liabilities may be different from the volatility assumption for equity index options, especially for the longer dated points on the curve.

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.

We classify the GMWB valuation as Level 3 based on having significant unobservable inputs, with equity index volatility and non-performance risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase in non-performance risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value.

Fixed index annuity embedded derivatives

We have fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

Indexed universal life embedded derivatives

We have indexed universal life products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

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. Increases in the valuation of the underlying assets or decreases in the derivative liabilities will result in an increase in the fair value of these borrowings.

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The following tables set forth our assets by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:

 

  September 30, 2016   September 30, 2017 

(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

  $6,703   $—     $6,701   $2   $5,670   $—     $5,669   $1 

State and political subdivisions

   2,824    —      2,788    36    2,860    —      2,823    37

Non-U.S. government

   2,227    —      2,227    —      2,226    —      2,226    —   

U.S. corporate:

                

Utilities

   4,749    —      4,187    562    4,923    —      4,261    662

Energy

   2,279    —      2,077    202    2,440    —      2,282    158

Finance and insurance

   6,340    —      5,520    820    6,587    —      5,917    670

Consumer—non-cyclical

   4,878    —      4,775    103    4,828    —      4,701    127

Technology and communications

   2,726    —      2,673    53    2,740    —      2,688    52

Industrial

   1,291    —      1,213    78    1,346    —      1,299    47

Capital goods

   2,195    —      2,059    136    2,321    —      2,203    118

Consumer—cyclical

   1,660    —      1,395    265    1,611    —      1,349    262

Transportation

   1,215    —      1,091    124    1,306    —      1,245    61

Other

   362    —      200    162    380   —      210   170
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total U.S. corporate

   27,695    —      25,190    2,505    28,482    —      26,155    2,327 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Non-U.S. corporate:

                

Utilities

   961    —      592    369    1,062    —      703   359

Energy

   1,395    —      1,170    225    1,463    —      1,286    177

Finance and insurance

   2,658    —      2,444    214    2,696    —      2,527    169

Consumer—non-cyclical

   822    —      678    144    716   —      587   129

Technology and communications

   1,047    —      966    81    1,014    —      985   29

Industrial

   1,018    —      906    112    1,058    —      919   139

Capital goods

   580    —      407    173    587   —      437   150

Consumer—cyclical

   505    —      434    71    527   —      458   69

Transportation

   683    —      510    173    718   —      537   181

Other

   3,339    —      3,312    27    2,782    —      2,733    49
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total non-U.S. corporate

   13,008    —      11,419    1,589    12,623    —      11,172    1,451 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Residential mortgage-backed

   4,823    —      4,786    37    4,209    —      4,123    86

Commercial mortgage-backed

   3,173    —      3,145    28    3,414    —      3,392    22

Other asset-backed

   3,327    —      3,177    150    3,068    —      2,843    225
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total fixed maturity securities

   63,780    —      59,433    4,347    62,552    —      58,403    4,149 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Equity securities

   590    520    24    46    765   644   77   44
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Other invested assets:

                

Trading securities

   384    —      384    —   

Derivative assets:

                

Interest rate swaps

   1,260    —      1,260    —      70   —      70   —   

Foreign currency swaps

   6    —      6    —      12   —      12   —   

Equity index options

   61    —      —      61    81   —      —      81

Other foreign currency contracts

   4    —      3    1    98   —      98   —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total derivative assets

   1,331    —      1,269    62    261   —      180   81
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Securities lending collateral

   417    —      417    —      237   —      237   —   

Short-term investments

   787   —      787   —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total other invested assets

   2,132    —      2,070    62    1,285    —      1,204    81
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Restricted other invested assets related to securitization entities

   312    —      181    131 

Reinsurance recoverable(1)

   24    —      —      24    14   —      —      14

Separate account assets

   7,485    7,485    —      —      7,264    7,264    —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total assets

  $74,323   $8,005   $61,708   $4,610   $71,880   $7,908   $59,684   $4,288 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  December 31, 2015   December 31, 2016 

(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

  $6,203   $—     $6,200   $3   $6,036   $—     $6,034   $2 

State and political subdivisions

   2,438    —      2,403    35    2,647    —      2,610    37

Non-U.S. government

   2,015    —      2,015    —      2,107    —      2,107    —   

U.S. corporate:

                

Utilities

   3,693    —      3,244    449    4,550    —      3,974    576

Energy

   2,501    —      2,248    253    2,300    —      2,090    210

Finance and insurance

   5,632    —      4,917    715    6,097    —      5,311    786

Consumer—non-cyclical

   4,096    —      3,987    109    4,734    —      4,613    121

Technology and communications

   2,193    —      2,158    35    2,598    —      2,544    54

Industrial

   1,173    —      1,112    61    1,223    —      1,175    48

Capital goods

   1,950    —      1,770    180    2,258    —      2,106    152

Consumer—cyclical

   1,675    —      1,436    239    1,530    —      1,272    258

Transportation

   1,086    —      980    106    1,190    —      1,051    139

Other

   402    —      220    182    348   —      205   143
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total U.S. corporate

   24,401    —      22,072    2,329    26,828    —      24,341    2,487 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Non-U.S. corporate:

                

Utilities

   843    —      556    287    969   —      583   386

Energy

   1,686    —      1,434    252    1,331    —      1,125    206

Finance and insurance

   2,473    —      2,282    191    2,538    —      2,356    182

Consumer—non-cyclical

   752    —      583    169    714   —      575   139

Technology and communications

   988    —      926    62    987   —      920   67

Industrial

   986    —      902    84    958   —      849   109

Capital goods

   604    —      391    213    535   —      366   169

Consumer—cyclical

   526    —      455    71    442   —      373   69

Transportation

   605    —      461    144    677   —      496   181

Other

   2,736    —      2,664    72    3,144    —      3,119    25
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total non-U.S. corporate

   12,199    —      10,654    1,545    12,295    —      10,762    1,533 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Residential mortgage-backed

   5,101    —      4,985    116    4,379    —      4,336    43

Commercial mortgage-backed

   2,559    —      2,549    10    3,129    —      3,075    54

Other asset-backed

   3,281    —      2,139    1,142    3,151    —      3,006    145
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total fixed maturity securities

   58,197    —      53,017    5,180    60,572    —      56,271    4,301 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Equity securities

   310    270    2    38    632   551   34   47
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Other invested assets:

                

Trading securities

   447    —      447    —      259   —      259   —   

Derivative assets:

                

Interest rate swaps

   1,054    —      1,054    —      596   —      596   —   

Foreign currency swaps

   8    —      8    —      4   —      4   —   

Credit default swaps

   1    —      —      1 

Equity index options

   30    —      —      30    72   —      —      72

Equity return swaps

   2    —      2    —      1   —      1   —   

Other foreign currency contracts

   17    —      14    3    35   —      32   3
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total derivative assets

   1,112    —      1,078    34    708   —      633   75
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Securities lending collateral

   347    —      347    —      534   —      534   —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total other invested assets

   1,906    —      1,872    34    1,501    —      1,426    75
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Restricted other invested assets related to securitization entities

   413    —      181    232    312   —      181   131

Reinsurance recoverable(1)

   17    —      —      17    16   —      —      16

Separate account assets

   7,883    7,883    —      —      7,299    7,299    —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total assets

  $68,726   $8,153   $55,072   $5,501   $70,332   $7,850   $57,912   $4,570 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

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 between levels at the beginning fair value for the reporting period in which the changes occur. Given the types of assets classified as Level 1, which primarily represents mutual fund investments, we typically do not have any transfers between Level 1 and Level 2 measurement categories and did not have any such transfers during any period presented.

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/or rating, 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

(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:

 

(Amounts in millions)

 Beginning
balance

as of
July 1,
2016
  

 

Total realized and
unrealized gains
(losses)

  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3 
(1)
  Transfer
out of
Level 3 (1)
  Ending
balance

as of
September 30,
2016
  Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
 
  Included in
net income
(loss)
  Included
in OCI
         

Fixed maturity securities:

           

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

 $2  $—    $—    $—    $—    $—    $—    $—     $—     $2  $—   

State and political subdivisions

  36   1   —     —     —     —     —     —      (1  36   1 

U.S. corporate:

           

Utilities

  552   1   4   54   (6  —     (1  1    (43  562   —   

Energy

  208   —     3   —     —     —     (8  —      (1  202   —   

Finance and insurance

  775   4   14   27   (5  —     (32  37    —      820   5 

Consumer—non-cyclical

  102   —     1   5   (5  —     —     —      —      103   —   

Technology and communications

  40   1   —     12   —     —     —     —      —      53   1 

Industrial

  78   —     —     —     —     —     —     —      —      78   —   

Capital goods

  135   —     1   —     —     —     —     —      —      136   1 

Consumer—cyclical

  254   —     —     19   (5  —     (1  1    (3  265   —   

Transportation

  129   —     1   —     —     —     (6  —      —      124   —   

Other

  147   —     —     —     —     —     (1  16    —      162   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  2,420   6   24��  117   (21  —     (49  55    (47  2,505   7 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

           

Utilities

  331   —     1   52   (5  —     —     —      (10  369   —   

Energy

  234   —     9   8   (9  —     (17  —      —      225   —   

Finance and insurance

  201   —     3   11   (1  —     —     —      —      214   —   

Consumer—non-cyclical

  168   2   (1  3   (3  —     (37  12    —      144   —   

Technology and communications

  80   —     1   2   (2  —     —     —      —      81   —   

Industrial

  95   —     2   17   (17  —     —     15    —      112   —   

Capital goods

  212   1   (2  —     —     —     (5  —      (33  173   1 

Consumer—cyclical

  71   —     —     —     —     —     —     —      —      71   —   

Transportation

  186   1   (1  —     —     —     (14  1    —      173   —   

Other

  29   (2  2   —     (12  —     —     10    —      27   (2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-U.S. corporate

  1,607   2   14   93   (49  —     (73  38    (43  1,589   (1
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  96   —     —     —     (45  —     (8  5    (11  37   —   

Commercial mortgage-backed

  33   —     (3  —     —     —     —     —      (2  28   —   

Other asset-backed

  198   (6  7   —     (5  —     (5  25    (64  150   (6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturity securities

  4,392   3   42   210   (120  —     (135  123    (168  4,347   1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity securities

  44   —     —     2   —     —     —     —      —      46   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other invested assets:

           

Derivative assets:

           

Equity index options

  57   9   —     15   —     —     (20  —      —      61   —   

Other foreign currency contracts

  1   —     —     —     —     —     —     —      —      1   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative assets

  58   9   —     15   —     —     (20  —      —      62   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other invested assets

  58   9   —     15   —     —     (20  —      —      62   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Restricted other invested assets related to securitization entities

  131   —     —     —     —     —     —     —      —      131   —   

Reinsurance recoverable(2)

  26   (3  —     —     —     1   —     —      —      24   (3
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 assets

 $4,651  $9  $42  $227  $(120 $1  $(155 $123   $(168 $4,610  $(2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in millions)

 Beginning
balance

as of
July 1,
2015
  

 

Total realized and
unrealized gains
(losses)

 Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3 
(1)
  Transfer
out of
Level 3 
(1)
  Ending
balance

as of
September 30,
2015
  Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
  Beginning
balance

as of
July 1,
2017
  Total realized and
unrealized gains
(losses)
 Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3 (1)
  Transfer
out of
Level 3 (1)
  Ending
balance

as of
September 30,
2017
  Total
gains
(losses)
included

in net
income
(loss)

attributable
to assets
still held
 
 Included in
net income
(loss)
 Included
in OCI
   Included
in net
income
(loss)
 Included
in OCI
 

Fixed maturity securities:

                      

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

 $3  $—    $—    $—    $—    $—    $—    $—     $—     $3  $—    $1  $—    $—    $—    $—    $—    $—    $—    $—    $1  $—   

State and political subdivisions

 40  1  (1  —     —     —     —     —     (5 35  1  37 1 (1  —     —     —     —     —     —    37 1

Non-U.S. government

 5   —     —     —     —     —     —     —     (5  —     —   

U.S. corporate:

                      

Utilities

 448   —    1  23   —     —     —    8   (17 463   —    638  —     —    26  —     —    (2  —     —    662  —   

Energy

 269   —    (3  —     —     —    (1  —      —     265   —    160  —     —     —     —     —    (2  —     —    158  —   

Finance and insurance

 629  4  (3 55   —     —    (3  —     (20 662  3  861 3 (52 22 (14  —    (157  8   (1)  670 2

Consumer—non-cyclical

 108   —    (1  —     —     —    (2  —     (10 95   —    122  —    1 4  —     —     —     —     —    127  —   

Technology and communications

 33  1  1   —     —     —     —     —     (1 34  1  58 1 (3  —     —     —    (1  —     (3)  52 1

Industrial

 36   —    1  28   —     —     —     —      —     65   —    61  —     —     —     —     —     —     —     (14)  47  —   

Capital goods

 165   —    (2 27   —     —     —     —      —     190   —    118 1  —     —     —     —    (1  —     —    118 1

Consumer—cyclical

 296  1  (2 30   —     —    (28 10    —     307   —    266  —     —     —     —     —    (2  —     (2)  262  —   

Transportation

 121   —    (1  —     —     —    (1  —     (9 110   —    100 16 (10  —     —     —    (45  —     —    61  —   

Other

 166   —    2   —     —     —    (1 19    —     186   —    176  —     —     —    (4  —    (2  —     —    170  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total U.S. corporate

 2,271  6  (7 163   —     —    (36 37   (57 2,377  4  2,560  21 (64 52 (18  —    (212  8   (20)  2,327  4
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Non-U.S. corporate:

                      

Utilities

 326   —     —    18   —     —     —     —      —     344   —    359  —     —     —     —     —     —     —     —    359  —   

Energy

 305   —    (3  —     —     —    (23  —      —     279   —    177  —    1  —     —     —    (1  —     —    177  —   

Finance and insurance

 218   —    1  15   —     —     —     —      —     234   —    172 1 1  —     —     —    (5  —     —    169  —   

Consumer—non-cyclical

 169   —     —     —     —     —    (11  —     (1 157   —    129  —     —     —     —     —     —     —     —    129  —   

Technology and communications

 42   —     —     —     —     —     —     —      —     42   —    48 1 1  —    (21  —     —     —     —    29  —   

Industrial

 125   —     —     —     —     —    (4  —     (33 88   —    112  —     —    13  —     —     —     14   —    139  —   

Capital goods

 237   —    (2  —     —     —    (5  —      —     230   —    149  —    1  —     —     —     —     —     —    150  —   

Consumer—cyclical

 73   —    (2  —     —     —     —    16    —     87   —    67  —     —     —     —     —     —     2   —    69  —   

Transportation

 154   —     —     —     —     —    (8  —��     —     146   —    190  —    1  —     —     —    (10  —     —    181  —   

Other

 75   —    (2  —     —     —     —     —      —     73   —    41 (2 1  —    (2  —     —     11   —    49  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total non-U.S. corporate

 1,724   —    (8 33   —     —    (51 16   (34 1,680   —    1,444   —    6 13 (23  —    (16  27   —    1,451   —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Residential mortgage-backed

 132   —    (3 6   —     —    (2 9   (72 70   —    73  —     —    22  —     —    (1  —     (8)  86  —   

Commercial mortgage-backed

 25   —    (1  —     —     —     —     —     (13 11   —    52 (1 (2 14  —     —     —     —     (41)  22  —   

Other asset-backed

 1,360   —    (7 34  (14  —    (50 77   (94 1,306  2  150 (1 1 52  —     —    (5  44   (16)  225  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total fixed maturity securities

 5,560  7  (27 236  (14  —    (139 139   (280 5,482  7  4,317  20 (60 153 (41  —    (234  79   (85)  4,149  5
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Equity securities

 41   —     —     —    (4  —     —    1    —     38   —    48  —     —     —    (1  —     —     —     (3)  44  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Other invested assets:

                      

Derivative assets:

                      

Credit default swaps

 1   —     —     —     —     —     —     —      —     1   —   

Equity index options

 12  6   —     —     —     —    (3  —      —     15  5  81 16  —    15  —     —    (31  —     —    81 13
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total derivative assets

 13  6   —     —     —     —    (3  —      —     16  5  81 16  —    15  —     —    (31  —     —    81 13
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total other invested assets

 13  6   —     —     —     —    (3  —      —     16  5  81 16  —    15  —     —    (31  —     —    81 13
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Restricted other invested assets related to securitization entities

 230  1   —     —     —     —     —     —      —     231  1 

Reinsurance recoverable(2)

 10  9   —     —     —     —     —     —      —     19  9  15 (1  —     —     —     —     —     —     —    14 (1
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total Level 3 assets

 $5,854  $23  $(27 $236  $(18 $—    $(142 $140   $(280 $5,786  $22  $4,461  $35  $(60 $168  $(42 $—    $(265 $79  $(88)  $4,288  $17 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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:

(Amounts in millions)

 Beginning
balance

as of
January 1,
2016
  

 

Total realized and
unrealized gains
(losses)

  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3 
(1)
  Transfer
out of
Level 3 
(1)
  Ending
balance

as of
September 30,
2016
  Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
 
  Included in
net income
(loss)
  Included
in OCI
         

Fixed maturity securities:

           

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

 $3  $—    $—    $—    $—    $—    $(1 $—     $—     $2  $—   

State and political subdivisions

  35   2   (1  7   —     —     —     —      (7  36   2 

U.S. corporate:

           

Utilities

  449   1   28   101   (6  —     (9  68    (70  562   —   

Energy

  253   —     (1  —     —     —     (10  7    (47  202   —   

Finance and insurance

  715   12   58   54   (14  —     (59  72    (18  820   11 

Consumer—non-cyclical

  109   —     7   5   (18  —     —     —      —      103   —   

Technology and communications

  35   2   4   12   —     —     —     —      —      53   2 

Industrial

  61   —     5   —     —     —     —     12    —      78   —   

Capital goods

  180   1   6   —     (10  —     —     —      (41  136   1 

Consumer—cyclical

  239   4   9   44   (5  —     (42  19    (3  265   —   

Transportation

  106   1   9   17   —     —     (14  5    —      124   1 

Other

  182   1   1   —     —     —     (5  16    (33  162   1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  2,329   22   126   233   (53  —     (139  199    (212  2,505   16 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

           

Utilities

  287   —     9   62   (5  —     —     26    (10  369   —   

Energy

  252   —     33   8   (11  —     (31  —      (26  225   —   

Finance and insurance

  191   2   11   11   (1  —     —     —      —      214   2 

Consumer—non-cyclical

  169   2   9   3   (3  —     (48  12    —      144   —   

Technology and communications

  62   —     6   18   (5  —     —     —      —      81   —   

Industrial

  84   —     7   17   (20  —     —     24    —      112   —   

Capital goods

  213   1   7   —     —     —     (15  —      (33  173   1 

Consumer—cyclical

  71   —     2   —     —     —     (2  —      —      71   —   

Transportation

  144   1   3   —     —     —     (14  39    —      173   —   

Other

  72   (2  4   —     (12  —     (7  10    (38  27   (2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-U.S. corporate

  1,545   4   91   119   (57  —     (117  111    (107  1,589   1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  116   —     2   51   (45  —     (13  13    (87  37   —   

Commercial mortgage-backed

  10   —     1   23   —     —     (4  —      (2  28   —   

Other asset-backed

  1,142   (16  3   12   (25  —     (19  66    (1,013  150   (16
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturity securities

  5,180   12   222   445   (180  —     (293  389    (1,428  4,347   3 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity securities

  38   —     —     8   —     —     —     —      —      46   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other invested assets:

           

Derivative assets:

           

Credit default swaps

  1   —     —     —     —     —     (1  —      —      —     —   

Equity index options

  30   5   —     51   —     —     (25  —      —      61   (4

Other foreign currency contracts

  3   (2  —     1   —     —     (1  —      —      1   (2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative assets

  34   3   —     52   —     —     (27  —      —      62   (6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other invested assets

  34   3   —     52   —     —     (27  —      —      62   (6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Restricted other invested assets related to securitization entities

  232   (55  —     —     —     —     (46  —      —      131   9 

Reinsurance recoverable(2)

  17   5   —     —     —     2   —     —      —      24   5 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 assets

 $5,501  $(35 $222  $505  $(180 $2  $(366 $389   $(1,428 $4,610  $11 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities. Most significantly, the majority of the transfers out of Level 3 related to a reclassification of collateralized loan obligation securities previously valued using a broker priced source to now being valued using third-party pricing services.
(2)Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in millions)

 Beginning
balance

as of
January 1,
2015
  

 

Total realized and
unrealized gains
(losses)

 Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3 
(1)
  Transfer
out of
Level 3 
(1)
  Ending
balance

as of
September 30,
2015
  Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
  Beginning
balance

as of
July 1,
2016
  Total realized and
unrealized gains
(losses)
 Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3 (1)
  Transfer
out of
Level 3 (1)
  Ending
balance

as of
September 30,
2016
  Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
 
 Included in
net income
(loss)
 Included
in OCI
   Included
in net
income
(loss)
 Included
in OCI
 

Fixed maturity securities:

                      

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

 $4  $—    $—    $—    $—    $—    $(1 $—     $—     $3  $—    $2  $—    $—    $—    $—    $—    $—    $—    $—    $2  $—   

State and political subdivisions

 30  2  8  5   —     —     —     —     (10 35  2  36 1  —     —     —     —     —     —     (1)  36 1

Non-U.S. government

 7   —    (1  —     —     —    (1  —     (5  —     —   

U.S. corporate:

                      

Utilities

 444   —    (9 38   —     —    (2 10   (18 463   —    552 1 4 54 (6  —    (1  1   (43)  562  —   

Energy

 285   —    (7 4  (4  —    (5  —     (8 265   —    208  —    3  —     —     —    (8  —     (1)  202  —   

Finance and insurance

 616  12  (25 83   —     —    (28 47   (43 662  10  775 4 14 27 (5  —    (32  37   —    820 5

Consumer—non-cyclical

 140  2   —     —     —     —    (37  —     (10 95   —    102  —    1 5 (5  —     —     —     —    103  —   

Technology and communications

 45  2  (2  —     —     —     —     —     (11 34  2  40 1  —    12  —     —     —     —     —    53 1

Industrial

 36   —    1  28   —     —     —     —      —     65   —    78  —     —     —     —     —     —     —     —    78  —   

Capital goods

 166   —    (3 28  (1  —     —     —      —     190   —    135  —    1  —     —     —     —     —     —    136 1

Consumer—cyclical

 363  1  (3 39   —     —    (36 10   (67 307   —    254  —     —    19 (5  —    (1  1   (3)  265  —   

Transportation

 153  1  (3 7   —     —    (30  —     (18 110  1  129  —    1  —     —     —    (6  —     —    124  —   

Other

 171  1   —     —     —     —    (5 19    —     186  1  147  —     —     —     —     —    (1  16   —    162  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total U.S. corporate

 2,419  19  (51 227  (5  —    (143 86   (175 2,377  14  2,420  6 24 117 (21  —    (49  55   (47)  2,505  7
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Non-U.S. corporate:

                      

Utilities

 328   —    (2 18   —     —     —     —      —     344   —    331  —    1 52 (5  —     —     —     (10)  369  —   

Energy

 324  (1 (5  —    (9  —    (30  —      —     279  (1 234  —    9 8 (9  —    (17  —     —    225  —   

Finance and insurance

 221  2  (3 21   —     —    (3  —     (4 234  2  201  —    3 11 (1  —     —     —     —    214  —   

Consumer—non-cyclical

 197   —    2   —     —     —    (41  —     (1 157   —    168 2 (1 3 (3  —    (37  12   —    144  —   

Technology and communications

 42   —     —     —     —     —     —    1   (1 42   —    80  —    1 2 (2  —     —     —     —    81  —   

Industrial

 131   —     —    7   —     —    (18 1   (33 88   —    95  —    2 17 (17  —     —     15   —    112  —   

Capital goods

 237   —    (2  —     —     —    (5  —      —     230   —    212 1 (2  —     —     —    (5  —     (33)  173 1

Consumer—cyclical

 89   —    (1  —     —     —     —    16   (17 87   —    71  —     —     —     —     —     —     —     —    71  —   

Transportation

 154   —     —     —     —     —    (8  —      —     146   —    186 1 (1  —     —     —    (14  1   —    173  —   

Other

 81   —    3   —     —     —    (11 1   (1 73   —    29 (2 2  —    (12  —     —     10   —    27 (2
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total non-U.S. corporate

 1,804  1  (8 46  (9  —    (116 19   (57 1,680  1  1,607  2 14 93 (49  —    (73  38   (43)  1,589  (1
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Residential mortgage-backed

 65   —    (3 37   —     —    (7 50   (72 70   —    96  —     —     —    (45  —    (8  5   (11)  37  —   

Commercial mortgage-backed

 5   —    (1 9   —     —    (1 13   (14 11   —    33  —    (3  —     —     —     —     —     (2)  28  —   

Other asset-backed

 1,420  3  10  129  (22  —    (234 141   (141 1,306  2  198 (6 7  —    (5  —    (5  25   (64)  150 (6
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total fixed maturity securities

 5,754  25  (46 453  (36  —    (503 309   (474 5,482  19  4,392  3 42 210 (120  —    (135  123   (168)  4,347  1
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Equity securities

 34   —     —    1  (5  —     —    8    —     38   —    44  —     —    2  —     —     —     —     —    46  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Other invested assets:

                      

Derivative assets:

                      

Credit default swaps

 3   —     —     —     —     —    (2  —      —     1   —   

Equity index options

 17  (11  —    12   —     —    (3  —      —     15  (8 57 9  —    15  —     —    (20  —     —    61  —   

Other foreign currencycontracts

 1  —     —     —     —     —     —     —     —    1  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total derivative assets

 20  (11  —    12   —     —    (5  —      —     16  (8 58 9  —    15  —     —    (20  —     —    62  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total other invested assets

 20  (11  —    12   —     —    (5  —      —     16  (8 58 9  —    15  —     —    (20  —     —    62  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Restricted other invested assets related to securitization entities

 230  1   —     —     —     —     —     —      —     231  1  131  —     —     —     —     —     —     —     —    131  —   

Reinsurance recoverable(2)

 13  5   —     —     —    1   —     —      —     19  5  26 (3  —     —     —    1  —     —     —    24 (3
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total Level 3 assets

 $6,051  $20  $(46 $466  $(41 $1  $(508 $317   $(474 $5,786  $17  $4,651  $9  $42  $227  $(120 $1  $(155 $123  $(168)  $4,610  $(2
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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:

(Amounts in millions)

 Beginning
balance as
of

January 1,
2017
  Total realized and
unrealized gains
(losses)
  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3 (1)
  Transfer
out of
Level 3 (1)
  Ending
balance as of

September 30,
2017
  Total
gains
(losses)
included in
net income
(loss)
attributable

to assets
still held
 
  Included
in net
income
(loss)
  Included
in OCI
         

Fixed maturity securities:

           

U.S. government, agenciesand government-sponsoredenterprises

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

State and political subdivisions

  37  2  (2  —     —     —     —     —     —     37  2

U.S. corporate:

           

Utilities

  576  —     20  70  —     —     (4  30   (30)   662  —   

Energy

  210  (1  6  —     (10  —     (32  1   (16)   158  (1

Finance and insurance

  786  11  (1  75  (31  —     (163  8   (15)   670  10

Consumer—non-cyclical

  121  —     2  4  —     —     —     —     —     127  —   

Technology and

           

communications

  54  2  3  14  —     —     (1  —     (20)   52  2

Industrial

  48  —     —     13  —     —     —     —     (14)   47  —   

Capital goods

  152  1  3  —     —     —     (1  —     (37)   118  1

Consumer—cyclical

  258  —     9  2  —     —     (5  —     (2)   262  —   

Transportation

  139  17  (5  —     —     —     (48  —     (42)   61  1

Other

  143  —     1  —     (4  —     (7  37   —     170  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  2,487   30  38  178  (45  —     (261  76   (176)   2,327   13
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

           

Utilities

  386  —     5  30  —     —     —     —     (62)   359  —   

Energy

  206  —     6  —     (1  —     (1  —     (33)   177  —   

Finance and insurance

  182  4  9  4  —     —     (30  —     —     169  2

Consumer—non-cyclical

  139  —     2  —     —     —     (12  —     —     129  —   

Technology and

           

communications

  67  1  1  —     (21  —     (19  —     —     29  —   

Industrial

  109  —     3  13  —     —     —     14   —     139  —   

Capital goods

  169  —     3  —     —     —     (15  —     (7)   150  —   

Consumer—cyclical

  69  —     —     —     —     —     (2  2   —     69  —   

Transportation

  181  —     4  6  —     —     (10  11   (11)   181  —   

Other

  25  (2  2  15  (2  —     —     11   —     49  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate

  1,533   3  35  68  (24  —     (89  38   (113)   1,451   2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  43  —     1  26  —     —     (2  26   (8)   86  —   

Commercial mortgage-backed

  54  (2  4  23  (9  —     —     —     (48)   22  —   

Other asset-backed

  145  (8  11  116  (35  —     (12  58   (50)   225  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturity securities

  4,301   25  87  411  (113  —     (365  198   (395)   4,149   17
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity securities

  47  —     —     1  (1  —     —     —     (3)   44  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other invested assets:

           

Derivative assets:

           

Equity index options

  72  42  —     36  —     —     (69  —     —     81  21

Other foreign currencycontracts

  3  (3  —     —     —     —     —     —     —     —     (2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative assets

  75  39  —     36  —     —     (69  —     —     81  19
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other invested assets

  75  39  —     36  —     —     (69  —     —     81  19
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Restricted other invested assetsrelated to securitization entities

  131  —     —     —     (131  —     —     —     —     —     —   

Reinsurance recoverable(2)

  16  (3  —     —     —     1  —     —     —     14  (3
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 assets

 $4,570  $61  $87  $448  $(245 $1  $(434 $198  $(398)  $4,288  $33 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  Beginning
balance as
of

January 1,
2016
  Total realized and
unrealized gains
(losses)
              Transfer
into
Level 3 (1)
  Transfer
out of
Level 3 (1)
  Ending
balance as of

September 30,
2016
  Total
gains
(losses)
included in
net income
(loss)
attributable

to assets
still held
 

(Amounts in millions)

  Included
in net
income
(loss)
  Included
in OCI
  Purchases  Sales  Issuances  Settlements     

Fixed maturity securities:

           

U.S. government, agenciesand government-sponsoredenterprises

 $3  $—    $—    $—    $—    $—    $(1 $—    $—    $2  $—   

State and political subdivisions

  35  2  (1  7  —     —     —     —     (7)   36  2

U.S. corporate:

           

Utilities

  449  1  28  101  (6  —     (9  68   (70)   562  —   

Energy

  253  —     (1  —     —     —     (10  7   (47)   202  —   

Finance and insurance

  715  12  58  54  (14  —     (59  72   (18)   820  11

Consumer—non-cyclical

  109  —     7  5  (18  —     —     —     —     103  —   

Technology andcommunications

  35  2  4  12  —     —     —     —     —     53  2

Industrial

  61  —     5  —     —     —     —     12   —     78  —   

Capital goods

  180  1  6  —     (10  —     —     —     (41)   136  1

Consumer—cyclical

  239  4  9  44  (5  —     (42  19   (3)   265  —   

Transportation

  106  1  9  17  —     —     (14  5   —     124  1

Other

  182  1  1  —     —     —     (5  16   (33)   162  1
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  2,329   22  126  233  (53  —     (139  199   (212)   2,505   16
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

           

Utilities

  287  —     9  62  (5  —     —     26   (10)   369  —   

Energy

  252  —     33  8  (11  —     (31  —     (26)   225  —   

Finance and insurance

  191  2  11  11  (1  —     —     —     —     214  2

Consumer—non-cyclical

  169  2  9  3  (3  —     (48  12   —     144  —   

Technology andcommunications

  62  —     6  18  (5  —     —     —     —     81  —   

Industrial

  84  —     7  17  (20  —     —     24   —     112  —   

Capital goods

  213  1  7  —     —     —     (15  —     (33)   173  1

Consumer—cyclical

  71  —     2  —     —     —     (2  —     —     71  —   

Transportation

  144  1  3  —     —     —     (14  39   —     173  —   

Other

  72  (2  4  —     (12  —     (7  10   (38)   27  (2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate

  1,545   4  91  119  (57  —     (117  111   (107)   1,589   1
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  116  —     2  51  (45  —     (13  13   (87)   37  —   

Commercial mortgage-backed

  10  —     1  23  —     —     (4  —     (2)   28  —   

Other asset-backed

  1,142   (16  3  12  (25  —     (19  66   (1,013)   150  (16
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturity securities

  5,180   12  222  445  (180  —     (293  389   (1,428)   4,347   3
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity securities

  38  —     —     8  —     —     —     —     —     46  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other invested assets:

           

Derivative assets:

           

Credit default swaps

  1  —     —     —     —     —     (1  —     —     —     —   

Equity index options

  30  5  —     51  —     —     (25  —     —     61  (4

Other foreign currencycontracts

  3  (2  —     1  —     —     (1  —     —     1  (2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative assets

  34  3  —     52  —     —     (27  —     —     62  (6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other invested assets

  34  3  —     52  —     —     (27  —     —     62  (6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Restricted other invested assetsrelated to securitization entities

  232  (55  —     —     —     —     (46  —     —     131  9

Reinsurance recoverable (2)

  17  5  —     —     —     2  —     —     —     24  5
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 assets

 $5,501  $(35 $222  $505  $(180 $2  $(366 $389  $(1,428 $4,610  $11 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the gains and losses included in net income (loss) from assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:

 

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

(Amounts in millions)

      2016         2015           2016         2015       2017   2016 2017   2016 

Total realized and unrealized gains (losses) included in net income (loss):

             

Net investment income

  $11  $9   $(33 $30   $7   $11  $22   $(33

Net investment gains (losses)

   (2 14    (2 (10   28   (2 39   (2
  

 

  

 

   

 

  

 

   

 

   

 

  

 

   

 

 

Total

  $9  $23   $(35 $20   $35   $9  $61   $(35
  

 

  

 

   

 

  

 

   

 

   

 

  

 

   

 

 

Total gains (losses) included in net income (loss) attributable to assets still held:

             

Net investment income

  $9  $8   $23  $23   $5   $9  $18   $23 

Net investment gains (losses)

   (11 14    (12 (6   12   (11 15   (12
  

 

  

 

   

 

  

 

   

 

   

 

  

 

   

 

 

Total

  $(2 $22   $11  $17   $17   $(2 $33   $11 
  

 

  

 

   

 

  

 

   

 

   

 

  

 

   

 

 

The amount presented for unrealized gains (losses) included in net income (loss) foravailable-for-sale securities represents impairments and accretion on certain fixed maturity securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents a summary of the significant unobservable inputs used for certain asset fair value measurements that are based on internal models and classified as Level 3 as of September 30, 2016:2017:

 

(Amounts in millions)

 Valuation technique Fair value Unobservable input Range Weighted-average  Valuation
technique
   Fair value   Unobservable
input
   Range   Weighted-
average
 

Fixed maturity securities:

              

U.S. corporate:

              

Utilities

 Internal models   $537  Credit spreads    94bps - 315bps   158bps   Internal models   $647    Credit spreads    73bps - 379bps    135bps 

Energy

 Internal models   65  Credit spreads    113bps - 359bps   183bps   Internal models    86   Credit spreads    80bps - 193bps    142bps 

Finance and insurance

 Internal models   746  Credit spreads    92bps - 528bps   253bps   Internal models    629   Credit spreads    70bps - 354bps    180bps 

Consumer—non-cyclical

 Internal models   103  Credit spreads    107bps - 326bps   189bps   Internal models    127   Credit spreads    88bps - 247bps    132bps 

Technology and communications

 Internal models   53  Credit spreads    295bps - 390bps   372bps   Internal models    52   Credit spreads    60bps - 353bps    299bps 

Industrial

 Internal models   49  Credit spreads    139bps - 346bps   229bps   Internal models    20   Credit spreads    90bps - 207bps    162bps 

Capital goods

 Internal models   136  Credit spreads    70bps - 291bps   136bps   Internal models    118   Credit spreads    90bps - 247bps    140bps 

Consumer—cyclical

 Internal models   240  Credit spreads    70bps - 313bps   188bps   Internal models    236   Credit spreads    56bps - 210bps    129bps 

Transportation

 Internal models   115  Credit spreads    87bps - 292bps   170bps   Internal models    54   Credit spreads    56bps - 123bps    89bps 

Other

 Internal models   131  Credit spreads    84bps - 187bps   116bps   Internal models    161   Credit spreads    64bps - 135bps    75bps 
  

 

       

 

       

Total U.S. corporate

 Internal models   $2,175  Credit spreads    70bps - 528bps   200bps   Internal models   $2,130    Credit spreads    56bps - 379bps    146bps 
  

 

       

 

       

Non-U.S. corporate:

              

Utilities

 Internal models   $369  Credit spreads    94bps - 192bps   135bps   Internal models   $358    Credit spreads    77bps - 158bps    116bps 

Energy

 Internal models   153  Credit spreads    117bps - 221bps   165bps   Internal models    146   Credit spreads    90bps - 169bps    116bps 

Finance and insurance

 Internal models   204  Credit spreads    90bps - 255bps   146bps   Internal models    160   Credit spreads    69bps - 179bps    107bps 

Consumer—non-cyclical

 Internal models   132  Credit spreads    70bps - 254bps   158bps   Internal models    118   Credit spreads    56bps - 191bps    112bps 

Technology and communications

 Internal models   81  Credit spreads    117bps - 254bps   191bps   Internal models    29   Credit spreads    123bps - 222bps    171bps 

Industrial

 Internal models   103  Credit spreads    132bps - 254bps   195bps   Internal models    130   Credit spreads    109bps - 247bps    146bps 

Capital goods

 Internal models   124  Credit spreads    117bps - 221bps   155bps   Internal models    121   Credit spreads    88bps - 145bps    112bps 

Consumer—cyclical

 Internal models   71  Credit spreads    110bps - 186bps   150bps   Internal models    69   Credit spreads    87bps - 169bps    112bps 

Transportation

 Internal models   145  Credit spreads    95bps - 243bps   141bps   Internal models    161   Credit spreads    78bps - 210bps    115bps 

Other

 Internal models   14  Credit spreads    105bps - 916bps   345bps   Internal models    49   Credit spreads    101bps - 233bps    181bps 
  

 

       

 

       

Total non-U.S. corporate

 Internal models   $1,396  Credit spreads    70bps - 916bps   155bps   Internal models   $1,341    Credit spreads    56bps - 247bps    120bps 
  

 

       

 

       

Derivative assets:

              

Equity index options

  

 

Discounted cash

flows

  

  

 $61   
 
Equity index
volatility
  
  
  —  % - 26%   17%    
Discounted
cash flows
 
 
  $81    
Equity index
volatility
 
 
   6% - 27%    18
   

 

       

Other foreign currency contracts

  

 

Discounted cash

flows

 

  

 $1   
 
Foreign exchange
rate volatility
  
  
  9% - 12%   11%  

Certain classes of instruments classified as Level 3 are excluded above as a result of not being material or due to limitations in being able to obtain the underlying inputs used by certain third-party sources, such as broker quotes, used as an input in determining fair value.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables set forth our liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:

 

  September 30, 2016   September 30, 2017 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3 

Liabilities

                

Policyholder account balances:

                

GMWB embedded derivatives(1)

  $439   $—     $—     $439   $257   $—     $—     $257 

Fixed index annuity embedded derivatives

   364    —      —      364    394   —      —      394

Indexed universal life embedded derivatives

   13    —      —      13    14   —      —      14
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total policyholder account balances

   816    —      —      816    665   —      —      665
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Derivative liabilities:

                

Interest rate swaps

   397    —      397    —      39   —      39   —   

Foreign currency swaps

   5    —      5    —   

Credit default swaps related to securitization entities

   2    —      2    —   

Equity return swaps

   5    —      5    —      2   —      2   —   

Other foreign currency contracts

   32    —      32    —      23   —      23   —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total derivative liabilities

   441    —      441    —      64   —      64   —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Borrowings related to securitization entities

   11    —      —      11    12   —      —      12
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total liabilities

  $1,268   $—     $441   $827   $741   $—     $64   $677 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

 

  December 31, 2015   December 31, 2016 

(Amounts in millions)

  Total   Level 1   Level��2   Level 3   Total   Level 1   Level 2   Level 3 

Liabilities

                

Policyholder account balances:

                

GMWB embedded derivatives(1)

  $352   $—     $—     $352   $303   $—     $—     $303 

Fixed index annuity embedded derivatives

   342    —      —      342    344   —      —      344

Indexed universal life embedded derivatives

   10    —      —      10    11   —      —      11
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total policyholder account balances

   704    —      —      704    658   —      —      658
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Derivative liabilities:

                

Interest rate swaps

   220    —      220    —      349   —      349   —   

Interest rate swaps related to securitization entities

   30    —      30    —   

Inflation indexed swaps

   33    —      33    —   

Foreign currency swaps

   27    —      27    —      5   —      5   —   

Credit default swaps related to securitization entities

   14    —      —      14    1   —      1   —   

Equity return swaps

   1    —      1    —      1   —      1   —   

Other foreign currency contracts

   34    —      34    —      27   —      27   —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total derivative liabilities

   359    —      345    14    383   —      383   —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Borrowings related to securitization entities

   81    —      —      81    12   —      —      12
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total liabilities

  $1,144   $—     $345   $799   $1,053   $—     $383   $670 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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:

 

(Amounts in millions)

 Beginning
balance

as of
July 1,
2016
  

 

Total realized and
unrealized (gains)
losses

  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3
  Transfer
out of
Level 3
  Ending
balance

as of
September 30,
2016
  Total (gains)
losses
included in
net (income)
loss

attributable
to liabilities
still held
 
  Included
in net
(income)
loss
  Included
in OCI
         

Policyholder account balances:

           

GMWB embedded derivatives(1)

 $494  $(63 $—    $—    $—    $8  $—    $—    $—    $439  $(59

Fixed index annuity embedded derivatives

  351   16   —     —     —     —     (3  —     —     364   16 

Indexed universal life embedded derivatives

  13   (3  —     —     —     3   —     —     —     13   (3
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholder account balances

  858   (50  —     —     —     11   (3  —     —     816   (46
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Borrowings related to securitization entities

  11   —     —     —     —     —     —     —     —     11   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $869  $(50 $—    $—    $—    $11  $(3 $—    $—    $827  $(46
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  Beginning
balance
as of
July 1,
2017
  

 

Total realized and
unrealized (gains)
losses

  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3
  Transfer
out of
Level 3
  Ending
balance as of
September 30,
2017
  Total
(gains)
losses
included in
net
(income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

  Included
in net
(income)
loss
  Included
in OCI
         

Policyholder account balances:

           

GMWB embeddedderivatives (1)

 $281  $(31 $—    $—    $—    $7  $—    $—    $—    $257  $(31

Fixed index annuityembedded derivatives

  376  21  —     —     —     —     (3  —     —     394  21

Indexed universal lifeembedded derivatives

  13  (2  —     —     —     3  —     —     —     14  (2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholder accountbalances

  670  (12  —     —     —     10  (3  —     —     665  (12
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Borrowings related tosecuritization entities

  12  —     —     —     —     —     —     —     —     12  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $682  $(12 $—    $—    $—    $10  $(3 $—    $—    $677  $(12
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(Amounts in millions)

 Beginning
balance

as of
July 1,
2015
  Total realized and
unrealized (gains)
losses
  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3
  Transfer
out of
Level 3
  Ending
balance

as of
September 30,
2015
  Total
(gains)
losses
included in
net
(income)
loss

attributable
to liabilities
still held
 
  Included
in net
(income)
loss
  Included
in OCI
         

Policyholder account balances:

           

GMWB embedded derivatives(1)

 $255  $126  $—    $—    $—    $9  $—    $—    $—    $390  $124 

Fixed index annuity embedded derivatives

  322   (31  —     —     —     14   (1  —     —     304   (31

Indexed universal life embedded derivatives

  9   (2  —     —     —     3   —     —     —     10   (2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholder account balances

  586   93   —     —     —     26   (1  —     —     704   91 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivative liabilities:

           

Credit default swaps related to securitization entities

  8   1   —     1   —     —     —     —     —     10   1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative liabilities

  8   1   —     1   —     —     —     —     —     10   1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Borrowings related to securitization entities

  84   (4  —     —     —     —     —     —     —     80   (4
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $678  $90  $—    $1  $—    $26  $(1 $—    $—    $794  $88 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Amounts in millions)

 Beginning
balance
as of
July 1,
2016
  

 

Total realized and
unrealized (gains)
losses

  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3
  Transfer
out of
Level 3
  Ending
balance as of
September 30,
2016
  Total
(gains)
losses
included in
net
(income)
loss
attributable
to liabilities
still held
 
  Included in
net
(income)
loss
  Included
in OCI
         

Policyholder account balances:

           

GMWB embeddedderivatives (1)

 $494  $(63 $—    $—    $—    $8  $—    $—    $—    $439  $(59

Fixed index annuityembedded derivatives

  351  16  —     —     —     —     (3  —     —     364  16

Indexed universal lifeembedded derivatives

  13  (3  —     —     —     3  —     —     —     13  (3
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholder accountbalances

  858  (50  —     —     —     11  (3  —     —     816  (46
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Borrowings related tosecuritization entities

  11  —     —     —     —     —     —     —     —     11  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $869  $(50 $—    $—    $—    $11  $(3 $—    $—    $827  $(46
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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:

 

(Amounts in millions)

 Beginning
balance

as of
January 1,
2016
  Total realized
and unrealized
(gains) losses
  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3
  Transfer
out of
Level 3
  Ending
balance

as of
September 30,
2016
  Total (gains)
losses
included in
net (income)
loss

attributable
to liabilities
still held
 
  Included
in net
(income)
loss
  Included
in OCI
         

Policyholder account balances:

           

GMWB embedded derivatives(1)

 $352  $63  $—    $—    $—    $24  $—    $—    $—    $439  $72 

Fixed index annuity embedded derivatives

  342   22   —     —     —     10   (10  —     —     364   22 

Indexed universal life embedded derivatives

  10   (6  —     —     —     9   —     —     —     13   (6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholder account balances

  704   79   —     —     —     43   (10  —     —     816   88 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivative liabilities:

           

Credit default swaps related to securitization entities

  14   (13  —     —     —     —     2   —     (3  —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative liabilities

  14   (13  —     —     —     —     2   —     (3  —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Borrowings related to securitization entities

  81   (65  —     —     —     —     (5  —     —     11   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $799  $1  $—    $—    $—    $43  $(13 $—    $(3 $827  $88 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  Beginning
balance as
of
January 1,
2017
  Total realized and
unrealized (gains)
losses
  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3
  Transfer
out of
Level 3
  Ending
balance as of
September 30,
2017
  Total
(gains)
losses
included in
net
(income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

  Included
in net
(income)
loss
  Included
in OCI
         

Policyholder account balances:

           

GMWB embeddedderivatives(1)

 $303  $(67 $—    $—    $—    $21  $—    $—    $—    $257  $(64

Fixed index annuityembedded derivatives

  344  57  —     —     —     —     (7  —     —     394  57

Indexed universal lifeembedded derivatives

  11  (5  —     —     —     8  —     —     —     14  (5
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholder accountbalances

  658  (15  —     —     —     29  (7  —     —     665  (12
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Borrowings related tosecuritization entities

  12  1  —     —     —     —     (1  —     —     12  1
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $670  $(14 $—    $—    $—    $29  $(8 $—    $—    $677  $(11
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(Amounts in millions)

 Beginning
balance

as of
January 1,
2015
  Total realized and
unrealized (gains)
losses
  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3
  Transfer
out of
Level 3
  Ending
balance

as of
September 30,
2015
  Total (gains)
losses
included in
net (income)
loss

attributable
to liabilities
still held
 
  Included
in net
(income)
loss
  Included
in OCI
         

Policyholder account balances:

           

GMWB embedded derivatives(1)

 $291  $73  $—    $—    $—    $26  $—    $—    $—    $390  $75 

Fixed index annuity embedded derivatives

  276   (14  —     —     —     47   (5  —     —     304   (14

Indexed universal life embedded derivatives

  7   (5  —     —     —     8   —     —     —     10   (5
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholder account balances

  574   54   —     —     —     81   (5  —     —     704   56 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Derivative liabilities:

           

Credit default swaps related to securitization entities

  17   (10  —     3   —     —     —     —     —     10   (10
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative liabilities

  17   (10  —     3   —     —     —     —     —     10   (10
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Borrowings related to securitization entities

  85   (6  —     —     —     1   —     —     —     80   (6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $676  $38  $—    $3  $—    $82  $(5 $—    $—    $794  $40 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  Beginning
balance as
of
January 1,
2016
  Total realized and
unrealized (gains)
losses
  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3
  Transfer
out of
Level 3
  Ending
balance as of
September 30,
2016
  Total
(gains)
losses
included in
net
(income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

  Included
in net
(income)
loss
  Included
in OCI
         

Policyholder account balances:

           

GMWB embeddedderivatives (1)

 $352  $63  $—    $—    $—    $24  $—    $—    $—    $439  $72 

Fixed index annuityembedded derivatives

  342  22  —     —     —     10  (10  —     —     364  22

Indexed universal lifeembedded derivatives

  10  (6  —     —     —     9  —     —     —     13  (6
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholderaccount balances

  704  79  —     —     —     43  (10  —     —     816  88
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
Derivative liabilities:           

Credit default swaps relatedto securitization entities

  14  (13  —     —     —     —     2  —     (3  —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative liabilities

  14  (13  —     —     —     —     2  —     (3  —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Borrowings related tosecuritization entities

  81  (65  —     —     —     —     (5  —     —     11  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $799  $1  $—    $—    $—    $43  $(13 $—    $(3 $827  $88 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gains and losses included in net (income) loss from liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:

 

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

(Amounts in millions)

      2016         2015           2016           2015         2017       2016       2017       2016   

Total realized and unrealized (gains) losses included in net (income) loss:

               

Net investment income

  $—    $—     $—     $—     $—     $—     $—     $—   

Net investment (gains) losses

   (50 90    1    38    (12   (50   (14   1
  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $(50 $90   $1   $38   $(12  $(50  $(14  $1 
  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total (gains) losses included in net (income) loss attributable to liabilities still held:

               

Net investment income

  $—    $—     $—     $—     $—     $—     $—     $—   

Net investment (gains) losses

   (46 88    88    40    (12   (46   (11   88
  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $(46 $88   $88   $40   $(12  $(46  $(11  $88 
  

 

  

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Purchases, sales, issuances and settlements 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 settlements of fixed maturity, equity and trading securities and purchases, issuances and settlements of derivative instruments.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Issuances presented for GMWB embedded derivative liabilities 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. Issuances for fixed index annuity and indexed universal life embedded derivative liabilities represent the amount of the premium received that is attributed to the value of the embedded derivative. Settlements of embedded derivatives 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents a summary of the significant unobservable inputs used for certain liability fair value measurements that are based on internal models and classified as Level 3 as of September 30, 2016:2017:

 

(Amounts in millions)

 Valuation technique  Fair value  Unobservable input  Range  Weighted-average 

Policyholder account balances:

     
    
 
Withdrawal
utilization rate
  
  
  —  % - 99%    68%  
    Lapse rate    —  % - 15%    6%  
    
 
Non-performance risk
(credit spreads)
  
  
  40bps - 85bps    71bps  

GMWB embedded derivatives(1)

  
 
Stochastic cash flow
model
  
  
  $439   
 
Equity index
volatility
  
  
  15% - 24%    21%  

Fixed index annuity embedded derivatives

  
 
Option budget
method
  
  
  $364   
 
Expected future
interest credited
  
  
  —  % - 2%    2%  

Indexed universal life embedded derivatives

  
 
Option budget
method
  
  
  $13   
 
Expected future
interest credited
  
  
  4% - 9%    6%  

(Amounts in millions)

  Valuation
technique
   Fair
value
   Unobservable input   Range  Weighted-
average
 

Policyholder account balances:

         
       
Withdrawal
utilization rate
 
 
   40% - 84%   65% 
       Lapse rate    —  % - 8%   4% 
       

Non-performance
risk (credit
spreads)
 
 
 
   26bps - 83bps   66bp

GMWB embeddedderivatives(1)

   
Stochastic cash
flow model
 
 
   $257    
Equity index
volatility
 
 
   13% - 24%   20% 

Fixed index annuity embeddedderivatives

   
Option budget
method
 
 
   $394    
Expected future
interest credited
 
 
   —  % - 2%   1% 

Indexed universal life embeddedderivatives

   
Option budget
method
 
 
   $14    
Expected future
interest credited
 
 
   3% - 8%   5% 

 

(1)Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

(7) Deferred Acquisition Costs

The following table presents the activity impacting deferred acquisition costs (“DAC”) for the dates indicated:

 

   As of or for the nine months
ended September 30,
 

(Amounts in millions)

      2016          2015     

Unamortized beginning balance

  $4,569  $5,200 

Impact of foreign currency translation

   8   (20

Costs deferred

   124   228 

Amortization, net of interest accretion

   (257  (266

Impairment

   —     (455
  

 

 

  

 

 

 

Unamortized ending balance

   4,444   4,687 

Accumulated effect of net unrealized investment (gains) losses

   (462  (246
  

 

 

  

 

 

 

Ending balance

  $3,982  $4,441 
  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   As of or for the nine months
ended September 30,
 

(Amounts in millions)

      2017           2016     

Unamortized beginning balance

  $4,241   $4,569 

Impact of foreign currency translation

   12   8

Costs deferred

   67   124

Amortization, net of interest accretion

   (261   (257
  

 

 

   

 

 

 

Unamortized ending balance

   4,059    4,444 

Accumulated effect of net unrealized investment (gains) losses

   (1,717   (462
  

 

 

   

 

 

 

Ending balance

  $2,342   $3,982 
  

 

 

   

 

 

 

We regularly review DAC to determine if it is recoverable from future income. In the second quarter of2017 and 2016, we performed our loss recognition testing and determined that we had a premium deficiencydeficiencies in our fixed immediate annuity products. The results of the test were primarily driven by the low interest rate environment in the second quarter of 2016. As a result, as of June 30, 2016, we wrote off the entire DAC balance for our fixed immediate annuity products of $14 million through amortizationamortization. In addition, as a result of our fixed immediate annuity loss recognition testing as of September 30, 2017 and 2016, we increased our future policy benefit reserves by $18 million. In the third quarterand recognized expenses of 2016,$31 million and $24 million, respectively. The premium deficiency test results were primarily driven by aging of the in-force and the low interest rate environment, we determined that an additional premium deficiency existed in our fixed immediate annuity products that resulted in a further increase to our future policy benefit reserves of $6 million.environment. As of September 30, 2016,2017, we believe all of our other businesses had sufficient future income and therefore the related DAC was recoverable.

On

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In addition, we are required to analyze the impacts from net unrealized investment gains and losses on ouravailable-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. These “shadow accounting” adjustments result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses onavailable-for-sale investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, based on changes in net unrealized investment (gains) losses, these shadow adjustments may reverse from period to period. As of September 30, 2015, Genworth Life and Annuity Insurance Company (“GLAIC”), our indirect wholly-owned subsidiary, entered into a Master Agreement (the “Master Agreement”) for a life block transaction with Protective Life Insurance Company (“Protective Life”). Pursuant2017, due primarily to the Master Agreement, GLAIC and Protective Life agreed to enter into a reinsurance agreement (the “Reinsurance Agreement”), underdecline in interest rates increasing unrealized investments gains, we reduced the termsDAC balance of which Protective Life would coinsure certain term lifeour long-term care insurance business to zero, a cumulative decrease in the accumulated effect of GLAIC, net unrealized investment gains of third-party reinsurance. The Reinsurance Agreement was entered intoapproximately $1.3 billion out of the total $1.7 billion in January 2016.the table above, with an offsetting amount recorded in other comprehensive income (loss). In connection with entering into the Master Agreement,addition, we recorded a DAC impairment of $455increased our future policy benefit reserves in our long-term care insurance business by approximately $333 million as a result of loss recognition testing of certain term life insurance policies as part of this life block transaction.September 30, 2017, with an offsetting amount recorded in other comprehensive income (loss). There was no impact to net income (loss).

(8) Liability for Policy and Contract Claims

The following table sets forth changes in our recorded liability for policy and contract claims by business as of the dates indicated:

 

(Amounts in millions)

  September 30,
2016
   December 31,
2015
 

Long-term care insurance

  $7,654   $6,749 

U.S. mortgage insurance

   658    849 

Australia mortgage insurance

   215    165 

Life insurance

   195    202 

Canada mortgage insurance

   112    87 

Runoff

   16    18 

Fixed annuities

   12    18 

Other mortgage insurance

   7    7 
  

 

 

   

 

 

 

Total liability for policy and contract claims

  $8,869   $8,095 
  

 

 

   

 

 

 
   As of or for the nine
months ended
September 30,
 

(Amounts in millions)

  2017   2016 

Beginning balance

  $9,256   $8,095 

Less reinsurance recoverables

   (2,409   (2,122
  

 

 

   

 

 

 

Net beginning balance

   6,847    5,973 
  

 

 

   

 

 

 

Incurred related to insured events of:

    

Current year

   2,748    2,569 

Prior years

   (306   320
  

 

 

   

 

 

 

Total incurred

   2,442    2,889 
  

 

 

   

 

 

 

Paid related to insured events of:

    

Current year

   (755   (727

Prior years

   (1,746   (1,646
  

 

 

   

 

 

 

Total paid

   (2,501   (2,373
  

 

 

   

 

 

 

Interest on liability for policy and contract claims

   223   188

Foreign currency translation

   27   14
  

 

 

   

 

 

 

Net ending balance

   7,038    6,691 

Add reinsurance recoverables

   2,346    2,178 
  

 

 

   

 

 

 

Ending balance

  $9,384   $8,869 
  

 

 

   

 

 

 

The liability for policy and contract claims represents our current best estimate; however, there may be future adjustments to this estimate and related assumptions. Such adjustments, reflecting any variety of new and

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

adverse trends, could possibly be significant, and result in increases in reserves by an amount that could be material to our results of operations and financial condition and liquidity.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Long-term care insurance

The following table sets forth changes in the liability for policy and contract claims for our long-term care insurance business for the dates indicated:

   As of or for the nine
months ended
September 30,
 

(Amounts in millions)

  2016   2015 

Beginning balance

  $6,749   $6,216 

Less reinsurance recoverables

   (2,055   (1,926
  

 

 

   

 

 

 

Net beginning balance

   4,694    4,290 
  

 

 

   

 

 

 

Incurred related to insured events of:

    

Current year

   1,546    1,241 

Prior years

   378    6 
  

 

 

   

 

 

 

Total incurred

   1,924    1,247 
  

 

 

   

 

 

 

Paid related to insured events of:

    

Current year

   (82   (75

Prior years

   (1,160   (1,050
  

 

 

   

 

 

 

Total paid

   (1,242   (1,125
  

 

 

   

 

 

 

Interest on liability for policy and contract claims

   188    172 
  

 

 

   

 

 

 

Net ending balance

   5,564    4,584 

Add reinsurance recoverables

   2,090    1,999 
  

 

 

   

 

 

 

Ending balance

  $7,654   $6,583 
  

 

 

   

 

 

 

As of September 30, 2016, the liability for policy and contract claims increased $905 million in our long-term care insurance business largely from the completion of our annual review of assumptions in the third quarter of 2016 which increased reserves by $460 million and increased reinsurance recoverables by $25 million. The increase was also attributable to aging and growth of the in-force block and higher severity on new claims in the current year. Based on our annual review of our long-term care insurance claim reserves, which included an additional year of claims experience since our last annual review in the third quarter of 2015, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves. The primary impact of assumption changes was from an overall lowering of claim termination rate assumptions for longer duration claims, particularly for reimbursement claims. We also updated our claim termination rate assumptions to reflect differences between product types, separating our indemnity and reimbursement blocks that were previously combined, and modestly refined our utilization rate assumptions and methodologies as well as refined our methodology primarily related to the calculation of incurred but not reported reserves to better reflect the aging of the in-force blocks.

For the nine months ended September 30, 2016,2017, the incurred amountfavorable development of $378$306 million related to insured events of prior years increased largely as a result of the completion of our annual review ofwas primarily attributable to favorable claim terminations in our long-term care insurance claim reserves, as described above, which resulted in recording higher reserves of $305 million, net of reinsurance recoverables of $25 million. In addition, we recorded $39 million of unfavorable adjustments in the second quarter of 2016, which included refinements to the calculations of claim reserves.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(9) Borrowings and Other Financings

(a) Short-Term Borrowings

Revolving Credit Facilities

On May 20, 2016, Genworth MI Canada Inc. (“Genworth Canada”), our majority-owned subsidiary, entered into a CAD$100 million senior unsecured revolving credit facility, which matures on May 20, 2019. Any borrowings under Genworth Canada’s credit facility will bear interest at a rate per annum equal to, at the option of Genworth Canada, either a fixed rate or a variable rate pursuant to the terms of the credit agreement. Genworth Canada’s credit facility includes customary representations, warranties, covenants, terms and conditions. As of September 30, 2016, there was no amount outstanding under Genworth Canada’s credit facility.

In April 2016, Genworth Holdings terminated its $300 million multicurrency revolving credit facility, prior to its September 26, 2016 maturity date. There were no amounts outstanding under the credit facility at the time of termination.

