0001276520 us-gaap:NondesignatedMember us-gaap:FutureMember us-gaap:OtherLiabilitiesMember 2019-06-30 0001276520 us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember us-gaap:InterestRateSwapMember 2018-01-01 2018-06-30

Table of Contents
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-Q

☒

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

For the quarterly period ended March 31,June 30, 2019

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 number
001-32195

GENWORTH FINANCIAL, INC.

(Exact Namename of Registrantregistrant as Specifiedspecified in its Charter)

charter)
Delaware 
Delaware
80-0873306

(State or Other Jurisdictionother jurisdiction of

Incorporation

incorporation or Organization)

organization)
 

(I.R.S. Employer

Identification Number)

6620 West Broad Street

Richmond,
Virginia

 
23230
(Address of Principal Executive Offices)principal executive offices)
 
(Zip Code)

(804)

(
804
)
281-6000

(Registrant’s Telephone Number, Including Area Code)

telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading
Symbol
Name of each exchange
on which registered
Class A Common Stock, par value
$.001 per share
GNW
New York Stock Exchange
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
☒
    No  
☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation
 S-T (§
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes
☒
    No  
☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitiondefinitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one):

Large accelerated filer
 
☒
 
Accelerated filer
 
☐
Non-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 Rule
12b-2
of the Exchange Act).    Yes  
☐
    No  
☒

As of April 24,July 25, 2019, 503,314,344
503,465,078
shares of Class A Common Stock, par value $0.001 per share, were outstanding.

Table of Contents
TABLE OF CONTENTS

Page
PART I—FINANCIAL INFORMATION
3
    Page

PART I—FINANCIAL INFORMATION

 
Item 1. 

Financial Statements

  
3
 

Condensed Consolidated Balance Sheets as of March  31,June 30, 2019 (Unaudited) and December 31, 2018.

  
3
 

Condensed Consolidated Statements of Income for the three and six months ended March 31,June 30, 2019 and 2018 (Unaudited)

  
4
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 31,June 30, 2019 and 2018 (Unaudited)

  
5
 

Condensed Consolidated Statements of Changes in Equity for the threesix months ended March 31,June 30, 2019 and 2018 (Unaudited)

  
6
 

Condensed Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2019 and 2018 (Unaudited)

  7
8
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

  8
9
 
Item 2. 

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

  74
85
 
Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

  133
163
 
Item 4. 

Controls and Procedures

  134
164
 

PART II—OTHER INFORMATION

 
164
Item 1. 

Legal Proceedings

  134
164
 
Item 1A. 

Risk Factors

  134
164
 
Item 6. 

Exhibits

  134
165
 

Signatures

  136
Signatures
166
 

2
Table of Contents
PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

   March 31,  December 31, 
   2019  2018 
   (Unaudited)    

Assets

   

Investments:

   

Fixed maturity securitiesavailable-for-sale, at fair value

  $61,360 $59,661

Equity securities, at fair value

   635  655

Commercial mortgage loans ($59 and $62 are restricted as of March 31, 2019 and December 31, 2018, respectively, related to a securitization entity)

   6,988  6,749

Policy loans

   1,994  1,861

Other invested assets

   1,208  1,188
  

 

 

  

 

 

 

Total investments

   72,185  70,114

Cash, cash equivalents and restricted cash

   2,221  2,177

Accrued investment income

   726  675

Deferred acquisition costs

   2,219  3,263

Intangible assets and goodwill

   265  347

Reinsurance recoverable

   17,257  17,278

Other assets

   532  474

Deferred tax asset

   573  736

Separate account assets

   6,210  5,859
  

 

 

  

 

 

 

Total assets

  $102,188 $100,923
  

 

 

  

 

 

 

Liabilities and equity

   

Liabilities:

   

Future policy benefits

  $38,369 $37,940

Policyholder account balances

   22,651  22,968

Liability for policy and contract claims

   10,536  10,379

Unearned premiums

   3,482  3,546

Other liabilities

   1,682  1,682

Non-recourse funding obligations

   311  311

Long-term borrowings

   4,035  4,025

Deferred tax liability

   30  24

Separate account liabilities

   6,210  5,859
  

 

 

  

 

 

 

Total liabilities

   87,306  86,734
  

 

 

  

 

 

 

Commitments and contingencies

   

Equity:

   

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 591 million and 589 million shares issued as of March 31, 2019 and December 31, 2018, respectively; 503 million and 501 million shares outstanding as of March 31, 2019 and December 31, 2018, respectively

   1  1

Additionalpaid-in capital

   11,989  11,987
  

 

 

  

 

 

 

Accumulated other comprehensive income (loss):

   

Net unrealized investment gains (losses):

   

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

   932  585

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

   11  10
  

 

 

  

 

 

 

Net unrealized investment gains (losses)

   943  595
  

 

 

  

 

 

 

Derivatives qualifying as hedges

   1,850  1,781

Foreign currency translation and other adjustments

   (301)   (332) 
  

 

 

  

 

 

 

Total accumulated other comprehensive income (loss)

   2,492  2,044

Retained earnings

   1,292  1,118

Treasury stock, at cost (88 million shares as of March 31, 2019 and December 31, 2018)

   (2,700)   (2,700) 
  

 

 

  

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

   13,074  12,450

Noncontrolling interests

   1,808  1,739
  

 

 

  

 

 

 

Total equity

   14,882  14,189
  

 

 

  

 

 

 

Total liabilities and equity

  $102,188 $100,923
  

 

 

  

 

 

 

         
 
June 30,
  
December 31,
 
 
2019
  
2018
 
 
(Unaudited)
   
Assets
  
   
 
Investments:
  
   
 
Fixed maturity securities
available-for-sale,
at fair value
 $
63,774
  $
59,661
 
Equity securities, at fair value
  
644
   
655
 
Commercial mortgage loans ($56 and $62 are restricted as of June 30, 2019 and December 31, 2018, respectively, related to a securitization entity)
  
7,019
   
6,749
 
Policy loans
  
2,076
   
1,861
 
Other invested assets
  
1,535
   
1,188
 
         
Total investments
  
75,048
   
70,114
 
Cash, cash equivalents and restricted cash
  
1,938
   
2,177
 
Accrued investment income
  
626
   
675
 
Deferred acquisition costs
  
2,105
   
3,263
 
Intangible assets and goodwill
  
244
   
347
 
Reinsurance recoverable
  
17,211
   
17,278
 
Other assets
  
564
   
474
 
Deferred tax asset
  
383
   
736
 
Separate account assets
  
6,187
   
5,859
 
         
Total assets
 $
104,306
  $
100,923
 
Liabilities and equity
  
   
 
Liabilities:
  
   
 
Future policy benefits
 $
39,583
  $
37,940
 
Policyholder account balances
  
22,673
   
22,968
 
Liability for policy and contract claims
  
10,677
   
10,379
 
Unearned premiums
  
3,488
   
3,546
 
Other liabilities
  
1,723
   
1,682
 
Non-recourse
funding obligations
  
311
   
311
 
Long-term borrowings
  
4,044
   
4,025
 
Deferred tax liability
  
28
   
24
 
Separate account liabilities
  
6,187
   
5,859
 
         
Total liabilities
  
88,714
   
86,734
 
         
Commitments and contingencies
        
Equity:
  
   
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 592 million and 589 million shares issued as of June 30, 2019 and December 31, 2018, respectively; 504 million and 501 million shares outstanding as of June 30, 2019 and December 31, 2018, respectively
  
1
   
1
 
Additional
paid-in
capital
  
11,983
   
11,987
 
         
Accumulated other comprehensive income (loss):
  
   
 
Net unrealized investment gains (losses):
  
   
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
  
1,294
   
585
 
Net unrealized gains (losses) on other-than-temporarily impaired securities
  
11
   
10
 
         
Net unrealized investment gains (losses)
  
1,305
   
595
 
         
Derivatives qualifying as hedges
  
1,983
   
1,781
 
Foreign currency translation and other adjustments
  
(275
)  
(332
)
         
Total accumulated other comprehensive income (loss)
  
3,013
   
2,044
 
Retained earnings
  
1,460
   
1,118
 
Treasury stock, at cost (88 million shares as of June 30, 2019 and December 31, 2018)
  
(2,700
)  
(2,700
)
         
Total Genworth Financial, Inc.’s stockholders’ equity
  
13,757
   
12,450
 
Noncontrolling interests
  
1,835
   
1,739
 
         
Total equity
  
15,592
   
14,189
 
         
Total liabilities and equity
 $
104,306
  $
100,923
 
See Notes to Condensed Consolidated Financial Statements

3
Table of Contents
GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)

   Three months ended 
   March 31, 
   2019   2018 

Revenues:

    

Premiums

  $1,114  $1,140

Net investment income

   829   804

Net investment gains (losses)

   74   (31) 

Policy fees and other income

   187   202
  

 

 

   

 

 

 

Total revenues

   2,204   2,115
  

 

 

   

 

 

 

Benefits and expenses:

    

Benefits and other changes in policy reserves

   1,301   1,311

Interest credited

   147   156

Acquisition and operating expenses, net of deferrals

   251   240

Amortization of deferred acquisition costs and intangibles

   91   104

Interest expense

   72   76
  

 

 

   

 

 

 

Total benefits and expenses

   1,862   1,887
  

 

 

   

 

 

 

Income before income taxes

   342   228

Provision for income taxes

   112   63
  

 

 

   

 

 

 

Net income

   230   165

Less: net income attributable to noncontrolling interests

   56   53
  

 

 

   

 

 

 

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

  $174  $112
  

 

 

   

 

 

 

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

    

Basic

  $0.35  $0.22
  

 

 

   

 

 

 

Diluted

  $0.34  $0.22
  

 

 

   

 

 

 

Weighted-average common shares outstanding:

    

Basic

   501.2   499.6
  

 

 

   

 

 

 

Diluted

   508.6   502.7
  

 

 

   

 

 

 

Supplemental disclosures:

    

Total other-than-temporary impairments

  $—     $—   

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

   —      —   
  

 

 

   

 

 

 

Net other-than-temporary impairments

   —      —   

Other investments gains (losses)

   74   (31) 
  

 

 

   

 

 

 

Total net investment gains (losses)

  $74  $(31) 
  

 

 

   

 

 

 

                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Revenues:
  
   
   
   
 
Premiums
 $
1,126
  $
1,136
  $
2,240
  $
2,276
 
Net investment income
  
852
   
828
   
1,681
   
1,632
 
Net investment gains (losses)
  
(45
)  
(14
)  
29
   
(45
)
Policy fees and other income
  
223
   
209
   
410
   
411
 
                 
Total revenues
  
2,156
   
2,159
   
4,360
   
4,274
 
                 
Benefits and expenses:
  
   
   
   
 
Benefits and other changes in policy reserves
  
1,270
   
1,205
   
2,571
   
2,516
 
Interest credited
  
146
   
152
   
293
   
308
 
Acquisition and operating expenses, net of deferrals
  
247
   
253
   
498
   
493
 
Amortization of deferred acquisition costs and intangibles
  
95
   
112
   
186
   
216
 
Interest expense
  
73
   
77
   
145
   
153
 
                 
Total benefits and expenses
  
1,831
   
1,799
   
3,693
   
3,686
 
                 
Income before income taxes
  
325
   
360
   
667
   
588
 
Provision for income taxes
  
107
   
111
   
219
   
174
 
                 
Net income
  
218
   
249
   
448
   
414
 
Less: net income attributable to noncontrolling interests
  
50
   
59
   
106
   
112
 
                 
Net income available to Genworth Financial, Inc.’s common stockholders
 $
168
  $
190
  $
342
  $
302
 
Net income available to Genworth Financial, Inc.’s common stockholders per share:
  
   
   
   
 
Basic
 $
0.33
  $
0.38
  $
0.68
  $
0.60
 
Diluted
 $
0.33
  $
0.38
  $
0.67
  $
0.60
 
Weighted-average common shares outstanding:
  
   
   
   
 
Basic
  
503.4
   
500.6
   
502.3
   
500.1
 
Diluted
  
508.7
   
502.6
   
508.7
   
502.6
 
Supplemental disclosures:
  
   
   
   
 
Total other-than-temporary impairments
 $
—  
  $
—  
  $
—  
  $
—  
 
Portion of other-than-temporary impairments included in other comprehensive income (loss)
  
—  
   
—  
   
—  
   
—  
 
                 
Net other-than-temporary impairments
  
—  
   
—  
   
—  
   
—  
 
Other investments gains (losses)
  
(45
)  
(14
)  
29
   
(45
)
                 
Total net investment gains (losses)
 $
(45
) $
(14
) $
29
  $
(45
)
                 
4
Table of Contents
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
(Unaudited)
                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Net income
 $
218
  $
249
  $
448
  $
414
 
Other comprehensive income (loss), net of taxes:
  
   
   
   
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
  
376
   
(185
)  
755
   
(526
)
Net unrealized gains (losses) on other-than-temporarily impaired securities
  
—  
   
(2
)  
1
   
(2
)
Derivatives qualifying as hedges
  
133
   
(64
)  
202
   
(216
)
Foreign currency translation and other adjustments
  
43
   
(98
)  
97
   
(185
)
                 
Total other comprehensive income (loss)
  
552
   
(349
)  
1,055
   
(929
)
                 
Total comprehensive income (loss)
  
770
   
(100
)  
1,503
   
(515
)
Less: comprehensive income attributable to noncontrolling interests
  
81
   
10
   
192
   
14
 
                 
Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders
 $
689
  $
(110
) $
1,311
  $   
(529
)
                 
See Notes to Condensed Consolidated Financial Statements

5
Table of Contents
GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CHANGES IN EQUITY

(Amounts in millions)

(Unaudited)

   Three months ended 
   March 31, 
   2019   2018 

Net income

  $230  $165

Other comprehensive income (loss), net of taxes:

    

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

   379   (341) 

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

   1   —   

Derivatives qualifying as hedges

   69   (152) 

Foreign currency translation and other adjustments

   54   (87) 
  

 

 

   

 

 

 

Total other comprehensive income (loss)

   503   (580) 
  

 

 

   

 

 

 

Total comprehensive income (loss)

   733   (415) 

Less: comprehensive income attributable to noncontrolling interests

   111   4
  

 

 

   

 

 

 

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

  $622  $(419) 
  

 

 

   

 

 

 

                                 
 
Three months ended June 30, 2019
 
           
Total
     
           
Genworth
     
     
Accumulated
      
Financial,
     
   
Additional
  
other
    
Treasury
  
Inc.’s
     
 
Common
  
paid-in
  
comprehensive
  
Retained
  
stock, at
  
stockholders’
  
Noncontrolling
  
Total
 
 
stock
  
capital
  
income (loss)
  
earnings
  
cost
  
equity
  
interests
  
equity
 
Balances as of March 31, 2019
 $
1
  $
11,989
  $
2,492
  $
1,292
  $
(2,700
) $
13,074
  $
1,808
  $
14,882
 
Repurchase of subsidiary shares
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
(32
)  
(32
)
Comprehensive income:
  
   
   
   
   
   
   
   
 
Net income
  
—  
   
—  
   
—  
   
168
   
—  
   
168
   
50
   
218
 
Other comprehensive income, net of taxes
  
—  
   
—  
   
521
   
—  
   
—  
   
521
   
31
   
552
 
                                 
Total comprehensive income
  
—  
   
 
   
 
   
 
   
 
   
689
   
81
   
770
 
Dividends to noncontrolling interests
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
(25
)  
(25
)
Stock-based compensation expense and exercises and other
  
—  
   
(6
)  
—  
   
—  
   
—  
   
(6
)  
3
   
(3
)
                                 
Balances as of June 30, 2019
 $
 1
  $
  11,983
  $
3,013
  $
1,460
  $
  (2,700
) $
  13,757
  $
1,835
  $
15,592
 
    
 
Three months ended June 30, 2018
 
           
Total
     
           
Genworth
     
     
Accumulated
      
Financial,
     
   
Additional
  
other
    
Treasury
  
Inc.’s
     
 
Common
  
paid-in
  
comprehensive
  
Retained
  
stock, at
  
stockholders’
  
Noncontrolling
  
Total
 
 
stock
  
capital
  
income (loss)
  
earnings
  
cost
  
equity
  
interests
  
equity
 
Balances as of March 31, 2018
 $
1
  $
11,979
  $
2,627
  $
1,111
  $
(2,700
) $
13,018
  $
1,844
  $
14,862
 
Repurchase of subsidiary shares
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
(13
)  
(13
)
Comprehensive income (loss):
  
   
   
   
   
   
   
   
 
Net income
  
—  
   
—  
   
—  
   
190
   
—  
   
190
   
59
   
249
 
Other comprehensive loss, net of taxes
  
—  
   
—  
   
(300
)  
—  
   
—  
   
(300
)  
(49
)  
(349
)
                                 
Total comprehensive income (loss)
  
   
   
   
   
   
(110
)  
10
   
(100
)
Dividends to noncontrolling interests
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
(14
)  
(14
)
Stock-based compensation expense and exercises and other
  
—  
   
2
   
—  
   
—  
   
—  
   
2
   
4
   
6
 
                                 
Balances as of June 30, 2018
 $
1
  $
11,981
  $
2,327
  $
1,301
  $
(2,700
) $
12,910
  $
1,831
  $
14,741
 
                                 
6
Table of Contents
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY, CONTINUED
(Amounts in millions)
(Unaudited)
 
Six months ended June 30, 2019
 
           
Total
     
           
Genworth
     
     
Accumulated
      
Financial,
     
   
Additional
  
other
    
Treasury
  
Inc.’s
     
 
Common
  
paid-in
  
comprehensive
  
Retained
  
stock, at
  
stockholders’
  
Noncontrolling
  
Total
 
 
stock
  
capital
  
income (loss)
  
earnings
  
cost
  
equity
  
interests
  
equity
 
Balances as of December 31, 2018
 $
1
  $
11,987
  $
2,044
  $
1,118
  $
(2,700
) $
12,450
  $
1,739
  $
14,189
 
Repurchase of subsidiary shares
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
(44
)  
(44
)
Comprehensive income:
  
   
   
   
   
   
   
   
 
Net income
  
—  
   
—  
   
—  
   
342
   
—  
   
342
   
106
   
448
 
Other comprehensive income, net of taxes
  
—  
   
—  
   
969
   
—  
   
—  
   
969
   
86
   
1,055
 
Total comprehensive income
  
 
   
 
   
 
   
 
   
 
   
1,311
   
192
   
1,503
 
Dividends to noncontrolling interests
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
(53
)  
(53
)
Stock-based compensation expense and exercises and other
  
—  
   
(4
)  
—  
   
—  
   
—  
   
(4
)  
1
   
(3
)
                                 
Balances as of June 30, 2019
 $
1
  $
11,983
  $
3,013
  $
1,460
  $
(2,700
) $
13,757
  $
1,835
  $
15,592
 
    
 
Six months ended June 30, 2018
 
           
Total
     
           
Genworth
     
     
Accumulated
      
Financial,
     
   
Additional
  
other
    
Treasury
  
Inc.’s
     
 
Common
  
paid-in
  
comprehensive
  
Retained
  
stock, at
  
stockholders’
  
Noncontrolling
  
Total
 
 
stock
  
capital
  
income (loss)
  
earnings
  
cost
  
equity
  
interests
  
equity
 
Balances as of December 31, 2017
 $
1
  $
11,977
  $
3,027
  $
1,113
  $
(2,700
) $
13,418
  $
1,910
  $
15,328
 
Cumulative effect of change in accounting, net of taxes
  
—  
   
—  
   
131
   
(114
)  
—  
   
17
   
—  
   
17
 
Repurchase of subsidiary shares
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
(49
)  
(49
)
Comprehensive income (loss):
  
   
   
   
   
   
   
   
 
Net income
  
—  
   
—  
   
—  
   
302
   
—  
   
302
   
112
   
414
 
Other comprehensive loss, net of taxes
  
—  
   
—  
   
(831
)  
—  
   
—  
   
(831
)  
(98
)  
(929
)
 
                                 
Total comprehensive income (loss)
  
   
   
   
   
   
(529
)  
14
   
(515
)
Dividends to noncontrolling interests
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
(50
)  
(50
)
Stock-based compensation expense and exercises and other
  
—  
   
4
   
—  
   
—  
   
—  
   
4
   
6
   
10
 
                                 
Balances as of June 30, 2018
 $
1
  $
11,981
  $
2,327
  $
1,301
  $
(2,700
) $
12,910
  $
1,831
  $
14,741
 
                                 
See Notes to Condensed Consolidated Financial Statements

7
Table of Contents
GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

CASH FLOWS

(Amounts in millions)

(Unaudited)

                 Total       
                 Genworth       
        Accumulated        Financial,       
     Additional  other     Treasury  Inc.’s       
  Common  paid-in  comprehensive  Retained  stock, at  stockholders’  Noncontrolling  Total 
  stock  capital  income (loss)  earnings  cost  equity  interests  equity 

Balances as of December 31, 2018

 $1 $11,987 $2,044 $1,118 $(2,700)  $12,450 $1,739 $14,189

Repurchase of subsidiary shares

  —     —     —     —     —     —     (12)   (12) 

Comprehensive income:

        

Net income

  —     —     —     174  —     174  56  230

Other comprehensive income, net of taxes

  —     —     448  —     —     448  55  503
      

 

 

  

 

 

  

 

 

 

Total comprehensive income

       622  111  733

Dividends to noncontrolling interests

  —     —     —     —     —     —     (28)   (28) 

Stock-based compensation expense and exercises and other

  —     2  —     —     —     2  (2)   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as of March 31, 2019

 $1 $11,989 $2,492 $1,292 $(2,700)  $13,074 $1,808 $14,882
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as of December 31, 2017

 $1 $11,977 $3,027 $1,113 $(2,700)  $13,418 $1,910 $15,328

Cumulative effect of change in accounting, net of taxes

  —     —     131  (114)   —     17  —     17

Repurchase of subsidiary shares

  —     —     —     —     —     —     (36)   (36) 

Comprehensive income (loss):

        

Net income

  —     —     —     112  —     112  53  165

Other comprehensive loss, net of taxes

  —     —     (531)   —     —     (531)   (49)   (580) 
      

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss)

       (419)   4  (415) 

Dividends to noncontrolling interests

  —     —     —     —     —     —     (36)   (36) 

Stock-based compensation expense and exercises and other

  —     2  —     —     —     2  2  4
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balances as of March 31, 2018

 $1 $11,979 $2,627 $1,111 $(2,700)  $13,018 $1,844 $14,862
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

         
 
Six months ended
 
 
June 30,
 
 
2019
  
2018
 
Cash flows from operating activities:
  
   
 
Net income
 $
448
  $
414
 
Adjustments to reconcile net income to net cash from operating activities:
  
   
 
Amortization of fixed maturity securities discounts and premiums
  
(54
)  
(62
)
Net investment (gains) losses
  
(29
)  
45
 
Charges assessed to policyholders
  
(364
)  
(359
)
Acquisition costs deferred
  
(35
)  
(40
)
Amortization of deferred acquisition costs and intangibles
  
186
   
216
 
Deferred income taxes
  
134
   
83
 
Derivative instruments and limited partnerships
  
22
   
(195
)
Stock-based compensation expense
  
12
   
16
 
Change in certain assets and liabilities:
  
   
 
Accrued investment income and other assets
  
(290
)  
(89
)
Insurance reserves
  
609
   
691
 
Current tax liabilities
  
27
   
(37
)
Other liabilities, policy and contract claims and other policy-related balances
  
129
   
(122
)
         
Net cash from operating activities
  
795
   
561
 
         
Cash flows used by investing activities:
  
   
 
Proceeds from maturities and repayments of investments:
  
   
 
Fixed maturity securities
  
1,929
   
1,979
 
Commercial mortgage loans
  
285
   
350
 
Restricted commercial mortgage loans related to a securitization entity
  
6
   
16
 
Proceeds from sales of investments:
  
   
 
Fixed maturity and equity securities
  
2,859
   
1,920
 
Purchases and originations of investments:
  
   
 
Fixed maturity and equity securities
  
(4,681
)  
(4,082
)
Commercial mortgage loans
  
(561
)  
(489
)
Other invested assets, net
  
(227
)  
93
 
Policy loans, net
  
39
   
15
 
         
Net cash used by investing activities
  
(351
)  
(198
)
         
Cash flows used by financing activities:
  
   
 
Deposits to universal life and investment contracts
  
444
   
503
 
Withdrawals from universal life and investment contracts
  
(1,096
)  
(1,177
)
Proceeds from issuance of long-term debt
  
77
   
441
 
Repayment and repurchase of long-term debt
  
(78
)  
(597
)
Repayment of borrowings related to a securitization entity
  
—  
   
(12
)
Repurchase of subsidiary shares
  
(44
)  
(49
)
Dividends paid to noncontrolling interests
  
(53
)  
(50
)
Other, net
  
55
   
(2
)
         
Net cash used by financing activities
  
(695
)  
(943
)
         
Effect of exchange rate changes on cash, cash equivalents and restricted cash
  
12
   
(52
)
         
Net change in cash, cash equivalents and restricted cash
  
(239
)  
(632
)
Cash, cash equivalents and restricted cash at beginning of period
  
2,177
   
2,875
 
         
Cash, cash equivalents and restricted cash at end of period
 $
1,938
  $
2,243
 
         
See Notes to Condensed Consolidated Financial Statements

8
Table of Contents
GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

   Three months ended 
   March 31, 
   2019  2018 

Cash flows from operating activities:

   

Net income

  $230 $165

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

   

Amortization of fixed maturity securities discounts and premiums

   (16)   (25) 

Net investment (gains) losses

   (74)   31

Charges assessed to policyholders

   (165)   (178) 

Acquisition costs deferred

   (17)   (18) 

Amortization of deferred acquisition costs and intangibles

   91  104

Deferred income taxes

   75  26

Derivative instruments and limited partnerships

   (30)   (152) 

Stock-based compensation expense

   7  7

Change in certain assets and liabilities:

   

Accrued investment income and other assets

   (258)   (45) 

Insurance reserves

   301  377

Current tax liabilities

   8  (39) 

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

   (18)   (144) 
  

 

 

  

 

 

 

Net cash from operating activities

   134  109
  

 

 

  

 

 

 

Cash flows from (used by) investing activities:

   

Proceeds from maturities and repayments of investments:

   

Fixed maturity securities

   902  934

Commercial mortgage loans

   127  205

Restricted commercial mortgage loans related to a securitization entity

   3  8

Proceeds from sales of investments:

   

Fixed maturity and equity securities

   1,714  792

Purchases and originations of investments:

   

Fixed maturity and equity securities

   (2,128)   (2,013) 

Commercial mortgage loans

   (370)   (199) 

Other invested assets, net

   17  104

Policy loans, net

   12  2
  

 

 

  

 

 

 

Net cash from (used by) investing activities

   277  (167) 
  

 

 

  

 

 

 

Cash flows from (used by) financing activities:

   

Deposits to universal life and investment contracts

   198  255

Withdrawals from universal life and investment contracts

   (581)   (591) 

Proceeds from issuance of long-term debt

   —     441

Repayment of borrowings related to a securitization entity

   —     (8) 

Repurchase of subsidiary shares

   (12)   (36) 

Dividends paid to noncontrolling interests

   (28)   (36) 

Other, net

   48  22
  

 

 

  

 

 

 

Net cash from (used by) financing activities

   (375)   47
  

 

 

  

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

   8  (21) 
  

 

 

  

 

 

 

Net change in cash, cash equivalents and restricted cash

   44  (32) 

Cash, cash equivalents and restricted cash at beginning of period

   2,177  2,875
  

 

 

  

 

 

 

Cash, cash equivalents and restricted cash at end of period

  $2,221 $2,843
  

 

 

  

 

 

 

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. (“Parent”), a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect,a direct, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect,a direct, wholly-owned subsidiary of Asia Pacific Insurance. 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 Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement. The closing of the transaction remains subject to other closing conditions and approvals.