(b) Long-Term Borrowings

The following table sets forth total long-term borrowings as of the dates indicated:

(Amounts in millions)

  September 30, 2016  December 31, 2015 

Genworth Holdings (1)

   

8.625% Senior Notes, due 2016

  $—    $298 

6.52% Senior Notes, due 2018

   597   598 

7.70% Senior Notes, due 2020

   397   397 

7.20% Senior Notes, due 2021

   381   389 

7.625% Senior Notes, due 2021

   705   724 

4.90% Senior Notes, due 2023

   399   399 

4.80% Senior Notes, due 2024

   400   400 

6.50% Senior Notes, due 2034

   297   297 

6.15% Fixed-to-Floating Rate Junior Subordinated Notes, due 2066

   598   598 
  

 

 

  

 

 

 

Subtotal

   3,774   4,100 

Bond consent fees

   (40  —   

Deferred borrowing charges

   (20  (21
  

 

 

  

 

 

 

Total Genworth Holdings

   3,714   4,079 
  

 

 

  

 

 

 

Canada (2)

   

5.68% Senior Notes, due 2020

   210   199 

4.24% Senior Notes, due 2024

   122   116 
  

 

 

  

 

 

 

Subtotal

   332   315 

Deferred borrowing charges

   (2  (2
  

 

 

  

 

 

 

Total Canada

   330   313 
  

 

 

  

 

 

 

Australia (3)

   

Floating Rate Junior Notes, due 2021

   —     36 

Floating Rate Junior Notes, due 2025

   153   146 
  

 

 

  

 

 

 

Subtotal

   153   182 

Deferred borrowing charges

   (3  (4
  

 

 

  

 

 

 

Total Australia

   150   178 
  

 

 

  

 

 

 

Total

  $4,194  $4,570 
  

 

 

  

 

 

 

(1)We have the option to redeem all or a portion of the senior notes at any time with notice to the noteholders 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.
(2)Senior notes issued by Genworth Canada, our majority-owned subsidiary.
(3)Subordinated floating rate notes issued by Genworth Financial Mortgage Insurance Pty Limited, our indirect wholly-owned subsidiary.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Genworth Holdings

In January 2016, Genworth Holdings redeemed $298 million of its 8.625% senior notes due 2016 issued in December 2009 (the “2016 Notes”) and paid a make-whole premium of approximately $20 million pre-tax in addition to accrued and unpaid interest.

During the three months ended March 31, 2016, we also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for a pre-tax gain of $4 million and paid accrued and unpaid interest thereon.

On March 18, 2016, Genworth Holdings received the requisite consents, pursuant to a solicitation of consents (the “Consent Solicitation”), to amend the indenture dated as of June 15, 2004, by and between Genworth Holdings and The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as successor to JP Morgan Chase Bank, N.A., as amended and supplemented from time to time (as so amended and supplemented, the “Senior Notes Indenture”) and the indenture dated as of November 14, 2006, by and between Genworth Holdings and the Trustee, as amended and supplemented from time to time (as so amended and supplemented, the “Subordinated Notes Indenture” and together with the Senior Notes Indenture, the “Indentures”).

On March 18, 2016, Genworth Holdings, Genworth Financial, as guarantor, and the Trustee entered into Supplemental Indenture No. 12 to the Senior Notes Indenture and the Third Supplemental Indenture to the Subordinated Notes Indenture (the “Supplemental Indentures”) that amended the Senior Notes Indenture and the Subordinated Notes Indenture, respectively, to (i) exclude Genworth Life Insurance Company and Genworth Life Insurance Company of New York, which operate our long-term care insurance business, from the event of default provisions of the Indentures (such amendment also previously excluded Brookfield Life and Annuity Insurance Company Limited until it merged into Genworth Life Insurance Company in October 2016) and (ii) clarify that one or more transactions disposing of any or all of the Genworth Holdings’ long-term care and other lifebusiness. Our mortgage insurance businesses also experienced favorable prior year claim development mostly from an improvement in net cures and assets (a “Life Sale”) would not constitute a dispositionaging of “all or substantially all” of Genworth Holdings’ assets under the Indentures, provided that in order to rely on that clarification, the assets of our U.S. Mortgage Insurance segment would be contributed to Genworth Holdings and 80% of any Net Cash Proceeds, as defined in the Supplemental Indentures, to us from any Life Sale would be used to reduce outstanding indebtedness.

The Supplemental Indentures became operative on March 22, 2016 upon the payment of the applicable consent fees payable under the terms of the Consent Solicitation. We paid total fees related to the Consent Solicitation of approximately $61 million, including bond consent fees of $43 million, which were deferred,existing claims, as well as broker, advisorlower delinquencies and investment banking fees of $18 million, which were expensed,an improvement in the first quarter of 2016.

estimated claim severity or amount.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Australia

In June 2016, Genworth Financial Mortgage Insurance Pty Limited, our indirect majority-owned subsidiary, redeemed all of its outstanding AUD$50 million of subordinated floating rate notes with an interest rate of three-month Bank Bill Swap reference rate plus a margin of 4.75% due 2021.

(c) Non-Recourse Funding Obligations

The following table sets forth the non-recourse funding obligations (surplus notes) of our wholly-owned, special purpose consolidated captive insurance subsidiaries as of the dates indicated:

(Amounts in millions)

  September 30,
2016
  December 31,
2015
 

Issuance

   

River Lake Insurance Company(a), due 2033

  $—    $570 

River Lake Insurance Company(b), due 2033

   —     405 

River Lake Insurance Company II(a), due 2035

   —     192 

River Lake Insurance Company II(b), due 2035

   —     453 

Rivermont Life Insurance Company I(a), due 2050

   315   315 
  

 

 

  

 

 

 

Subtotal

   315   1,935 

Deferred borrowing charges

   (5  (15
  

 

 

  

 

 

 

Total

  $310  $1,920 
  

 

 

  

 

 

 

(a)Accrual of interest based on one-month London Interbank Offered Rate (“LIBOR”) that resets every 28 days plus a fixed margin.
(b)Accrual of interest based on one-month LIBOR that resets on a specified date each month plus a contractual margin.

During the three months ended March 31, 2016, in connection with a life block transaction, River Lake Insurance Company, our indirect wholly-owned subsidiary, redeemed $975 million of its total outstanding floating rate subordinated notes due in 2033 and River Lake Insurance Company II, our indirect wholly-owned subsidiary, redeemed $645 million of its total outstanding floating rate subordinated notes due in 2035 for a pre-tax loss of $9 million from the write-off of deferred borrowing costs.

(d) Repurchase agreements and securities lending activity

Repurchase agreements

We previously had a repurchase program in which we sold an investment security at a specified price and agreed to repurchase that security at another specified price at a later date. Repurchase agreements were treated as collateralized financing transactions and were carried at the amounts at which the securities were subsequently reacquired, including accrued interest, as specified in the respective agreement. The market value of securities to be repurchased were monitored and collateral levels adjusted where appropriate to protect the parties against credit exposure. Cash received was invested in fixed maturity securities. As of December 31, 2015, the fair value of securities pledged under the repurchase program was $231 million and the repurchase obligation of $229 million was included in other liabilities in the consolidated balance sheet. As of September 30, 2016, the fair value of securities pledged under the repurchase program and the repurchase obligation was zero as they matured during the three months ended June 30, 2016.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Securities lending activity

In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary.

Under the securities lending program in the United States, the borrower is required to provide collateral, which can consist of cash or government securities, on a daily basis in amounts equal to or exceeding 102% of the value of the loaned securities. Currently, we only accept cash collateral from borrowers under the program. Cash collateral 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 United States, the reinvested cash collateral is primarily invested in a money market fund approved by the National Association of Insurance Commissioners, U.S. and foreign government securities, U.S. government agency securities, asset-backed securities and corporate debt securities. As of September 30, 2016 and December 31, 2015, the fair value of securities loaned under our securities lending program in the United States was $401 million and $334 million, respectively. As of September 30, 2016 and December 31, 2015, the fair value of collateral held under our securities lending program in the United States was $417 million and $347 million, respectively, and the offsetting obligation to return collateral of $417 million and $347 million, respectively, was included in other liabilities in the consolidated balance sheets. We did not have any non-cash collateral provided by the borrowers in our securities lending program in the United States as of September 30, 2016 and December 31, 2015.

Under our securities lending program in Canada, the borrower is required to provide collateral consisting of government securities on a daily basis in amounts equal to or exceeding 105% of the fair value of the applicable securities loaned. Securities received from counterparties as collateral are not recorded on our consolidated balance sheet given that the risk and rewards of ownership is not transferred from the counterparties to us in the course of such transactions. Additionally, there was no cash collateral because it is not permitted as an acceptable form of collateral under the program. 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. As of September 30, 2016 and December 31, 2015, the fair value of securities loaned under our securities lending program in Canada was $364 million and $340 million, respectively.

Risks associated with repurchase agreements and securities lending programs

Our repurchase agreement and securities lending programs expose us to liquidity risk if we did not have enough cash or collateral readily available to return to the counterparty when required to do so under the agreements. We manage this risk by regularly monitoring our available sources of cash and collateral to ensure we can meet short-term liquidity demands under normal and stressed scenarios.

We are also exposed to credit risk in the event of default of our counterparties or changes in collateral values. This risk is significantly reduced because our programs require over collateralization and collateral exposures are trued up on a daily basis. We manage this risk by using multiple counterparties and ensuring that changes in required collateral are monitored and adjusted daily. We also monitor the creditworthiness, including credit ratings, of our counterparties on a regular basis.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contractual maturity

The following tables present the remaining contractual maturity of the agreements as of the dates indicated:

   September 30, 2016 

(Amounts in millions)

  Overnight and
continuous
   Up to 30 days   31 - 90 days   Greater than
90 days
   Total 

Repurchase agreements:

          

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

  $—     $—     $—     $—     $—   

Securities lending:

          

Fixed maturity securities:

          

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

   78    —      —      —      78 

Non-U.S. government

   61    —      —      —      61 

U.S. corporate

   163    —      —      —      163 

Non-U.S. corporate

   110    —      —      —      110 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

   412    —      —      —      412 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

   5    —      —      —      5 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities lending

   417    —      —      —      417 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total repurchase agreements and securities lending

  $417   $—     $—     $—     $417 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

   December 31, 2015 

(Amounts in millions)

  Overnight and
continuous
   Up to 30 days   31 - 90 days   Greater than
90 days
   Total 

Repurchase agreements:

          

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

  $—     $58   $25   $146   $229 

Securities lending:

          

Fixed maturity securities:

          

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

   18    —      —      —      18 

Non-U.S. government

   39    —      —      —      39 

U.S. corporate

   95    —      —      —      95 

Non-U.S. corporate

   190    —      —      —      190 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

   342    —      —      —      342 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

   5    —      —      —      5 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities lending

   347    —      —      —      347 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total repurchase agreements and securities lending

  $347   $58   $25   $146   $576 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(Amounts in millions)

  2016 2015 2016 2015   2017 2016 2017 2016 

Pre-tax income (loss)

  $(125  $(351  $376   $188    $286   $(125  $1,019   $376  
  

 

   

 

   

 

   

 

    

 

   

 

   

 

   

 

  

Statutory U.S. federal income tax rate

  $(44 35.0 $(123 35.0 $132  35.0 $66  35.0  $100  35.0 $(44 35.0 $357  35.0 $132  35.0

Increase (reduction) in rate resulting from:

                  

State income tax, net of federal income tax effect

   —     —     (1 0.4   1  0.2   3  1.4     1 0.1   —     —    (2 (0.2 1 0.2 

Benefit on tax favored investments

   1  (0.7 (9 2.5   (2 (0.5 (14 (7.2

Tax favored investments

   6 1.9  1 (0.7 3 0.3  (2 (0.5

Effect of foreign operations

   5  (3.9 (3 0.8   (12 (3.3 (33 (17.5   (6 (2.0 5 (3.9 (14 (1.3 (12 (3.3

Non-deductible expenses

   (1 0.5    —     —     (1 (0.1 1  0.6     —     —    (1 0.5  1 0.1  (1 (0.1

Interest on uncertain tax positions

   —     —     1  (0.2  —     —     1  0.4  

Valuation allowance

   265  (212.9  —     —     240  63.8    —     —       —     —    265 (212.9  —     —    240 63.8 

Stock-based compensation

   2  (1.8 2  (0.5 5  1.4   4  2.0     1 0.5  2 (1.8 3 0.2  5 1.4 

Loss on sale of business

   —     —      —     —     (1 (0.2  —     —       —     —     —     —     —     —    (1 (0.2

Other, net

   (6) 4.8   (1 0.1   (7 (1.8 (1 (0.4   —     —    (6 4.8   —     —    (7 (1.8
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Effective rate

  $222  (179.0)%  $(134 38.1 $355  94.5 $27  14.3  $102  35.5 $222  (179.0)%  $348  34.1 $355  94.5
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

The effective tax rate for the three and nine months ended September 30, 2017 was impacted by higher tax benefits from lower taxed foreign income. The effective tax rate for the three and nine months ended September 30, 2016 was impacted by a valuation allowance of $265 million recorded on deferred tax assets. In light of our latest financial projections, including the projected impact to current and future earnings associated with higher expected claim costs in our long-term care insurance business as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowanceassets related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership. The effective tax rate for the nine months ended September 30, 2016 was also impacted by the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe due to taxable gains supporting the recognition of these deferred tax assets in the currentprior year.

(11)(10) Segment Information

Beginning in the fourth quarter of 2015, we changed how we review our operating businesses and no longer have separate reporting divisions. Under our new structure, weWe have the following five operating business segments: U.S. Mortgage Insurance; Canada Mortgage Insurance; Australia Mortgage Insurance; U.S Life Insurance (which includes our long-term care insurance, life insurance and fixed annuities businesses); and Runoff (which includes the results ofnon-strategic products which are no longerhave not been actively sold). In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations. Financial information has been updated for all periods to reflect the reorganized segment reporting structure.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We allocate our consolidated provision for income taxes to our operating segments. Our allocation methodology applies a specific tax rate to thepre-tax income (loss) of each segment, which is then adjusted in each segment to reflect the tax attributes of items unique to that segment such as foreign income. The difference between the consolidated provision for income taxes and the sum of the provision for income taxes in each segment is reflected in Corporate and Other activities. The annually-determined tax rates and adjustments to each segment’s provision for income taxes are estimates which are subject to review and could change from year to year.

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“adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders.” We define netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding theafter-tax effects of income attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions, restructuring costs and infrequent or unusualnon-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment ofnon-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusualnon-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A 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) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and restructuring costs are also excluded from netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders because, in our opinion, they are not indicative of overall operating trends. Infrequent or unusualnon-operating items are also excluded from netadjusted 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 netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate netadjusted 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. Management also uses netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders have occurred in the past and could, and in some cases will, recur in the future. NetAdjusted 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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

definition of netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.

Adjustments to reconcile net income (loss) attributable to Genworth Financial, Inc.’s common stockholders and netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders assume a 35% tax

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

rate (unless otherwise indicated) and are net of the portion attributable to noncontrolling interests. Net investment gains (losses) are also adjusted for DAC and other intangible amortization and certain benefit reserves.

We recorded apre-tax expense of $1 million in both the third and first quarters of 2017 related to restructuring costs as the company continues to evaluate and appropriately size its organizational needs and expenses.

In Junethe third quarter of 2016, we completedrecorded apre-tax expense of $2 million related to restructuring costs as part of an expense reduction plan as the salecompany evaluated and appropriately sized its organizational needs and expenses.

In the second quarter of our term life insurance new business platform and recorded a pre-tax gain of $12 million. In May 2016, we completed the sale of our mortgage insurance business in Europe and recorded an additionalpre-tax loss of $2 million. million; we completed the sale of our term life insurance new business platform and recorded apre-tax gain of $12 million; we settled restricted borrowings related to a securitization entity and recorded a $64 millionpre-tax gain related to the early extinguishment of debt; and we recorded apre-tax expense of $5 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.

In the first quarter of 2016, we recorded an estimated apre-tax loss of $7 million and a tax benefit of $27 million related to the planned sale of our mortgage insurance business in Europe. We recognized a tax charge of $7 million in the third quarter of 2015 from potential business portfolio changes related to the sale of this business. These transactions were excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the periods presented as they related to a gain (loss) on the sale of businesses.

In June 2016, we settled restricted borrowings of $70 million related to a securitization entity and recorded a $64 million pre-tax gain related to the early extinguishment of debt. In January 2016,Europe; we paid apre-tax make-whole expense of $20 million related to the early redemption of Genworth Holdings’ 2016 Notes. Wenotes; we also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for apre-tax gain of $4 million in the first quarter of 2016. In the third quarter of 2015, we paid an early redemption payment of approximately $1 million, net of the portion attributable to noncontrolling interests, related to the early redemption of Genworth Financial Mortgage Insurance Pty Limited’s notes that were scheduled to mature in 2021. In the third quarter of 2015, we also repurchased approximately $50 million principal amount of Genworth Holdings, Inc.’s notes with various maturity dates for a pre-tax loss of $1 million. These transactions were excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the periods presented as they related to a gain (loss) on the early extinguishment of debt.

In the first quarter of 2016,million; we completed a life block transaction resulting in apre-tax loss of $9 million in connection with the early extinguishment ofnon-recourse funding obligations. In the third quarter of 2015,obligations; and we recorded apre-tax DAC impairment of $455 million on certain term life insurance policies in connection with entering into an agreement to complete a life block transaction.

In the third, second and first quarters of 2016, we recorded a pre-tax expense of $2 million, $5 million and $15 million respectively, related to restructuring costs as part of an expense reduction plan as we evaluatethe company evaluated and appropriately size oursized its organizational needs and expenses. In the second quarter of 2015, we also recorded a pre-tax expense of $3 million related to restructuring costs.

There were no infrequent or unusual items excluded from netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders during the periods presented other than the following item. We incurred fees incurred during the first quarter of 2016 related to Genworth Holdings’ bond consent solicitation of $18 million for broker, advisor and investment banking fees.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:

 

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

(Amounts in millions)

  2016   2015   2016   2015   2017   2016   2017   2016 

Revenues:

                

U.S. Mortgage Insurance segment

  $186   $161   $537   $497   $194   $186   $570   $537 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Canada Mortgage Insurance segment

   156    124    463    429    220   156   593   463
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Australia Mortgage Insurance segment

   115    122    333    360    98   115   317   333
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

U.S. Life Insurance segment:

                

Long-term care insurance

   980    949    3,051    2,769    1,033    980   3,063    3,051 

Life insurance

   418    455    953    1,419    389   418   1,217    953

Fixed annuities

   218    221    613    683    190   218   605   613
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

U.S. Life Insurance segment

   1,616    1,625    4,617    4,871    1,612    1,616    4,885    4,617 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Runoff segment

   84    53    218    209    90   84   266   218
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Corporate and Other activities

   (7   15    3    26    1   (7   (22   3
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total revenues

  $2,150   $2,100   $6,171   $6,392   $2,215   $2,150   $6,609   $6,171 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The increase in total revenues for the nine months ended September 30, 2017 was primarily attributable to our U.S. Life Insurance segment driven mostly by a life block transaction in our life insurance business in the first quarter of 2016, under which we initially ceded $326 million of certain term life insurance premiums.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following is a summarytables present the reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities and a reconciliationsummary of netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities to net loss available to Genworth Financial, Inc.’s common stockholders for the periods indicated:

 

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

(Amounts in millions)

   2016      2015      2016      2015   

Net operating income (loss) available to Genworth Financial, Inc.‘s common stockholders:

    

U.S. Mortgage Insurance segment

 $67  $37  $189  $138 
 

 

 

  

 

 

  

 

 

  

 

 

 

Canada Mortgage Insurance segment

  36   38   107   115 
 

 

 

  

 

 

  

 

 

  

 

 

 

Australia Mortgage Insurance segment

  14   21   48   80 
 

 

 

  

 

 

  

 

 

  

 

 

 

U.S. Life Insurance segment:

    

Long-term care insurance

  (270  (10  (199  10 

Life insurance

  48   31   110   93 

Fixed annuities

  15   19   28   75 
 

 

 

  

 

 

  

 

 

  

 

 

 

U.S. Life Insurance segment

  (207  40   (61  178 
 

 

 

  

 

 

  

 

 

  

 

 

 

Runoff segment

  12   (4  22   16 

Corporate and Other activities

  (327  (68  (484  (190
 

 

 

  

 

 

  

 

 

  

 

 

 

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

  (405  64   (179  337 

Adjustments to net operating income (loss) available to Genworth Financial, Inc.’s common stockholders:

    

Net investment gains (losses), net(1)

  18   (33  38   (29

Gains (losses) on sale of businesses

  —     —     3   —   

Gains (losses) on early extinguishment of debt, net(2)

  —     (2  48   (2

Gains (losses) from life block transactions

  —     (455  (9  (455

Expenses related to restructuring

  (2  —     (22  (3

Fees associated with bond consent solicitation

  —     —     (18  —   

Taxes on adjustments

  (6  163   9   163 
 

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations available to Genworth Financial, Inc.‘s common stockholders

  (395  (263  (130  11 

Add: income from continuing operations attributable to noncontrolling interests

  48   46   151   150 
 

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations

  (347  (217  21   161 

Income (loss) from discontinued operations, net of taxes

  15   (21  (25  (334
 

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

  (332  (238  (4  (173

Less: net income attributable to noncontrolling interests

  48   46   151   150 
 

 

 

  

 

 

  

 

 

  

 

 

 

Net loss available to Genworth Financial, Inc.‘s common stockholders

 $(380 $(284 $(155 $(323
 

 

 

  

 

 

  

 

 

  

 

 

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

(Amounts in millions)

    2017      2016      2017      2016   

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

  $107  $(380 $464  $(155

Add: net income attributable to noncontrolling interests

   68  48  198  151
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

   175  (332  662  (4

Income (loss) from discontinued operations, net of taxes

   (9  15  (9  (25
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations

   184  (347  671  21

Less: income from continuing operations attributable tononcontrolling interests

   68  48  198  151
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations available to Genworth Financial,Inc.’s common stockholders

   116  (395  473  (130

Adjustments to income (loss) from continuing operations available toGenworth Financial, Inc.’s common stockholders:

     

Net investment (gains) losses, net (1)

   (62  (18  (161  (38

(Gains) losses from sale of businesses

   —     —     —     (3

(Gains) losses on early extinguishment of debt, net

   —     —     —     (48

Losses from life block transactions

   —     —     —     9

Expenses related to restructuring

   1  2  2  22

Fees associated with bond consent solicitation

   —     —     —     18

Taxes on adjustments

   21  6  56  (9
  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted operating income (loss) available to Genworth Financial, Inc.’scommon stockholders

  $76  $(405 $370  $(179
  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)For the three months ended September 30, 20162017 and 2015,2016, net investment gains (losses)(gains) losses were adjusted for net investment (gains) losses attributable to noncontrolling interests of $23 million and $2 million, respectively. For the nine months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of zero and $10$(15) million, respectively, and adjusted for net investment (gains) losses attributable to noncontrolling interests of $(2)$59 million and $8 million, respectively. For the nine months ended September 30, 2016 and 2015, net investment gains (losses) were adjusted for DAC and other intangible amortization and certain benefit reserves of $15 million and $24 million, respectively, and adjusted for net investment (gains) losses attributable to noncontrolling interests of $(8) million and $6 million, respectively.
(2)For the three and nine months ended September 30, 2015, (gains) losses on the early extinguishment of debt were adjusted for the portion attributable to noncontrolling interests of $(1) million.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

(Amounts in millions)

     2017        2016       2017       2016   

Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:

        

U.S. Mortgage Insurance segment

  $73   $67   $237   $189 
  

 

 

   

 

 

   

 

 

   

 

 

 

Canada Mortgage Insurance segment

   37   36   114   107
  

 

 

   

 

 

   

 

 

   

 

 

 

Australia Mortgage Insurance segment

   12   14   37   48
  

 

 

   

 

 

   

 

 

   

 

 

 

U.S. Life Insurance segment:

        

Long-term care insurance

   (5   (270   42   (199

Life insurance

   (9   48   6   110

Fixed annuities

   13   15   43   28
  

 

 

   

 

 

   

 

 

   

 

 

 

U.S. Life Insurance segment

   (1   (207   91   (61
  

 

 

   

 

 

   

 

 

   

 

 

 

Runoff segment

   13   12   38   22

Corporate and Other activities

   (58   (327   (147   (484

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

  $76   $(405  $370   $(179
  

 

 

   

 

 

   

 

 

   

 

 

 

The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:

 

(Amounts in millions)

  September 30,
2016
   December 31,
2015
   September 30,
2017
   December 31,
2016
 

Assets:

        

U.S. Mortgage Insurance segment

  $2,667   $2,899   $3,015   $2,674 

Canada Mortgage Insurance segment

   4,983    4,520    5,435    4,884 

Australia Mortgage Insurance segment

   2,794    2,987    2,814    2,619 

U.S. Life Insurance segment

   85,016    79,530    81,858    81,933 

Runoff segment

   11,503    12,115    11,149    11,352 

Corporate and Other activities

   1,889    4,253    358   1,196 
  

 

   

 

   

 

   

 

 

Segment assets from continuing operations

   108,852    106,304 

Assets held for sale

   —      127 
  

 

   

 

 

Total assets

  $108,852   $106,431   $104,629   $104,658 
  

 

   

 

   

 

   

 

 

(12)(11) Commitments and Contingencies

(a) Litigation and Regulatory Matters

We face the 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-termin-forcelong-term care insurance premiums, payment of contingent or other sales commissions, claims payments and procedures, product design, product disclosure, product administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 mortgage insurance policy rescissions and curtailments, and breaching fiduciary or other duties to customers, including but not limited to breach of customer information. Plaintiffs in class action and other lawsuits against us may seek very large 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, post-closing obligations associated with previous dispositions and securities lawsuits. In 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 or results of operations.

In a complaint filed in July 2016, Genworth Financial, Inc., Genworth Life and Annuity Insurance Company, Genworth Life Insurance Company of New York and Genworth Life Insurance Company were named in a putative class action lawsuit captionedEstate of Helen F. Walsh, Deceased v. Genworth Financial, Inc., et al, in the United States District Court for the Northern District of Ohio, Eastern Division. The complaint alleged

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

breach of contract involving optional inflation increase benefit riders on certain long-term care insurance policies and sought unspecified actual damages, declaratory relief, attorneys’ fees, costs and pre-judgment and post-judgment interest. On September 23, 2016, we filed a motion to transfer the action to Connecticut and a motion to dismiss the action. Pursuant to stipulation, on October 14, 2016, the court ordered the matter dismissed without prejudice.

In August 2014, Genworth Financial, Inc., its current chief executive officer and its then current chief financial officer were named in a putative class action lawsuit captionedManuel Esguerra v. Genworth Financial, Inc.,et al, in the United States District Court for the Southern District of New York. Plaintiff alleged securities law violations involving certain disclosures in 2013 and 2014 concerning Genworth’s long-term care insurance reserves. The lawsuit sought unspecified compensatory damages, costs and expenses, including counsel fees and expert fees. In October 2014, a putative class action lawsuit captionedCity of Pontiac General Employees’ Retirement System v. Genworth Financial, Inc.,et al., was filed in the United States District Court for the Eastern District of Virginia. This lawsuit names the same defendants, alleges the same securities law violations, seeks the same damages and covers the same class as theEsguerralawsuit. Following the filing of theCity of Pontiac lawsuit, theEsguerra lawsuit was voluntarily dismissed without prejudice allowing theCity of Pontiac lawsuit to proceed. In theCity of Pontiac lawsuit, the United States District Court for the Eastern District of Virginia appointed Her Majesty the Queen in Right of Alberta and Fresno County Employees’ Retirement Association as lead plaintiffs and designated the caption of the action asIn re Genworth Financial, Inc. Securities Litigation.On December 22, 2014, the lead plaintiffs filed an amended complaint. On February 5, 2015, we filed a motion to dismiss plaintiffs’ amended complaint. On May 1, 2015, the court denied the motion to dismiss. We engaged in mediation in the fourth quarter of 2015, continuing into the first quarter of 2016, and accrued $25 million in connection with this matter during the fourth quarter of 2015, which was the amount of our self-insured retention on our executive and organizational liability insurance program. On March 11, 2016, in connection with the mediation, we reached an agreement in principle to settle the action. On April 1, 2016, the parties entered into a stipulation and agreement of settlement. The settlement provides for a full release of all defendants in connection with the allegations made in the lawsuit. We believe that the plaintiffs’ claims are without merit, but we are settling the lawsuit to avoid the burden, risk and expense of further litigation. The agreement provides for a settlement payment to the class of $219 million, inclusive of all plaintiffs’ attorneys fees and expenses and settlement costs, of which $150 million was paid by our insurance carriers, and $69 million pre-tax was paid by Genworth. Our payment was made into an escrow account during the first quarter of 2016. We also incurred additional legal fees and expenses of approximately $10 million pre-tax, for a total additional pre-tax incurred amount of $79 million in the first quarter of 2016. On April 13, 2016, the court granted plaintiffs’ motion for preliminary approval of the settlement, provisional certification of the class for settlement purposes only, and issuance of notice to settlement class members. The court held a hearing on July 20, 2016 and approved the settlement. On September 26, 2016, the court entered final judgment in the action. The time to appeal the entry of this judgment expired on October 26, 2016. As a result of the approved settlement, all coverage available to Genworth under our 2014 executive and organizational liability insurance program was exhausted. Therefore, Genworth does not have coverage under the program to pay any future settlements or judgments in relation to litigation brought during the 2014 policy year, including theCity of Hialeah Employees’ Retirement System v. Genworth Financial, Inc.,et al., case discussed below.

In April 2014, Genworth Financial, Inc., its former chief executive officer and its then current chief financial officer were named in a putative class action lawsuit captionedCity of Hialeah Employees’ Retirement System v. Genworth Financial, Inc.,et al., in the United States District Court for the Southern District of New York. Plaintiff alleges securities law violations involving certain disclosures in 2012 concerning Genworth’s Australian mortgage insurance business, including our plans for an initial public offeringIPO of the business. The lawsuit seeks unspecified damages, costs and attorneys’ fees and such equitable/injunctive relief as the court may

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

deem proper. The United States District Court for the Southern District of New York appointed City of Hialeah Employees’ Retirement System and New Bedford Contributory Retirement System as lead plaintiffs and designated the caption of the action asIn re Genworth Financial, Inc. Securities Litigation. On October 3, 2014, the lead plaintiffs filed an amended complaint. On December 2, 2014, we filed a motion to dismiss plaintiffs’ amended complaint. On March 25, 2015, the United States District Court for the Southern District of New York denied the motion but entered an order dismissing the amended complaint with leave to replead. On April 17, 2015, plaintiffs filed a second amended complaint. We filed a motion to dismiss the second amended complaint and on June 16, 2015, the court denied the motion to dismiss. On January 22, 2016, we filed a motion for reconsideration of the court’s June 16, 2015 order denying our motion to dismiss which the court denied on March 3, 2016. On January 29, 2016, plaintiffs filed a motion for class certification which we opposed. On March 7, 2016, the court granted plaintiffs’ motion for class certification. We intend to vigorously defend this action. As discussed above, we have exhausted all coverage under our 2014 executive and organizational liability insurance program applicable to this case; therefore, there is no insurance coverage for Genworth with respect to any settlement or judgment amount related to this litigation. The parties engaged in settlement discussions. On March 21, 2017 in connection with those discussions, we reached an agreement in principle to settle the action, subject to the execution of a stipulation and agreement of settlement that provides a full release of all defendants in connection with the allegations made in the lawsuit, and for a settlement payment to the class of $20 million, inclusive of all plaintiffs’ attorneys fees and expenses and settlement costs, and subject further to the approval of the court. Subsequently, the parties executed a stipulation and agreement of settlement. We believe that the plaintiffs’ claims are without merit, but we are settling the lawsuit to avoid the burden, risk and expense of further litigation. On June 21, 2017, plaintiffs filed the stipulation and agreement of settlement and motion for preliminary approval with the court. On July 28, 2017, the court held a preliminary approval hearing, preliminarily approved the settlement, and set November 15, 2017 for a final approval hearing.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In January 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, its former chief financial officer and current and former members of its board of directors were named in a shareholder derivative suit filed by International Union of Operating Engineers Local No. 478 Pension Fund, Richard L. Salberg and David Pinkoski in the Court of Chancery of the State of Delaware. The case was captionedInt’l Union of Operating Engineers Local No. 478 Pension Fund, et al v. McInerney, et al. In February 2016, Genworth Financial, Inc., its current Chief Executive Officer,chief executive officer, its former Chief Executive Officer,chief executive officer, its former Chief Financial Officerchief financial officer and current and former members of its board of directors were named in a second shareholder derivative suit filed by Martin Cohen in the Court of Chancery of the State of Delaware. The case was captionedCohen v. McInerney, et al. On February 23, 2016, the Court of Chancery of the State of Delaware consolidated these derivative suits under the captionGenworth Financial, Inc. Consolidated Derivative Litigation. On March 28, 2016, plaintiffs in the consolidated action filed an amended complaint. The amended complaint alleges breaches of fiduciary duties concerning Genworth’s long-term care insurance reserves and concerning Genworth’s Australian mortgage insurance business, including our plans for an initial public offeringIPO of the business and seeks unspecified damages, costs, attorneys’ fees and such equitable relief as the court may deem proper. The amended consolidated complaint also adds Genworth’s current Chief Financial Officerchief financial officer as a defendant, based on the current Chief Financial Officer’schief financial officer’s alleged conduct in her former capacity as Genworth’s Controllercontroller and principal accounting officer. We moved to dismiss the consolidated action on May 27, 2016. Thereafter, plaintiffs filed a substantially similar second amended complaint which we moved to dismiss on September 16, 2016. The motion is fully briefed and awaiting disposition by the court.

In October 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, its current chief financial officer, its former chief financial officer and current and former members of its board of directors were named in a shareholder derivative suit filed by Esther Chopp in the Court of Chancery of the State of Delaware. The case is captionedChopp v. McInerney, et al. The complaint alleges that Genworth’s board of directors wrongfully refused plaintiff’s demand to commence litigation on behalf of Genworth and asserts claims for breaches of fiduciary duties, waste, contribution and indemnification, and unjust enrichment concerning Genworth’s long-term care insurance reserves and concerning Genworth’s Australian mortgage insurance business, including our plans for an initial public offeringIPO of the business, and seeks unspecified damages, costs, attorneys’ fees and such equitable relief as the court may deem proper. We intend to filefiled a motion to dismiss.dismiss on November 14, 2016.

In NovemberDecember 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, two former chief financial officers, and two of its current board of directorsinsurance subsidiaries were named as defendants in a putative class action lawsuit captionedFavermanLeifer, et al v. Genworth Financial, Inc., et al,, in the

United States District Court for the Eastern District of Virginia, Richmond Division. Plaintiffs allege that the defendants’ financial disclosures and alleged misrepresentations concerning Genworth’s long-term care insurance reserves caused harm to current and former long-term care insurance policyholders and seek unspecified damages, declaratory and injunctive relief, attorneys’ fees, costs andpre-judgment and post-judgment interest. We filed a motion to dismiss on March 27, 2017. Plaintiffs filed an amended complaint on April 10, 2017. We filed a motion to dismiss on May 22, 2017. On June 20, 2017, plaintiffs filed a notice of voluntary dismissal without prejudice. On June 26, 2017, the court so ordered the notice of withdrawal of first amended complaint and of voluntary dismissal without prejudice against all defendants.

In January 2017, two putative stockholder class action lawsuits, captionedRice v. Genworth Financial Incorporated, et al, andJames v. Genworth Financial, Inc. et al,were filed in the United States District Court for the Eastern District of Virginia, Richmond Division, against Genworth and its board of directors. A third putative stockholder class action lawsuit captionedRosenfeld Family Trust v. Genworth Financial, Inc. et al, was filed in

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

the United States District Court for the District of Delaware against Genworth and its board of directors. In February 2017, a fourth putative class action lawsuit captionedChopp v. Genworth Financial, Inc. et al, was filed in the United States District Court for the District of Delaware against Genworth and its board of directors and a fifth putative class action lawsuit captionedRatliff v. Genworth Financial, Inc. et al, was filed in the United States District Court for the Eastern District of Virginia, Richmond Division.Division, against Genworth and its board of directors. The complaints in all five actions allege, among other things, that the preliminary proxy statement filed by Genworth with the SEC on December 21, 2016 contains false and/or materially misleading statements and/or omits material information. The complaints assert claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, and seek equitable relief, including declaratory and injunctive relief, and an award of attorneys’ fees and expenses. On February 2, 2017, the plaintiff inRice filed a motion for a preliminary injunction to enjoin the transaction described in the preliminary proxy. On February 10, 2017, defendants filed an opposition to the preliminary injunction motion in theRice action. Also on February 10, 2017, the plaintiff inRosenfeld Family Trust filed a motion for a preliminary injunction to enjoin the transaction described in the preliminary proxy. On February 14, 2017, defendants filed a motion to transfer theRosenfeld Family Trustaction to the Eastern District of Virginia. On February 15, 2017, defendants filed a motion to transfer theChopp action to the Eastern District of Virginia. On February 21, 2017, the parties to the Eastern District of Virginia actions (Rice, James andRatliff) reached an agreement in principle to resolve the pending preliminary injunction motion in the Eastern District of Virginia through additional disclosure prior to the March 7, 2017 stockholder vote on the proposed merger transaction. On February 22, 2017, the plaintiffs in the Eastern District of Virginia withdrew their preliminary injunction motion in consideration of the agreed disclosures to be filed in a Form8-K by February 24, 2017. Also on February 22, 2017, the court in the District of Delaware suspended briefing on the motion for preliminary injunction in theRosenfeld Family Trust action and entered an order transferring theRosenfeld Family Trust andChopp actions to the Eastern District of Virginia. On February 23, 2017, the court in the Eastern District of Virginia set theRosenfeld Family Trust preliminary injunction motion for a hearing on March 1, 2017. On February 26, 2017, defendants filed an opposition to the preliminary injunction motion in theRosenfeld Family Trustaction. On February 27, 2017, the parties in theRosenfeld Family Trust action reached an agreement in principle to resolve the pending preliminary injunction motion in theRosenfeld Family Trust action through additional disclosure prior to the March 7, 2017 stockholder vote on the proposed merger transaction, and the plaintiff in theRosenfeld Family Trustaction withdrew its preliminary injunction motion in consideration of the agreed disclosures as filed in a Form8-K on February 28, 2017. On March 6, 2017, the court in the Eastern District of Virginia entered an order setting a schedule for proceedings to appoint a lead plaintiff and lead counsel for the purported class action. On March 7, 2017, the court in the Eastern District of Virginia consolidated theRice,James,Ratliff,Rosenfeld Family Trust, andChopp actions. On July 5, 2017, the court in the Eastern District of Virginia heard oral argument on the motion to appoint a lead plaintiff and lead counsel. On August 25, 2017, the court in the Eastern District of Virginia entered an order appointing the plaintiffs Alexander Rice and Brian James as lead plaintiffs and their counsel as lead counsel.

In April 2017, one of our insurance subsidiaries, Genworth Life and Annuity Insurance Company (“GLAIC”) was named as a defendant in a putative class action lawsuit captionedAvazian, et al v. Genworth Life and Annuity Insurance Company, et al, in the United States District Court for the Central District of California. Plaintiff alleges breach of fiduciary dutycontract and breach of the covenant of good faith and fair dealing based upon GLAIC’s termination of plaintiff’s life insurance policy for nonpayment of premium. Plaintiff alleges that the termination for nonpayment of premium failed to comply with certain notice requirements of the California Insurance Code and seeks certification as a California class action on behalf of all insureds and beneficiaries of life insurance policies issued or delivered by GLAIC in California before January 1, 2013 who lost either their coverage or their ability to enjoin the acquisitionmake a claim because of the publicly owned sharestermination of Genworth Financial, Inc. common stocktheir policies by Asia Pacific Global Capital Co., Ltd., through its wholly-owned subsidiary, Asia Pacific Global Capital USA Corporation. The lawsuitGLAIC for nonpayment of premium, and further seeks unspecified rescissory damages, costs, attorneys’ pre-judgment and post-judgment interest, punitive damages,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

fees, experts’ feescosts and such other and further equitable relief as the court may deemdeems just and proper. On June 23, 2017, we filed a motion to dismiss the complaint. On July 10, 2017, the plaintiff filed a notice of voluntary dismissal without prejudice. On July 12, 2017, the court ordered that this action and all claims therein, are dismissed in their entirety without prejudice. In August 2017, plaintiffre-filed a similar putative class action lawsuit, along with another plaintiff, Michael Torres, captionedAvazian, et al v. Genworth Life and Annuity Insurance Company, et al, in the Superior Court for the State of California, County of Los Angeles, naming GLAIC as a defendant. Plaintiffs allege similar causes of action as the previously dismissed lawsuit, and have added a claim for alleged violation of California Business and Professions Code. On August 31, 2017, we filed notice of the removal of this matter to the United States District Court for the Central District of California and on October 6, 2017, filed a motion to dismiss the complaint. We intend to file a motion to dismiss.vigorously defend the action.

At this time, other than as noted above, we cannot determine or predict the ultimate outcome of any of the pending legal and regulatory matters specifically identified above or the likelihood of potential future legal and regulatory matters against us. Except as disclosed above, we also are not able to provide an estimate or range of reasonably possible losses related to these matters. Therefore, 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 additional unrelated investigations and 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.

(b) Commitments

As of September 30, 2016,2017, we were committed to fund $188$319 million in limited partnership investments, $106$40 million in U.S. commercial mortgage loan investments and $43$21 million in private placement investments.

(13)(12) Changes in Accumulated Other Comprehensive Income (Loss)

The following tables show the changes in accumulated other comprehensive income (loss), net of taxes, by component as of and for the periods indicated:

 

(Amounts in millions)

  Net
unrealized
investment
gains
(losses)
(1)
 Derivatives
qualifying as
hedges
 (2)
 Foreign
currency
translation
and other
adjustments
 Total   Net
unrealized
investment
gains
(losses) (1)
 Derivatives
qualifying as
hedges (2)
 Foreign
currency
translation
and other
adjustments
 Total 

Balances as of July 1, 2016

  $2,789   $2,439   $(140 $5,088 

Balances as of July 1, 2017

  $1,180  $2,064  $(149 $3,095 

OCI before reclassifications

   86   72   (1 157    (70)   10  81 21

Amounts reclassified from (to) OCI

   (9 (18  —    (27   (19)   (22)   —    (41
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Current period OCI

   77   54   (1 130    (89)   (12)  81 (20
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balances as of September 30, 2016 before noncontrolling interests

   2,866   2,493   (141 5,218 

Balances as of September 30, 2017 before noncontrolling interests

   1,091   2,052  (68 3,075 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Less: change in OCI attributable to noncontrolling interests

   6    —     10  16    (17)   —    57 40
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balances as of September 30, 2016

  $2,860   $2,493   $(151 $5,202 

Balances as of September 30, 2017

  $1,108  $2,052  $(125 $3,035 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1)Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
(2)See note 5 for additional information.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(Amounts in millions)

  Net
unrealized
investment
gains
(losses)
(1)
 Derivatives
qualifying as
hedges
 (2)
 Foreign
currency
translation
and other
adjustments
 Total   Net
unrealized
investment
gains
(losses) (1)
 Derivatives
qualifying as
hedges (2)
 Foreign
currency
translation
and other
adjustments
 Total 

Balances as of July 1, 2015

  $1,628   $1,913   $(232 $3,309 

Balances as of July 1, 2016

  $2,789  $2,439  $(140 $5,088 

OCI before reclassifications

   79   229   (302 6    86   72  (1 157

Amounts reclassified from (to) OCI

   8   (12  —    (4   (9)   (18)   —    (27
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Current period OCI

   87   217   (302 2    77   54  (1 130
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balances as of September 30, 2015 before noncontrolling interests

   1,715   2,130   (534 3,311 

Balances as of September 30, 2016 before noncontrolling interests

   2,866   2,493  (141 5,218 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Less: change in OCI attributable to noncontrolling interests

   (16  —     (151 (167   6   —    10 16
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balances as of September 30, 2015

  $1,731   $2,130   $(383 $3,478 

Balances as of September 30, 2016

  $2,860  $2,493  $(151 $5,202 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1)Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
(2)See note 5 for additional information.

 

(Amounts in millions)

  Net
unrealized
investment
gains
(losses)
(1)
 Derivatives
qualifying as
hedges
(2)
 Foreign
currency
translation
and other
adjustments
 Total   Net
unrealized
investment
gains
(losses) (1)
 Derivatives
qualifying as
hedges (2)
 Foreign
currency
translation
and other
adjustments
 Total 

Balances as of January 1, 2016

  $1,254   $2,045   $(289 $3,010 

Balances as of January 1, 2017

  $1,262  $2,085  $(253 $3,094 

OCI before reclassifications

   1,692   507   223  2,422    (95)   29  261 195

Amounts reclassified from (to) OCI

   (62 (59  —    (121   (77)   (62)   —    (139
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Current period OCI

   1,630   448   223  2,301    (172)   (33)  261 56
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balances as of September 30, 2016 before noncontrolling interests

   2,884   2,493   (66 5,311 

Balances as of September 30, 2017 before noncontrolling interests

   1,090   2,052  8 3,150 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Less: change in OCI attributable to noncontrolling interests

   24    —     85  109    (18)   —    133 115
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balances as of September 30, 2016

  $2,860   $2,493   $(151 $5,202 

Balances as of September 30, 2017

  $1,108  $2,052  $(125 $3,035 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1)Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
(2)See note 5 for additional information.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(Amounts in millions)

  Net
unrealized
investment
gains
(losses)
(1)
 Derivatives
qualifying as
hedges
(2)
 Foreign
currency
translation
and other
adjustments
 Total   Net
unrealized
investment
gains
(losses) (1)
 Derivatives
qualifying as
hedges (2)
 Foreign
currency
translation
and other
adjustments
 Total 

Balances as of January 1, 2015

  $2,453   $2,070   $(77 $4,446 

Balances as of January 1, 2016

  $1,254  $2,045  $(289 $3,010 

OCI before reclassifications

   (727 99   (619 (1,247   1,692   507  223 2,422 

Amounts reclassified from (to) OCI

   (1 (39  —    (40   (62)   (59)   —    (121
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Current period OCI

   (728 60   (619 (1,287   1,630   448  223 2,301 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balances as of September 30, 2015 before noncontrolling interests

   1,725   2,130   (696 3,159 

Balances as of September 30, 2016 before noncontrolling interests

   2,884   2,493  (66 5,311 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Less: change in OCI attributable to noncontrolling interests

   (6  —     (313 (319   24   —    85 109
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balances as of September 30, 2015

  $1,731   $2,130   $(383 $3,478 

Balances as of September 30, 2016

  $2,860  $2,493  $(151 $5,202 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1)Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
(2)See note 5 for additional information.

The foreign currency translation and other adjustments balance included $5$(5) million and $31$5 million, respectively, net of taxes of $2$1 million and $14$2 million, respectively, related to a net unrecognized postretirement benefit obligation as of September 30, 20162017 and 2015. Amount2016. The amount also includedincludes taxes of $(37)$28 million and $(93)$37 million, respectively, related to foreign currency translation adjustments as of September 30, 20162017 and 2015.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2016.

The following table shows reclassifications in (out) of accumulated other comprehensive income (loss), net of taxes, for the periods presented:

 

 Amount reclassified from accumulated other
comprehensive income (loss)
 

Affected line item in the

consolidated statements

of income

  Amount reclassified from accumulated
other comprehensive income (loss)
 

Affected line item
in the consolidated statements of
income

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

(Amounts in millions)

 2016 2015 2016 2015    2017   2016   2017   2016  

Net unrealized investment (gains) losses:

           

Unrealized (gains) losses on investments(1)

 $(13 $13  $(95 $(1 Net investment (gains) losses  $(29 $(13 $(118 $(95 Net investment (gains) losses

Provision for income taxes

 4  (5 33   —    Provision for income taxes   10 4 41 33 Provision for income taxes
 

 

  

 

  

 

  

 

    

 

  

 

  

 

  

 

  

Total

 $(9 $8  $(62 $(1   $(19 $(9 $(77 $(62 
 

 

  

 

  

 

  

 

    

 

  

 

  

 

  

 

  

Derivatives qualifying as hedges:

           

Interest rate swaps hedging assets

 $(27 $(22 $(80 $(61 Net investment income  $(34 $(27 $(95 $(80 Net investment income

Interest rate swaps hedging assets

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

Inflation indexed swaps

  —    5  (2 2  Net investment income   —     —     —    (2 Net investment income

Inflation indexed swaps

  —     —    (7  —    Net investment (gains) losses   —     —     —    (7 Net investment (gains) losses

Forward bond purchase commitments

  —    (1  —    (1 Net investment income

Provision for income taxes

 9  6  31  21  Provision for income taxes   12 9 35 31 Provision for income taxes
 

 

  

 

  

 

  

 

    

 

  

 

  

 

  

 

  

Total

 $(18 $(12 $(59 $(39   $(22 $(18 $(62 $(59 
 

 

  

 

  

 

  

 

    

 

  

 

  

 

  

 

  

 

(1)Amounts exclude adjustments to DAC, present value of future profits, sales inducements and benefit reserves.

(14) Sale of Businesses

European mortgage insurance business

As discussed in note 1, on May 9, 2016, GMICO completed the sale of our European mortgage insurance business to AmTrust Financial Services, Inc. and received net proceeds of approximately $50 million. As a result of the completion of the sale, we recorded an additional pre-tax loss of $2 million in the second quarter of 2016. In the first quarter of 2016, we also recorded an estimated pre-tax loss of $7 million and a tax benefit of $27 million primarily related to the reversal of a deferred tax valuation allowance for a total net after-tax gain of $18 million in 2016.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The major assets and liability categories of our European mortgage insurance business were as follows as of the dates indicated:

(Amounts in millions)

  September 30,
2016
   December 31,
2015
 

Assets

    

Investments:

    

Fixed maturity securities available-for-sale, at fair value

  $—     $195 

Other invested assets

   —      6 
  

 

 

   

 

 

 

Total investments

   —      201 

Cash and cash equivalents

   —      28 

Accrued investment income

   —      3 

Reinsurance recoverable

   —      21 

Other assets

   —      14 
  

 

 

   

 

 

 

Assets held for sale

   —      267 

Fair value less closing costs impairment

   —      (140
  

 

 

   

 

 

 

Total assets held for sale

  $—     $127 
  

 

 

   

 

 

 

Liabilities

    

Liability for policy and contract claims

  $—     $56 

Unearned premiums

   —      58 

Other liabilities

   —      12 

Deferred tax liability

   —      1 
  

 

 

   

 

 

 

Liabilities held for sale

  $—     $127 
  

 

 

   

 

 

 

Deferred tax liabilities that result in future taxable or deductible amounts to the remaining consolidated group have been reflected in liabilities of continuing operations and not reflected in liabilities held for sale.

Lifestyle protection insurance business

On December 1, 2015, we completed the sale of our lifestyle protection insurance business and received approximately $493 million with net proceeds of approximately $400 million. In the third quarter of 2016, we recorded an after-tax gain of $15 million primarily related to tax items. In the second quarter of 2016, we finalized the closing balance sheet and purchase price adjustments and recorded an additional after-tax loss of $21 million primarily for tax related items. During the first quarter of 2016, we recorded an additional after-tax loss of approximately $19 million primarily related to claim liabilities and taxes we retain. The total additional after-tax loss recorded in 2016 was $25 million.

We retained liabilities for taxes and certain claims and sales practices that occurred while we owned the lifestyle protection insurance business. We have established our current best estimates for these liabilities, where appropriate; however, there may be future adjustments to these estimates.

In connection with the settlement of the U.K. pension plan as part of the sale of our lifestyle protection insurance business, we purchased a group annuity contract. The amounts associated with the group annuity contract were held in a third-party trust for the benefit of the participants until individual annuity contracts were transferred to the participants on September 1, 2016. As a result, the U.K. pension plan was completely settled in September 2016.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Life insurance business

On June 24, 2016, we completed the sale of our term life insurance new business platform to Pacific Life Insurance Company for a purchase price of $29 million. The sale primarily included a building located in Lynchburg, Virginia and software. As a result of this transaction, we recorded a pre-tax gain of $12 million and taxes of $4 million.

(15)(13) Condensed Consolidating Financial Information

Genworth Financial provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior notes and the holders of the senior notes, on an unsecured unsubordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior notes indenture in respect of such senior notes. Genworth Financial also provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding subordinated notes and the holders of the subordinated notes, on an unsecured subordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, the outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the subordinated notes indenture in respect of the subordinated notes. Genworth Holdings is a direct, 100% owned subsidiary of Genworth Financial.

The following condensed consolidating financial information of Genworth Financial and its direct and indirect subsidiaries have been prepared pursuant to rules regarding the preparation of consolidating financial information ofRegulation S-X. The condensed consolidating financial information has been prepared as if the guarantee had been in place during the periods presented herein.

The condensed consolidating financial information presents the condensed consolidating balance sheet information as of September 30, 20162017 and December 31, 2015,2016, the condensed consolidating income statement information and the condensed consolidating comprehensive income statement information for the three and nine months ended September 30, 20162017 and 20152016 and the condensed consolidating cash flows statement information for the nine months ended September 30, 20162017 and 2015.2016.

The condensed consolidating financial information reflects Genworth Financial (“Parent Guarantor”), Genworth Holdings (“Issuer”) and each of Genworth Financial’s other direct and indirect subsidiaries (the “All Other Subsidiaries”) on a combined basis, none of which guarantee the senior notes or subordinated notes, as well as the eliminations necessary to present Genworth Financial’s financial information on a consolidated basis and total consolidated amounts.

The accompanying condensed consolidating financial information is presented based on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries and intercompany activity.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating balance sheet information as of September 30, 2016:2017:

 

(Amounts in millions)

 Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated  Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated 

Assets

          

Investments:

          

Fixed maturity securities available-for-sale, at fair value

 $—    $—    $63,980  $(200 $63,780  $—    $—    $62,752  $(200 $62,552 

Equity securities available-for-sale, at fair value

  —     —    590   —    590   —     —     765  —     765

Commercial mortgage loans

  —     —    6,017   —    6,017   —     —     6,268   —     6,268 

Restricted commercial mortgage loans related to securitization entities

  —     —    134   —    134   —     —     111  —     111

Policy loans

  —     —    1,751   —    1,751   —     —     1,818   —     1,818 

Other invested assets

  —    102  2,582  (8 2,676   —     75  1,517   (2  1,590 

Restricted other invested assets related to securitization entities, at fair value

  —     —    312   —    312 

Investments in subsidiaries

 14,945  14,517   —    (29,462  —     13,191   12,459   —     (25,650  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total investments

 14,945  14,619  75,366  (29,670 75,260   13,191   12,534   73,231   (25,852  73,104 
 

 

  

 

  

 

  

 

  

 

 

Cash and cash equivalents

  —    1,065  2,013   —    3,078   —    754 2,082   —    2,836 

Accrued investment income

  —     —    677   —    677   —     —    639  —    639

Deferred acquisition costs

  —     —    3,982   —    3,982   —     —    2,342   —    2,342 

Intangible assets and goodwill

  —     —    258   —    258   —     —    315  —    315

Reinsurance recoverable

  —     —    17,542   —    17,542   —     —    17,553   —    17,553 

Other assets

 3  188  380  (1 570   —    90 470 (8 552

Intercompany notes receivable

  —    60  85  (145  —     —    161 33 (194  —   

Deferred tax assets

  —     —    24  —    24

Separate account assets

  —     —    7,485   —    7,485   —     —    7,264   —    7,264 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total assets

 $14,948  $15,932  $107,788  $(29,816 $108,852  $13,191  $13,539  $103,953  $(26,054 $104,629 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Liabilities and equity

          

Liabilities:

          

Future policy benefits

 $—    $—    $37,405  $—    $37,405  $—    $—    $38,022  $—    $38,022 

Policyholder account balances

  —     —    25,867   —    25,867   —     —     24,531   —     24,531 

Liability for policy and contract claims

  —     —    8,869   —    8,869   —     —     9,384   —     9,384 

Unearned premiums

  —     —    3,464   —    3,464   —     —     3,512   —     3,512 

Other liabilities

 30  305  2,955  (10 3,280   8  163  1,842   (11  2,002 

Intercompany notes payable

 60  285   —    (345  —     145  232  17  (394  —   

Borrowings related to securitization entities

  —     —    78   —    78   —     —     59  —     59

Non-recourse funding obligations

  —     —    310   —    310   —     —     310  —     310

Long-term borrowings

  —    3,714  480   —    4,194   —     3,722   502  —     4,224 

Deferred tax liability

 (13 (761 1,925   —    1,151   (31  (862  1,127   —     234

Separate account liabilities

  —     —    7,485   —    7,485   —     —     7,264   —     7,264 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities

 77  3,543  88,838  (355 92,103   122  3,255   86,570   (405  89,542 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Equity:

          

Common stock

 1   —     —     —    1   1  —     3  (3  1

Additional paid-in capital

 11,959  9,097  20,251  (29,348 11,959   11,973   9,096   18,381   (27,477  11,973 

Accumulated other comprehensive income (loss)

 5,202  5,188  5,255  (10,443 5,202   3,035   3,040   3,057   (6,097  3,035 

Retained earnings

 409  (1,896 (8,734 10,630  409   760  (1,852  (6,376  8,228   760

Treasury stock, at cost

 (2,700  —     —     —    (2,700  (2,700  —     —     —     (2,700
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

 14,871  12,389  16,772  (29,161 14,871   13,069   10,284   15,065   (25,349  13,069 

Noncontrolling interests

  —     —    2,178  (300 1,878   —     —     2,318   (300  2,018 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total equity

 14,871  12,389  18,950  (29,461 16,749   13,069   10,284   17,383   (25,649  15,087 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities and equity

 $14,948  $15,932  $107,788  $(29,816 $108,852  $13,191  $13,539  $103,953  $(26,054 $104,629 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating balance sheet information as of December 31, 2015:2016:

 

(Amounts in millions)

 Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated  Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated 

Assets

          

Investments:

          

Fixed maturity securities available-for-sale, at fair value

 $—    $150  $58,247  $(200 $58,197  $—    $—    $60,772  $(200 $60,572 

Equity securities available-for-sale, at fair value

  —     —    310   —    310   —     —    632  —    632

Commercial mortgage loans

  —     —    6,170   —    6,170   —     —    6,111   —    6,111 

Restricted commercial mortgage loans related to securitization entities

  —     —    161   —    161   —     —    129  —    129

Policy loans

  —     —    1,568   —    1,568   —     —    1,742   —    1,742 

Other invested assets

  —    114  2,198  (3 2,309   —    105 1,966   —    2,071 

Restricted other invested assets related to securitization entities, at fair value

  —     —    413   —    413   —     —    312  —    312

Investments in subsidiaries

 12,814  12,989   —    (25,803  —    12,730  12,308   —    (25,038  —   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total investments

 12,814  13,253  69,067  (26,006 69,128  12,730  12,413  71,664  (25,238 71,569 
 

 

  

 

  

 

  

 

  

 

 

Cash and cash equivalents

  —    1,124  4,841   —    5,965   —    998 1,786   —    2,784 

Accrued investment income

  —     —    657  (4 653   —     —    663 (4 659

Deferred acquisition costs

  —     —    4,398   —    4,398   —     —    3,571   —    3,571 

Intangible assets and goodwill

  —     —    357   —    357   —     —    348  —    348

Reinsurance recoverable

  —     —    17,245   —    17,245   —     —    17,755   —    17,755 

Other assets

  —    199  323  (2 520  9 134 530  —    673

Intercompany notes receivable

  —    2  458  (460  —     —    84 67 (151  —   

Deferred tax assets

 25  1,038  (908  —    155  28  —    (28  —     —   

Separate account assets

  —     —    7,883   —    7,883   —     —    7,299   —    7,299 

Assets held for sale

  —     —    127   —    127 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total assets

 $12,839  $15,616  $104,448  $(26,472 $106,431  $12,767  $13,629  $103,655  $(25,393 $104,658 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Liabilities and equity

          

Liabilities:

          

Future policy benefits

 $—    $—    $36,475  $—    $36,475  $—    $—    $37,063  $—    $37,063 

Policyholder account balances

  —     —    26,209   —    26,209   —     —    25,662   —    25,662 

Liability for policy and contract claims

  —     —    8,095   —    8,095   —     —    9,256   —    9,256 

Unearned premiums

  —     —    3,308   —    3,308   —     —    3,378   —    3,378 

Other liabilities

 13  279  2,722  (10 3,004  39 301 2,581  (5 2,916 

Intercompany notes payable

 2  658   —    (660  —    84 267  —    (351  —   

Borrowings related to securitization entities

  —     —    179   —    179   —     —    74  —    74

Non-recourse funding obligations

  —     —    1,920   —    1,920   —     —    310  —    310

Long-term borrowings

  —    4,078  492   —    4,570   —    3,716  464  —    4,180 

Deferred tax liability

  —     —    24   —    24   —    (816 869  —    53

Separate account liabilities

  —     —    7,883   —    7,883   —     —    7,299   —    7,299 

Liabilities held for sale

  —     —    127   —    127 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total liabilities

 15  5,015  87,434  (670 91,794  123 3,468  86,956  (356 90,191 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Equity:

          

Common stock

 1   —     —     —    1  1  —     —     —    1

Additional paid-in capital

 11,949  9,097  17,007  (26,104 11,949  11,962  9,097  20,252  (29,349 11,962 

Accumulated other comprehensive income (loss)

 3,010  3,116  3,028  (6,144 3,010  3,094  3,135  3,116  (6,251 3,094 

Retained earnings

 564  (1,612 (5,134 6,746  564  287 (2,071 (8,792 10,863  287

Treasury stock, at cost

 (2,700  —     —     —    (2,700 (2,700  —     —     —    (2,700
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

 12,824  10,601  14,901  (25,502 12,824  12,644  10,161  14,576  (24,737 12,644 

Noncontrolling interests

  —     —    2,113  (300 1,813   —     —    2,123  (300 1,823 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total equity

 12,824  10,601  17,014  (25,802 14,637  12,644  10,161  16,699  (25,037 14,467 
 

 

  

 

  

 

  

 

  

 

�� 

 

  

 

  

 

  

 

  

 

 

Total liabilities and equity

 $12,839  $15,616  $104,448  $(26,472 $106,431  $12,767  $13,629  $103,655  $(25,393 $104,658 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating income statement information for the three months ended September 30, 2017:

(Amounts in millions)

  Parent
Guarantor
  Issuer  All Other
Subsidiaries
  Eliminations  Consolidated 

Revenues:

      

Premiums

  $—    $—    $1,135  $—    $1,135 

Net investment income

   (1  2  800  (4  797

Net investment gains (losses)

   —     (4  89  —     85

Policy fees and other income

   —     4  195  (1  198
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

   (1  2  2,219   (5  2,215 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Benefits and expenses:

      

Benefits and other changes in policy reserves

   —     —     1,344   —     1,344 

Interest credited

   —     —     164  —     164

Acquisition and operating expenses, net of deferrals

   20  (2  247  —     265

Amortization of deferred acquisition costs and intangibles

   —     —     83  —     83

Interest expense

   —     66  12  (5  73
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total benefits and expenses

   20  64  1,850   (5  1,929 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries

   (21  (62  369  —     286

Provision (benefit) for income taxes

   (5  (21  128  —     102

Equity in income of subsidiaries

   123  71  —     (194  —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income from continuing operations

   107  30  241  (194  184

Income (loss) from discontinued operations, net of taxes

   —     4  (13  —     (9
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

   107  34  228  (194  175

Less: net income attributable to noncontrolling interests

   —     —     68  —     68
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $107  $34  $160  $(194 $107 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating income statement information for the three months ended September 30, 2016:

 

(Amounts in millions)

  Parent
Guarantor
  Issuer  All Other
Subsidiaries
  Eliminations  Consolidated 

Revenues:

      

Premiums

  $—    $—    $1,108  $—    $1,108 

Net investment income

   (2  1  810  (4  805

Net investment gains (losses)

   —     (1  21  —     20

Policy fees and other income

   —     —     217  —     217
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

   (2  —     2,156   (4  2,150 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Benefits and expenses:

      

Benefits and other changes in policy reserves

   —     —     1,662   —     1,662 

Interest credited

   —     —     173  —     173

Acquisition and operating expenses, net of deferrals

   13  —     256  —     269

Amortization of deferred acquisition costs and intangibles

   —     —     94  —     94

Interest expense

   —     69  12  (4  77
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total benefits and expenses

   13  69  2,197   (4  2,275 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations before income taxes and equity in loss of subsidiaries

   (15  (69  (41  —     (125

Provision (benefit) for income taxes

   (4  155  71  —     222

Equity in loss of subsidiaries

   (369  (207  —     576  —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Loss from continuing operations

   (380  (431  (112  576  (347

Income from discontinued operations, net of taxes

   —     11  4  —     15
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

   (380  (420  (108  576  (332

Less: net income attributable to noncontrolling interests

   —     —     48  —     48
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $(380 $(420 $(156 $576  $(380
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating income statement information for the threenine months ended September 30, 2015:2017:

 

(Amounts in millions)

  Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated   Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated 

Revenues:

            

Premiums

  $—    $—    $1,145  $—    $1,145   $—    $—    $3,382  $—    $3,382 

Net investment income

   (1  —    788  (4 783    (3 5 2,397  (11 2,388 

Net investment gains (losses)

   —    21  (72  —    (51   —    (12 232  —    220

Policy fees and other income

   —    (10 233   —    223    —    3 617 (1 619
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total revenues

   (1 11  2,094  (4 2,100    (3 (4 6,628  (12 6,609 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Benefits and expenses:

            

Benefits and other changes in policy reserves

   —     —    1,290   —    1,290    —     —    3,796   —    3,796 

Interest credited

   —     —    179   —    179    —     —    494  —    494

Acquisition and operating expenses, net of deferrals

   9  1  304   —    314    48 (2 729  —    775

Amortization of deferred acquisition costs and intangibles

   —     —    563   —    563    —     —    316  —    316

Interest expense

   —    77  32  (4 105    —    187 34 (12 209
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total benefits and expenses

   9  78  2,368  (4 2,451    48 185 5,369  (12 5,590 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Loss from continuing operations before income taxes and equity in loss of subsidiaries

   (10 (67 (274  —    (351

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries

   (51 (189 1,259   —    1,019 

Provision (benefit) for income taxes

   (40 21  (115  —    (134   (9 (65 422  —    348

Equity in loss of subsidiaries

   (314 (270  —    584   —   

Equity in income of subsidiaries

   506 339  —    (845  —   
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Loss from continuing operations

   (284 (358 (159 584  (217

Loss from discontinued operations, net of taxes

   —     —    (21  —    (21

Income from continuing operations

   464 215 837 (845 671

Income (loss) from discontinued operations, net of taxes

   —    4 (13  —    (9
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Net loss

   (284 (358 (180 584  (238

Net income

   464 219 824 (845 662

Less: net income attributable to noncontrolling interests

   —     —    46   —    46    —     —    198  —    198
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

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

  $(284 $(358 $(226 $584  $(284

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

  $464  $219  $626  $(845 $464 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating income statement information for the nine months ended September 30, 2016:

 

(Amounts in millions)

  Parent
Guarantor
  Issuer  All Other
Subsidiaries
  Eliminations  Consolidated 

Revenues:

      

Premiums

  $—    $—    $3,029  $—    $3,029 

Net investment income

   (3  1  2,386   (11  2,373 

Net investment gains (losses)

   —     (14  45  —     31

Policy fees and other income

   —     (6  745  (1  738
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

   (3  (19  6,205   (12  6,171 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Benefits and expenses:

      

Benefits and other changes in policy reserves

   —     —     3,715   —     3,715 

Interest credited

   —     —     523  —     523

Acquisition and operating expenses, net of deferrals

   118  38  834  —     990

Amortization of deferred acquisition costs and intangibles

   —     —     305  —     305

Interest expense

   1  210  63  (12  262
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total benefits and expenses

   119  248  5,440   (12  5,795 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations before income taxes and equity in income (loss) of subsidiaries

   (122  (267  765  —     376

Provision (benefit) for income taxes

   (31  88  298  —     355

Equity in income (loss) of subsidiaries

   (62  78  —     (16  —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations

   (153  (277  467  (16  21

Loss from discontinued operations, net of taxes

   (2  (7  (16  —     (25
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

   (155  (284  451  (16  (4

Less: net income attributable to noncontrolling interests

   —     —     151  —     151
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $(155 $(284 $300  $(16 $(155
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating income statement information for the nine months ended September 30, 2015:

(Amounts in millions)

  Parent
Guarantor
  Issuer  All Other
Subsidiaries
  Eliminations  Consolidated 

Revenues:

      

Premiums

  $—    $—    $3,422  $—    $3,422 

Net investment income

   (2  1   2,369   (11  2,357 

Net investment gains (losses)

   —     37   (96  —     (59

Policy fees and other income

   —     (30  703   (1  672 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

   (2  8   6,398   (12  6,392 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Benefits and expenses:

      

Benefits and other changes in policy reserves

   —     —     3,714   —     3,714 

Interest credited

   —     —     540   —     540 

Acquisition and operating expenses, net of deferrals

   23   2   851   —     876 

Amortization of deferred acquisition costs and intangibles

   —     —     759   —     759 

Interest expense

   —     231   96   (12  315 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total benefits and expenses

   23   233   5,960   (12  6,204 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations before income taxes and equity in income (loss) of subsidiaries

   (25  (225  438   —     188 

Provision (benefit) for income taxes

   (7  (81  115   —     27 

Equity in income (loss) of subsidiaries

   (299  (319  —     618   —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from continuing operations

   (317  (463  323   618   161 

Loss from discontinued operations, net of taxes

   (6  —     (328  —     (334
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss

   (323  (463  (5  618   (173

Less: net income attributable to noncontrolling interests

   —     —     150   —     150 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $(323 $(463 $(155 $618  $(323
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating comprehensive income statement information for the three months ended September 30, 2016:2017:

 

(Amounts in millions)

  Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated   Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated 

Net loss

  $(380 $(420 $(108 $576  $(332

Net income

  $107  $34  $228  $(194 $175 

Other comprehensive income (loss), net of taxes:

            

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

   66  63  73  (130 72    (72 (71 (89 143 (89

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

   5  4  4  (8 5 

Derivatives qualifying as hedges

   54  54  57  (111 54    (12 (12 (12 24 (12

Foreign currency translation and other adjustments

   (11 (3  —    13  (1   24 12 80 (35 81
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total other comprehensive income (loss)

   114  118  134  (236 130    (60 (71 (21 132 (20
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total comprehensive income (loss)

   (266 (302 26  340  (202   47 (37 207 (62 155

Less: comprehensive income attributable to noncontrolling interests

   —     —    64   —    64    —     —    108  —    108
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total comprehensive income (loss) available to Genworth Financial, Inc.‘s common stockholders

  $(266 $(302 $(38 $340  $(266

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

  $47  $(37 $99  $(62 $47 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

The following table presents the condensed consolidating comprehensive income statement information for the three months ended September 30, 2015:2016:

 

(Amounts in millions)

  Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated   Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated 

Net loss

  $(284 $(358 $(180 $584  $(238  $(380 $(420 $(108 $576  $(332

Other comprehensive income (loss), net of taxes:

            

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

   103  111  85  (212 87    66 63 73 (130 72

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

   —    (1  —    1   —      5 4 4 (8 5

Derivatives qualifying as hedges

   217  217  231  (448 217    54 54 57 (111 54

Foreign currency translation and other adjustments

   (151 (127 (302 278  (302   (11 (3  —    13 (1
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total other comprehensive income (loss)

   169  200  14  (381 2    114 118 134 (236 130
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total comprehensive income (loss)

   (115 (158 (166 203  (236   (266 (302 26 340 (202

Less: comprehensive income attributable to noncontrolling interests

   —     —    (121  —    (121   —     —    64  —    64
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total comprehensive income (loss) available to Genworth Financial, Inc.‘s common stockholders

  $(115 $(158 $(45 $203  $(115

Total comprehensive loss available to Genworth Financial, Inc.’s common stockholders

  $(266 $(302 $(38 $340  $(266
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating comprehensive income statement information for the nine months ended September 30, 2016:2017:

 

(Amounts in millions)

  Parent
Guarantor
 Issuer All Other
Subsidiaries
   Eliminations Consolidated   Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated 

Net income (loss)

  $(155 $(284 $451   $(16 $(4

Net income

  $464  $219  $824  $(845 $662 

Other comprehensive income (loss), net of taxes:

             

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

   1,600  1,555  1,625    (3,156 1,624    (155 (172 (173 327 (173

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

   6  5  6    (11 6    1 1 1 (2 1

Derivatives qualifying as hedges

   448  447  481    (928 448    (33 (33 (32 65 (33

Foreign currency translation and other adjustments

   138  65  224    (204 223    128 109 260 (236 261
  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total other comprehensive income (loss)

   2,192  2,072  2,336    (4,299 2,301    (59 (95 56 154 56
  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total comprehensive income (loss)

   2,037  1,788  2,787    (4,315 2,297 

Total comprehensive income

   405 124 880 (691 718

Less: comprehensive income attributable to noncontrolling interests

   —     —    260    —    260    —     —    313  —    313
  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Total comprehensive income available to Genworth Financial, Inc.‘s common stockholders

  $2,037  $1,788  $2,527   $(4,315 $2,037 

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

  $405  $124  $567  $(691 $405 
  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

The following table presents the condensed consolidating comprehensive income statement information for the nine months ended September 30, 2015:2016:

 

(Amounts in millions)

  Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated   Parent
Guarantor
 Issuer All Other
Subsidiaries
   Eliminations Consolidated 

Net loss

  $(323 $(463 $(5 $618  $(173

Net income (loss)

  $(155 $(284 $451   $(16 $(4

Other comprehensive income (loss), net of taxes:

             

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

   (708 (696 (729 1,405  (728   1,600  1,555  1,625    (3,156 1,624 

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

   —    (1  —    1   —      6 5 6   (11 6

Derivatives qualifying as hedges

   60  60  68  (128 60    448 447 481   (928 448

Foreign currency translation and other adjustments

   (344 (276 (619 620  (619   138 65 224   (204 223
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

  

 

 

Total other comprehensive income (loss)

   (992 (913 (1,280 1,898  (1,287   2,192  2,072  2,336    (4,299 2,301 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

  

 

 

Total comprehensive income (loss)

   (1,315 (1,376 (1,285 2,516  (1,460

Total comprehensive income

   2,037  1,788  2,787    (4,315 2,297 

Less: comprehensive income attributable to noncontrolling interests

   —     —    (145  —    (145   —     —    260   —    260
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

  

 

 

Total comprehensive income (loss) available to Genworth Financial, Inc.‘s common stockholders

  $(1,315 $(1,376 $(1,140 $2,516  $(1,315

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

  $2,037  $1,788  $2,527   $(4,315 $2,037 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating cash flows statement information for the nine months ended September 30, 2017:

(Amounts in millions)

 Parent
Guarantor
  Issuer  All Other
Subsidiaries
  Eliminations  Consolidated 

Cash flows from operating activities:

     

Net income

 $464  $219  $824  $(845 $662 

Less loss from discontinued operations, net of taxes

  —     (4  13  —     9

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

     

Equity in income from subsidiaries

  (506  (339  —     845  —   

Dividends from subsidiaries

  —     119  (119  —     —   

Amortization of fixed maturity securities discounts and premiums and limited partnerships

  —     4  (111  —     (107

Net investment (gains) losses

  —     12  (232  —     (220

Charges assessed to policyholders

  —     —     (534  —     (534

Acquisition costs deferred

  —     —     (67  —     (67

Amortization of deferred acquisition costs and intangibles

  —     —     316  —     316

Deferred income taxes

  6  (47  275  —     234

Trading securities,held-for-sale investments and derivative instruments

  —     (46  762  —     716

Stock-based compensation expense

  23  —     6  —     29

Change in certain assets and liabilities:

     

Accrued investment income and other assets

  2  (2  (25  4  (21

Insurance reserves

  —     —     1,202   —     1,202 

Current tax liabilities

  (6  (75  54  —     (27

Other liabilities, policy and contract claims and other policy-related balances

  (29  34  (259  (6  (260
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash from operating activities

  (46  (125  2,105   (2  1,932 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows used by investing activities:

     

Proceeds from maturities and repayments of investments:

     

Fixed maturity securities

  —     —     3,396   —     3,396 

Commercial mortgage loans

  —     —     454  —     454

Restricted commercial mortgage loans related to securitization entities

  —     —     18  —     18

Proceeds from sales of investments:

     

Fixed maturity and equity securities

  —     —     3,269   —     3,269 

Purchases and originations of investments:

     

Fixed maturity and equity securities

  —     —     (6,709  —     (6,709

Commercial mortgage loans

  —     —     (608  —     (608

Other invested assets, net

  —     25  (548  2  (521

Policy loans, net

  —     —     28  —     28

Intercompany notes receivable

  —     (77  34  43  —   

Capital contributions to subsidiaries

  (7  —     7  —     —   

Payments for business purchased, net of cash acquired

  (7  —     2  —     (5
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash used by investing activities

  (14  (52  (657  45  (678
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows used by financing activities:

     

Deposits to universal life and investment contracts

  —     —     902  —     902

Withdrawals from universal life and investment contracts

  —     —     (2,003  —     (2,003

Repayment of borrowings related to securitization entities

  —     —     (16  —     (16

Repurchase of subsidiary shares

  —     —     (31  —     (31

Dividends paid to noncontrolling interests

  —     —     (92  —     (92

Proceeds from intercompany notes payable

  61  (35  17  (43  —   

Other, net

  (1  (32  3  —     (30
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash used by financing activities

  60  (67  (1,220  (43  (1,270
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash and cash equivalents

  —     —     68  —     68
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net change in cash and cash equivalents

  —     (244  296  —     52

Cash and cash equivalents at beginning of period

  —     998  1,786   —     2,784 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of period

 $—    $754  $2,082  $—    $2,836 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating cash flows statement information for the nine months ended September 30, 2016:

 

(Amounts in millions)

  Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated  Parent
Guarantor
 Issuer All Other
Subsidiaries
 Eliminations Consolidated 

Cash flows from operating activities:

           

Net income (loss)

  $(155 $(284 $451  $(16 $(4 $(155 $(284 $451  $(16 $(4

Less loss from discontinued operations, net of taxes

   2  7  16   —    25  2 7 16  —    25

Adjustments to reconcile net income (loss) to net cash from operating activities:

           

Equity in (income) loss from subsidiaries

   62  (78  —    16   —    62 (78  —    16  —   

Dividends from subsidiaries

   —    250  (250  —     —     —    250 (250  —     —   

(Gain) loss on sale of businesses

   —    1  (27  —    (26  —    1 (27  —    (26

Amortization of fixed maturity securities discounts and premiums and limited partnerships

   —    3  (115  —    (112  —    3 (115  —    (112

Net investment losses (gains)

   —    14  (45  —    (31

Net investment (gains) losses

  —    14 (45  —    (31

Charges assessed to policyholders

   —     —    (574  —    (574  —     —    (574  —    (574

Acquisition costs deferred

   —     —    (124  —    (124  —     —    (124  —    (124

Amortization of deferred acquisition costs and intangibles

   —     —    305   —    305   —     —    305  —    305

Deferred income taxes

   8  304  (139  —    173  8 304 (139  —    173

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

   —    5  754   —    759 

Trading securities,held-for-sale investments and derivative instruments

  —    5 754  —    759

Stock-based compensation expense

   18   —    7   —    25  18  —    7  —    25

Change in certain assets and liabilities:

           

Accrued investment income and other assets

   (3 (4 (246 (5 (258 (3 (4 (246 (5 (258

Insurance reserves

   —     —    691   —    691   —     —    691  —    691

Current tax liabilities

   11  (4 37   —    44  11 (4 37  —    44

Other liabilities, policy and contract claims and other policy-related balances

   (1 (22 928   —    905  (1 (22 928  —    905
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net cash from operating activities

   (58 192  1,669  (5 1,798  (58 192 1,669  (5 1,798 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Cash flows from investing activities:

      

Cash flows used by investing activities:

     

Proceeds from maturities and repayments of investments:

           

Fixed maturity securities

   —    150  2,496   —    2,646   —    150 2,496   —    2,646 

Commercial mortgage loans

   —     —    555   —    555   —     —    555  —    555

Restricted commercial mortgage loans related to securitization entities

   —     —    27   —    27   —     —    27  —    27

Proceeds from sales of investments:

           

Fixed maturity and equity securities

   —     —    4,064   —    4,064   —     —    4,064   —    4,064 

Purchases and originations of investments:

           

Fixed maturity and equity securities

   —     —    (8,758  —    (8,758  —     —    (8,758  —    (8,758

Commercial mortgage loans

   —     —    (405  —    (405  —     —    (405  —    (405

Other invested assets, net

   —     —    (143 5  (138  —     —    (143 5 (138

Policy loans, net

   —     —    (80  —    (80  —     —    (80  —    (80

Intercompany notes receivable

   —    (58 (18 76   —     —    (58 (18 76  —   

Proceeds from sale of businesses, net of cash transferred

   —    1  38   —    39   —    1 38  —    39
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net cash from investing activities

   —    93  (2,224 81  (2,050

Net cash used by investing activities

  —    93 (2,224 81 (2,050
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Cash flows from financing activities:

      

Cash flows used by financing activities:

     

Deposits to universal life and investment contracts

   —     —    1,028   —    1,028   —     —    1,028   —    1,028 

Withdrawals from universal life and investment contracts

   —     —    (1,463  —    (1,463  —     —    (1,463  —    (1,463

Redemption of non-recourse funding obligations

   —     —    (1,620  —    (1,620  —     —    (1,620  —    (1,620

Repayment and repurchase of long-term debt

   —    (326 (36  —    (362  —    (326 (36  —    (362

Repayment of borrowings related to securitization entities

   —     —    (37  —    (37  —     —    (37  —    (37

Return of capital to noncontrolling interests

   —     —    (70  —    (70  —     —    (70  —    (70

Dividends paid to noncontrolling interests

   —     —    (126  —    (126  —     —    (126  —    (126

Proceeds from intercompany notes payable

   58  18   —    (76  —    58 18  —    (76  —   

Other, net

   —    (36 (13  —    (49  —    (36 (13  —    (49
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net cash from financing activities

   58  (344 (2,337 (76 (2,699

Net cash used by financing activities

 58 (344 (2,337 (76 (2,699
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Effect of exchange rate changes on cash and cash equivalents

   —     —    36   —    36   —     —    36  —    36
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net change in cash and cash equivalents

   —    (59 (2,856  —    (2,915  —    (59 (2,856  —    (2,915

Cash and cash equivalents at beginning of period

   —    1,124  4,869   —    5,993   —    1,124  4,869   —    5,993 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Cash and cash equivalents at end of period

   —    1,065  2,013   —    3,078  $—    $1,065  $2,013  $—    $3,078 

Less cash and cash equivalents held for sale at end of period

   —     —     —     —     —   
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Cash and cash equivalents of continuing operations at end of period

  $—    $1,065  $2,013  $—    $3,078 
  

 

  

 

  

 

  

 

  

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating cash flows statement information for the nine months ended September 30, 2015:

(Amounts in millions)

  Parent
Guarantor
  Issuer  All Other
Subsidiaries
  Eliminations  Consolidated 

Cash flows from operating activities:

      

Net loss

  $(323 $(463 $(5 $618  $(173

Less loss from discontinued operations, net of taxes

   6   —     328   —     334 

Adjustments to reconcile net income (loss) to net cash from operating activities:

      

Equity in loss from subsidiaries

   299   319   —     (618  —   

Dividends from subsidiaries

   —     454   (454  —     —   

Amortization of fixed maturity securities discounts and premiums and limited partnerships

   —     —     (80  —     (80

Net investment losses (gains)

   —     (37  96   —     59 

Charges assessed to policyholders

   —     —     (586  —     (586

Acquisition costs deferred

   —     —     (226  —     (226

Amortization of deferred acquisition costs and intangibles

   —     —     759   —     759 

Deferred income taxes

   (2  (102  (13  —     (117

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

   —     27   (274  —     (247

Stock-based compensation expense

   16   —     (2  —     14 

Change in certain assets and liabilities:

      

Accrued investment income and other assets

   —     3   (133  (3  (133

Insurance reserves

   —     —     1,270   —     1,270 

Current tax liabilities

   (1  13   (88  5   (71

Other liabilities, policy and contract claims and other policy-related balances

   —     (1  353   —     352 

Cash from operating activities—held for sale

   —     —     3   —     3 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash from operating activities

   (5  213   948   2   1,158 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities:

      

Proceeds from maturities and repayments of investments:

      

Fixed maturity securities

   —     1   3,388   —     3,389 

Commercial mortgage loans

   —     —     640   —     640 

Restricted commercial mortgage loans related to securitization entities

   —     —     27   —     27 

Proceeds from sales of investments:

      

Fixed maturity and equity securities

   —     —     1,333   —     1,333 

Purchases and originations of investments:

      

Fixed maturity and equity securities

   —     —     (6,836  —     (6,836

Commercial mortgage loans

   —     —     (678  —     (678

Other invested assets, net

   —     (100  63   (2  (39

Policy loans, net

   —     —     23   —     23 

Intercompany notes receivable

   7   (24  (4  21   —   

Capital contributions to subsidiaries

   —     (25  25   —     —   

Cash transferred for purchase of a subsidiary

   —     (202  202   —     —   

Cash from investing activities—held for sale

   —     —     (22  —     (22
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash from investing activities

   7   (350  (1,839  19   (2,163
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities:

      

Deposits to universal life and investment contracts

   —     —     1,693   —     1,693 

Withdrawals from universal life and investment contracts

   —     —     (1,677  —     (1,677

Redemption of non-recourse funding obligations

   —     —     (45  —     (45

Proceeds from the issuance of long-term debt

   —     —     150   —     150 

Repayment and repurchase of long-term debt

   —     (50  (70  —     (120

Repayment of borrowings related to securitization entities

   —     —     (26  —     (26

Proceeds from sale of subsidiary shares to noncontrolling interests

   —     —     226   —     226 

Repurchase of subsidiary shares

   —     —     (17  —     (17

Dividends paid to noncontrolling interests

   —     —     (145  —     (145

Proceeds from intercompany notes payable

   —     (2  23   (21  —   

Other, net

   (2  (30  7   —     (25

Cash from financing activities—held for sale

   —     —     (33  —     (33
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash from financing activities

   (2  (82  86   (21  (19
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash and cash equivalents

   —     —     (86  —     (86
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net change in cash and cash equivalents

   —     (219  (891  —     (1,110

Cash and cash equivalents at beginning of period

   —     953   3,965   —     4,918 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of period

   —     734   3,074   —     3,808 

Less cash and cash equivalents held for sale at end of period

   —     —     142   —     142 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents of continuing operations at end of period

  $—    $734  $2,932  $—    $3,666 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Our insurance company subsidiaries are restricted by state and foreign laws and regulations as to the amount of dividends they may pay to their parent without regulatory approval in any year, the purpose of which is to protect affected insurance policyholders and contractholders, not stockholders. Any dividends in excess of limits are deemed “extraordinary” and require approval. Based on estimated statutory results as of December 31, 2015,2016, in accordance with applicable dividend restrictions, our subsidiaries could pay dividends of approximately $140$220 million to us in 20162017 without obtaining regulatory approval, and the remaining net assets are considered restricted. While the $140$220 million is unrestricted, we do not expect our insurance subsidiaries to pay dividends to us in 20162017 at this level ifas they need to retain capital for growth and to meet capital requirements and desired thresholds. As of September 30, 2016,2017, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $14.8$13.0 billion and $14.4$12.2 billion, respectively.

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 and with our 20152016 Annual Report on Form10-K. References herein to “Genworth,” the “Company,” “we” or “our” in are, unless the context otherwise requires, to Genworth Financial, Inc. on a consolidated basis.

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. Examples of forward-looking statements include statements we make relating to the China Oceanwide transaction. 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 from those in the forward-looking statements due to global political, economic, business, competitive, market, regulatory and other factors and risks, including, but not limited to, the following:

 

  risks related to the proposed transaction with China Oceanwide Holdings Group Co., Ltd. (“China Oceanwide”)including: our inability to complete the transaction in a timely manner or at all; ourthe parties’ inability to obtain stockholder or regulatory approvals, including from the Committee on Foreign Investment in the United States (“CFIUS”), or the possibility that such regulatory approvals may further delay the transaction or will not be received prior to November 30, 2017 (and either or both of the parties may delay the transactionnot be willing to further waive their end date termination rights beyond November 30, 2017) or that materially burdensome or adverse regulatory conditions may be imposed or undesirable measures may be required in connection with any such regulatory approvals;approvals, including any mitigation approaches that may be necessary to obtain CFIUS approval (including conditions or measures that either or both of the parties may be unwilling to accept or undertake, as applicable); existing and potential legal proceedings may be instituted against us in connection with the proposed transaction;transaction that may delay the transaction, make it more costly or ultimately preclude it; the risk that the proposed transaction may disruptdisrupts our current plans and operations;operations as a result of the consummation of the transaction; certain restrictions during the pendency of the transaction that may impact our ability to pursue certain business opportunities or strategic transactions; there may be insufficient continued availability of capital and financing to Genworthus before, or in the absence of, the consummation of the transaction; there may be further rating agency actions and downgrades in our debt or financial strength ratings; there may be changes in applicable laws or regulations; we may notour ability to recognize the anticipated benefits of the transaction; the amount of the costs, fees, expenses and other charges related to the transaction may be material;transaction; the risks related to diverting management’s attention may be diverted from our ongoing business operations; the merger agreement may be terminated in circumstances that would require us to pay China Oceanwide a fee; our ability to attract, recruit, retain and motivate current and prospective employees may be adversely affected; and disruptions and uncertainty relating to the transaction, whether or not it is completed, may harm our relationships with our employees, customers, distributors, vendors or other business partners, and may result in a negative impact on our business;

 

  

strategic risksin the event the proposed transaction with China Oceanwide is not consummatedincluding: our inability to successfully execute alternative strategic plans to effectively address our current business challenges (including with respect to the restructuring of our U.S. life insurance businesses, debt obligations, including our debt maturing in May 2018, cost savings, ratings and capital); our ability to continue to sell long-term care insurance policies; our inability to attract buyers for any businesses or other assets we may seek to sell, or securities we may seek to issue, in each case, in a timely manner and on anticipated terms; failure to obtain any required regulatory, stockholder and/or noteholder approvals or consents for such alternative strategic plans, or our challenges changing or

being more costly or difficult to successfully address than currently anticipated or the benefits achieved being less than anticipated; inability to achieve anticipated cost-savings in a timely manner; or adverse tax or accounting charges; and inability to increase the capital needed in our businesses in a timely manner and on anticipated terms, including through improved business performance, reinsurance or similar transactions, asset sales, securities offerings or otherwise, in each case as and when required;

 

  

risks relating to estimates, assumptions and valuations including: risks related to the impact of our annual review of assumptions and methodologies related to our long-term care insurance claim reserves in the third quarter of 2016 and our margin reviews in the fourth quarter of 2016,2017, including risks that additional information obtained in finalizing our margin review in the fourth quarter of 20162017 or other changes to assumptions or methodologies materially affect the impact on margins or that we

underestimate the magnitude of impact the updated claim reserves assumptions have on our margins; inadequate reserves and the need to increase reserves (including as a result of changes we made to our assumptions in the third quarter of 2016 in connection with our annual review of our long-term care insurance claim reserves and any changes we may make in the future to our assumptions, methodologies or otherwise in connection with periodic or other reviews); inaccurate models; deviations from our estimates and actuarial assumptions or other reasons in our long-term care insurance, life insurance and/or annuity businesses; accelerated amortization of deferred acquisition costs (“DAC”) and present value of future profits (“PVFP”) (including as a result of any changes we made to our assumptions in the third quarter of 2016 in connection with our annual review of our long-term care insurance claim reserves and any changes we may make in the future to our assumptions, methodologies or otherwise in connection with periodic or other reviews)reviews, including reviews we expect to carry out in the fourth quarter of 2017); adverse impact on our financial results as a result of projected profits followed by projected losses (as is currently the case with our long-term care insurance business); adverse impact on our results of operations, including our loss ratio as a result of our annual review of the premium earnings pattern for our mortgage insurance business in Australia (which we expect to carry out in the fourth quarter of 2017); and changes in valuation of fixed maturity, equity and trading securities;

 

  risks relating to economic, market and political conditions including: downturns and volatility in global economies and equity and credit markets; interest rates and changes in rates (particularly given the historically low interest rate environment) have adversely impacted, and may continue to materially adversely impact, our business and profitability; deterioration in economic conditions or a decline in home prices that adversely affect our loss experience in mortgage insurance; political and economic instability or changes in government policies; and fluctuations in foreign currency exchange rates and international securities markets;

 

  regulatory and legal risks including: extensive regulation of our businesses and changes in applicable laws and regulations;regulations (including changes to tax laws and regulations); litigation and regulatory investigations or other actions; dependence on dividends and other distributions from our subsidiaries (particularly our international subsidiaries) and the inability of any subsidiaries to pay dividends or make other distributions to us, including as a result of the performance of our subsidiaries and insurance, regulatory or corporate law restrictions; adverse change in regulatory requirements, including risk-based capital; changes in regulations adversely affecting our international operations; inability to meet or maintain the private mortgage insurer eligibility requirements (“PMIERs”); inability of our U.S. mortgage insurance subsidiaries to meet minimum statutory capital requirements and hazardous financial condition standards; the influence of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and a small number of large mortgage lenders on the U.S. mortgage insurance market and adverse changes to the role or structure of Fannie Mae and Freddie Mac; adverse changes in regulations affecting our mortgage insurance businesses; inability to continue to implement actions to mitigate the impact of statutory reserve requirements; impact of additional regulations pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);Act; and changes in accounting and reporting standards;

 

  

liquidity, financial strength ratings, credit and counterparty risks including: insufficient internal sources to meet liquidity needs and limited or no access to capital (including our inabilitythe ability to replace ourobtain financing under a credit facility); recent or future adverse rating agency actions, including with respect to rating downgrades or potential downgrades or being put on review for potential downgrade, (including in connection with our recent announcement of a material increase to our long-term care insurance claim reserves), all of which could have adverse implications for us, including with respect to key business relationships, product offerings, business results of operations, financial condition and capital needs, strategic plans, collateral obligations and

availability and terms of hedging, reinsurance and borrowings; defaults by counterparties to reinsurance arrangements or derivative instruments; defaults or other events impacting the value of our fixed maturity securities portfolio; and defaults on our commercial mortgage loans or the mortgage loans underlying our investments in commercial mortgage-backed securities and volatility in performance;

 

  

operational risks including: inability to retain, attract and motivate qualified employees or senior management; ineffective or inadequate risk management in identifying, controlling or mitigating risks;

reliance on, and loss of, key customer or distribution relationships; availability, affordability and adequacy of reinsurance to protect us against losses; competition; competition in our mortgage insurance businesses from government and government-owned and government-sponsored enterprises (“GSEs”) offering mortgage insurance; material weakness in, or ineffective,the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting;reporting may not prevent all errors, misstatements or misrepresentations; and failure or any compromise of the security of our computer systems, disaster recovery systems and business continuity plans and failures to safeguard, or breaches of, our confidential information;

 

  insurance and product-related risks including: our inability to increase sufficiently, and in a timely manner, premiums onin-force long-term care insurance policies and/or reducein-force benefits, and charge higher premiums on new policies, in each case, as currently anticipated and as may be required from time to time in the future (including as a result of our failure to obtain any necessary regulatory approvals or unwillingness or inability of policyholders to pay increased premiums), including to offset theany impact on our margins of updated claim reserves assumptions in connection with our annual review of our long-term care insurance claim reserves in the third quarter of 2016 and our margin reviews in the fourth quarter of 2016;2017; our inability to reflect future premium increases and other management actions in our margin calculation as anticipated, including in connection with our margin reviews in the fourth quarter of 2016;2017; failure to sufficiently increase new sales for our long-term care insurance products; our inability to realize anticipated benefits of our rescissions, curtailments, loan modifications or other similar programs in our mortgage insurance businesses; premiums for the significant portion of our mortgage insurance riskin-force with highloan-to-value ratios may not be sufficient to compensate us for the greater risks associated with those policies; decreases in the volume of highloan-to-value mortgage originations or increases in mortgage insurance cancellations; increases in the use of alternatives to private mortgage insurance and reductions in the level of coverage selected; potential liabilities in connection with our U.S. contract underwriting services; and medical advances, such as genetic research and diagnostic imaging, and related legislation that impact policyholder behavior in ways adverse to us;

 

  other risks including: occurrence of natural orman-made disasters or a pandemic; impairments of or valuation allowances against our deferred tax assets; 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 our certificate of incorporation and bylaws and the tax matters agreement with GE may discourage takeover attempts and business combinations that stockholders might consider in their best interests; and

 

  risks relating to our common stockincluding: the continued suspension of payment of dividends; and stock price fluctuations.

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 dedicated to helping meet the homeownership and long-term care needs of our customers. We have the following five operating business segments:

 

  U.S. Mortgage Insurance.In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.

 

  Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada.

  Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.

 

  U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.

 

  Runoff.The Runoff segment includes the results ofnon-strategic products which are no longer actively sold but we continue to service our existing blocks of business. Ournon-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”).

In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings, Inc. (“Genworth Holdings”) level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.

On May 9, 2016, Genworth Mortgage Insurance Corporation (“GMICO”), our wholly-owned indirect subsidiary, completed the sale of our European mortgage insurance business. As the held-for-sale criteria were satisfied during the fourth quarter of 2015, our European mortgage insurance business, included in Corporate and Other activities, has been reported as held for sale and its financial position is separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 14 in our consolidated financial statements under “Item 1—Financial Statements” for additional information.

Strategic Update

OurWe continue to focus remains on improving business performance, reducingaddressing financial leverage and increasing financial and strategic flexibility across the organization. Our strategy includes maximizing our opportunities in our mortgage insurance businesses and restructuring our U.S. life insurance businesses.

China Oceanwide Transaction

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent, entered into a definitive agreement, pursuantParent. Subject to which Genworth Financial will be acquired by the Parent through a merger. Subject toterms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub willwould merge with and into Genworth Financial. As a result of that merger, Merger Sub will cease to exist andFinancial with Genworth Financial will survivesurviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. The agreement concludesconcluded our previously announced strategic review process, which we havehad undertaken over the pastprevious two years. At a special meeting held on March 7, 2017, Genworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement.

Genworth Financial and China Oceanwide continue to work towards satisfying the closing conditions of their proposed transaction as soon as possible. To date, we have announced approvals from the Virginia State Corporation Commission Bureau of Insurance, the North Carolina Department of Insurance, the South Carolina Department of Insurance and the Vermont Insurance Division. However, on October 2, 2017, Genworth Financial and China Oceanwide withdrew their joint voluntary notice to CFIUS, with an intent to refile with additional mitigation approaches. Both parties are actively engaged in developing these approaches, including the potential involvement of a U.S. third-party service provider, and anticipate refiling a new joint notice with CFIUS as soon as the terms of the additional mitigation approaches are determined. Genworth Financial and China Oceanwide are fully committed to developing an acceptable solution with CFIUS; however, there can be no assurance that CFIUS will ultimately agree to clear the transaction between Genworth Financial and China Oceanwide on terms acceptable to the parties or at all. In addition to approval and clearance by CFIUS, the closing of the proposed transaction remains subject to the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions and other closing conditions. Genworth Financial and China Oceanwide also continue to be actively engaged with the other relevant regulators regarding the pending applications.

On August 21, 2017, Genworth Financial, the Parent and Merger Sub entered into a Waiver and Agreement pursuant to which Genworth Financial and the Parent each agreed to, among other things, waive until November 30, 2017 its right to terminate the Merger Agreement and abandon the merger in accordance with the terms of the Merger Agreement due to a failure of the merger to have been completed on or before August 31, 2017. Genworth Financial and China Oceanwide are also discussing an additional waiver of each party’s right to terminate the Merger Agreement beyond the November 30, 2017 deadline. If we are unable to reach an agreement as to a further extension of the deadline or are unable to satisfy the closing conditions by the applicable deadline, then either party may terminate the Merger Agreement. Genworth Financial and China Oceanwide remain committed to satisfying the closing conditions under the Merger Agreement as soon as possible.

As part of the transaction, China Oceanwide has additionally committed in the Merger Agreement to contribute $600 million of cash to usGenworth Financial to address our debt maturing in May 2018, on or before its maturity, as well as $525 million of cash to our U.S. life insurance businesses. This contribution is in addition to $175 million of cash previously committed by Genworth Holdings to our U.S. life insurance businesses to pursue their restructuring as described below. These contributions, in addition to addressing the 2018 debt maturity, are intended to increase the likelihood of obtaining regulatory approvals for the China Oceanwide transaction as well as help achieve our strategic objectives of improving Genworth’s overall financial strength and flexibility and supporting the restructuring of our U.S. life insurance businesses, as described further below.

Upon Due to the completiondelay in the timing of the closing of the transaction, we are currently reviewing potential refinancing options, which may include secured indebtedness, to address upcoming debt maturities in the event the transaction with China Oceanwide cannot be completed in a timely manner or at all. We could also utilize holding company cash and/or pursue potential asset sales to address upcoming debt maturities in the event the transaction with China Oceanwide cannot be completed. In the absence of the transaction with China Oceanwide or a refinancing alternative, we believe we would need to pursue asset sales to address our debt maturities, including potential sales of our mortgage insurance businesses in Canada and/or Australia. We are also evaluating options to insulate our U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event a transaction with China Oceanwide cannot be completed.

If the China Oceanwide transaction is completed, we will be a standalone subsidiary of China Oceanwide and our senior management team will continue to lead the business from our current headquarters in Richmond, Virginia. WeLikewise, we intend to maintain our existing portfolio of businesses, including our mortgage insurance businesses in Australia and Canada. Ourday-to-day operations are not expected to change as a result of this transaction. The transaction is subject to approval by Genworth’s stockholders as well as other closing conditions, including the receipt of required regulatory approvals.

Restructuring of U.S. Life Insurance Businesses

As previouslyIn February 2016, we announced that one of our strategic objectives has beenwas to separate, then isolate, through a series of internal transactions, our long-term care insurance business from our other U.S. life insurance

businesses. We continued to pursue this plan in connection with the China Oceanwide transaction, with some differences from our previously announced restructuring plan. Our aim isgoal under the plan has been to align substantially all of our non-New Yorkin-force life insurance and annuity business under Genworth Life and Annuity Insurance Company (“GLAIC”), our Virginia domiciled life insurance company, and substantially all of our non-New York long-term care insurance business under Genworth Life Insurance Company (“GLIC”), our Delaware domiciled life insurance company. In connection with these actions, we would separate GLAIC and GLIC ownership so that both subsidiaries are wholly-owned by an intermediate holding company. As part of this plan, Genworth Life Insurance Companystrategic objective, effective April 1, 2017, GLAIC assumed risk on a coinsurance basis for certain blocks of New York (“GLICNY”), our New York domiciledterm life insurance, company, which is currently partially owneduniversal life insurance and single premium whole life insurance from GLIC. Effective July 1, 2017, GLIC recaptured certain single premium deferred annuity products previously ceded to GLAIC. In addition, effective July 1, 2017, GLAIC assumed risk on a modified coinsurance basis for certain blocks of fixed annuities, including those single premium deferred annuity products recaptured by GLIC, and certain corporate-owned life insurance policies from GLIC. As a result, there was an adverse impact on GLIC’s risk-based capital ratio of approximately 15 points in the third quarter of 2017. However, the internal transactions had no impact on our consolidated results of operations and financial condition prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) as the financial impact of the intercompany reinsurance was eliminated in consolidation. These transactions complete our goal to align substantially all of our non-New Yorkin-force life insurance and annuity business under GLAIC would become a wholly-owned subsidiaryand substantially all of GLIC. To further isolate our non-New York long-term care insurance business from our other businesses, GLIC and GLICNY may ultimately be direct subsidiariesunder GLIC. All of Genworth Financial and no longer subsidiaries of Genworth Holdings. We have agreedthese transactions were also required under the Merger Agreement with China Oceanwide. The reinsurance treaties effective July 1, 2017 include provisions that require us to pursue a similar plan to separate and then isolate our long-term care insurance business from our other U.S. life insurance businessesunwind or void these treaties in connectionthe event the merger transaction with the China Oceanwide transaction, but such plan has some important differences from the previously announced plan as discussed below.is terminated.

In connection with the proposed China Oceanwide transaction,addition, based on China Oceanwide’s $525 million capital commitment under the Merger Agreement, together with the $175 million of cash previously committed by Genworth Holdings, a Genworth Holdings will pursueholding company would seek, in connection with the completion of the China Oceanwide transaction, the purchase of GLAIC from GLIC at fair market valuevalue. Together with the internal reinsurance transactions completed in April 2017 and we will pursue a varietyJuly 2017, finalization of reinsurance transactions. Doing sothe GLAIC sale, if completed, would achieveisolate our strategic objective of separating and isolating ournon-New York long-term care insurance business from our other non-New York U.S. life insurance businesses and achieve this strategic objective, and regulatory approval to do so is a condition to the closing of the China Oceanwide transaction. China Oceanwide has no future obligation and has expressed no intention to contribute additional capital to support our legacy long-term care insurance business.

Separating and isolating our long-term care insurance business has been an important strategic objective, because we believe it would:

 

help to isolate the downside risk from our long-term care insurance business that is putting downward pressure on the ratings of Genworth Holdings and our other subsidiaries,

 

allow any future dividends from GLAIC to be paid directly to the holding company, which increases Genworth Holdings’ liquidity and ability to repay and/or refinance its indebtedness, and

 

give a clearer picture of the necessity for the long-term care insurance rate actions that we are working towards today.

InStrategic Alternatives

If the absenceChina Oceanwide transaction is not completed, we will continue to explore strategic alternatives and financing options to address our ongoing challenges, including our May 2018 debt maturity and other debt service obligations. Prior to the announcement of the China Oceanwide transaction, we previously disclosed that after discussions with regulators, we believed as a first step, we might only be able to distribute a portion of GLAIC to the holding company, which we expected to complete by the endfrom GLIC. As a result of the first halfrecent performance of 2017. In light ofour long-term care and life insurance businesses and the charges we recorded in the third quarterand fourth quarters of 2016, claim reserve charges relating to our long-term insurance business, absent the China Oceanwide transaction and any alternative commitment of external capital, we believe there would bebe: considerable pressure ondoubt as to the feasibility and timing of achieving a partial unstacking of GLAIC in the foreseeable future, if at all.

Strategic Alternatives

If the China Oceanwide transaction is not completed, we will continue to explore strategic alternatives and financing options to address our ongoing challenges. As a result of the recent performance of our long-term care insurance business and the charges we recorded in the third quarter of 2016, our challenges include pressure on the

feasibility and timing of our unstacking plan, as indicated above, which we believe is essential to increasing the liquidity of the holding company and isolating long-term care insurance risks from the rest of our businesses;all; increased pressure on

and potential downgrades of our financial strength ratings, particularly for our mortgage insurance businesses, which could affect our ability to maintain our market share of the U.S. mortgage insurance industry; limitation on our ability to continue to write new long-term care insurance policies; and other limitations on our holding company liquidity and ability to service and/or refinance our holding company debt. In the absence of anthe China Oceanwide transaction and/or a refinancing alternative, third-party transaction, which we can neither predict nor guarantee, we believe we would be requiredneed to pursue asset sales to address these challenges, including potential sales of our mortgage insurance businesses in Canada and Australia and/or Australia. Asset sales or changes to our financial projections, including changes that anticipate planned asset sales, may negatively impact our ability to realize certain foreign tax credits or other deferred tax assets and have a partial saleresulting material adverse effect on our results of operation. We are also evaluating options to insulate our U.S. mortgage insurance business.

BLAIC Repatriation

In February 2016, as part of restructuring our U.S. life insurance businesses, we also announced an initiative to repatriate existing reinsured business from Brookfield Life and Annuity Insurance Company Limited (“BLAIC”), our primary Bermuda domiciled captive reinsurance subsidiary, to our U.S. life insurance subsidiaries in 2016. Effective April 1, 2016, we recapturedadditional ratings pressure, including a block of universal life insurance from BLAIC to GLAIC. In addition, effective July 1, 2016, we recaptured a block of term life insurance from BLAIC to GLAIC and terminated a term life insurance excess of loss treaty with BLAIC. The repatriation was completed through the merger of BLAIC into GLIC in October 2016. As part of the repatriation, all parental support provided to BLAIC, including the capital maintenance agreement that previously existed between Genworth Financial International Holdings, LLC and BLAIC, was terminated. There will be no impact on our consolidated results of operations and financial condition prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) as the financial impact of these reinsurance transactions had been eliminated in consolidation. However, there is expected to be an adverse impact on GLIC’s risk-based capital ratio of between five and ten pointspotential partial sale, in the fourth quarter of 2016.event a transaction with China Oceanwide cannot be completed.

Ongoing Priorities

Stabilizing our long-term care insurance business continues to be our long-term goal. We will continue to execute against this objective primarily through our multi-year long-term care insurance rate action plan. Increasing premiums and/or benefit modifications on our legacy long-term care insurance policies are critical to our ability to increase the capital levels needed to support the business. In addition, reducing debt will remain a high priority. We believe that increased financial support and our strengthened financial foundation resulting from the China Oceanwide transaction would provide us with more options to manage our debt maturities and reduce overall indebtedness, which in turn is intended to improve our credit and ratings profile over time. Finally, we also believe that the completion of the China Oceanwide transaction would allow us to place greater focus on the future of our long-term care and mortgage insurance businesses while continuing to service our existing policyholders.

For a discussion of the risks associated with the China Oceanwide transaction and our strategic alternatives, see “Item 1A Risk Factors—The proposed transaction with China Oceanwide may not be completed or may not be completed in the timeframe, terms or manner currently anticipated, which could have a material adverse effect on us and our stock price.”

Executive Summary of Financial Results

Below is an executive summary of our consolidated financial results for the periods indicated. Amounts below are net of taxes, unless otherwise indicated.

Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016

 

DuringWe had net income available to Genworth Financial, Inc.’s common stockholders of $107 million during the three months ended September 30, 20162017 and 2015, we had a net loss available to Genworth Financial, Inc.’s common stockholders of $380 million and $284 million, respectively.during the three months ended September 30, 2016.

 

In our long-term care insurance business, our financial results wereadjusted operating loss available to Genworth Financial, Inc.’s common stockholders was lower for the three months ended September 30, 2017 largely from an increase of $283 million in claim reserves, net of reinsurance, in the prior year as a result of our annual claims assumption review. As a result of this review,

we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves. This increase was partially offset by higher severity on new claims in the current year. The current year also included $8 million of higher premiums and reduced benefits fromin-force rate actions approved and implemented.

in the current year. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information). This decrease was partially offset by higher premiums and reduced benefits of $35 million in the current year from in-force rate actions approved and implemented.

 

During the third quarter of 2016, we recorded a valuation allowance of $265 million on deferred tax assets in Corporate and Other activities. In light of our latestthe prior year’s financial projections, includingwhich included the projected impact to current and future earnings associated with higher expected claim costs in our long-term care insurance business as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowance related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership.

We recorded a DAC impairment of $296 million in our life insurance business during the three months ended September 30, 2015 that did not recur.

During the three months ended September 30, 2016, we recorded a gain of $15 million related to the sale of our lifestyle protection insurance business compared to a loss of $21 million during the three months ended September 30, 2015. See note 14 in our consolidated financial statements under “Item 1—Financial Statements” for additional information related to the sale of businesses.

Nine Months Ended September 30, 20162017 Compared to Nine Months Ended September 30, 20152016

 

DuringWe had net income available to Genworth Financial, Inc.’s common stockholders of $464 million during the nine months ended September 30, 20162017 and 2015, we had a net loss available to Genworth Financial, Inc.’s common stockholders of $155 million and $323 million, respectively.

During the nine months ended September 30, 2015, we recorded a loss of $334 million related to the sale of our lifestyle protection insurance business. During the nine months ended September 30, 2016, we recorded an additional loss of $25 million related to the sale of our lifestyle protection insurance business and a gain of $18 million related to the sale of our mortgage insurance business in Europe. See note 14 in our consolidated financial statements under “Item 1—Financial Statements” for additional information related to the sale of businesses.

We recorded a DAC impairment of $296 million in our life insurance business during the nine months ended September 30, 20152016.

Benefits and other changes in policy reserves decreased across our mortgage insurance businesses, particularly in our U.S. Mortgage Insurance and Canada Mortgage Insurance segments, which decreasedpre-tax by $45 million and $39 million, respectively. These decreases were largely attributable to the favorable developments in our loss ratios discussed below.

The loss ratios in our U.S. Mortgage Insurance and Canada Mortgage Insurance segments were 13% and 11%, respectively, for the nine months ended September 30, 2017. The loss ratio in our U.S. Mortgage Insurance segment was driven mostly by improvements in the net benefit from cures and aging of existing delinquencies and an increase in earned premiums in the current year. A continued decline in new flow delinquencies, net of cures, mostly from overall improving regional macroeconomic conditions, along with a lower average reserve per delinquency benefited the loss ratio in our Canada Mortgage Insurance segment.

On March 1, 2017, the Pennsylvania Commonwealth Court approved petitions to liquidate Penn Treaty Network America Insurance Company and American Network Insurance Company (“Penn Treaty”) due to financial difficulties that didcould not recur.be resolved through rehabilitation. As a result of the plan of Penn Treaty liquidation, our long-term care insurance business recorded net guaranty fund assessments of $14 million in the first quarter of 2017.

 

In our long-term care insurance business, our financial results were lowerthe adjusted operating loss available to Genworth Financial, Inc.’s common stockholders for the nine months ended September 30, 2016 was largely from an increase of $283 million in claim reserves, net of reinsurance, as a result of our annual claims assumption review in the current year. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information).discussed above. The current year also included $44 million of unfavorable adjustments which included refinements to the calculations of reserves. These decreases were partially offset by higher incremental premiums and reduced benefits of $141$18 million in the current year fromin-force rate actions approved and implemented. Our long-term care insurance results were also favorably impacted by seasonally higher claim terminations during the first half of 2017.

 

During the third quarter ofnine months ended September 30, 2016, we recorded a valuation allowance of $265 million on deferred tax assets in Corporate and Other activities. In light of our latest financial projections, including the projected impact to current and future earnings associated with higher expected claim costs in our long-term care insurance businessactivities, as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowance related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership.discussed above.

  During the nine months ended September 30, 2016, we recorded a $45 million expense related to the settlement ofIn re Genworth Financial, Inc. Securities Litigationand an additional $6 million of legal fees and expenses related to this litigation. We also recorded $3 million of additional legal fees in the prior year related to other pending litigation.

During the nine months ended September 30, 2016, we recorded $14 million related to restructuring costs as part of an expense reduction plan as we evaluated and appropriately sized our organizational needs and expenses. In addition, we recorded a loss of $6 million from thewrite-off of deferred borrowing costs in connection with the early extinguishment ofnon-recourse funding obligations as part of a life block transaction completed in the first quarter of 2016.

Significant Developments

The periods under review include, among others, the following significant developments.

Low interest rate environment

Interest rates in the United States continue to remain lower than historical levels but rose modestly in the third quarter of 2016 after declining in the second quarter of 2016. Low interest rates are relatively neutral for our U.S. mortgage insurance business. While low interest rates have contributed to a stronger housing market and an increase in first-time homebuyers, low interest rates have increased the rate at which borrowers refinance their existing mortgages and have contributed to home price appreciation, both of which can result in the cancellation of mortgage insurance coverage.

In our long-term care insurance, life insurance and annuity products, low interest rates reduce the returns we earn on the investments that support our obligations under these products, which increases reinvestment risk and reduces our ability to achieve our targeted investment returns. Given the average life of our assets is shorter than the average life of the liabilities, our reinvestment risk is greater for these products as a significant portion of cash flows used to pay benefits to our policyholders and contractholders comes from investment returns. Because we may reduce the interest rates we credit on most of these products only at limited, pre-established intervals, and because many contracts have guaranteed minimum interest crediting rates, declines in earned investment returns can impact the profitability of these products. A low interest rate environment can also negatively impact the sufficiency of our margins on DAC and PVFP. For example, as a result of low interest rates, the margin on our fixed immediate annuities was negative in the second quarter of 2016 and resulted in a DAC write off and the establishment of additional reserves. See “—Critical Accounting Estimates” for additional information. In addition, prolonged periods of low interest rates have increased our statutory reserves and the required capital in our U.S. life insurance subsidiaries. As a result, historically low interest rates over the last few years have adversely impacted our business, particularly in our long-term care insurance, life insurance and annuity products, and may materially adversely impact the profitability of these products in the future.

Our investment portfolio has overall been negatively impacted by the low interest rate environment. We have had to reinvest the cash we receive as interest or return of principal on our investments that matured or were called in lower-yielding high-grade instruments or in lower-credit instruments. For example, during the three months ended September 30, 2016, we reinvested $3.1 billion at an average rate of 2.6% as compared to our annualized weighted-average investment yield of 4.6%. Our derivatives portfolio contains forward starting interest rate swaps to hedge against changes in interest rates associated with future bond purchases in our long-term care insurance business, which increase in value at lower interest rates. However, a majority of these future bond purchases are not hedged.

See “Item 3—Quantitative and Qualitative Disclosures About Market Risk” for additional information about interest rate risk. In addition, for a further discussion of the risks associated with interest rates, see “Item 1A Risk Factors—Interest rates and changes in rates could materially adversely affect our business and profitability” in our 2015 Annual Report on Form 10-K.

Dispositions

Completed sale of our mortgage insurance business in Europe.On May 9, 2016, GMICO completed the sale of our European mortgage insurance business to AmTrust Financial Services, Inc. and received $55 million with net proceeds of approximately $50 million.

 

  

Completed sale of a life insurance block. In January 2016, GLAIC, our indirect wholly-owned subsidiary, entered into a reinsurance agreement to coinsure certain term life insurance business with

Protective Life Insurance Company (“Protective Life”) as part of a life block transaction. This transaction generated capital in excess of $150 million in aggregate to Genworth, including tax benefits of approximately $175

$175 million to the holding company that were settled in July 2016, which areis committed to be used in executing the restructuring plan for our U.S. life insurance businesses.

U.S. Life Insurance

Completed sale of our mortgage insurance business in Europe. On May 9, 2016, we completed the sale of our European mortgage insurance business to AmTrust Financial Services, Inc. for $55 million and received net proceeds of approximately $50 million. During the nine months ended September 30, 2016, we recorded anafter-tax gain of $18 million related to the sale of our mortgage insurance business in Europe.

 

  CompletionSale of annual long-term careour lifestyle protection business. During the three months ended September 30, 2017, we recorded an additional loss of $9 million associated with the sale of our lifestyle protection insurance business primarily related to an adjustment of certain claims assumption review.Inpreviously included in discontinued operations and tax items. We retained liabilities for certain claims, taxes and sales practices that occurred while we owned the third quarter oflifestyle protection insurance business. We have established our current best estimates for these liabilities, where appropriate; however, there may be future adjustments to these estimates. During the three and nine months ended September 30, 2016, we completedrecorded a gain of $15 million and a loss of $25 million related to the sale of our annual claims assumption review in our long-term carelifestyle protection insurance business. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information).business, respectively.

U.S. Life Insurance

 

  Rate actions in our long-term care insurance business. As part of our strategy for our long-term care insurance business, we have been implementing, and expect to continue to pursue, significant premium rate increases on the older generation blocks of business that were written before 2002.in order to bring those blocks closer to a break-even point over time and reduce the strain on earnings and capital. We are also requesting premium rate increases on newer blocks of business, as needed.needed, some of which may be significant, to help bring their loss ratios back towards their original pricing. For all of these rate action filings, we received 7675 filing approvals from 2032 states during the nine months ended September 30, 2016,2017, representing a weighted-average increase of 29%27% on approximately $584$457 million in annualizedin-force premiums. We also submitted 71131 new filings in 3139 states during the nine months ended September 30, 20162017 on approximately $610$828 million in annualizedin-force premiums. We will update

Restructuring and business alignment. The internal reinsurance transactions completed in April 2017 and July 2017, as discussed above, complete our rate action filing plangoal to reflectalign substantially all of our updated experience reflected inin-force life insurance and annuity business under GLAIC and substantially all of our long-term care insurance claims assumption review completedbusiness under GLIC.

Suspension of sales of our traditional life insurance and fixed annuity products. As part of our initiative announced on February 4, 2016 to restructure our U.S. life insurance businesses, we decided to suspend sales of our traditional life insurance and fixed annuity products on March 7, 2016 given the continued impact of ratings and recent sales levels of these products. This action, along with reducing expense levels in the third quarterour U.S. life insurance businesses resulted in approximately $50 million of 2016.annualizedpre-tax cash expense savings.

Liquidity and Capital Resources

 

Genworth MI Canada Inc. (“Genworth Canada”) New Credit Facility. On September 29, 2017, Genworth Canada, our majority-owned subsidiary, entered into a CAD$200 million syndicated senior unsecured revolving credit facility, which matures on September 29, 2022. Any borrowings under Genworth Canada’s credit facility will bear interest at a rate per annum equal to, at the option of Genworth Canada, either a fixed rate or a variable rate pursuant to the terms of the credit agreement. The credit facility includes customary representations, warranties, covenants, terms and conditions. This syndicated credit facility replaced an existing CAD$100 million senior unsecured revolving credit facility which was cancelled on September 29, 2017. As of September 30, 2017, there was no amount outstanding under Genworth Canada’s credit facility and all of the covenants were fully met.

  Redemption of Genworth Holdings’ 2016 notes. In January 2016, Genworth Holdings redeemed $298 million of its 8.625% senior notes due 2016 issued in December 2009 (the “2016 Notes”) and paid a make-whole premium of approximately $20 millionpre-tax in addition to accrued and unpaid interest using cash proceeds received from the sale of our lifestyle protection insurance business.

 

  Repurchase of Genworth Holdings senior notes. During the three months ended March 31, 2016, we repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for apre-tax gain of $4 million and paid accrued and unpaid interest thereon.

 

  Completion ofGenworth Holdings’ bond consent solicitation. During the three months ended March 31, 2016, Genworth Holdings paid total fees related to the bond consent solicitation of approximately $61 million, including bond consent fees of $43 million, which were deferred, as well as broker, advisor and investment banking fees of $18 million, which were expensed, in the first quarter of 2016.expensed.

 

  Redemption of non-recourse funding obligations.Non-Recourse Funding Obligations. During the three months ended March 31, 2016, in connection with a life block transaction, River Lake Insurance Company, (“River Lake”), our indirect wholly-owned subsidiary, redeemed $975 million of its total outstanding floating rate subordinated notes due in 2033 and River Lake Insurance Company II, (“River Lake II”), our indirect wholly-owned subsidiary, redeemed $645 million of its total outstanding floating rate subordinated notes due in 2035 for apre-tax loss of $9 million from thewrite-off of deferred borrowing costs.

Financial Strength Ratings

Ratings with respect to the financial strength of operating subsidiaries are an important factor in establishing the competitive position of insurance companies. Ratings are important to maintaining public confidence in us and our ability to market our products. Rating organizations review the financial performance and condition of most insurers and provide opinions regarding financial strength, operating performance and ability to meet obligations to policyholders.

As of November 7, 2016,2, 2017, our principal mortgage insurance subsidiaries were rated in terms of financial strength by Standard & Poor’s Financial Services, LLC (“S&P”), Moody’s Investor Service, Inc. (“Moody’s”) and Dominion Bond Rating Service (“DBRS”) as follows:

 

Company

  S&P rating  Moody’s rating  DBRS rating

Genworth Mortgage Insurance Corporation

  BB+ (Marginal)  Ba1 (Questionable)  Not rated

Genworth Financial Mortgage Insurance Company Canada

  A+ (Strong)  Not rated  AA (Superior)

Genworth Financial Mortgage Insurance Pty. Limited (Australia)(1)

  A+ (Strong)  A3 (Good)Baa1 (Adequate)  Not rated

 

(1)Also rated “A+” by Fitch Ratings (“Fitch”).

As of November 7, 2016,2, 2017, our principal life insurance subsidiaries were rated in terms of financial strength by S&P, Moody’s and A.M. Best Company, Inc. (“A.M. Best”) as follows:

 

Company

  S&P rating  Moody’s rating  A.M. Best rating

Genworth Life Insurance Company

  BB-(Marginal)B+ (Weak)  Ba2 (Questionable)B2 (Poor)  B (Fair)

Genworth Life and Annuity Insurance Company

  BB-(Marginal)B+ (Weak)  Baa2 (Adequate)Ba1 (Questionable)  B++ (Good)

Genworth Life Insurance Company of New York

  BB-(Marginal)B+ (Weak)  Ba2 (Questionable)B2 (Poor)  B (Fair)

The S&P, Moody’s, DBRS and A.M. Best financial strength ratings of our operating companies are not designed to be, and do not serve as, measures of protection or valuation offered to investors. These financial strength ratings should not be relied on with respect to making an investment in our securities.