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,
“Genworth Financial,”
“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.

•

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 and funding agreements backing notes.

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.
9
Table of Contents
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 of
non-strategic
products which are no longer actively sold but we continue to service our existing blocks of business. Our
non-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 and funding agreements backing notes.
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.

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 2018 Annual Report on Form
10-K.
Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On January 1, 2019, we adopted new accounting guidance related to benchmark interest rates used in derivative hedge accounting. The guidance adds an additional permissible U.S. benchmark interest rate, the Secured Overnight Financing Rate, for hedge accounting purposes. We adopted this new accounting guidance using the prospective method, which did not have any impact on our condensed consolidated financial statements and disclosures.

On January 1, 2019, we adopted new accounting guidance related to accounting for nonemployee share-based payments. The guidance aligns the measurement and classification of share-based payments to nonemployees issued in exchange for goods or services with the guidance for share-based payments to employees, with certain exceptions. We adopted this new accounting guidance using the modified retrospective method. This guidance is consistent with our previous accounting practices and, accordingly, had no impact on our condensed consolidated financial statements at adoption.

On January 1, 2019, we adopted new accounting guidance related to shortening the amortization period of certain callable debt securities held 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. We adopted this new accounting guidance using the modified retrospective method, which had nodid not have a significant impact on our condensed consolidated financial statements at adoption.

10
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 1, 2019, we adopted new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a
right-of-use
asset and a corresponding lease liability on the balance sheet. We adopted this new accounting guidance using the effective date transition method, which

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

permits entities to apply the new lease standard using a modified retrospective transition approach at the date of adoption. As such, historical periods will continue to be measured and presented under the previous guidance while current and future periods will be subject to this new accounting guidance. The package of practical expedients was also elected upon adoption. Upon adoption we recorded a $60 million

right-of-use
asset related to operating leases and a $63 million lease liability. In addition, we
de-recognized
accrued rent expense of $3 million recorded under the previous accounting guidance. The
right-of-use
asset and the lease liability are included in other assets and other liabilities, respectively, but dodid not have a material impact on our condensed consolidated balance sheet as of March 31,June 30, 2019. The initial measurement of our
right-of-use
asset had no significant initial direct costs, prepaid lease payments or lease incentives; therefore, a cumulative-effect adjustment was not recorded to the opening retained earnings balance as a result of the change in accounting principle.

Our leased assets are predominantly classified as operating leases and consist of office space in 1415 locations primarily in the United States, Canada and Australia. Lease payments included in the calculation of our lease liability include fixed amounts contained within each rental agreement and variable lease payments that are based upon an index or rate. We have elected to combine lease and
non-lease
components, as permitted under this new accounting guidance, and as a result,
non-lease
components are included in the calculation of our lease liability as opposed to being separated and accounted for as consideration under the new revenue recognition standard. Our remaining lease terms rangeranged from less than 1 year to 1413 years and havehad a weighted-average remaining lease term of 7.67.3 years as of March 31,June 30, 2019. The implicit rate of our lease agreements was not readily determinable; therefore, we utilized our incremental borrowing rate to discount future lease payments. The weighted-average discount rate was 6.24%6.23% as of March 31,June 30, 2019.

Our aggregate annual rental expense for all leases under the previous guidance was approximately $11 million. Annual rental expense and future minimum lease payments are not expected to be materially different under this new accounting guidance.

Accounting Pronouncements Not Yet Adopted

In August 2018, the Financial Accounting Standards Board (“the FASB”) issued new accounting guidance that significantly changes the recognition and measurement of long-duration insurance contracts and expands disclosure requirements, which impacts our life insurance deferred acquisition costs (“DAC”) and liabilities. In accordance with the guidance, the more significant changes include:

assumptions will no longer be
locked-in
at contract inception and all cash flow assumptions used to estimate the liability for future policy benefits will be reviewed at least annually in the same period each year or more frequently if actual experience indicates a change is required;

changes in cash flow assumptions (except the discount rate) will be recorded in net income (loss) using a retrospective approach with a cumulative
catch-up
adjustment by recalculating the net premium ratio (which will be capped at 100%) using actual historical and updated future cash flow assumptions;

the discount rate used to determine the liability for future policy benefits will be a current upper-medium grade (low credit risk) fixed-income instrument yield, which is generally interpreted to mean a
single-A
rated bond rate for the same duration, and is required to be reviewed quarterly, with changes in the discount rate recorded in other comprehensive income (loss);

11
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the provision for adverse deviation and the premium deficiency test will be eliminated;

market risk benefits associated with deposit-type contracts will be measured at fair value with changes recorded in net income (loss);

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the amortization method for DAC will generally be on a straight-line basis over the expected contract term; and

disclosures will be greatly expanded to include significant assumptions and product liability rollforwards.

The guidance is currently effective for us on January 1, 2021 using the modified retrospective method, with early adoption permitted.
The FASB plans to propose delaying the effective date to January 1, 2022.
 We are in process of evaluating the new guidance and the impact it will have on our condensed consolidated financial statements.

In August 2018, the FASB issued new accounting guidance related to disclosure requirements for defined benefit plans as part of its disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for defined benefit pension and other postretirement benefit plans. The guidance is currently effective for us on January 1, 2020 using the retrospective method, with early adoption permitted. We do not expect any significant impact from this guidance on our condensed consolidated financial statements and disclosures.

In August 2018, the FASB issued new accounting guidance related to fair value disclosure requirements as part of its disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for fair value measurements. The guidance includes new disclosure requirements related to the change in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance is currently effective for us on January 1, 2020 using the prospective method for certain disclosures and the retrospective method for all other disclosures. Early adoption of either the entire standard or only the provisions that eliminate or modify the requirements is permitted. WeWhile we are still evaluating the full impact, at this time we do not expect a significant impact from this guidance on our condensed consolidated financial statements and we are in process of evaluating the impact the guidance may have onto our condensed consolidated financial statements and disclosures.

In June 2016, the FASB issued new accounting guidance related to accounting 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.recoverables. The new guidance retains most of the existing impairment guidance foravailable-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 reassessing changes in the credit losses each reporting period. The FASB also issued an amendment to the guidance allowing entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible instruments, which we are in the process of evaluating for certain portfolios. The new guidance is currently effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019. Upon adoption, the modified retrospective method will be used and a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption will be recorded.recorded to retained earnings. We have performed a gap analysis, developed a detailed implementation plan, identified model inputs and are in process of establishing policies, systems and controls that will be necessary to implement this new accounting guidance. While we are still in process of evaluating the impact the guidance may have on our condensed consolidated financial statements.

statements, the extent of the impact may vary and will depend on, among other things,

12
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

economic conditions and the composition and credit quality of our investments and reinsurance recoverables as of the date of adoption.
(3) Earnings Per Share

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

   Three months ended 
   March 31, 

(Amounts in millions, except per share amounts)

  2019   2018 

Weighted-average shares used in basic earnings per share calculations

   501.2   499.6

Potentially dilutive securities:

    

Stock options, restricted stock units and stock appreciation rights

   7.4   3.1
  

 

 

   

 

 

 

Weighted-average shares used in diluted earnings per share calculations

   508.6   502.7
  

 

 

   

 

 

 

Net income:

    

Net income

  $230  $165

Less: net income attributable to noncontrolling interests

   56   53
  

 

 

   

 

 

 

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

  $174  $112
  

 

 

   

 

 

 

Basic earnings per share:

    

Net income

  $0.46  $0.33

Less: net income attributable to noncontrolling interests

   0.11   0.11
  

 

 

   

 

 

 

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

  $0.35  $0.22
  

 

 

   

 

 

 

Diluted earnings per share:

    

Net income

  $0.45  $0.33

Less: net income attributable to noncontrolling interests

   0.11   0.10
  

 

 

   

 

 

 

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

  $0.34  $0.22
  

 

 

   

 

 

 

                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
(Amounts in millions, except per share amounts)
 
    2019    
  
    2018    
  
    2019    
  
    2018    
 
Weighted-average shares used in basic earnings per share calculations
  
503.4
   
500.6
   
502.3
   
500.1
 
Potentially dilutive securities:
  
   
   
   
 
Stock options, restricted stock units and stock appreciation rights
  
5.3
   
2.0
   
6.4
   
2.5
 
                 
Weighted-average shares used in diluted earnings per share calculations
  
508.7
   
502.6
   
508.7
   
502.6
 
                 
Net income:
  
   
   
   
 
Net income
 $
218
  $
249
  $
448
  $
414
 
Less: net income attributable to noncontrolling interests
  
50
   
59
   
106
   
112
 
                 
Net income available to Genworth Financial, Inc.’s common stockholders
 $
168
  $
190
  $
342
  $
302
 
                 
Basic earnings per share:
  
   
   
   
 
Net income
 $
0.44
  $
0.50
  $
0.89
  $
0.83
 
Less: net income attributable to noncontrolling interests
  
0.10
   
0.12
   
0.21
   
0.22
 
                 
Net income available to Genworth Financial, Inc.’s common stockholders
(1)
 $
0.33
  $
0.38
  $
0.68
  $
0.60
 
                 
Diluted earnings per share:
  
   
   
   
 
Net income
 $
0.43
  $
0.50
  $
0.88
  $
0.82
 
Less: net income attributable to noncontrolling interests
  
0.10
   
0.12
   
0.21
   
0.22
 
                 
Net income available to Genworth Financial, Inc.’s common stockholders
 $
0.33
  $
0.38
  $
0.67
  $
0.60
 
                 
(1)

May not total due to whole number calculation.

13
Table of Contents
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 
   March 31, 

(Amounts in millions)

  2019   2018 

Fixed maturity securities—taxable

  $643  $635

Fixed maturitysecurities—non-taxable

   2   3

Equity securities

   9   10

Commercial mortgage loans

   81   82

Restricted commercial mortgage loans related to a securitization entity

   1   2

Policy loans

   46   43

Other invested assets

   59   39

Cash, cash equivalents, restricted cash and short-term investments

   12   12
  

 

 

   

 

 

 

Gross investment income before expenses and fees

   853   826

Expenses and fees

   (24)    (22) 
  

 

 

   

 

 

 

Net investment income

  $829  $804
  

 

 

   

 

 

 

                 
 
Three months ended
June 30,
  
Six months ended
June 30,
 
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
 
Fixed maturity securities—taxable
 
$
665
  
$
651
  
$
1,308
  
$
1,286
 
Fixed maturity
securities—non-taxable
  
2
   
3
   
4
   
6
 
Equity securities
  
10
   
10
   
19
   
20
 
Commercial mortgage loans
  
84
   
77
   
165
   
159
 
Restricted commercial mortgage loans related to a securitization entity
  
1
   
2
   
2
   
4
 
Policy loans
  
45
   
41
   
91
   
84
 
Other invested assets
  
59
   
53
   
118
   
92
 
Cash, cash equivalents, restricted cash and short-term investments
  
11
   
14
   
23
   
26
 
                 
Gross investment income before expenses and fees
  
877
   
851
   
1,730
   
1,677
 
Expenses and fees
  
(25
)  
(23
)  
(49
)  
(45
)
                 
Net investment income
 $
852
  $
  828
  $
1,681
  $
  1,632
 
                 
(b) Net Investment Gains (Losses)

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

   Three months ended 
   March 31, 

(Amounts in millions)

  2019   2018 

Available-for-sale securities:

    

Realized gains

  $81  $7

Realized losses

   (22)    (16) 
  

 

 

   

 

 

 

Net realized gains (losses) onavailable-for-sale securities

   59   (9) 
  

 

 

   

 

 

 

Impairments:

    

Total other-than-temporary impairments

   —      —   

Portion of other-than-temporary impairments included in other comprehensive income

   —      —   
  

 

 

   

 

 

 

Net realized gains (losses) on equity securities sold

   3   2

Net unrealized gains (losses) on equity securities still held

   8   (18) 

Limited partnerships

   15   7

Commercial mortgage loans

   (1)    —   

Derivative instruments (1)

   (10)    (13) 
  

 

 

   

 

 

 

Net investment gains (losses)

  $74  $(31) 
  

 

 

   

 

 

 

                 
 
Three months ended
June 30,
  
Six months ended
June 30,
 
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
 
Available-for-sale 
fixed maturity securities:
  
   
   
   
 
Realized gains
 $
5
  $
  
13
  $
86
  $
  
20
 
Realized losses
  
(6
)  
(21
)  
(28
)  
(37
)
                 
Net realized gains (losses) on
available-for-sale 
fixed maturity securities
  
(1
)  
(8
)  
58
   
(17
)
                 
Impairments:
  
   
   
   
 
Total other-than-temporary impairments
  
—  
   
—  
   
—
  
   
—  
 
Portion of other-than-temporary impairments included inother comprehensive income (loss)
  
—  
   
—  
   
—
  
   
—  
 
                 
Net other-than-temporary impairments
  
—
  
   
—  
   
—
  
   
—  
 
                 
Net realized gains (losses) on equity securities sold
  
—
  
   
8
   
3
   
10
 
Net unrealized gains (losses) on equity securities still held
  
(12
)  
3
   
(4
)  
(15
)
Limited partnerships
  
(11
)  
(2
)  
4
   
5
 
Commercial mortgage loans  
1
   
—  
   
—  
   
—  
 
Derivative instruments 
(1)
  
(22
)  
(15
)  
(32
)  
(28
)
                 
Net investment gains (losses)
 $
(45
) $
(14
) $
29
  $
(45
)
                 
(1)

See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).

14
Table of Contents
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 March 31,June 30, 2019 and 2018 was $763$423 million and $619$640 million, respectively, which was approximately 98% and 97%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2019 and 2018 was $1,185 million and $1,259 million, respectively, which was approximately 97% and 98%, respectively, of book value.

value for both periods.

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

(Amounts in millions)

  2019  2018 

Beginning balance

  $24 $32

Reductions:

   

Securities sold, paid down or disposed

   (1)   (4) 
  

 

 

  

 

 

 

Ending balance

  $23 $28
  

 

 

  

 

 

 

periods indicated:

                 
 
As of or for the
three months ended
June 30,
  
As of or for the
six months ended
June 30,
 
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
 
Beginning balance
 $
23
  $
28
  $
  
24
  $
 
32
 
Reductions:
  
   
   
   
 
Securities sold, paid down or disposed
  
—  
   
(3
)  
(1
)  
(7
)
                 
Ending balance
 $
23
  $
  
25
  $
23
  $
  25
 
                 
(c) Unrealized Investment Gains and Losses

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

(Amounts in millions)

  March 31, 2019  December 31, 2018 

Net unrealized gains (losses) on fixed maturity securities(1)

  $3,714 $1,775

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

   (2,401)   (952) 

Income taxes, net

   (300)   (190) 
  

 

 

  

 

 

 

Net unrealized investment gains (losses)

   1,013  633

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

   70  38
  

 

 

  

 

 

 

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

  $943 $595
  

 

 

  

 

 

 

         
(Amounts in millions)
 
June 30, 
2019
  
December 31, 
2018
 
Net unrealized gains (losses) on fixed maturity securities 
(1)
 $
5,673
  $
1,775
 
Adjustments to deferred acquisition costs, present value of future profits, salesinducements and benefit reserves
  
 (3,879
)  
(952
)
Income taxes, net
  
(405
)  
(190
)
         
Net unrealized investment gains (losses)
  
1,389
   
633
 
Less: net unrealized investment gains (losses) attributable to noncontrolling interests
  
84
   
38
 
         
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.
 $
1,305
  $
595
 
         
(1)

Excludes foreign exchange.

15
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The change in net unrealized gains (losses) on
available-for-sale
investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the three months ended March 31:

(Amounts in millions)

  2019   2018 

Beginning balance

  $595  $1,085

Cumulative effect of changes in accounting:

    

Stranded tax effects

   —      189

Recognition and measurement of financial assets and liabilities, net of taxes of $— and $18

   —      (25) 
  

 

 

   

 

 

 

Total cumulative effect of changes in accounting

   —      164
  

 

 

   

 

 

 

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

   1,999   (1,681) 

Adjustment to deferred acquisition costs

   (989)    442

Adjustment to present value of future profits

   (53)    36

Adjustment to sales inducements

   (19)    20

Adjustment to benefit reserves

   (388)    740

Provision for income taxes

   (123)    95
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

   427   (348) 

Reclassification adjustments to net investment (gains) losses, net of taxes of $13 and $(1)

   (47)    7
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

   380   (341) 

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

   32   (9) 
  

 

 

   

 

 

 

Ending balance

  $943  $917
  

 

 

   

 

 

 
periods indicated:

         
 
As of or for the
three months ended
June 30,
 
(Amounts in millions)
 
2019
  
2018
 
Beginning balance
 $
  943
  $
917
 
Unrealized gains (losses) arising during the period:
  
   
 
Unrealized gains (losses) on fixed maturity securities
  
1,957
   
(905
)
Adjustment to deferred acquisition costs
  
(52
)  
467
 
Adjustment to present value of future profits
  
(2
)  
20
 
Adjustment to sales inducements
  
(12
)  
9
 
Adjustment to benefit reserves
  
(1,412
)  
162
 
Provision for income taxes
  
(104
)  
54
 
         
Change in unrealized gains (losses) on investment securities
  
375
   
(193
)
Reclassification adjustments to net investment (gains) losses, net of taxes of $(1) and $(2)
  
1
   
6
 
         
Change in net unrealized investment gains (losses)
  
376
   
(187
)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests
  
14
   
(6
)
         
Ending balance
 $
1,305
  $
736
 
         
    
 
As of or for the
six months ended
June 30,
 
(Amounts in millions)
 
2019
  
2018
 
Beginning balance
 $
  595
  $
  
1,085
 
Cumulative effect of changes in accounting:
  
   
 
Stranded tax effects
  
—  
   
189
 
Recognition and measurement of financial assets and liabilities, net of taxes of $— and $18
  
—  
   
(25
)
         
Total cumulative effect of changes in accounting
  
—  
   
164
 
         
Unrealized gains (losses) arising during the period:
  
   
 
Unrealized gains (losses) on fixed maturity securities
  
3,956
   
(2,586
)
Adjustment to deferred acquisition costs
  
(1,041
)  
909
 
Adjustment to present value of future profits
  
(55
)  
56
 
Adjustment to sales inducements
  
(31
)  
29
 
Adjustment to benefit reserves
  
(1,800
)  
902
 
Provision for income taxes
  
(227
)  
149
 
         
Change in unrealized gains (losses) on investment securities
  
802
   
(541
)
Reclassification adjustments to net investment (gains) losses, net of taxes of $12 and $(3)
  
(46
)  
13
 
         
Change in net unrealized investment gains (losses)
  
756
   
(528
)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests
  
46
   
(15
)
         
Ending balance
 $
1,305
  $
736
 
         

16
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Amounts reclassified out of accumulated other comprehensive income (loss) to net investment gains (losses) include realized gains (losses) on sales of securities, which are determined on a specific identification basis.
(d) Fixed Maturity Securities

As of March 31,June 30, 2019, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as
available-for-sale
were as follows:

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

(Amounts in millions)

 cost  impaired  impaired  impaired  impaired  value 

Fixed maturity securities:

      

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

 $4,116 $619 $—    $(4)  $—    $4,731

State and political subdivisions

  2,329  223  —     (6)   —     2,546

Non-U.S. government

  2,403  121  —     (6)   —     2,518

U.S. corporate:

      

Utilities

  4,296  426  —     (37)   —     4,685

Energy

  2,447  186  —     (15)   —     2,618

Finance and insurance

  6,883  405  —     (37)   —     7,251

Consumer—non-cyclical

  4,905  407  —     (55)   —     5,257

Technology and communications

  2,832  161  —     (19)   —     2,974

Industrial

  1,194  67  —     (12)   —     1,249

Capital goods

  2,283  225  —     (19)   —     2,489

Consumer—cyclical

  1,579  83  —     (16)   —     1,646

Transportation

  1,271  107  —     (16)   —     1,362

Other

  379  33  —     (1)   —     411
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  28,069  2,100  —     (227)   —     29,942
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

      

Utilities

  1,100  36  —     (9)   —     1,127

Energy

  1,327  124  —     (4)   —     1,447

Finance and insurance

  2,434  129  —     (9)   —     2,554

Consumer—non-cyclical

  699  19  —     (9)   —     709

Technology and communications

  1,151  52  —     (6)   —     1,197

Industrial

  920  56  —     (3)   —     973

Capital goods

  644  21  —     (3)   —     662

Consumer—cyclical

  537  8  —     (4)   —     541

Transportation

  756  65  —     (6)   —     815

Other

  2,127  139  —     (6)   —     2,260
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate

  11,695  649  —     (59)   —     12,285
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  2,762  181  13  (6)   —     2,950

Commercial mortgage-backed

  2,946  64  —     (48)   —     2,962

Other asset-backed

  3,422  18  1  (15)   —     3,426
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalavailable-for-sale fixed maturity securities

 $57,742 $3,975 $14 $(371)  $—    $61,360
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
   
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
 $
4,151
  $
837
  $
—  
  $
(1
) $
—  
  $
4,987
 
State and political subdivisions
  
2,319
   
317
   
—  
   
—  
   
—  
   
2,636
 
Non-U.S.
government
  
2,496
   
155
   
—  
   
(2
)  
—  
   
2,649
 
U.S. corporate:
  
   
   
   
   
   
 
Utilities
  
4,327
   
565
   
—  
   
(13
)  
—  
   
4,879
 
Energy
  
2,468
   
255
   
—  
   
(10
)  
—  
   
2,713
 
Finance and insurance
  
6,974
   
633
   
—  
   
(10
)  
—  
   
7,597
 
Consumer—non-cyclical
  
4,954
   
616
   
—  
   
(18
)  
—  
   
5,552
 
Technology and communications
  
2,893
   
269
   
—  
   
(6
)  
—  
   
3,156
 
Industrial
  
1,242
   
98
   
—  
   
(4
)  
—  
   
1,336
 
Capital goods
  
2,323
   
303
   
—  
   
(6
)  
—  
   
2,620
 
Consumer—cyclical
  
1,619
   
127
   
—  
   
(5
)  
—  
   
1,741
 
Transportation
  
1,263
   
152
   
—  
   
(4
)  
—  
   
1,411
 
Other
  
356
   
40
   
—  
   
—  
   
—  
   
396
 
                         
Total U.S. corporate
  
28,419
   
3,058
   
—  
   
(76
)  
—  
   
31,401
 
                         
Non-U.S.
corporate:
  
   
   
   
   
   
 
Utilities
  
1,114
   
54
   
—  
   
(3
)  
—  
   
1,165
 
Energy
  
1,349
   
168
   
—  
   
(1
)  
—  
   
1,516
 
Finance and insurance
  
2,438
   
191
   
—  
   
(1
)  
—  
   
2,628
 
Consumer—non-cyclical
  
674
   
40
   
—  
   
(4
)  
—  
   
710
 
Technology and communications
  
1,179
   
94
   
—  
   
—  
   
—  
   
1,273
 
Industrial
  
936
   
81
   
—  
   
—  
   
—  
   
1,017
 
Capital goods
  
663
   
33
   
—  
   
(1
)  
—  
   
695
 
Consumer—cyclical
  
542
   
16
   
—  
   
(1
)  
—  
   
557
 
Transportation
  
761
   
82
   
—  
   
(2
)  
—  
   
841
 
Other
  
2,061
   
186
   
—  
   
(2
)  
—  
   
2,245
 
                         
Total
non-U.S.
corporate
  
11,717
   
945
   
—  
   
(15
)  
—  
   
12,647
 
                         
Residential mortgage-backed
  
2,511
   
215
   
14
   
(2
)  
—  
   
2,738
 
Commercial mortgage-backed
  
2,882
   
121
   
—  
   
(14
)  
—  
   
2,989
 
Other asset-backed
  
3,699
   
38
   
—  
   
(10
)  
—  
   
3,727
 
                         
Total
available-for-sale
fixed
maturity securities
 $
58,194
  $
5,686
  $
14
  $
(120
) $
—  
  $
63,774
 
                         

17
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2018, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as
available-for-sale
were as follows:

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

(Amounts in millions)

 cost  impaired  impaired  impaired  impaired  value 

Fixed maturity securities:

      

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

 $4,175 $473 $—    $(17)  $—    $4,631

State and political subdivisions

  2,406  168  —     (22)   —     2,552

Non-U.S. government

  2,345  72  —     (24)   —     2,393

U.S. corporate:

      

Utilities

  4,439  331  —     (95)   —     4,675

Energy

  2,382  101  —     (64)   —     2,419

Finance and insurance

  6,705  249  —     (132)   —     6,822

Consumer—non-cyclical

  4,891  294  —     (137)   —     5,048

Technology and communications

  2,823  110  —     (78)   —     2,855

Industrial

  1,230  41  —     (33)   —     1,238

Capital goods

  2,277  165  —     (51)   —     2,391

Consumer—cyclical

  1,592  53  —     (48)   —     1,597

Transportation

  1,283  78  —     (41)   —     1,320

Other

  376  24  —     (3)   —     397
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  27,998  1,446  —     (682)   —     28,762
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

      

Utilities

  1,056  17  —     (32)   —     1,041

Energy

  1,320  72  —     (23)   —     1,369

Finance and insurance

  2,391  72  —     (40)   —     2,423

Consumer—non-cyclical

  756  8  —     (25)   —     739

Technology and communications

  1,168  23  —     (26)   —     1,165

Industrial

  926  36  —     (17)   —     945

Capital goods

  615  10  —     (10)   —     615

Consumer—cyclical

  532  1  —     (13)   —     520

Transportation

  689  46  —     (15)   —     720

Other

  2,218  105  —     (23)   —     2,300
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate

  11,671  390  —     (224)   —     11,837
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  2,888  160  13  (17)   —     3,044

Commercial mortgage-backed

  3,054  43  —     (81)   —     3,016

Other asset-backed

  3,444  10  1  (29)   —     3,426
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalavailable-for-sale fixed maturity securities

 $57,981 $2,762 $14 $(1,096)  $—    $59,661
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
   
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
 $
4,175
  $
473
  $
—  
  $
(17
) $
—  
  $
4,631
 
State and political subdivisions
  
2,406
   
168
   
—  
   
(22
)  
—  
   
2,552
 
Non-U.S.
government
  
2,345
   
72
   
—  
   
(24
)  
—  
   
2,393
 
U.S. corporate:
  
   
   
   
   
   
 
Utilities
  
4,439
   
331
   
—  
   
(95
)  
—  
   
4,675
 
Energy
  
2,382
   
101
   
—  
   
(64
)  
—  
   
2,419
 
Finance and insurance
  
6,705
   
249
   
—  
   
(132
)  
—  
   
6,822
 
Consumer—non-cyclical
  
4,891
   
294
   
—  
   
(137
)  
—  
   
5,048
 
Technology and communications
  
2,823
   
110
   
—  
   
(78
)  
—  
   
2,855
 
Industrial
  
1,230
   
41
   
—  
   
(33
)  
—  
   
1,238
 
Capital goods
  
2,277
   
165
   
—  
   
(51
)  
—  
   
2,391
 
Consumer—cyclical
  
1,592
   
53
   
—  
   
(48
)  
—  
   
1,597
 
Transportation
  
1,283
   
78
   
—  
   
(41
)  
—  
   
1,320
 
Other
  
376
   
24
   
—  
   
(3
)  
—  
   
397
 
                         
Total U.S. corporate
  
27,998
   
1,446
   
—  
   
(682
)  
—  
   
28,762
 
                         
        
Non-U.S.
corporate:
  
   
   
   
   
   
 
Utilities
  
1,056
   
17
   
—  
   
(32
)  
—  
   
1,041
 
Energy
  
1,320
   
72
   
—  
   
(23
)  
—  
   
1,369
 
Finance and insurance
  
2,391
   
72
   
—  
   
(40
)  
—  
   
2,423
 
Consumer—non-cyclical
  
756
   
8
   
—  
   
(25
)  
—  
   
739
 
Technology and communications
  
1,168
   
23
   
—  
   
(26
)  
—  
   
1,165
 
Industrial
  
926
   
36
   
—  
   
(17
)  
—  
   
945
 
Capital goods
  
615
   
10
   
—  
   
(10
)  
—  
   
615
 
Consumer—cyclical
  
532
   
1
   
—  
   
(13
)  
—  
   
520
 
Transportation
  
689
   
46
   
—  
   
(15
)  
—  
   
720
 
Other
  
2,218
   
105
   
—  
   
(23
)  
—  
   
2,300
 
                         
Total
non-U.S.
corporate
  
11,671
   
390
   
—  
   
(224
)  
—  
   
11,837
 
                         
Residential mortgage-backed
  
2,888
   
160
   
13
   
(17
)  
—  
   
3,044
 
Commercial mortgage-backed
  
3,054
   
43
   
—  
   
(81
)  
—  
   
3,016
 
Other asset-backed
  
3,444
   
10
   
1
   
(29
)  
—  
   
3,426
 
                         
Total
available-for-sale
fixed maturity securities
 $
 57,981
  $
  
2,762
  $
14
  $
(1,096
) $
—  
  $
59,661
 
                         

18
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our fixed maturity securities, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of March 31,June 30, 2019:

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

(Dollar amounts in millions)

 value  losses  securities  value  losses  securities  value  losses  securities 

Description of Securities

         

Fixed maturity securities:

         

U.S. government, agencies and government-sponsoredenterprises

 $—    $—     —    $229 $ (4)   31 $229 $ (4)   31

State and political subdivisions

  11  —     3  259  (6)   60  270  (6)   63

Non-U.S. government

  62  —     11  331  (6)   36  393  (6)   47

U.S. corporate

  1,247  (37)   153  5,003  (190)   698  6,250  (227)   851

Non-U.S. corporate

  354  (6)   57  1,922  (53)   296  2,276  (59)   353

Residential mortgage-backed

  46  (1)   9  476  (5)   85  522  (6)   94

Commercial mortgage-backed

  168  (4)   22  933  (44)   143  1,101  (48)   165

Other asset-backed

  981  (10)   209  707  (5)   162  1,688  (15)   371
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total for fixed maturity securities in an unrealized loss position

 $2,869 $(58)   464 $9,860 $(313)   1,511 $12,729 $(371)   1,975
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% Below cost:

         

<20% Below cost

 $2,869 $(58)   464 $9,839 $(304)   1,505 $12,708 $(362)   1,969

20%-50% Below cost

  —     —     —     18  (6)   3  18  (6)   3

>50% Below cost

  —     —     —     3  (3)   3  3  (3)   3
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total for fixed maturity securities in an unrealized loss position

 $2,869 $(58)   464 $9,860 $(313)   1,511 $12,729 $(371)   1,975
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investment grade

 $2,639 $(51)   434 $9,439 $(292)   1,446 $12,078 $(343)   1,880

Below investment grade

  230  (7)   30  421  (21)   65  651  (28)   95
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total for fixed maturity securities in an unrealized loss position

 $2,869 $(58)   464 $9,860 $(313)   1,511 $12,729 $(371)   1,975
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                     
 
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
 
Description of Securities
  
   
   
   
   
   
   
   
   
 
Fixed maturity securities:
  
   
   
   
   
   
   
   
   
 
U.S. government, agenciesand
government-sponsored enterprises
 $
—  
  $
—  
   
—  
  $
51
  $
(1
)  
9
  $
51
  $
(1
)  
9
 
Non-U.S. government  
—
   
—  
   
—
   
198
   
(2
)  
14
   198   
(2
)  
14
 
U.S. corporate
  
372
   
(15
)  
33
   
1,907
   
(61
)  
256
   
2,279
   
(76
)  
289
 
Non-U.S.
corporate
  
34
   
(2
)  
5
   
526
   
(13
)  
82
   
560
   
(15
)  
87
 
Residential mortgage-backed
  
—
   
—  
   
—
   
166
   
(2
)  
39
   
166
   
(2
)  
39
 
Commercial mortgage-backed
  
—
   
—  
   
—
   
399
   
(14
)  
53
   
399
   
(14
)  
53
 
Other asset-backed
  
832
   
(5
)  
160
   
425
   
(5
)  
101
   
1,257
   
(10
)  
261
 
                                     
Total for fixed maturity securities inan unrealized loss position
 $
1,238
  $
(22
)  
198
  $
3,672
  $
(98
)  
554
  $
4,910
  $
(120
)  
752
 
                                     
% Below cost:
  
   
   
   
   
   
   
   
   
 
<20% Below cost
 $
1,238
  $
(22
)  
198
  $
3,647
  $
(88
)  
549
  $
4,885
  $
(110
)  
747
 
20%-50%
Below cost
  
—  
   
—  
   
—  
   
22
   
(7
)  
3
   
22
   
(7
)  
3
 
>50% Below cost
  
—  
   
—  
   
—  
   
3
   
(3
)  
2
   
3
   
(3
)  
2
 
Total for fixed maturity securities inan unrealized loss position
 $
1,238
  $
(22
)  
198
  $
3,672
  $
(98
)  
554
  $
4,910
  $
(120
)  
752
 
                                     
Investment grade
 $
1,096
  $
(11
)  
185
  $
3,463
  $
(83
)  
524
  $
4,559
  $
(94
)  
709
 
Below investment grade
  
142
   
(11
)  
13
   
209
   
(15
)  
30
   
351
   
(26
)  
43
 
                                     
Total for fixed maturity securities inan unrealized loss position
 $1,238  $
(22
)   
198
  $3,672  $
(98
)   554  $4,910  $
(120
)   752 
                                     

19
Table of Contents
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 March 31,June 30, 2019:

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

(Dollar amounts in millions)

 value  losses  securities  value  losses  securities  value  losses  securities 

Description of Securities

         

U.S. corporate:

         

Utilities

 $217 $(7)   22 $697 $(30)   103 $914 $(37)   125

Energy

  60  —     15  368  (15)   49  428  (15)   64

Finance and insurance

  203  (5)   27  1,398  (32)   198  1,601  (37)   225

Consumer—
non-cyclical

  313  (13)   27  813  (42)   104  1,126  (55)   131

Technology and communications

  95  (4)   17  446  (15)   66  541  (19)   83

Industrial

  98  (2)   10  193  (10)   27  291  (12)   37

Capital goods

  87  (2)   15  359  (17)   48  446  (19)   63

Consumer—cyclical

  59  —     12  397  (16)   53  456  (16)   65

Transportation

  99  (3)   7  316  (13)   49  415  (16)   56

Other

  16  (1)   1  16  —     1  32  (1)   2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal, U.S. corporatesecurities

  1,247  (37)   153  5,003  (190)   698  6,250  (227)   851
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

         

Utilities

  24  —     2  259  (9)   30  283  (9)   32

Energy

  29  —     4  187  (4)   26  216  (4)   30

Finance and insurance

  39  —     9  475  (9)   73  514  (9)   82

Consumer—
non-cyclical

  38  (1)   9  208  (8)   25  246  (9)   34

Technology and communications

  89  (2)   7  136  (4)   28  225  (6)   35

Industrial

  8  —     4  135  (3)   18  143  (3)   22

Capital goods

  23  —     4  116  (3)   16  139  (3)   20

Consumer—cyclical

  37  (1)   6  128  (3)   25  165  (4)   31

Transportation

  38  (1)   6  102  (5)   18  140  (6)   24

Other

  29  (1)   6  176  (5)   37  205  (6)   43
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal,non-U.S. corporatesecurities

  354  (6)   57  1,922  (53)   296  2,276  (59)   353
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total for corporate securities in an unrealized loss position

 $1,601 $(43)   210 $6,925 $(243)   994 $8,526 $(286)   1,204
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 
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
 
Description of Securities
  
   
   
   
   
   
   
   
   
 
U.S. corporate:
  
   
   
   
   
   
   
   
   
 
Utilities
 $
46
  $
(4
)  
4
  $
326
  $
(9
)  
50
  $
372
  $
(13
)  
54
 
Energy
  
60
   
(2
)  
11
   
143
   
(8
)  
17
   
203
   
(10
)  
28
 
Finance and insurance
  
—  
   
—  
   
—  
   
343
   
(10
)  
46
   
343
   
(10
)  
46
 
Consumer—non-cyclical
  
93
   
(7
)  
12
   
383
   
(11
)  
49
   
476
   
(18
)  
61
 
Technology andcommunications
  
173
   
(2
)  
6
   
198
   
(4
)  
22
   
371
   
(6
)  
28
 
Industrial
  
—  
   
—  
   
—  
   
94
   
(4
)  
14
   
94
   
(4
)  
14
 
Capital goods
  
—  
   
—  
   
—  
   
128
   
(6
)  
18
   
128
   
(6
)  
18
 
Consumer—cyclical
  
—  
   
—  
   
—  
   
175
   
(5
)  
24
   
175
   
(5
)  
24
 
Transportation
  
—  
   
—  
   
—  
   
117
   
(4
)  
16
   
117
   
(4
)  
16
 
                                     
Subtotal, U.S. corporate
securities
  
372
   
(15
)  
33
   
1,907
   
(61
)  
256
   
2,279
   
(76
)  
289
 
                                     
Non-U.S.
corporate:
  
   
   
   
   
   
   
   
   
 
Utilities
  
21
   
(1
)  
3
   
103
   
(2
)  
13
   
124
   
(3
)  
16
 
Energy
  
13
   
(1
)  
2
   
—  
   
—  
   
—  
   
13
   
(1
)  
2
 
Finance and insurance
  
—  
   
—  
   
—  
   
113
   
(1
)  
23
   
113
   
(1
)  
23
 
Consumer—non-cyclical
  
—  
   
—  
   
—  
   
72
   
(4
)  
10
   
72
   
(4
)  
10
 
Capital goods
  
—  
   
—  
   
—  
   
44
   
(1
)  
5
   
44
   
(1
)  
5
 
Consumer—cyclical
  
—  
   
—  
   
—  
   
64
   
(1
)  
10
   
64
   
(1
)  
10
 
Transportation
  
—  
   
—  
   
—  
   
51
   
(2
)  
8
   
51
   
(2
)  
8
 
Other
  
—  
   
—  
   
—  
   
79
   
(2
)  
13
   
79
   
(2
)  
13
 
                                     
Subtotal,
non-U.S.
corporate
securities
  
34
   
(2
)  
5
   
526
   
(13
)  
82
   
560
   
(15
)  
87
 
                                     
Total for corporate securities in anunrealized loss position
 $
406
  $
(17
)  
38
  $
2,433
  $
(74
)  
338
  $
2,839
  $
(91
)  
376
 
                                     
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.

20
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our fixed maturity securities, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of December 31, 2018:

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

(Dollar amounts in millions)

 value  losses  securities  value  losses  securities  value  losses  securities 

Description of Securities

         

Fixed maturity securities:

         

U.S. government, agencies and government-sponsoredenterprises

 $545 $(8)   17 $161 $(9)   26 $706 $(17)   43

State and political subdivisions

  371  (10)   63  233  (12)   57  604  (22)   120

Non-U.S. government

  261  (7)   51  508  (17)   35  769  (24)   86

U.S. corporate

  9,975  (472)   1,342  2,449  (210)   365  12,424  (682)   1,707

Non-U.S. corporate

  4,172  (150)   614  1,274  (74)   209  5,446  (224)   823

Residential mortgage-backed

  363  (6)   57  579  (11)   96  942  (17)   153

Commercial mortgage-backed

  758  (19)   115  870  (62)   130  1,628  (81)   245

Other asset-backed

  1,597  (23)   326  604  (6)   137  2,201  (29)   463
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total for fixed maturity securities inan unrealized loss position

 $18,042 $(695)   2,585 $6,678 $(401)   1,055 $24,720 $(1,096)   3,640
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% Below cost—fixed maturitysecurities:

         

<20% Below cost

 $18,008 $(685)   2,581 $6,624 $(383)   1,045 $24,632 $(1,068)   3,626

20%-50% Below cost

  34  (10)   4  54  (18)   10  88  (28)   14
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total for fixed maturity securities inan unrealized loss position

 $18,042 $(695)   2,585 $6,678 $(401)   1,055 $24,720 $(1,096)   3,640
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investment grade

 $16,726 $(615)   2,393 $6,508 $(379)   1,024 $23,234 $(994)   3,417

Below investment grade

  1,316  (80)   192  170  (22)   31  1,486  (102)   223
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total for fixed maturity securities inan unrealized loss position

 $18,042 $(695)   2,585 $6,678 $(401)   1,055 $24,720 $(1,096)   3,640
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 
Less than 12 months
  
12 months or more
  
Total
 
   
Gross
  
Number 
    
Gross
  
Number 
    
Gross
  
Number 
 
 
Fair
  
unrealized
  
of
  
Fair
  
unrealized
  
of
  
Fair
  
unrealized
  
of
 
(Dollar amounts in millions)
 
value
  
losses
  
securities
  
value
  
losses
  
securities
  
value
  
losses
  
securities
 
Description of Securities
  
   
   
   
   
   
   
   
   
 
Fixed maturity securities:
  
   
   
   
   
   
   
   
   
 
U.S. government, agenciesand government-sponsored
enterprises
 $
545
  $
(8
)  
17
  $
161
  $
(9
)
 		  
26
  $
706
  $
(17
)
 		  
43
 
State and political subdivisions
  
371
   
(10
)  
63
   
233
   
(12
)
 		  
57
   
604
   
(22
)
 		  
120
 
Non-U.S.
government
  
261
   
(7
)  
51
   
508
   
(17
)
 		  
35
   
769
   
(24
)
 		  
86
 
U.S. corporate
  
9,975
   
(472
)  
1,342
   
2,449
   
(210
)
 		  
365
   
12,424
   
(682
)
 		  
1,707
 
Non-U.S.
corporate
  
4,172
   
(150
)  
614
   
1,274
   
(74
)
 		  
209
   
5,446
   
(224
)
 		  
823
 
Residential mortgage-backed
  
363
   
(6
)  
57
   
579
   
(11
)
 		  
96
   
942
   
(17
)
 		  
153
 
Commercial mortgage-backed
  
758
   
(19
)  
115
   
870
   
(62
)
 		  
130
   
1,628
   
(81
)
 		  
245
 
Other asset-backed
  
1,597
   
(23
)  
326
   
604
   
(6
)
 		  
137
   
2,201
   
(29
)
 		  
463
 
                                     
Total for fixed maturity securities in
an unrealized loss position
 $
18,042
  $
(695
)  
2,585
  $
6,678
  $
(401
)  
1,055
  $
24,720
  $
(1,096
)  
3,640
 
                                     
% Below cost:
  
   
   
   
   
   
   
   
   
 
<20% Below cost
 $
18,008
  $
(685
)  
2,581
  $
6,624
  $
(383
)  
1,045
  $
24,632
  $
(1,068
)  
3,626
 
20%-50%
Below cost
  
34
   
(10
)  
4
   
54
   
(18
)
 		  
10
   
88
   
(28
)
 		  
14
 
                                     
Total for fixed maturity securities in
an unrealized loss position
 $
18,042
  $
(695
)  
2,585
  $
6,678
  $
(401
)  
1,055
  $
24,720
  $
(1,096
)  
3,640
 
                                     
Investment grade
 $
16,726
  $
(615
)  
2,393
  $
6,508
  $
(379
)  
1,024
  $
23,234
  $
(994
)
 		  
3,417
 
Below investment grade
  
1,316
   
(80
)  
192
   
170
   
(22
)
 		  
31
   
1,486
   
(102
)
 		  
223
 
                                     
Total for fixed maturity securities in
an unrealized loss position
 $
18,042
  $
(695
)  
2,585
  $
6,678
  $
(401
)  
1,055
  $
24,720
  $
(1,096
)  
3,640
 
                                     

21
Table of Contents
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, 2018:

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

(Dollar amounts in millions)

 value  losses  securities  value  losses  securities  value  losses  securities 

Description of Securities

         

U.S. corporate:

         

Utilities

 $1,246 $(61)   173 $343 $(34)   60 $1,589 $(95)   233

Energy

  944  (47)   135  152  (17)   23  1,096  (64)   158

Finance and insurance

  2,393  (92)   326  688  (40)   95  3,081  (132)   421

Consumer—non-cyclical

  1,826  (101)   203  389  (36)   55  2,215  (137)   258

Technology and communications

  1,135  (51)   152  263  (27)   34  1,398  (78)   186

Industrial

  506  (27)   63  74  (6)   13  580  (33)   76

Capital goods

  704  (31)   103  184  (20)   27  888  (51)   130

Consumer—cyclical

  738  (35)   123  162  (13)   26  900  (48)   149

Transportation

  435  (25)   60  179  (16)   31  614  (41)   91

Other

  48  (2)   4  15  (1)   1  63  (3)   5
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal, U.S. corporatesecurities

  9,975  (472)   1,342  2,449  (210)   365  12,424  (682)   1,707
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

         

Utilities

  404  (19)   58  173  (13)   24  577  (32)   82

Energy

  439  (15)   64  136  (8)   20  575  (23)   84

Finance and insurance

  899  (25)   151  294  (15)   52  1,193  (40)   203

Consumer—non-cyclical

  377  (16)   51  102  (9)   14  479  (25)   65

Technology and communications

  611  (24)   75  50  (2)   12  661  (26)   87

Industrial

  275  (11)   48  72  (6)   8  347  (17)   56

Capital goods

  226  (7)   27  69  (3)   13  295  (10)   40

Consumer—cyclical

  268  (11)   42  117  (2)   19  385  (13)   61

Transportation

  232  (7)   27  67  (8)   11  299  (15)   38

Other

  441  (15)   71  194  (8)   36  635  (23)   107
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal,non-U.S. corporatesecurities

  4,172  (150)   614  1,274  (74)   209  5,446  (224)   823
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total for corporate securities in an unrealized loss position

 $14,147 $(622)   1,956 $3,723 $(284)   574 $17,870 $(906)   2,530
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                     
 
Less than 12 months
  
12 months or more
  
Total
 
   
Gross
  
Number
    
Gross
  
Number
    
Gross
  
Number
 
 
Fair
  
unrealized
  
of
  
Fair
  
unrealized
  
of
  
Fair
  
unrealized
  
of
 
(Dollar amounts in millions)
 
value
  
losses
  
securities
  
value
  
losses
  
securities
  
value
  
losses
  
securities
 
Description of Securities
  
   
   
   
   
   
   
   
   
 
U.S. corporate:
  
   
   
   
   
   
   
   
   
 
Utilities
 $
1,246
  $
(61
)  
173
  $
343
  $
(34
)  
60
  $
1,589
  $
(95
)  
233
 
Energy
  
944
   
(47
)  
135
   
152
   
(17
)  
23
   
1,096
   
(64
)  
158
 
Finance and insurance
  
2,393
   
(92
)  
326
   
688
   
(40
)  
95
   
3,081
   
(132
)  
421
 
Consumer—non-cyclical
  
1,826
   
(101
)  
203
   
389
   
(36
)  
55
   
2,215
   
(137
)  
258
 
Technology andcommunications
  
1,135
   
(51
)  
152
   
263
   
(27
)  
34
   
1,398
   
(78
)  
186
 
Industrial
  
506
   
(27
)  
63
   
74
   
(6
)  
13
   
580
   
(33
)  
76
 
Capital goods
  
704
   
(31
)  
103
   
184
   
(20
)  
27
   
888
   
(51
)  
130
 
Consumer—cyclical
  
738
   
(35
)  
123
   
162
   
(13
)  
26
   
900
   
(48
)  
149
 
Transportation
  
435
   
(25
)  
60
   
179
   
(16
)  
31
   
614
   
(41
)  
91
 
Other
  
48
   
(2
)  
4
   
15
   
(1
)  
1
   
63
   
(3
)  
5
 
                                     
Subtotal, U.S. corporate
securities
  
9,975
   
(472
)  
1,342
   
2,449
   
(210
)  
365
   
12,424
   
(682
)  
1,707
 
                                     
Non-U.S.
corporate:
  
   
   
   
   
   
   
   
   
 
Utilities
  
404
   
(19
)  
58
   
173
   
(13
)  
24
   
577
   
(32
)  
82
 
Energy
  
439
   
(15
)  
64
   
136
   
(8
)  
20
   
575
   
(23
)  
84
 
Finance and insurance
  
899
   
(25
)  
151
   
294
   
(15
)  
52
   
1,193
   
(40
)  
203
 
Consumer—non-cyclical
  
377
   
(16
)  
51
   
102
   
(9
)  
14
   
479
   
(25
)  
65
 
Technology andcommunications
  
611
   
(24
)  
75
   
50
   
(2
)  
12
   
661
   
(26
)  
87
 
Industrial
  
275
   
(11
)  
48
   
72
   
(6
)  
8
   
347
   
(17
)  
56
 
Capital goods
  
226
   
(7
)  
27
   
69
   
(3
)  
13
   
295
   
(10
)  
40
 
Consumer—cyclical
  
268
   
(11
)  
42
   
117
   
(2
)  
19
   
385
   
(13
)  
61
 
Transportation
  
232
   
(7
)  
27
   
67
   
(8
)  
11
   
299
   
(15
)  
38
 
Other
  
441
   
(15
)  
71
   
194
   
(8
)  
36
   
635
   
(23
)  
107
 
                                     
Subtotal,
non-U.S.
corporate
securities
  
4,172
   
(150
)  
614
   
1,274
   
(74
)  
209
   
5,446
   
(224
)  
823
 
                                     
Total for corporate securities in anunrealized loss position
 $
14,147
  $
(622
)  
1,956
  $
3,723
  $
(284
)  
574
  $
17,870
  $
(906
)  
2,530
 
                                     

22
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The scheduled maturity distribution of fixed maturity securities as of March 31,June 30, 2019 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.