S&P states that insurers rated “A” (Strong) or, “BB” (Marginal) or “B” (Weak) have strong, marginal or marginalweak financial security characteristics, respectively. The “A”“A,” “BB” and “BB”“B” ranges are the third-, fifth- and fifth-highestsixth-highest of nine financial strength rating ranges assigned by S&P, which range from “AAA” to “R.” A plus (+) or minus (-) shows relative standing within a major rating category. These suffixes are not added to ratings in the “AAA” category or to ratings below the “CCC” category. Accordingly, the “A+,” “BB+” and “BB-“B+” ratings are the fifth-, eleventh- and thirteenth-highestfourteenth-highest of S&P’s 21 ratings categories.

On September 18, 2017, based largely on regulatory approval uncertainty pertaining to the China Oceanwide transaction, S&P revised Genworth Financial and Genworth Holding’s CreditWatch status from developing implications to negative implications. S&P downgraded the financial strength rating of our principal life insurance subsidiaries; GLIC, Genworth Life Insurance Company of New York (“GLICNY”) and GLAIC fromBB- (Marginal) to B+ (Weak), and maintained the CreditWatch status of GLIC and GLICNY at negative implications and GLAIC at developing implications. S&P’s rating actions were also based on their negative view of the operating performance of our U.S. Life Insurance segment, the ongoing impact of the low interest rate environment and the further need for premium rate increases in our long-term care insurance business. S&P also affirmed the financial strength rating of Genworth Mortgage Insurance Corporation (“GMICO”) at BB+ (Marginal), however, revised GMICO’s CreditWatch status from developing implications to negative implications. The financial strength ratings of Genworth Financial Mortgage Insurance Company Canada and Genworth Financial Mortgage Insurance Pty. Limited (Australia) were also affirmed at A+ (Strong).

Moody’s states that insurance companies rated “A” (Good) offer good financial security, that insurance companies rated “Baa” (Adequate) offer adequate financial security and that insurance companies rated “Ba” (Questionable) or “B” (Poor) offer questionable financial security. The “A” (Good), “Baa” (Adequate), “Ba” (Questionable) and “Ba” (Questionable)“B” (Poor) ranges are the third-fourth-, fourth-fifth- and fifth-highest,sixth-highest, respectively, of nine financial strength rating ranges assigned by Moody’s, which range from “Aaa” to “C.” Numeric modifiers are used to refer to the ranking within the group, with 1 being the highest and 3 being the lowest. These modifiers are not added to ratings in the “Aaa” category or to ratings below the “Caa” category. Accordingly, the “A3,” “Baa2,“Baa1,” “Ba1” and “Ba2”“B2” ratings are the seventh-, ninth-eighth-, eleventh- and twelfth-highest,fifteenth-highest, respectively, of Moody’s 21 ratings categories.

On October 3, 2017, which followed our recent announcement that we had withdrawn our joint voluntary notice with CFIUS with an intent to refile, Moody’s downgraded the credit ratings of Genworth Holdings senior unsecured debt from Ba3 (Questionable) to B2 (Poor), downgraded the financial strength ratings of GLIC and GLICNY from Ba3 (Questionable) to B2 (Poor) and downgraded GLAIC from Baa2 (Adequate) to Ba1 (Questionable). Moody’s downgrade was based principally upon the uncertain financial flexibility at Genworth Holdings to address upcoming debt maturities, execution risk associated with closing the China Oceanwide transaction and continued risk associated with our long-term care insurance business. On September 13, 2017, Moody’s downgraded the financial strength rating of Genworth Financial Mortgage Insurance Pty. Limited (Australia) from A3 (Good) to Baa1 (Adequate). Moody’s downgrade reflects their risk assessment surrounding the Australian housing market, which in their view, has higher risk and lower demand for domestic lenders’ mortgage insurance products. On March 10, 2017, Moody’s downgraded the financial strength rating of GLIC and GLICNY from Ba2 (Questionable) to Ba3 (Questionable). Moody’s downgrade was principally related to a reduction in our long-term care insurance margins, uncertainty related to future long-term care insurance margins and reliance on significant future rate actions, the approval for which varies by state and can take several years.

DBRS states that long-term obligations rated “AA” are of superior credit quality. The capacity for the payment of financial obligations is considered high and unlikely to be significantly vulnerable to future events. Credit quality differs from “AAA” only to a small degree. On July 21, 2017, DBRS confirmed the financial strength rating of Genworth Financial Mortgage Insurance Company Canada at AA (Superior). The financial strength rating confirmation reflects the company’s market position, insurance portfolio and risk analytics, as well as its capital position relative to the capital required to meet insurance claim obligations.

A.M. Best states that the “B++” (Good) rating is assigned to those companies that have, in its opinion, a good ability to meet their ongoing insurance obligations while “B” (Fair) is assigned to those companies that

have, in its opinion, a fair ability to meet their ongoing insurance obligations. The “B++” (Good) and “B” (Fair) ratings are the fifth- and seventh-highest of 15 ratings assigned by A.M. Best, which range from “A++” to “F.”

We also solicit a rating from Fitch for our Australian mortgage insurance subsidiary. Fitch states that “A” (Strong) rated insurance companies are viewed as possessing strong capacity to meet policyholder and contract

obligations. The “A” rating category is the third-highest of nine financial strength rating categories, which range from “AAA” to “C.” The symbol (+) or (-) may be appended to a rating to indicate the relative position of a credit within a rating category. These suffixes are not added to ratings in the “AAA” category or to ratings below the “B” category. Accordingly, the “A+” rating is the fifth-highest of Fitch’s 21 ratings categories.

We also solicit a rating from HR Ratings on a local scale for Genworth Seguros de Credito a la Vivienda S.A. de C.V., our Mexican mortgage insurance subsidiary. On November 1, 2016, HR Ratings downgraded the long-term rating of our Mexican mortgage insurance subsidiary to “HR AA-” from “HR AA” but maintained its short-term rating of “HR1.” For short-term ratings, HR Ratings states that “HR1” rated companies are viewed as exhibiting high capacity for timely payment of debt obligations in the short-term and maintain low credit risk. The “HR1” short-term rating category is the highest of six short-term rating categories, which range from “HR1” to “HR D.” For long-term ratings, HR Ratings states that “HR AA-” rated companies are viewed as having high credit quality and offer high safety for timely payment of debt obligations and maintain low credit risk under adverse economic scenarios. The “HR AA-” long-term rating is the second-highest of HR Rating’s eight long-term rating categories, which range from “HR AAA” to “HR D.”

Following our recent announcements regarding the China Oceanwide transaction and charges in our long-term care insurance business, rating agencies took a variety of adverse rating actions with respect to our principal life insurance subsidiaries. On October 25, 2016, A.M. Best downgraded the financial strength ratings of GLIC and GLICNY to “B” from “B++” but affirmed GLAIC’s financial strength rating at “B++.” A.M. Best has placed all of our ratings under review with negative implications. On October 24, 2016, S&P placed the ratings of Genworth Holdings, GMICO and GLAIC on CreditWatch with developing implications after downgrading GLAIC to “BB-” from “BB” on September 15, 2016. S&P also placed GLIC and GLICNY on CreditWatch with negative implications after downgrading these subsidiaries to “BB-” from “BB” on September 15, 2016. S&P made no changes to its ratings of our mortgage insurance businesses in Canada and Australia. On October 24, 2016, Moody’s downgraded GLIC and GLICNY to “Ba2” from Ba1” and ratings of these insurance subsidiaries remain on review for downgrade. At the same time, Moody’s also announced its continued review of Genworth Holdings and GLAIC for downgrade. Moody’s affirmed GMICO’s rating with stable outlook. Moody’s made no changes to its rating of our mortgage insurance business in Australia.

S&P, Moody’s, DBRS, A.M. Best Fitch and HR RatingsFitch review their ratings periodically and we cannot assure you that we will maintain our current ratings in the future. Other agencies may also rate our company or our insurance subsidiaries on a solicited or an unsolicited basis. We do not provide information to agencies issuing unsolicited ratings and we cannot ensure that any agencies that rate our company or our insurance subsidiaries on an unsolicited basis will continue to do so.

For a discussion of the impacts of the recent rating agency actions on our derivative instruments, see “Item 2—Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Investments and Derivative Instruments.”

For a discussion of the risks associated with ratings actions, see “Item 1A Risk Factors—Recent adverse rating agency actions have resulted in a loss of business and adversely affected our results of operations, financial condition and business and future adverse rating actions could have a further and more significant adverse impact on us” in our 20152016 Annual Report on Form10-K.

Critical Accounting Estimates

As of September 30, 2016, other than as set forth below, there have been no material changes to critical accounting estimates set forth in our Annual Report on Form 10-K filed on February 26, 2016.The accounting estimates (including sensitivities) discussed in this section are those that we consider to be particularly critical to an understanding of our consolidated financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. The sensitivities included in this section involve matters that are also inherently uncertain and involve the exercise of significant judgment in selecting the factors and amounts used in the sensitivities. Small changes in the amounts used in the sensitivities or the use of different factors could result in materially different outcomes from those reflected in the sensitivities. For all of these accounting estimates, we caution that future events seldom develop exactly as estimated and management’s best estimates may require adjustment.

Insurance liabilities and reserves. We calculate and maintain reserves for the estimated future payment of claims to our policyholders and contractholders based on actuarial assumptions and in accordance with U.S. GAAP and industry practice. Many factors can affect these reserves, including, but not limited to: interest rates; investment returns and volatility; economic and social conditions, such as inflation, unemployment, home price appreciation or depreciation, and health care experience (including type of care and cost of care); policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next); insured mortality (i.e., life expectancy or longevity); insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates); future premium increases; expenses; and doctrines of legal liability and damage awards in litigation. Because these factors are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past had, material impacts on our reserve levels, results of operations and financial condition. For a discussion of the risks associated with our reserves and assumptions, see “Item 1A Risk Factors—We may be required to increase our reserves in our long-term care insurance, life insurance and/or annuity businesses in the fourth quarter of 2016 as a result of the changes we made to assumptions and methodologies in our long-term care insurance business in the third quarter of 2016, deviations from our estimates and actuarial assumptions or other reasons, which could have a material adverse effect on our results of operations and financial condition.”

Long-term care insurance products

During the third quarter of 2016, we completed our annual review of our long-term care insurance claim reserve assumptions. Based on this review, which included an additional year of claims experience since our last annual review in the third quarter of 2015, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves. The primary impact of assumption changes was from an overall lowering of claim termination rate assumptions for longer duration claims, particularly for reimbursement claims. We also updated our claim termination rate assumptions to reflect differences between product types, separating our indemnity and reimbursement blocks that were previously combined, and modestly refined our utilization rate assumptions and methodologies as well as refined our methodology primarily related to the calculation of incurred but not reported reserves to better reflect the aging of the in-force blocks. As a result of this review, we increased our long-term care insurance claim reserves by $460 million and increased reinsurance recoverables by $25 million in the third quarter of 2016.

In the fourth quarter of 2016, we will perform our U.S. GAAP loss recognition testing. We will incorporate the assumption and methodology changes made in the third quarter of 2016 into this test. We anticipate these changes will have a material negative impact on the margins of our long-term care insurance blocks. As a part of the process, we will consider how and to what extent incremental benefits from expected further premium rate actions or benefit reductions would help mitigate the impact of these changes. In connection with our annual testing, we will also review assumptions for incidence and interest rates, among other assumptions. The analysis and work will be completed in the fourth quarter of 2016. We will continue to regularly review our methodologies and assumptions in light of emerging experience and may be required to make further adjustments to our long-term care insurance claim reserves in the future, which could also impact our loss recognition testing results.

As previously disclosed, our acquired block of long-term care insurance had a premium deficiency in 2014. Due to the premium deficiency that existed in 2014, we monitor our acquired block frequently. The acquired block has a higher percentage of indemnity policies and therefore would be less likely to be adversely affected by the claim assumption changes made in the third quarter of 2016. Any adverse changes in our assumptions could result in the establishment of additional future policy benefit reserves. Our acquired block would not benefit significantly from additional rate actions as it is older, and therefore, there is a higher likelihood that adverse changes could result in additional losses on that block. For our acquired block of long-term care insurance, the impacts of adverse changes in assumptions would be immediately reflected in net income (loss) if our margin for this block is reduced below zero.

Fixed immediate annuity products

Historically low interest rate spreads have impacted the margins of our fixed immediate annuity products. In the second quarter of 2016, we performed our loss recognition testing and determined that we had a premium deficiency that resulted in negative margin of $32 million on our fixed immediate annuity products. The results of the test were primarily driven by the low interest rate environment in the second quarter of 2016. As a result, as of June 30, 2016, we wrote off the entire DAC balance for our fixed immediate annuity products of $14 million through amortization and increased our future policy benefit reserves by $18 million. In the third quarter of 2016, due to aging of the in-force block and the low interest environment, we determined that an additional premium deficiency existed in our fixed immediate annuity products that resulted in a further increase to our future policy benefit reserves of $6 million. These updated assumptions will remain locked-in until such time as we determine another premium deficiency exists. The impacts of future adverse changes in our assumptions could result in the establishment of additional future policy benefit reserves and would be immediately reflected in net income (loss) if our margin for this block is again reduced below zero. Any favorable variation would result in additional margin but no immediate benefit to income, and would result in higher income recognition over the remaining duration of the in-force block. Due to the premium deficiency that existed in the second and third quarters of 2016 and the current low interest rate environment, we will continue to monitor our fixed immediate annuity products frequently.

The risks we face include adverse variations in interest rates, credit spreads, persistency or lapse rates and/or mortality. Adverse experience in one or all of these risks will result in the establishment of additional benefit reserves and will be immediately reflected as a reduction to net income (loss) if our margin for this block is reduced to below zero. As of September 30, 2016, for our fixed immediate annuity products, we estimate that a combined 25 basis point reduction in interest rates or credit spreads from the September 30, 2016 levels, or 2% lower mortality, scenarios that we consider to be reasonably possible given historical changes in market conditions and experience on these products, would result in the establishment of additional benefit reserves and an after-tax charge to earnings of approximately $10 million or $15 million, respectively.

Universal and term universal life insurance products

Low interest rates can also negatively impact the financial results of our universal and term universal life insurance products. As of September 30, 2016 and December 31, 2015, we had DAC of $705 million and $898 million, respectively, and total policyholder account balances including reserves in excess of the contract value of $7,602 million and $7,490 million, respectively, related to these products. Adverse experience in long-term interest rates could result in the acceleration of DAC amortization as well as the establishment of additional benefit reserves. As of September 30, 2016, we estimate that if our assumption for reinvestment rates, as established in the fourth quarter of 2015, declined by 100 basis points and remained at that level, the result would be an after-tax charge to earnings of approximately $115 million from the acceleration of DAC amortization for our universal and term universal life insurance products. In determining interest rate assumptions for our universal and term universal life insurance products we also consider credit spreads, defaults, investment expenses, crediting rates and investment philosophy. To update interest rates assumption for DAC amortization, we would use the risk-free forward curve for new money assumptions as opposed to the fixed rate sensitivity above. Additionally, there are other assumptions, including expected mortality and persistency or lapse rates, which can influence DAC amortization and the establishment of additional benefit reserve estimates for our universal and term universal life insurance products. We plan to update all of these assumptions in the fourth quarter of 2016.

Valuation of deferred tax assets. Deferred tax assets represent the tax benefit of future deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax assets are measured using the enacted tax rates expected to be in effect when such benefits are realized if there is no change in tax law. Under U.S. GAAP, we test the value of deferred tax assets for impairment on a quarterly basis at our taxpaying component level within each tax jurisdiction, consistent with our filed tax returns. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. In determining the need for a valuation allowance,

we consider carryback capacity, reversal of existing temporary differences, future taxable income and tax planning strategies. Tax planning strategies are actions that are prudent and feasible, that an entity ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused. The determination of the valuation allowance for our deferred tax assets requires management to make certain judgments and assumptions regarding future operations that are based on our historical experience and our expectations of future performance. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance, which is impacted by, but not limited to, policyholder behavior, competitor pricing, new product introductions, and specific industry and market conditions. Based on our analysis, we believe it is more likely than not that the results of future operations will generate sufficient taxable income to enable us to realize the deferred tax assets for which we have not established valuation allowances.

During the third quarter of 2016, we recorded a valuation allowance of $265 million on deferred tax assets. In light of our latest financial projections, including the projected impact to current and future earnings associated with higher expected claim costs in our long-term care insurance business as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowance related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership.

As of September 30, 2016, we had a net deferred tax liability of $1,151 million. We had a consolidated gross deferred tax asset of $941 million related to net operating loss carryforwards of $2,704 million as of September 30, 2016, which, if unused, will expire beginning in 2023. Foreign tax credit carryforwards amounted to $697 million as of September 30, 2016, which, if unused, will begin to expire in 2019. The amount of carryforward set to expire in 2019 is $11 million. As of September 30, 2016, we had a $588 million valuation allowance related to foreign tax credits, state deferred tax assets, foreign net operating losses and a specific federal separate tax return net operating loss deferred tax asset.

We are in a three-year cumulative pre-tax loss position in our U.S. jurisdiction as of September 30, 2016. A cumulative loss position is considered significant negative evidence in assessing the realizability of our deferred tax assets. Our ability to realize our net U.S. deferred tax liability of $1,151 million, which includes deferred tax assets of $1,638 million related to net operating loss and foreign tax credit carryforwards, is primarily dependent upon generating sufficient taxable income in future years. Management has concluded that there is sufficient positive evidence to overcome this negative evidence for the net operating losses and the majority of foreign tax credit carryforwards. This positive evidence includes the fact that: (i) our three-year cumulative pre-tax loss position includes significant charges that are not expected to recur in the future, including goodwill impairments, charges from our long-term care acquired block loss recognition testing in our U.S. Life Insurance segment in 2014, a loss on the sale of our lifestyle protection insurance business in 2015 and a loss recorded in 2015 related to the sale of our mortgage insurance business in Europe; and (ii) our profitable U.S. operating forecasts, exclusive of tax planning strategies, did not support full utilization of the net deferred tax assets related to foreign tax credit carryforwards within the U.S. federal carryforward periods based on our current projections.

Deferred taxes on permanently reinvested foreign income.We are no longer able to positively assert that some undistributed income from our foreign operations will be reinvested indefinitely. Accordingly, we have recorded U.S. deferred taxes on the income from all foreign income for financial reporting purposes.

Consolidated

General Trends and Conditions

The stability of both the financial markets and global economies in which we operate impacts the sales, revenue growth and profitability trends of our businesses as well as value of assets and liabilities. The U.S. and several international financial markets have been impacted by concerns regarding global economies and the rate

and strength of recovery, particularly given recent political and geographical events in East Asia, Europe and the Middle EastEast. Slower growth and slower growthhigher debt levels in China. WeChina have created more uncertainty for global economies, heightened by S&P’s and Moody’s downgrade of the financial strength rating of China in September 2017 and May 2017, respectively. Although some of our businesses have started to realize benefits in their financial results from improvements in the general macroeconomic environment, particularly our mortgage insurance businesses in the U.S. and Canada, we continue to operate in a challenging economic environment characterized by slow global growth, fluctuating oil and commodity prices and very low interest rates. Interest rates remain at historically low levels despite a modestthe fact the U.S. Federal Reserve has raised its benchmark lending rate two times in 2017 and market expectations remain for one additional rate increase induring 2017. Additionally, during the third quarter of 2016 after sharp declines2017, the U.S. Federal Reserve announced that it would begin to normalize monetary policy and scale back quantitative easing. Despite the Federal Reserve’s actions, U.S. Treasury yields remained lower throughout the third quarter of 2017 but rose significantly in the last week of September 2017, in response to potential tax reform. However,pro-growth stimulus policies are still uncertain and weaker inflation data has investors more cautious on the direction of longer term interest rates. The U.S. equity markets increased and credit spreads tightened during the secondthird quarter of 2016 due in part2017. Spreads initially widened when geopolitical issues and natural disasters arose, but quickly tightened driven by both positive economic data and corporate profits. U.S. fixed income markets saw reduced issuances, but demand from foreign and domestic investors continued to support valuations. Global equity markets were generally higher and the United Kingdom’s voteeconomies of the Eurozone countries continue to exit the European Union.improve. For a discussion of the risks associated with interest rates, see “Item 1A Risk Factors—Interest rates and changes in rates could materially adversely affect our business and profitability” in our 20152016 Annual Report on Form10-K.

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. These trends change as investor confidence in the markets and the outlook for some consumers and businesses shift. As a result, our sales, revenues and profitability trends of certain insurance and investment products as well as the value of assets and liabilities have been and could be further 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 global financial regulation reform will continue to affect economic and business outlooks, level of interest rates and consumer behaviors moving forward.

The U.S. and international governments, the Federal Reserve, other central banks and other legislative and regulatory bodies have taken certain actions to support the economy and capital markets, influence interest rates, influence housing markets and mortgage servicing and provide liquidity to promote economic growth. These include various mortgage restructuring programs implemented or under consideration by the GSEs, lenders, servicers and the U.S. government. Outside of the United States, various governments and central banks have taken actions to stimulate economies, stabilize financial systems and improve market liquidity. In aggregate, these actions had a positive effect in the short term on the economies of these countries and their markets; however, there can be no assurance as to the future impact these types of actions may have on the economic and financial markets, including levels of interest rates and volatility. A delayed economic recovery period, a U.S. or global recession or regional or global financial crisis could materially and adversely affect our business, financial condition and results of operations.

Consolidated Results of Operations

The following is a discussion of our consolidated results of operations. For a discussion of our segment results, see “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.”

Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016

The following table sets forth the consolidated results of operations for the periods indicated:

 

  Three months ended
September 30,
 Increase
(decrease) and
percentage

change
   Three months ended
September 30,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2016         2015         2016 vs. 2015       2017 2016 2017 vs. 2016 

Revenues:

          

Premiums

  $1,108  $1,145  $(37 (3)%   $1,135  $1,108  $27   2% 

Net investment income

   805  783  22  3   797 805 (8  (1)% 

Net investment gains (losses)

   20  (51 71  139   85 20 65  NM(1) 

Policy fees and other income

   217  223  (6 (3)%    198 217 (19  (9)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total revenues

   2,150  2,100  50  2   2,215  2,150  65  3% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   1,662  1,290  372  29   1,344  1,662  (318  (19)% 

Interest credited

   173  179  (6 (3)%    164 173 (9  (5)% 

Acquisition and operating expenses, net of deferrals

   269  314  (45 (14)%    265 269 (4  (1)% 

Amortization of deferred acquisition costs and intangibles

   94  563  (469 (83)%    83 94 (11  (12)% 

Interest expense

   77  105  (28 (27)%    73 77 (4  (5)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total benefits and expenses

   2,275  2,451  (176 (7)%    1,929  2,275  (346  (15)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Loss from continuing operations before income taxes

   (125 (351 226  64

Provision (benefit) for income taxes

   222  (134 356   NM(1) 

Income (loss) from continuing operations before income taxes

   286 (125 411  NM(1) 

Provision for income taxes

   102 222 (120  (54)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Loss from continuing operations

   (347 (217 (130 (60)% 

Income (loss) from continuing operations

   184 (347 531  153% 

Income (loss) from discontinued operations, net of taxes

   15  (21 36  171   (9 15 (24 (160)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Net loss

   (332 (238 (94 (39)% 

Net income (loss)

   175 (332 507  153% 

Less: net income attributable to noncontrolling interests

   48  46  2  4   68 48 20  42% 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

  $(380 $(284 $(96 (34)% 

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

  $107  $(380 $487   128% 
  

 

  

 

  

 

    

 

  

 

  

 

  

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.

Premiums.Premiums consist primarily of premiums earned on insurance products for mortgage, long-term care, life and accident and health insurance, single premium immediate annuities and structured settlements with life contingencies.

 

Our U.S. Life Insurance segment decreased $59increased $23 million. Our life insurance business decreased $47 million mainly attributable to higher ceded reinsurance and lower sales in the current year. Our long-term care insurance business decreased $8increased $31 million largely attributable to policy terminations and lower sales in the current year. This decrease was partially offset by $32from $21 million of increased premiums in the current year fromin-force rate actions approved and implemented. Our fixed annuitieslife insurance business decreased $4$8 million principally from lower salesmainly driven by continued runoff of our life-contingentterm life insurance products, including higher lapses primarily from our large15-year and20-year term life insurance blocks entering their post-level guaranteed premium rate periods in the current year.

Corporate and Other activities decreased $5 million largely related to the sale of our European mortgage insurance business in May 2016.

Our Australia Mortgage Insurance segment decreased $4 million mainly driven by lower flow volume and the seasoning of our smaller prior year in-force blocks of business in the current year. The decrease was also attributable to a favorable adjustment of $8 million relating to refinements to premium recognition factors in the prior year that did not recur. These decreases were partially offset by higher

policy cancellations, lower ceded reinsurance and higher premiums in the current year as a result of the premium recognition factors that were refined in the prior year. The three months ended September 30, 2016 included an increase of $1 million attributable to changes in foreign exchange rates.

Our U.S. Mortgage Insurance segment increased $23 million mainly attributable to higher average flow mortgage insurance in-force in the current year. The prior year included an accrual for premium refunds related to policy cancellations that was reversed in the first quarter of 2016.

 

Our Canada Mortgage Insurance segment increased $8$7 million principally from the seasoning of our larger, more recentin-force blocks of business.

Our U.S. Mortgage Insurance segment increased $6 million mostly attributable to higher average flow insurancein-force, partially offset by lower rates on our mortgage insurance in-force in the current year.

Our Australia Mortgage Insurance segment decreased $10 million largely due to the seasoning of our smaller prior yearin-force blocks of business and lower policy cancellations in the current year. The three months ended September 30, 20162017 included a decreasean increase of $2$3 million attributable to changes in foreign exchange rates.

Net investment income.Net investment income represents the income earned on our investments. For discussion of the change in net investment income, see the comparison for this line item under “—Investments and Derivative Instruments.”

Net investment gains (losses).Net investment gains (losses) consist primarily of realized gains and losses from the sale or impairment of our investments, unrealized and realized gains and losses from our trading securities and derivative instruments. For discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

Policy fees and other income. Policy fees and other income consists 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 U.S. Life Insurance segment decreased $21 million mostly attributable to our life insurance business primarily as a result of suspending sales of these products on March 7, 2016 and a decline in our term universal and universal life insurancein-force blocks in the current year. The decrease was also driven by an $8 million unfavorable model refinement in the current year.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of claim costs incurred related to mortgage insurance products and benefits paid and reserve activity related to current claims and future policy benefits on insurance and investment products for long-term care, life and accident and health insurance, structured settlements and single premium immediate annuities with life contingencies.

 

Our U.S. Life Insurance segment increased $401decreased $301 million. Our long-term care insurance business increased $437decreased $366 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $435 million, net of reinsurance. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information). The increasedecrease was also attributable topartially offset by aging and growth of thein-force block, and higher severity on new claims in the current year. These increases were partially offset byand a less favorable impact of $7 million from reduced benefits of $24 million in the current year related toin-force rate actions approved and implemented. Our life insurance business decreased $32increased $64 million principally relatedprimarily attributable to higher ceded reinsurance and favorable mortality in our term life insurance products, partially offset bya $30 million unfavorable model refinement, unfavorable mortality in ourand higher universal life insurance productsreserves in the current year.year reflecting our previously updated assumptions from the fourth quarter of 2016. Our fixed annuities business decreased $4increased $1 million attributable to lower interest credited, lower salesas $3 million of our life-contingent products and less unfavorable mortality in the current year. These decreases were partially offset by an increase inhigher reserves of $6 million related tofrom loss recognition testing in our fixed immediate annuity products primarily drivenwere mostly offset by aging of the in-force and the lowlower interest rate environmentcredited in the current year (see “—Critical Accounting Estimates” for additional information).year.

Our Canada Mortgage Insurance segment decreased $12 million largely from lower new delinquencies, net of cures, and from a lower average reserve per delinquency in the current year.

 

Our Australia Mortgage Insurance segment increased $10decreased $8 million largely attributable to higherlower new delinquencies, as well as a higher average reserve per delinquency resultingnet of cures, and from unfavorableimproved aging of existing delinquencies primarily in commodity-dependent regions in the current year. The prior year included an increase in reserves of $9 million that did not recur mainly related to the estimate of the period of time it takes for a delinquent loan to be reported.

Our Canada Mortgage Insurance segment increased $6 million largely attributable to an increase in the number of new delinquencies, net of cures, and a higher average reserve per delinquency from higher severity as a result of economic pressure in oil-producing regions in the current year. The three months ended September 30, 2016 included a decrease of $1 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment decreased $27$1 million in the current yearprimarily due to a continued decline in newfavorable net cures and aging of existing delinquencies, primarily in our 2005 through 2008 book years andmostly offset by a favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies.

Our Runoff segment decreased $16 million primarily attributable to a decrease in guaranteed minimum death benefit (“GMDB”) reserves in our variable annuity products due to favorable equity market performance in the current year and unfavorable mortality in our corporate-owned life insurance productsdelinquencies in the prior year.year that did not recur.

Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances. Our U.S. Life Insurance segment decreased $8$12 million primarily related to our fixed annuities business predominantly from a decrease in crediting rates and lower average account values in the current year.

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 costs and expenses that are related directly to the successful acquisition of new or renewal insurance policies and investment contracts, such as first-year commissions in excess of ultimate renewal commissions and other policy issuance expenses.

 

CorporateOur Australia Mortgage Insurance segment decreased $5 million primarily from a change in the classification of contract fees amortization expense, which we began recording to amortization of DAC and Other activitiesintangibles as of the second quarter of 2017.

Our Runoff segment decreased $29$4 million mainly driven bymostly from lower legal accruals and expenses of $20 million and lower net expenses after allocations to our operating segmentsstate guaranty fund assessments in the current year.

 

Our U.S. Life Insurance segment decreased $27 million. Our long-term care insurance business decreased $17 million principally from lower sales in the current year. Our life insurance business decreased $17 million primarily from lower sales in the current year. Our fixed annuities business increased $7 million largely attributable to a $12 million unfavorable correction related to state guaranty funds, partially offset by lower sales in the current year.

Our Australia Mortgage Insurance segment decreased $4$2 million primarily from an early debt redemption payment of $2 million in July 2015 related to the redemption of AUD$90 million of Genworth Financial Mortgage Insurance Pty Limited’s subordinated floating rate notes that were scheduled to mature in 2021.

Our U.S. Mortgage Insurance segment increased $7 million primarily from higherlower production costs in the current year.

 

Our Canada Mortgage Insurance segmentCorporate and Other activities increased $5$8 million mainly driven by higher stock-based compensation expense from an increase in Genworth MI Canada Inc.’s (“Genworth Canada”) share priceconsulting fees in the current year compared to a decrease in Genworth Canada’s share price in the prior year.

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, PVFP and capitalized software.

 

Our U.S. Life Insurance segment decreased $461$19 million principally related todriven mostly by our life insurance business driven mostly by a $455 million impairment of DACprincipally as a result of loss recognition testing of certaina net $15 million favorable model refinement in the current year. The decrease was partially offset by higher amortization in our term universal life insurance product reflecting previously updated lapse assumptions. In the current year, we have also experienced higher lapses and accelerated DAC amortization associated with our large15-year and20-year term life insurance policiesblocks entering their post-level guaranteed level premium rate periods.

Our Australia Mortgage Insurance segment increased $6 million principally as a result of a change in the prior yearclassification of contract fees amortization expense that was previously recorded to acquisition and operating expenses, net of deferrals, as part of a life block transaction that did not recur and from lower lapses in the current year.

Our Runoff segment decreased $10 million principally from favorable equity market performance related to our variable annuity products in the current year.discussed above.

Interest expenseexpense.. Interest expense represents interest related to our borrowings that are incurred at Genworth Holdings or subsidiaries and ournon-recourse funding obligations and interest expense related to the Tax Matters Agreement and certain reinsurance arrangements being accounted for as deposits.

Our U.S. Life Insurance segment decreased $20 million principally as a result of the redemption of certain non-recourse funding obligations as part of a life block transaction completed in the first quarter of 2016 and from letter of credit fees in the prior year that did not recur.

Corporate and Other activities decreased $8$4 million largely driven by a contractual change in our junior subordinated notes related to an interest rate change from fixed to floating rates in the redemption of $298 million of Genworth Holdings’ senior notes in January 2016.
current year.

Provision (benefit) for income taxes. The effective tax rate decreasedwas 35.5% for the three months ended September 30, 2017 compared to (179.0)% for the three months ended September 30, 2016 from 38.1%2016. The effective tax rate for the three months ended September 30, 2015.2017 was impacted by higher tax benefits from lower taxed foreign income. The change from aeffective tax benefit inrate for the prior year to tax expense in the current yearthree months ended September 30, 2016 was largely attributable toimpacted by a valuation allowance of $265 million recorded on deferred tax assets in the current year. In light of our latest financial projections, including the projected impact to current and future earnings associated with higher expected claim costs in our long-term care insurance business as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowance related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership. The three months ended September 30, 2016 included a decrease of $1 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.

Nine Months Ended September 30, 20162017 Compared to Nine Months Ended September 30, 20152016

The following table sets forth the consolidated results of operations for the periods indicated:

 

  Nine months ended
September 30,
 Increase (decrease)
and percentage change
   Nine months ended
September 30,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2016         2015                 2016 vs. 2015                2017 2016 2017 vs. 2016 

Revenues:

          

Premiums

  $3,029  $3,422  $(393 (11)%   $3,382  $3,029  $353   12% 

Net investment income

   2,373  2,357  16  1   2,388  2,373  15  1% 

Net investment gains (losses)

   31  (59 90  153   220 31 189  NM(1) 

Policy fees and other income

   738  672  66  10   619 738 (119  (16)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total revenues

   6,171  6,392  (221 (3)%    6,609  6,171  438  7% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   3,715  3,714  1  —     3,796  3,715  81  2% 

Interest credited

   523  540  (17 (3)%    494 523 (29  (6)% 

Acquisition and operating expenses, net of deferrals

   990  876  114  13   775 990 (215  (22)% 

Amortization of deferred acquisition costs and intangibles

   305  759  (454 (60)%    316 305 11  4% 

Interest expense

   262  315  (53 (17)%    209 262 (53  (20)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total benefits and expenses

   5,795  6,204  (409 (7)%    5,590  5,795  (205  (4)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations before income taxes

   376  188  188  100   1,019  376 643  171% 

Provision for income taxes

   355  27  328   NM (1)    348 355 (7  (2)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations

   21  161  (140 (87)%    671 21 650  NM(1) 

Loss from discontinued operations, net of taxes

   (25 (334 309  93   (9 (25 16  64% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Net loss

   (4 (173 169  98

Net income (loss)

   662 (4 666  NM(1) 

Less: net income attributable to noncontrolling interests

   151  150  1  1   198 151 47  31% 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

  $(155 $(323 $168  52

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

  $464  $(155 $619   NM(1) 
  

 

  

 

  

 

    

 

  

 

  

 

  

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.

Premiums

 

Our U.S. Life Insurance segment decreased $414increased $325 million. Our long-term care insurance business increased $34 million largely from $71 million of increased premiums in the current year fromin-force rate actions approved and implemented, partially offset by policy terminations in the current year. Our life insurance business decreased $460increased $294 million mainly attributable to higher cededthe impact of a reinsurance and lower sales in the current year. In the first quarter of 2016,treaty under which we initially ceded $326 million of certain term life insurance premiums under a new reinsurance treaty as part of a life block transaction. Our fixed annuities business decreased $14 million principally from lower sales of our life-contingent productstransaction in the current year. Our long-term care insurance business increased $60 million principally from $100 millionfirst quarter of increased premiums in the current year from in-force rate actions approved and implemented,2016, partially offset by policy terminations and lower salesthe continued runoff of our term life insurance products in the current year.

 

Our Canada Mortgage Insurance segment increased $26 million principally from the seasoning of our larger, more recentin-force blocks of business.

Our U.S. Mortgage Insurance segment increased $25 million mainly attributable to higher average flow insurance in-force, partially offset by lower rates on our mortgage insurance in-force in the current year. The prior year included the reversal of an accrual for premium refunds related to policy cancellations that did not recur.

Our Australia Mortgage Insurance segment decreased $16$18 million primarily driven by a $13predominantly from the seasoning of our smaller prior yearin-force blocks of business. The nine months ended September 30, 2017 included an increase of $7 million decrease attributable to changes in foreign exchange rates during the nine months ended September 30, 2016. Premiums also decreased from lower flow volume and the seasoning of our smaller prior year in-force blocks of business in the current year, as well as the termination of a customer relationship with respect to new business effective in the second quarter of 2015. The decrease was also attributable to a favorable adjustment of $8 million relating to refinements to premium recognition factors in the prior year that did not recur. These decreases were partially offset by higher policy cancellations, lower ceded reinsurance and higher premiums in the current year as a result of the premium recognition factors that were refined in the prior year.rates.

Corporate and Other activities decreased $8$5 million largely related to the sale of our European mortgage insurance business in May 2016.

Our U.S. Mortgage Insurance segment increased $40 million mainly attributable to higher average flow mortgage insurance in-force, partially offset by higher ceded reinsurance premiums in the current year. The prior year included an accrual for premium refunds related to policy cancellations that was reversed in the first quarter of 2016.

Our Canada Mortgage Insurance segment increased $6 million primarily from the seasoning of our larger, more recent in-force blocks of business in the current year. The nine months ended September 30, 2016 included a decrease of $25 million attributable to changes in foreign exchange rates.

Net investment income.For discussion of the change in net investment income, see the comparison for this line item under “—Investments and Derivative Instruments.”

Net investment gains (losses).For discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

Policy fees and other income

 

Corporate and Other activities increased $86decreased $78 million. The currentprior year included a gain of $64 million from the early extinguishment of debt related to the redemption of a securitization entity and a gain of $11 million attributable to the sale of assets to Pacific Life Insurance Company (“Pac Life”). Policy fees and other income in the prior year included losses from non-functional currency transactions attributable to changes in foreign exchange rates related to intercompany transactions.

Our Australia Mortgage Insurance segment increased $4 million primarily due to non-functional currency transactions attributable to remeasurement and repayment of intercompany loans in the prior year that did not recur.

Our Runoff segment decreased $17 million mainly attributable to lower account values in our variable annuity products in the current year.

 

Our U.S. Life Insurance segment decreased $7$38 million primarily frommostly attributable to our life insurance business largely related to lowerprimarily as a result of suspending sales of these products on March 7, 2016 and a decreasedecline in our term universal and universal life insurancein-force blocks in the current year. The decrease was also related to an $8 million unfavorable model refinement in the current year.

Benefits and other changes in policy reserves

 

Our U.S. Life Insurance segment increased $35$179 million. Our long-term care insurance business increased $473decreased $292 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $435 million, net of reinsurance. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information). The increasedecrease was also attributable to aging and growth of the in-force block, higher severity on new claims and $68 million of unfavorable adjustments which included refinements to the calculations of reserves in the prior year that did not recur and favorable claim terminations in the current year. These increasesdecreases were partially offset by aging and growth of thein-force block, higher severity on new claims, higher incremental reserves of $64 million recorded in connection with an accrual for profits followed by losses and a $38 million less favorable impact from reduced benefits of $125 million in the current year related toin-force rate actions approved and implemented. Our life insurance business decreased $404increased $429 million principally related to higher cededthe impact of a reinsurance and favorable mortality in our term life insurance products in the current year. In the first quarter of 2016,treaty under which we initially ceded $331 million of certain term life insurance reserves under a new reinsurance treaty as part of a life block transaction. These decreases were partially offset bytransaction in the first quarter of 2016. The increase was also attributable to higher reserves in our universal and term universal life insurance productsreserves reflecting our previously updated assumptions from the fourth quarter of 2015.2016 and unfavorable mortality in the current year. The current year also included a $30 million unfavorable model refinement. Our fixed annuities business decreased $34

increased $42 million largely attributable to $45 million of lower assumed reinsurance in connection with the recapture of certain life-contingent products by a third party in the current year. The decrease was also attributable to lower sales of our life-contingent products and lower interest credited in the current year. These decreases were partially offset by an increase in reserves of $24 million related to loss recognition testing in our fixed immediate annuity products driven primarily by the low interest rate environment (see “—Critical Accounting Estimates” for additional information). The decrease was also partially offset by unfavorable mortality in the current year.

Our Australia Mortgage Insurance segment increased $23 million largely attributable to higher new delinquencies, as well as a higher average reserve per delinquency resulting from unfavorable aging of existing delinquencies primarily in commodity-dependent regions in the current year. In addition, the prior year included a favorable adjustment of $7 million in the first quarter of 2015 related to the expected recovery of claims paid in prior periods that did not recur. These increases were partially offset by an increase in reserves of $9 million in the prior year that did not recur, mainly related to the estimate of the period of time it takes for a delinquent loan to be reported. The nine months ended September 30, 2016 included a decrease of $4 million attributable to changes in foreign exchange rates.

Our Canada Mortgage Insurance segment increased $11 million primarily attributable to an increase in the number of new delinquencies, net of cures, and a higher average reserve per delinquency from higher severity as a result of economic pressure in oil-producing regionspartially offset by favorable mortality in the current year. The nine months ended September 30, 2016 included a decrease of $6 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment decreased $51$45 million in the current yearprimarily due to a continued decline in new delinquencies primarily in our 2005 through 2008 book years and a favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies. These decreases were partially offset by a lower net benefit from cures and aging of existing delinquencies and from a $5 million higher favorable reserve adjustment in the current year.

 

Our Canada Mortgage Insurance segment decreased $39 million largely from lower new delinquencies, net of cures, as well as from a lower average reserve per delinquency and from favorable loss reserve development related to incurred but not reported delinquencies as of December 31, 2016.

Our Runoff segment decreased $10$8 million primarily attributable to decrease in GMDBlower guaranteed minimum death benefits (“GMDB”) reserves in our variable annuity products due to favorable equity market performance in the current year and unfavorable mortality in our corporate-owned life insurance products in the prior year.

 

Corporate and Other activitiesOur Australia Mortgage Insurance segment decreased $7$5 million largely relatedattributable to $6 million of favorablenon-reinsurance recoveries on paid claims in the salesecond quarter of our European mortgage insurance business2017 and a higher net benefit from cures and aging of existing delinquencies, partially offset by higher new delinquencies primarily in May 2016.commodity-dependent regions in the current year. The nine months ended September 30, 2017 included an increase of $3 million attributable to changes in foreign exchange rates.

Interest credited

 

Our U.S. Life Insurance segment decreased $21 million. Our$38 million primarily related to our fixed annuities business decreased $14 million largely driven by a decrease inpredominantly from lower average account values and lowera decrease in crediting rates in the current year. Our life insurance business decreased $7 million predominantly from lower crediting rates in our universal life insurance products in the current year.

 

Our Runoff segment increased $4$9 million largely related to higher cash values in our corporate-owned life insurance products in the current year.

Acquisition and operating expenses, net of deferrals

 

Corporate and Other activities increased $97

Corporate and Other activities decreased $126 million mainly driven by $69 million for the settlement ofIn re Genworth Financial, Inc. Securities Litigationand an additional $10 million of legal fees and expenses related to this litigation in the current year. In addition, we paid a make-whole expense of $20 million on the early redemption of Genworth Holdings’ 2016 senior notes in January 2016 and paid broker, advisor and investment banking fees of $18 million associated with Genworth Holdings’ bond consent solicitation in March 2016. The increase in the current year was also attributable to an

additional loss of $9 million recorded related to the sale of our mortgage insurance business in Europe. These increases were partially offset by lower net expenses after allocations to our operating segments in the current year.

Our U.S. Mortgage Insurance segment increased $12 million primarily from higher production costs in the current year. This increase was partially offset by a write-off of software in the prior year that did not recur.

Our Canada Mortgage Insurance segment increased $8 The prior year expenses included $79 million mainly drivenof a litigation settlement and related legal expenses, $20 million of expenses related to the early redemption of debt, $18 million of bond consent fees and a $9 million loss related to the sale of our European mortgage insurance business. These decreases were partially offset by higher stock-based compensation expense from an increase in Genworth Canada’s share priceconsulting fees in the current year compared to a decrease in Genworth Canada’s share price in the prior year. The nine months ended September 30, 2016 included a decrease of $3 million attributable to changes in foreign exchange rates.

 

Our U.S. Life Insurance segment decreased $63 million. Our long-term care insurance business increased $24 million from guaranty fund assessments in connection with the Penn Treaty liquidation in the current year. Our life insurance business decreased $19 million primarily from lower operating expenses attributable to the suspension of sales on March 7, 2016. The decrease was also attributable to $7 million.million of restructuring charges and expenses of $5 million associated with the life block transaction in the prior year that did not recur. Our fixed annuities business increased $59decreased $68 million largely attributable to a $55 million ceding commission paidpayment in connection with the recapture of certain life-contingent products by a third party in the prior year that did not recur and lower operating expenses as a result of the suspension of sales on March 7, 2016. The prior year included an unfavorable correction of $12 million related to state guaranty funds and a $3 million restructuring charge, partially offset by lower sales in the current year. Our life insurance business decreased $30 million primarily related to lower sales, partially offset by $7 million in restructuring charges in the current year. Our long-term care insurance business decreased $22 million predominantly from lower sales and marketing costs, partially offset by $6 million in restructuring charges and a $3 million write-off of a receivable associated with a disputed reinsurance claim in the current year.funds.

 

Our Australia Mortgage Insurance segment decreased $7$17 million primarily from a change in the classification of contract fees amortization expense, which we began recording to amortization of DAC and intangibles in the second quarter of 2017, as well as lower employee compensation and benefit expenses and a decrease of $3 million attributable to changes in foreign exchange ratesprofessional fees in the current year and an early debt redemption payment of $2year.

Our Runoff segment decreased $7 million largely driven by lower state guaranty fund assessments in July 2015 related to the redemption of AUD$90 million of Genworth Financial Mortgage Insurance Pty Limited’s subordinated floating rate notes that were scheduled to mature in 2021.current year.

Amortization of deferred acquisition costs and intangibles

 

Our Australia Mortgage Insurance segment increased $20 million as a result of a change in the classification of contract fees amortization expense that was previously recorded to acquisition and operating expenses, net of deferrals, as discussed above, and higher contract fees being amortized in the current year.

Our U.S. Life Insurance segment decreased $447$10 million. Our lifelong-term care insurance business decreased $463$8 million principally related to an impairment of DAC of $455 millionfrom a smallerin-force block in the current year as a result of loss recognition testing of certain term life insurance policies in the prior year as part of a life block transaction that did not recur and from lower lapses in the current year. Our fixed annuities business increased $13 million predominantly related to the write-off of DAC in connection with loss recognition testing in our fixed immediate annuity products of $14 million driven primarily by the low interest rate environment in the current year (see “—Critical Accounting Estimates” for additional information).

sales. Our life insurance business increased $17 million largely related to a $41 million unfavorable term conversion mortality assumption correction and higher amortization in our term universal life insurance product reflecting previously updated lapse assumptions, partially offset by a net $15 million favorable model refinement and an $11 million refinement related to reinsurance rates in the current year. Our fixed annuities business decreased $19 million predominantly related to thewrite-off of DAC in connection with loss recognition testing in our fixed immediate annuity products of $14 million in the prior year that did not recur.

 

Our Runoff segment decreased $7$5 million primarily related to our variable annuity products principally from favorable equity market performance and lower account values, partially offset by lower net investment losses in the current year.

Interest expense

 

Our U.S. Life Insurance segment decreased $34$26 million driven by our life insurance business principally as a result of the redemption of certain non-recourse funding obligations as part of a life block transaction completed in the first quarter of 2016 which included the redemption of certainnon-recourse funding obligations and lower letter of credit fees. These decreases were partially offset by thewrite-off of $9 million of deferred borrowing costs associated with ournon-recourse funding obligations as partwell as the restructuring of a life block transaction and the impact of credit rating downgrades which increased the cost of financing term life insurance reserves in the current year.captive reinsurance entity.

 

Corporate and Other activities decreased $19$26 million largely driven by the redemptiona favorable correction of $298$11 million of Genworth Holdings’ seniorrelated to our Tax Matters Agreement liability and a contractual change in our junior subordinated notes in January 2016.related to an interest rate change from fixed to floating rates.

Provision for income taxes. The effective tax rate increaseddecreased to 34.1% for the nine months ended September 30, 2017 from 94.5% for the nine months ended September 30, 2016 from 14.3%2016. The effective tax rate for the nine months ended September 30, 2015.2017 was impacted by higher tax benefits from lower taxed foreign income. The increase in the effective tax rate for the nine months ended September 30, 2016 was largely attributable toimpacted by a valuation allowance of $265 million recorded on deferred tax assets in the current year. In light of our latest financial projections, including the projected impact to current and future earnings associated with higher

expected claim costs in our long-term care insurance business as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowance related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership. The increase in the effective tax ratesrate for the nine months ended September 30, 2016 was also related to true ups on international income in the prior year, decreased tax benefits from lower taxed foreign income in the current year compared to the prior year and decreased tax benefits from tax favored investments in the current year compared to the prior year. These increases were partially offsetimpacted by a tax benefit in the current year attributable to the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe and true ups on state income taxesdue to taxable gains supporting the recognition of these deferred tax assets in the prior year. The nine months ended September 30, 2016 included a decrease

Use of $9 million attributable to changes in foreign exchange rates.non-GAAP measures

Reconciliation of net lossincome (loss) to netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders

We usenon-GAAP financial measures entitled “net“adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders” and “net“adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per common share.” NetAdjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per common share is derived from netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. We define netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding theafter-tax effects of income attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions, restructuring costs and infrequent or unusualnon-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment ofnon-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusualnon-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A 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) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and restructuring costs are also excluded from netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders because, in our opinion, they are not indicative of overall operating trends. Infrequent or unusualnon-operating items are also excluded from netadjusted 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 netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, including netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per 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. Management also uses netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders have occurred in the past and could, and in some cases will, recur in the future. NetAdjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and netadjusted 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 (loss) available to Genworth Financial, Inc.’s common stockholders or net income (loss) 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 netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.

Adjustments to reconcile net loss attributableincome (loss) available to Genworth Financial, Inc.’s common stockholders and netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders assume a 35% tax rate (unless otherwise indicated) and are net of the portion attributable to noncontrolling interests. Net investment gains (losses) are also adjusted for DAC and other intangible amortization and certain benefit reserves.

The following table includes a reconciliation of net lossincome (loss) available to Genworth Financial, Inc.’s common stockholders to netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the periods indicated:

 

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

(Amounts in millions)

      2016         2015         2016         2015         2017     2016     2017     2016   

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

  $(380 $(284 $(155 $(323

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

  $107  $(380 $464  $(155

Add: net income attributable to noncontrolling interests

   48  46  151  150    68 48 198 151
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net loss

   (332 (238 (4 (173

Net income (loss)

   175 (332 662 (4

Income (loss) from discontinued operations, net of taxes

   15  (21 (25 (334   (9 15 (9 (25
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income (loss) from continuing operations

   (347 (217 21  161    184 (347 671 21

Less: income from continuing operations attributable to noncontrolling interests

   48  46  151  150    68 48 198 151
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders

   (395 (263 (130 11    116 (395 473 (130

Adjustments to income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders:

          

Net investment (gains) losses, net (1)

   (18 33  (38 29    (62 (18 (161 (38

(Gains) losses on sale of businesses

   —      —     (3  —       —     —     —    (3

(Gains) losses on early extinguishment of debt, net(2)

   —     2  (48 2    —     —     —    (48

(Gains) losses from life block transactions

   —     455  9  455 

Losses from life block transactions

   —     —     —    9

Expenses related to restructuring

   2   —     22  3    1 2 2 22

Fees associated with bond consent solicitation

   —      —     18   —       —     —     —    18

Taxes on adjustments

   6  (163 (9 (163   21 6 56 (9
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

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

  $(405 $64  $(179 $337 

Adjusted operating income (loss) available to Genworth Financial, Inc.’scommon stockholders

  $76  $(405 $370  $(179
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1)For the three months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for net investment (gains) losses attributable to noncontrolling interests of $23 million and 2015,$2 million, respectively. For the nine months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of zero and $(10)$(15) million, respectively, and adjusted for the portion of net investment gains (losses)(gains) losses attributable to noncontrolling interests of $2$59 million and $(8) million, respectively. For the nine months ended September 30, 2016 and 2015, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(15) million and $(24) million, respectively, and adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $8 million and $(6) million, respectively.
(2)For the three and nine months ended September 30, 2015, (gains) losses on the early extinguishment of debt were adjusted for the portion attributable to noncontrolling interests of $1 million.

We recorded apre-tax expense of $1 million in both the third and first quarters of 2017 related to restructuring costs as the company continues to evaluate and appropriately size its organizational needs and expenses.

In Junethe third quarter of 2016, we completedrecorded apre-tax expense of $2 million related to restructuring costs as part of an expense reduction plan as the salecompany evaluated and appropriately sized its organizational needs and expenses.

In the second quarter of our term life insurance new business platform and recorded a pre-tax gain of $12 million. In May 2016, we completed the sale of our mortgage insurance business in Europe and recorded an additionalpre-tax loss of $2 million. million; we completed the sale of our term life insurance new business platform and recorded apre-tax gain of $12 million; we settled restricted borrowings related to a securitization entity and recorded a $64 millionpre-tax gain related to the early extinguishment of debt; and we recorded apre-tax expense of $5 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.

In the first quarter of 2016, we recorded an estimated apre-tax loss of $7 million and a tax benefit of $27 million related to the planned sale of this business. We also incurred a tax charge of $7 millionour mortgage insurance business in the third quarter of 2015 from potential business portfolio changes related to this business. These transactions were excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the periods presented as they related to a gain (loss) on the sale of businesses.

In June 2016, we settled restricted borrowings of $70 million related to a securitization entity and recorded a $64 million pre-tax gain related to the early extinguishment of debt. In January 2016,Europe; we paid apre-tax make-whole expense of $20 million related to the early redemption of Genworth Holdings’ 2016 Notes. Wenotes; we also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for apre-tax gain of $4 million in the first quarter of 2016. In the third quarter of 2015, we paid an early redemption payment of approximately $1 million, net of the portion attributable to noncontrolling interests, related to the early redemption of Genworth Financial Mortgage Insurance Pty Limited’s notes that were scheduled to mature in 2021. In the third quarter of 2015, we also repurchased approximately $50 million principal amount of Genworth Holdings’ notes with various maturity dates for a pre-tax loss of $1 million. These transactions were excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the periods presented as they related to a gain (loss) on the early extinguishment of debt.

In the first quarter of 2016,million; we completed a life block transaction resulting in apre-tax loss of $9 million in connection with the early extinguishment ofnon-recourse funding obligations. In the third quarter of 2015,obligations; and we recorded apre-tax DAC impairment of $455 million on certain term life insurance policies in connection with entering into an agreement to complete a life block transaction.

In the third, second and first quarters of 2016, we recorded a pre-tax expense of $2 million, $5 million and $15 million respectively, related to restructuring costs as part of an expense reduction plan as we evaluatethe company evaluated and appropriately size oursized its organizational needs and expenses. In the second quarter of 2015, we also recorded a pre-tax expense of $3 million related to restructuring costs.

There were no infrequent or unusual items excluded from netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders during the periods presented other than the following item. We incurred fees incurred during the first quarter of 2016 related to Genworth Holdings’ bond consent solicitation of $18 million for broker, advisor and investment banking fees.

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 common shares outstanding for the periods indicated:

 

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

(Amounts in millions, except per share amounts)

      2016         2015         2016         2015          2017         2016      2017       2016   

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders per common share:

     

Income (loss) from continuing operations available to GenworthFinancial, Inc.’s common stockholders per share:

       

Basic

  $(0.79 $(0.53 $(0.26 $0.02   $0.23   $(0.79 $0.95   $(0.26
  

 

  

 

  

 

  

 

   

 

   

 

  

 

   

 

 

Diluted

  $(0.79 $(0.53 $(0.26 $0.02   $0.23   $(0.79 $0.94   $(0.26
  

 

  

 

  

 

  

 

   

 

   

 

  

 

   

 

 

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

     

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

       

Basic

  $(0.76 $(0.57 $(0.31 $(0.65  $0.21   $(0.76 $0.93   $(0.31
  

 

  

 

  

 

  

 

   

 

   

 

  

 

   

 

 

Diluted

  $(0.76 $(0.57 $(0.31 $(0.65  $0.21   $(0.76 $0.93   $(0.31
  

 

  

 

  

 

  

 

   

 

   

 

  

 

   

 

 

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

     

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

       

Basic

  $(0.81 $0.13  $(0.36 $0.68   $0.15   $(0.81 $0.74   $(0.36
  

 

  

 

  

 

  

 

   

 

   

 

  

 

   

 

 

Diluted

  $(0.81 $0.13  $(0.36 $0.68   $0.15   $(0.81 $0.74   $(0.36
  

 

  

 

  

 

  

 

   

 

   

 

  

 

   

 

 

Weighted-average common shares outstanding:

            

Basic

   498.3  497.4  498.3  497.3    499.1    498.3  498.9    498.3 
  

 

  

 

  

 

  

 

   

 

   

 

  

 

   

 

 

Diluted (1)

   498.3  497.4  498.3  499.0    501.6    498.3  501.2    498.3 
  

 

  

 

  

 

  

 

   

 

   

 

  

 

   

 

 

 

(1)Under applicable accounting guidance, companies in a loss position are required to use basicweighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2016, and the three months ended September 30, 2015, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share, for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million, 1.3 million and 1.8 million, respectively, would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million 498.7 million and 500.1 million, respectively. Since we had net operating income available to Genworth Financial, Inc.’s common stockholders for the three months ended September 30, 2015, we used 498.7 million diluted weighted-average common shares outstanding in the calculation of diluted net operating income available to Genworth Financial, Inc.’s common stockholders per common share.

Diluted weighted-average common shares outstanding 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 netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. See note 1110 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for a reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders of our segments and Corporate and Other activities to net loss available to Genworth Financial, Inc.’s common stockholders.activities.

We allocate our consolidated provision for income taxes to our operating segments. Our allocation methodology applies a specific tax rate to thepre-tax income (loss) of each segment, which is then adjusted in each segment to reflect the tax attributes of items unique to that segment such as foreign income. The difference between the consolidated provision for income taxes and the sum of the provision for income taxes in each segment is reflected in Corporate and Other activities. The annually-determined tax rates and adjustments to each segment’s provision for income taxes are estimates which are subject to review and could change from year to year. The effective tax rates disclosed herein are calculated using whole dollars. As a result, the percentages shown may differ from an effective tax rate calculated using rounded numbers.

Management’s discussion and analysis by segment contains selected operating performance measures including “sales” and “insurancein-force” or “riskin-force” which are commonly used in the insurance industry 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 refer to: (1) new insurance written for mortgage insurance; (2) annualized first-year premiums for long-term care and term life insurance products; (3) annualized first-year deposits plus 5% of excess deposits for universal and term universal life insurance products; (4) 10% of premium deposits for linked-benefits products; and (5) new and additional premiums/deposits for fixed annuities. Sales do not include renewal premiums on policies or contracts written during prior periods. We consider new insurance written, annualized first-year premiums/deposits, premium equivalents and new premiums/deposits 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 insurancein-force and riskin-force. Insurancein-force for our mortgage insurance businesses is a measure of the aggregate original loan balance for outstanding insurance policies as of the respective reporting date. Riskin-force for our U.S. mortgage insurance business is based on the coverage percentage applied to the estimated current outstanding loan balance. For riskin-force in our mortgage insurance businesses in Canada and Australia, we have computed an “effective” riskin-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 riskin-force has been calculated by applying to insurancein-force a factor of 35% that represents the highest expected averageper-claim payment for any one underwriting year over the life of our mortgage insurance businesses in Canada and Australia. In Australia, we have certain risk share arrangements where we providepro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicablepro-rata coverage amount provided is used when applying the factor. We consider insurancein-force and riskin-force to be measures of our operating performance because they represent measures of the size of our business at a specific date which will generate revenues and profits in a future period, rather than measures of our revenues or profitability during that period.

Management also regularly monitors and reports a loss ratio for our businesses. For our mortgage insurance businesses, the loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. For

our long-term care insurance business, the loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums. We consider the loss ratio to be a measure of underwriting performance in these businesses and helpshelp to enhance the understanding of the operating performance of our businesses.

An assumed tax rate of 35% is utilized in certain adjustments to netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and in the explanation of specific variances of operating performance.

These operating performance 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.

U.S. Mortgage Insurance segment

Trends and conditions

Results of our U.S. mortgage insurance business are affected primarily by the following factors: competitor actions; unemployment or underemployment levels; other economic and housing market trends, including interest rates, home prices, and mortgage origination volume mix and practices; the levels and aging of mortgage delinquencies, which may be affected bydelinquencies; the effect of seasonal variations; the inventory of unsold homes; loan modification and other servicing efforts; and any future litigation, among other items. Our results are subject to the performance of the U.S. housing market and the extent of the adverse impact of seasonality that we experience historically in the second half of the year.

The level of private mortgage insurance market penetration and eventual market size is affected in part by actions taken by the GSEs and the U.S. government, including the Federal Housing Administration (“FHA”), the Federal Housing Finance Agency, (“FHFA”),and the U.S. Congress, or the U.S. government which impact housing or housing finance policy. In the past, these actions have included announced changes, or potential changes, to underwriting standards, FHA pricing, GSE guaranty fees and loan limits as well aslow-down-payment programs available through the FHA or GSEs.