   Amortized     
   cost or   Fair 

(Amounts in millions)

  cost   value 

Due one year or less

  $2,005  $2,021

Due after one year through five years

   10,826   11,105

Due after five years through ten years

   12,265   12,770

Due after ten years

   23,516   26,126
  

 

 

   

 

 

 

Subtotal

   48,612   52,022

Residential mortgage-backed

   2,762   2,950

Commercial mortgage-backed

   2,946   2,962

Other asset-backed

   3,422   3,426
  

 

 

   

 

 

 

Total

  $57,742  $61,360
  

 

 

   

 

 

 

         
 
Amortized
   
 
cost or
  
Fair
 
(Amounts in millions)
 
cost
  
value
 
Due one year or less
 $
1,957
  $
1,973
 
Due after one year through five years
  
11,198
   
11,602
 
Due after five years through ten years
  
12,300
   
13,197
 
Due after ten years
  
23,647
   
27,548
 
         
Subtotal
  
49,102
   
54,320
 
Residential mortgage-backed
  
2,511
   
2,738
 
Commercial mortgage-backed
  
2,882
   
2,989
 
Other asset-backed
  
3,699
   
3,727
 
Total $
58,194
  $
 63,774
 
As of March 31,June 30, 2019, securities issued by finance and insurance,
consumer—non-cyclical,
 utilities and utilities technology and communications 
industry groups represented approximately 24%
23
%,
14
%, 14% and 14%
10
%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10%
10
% of our investment portfolio.

As of March 31,June 30, 2019, 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 loancredit losses.

23
Table of Contents
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:

   March 31, 2019  December 31, 2018 
   Carrying   % of  Carrying   % of 

(Amounts in millions)

  value   total  value   total 

Property type:

       

Retail

  $2,548   37%  $2,463   37% 

Industrial

   1,678   24  1,659   25

Office

   1,671   24  1,548   23

Apartments

   520   7  495   7

Mixed use

   254   4  254   4

Other

   272   4  281   4
  

 

 

   

 

 

  

 

 

   

 

 

 

Subtotal

   6,943   100%   6,700   100% 
    

 

 

    

 

 

 

Unamortized balance of loan origination fees and costs

   (4)     (4)   

Allowance for losses

   (10)     (9)   
  

 

 

    

 

 

   

Total

  $6,929   $6,687  
  

 

 

    

 

 

   

   March 31, 2019  December 31, 2018 
   Carrying   % of  Carrying   % of 

(Amounts in millions)

  value   total  value   total 

Geographic region:

       

South Atlantic

  $1,739   25%  $1,709   26% 

Pacific

   1,705   25  1,684   25

Middle Atlantic

   1,020   15  950   14

Mountain

   688   10  667   10

West North Central

   486   7  470   7

East North Central

   449   6  405   6

West South Central

   369   5  364   6

New England

   267   4  228   3

East South Central

   220   3  223   3
  

 

 

   

 

 

  

 

 

   

 

 

 

Subtotal

   6,943   100%   6,700   100% 
    

 

 

    

 

 

 

Unamortized balance of loan origination fees and costs

   (4)     (4)   

Allowance for losses

   (10)     (9)   
  

 

 

    

 

 

   

Total

  $6,929   $6,687  
  

 

 

    

 

 

   

                 
 
June 30, 2019
  
December 31, 2018
 
 
Carrying
  
% of
  
Carrying
  
% of
 
(Amounts in millions)
 
value
  
total
  
value
  
total
 
Property type:
  
   
   
   
 
Retail
 $
2,581
   
37
% $
2,463
   
37
%
Industrial
  
1,699
   
24
   
1,659
   
25
 
Office
  
1,656
   
24
   
1,548
   
23
 
Apartments
  
525
   
7
   
495
   
7
 
Mixed use
  
247
   
4
   
254
   
4
 
Other
  
270
   
4
   
281
   
4
 
                 
Subtotal
  
6,978
   
100
%  
6,700
   
100
%
                 
Unamortized balance of loan origination fees and costs
  
(4
)  
   
(4
)  
 
Allowance for credit losses
  
(11
)  
   
(9
)  
 
                 
Total
 $
6,963
   
  $
6,687
   
 
                 
       
 
June 30, 2019
  
December 31, 2018
 
 
Carrying
  
% of
  
Carrying
  
% of
 
(Amounts in millions)
 
value
  
total
  
value
  
total
 
Geographic region:
  
   
   
   
 
South Atlantic
 $
1,747
   
25
% $
1,709
   
26
%
Pacific
  
1,701
   
24
   
1,684
   
25
 
Middle Atlantic
  
1,000
   
14
   
950
   
14
 
Mountain
  
717
   
10
   
667
   
10
 
West North Central
  
490
   
7
   
470
   
7
 
East North Central
  
457
   
7
   
405
   
6
 
West South Central
  
387
   
6
   
364
   
6
 
New England
  
261
   
4
   
228
   
3
 
East South Central
  
218
   
3
   
223
   
3
 
                 
Subtotal
  
6,978
   
100
%  
6,700
   
100
%
                 
Unamortized balance of loan origination fees and costs
  
(4
)  
   
(4
)  
 
Allowance for credit losses
  
(11
)  
   
(9
)  
 
                 
Total
 $
6,963
   
  $
6,687
   
 
                 

24
Table of Contents
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:

   March 31, 2019 
         Greater than          
   31 - 60 days  61 - 90 days  90 days past  Total       

(Amounts in millions)

  past due  past due  due  past due  Current  Total 

Property type:

       

Retail

  $—   $—   $—   $—   $2,548 $2,548

Industrial

   —     —     —     —     1,678  1,678

Office

   —     —     3  3  1,668  1,671

Apartments

   —     —     —     —     520  520

Mixed use

   —     —     —     —     254  254

Other

   —     —     —     —     272  272
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recorded investment

  $—   $—   $3 $3 $6,940 $6,943
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of total commercial mortgage loans

   —  %   —  %   —  %   —  %   100%   100% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   December 31, 2018 
         Greater than          
   31 - 60 days  61 - 90 days  90 days past  Total       

(Amounts in millions)

  past due  past due  due  past due  Current  Total 

Property type:

       

Retail

  $3 $—    $—    $3 $2,460 $2,463

Industrial

   —     —     —     —     1,659  1,659

Office

   —     —     3  3  1,545  1,548

Apartments

   —     —     —     —     495  495

Mixed use

   —     —     —     —     254  254

Other

   —     —     —     —     281  281
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recorded investment

  $3 $—    $3 $6 $6,694 $6,700
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of total commercial mortgage loans

   —  %   —  %   —  %   —  %   100%   100% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
 
June 30, 2019
 
     
Greater than
       
 
31 - 60 days
  
61 - 90 days
  
90 days past
  
Total
     
(Amounts in millions)
 
past due
  
past due
  
due
  
past due
  
Current
  
Total
 
Property type:
  
   
   
   
   
   
 
Retail
 $
—  
  $
—  
  $
—  
  $
—  
  $
2,581
  $
2,581
 
Industrial
  
—  
   
—  
   
—  
   
—  
   
1,699
   
1,699
 
Office
  
—  
   
—  
   
—  
   
—  
   
1,656
   
1,656
 
Apartments
  
—  
   
—  
   
—  
   
—  
   
525
   
525
 
Mixed use
  
—  
   
—  
   
—  
   
—  
   
247
   
247
 
Other
  
—  
   
—  
   
—  
   
—  
   
270
   
270
 
                         
Total recorded investment
 $
—  
  $
—  
  $
—  
  $
—  
  $
6,978
  $
6,978
 
% of total commercial mortgage loans
  
—  
%  
—  
%  
—  
%  
—  
%  
100
%  
100
%
                         
    
 
December 31, 2018
 
     
Greater than
       
 
31 - 60 days
  
61 - 90 days
  
90 days past
  
Total
     
(Amounts in millions)
 
past due
  
past due
  
due
  
past due
  
Current
  
Total
 
Property type:
  
   
   
   
   
   
 
Retail
 $
3
  $
 —  
  $
 —  
  $
3
  $
2,460
  $
2,463
 
Industrial
  
—  
   
—  
   
—  
   
—  
   
1,659
   
1,659
 
Office
  
—  
   
—  
   
3
   
3
   
1,545
   
1,548
 
Apartments
  
—  
   
—  
   
—  
   
—  
   
495
   
495
 
Mixed use
  
—  
   
—  
   
—  
   
—  
   
254
   
254
 
Other
  
—  
   
—  
   
—  
   
—  
   
281
   
281
 
                         
Total recorded investment
 $
3
  $
  —  
  $
3
  $
6
  $
6,694
  $
6,700
 
                         
% of total commercial mortgage loans
  
—  
%  
—  
%  
—  
%  
—  
%  
100
%  
100
%
                         
As of March 31,June 30, 2019 and December 31, 2018, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on
non-accrual
status as of March 31,June 30, 2019 and December 31, 2018.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of March 31,June 30, 2019, andnone of our commercial mortgage loans were greater than 90 days past due. As of December 31, 2018, our commercial mortgage loans greater than 90 days past due included one impaired loan with a carrying value
of $3 million. This loan was modified and the modification was considered to be a troubled debt restructuring. As part of this troubled debt restructuring, we forgave default interest, penalties and fees, and modified the original contractual interest rate but we did not forgive the outstanding principal amount owed by the borrower. This loan’s collateral has an appraised value in excess of the carrying amount and the current carrying amount of this loan is expected to be recoverable.

During the threesix months ended March 31,June 30, 2019 and the year ended December 31, 2018, we also modified or extended one and two additional commercial mortgage loans, respectively, with a total carrying value of

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

$11 $11 million and $12 million, respectively. All of these modifications or extensions were based on current market interest rates, and did not result in any forgiveness of the outstanding principal amount owed by the borrower.

borrower and were not considered troubled debt restructurings.

25
Table of Contents
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 
   March 31, 

(Amounts in millions)

  2019   2018 

Allowance for credit losses:

    

Beginning balance

  $9   $9 

Charge-offs

   —      —   

Recoveries

   —      —   

Provision

   1   —   
  

 

 

   

 

 

 

Ending balance

  $10  $9
  

 

 

   

 

 

 

Ending allowance for individually impaired loans

  $—     $—   
  

 

 

   

 

 

 

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

  $10  $9
  

 

 

   

 

 

 

Recorded investment:

    

Ending balance

  $6,943  $6,348
  

 

 

   

 

 

 

Ending balance of individually impaired loans

  $3  $6
  

 

 

   

 

 

 

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

  $6,940  $6,342
  

 

 

   

 

 

 

                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
 
Allowance for credit losses:
  
   
   
   
 
Beginning balance
 $
10
  $
9
  $
9
  $
9
 
Charge-offs
  
—  
   
—  
   
—  
   
—  
 
Recoveries
  
—  
   
—  
   
—  
   
—  
 
Provision
  
1
   
—
  
   
2
   
—
  
 
                 
Ending balance
 $
11
  $
9
  $
11
  $
9
 
                 
Ending allowance for individually impaired loans
 $
—  
  $
—  
  $
—  
  $
—  
 
                 
Ending allowance for loans not individually impaired that were evaluated collectively for impairment
 $
11
  $
9
  $
11
  $
9
 
                 
Recorded investment:
  
   
   
   
 
Ending balance
 $
6,978
  $
6,492
  $
6,978
  $
6,492
 
                 
Ending balance of individually impaired loans
 $
—  
  $
6
  $
—  
  $
6
 
                 
Ending balance of loans not individually impaired that were evaluated collectively for impairment
 $
6,978
  $
6,486
  $  
6,978
  $  
6,486
 
                 
As of March 31,June 30, 2019 and
, we had no individually impaired loans. As of
December 31, 2018, we had one individualindividually impaired loan within the office property type with a recorded investment and unpaid principal balance of $3 million and as of March 31,June 30, 2018, we had one individualthis individually impaired loan with anhad a recorded investment and unpaid principal balance of $6 million.

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 the
loan-to-value
and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average
loan-to-value
ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower
loan-to-value
indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual
one-time
events such as capital expenditures, prepaid or late real estate tax payments or
non-recurring
third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio is not 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.

26
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

   March 31, 2019 
               Greater    

(Amounts in millions)

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

Property type:

       

Retail

  $877 $537 $1,119 $15 $—    $2,548

Industrial

   738  290  634  14  2   1,678

Office

   588  371  712  —     —     1,671

Apartments

   208  90  217  5  —     520

Mixed use

   104  45  105  —     —     254

Other

   43  68  161  —     —     272
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recorded investment

  $2,558 $1,401 $2,948 $34 $2  $6,943
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of total

   37%   20%   43%   —  %   —  %   100% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted-average debt service coverage ratio

   2.42  1.80  1.58  1.46  0.88   1.93
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
 
June 30, 2019
 
(Amounts in millions)
 
0% - 50%
  
51% - 60%
  
61% - 75%
  
76% - 100%
  
Greater
than 100%
 
(1)
  
Total
 
Property type:
  
   
   
   
   
   
 
Retail
 $
882
  $
534
  $
1,152
  $
13
  $
—  
  $
2,581
 
Industrial
  
732
   
284
   
674
   
7
   
2
   
1,699
 
Office
  
587
   
378
   
691
   
—  
   
—  
   
1,656
 
Apartments
  
200
   
97
   
223
   
5
   
—  
   
525
 
Mixed use
  
102
   
43
   
102
   
—  
   
—  
   
247
 
Other
  
47
   
63
   
160
   
—  
   
—  
   
270
 
                         
Total recorded investment
 $
2,550
  $
1,399
  $
3,002
  $
25
  $
2
  $
6,978
 
                         
% of total
  
37
%  
20
%  
43
%  
—  
%  
—  
%  
100
%
                         
Weighted-average debt service coverage ratio
  
2.39
   
1.84
   
1.57
   
1.34
   
0.88
   
1.92
 
                         
(1)

Included a loan with a recorded investment of $2 million in good standing, where the borrower continued to make timely payments, with a

loan-to-value
of 104%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, 2018 
               Greater    

(Amounts in millions)

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

Property type:

       

Retail

  $866 $565 $1,017 $15 $—    $2,463

Industrial

   749  279  615  14  2   1,659

Office

   585  373  588  2  —     1,548

Apartments

   206  95  189  5  —     495

Mixed use

   105  36  113  —     —     254

Other

   43  78  160  —     —     281
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recorded investment

  $2,554 $1,426 $2,682 $36 $2  $6,700
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of total

   38%   21%   40%   1%   —  %   100% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted-average debt service coverage ratio

   2.42  2.04  1.59  1.38  0.88   2.00
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
 
December 31, 2018
 
(Amounts in millions)
 
0% - 50%
  
51% - 60%
  
61% - 75%
  
76% - 100%
  
Greater
than 100%
 
(1)
  
Total
 
Property type:
  
   
   
   
   
   
 
Retail
 $
866
  $
565
  $
1,017
  $
15
  $
 —  
  $
2,463
 
Industrial
  
749
   
279
   
615
   
14
   
2
   
1,659
 
Office
  
585
   
373
   
588
   
2
   
—  
   
1,548
 
Apartments
  
206
   
95
   
189
   
5
   
—  
   
495
 
Mixed use
  
105
   
36
   
113
   
—  
   
—  
   
254
 
Other
  
43
   
78
   
160
   
—  
   
—  
   
281
 
                         
Total recorded investment
 $
2,554
  $
1,426
  $
2,682
  $
36
  $
2
  $
6,700
 
                         
% of total
  
38
%  
21
%  
40
%  
1
%  
—  
%  
100
%
                         
Weighted-average debt service coverage ratio
  
2.42
   
2.04
   
1.59
   
1.38
   
0.88
   
2.00
 
                         
(1)

Included a loan with a recorded investment of $2 million in good standing, where the borrower continued to make timely payments, with a

loan-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.

27
Table of Contents
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:

   March 31, 2019 
               Greater    

(Amounts in millions)

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

Property type:

       

Retail

  $35 $155 $572 $1,216 $570 $2,548

Industrial

   22  69  259  667  661  1,678

Office

   53  56  203  836  523  1,671

Apartments

   4  24  108  191  193  520

Mixed use

   3  18  52  80  101  254

Other

   13  133  52  40  34  272
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recorded investment

  $130 $455 $1,246 $3,030 $2,082 $6,943
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of total

   2%   7%   18%   43%   30%   100% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted-averageloan-to-value

   56%   61%   64%   59%   42%   55% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   December 31, 2018 
               Greater    

(Amounts in millions)

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

Property type:

       

Retail

  $43 $157 $448 $1,234 $581 $2,463

Industrial

   22  75  233  653  676  1,659

Office

   57  56  156  765  514  1,548

Apartments

   4  24  104  168  195  495

Mixed use

   3  19  51  80  101  254

Other

   13  134  50  50  34  281
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recorded investment

  $142 $465 $1,042 $2,950 $2,101 $6,700
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of total

   2%   7%   16%   44%   31%   100% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted-averageloan-to-value

   57%   61%   62%   59%   42%   54% 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
 
June 30, 2019
 
(Amounts in millions)
 
Less than 1.00
  
1.00
 -
 1.25
  
1.26
 -
 1.50
  
1.51
 -
 2.00
  
Greater
than 2.00
  
Total
 
Property type:
  
   
   
   
   
   
 
Retail
 $
33
  $
147
  $
604
  $
1,238
  $
559
  $
2,581
 
Industrial
  
22
   
68
   
254
   
711
   
644
   
1,699
 
Office
  
51
   
47
   
213
   
833
   
512
   
1,656
 
Apartments
  
4
   
24
   
107
   
196
   
194
   
525
 
Mixed use
  
3
   
18
   
52
   
79
   
95
   
247
 
Other
  
12
   
132
   
52
   
40
   
34
   
270
 
                         
Total recorded investment
 $
125
  $
436
  $
1,282
  $
3,097
  $
2,038
  $
6,978
 
                         
% of total
  
2
%  
6
%  
18
%  
45
%  
29
%  
100
%
                         
Weighted-average
loan-to-value
  
55
%  
61
%  
64
%  
59
%  
42
%  
55
%
                         
    
 
December 31, 2018
 
(Amounts in millions)
 
Less than 1.00
  
1.00 - 1.25
  
1.26 - 1.50
  
1.51 - 2.00
  
Greater
than 2.00
  
Total
 
Property type:
  
   
   
   
   
   
 
Retail
 $
43
  $
157
  $
448
  $
1,234
  $
581
  $
2,463
 
Industrial
  
22
   
75
   
233
   
653
   
676
   
1,659
 
Office
  
57
   
56
   
156
   
765
   
514
   
1,548
 
Apartments
  
4
   
24
   
104
   
168
   
195
   
495
 
Mixed use
  
3
   
19
   
51
   
80
   
101
   
254
 
Other
  
13
   
134
   
50
   
50
   
34
   
281
 
                         
Total recorded investment
 $
142
  $
465
  $
1,042
  $
2,950
  $
2,101
  $  
6,700
 
                         
% of total
  
2
%  
7
%  
16
%  
44
%  
31
%  
100
%
                         
Weighted-average
loan-to-value
  
57
%  
61
%  
62
%  
59
%  
42
%  
54
%
                         
(f) Restricted Commercial Mortgage Loans Related To A Securitization Entity

We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to a securitization entity. Our primary economic interest in this securitization entity represents the excess interest of the commercial mortgage loans.

(g) Limited Partnerships or Similar Entities

Limited partnerships are accounted for at fair value when our partnership interest is considered minor (generally less than 3% ownership in the limited partnerships) and we exercise no influence over operating and financial policies. If our ownership percentage exceeds that threshold, limited partnerships are accounted for using the equity method of accounting. In applying either method, we use financial information provided by the investee generally on a
one-to-three
month lag. However, we consider whether an adjustment to the estimated fair value is necessary when the measurement date is not aligned with our reporting date.

28
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Investments

I
nvestments in limited 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 March 31, June 
30
,
2019
and December 
31
,
2018
, the total carrying value of these investments was $445$
489
 million and $394$
394
 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 some 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 cash flow hedges.

29
Table of Contents
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 
  Balance March 31,  December 31,  Balance March 31,  December 31, 

(Amounts in millions)

 

sheet classification

 2019   2018  

sheet classification

 2019   2018 

Derivatives designated ashedges

      

Cash flow hedges:

      

Interest rate swaps

 Other invested assets $59  $42 Other liabilities $49  $102

Foreign currency swaps

 Other invested assets  3   6 Other liabilities  —     —   
  

 

 

  

 

 

   

 

 

  

 

 

 

Total cash flow hedges

   62   48   49   102
  

 

 

  

 

 

   

 

 

  

 

 

 

Total derivativesdesignated as hedges

   62   48   49   102
  

 

 

  

 

 

   

 

 

  

 

 

 

Derivatives not designated ashedges

      

Interest rate swaps in a foreign currency

 Other invested assets  46   74 Other liabilities  —     —   

Interest rate caps and floors

 Other invested assets  13   7 Other liabilities  —     —   

Foreign currency swaps

 Other invested assets  —     —    Other liabilities  13   23

Equity index options

 Other invested assets  60   39 Other liabilities  —     —   

Financial futures

 Other invested assets  —     —    Other liabilities  —     —   

Equity return swaps

 Other invested assets  —     —    Other liabilities  1   1

Other foreign currencycontracts

 Other invested assets  6   10 Other liabilities  25   42

GMWB embedded derivatives

 Reinsurancerecoverable(1)  18   20 Policyholderaccount balances (2)  295   337

Fixed index annuity embeddedderivatives

 Other assets  —     —    Policyholderaccount balances(3)  423   389

Indexed universal life embedded derivatives

 Reinsurancerecoverable  —     —    Policyholderaccount balances(4)  13   12
  

 

 

  

 

 

   

 

 

  

 

 

 

Total derivatives notdesignated as hedges

   143   150   770   804
  

 

 

  

 

 

   

 

 

  

 

 

 

Total derivatives

  $205  $198  $819  $906
  

 

 

  

 

 

   

 

 

  

 

 

 

                     
 
Derivative assets
 
Derivative liabilities
 
  
Fair value
   
Fair value
 
(Amounts in millions)
 
Balance
sheet classification
 
June 30,
2019
  
December 31,
2018
  
Balance
sheet classification
 
June 30,
2019
  
December 31,
2018
 
Derivatives designated as
hedges
   
   
    
   
 
Cash flow hedges:
   
   
    
   
 
Interest rate swaps
 
Other invested assets
 $
144
  $
42
  
Other liabilities
 $
10
  $
102
 
Foreign currency swaps
 
Other invested assets
  
5
   
6
  
Other liabilities
  
1
   
—  
 
                     
Total cash flow hedges
   
149
   
48
    
11
   
102
 
                     
Total derivatives
designated as hedges
   
149
   
48
    
11
   
102
 
                     
Derivatives not designated as
hedges
   
   
    
   
 
Interest rate swaps in aforeign currency
 
Other invested assets
  
35
   
74
  
Other liabilities
  
—  
   
—  
 
Interest rate caps and floors
 
Other invested assets
  
16
   
7
  
Other liabilities
  
—  
   
—  
 
Foreign currency swaps
 
Other invested assets
  
1
   
—  
  
Other liabilities
  
7
   
23
 
Equity index options
 
Other invested assets
  
65
   
39
  
Other liabilities
  
—  
   
—  
 
Financial futures
 
Other invested assets
  
—  
   
—  
  
Other liabilities
  
—  
   
—  
 
Equity return swaps
 
Other invested assets
  
—  
   
—  
  
Other liabilities
  
—  
   
1
 
Other foreign currency
contracts
 
Other invested assets
  
14
   
10
  
Other liabilities
  
25
   
42
 
GMWB embeddedderivatives
 
Reinsurance
 
recoverable 
(1)
  
20
   
20
  
Policyholder
account balances 
(2)
  
325
   
337
 
Fixed index annuity embedded
derivatives
 
Other assets
  
—  
   
—  
  
Policyholder
account balances 
(3)
  
438
   
389
 
Indexed universal lifeembedded
derivatives
 
Reinsurance
recoverable
  
—  
   
—  
  
Policyholder
account balances 
(4)
  
15
   
12
 
                     
Total derivatives not
designated as hedges
   
151
   
150
    
810
   
804
 
                     
Total derivatives
  $
300
  $
198
   $
821
  $
906
 
                     
(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.

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 received or provided under these agreements.

30
Table of Contents
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 embedded derivatives, 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:

    December 31,     Maturities/  March 31, 

(Notional in millions)

 

Measurement

 2018  Additions  terminations  2019 

Derivatives designated as hedges

     

Cash flow hedges:

     

Interest rate swaps

 Notional $9,924 $—    $(654)  $9,270

Foreign currency swaps

 Notional  80  35  (22)   93
  

 

 

  

 

 

  

 

 

  

 

 

 

Total cash flow hedges

   10,004  35  (676)   9,363
  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivatives designated as hedges

   10,004  35  (676)   9,363
  

 

 

  

 

 

  

 

 

  

 

 

 

Derivatives not designated as hedges

     

Interest rate swaps

 Notional  4,674  —     —     4,674

Interest rate swaps in a foreign currency

 Notional  2,565  98  (44)   2,619

Interest rate caps and floors

 Notional  2,624  84  (38)   2,670

Foreign currency swaps

 Notional  453  —     (2)   451

Equity index options

 Notional  2,628  503  (580)   2,551

Financial futures

 Notional  1,415  1,759  (1,968)   1,206

Equity return swaps

 Notional  17  1  —     18

Other foreign currency contracts

 Notional  1,080  1,386  (1,414)   1,052
  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivatives not designated as hedges

   15,456  3,831  (4,046)   15,241
  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivatives

  $25,460 $3,866 $(4,722)  $24,604
  

 

 

  

 

 

  

 

 

  

 

 

 
    December 31,     Maturities/  March 31, 

(Number of policies)

 

Measurement

 2018  Additions  terminations  2019 

Derivatives not designated as hedges

     

GMWB embedded derivatives

 Policies  27,886  —     (577)   27,309

Fixed index annuity embedded derivatives

 Policies  16,464  —     (213)   16,251

Indexed universal life embedded derivatives

 Policies  929  —     (11)   918

                     
(Notional in millions)
 
Measurement
  
December 31,
201
8
  
Additions
  
Maturities/
terminations
  
June 30,
2019
 
Derivatives designated as hedges
  
   
   
   
   
 
Cash flow hedges:
  
   
   
   
   
 
Interest rate swaps
  
Notional
  $
9,924
  $
469
  $
( 1,338
) $
9,055
 
Foreign currency swaps
  
Notional
   
80
   
52
   
(22
)  
110
 
                     
Total cash flow hedges
  
   
10,004
   
521
   
(1,360
)  
9,165
 
                     
Total derivatives designated as hedges
  
   
10,004
   
521
   
(1,360
)  
9,165
 
                     
Derivatives not designated as hedges
  
   
   
   
   
 
Interest rate swaps
  
Notional
   
4,674
   
—  
   
—  
   
4,674
 
Interest rate swaps in a foreign currency
  
Notional
   
2,565
   
187
   
(77
)  
2,675
 
Interest rate caps and floors
  
Notional
   
2,624
   
160
   
(66
)  
2,718
 
Foreign currency swaps
  
Notional
   
453
   
—  
   
(2
)  
451
 
Equity index options
  
Notional
   
2,628
   
939
   
(1,035
)  
2,532
 
Financial futures
  
Notional
   
1,415
   
3,029
   
(3,217
)  
1,227
 
Equity return swaps
  
Notional
   
17
   
2
   
(2
)  
17
 
Other foreign currency contracts
  
Notional
   
1,080
   
2,925
   
(2,704
)  
1,301
 
                     
Total derivatives not designated as hedges
  
   
15,456
   
7,242
   
(7,103
)  
15,595
 
                     
Total derivatives
  
  $
25,460
  $
7,763
  $
( 8,463
) $
24,760
 
                     
                
(Number of policies)
 
Measurement
  
December 31,
2018
  
Additions
  
Maturities/
terminations
  
June 30,
2019
 
Derivatives not designated as hedges
  
   
   
   
   
 
GMWB embedded derivatives
  
Policies
   
27,886
   
—  
   
(1,139
)  
26,747
 
Fixed index annuity embedded derivatives
  
Policies
   
16,464
   
—  
   
(410
)  
16,054
 
Indexed universal life embedded derivatives
  
Policies
   
929
   
—  
   
(21
)  
908
 
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 swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; and (v) other instruments to hedge the cash flows of various forecasted transactions.

31
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about the
pre-tax
income effects of cash flow hedges for the three months ended March 31,June 30, 2019:

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

(Amounts in millions)

 recognized in OCI  from OCI  

net income

 net income  

net income

Interest rate swaps hedging assets

 $137 $38 Net investment income $—    Net investment gains (losses)

Interest rate swaps hedging assets

  —     6 Net investment gains (losses)  —    Net investment gains (losses)

Interest rate swaps hedging liabilities

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

Foreign currency swaps

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

 

 

  

 

 

   

 

 

  

Total

 $122 $44  $2  
 

 

 

  

 

 

   

 

 

  

                     
   
Gain (loss)
reclassified into
  
 
Classification of 
gain 
(loss)
 
 
Gain (loss)
  
 
Classification of 
gain 
(loss)
 
 
Gain (loss)
  
net income
  
 
reclassified into
 
 
recognized in
  
 
recognized in 
net
 
(Amounts in millions)
 
recognized in OCI
  
from OCI
  
 
net income
 
 
net income
  
 
income
 
Interest rate swaps hedging
assets
 $
216
  $
42
   
Net investment income
  $
—  
   
Net investment gains (losses)
 
Interest rate swaps hedging
assets
  
—  
   
(4
)  
Net investment gains (losses)
   
—  
   
Net investment gains (losses)
 
Interest rate swaps hedging
liabilities
  
(20
)  
—  
   
Interest expense
   
—  
   
Net investment gains (losses)
 
Foreign currency swaps
  
2
   
(1
)  
Net investment income
   
—  
   
Net investment gains (losses)
 
                     
Total
 $
198
  $
37
   $
—  
  
                     
The following table provides information about the
pre-tax
income effects of cash flow hedges for the three months ended March 31,June 30, 2018:

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

(Amounts in millions)

 recognized in OCI  from OCI  

net income

 net income  

net income

Interest rate swaps hedging assets

 $(173)  $35 Net investment income $—    Net investment gains (losses)

Interest rate swaps hedging assets

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

Interest rate swaps hedging liabilities

  17  —    Interest expense  —    Net investment gains (losses)

Foreign currency swaps

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

 

 

  

 

 

   

 

 

  

Total

 $(157)  $40  $—    
 

 

 

  

 

 

   

 

 

  

                     
   
Gain (loss)
reclassified into
  
 
Classification of 
gain 
(loss)
 
 
Gain (loss)
  
 
Classification of 
gain 
(loss)
 
 
Gain (loss)
  
net income
  
 
reclassified into
 
 
recognized in
  
 
recognized in 
net
 
(Amounts in millions)
 
recognized in OCI
  
from OCI
  
 
net income
 
 
net income
  
 
income
 
Interest rate swaps hedging
assets
 $
(54
) $
39
   
Net investment income
  $
—  
   
Net investment gains (losses)
 
Interest rate swaps hedging
liabilities
  
5
   
—  
   
Interest expense
   
—  
   
Net investment gains (losses)
 
Foreign currency swaps
  
1
   
—  
   
Net investment income
   
—  
   
Net investment gains (losses)
 
                     
Total
 $
(48
) $
39
   $
—  
  
                     

32
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about the pre-tax income effects of cash flow hedges for the six months ended June 30, 2019:
   
Gain (loss)
reclassified into
  
 
Classification of 
gain 
(loss)
 
 
Gain (loss)
  
 
Classification of 
gain 
(loss)
 
 
Gain (loss)
  
net income
  
 
reclassified into
 
 
recognized in
  
 
recognized in
 
(Amounts in millions)
 
recognized in OCI
  
from OCI
  
 
net income
 
 
net income
  
 
net income
 
Interest rate swaps hedging
assets		 $353  $80   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		  (32)  —     Interest expense   —     Net investment gains (losses) 
Foreign currency swaps  (1)  (1)  Net investment income   —     Net investment gains (losses) 
Foreign currency swaps  —     —     
Net investment
gains (losses)
   2   
Net investment gains (losses)
 
                     
Total $320  $81   $2  
                     
The following table provides information about the
pre-tax
income effects of cash flow hedges for the six months ended June 30, 2018:
   
Gain (loss)
reclassified into
  
 
Classification of 
gain 
(loss) 
 
 
Gain (loss)
  
 
Classification of 
gain 
(loss) 
 
 
Gain (loss)
  
net income
  
 
reclassified into
 
 
recognized in
  
 
recognized in
 
(Amounts in millions)
 
recognized in OCI
  
from OCI
  
 
net income
 
 
net income
  
 
net income
 
Interest rate swaps hedging
assets
 $
(227
) $
74
   
Net investment income
  $
—  
   
Net investment gains (losses)
 
Interest rate swaps hedging
assets
  
—  
   
5
   
Net investment gains (losses)
   
—  
   
Net investment gains (losses)
 
Interest rate swaps hedging
liabilities
  
22
   
—  
   
Interest expense
   
—  
   
Net investment gains (losses)
 
                     
Total
 $
(205
) $
79
   $
 —  
  
                     
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 
   March 31, 

(Amounts in millions)

  2019  2018 

Derivatives qualifying as effective accounting hedges as of January 1

  $1,781 $2,065

Cumulative effect of changes in accounting:

   

Stranded tax effects

   —     12

Changes to the hedge accounting model, net of deferred taxes of $— and $(1)

   —     2
  

 

 

  

 

 

 

Total cumulative effect of changes in accounting

   —     14
  

 

 

  

 

 

 

Current period increases (decreases) in fair value, net of deferred taxes of $(25) and $34

   97  (126) 

Reclassification to net (income), net of deferred taxes of $16 and $14

   (28)   (26) 
  

 

 

  

 

 

 

Derivatives qualifying as effective accounting hedges as of March 31

  $1,850 $1,927
  

 

 

  

 

 

 

 
Three months ended
June 30,
 
(Amounts in millions)
 
2019
  
2018
 
Derivatives qualifying as effective accounting hedges as of April 1 $
1,850
  $
1,927
 
Current period increases (decreases) in fair value, net of deferred taxes of $(41) and $9  157   (39)
Reclassification to net (income), net of deferred taxes of $13 and $14  (24)  (25)
         
Derivatives qualifying as effective accounting hedges as of June 30 $  
1,983
  $  
1,863
 
         
33
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Six months ended
June 30,
 
(Amounts in millions)
 
2019
  
2018
 
Derivatives qualifying as effective accounting hedges as of January 1 $
1,781
  $
2,065
 
Cumulative effect of changes in accounting:      
Stranded tax effects  —     12 
Changes to the hedge accounting model, net of deferred taxes of $— and $(1)  —     2 
         
Total cumulative effect of changes in accounting  —     14 
         
Current period increases (decreases) in fair value, net of deferred taxes of $(66) and $43  254   (165)
Reclassification to net (income), net of deferred taxes of $29 and $28  (52)  (51)
         
Derivatives qualifying as effective accounting hedges as of June 30 $
1,983
  $
1,863
 
         
The total of derivatives designated as cash flow hedges of $1,850$1,983 million, net of taxes, recorded in stockholders’ equity as of March 31,June 30, 2019 is expected to be reclassified to net income 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, $109$112 million, net of taxes, is expected to be reclassified to net income 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 2057. During the threesix months ended March 31,June 30, 2019 and 2018, we reclassified $4net gains of $2 million and $3$5 million, respectively, to net income in connection with forecasted transactions that were no longer considered probable of occurring.

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) 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; (iii) interest rate swaps in a foreign currency and interest rate caps and floors where the hedging relationship does not qualify for hedge accounting; (iv) 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 (v) 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 insurance products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

34
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

   Three months ended March 31,  

Classification of gain (loss) recognized

in net income

(Amounts in millions)

  2019  2018 

Interest rate swaps

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

Interest rate swaps in a foreign currency

   (23)   —    Net investment gains (losses)

Interest rate caps and floors

   6  —    Net investment gains (losses)

Equity index options

   17  (15)  Net investment gains (losses)

Financial futures

   (44)   (24)  Net investment gains (losses)

Equity return swaps

   —     (5)  Net investment gains (losses)

Other foreign currency contracts

   9  8 Net investment gains (losses)

Foreign currency swaps

   10  (8)  Net investment gains (losses)

GMWB embedded derivatives

   45  14 Net investment gains (losses)

Fixed index annuity embedded derivatives

   (38)   8 Net investment gains (losses)

Indexed universal life embedded derivatives

   1  5 Net investment gains (losses)
  

 

 

  

 

 

  

Total derivatives not designated as hedges

  $(18)  $(18)  
  

 

 

  

 

 

  

           
 
Three months ended 
June 30,
  
Classification of gain (loss) recognized
 
(Amounts in millions)
 
2019
  
2018
  
in net income
Interest rate swaps
 $
(3
) $
(2
) 
Net investment gains (losses)
Interest rate swaps in a foreign currency
  
(6
)  
—  
  
Net investment gains (losses)
Interest rate caps and floors
  
3
   
—  
  
Net investment gains (losses)
Foreign currency swaps
  
6
   
(10
) 
Net investment gains (losses)
Equity index options
  
10
   
8
  
Net investment gains (losses)
Financial futures
  
17
   
(13
) 
Net investment gains (losses)
Equity return swaps
  
1
   
1
  
Net investment gains (losses)
Other foreign currency contracts
  
(3
)  
1
  
Net investment gains (losses)
GMWB embedded derivatives
  
(22
)  
13
  
Net investment gains (losses)
Fixed index annuity embedded derivatives
  
(20
)  
(15
) 
Net investment gains (losses)
Indexed universal life embedded derivatives
  
(1
)  
2
  
Net investment gains (losses)
           
Total derivatives not designated as hedges
 $
(18
) $
(15
) 
           
 
Six months ended 
June 30,
  
Classification of gain (loss) recognized
 
(Amounts in millions)
 
2019
  
2018
  
in net income
Interest rate swaps
 $
(4
) $
(3
) 
Net investment gains (losses)
Interest rate swaps in a foreign currency
  
(29
)  
—  
  
Net investment gains (losses)
Interest rate caps and floors
  
9
   
—  
  
Net investment gains (losses)
Foreign currency swaps
  
16
   
(18
) 
Net investment gains (losses)
Equity index options
  
27
   
(7
) 
Net investment gains (losses)
Financial futures
  
(27
)  
(37
) 
Net investment gains (losses)
Equity return swaps
  
1
   
(4
) 
Net investment gains (losses)
Other foreign currency contracts
  
6
   
9
  
Net investment gains (losses)
GMWB embedded derivatives
  
23
   
27
  
Net investment gains (losses)
Fixed index annuity embedded derivatives
  
(58
)  
(7
) 
Net investment gains (losses)
Indexed universal life embedded derivatives
  
—  
   
7
  
Net investment gains (losses)
           
Total derivatives not designated as hedges
 $
(36
) $
(33
) 
           
35
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Derivative Counterparty Credit Risk

Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:

  March 31, 2019  December 31, 2018 
  Derivatives  Derivatives  Net  Derivatives  Derivatives  Net 

(Amounts in millions)

 assets (1)  liabilities (2)  derivatives  assets (1)  liabilities (2)  derivatives 

Amounts presented in the balance sheet:

      

Gross amounts recognized

 $196  $89  $107 $185  $169  $16

Gross amounts offset in the balance sheet

  —     —     —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net amounts presented in the balance sheet

  196   89   107  185   169   16

Gross amounts not offset in the balance sheet:

      

Financial instruments(3)

  (40)   (40)   —     (66)   (66)   —   

Collateral received

  (66)   —     (66)   (84)   —     (84) 

Collateral pledged

  —     (428)   428  —     (536)   536

Over collateralization

  2   380   (378)   10   433   (423) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net amount

 $92  $1  $91 $45  $—    $45
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
 
June 30,
2019
  
December 31,
2018
 
(Amounts in millions)
 
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
 $
287
  $
44
  $
243
  $
185
  $
169
  $
16
 
Gross amounts offset in the balance sheet
  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
 
                         
Net amounts presented in the balance sheet
  
287
   
44
   
243
   
185
   
169
   
16
 
Gross amounts not offset in the balance sheet:
  
   
   
   
   
   
 
Financial instruments 
(3)
  
(35
)  
(35
)  
—  
   
(66
)
 		  
(66
)
 		  
—  
 
Collateral received
  
(77
)  
—  
   
(77
)  
(84
)
 		  
—  
   
(84
)
Collateral pledged
  
—  
   
(327
)  
327
   
—  
   
(536
)
 		  
536
 
Over collateralization
  
—  
   
318
   
(318
)  
10
   
433
   
(423
)
                         
Net amount
 $
175
  $
—  
  $
175
  $
45
  $
—  
  $
45
 
                         
(1)

Included $9$7 million and $6 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives as of March 31,June 30, 2019 and December 31, 2018, respectively.

(2)

Included $1 million of accruals on derivatives included in other liabilities as of March 31,June 30, 2019 and does not include amounts related to embedded derivatives as of March 31,June 30, 2019 and December 31, 2018.

(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)

Several 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, financial strength rating or risk-based capital ratio is below the limit defined in the applicable agreement. If the provisions defined in these agreements had been triggered as of March 31, 2019 and December 31, 2018, we could have been allowed to claim $92 million and $45 million, respectively, or have been required to disburse up to $1 million as of March 31, 2019. The chart above excludes embedded derivatives as those derivatives are not subject to master netting arrangements. As of March 31, 2019, no counterparties exercised their rights to terminate or revise the terms of their transactions with us.

(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, cash equivalents and restricted cash, short-term investments, investment securities, separate accounts, securities held as collateral and derivative instruments. Apart from certain of our borrowings and certain marketable securities, few of the instruments 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
36
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The 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:

   March 31, 2019 
   Notional
amount		  Carrying
amount		   Fair value 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3 

Assets:

           

Commercial mortgage loans

           (1)  $6,929  $7,038  $—     $—     $7,038

Restricted commercial mortgage loans

           (1)   59   63   —      —      63

Bank loan investments

           (1)   294   293   —      —      293

Liabilities:

           

Long-term borrowings

           (1)   4,035   3,564   —      3,420   144

Non-recourse funding obligations

           (1)   311   215   —      —      215

Investment contracts

           (1)   12,663   13,241   —      —      13,241

Other firm commitments:

           

Commitments to fund limited partnerships

   747   —      —      —      —      —   

Commitments to fund bank loan investments

   40   —      —      —      —      —   

Ordinary course of business lendingcommitments

   152   —      —      —      —      —   
   December 31, 2018 
   Notional
amount		  Carrying
amount		   Fair value 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3 

Assets:

           

Commercial mortgage loans

           (1)  $6,687  $6,737  $—     $—     $6,737

Restricted commercial mortgage loans

           (1)   62   66   —      —      66

Bank loan investments

           (1)   248   248   —      —      248

Liabilities:

           

Long-term borrowings

           (1)   4,025   3,577   —      3,434   143

Non-recourse funding obligations

           (1)   311   215   —      —      215

Investment contracts

           (1)   13,105   13,052   —      —      13,052

Other firm commitments:

           

Commitments to fund limited partnerships

   539   —      —      —      —      —   

Commitments to fund bank loan investments

   33   —      —      —      —      —   

Ordinary course of business lendingcommitments

   73   —      —      —      —      —   

                         
 
June 30, 2019
 
 
Notional
  
Carrying
  
Fair value
 
(Amounts in millions)
 
amount
  
amount
  
Total
  
Level 
1
  
Level 
2
  
Level 
3
 
Assets:
  
   
   
   
   
   
 
Commercial mortgage loans
  
(1
) $
6,963
  $
7,241
  $
—  
  $
—  
  $
7,241
 
Restricted commercial mortgage loans
  
( 1
)  
56
   
61
   
—  
   
—  
   
61
 
Other invested assets:
  
   
   
   
   
   
 
Bank loan investments
  
( 1
)  
337
   
336
   
—  
   
—  
   
336
 
Liabilities:
  
   
   
   
   
   
 
Long-term borrowings
  
( 1
)  
4,044
   
3,622
   
—  
   
3,480
   
142
 
Non-recourse
funding obligations
  
( 1
)  
311
   
215
   
—  
   
—  
   
215
 
Investment contracts
  
( 1
)  
12,364
   
13,194
   
—  
   
—  
   
13,194
 
Other firm commitments:
  
   
   
   
   
   
 
Commitments to fund limited partnerships
  
903
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commitments to fund bank loan investments
  
52
   
—  
   
—  
   
—  
   
—  
   
—  
 
Ordinary course of business lending
commitments
  
188
   
—  
   
—  
   
—  
   
—  
   
—  
 
 
December 31, 2018
 
 
Notional
  
Carrying
  
Fair value
 
(Amounts in millions)
 
amount
  
amount
  
Total
  
Level 
1
  
Level 
2
  
Level 
3
 
Assets:
  
   
   
   
   
   
 
Commercial mortgage loans
  
(1) $
6,687
  $
6,737
  $
—  
  $
—  
  $
6,737
 
Restricted commercial mortgage loans
  
(1)  
62
   
66
   
—  
   
—  
   
66
 
Other invested assets:
  
   
   
   
   
   
 
Bank loan investments
  
(1)  
248
   
248
   
—  
   
—  
   
248
 
Liabilities:
  
   
   
   
   
   
 
Long-term borrowings
  
(1)  
4,025
   
3,577
   
—  
   
3,434
   
143
 
Non-recourse
funding obligations
  
(1)  
311
   
215
   
—  
   
—  
   
215
 
Investment contracts
  
(1)  
13,105
   
13,052
   
—  
   
—  
   
13,052
 
Other firm commitments:
  
   
   
   
   
   
 
Commitments to fund limited partnerships
  
539
   
—  
   
—  
   
—  
   
—  
   
—  
 
Commitments to fund bank loan investments
  
33
   
—  
   
—  
   
—  
   
—  
   
—  
 
Ordinary course of business lending
commitments
  
73
   
—  
   
—  
   
—  
   
—  
   
—  
 
(1)

These financial instruments do not have notional amounts.

37
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recurring Fair Value Measurements

We have fixed maturity, short-term investments, equity securities, limited partnerships, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Limited partnerships

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. We utilize the net asset value (“NAV”) of the underlying fund statements as a practical expedient for fair value.

Fixed maturity, short-term investments and equity securities

The fair value of fixed maturity, short-term investments and equity securities are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or broker 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 certain
pre-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. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value
38
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
since transactions for identical securities are not readily observable and these securities are not typically valued by pricing services. If prices are unavailable from public pricing services, we obtain broker quotes. 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 a

pre-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.

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.transaction. 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 a
pre-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 a
pre-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 andor 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.

39
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the inputs used for our fixed maturity, short-term investments and equity 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Level 1 measurements

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

Short-term investments.
Short-term investments primarily include commercial paper and other highly liquid debt instruments. The fair value of short-term investments classified as Level 1 is based on quoted prices for the identical instrument.

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 services:In estimating the fair value of fixed maturity securities, approximately 91% of our portfolio is priced using third-party pricing sources as of March 31, 2019. 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 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.

Third-party pricing services:
In estimating the fair value of fixed maturity securities, approximately
91
% of our portfolio is priced using third-party pricing sources as of June 30, 2019. 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 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.
40 
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 March 31,June 30, 2019:

(Amounts in millions)

  Fair value   

Primary methodologies

  

Significant inputs

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

  $4,731  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

  $2,494  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

  $2,502  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

  $ 26,748  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

  $ 10,123  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

  $2,915  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

  $2,864  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

  $3,224  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

•

Internal models:A portion of ournon-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

(Amounts in millions)
 
Fair value
  
Primary methodologies
 
Significant inputs
U.S. government, agencies and government-sponsored enterprises $
4,987
  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 $
2,575
  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 $
2,634
  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 $
28,118
  Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, 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 $
10,417
  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 $
2,697
  OAS-based 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 $
2,897
  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 $
3,492
  Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers 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

Internal models:
A portion of our non-U.S. government, U.S. corporate and non-U.S. corporate securities are valued using internal models. The fair value of these fixed maturity securities were
41 
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

$1615 million, $1,031$1,056 million and $588$599 million, respectively, as of March 31,June 30, 2019. 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

The fair value of short-term investments classified as Level 2 is determined after considering prices obtained by third-party pricing services.

Level 3 measurements

Fixed maturity securities

•

Internal models: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 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 $3,660 million as of March 31, 2019.

•

Broker quotes: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 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 $464 million as of March 31, 2019.

Internal models:
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 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 the interest rate yield curve, as well as published credit spreads for  similar securities, which includes significant unobservable inputs. 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 $3,806 million as of June 30, 2019.
Broker quotes:
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 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 $481 million as of June 30, 2019.
42
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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 March 31,June 30, 2019 and December 31, 2018, the impact of
non-performance
risk resulted in a lower fair value of our GMWB liabilities of $60 million and $64 million, respectively.

million.

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 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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
43
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 insurance 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.

Derivatives

We consider counterparty collateral arrangements and rights of
set-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 our
non-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 our
non-performance
risk or the
non-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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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
44
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.

Interest rate swaps in a foreign currency.
The valuation of interest rate swaps in a foreign currency is determined using an income approach. The primary inputs into the valuation represents the forward interest rate swap curve and foreign currency exchange rates, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Interest rate caps and floors.
The valuation of interest rate caps and floors is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, forward interest rate volatility and time value component associated with the optionality in the derivative which are generally considered observable inputs and results in the derivatives 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 observable inputs, and results in the derivative being classified as Level 2.

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 rates, equity index volatility, equity index 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.

Equity return swaps.
The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Other foreign currency contracts.
We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, foreign currency exchange rate volatility and time value component associated with the optionality in the derivative, which are generally considered observable inputs and results in the derivative being classified as Level 2. 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.