Mortgage origination volume increaseddecreased during the third quarter of 2017 compared to the third quarter of 2016, primarily due to a strong purchase originations market and an increasedeclines in refinance mortgage originations. Purchase mortgages are typically insured with privateThe decline in refinance mortgage insurance more often than refinance mortgages, which contributedoriginations was driven by increases in interest rates. Our flow persistency was 83% during the third quarter of 2017 compared to a larger private mortgage insurance market size77% in the third quarter of 2016, comparedin part due to the first and second quarters of 2016. Refinance originations increased from the second quarter of 2016 as mortgage interest rates declined further during the third quarter of 2016. As a result of the increase in refinance originations, we have seen sustained pressure on the persistency of our portfolio, which remained at 77%.interest rates. Our U.S. mortgage insurance estimated market share declined modestly duringfor the third quarter of 2016,2017 decreased compared to the third quarter of 2016. This decrease in market share was primarily due to the reduction in the concentration of our single premium lender paid business as we continue to selectively participate in that market and to a lesser extent, competitor pricing, the negative ratings differential relative to our competitors, and concerns expressed about Genworth’s financial condition.condition and the proposed transaction with China Oceanwide. The decline was partially offset by business gains from the addition of new customers as well as growth within our existing customer base driven, in part, we believe by competitive pricing and differentiated service levels.

New insurance written increased 38% indecreased 12% during the third quarter of 20162017 compared to the third quarter of 20152016 due to a larger purchase originationsdecline in our estimated market and refinance originations market and increased 12% compared to the second quarter of 2016 consistent with the seasonal increases in purchase originations and the increase in refinance originations driven by lower interest rates.share. We continue to manage the quality of new business through our underwriting guidelines, which we modify from time to time when circumstances warrant. In the third quarter of 2016,2017, we experienced an increase in the percentage of 97%loan-to-value new insurance written, compared to the third quarter of 2016, as the result of GSE changes in underwriting guidelines which was partially offset by refinance originations and the reduction in the percentage of 95% loan-to-value new insurance written.for purchase transactions. The percentage of single premium new insurance written decreasedincreased in the third quarter of 20162017 compared to the third quarter of 20152016 and the second quarter of 2016,2017, reflecting our selective participation in this market. There was also a higher refinance originations market compared to the second quarter of 2017. Future volumes of these products will vary depending in part on our evaluation of their risk return profile of these transactions. We have observed changes in competitor pricing protocols as well as continued competitive pricing with monthly premium borrower paid mortgage insuranceprofile.

Our loss ratio was 20% during the third quarter of 2016. In March 2016, we introduced a new national monthly premium borrower paid rate card that was effective beginning April 4, 2016. This new rate card aligned our pricing with the factors promulgated by the GSEs in the revised industry-wide risk-based capital requirements under PMIERs, features reduced rates across all loan-to-value ratios for borrowers with credit scores above 740 and is broadly competitive with the industry, including the FHA. As a result, our new insurance written consisted of higher credit quality loans, which resulted in a lower weighted-average price and a similar reduction in PMIERs capital requirements2017 compared to 21% during the second and third quartersquarter of 2016.

Our loss ratio was 21% for the three months ended September 30, 2016, reflecting a favorable reserve adjustment offset by seasonally higher new delinquencies. In the third quarter of 2016, we made a favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies.reserves. This adjustment favorably impacted the loss ratio forduring the three months ended September 30,third quarter of 2016 by six points. Additionally, the 2017 loss ratio declined due to improvements in the net benefit from cures and aging of existing delinquencies and an increase in earned premiums. New delinquencies decreased during the third quarter of 20162017 compared to the third quarter of 20152016 due to improvements in unemployment rates and housing values and the declining volume of new delinquencies from our 2005 through 2008 book years. However, the majority of our new delinquencies in the third quarter of 2016 continued to come from our 2005 through 2008 book years, which were negatively impacted by economic and housing market trends. New delinquencies increased during the third quarter of 2016 compared to the second quarter of 2016 primarily from the seasonal historical trends we see in the second half of the year. Foreclosure starts and the number of paid claims decreased during the third quarter of 20162017 as compared to the third quarter of 2015.2016. Additionally, we have seen a reduction in loans that have been subject to a modification or workout in the third quarter of 2016 compared to the third quarter of 2015.workout. We expect our level of loan modifications to continue to decline going forward in line with the expected reduction in delinquent loans and the continuing aging of delinquencies. As of September 30, 2017, we have not experienced any material impact from the recent hurricanes affecting the South Central and Southeast regions of the United States. We will continue to monitor these affected areas and support the measures enacted by the GSEs restricting foreclosure actions and providing other forms of mortgage relief for those dealing with damage in the affected areas.

As of September 30, 2016,2017, GMICO’srisk-to-capital ratio under the current regulatory framework as established under North Carolina law and enforced by the North Carolina Department of Insurance (“NCDOI”), GMICO’s domestic insurance regulator, was approximately 15.0:12.9:1, compared with arisk-to-capital ratio of approximately 15.1:13.1:1 as of June 30, 20162017 and approximately 16.4:14.5:1 as of December 31, 2015.2016. Thisrisk-to-capital ratio remains below the NCDOI’s maximumrisk-to-capital ratio of 25:1. GMICO’s ongoingrisk-to-capital ratio will depend principally on the magnitude of future losses incurred by GMICO, the effectiveness of ongoing loss mitigation activities, new business volume and profitability, the amount of policy lapses, changes in the value of affiliated assets and the amount of additional capital that is generated within the business or capital support (if any) that we provide.

Effective December 31, 2015, each GSE adopted revised PMIERs, which set forth operational and financial requirements that mortgage insurers must meet in order to remain eligible. Each approved mortgage insurer is required to provide the GSEs with an annual certification and a quarterly report as to its compliance with PMIERs. We have met all PMIERs reporting requirements as required by the GSEs. As of September 30, 2016,2017, we estimate our U.S. mortgage insurance business had available assets of approximately 117%122% of the required assets under PMIERs compared to approximately 115%122% as of June 30, 20162017 and 109%115% as of December 31, 2015.2016. As of September 30, 2016,2017, June 30, 20162017, and December 31, 2015,2016, the PMIERs sufficiency ratios were in excess of $400$500 million, $350$500 million and $200$350 million, respectively, of available assets above the PMIERs requirements. The increase during the third quarter of 2017 as compared to December 31, 2016 was driven, in part, by a higher valuation and the impact of foreign exchange of our U.S. mortgage insurance business’ holdings in Genworth Canada, positive operating cash flows execution of new reinsurance, proceeds from the sale of our European mortgage insurance business, tax proceeds and the reduction in delinquent loans. This increase was partially offset by growth in new insurance written. The value of our investment in Genworth Canada could be impacted going forward by the proposed regulatory changes discussed in more detail in “—Canada Mortgage Insurance segment—Trends and conditions.”

Effective July 1, 2016, our U.S. mortgage insurance business executed two excess of loss reinsurance transactions with a panel of reinsurers covering current and expected new insurance written for the 2016 and 2017 book years. The reinsurance transaction covering our 2016 book year and the three reinsurance transactions executed during 2015, covering our 20092014 through 20152017 book years provided an aggregate of approximately $545$510 million of PMIERs capital credit as of September 30, 2016.2017. Previously, the GSEs informed us that they expect to review and revise the existing PMIERs financial requirements for all eligible insurers. The GSEs do not anticipate any new PMIERs financial requirements becoming effective before the fourth quarter of 2018. In addition, the GSEs have stated they plan to solicit feedback from eligible insurers on proposed PMIERs revisions and provide at least 180 days written notice prior to the effective date of the new requirements.

As of September 30, 2016,2017, loans modified through the Home Affordable Refinance Program (“HARP”) accounted for approximately $15.6$13.2 billion of insurancein-force, with approximately $14.6$12.5 billion of those loans from our 2005 through 2008 book years. The volume of new HARP modifications continues to decrease as the number of loans that would benefit from a HARP modification decreases. Loans modified through HARP have extended amortization periods and reduced interest rates, which reduce borrower’s monthly payments. Over time,

we expect these modified loans to result in extended premium streams and a lower incidence of default. TheOn August 17, 2017, the U.S. government has extended HARP through the year ending December 31, 2016.2018. For financial reporting purposes, we report HARP modified loans as a modification of the coverage on existing insurancein-force rather than new insurance written.

On April 14, 2016, FHFA announced the Principal Reduction Modification program for borrowers whose loans are owned or guaranteed by Fannie Mae or Freddie Mac and who meet specific eligibility criteria. FHFA expects that approximately 33,000 borrowers will be eligible for the program. Actual participation will be dependent upon a variety of factors, including the effectiveness of loan servicer solicitations and loan modification processes. We are not anticipating this program to have a material impact on our results of operations.

Segment results of operations

Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016

The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:

 

   Three months ended
September 30,
  Increase
  (decrease) and  
percentage
change
 

(Amounts in millions)

    2016       2015      2016 vs. 2015   

Revenues:

      

Premiums

  $169   $146  $23   16

Net investment income

   16    12   4   33

Net investment gains (losses)

   —       1   (1  (100)% 

Policy fees and other income

   1    2   (1  (50)% 
  

 

 

   

 

 

  

 

 

  

Total revenues

   186    161   25   16
  

 

 

   

 

 

  

 

 

  

Benefits and expenses:

      

Benefits and other changes in policy reserves

   36    63   (27  (43)% 

Acquisition and operating expenses, net of deferrals

   45    38   7   18

Amortization of deferred acquisition costs and intangibles

   3    3   —      —  
  

 

 

   

 

 

  

 

 

  

Total benefits and expenses

   84    104   (20  (19)% 
  

 

 

   

 

 

  

 

 

  

Income from continuing operations before income taxes

   102    57   45   79

Provision for income taxes

   36    20   16   80
  

 

 

   

 

 

  

 

 

  

Income from continuing operations

   66    37   29   78

Adjustments to income from continuing operations:

      

Net investment (gains) losses

   —       (1  1   100

Expenses related to restructuring

   1    —      1   NM(1) 

Taxes on adjustments

   —       1   (1  (100)% 
  

 

 

   

 

 

  

 

 

  

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

  $67   $37  $30   81
  

 

 

   

 

 

  

 

 

  

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.
   Three months ended
September 30,
   Increase
(decrease) and
percentage
change
 

(Amounts in millions)

    2017       2016       2017 vs. 2016   

Revenues:

       

Premiums

  $175   $169   $6   4% 

Net investment income

   18   16   2  13% 

Net investment gains (losses)

   —      —      —     —  % 

Policy fees and other income

   1   1   —     —  % 
  

 

 

   

 

 

   

 

 

  

Total revenues

   194   186   8  4% 
  

 

 

   

 

 

   

 

 

  

Benefits and expenses:

       

Benefits and other changes in policy reserves

   35   36   (1  (3)% 

Acquisition and operating expenses, net of deferrals

   43   45   (2  (4)% 

Amortization of deferred acquisition costs and intangibles

   3   3   —     —  % 
  

 

 

   

 

 

   

 

 

  

Total benefits and expenses

   81   84   (3  (4)% 
  

 

 

   

 

 

   

 

 

  

Income from continuing operations before income taxes

   113   102   11  11% 

Provision for income taxes

   40   36   4  11% 
  

 

 

   

 

 

   

 

 

  

Income from continuing operations

   73   66   7  11% 

Adjustments to income from continuing operations:

       

Net investment (gains) losses

   —      —      —     —  % 

Expenses related to restructuring

   —      1   (1  (100)% 

Taxes on adjustments

   —      —      —     —  % 
  

 

 

   

 

 

   

 

 

  

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

  $73   $67   $6   9% 
  

 

 

   

 

 

   

 

 

  

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

NetAdjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly due to higher premiums resulting from higher mortgage insurancein-forcein the current year mainly attributable to lower losses and higher premiums.year.

Revenues

Premiums increased mainly attributable to higher average flow insurancein-force, partially offset by lower rates on our mortgage insurance in-force in the current year. The prior year included an accrual for premium refunds related to policy cancellations that was reversed in the first quarter of 2016.

Net investment income increased primarily from higher average invested assets in the current year.

Benefits and expenses

Benefits and other changes in policy reserves decreased in the current yearprimarily due to a continued decline inlower new delinquencies primarily in our 2005 through 2008 book years and favorable net cures and aging of existing delinquencies, mostly offset by a favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies.delinquencies in the prior year that did not recur.

Acquisition and operating expenses, net of deferrals, increaseddecreased primarily from higher productionlower operating costs in the current year.

Provision for income taxes. The effective tax rate increased slightly to 35.9% for the three months ended September 30, 2017 from 35.8% for the three months ended September 30, 2016 from 35.4% for2016. The increase in the three months ended September 30, 2015.effective tax rate was primarily attributable to decreased tax benefits related to tax favored investments in relation topre-tax income, partially offset by state taxes.

Nine Months Ended September 30, 20162017 Compared to Nine Months Ended September 30, 20152016

The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:

 

   Nine months ended
September 30,
        Increase      
  (decrease) and  
     percentage    
      change      
 

(Amounts in millions)

    2016      2015      2016 vs. 2015   

Revenues:

     

Premiums

  $489  $449  $40   9

Net investment income

   46   44   2   5

Net investment gains (losses)

   (1  1   (2  (200)% 

Policy fees and other income

   3   3   —      —  
  

 

 

  

 

 

  

 

 

  

Total revenues

   537   497   40   8
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   112   163   (51  (31)% 

Acquisition and operating expenses, net of deferrals

   125   113   12   11

Amortization of deferred acquisition costs and intangibles

   8   7   1   14
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   245   283   (38  (13)% 
  

 

 

  

 

 

  

 

 

  

Income from continuing operations before income taxes

   292   214   78   36

Provision for income taxes

   104   76   28   37
  

 

 

  

 

 

  

 

 

  

Income from continuing operations

   188   138   50   36

Adjustments to income from continuing operations:

     

Net investment (gains) losses

   1   (1  2   200

Expenses related to restructuring

   1   —      1   NM(1) 

Taxes on adjustments

   (1  1   (2  (200)% 
  

 

 

  

 

 

  

 

 

  

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

  $189  $138  $51   37
  

 

 

  

 

 

  

 

 

  

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.

   Nine months ended
September 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

    2017       2016      2017 vs. 2016   

Revenues:

      

Premiums

  $514   $489  $25   5% 

Net investment income

   53   46  7  15% 

Net investment gains (losses)

   —      (1  1  (100)% 

Policy fees and other income

   3   3  —     —  % 
  

 

 

   

 

 

  

 

 

  

Total revenues

   570   537  33  6% 
  

 

 

   

 

 

  

 

 

  

Benefits and expenses:

      

Benefits and other changes in policy reserves

   67   112  (45  (40)% 

Acquisition and operating expenses, net of deferrals

   124   125  (1  (1)% 

Amortization of deferred acquisition costs and intangibles

   10   8  2  25% 
  

 

 

   

 

 

  

 

 

  

Total benefits and expenses

   201   245  (44  (18)% 
  

 

 

   

 

 

  

 

 

  

Income from continuing operations before income taxes

   369   292  77  26% 

Provision for income taxes

   132   104  28  27% 
  

 

 

   

 

 

  

 

 

  

Income from continuing operations

   237   188  49  26% 

Adjustments to income from continuing operations:

      

Net investment (gains) losses

   —      1  (1  (100)% 

Expenses related to restructuring

   —      1  (1  (100)% 

Taxes on adjustments

   —      (1  1  100% 
  

 

 

   

 

 

  

 

 

  

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

  $237   $189  $48   25% 
  

 

 

   

 

 

  

 

 

  

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

NetAdjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly attributable to higher premiums resulting from an increase in mortgage insurance in-force in the current year mainlyyear. The increase was also attributable to lower losses from favorable net cures and higher premiums.aging of existing delinquencies in the current year.

Revenues

Premiums increased mainly attributable to higher average flow mortgage insurance in-force, partially offset by higher ceded reinsurance premiumslower rates on our mortgage insurance in-force in the current year. The prior year included the reversal of an accrual for premium refunds related to policy cancellations that was reverseddid not recur.

Net investment income increased primarily from higher average invested assets in the first quarter of 2016.current year.

Benefits and expenses

Benefits and other changes in policy reserves decreased in the current yearprimarily due to a continued decline in new delinquencies primarily in our 2005 through 2008 book years and a favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies. These decreases were partially offset by a lower net benefit from cures and aging of existing delinquencies, lower new delinquencies and from a $5 million higher favorable reserve adjustment in the current year.

Acquisition and operating expenses, net of deferrals, increased primarily from higher production costs in the current year. This increase was partially offset by a write-off of software in the prior year that did not recur.

Provision for income taxes. The effective tax rate increased slightly to 35.9% for the nine months ended September 30, 2017 from 35.8% for the nine months ended September 30, 2016 from 35.6% for2016. The increase in the nine months ended September 30, 2015.effective tax rate was primarily attributable to decreased tax benefits related to tax favored investments in relation topre-tax income, partially offset by state taxes.

U.S. Mortgage Insurance selected operating performance measures

The following tables set forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:

 

   As of September 30,   Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2016   2015   2016 vs. 2015 

Primary insurance in-force(1)

  $133,700   $120,400   $13,300    11

Risk in-force(2)

   32,500    29,000    3,500    12
   As of September 30,   Increase (decrease) and
percentage change
 

(Amounts in millions)

  2017   2016                 2017 vs. 2016                

Primary insurancein-force (1)

  $148,000   $133,700   $14,300    11

Riskin-force

   35,900    32,500    3,400    10

 

(1)Primary insurancein-force represents the aggregate original loan balance for outstanding insurance policies and is used to determine premiums. Original loan balances are presented for policies with level renewal premiums. Amortized loan balances are presented for policies with annual, amortizing renewal premiums.
(2)In the third quarter of 2016, all risk in-force metrics were based upon more current loan balances as provided by servicers, lenders and investors and conform to our presentation under PMIERs. Previously, certain risk in-force metrics were based on original loan balances when current loan balances were not available. The prior period has been re-presented to reflect these modified metrics.

 

   Three months ended
September 30,
   Increase
(decrease) and
percentage
change
  Nine months ended
September 30,
   Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2016   2015   2016 vs. 2015  2016   2015   2016 vs. 2015 

New insurance written

  $12,800   $9,300   $3,500    38 $31,600   $23,800   $7,800    33

Net premiums written

   193    171    22    13  559    511    48    9

   Three months ended
September 30,
   Increase
(decrease) and
percentage
change
  Nine months ended
September 30,
   Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2017   2016   2017 vs. 2016  2017   2016   2017 vs. 2016 

New insurance written

  $11,300   $12,800   $(1,500  (12)%  $28,700   $31,600   $(2,900  (9)% 

Net premiums written

   200   193   7  4  561   559   2  —  

Primary insurancein-force and riskin-force

Primary insurancein-force increased primarily as a result of the increase of $14.1largely from $14.8 billion in higher flow insurancein-force, which increased from $117.5 billion as of September 30, 2015 to $131.6 billion as of September 30, 2016 to $146.4 billion as of September 30, 2017 as a result of new insurance written, partially offset by lapses during the current year. The increase in flow insurancein-force was partially offset by a decline of $0.8$0.5 billion in bulk insurancein-force, which decreased from $2.9 billion as of September 30, 2015 to $2.1 billion as of September 30, 2016 to $1.6 billion as of September 30, 2017 from cancellations and lapses. In addition, riskin-force increased primarily as a result of higher flow new insurance written.in-force. Flow persistency was 78%83% and 79%78% for the nine months ended September 30, 20162017 and 2015,2016, respectively.

New insurance written

For the three months ended September 30, 2016, new insurance written increased primarily as a result of a larger purchase originations market and higher refinance originations as a result of low interest rates. We also had lower concentration of single premium lender paid business, consistent with our decision to selectively participate in the market and an increase in our market share. For the nine months ended September 30, 2016,2017, new insurance written increaseddecreased due to highera decline in our estimated market share and a larger purchase originations market.share.

Net premiums written

Net premiums written for the three and nine months ended September 30, 20162017 increased primarily from higher average flow insurancein-force in the current year.

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
September 30,
 Increase (decrease) Nine months ended
September 30,
 Increase (decrease)  Three months ended
September 30,
 Increase (decrease) Nine months ended
September 30,
 Increase (decrease) 
 2016 2015 2016 vs. 2015 2016 2015 2016 vs. 2015  2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016 

Loss ratio

  21  43  (22)%   23  36  (13)%  20 21 (1)%  13 23 (10)% 

Expense ratio (net earned premiums)

  28  28  —    27  27  —   26 28 (2)%  26 27 (1)% 

Expense ratio (net premiums written)

  24  24  —    24  23  1 23 24 (1)%  24 24 —  

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) 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 DAC and intangibles.

The loss ratio for the three and nine months ended September 30, 20162017 decreased from a continued declineimprovements in net benefit from cures and aging of existing delinquencies and lower new delinquencies primarily in our 2005 through 2008 book years and higher net earned premiums in the current year. The decrease in the current yearloss ratio was also driven by higher net earned premiums attributable to higher average flow insurancein-force in the current year. The decrease in the loss ratio for the three months ended September 30, 2017 was mostly offset by a prior year favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies. This adjustment favorably impacteddelinquencies that did not recur. The decrease in the loss ratio for the nine months ended September 30, 2017 was also attributable to a $5 million higher favorable reserve adjustment in the current year, partially offset by the reversal of an accrual for premium refunds related to policy cancellations in the prior year.

The expense ratio (net earned premiums) for the three and nine months ended September 30, 20162017 decreased slightly driven by six and two points, respectively. For the nine months ended September 30, 2016, the decreases were partially offset by a lowerhigher net benefit from cures and aging of existing delinquenciesearned premiums in the current year.

The expense ratio (net premiums written) for the ninethree months ended September 30, 2016 increased2017 decreased slightly from higher production costs, mostly offset by higher net premiums written and lower amortization and production costs in the in the current year.

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:

 

 September 30,
2016
 December 31,
2015
 September 30,
2015
   September 30,
2017
 December 31,
2016
 September 30,
2016
 

Primary insurance:

       

Insured loans in-force

  686,789   651,668   647,126    730,174  699,841  686,789 

Delinquent loans

  25,803   31,663   32,989    20,508  25,709  25,803 

Percentage of delinquent loans (delinquency rate)

  3.76  4.86  5.10   2.81 3.67 3.76

Flow loan in-force

  665,821   627,349   620,430    712,848  678,168  665,821 

Flow delinquent loans

  24,720   30,416   31,678    19,765  24,631  24,720 

Percentage of flow delinquent loans (delinquency rate)

  3.71  4.85  5.11   2.77 3.63 3.71

Bulk loans in-force

  20,968   24,319   26,696    17,326  21,673  20,968 

Bulk delinquent loans(1)

  1,083   1,247   1,311    743 1,078  1,083 

Percentage of bulk delinquent loans (delinquency rate)

  5.17  5.13  4.91   4.29 4.97 5.17

A minus and sub-prime loans in-force

  24,281   28,332   29,745    19,828  23,063  24,281 

A minus and sub-prime loans delinquent loans

  5,306   6,448   6,642 

A minus andsub-prime delinquent loans

   4,080  5,252  5,306 

Percentage of A minus and sub-prime delinquent loans (delinquency rate)

  21.85  22.76  22.33   20.58 22.77 21.85

Pool insurance:

       

Insured loans in-force

  5,896   6,620   7,284    5,145  5,742  5,896 

Delinquent loans

  343   386   426    252 325 343

Percentage of delinquent loans (delinquency rate)

  5.82  5.83  5.85   4.90 5.66 5.82

 

(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 631 as of September 30, 2017, 756 as of December 31, 2016 and 778 as of September 30, 2016, 889 as of December 31, 2015 and 917 as of September 30, 2015.2016.

Total delinquencies related toDelinquency and foreclosure levels that developed principally in our 2005 through 2008 book years have declined as the United States has continued to experience improvement in its residential real estate market. We have also seen a further decline in new delinquencies and lower foreclosure starts in the third quarter of 2017 compared to the third quarter of 2016.

The following tables set forth flow delinquencies, direct case reserves and riskin-force by aged missed payment status in our U.S. mortgage insurance portfolio as of the dates indicated:

 

  September 30, 2016   September 30, 2017 

(Dollar amounts in millions)

  Delinquencies   Direct case
reserves
(1)
   Risk
in-force
   Reserves as %
of risk in-force
   Delinquencies   Direct case
reserves(1)
   Risk
in-force
   Reserves as %
of risk in-force
 

Payments in default:

                

3 payments or less

   9,048   $45    $371    12   8,268   $40   $350    11

4 – 11 payments

   6,053    144     252    57

4 - 11 payments

   5,273    116    228   51

12 payments or more

   9,619    410     466    88   6,224    256    306   84
  

 

   

 

   

 

     

 

   

 

   

 

   

Total

   24,720   $599    $1,089    55   19,765   $412   $884    47
  

 

   

 

   

 

     

 

   

 

   

 

   

 

(1)Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.

   December 31, 2015 

(Dollar amounts in millions)

  Delinquencies   Direct case
reserves
(1)
   Risk
in-force
   Reserves as %
of risk in-force
 

Payments in default:

        

3 payments or less

   10,103   $52    $405    13

4 – 11 payments

   7,366    180     307    59

12 payments or more

   12,947    543     638    85
  

 

 

   

 

 

   

 

 

   

Total

   30,416   $775    $1,350    57
  

 

 

   

 

 

   

 

 

   

   December 31, 2016 

(Dollar amounts in millions)

  Delinquencies   Direct case
reserves (1)
   Risk
in-force
   Reserves as %
of risk in-force
 

Payments in default:

        

3 payments or less

   9,355   $49   $382    13

4 - 11 payments

   6,364    147    268   55

12 payments or more

   8,912    383    434   88
  

 

 

   

 

 

   

 

 

   

Total

   24,631   $579   $1,084    53
  

 

 

   

 

 

   

 

 

   

 

(1)Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.

Primary insurance delinquency rates differ from region to region in the 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 United States and the 10 largest states by our riskin-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
September 30, 2016
  Percent of total
reserves as of
September 30, 2016 (1)
  Delinquency rate 
     September 30,
2016
  December 31,
2015
  September 30,
2015
 

By Region:

      

Southeast(2)

   19  22  4.44  5.78  6.09

South Central(3)

   15   8    3.12  3.81  3.85

Northeast(4)

   14   35    6.96  8.91  9.37

Pacific(5)

   14   8    2.08  3.01  3.25

North Central(6)

   12   8    2.97  3.89  4.13

Great Lakes(7)

   10   6    2.78  3.50  3.71

New England(8)

   6   6    3.70  4.71  5.06

Mid-Atlantic(9)

   6   5    3.84  5.05  5.22

Plains(10)

   4   2    3.09  3.70  3.68
  

 

 

  

 

 

    

Total

   100  100%   3.76  4.86  5.10
  

 

 

  

 

 

    
   Percent of primary
riskin-force as of
September 30, 2017
  Percent of total
reserves as of
September 30, 2017 (1)
  Delinquency rate 
     September 30,
2017
  December 31,
2016
  September 30,
2016
 

By Region:

      

Southeast (2)

   18  21%   3.28  4.28  4.44

South Central (3)

   15  10   2.63  3.20  3.12

Pacific (4)

   15  8   1.52  2.02  2.08

Northeast (5)

   13  33   4.94  6.72  6.96

North Central (6)

   12  9   2.30  3.00  2.97

Great Lakes (7)

   11  6   2.11  2.70  2.78

New England (8)

   6  6   2.83  3.62  3.70

Mid-Atlantic (9)

   6  5   2.92  3.80  3.84

Plains (10)

   4  2   2.27  2.94  3.09
  

 

 

  

 

 

    

Total

   100  100%   2.81  3.67  3.76
  

 

 

  

 

 

    

 

(1)Total reserves were $658$460 million as of September 30, 2016.2017.
(2)Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee.
(3)Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah.
(4)New Jersey, New YorkAlaska, California, Hawaii, Nevada, Oregon and Pennsylvania.Washington.
(5)Alaska, California, Hawaii, Nevada, OregonNew Jersey, New York and Washington.Pennsylvania.
(6)Illinois, Minnesota, Missouri and Wisconsin.
(7)Indiana, Kentucky, Michigan and Ohio.
(8)Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.
(9)Delaware, Maryland, Virginia, Washington D.C. and West Virginia.
(10)Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming.

   Percent of primary
risk in-force as of
September 30, 2016
  Percent of total
reserves as of
September 30, 2016 (1)
  Delinquency rate 
     September 30,
2016
  December 31,
2015
  September 30,
2015
 

By State:

      

California

   8  3  1.59  2.26  2.29

Texas

   7  3  3.33  3.90  3.83

Florida

   6  12  5.33  7.71  8.52

New York

   6  17  7.12  9.07  9.46

Illinois

   6  5  3.42  4.70  5.00

Pennsylvania

   4  5  4.83  6.20  6.40

Michigan

   4  1  1.91  2.56  2.78

Ohio

   4  3  3.38  4.14  4.39

Washington

   4  2  1.86  2.92  3.15

New Jersey

   4  13  10.11  12.71  13.57

   Percent of primary
riskin-force as of
September 30, 2017
  Percent of total
reserves as of
September 30, 2017 (1)
  Delinquency rate 
    September 30,
2017
  December 31,
2016
  September 30,
2016
 

By State:

      

California

   8  3%   1.35  1.56  1.59

Texas

   7  4  2.94  3.33  3.33

Florida

   6  11  3.54  4.89  5.33

New York

   6  17  5.09  6.88  7.12

Illinois

   6  6  2.70  3.45  3.42

Washington

   4  2  1.20  1.79  1.86

Pennsylvania

   4  4  3.59  4.70  4.83

Michigan

   4  1  1.47  1.79  1.91

Ohio

   4  2  2.44  3.30  3.38

North Carolina

   3  2  2.80  3.65  3.79

 

(1)Total reserves were $658$460 million as of September 30, 2016.2017.

The following table sets forth the dispersion of our total reserves and primary insurancein-force and riskin-force by year of policy origination and average annual mortgage interest rate as of September 30, 2016:2017:

 

(Amounts in millions)

  Average
rate
 Percent of total
reserves
(1)
 Primary
insurance
in-force
   Percent
of total
 Primary
risk

in-force
   Percent
of total
   Average
rate
 Percent of total
reserves(1)
 Primary
insurance
in-force
   Percent
of total
 Primary
risk
in-force
   Percent
of total
 

Policy Year

                  

2004 and prior

   6.02 11.6 $3,205    2.4 $627    1.9   6.01 10.3 $2,361    1.6 $463    1.3

2005

   5.63 11.2  2,887    2.2  697    2.2    5.60 10.0  2,206    1.5  531   1.5 

2006

   5.79 17.0  4,992    3.7  1,177    3.6    5.73 15.6  4,018    2.7  942   2.6 

2007

   5.71 35.3  12,757    9.5  3,001    9.3    5.66 33.4  10,423    7.0  2,431    6.8 

2008

   5.26 16.5  10,891    8.2  2,555    7.9    5.20 15.9  8,676    5.9  2,017    5.6 

2009

   4.95 0.8  1,350    1.0  290    0.9    4.93 0.6  851   0.6  183   0.5 

2010

   4.68 0.7  1,755    1.3  401    1.2    4.68 0.5  1,178    0.8  270   0.8 

2011

   4.53 0.7  2,430    1.8  580    1.8    4.54 0.7  1,712    1.2  403   1.1 

2012

   3.84 0.8  6,432    4.8  1,567    4.8    3.84 0.8  4,544    3.1  1,111    3.1 

2013

   4.03 1.4  11,409    8.5  2,795    8.6    4.05 1.7  8,250    5.6  2,041    5.7 

2014

   4.41 2.3  16,562    12.4  4,063    12.6    4.43 3.5  12,556    8.5  3,067    8.6 

2015

   4.10 1.5  28,053    21.0  6,911    21.4    4.12 4.0  23,726    16.0  5,807    16.2 

2016

   3.91 0.2  31,007    23.2  7,693    23.8    3.86 2.7  39,291    26.5  9,545    26.6 

2017

   4.26 0.3  28,197    19.0  7,008    19.6 
   

 

  

 

   

 

  

 

   

 

    

 

  

 

   

 

  

 

   

 

 

Total portfolio

   4.59 100.0 $133,730    100.0 $32,357    100.0   4.46 100.0 $147,989    100.0 $35,819    100.0
   

 

  

 

   

 

  

 

   

 

    

 

  

 

   

 

  

 

   

 

 

 

(1)Total reserves were $658$460 million as of September 30, 2016.2017.

Canada Mortgage Insurance segment

Trends and conditions

Results of our mortgage insurance business in Canada are affected primarily by changes in the regulatory environment, employment levels, consumer borrowing behavior, lender mortgage-related strategies, including lender servicing practices, and other economic and housing market influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels and aging of mortgage delinquencies and movements in foreign currency exchange rates. During the third quarter of 2016,2017, the U.S.Canadian dollar weakenedstrengthened against the CanadianU.S. dollar as compared to both the third quarter of 2015,2016 and the second quarter of 2017, which positively impacted the results of our mortgage insurance business in Canada as reported in U.S. dollars. However, there was strengthening of the U.S. dollar against the Canadian dollar compared to the second quarter of 2016, which negatively impacted our results. Any future movement in foreign exchange rates could impact future results.

The Canadian gross domestic product is expected to have experienced moderate growth in the third quarter of 20162017, although slightly lower than in the second quarter of 2017, reflecting improving exports and a return to fullnormalization in oil sands production and rebuilding efforts in Alberta following the Fort McMurray wildfires. Bank of Canada recently adjusted its full year 2016 gross domestic product forecast to 1.1%.

strong residential investment. The overnight interest rate in Canada remained flatwas 1.0% at September 30, 2017 as compared to 0.50% inat the thirdend of the second quarter of 2016 and the low interest rate environment is expected to continue for the remainder of 2016.2017. Canada’s unemployment rate increaseddecreased to 7.0%6.2% at the end of the third quarter of 20162017 compared to 6.8%6.5% at the end of the second quarter of 20162017 due in part to an increasea decrease in workforce participation. Home sales in Canada

National home prices increased approximately 4% in the third quarter of 20162017 by approximately 11% compared to the third quarter of 2015, while home sales decreased2016 largely driven by strong housing markets in Ontario and British Columbia. The increase was approximately 4%2% compared to the second quarter of 2016. The national average home price increased modestly as of2017, mostly due to continued strength in the end ofBritish Columbia market, while Ontario prices remained relatively flat. Home sales in Canada decreased in the third quarter of 20162017 by approximately 9% compared to the third quarter of 20152016 and 6% compared to the second quarter of 2016. We expect the Canadian housing market2017. This was largely due to continue to experience significant regional variations with weaknessa slowdown in sales in Ontario, particularly in the oil-producing regions more than offset by strongGreater Toronto Area (“GTA”) following the release of the Ontario Provincial Government’s Fair Housing Plan in April 2017. The plan was designed to temper the real estate market and contained numerous measures, including anon-resident speculation tax that targets affordability in the purchase and rental housing markets in British Columbiathe GTA and Ontario.surrounding areas.

Our mortgage insurance business in Canada experienced higherlower losses in the third quarter of 20162017 compared to both the third quarter of 2015 and the second quarter of 2016 primarily due to economic pressure in oil-producing regions, resulting in an increase inlower new delinquencies, net of cures, resulting from strong or improving regional economic conditions and from a higherlower average reserve per delinquency.delinquency in the current year. Our loss ratio in Canada was 24% and 23%14% for the three and nine months ended September 30, 2016, respectively. We expect continuing economic pressure in oil-producing regions and seasonality during the fourththird quarter of 2016 to drive our loss ratio in Canada2017 and 11% for the full year ending December 31, 2016 to be higher than the nine months ended September 30, 2016.2017. Given the loss ratio performance thus far in 2017 and the economic forecast for the balance of the year, we expect our full year 2017 loss ratio to be lower than our full year 2016 loss ratio of 22%.

On October 3, 2016, the Minister of Finance announced changes intended to reinforce the Canadian housing finance system. These changes primarily included more restrictive qualification guidelines on homebuyers seeking mortgage insurance and new requirements on insured mortgage loans using bulk or other discretionary lowloan-to-value mortgage insurance that previously only applied to highloan-to-value insured mortgages. These changes in regulatory requirements have resulted in a smaller flow mortgage insurance market and lower demand for bulk insurance.

In the third quarter of 2016,2017, flow new insurance written volumes decreased in our mortgage insurance business in Canada compared to the third quarter of 20152016 primarily due to targeted underwriting changes in select markets and a smaller flow mortgage insurance market size as a result of the aforementioned regulatory changes in the current year. Compared to the secondfourth quarter of 2016, flow new insurance written increased due to a seasonally larger loan origination market2016. However, earned premiums were higher in the third quarter of 2016. Given the underwriting changes as well as economic uncertainty, we expect lower net premiums written from flow mortgage insurance in 20162017 compared to 2015. However, given the larger sizethird quarter of 2016 from seasoning of our larger, more recent blocks of business and recent price increases we expect earned premiums to be moderately higher in 2016 than in 2015 (excluding the impact from foreign exchange movements).recent years.

Bulk new insurance written levels were slightly higherlower in the third quarter of 20162017 compared to the third quarter of 2015 and lower compared to the second quarter of 2016 primarily due to variationslower demand as a result of regulatory changes that took effect in customer demand primarily associated with the timing of new regulations which restrict the use of2016 and a substantial increase in bulk insurance premium rates on mortgage insurance. In Canada, our newapplications received after December 31, 2016 in response to higher regulatory capital requirements. New insurance written from bulk mortgage insurance varies from period to period based on a number of factors, including the amount of portfoliobulk mortgages lenders seek to insure, the competitiveness of our pricing and our risk appetite for such mortgage insurance. On June 6, 2015, the Canadian government published draft regulations to limitEffective July 1, 2016, bulk mortgage insurance tois only thoseavailable on mortgages that will be used in the Canada Mortgage and Housing Corporation securitization programs and to prohibit the use of government guaranteed insuredis prohibited on mortgages used in private securitizations after aphase-in period for existing private securitizations. The regulations became period. In addition, effective on July 1,November 30, 2016, additional regulatory changes were implemented that prohibit insuring bulk refinances and resulted inmost investor mortgages. While there was a significantone-time increase in demand for bulk mortgage insurance in Canada particularlyvolumes in the secondfirst quarter of 2017 primarily due to the closing of several large bulk insurance transactions on applications received in the fourth quarter of 2016, in advance of the new regulation’s effective date andwe anticipate a decrease in demand in the third quarter of 2016. We anticipate a significant decrease in demand for bulk new insurance written for the remainder of 2016 and going forwardfull year 2017 as a result of these new regulations. However, we expect bulk new insurance written to be higher for the year ending December 31, 2016 as compared to 2015.aforementioned changes.

We are subject to regulation under the Protection of Residential Mortgage or Hypothecary Insurance Act (Canada) (“PRMHIA”). Under PRMHIA and the Insurance Companies Act (Canada), our mortgage insurance business in Canada is required to meet a minimum capital test (“MCT”) to support its outstanding mortgage insurancein-force. The MCT ratio is calculated based on a methodology prescribed by the Office of the Superintendent of Financial Institutions (“OSFI”). The Department of Finance in Canada has established a target

MCT ratio for our mortgage insurance business in Canada of 175% under PRMHIA. We regularly review ourOn January 1, 2017, the capital levels and, after reviewing stress testing results and consulting with OSFI in 2014, we have established an operating MCT holding target of 220% pending the development of the new capital framework for mortgage insurers, which is targeted for implementation in 2017. As of September 30, 2016, our MCT ratio was approximately 236%, which was above the MCT holding target.

On September 23, 2016, OSFI released a draft advisory for comment titled “Capital Requirements for Federally Regulated Mortgage Insurers.” This draftInsurers” became effective. The advisory provides a new standard framework for determining the capital requirements for residential mortgage insurance companies. Under this new regulatory capital framework, the holding target of 220% was recalibrated to the updated OSFI Supervisory MCT Target and PRMHIA requirement of 150%. As of September 30, 2017, our MCT ratio under the new framework was approximately 165%, which was above the supervisory target.

The proposednew framework released by OSFI in December 2016 is more risk sensitive and incorporates additional risk attributes, including credit score, remaining amortization and outstanding loan balance. The comment period for the draft advisory endedincludes supplementary capital requirements on October 21, 2016, after which OSFI intendsnew business in areas where home prices are high relative to finalize the advisory. The finalized advisory is expected to come into force on January 1, 2017.

Under the new proposed regulatory capital framework set forth in the draft advisory, the current Holding Target of 220% will be recalibrated to the OSFI Supervisory MCT Target of 150%.borrower incomes upon origination. As a result Genworth Canada’s reported MCT ratio under the new proposed standard framework will be significantly different than the ratio under the current MCTof these higher regulatory capital model. We expect that the capital required for certain loan-to-value categories may increase on January 1, 2017 and this could lead to a correspondingrequirements, our mortgage insurance business in Canada implemented an increase in premium rates.

Basedrates of approximately 20% on flow new business effective March 17, 2017. Similarly, the new proposed framework, we estimate that Genworth Canada’s pro forma MCT ratio as of September 30, 2016 would have been in the range of 155% to 158%. As a result, Genworth Canada expects to be compliant with the new proposed framework uponbusiness also increased its implementation on January 1, 2017, subject to business and market conditions. Further changes to the new proposed standard framework may be made by OSFI as a result of comments and input received during the consultation period, which ended on October 21, 2016. Genworth Canada continues to work with OSFI to further refine the new proposed regulatory capital framework in specific areas.premium rates for bulk insurance.

On October 3, 2016,17, 2017, OSFI released the Ministerfinal version of Finance announcedGuidelineB-20 “Residential Mortgage Underwriting Practices and Procedures,” which applies to all federally-regulated financial institutions that are engaged in residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada. The guideline takes effect January 1, 2018, and will require enhanced underwriting practices for all uninsured mortgages, including the application of a number of changes designed to reinforcequalifying stress test. TheB-20 Guideline does not directly impact the Canadian housing finance system. Effective October 17, 2016, all insured homebuyers must qualifyregulatory requirements for our mortgage insurance based on more restrictive guidelines compared to the prior requirements including a mortgage rate stress test. Additionally, effective November 30, 2016, insured mortgages with loan-to-values less than or equal to 80% must meet new requirements that currently only apply to high loan-to-value insured mortgages.business in Canada, as it is governed by OSFI’s GuidelineB-21 “Residential Mortgage Insurance Underwriting Practices and Procedures.” We believe these changesthe Guideline will not have a material impact on the highloan-to-value market in regulatory requirements will cause our flow and bulk new insurance written to decline.

On October 21, 2016, the Federal government launched a public consultation on a policy option that would require mortgage lenders to manage a portion of loan losses on insured mortgages that default, known as “lender risk sharing.” This would transfer some of the risk borne by mortgage insurers and taxpayers to lenders. The comment period for this consultation ends on February 28, 2017. At this time,Canada. However, it is still too early to determine the potential impact of this processGuideline will have on the Canadian mortgage and its ultimate outcome on our business.housing market.

Segment results of operations

Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016

The following table sets forth the results of operations relating to our Canada Mortgage Insurance segment for the periods indicated:

 

  Three months ended
September 30,
 Increase
(decrease) and
percentage
change
   Three months
ended
September 30,
 Increase
(decrease)
and
percentage
change
 

(Amounts in millions)

    2016     2015   2016 vs. 2015   2017 2016 2017 vs. 2016 

Revenues:

          

Premiums

  $124  $116  $8  7  $131  $124  $7   6% 

Net investment income

   33  32  1  3   33 33  —    —  

Net investment gains (losses)

   —     (23 23  100   55  —    55  NM(1) 

Policy fees and other income

   (1 (1  —     —     1 (1 2 200
  

 

  

 

  

 

    

 

  

 

  

 

  

Total revenues

   156  124  32  26   220 156 64 41
  

 

  

 

  

 

    

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   30  24  6  25   18 30 (12 (40)% 

Acquisition and operating expenses, net of deferrals

   21  16  5  31   20 21 (1 (5)% 

Amortization of deferred acquisition costs and intangibles

   10  9  1  11   11 10 1 10

Interest expense

   5  5   —     —     4 5 (1 (20)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total benefits and expenses

   66  54  12  22   53 66 (13 (20)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations before income taxes

   90  70  20  29   167 90 77 86

Provision for income taxes

   24  17  7  41   55 24 31 129
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations

   66  53  13  25   112 66 46 70

Less: income from continuing operations attributable to noncontrolling interests

   30  24  6  25   54 30 24 80
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders

   36  29  7  24   58 36 22 61

Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:

          

Net investment (gains) losses, net(1)(2)

   —     13  (13 (100)%    (32  —    (32  NM(1) 

Expenses related to restructuring

   1  —    1  NM(1) 

Taxes on adjustments

   —     (4 4  100   10  —    10  NM(1) 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

  $36  $38  $(2 (5)% 

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

  $37  $36  $1   3% 
  

 

  

 

  

 

    

 

  

 

  

 

  

 

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)For the three months ended 2015,September 30, 2017, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $(10)$23 million.

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

NetAdjusted operating income available to Genworth Financial, Inc.’s common stockholders decreasedincreased mainly driven by higherlower losses and operating expenses, partiallyhigher premiums, mostly offset by higher premiumslower tax benefits in the current year.

Revenues

Premiums increased principally from the seasoning of our larger, more recentin-force blocks of businessbusiness.

Net investment gains in the current year. The three months ended September 30, 2016 included a decrease of $2 million attributable to changes in foreign exchange rates.

Net investment losses in the prior year were primarily related todriven by derivative losses largely from hedging non-functionalgains on interest rate swaps, foreign currency transactions.forward contracts and cross currency interest rate swaps.

Benefits and expenses

Benefits and other changes in policy reserves increaseddecreased largely attributable to an increase in the number offrom lower new delinquencies, net of cures, and from a higherlower average reserve per delinquency from higher severity as a result of economic pressure in oil-producing regions in the current year. The three months ended September 30, 2016 included a decrease of $1 million attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, increased mainly driven by higher stock-based compensation expense from an increase in Genworth Canada’s share price in the current year compared to a decrease in Genworth Canada’s share price in the prior year.

Provision for income taxes.The effective tax rate increased to 26.7% for three months ended September 30, 2016 from 23.8%32.9% for the three months ended September 30, 2015.2017 from 26.7% for the three months ended September 30, 2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income in the current year. The three months ended September 30, 2016 included a decrease of $1 million attributable to changes in foreign exchange rates.

Nine Months Ended September 30, 20162017 Compared to Nine Months Ended September 30, 20152016

The following table sets forth the results of operations relating to our Canada Mortgage Insurance segment for the periods indicated:

 

  Nine months ended
September 30,
 Increase
(decrease) and
percentage
change
   Nine months
ended
September 30,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

    2016     2015     2016 vs. 2015     2017 2016 2017 vs. 2016 

Revenues:

          

Premiums

  $357  $351  $6  2  $383  $357  $26   7% 

Net investment income

   94  99  (5 (5)%    96 94 2  2% 

Net investment gains (losses)

   12  (21 33  157   113 12 101  NM(1) 

Policy fees and other income

   1  —    1  NM(1) 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total revenues

   463  429  34  8   593 463 130 28
  

 

  

 

  

 

    

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   81  70  11  16   42 81 (39 (48)% 

Acquisition and operating expenses, net of deferrals

   58  50  8  16   57 58 (1 (2)% 

Amortization of deferred acquisition costs and intangibles

   29  27  2  7   32 29 3 10

Interest expense

   13  14  (1 (7)%    13 13  —    
  

 

  

 

  

 

    

 

  

 

  

 

  

Total benefits and expenses

   181  161  20  12   144 181 (37 (20)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations before income taxes

   282  268  14  5   449 282 167 59

Provision for income taxes

   76  70  6  9   147 76 71 93
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations

   206  198  8  4   302 206 96  47% 

Less: income from continuing operations attributable to noncontrolling interests

   94  91  3  3   146 94 52 55
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders

   112  107  5  5   156 112 44 39

Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:

          

Net investment (gains) losses, net(1)

   (7 12  (19 (158)% 

Net investment (gains) losses, net (2)

   (65 (7 (58  NM(1) 

Expenses related to restructuring

   1  —    1  NM(1) 

Taxes on adjustments

   2  (4 6  150   22 2 20  NM(1) 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

  $107  $115  $(8 (7)% 

Adjusted operating income available to Genworth Financial, Inc.’s commonstockholders

  $114  $107  $7   7% 
  

 

  

 

  

 

    

 

  

 

  

 

  

 

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)For the nine months ended September 30, 20162017 and 2015,2016, net investment (gains) lossesgains (losses) were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $5$48 million and $(9)$5 million, respectively.

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

NetAdjusted operating income available to Genworth Financial, Inc.’s common stockholders decreasedincreased mainly driven by an $8 million decrease attributable to changeslower losses and higher premiums, partially offset by lower tax benefits in foreign exchange rates during the nine months ended September 30, 2016.current year.

Revenues

Premiums increased primarily from the seasoning of our larger, more recentin-force blocks of business in the current year. The nine months ended September 30, 2016 included a decrease of $25 million attributable to changes in foreign exchange rates.

Net investment income decreased primarily from a $7 million decrease attributable to changes in foreign exchange rates. Excluding the effects of foreign exchange, net investment income increased from higher average invested assets, partially offset by lower yields in the current year.business.

Net investment gains in the current year were primarily related todriven by derivative gains largely from hedging non-functionalon interest rate swaps, foreign currency transactions, partially offset by impairments in the current year. Net investment losses in the prior year were mainly related to derivative losses largely from hedging non-functionalforward contracts and cross currency transactions, partially offset by netinterest rate swaps, as well as foreign exchange gains fromon the sale ofnon-functional currency investment securities. The nine months ended September 30, 2016 included a decrease of $2 million attributable to changes in foreign exchange rates.

Benefits and expenses

Benefits and other changes in policy reserves increased primarily attributable to an increase in the number ofdecreased largely from lower new delinquencies, net of cures, andas well as from a higherlower average reserve per delinquency and from higher severity as a result of economic pressure in oil-producing regions in the current year. The nine months ended September 30, 2016 included a decrease of $6 million attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, increased mainly driven by higher stock-based compensation expense from an increase in Genworth Canada’s share price in the current year compared to a decrease in Genworth Canada’s share price in the prior year. The nine months ended September 30, 2016 included a decrease of $3 million attributable to changes in foreign exchange rates.

Amortization of deferred acquisition costs and intangibles increased primarily from higher DAC amortizationfavorable loss reserve development related to the larger, more recent in-force blocksincurred but not reported delinquencies as of business in the current year. The nine months ended September 30, 2016 included a decrease of $2 million attributable to changes in foreign exchange rates.December 31, 2016.

Provision for income taxes.The effective tax rate increased to 32.7% for the nine months ended September 30, 2017 from 27.1% for the nine months ended September 30, 2016 from 26.2% for the nine months ended September 30, 2015.2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income in the current year. The nine months ended September 30, 2016 included a decrease of $6 million attributable to changes in foreign exchange rates.

Canada Mortgage Insurance selected operating performance measures

The following tables set forth selected operating performance measures regarding our Canada Mortgage Insurance segment as of or for the dates indicated:

 

   As of September 30,   Increase
(decrease) and
percentage change
 

(Amounts in millions)

  2016   2015   2016 vs. 2015 

Primary insurance in-force

  $347,300   $292,000   $55,300    19

Risk in-force

   121,500    102,200    19,300    19
   As of September 30,   Increase (decrease)
and
percentage change
 

(Amounts in millions)

  2017   2016   2017 vs. 2016 

Primary insurancein-force

  $390,700   $347,300   $43,400    12

Riskin-force

   136,700    121,500    15,200    13

  Three months ended
September 30,
   Increase
(decrease) and
percentage
change
 Nine months ended
September 30,
   Increase
(decrease) and
percentage
change
   Three months ended
September 30,
   Increase
(decrease) and
percentage
change
 Nine months ended
September 30,
   Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2016   2015   2016 vs. 2015 2016   2015   2016 vs. 2015   2017   2016   2017 vs. 2016 2017   2016   2017 vs. 2016 

New insurance written

  $10,400   $11,400   $(1,000 (9)%  $40,200   $28,400   $11,800  42  $5,000   $10,400   $(5,400 (52)%  $19,800   $40,200   $(20,400 (51)% 

Net premiums written

   172    204    (32 (16)%  447    479    (32  (7)%    156   172   (16 (9)%  378   447   (69 (15)% 

Primary insurancein-force and riskin-force

Our mortgage insurance business in Canada currently provides 100% coverage on the majority of the loans we insure in that market. For the purpose of representing our riskin-force, we have computed an “effective” riskin-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 riskin-force has been calculated by applying to insurancein-force a factor that represents our highest expected averageper-claim payment for any one underwriting year over the life of our business in Canada. For the three and nine months ended September 30, 20162017 and 2015,2016, this factor was 35%.

Primary insurancein-force and riskin-force increased primarily as a result of flow new insurance written and bulk mortgage insurance activity. Insurancein-force and riskin-force included increases of $6.1$19.2 billion and $2.1$6.7 billion, respectively, attributable to changes in foreign exchange rates.

New insurance written

New insurance written decreased for the three and nine months ended September 30, 20162017 primarily as a result of lower flow mortgage insurance activity. New insurance written increased for the nine months ended September 30, 2016 primarily as a result of higher bulk mortgage insurance activity partially offset by lowerand flow new insurance written. For the three and nine months ended September 30, 2016, flow new insurance written decreased $1.3 billion and $3.1 billion, respectively, as a result of targeted underwriting changes in select markets and a smaller flow mortgage insurance market size in the current year. For the nine months ended September 30, 2016,2017, bulk mortgage insurance activity increased $14.9decreased by $4.5 billion and $18.6 billion, respectively, driven by increased demand in the prior toyear preceding regulatory changes to regulations that restrict the use of bulk mortgage insurance that became effective on July 1, 2016 and from lower demand in the current year due to a higher average premium rate as a result of higher regulatory capital requirements and additional regulatory changes that became effective on November 30, 2016. TheFlow new insurance written decreased $900 million and $1.8 billion for the three and nine months ended September 30, 20162017, respectively, primarily due to a smaller market size resulting from regulatory changes effective October 17, 2016. New insurance written for the three and nine months ended September 30, 2017 included decreasesincreases of $0.2 billion$100 million and $2.3 billion,$400 million, respectively, attributable to changes in foreign exchange rates.

Net premiums written

Our mortgage insurance policies in Canada 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 September 30, 2016,2017, our unearned premium reserves were $1,628$1,713 million, compared to $1,467$1,628 million as of September 30, 2015.2016. The change in unearned premium reserves included an increase of $84 million attributable to changes in foreign exchange rates.

Net premiums written decreased for the three and nine months ended September 30, 20162017 primarily from lower flow mortgage insurance volume from targeted underwriting changes in select markets and a smaller flow mortgage insurance market size in the current year. The decrease for the nine months ended September 30, 2016 was partially offset by higher bulk mortgage insurance activity from higher customer demand priorand lower flow volume due to regulatory changes, to regulations that restrict the use of bulk mortgage insurance that became effective on July 1, 2016, as well as a higher flow mortgage insurance averagepartially offset by premium rate resulting from the rate increase implemented in June 2015. The three and nine months ended September 30, 2016 included decreases of $3 million and $25 million, respectively, attributable to changes in foreign exchange rates.increases.

Loss and expense ratios

The following table sets forth the loss and expense ratios for our Canada Mortgage Insurance segment for the periods indicated:

 

 Three months ended
September 30,
 Increase (decrease) Nine months ended
September 30,
 Increase (decrease)   Three months
ended
September 30,
 Increase
(decrease)
 Nine months
ended
September 30,
 Increase
(decrease)
 
 2016 2015 2016 vs. 2015 2016 2015 2016 vs. 2015   2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016 

Loss ratio

 24 21 3 23 20 3   14  24%  (10)%  11 23 (12)% 

Expense ratio (net earned premiums)

 24 22 2 24 22 2   23 24 (1)%  23 24 (1)% 

Expense ratio (net premiums written)

 18 12 6 19 16 3   20 18 2 23 19 4

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our mortgage insurance business in Canada, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of DAC and intangibles.

The loss ratio increaseddecreased for the three and nine months ended September 30, 20162017 primarily from an increasea decrease in the number of new flow delinquencies, net of cures, and from a higherlower average reserve per delinquency from higher severity as a result of economic pressureimprovement inoil-producing regions, home price appreciation, particularly in Ontario, and overall improving regional macroeconomic conditions in the current year.

The expense ratio (net earned premiums) increaseddecreased for the three and nine months ended September 30, 20162017 primarily attributable to higher stock-based compensation expensepremiums from an increase in Genworth Canada’s share price in the current year compared to a decrease in Genworth Canada’s share price in the prior year.seasoning of our larger, more recentin-force blocks of business.

The expense ratio (net premiums written) increased for the three and nine months ended September 30, 20162017 primarily attributable to higher stock-based compensation expense from an increase in Genworth Canada’s share price in the current year compared to a decrease in Genworth Canada’s share price in the prior year, as well as lower net premiums written in the current year.

Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our Canada mortgage insurance portfolio as of the dates indicated:

 

  September 30,
2016
 December 31,
2015
 September 30,
2015
  September 30, 2017 December 31, 2016 September 30, 2016 

Primary insured loans in-force

   2,006,484  1,835,916  1,785,541  2,098,771  2,029,400  2,006,484 

Delinquent loans

   2,027  1,829  1,715  1,759  2,070  2,027 

Percentage of delinquent loans (delinquency rate)

   0.10 0.10 0.10 0.08 0.10 0.10

Flow loans in-force

   1,379,020  1,331,773  1,313,034  1,434,662  1,394,067  1,379,020 

Flow delinquent loans

   1,715  1,550  1,449  1,434  1,693  1,715 

Percentage of flow delinquent loans (delinquency rate)

   0.12 0.12 0.11 0.10 0.12 0.12

Bulk loans in-force

   627,464  504,143  472,507  664,109  635,333  627,464 

Bulk delinquent loans

   312  279  266  325 377 312

Percentage of bulk delinquent loans (delinquency rate)

   0.05 0.06 0.06 0.05 0.06 0.05

Flow mortgage loansin-force increased from new policies written and bulk mortgage loansin-force increased from highernew bulk activity, particularly in the second quarter of 2016.activity. The number of delinquent loans increasedof our flow mortgage insurance decreased primarily from ongoing economic pressureregional housing market improvement, particularly inoil-producing regions. regions in the current year.

Primary insurance delinquency rates differ by the various provinces and territories of Canada at any one time depending upon economic conditions and cyclical growth patterns. The table below sets forth our primary delinquency rates for the various provinces and territories of Canada by our riskin-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
September 30, 2016
  Delinquency rate   Percent of primary
riskin-force as of
September 30, 2017
  Delinquency rate 
   September 30,
2016
 December 31,
2015
 September 30,
2015
    September 30,
2017
 December 31,
2016
 September 30,
2016
 

By province and territory:

          

Ontario

   46 0.04 0.05 0.05   47 0.03 0.04 0.04

Alberta

   16  0.22 0.12 0.10   16 0.18 0.22 0.22

British Columbia

   15  0.07 0.08 0.10   15 0.05 0.06 0.07

Quebec

   13  0.15 0.19 0.18   13 0.12 0.15 0.15

Saskatchewan

   3  0.27 0.17 0.15   3 0.25 0.28 0.27

Nova Scotia

   2  0.20 0.18 0.20   2 0.16 0.18 0.20

Manitoba

   2  0.08 0.09 0.08   2 0.09 0.07 0.08

New Brunswick

   1  0.15 0.20 0.19   1 0.15 0.19 0.15

All other

   2  0.14 0.13 0.11%��   1 0.16 0.17 0.14
  

 

      

 

    

Total

   100 0.10 0.10 0.10   100 0.08 0.10 0.10
  

 

      

 

    

Delinquency rates were flat as increasesdecreased slightly reflecting improvement primarily in commodity-dependent regionsAlberta and Quebec due to economic pressure were offset by decreasesimproving macroeconomic conditions in other provinces.those regions in the current year.

As a part of enhanced lender reporting, we receive updated outstanding loansin-force in Canada from mostalmost all of our customers on a quarter lag.customers. Based on the data provided by lenders, the 2016 delinquency rate as of JuneSeptember 30, 20162017 was 0.20%0.18%, reflecting a lower number of outstanding loans and related policiesin-force compared to our reported policies in-force using the original terms of the loan.in-force.

Australia Mortgage Insurance segment

Trends and conditions

Results of our mortgage insurance business in Australia are affected primarily by changes in regulatory environments, employment levels, consumer borrowing behavior, lender mortgage-related strategies, including lender servicing practices, and other economic and housing market influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels and aging of mortgage delinquencies and movements in foreign currency exchange rates. During the third quarter of 2016,2017, the U.S.Australian dollar weakenedstrengthened against the AustralianU.S. dollar as compared to both the third quarter of 20152016 and the second quarter of 2016,2017, which positivelyfavorably impacted the results of our mortgage insurance business in Australia as reported in U.S. dollars. Any future movement in foreign exchange rates could impact future results.

The Australian gross domestic product is expected to have had moderate growth in the third quarter of 2016, as2017, supported by sustained low interest rates and depreciation of the Australian dollar have continued to support the rebalancing of economic activity toward non-resource sectors.an ongoing rise in resource exports. The cash rate was lowered from 1.75% toremained flat at 1.50% in the third quarter of 2016.2017. The September 20162017 unemployment rate fellimproved slightly to 5.6%5.5% from 5.8%5.6% at the end of the second quarter of 2016.2017.

Home prices in Australia continued to appreciate in the third quarter of 2016,2017, with September 201630, 2017 home values approximately 7%9% higher than a year ago and approximately 3%1% higher than at the end of the second quarter of 2016.2017. The Sydney and Melbourne housing markets continue to be the major driver with annual home price growth of approximately 10%11% and 9%12%, respectively, as of the end of the third quarter of 2016. We expect home price appreciation for 2016 will moderate compared to 2015 levels.2017.

Our mortgage insurance business in Australia had higherlower losses in the third quarter of 20162017 compared to both the third quarter of 2015 and the second quarter of 2016 largely due to a higher average reserve per delinquency resulting fromlower new delinquencies net of cures, as well as improved aging pressureof existing delinquencies, primarily in commodity-dependent regions, where production activity has been depressed. In comparison with the third quarter of 2015, the increase in loss reserves was also attributable to higher new delinquencies.regions. The loss ratio in the aggregate in Australia for the three and nine months ended September 30, 2017 was 37%. We expect continued regional loss pressures and lower expected earned premiums to drive our loss ratio higher for the full year 2017 as compared to the full year 2016 was 42% and 35%, respectively. Weloss ratio of 34%. In addition, during the fourth quarter of 2017, our mortgage insurance business in Australia will continue to closely monitor these economic conditions and assess theircomplete its annual review of its premium earnings pattern. The outcome of this review could impact on our business.results of operations, including our loss ratio.

In the third quarter of 2016,2017, our mortgage insurance business in Australia experienced a decrease in new insurance written volumes compared to both the third quarter of 20152016 and the second quarter of 2016 primarily2017 due to lower market penetration from a change in customer mix, as well as the Australian Prudential Regulation Authority’s (“APRA”) continued focus on lending standards, investment lending and serviceability. Given the APRA restrictions and reduced customer business, new insurance written is expected to be lower in 2016 than in 2015.

In our mortgage insurance business in Australia, grossGross premiums written in the third quarter of 20162017 were lower compared to both the third quarter of 2015 and the second quarter of 2016 primarily driven by a decrease in volume,flow volumes, particularly from a reduction in highloan-to-value mortgage origination volume resulting from regulatory changes restricting loans originated formeasures to slow the growth in investment propertieslending and high loan-to-valuelimit the flow of new interest-only lending. The average premium rate in our mortgage insurance business in Australia over the past year has also been impacted by the tighter lending standards resulting in a shift of our flow new insurance written to lower loan-to-value products that have a lower premium rate and risk. Consequently, we expect high loan-to-value mortgages in proportion to total originations to be lower in 2016 compared to 2015. This will likely result in a decrease in both gross premiums written and earned premiums in 2016 despite the price increase, which was effective in March 2016.

The term of the current supply and service contract with our largest customer in our mortgage insurance business in Australia is due to expire on December 31, 2016. In November 2016, we entered into a new contract with thisour largest customer, and it takes effect oneffective January 1, 2017, and haswith a term of three years. During the first three quarters of 2017, this customer represented 39% of our new insurance written. The contract with another large customer was set to expire in November 2017 but was recently extended through November 2018 under similar terms. This customer represented 12% of our new insurance written during the first three quarters of 2017. The contract with our former second largest customer was terminated by the customer effective April 8, 2017.

Our mortgage insurance business in Australia evaluates its capital position in relation to the Prescribed Capital Amount (“PCA”) as determined by APRA, utilizing the Internal Capital Adequacy Assessment Process (“ICAAP”) as the framework to ensure that our Australia group of companies as a whole, and each regulated entity, are independently capitalized to meet regulatory requirements. As of September 30, 2016,2017, the estimated PCA ratio of

our mortgage insurance business in Australia was approximately 155%184%, representing a decreasean increase from 156%181% as of June 30, 2016,2017, largely resulting from the payment of both ordinarylower production volumes, portfolio seasoning and specialcancellations, partially offset by dividends paid and share repurchase activity in the third quarter of 2016.

2017.

In March 2017, APRA announced changes to reinforce sound mortgage lending practices, focusing on slowing investor growth and limiting the flow of new interest-only lending. These changes could impact future new insurance written volumes in our Australian mortgage insurance business.

Segment results of operations

Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016

The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated:

 

  Three months ended
September 30,
 Increase
(decrease) and
percentage
change
   Three months
ended

September 30,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

    2016     2015   2016 vs. 2015   2017 2016 2017 vs. 2016 

Revenues:

          

Premiums

  $88  $92  $(4 (4)%   $78  $88  $(10  (11)% 

Net investment income

   23  28  (5 (18)%    19 23 (4  (17)% 

Net investment gains (losses)

   4  3  1  33   1 4 (3  (75)% 

Policy fees and other income

   —     (1 1  100
  

 

  

 

  

 

    

 

  

 

  

 

  

Total revenues

   115  122  (7 (6)%    98 115 (17  (15)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   37  27  10  37   29 37 (8  (22)% 

Acquisition and operating expenses, net of deferrals

   23  27  (4 (15)%    18 23 (5  (22)% 

Amortization of deferred acquisition costs and intangibles

   4  4   —     —     10 4 6  150% 

Interest expense

   2  3  (1 (33)%    3 2 1  50% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total benefits and expenses

   66  61  5  8   60 66 (6  (9)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations before income taxes

   49  61  (12 (20)%    38 49 (11  (22)% 

Provision for income taxes

   16  18  (2 (11)%    12 16 (4  (25)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations

   33  43  (10 (23)%    26 33 (7  (21)% 

Less: income from continuing operations attributable to noncontrolling interests

   18  22  (4 (18)%    14 18 (4  (22)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders

   15  21  (6 (29)%    12 15 (3  (20)% 

Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:

          

Net investment (gains) losses, net(2)

   (2 (1 (1 (100)% 

(Gains) losses on early extinguishment of debt, net(3)

   —     1  (1 (100)% 

Net investment (gains) losses, net (1)

   (1 (2 1  50% 

Taxes on adjustments

   1   —     1   NM(1)    1 1  —     —  % 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

  $14  $21  $(7 (33)% 

Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders

  $12  $14  $(2  (14)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

 

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)For the three months ended September 30, 2016, and 2015, net investment (gains) lossesgains (losses) were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $2 million.
(3)For the three months ended September 30, 2015, (gains) losses on early extinguishment of debt were adjusted for the portion attributable to noncontrolling interests of $1 million.

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

NetAdjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily driven by higherlower premiums and investment income, partially offset by lower losses in the current year.

Revenues

Premiums decreased largely due to the seasoning of our smaller prior yearin-force blocks of business and lower net investment incomepolicy cancellations in the current year. The three months ended September 30, 20162017 included an increase of $1 million attributable to changes in foreign exchange rates.

Revenues

Premiums decreased mainly driven by lower flow volume and the seasoning of our smaller prior year in-force blocks of business in the current year. The decrease was also attributable to a favorable adjustment of $8 million relating to refinements to premium recognition factors in the prior year that did not recur. These decreases were partially offset by higher policy cancellations, lower ceded reinsurance and higher premiums in the current year as a result of the premium recognition factors that were refined in the prior year. The three months ended September 30, 2016 included an increase of $1$3 million attributable to changes in foreign exchange rates.

Net investment income decreased primarily from lower average invested assetsyields in the current year.

Net investment gains decreased predominantly from lower net gains from the sale of investment securities, partially offset by impairments in the current year.

Benefits and expenses

Benefits and other changes in policy reserves increaseddecreased largely attributable to higherlower new delinquencies, as well as a higher average reserve per delinquency resultingnet of cures, and from unfavorableimproved aging of existing delinquencies primarily in commodity-dependent regions in the current year. The prior year included an increase in reserves of $9 million that did not recur mainly related to the estimate of the period of time it takes for a delinquent loan to be reported.

Acquisition and operating expenses, net of deferrals, decreased primarily from an early debt redemption paymenta change in the classification of $2 millioncontract fees amortization expense, which we began recording to amortization of DAC and intangibles as of the second quarter of 2017.

Amortization of DAC and intangibles increased principally as a result of a change in July 2015 relatedthe classification of contract fees amortization expense that was previously recorded to the redemptionacquisition and operating expenses, net of AUD$90 million of Genworth Financial Mortgage Insurance Pty Limited’s subordinated floating rate notes that were scheduled to mature in 2021.deferrals, as discussed above.

Provision for income taxes. The effective tax rate increased to 33.1% for the three months ended September 30, 2017 from 32.2% for the three months ended September 30, 2016 from 29.5% for the three months ended September 30, 2015.2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income in the current year.

Nine Months Ended September 30, 20162017 Compared to Nine Months Ended September 30, 20152016

The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated:

 

  Nine months ended
September 30,
 Increase
(decrease) and
percentage
change
   Nine months
ended
September 30,
 Increase
(decrease) and

percentage
change
 

(Amounts in millions)

      2016         2015     2016 vs. 2015   2017 2016 2017 vs. 2016 

Revenues:

          

Premiums

  $255  $271  $(16 (6)%   $237  $255  $(18  (7)% 

Net investment income

   72  89  (17 (19)%    57 72 (15  (21)% 

Net investment gains (losses)

   6  4  2  50   23 6 17  NM(1) 

Policy fees and other income

   —     (4 4  100
  

 

  

 

  

 

    

 

  

 

  

 

  

Total revenues

   333  360  (27 (8)%    317 333 (16  (5)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   89  66  23  35   84 89 (5  (6)% 

Acquisition and operating expenses, net of deferrals

   67  74  (7 (9)%    50 67 (17  (25)% 

Amortization of deferred acquisition costs and intangibles

   11  14  (3 (21)%    31 11 20  182% 

Interest expense

   8  7  1  14   7 8 (1  (13)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total benefits and expenses

   175  161  14  9   172 175 (3  (2)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations before income taxes

   158  199  (41 (21)%    145 158 (13  (8)% 

Provision for income taxes

   51  60  (9 (15)%    48 51 (3  (6)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations

   107  139  (32 (23)%    97 107 (10  (9)% 

Less: income from continuing operations attributable to noncontrolling interests

   57  59  (2 (3)%    52 57 (5  (9)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders

   50  80  (30 (38)%    45 50 (5  (10)% 

Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:

          

Net investment (gains) losses, net(2)

   (3 (1 (2 (200)%    (12 (3 (9  NM(1) 

(Gains) losses on early extinguishment of debt, net(3)

   —     1  (1 (100)% 

Taxes on adjustments

   1   —     1   NM(1)    4 1 3  NM(1) 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

  $48  $80  $(32 (40)% 

Adjusted operating income available to Genworth Financial, Inc.’s commonstockholders

  $37  $48  $(11  (23)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

 

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)For the nine months ended September 30, 20162017 and 2015,2016, net investment (gains) lossesgains (losses) were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $11 million and $3 million.
(3)For the nine months ended September 30, 2015, (gains) losses on early extinguishment of debt were adjusted for the portion attributable to noncontrolling interests of $1 million.million, respectively.

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

NetAdjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily driven by higher losses, as well as lower netpremiums and investment income, and premiums, partially offset by a decrease in taxeslower losses in the current year.

Revenues

Premiums decreased predominantly from the seasoning of our smaller prior yearin-force blocks of business. The nine months ended September 30, 2016 also2017 included a decreasean increase of $3$7 million attributable to changes in foreign exchange rates.

Revenues

Premiums decreased primarily driven by a $13 million decrease attributable to changes in foreign exchange rates during the nine months ended September 30, 2016. Premiums also decreased from lower flow volume and the seasoning of our smaller prior year in-force blocks of business in the current year, as well as the termination of a customer relationship with respect to new business effective in the second quarter of 2015. The decrease was also attributable to a favorable adjustment of $8 million relating to refinements to premium recognition factors in the prior year that did not recur. These decreases were partially offset by higher policy cancellations, lower ceded reinsurance and higher premiums in the current year as a result of the premium recognition factors that were refined in the prior year.

Net investment income decreased primarily from lower yields and lower average invested assets lower yields and a $4 million decrease attributable to changes in foreign exchange rates during the nine months ended September 30, 2016.

Policy fees and other income in the prior year was a resultcurrent year.

Net investment gains increased predominantly from higher net gains from the sale of non-functional currency transactions attributableinvestment securities due to remeasurementthe rebalancing of our portfolio, partially offset by impairments and repayment of intercompany loans that did not recur.derivative losses in the current year.

Benefits and expenses

Benefits and other changes in policy reserves increaseddecreased largely attributable to higher new delinquencies, as well as$6 million of favorablenon-reinsurance recoveries on paid claims in the second quarter of 2017 and a higher average reserve per delinquency resultingnet benefit from unfavorablecures and aging of existing delinquencies, partially offset by higher new delinquencies primarily in commodity-dependent regions in the current year. In addition, the prior year included a favorable adjustment of $7 million in the first quarter of 2015 related to the expected recovery of claims paid in prior periods that did not recur. These increases were partially offset by an increase in reserves of $9 million in the prior year that did not recur mainly related to the estimate of the period of time it takes for a delinquent loan to be reported. The nine months ended September 30, 20162017 included a decreasean increase of $4$3 million attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, decreased primarily from a change in the classification of contract fees amortization expense, which we began recording to amortization of DAC and intangibles in the second quarter of 2017, as well as lower employee compensation and benefit expenses and a decrease of $3 million attributable to changes in foreign exchange ratesprofessional fees in the current year and an early debt redemption payment of $2 million in July 2015 related to the redemption of AUD$90 million of Genworth Financial Mortgage Insurance Pty Limited’s subordinated floating rate notes that were scheduled to mature in 2021.year.

Amortization of deferred acquisition costsDAC and intangibles decreased mainly driven by lower softwareincreased as a result of a change in the classification of contract fees amortization expense that was previously recorded to acquisition and operating expenses, net of deferrals, as discussed above, and higher contract fees being amortized in the current year. The nine months ended September 30, 2016 included a decrease of $1 million attributable to changes in foreign exchange rates.

Provision for income taxes. The effective tax rate increased to 33.5% for the nine months ended September 30, 2017 from 32.4% for the nine months ended September 30, 2016 from 30.0% for the nine months ended September 30, 2015.2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income in the current year. The nine months ended September 30, 2016 included a decrease of $3 million attributable to changes in foreign exchange rates.

Australia Mortgage Insurance selected operating performance measures

The following tables set forth selected operating performance measures regarding our Australia Mortgage Insurance segment as of or for the dates indicated:

 

   As of September 30,   Increase
(decrease) and
percentage

change
 

(Amounts in millions)

  2016   2015   2016 vs. 2015 

Primary insurance in-force

  $247,900   $224,100   $23,800    11

Risk in-force

   86,300    78,400    7,900    10
   As of September 30,   Increase
(decrease)
and
percentage
change
 

(Amounts in millions)

  2017   2016   2017 vs. 2016 

Primary insurancein-force

  $252,200   $247,900   $4,300    2

Riskin-force

   87,700    86,300    1,400    2

 

  Three months ended
September 30,
   Increase
(decrease) and
percentage
change
 Nine months ended
September 30,
   Increase
(decrease) and
percentage
change
   Three months
ended
September 30,
   Increase
(decrease)
and
percentage
change
 Nine months ended
September 30,
   Increase
(decrease)
and
percentage
change
 

(Amounts in millions)

      2016           2015       2016 vs. 2015 2016   2015   2016 vs. 2015   2017   2016   2017 vs. 2016 2017   2016   2017 vs. 2016 

New insurance written

  $4,600   $6,300   $(1,700 (27)%  $14,800   $20,300   $(5,500 (27)%   $4,300   $4,600   $(300 (7)%  $14,100   $14,800   $(700 (5)% 

Net premiums written

   57    79    (22 (28)%  169    273    (104 (38)%    56   57   (1 (2)%  168   169   (1 (1)% 

Primary insurancein-force and riskin-force

Our mortgage insurance business in Australia currently provides 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our riskin-force, we have computed an “effective” riskin-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 riskin-force has been calculated by applying to insurancein-force a factor that represents our highest expected averageper-claim payment for any one underwriting year over the life of our business in Australia. For the three and nine months ended September 30, 20162017 and 2015,2016, this factor was

35%. We also have certain risk share arrangements where we providepro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicablepro-rata coverage amount provided is used when applying the factor. In addition, Australia currently providesexcess-of-loss reinsurance coverage with one lender. The insurancein-force and riskin-force associated with this reinsurance agreement are excluded from the above metrics as they are insignificant in relation to the rest of the portfolio.

Primary insurancein-force and riskin-force increased primarily from increases of $21.0$5.8 billion and $7.3$2.0 billion, respectively, attributable tofrom changes in foreign exchange rates and flow new insurance written.rates.

New insurance written

New insurance written decreased for the three and nine months ended September 30, 20162017 mainly attributable to lower market penetration from a smaller high loan-to-value originations market primarily drivenchange in customer mix, partially offset by a reduction in the amount of risk lenders are willing to take in the current year resulting from regulatory focus on the market. Newhigher bulk mortgage insurance written for thewritten. The three and nine months ended September 30, 2016 also decreased from the impact2017 included increases of the termination of a customer relationship with respect to new business in the second quarter of 2015. The nine months ended September 30, 2016 included a decrease of $700$200 million and $500 million, respectively, attributable to changes in foreign exchange rates.

Net premiums written

Most of our Australian 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 September 30, 2016,2017, our unearned premium reserves were $922$852 million, compared to $956$922 million as of September 30, 2015.2016. The change in unearned premium reserves included an increase of $19 million attributable to changes in foreign exchange rates.

Net premiums written decreased slightly for the three and nine months ended September 30, 20162017 primarily from lower flow volumemarket penetration from a change in the current year. Net premiums written for thecustomer mix. The three and nine months ended September 30, 2016 also decreased from changes in the loan-to-value mix in the current year, as well as the impact2017 included increases of the termination of a customer relationship with respect to new business in the second quarter of 2015. The nine months ended September 30, 2016 included a decrease of $8$2 million and $5 million, respectively, attributable to changes in foreign exchange rates.

Loss and expense ratios

The following table sets forth the loss and expense ratios for our Australia Mortgage Insurance segment for the periods indicated:

 

  Three months ended
September 30,
 Increase
(decrease)
 Nine months ended
September 30,
 Increase
(decrease)
  Three months ended
September 30,
 Increase (decrease) Nine months ended
September 30,
 Increase (decrease) 
  2016 2015 2016 vs. 2015 2016 2015 2016 vs. 2015  2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016 

Loss ratio

   42 29 13 35 24 11  37%   42%   (5)%  35 35 —  

Expense ratio (net earned premiums)

   31 34 (3)%  31 33 (2)%   37%   31%   6%  35 31 4

Expense ratio (net premiums written)

   48 40 8 46 32 14  51%   48%   3%  49 46 3

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our mortgage insurance business in Australia, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of DAC and intangibles.

The loss ratio increaseddecreased for the three and nine months ended September 30, 20162017 largely attributable to higherlower new delinquencies, as well as a higher average reserve per delinquency resulting from unfavorablenet of cures, and improved aging of existing delinquencies primarily in commodity-dependent regions in the current year. The prior year included an increaseloss ratio was flat for the nine months ended September 30, 2017 as higher new delinquencies predominantly in reservescommodity-dependent regions and lower net earned premiums were offset by $6 million of $9 that did not recur mainly related to the estimatefavorablenon-reinsurance recoveries on paid claims and higher net benefits from cures and aging of the period of time it takes for a delinquent loan to be reported. The prior year increase in reserves coupled with an increase in premiums of $8 million from refinements to premium recognition factorsexisting delinquencies in the third quarter of 2015current year.

The expense ratio (net earned premiums) increased the loss ratio by seven percentage points for the three months ended September 30, 2015. For2017 primarily from lower net earned premiums and for the nine months ended September 30, 2016, the loss ratio also increased attributable to a favorable adjustment of $7 million2017 primarily from lower net earned premiums and from higher contract fees being amortized in the first quarter of 2015 related to the expected recovery of claims paid in prior periods that did not recur.

The expense ratio (net earned premiums) decreased for the three and nine months ended September 30, 2016 from an early debt redemption payment of $2 million in July 2015 related to the redemption of AUD$90 million of Genworth Financial Mortgage Insurance Pty Limited’s subordinated floating rate notes that were scheduled to mature in 2021. The early redemption payment of $2 million increased the expense ratio (net earned premiums) by two percentage points for the three months ended September 30, 2015.current year.

The expense ratio (net premiums written) increased for the three and nine months ended September 30, 20162017 primarily fromdue to higher contract fees being amortized and lower net premiums written in the current year, partially offset by an early debt redemption payment of $2 million in July 2015 related to the redemption of AUD$90 million of Genworth Financial Mortgage Insurance Pty Limited’s subordinated floating rate notes that were scheduled to mature in 2021. The early redemption payment of $2 million increased the expense ratio (net premiums written) by two percentage points for the three months ended September 30, 2015.year.

Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our Australia mortgage insurance portfolio as of the dates indicated:

 

  September 30,
2016
 December 31,
2015
 September 30,
2015
   September 30, 2017 December 31, 2016 September 30, 2016 

Primary insured loans in-force

   1,470,302  1,478,434  1,479,676    1,422,501  1,464,139  1,470,302 

Delinquent loans

   6,844  5,552  5,804    7,146  6,731  6,844 

Percentage of delinquent loans (delinquency rate)

   0.47 0.38 0.39   0.50 0.46 0.47

Flow loans in-force

   1,358,286  1,364,628  1,364,537    1,308,998  1,354,616  1,358,286 

Flow delinquent loans

   6,574  5,317  5,545    6,912  6,451  6,574 

Percentage of flow delinquent loans (delinquency rate)

   0.48 0.39 0.41   0.53 0.48 0.48

Bulk loans in-force

   112,016  113,806  115,139    113,503  109,523  112,016 

Bulk delinquent loans

   270  235  259    234 280 270

Percentage of bulk delinquent loans (delinquency rate)

   0.24 0.21 0.22   0.21 0.26 0.24

Loans Flow loansin-force decreased primarily from policy cancellations. Flow delinquent loans increased from higher new delinquencies primarily as a result of economic pressures in commodity-dependent regions.

Primary insurance delinquency rates differ by the various states and territories of Australia at any one time depending upon economic conditions and cyclical growth patterns. The table below sets forth our primary delinquency rates for the states and territories of Australia by our riskin-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
September 30, 2016
  Delinquency rate   Percent of primary
riskin-force as of
September 30, 2017
  Delinquency rate 
   September 30,
2016
 December 31,
2015
 September 30,
2015
    September 30,
2017
 December 31,
2016
 September 30,
2016
 

By state and territory:

          

New South Wales

   28 0.32 0.27 0.30   28 0.31 0.30 0.32

Queensland

   23  0.67 0.53 0.57   23 0.72 0.66 0.67

Victoria

   23  0.39 0.33 0.35   23 0.39 0.38 ��0.39

Western Australia

   12  0.69 0.46 0.45   12 0.88 0.74 0.69

South Australia

   6  0.62 0.51 0.50   6 0.65 0.61 0.62

Australian Capital Territory

   3  0.20 0.17 0.15   3 0.19 0.17 0.20

Tasmania

   2  0.37 0.32 0.31   2 0.38 0.35 0.37

New Zealand

   2  0.10 0.17 0.23   2 0.06 0.07 0.10

Northern Territory

   1  0.33 0.17 0.21   1 0.50 0.36 0.33
  

 

      

 

    

Total

   100 0.47 0.38 0.39   100 0.50 0.46 0.47
  

 

      

 

    

Delinquency rates increased in the current year compared to December 31, 20152016 and September 30, 20152016 primarily from higher new delinquencies in Queensland and Western Australia mainly attributable to economic pressures.pressures, particularly in commodity-dependent regions.

U.S. Life Insurance segment

Trends and conditions

Results of our U.S. life insurance businesses depend significantly upon the extent to which our actual future experience is consistent with assumptions and methodologies we have used in calculating our reserves. Many factors can affect the reserves in our U.S. life insurance businesses. Because these factors are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. We will continue to monitor our experience and assumptions closely and make changes to our assumptions and methodologies, as appropriate, for our U.S. life insurance products. Even small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our DAC amortization, reserve levels, results of operations and financial condition.

We perform loss recognition testing to ensure that the current reserves along with the present value of future gross premiums are sufficient to cover the present value of future expected claims and expense, as well as recover the unamortized portion of DAC and, if any, PVFP. If the loss recognition test indicates a deficiency in the ability to pay all future claims and expenses, including the amortization of DAC and PVFP, a loss is recognized in earnings as an impairment of the DAC and/or PVFP balance and, if the loss is greater than the DAC and/or PVFP balance, by an increase in reserves. Our liability for policy and contract claims is reviewed quarterly and we conduct a detailed review of our claim reserve assumptions for our long-term care insurance business annually typically during the third quarter of each year. Our liability for future policy benefits is reviewed at least annually as a part of our loss recognition testing typically performed in the third or fourth quarter of each year. As part of loss recognition testing, we also review the recoverability of DAC and PVFP at least annually. In addition, we perform cash flow testing separately for each of our U.S. life insurance companies on a statutory accounting basis annually. We performed our annual review of claim reserve assumptions for our long-term care insurance business in the third quarter of 2016.2017. In the fourth quarter of 2016,2017, we will perform assumption reviews for our universal and term universal life insurance products as well as for our other U.S. life insurance businesses as well asproducts, including our long-term care insurance products, and complete our loss recognition testing.

In addition,Our U.S. Life Insurance segment will continue to migrate to a new valuation and projection platform for certain lines of business, while we upgrade platforms for other lines of business. The migration and upgrades are part of our ongoing efforts to improve the infrastructure and capabilities of our information systems and our routine assessment and refinement of financial, actuarial, investment and risk management capabilities and processes enterprise wide. These efforts will also continueprovide our U.S. Life Insurance segment with improved platforms to monitor our experiencesupport emerging accounting guidance and assumptions closelyongoing changes in capital regulations. Concurrently, valuation processes and make changesmethodologies will be reviewed, and may result in additional refinements to our assumptions and methodologies, as appropriate, for certain other U.S. life insurance products. In our assumption reviewmodels and/or assumptions. Any material changes in 2015, we looked at a number of assumptions, including older age mortality in our life insurance products and shock lapse in our term universal life insurance product as well as assumptions in our group long-term care insurance products, for which we did not make any changes at that time. We will review these and other assumptions, including interest rate assumptions, again in the fourth quarter of 2016 with the benefit of updated experience and comparisons to industry experience, where appropriate, and we will likely make changes to at least onebalances, margins or more of these or other assumptions with a resulting negative impact. We do not know whether such impact would be material or whether it would be offset by impacts from other assumption changesincome trends that may or may not occur. Even small changes in assumptions or small deviations of actual experienceresult from assumptions can have, and in the past have had, material impacts on our DAC amortization, reserve levels, results of operations and financial condition.

these activities will be disclosed accordingly. In addition, we intend to continue to enhance our modeling capabilities of our various businesses, including for our long-term care insurance projections where we are migratingmigrated to a new modeling system and we expect to implement it for the majority of ourlong-term care insurance business in the fourth quarter of 2016. We anticipate migrating the remaining portionsubstantially all of our retained long-term care insurance business to this new modeling system in 2017 or later. Thisby the end of 2017. The new modeling system will value and forecast associated liability cash flows and policyholder behavior at a more granular level than our current system.

One of our strategic objectives is intended to segregateseparate, then isolate, through a series of internal transactions, ourlong-term care insurance business from our other U.S. life insurance businesses. Our goal under the plan has been to align substantially all of our non-New Yorkin-force life insurance and refine assumptions based upon healthyannuity business under GLAIC, our Virginia domiciled life insurance company, and disabled insured lives,substantially all of our non-New York long-term care insurance business under GLIC, our Delaware domiciled life insurance company. As part of this strategic objective, effective April 1, 2017, GLAIC assumed risk on a coinsurance basis for certain blocks of term life insurance, universal life insurance and single premium whole life insurance from GLIC. Effective July 1, 2017, GLIC recaptured certain single premium deferred annuity products previously ceded to GLAIC. In addition,

effective July 1, 2017, GLAIC assumed risk on a modified coinsurance basis for certain blocks of fixed annuities, including those single premium deferred annuity products recaptured by GLIC, and certain corporate-owned life insurance policies from GLIC. As a result, there was an adverse impact on GLIC’s risk-based capital ratio of approximately 15 points in the third quarter of 2017. However, the internal transactions had no impact on our consolidated results of operations and financial condition prepared in accordance with U.S. GAAP as comparedthe financial impact of the intercompany reinsurance was eliminated in consolidation. These transactions complete our goal to align substantially all of our total insured lives estimate we use today.non-New Yorkin-force life insurance and annuity business under GLAIC and substantially all of our non-New York long-term care insurance business under GLIC. All of these transactions were also required under the Merger Agreement with China Oceanwide. The reinsurance treaties effective July 1, 2017 include provisions that require us to unwind or void these treaties in the event the merger transaction with China Oceanwide is terminated.

In addition, a Genworth holding company will pursue the purchase of GLAIC from GLIC at fair market value, subject to applicable regulatory approvals. Together with the internal reinsurance transactions completed in April 2017 and July 2017, finalization of the GLAIC sale, if completed, would isolate our non-New York long-term care insurance business from our other non-New York U.S. life insurance businesses and achieve this strategic objective.

Results of our U.S. life insurance businesses are also impacted by interest rates. The continued low interest rate environment puts pressure on the profitability and returns of these businesses as higher yielding investments have matured and been replaced with lower-yielding investments. We seek to manage the impact of low interest rates through asset-liability management as well as interest rate hedging strategies for a portion of our long-term care insurance product cash flows. Additionally, certain products have implicit and explicit rate guarantees or optionality that isare significantly impacted by changes in interest rates. SeeFor a further discussion of the impact of interest rates on our U.S. life insurance businesses, see “Item 3—7A—Quantitative and Qualitative Disclosures About Market Risk” for additional information about interest rate risk associated with our U.S. life insurance businesses.

For a discussion of additional information related to potential changes to our assumptions and methodologies, including certain related sensitivities, see “—Critical Accounting Estimates” as well as “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our 20152016 Annual Report on Form10-K.

Long-term care insurance

Results of our long-term care insurance business are influenced primarily by sales, morbidity, mortality, persistency, investment yields, expenses, ability to achieve rate actions, changes in regulations and reinsurance. Sales of our products are impacted by the relative competitiveness of our current ratings, product features, pricing and commission levels future actions by rating agencies and the impact ofin-force rate actions on distribution and consumer demand. Changes in regulations or government programs, including long-term care insurance rate action legislation, could impact our long-term care insurance business either positively or negatively.

Our liability for policy and contract claims is reviewed quarterly and we conduct a detailed review of our claim reserve assumptions for our long-term care insurance business annually typically during the third quarter of each year. As previously disclosed, as partDuring the third quarter of our annual review in 2014,2017, we updatedreviewed our assumptions and methodologies primarily impacting claim termination rates and benefit utilization rates, resulting in increasesrelating to our long-term care insurance claim reserves. In the third quarterreserves of 2015, we reviewed our claim reserve assumptions for our long-term care insurance business but did not make any significant changes to the assumptions or methodologies, other than routine updates to investment returns and basedbenefit utilization rates as we typically do each quarter. These updates in the third quarter of 2017 did not have a significant impact on experience, no adjustment was required.claim reserve levels. During the third quarter of 2016, we completed our annual review of assumptions and methodologies related to our long-term care insurance claim reserves, which resulted in recording higher claim reserves of $460 million and reinsurance recoverables of $25 million. This review incorporated two additional years of claims experience since our 2014 review and one year of additional experience since our 2015 review. Based on our review in the third quarter of 2016, weWe updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves. For a discussion of additional information related to changes to our assumptions and methodologies, see “—Critical Accounting Estimates.”

In the fourth quarter of 2016, we will performperformed our loss recognition and cash flow testing. We will incorporateincorporated the assumption and methodology changes made in the third quarter of 2016 into these tests. We anticipate theseThese changes will havehad a material negative impact on the margins of our long-term care insurance blocks.block, excluding the acquired block. The acquired block has a higher percentage of indemnity policies and therefore would be less likely to be adverselywas positively affected by the new claim assumptions. As a part of the process, we will considerconsidered incremental benefits from expected furtherfuture rate actions that would helphelped mitigate the impact of these changes. As part of the annual testing, we will also reviewreviewed assumptions for

incidence and interest rates, among other assumptions. The analysis and work will be completed in the fourth quarter of 2016. We will continue to regularly review our methodologies and assumptions in light of emerging experience and may be required to make further adjustments to our long-term care insurance claim reserves in the future, which could also impact our loss recognition and cash flow testing results. Any further materiallyAs of December 31, 2016, our loss recognition testing margins for our long-term care insurance business were positive but were significantly reduced from the 2015 levels. In the fourth quarter of 2017, we will perform assumption reviews and complete our loss recognition testing for our long-term care insurance products. We have observed a higher incidence of claim on policies with lifetime, or unlimited, benefits and will consider this as we complete our 2017 loss recognition testing. Our assumptions are sensitive to slight variability in actual experience and small changes in assumptions could result in the margin of our long-term care insurance block, excluding the acquired block to decrease to at/or below zero in future years. To the extent, based on reviews, our margin is negative, we would be required to recognize a loss, by amortizing more DAC and/or establishing additional benefit reserves, the impact of which may be material. In the event a loss is recognized, we would increase reserves to offset such losses that would be recognized in later years. A significant decrease in our loss recognition testing margin, the need to amortize a significant amount of DAC and/or the need to significantly increase reserves could have a material adverse changes toeffect on our claim reserves or changes asbusiness, results of operations and financial condition.

As a result of loss recognitionour annual statutory cash flow testing may have a materially negative impact onin the fourth quarter of 2016, GLICNY, our resultsinsurance subsidiary domiciled in New York, did not require any additional statutory reserves. However, in the second quarter of operations, financial condition and business. For a discussion2017, the New York Department of Financial Services required GLICNY to record an additional $58 million of statutory long-term care insurance reserves related to cash flow testing. GLICNY now currently expects to record an aggregate of approximately $178 million of additional information related to changes to our assumptions and methodologies, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our 2015 Annual Report on Form 10-K.statutory reserves over the next 15 months.

In connection with the updated assumptions and methodologies that increased claim reserves on existing claims in our 2016 review, we now establish higher claim reserves on new claims, which will decrease earnings in future periods in which the higher reserves are recorded. Additionally, average claim reserves for new claims are higher as the mix of claims continues to evolve, with an increasing number of policies with higher daily benefit amounts, unlimited benefit pools and higher inflation factors going on claim. Also, we expect growth in new claims as our blocks of business continue to age. We also expect the remaining quarterly benefits of our in-force rate actions, in aggregate, to be lower in the fourth quarter of 2016 than the levels we experienced in the first nine months of 2016 as the implementation of certain rate increase approvals were largely completed in the third quarter of 2016. In addition, premiums will decline as policies terminate from mortality and lapses.

We experience volatility in our loss ratios caused by variances in policy terminations, claim terminations, claim severity and claim counts. Our approved premium rate actions may also cause fluctuations in our loss ratios during the period when reserves are adjusted to reflect policyholders taking reduced benefits or non-

forfeiturenon-forfeiture options within their policy coverage. In addition, we periodically review our reserve assumptions and methodologies based upon developing experience, which may result in changes to claim reserves and loss recognition testing results, causing volatility in our operating results and loss ratios. Our loss ratio infor the third quarter ofnine months ended September 30, 2017 was 74% compared to 94% for the nine months ended September 30, 2016. The loss ratio for the nine months ended September 30, 2016 was 146%, reflecting ourreflected the updated assumptions and methodologies from our annual review of claim reserve assumptions completed in the third quarter of 2016, compared to 70% in the second quarter of 2016 and 76% in the third quarter of 2015.

One of our strategic priorities was to repatriate all of the existing business, including our long-term care insurance business, held in BLAIC, our primary Bermuda domiciled captive reinsurance subsidiary. The repatriation was completed through the merger of BLAIC into GLIC in October 2016. There will be no impact on our consolidated results of operations and financial condition prepared in accordance with U.S. GAAP as the financial impact of this reinsurance had been eliminated in consolidation. However, there is expected to be an adverse impact on GLIC’s risk-based capital ratio of between five and ten points in the fourth quarter of 2016.

Our long-term care insurance sales decreased 36%50% during the nine months ended September 30, 20162017 compared to the nine months ended September 30, 2015.2016. Sales decreased primarily due to our lower ratings and certain distributor suspensions driven by recent rating agency actions.ratings. We expect that our sales will continue to be adversely impacted by our current ratings. RecentFuture adverse ratings announcements or actions maycould negatively impact our sales levels.levels further.

Despite our low sales levels in our long-term care insurance business given our current ratings, we continue to evaluate new products with appropriately priced products. For example, in the fourth quarter of 2014, we began filing for regulatory approval ofpreviously launched an enhanced product to improve competitiveness, while meeting our targeted returns, by, among other things, reducing premium rates, benefit levels and adjusting other coverage options. In support of this new product, we are investing in targeted distribution and marketing initiatives to increase long-term care insurance sales. In addition, we are evaluating market trends and sales and investing in the development of products and distribution strategies that we believe will help expand the long-term care insurance market over time and meet broader consumer needs.

We also manage risk and capital allocated to our long-term care insurance business through utilization of external reinsurance in the form of coinsurance. We executed external reinsurance agreements to reinsure 20% of all sales of our individual long-term care insurance products that have been introduced since early 2013. External new business reinsurance levels vary and are dependent on a number of factors, including price, availability, risk tolerance and capital levels. Over time, there can be no assurance that affordable, or any, reinsurance will continue to be available. We also have external reinsurance on some older blocks of business which includes a treaty on a yearly renewable term basis on business that was written between 1998 and 2003. This yearly renewable term reinsurance provides coverage for claims on those policies for 15 years after the policy was written. After 15 years, reinsurance coverage ends for policies not on claim, while reinsurance coverage continues for policies on claim until the claim ends. Since 2013, we have seen, and may continue to see, through 2018, an increase in our benefit costs ifas policies with reinsurance coverage exhaust their benefits or terminate and when those policies thatwhich are no longernot covered under thisby reinsurance go on claim.

As a result of ongoing challenges in our long-term care insurance business, we continue pursuing initiatives to improve the risk and profitability profile of our business including: premium rate increases and associated benefit reductions on ourin-force policies; product refinements; changes to our current product offerings in certain states; new distribution strategies; refining underwriting requirements; managing expense levels; actively exploring additional reinsurance strategies; executing investment strategies targeting higher returns; enhancing our financial and actuarial analytical capabilities; and considering other actions to improve the performance of the overall business. These efforts include a plan for significant futurein-force premium rate increases on issued policies. For an update on rate actions, refer to “—Significant Developments—U.S. Life Insurance.” In the past, weWe have suspended new sales in Hawaii, Massachusetts, New Hampshire and Vermont, and will consider taking similar actions in the future, in other states where we are unable to obtain satisfactory rate increases onin-force policies as we did in Massachusetts, New Hampshire and Vermont.and/or unable to obtain approval for new products. We will also consider litigation against states that decline actuarially justified rate increases. We are currently in litigation with one state that has refused to approve actuarially justified rate actions. The

approval process forin-force premium rate increases and the amount and timing of the rate increases approved vary by state. In certain states, the decision to approve or disapprove a rate increase can take several years. Upon approval, insureds are provided with written notice of the increase and increases are generally applied on the insured’s next policy anniversary date. Therefore,As a result, the benefits of any rate increase are not fully realized until the implementation cycle is complete and are, therefore, expected to be realized over time. We previously expected the remaining quarterly income benefits of our in-force rate actions, in aggregate, to be lower in 2017 than the levels we experienced in 2016 as the implementation of certain rate increase approvals were largely completed in the third quarter of 2016. However, during 2017, quarterly income benefits of our in-force rate actions have increased sequentially each quarter. We now expect the 2017 income benefits of the in-force rate actions, in aggregate, to be above those recognized in 2016.

In 2009, theThe Pennsylvania Insurance Commissioner (the “Commissioner”) previously placed long-term care insurer Penn Treaty Network Company America Insurance Company and one of its subsidiaries (collectively, “Penn Treaty”) in rehabilitation, an intermediate action before insolvency, and subsequently petitioned a state court to convert the rehabilitation into a liquidation. In 2012,On November 9, 2016, the state court denied the Commissioner’s petition for liquidation and ordered the Commissioner to develop a plan of rehabilitation. In July 2016, the Commissioner petitioned the state court to convert the rehabilitation into liquidation. The state court grantedheld a hearing on November 9, 2016 for the Commissioner’s petition to convert the rehabilitation into liquidation. In the event Penn Treaty is placed in liquidation we and other insurers likely would be assessed immediately or over a period of years by guaranty associations for the payments the guaranty associations are required to make to Penn Treaty policyholders.with no objections. As of September 30,December 31, 2016, the liquidation order had not been entered and as a result, we were unable to estimate when or to what extent Penn Treaty willwould ultimately be declared insolvent, or the amount of the insolvency. As such,insolvency and we havedid not established any accrualsestablish an accrual for guaranty fund assessments associated with Penn Treaty as of September 30,December 31, 2016. We will continueHowever, on March 1, 2017, the Pennsylvania Commonwealth Court approved petitions to monitorliquidate Penn Treaty due to financial difficulties that could not be resolved through rehabilitation. In the situationfirst quarter of 2017, we received guaranty fund assessments related to Penn Treaty and may record a liability and expense in future reporting periods.recorded an accrual of $21 million.

Life insurance

Results of our life insurance business are impacted primarily by sales, competitor actions, mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements, among other factors.

In February 2016, because of low sales and our lower ratings, As previously disclosed, we announced our decision to suspendsuspended sales of our traditional life insurance products on March 7, 2016. Life insurance sales decreased 68% during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease in

We review our sales was predominantly related to our decision to suspend sales, our competitive positioninglife assumptions at least annually typically in the marketplace and distributor suspensions following adverse rating actions.

In 2015 and duringthird or fourth quarter of each year. As part of our annual review of assumptions in the first nine monthsfourth quarter of 2016, we reviewed our assumptions, including interest rate assumptions, with the benefit of updated experience and comparisons to industry experience, where appropriate. As part of this review, we implemented an updated mortality experience was favorable to pricing expectationstable for our term life insurance products but unfavorable for our universal life insurance products. This updated table improved our mortality rates in younger ages but deteriorated mortality rates in older ages. Mortality levels may deviate each period from historical trends. As a result of the updated assumptions, we recorded $196 million ofafter-tax charges in our universal and term universal life insurance products in the fourth quarter of 2016 primarily reflecting the mortality experience deterioration in older age populations. We have also experienced a higher mortality trend in 2017 as policies have aged. We will continue to regularly review our mortality as well as all of our other assumptions in light of emerging experience and may be required to make further adjustments to our universal and term universal life insurance reserves in the future, which could also impact our loss recognition testing results. In the fourth quarter of 2017, we will perform assumption reviews and complete our loss recognition testing for our universal and term life insurance products. Any further materially adverse changes to our assumptions, including mortality, may have a materially negative impact on our results of operations, financial condition and business.

Between 1999 and 2009, we had a significant increase in term life insurance sales, as compared to 1998 and prior years. As our15-year term life insurance policies written in 1999 and 2000 transition to their post-level guaranteed premium rate period, we have experienced lower persistency compared to our pricing and valuation assumptions. The blocks of business issued since 2000 vary in size as compared to the 1999 and 2000 blocks of business. Accordingly, in the future, as additional10-, 15-,15- and20-year level premium period blocks enter their post-level guaranteed premium rate period, we may experience volatility in DAC amortization, premiums and mortality experience, which may reduce profitability or create losses in our term life insurance products, in amounts that could be material, if persistency is lower than our original assumptions as it has been on our10- and15-year business written in 1999 and 2000. In 2017, we have experienced higher lapses and accelerated DAC amortization associated with our large15-year and20-year term life insurance blocks entering their post-level guaranteed level premium rate periods. We anticipate this trend will continue, with accompanying higher DAC amortization and lower profitability as larger blocks reach the end of their level premium periods through 2020. As of September 30, 2016,2017, our term life insurance products had a DAC balance of $1.4 billion. We have also taken actions to mitigate potentially unfavorable impacts through the use of reinsurance, particularly for certain term life insurance policies issued between 2001 and 2004.

A portion of our life insurance reserves are financed through captive reinsurance structures. The financing cost of certain captive reinsurance structures is determined in part by the financial strength ratings of our principal life insurance subsidiaries. As a result of the ratings downgrade of our principal life insurance subsidiaries in February 2016, the cost of financing increased for a portion of our captive-financed reserves by approximately $1 million per quarter. However, in April 2016, we successfully refinanced an existing reinsurance structure, which improved after-tax earnings by approximately $15 million by reducing interest expense.

As part of our strategic priority to repatriate all of the existing business held in BLAIC, effective April 1, 2016, we recaptured a block of universal life insurance from BLAIC to GLAIC. In addition, effective July 1, 2016, we also recaptured a block of term life insurance from BLAIC to GLAIC and terminated a term life insurance excess of loss treaty with BLAIC. Effective September 1, 2016, GLAIC entered into a reinsurance agreement, subject to regulatory approval, to cede a block of term life insurance, which primarily includes the business previously ceded to BLAIC, to an affiliated reinsurer. As previously discussed, the repatriation was completed in October 2016.

Fixed annuities

Results of our fixed annuities business are affected primarily by investment performance, interest rate levels, the slope of the interest rate yield curve, net interest spreads, equity market conditions, mortality, persistency, expense and commission levels, product sales,and competitor actions and competitiveness of our offerings.

In February 2016,actions. As previously disclosed, we announced our decision to suspendsuspended sales of our traditional fixed annuity products on March 7, 2016. Sales of fixed annuities decreased 78% during the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease was largely as a result of our lower rating, distributor actions and our decision to suspend sales.

We monitor and change crediting rates on fixed annuities on a regular basis to maintain spreads and targeted returns. However, if interest rates remain at current levels or decrease further, we could see declines in spreads. spreads which impact the margins on our products, particularly our fixed immediate annuity products. Beginning in the second quarter of 2016, our loss recognition testing resulted in a premium deficiency on our fixed immediate annuity products driven by the low interest rate environment. Due to the premium deficiency that existed in 2016 and the current low interest rate environment, we continue to monitor our fixed immediate annuity products more frequently than annually and have recorded additional charges in each quarter of 2017. If interest rates remain at the current levels or increase at a slower pace than we assumed, we could incur additional charges in the future. The impacts of future adverse changes in our assumptions would result in the establishment of additional future policy benefit reserves and would be immediately reflected in net income (loss) if our margin for this block is again reduced below zero. Any favorable variation would result in additional margin but no immediate benefit to income (loss), and would result in higher income recognition over the remaining duration of thein-force block.

For fixed indexed annuities, equity market performance and volatility could also result in additional gains or losses, although associated hedging activities are expected to partially mitigate these impacts.

Segment results of operations

Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016

The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:

 

  Three months ended
September 30,
 Increase
(decrease) and
percentage
change
   Three months ended
September 30,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2016         2015     2016 vs. 2015   2017 2016 2017 vs. 2016 

Revenues:

          

Premiums

  $725  $784  $(59 (8)%   $748  $725  $23   3% 

Net investment income

   695  680  15  2   683 695 (12  (2)% 

Net investment gains (losses)

   21  (16 37   NM(1)    27 21 6  29% 

Policy fees and other income

   175  177  (2 (1)%    154 175 (21  (12)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total revenues

   1,616  1,625  (9 (1)%    1,612  1,616  (4  % 
  

 

  

 

  

 

    

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   1,556  1,155  401  35   1,255  1,556  (301  (19)% 

Interest credited

   140  148  (8 (5)%    128 140 (12  (9)% 

Acquisition and operating expenses, net of deferrals

   149  176  (27 (15)%    149 149  —     % 

Amortization of deferred acquisition costs and intangibles

   69  530  (461 (87)%    50 69 (19  (28)% 

Interest expense

   2  22  (20 (91)%    3 2 1  50% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total benefits and expenses

   1,916  2,031  (115 (6)%    1,585  1,916  (331  (17)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Loss from continuing operations before income taxes

   (300 (406 106  26

Benefit for income taxes

   (106 (144 38  26

Income (loss) from continuing operations before income taxes

   27 (300 327  109% 

Provision (benefit) for income taxes

   10 (106 116  109% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Loss from continuing operations

   (194 (262 68  26

Adjustments to loss from continuing operations:

     

Income (loss) from continuing operations

   17 (194 211  109% 

Adjustments to income (loss) from continuing operations:

     

Net investment (gains) losses, net(2)(1)

   (21 10  (31  NM(1)    (28 (21 (7  (33)% 

(Gains) losses from life block transactions

   —     455  (455 (100)% 

Expenses related to restructuring

   1   —     1   NM(1)    —    1 (1  (100)% 

Taxes on adjustments

   7  (163 170  104   10 7 3  43% 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

  $(207 $40  $(247  NM(1) 

Adjusted operating loss available to Genworth Financial,Inc.’s common stockholders

  $(1 $(207 $206   100% 
  

 

  

 

  

 

    

 

  

 

  

 

  

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)For the three months ended September 30, 2015,2017, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(6)$(1) million.

The following table sets forth netadjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the businesses included in our U.S. Life Insurance segment for the periods indicated:

 

  Three months ended
September 30,
 Increase
(decrease) and
percentage
change
   Three months ended
September 30,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

    2016     2015   2016 vs. 2015     2017     2016   2017 vs. 2016 

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

     

Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:

     

Long-term care insurance

  $(270 $(10 $(260  NM(1)   $(5 $(270 $265   98% 

Life insurance

   48  31  17  55   (9 48 (57  (119)% 

Fixed annuities

   15  19  (4 (21)%    13 15 (2  (13)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total net operating income (loss) available to Genworth Financial, Inc.’s common stockholders

  $(207 $40  $(247  NM(1) 

Total adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

  $(1 $(207 $206   100% 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders for ourlong-term care insurance decreased $265 million predominantly attributable to higher claim reserves of $283 million as a result of the completion of our annual review of our claim reserves conducted during the third quarter of 2016, partially offset by higher severity on new claims in the current year. The current year also included $8 million of higher premiums and reduced benefits fromin-force rate actions approved and implemented.

Our life insurance business had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $9 million in the current year compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $48 million in the prior year. The change was predominantly attributable to a $15 million net unfavorable model refinement, unfavorable mortality and higher lapses in the current year.

Our fixed annuities business decreased $2 million predominantly from lower investment income, partially offset by lower interest credited in the current year. The prior year included an $8 million unfavorable correction related to state guaranty funds that did not recur.

Revenues

Premiums

Our long-term care insurance business increased $31 million largely from $21 million of increased premiums in the current year fromin-force rate actions approved and implemented.

Our life insurance business decreased $8 million mainly driven by continued runoff of our term life insurance products, including higher lapses primarily from our large15-year and20-year term life insurance blocks entering their post-level guaranteed premium rate periods, partially offset by lower reinsurance ceded in the current year.

Net investment income

Our long-term care insurance business increased $16 million largely from higher average invested assets due to growth of ourin-force block, partially offset by lower reinvestment yields and $4 million of lower income related to inflation-driven volatility on U.S. Government Treasury Inflation Protected Securities (“TIPS”) in the current year.

Our life insurance business decreased $4 million primarily due to a less favorable prepayment speed adjustment on structured securities in the current year.

Our fixed annuities business decreased $24 million largely attributable to lower average invested assets in the current year.

Net investment gains (losses). The increase was driven largely by our long-term care insurance business predominantly from higher net gains from the sale of investment securities in the current year.

Policy fees and other income. The decrease was mostly attributable to our life insurance business primarily as a result of suspending sales of these products on March 7, 2016 and a decline in our term universal and universal life insurancein-force blocks in the current year. The decrease was also driven by an $8 million unfavorable model refinement in the current year.

Benefits and expenses

Benefits and other changes in policy reserves

Our long-term care insurance business decreased $366 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher

claim reserves of $435 million, net of reinsurance. The decrease was partially offset by aging and growth of thein-force block, higher severity on new claims and a less favorable impact of $7 million from reduced benefits in the current year related toin-force rate actions approved and implemented.

Our life insurance business increased $64 million primarily attributable to a $30 million unfavorable model refinement, unfavorable mortality and higher universal life insurance reserves in the current year reflecting our previously updated assumptions from the fourth quarter of 2016.

Our fixed annuities business increased $1 million as $3 million of higher reserves from loss recognition testing in our fixed immediate annuity products were mostly offset by lower interest credited in the current year.

Interest credited. Interest credited decreased mostly driven by our fixed annuities business predominantly from lower average account values in the current year.

Acquisition and operating expenses, net of deferrals

Our life insurance business increased $5 million primarily from lower deferrals due to block runoff, partially offset by lower operating expenses in the current year attributable to the suspension of sales on March 7, 2016.

Our fixed annuities business decreased $8 million largely attributable to a $12 million unfavorable correction related to state guaranty funds in the prior year that did not recur.

Amortization of deferred acquisition costs and intangibles.The decrease in amortization of DAC and intangibles was primarily related to our life insurance business principally as a result of a net $15 million favorable model refinement in the current year. The decrease was partially offset by higher amortization in our term universal life insurance product reflecting previously updated lapse assumptions. In the current year, we have also experienced higher lapses and accelerated DAC amortization associated with our large15-year and20-year term life insurance blocks entering their post-level guaranteed level premium rate periods.

Provision for income taxes. The effective tax rate was 35.3% for the three months ended September 30, 2017 and 2016.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:

   Nine months ended
September 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2017  2016  2017 vs. 2016 

Revenues:

     

Premiums

  $2,242  $1,917  $325   17% 

Net investment income

   2,058   2,049   9  % 

Net investment gains (losses)

   91  119  (28  (24)% 

Policy fees and other income

   494  532  (38  (7)% 
  

 

 

  

 

 

  

 

 

  

Total revenues

   4,885   4,617   268  6% 
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   3,582   3,403   179  5% 

Interest credited

   389  427  (38  (9)% 

Acquisition and operating expenses, net of deferrals

   450  513  (63  (12)% 

Amortization of deferred acquisition costs and intangibles

   221  231  (10  (4)% 

Interest expense

   9  35  (26  (74)% 
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   4,651   4,609   42  1% 
  

 

 

  

 

 

  

 

 

  

Income from continuing operations before income taxes

   234  8  226  NM(1) 

Provision for income taxes

   83  3  80  NM(1) 
  

 

 

  

 

 

  

 

 

  

Income from continuing operations

   151  5  146  NM(1) 

Adjustments to income from continuing operations:

     

Net investment (gains) losses, net (2)

   (93  (129  36  28% 

(Gains) losses from life block transactions

   —     9  (9  (100)% 

Expenses related to restructuring

   —     19  (19  (100)% 

(Gains) losses on sale of businesses

   —     (1  1  100% 

Taxes on adjustments

   33  36  (3  (8)% 
  

 

 

  

 

 

  

 

 

  

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

  $91  $(61 $152   NM(1) 
  

 

 

  

 

 

  

 

 

  

 

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)For the nine months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(2) million and $(10) million, respectively.

The following table sets forth adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the businesses included in our U.S. Life Insurance segment for the periods indicated:

   Nine months
ended
September 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2017   2016  2017 vs. 2016 

Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:

      

Long-term care insurance

  $42   $(199 $241   121

Life insurance

   6   110  (104  (95)% 

Fixed annuities

   43   28  15  54
  

 

 

   

 

 

  

 

 

  

Total adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders

  $91   $(61 $152   NM(1) 
  

 

 

   

 

 

  

 

 

  

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.

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

 

The netOur long-term care insurance business had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $42 million in the current year compared to an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders for our long-term care insurance business increased $260of $199 million primarily relatedin the prior year. The change was predominantly attributable to higher claim reserves of $283 million as a result of the completion of our annual review of our claim reserves conducted during the third quarter of 2016. As a resultThe increase was also attributable to $44 million of this review, we updated several assumptionsunfavorable adjustments which included refinements to the calculations of reserves in the prior year that did not recur and methodologies primarily impacting claim termination rates, benefit utilization rateshigher incremental premiums and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information).reduced benefits of $18 million fromin-force rate actions approved and implemented. These increases were partially offset by higher premiumsseverity on new claims and reduced benefitshigher incremental reserves of $35$42 million recorded in connection with an accrual for profits followed by losses as a result of higher profitability driven by favorable claim terminations in the current year from in-force rate actions approved and implemented.year.

 

Our life insurance business increased $17decreased $104 million principallypredominantly from a $20 million net unfavorable term conversion mortality assumption correction, unfavorable mortality and a $15 million net unfavorable model refinement in the current year. The decrease was also attributable to higher reserves in the current year reflecting previously updated assumptions from the fourth quarter of 2016. These decreases were partially offset by lower financing costs in the current year.

 

Our fixed annuities business decreased $4increased $15 million predominantly from lower investment income and an $8 million unfavorable correction related to state guaranty funds partially offsetand a $7 million net unfavorable impact from the recapture of certain life-contingent products by lower interest credited and less unfavorable mortalitya third-party in the current year.prior year that did not recur.

Revenues

Premiums

 

Our long-term care insurance business decreased $8increased $34 million largely from policy terminations and lower sales in the current year. This decrease was partially offset by $32$71 million of increased premiums in the current year fromin-force rate actions approved and implemented.

Our life insurance business decreased $47 million mainly attributable to higher ceded reinsurance and lower salesimplemented, partially offset by policy terminations in the current year.

 

Our fixed annuitieslife insurance business decreased $4increased $294 million principally from lower salesmainly attributable to the impact of a reinsurance treaty under which we initially ceded $326 million of certain term life insurance premiums as part of a life block transaction in the first quarter of 2016, partially offset by the continued runoff of our life-contingentterm life insurance products in the current year.

Net investment income

 

Our long-term care insurance business increased $26$68 million largely from higher average invested assets due to growth of ourin-force block, and $5 million of higher income related to inflation-driven volatility on recent U.S. Government Treasury Inflation Protected Securities (“TIPS”) purchases, partially offset by lower reinvestment yields in the current year.

Our life insurance business increased $2 million principally from a $4 million favorable prepayment speed adjustment on structured securities in the current year compared to a $3 million unfavorable prepayment speed adjustment in the prior year. This increase was mostly offset by lower average invested assets in the current year.

 

Our fixed annuities business decreased $13$56 million largely due to lower average invested assets in the current year.

Net investment gains (losses)

 

Net investment gains in our long-term care insurance business decreased $90 million primarily related to net gains of $130 million from the sale of TIPS in the prior year that did not recur and lower derivative gains in the current year.

Net investment gains in our life insurance business increased $13$10 million largely relatedfrom higher net gains from the sale of investment securities and lower impairments in the current year.

Our fixed annuities business had net investment gains of $6 million in the current year compared to highernet investment losses of $46 million in the prior year. Net investment gains in the current year resulted from derivative gains and net gains from the sale of investment securities, partially offset by lower derivative gains in the current year.

In the current year, net investment gains of $4 million in our life insurance business were mostly attributable to gainslosses on embedded derivatives related to our fixed indexed universal life insurance products.annuities. Net investment losses of $8 million in the prior year were largely related to impairments.

Net investment losses in our fixed annuities business decreased $12 million predominantly from lower netimpairments, losses on embedded derivatives related to our fixed indexed annuities and net gainslosses from the sale of investment securities, partially offset by derivative gains.

Policy fees and other income. The decrease was mostly attributable to our life insurance business primarily as a result of suspending sales of these products on March 7, 2016 and a decline in our term universal and universal life insurancein-force blocks in the current year comparedyear. The decrease was also related to net lossesan $8 million unfavorable model refinement in the priorcurrent year.

Benefits and expenses

Benefits and other changes in policy reserves

 

Our long-term care insurance business increased $437decreased $292 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $435 million, net of reinsurance. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information). The increase was also attributable to aging and growth of the in-force block and higher severity on new claims in the current year. These increases were partially offset by reduced benefits of $24 million in the current year related to in-force rate actions approved and implemented.

Our life insurance business decreased $32 million principally related to higher ceded reinsurance and favorable mortality in our term life insurance products, partially offset by unfavorable mortality in our universal life insurance products in the current year.

Our fixed annuities business decreased $4 million largely attributable to lower interest credited, lower sales of our life-contingent products and less unfavorable mortality in the current year. These decreases were partially offset by an increase in reserves of $6 million related to loss recognition testing in our fixed immediate annuity products primarily driven by aging of the in-force and the low interest rate environment in the current year (see “—Critical Accounting Estimates” for additional information).

Interest credited. Interest credited decreased driven mostly by our fixed annuities business predominantly from a decrease in crediting rates and lower average account values in the current year.

Acquisition and operating expenses, net of deferrals

Our long-term care insurance business decreased $17 million principally from lower sales in the current year.

Our life insurance business decreased $17 million primarily from lower sales in the current year.

Our fixed annuities business increased $7 million largely attributable to a $12 million unfavorable correction related to state guaranty funds, partially offset by lower sales in the current year.

Amortization of deferred acquisition costs and intangibles. The decrease in amortization of DAC and intangibles was primarily related to our life insurance business principally from a $455 million impairment of DAC as a result of loss recognition testing of certain term life insurance policies in the prior year as part of a life block transaction that did not recur and from lower lapses in the current year.

Interest expense. Interest expense decreased driven by our life insurance business principally as a result of the redemption of certain non-recourse funding obligations as part of a life block transaction completed in the first quarter of 2016 and from letter of credit fees in the prior year that did not recur.

Benefit for income taxes. The effective tax rate was 35.3% for the three months ended September 30, 2016 and 2015.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:

   Nine months ended
September 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2016          2015      2016 vs. 2015 

Revenues:

     

Premiums

  $1,917  $2,331  $(414  (18)% 

Net investment income

   2,049   2,028   21   1

Net investment gains (losses)

   119   (27  146   NM(1) 

Policy fees and other income

   532   539   (7  (1)% 
  

 

 

  

 

 

  

 

 

  

Total revenues

   4,617   4,871   (254  (5)% 
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   3,403   3,368   35   1

Interest credited

   427   448   (21  (5)% 

Acquisition and operating expenses, net of deferrals

   513   506   7   1

Amortization of deferred acquisition costs and intangibles

   231   678   (447  (66)% 

Interest expense

   35   69   (34  (49)% 
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   4,609   5,069   (460  (9)% 
  

 

 

  

 

 

  

 

 

  

Income (loss) from continuing operations before income taxes

   8   (198  206   104

Provision (benefit) for income taxes

   3   (70  73   104
  

 

 

  

 

 

  

 

 

  

Income (loss) from continuing operations

   5   (128  133   104

Adjustments to income (loss) from continuing operations:

     

Net investment (gains) losses, net(2)

   (129  15   (144  NM(1) 

(Gains) losses from life block transactions

   9   455   (446  (98)% 

Expenses related to restructuring

   19   2   17   NM(1) 

(Gains) losses on sale of businesses

   (1  —      (1  NM(1) 

Taxes on adjustments

   36   (166  202   122
  

 

 

  

 

 

  

 

 

  

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

  $(61 $178  $(239  (134)% 
  

 

 

  

 

 

  

 

 

  

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)For the nine months ended September 30, 2016 and 2015, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(10) million and $(12) million, respectively.