45
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:

   March 31, 2019 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3   NAV (1) 

Assets

          

Investments:

          

Fixed maturity securities:

          

U.S. government, agencies and government-sponsoredenterprises

  $4,731  $—     $4,731  $—     $—   

State and political subdivisions

   2,546   —      2,494   52   —   

Non-U.S. government

   2,518   —      2,518   —      —   

U.S. corporate:

          

Utilities

   4,685   —      3,937   748   —   

Energy

   2,618   —      2,503   115   —   

Finance and insurance

   7,251   —      6,661   590   —   

Consumer—non-cyclical

   5,257   —      5,183   74   —   

Technology and communications

   2,974   —      2,922   52   —   

Industrial

   1,249   —      1,209   40   —   

Capital goods

   2,489   —      2,394   95   —   

Consumer—cyclical

   1,646   —      1,451   195   —   

Transportation

   1,362   —      1,308   54   —   

Other

   411   —      212   199   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

   29,942   —      27,780   2,162   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

          

Utilities

   1,127   —      692   435   —   

Energy

   1,447   —      1,226   221   —   

Finance and insurance

   2,554   —      2,372   182   —   

Consumer—non-cyclical

   709   —      642   67   —   

Technology and communications

   1,197   —      1,170   27   —   

Industrial

   973   —      910   63   —   

Capital goods

   662   —      489   173   —   

Consumer—cyclical

   541   —      416   125   —   

Transportation

   815   —      623   192   —   

Other

   2,260   —      2,170   90   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totalnon-U.S. corporate

   12,285   —      10,710   1,575   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

   2,950   —      2,915   35   —   

Commercial mortgage-backed

   2,962   —      2,864   98   —   

Other asset-backed

   3,426   —      3,224   202   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

   61,360   —      57,236   4,124   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

   635   513   67   55   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets:

          

Derivative assets:

          

Interest rate swaps

   59   —      59   —      —   

Interest rate swaps in a foreign currency

   46   —      46   —      —   

Interest rate caps and floors

   13   —      13   —      —   

Foreign currency swaps

   3   —      3   —      —   

Equity index options

   60   —      —      60   —   

Other foreign currency contracts

   6   —      6   —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

   187   —      127   60   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities lending collateral

   106   —      106   —      —   

Short-term investments

   139   —      139   —      —   

Limited partnerships

   359   —      —      —      359 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other invested assets

   791   —      372   60   359 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reinsurance recoverable(2)

   18   —      —      18   —   

Separate account assets

   6,210   6,210   —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 69,014  $ 6,723  $ 57,675  $ 4,257  $ 359 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

                     
 
June 30, 2019
 
(Amounts in millions)
 
Total
  
Level 1
  
Level 2
  
Level 3
  
NAV
(1)
 
Assets
  
   
   
   
   
 
Investments:
  
   
   
   
   
 
Fixed maturity securities:
  
   
   
   
   
 
U.S. government, agencies and government-sponsored
enterprises
 $
4,987
  $
—  
  $
4,987
  $
—  
  $
—  
 
State and political subdivisions
  
2,636
   
—
  
   
2,575
   
61
   
—  
 
Non-U.S.
government
  
2,649
   
—  
   
2,649
   
—  
   
—  
 
U.S. corporate:
  
   
   
   
   
 
Utilities
  
4,879
   
—  
   
4,090
   
789
   
—  
 
Energy
  
2,713
   
—  
   
2,591
   
122
   
—  
 
Finance and insurance
  
7,597
   
—  
   
6,990
   
607
   
—  
 
Consumer—non-cyclical
  
5,552
   
—  
   
5,463
   
89
   
—  
 
Technology and communications
  
3,156
   
—  
   
3,112
   
44
   
—  
 
Industrial
  
1,336
   
—  
   
1,296
   
40
   
—  
 
Capital goods
  
2,620
   
—  
   
2,522
   
98
   
—  
 
Consumer—cyclical
  
1,741
   
—  
   
1,556
   
185
   
—  
 
Transportation
  
1,411
   
—  
   
1,357
   
54
   
—  
 
Other
  
396
   
—  
   
197
   
199
   
—  
 
                     
Total U.S. corporate
  
31,401
   
—  
   
29,174
   
2,227
   
—  
 
                     
Non-U.S.
corporate:
  
   
   
   
   
 
Utilities
  
1,165
   
—  
   
748
   
417
   
—  
 
Energy
  
1,516
   
—  
   
1,275
   
241
   
—  
 
Finance and insurance
  
2,628
   
—  
   
2,449
   
179
   
—  
 
Consumer—non-cyclical
  
710
   
—  
   
642
   
68
   
—  
 
Technology and communications
  
1,273
   
—  
   
1,246
   
27
   
—  
 
Industrial
  
1,017
   
—  
   
953
   
64
   
—  
 
Capital goods
  
695
   
—  
   
514
   
181
   
—  
 
Consumer—cyclical
  
557
   
—  
   
431
   
126
   
—  
 
Transportation
  
841
   
—  
   
642
   
199
   
—  
 
Other
  
2,245
   
—  
   
2,116
   
129
   
—  
 
                     
Total
non-U.S.
corporate
  
12,647
   
—  
   
11,016
   
1,631
   
—  
 
                     
Residential mortgage-backed
  
2,738
   
—  
   
2,697
   
41
   
—  
 
Commercial mortgage-backed
  
2,989
   
—  
   
2,897
   
92
   
—  
 
Other asset-backed
  
3,727
   
—  
   
3,492
   
235
   
—  
 
                     
Total fixed maturity securities
  
63,774
   
—  
   
59,487
   
4,287
   
—  
 
                     
Equity securities
  
644
   
519
   
69
   
56
   
—  
 
                     
Other invested assets:
  
   
   
   
   
 
Derivative assets:
  
   
   
   
   
 
Interest rate swaps
  
144
   
—  
   
144
   
—  
   
—  
 
Interest rate swaps in a foreign currency
  
35
   
—  
   
35
   
—  
   
—  
 
Interest rate caps and floors
  
16
   
—  
   
16
   
—  
   
—  
 
Foreign currency swaps
  
6
   
—  
   
6
   
—  
   
—  
 
Equity index options
  
65
   
—  
   
—  
   
65
   
—  
 
Other foreign currency contracts
  
14
   
—  
   
14
   
—  
   
—  
 
                     
Total derivative assets
  
280
   
—  
   
215
   
65
   
—  
 
                     
Securities lending collateral
  
113
   
—  
   
113
   
—  
   
—  
 
Short-term investments
  
273
   
—  
   
273
   
—  
   
—  
 
Limited partnerships
  
401
   
—  
   
—  
   
—  
   
401
 
                     
Total other invested assets
  
1,067
   
—  
   
601
   
65
   
401
 
                     
Reinsurance recoverable
(2)
  
20
   
—  
   
—  
   
20
   
—  
 
Separate account assets
  
6,187
   
6,187
   
—  
   
—  
   
—  
 
                     
Total assets
 $
71,692
  $
6,706
  $
60,157
  $
4,428
  $
401
 
                     
(1)

Limited partnerships that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.

(2)

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


Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   December 31, 2018 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3   NAV(1) 

Assets

          

Investments:

          

Fixed maturity securities:

          

U.S. government, agencies and government-sponsoredenterprises

  $4,631  $—     $4,631  $—     $—   

State and political subdivisions

   2,552   —      2,501   51   —   

Non-U.S. government

   2,393   —      2,393   —      —   

U.S. corporate:

          

Utilities

   4,675   —      4,032   643   —   

Energy

   2,419   —      2,298   121   —   

Finance and insurance

   6,822   —      6,288   534   —   

Consumer—non-cyclical

   5,048   —      4,975   73   —   

Technology and communications

   2,855   —      2,805   50   —   

Industrial

   1,238   —      1,199   39   —   

Capital goods

   2,391   —      2,299   92   —   

Consumer—cyclical

   1,597   —      1,386   211   —   

Transportation

   1,320   —      1,263   57   —   

Other

   397   —      219   178   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

   28,762   —      26,764   1,998   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

          

Utilities

   1,041   —      637   404   —   

Energy

   1,369   —      1,152   217   —   

Finance and insurance

   2,423   —      2,252   171   —   

Consumer—non-cyclical

   739   —      633   106   —   

Technology and communications

   1,165   —      1,139   26   —   

Industrial

   945   —      884   61   —   

Capital goods

   615   —      442   173   —   

Consumer—cyclical

   520   —      398   122   —   

Transportation

   720   —      549   171   —   

Other

   2,300   —      2,219   81   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totalnon-U.S. corporate

   11,837   —      10,305   1,532   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

   3,044   —      3,009   35   —   

Commercial mortgage-backed

   3,016   —      2,921   95   —   

Other asset-backed

   3,426   —      3,261   165   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

   59,661   —      55,785   3,876   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

   655   533   64   58   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets:

          

Derivative assets:

          

Interest rate swaps

   42   —      42   —      —   

Interest rate swaps in a foreign currency

   74   —      74   —      —   

Interest rate caps and floors

   7   —      7   —      —   

Foreign currency swaps

   6   —      6   —      —   

Equity index options

   39   —      —      39   —   

Other foreign currency contracts

   10   —      10   —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

   178   —      139   39   —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Securities lending collateral

   102   —      102   —      —   

Short-term investments

   230   —      230   —      —   

Limited partnerships

   318   —      —      —      318 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other invested assets

   828   —      471   39   318 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reinsurance recoverable(2)

   20   —      —      20   —   

Separate account assets

   5,859   5,859   —      —      —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $67,023  $6,392  $56,320  $3,993  $318 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

                     
 
December 31, 2018
 
(Amounts in millions)
 
Total
  
Level 1
  
Level 2
  
Level 3
  
NAV
(1)
 
Assets
  
   
   
   
   
 
Investments:
  
   
   
   
   
 
Fixed maturity securities:
  
   
   
   
   
 
U.S. government, agencies and government-sponsored
enterprises
 $
4,631
  $
—  
  $
4,631
  $
—  
  $
—  
 
State and political subdivisions
  
2,552
   
—  
   
2,501
   
51
   
—  
 
Non-U.S.
government
  
2,393
   
—  
   
2,393
   
—  
   
—  
 
U.S. corporate:
  
   
   
   
   
 
Utilities
  
4,675
   
—  
   
4,032
   
643
   
—  
 
Energy
  
2,419
   
—  
   
2,298
   
121
   
—  
 
Finance and insurance
  
6,822
   
—  
   
6,288
   
534
   
—  
 
Consumer—non-cyclical
  
5,048
   
—  
   
4,975
   
73
   
—  
 
Technology and communications
  
2,855
   
—  
   
2,805
   
50
   
—  
 
Industrial
  
1,238
   
—  
   
1,199
   
39
   
—  
 
Capital goods
  
2,391
   
—  
   
2,299
   
92
   
—  
 
Consumer—cyclical
  
1,597
   
—  
   
1,386
   
211
   
—  
 
Transportation
  
1,320
   
—  
   
1,263
   
57
   
—  
 
Other
  
397
   
—  
   
219
   
178
   
—  
 
                     
Total U.S. corporate
  
28,762
   
—  
   
26,764
   
1,998
   
—  
 
                     
Non-U.S.
corporate:
  
   
   
   
   
 
Utilities
  
1,041
   
—  
   
637
   
404
   
—  
 
Energy
  
1,369
   
—  
   
1,152
   
217
   
—  
 
Finance and insurance
  
2,423
   
—  
   
2,252
   
171
   
—  
 
Consumer—non-cyclical
  
739
   
—  
   
633
   
106
   
—  
 
Technology and communications
  
1,165
   
—  
   
1,139
   
26
   
—  
 
Industrial
  
945
   
—  
   
884
   
61
   
—  
 
Capital goods
  
615
   
—  
   
442
   
173
   
—  
 
Consumer—cyclical
  
520
   
—  
   
398
   
122
   
—  
 
Transportation
  
720
   
—  
   
549
   
171
   
—  
 
Other
  
2,300
   
—  
   
2,219
   
81
   
—  
 
                     
Total
non-U.S.
corporate
  
11,837
   
—  
   
10,305
   
1,532
   
—  
 
                     
Residential mortgage-backed
  
3,044
   
—  
   
3,009
   
35
   
—  
 
Commercial mortgage-backed
  
3,016
   
—  
   
2,921
   
95
   
—  
 
Other asset-backed
  
3,426
   
—  
   
3,261
   
165
   
—  
 
                     
Total fixed maturity securities
  
59,661
   
—  
   
55,785
   
3,876
   
—  
 
                     
Equity securities
  
655
   
533
   
64
   
58
   
—  
 
                     
Other invested assets:
  
   
   
   
   
 
Derivative assets:
  
   
   
   
   
 
Interest rate swaps
  
42
   
—  
   
42
   
—  
   
—  
 
Interest rate swaps in a foreign currency
  
74
   
—  
   
74
   
—  
   
—  
 
Interest rate caps and floors
  
7
   
—  
   
7
   
—  
   
—  
 
Foreign currency swaps
  
6
   
—  
   
6
   
—  
   
—  
 
Equity index options
  
39
   
—  
   
—  
   
39
   
—  
 
Other foreign currency contracts
  
10
   
—  
   
10
   
—  
   
—  
 
                     
Total derivative assets
  
178
   
—  
   
139
   
39
   
—  
 
                     
Securities lending collateral
  
102
   
—  
   
102
   
—  
   
—  
 
Short-term investments
  
230
   
—  
   
230
   
—  
   
—  
 
Limited partnerships
  
318
   
—  
   
—  
   
—  
   
318
 
                     
Total other invested assets
  
828
   
—  
   
471
   
39
   
318
 
                     
Reinsurance recoverable
(2
)
  
20
   
—  
   
—  
   
20
   
—  
 
Separate account assets
  
5,859
   
5,859
   
—  
   
—  
   
—  
 
                     
 Total assets
 $
67,023
  $
6,392
  $
56,320
  $
3,993
  $
318
 
                     
(1)

Limited partnerships that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.

(2)

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


4
7 
Table of Contents
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 representsrepresent mutual fund and equity 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.

48
Table of Contents
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,
2019		  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
March 31,
2019		  Total gains
(losses)
included in
net
income
attributable
to assets
still held		 
 Included in
net
income		  Included
in OCI		 

Fixed maturity securities:

           

U.S. government, agenciesand government-sponsoredenterprises

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

State and political subdivisions

  51  1  —     —     —     —     —     —     —     52  1

U.S. corporate:

           

Utilities

  643  —     22  14  (1)   —     (2)   72   —     748  —   

Energy

  121  —     4  —     —     —     (10)   —     —     115  —   

Finance and insurance

  534  —     23  30  —     —     (4)   7   —     590  —   

Consumer—non-cyclical

  73  —     2  —     —     —     (10)   9   —     74  —   

Technology andcommunications

  50  —     2  —     —     —     —     —     —     52  —   

Industrial

  39  —     1  —     —     —     —     —     —     40  —   

Capital goods

  92  —     3  —     —     —     —     —     —     95  —   

Consumer—cyclical

  211  —     7  —     (13)   —     (1)   —     (9)   195  —   

Transportation

  57  —     1  4  —     —     (8)   —     —     54  —   

Other

  178  —     3  22  —     —     (12)   8   —     199  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  1,998  —     68  70  (14)   —     (47)   96   (9)   2,162  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

           

Utilities

  404  —     16  30  —     —     —     —     (15)   435  —   

Energy

  217  —     7  1  —     —     (4)   —     —     221  —   

Finance and insurance

  171  1  11  5  —     —     —     —     (6)   182  1

Consumer—non-cyclical

  106  2  3  —     —     —     (44)   —     —     67  —   

Technology andcommunications

  26  —     1  —     —     —     —     —     —     27  —   

Industrial

  61  —     2  —     —     —     —     —     —     63  —   

Capital goods

  173  —     6  5  —     —     (11)   —     —     173  —   

Consumer—cyclical

  122  —     6  —     —     —     (3)   —     —     125  —   

Transportation

  171  —     6  15  —     —     —     —     —     192  —   

Other

  81  —     4  —     —     —     (1)   6   —     90  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate

  1,532  3  62  56  —     —     (63)   6   (21)   1,575  1
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  35  —     —     —     —     —     —     —     —     35  —   

Commercial mortgage-backed

  95  —     2  1  —     —     —     —     —     98  —   

Other asset-backed

  165  —     1  54  —     —     (13)   1   (6)   202  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturity securities

  3,876  4  133  181  (14)   —     (123)   103   (36)   4,124  2
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity securities

  58  —     —     —     (3)   —     —     —     —     55  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other invested assets:

           

Derivative assets:

           

Equity index options

  39  17  —     12  —     —     (8)   —     —     60  12
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative assets

  39  17  —     12  —     —     (8)   —     —     60  12
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other invested assets

  39  17  —     12  —     —     (8)   —     —     60  12
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Reinsurance recoverable(2)

  20  (3)   —     —     —     1  —     —     —     18  (3) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 assets

 $3,993 $18 $133 $193 $(17)  $1 $(131)  $103  $(36)  $4,257 $11
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                             
                     
Total gains
 
    
Total realized and
                 
(losses)
  
 
Beginning
  
unrealized gains
              
Ending
  
included in
  
 
balance
  
(losses)
                
balance
  
net income
  
 
as of

April 1,
  
Included 
in 
net
  
Included
          
Transfer

into
  
Transfer

out of
  
as of

June 30,
  
attributable

to assets
 
(Amounts in millions)
 
2019
  
 income
  
in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Level 3
 
(1)
  
Level 3
 
(1)
  
2019
  
still held
 
Fixed maturity securities:
  
   
   
   
   
   
   
   
   
   
   
 
State and political subdivisions
 $
52
  $
1
  $
8
  $
—  
  $
—  
  $
—  
  $
—  
  $
—
  $
—
  $
61
  $
—  
 
U.S. corporate:
  
   
   
   
   
   
   
   
   
   
   
 
Utilities
  
748
   
—  
   
20
   
82
   
(13
)  
—  
   
(38
)  
—
   
(10
)  
789
   
—  
 
Energy
  
115
   
—  
   
3
   
5
   
—  
   
—  
   
(1
)  
—
   
—
   
122
   
—  
 
Finance and insurance
  
590
   
—  
   
15
   
10
   
—  
   
—  
   
(8
)  
—
   
—
   
607
   
—  
 
Consumer—
non-cyclical
  
74
   
—  
   
1
   
14
   
—  
   
—  
   
—  
   
—
   
—
   
89
   
—  
 
Technology and
communications
  
52
   
—  
   
3
   
—  
   
—  
   
—  
   
—  
   
—
   
(11
)  
44
   
—  
 
Industrial
  
40
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—
   
—
   
40
   
—  
 
Capital goods
  
95
   
—  
   
3
   
—  
   
—  
   
—  
   
—  
   
—
   
—
   
98
   
—  
 
Consumer—cyclical
  
195
   
—  
   
3
   
—  
   
—  
   
—  
   
(13
)  
—
   
—
   
185
   
—  
 
Transportation
  
54
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—
   
—
   
54
   
—  
 
Other
  
199
   
—  
   
3
   
—  
   
—  
   
—  
   
(3
)  
—
   
—
   
199
   
—  
 
                                             
Total U.S. corporate
  
2,162
   
—  
   
51
   
111
   
(13
)  
—  
   
(63
)  
—  
   
(21
)  
2,227
   
—  
 
                                             
Non-U.S.
corporate:
  
   
   
   
   
   
   
   
   
   
   
 
Utilities
  
435
   
—  
   
7
   
—  
   
(7
)  
—  
   
(17
)  
—
   
(1
)  
417
   
—  
 
Energy
  
221
   
—  
   
5
   
15
   
—  
   
—  
   
—  
   
—
   
—
   
241
   
—  
 
Finance and insurance
  
182
   
1
   
7
   
2
   
—  
   
—  
   
(13
)  
—
   
—
   
179
   
1
 
Consumer—
non-cyclical
  
67
   
—  
   
1
   
—  
   
—  
   
—  
   
—  
   
—
   
—
   
68
   
—  
 
Technology and
communications
  
27
   
—  
   
—
  
   
—  
   
—  
   
—  
   
—  
   
—
   
—
   
27
   
—  
 
Industrial
  
63
   
—  
   
1
   
—  
   
—  
   
—  
   
—  
   
—
   
—
   
64
   
—  
 
Capital goods
  
173
   
—  
   
3
   
5
   
—  
   
—  
   
—  
   
—
   
—
   
181
   
—  
 
Consumer—cyclical
  
125
   
—  
   
2
   
—  
   
—  
   
—  
   
(1
)  
—
   
—
   
126
   
—  
 
Transportation
  
192
   
—  
   
3
   
4
   
—  
   
—  
   
—  
   
—
   
—
   
199
   
—  
 
Other
  
90
   
—  
   
4
   
35
   
—  
   
—  
   
—  
   
—
   
—
   
129
   
—  
 
                                             
Total
non-U.S.
corporate
  
1,575
   
1
   
33
   
61
   
(7
)  
—  
   
(31
)  
—
   
(1
)  
1,631
   
1
 
                                             
Residential mortgage-backed
  
35
   
—  
   
2
   
5
   
—  
   
—  
   
(1
)  
—
   
—
   
41
   
—  
 
Commercial mortgage-backed
  
98
   
—  
   
7
   
1
   
—  
   
—  
   
—  
   
—
   
(14
)  
92
   
—  
 
Other asset-backed
  
202
   
—  
   
1
   
41
   
—  
   
—  
   
(28
)  
27
   
(8
)  
235
   
—  
 
                                             
Total fixed maturity securities
  
4,124
   
2
   
102
   
219
   
(20
)  
—  
   
(123
)  
27
   
(44
)  
4,287
   
1
 
                                             
Equity securities
  
55
   
—  
   
—  
   
2
   
(1
)  
—  
   
—  
   
—
   
—
   
56
   
—  
 
                                             
Other invested assets:
  
   
   
   
   
   
   
   
   
   
   
 
Derivative assets:
  
   
   
   
   
   
   
   
   
   
   
 
Equity index options
  
60
   
10
   
—  
   
9
   
—  
   
—  
   
(14
)  
—
   
—
   
65
   
7
 
                                             
Total derivative assets
  
60
   
10
   
—  
   
9
   
—  
   
—  
   
(14
)  
—
   
—
   
65
   
7
 
                                             
Total other invested assets
  
60
   
10
   
—  
   
9
   
—  
   
—  
   
(14
)  
—
   
—
   
65
   
7
 
                                             
Reinsurance recoverable
(2)
  
18
   
2
   
—  
   
—  
   
—  
   
—  
   
—  
   
—
   
—
   
20
   
2
 
                                             
Total Level 3 assets
 $
4,257
  $
14
  $
102
  $
230
  $
(21
) $
—  
  $
(137
) $
27
  $
(44
) $
4,428
  $
10
 
                                             
(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.


4
9
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in millions)

 Beginning
balance
as of
January 1,
2018		  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
March 31,
2018		  Total gains
(losses)
included in
net
income
attributable
to assets
still held		 
 Included in
net
income		  Included
in OCI		 

Fixed maturity securities:

           

U.S. government, agencies and government-sponsoredenterprises

 $1 $—    $—    $—    $—    $—    $(1)  $—    $—    $—    $—   

State and political subdivisions

  37  1  (3)   —     —     —     —     18   —     53  1

U.S. corporate:

           

Utilities

  574  —     (18)   3  —     —     (2)   —     (4)   553  —   

Energy

  147  —     (5)   22  —     —     (18)   —     —     146  —   

Finance and insurance

  626  1  (26)   26  —     —     (36)   —     (11)   580  1

Consumer—non-cyclical

  81  —     (2)   —     —     —     —     —     —     79  —   

Technology andcommunications

  73  —     (6)   —     —     —     (42)   —     —     25  —   

Industrial

  39  —     —     —     —     —     —     —     —     39  —   

Capital goods

  121  —     (8)   —     —     —     (10)   —     —     103  —   

Consumer—cyclical

  262  —     (9)   10  —     —     (11)   —     —     252  —   

Transportation

  60  —     (1)   —     —     —     (2)   —     —     57  —   

Other

  169  —     (1)   —     —     —     (2)   —     —     166  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  2,152  1  (76)   61  —     —     (123)   —     (15)   2,000  1
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

           

Utilities

  343  —     (9)   22  —     —     (20)   —     —     336  —   

Energy

  176  —     (4)   23  —     —     —     —     —     195  —   

Finance and insurance

  161  1  (8)   —     —     —     (1)   —     —     153  1

Consumer—non-cyclical

  124  —     (3)   —     —     —     (1)   —     —     120  —   

Technology andcommunications

  29  —     (1)   —     —     —     —     —     —     28  —   

Industrial

  116  —     (3)   —     —     —     (5)   —     —     108  —   

Capital goods

  191  —     (5)   —     —     —     —     —     —     186  —   

Consumer—cyclical

  54  —     (2)   —     —     —     —     —     —     52  —   

Transportation

  170  —     (4)   —     —     —     —     —     —     166  —   

Other

  52  —     (2)   33  —     —     —     —     —     83  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate

  1,416  1  (41)   78  —     —     (27)   —     —     1,427  1
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed

  77  —     (1)   12  —     —     —     —     (54)   34  —   

Commercial mortgage-backed

  30  —     (2)   7  —     —     —     —     (29)   6  —   

Other asset-backed

  237  —     (2)   55  —     —     (32)   3   (89)   172  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total fixed maturity securities

  3,950  3  (125)   213  —     —     (183)   21   (187)   3,692  3
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity securities

  44  —     —     4  (3)   —     —     —     —     45  —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other invested assets:

           

Derivative assets:

           

Equity index options

  80  (15)   —     14  —     —     (19)   —     —     60  (12) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total derivative assets

  80  (15)   —     14  —     —     (19)   —     —     60  (12) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other invested assets

  80  (15)   —     14  —     —     (19)   —     —     60  (12) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Reinsurance recoverable(2)

  14  (2)   —     —     —     1  —     —     —     13  (2) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 assets

 $4,088 $(14)  $(125)  $231 $(3)  $1 $(202)  $21  $(187)  $3,810 $(11) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                             
                       
                     
Total gains
 
    
Total realized and
                 
(losses)
  
 
Beginning
  
unrealized gains
              
Ending
  
included in
  
 
balance
  
(losses)
                
balance
  
net income
  
 
as of
  
Included
             
Transfer
  
Transfer
  
as of
  
attributable
 
(Amounts in millions)
 
April 1,

2018
  
in net
income
  
Included
 
in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
into
Level 3
 
(1)
  
out of
Level 3
 
(1)
  
June 30,
2018
  
to assets

still held
 
Fixed maturity securities:
  
   
   
   
   
   
   
   
   
   
   
 
State and political subdivisions
 $
53
  $
—  
  $
(1
) $
—  
  $
—  
  $
—  
  $
—  
  $
—  
  $
—  
  $
52
  $
—  
 
U.S. corporate:
  
   
   
   
   
   
   
   
   
   
   
 
Utilities
  
553
   
(1
)  
(7
)  
66
   
(12
)  
—  
   
(2
)  
25
   
—  
   
622
   
—  
 
Energy
  
146
   
—  
   
—  
   
—  
   
—  
   
—  
   
(1
)  
—  
   
(7
)
 
  
138
   
—  
 
Finance and insurance
  
580
   
—  
   
(41
)  
—  
   
—  
   
—  
   
(74
)  
—  
   
(7
)
 
  
458
   
—  
 
Consumer—
non-cyclical
  
79
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
79
   
—  
 
Technology and
communications
  
25
   
—  
   
1
   
4
   
—  
   
—  
   
(18
)  
—  
   
—  
   
12
   
—  
 
Industrial
  
39
   
—  
   
1
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
40
   
—  
 
Capital goods
  
103
   
—  
   
(1
)  
24
   
—  
   
—  
   
—  
   
—  
   
(7
)
 
  
119
   
—  
 
Consumer—cyclical
  
252
   
—  
   
(1
)  
7
   
(3
)  
—  
   
(1
)  
—  
   
—  
   
254
   
—  
 
Transportation
  
57
   
—  
   
—  
   
—  
   
—  
   
—  
   
(1
)  
—  
   
—  
   
56
   
—  
 
Other
  
166
   
—  
   
—  
   
—  
   
(10
)  
—  
   
(3
)  
—  
   
—  
   
153
   
—  
 
                                             
Total U.S. corporate
  
2,000
   
(1
)  
(48
)  
101
   
(25
)  
—  
   
(100
)  
25
   
(21
)
 
  
1,931
   
—  
 
                                             
Non-U.S.
corporate:
  
   
   
   
   
   
   
   
   
   
   
 
Utilities
  
336
   
—  
   
(4
)  
—  
   
—  
   
—  
   
—  
   
15
   
(14
)
 
  
333
   
—  
 
Energy
  
195
   
—  
   
(2
)  
—  
   
—  
   
—  
   
(18
)  
—  
   
—  
   
175
   
—  
 
Finance and insurance
  
153
   
1
   
(3
)  
1
   
—  
   
—  
   
(1
)  
—  
   
(1
)
 
  
150
   
1
 
Consumer—
non-cyclical
  
120
   
—  
   
(1
)  
—  
   
—  
   
—  
   
(11
)  
—  
   
—  
   
108
   
—  
 
Technology and
communications
  
28
   
—  
   
1
   
—  
   
—  
   
—  
   
(13
)  
—  
   
—  
   
16
   
—  
 
Industrial
  
108
   
—  
   
(1
)  
3
   
—  
   
—  
   
(5
)  
—  
   
—  
   
105
   
—  
 
Capital goods
  
186
   
1
   
—  
   
—  
   
—  
   
—  
   
(21
)  
—  
   
—  
   
166
   
1
 
Consumer—cyclical
  
52
   
—  
   
—  
   
—  
   
(1
)  
—  
   
(3
)  
—  
   
—  
   
48
   
—  
 
Transportation
  
166
   
—  
   
(2
)  
22
   
—  
   
—  
   
—  
   
17
   
—  
   
203
   
—  
 
Other
  
83
   
—  
   
(1
)  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
82
   
—  
 
                                             
Total
non-U.S.
corporate
  
1,427
   
2
   
(13
)  
26
   
(1
)  
—  
   
(72
)  
32
   
(15
)
 
  
1,386
   
2
 
                                             
Residential mortgage-backed
  
34
   
—  
   
1
   
17
   
—  
   
—  
   
(1
)  
—  
   
(17
)
 
  
34
   
—  
 
Commercial mortgage-backed
  
6
   
—  
   
—  
   
28
   
—  
   
—  
   
—  
   
13
   
(3
)
 
  
44
   
—  
 
Other asset-backed
  
172
   
—  
   
(1
)  
6
   
—  
   
—  
   
(24
)  
45
   
(32
)
 
  
166
   
—  
 
                                             
Total fixed maturity securities
  
3,692
   
1
   
(62
)  
178
   
(26
)  
—  
   
(197
)  
115
   
(88
)
 
  
3,613
   
2
 
                                             
Equity securities
  
45
   
—  
   
—  
   
1
   
—  
   
—  
   
—  
   
—  
   
—  
   
46
   
—  
 
                                             
Other invested assets:
  
   
   
   
   
   
   
   
   
   
   
 
Derivative assets:
  
   
   
   
   
   
   
   
   
   
   
 
Equity index options
  
60
   
8
   
—  
   
15
   
—  
   
—  
   
(13
)  
—  
   
—  
   
70
   
8
 
                                             
Total derivative assets
  
60
   
8
   
—  
   
15
   
—  
   
—  
   
(13
)  
—  
   
—  
   
70
   
8
 
                                             
Total other invested assets
  
60
   
8
   
—  
   
15
   
—  
   
—  
   
(13
)  
—  
   
—  
   
70
   
8
 
                                             
Reinsurance recoverable
(2)
  
13
   
(1
)  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
12
   
(1
)
                                             
Total Level 3 assets
 $
3,810
  $
8
  $
(62
) $
194
  $
(26
) $
—  
  $
(210
) $
115
  $
(88
) $
3,741
  $
9
 
                                             
(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.

50
Table of Contents
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:
                                             
                     
Total gains
 
   
Total realized and
                
(losses)
  
 
Beginning
  
unrealized gains
              
Ending
  
included in
  
 
balance
  
(losses)
              
balance
  
net income
  
 
as of
  
Included 
            
Transfer
  
Transfer
  
as of
  
attributable
 
 
January 1,
  
in net
  
Included
          
into
  
out of
  
June 30,
  
to assets
 
(Amounts in millions)
 
2019
  
income
  
in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Level
 3 
(1)
  
Level 3
 
(1)
  
2019
  
still held
 
Fixed maturity securities:
  
   
   
   
   
   
   
   
   
   
   
 
State and political subdivisions
 $
51
  $
2
  $
8
  $
—  
  $
—  
  $
—  
  $
—  
  $
—  
  $
—  
  $
61
  $
1
 
U.S. corporate:
  
   
   
   
   
   
   
   
   
   
   
 
Utilities
  
643
   
—  
   
42
   
96
   
(14
)  
—  
   
(40
)  
72
   
(10
)  
789
   
—  
 
Energy
  
121
   
—  
   
7
   
5
   
—  
   
—  
   
(11
)  
—  
   
—  
   
122
   
—  
 
Finance and insurance
  
534
   
—  
   
38
   
40
   
—  
   
—  
   
(12
)  
7
   
—  
   
607
   
—  
 
Consumer—non-cyclical
  
73
   
—  
   
3
   
14
   
—  
   
—  
   
(10
)  
9
   
—  
   
89
   
—  
 
Technology and communications
  
50
   
—  
   
5
   
—  
   
—  
   
—  
   
—  
   
—  
   
(11
)  
44
   
—  
 
Industrial
  
39
   
—  
   
1
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
40
   
—  
 
Capital goods
  
92
   
—  
   
6
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
98
   
—  
 
Consumer—cyclical
  
211
   
—  
   
10
   
—  
   
(13
)  
—  
   
(14
)  
—  
   
(9
)  
185
   
—  
 
Transportation
  
57
   
—  
   
1
   
4
   
—
   
—  
   
(8
)  
—  
   
—  
   
54
   
—  
 
Other
  
178
   
—  
   
6
   
22
   
—  
   
—  
   
(15
)  
8
   
—  
   
199
   
—  
 
                                             
Total U.S. corporate
  
1,998
   
—  
   
119
   
181
   
(27
)  
—  
   
(110
)  
96
   
(30
)  
2,227
   
—  
 
                                             
Non-U.S.
corporate:
  
   
   
   
   
   
   
   
   
   
   
 
Utilities
  
404
   
—  
   
23
   
30
   
(7
)  
—  
   
(17
)  
—  
   
(16
)  
417
   
—  
 
Energy
  
217
   
—  
   
12
   
16
   
—  
   
—  
   
(4
)  
—  
   
—  
   
241
   
—  
 
Finance and insurance
  
171
   
2
   
18
   
7
   
—  
   
—  
   
(13
)  
—  
   
(6
)  
179
   
2
 
Consumer—non-cyclical
  
106
   
2
   
4
   
—  
   
—  
   
—  
   
(44
)  
—  
   
—  
   
68
   
—  
 
Technology and
communications
  
26
   
—  
   
1
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
27
   
—  
 
Industrial
  
61
   
—  
   
3
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
64
   
—  
 
Capital goods
  
173
   
—  
   
9
   
10
   
—  
   
—  
   
(11
)  
—  
   
—  
   
181
   
—  
 
Consumer—cyclical
  
122
   
—  
   
8
   
—  
   
—  
   
—  
   
(4
)  
—  
   
—  
   
126
   
—  
 
Transportation
  
171
   
—  
   
9
   
19
   
—  
   
—  
   
—  
   
—  
   
—  
   
199
   
—  
 
Other
  
81
   
—  
   
8
   
35
   
—  
   
—  
   
(1
)  
6
   
—  
   
129
   
—  
 
                                             
Total
non-U.S.
corporate
  
1,532
   
4
   
95
   
117
   
(7
)  
—  
   
(94
)  
6
   
(22
)  
1,631
   
2
 
                                             
Residential mortgage-backed
  
35
   
—  
   
2
   
5
   
—  
   
—  
   
(1
)  
—  
   
—  
   
41
   
—  
 
Commercial mortgage-backed
  
95
   
—  
   
9
   
2
   
—  
   
—  
   
—  
   
—  
   
(14
)  
92
   
—  
 
Other asset-backed
  
165
   
—  
   
2
   
95
   
—  
   
—  
   
(41
)  
28
   
(14
)  
235
   
—  
 
                                             
Total fixed maturity securities
  
3,876
   
6
   
235
   
400
   
(34
)  
—  
   
(246
)  
130
   
(80
)  
4,287
   
3
 
                                             
Equity securities
  
58
   
—  
   
—  
   
2
   
(4
)  
—  
   
—  
   
—  
   
—  
   
56
   
—  
 
                                             
Other invested assets:
  
   
   
   
   
   
   
   
   
   
   
 
Derivative assets:
  
   
   
   
   
   
   
   
   
   
   
 
Equity index options
  
39
   
27
   
—  
   
21
   
—  
   
—  
   
(22
)  
—  
   
—  
   
65
   
11
 
                                             
Total derivative assets
  
39
   
27
   
—  
   
21
   
—  
   
—  
   
(22
)  
—  
   
—  
   
65
   
11
 
                                             
Total other invested assets
  
39
   
27
   
—  
   
21
   
—  
   
—  
   
(22
)  
—  
   
—  
   
65
   
11
 
                                             
Reinsurance recoverable 
(2)
  
20
   
(1
)  
—  
   
—
   
—  
   
1
   
—  
   
—  
   
—  
   
20
   
(1
)
                                             
Total Level 3 assets
 $
3,993
  $
32
  $
235
  $
423
  $
(38
) $
1
  $
(268
) $
130
  $
(80
) $
4,428
  $
13
 
                                             
(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.
51
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
                     
Total gains
 
   
Total realized and
                
(losses)
  
 
Beginning
  
unrealized gains
              
Ending
  
included in 
  
 
balance
  
(losses)
              
balance
  
net income
  
 
as of
  
Included
            
Transfer
  
Transfer
  
as of
  
attributable
 
 
January 1,
  
in net
  
Included
          
into
  
out of
  
June 30,
  
to assets
 
(Amounts in millions)
 
2018
  
income
  
in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Level 3
 
(1)
  
Level 3
 
(1)
  
2018
  
still held
 
Fixed maturity securities:
  
   
   
   
   
   
   
   
   
   
   
 
U.S. government, agencies and government-sponsored
enterprises
 $
1
  $
—  
  $
—  
  $
—  
  $
—  
  $
—  
  $
(1
) $
—  
  $
—  
  $
—  
  $
—  
 
State and political subdivisions
  
37
   
1
   
(4
)  
—  
   
—  
   
—  
   
—  
   
18
   
—  
   
52
   
1
 
U.S. corporate:
  
   
   
   
   
   
   
   
   
   
   
 
Utilities
  
574
   
(1
)  
(25
)  
69
   
(12
)  
—  
   
(4
)  
25
   
(4
)
 
  
622
   
—  
 
Energy
  
147
   
—  
   
(5
)  
22
   
—  
   
—  
   
(19
)  
—  
   
(7
)
 
  
138
   
—  
 
Finance and insurance
  
626
   
1
   
(67
)  
26
   
—  
   
—  
   
(110
)  
—  
   
(18
)
 
  
458
   
1
 
Consumer—non-cyclical
  
81
   
—  
   
(2
)  
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
79
   
—  
 
Technology and
communications
  
73
   
—  
   
(5
)  
4
   
—  
   
—  
   
(60
)  
—  
   
—  
   
12
   
—  
 
Industrial
  
39
   
—  
   
1
   
—  
   
—  
   
—  
   
—  
   
—  
   
—  
   
40
   
—  
 
Capital goods
  
121
   
—  
   
(9
)  
24
   
—  
   
—  
   
(10
)  
—  
   
(7
)
 
  
119
   
—  
 
Consumer—cyclical
  
262
   
—  
   
(10
)  
17
   
(3
)  
—  
   
(12
)  
—  
   
—  
   
254
   
—  
 
Transportation
  
60
   
—  
   
(1
)  
—  
   
—  
   
—  
   
(3
)  
—  
   
—  
   
56
   
—  
 
Other
  
169
   
—  
   
(1
)  
—  
   
(10
)  
—  
   
(5
)  
—  
   
—  
   
153
   
—  
 
                                             
Total U.S. corporate
  
2,152
   
—  
   
(124
)  
162
   
(25
)  
—  
   
(223
)  
25
   
(36
)
 
  
1,931
   
1
 
                                             
Non-U.S.
corporate:
  
   
   
   
   
   
   
   
   
   
   
 
Utilities
  
343
   
—  
   
(13
)  
22
   
—  
   
—  
   
(20
)  
15
   
(14
)
 
  
333
   
—  
 
Energy
  
176
   
—  
   
(6
)  
23
   
—  
   
—  
   
(18
)  
—  
   
—  
   
175
   
—  
 
Finance and insurance
  
161
   
2
   
(11
)  
1
   
—  
   
—  
   
(2
)  
—  
   
(1
)
 
  
150
   
2
 
Consumer—non-cyclical
  
124
   
—  
   
(4
)  
—  
   
—  
   
—  
   
(12
)  
—  
   
—  
   
108
   
—  
 
Technology and
communications
  
29
   
—  
   
—  
   
—  
   
—  
   
—  
   
(13
)  
—  
   
—  
   
16
   
—  
 
Industrial
  
116
   
—  
   
(4
)  
3
   
—  
   
—  
   
(10
)  
—  
   
—  
   
105
   
—  
 
Capital goods
  
191
   
1
   
(5
)  
—  
   
—  
   
—  
   
(21
)  
—  
   
—  
   
166
   
1
 
Consumer—cyclical
  
54
   
—  
   
(2
)  
—  
   
(1
)  
—  
   
(3
)  
—  
   
—  
   
48
   
—  
 
Transportation
  
170
   
—  
   
(6
)  
22
   
—  
   
—  
   
—  
   
17
   
—  
   
203
   
—  
 
Other
  
52
   
—  
   
(3
)  
33
   
—  
   
—  
   
—  
   
—  
   
—  
   
82
   
—  
 
                                             
Total
non-U.S.
corporate
  
1,416
   
3
   
(54
)  
104
   
(1
)  
—  
   
(99
)  
32
   
(15
)
 
  
1,386
   
3
 
                                             
Residential mortgage-backed
  
77
   
—  
   
—  
   
29
   
—  
   
—  
   
(1
)  
—  
   
(71
)
 
  
34
   
—  
 
Commercial mortgage-backed
  
30
   
—  
   
(2
)  
35
   
—  
   
—  
   
—  
   
13
   
(32
)
 
  
44
   
—  
 
Other asset-backed
  
237
   
—  
   
(3
)  
61
   
—  
   
—  
   
(56
)  
48
   
(121
)
 
  
166
   
—  
 
                                             
Total fixed maturity securities
  
3,950
   
4
   
(187
)  
391
   
(26
)  
—  
   
(380
)  
136
   
(275
)
 
  
3,613
   
5
 
                                             
Equity securities
  
44
   
—  
   
—  
   
5
   
(3
)  
—  
   
—  
   
—  
   
—  
   
46
   
—  
 
                                             
Other invested assets:
  
   
   
   
   
   
   
   
   
   
   
 
Derivative assets:
  
   
   
   
   
   
   
   
   
   
   
 
Equity index options
  
80
   
(7
)  
—  
   
29
   
—  
   
—  
   
(32
)  
—  
   
—  
   
70
   
(4
)
                                             
Total derivative assets
  
80
   
(7
)  
—  
   
29
   
—  
   
—  
   
(32
)  
—  
   
—  
   
70
   
(4
)
                                             
Total other invested assets
  
80
   
(7
)  
—  
   
29
   
—  
   
—  
   
(32
)  
—  
   
—  
   
70
   
(4
)
                                             
Reinsurance recoverable
(2)
  
14
   
(3
)  
—  
   
—  
   
—  
   
1
   
—  
   
—  
   
—  
   
12
   
(3
)
                                             
Total Level 3 assets
 $
4,088
  $
(6
) $
(187
) $
425
  $
(29
) $
1
  $
(412
) $
136
  $
(275
) $
3,741
  $
(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.
52
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gains and losses included in net income 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 three months ended March 31:

(Amounts in millions)

  2019   2018 

Total realized and unrealized gains (losses) included in net income:

    

Net investment income

  $4  $3

Net investment gains (losses)

   14   (17) 
  

 

 

   

 

 

 

Total

  $18  $(14) 
  

 

 

   

 

 

 

Net gains (losses) included in net income attributable to assets still held:

    

Net investment income

  $2  $3

Net investment gains (losses)

   9   (14) 
  

 

 

   

 

 

 

Total

  $11  $(11) 
  

 

 

   

 

 

 

periods indicated:

 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
 
Total realized and unrealized gains (losses) included in net income:
  
   
   
   
 
Net investment income
 $
2
  $
2
  $
6
  $
5
 
Net investment gains (losses)
  
12
   
6
   
26
   
(11
)
                 
Total
 $
14
  $
8
  $
32
  $
(6
)
                 
Total gains (losses) included in net income attributable to assets still held:
  
   
   
   
 
Net investment income
 $
1
  $
2
  $
3
  $
5
 
Net investment gains (losses)
  
9
   
7
   
10
   
(7
)
                 
Total
 $
10
  $
9
  $
13
  $
(2
)
                 
The amount presented for realized and unrealized gains (losses) included in net income for
available-for-sale
securities primarily represents amortization and accretion of premiums and discounts on certain fixed maturity securities.

53
Table of Contents
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 March 31,June 30, 2019:

(Amounts in millions)

 

Valuation technique

 Fair value  

Unobservable input

 

Range

 

Weighted-average

Fixed maturity securities:

     

U.S. corporate:

     

Utilities

 Internal models $674 Credit spreads 60bps - 302bps 146bps

Energy

 Internal models  92 Credit spreads 72bps - 317bps 169bps

Finance and insurance

 Internal models  578 Credit spreads 64bps - 268bps 167bps

Consumer—non-cyclical

 Internal models  74 Credit spreads 85bps - 177bps 123bps

Technology andcommunications

 Internal models  52 Credit spreads 90bps - 317bps 205bps

Industrial

 Internal models  40 Credit spreads 108bps - 225bps 153bps

Capital goods

 Internal models  96 Credit spreads 100bps - 283bps 162bps

Consumer—cyclical

 Internal models  181 Credit spreads 61bps - 235bps 142bps

Transportation

 Internal models  54 Credit spreads 54bps - 235bps 107bps

Other

 Internal models  170 Credit spreads 64bps - 146bps 85bps
  

 

 

    

Total U.S. corporate

 Internal models $2,011 Credit spreads 54bps - 317bps 148bps
  

 

 

    

Non-U.S. corporate:

     

Utilities

 Internal models $435 Credit spreads 78bps - 228bps 142bps

Energy

 Internal models  202 Credit spreads 100bps - 283bps 163bps

Finance and insurance

 Internal models  182 Credit spreads 61bps - 222bps 131bps

Consumer—non-cyclical

 Internal models  66 Credit spreads 61bps - 172bps 143bps

Technology andcommunications

 Internal models  27 Credit spreads 127bps - 184bps 167bps

Industrial

 Internal models  63 Credit spreads 99bps - 151bps 112bps

Capital goods

 Internal models  173 Credit spreads 85bps - 283bps 165bps

Consumer—cyclical

 Internal models  121 Credit spreads 72bps - 283bps 195bps

Transportation

 Internal models  192 Credit spreads 61bps - 235bps 131bps

Other

 Internal models  84 Credit spreads 111bps - 223bps 158bps
  

 

 

    

Totalnon-U.S. corporate

 Internal models $1,545 Credit spreads 61bps - 283bps 149bps
  

 

 

    

Derivative assets:

     

Equity index options

 Discounted cash flows $60 Equity index volatility 6% - 28% 16%

(Amounts in millions)
 
Valuation technique
 
Fair value
  
Unobservable input
 
Range
  
Weighted-average
 
Fixed maturity securities:
 
  
  
 
  
 
U.S. corporate:
 
  
  
 
  
 
Utilities
 
Internal models​​​​​​​
 
$
719
  
Credit spreads
 
66bps - 326bps
  
146
bps
 
Energy
 
Internal models
  
99
  
Credit spreads
 
82bps - 311bps
  
167
bps
 
Finance and insurance
 
Internal models
  
595
  
Credit spreads
 
68bps - 246bps
  
158
bps
 
Consumer—non-cyclical
 
Internal models
  
89
  
Credit spreads
 
93bps - 311bps
  
159
bps
 
Technology and
communications
 
Internal models
  
44
  
Credit spreads
 
137bps - 311bps 
  
217
bps
 
Industrial
 
Internal models
  
40
  
Credit spreads
 
118bps - 212bps 
  
155
bps
 
Capital goods
 
Internal models
  
98
  
Credit spreads
 
103bps - 277bps 
  
157
bps
 
Consumer—cyclical
 
Internal models
  
170
  
Credit spreads
 
70bps - 218bps
  
144
bps
 
Transportation
 
Internal models
  
54
  
Credit spreads
 
63bps - 215bps
  
109
bps
 
Other
 
Internal models
  
168
  
Credit spreads
 
68bps - 131bps
  
85
bps
 
               
Total U.S. corporate
 
Internal models
 
$
2,076
  
Credit spreads
 
63bps - 326bps
  
147
bps
 
               
Non-U.S.
corporate:
 
  
  
 
  
 
Utilities
 
Internal models
 
$
417
  
Credit spreads
 
84bps - 215bps
  
140
bps
 
Energy
 
Internal models
  
221
  
Credit spreads
 
103bps - 277bps 
  
162
bps
 
Finance and insurance
 
Internal models
  
179
  
Credit spreads
 
70bps - 189bps
  
128
bps
 
Consumer—non-cyclical
 
Internal models
  
68
  
Credit spreads
 
70bps - 170bps
  
135
bps
 
Technology and
communications
 
Internal models
  
27
  
Credit spreads
 
124bps - 150bps 
  
141
bps
 
Industrial
 
Internal models
  
64
  
Credit spreads
 
99bps - 157bps
  
113
bps
 
Capital goods
 
Internal models
  
181
  
Credit spreads
 
93bps - 277bps
  
169
bps
 
Consumer—cyclical
 
Internal models
  
123
  
Credit spreads
 
81bps - 277bps
  
193
bps
 
Transportation
 
Internal models
  
198
  
Credit spreads
 
70bps - 218bps
  
134
bps
 
Other
 
Internal models
  
125
  
Credit spreads
 
109bps - 218bps 
  
162
bps
 
               
Total
non-U.S.
corporate
 
Internal models
 
$
1,603
  
Credit spreads
 
70bps - 277bps
  
149
bps
 
               
Derivative assets:
 
  
  
 
  
 
 
 
Discounted cash
 
 
 
 
 
Equity index
 
 
 
 
 
 
Equity index options
 
flows
 
$
65
  
volatility
 
6
% -
29
% 
  
17%
 
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.