The following table sets forth net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the businesses included in our U.S. Life Insurance segment for the periods indicated:

   Nine months ended
September 30,
   Increase
(decrease) and
percentage

change
 

(Amounts in millions)

      2016          2015                   2016 vs. 2015              

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

      

Long-term care insurance

  $(199 $10   $(209  NM(1) 

Life insurance

   110   93    17   18

Fixed annuities

   28   75    (47  (63)% 
  

 

 

  

 

 

   

 

 

  

Total net operating income (loss) available to Genworth Financial, Inc.’s common stockholders

  $(61 $178   $(239  (134)% 
  

 

 

  

 

 

   

 

 

  

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.

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

Our long-term care insurance business had a net operating loss available to Genworth Financial, Inc.’s common stockholders of $199 million in the current year compared to net operating income available to Genworth Financial, Inc.’s common stockholders of $10 million in the prior year largely related to the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $283 million. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information). The current year also included $44 million of unfavorable adjustments which included refinements to the calculations of reserves. These decreases were partially offset by higher premiums and reduced benefits of $141 million in the current year from in-force rate actions approved and implemented.

Our life insurance business increased $17 million principally from lower financing costs and favorable mortality and lapses in our term life insurance products, partially offset by higher reserves in our universal and term universal life insurance products reflecting our updated assumptions from the fourth quarter of 2015.

Our fixed annuities business decreased $47 million primarily related to loss recognition testing in our fixed immediate annuity products that resulted in a charge of $25 million driven primarily by the low interest rate environment in the current year (see “—Critical Accounting Estimates” for additional information). The decrease was also attributable to an $8 million unfavorable correction related to state guaranty funds, a $7 million net unfavorable impact from the recapture of certain life-contingent products by a third party, lower investment income and unfavorable mortality in the current year.

Revenues

Premiums

Our long-term care insurance business increased $60 million principally from $100 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations and lower sales in the current year.

Our life insurance business decreased $460 million attributable to higher ceded reinsurance and lower sales in the current year. In the first quarter of 2016, we initially ceded $326 million of certain term life insurance premiums under a new reinsurance treaty as part of a life block transaction.

Our fixed annuities business decreased $14 million principally from lower sales of our life-contingent products in the current year.

Net investment income

Our long-term care insurance business increased $66 million largely from higher average invested assets due to growth of our in-force block and $8 million of higher income related to inflation-driven volatility on TIPS purchases, partially offset by lower reinvestment yields and $8 million of lower gains from bond calls and mortgage loan prepayments in the current year.

Our fixed annuities business decreased $43 million largely due to lower average invested assets, $8 million of lower gains from limited partnerships and $4 million of lower gains from bond calls and mortgage loan prepayments in the current year.

Net investment gains (losses)

Net investment gains in our long-term care insurance business increased $156 million primarily related to net gains of $130 million from the sale of TIPS and higher derivative gains in the current year.

In the current year, net investment gains of $5 million in our life insurance business were predominantly related to gains on embedded derivatives related to our indexed universal life insurance products, partially offset by impairments. Net investment losses of $2 million in the prior year were largely related to impairments, partially offset by net gains from the sale of investment securities.

Net investment losses in our fixed annuities business increased $17 million predominantly from higher impairments and higher net losses from the sale of investment securities in the current year. These increases were partially offset by lower net losses on embedded derivatives related to our fixed indexed annuities in the current year.

Policy fees and other income.The decrease was primarily attributable to our life insurance business largely related to lower sales and a decrease in our term universal and universal life insurance in-force blocks in the current year.

Benefits and expenses

Benefits and other changes in policy reserves

Our long-term care insurance business increased $473 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $435 million, net of reinsurance. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information). The increase was also attributable to aging and growth of the in-force block, higher severity on new claims and $68 million of unfavorable adjustments which included refinements to the calculations of reserves in the prior year that did not recur and favorable claim terminations in the current year. These increasesdecreases were partially offset by aging and growth of thein-force block, higher severity on new claims, higher incremental reserves of $64 million recorded in connection with an accrual for profits followed by losses and a $38 million less favorable impact from reduced benefits of $125 million in the current year related toin-force rate actions approved and implemented.

 

Our life insurance business decreased $404increased $429 million principally related to higher cededthe impact of a reinsurance and favorable mortality in our term life insurance products in the current year. In the first quarter of 2016,treaty under which we initially ceded $331 million of certain term life insurance reserves under a new reinsurance treaty as part of a life block transaction. These decreases were partially offset bytransaction in the first quarter of 2016. The increase was also attributable to higher reserves in our universal and term universal life insurance productsreserves reflecting our previously updated assumptions from the fourth quarter of 2015.2016 and unfavorable mortality in the current year. The current year also included a $30 million unfavorable model refinement.

 

Our fixed annuities business decreased $34increased $42 million largely attributable to $45 million of lower assumed reinsurance in connection with the recapture of certain life-contingent products by a third party in the current year. The decrease was also attributable to lower sales of our life-contingent products and lower interest credited in the current year. These decreases wereprior year that did not recur, partially offset by an increase in reserves of

$24 million related to loss recognition testing in our fixed immediate annuity products driven primarily by the low interest rate environment (see “—Critical Accounting Estimates” for additional information). The decrease was also partially offset by unfavorablefavorable mortality in the current year.

Interest credited

Our life insurance business decreased $7 million predominantly from lower crediting rates in our universal life insurance products in the current year.

OurInterest credited. Interest credited decreased driven mostly by our fixed annuities business decreased $14 million largely driven by a decrease inpredominantly from lower average account values and lowera decrease in crediting rates in the current year.

Acquisition and operating expenses, net of deferrals

 

Our long-term care insurance business decreased $22increased $24 million predominantly from lower sales and marketing costs, partially offset by $6 millionguaranty fund assessments in restructuring charges and a $3 million write-off of a receivable associatedconnection with a disputed reinsurance claimthe Penn Treaty liquidation in the current year.

 

Our life insurance business decreased $30$19 million primarily relatedfrom lower operating expenses attributable to lowerthe suspension of sales partially offset byon March 7, 2016. The decrease was also attributable to $7 million inof restructuring charges and expenses of $5 million associated with the life block transaction in the current year.prior year that did not recur.

 

Our fixed annuities business increased $59decreased $68 million largely attributable to a $55 million ceding commission paidpayment in connection with the recapture of certain life-contingent products by a third party in the prior year that did not recur and lower operating expenses as a result of the suspension of sales on March 7, 2016. The prior year included an unfavorable correction of $12 million related to state guaranty funds and a $3 million restructuring charge, partially offset by lower sales in the current year.funds.

Amortization of deferred acquisition costs and intangibles

 

Our lifelong-term care insurance business decreased $463$8 million principally related to an impairment of DAC of $455 millionfrom a smallerin-force block in the current year as a result of loss recognition testing of certain termlower sales.

Our life insurance policiesbusiness increased $17 million largely related to a $41 million unfavorable term conversion mortality assumption correction and higher amortization in the prior year as part ofour term universal life insurance product reflecting previously updated lapse assumptions, partially offset by a life block transaction that did not recurnet $15 million favorable model refinement and from lower lapsesan $11 million refinement related to reinsurance rates in the current year.

 

Our fixed annuities business increased $13decreased $19 million predominantly related to thewrite-off of DAC in connection with loss recognition testing in our fixed immediate annuity products of $14 million driven primarily by the low interest rate environment in the currentprior year (see “—Critical Accounting Estimates” for additional information).that did not recur.

Interest expense. Interest expense decreased driven by our life insurance business principally as a result of the redemption of certain non-recourse funding obligations as part of a life block transaction completed in the first quarter of 2016 which included the redemption of certainnon-recourse funding obligations and lower letter of credit fees. These decreases were partially offset by thewrite-off of $9 million of deferred borrowing costs associated with ournon-recourse funding obligations as partwell as the restructuring of a life block transaction and the impact of credit rating downgrades which increased the cost of financing term life insurance reserves in the current year.captive reinsurance entity.

Provision (benefit) for income taxes.The effective tax rate was 35.3% for the nine months ended September 30, 20162017 and 2015.2016.

U.S. Life Insurance selected operating performance measures

Long-term care insurance

The following table sets forth selected operating performance measures regarding our individual and group long-term care insurance productsbusiness as of or for the periodsdates indicated:

 

 Three months ended
September 30,
 Increase
(decrease) and
percentage
change
 Nine months ended
September 30,
 Increase
(decrease) and
percentage
change
   Three months
ended
September 30,
 Increase
(decrease)
and
percentage
change
 Nine months
ended
September 30,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

     2016         2015             2016 vs. 2015             2016         2015           2016 vs. 2015           2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016 

Net earned premiums:

                 

Individual long-term care insurance

 $591   $591   $—     —   $1,792   $1,723   $69   4  $613  $591  $22   4 $1,815  $1,792  $23   1

Group long-term care insurance

 19   27   (8 (30)%  72   81   (9 (11)%    28   19   9   47  83   72   11   15
 

 

  

 

  

 

   

 

  

 

  

 

    

 

  

 

  

 

   

 

  

 

  

 

  

Total

 $610   $618   $(8 (1)%  $1,864   $1,804   $60   3  $641  $610  $31   5 $1,898  $1,864  $34   2
 

 

  

 

  

 

   

 

  

 

  

 

    

 

  

 

  

 

   

 

  

 

  

 

  

Annualized first-year premiums and deposits:

                 

Individual long-term care insurance

 $2   $7   $(5 (71)%  $11   $25   $(14 (56)%   $2  $2  $—     —   $6  $11  $(5  (45)% 

Group long-term care insurance

 3   1   2   200 7   3   4   133   1   3   (2  (67)%   3   7   (4  (57)% 
 

 

  

 

  

 

   

 

  

 

  

 

    

 

  

 

  

 

   

 

  

 

  

 

  

Total

 $5   $8   $(3 (38)%  $18   $28   $(10 (36)%   $3  $5  $(2  (40)%  $9  $18  $(9  (50)% 
 

 

  

 

  

 

   

 

  

 

  

 

    

 

  

 

  

 

   

 

  

 

  

 

  

Loss ratio

 146 76 70  94 74 20    79 146 (67)%   74 94 (20)%  

The loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums.

Net earned premiums decreasedincreased for the three months ended September 30, 2016 largely2017 mostly from policy terminations and lower sales in the current year. This decrease was partially offset by $32$21 million of increased premiums in the current year fromin-force rate actions approved and implemented.

Net earned premiums increased for the nine months ended September 30, 20162017 mostly from $100$71 million of increased premiums in the current year fromin-force rate actions approved and implemented, partially offset by policy terminations and lower sales in the current year.

Annualized first-year premiums and deposits decreased principally from reducedlower sales due to higher pricing on newer products and certain distributor suspensions driven by rating agency actions.our current ratings.

The loss ratio increaseddecreased for the three and nine months ended September 30, 20162017 largely from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $435 million, net of reinsurance. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information). For the three months ended September 30, 2016, this increase was partially offset by $56 million of higher premiums and reduced benefits in the current year related to in-force rate actions approvedthe decrease in benefits and implemented. For the nine months ended September 30, 2016,other changes in reserves and the increase was also attributable to higher severity on new claims and $68 million of unfavorable adjustments, which included refinements to the calculations of reserves in the current year. These increases were partially offset by $225 million of higher premiums and reduced benefits in the current year related to in-force rate actions approved and implemented.as discussed above.

Life insurance

The following tables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:

 

  Three months
ended September 30,
   Increase
(decrease) and
percentage
change
 Nine months
ended September 30,
   Increase
(decrease) and
percentage
change
   Three months
ended
September 30,
   Increase
(decrease)
and
percentage
change
 Nine months
ended
September 30,
   Increase
(decrease)
and
percentage
change
 

(Amounts in millions)

    2016       2015     2016 vs. 2015   2016       2015     2016 vs. 2015   2017   2016   2017 vs. 2016 2017   2016   2017 vs. 2016 

Term and whole life insurance

                            

Net earned premiums

  $115   $162   $(47   (29)%  $50   $510   $(460   (90)%   $107   $115   $(8  (7)%  $344   $50   $294   NM(1) 

Sales

   —       7    (7   (100)%  7    25    (18   (72)%    —      —      —     —    —      7   (7  (100)% 

Term universal life insurance

                            

Net deposits

  $62   $64   $(2   (3)%  $191   $198   $(7   (4)%   $59   $62   $(3  (5)%  $184   $191   $(7  (4)% 

Universal life insurance

                            

Net deposits

  $86   $116   $(30   (26)%  $297   $378   $(81   (21)%   $81   $86   $(5  (6)%  $250   $297   $(47  (16)% 

Sales:

                            

Universal life insurance

   1    2    (1   (50)%  4    10    (6   (60)%    1   1   —     —    2   4   (2  (50)% 

Linked-benefits

   —       3    (3   (100)%  3    9    (6   (67)%    —      —      —     —    —      3   (3  (100)% 

Total life insurance

                            

Net earned premiums and deposits

  $263   $342   $(79   (23)%  $538   $1,086   $(548   (50)%   $247   $263   $(16  (6)%  $778   $538   $240   45

Sales:

                            

Term life insurance

   —       7    (7   (100)%  7    25    (18   (72)%    —      —      —     —    —      7   (7  (100)% 

Universal life insurance

   1    2    (1   (50)%  4    10    (6   (60)%    1   1   —     —    2   4   (2  (50)% 

Linked-benefits

   —       3    (3   (100)%  3    9    (6   (67)%    —      —      —     —    —      3   (3  (100)% 

 

   As of September 30,   Percentage
change
 

(Amounts in millions)

  2016   2015   2016 vs. 2015 

Term and whole life insurance

      

Life insurance in-force, net of reinsurance

  $204,549   $313,675    (35)% 

Life insurance in-force before reinsurance

   494,642    514,306    (4)% 

Term universal life insurance

      

Life insurance in-force, net of reinsurance

  $123,770   $125,820    (2)% 

Life insurance in-force before reinsurance

   124,670    126,758    (2)% 

Universal life insurance

      

Life insurance in-force, net of reinsurance

  $40,237   $40,591    (1)% 

Life insurance in-force before reinsurance

   46,038    46,883    (2)% 

Total life insurance

      

Life insurance in-force, net of reinsurance

  $368,556   $480,086    (23)% 

Life insurance in-force before reinsurance

   665,350    687,947    (3)% 
(1)We define “NM” as not meaningful for increases or decreases greater than 200%.

   As of September 30,   Percentage
change
 

(Amounts in millions)

  2017   2016   2017 vs. 2016 

Term and whole life insurance

      

Life insurancein-force, net of reinsurance

  $196,872   $204,549    (4)% 

Life insurancein-force before reinsurance

   467,821    494,642    (5)% 

Term universal life insurance

      

Life insurancein-force, net of reinsurance

  $119,442   $123,770    (3)% 

Life insurancein-force before reinsurance

   120,291    124,670    (4)% 

Universal life insurance

      

Life insurancein-force, net of reinsurance

  $37,335   $40,237    (7)% 

Life insurancein-force before reinsurance

   42,726    46,038    (7)% 

Total life insurance

      

Life insurancein-force, net of reinsurance

  $353,649   $368,556    (4)% 

Life insurancein-force before reinsurance

   630,838    665,350    (5)% 

Term and whole life insurance

Net earned premiums anddecreased during the three months ended September 30, 2017 primarily from continued runoff of our term life insurance in-force, net ofproducts, including higher lapses primarily from our large15-year and20-year term life insurance blocks entering their post-level guaranteed premium rate periods, partially offset by lower reinsurance decreasedceded in the current year.

Net earned premiums increased during the nine months ended September 30, 2017 primarily related to higher cededthe impact of a reinsurance and lower sales in the current year. In the first quarter of 2016,treaty under which we initially ceded $326 million of certain term life insurance

premiums under a new reinsurance treaty as part of a life block transaction. transaction in the first quarter of 2016, partially offset by the continued runoff of our term life insurance products in the current year.

Sales of our term life insurance productproducts decreased predominantly related to certain distributor suspensions driven by rating agency actions and from our decision to suspendthe suspension of sales of our traditional life insurance products on March 7, 2016. While we no longer solicit sales of these products, we continue to service our existing block of business.

Term universal life insurance

We no longer solicit sales of term universal life insurance products; however, we continue to service our existing block of business.

Universal life insurance

Net deposits of our universal life insurance products decreased primarily related to changes in our competitive positioning infrom the marketplace, distributor suspensions following adverse rating actions and our decision to suspendsuspension of sales of our traditional life insurance products on March 7, 2016. While we no longer solicit sales of these products, we continue to service our existing block of business.

Fixed annuities

The following table sets forth selected operating performance measures regarding our fixed annuities as of or for the dates indicated:

 

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

(Amounts in millions)

      2016         2015         2016         2015             2017             2016             2017             2016       

Single Premium Deferred Annuities

          

Account value, beginning of period

  $12,191  $12,418  $12,480  $12,437   $11,321  $12,191  $11,806  $12,480 

Deposits

   3  253  175  777    3 3 7 175

Surrenders, benefits and product charges

   (270 (333 (879 (1,042   (383 (270 (1,031 (879
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net flows

   (267 (80 (704 (265   (380 (267 (1,024 (704

Interest credited and investment performance

   86  42  234  208    79 86 238 234
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Account value, end of period

  $12,010  $12,380  $12,010  $12,380   $11,020  $12,010  $11,020  $12,010 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Single Premium Immediate Annuities

          

Account value, beginning of period

  $5,198  $5,442  $5,180  $5,763   $4,752  $5,198  $4,853  $5,180 

Premiums and deposits

   25  36  75  112    24 25 64 75

Surrenders, benefits and product charges

   (173 (186 (572 (595   (151 (173 (474 (572
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net flows

   (148 (150 (497 (483   (127 (148 (410 (497

Interest credited

   56  61  173  188    52 56 159 173

Effect of accumulated net unrealized investment gains (losses)

   23  (8 273  (123   9 23 84 273
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Account value, end of period

  $5,129  $5,345  $5,129  $5,345   $4,686  $5,129  $4,686  $5,129 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Structured Settlements

          

Account value, net of reinsurance, beginning of period

  $1,061  $1,074  $1,066  $1,078   $1,055  $1,061  $1,061  $1,066 

Surrenders, benefits and product charges

   (11 (19 (44 (52   (17 (11 (51 (44
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net flows

   (11 (19 (44 (52   (17 (11 (51 (44

Interest credited

   14  14  42  43    14 14 42 42
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Account value, net of reinsurance, end of period

  $1,064  $1,069  $1,064  $1,069   $1,052  $1,064  $1,052  $1,064 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total premiums from fixed annuities

  $—     $4  $3  $17   $—    $—    $—    $3 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total deposits from fixed annuities

  $28  $285  $247  $872   $27  $28  $71  $247 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

We no longer solicit sales of our traditional fixed annuity products; however, we continue to service our existing block of business.

Single Premium Deferred Annuities

Account value of our single premium deferred annuities decreased as surrenders and benefits outpaced deposits and interest credited. SalesDeposits decreased primarily related to the suspension of our products by distributors driven by the rating actions and from our decision to suspend sales of our traditional fixed annuity products on March 7, 2016.

Single Premium Immediate Annuities

Account value of our single premium immediate annuities decreased as benefits exceeded interest credited, net unrealized investment gains interest credited and premiums. For the nine months ended September 30, 2016, we also had $24 million of higher reservesSales decreased predominantly related to loss recognition testing driven primarily by the low interest rate environment in the current year (see “—Critical Accounting Estimates” for additional information). Sales declined primarily related to suspension of our products by distributors driven by the rating actions and from our decision to suspend sales of our traditional fixed annuity products on March 7, 2016.

Structured Settlements

We no longer solicit sales of structured settlements; however, we continue to service our existing block of business.

Valuation systems and processes

Our U.S. Life Insurance segment will continue to migrate to a new valuation and projection platform for certain lines of business, while we upgrade platforms for other lines of business. For example, we are migrating to a new modeling system and we expect to implement it for the majority of our long-term care insurance business in the fourth quarter of 2016. We anticipate migrating the remaining portion of our long-term care insurance business to this new modeling system in 2017 or later. The migration and upgrades are part of our ongoing efforts to improve the infrastructure and capabilities of our information systems and our routine assessment and refinement of financial, actuarial, investment and risk management capabilities enterprise wide. These efforts will also provide our U.S. Life Insurance segment with improved platforms to support emerging accounting guidance and ongoing changes in capital regulations. Concurrently, valuation processes and methodologies will be reviewed, and may result in additional refinements to assumptions. Any material changes in balances, margins or income trends that may result from these activities will be disclosed accordingly.

Runoff segment

Trends and conditions

Results of our Runoff segment are affected primarily by investment performance, interest rate levels, net interest spreads, equity market conditions, mortality, policyholder loan activity, policyholder surrenders and scheduled maturities. In addition, the results of our Runoff segment can significantly impact our operating performance, regulatory capital requirements, distributable earnings and liquidity.

We discontinued sales of our individual and group variable annuities in 2011; however, we continue to service our existing blocks of variable annuity business and accept additional deposits on existing contracts. Equity market volatility has caused fluctuations in the results of our variable annuity products and regulatory capital requirements. In the future, equity and interest rate market performance and volatility could result in additional gains or losses in our variable annuity products although associated hedging activities are expected to partially mitigate these impacts. Volatility in the results of our variable annuity products can result in favorable or unfavorable impacts on earnings and statutory capital. In addition to the use of hedging activities to help mitigate impacts related to equity market volatility and interest rate risks, in the future, we may consider reinsurance opportunities to further mitigate volatility in results and manage capital.

The results of our institutional products are impacted by scheduled maturities of the liabilities, credit and interest income performance on assets, as well as liquidity levels. However, we believe our liquidity planning and our asset-liability management will mitigate this risk. While we do not actively sell institutional products, we may periodically issue funding agreements for asset-liability matching purposes.

Several factors may impact the time period for these products to runoff including the specific policy types, economic conditions and management strategies.

Segment results of operations

Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016

The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:

 

  Three months ended
September 30,
 Increase
  (decrease) and  
percentage

change
   Three months ended
September 30,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

    2016     2015     2016 vs. 2015     2017 2016 2017 vs. 2016 

Revenues:

          

Net investment income

  $37  $32  $5  16  $40  $37  $3   8% 

Net investment gains (losses)

   4  (25 29  116   9 4 5  125% 

Policy fees and other income

   43  46  (3 (7)%    41 43 (2  (5)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total revenues

   84  53  31  58   90 84 6  7% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   2  18  (16 (89)%    5 2 3  150% 

Interest credited

   33  31  2  6   36 33 3  9% 

Acquisition and operating expenses, net of deferrals

   20  17  3  18   16 20 (4  (20)% 

Amortization of deferred acquisition costs and intangibles

   7  17  (10 (59)%    7 7  —     —  % 

Interest expense

   1   —     1   NM(1)    —    1 (1  (100)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total benefits and expenses

   63  83  (20 (24)%    64 63 1  2% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income (loss) from continuing operations before income taxes

   21  (30 51  170

Provision (benefit) for income taxes

   6  (12 18  150

Income from continuing operations before income taxes

   26 21 5  24% 

Provision for income taxes

   8 6 2  33% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Income (loss) from continuing operations

   15  (18 33  183

Adjustments to income (loss) from continuing operations:

     

Income from continuing operations

   18 15 3  20% 

Adjustments to income from continuing operations:

     

Net investment (gains) losses, net (2)(1)

   (4 21  (25 (119)%    (8 (4 (4  (100)% 

Taxes on adjustments

   1  (7 8  114   3 1 2  200% 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

  $12  $(4 $16   NM(1) 

Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders

  $13  $12  $1   8% 
  

 

  

 

  

 

    

 

  

 

  

 

  

(1)For the three months ended September 30, 2017, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $1 million.

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

Adjusted operating income available to Genworth Financial, Inc.’s common stockholdersincreased slightly as lower operating expenses were mostly offset by higher tax expenses in the current year.

Revenues

Net investment gains increased predominantly from higher derivative gains and lower net losses from the sale of investment securities, partially offset by lower gains on embedded derivatives associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”) in the current year.

Benefits and expenses

Acquisition and operating expenses, net of deferrals, decreased mostly from lower state guaranty fund assessments in the current year.

Provision for income taxes. The effective tax rate increased to 30.7% for the three months ended September 30, 2017 from 29.1% for the three months ended September 30, 2016. The increase in the effective tax rate is primarily attributable to changes in tax favored investments in relation topre-tax results in the current year compared to the prior year.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:

   Nine months ended
September 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2017          2016      2017 vs. 2016 

Revenues:

     

Net investment income

  $119  $108  $11   10% 

Net investment gains (losses)

   24  (17  41  NM(1) 

Policy fees and other income

   123  127  (4  (3)% 
  

 

 

  

 

 

  

 

 

  

Total revenues

   266  218  48  22% 
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   18  26  (8  (31)% 

Interest credited

   105  96  9  9% 

Acquisition and operating expenses, net of deferrals

   47  54  (7  (13)% 

Amortization of deferred acquisition costs and intangibles

   20  25  (5  (20)% 

Interest expense

   1  1  —     —  % 
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   191  202  (11  (5)% 
  

 

 

  

 

 

  

 

 

  

Income from continuing operations before income taxes

   75  16  59  NM(1) 

Provision for income taxes

   23  2  21  NM(1) 
  

 

 

  

 

 

  

 

 

  

Income from continuing operations

   52  14  38  NM(1) 

Adjustments to income from continuing operations:

     

Net investment (gains) losses, net(2)

   (22  12  (34  NM(1) 

Taxes on adjustments

   8  (4  12  NM(1) 
  

 

 

  

 

 

  

 

 

  

Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders

  $38  $22  $16   73% 
  

 

 

  

 

 

  

 

 

  

 

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)For the threenine months ended 2015,September 30, 2017 and 2016, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(4) million.$2 million and $(5) million, respectively.

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

We had netAdjusted operating income available to Genworth Financial, Inc.’s common stockholders in the current year compared to a net operating loss available to Genworth Financial, Inc.’s common stockholders in the prior year. The change wasincreased primarily driven by favorable equity market performance in the current year.

Revenues

Net investment income increased mainly driven by higher policy loan income in our corporate-owned life insurance products in the current year.

Net investment gains increased largely related to net gains in the current year were primarily related to gains on changes in embedded derivatives associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”) and the change in related hedge positions compared to netGMWBs, partially offset by derivative losses. Net investment losses in the prior year.year were largely related to losses on embedded derivatives associated with our variable annuity products with GMWBs, partially offset by net gains from the sale of investment securities and derivative gains.

Benefits and expenses

Benefits and other changes in policy reserves decreased primarily attributable to a decrease inlower GMDB reserves in our variable annuity products due to favorable equity market performance in the current year and unfavorable mortalityyear.

Interest credited increased largely related to higher cash values in our corporate-owned life insurance products in the priorcurrent year.

Acquisition and operating expenses, net of deferrals, decreased largely driven by lower state guaranty fund assessments in the current year.

Amortization of deferred acquisition costsDAC and intangibles decreased related to our variable annuity products principally from favorable equity market performance in the current year.

Provision (benefit) for income taxestaxes.. The effective tax rate decreasedincreased to 29.1%30.4% for the threenine months ended September 30, 20162017 from 39.4% for the three months ended September 30, 2015. The decrease in the effective tax rate is primarily attributable to changes in tax favored investment benefits in relation to pre-tax results in the current year compared to the prior year.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:

   Nine months ended
September 30,
        Increase      
  (decrease) and  
     percentage    
      change      
 

(Amounts in millions)

    2016      2015      2016 vs. 2015   

Revenues:

     

Premiums

  $—     $1  $(1  (100)% 

Net investment income

   108   103   5   5

Net investment gains (losses)

   (17  (39  22   56

Policy fees and other income

   127   144   (17  (12)% 
  

 

 

  

 

 

  

 

 

  

Total revenues

   218   209   9   4
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   26   36   (10  (28)% 

Interest credited

   96   92   4   4

Acquisition and operating expenses, net of deferrals

   54   57   (3  (5)% 

Amortization of deferred acquisition costs and intangibles

   25   32   (7  (22)% 

Interest expense

   1   1   —      
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   202   218   (16  (7)% 
  

 

 

  

 

 

  

 

 

  

Income (loss) from continuing operations before income taxes

   16   (9  25   NM(1) 

Provision (benefit) for income taxes

   2   (7  9   129
  

 

 

  

 

 

  

 

 

  

Income (loss) from continuing operations

   14   (2  16   NM(1) 

Adjustments to income (loss) from continuing operations:

     

Net investment (gains) losses, net (2)

   12   27   (15  (56)% 

Taxes on adjustments

   (4  (9  5   56
  

 

 

  

 

 

  

 

 

  

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

  $22  $16  $6   38
  

 

 

  

 

 

  

 

 

  

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)For the nine months ended September 30, 2016 and 2015, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(5) million and $(12) million, respectively.

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

Net operating income available to Genworth Financial, Inc.’s common stockholders increased primarily driven by favorable equity market performance, partially offset by lower account values in our variable annuity products in the current year.

Revenues

Net investment income increased driven by higher policy loan income in our corporate-owned life insurance products and higher average invested assets, partially offset by $6 million of gains from limited partnerships in the prior year.

Net investment losses decreased primarily related to lower net losses on changes in embedded derivatives associated with our variable annuity products with GMWBs and the change in related hedge positions, partially offset by impairments in the current year.

Policy fees and other income decreased mainly attributable to lower account values in our variable annuity products in the current year.

Benefits and expenses

Benefits and other changes in policy reserves decreased primarily attributable to decrease in GMDB reserves in our variable annuity products due to favorable equity market performance in the current year and unfavorable mortality in our corporate-owned life insurance products in the prior year.

Interest credited increased largely related to higher cash values in our corporate-owned life insurance products in the current year.

Amortization of deferred acquisition costs and intangibles decreased related to our variable annuity products principally from favorable equity market performance and lower account values, partially offset by lower net investment losses in the current year.

Provision (benefit) for income taxes. The effective tax rate decreased to 12.1% for the nine months ended September 30, 2016 from 76.3% for the nine months ended September 30, 2015.2016. The decreaseincrease in the effective tax rate was primarily attributable to tax favored investments in relation to small pre-tax results in the current year compared to the prior year.

Runoff selected operating performance measures

Variable annuity and variable life insurance products

The following table sets forth selected operating performance measures regarding our variable annuity and variable life insurance products as of or for the dates indicated:

 

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

(Amounts in millions)

      2016         2015         2016         2015           2017         2016     2017 2016 

Variable Annuities—Income Distribution Series (1)

          

Account value, beginning of period

  $4,849  $5,341  $4,942  $5,666   $4,526  $4,849  $4,581  $4,942 

Deposits

   6   7   17   26    5 6 13 17

Surrenders, benefits and product charges

   (151  (158  (431  (542   (132 (151 (425 (431
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net flows

   (145  (151  (414  (516   (127 (145 (412 (414

Interest credited and investment performance

   90   (192  266   (152   98 90 328 266
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Account value, end of period

  $4,794  $4,998  $4,794  $4,998   $4,497  $4,794  $4,497  $4,794 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Traditional Variable Annuities

          

Account value, net of reinsurance, beginning of period

  $1,177  $1,371  $1,241  $1,455   $1,149  $1,177  $1,167  $1,241 

Deposits

   2   1   6   8    2 2 6 6

Surrenders, benefits and product charges

   (47  (60  (154  (201   (52 (47 (162 (154
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net flows

   (45  (59  (148  (193   (50 (45 (156 (148

Interest credited and investment performance

   49   (65  88   (15   41 49 129 88
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Account value, net of reinsurance, end of period

  $1,181  $1,247  $1,181  $1,247   $1,140  $1,181  $1,140  $1,181 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Variable Life Insurance

          

Account value, beginning of period

  $283  $309  $291  $313   $295  $283  $283  $291 

Deposits

   1   2   5   6    1 1 5 5

Surrenders, benefits and product charges

   (7  (7  (24  (29   (10 (7 (27 (24
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net flows

   (6  (5  (19  (23   (9 (6 (22 (19

Interest credited and investment performance

   8   (18  13   (4   10 8 35 13
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Account value, end of period

  $285  $286  $285  $286   $296  $285  $296  $285 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(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.

We no longer solicit sales of our variable annuity or variable life insurance products; however, we continue to service our existing blocks of business and accept additional deposits on existing contracts and policies.

Variable Annuities—Income Distribution Series

Account value related to our Income Distribution Series products decreased compared to June 30, 20162017 and December 31, 20152016 primarily related to surrenders outpacing favorable equity market performance. 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.

Traditional Variable Annuities

In our traditional variable annuities, the increasedecrease in account values compared to June 30, 2016 was primarily the result of favorable equity market performance outpacing surrenders. The decrease in account value compared to2017 and December 31, 20152016 was primarily the result of surrenders outpacing favorable equity market performance. 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 variable life insurance; however, we continue to service our existing block of business.

Institutional products

The following table sets forth selected operating performance measures regarding our institutional products as of or for the dates indicated:

 

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

(Amounts in millions)

      2016         2015         2016         2015       2017 2016 2017 2016 

GICs, FABNs and Funding Agreements

          

Account value, beginning of period

  $561  $491  $410  $493   $460  $561  $560  $410 

Deposits

   —      —     150   —       —     —     —    150

Surrenders and benefits

   (2 (81 (4 (85   (102 (2 (206 (4
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net flows

   (2 (81 146  (85   (102 (2 (206 146

Interest credited

   2  1  5  3    2 2 6 5
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Account value, end of period

  $561  $411  $561  $411   $360  $561  $360  $561 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Account value related to our institutional products remained unchangeddecreased compared to June 30, 2016. Account value related to our institutional products increased compared to2017 and December 31, 2015 was2016 mainly attributable to higher deposits as a resultscheduled maturities of issuingcertain products in the current year. Deposits in the prior year related to funding agreements for asset-liability management and yield enhancement in the current year.enhancement.

Corporate and Other Activities

Results of operations

Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016

The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:

 

  Three months ended
September 30,
 Increase
(decrease) and
percentage
change
   Three months ended
September 30,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

    2016     2015   2016 vs. 2015     2017     2016   2017 vs. 2016 

Revenues:

          

Premiums

  $2  $7  $(5 (71)%   $3  $2  $1   50% 

Net investment income

   1  (1 2  200   4 1 3  NM(1) 

Net investment gains (losses)

   (9 9  (18 (200)%    (7 (9 2  22% 

Policy fees and other income

   (1  —     (1  NM(1)    1 (1 2  200% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total revenues

   (7 15  (22 (147)%    1 (7 8  114% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   1  3  (2 (67)%    2 1 1  100% 

Acquisition and operating expenses, net of deferrals

   11  40  (29 (73)%    19 11 8  73% 

Amortization of deferred acquisition costs and intangibles

   1   —     1   NM(1)    2 1 1  100% 

Interest expense

   67  75  (8 (11)%    63 67 (4  (6)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Total benefits and expenses

   80  118  (38 (32)%    86 80 6  8% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Loss from continuing operations before income taxes

   (87 (103 16  16   (85 (87 2  2% 

Provision (benefit) for income taxes

   246  (33 279   NM(1)    (23 246 (269  (109)% 
  

 

  

 

  

 

    

 

  

 

  

 

  

Loss from continuing operations

   (333 (70 (263  NM(1)    (62 (333 271  81% 

Adjustments to loss from continuing operations:

          

Net investment (gains) losses

   9  (9 18  200   7 9 (2  (22)% 

Expenses related to restructuring

   —     1  (1 (100)% 

Taxes on adjustments

   (3 10  (13 (130)%    (3 (3  —     —  % 
  

 

  

 

  

 

    

 

  

 

  

 

  

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

  $(327 $(68 $(259  NM(1) 

Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

  $(58 $(327 $269   82% 
  

 

  

 

  

 

    

 

  

 

  

 

  

(1)We define “NM” as not meaningful for increases or decreases greater than 200%.

Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders decreased primarily related to tax charges of $265 million in the prior year that did not recur and lower interest expense in the current year, partially offset by unfavorable tax charges related to prior period tax returns recorded in the third quarter of 2017.

Revenues

Net investment income increased primarily related to higher yields in the current year.

The decrease in net investment losses was primarily related to lower losses from derivatives in the current year.

Benefits and expenses

Acquisition and operating expenses, net of deferrals, increased mainly driven by higher consulting fees in the current year.

Interest expense decreased largely driven by a contractual change in our junior subordinated notes related to an interest rate change from fixed to floating rates in the current year.

The income tax benefit in the current year was principally from lower taxed foreign income. The income tax provision in the prior year was largely attributable to a valuation allowance of $265 million recorded on deferred tax assets that did not recur.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:

   Nine months ended
September 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

    2017      2016    2017 vs. 2016 

Revenues:

     

Premiums

  $6  $11  $(5  (45)% 

Net investment income

   5  4  1  25% 

Net investment gains (losses)

   (31  (88  57  65% 

Policy fees and other income

   (2  76  (78  (103)% 
  

 

 

  

 

 

  

 

 

  

Total revenues

   (22  3  (25  NM(1) 
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   3  4  (1  (25)% 

Acquisition and operating expenses, net of deferrals

   47  173  (126  (73)% 

Amortization of deferred acquisition costs and intangibles

   2  1  1  100% 

Interest expense

   179  205  (26  (13)% 
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   231  383  (152  (40)% 
  

 

 

  

 

 

  

 

 

  

Loss from continuing operations before income taxes

   (253  (380  127  33% 

Provision (benefit) for income taxes

   (85  119  (204  (171)% 
  

 

 

  

 

 

  

 

 

  

Loss from continuing operations

   (168  (499  331  66% 

Adjustments to loss from continuing operations:

     

Net investment (gains) losses

   31  88  (57  (65)% 

(Gains) losses on sale of businesses

   —     (2  2  100% 

(Gains) losses on early extinguishment of debt

   —     (48  48  100% 

Expenses related to restructuring

   1  2  (1  (50)% 

Fees associated with bond consent solicitation

   —     18  (18  (100)% 

Taxes on adjustments

   (11  (43  32  74% 
  

 

 

  

 

 

  

 

 

  

Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

  $(147 $(484 $337   70% 
  

 

 

  

 

 

  

 

 

  

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.

NetAdjusted operating loss available to Genworth Financial, Inc.’s common stockholders

The netadjusted operating loss available to Genworth Financial, Inc.’s common stockholders increaseddecreased primarily as a result ofrelated to tax charges of $265 million partially offset byin the prior year that did not recur and lower operating expenses and interest expense in the current year.

Revenues

Premiums decreased largely related to the sale of our European mortgage insurance business in May 2016.

NetThe decrease in net investment losses in the current year were primarily related to derivative losses and net realized losses from the sale of investment securities. Net investment gains in the prior year resulted from derivative gains and net realized gains from the sale of investment securities, partially offset by impairments.

Benefits and expenses

Acquisition and operating expenses, net of deferrals, decreased mainly driven by lower legal accruals and expenses of $20 million and lower net expenses after allocations to our operating segments in the current year.

Interest expense decreased largely driven by the redemption of $298 million of Genworth Holdings’ senior notes in January 2016.

The income tax provision in the current year was largely attributable to a valuation allowance of $265 million recorded on deferred tax assets in the current year. In light of our latest financial projections, including the projected impact to current and future earnings associated with higher expected claim costs in our long-term care insurance business as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowance related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:

   Nine months ended
September 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2016          2015      2016 vs. 2015 

Revenues:

     

Premiums

  $11  $19  $(8  (42)% 

Net investment income

   4   (6 $10   167

Net investment gains (losses)

   (88  23   (111  NM(1) 

Policy fees and other income

   76   (10  86   NM(1) 
  

 

 

  

 

 

  

 

 

  

Total revenues

   3   26   (23  (88)% 
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   4   11   (7  (64)% 

Acquisition and operating expenses, net of deferrals

   173   76   97   128

Amortization of deferred acquisition costs and intangibles

   1   1   —      —  

Interest expense

   205   224   (19  (8)% 
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   383   312   71   23
  

 

 

  

 

 

  

 

 

  

Loss from continuing operations before income taxes

   (380  (286  (94  (33)% 

Provision (benefit) for income taxes

   119   (102  221   NM(1) 
  

 

 

  

 

 

  

 

 

  

Loss from continuing operations

   (499  (184  (315  (171)% 

Adjustments to loss from continuing operations:

     

Net investment (gains) losses

   88   (23  111   NM(1) 

(Gains) losses on sale of businesses

   (2  —      (2  NM(1) 

(Gains) losses on early extinguishment of debt

   (48  1   (49  NM(1) 

Expenses related to restructuring

   2   1   1   100

Fees associated with bond consent solicitation

   18   —      18   NM(1) 

Taxes on adjustments

   (43  15   (58  NM(1) 
  

 

 

  

 

 

  

 

 

  

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

  $(484 $(190 $(294  (155)% 
  

 

 

  

 

 

  

 

 

  

(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 net operating loss available to Genworth Financial, Inc.’s common stockholders increased mainly as a result of tax charges of $265 million and additional legal fees and expenses of $54 million, partially offset by lower interest expense in the current year.

Revenues

Premiums decreased largely related to the sale of our European mortgage insurance business in May 2016.

Net investment income increased related to the elimination of affiliate preferred stock dividends of approximately $8 million in the prior year that did not recur.

Net investment losses in the current year were primarily related to a $64 million loss from thewrite-off of our residual interest in certain policy loan securitization entities. Net investmententities in the prior year that did not recur and from lower derivative losses in the current yearyear. These decreases were also driven by derivative losses and impairments, partially offset by net realized gains from the sale of investment securities. Net investment gains in the prior year resulted from derivative gains and net realized losses from the sale of investment securities partially offset by impairments.in the current year compared to net gains in the prior year.

Policy fees and other income in the currentprior year included a gain of $64 million from the early extinguishment of debt related to the redemption of a securitization entity and a gain of $11 million attributable to the sale of assets to Pac Life. Policy fees and other income in the prior year included losses from non-functional currency transactions attributable to changes in foreign exchange rates related to intercompany transactions.Life that did not recur.

Benefits and expenses

BenefitsAcquisition and other changesoperating expenses, net of deferrals, decreased mainly driven by expenses in policy reserves decreased largelythe prior year that did not recur. The prior year expenses included $79 million of a litigation settlement and related legal expenses, $20 million of expenses related to the early redemption of debt, $18 million of bond consent fees and a $9 million loss related to the sale of our European mortgage insurance business in May 2016.

Acquisition and operating expenses, net of deferrals, increased mainly driven by $69 million for the settlement ofIn re Genworth Financial, Inc. Securities Litigationand an additional $10 million of legal fees and expenses related to this litigation in the current year. In addition, we paid a make-whole expense of $20 million on the early redemption of Genworth Holdings’ 2016 senior notes in January 2016 and paid broker, advisor and investment banking fees of $18 million associated with Genworth Holdings’ bond consent solicitation in March 2016. The increase in the current year was also attributable to an additional loss of $9 million recorded related to the sale of our mortgage insurance business in Europe.business. These increasesdecreases were partially offset by lower net expenses after allocations to our operating segmentshigher consulting fees in the current year.

Interest expense decreased largely driven by a favorable correction of $11 million related to our Tax Matters Agreement liability and a contractual change in our junior subordinated notes related to an interest rate change from fixed to floating rates.

The income tax benefit in the redemption of $298 million of Genworth Holdings’ senior notes in January 2016.

current year was principally from lower taxed foreign income. The income tax provision in the currentprior year was largely attributable to a valuation allowance of $265 million recorded on deferred tax assets in the current year. In light of our latest financial projections, including the projected impact to current and future earnings associated with higher expected claim costs in our long-term care insurance business as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowance related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership. This increase was partially offset by a tax benefit in the current year related to the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe.recur.

Investments and Derivative Instruments

Trends and conditions

Investments—credit and investment markets

U.S. Treasury yields rose modestly at the end ofDuring the third quarter of 2016 but remain significantly lower in 2016 as2017, the Federal Reserve and other global central banks maintain stimulative monetary policies. The European Central Bank and Bank of England added local corporate bonds to their quantitative easing programs, increasing demand for U.S. markets. The U.S. economy continues to grow at a moderate pace and while the labor market has tightened, inflation remains muted. The U.S. Federal Reserve heldannounced that it would begin to normalize monetary policy and scale back quantitative easing. Interest rates steadyremain at historically low levels despite the fact the U.S. Federal Reserve has raised its benchmark lending rate two times in 2017 and market expectations remain for one additional rate increase during 2017. Despite the Federal Reserve’s actions, U.S. Treasury yields remained lower throughout the third quarter of 2017 but rose significantly in the last week of September 2017, in response to potential tax reform. However,pro-growth stimulus policies are still uncertain and weaker inflation data has investors more cautious on the direction of longer term interest rates. The U.S. equity markets increased and credit spreads tightened during the third quarter of 2016. Yield levels on2017. Spreads initially widened when geopolitical issues and natural disasters arose, but quickly tightened driven by both positive economic data and corporate profits. U.S. investment grade credit neared record lows in July 2016. Credit spreads infixed income markets saw reduced issuances, but demand from foreign and domestic investors continued to support valuations. Global equity markets were generally higher and the energy and metals sectors tightened as commodity prices stabilized at higher levels.economies of the Eurozone countries continue to improve.

As of September 30, 2016,2017, our fixed maturities securities portfolio, which was 96% investment grade, comprised 81%86% of our total investment portfolio. Our $3.7$3.9 billion energy portfolio was predominantly investment grade and our metals and mining sector holdings were less than 1% of our total investment portfoliocash, cash equivalents and invested assets as of September 30, 2016.2017. We believe our energy portfolio is well-diversified and would expect manageable capital impact on our U.S. life insurance subsidiaries.

Derivatives

We actively responded to the risk toin our derivatives portfolio arising from our counterparties’ right to terminate their bilateralover-the-counter (“OTC”) derivatives transactions with us following the downgrades of our life insurance subsidiaries by S&P in September 2017 and by Moody’s in October 2016.2017. We notified our counterparties of the downgrades to determine whether they would exercise their rights to terminate the transactions, agree to maintain the transactions with us under revised terms or permit us to move the transactions to clearing through the Chicago Mercantile Exchange (“CME”). Although some counterparties have indicated

that they reserve their rights to take action against us, noneonly one counterparty has done so. During October 2017, this counterparty terminated approximately $800 million notional with us, which we have and were-hedged using financial futures. We also continue to discuss the downgrades with them.the other counterparties.

As of September 30, 2016, $14.42017, $14.2 billion notional of our derivatives portfolio was cleared through the CME. The customer swap agreements that govern our cleared derivatives contain provisions that enable our clearing agents to request initial margin in excess of CME requirements. As of September 30, 2016,2017, we posted initial margin of $386$314 million to our clearing agents, which represented approximately $94$77 million more than was otherwise required by the clearinghouse. Because our clearing agents serve as guarantors of our obligations to the CME, the customer agreements contain broad termination provisions that are not specifically dependent on ratings.ratings and may be more easily terminated for other reasons. As of September 30, 2016,2017, $5.9 billion notional of our derivatives portfolio was in bilateral OTC derivatives transactions pursuant to which we have posted aggregate independent amounts of $223$261 million and are holding collateral from counterparties in the amount of $203$187 million. We have notional of $3.7 millionbillion in bilateral OTC derivatives where the counterparty has the right to terminate its transactions with us based on our current ratings. Given our current ratings, our ability to enter into new derivatives transactions will be moreis limited.

During the second quarter of 2016, we restruck our forward starting swap portfolio by terminating and settling then existing positions and entering into new forward starting swaps at current interest rates. These transactions had no direct impact on our consolidated results or financial position. Because the forward starting swap portfolio was at a significant gain, upon termination, we received cash which was invested to generate additional income. Reestablishing the forward starting swaps is intended to help protect us against further declines in interest rates. Derivatives qualifying as hedges includes amounts related to both previously terminated and active hedge positions in our long-term care insurance business and will be amortized into net investment income over time as we invest future premiums.

During the second quarter of 2016, a counterparty to our inflation index swaps indicated it would exercise its right to terminate its derivative positions with us. As a result, we discontinued hedge accounting for the

inflation index swaps used to hedge inflation risk in the TIPS we purchased in 2009 and 2010. We decided to sell the TIPS concurrent with the hedge termination which eliminated the possibility that the remaining forecasted transactions would occur. These extenuating circumstances were beyond our control and we do not believe this impacts our ability to forecast transactions related to other cash flow hedge programs.

Investment results

The following tables set 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 September 30,  Increase (decrease) 

(Amounts in millions)

  2016  2015  2016 vs. 2015 
   Yield  Amount  Yield  Amount  Yield  Amount 

Fixed maturity securities—taxable

   4.6 $655   4.6 $647   —   $8 

Fixed maturity securities—non-taxable

   3.7  3   3.5  3   0.2  —    

Commercial mortgage loans

   5.2  79   5.5  84   (0.3)%   (5

Restricted commercial mortgage loans related to securitization entities

   7.4  3   6.4  3   1.0  —    

Equity securities

   5.8  8   4.0  3   1.8  5 

Other invested assets

   24.7  34   17.3  26   7.4  8 

Restricted other invested assets related to securitization entities

   —    —      1.0  1   (1.0)%   (1

Policy loans

   8.7  38   8.4  33   0.3  5 

Cash, cash equivalents and short-term investments

   0.6  5   0.3  3   0.3  2 
   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

   4.7  825   4.6  803   0.1  22 

Expenses and fees

   (0.1)%   (20  (0.1)%   (20  —    —    
   

 

 

   

 

 

   

 

 

 

Net investment income

   4.6 $805   4.5 $783   0.1 $22 
   

 

 

   

 

 

   

 

 

 

Average invested assets and cash

   $69,825   $69,944   $(119
   

 

 

   

 

 

   

 

 

 

  Nine months ended September 30, Increase (decrease) 
  2016 2015 2016 vs. 2015   Three months ended September 30, Increase (decrease) 

(Amounts in millions)

  Yield Amount Yield Amount Yield Amount   2017 2016 2017 vs. 2016 
      Yield         Amount         Yield         Amount         Yield         Amount     

Fixed maturity securities—taxable

   4.6 $1,930  4.6 $1,924  —   $6    4.5 $640  4.6 $655  (0.1)%  $(15

Fixed maturity securities—non-taxable

   3.6 9  3.5 9  0.1  —       3.7 3 3.7 3 —    —   

Commercial mortgage loans

   5.2 237  5.5 252  (0.3)%  (15   5.0 78 5.2 79 (0.2)%  (1

Restricted commercial mortgage loans related to securitization entities

   7.2 8  7.2 10  —   (2   10.5 3 7.4 3 3.1  —   

Equity securities

   5.7 20  5.2 11  0.5 9    5.1 9 5.8 8 (0.7)%  1

Other invested assets

   24.0 105  26.1 103  (2.1)%  2    61.6 39 24.7 34 36.9 5

Restricted other invested assets related to securitization entities

   1.1 3  1.0 3  0.1  —    

Policy loans

   8.6 107  8.7 101  (0.1)%  6    8.6 39 8.7 38 (0.1)%  1

Cash, cash equivalents and short-term investments

   0.5 16  0.3 10  0.2 6    1.1 10 0.6 5 0.5 5
   

 

   

 

   

 

    

 

   

 

   

 

 

Gross investment income before expenses and fees

   4.6 2,435  4.6 2,423  —   12    4.7 821 4.7 825 —   (4

Expenses and fees

   (0.1)%  (62 (0.1)%  (66 —   4    (0.2)%  (24 (0.1)%  (20 (0.1)%  (4
   

 

   

 

   

 

    

 

   

 

   

 

 

Net investment income

   4.5 $2,373  4.5 $2,357  —   $16    4.5 $797  4.6 $805  (0.1)%  $(8
   

 

   

 

   

 

    

 

   

 

   

 

 

Average invested assets and cash

   $69,837   $69,844   $(7   $70,400   $69,825   $575 
   

 

   

 

   

 

    

 

   

 

   

 

 

   Nine months ended September 30,  Increase (decrease) 
   2017  2016  2017 vs. 2016 

(Amounts in millions)

      Yield          Amount          Yield          Amount          Yield          Amount     

Fixed maturity securities—taxable

   4.5 $1,930   4.6 $1,930   (0.1)%  $—   

Fixed maturitysecurities—non-taxable

   3.7  9  3.6  9  0.1  —   

Commercial mortgage loans

   5.0  231  5.2  237  (0.2)%   (6

Restricted commercial mortgage loans related tosecuritization entities

   7.8  7  7.2  8  0.6  (1

Equity securities

   5.1  26  5.7  20  (0.6)%   6

Other invested assets

   45.7  106  24.0  105  21.7  1

Restricted other invested assets related tosecuritization entities

   1.1  1  1.1  3  —    (2

Policy loans

   9.0  120  8.6  107  0.4  13

Cash, cash equivalents and short-term investments

   1.0  26  0.5  16  0.5  10
   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

   4.7  2,456   4.6  2,435   0.1  21

Expenses and fees

   (0.2)%   (68  (0.1)%   (62  (0.1)%   (6
   

 

 

   

 

 

   

 

 

 

Net investment income

   4.5 $2,388   4.5 $2,373   —   $15 
   

 

 

   

 

 

   

 

 

 

Average invested assets and cash

   $70,018   $69,837   $181 
   

 

 

   

 

 

   

 

 

 

Yields are based on net investment income as reported under U.S. GAAP and are consistent with how the company measures its investment performance for management purposes. Yields are annualized, for interim periods, and are calculated as net investment income as a percentage of average quarterly asset carrying values except for fixed maturity and equity securities, derivatives and derivative counterparty collateral, which exclude unrealized fair value adjustments and securities lending activity, which is included in other invested assets and is calculated net of the corresponding securities lending liability.

For the three months ended September 30, 2016,2017, annualized weighted-average investment yields increaseddecreased primarily attributable to higher reinvestment yieldslower investment income on lowerhigher average invested assets. Net investment income included $10$7 million of higher favorable prepayment speed adjustments on structured securities, $5 million of higher income related to inflation-driven volatility on recent TIPS purchases and $2 million of higher gains related to bond calls and mortgage prepayments as compared to the prior year.

For the nine months ended September 30, 2016, annualized weighted-average investment yields remained unchanged from the prior year as lower reinvestment yields and variable income were offset by higher average invested assets in our long-term care insurance business. Net investment income included $20 million of lower gains related to limited partnerships and $13 million of lower gains related to bond calls and mortgage prepayments, partially offset by $19 million of higher favorable prepayment speed adjustments on structured securities and $8$4 million of higherlower bond call and prepayment income related to inflation-driven volatility on recent TIPS purchases as compared to the prior year. The nine months ended September 30, 2016 included a decrease of $11 million attributable to changes in foreign exchange rates.

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

 

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

(Amounts in millions)

  2016 2015 2016 2015   2017 2016 2017 2016 

Available-for-sale securities:

          

Realized gains

  $39  $14  $205  $49   $40  $39  $177  $205 

Realized losses

   (24 (18 (75 (36   (10 (24 (55 (75
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

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

   15  (4 130  13    30 15 122 130
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Impairments:

          

Total other-than-temporary impairments

   (2 (10 (35 (13   (1 (2 (4 (35

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

   —     1   —     1    —     —     —     —   
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net other-than-temporary impairments

   (2 (9 (35 (12   (1 (2 (4 (35
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Trading securities

   (4 12  40  2    —    (4 1 40

Commercial mortgage loans

   (1 1  1  5    1 (1 3 1

Net gains (losses) related to securitization entities

   2  (1 (51 9    1 2 5 (51

Derivative instruments

   10  (53 (52 (79   54 10 93 (52

Contingent consideration adjustment

   —     2  (2 2    —     —     —    (2

Other

   —     1   —     1 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net investment gains (losses)

  $20  $(51 $31  $(59  $85  $20  $220  $31 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Three Months Ended September 30, 20162017 Compared to Three Months Ended September 30, 20152016

 

We recorded $7$1 million of lower net other-than-temporary impairments during the three months ended September 30, 2016. Impairments2017. The total impairments of $1 million and $2 million recorded during the three months ended September 30, 2017 and September 30, 2016, respectively, related to equity securities. Of total impairments recorded

Net investment gains related to derivatives of $54 million during the three months ended September 30, 2015, $6 million2017 were primarily associated with various hedging programs that support our Canada Mortgage Insurance segment and hedging programs for our runoff variable annuity products. These gains were partially offset by losses related to corporate securities, $2 million relatedhedging programs for our fixed indexed annuity products and derivatives used to structured securities and $1 million related to commercial mortgage loans.hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries.

Net investment gains related to derivatives of $10 million during the three months ended September 30, 2016 were primarily associated with hedging programs for our runoff variable annuity products and gains related to hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to a decrease in long-term interest rates. These gains were partially offset by losses in derivatives used to hedge foreign currency risk associated with assets held and expected dividend payments from certain foreign subsidiaries.

Net investment losses

We recorded $15 million of higher net gains related to derivativesthe sale of $53 millionavailable-for-sale securities during the three months ended September 30, 20152017. We also recorded $4 million of lower losses during the three months ended September 30, 2017 related to trading securities primarily from a decline in our trading portfolio in the current year.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

We recorded $31 million of lower net other-than-temporary impairments during the nine months ended September 30, 2017. Of the total impairments recorded during the nine months ended September 30, 2017 and 2016, $1 million and $24 million, respectively, related to corporate securities, $1 million and $3 million, respectively, related to limited partnerships, and $2 million in each period related to equity securities. During the nine months ended September 30, 2016, we also recorded impairments of $4 million related to commercial mortgage loans.

Net investment gains related to derivatives of $93 million during the nine months ended September 30, 2017 were primarily associated with various hedging programs that support our Canada Mortgage Insurance segment and hedging programs for our runoff variable annuity products, including decreases in the values of instruments used to protect statutory surplus from equity market fluctuation. We also had losses related to derivatives used to hedge foreign currency risk associated with assets held and losses related to a non-qualified derivative strategy to mitigate interest rate risk associated with our statutory capital position.products. These lossesgains were partially offset by gainslosses related to derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries.

We recorded $15 million of net gains related to the sale of available-for-sale securities during the three months ended September 30, 2016 compared to $4 million of netsubsidiaries and losses during the three months ended September 30, 2015. We also recorded $4 million of losses related to trading securities during the three months ended September 30, 2016 compared to $12 million of gains during the three months ended September 30, 2015 due to unrealized losses resulting from changes in the long-term interest rate environment in the current year.hedging programs for our fixed indexed annuity products.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

We recorded $23 million of higher net other-than-temporary impairments during the nine months ended September 30, 2016. Of total impairments recorded during the nine months ended September 30, 2016 and 2015, we recorded impairments of $24 million and $6 million, respectively, related to corporate securities and $4 million in each period related to commercial mortgage loans. During the nine months ended September 30, 2016, impairments included $3 million related to limited partnerships and $2 million related to equity securities. Impairments during the nine months ended September 30, 2016 and September 30, 2015 also included $1 million and $2 million, respectively, related to structured securities.

Net investment losses related to derivatives of $52 million during the nine months ended September 30, 2016 were primarily associated with hedging programs for our runoff variable annuity products. We also had losses associated with hedging programs for our fixed indexed annuity products. These losses were partially offset by gains related to hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business.

Net investment losses related to derivatives of $79 million during the nine months ended September 30, 2015 were primarily associated with hedging programs for our runoff variable annuity products, including decreases in the values of instruments used to protect statutory surplus from equity market fluctuation. We also had losses related to derivatives used to hedge foreign currency risk associated with assets held and losses related to fixed indexed annuity derivatives. These losses were partially offset by gains related to derivatives to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries.

 

We recorded $117$8 million of higherlower net gains related to the sale ofavailable-for-sale securities during the nine months ended September 30, 2016 primarily related to $130 million of gains from the sale of TIPS in the current year.2017. We also recorded $38$39 million of higherlower net gains related to trading securities during the nine months ended September 30, 2016 resulting2017 principally from changesa decline in our trading portfolio in the long-term interest rate environment.current year. We recorded $5 million of gains during the nine months ended September 30, 2017 compared to $51 million of losses related to securitization entities during the nine months ended September 30, 2016 primarily related to a $64 million loss from thewrite-off of our residual interest in certain policy loan securitization entities in the currentprior year compared to $9 million of gains during the nine months ended September 30, 2015.that did not recur.

Investment portfolio

The following table sets forth our cash, cash equivalents and invested assets as of the dates indicated:

 

  September 30, 2016 December 31, 2015   September 30, 2017 December 31, 2016 

(Amounts in millions)

  Carrying value   % of total Carrying value   % of total   Carrying value   % of total Carrying value   % of total 

Fixed maturity securities, available-for-sale:

              

Public

  $47,755    61 $43,136    58  $45,882    61 $45,131    61

Private

   16,025    20  15,061    20    16,670    22 15,441    21

Equity securities,available-for-sale

   765   1 632   1

Commercial mortgage loans

   6,017    8  6,170    8    6,268    8 6,111    8

Restricted commercial mortgage loans related to securitization entities

   111   —    129   —   

Policy loans

   1,818    2 1,742    2

Other invested assets

   2,676    4  2,309    3    1,590    2 2,071    3

Policy loans

   1,751    2  1,568    2 

Restricted other invested assets related to securitization entities

   312    —     413    1    —      —    312   —   

Equity securities, available-for-sale

   590    1  310    —    

Restricted commercial mortgage loans related to securitization entities

   134    —     161    —    

Cash and cash equivalents

   3,078    4  5,965    8    2,836    4 2,784    4
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total cash, cash equivalents and invested assets

  $78,338    100 $75,093    100  $75,940    100 $74,353    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 unaudited condensed consolidated financial statements under “Item 1—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 September 30, 2016,2017, approximately 7% of our investment holdings recorded at fair value waswere based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 6 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to fair value.

Fixed maturity and equity securities

As of September 30, 2017, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified asavailable-for-sale were as follows:

     Gross unrealized gains  Gross unrealized losses    

(Amounts in millions)

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

Fixed maturity securities:

      

U.S. government, agencies andgovernment-sponsoredenterprises

 $4,893  $784  $—    $(7 $—    $5,670 

State and political subdivisions

  2,639   247  —     (26  —     2,860 

Non-U.S. government (1)

  2,143   107  —     (24  —     2,226 

U.S. corporate:

      

Utilities

  4,382   556  —     (15  —     4,923 

Energy

  2,243   207  —     (10  —     2,440 

Finance and insurance

  6,051   547  —     (11  —     6,587 

Consumer—non-cyclical

  4,330   508  —     (10  —     4,828 

Technology and communications

  2,558   193  —     (11  —     2,740 

Industrial

  1,247   102  —     (3  —     1,346 

Capital goods

  2,067   263  —     (9  —     2,321 

Consumer—cyclical

  1,506   111  —     (6  —     1,611 

Transportation

  1,188   124  —     (6  —     1,306 

Other

  358  24  —     (2  —     380
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate (1)

  25,930   2,635   —     (83  —     28,482 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

      

Utilities

  1,022   45  —     (5  —     1,062 

Energy

  1,330   140  —     (7  —     1,463 

Finance and insurance

  2,524   177  —     (5  —     2,696 

Consumer—non-cyclical

  692  27  —     (3  —     716

Technology and communications

  945  71  —     (2  —     1,014 

Industrial

  979  81  —     (2  —     1,058 

Capital goods

  556  33  —     (2  —     587

Consumer—cyclical

  518  10  —     (1  —     527

Transportation

  650  71  —     (3  —     718

Other

  2,594   193  —     (5  —     2,782 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate (1)

  11,810   848  —     (35  —     12,623 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed (2)

  3,950   255  14  (10  —     4,209 

Commercial mortgage-backed

  3,346   105  2  (39  —     3,414 

Other asset-backed (2)

  3,052   20  1  (5  —     3,068 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturitysecurities

  57,763   5,001   17  (229  —     62,552 

Equity securities

  720  59  —     (14  —     765
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalavailable-for-salesecurities

 $58,483  $5,060  $17  $(243 $—    $63,317 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Fair value included European periphery exposure of $523 million in Ireland, $266 million in Spain, $116 million in Italy and $38 million in Portugal.
(2)Fair value included $38 million collateralized byAlt-A residential mortgage loans and $27 million collateralized bysub-prime residential mortgage loans.

As of December 31, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified asavailable-for-sale were as follows:

 

   Gross unrealized gains Gross unrealized losses      Gross unrealized gains Gross unrealized losses   

(Amounts in millions)

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

Fixed maturity securities:

            

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

 $5,416  $1,288  $—     $(1 $—     $6,703  $5,439  $647  $—    $(50 $—    $6,036 

State and political subdivisions

 2,491  350   —     (17  —     2,824  2,515  182  —    (50  —    2,647 

Non-U.S. government(1)

 2,052  175   —      —      —     2,227  2,024  101  —    (18  —    2,107 

U.S. corporate:

            

Utilities

 4,073  678   —     (2  —     4,749  4,137  454  —    (41  —    4,550 

Energy

 2,124  177   —     (22  —     2,279  2,167  157  —    (24  —    2,300 

Finance and insurance

 5,711  615  23  (9  —     6,340  5,719  424  —    (46  —    6,097 

Consumer—non-cyclical

 4,190  689   —     (1  —     4,878  4,335  433  —    (34  —    4,734 

Technology and communications

 2,486  248   —     (8  —     2,726  2,473  157  —    (32  —    2,598 

Industrial

 1,181  114   —     (4  —     1,291  1,161  76  —    (14  —    1,223 

Capital goods

 1,876  319   —      —      —     2,195  2,043  228  —    (13  —    2,258 

Consumer—cyclical

 1,506  158   —     (4  —     1,660  1,455  92  —    (17  —    1,530 

Transportation

 1,077  138   —      —      —     1,215  1,121  86  —    (17  —    1,190 

Other

 335  27   —      —      —     362  332 17  —    (1  —    348
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total U.S. corporate(1)

 24,559  3,163  23  (50  —     27,695  24,943  2,124   —    (239  —    26,828 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Non-U.S. corporate:

            

Utilities

 899  64   —     (2  —     961  940 40  —    (11  —    969

Energy

 1,281  129   —     (15  —     1,395  1,234  109  —    (12  —    1,331 

Finance and insurance

 2,458  201   —     (1  —     2,658  2,413  134  —    (9  —    2,538 

Consumer—non-cyclical

 768  55   —     (1  —     822  711 17  —    (14  —    714

Technology and communications

 968  80   —     (1  —     1,047  953 44  —    (10  —    987

Industrial

 955  68   —     (5  —     1,018  928 39  —    (9  —    958

Capital goods

 545  36   —     (1  —     580  518 21  —    (4  —    535

Consumer—cyclical

 490  15   —      —      —     505  434 10  —    (2  —    442

Transportation

 605  81   —     (3  —     683  619 65  —    (7  —    677

Other

 3,039  305   —     (5  —     3,339  2,967  190  —    (13  —    3,144 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total non-U.S. corporate(1)

 12,008  1,034   —     (34  —     13,008  11,717  669  —    (91  —    12,295 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Residential mortgage-backed (2)

 4,418  396  11  (2  —     4,823  4,122  259 10 (12  —    4,379 

Commercial mortgage-backed

 2,983  192  2  (4  —     3,173  3,084  98 3 (56  —    3,129 

Other asset-backed(2)

 3,324  28  1  (26  —     3,327  3,170  15 1 (35  —    3,151 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total fixed maturity securities

 57,251  6,626  37  (134  —     63,780  57,014  4,095  14 (551  —    60,572 

Equity securities

 599  26   —     (35  —     590  628 31  —    (27  —    632
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total available-for-sale securities

 $57,850  $6,652  $37  $(169 $—     $64,370  $57,642  $4,126  $14  $(578 $—    $61,204 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)Fair value included European periphery exposure of $465$447 million in Ireland, $252$231 million in Spain, $98$95 million in Italy and $16 million in Portugal.
(2)Fair value included $45$43 million collateralized byAlt-A residential mortgage loans and $27$26 million collateralized bysub-prime residential mortgage loans.

As of December 31, 2015, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

     Gross unrealized gains  Gross unrealized losses    

(Amounts in millions)

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

Fixed maturity securities:

      

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

 $5,487  $732  $—     $(16 $—     $6,203 

State and political subdivisions

  2,287   181   —      (30  —      2,438 

Non-U.S. government(1)

  1,910   110   —      (5  —      2,015 

U.S. corporate:

      

Utilities

  3,355   364   —      (26  —      3,693 

Energy

  2,560   103   —      (162  —      2,501 

Finance and insurance

  5,268   392   15   (43  —      5,632 

Consumer—non-cyclical

  3,755   371   —      (30  —      4,096 

Technology and communications

  2,108   123   —      (38  —      2,193 

Industrial

  1,164   53   —      (44  —      1,173 

Capital goods

  1,774   188   —      (12  —      1,950 

Consumer—cyclical

  1,602   95   —      (22  —      1,675 

Transportation

  1,023   75   —      (12  —      1,086 

Other

  385   22   —      (5  —      402 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate(1)

  22,994   1,786   15   (394  —      24,401 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

      

Utilities

  815   37   —      (9  —      843 

Energy

  1,700   64   —      (78  —      1,686 

Finance and insurance

  2,327   152   2   (8  —      2,473 

Consumer—non-cyclical

  746   24   —      (18  —      752 

Technology and communications

  978   36   —      (26  —      988 

Industrial

  1,063   19   —      (96  —      986 

Capital goods

  602   19   —      (17  —      604 

Consumer—cyclical

  522   8   —      (4  —      526 

Transportation

  559   52   —      (6  —      605 

Other

  2,574   187   —      (25  —      2,736 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-U.S. corporate(1)

  11,886   598   2   (287  —      12,199 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed(2)

  4,777   330   11   (17  —      5,101 

Commercial mortgage-backed

  2,492   84   3   (20  —      2,559 

Other asset-backed(2)

  3,328   11   1   (59  —      3,281 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturity securities

  55,161   3,832   32   (828  —      58,197 

Equity securities

  325   8   —      (23  —      310 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total available-for-sale securities

 $55,486  $3,840  $32  $(851 $—     $58,507 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Fair value included European periphery exposure of $361 million in Ireland, $244 million in Spain, $103 million in Italy and $15 million in Portugal.
(2)Fair value included $69 million collateralized by Alt-A residential mortgage loans and $32 million collateralized by sub-prime residential mortgage loans.

Fixed maturity securities increased $5.6$2.0 billion, compared to December 31, 2016, principally from higher net unrealized gains attributable to a decrease in treasury yields as well as changes in interestforeign exchange rates and from purchases exceeding sales and maturitiesthe weakening of the U.S. dollar in the current year.

Our exposure in peripheral European countries consists of fixed maturity securities in Portugal, Ireland, Italy and Spain. Investments in these countries are primarily made to diversify our U.S. corporate fixed maturity securities with European bonds denominated in U.S. dollars. During the nine months ended September 30, 2016,2017, our exposure to the peripheral European countries increased by $108$154 million to $831$943 million with unrealized gains of $73$72 million. Our exposure as of September 30, 20162017 was diversified with direct exposure to local economies of $182$199 million, indirect exposure through debt issued by subsidiaries outside of the European periphery of $97$141 million and exposure to multinational companies where the majority of revenues come from outside of the country of domicile of $552$603 million.

Commercial mortgage loans

The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:

 

  September 30, 2016   September 30, 2017 

(Dollar amounts in millions)

  Total recorded
investment
   Number of
loans
   Loan-to-value (1) Delinquent
principal balance
   Number of
delinquent
loans
   Total recorded
investment
   Number of
loans
   Loan-to-value (1) Delinquent
principal balance
   Number of
delinquent
loans
 

Loan Year

                  

2004 and prior

  $547    320    31 $—       —      $457    266   28%  $—      —   

2005

   491    139    45 10    2    428   128   41%  6   1

2006

   454    115    52 15    1    392   101   47%   —      —   

2007

   490    135    55  —       —       314   81   49%   —      —   

2008

   138    26    54  —       —       131   25   51%   —      —   

2009

   —       —       —    —       —       —      —      —  %   —      —   

2010

   90    17��   49  —       —       77   15   42%   —      —   

2011

   220    48    48  —       —       208   47   43%   —      —   

2012

   602    90    53  —       —       564   85   45%   —      —   

2013

   787    136    54  —       —       740   132   49%   —      —   

2014

   898    147    61  —       —       848   141   54%   —      —   

2015

   938    143    66  —       —       913   142   62%   —      —   

2016

   377    62    68  —       —       605   100   61%   —      —   

2017

   604   108   68%   —      —   
  

 

   

 

    

 

   

 

   

 

   

 

    

 

   

 

 

Total

  $6,032    1,378    55 $25    3   $6,281    1,371    52%  $6    1
  

 

   

 

    

 

   

 

   

 

   

 

    

 

   

 

 

 

(1)Represents weighted-averageloan-to-value as of September 30, 2016.2017.

   December 31, 2015 

(Dollar amounts in millions)

  Total recorded
investment
   Number of
loans
   Loan-to-value (1)  Delinquent
principal balance
   Number of
delinquent
loans
 

Loan Year

         

2004 and prior

  $609    361    32 $—       —    

2005

   542    146    49  5    1 

2006

   709    177    51  1    1 

2007

   540    146    59  6    1 

2008

   145    27    56  —       —    

2009

   —       —       —    —       —    

2010

   93    17    48  —       —    

2011

   226    48    49  —       —    

2012

   626    92    55  —       —    

2013

   822    138    58  —       —    

2014

   935    150    66  —       —    

2015

   940    142    67  —       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

  $6,187    1,444    56 $12    3 
  

 

 

   

 

 

    

 

 

   

 

 

 

   December 31, 2016 

(Dollar amounts in millions)

  Total recorded
investment
   Number of
loans
   Loan-to-value (1)  Delinquent
principal
balance
   Number of
delinquent
loans
 

Loan Year

         

2004 and prior

  $521    304   31%  $—      —   

2005

   469   135   43%   —      —   

2006

   434   105   52%   15   1

2007

   452   126   54%   1   1

2008

   135   25   54%   —      —   

2009

   —      —      —  %   —      —   

2010

   89   17   48%   —      —   

2011

   215   47   47%   —      —   

2012

   588   88   52%   —      —   

2013

   781   136   54%   —      —   

2014

   892   147   61%   —      —   

2015

   932   143   65%   —      —   

2016

   617   100   69%   —      —   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

  $6,125    1,373    55%  $16    2
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)Represents weighted-averageloan-to-value as of December 31, 2015.2016.

Other invested assets

The following table sets forth the carrying values of our other invested assets as of the dates indicated:

 

  September 30, 2016 December 31, 2015   September 30, 2017 December 31, 2016 

(Amounts in millions)

  Carrying value   % of total Carrying value   % of total   Carrying value   % of total Carrying value   % of total 

Short-term investments

  $787    49 $352    17

Derivatives

  $1,331    50 $1,112    48   261   16 708   34

Limited partnerships

   244   15 199   10

Securities lending collateral

   417    15  347    15    237   15 534   25

Trading securities

   384    14  447    19    —      —    259   13

Short-term investments

   342    13  197    9 

Limited partnerships

   188    7  188    8 

Other investments

   14    1  18    1    61   5 19   1
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total other invested assets

  $2,676    100 $2,309    100  $1,590    100 $2,071    100
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Derivatives increaseddecreased primarily attributable to recent central clearing parties rule changes inimpacting our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and is now treated as daily settlements of the long-term interest rate environment, partially offset by early terminations in the current year. Short-term investments increased principally from purchases exceeding sales and maturities in the current year.derivative contract. Securities lending collateral increaseddecreased driven by market demand. Our investments in trading securities decreased from higher net sales. Short-term investments increased principally from higher net purchases in our Australia Mortgage Insurance and U.S. Life Insurance segments in the current year.

Derivatives

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB and fixed index annuity 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,
2015
  Additions  Maturities/
terminations
  September 30,
2016
 

Derivatives designated as hedges

     

Cash flow hedges:

     

Interest rate swaps

 Notional $11,214  $9,414  $(9,587 $11,041 

Inflation indexed swaps

 Notional  571   1   (572  —    

Foreign currency swaps

 Notional  35   —      —      35 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total cash flow hedges

   11,820   9,415   (10,159  11,076 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivatives designated as hedges

   11,820   9,415   (10,159  11,076 
  

 

 

  

 

 

  

 

 

  

 

 

 

Derivatives not designated as hedges

     

Interest rate swaps

 Notional  4,932   —      (253  4,679 

Interest rate swaps related to securitization entities

 Notional  67   —      (67  —    

Foreign currency swaps

 Notional  162   133   (97  198 

Credit default swaps

 Notional  144   —      (5  139 

Credit default swaps related to securitization entities

 Notional  312   —      —      312 

Equity index options

 Notional  1,080   2,346   (1,097  2,329 

Financial futures

 Notional  1,331   5,393   (5,255  1,469 

Equity return swaps

 Notional  134   211   (184  161 

Other foreign currency contracts

 Notional  1,656   1,551   (535  2,672 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivatives not designated as hedges

   9,818   9,634   (7,493  11,959 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivatives

  $21,638  $19,049  $(17,652 $23,035 
  

 

 

  

 

 

  

 

 

  

 

 

 

(Notional in millions)

  Measurement   December 31,
2016
   Additions   Maturities/
terminations
 September 30,
2017
 

Derivatives designated as hedges

         

Cash flow hedges:

         

Interest rate swaps

   Notional   $11,570   $—     $(306 $11,264 

Foreign currency swaps

   Notional    22   —      —    22
    

 

   

 

   

 

  

 

 

Total cash flow hedges

     11,592    —      (306 11,286 
    

 

   

 

   

 

  

 

 

Total derivatives designated as hedges

     11,592    —      (306 11,286 
    

 

   

 

   

 

  

 

 

Derivatives not designated as hedges

         

Interest rate swaps

   Notional    4,679    —      —    4,679 

Foreign currency swaps

   Notional    201   95   (14 282

Credit default swaps

   Notional    39   —      —    39

Credit default swaps related to securitization entities

   Notional    312   —      (200 112

Equity index options

   Notional    2,396    1,584    (1,484 2,496 

Financial futures

   Notional    1,398    4,300    (4,376 1,322 

Equity return swaps

   Notional    165   186   (258 93

Other foreign currency contracts

   Notional    3,130    2,163    (691 4,602 
    

 

   

 

   

 

  

 

 

Total derivatives not designated as hedges

     12,320    8,328    (7,023 13,625 
    

 

   

 

   

 

  

 

 

Total derivatives

    $23,912   $8,328   $(7,329 $24,911 
    

 

   

 

   

 

  

 

 

(Number of policies)

 Measurement December 31,
2015
 Additions Maturities/
terminations
 September 30,
2016
   Measurement   December 31,
2016
   Additions   Maturities/
terminations
 September 30,
2017
 

Derivatives not designated as hedges

              

GMWB embedded derivatives

 Policies   36,146   —     (2,179 33,967    Policies    33,238    —      (2,127 31,111 

Fixed index annuity embedded derivatives

 Policies   17,482  647  (462 17,667    Policies    17,549    —      (367 17,182 

Indexed universal life embedded derivatives

 Policies   982  167  (48 1,101    Policies    1,074    1   (66 1,009 

The $1.4$1.0 billion increase in the notional value of derivatives was primarily attributable to a notionalan increase in ournon-qualified equity options foreign currency interest rate swaps related to our hedginganon-qualified derivative strategy to mitigate interest rate risk associated with fixed index annuity insurance products.our regulatory capital position.

The number of policies related to our GMWB embedded derivatives decreased as variable annuity products are no longer being offered. The number of policies related to our fixed index annuity and indexed universal life embedded derivatives increased as a result of product sales in the current year.

Consolidated Balance Sheets

Total assets. Total assets increased $2,421decreased $29 million from $106,431$104,658 million as of December 31, 20152016 to $108,852$104,629 million as of September 30, 2016.2017.

 

Cash and cash equivalents and invested assets increased $3,245$1,587 million primarily from an increase of $6,132$1,980 million in invested assets,fixed maturity securities and an increase of $157 million in commercial mortgage loans. The increase in fixed maturity securities was predominantly related to a decrease in treasury yields and from the weakening of the U.S. dollar compared to the balance sheet rate at December 31, 2016. The increase in equity securities was primarily related to higher unrealized gains on preferred securities and from purchases mostly in our Canada and Australia mortgage insurance businesses. These increases were partially offset by a decrease of $2,887$481 million in other invested assets mostly related to derivative assets, securities lending and trading securities. The decrease in derivative assets was principally driven by recent central clearing parties rule changes impacting our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and cash equivalents. Our fixedis now treated as daily settlements of the derivative contract. The change reduced the value of our derivative assets by $509 million in the third quarter of 2017. The increase was also partially offset by a decrease of $312 million in restricted other invested assets related to securitization entities driven mostly by proceeds from sales and maturities, as we reposition these assets in connection with the maturity securities increased $5,583of the associated liabilities.

DAC decreased $1,229 million principallypredominantly related to our long-term care insurance business. We are required to analyze the impacts from higher net unrealized investment gains and losses on ouravailable-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. As of $3,493 million attributableSeptember 30, 2017, due primarily to changesthe decline in interest rates and from purchases exceeding sales and maturitiesincreasing unrealized investments gains, we reduced the DAC balance of our long-term care insurance business to zero, a cumulative decrease in the accumulated effect of net unrealized investment (gains) losses of approximately $1.3 billion, with an offsetting amount recorded in other comprehensive income (loss). The decrease was also attributable to lower deferrals driven mostly by lower production in our U.S. Life Insurance segment in the current year. Other invested assets increased $367 million mainly from an increaseSee note 7 in derivatives driven by the changes in the long-term interest rate environment in the current year. Cash and cash equivalents decreased primarily from the redemption of non-recourse funding obligations and long-term borrowings in the current year.

Deferred acquisition costs decreased $416 million primarilyour unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to higher net unrealized investment gains in the current year.DAC.

 

Reinsurance recoverable increased $297decreased $202 million mainly attributable to a new reinsurance agreement with Protective Life to coinsure certainthe runoff of our term life insurance policies as partstructured settlement products ceded to Union Fidelity Life Insurance Company, an affiliate of a life block transaction completed in January 2016. As part of this transaction, we recorded a deferred gain of approximately $65 million in the current year.our former parent, GE.

 

Deferred tax assetOther assets decreased $155$121 million as a result of an increase inprincipally from lower derivative collateral receivable primarily due to the liabilitieschange described above within other invested assets related to net unrealized investment gains in the current year.

Separate account assets decreased $398 million principally driven by surrenders and benefits in the current year.variation margin.

Total liabilities. Total liabilities increased $309decreased $649 million from $91,794$90,191 million as of December 31, 20152016 to $92,103$89,542 million as of September 30, 2016.2017.

 

Future policy benefits increased $930$959 million primarily driven by an increase in our long-term care insurance business largely from the aging and growth of thein-force block in the current year. In addition, as discussed above, due primarily to the decline in interest rates increasing unrealized investments gains, we reduced the DAC balance of our long-term care insurance business to zero and established additional reserves of $333 million, with an offsetting amount recorded in other comprehensive income (loss).

 

Policyholder account balances decreased $342$1,131 million largely as a result of surrenders and benefits in our fixed annuities business partially offset by an increase in ourand from scheduled maturities of certain institutional products attributable to higher account values in the current year.

 

Liability for policy and contract claims increased $774 million mainly attributable to an increase of $905 million in our long-term care insurance business largely from our annual review of assumptions which increased claim reserves by $460 million. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves (see “—Critical Accounting Estimates” for additional information). The increase was also attributable to aging and growth of the in-force block and higher severity on new claims in the current year. This increase was partially offset by a decrease of $191 million in our U.S. mortgage insurance business principally from a decline in new delinquencies and favorable aging on existing delinquencies in the current year.

Unearned premiums increased $156 million primarily from our mortgage insurance business in Canada largely attributable to growth of the business and unfavorable changes in foreign exchange rates as well as higher sales in our U.S. mortgage insurance business in the current year.

Other liabilities increased $276decreased $914 million largely driven by higher derivativeslower securities lending liabilities and derivative counterparty collateral as a result of changes in the long-term interest rate environment, in the current year. This increase was partially offset by a decrease of $229 million related to our repurchase program mainly attributable to scheduled maturities in the current year.along with

Borrowings related to securitization entities decreased $101 million primarily attributable to the settlement of $70 million of restricted borrowings as well as scheduled principal payments the current year.

Non-recourse funding obligations decreased $1,610 million as a result of early redemptions of non-recourse funding obligations for River Lake and River Lake II related to a life block transaction completed in the current year.

Long-term borrowings decreased $376 million primarily attributable to the redemption of $298 million of Genworth Holdings’ 2016 senior notes in January 2016 and the repurchase of $28 million principal of Genworth Holdings’ senior notes with various maturity dates during the three months ended March 31, 2016. The decrease was also related to $40 million of bond consent fees paid as part of Genworth Holdings’ bond consent solicitation. Genworth Financial Mortgage Insurance Pty Limited redeemed $36 million of subordinated floating rate notes due in 2021. These decreases were partially offset by an increase of $24 million from changes in foreign exchange rates on debt in Canada and Australia.

Deferred tax liability increased $1,127 million primarily from an increase in net unrealized investment gains and a valuation allowance of $265 million recorded on deferred tax assets in the current year related to foreign tax credits that we no longer expect to realize.

Separate account liabilities decreased $398 million principally driven by surrenders and benefits in the current year.

lower derivative liabilities primarily from the change described above within other invested assets related to variation margin, which reduced our derivative liabilities by $274 million. The decrease was also attributable to lower tax liabilities principally related to our Tax Matters Agreement liability in the current year. These decreases were partially offset by an increase in amounts due to broker mostly related to unsettled trade activity in the current year.

Total equity. Total equity increased $2,112$620 million from $14,637$14,467 million as of December 31, 20152016 to $16,749$15,087 million as of September 30, 2016.2017.

 

We reported a net lossincome available to Genworth Financial, Inc.’s common stockholders of $155$464 million during the nine months ended September 30, 2016.2017.

 

Accumulated other comprehensive income (loss) increased $2,192 million predominantly attributable to higher net unrealized investment gains of $1,606 million and derivatives qualifying as hedges of $448 million related to changes in the long-term interest rate environment in the current year. Foreign currency translation alsoand other adjustments increased $138$128 million related toprincipally from the weakening of the U.S. dollar compared to the currencies in Canada and Australia in the current year.

Noncontrolling interests increased $195 million predominantly related to net income attributable to noncontrolling interest of $198 million and foreign currency translation adjustments of $133 million, partially offset by dividends to noncontrolling interests of $92 million and from the repurchase of shares of $31 million in the current year.

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 and subsidiaries

The following table sets forth our unaudited condensed consolidated cash flows for the nine months ended September 30:

 

(Amounts in millions)

  2016   2015   2017   2016 

Net cash from operating activities

  $1,798   $1,158   $1,932   $1,798 

Net cash from investing activities

   (2,050   (2,163

Net cash from financing activities

   (2,699   (19

Net cash used by investing activities

   (678   (2,050

Net cash used by financing activities

   (1,270   (2,699
  

 

   

 

   

 

   

 

 

Net decrease in cash before foreign exchange effect

  $(2,951  $(1,024  $(16  $(2,951
  

 

   

 

   

 

   

 

 

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. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. Positive cash flows from operating activities are then invested to support the obligations of our insurance and investment products and required capital supporting these products. In analyzing our cash flow, we focus on the change in the amount of cash available and used in investing activities. 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 or repurchase of borrowings andnon-recourse funding obligations; and dividends to our stockholders and other capital transactions.

We had higher cash inflows from operating activities during the current year mainly attributable to higher net sales of trading securities as well as higher amounts paid in the prior year related to a reinsurance agreement in our life insurance business that did not recur. These amounts were partially offset by cash collateral received from counterparties primarilyoutflows in the current year compared to cash inflows in the prior year as a result of the change in the derivative positions in the current year. This increase was partially offset by amounts paidcollateral related to a new reinsurance agreement in our life insurance business. We also paid amounts related to the settlement ofIn re Genworth Financial, Inc. Securities Litigationand fees associated with Genworth Holdings’ bond consent solicitation.derivative positions.

We had slightly lower cash outflows from investing activities duringprimarily from lower purchases and higher maturities of fixed maturity securities in the current yearyear. These amounts were partially offset by lower sales of fixed maturity securities as well as higher net purchases of short-term investments primarily as the result of net proceeds from the sale ofdecision to manage the interest rate risk and reposition our Europeanportfolios, particularly in our Australian mortgage insurance business and the sale of assets to Pac Life as well as net repayments of commercial mortgage loans in the current year compared to net originations in the prior year. These inflows were mostly offset by the purchase of policy loans in the second quarter of 2016 from the policy loan securitization entities in which we previously held a residual interest.

We had higherlower cash outflows from financing activities during the current year primarily from prior year transactions that did not recur, consisting of the redemption of $1,620 million ofnon-recourse funding obligations. Genworth Holdings also repaidobligations and repurchasedthe repayment and repurchase of $326 million of itsGenworth Holdings’ senior notes, in the current year. Cash outflowspartially offset by higher net withdrawals from financing activities were also as a result of withdrawals exceeding deposits of our investment contracts in the current year. The prior year included proceeds from the sale of additional shares of our Australian mortgage insurance business in May 2015.

In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary. See note 9 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to our securities lending program.

We previously had a repurchase program in which we sold an investment security at a specified price and agreed to repurchase that security at another specified price at a later date. See note 9 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional informationIn 2017 we repaid $75 million, the entire amount due at maturity related to ourthese repurchase program.agreements.

Genworth—holding company

Genworth Financial and Genworth Holdings each acts as a holding company for their respective subsidiaries and do not have any significant operations of their own. Dividends from their respective subsidiaries, payments to them under tax sharing and expense reimbursement arrangements with their subsidiaries and proceeds from borrowings or securities issuances are their principal sources of cash to meet their obligations. Insurance laws and regulations regulate the payment of dividends and other distributions to Genworth Financial and Genworth Holdings by their insurance subsidiaries. We expect dividends paid by the insurance subsidiaries will vary depending on strategic objectives, regulatory requirements and business performance.

The primary uses of funds at Genworth Financial and Genworth Holdings include payment of holding company general operating expenses (including taxes), payment of principal, interest and other expenses on current and any future borrowings, payments under current and any future guarantees (including guarantees of certain subsidiary obligations), payment of amounts owed to GE under the Tax Matters Agreement, payments to subsidiaries (and, in the case of Genworth Holdings, to Genworth Financial) under tax sharing agreements, contributions to subsidiaries, repurchases of debt and equity securities and, in the case of Genworth Holdings, loans, dividends or other distributions to Genworth Financial. In deploying future capital, important current priorities include focusing on our operating businesses so they remain appropriately capitalized, and accelerating

progress on reducing overall indebtedness of Genworth Holdings. We may from time to time seek to repurchase or redeem outstanding notes for cash (with cash on hand, proceeds from the issuance of new debt and/or the proceeds from asset or stock sales) in open market purchases, tender offers, privately negotiated transactions or otherwise. We currently seek to reduce our indebtedness over time through repurchases, redemptions and/or repayments at maturity.

Our Board of Directors has suspended the payment of stockholder dividends on our Genworth Financial 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. In addition, our Board of Directors has suspended repurchases of our Genworth Financial common stock under our stock repurchase program indefinitely. The resumption of our stock repurchase program will be at the discretion of our Board of Directors.

Genworth Holdings had $1,065$754 million and $1,124$998 million of cash and cash equivalents, which included approximately $52 million and $85 million of restricted assets, comprised primarily of cash and cash equivalents, as of September 30, 20162017 and December 31, 2015,2016, respectively. Genworth Holdings also held $75 million and $100 million in U.S. government securities of $100 million and $250 million as of September 30, 20162017 and December 31, 2015,2016, respectively. As of September 30, 2016, Genworth Holdings had approximately $80 million of restricted assets.

During the nine months ended September 30, 2017 and 2016, we received cash common stock dividends from our international subsidiaries of $119 million and $250 million, of which $73respectively. Dividends in 2017 included $16 million was receivedfrom our participation in the third quarter of 2016.share buyback programs in Genworth Mortgage Insurance Australia Limited (“Genworth Australia”) and Genworth Canada, as discussed below. Dividends in 2016 included $76 million for our portion of the AUD$202 million capital reduction in Genworth Mortgage Insurance Australia Limited in the second quarter of 2016.

The life block transaction completed in January 2016 generated approximately $175 million of tax benefits to the holding company in July 2016, which are committed to be used in executing the restructuring plan for our U.S. life insurance businesses.

Genworth Holdings provides capital support to some of its insurance subsidiaries in the form of guarantees of certain obligations. In July 2016, a capital support agreement of up to $205 million with one of Genworth Holdings’ insurance subsidiaries domiciled in Bermuda relating to an intercompany reinsurance agreement was terminated as the business was recaptured by one of our U.S. life insurance subsidiaries.

Genworth Holdings provided an unlimited guarantee for the benefit of policyholders for the payment of valid claims by our European mortgage insurance subsidiary prior to its sale in May 2016. Following the sale of this U.K. subsidiary to AmTrust Financial Services, Inc., the guarantee is now limited to the payment of valid claims on policies in-force prior to the sale date and those written approximately 90 days subsequent to the date of the sale, and AmTrust Financial Services, Inc. has agreed to provide us with a limited indemnification in the event there is any exposure under the guarantee. As of September 30, 2016, the risk in-force of the business subject to the guarantee was approximately $2.3 billion.

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 their respective parent company,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. ProductProducts having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are generally matched with investments having similar duration such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term product 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 September 30, 2016,2017, our total cash, cash equivalents and invested assets were $78.3$75.9 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership interestsinvestments and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 31%33% of the carrying value of our total cash, cash equivalents and invested assets as of September 30, 2016.2017.

Effective December 31, 2015, each GSE adopted revised PMIERs, which set forth operational and financial requirements that mortgage insurers must meet in order to remain eligible. Each approved mortgage insurer is required to provide the GSEs with an annual certification and a quarterly report as to its compliance with PMIERs. The reinsurance transactions covering our 2014 through 2017 book years provided an aggregate of approximately $510 million of PMIERs capital credit as of September 30, 2017. Our U.S. mortgage insurance business may execute future capital transactions to maintain a prudent level of financial flexibility in excess of the PMIERs capital requirements given the dynamic nature of asset valuations and requirement changes over time. These future capital transactions could include additional reinsurance transactions and contributions of holding company cash.

In August 2017, Genworth Australia announced its intention to commence anon-market sharebuy-back program for shares up to a maximum aggregate amount of AUD$100 million. The total number of shares to be purchased by Genworth Australia under the program depends on business and market conditions, the prevailing share price, market volumes and other considerations. Pursuant to the program, in August 2017 and September 2017, Genworth Australia repurchased approximately 15.1 million of its shares for AUD$45 million. As the majority shareholder, we participated inon-market sales transactions during thebuy-back period to maintain our ownership position of approximately 52.0% and received $18 million in cash. Of the $18 million of cash proceeds received, $4 million was paid as a dividend to Genworth Holdings in the third quarter of 2017 and we expect the remaining amount of $14 million to be paid to Genworth Holdings as a dividend in the fourth quarter of 2017.

In April 2016,May 2017, Genworth Canada announced acceptance by the Toronto Stock Exchange of its Notice of Intention to Make a Normal Course Issuer Bid (“NCIB”). Pursuant to the NCIB, Genworth Canada may, if considered advisable, purchase from time to time through May 4, 2017,2018, up to an aggregate of approximately 4.6 million of its issued and outstanding common shares. IfIn August 2017 and September 2017, Genworth Canada decides to repurchaserepurchased approximately 1.1 million of its shares for CAD$40 million through the NCIB, we intend to participateNCIB. We participated in the NCIB in order to maintain our overall ownership position at its current level.level of approximately 57.1% and received $18 million in cash. Of the $18 million of cash proceeds received, $12 million was paid as dividends to Genworth Holdings in the third quarter of 2017 and $6 million was retained by GMICO.

Capital resources and financing activities

On May 20, 2016,September 29, 2017, Genworth Canada, our majority-owned subsidiary, entered into a CAD$100200 million syndicated senior unsecured revolving credit facility, which matures on May 20, 2019.September 29, 2022. Any borrowings under Genworth Canada’s credit facility will bear interest at a rate per annum equal to, at the option of Genworth Canada, either a fixed rate or a variable rate pursuant to the terms of the credit agreement. Genworth Canada’sThe credit facility includes customary representations, warranties, covenants, terms and conditions. This syndicated credit facility replaced an existing CAD$100 million senior unsecured revolving credit facility which was cancelled on September 29, 2017. As of September 30, 2016,2017, there was no amount outstanding under Genworth Canada’s credit facility.

In April 2016, Genworth Holdings terminated its $300 million multicurrency revolving credit facility prior to its September 26, 2016 maturity date. There were no amounts outstanding under the credit facility at the time of termination.

In January 2016, Genworth Holdings redeemed $298 million of its 2016 Notes and paid a make-whole premium of approximately $20 million pre-tax in addition to accrued and unpaid interest.

During the three months ended March 31, 2016, we also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for a pre-tax gain of $4 million and paid accrued and unpaid interest thereon.

During the three months ended March 31, 2016, in connection with a life block transaction, River Lake redeemed $975 million of its total outstanding floating rate subordinated notes due in 2033 and River Lake II redeemed $645 million of its total outstanding floating rate subordinated notes due in 2035 for a pre-tax loss of $9 million from the write-off of deferred borrowing costs.

In June 2016, Genworth Financial Mortgage Insurance Pty Limited, our indirect majority-owned subsidiary, redeemed all of its outstanding AUD$50 million of subordinated floating rate notes with an interest rate of three-month Bank Bill Swap reference rate plus a margin of 4.75% due 2021.the covenants were fully met.

We believe existing cash held at Genworth Holdings combined with dividends from operating subsidiaries, payments under tax sharing and expense reimbursement arrangements with subsidiaries, proceeds from borrowings or securities issuances, and if necessary, sales of assets, as described below, will provide us with sufficient capital flexibility and liquidity to meet our projected future operating and financing requirements. We actively monitor our liquidity position, liquidity generation options and the credit markets given changing market conditions. We target liquidity at Genworth Holdings to maintain a minimum balance of one andone-half times expected annual debt interest payments plus an additional $350 million. As of September 30, 2016,2017, Genworth Holdings was above this target due in part to intercompany tax payments of $322approximately $300 million received from its subsidiaries in 2016. Subject to the second and third quarterscompletion of 2016.the China Oceanwide transaction, China Oceanwide has committed in the Merger Agreement to contribute $600 million of cash to us to address our debt maturing in May 2018, on or before its maturity. We will continue to evaluate our target level of liquidity as circumstances warrant and may move above or below the target for a period of time given future actions and due to the timing of cash inflows and outflows. Additionally, we will continue to evaluate market influences on the valuation of our senior debt, and may consider additional opportunities to repurchase our debt over time. We cannot predict with any certainty the impact to us from any future disruptions in the credit markets or the recent or any 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 companies. We are currently reviewing potential refinancing options, which may include secured indebtedness,to address upcoming debt maturitiesin the event the transaction with China Oceanwide cannot be completed in a timely manner or at all. We could also utilize holding company cash and/or pursue potential asset sales to address upcoming debt maturities in the event the transaction with China Oceanwide cannot be completed. In the absence of the transaction with China Oceanwide transaction or in the eventa refinancing alternative, we are unable to refinance our debt maturities,believe we may be requiredwould need to pursue asset sales to address our debt maturities, including potential sales of our mortgage insurance businesses in

Canada and Australia and/or a partial sale ofAustralia. We are also evaluating options to insulate our U.S. mortgage insurance business to service our holding company debt.from additional ratings pressure, including a potential partial sale, in the event the transaction with China Oceanwide cannot be completed. 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 reinsurance, our credit ratings and credit capacity and the performance of and outlook for our business. For a discussion of certain risks associated with our liquidity, see “Item 1A—Risk Factors—Factors)—Our internal sources of liquidity may be insufficient to meet our needs and our access to capital may be limited or unavailable. Under such conditions, we may seek additional capital but may be unable to obtain it” in our 20152016 Annual Report on Form10-K.

Contractual obligations and commercial commitments

Except as describeddisclosed above, there have been no material additions or changes to our contractual obligations and commercial commitments as set forth in our 20152016 Annual Report on Form10-K filed on February 26, 2016.27, 2017.

Securitization Entities

There were no new off-balance sheet securitization transactions during the nine months ended September 30, 20162017 or 2015. For a discussion of securitization entities, see note 4 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements.”2016.

New Accounting Standards

For a discussion of recently adopted accounting standards, see note 2 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements.”

 

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 practices.instruments are traded. Except as disclosed below, there were no other material changes in our market risks since December 31, 2015.2016.

In the first nine months of 2016, U.S. Treasury yields remainedInterest rates remain at historically low levels but rose modestlydespite the fact the U.S. Federal Reserve has raised its benchmark lending rate two times in 2017 and market expectations remain for an additional rate increase during 2017. Despite the Federal Reserve’s actions, U.S. Treasury yields were lower throughout the third quarter of 2016 after declining sharply2017 but rose significantly in the second quarterlast week of 2016. Yield levelsSeptember 2017, in response to potential tax reform. However,pro-growth stimulus policies are still uncertain and weaker inflation data has investors more cautious on U.S. investment grade credit neared record lows in July 2016 on strong global demand. Credit spreads in the energy and metals

sectors tightened significantly as commodity prices stabilized at higher levels.direction of longer term interest rates. 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.

We are exposed to foreign currency exchange risks associated with fluctuations in foreign currency exchange rates against the U.S. dollar resulting from our international operations andnon-U.S.-denominated securities. Our primary international operations are located in Canada and Australia. The assets and liabilities of our international operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date, while revenues and expenses of our international operations are translated into U.S. dollars at the average rates of exchange during the period of the transaction. In general, the weakening of the U.S. dollar results in higher levels of reported assets, liabilities, revenues and net income (loss). As of September 30, 2016,2017, the U.S. dollar weakened against the currencies in Canada and Australia compared to the balance sheet rate as of December 31, 2015.2016. In the third quarter of 2016,2017, the U.S. dollar weakened against the currencies in Canada and Australia compared to the average rate in the third quarter of 2015 and weakened against the currency in Australia in the second quarter of 2016 but strengthened against the currency in Canada in the second quarter of 2016. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact of changes in foreign currency exchange rates.

Interest Rate Risk

We enter into market-sensitive instruments primarily for purposes other than trading. Our life insurance, long-term care insurance and deferred annuity products have significant interest rate risk and are associated with our U.S. life insurance subsidiaries. Our mortgage insurance businesses in Canada and Australia and immediate annuity products have moderate interest rate risk, while our U.S. mortgage insurance business has relatively low interest rate risk.

The significant interest rate risk that is present in our life insurance, long-term care insurance and annuity products is a result of longer duration liabilities where a significant portion of cash flows to pay benefits comes from investment returns. Additionally, certain of these products have implicit and explicit rate guarantees or optionality that is significantly impacted by changes in interest rates. We seek to minimize interest rate risk by purchasing assets to better align the duration of our assets with the duration of the liabilities or utilizing derivatives to mitigate interest rate risk for product lines where asset durations are not sufficient to align with the related liability. Additionally, we also minimize certain of these risks through product design features. However, in our long-term care insurance, life insurance and annuity products, the average life of our assets is shorter than the average life of our liabilities.

Our insurance and investment products are sensitive to interest rate fluctuations and expose us to the risk that falling interest rates or tightening credit spreads will reduce our interest rate margin (the difference between the returns we earn on the investments that support our obligations under these products and the amounts that we must pay to policyholders and contractholders). Because we may reduce the interest rates we credit on most of these products only at limited, pre-established intervals, and because many contracts have guaranteed minimum interest crediting rates, declines in earned investment returns can impact the profitability of these products. As of September 30, 2016, of our $12.0 billion deferred annuity products, $0.8 billion have guaranteed minimum interest crediting rate floors greater than or equal to 3.5%, with less than $2 million guaranteed minimum interest crediting rate floors greater than 5.5%. Most of these products were sold prior to 1999. Our universal life insurance products also have guaranteed minimum interest crediting rate floors, with no guaranteed minimum interest crediting rate floors greater than 6.0%. Of our $7.0 billion of universal life insurance products as of September 30, 2016, $4.1 billion have guaranteed minimum interest crediting rate floors ranging between 3% and 4%.

Our life and long-term care insurance products as well as our guaranteed benefits on variable annuities also expose us to the risk of interest rate fluctuations. The pricing and expected future profitability of these products

are based in part on expected investment returns. Over time, life and long-term care insurance products are expected to generally produce positive cash flows as customers pay periodic premiums, which we invest as they are received. Low interest rates increase reinvestment risk and reduce our ability to achieve our targeted investment margins and may adversely affect the profitability of our life insurance, fixed annuity and long-term care insurance products and may increase hedging costs on our in-force block of variable annuity products. A prolonged low interest rate environment may negatively impact the sufficiency of our margins on our DAC and PVFP, which could result in an impairment. In addition, certain statutory capital requirements are based on models that consider interest rates. Prolonged periods of low interest rates may increase the statutory capital we are required to hold as well as the amount of assets we must maintain to support statutory reserves.

The carrying value of our investment portfolio as of September 30, 2016 was $75.3 billion, of which 85% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We seek to mitigate the market risk associated with our fixed maturity securities portfolio by attempting to match the duration of our fixed maturity securities with the duration of the liabilities that those securities are intended to support. However, because policyholder liabilities can be longer than the duration of fixed income securities, we face heightened reinvestment risk.

Interest rate fluctuations also could have an adverse effect on the results of our investment portfolio. During periods of declining market interest rates, the interest we receive on variable interest rate investments decreases. In addition, during those periods, we reinvest the cash we receive as interest or return of principal on our investments in lower-yielding high-grade instruments or in lower- credit instruments to maintain comparable returns. For example, during the three months ended September 30, 2016, we reinvested $3.1 billion at an average rate of 2.6% as compared to our annualized weighted-average investment yield of 4.6%. Issuers of fixed-income securities may also decide to prepay their obligations in order to borrow at lower market rates, which exacerbates the risk that we may have to invest the cash proceeds of these securities in lower-yielding or lower-credit instruments.

The primary market risk for our long-term borrowings is interest rate risk at the time of maturity or early redemption, when we may be required to refinance these obligations. We continue to monitor the interest rate environment and to evaluate refinancing opportunities as maturity dates approach. While we are exposed to interest rate risk from certain variable rate long-term borrowings and non-recourse funding obligations, in certain instances we invest in variable rate assets to back those obligations to mitigate the interest rate risk from the variable interest payments.

We use derivative instruments, such as interest rate swaps, financial futures and option-based financial instruments, as part of our risk management strategy. We use these derivatives to mitigate certain interest rate risk by:

reducing the risk between the timing of the receipt of cash and its investment in the market;

extending or shortening the duration of assets to better align with the duration of the liabilities; and

protecting against the early termination of an asset or liability.

As a matter of policy, we primarily use derivatives to hedge market or interest rate risk, and we have not and will not engage in derivative market-making, speculative derivative trading or other speculative derivatives activities.

Assuming investment yields remain at the September 30, 2016 levels for an extended period of time and based on our existing policies and investment portfolio as of September 30, 2016, we estimate the impact from investing in that lower interest rate environment could reduce our investment income by approximately $50 million and $100 million in 2017 and 2018, respectively, before considering the impact from taxes or DAC and other adjustments. The above impacts do not include or contemplate any potential changes in crediting rates to policyholders, evaluation of reserve adequacy or unlocking of DAC.

For a further discussion of the risks associated with interest rates, see “Item 1A Risk Factors—Interest rates and changes in rates could materially adversely affect our business and profitability” in our 2015 Annual Report on Form 10-K.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2016,2017, 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 our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2016.2017.

Changes in Internal Control Over Financial Reporting During the Quarter Ended September 30, 20162017

During the three months ended September 30, 2016,2017, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1.Legal Proceedings

See note 1211 in our unaudited condensed consolidated financial statements under “Part 1—Item 1—Financial Statements” for a description of material pending litigation and regulatory matters affecting us.

 

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 20152016 Annual Report on Form10-K, as supplemented by the risk factors below, which together 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. Except as disclosed below, thereThere have been no material changes to the risk factors set forth in the above-referenced filing as of September 30, 2016.2017.

The proposed transaction with China Oceanwide may not be completed or may not be completed in the timeframe, terms or manner currently anticipated, which could have a material adverse effect on us and our stock price.

On October 21, 2016, we entered into a definitive agreement with China Oceanwide, under which China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. As part of the transaction, China Oceanwide has additionally committed to contribute $600 million of cash to allow us to address our debt maturing in 2018, on or before its maturity, as well as $525 million of cash to be contributed to our U.S. life insurance businesses to pursue their restructuring. The transaction is subject to approval by Genworth’s stockholders as well as other closing conditions, including the receipt of required regulatory approvals. The required regulatory approvals include, in addition to certain Chinese approvals, certain requisite regulatory and other governmental approvals, non-disapprovals or confirmations, as applicable, from Fannie Mae and Freddie Mac (as may be applicable), the Financial Industry Regulatory Authority, the Committee on Foreign Investment in the United States, certain U.S. insurance regulators in Delaware, New York, North Carolina, South Carolina, Vermont and Virginia and certain Canadian, Australian and New Zealand regulators, and certain regulatory approvals necessary to consummate the transfer by GLIC of its ownership of GLAIC, in whole, to an intermediate holding company and certain other

planned restructuring transactions to be consummated by us. In addition, the transaction is conditioned on there not having been a change or the public announcement of a change in the financial strength rating assigned to GMICO to below “BB (negative outlook)” by S&P that is primarily and directly attributable to the actions or inactions by Genworth, its affiliates or their respective representatives that do not relate to an “excluded effect” (as defined in the merger agreement), or an adverse change in the condition (financial or otherwise) of GMICO and its businesses not resulting from or arising out of an excluded effect. There is no assurance that the conditions to the transaction will be satisfied in a timely manner or at all. If the transaction is not completed, we may suffer a number of consequences that could adversely affect our stock price, business, results of operations and financial condition, including:

the potential inability to restructure our U.S. life insurance businesses, which we believe is essential to increasing the liquidity of the holding company and isolating long-term care insurance risks from the rest of our businesses;

increased pressure on and potential downgrades of our debt and financial strength ratings, particularly for our mortgage insurance businesses, which could have an adverse impact on our mortgage businesses;

a negative impact on our holding company liquidity and ability to service and/or refinance our holding company debt; and

we may be required to pursue strategic alternatives that would materially impact our business, including potential sales of our mortgage insurance businesses in Canada and Australia and/or a partial sale of our U.S. mortgage insurance business.

There are numerous other risks related to the transaction, including the following:

the risk that the parties will not be able to obtain stockholder or regulatory approvals, or the possibility that they may delay the transaction or that materially burdensome or adverse regulatory conditions may be imposed in connection with any such regulatory approvals;

potential legal proceedings may be instituted against us following announcement of the transaction;

the risk that the proposed transaction disrupts Genworth’s current plans and operations as a result of the announcement and consummation of the transaction;

certain restrictions during the pendency of the transaction that may impact Genworth’s ability to pursue certain business opportunities or strategic transactions;

continued availability of capital and financing to Genworth before the consummation of the transaction;

further rating agency actions and downgrades in Genworth’s debt or financial strength ratings;

changes in applicable laws or regulations;

our ability to recognize the anticipated benefits of the transaction;

the amount of the costs, fees, expenses and other charges related to the transaction;

the risks related to diverting management’s attention from our ongoing business operations;

the merger agreement may be terminated in circumstances that would require us to pay China Oceanwide a fee;

our ability to attract, recruit, retain and motivate current and prospective employees may be adversely affected; and

disruptions and uncertainty relating to the transaction, whether or not it is completed, may harm our relationships with our employees, customers, distributors, vendors or other business partners, and may result in a negative impact on our business.

In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the transaction, and these fees and costs are payable by us regardless of whether the transaction is consummated.

We may be required to increase our reserves in our long-term care insurance, life insurance and/or annuity businesses in the fourth quarter of 2016 as a result of the changes we made to assumptions and methodologies in our long-term care insurance business in the third quarter of 2016, deviations from our estimates and actuarial assumptions or other reasons, which could have a material adverse effect on our results of operations and financial condition.

The expected future profitability and prices of our long-term care insurance, life insurance and some annuity products are based upon expected claims and payment patterns, using assumptions for, among other things, projected interest rates and investment returns, morbidity rates, mortality rates (i.e., likelihood of death of our policyholders and contractholders), persistency, lapses and expenses. The long-term profitability of these products depends upon how our actual experience compares with our pricing and valuation assumptions. If any of our assumptions are inaccurate, our reserves may be inadequate, which may have a material adverse effect on our results of operations, financial condition and business. For example, if morbidity rates are higher than our pricing assumptions, we could be required to make greater payments and thus establish additional reserves under our long-term care insurance policies than we had expected, and such amounts could be significant. Likewise, if mortality rates are lower than our pricing assumptions, we could be required to make greater payments and thus establish additional reserves under both our long-term care insurance policies and annuity contracts and such amounts could be significant. Conversely, if mortality rates are higher than our pricing and valuation assumptions, we could be required to make greater payments under our life insurance policies and annuity contracts with GMDBs than we had projected.

Changes in the assumptions we use can have, and in the past have had, a material adverse effect on our results of operations. For example, during the third quarter of 2016, we completed an annual review of our long-term care insurance claim reserve assumptions. In connection with this review, we made several changes to our assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves. As a result of these changes, we increased our long-term care insurance claim reserves by $460 million and increased reinsurance recoverables by $25 million, resulting in an after-tax charge to earnings of $283 million for the third quarter of 2016. See “Part 1—Item 1—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” for additional information. Increases to our reserves, including those made in the third quarter of 2016, may also, among other things, limit our ability to execute our strategic plans; reduce our liquidity; and adversely impact our debt or financial strength ratings. Any of these results could have a material adverse impact on business, results of operations and financial condition.

Our loss recognition testing for our long-term care insurance products is reviewed in the aggregate, excluding our acquired block of long-term care insurance, which is tested separately. In the fourth quarter of 2016, we will perform our loss recognition testing. We will incorporate the assumption and methodology changes made in the third quarter of 2016 into this test. We anticipate these changes will have a material negative impact on the margins of our long-term care insurance blocks. Additional information obtained in finalizing our margin review in the fourth quarter of 2016 or further changes to our assumptions or methodologies could materially affect the impact on margins. As a part of the process, we will consider incremental benefits from expected further premium rate actions that would help mitigate the impact of these changes. There is no guarantee that we will be able to obtain regulatory approval for the future rate actions we will assume in connection with our loss recognition testing. As previously disclosed, our acquired block of long-term care insurance had a premium deficiency in 2014. Due to the premium deficiency that existed in 2014, we monitor our acquired block frequently. Although the acquired block has a higher percentage of indemnity policies and therefore would be less likely to be adversely affected by the new claim assumptions, any adverse changes in our assumptions could result in the establishment of additional future policy benefit reserves, which could be material. Our acquired

block would not benefit significantly from additional rate actions as it is older, and therefore, there is a higher likelihood that adverse changes could result in additional losses on that block. For our acquired block of long-term care insurance, the impacts of adverse changes in assumptions would be immediately reflected in net income (loss) if our margin for this block is reduced below zero.

As part of our annual loss recognition testing, we will also review assumptions for incidence and interest rates, among other assumptions. We will continue to regularly review our methodologies and assumptions in light of emerging experience and may be required to make further adjustments to our long-term care insurance claim reserves in the future, which could also impact our loss recognition testing results. However, loss recognition testing assumptions have not been finalized and we therefore do not yet know the extent of the impact on our annual loss recognition testing. We currently cannot predict with more specificity the nature, extent or margin impact of any of the assumption and methodology changes we will make in completing our margin review. To the extent, based on the review, our margin is negative, we will be required to recognize a loss, by amortizing more DAC and/or establishing additional benefit reserves, the impact of which may be material. In the event a loss is recognized, we would increase reserves to offset such losses that would be recognized in later years. A significant decrease in our loss recognition testing margin, the need to amortize a significant amount of DAC and/or the need to significantly increase reserves could have a material adverse effect on our business, results of operations and financial condition.

In addition, we will also continue to monitor our experience and assumptions closely and make changes to our assumptions and methodologies, as appropriate, for certain other U.S. life insurance products. In our assumption review in 2015, we looked at a number of assumptions, including older age mortality in our life insurance products and shock lapse in our term universal life insurance product as well as assumptions in our group long-term care insurance products, for which we did not make any changes at that time. We will review these and other assumptions, including interest rate assumptions, again in the fourth quarter of 2016 with the benefit of updated experience and comparisons to industry experience, where appropriate, and we will likely make changes to at least one or more of these or other assumptions with a resulting negative impact. We do not know whether such impact would be material or whether, and to what extent, it would be offset by impacts from future premium rate actions or other assumption changes that may or may not occur. Even small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our DAC amortization, reserve levels, results of operations and financial condition.

For a discussion of additional information related to potential changes to our assumptions and methodologies, including certain related sensitivities, see “—Critical Accounting Estimates” as well as “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our 2015 Annual Report on Form 10-K.

We also perform cash flow testing separately for each of our U.S. life insurance companies on a statutory accounting basis. To the extent that the cash flow testing margin is negative in any of our U.S. life insurance companies, we would need to increase statutory reserves, which would decrease our risk-based capital ratios and we may be required to increase our capital within one or more of our U.S. life insurance companies. A need to significantly increase statutory reserves could have a material adverse effect on our business, results of operations and financial condition. For example, we anticipate the assumption and methodology changes made in the third quarter of 2016 will have a material negative impact on the margins of our long-term care insurance block. As a part of the process, we will consider incremental benefits from expected further premium rate actions that would help mitigate the impact of these changes. There is no guarantee that we will be able to obtain regulatory approval for the future rate actions we will assume in connection with our cash flow testing. We also established $198 million of additional statutory reserves resulting from updates to our universal life insurance products with secondary guarantees in our Virginia and Delaware licensed life insurance subsidiaries as of December 31, 2015. In addition, the New York Department of Financial Services, which regulates our New York domiciled insurance subsidiary, has historically not allowed us to combine long-term care insurance cash flow testing results with other products and has required specific adequacy testing scenarios that are generally more

severe than those deemed acceptable in other states. Moreover, the required testing scenarios by the New York Department of Financial Services have a disproportionate impact on our long-term care insurance products. Based on our annual statutory cash flow testing of our long-term care insurance business, our New York insurance subsidiary recorded $89 million of additional statutory reserves in the fourth quarter of 2015 and expects to record an aggregate of $267 million of additional statutory reserves over the next three years. Given the assumption and methodology changes made in the third quarter of 2016, we would expect the results of cash flow testing for our New York insurance subsidiary to deteriorate which will likely require additional long-term care insurance statutory reserves in the fourth quarter of 2016 and over the next several years. For additional information regarding impacts to statutory capital as a result of reserve increases, see “Item 1A Risk Factors—An adverse change in our regulatory requirements, including risk-based capital, could result in a decline in our ratings and/or increased scrutiny by regulators and have a material adverse impact on our results of operations, financial condition and business” in our 2015 Annual Report on Form 10-K.

The risk that our claims experience may differ significantly from our pricing assumptions is particularly significant for our long-term care insurance products. Long-term care insurance policies provide for long-duration coverage and, therefore, our actual claims experience will emerge over many years, or decades, after both pricing and locked-in valuation assumptions have been established. For example, among other factors, changes in economic and interest rate risk, socio-demographics, behavioral trends (e.g., location of care and level of benefit use) and medical advances, may have a material adverse impact on our future claims trends. Moreover, long-term care insurance does not have the extensive claims experience history of life insurance. As a consequence, given that recent experience will represent a larger proportion of total experience, our long-term care insurance assumptions will be more heavily influenced by recent experience than would be the case for our life insurance assumptions. It follows that our ability to forecast future claim costs for long-term care insurance is more limited than for life insurance. For additional information on our long-term care insurance reserves, including the significant historical financial impact of some of these risks, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—Insurance liabilities and reserves” in our 2015 Annual Report on Form 10-K.

The effect of persistency on profitability varies for different products. For most of our life insurance and deferred annuity products, actual persistency that is lower than our persistency assumptions could have an adverse impact on profitability, primarily because we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy or contract. For our deferred annuities with GMWBs and guaranteed annuitization benefits, actual persistency that is higher than our persistency assumptions could have an adverse impact on profitability because we could be required to make withdrawal or annuitization payments for a longer period of time than the account value would support. For our universal life insurance policies, increased persistency that is the result of the sale of policies by the insured to third parties that continue to make premium payments on policies that would otherwise have lapsed, also known as life settlements, could have an adverse impact on profitability because of the higher claims rate associated with settled policies.

For our long-term care insurance and some other health insurance policies, actual persistency in later policy durations that is higher than our persistency assumptions could have a negative impact on profitability. If these policies remain in-force longer than we assumed, then we could be required to make greater benefit payments than we had anticipated when we priced these products. This risk is particularly significant in our long-term care insurance business because we do not have the experience history that we have in many of our other businesses. As a result, our ability to predict persistency and resulting benefit experience for long-term care insurance is more limited than for many other products. A significant number of our long-term care insurance policies have experienced higher persistency than we had originally assumed, which has resulted in higher claims and an adverse effect on the profitability of that business. In addition, the impact of inflation on claims could be more pronounced for our long-term care insurance business than our other businesses given the “long tail” nature of this business. To the extent inflation causes long-term care costs to increase, we will be required to increase our claim reserves. Although we consider the potential effects of inflation when setting premium rates, our premiums may not fully offset the effects of inflation and may result in our underpricing of the risks we insure.

The risk that our lapse experience may differ significantly from our pricing assumptions is significant for our term life and term universal life insurance policies. These policies generally have a level premium period for a specified period of years (e.g., 10 years to 30 years), after which the premium may increase significantly. The level premium period for a significant portion of our term life insurance policies will end in the next few years and policyholders may lapse with greater frequency than we anticipate in our reserve assumptions. In addition, it may be that healthy policyholders are the ones who lapse (as they can more easily replace coverage at a lower cost), creating adverse selection where less healthy policyholders remain in our portfolio. If the frequency of lapses is higher than our reserve assumptions, we would experience higher DAC amortization and lower premiums and could experience higher benefit costs. We have somewhat limited experience on which to base both the lapse assumption and the mortality assumption after the end of the level premium period, which increases the uncertainty associated with our assumptions and reserve levels. However, we have experienced both a greater frequency of policyholder lapses and more severe adverse selection, after the level premium period, and this experience could continue or worsen.

Although some of our products permit us to increase premiums during the life of the policy or contract, we cannot guarantee that these increases would be sufficient to maintain profitability or that such increases would be approved by regulators or approved in a timely manner. Moreover, many of our products either do not permit us to increase premiums or limit those increases during the life of the policy or contract. Significant deviations in experience from pricing expectations could have an adverse effect on the profitability of our products. In addition to our annual reviews, we regularly review our methodologies and assumptions in light of emerging experience and may be required to make further adjustments to reserves in our long-term care insurance, life insurance and/or annuities businesses in the future. Any changes to these reserves may have a materially negative impact on our results of operations, financial condition and business.

Item 6.Exhibits

 

Number

  

Description

    2.1

  Waiver and Agreement, and Plandated as of Merger, dated OctoberAugust  21, 2016, by and2017, among the Genworth Financial, Inc., Asia Pacific Global Capital Co., Ltd., and Asia Pacific Global Capital USA Corporation (incorporated by reference to Exhibit 2.1 to the Current Report on Form8-K filed on October 24, 2016)August 21, 2017)

  12

  Statement of Ratio of Income to Fixed Charges (filed herewith)

  31.1

  Certification of Thomas J. McInerney (filed herewith)

  31.2

  Certification of Kelly L. Groh (filed herewith)

  32.1

  Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Thomas J. McInerney (filed herewith)

  32.2

  Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Kelly L. Groh (filed herewith)

101.INS

  XBRL Instance Document

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

SIGNATURES

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: November 8, 2016

3, 2017
  
 By: 

/s/S/    Matthew D. Farney

  

Matthew D. Farney

Vice President and Controller

(Principal Accounting Officer)

 

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