54
Table of Contents
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:

   March 31, 2019 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3 

Liabilities

        

Policyholder account balances:

        

GMWB embedded derivatives(1)

  $295  $—     $—     $295

Fixed index annuity embedded derivatives

   423   —      —      423

Indexed universal life embedded derivatives

   13   —      —      13
  

 

 

   

 

 

   

 

 

   

 

 

 

Total policyholder account balances

   731   —      —      731
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative liabilities:

        

Interest rate swaps

   49   —      49   —   

Foreign currency swaps

   13   —      13   —   

Equity return swaps

   1   —      1   —   

Other foreign currency contracts

   25   —      25   —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities

   88   —      88   —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $819  $—     $88  $731
  

 

 

   

 

 

   

 

 

   

 

 

 

                 
 
June 30, 2019
 
(Amounts in millions)
 
Total
  
Level 1
  
Level 2
  
Level 3
 
Liabilities
  
   
   
   
 
Policyholder account balances:
  
   
   
   
 
 GMWB embedded derivatives 
(1)
 $
325
  $
—
  $
—
  $
325
 
Fixed index annuity embedded derivatives
  
438
   
—
   
—
   
438
 
Indexed universal life embedded derivatives
  
15
   
—
   
—
   
15
 
                 
Total policyholder account balances
  
778
   
—
   
—
   
778
 
                 
Derivative liabilities:
  
   
   
   
 
Interest rate swaps
  
10
   
—
   
10
   
—
 
Foreign currency swaps
  
8
   
—
   
8
   
—
 
Other foreign currency contracts
  
25
   
—
   
25
   
—
 
                 
Total derivative liabilities
  
43
   
—
   
43
   
—
 
                 
Total liabilities
 $
821
  $
—
  $
43
  $
778
 
                 
(1)

Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

   December 31, 2018 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3 

Liabilities

        

Policyholder account balances:

        

GMWB embedded derivatives(1)

  $337  $—     $—     $337

Fixed index annuity embedded derivatives

   389   —      —      389

Indexed universal life embedded derivatives

   12   —      —      12
  

 

 

   

 

 

   

 

 

   

 

 

 

Total policyholder account balances

   738   —      —      738
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative liabilities:

        

Interest rate swaps

   102   —      102   —   

Foreign currency swaps

   23   —      23   —   

Equity return swaps

   1   —      1   —   

Other foreign currency contracts

   42   —      42   —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities

   168   —      168   —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $906  $—     $168  $738
  

 

 

   

 

 

   

 

 

   

 

 

 

                 
 
December 31, 2018
 
(Amounts in millions)
 
Total
  
Level 1
  
Level 2
  
Level 3
 
Liabilities
  
   
   
   
 
Policyholder account balances:
  
��  
   
   
 
GMWB embedded derivatives 
(1)
 $
337
  $
—  
  $
—  
  $
337
 
Fixed index annuity embedded derivatives
  
389
   
—  
   
—  
   
389
 
Indexed universal life embedded derivatives
  
12
   
—  
   
—  
   
12
 
                 
Total policyholder account balances
  
738
   
—  
   
—  
   
738
 
                 
Derivative liabilities:
  
   
   
   
 
Interest rate swaps
  
102
   
—  
   
102
   
—  
 
Foreign currency swaps
  
23
   
—  
   
23
   
—  
 
Equity return swaps
  
1
   
—  
   
1
   
—  
 
Other foreign currency contracts
  
42
   
—  
   
42
   
—  
 
                 
Total derivative liabilities
  
168
   
—  
   
168
   
—  
 
                 
Total liabilities
 $
906
  $
—  
  $
168
  $
738
 
                 
(1)

Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

55
Table of Contents
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:

  Beginning
balance
as of
January 1,
2019		  Total realized and
unrealized (gains)
losses		  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3		  Transfer
out of
Level 3		  Ending
balance as of
March 31,
2019		  Total (gains)
losses
included in
net (income)
attributable
to liabilities
still held		 

(Amounts in millions)

 Included in
net (income)		  Included
in OCI		 

Policyholder account balances:

           

GMWB embeddedderivatives(1)

 $337 $(48)  $—    $—    $—    $6 $—    $—    $—    $295 $(44) 

Fixed index annuity embedded derivatives

  389  38  —     —     —     —     (4)   —     —     423  38

Indexed universal lifeembedded derivatives

  12  (1)   —     —     —     2  —     —     —     13  (1) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholder accountbalances

  738  (11)   —     —     —     8  (4)   —     —     731  (7) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $738 $(11)  $—    $—    $—    $8 $(4)  $—    $—    $731 $(7) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                             
                     
Total (gains)
 
   Total realized and                
losses
 
 
Beginning
  
unrealized (gains)
              
Ending
  
included in
  
 
balance
  
losses
              
balance
  
net (income)
  
 
as of
             
Transfer
  
Transfer
  
as of
  
attributable
  
 
April 1,
  
Included in
  
Included
          
into
  
out of
  
June 30,
  
to liabilities
 
(Amounts in millions)
 
2019
  
net (income)
  
in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Level 3
  
Level 3
  
2019
  
still held
 
Policyholder account balances:
  
   
   
   
   
   
   
   
   
   
   
 
GMWB embedded
derivatives 
(1)
 $
295
  $
24
  $
—  
  $
—  
  $
—  
  $
6
  $
—  
  $
—  
  $
—  
  $
325
  $
24
 
Fixed index annuity
embedded derivatives
  
423
   
20
   
—  
   
—  
   
—  
   
—  
   
(5
)  
—  
   
—  
   
438
   
20
 
Indexed universal life
embedded derivatives
  
13
   
1
   
—  
   
—  
   
—  
   
1
   
—  
   
—  
   
—  
   
15
   
1
 
                                             
Total policyholder account
balances
  
731
   
45
   
—  
   
—  
   
—  
   
7
   
(5
)  
—  
   
—  
   
778
   
45
 
                                             
Total Level 3 liabilities
 $
731
  $
45
  $
—  
  $
—  
  $
—  
  $
7
  $
(5
) $
—  
  $
—  
  $
778
  $
45
 
                                             
(1)

Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

  Beginning
balance
as of
January 1,
2018		  Total realized and
unrealized (gains)
losses		  Purchases  Sales  Issuances  Settlements  Transfer
into
Level 3		  Transfer
out of
Level 3		  Ending
balance as of
March 31,
2018		  Total (gains)
losses
included in
net (income)
attributable
to liabilities
still held		 

(Amounts in millions)

 Included in
net (income)		  Included
in OCI		 

Policyholder account balances:

           

GMWB embeddedderivatives(1)

 $250 $(16)  $—    $—    $—    $8 $—    $—    $—    $242 $(12) 

Fixed index annuityembedded derivatives

  419  (8)   —     —     —     —     (3)   —     —     408  (8) 

Indexed universal lifeembedded derivatives

  14  (5)   —     —     —     4  —     —     —     13  (5) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

��

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total policyholderaccount balances

  683  (29)   —     —     —     12  (3)   —     —     663  (25) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 liabilities

 $683 $(29)  $—    $—    $—    $12 $(3)  $—    $—    $663 $(25) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                                             
                     
Total (gains)
 
    Total realized and                
losses
 
 
Beginning
  
unrealized (gains)
              
Ending
  
included in
  
 
balance
  
losses
              
balance
  
net (income)
  
 
as of
             
Transfer
  
Transfer
  
as of
  
attributable
  
 
April 1,
  
Included in
  
Included
          
into
  
out of
  
June 30,
  
to liabilities
 
(Amounts in millions)
 
2018
  
net (income)
  
in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Level 3
  
Level 3
  
2018
  
still held
 
Policyholder account balances:
  
   
   
   
   
   
   
   
   
   
   
 
GMWB embedded
derivatives
 
(1)
 $
242
  $
(14
) $
—  
  $
—  
  $
—  
  $
7
  $
—  
  $
—  
  $
—  
  $
235
  $
(14
)
Fixed index annuity
embedded derivatives
  
408
   
15
   
—  
   
—  
   
—  
   
—  
   
(3
)  
—  
   
—  
   
420
   
15
 
Indexed universal life
embedded derivatives
  
13
   
(2
)  
—  
   
—  
   
—  
   
2
   
—  
   
—  
   
—  
   
13
   
(2
)
                                             
Total policyholder account
balances
  
663
   
(1
)  
—  
   
—  
   
—  
   
9
   
(3
)  
—  
   
—  
   
668
   
(1
)
                                             
Total Level 3 liabilities
 $
663
  $
(1
) $
—  
  $
—  
  $
—  
  $
9
  $
(3
) $
—  
  $
—  
  $
668
  $
(1
)
                                             
(1)

Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

56
Table of Contents
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:
                     
Total (gains)
 
   
Total realized and
                
losses
  
 
Beginning
  
unrealized (gains)
              
Ending
  
included in
  
 
balance
  
losses
              
balance
  
net 
(income)
  
 
as of
  
Included in
            
Transfer
  
Transfer
  
as of
  
attributable
 
 
January 1,
  
net
  
Included
          
into
  
out of
  
June 30,
  
to liabilities
 
(Amounts in millions)
 
2019
  
(income)
  
in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Level 3
  
Level 3
  
2019
  
still held
 
Policyholder account balances:
  
   
   
   
   
   
   
   
   
   
   
 
GMWB embedded
derivatives
(1)
 $
337
  $
(24
) $
—
  $
—
  $
—
  $
12
  $
—
  $
—
  $
—
  $
325
  $
(20
)
Fixed index annuity embedded derivatives
  
389
   
58
   
—
   
—
   
—
   
—
   
(9
)  
—
   
—
   
438
   
58
 
Indexed universal life
embedded derivatives
  
12
   
—
   
—
   
—
   
—
   
3
   
—
   
—
   
—
   
15
   
—
 
                                             
Total policyholder account
balances
  
738
   
34
   
—
   
—
   
—
   
15
   
(9
)  
—
   
—
   
778
   
38
 
                                             
Total Level 3 liabilities
 $
738
  $
34
  $
—
  $
—
  $
—
  $
15
  $
(9
) $
—
  $
—
  $
778
  $
38
 
                                             
(1)
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
                     
Total (gains)
 
   
Total realized and
                
losses
  
 
Beginning
  
unrealized (gains)
              
Ending
  
included in
  
 
balance
  
losses
              
balance
  
net (income)
  
 
as of
  
Included in
            
Transfer
  
Transfer
  
as of
  
attributable
 
 
January 1,
  
net
  
Included
          
into
  
out of
  
June 30,
  
to liabilities
 
(Amounts in millions)
 
2018
  
(income)
  
in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Level 3
  
Level 3
  
2018
  
still held
 
Policyholder account balances:
  
   
   
   
   
   
   
   
   
   
   
 
GMWB embedded
derivatives
 
(1)
 $
250
  $
(30
) $
—  
  $
—  
  $
—  
  $
15
  $
—  
  $
—  
  $
—  
  $
235
  $
(26
)
Fixed index annuity
embedded derivatives
  
419
   
7
   
—  
   
—  
   
—  
   
—  
   
(6
)  
—  
   
—  
   
420
   
7
 
Indexed universal life
embedded derivatives
  
14
   
(7
)  
—  
   
—  
   
—  
   
6
   
—  
   
—  
   
—  
   
13
   
(7
)
                                             
Total policyholder account
balances
  
683
   
(30
)  
—  
   
—  
   
—  
   
21
   
(6
)  
—  
   
—  
   
668
   
(26
)
                                             
Total Level 3 liabilities
 $
683
  $
(30
) $
—  
  $
—  
  $
—  
  $
21
   
$
(6
) $
—  
  $
—  
  $
668
  $
(26
)
                                             
(1)
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
57
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gains and losses included in net (income) 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 three months ended March 31:

(Amounts in millions)

  2019   2018 

Total realized and unrealized (gains) losses included in net (income):

    

Net investment income

  $—    $—  

Net investment (gains) losses

   (11)    (29) 
  

 

 

   

 

 

 

Total

  $(11)   $(29) 
  

 

 

   

 

 

 

Total (gains) losses included in net (income) attributable to liabilities still held:

    

Net investment income

  $—    $—  

Net investment (gains) losses

   (7)    (25) 
  

 

 

   

 

 

 

Total

  $(7)   $(25) 
  

 

 

   

 

 

 

periods indicated:

 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
 
Total realized and unrealized (gains) losses included in net (income):
  
   
   
   
 
Net investment income
 $
—
  $
 —  
  $
—
  $
 —  
 
Net investment (gains) losses
  
45
   
(1
)  
34
   
(30
)
                 
Total
 $
45
  $
(1
) $
34
  $
(30
)
                 
Total (gains) losses included in net (income) attributable to liabilities still held:
  
   
   
   
 
Net investment income
 $
—
  $
 —  
  $
—
  $
 —  
 
Net investment (gains) losses
  
45
   
(1
)  
38
   
(26
)
                 
Total
 $
45
  $
(1
) $
38
  $
(26
)
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 and equity securities and purchases, issuances and settlements of derivative instruments.

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)” in the tables presented above.

58
Table of Contents
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 March 31,June 30, 2019:

(Amounts in millions)

 Valuation technique  Fair value  

Unobservable input

 

Range

 

Weighted-average

Policyholder account balances:

     
   Withdrawal utilization rate 44% - 87% 69%
   Lapse rate 2% - 9% 3%
   Non-performance risk (credit spreads) 17bps - 83bps 65bps

GMWB embeddedderivative(1)

  
Stochastic cash flow
model		 
 		 $295 Equity index volatility 14% - 23% 20%

Fixed index annuity embeddedderivatives

  
Option budget
method		 
 		 $423 Expected future interest credited —% - 3% 1%

Indexed universal life embeddedderivatives

  
Option budget
method		 
 		 $13 Expected future interest credited 3% - 9% 5%

(Amounts in millions)
 
Valuation technique
 
Fair value
  
Unobservable input
 
Range
  
Weighted-average
 
Policyholder account balances:
 
  
  
  
   
 
 
  
  
Withdrawal  utilization rate
  
45
% -
88
%
   
70
%
 
  
  
Lapse rate
  
2
% -
9
%
   
3
%
 
  
  
Non-performance
 risk
(credit spreads)
  
18
bps
 -
 
83
bps
   
66
bps
 
GMWB embedded
derivatives
(1)
 
Stochastic cash flow model
 $
325
  
Equity index volatility
  
13
% -
23
%
   
20
%
Fixed index annuity embedded
derivatives
 
Option budget method
 $
438
  
Expected future interest credited
  
–
% -
3
%
   
1
%
Indexed universal life embedded
derivatives
 
Option budget method
 $
15
  
Expected future interest credited
  
3
% - 
8
%
   
5
%
                 
(1)

Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(7) Liability for Policy and Contract Claims

The following table sets forth changes in our liability for policy and contract claims as of the dates indicated:

   As of or for the three 
   months ended 
   March 31, 

(Amounts in millions)

  2019   2018 

Beginning balance

  $10,379  $9,594

Less reinsurance recoverables

   (2,379)    (2,419) 
  

 

 

   

 

 

 

Net beginning balance

   8,000   7,175
  

 

 

   

 

 

 

Incurred related to insured events of:

    

Current year

   986   998

Prior years

   (81)    (108) 
  

 

 

   

 

 

 

Total incurred

   905   890
  

 

 

   

 

 

 

Paid related to insured events of:

    

Current year

   (162)    (175) 

Prior years

   (678)    (692) 
  

 

 

   

 

 

 

Total paid

   (840)    (867) 
  

 

 

   

 

 

 

Interest on liability for policy and contract claims

   93   81

Foreign currency translation

   3   (5) 
  

 

 

   

 

 

 

Net ending balance

   8,161   7,274

Add reinsurance recoverables

   2,375   2,377
  

 

 

   

 

 

 

Ending balance

  $10,536  $9,651
  

 

 

   

 

 

 

         
 
As of or for the six
 
 
months ended
 
 
June 30,
 
(Amounts in millions)
 
2019
  
2018
 
Beginning balance
 $
10,379
  $
9,594
 
Less reinsurance recoverables
  
(2,379
)  
(2,419
)
         
Net beginning balance
  
8,000
   
7,175
 
         
Incurred related to insured events of:
  
   
 
Current year
  
2,009
   
1,946
 
Prior years
  
(214
)  
(244
)
         
Total incurred
  
1,795
   
1,702
 
         
Paid related to insured events of:
  
   
 
Current year
  
(410
)  
(434
)
Prior years
  
(1,287
)  
(1,266
)
         
Total paid
  
(1,697
)  
(1,700
)
         
Interest on liability for policy and contract claims
  
188
   
163
 
Foreign currency translation
  
3
   
(16
)
         
Net ending balance
  
8,289
   
7,324
 
Add reinsurance recoverables
  
2,388
   
2,341
 
         
Ending balance
 $
10,677
  $
9,665
 
         
59
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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.

For the threesix months ended March 31,June 30, 2019, the favorable development of $81$214 million related to insured events of prior years was primarily attributable to our long-term care insurance business from favorable development on prior year incurred but not reported claims and favorable claim terminations, including pending claims that terminate before becoming an active claim. The favorable development for the six months ended June 30, 2019 was also related to our U.S. mortgage insurance business predominantly from an improvement in net cures and aging of existing delinquencies, including a favorable reserve adjustment of $9 million during the second quarter of 2019.
For the threesix months ended March 31,June 30, 2018, the favorable development of $108$244 million related to insured events of prior years was also primarily attributable to our long-term care insurance business from favorable claim terminations, including pending claims that terminate before becoming an active claim.

The favorable development for the six months ended June 30, 2018 was also impacted by our mortgage insurance businesses, primarily from an improvement in net cures and aging of existing claims, including a favorable reserve adjustment 
of $

26

million in our U.S. mortgage insurance business during the second quarter of 2018.
60
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8) Borrowings
(a) Long-Term Borrowings
The following table sets forth total long-term borrowings as of the dates indicated:
         
 
June 30,
  
December 31,
 
(Amounts in millions)
 
2019
  
2018
 
Genworth Holdings
(1)
  
   
 
Floating Rate Senior Secured Term Loan Facility, due 2023
 $
444
  $
445
 
7.70% Senior Notes, due 2020
  
397
   
397
 
7.20% Senior Notes, due 2021
  
381
   
381
 
7.625% Senior Notes, due 2021
  
703
   
703
 
4.90% Senior Notes, due 2023
  
399
   
399
 
4.80% Senior Notes, due 2024
  
400
   
400
 
6.50% Senior Notes, due 2034
  
297
   
297
 
Floating Rate Junior Subordinated Notes, due 2066
  
598
   
598
 
         
Subtotal
  
3,619
   
3,620
 
Bond consent fees
  
(29
)  
(32
)
Deferred borrowing charges
  
(19
)  
(21
)
         
Total Genworth Holdings
  
3,571
   
3,567
 
         
Canada
(2)
  
   
 
5.68% Senior Notes, due 2020
  
134
   
202
 
4.24% Senior Notes, due 2024
  
201
   
117
 
         
Subtotal
  
335
   
319
 
Deferred borrowing charges
  
(2
)  
(1
)
         
Total Canada
  
333
   
318
 
         
Australia
(3)
  
   
 
Floating Rate Junior Subordinated Notes, due 2025
  
141
   
141
 
Deferred borrowing charges
  
(1
)  
(1
)
         
Total Australia
  
140
   
140
 
         
Total
 $
4,044
  $
4,025
 
         
(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 MI Canada Inc. (“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 Canada
On May 22, 2019, Genworth Canada issued at a premium, CAD$100 million fixed rate senior notes with an interest rate of 4.24% that matures in 2024. The offering represents a re-opening of the 4.24% senior notes originally issued in April 2014. The total amount issued and outstanding associated with these senior notes after
61
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
this most recent offering is CAD$263 million. The senior notes are redeemable at the option of Genworth Canada, in whole or in part, at any time. In June 2019, Genworth Canada used the proceeds of the offering to early redeem approximately CAD$100 million of the 5.68% senior notes originally scheduled to mature in June 2020 and incurred an early redemption fee of CAD$3 million. As a result of the early redemption of Genworth Canada’s notes, we incurred a pre-tax loss of approximately $1 million, net of the portion attributable to noncontrolling interests.
(9) Income Taxes

The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:

   Three months ended March 31, 
   2019  2018 

Statutory U.S. federal income tax rate

   21.0%   21.0% 

Increase (reduction) in rate resulting from:

   

Effect of foreign operations

   5.4   5.0 

U.S. shareholder tax on foreign operations

   4.8   (2.1) 

Swaps terminated prior to the TCJA

   2.6   2.3 

Other, net

   (1.1)   1.4 
  

 

 

  

 

 

 

Effective rate

   32.7%   27.6% 
  

 

 

  

 

 

 

                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Statutory U.S. federal income tax rate
  
21.0
%  
21.0
%  
21.0
%  
21.0
%
Increase (reduction) in rate resulting from:
  
   
   
   
 
Effect of foreign operations
  
5.0
   
3.4
   
5.2
   
3.2
 
U.S. shareholder tax on foreign operations
  
4.4
   
—
  
   
4.6
   
—
  
 
Swaps terminated prior to the TCJA
  
2.1
   
3.9
   
2.4
   
3.2
 
TCJA, impact from change in tax rate
  
—
  
   
5.4
   
—
  
   
3.3
 
Valuation allowance
  
—
  
   
(2.0
)  
—
  
   
(1.3
)
Provision to return adjustments
  
—
  
   
(1.6
)  
—
  
   
(0.7
)
Other, net
  
0.4
   
0.7
   
(0.4
)  
0.9
 
                 
Effective rate
  
32.9
%  
30.8
%  
32.8
%  
29.6
%
                 
The increase in the effective tax rate for the three and six months ended March 31,June 30, 2019 was primarily attributable to a tax expense in the current year related to the Global Intangible Low Taxed Income (“GILTI”) provision of the Tax Cuts and Jobs Act (“TCJA”), which is reported within the line “U.S. shareholder tax on foreign operations” in the table above. GILTI has an unfavorable impact on our current year effective tax rate due to the utilization of net operating loss carryforwards and projected taxable losses in the U.S. life insurance businesses without any offsetting foreign tax credit carryforwards.

(9)

(10) Segment Information

We have the following five operating business segments: U.S. Mortgage Insurance; Canada Mortgage Insurance; Australia Mortgage Insurance; U.SU.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 have 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, 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.

We tax our international businesses at their local jurisdictional tax rates and our domestic businesses at the U.S. corporate federal income tax rate of 21%. Our segment tax methodology applies the respective jurisdictional or domestic tax rate to thepre-tax income (loss) of each segment, which is then adjusted in each segment to
62
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
reflect the tax attributes of items unique to that segment such as foreign withholding taxes and permanent differences between U.S. GAAP and local tax law. 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.

We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders.” We define adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding theafter-tax effects of income

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(loss) 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 adjusted 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 adjusted 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate adjusted 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 adjusted 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 adjusted 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. Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.

In the first quarter of 2019, we revised how we tax the adjustments to reconcile net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders to align the tax rate used in the reconciliation to each segment’s local jurisdictional tax rate. Beginning in the first quarter of 2019, we used a tax rate of 27% and 30% for our Canada
63
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and Australia Mortgage Insurance segments, respectively, to tax effect their adjustments. Our domestic segments remain at a 21% tax rate. In 2018, we assumed a flat 21% tax rate on adjustments for all of our segments to reconcile net income (loss) available to Genworth Financial, Inc.’s common stockholders and adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. These adjustments are also net of the portion attributable to noncontrolling interests and net investment gains (losses) are adjusted for DAC and other intangible amortization and certain benefit reserves.

Prior year amounts have not been
re-presented
to reflect this revised presentation; however, the previous methodology would not have resulted in a materially different segment-level adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We

In the second quarter of 2019, we recorded apre-tax loss
of $
1
million, net of the portion attributable to noncontrolling interests, related to the early redemption of CAD$100 million of Genworth Canada’s senior notes originally scheduled to mature in June 2020. In the first quarter of 2019, we recorded a pre-tax expense of $4 million for the three months ended March 31, 2019 related to restructuring costs as we continue to evaluate and appropriately size our organizational needs and expenses. There were no infrequent or unusual items excluded from adjusted operating income
during the periods presented.

The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:

   Three months ended 
   March 31, 

(Amounts in millions)

  2019  2018 

Revenues:

   

U.S. Mortgage Insurance segment

  $223 $200
  

 

 

  

 

 

 

Canada Mortgage Insurance segment

   159  158
  

 

 

  

 

 

 

Australia Mortgage Insurance segment

   110  107
  

 

 

  

 

 

 

U.S. Life Insurance segment:

   

Long-term care insurance

   1,114  1,020

Life insurance

   372  379

Fixed annuities

   159  182
  

 

 

  

 

 

 

U.S. Life Insurance segment

   1,645  1,581
  

 

 

  

 

 

 

Runoff segment

   82  68
  

 

 

  

 

 

 

Corporate and Other activities

   (15)   1
  

 

 

  

 

 

 

Total revenues

  $2,204 $2,115
  

 

 

  

 

 

 

 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
 
Revenues:
  
   
   
   
 
U.S. Mortgage Insurance segment
 $
235
  $
208
  $
458
  $
408
 
                 
Canada Mortgage Insurance segment
  
161
   
150
   
320
   
308
 
                 
Australia Mortgage Insurance segment
  
96
   
136
   
206
   
243
 
                 
U.S. Life Insurance segment:
  
   
   
   
 
Long-term care insurance
  
1,055
   
1,035
   
2,169
   
2,055
 
Life insurance
  
382
   
367
   
754
   
746
 
Fixed annuities
  
151
   
176
   
310
   
358
 
                 
U.S. Life Insurance segment
  
1,588
   
1,578
   
3,233
   
3,159
 
                 
Runoff segment
  
78
   
80
   
160
   
148
 
                 
Corporate and Other activities
  
(2
)  
7
   
(17
)  
8
 
                 
Total revenues
 $
2,156
  $
2,159
  $
4,360
  $
4,274
 
                 
64
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the reconciliation of net income available to Genworth Financial, Inc.’s common stockholders to adjusted operating income available to Genworth Financial, Inc.’s common stockholders and a summary of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities for the periods indicated:

   Three months ended 
   March 31, 

(Amounts in millions)

  2019  2018 

Net income

  $230 $165

Less: net income attributable to noncontrolling interests

   56  53
  

 

 

  

 

 

 

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

   174  112

Adjustments to net income available to Genworth Financial, Inc.’scommon stockholders:

   

Net investment (gains) losses, net(1)

   (71)   17

Expenses related to restructuring

   4  —   

Taxes on adjustments

   14  (4) 
  

 

 

  

 

 

 

Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders

  $121 $125
  

 

 

  

 

 

 

 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
 
Net income
 $
218
  $
249
  $
448
  $
414
 
Less: net income attributable to noncontrolling interests
  
50
   
59
   
106
   
112
 
                 
Net income available to Genworth Financial, Inc.’s common stockholders
  
168
   
190
   
342
   
302
 
Adjustments to net income available to Genworth Financial, Inc.’s
common stockholders:
  
   
   
   
 
Net investment (gains) losses, net
(1)
  
43
   
12
   
(28
)  
29
 
(Gains) losses on early extinguishment of debt, net
(2)
  
1
   
—  
   
1
   
—  
 
Expenses related to restructuring
  
—  
   
—  
   
4
   
—  
 
Taxes on adjustments
  
(8
)  
(2
)  
6
   
(6
)
                 
Adjusted operating income available to Genworth Financial, Inc.’s
common stockholders
 $
204
  $
200
  $
325
  $
325
 
                 
(1)

For the three months ended March 31,June 30, 2019 and March 31, 2018, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(2)$(3) million and $(3)$(1) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $5$1 million and $(11)$(1) million, respectively.

For the six months ended June 30, 2019 and 2018, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(5) million and $(4) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $6 million and $(12) million, respectively.

(2)
For the three and six months ended June 30, 2019, (gains) losses on the early extinguishment of debt were adjusted for the portion attributable to noncontrolling interests of $
1
 million.
65
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   Three months ended 
   March 31, 

(Amounts in millions)

  2019   2018 

Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:

    

U.S. Mortgage Insurance segment

  $124  $111
  

 

 

   

 

 

 

Canada Mortgage Insurance segment

   41   49
  

 

 

   

 

 

 

Australia Mortgage Insurance segment

   14   19
  

 

 

   

 

 

 

U.S. Life Insurance segment:

    

Long-term care insurance

   (20)    (32) 

Life insurance

   (2)    (1) 

Fixed annuities

   17   28
  

 

 

   

 

 

 

U.S. Life Insurance segment

   (5)    (5) 
  

 

 

   

 

 

 

Runoff segment

   20   10

Corporate and Other activities

   (73)    (59) 
  

 

 

   

 

 

 

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders

  $121  $125
  

 

 

   

 

 

 

 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
 
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:
  
   
   
   
 
U.S. Mortgage Insurance segment
 $
147
  $
137
  $
271
  $
248
 
                 
Canada Mortgage Insurance segment
  
41
   
46
   
82
   
95
 
                 
Australia Mortgage Insurance segment
  
13
   
22
   
27
   
41
 
                 
U.S. Life Insurance segment:
  
   
   
   
 
Long-term care insurance
  
37
   
22
   
17
   
(10
)
Life insurance
  
10
   
4
   
8
   
3
 
Fixed annuities
  
19
   
31
   
36
   
59
 
                 
U.S. Life Insurance segment
  
66
   
57
   
61
   
52
 
                 
Runoff segment
  
9
   
13
   
29
   
23
 
Corporate and Other activities
  
(72
)  
(75
)  
(145
)  
(134
)
                 
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
 $
204
  $
200
  $
325
  $
325
 
                 
The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:

   March 31,   December 31, 

(Amounts in millions)

  2019   2018 

Assets:

    

U.S. Mortgage Insurance segment

  $3,808  $3,583

Canada Mortgage Insurance segment

   5,146   5,038

Australia Mortgage Insurance segment

   2,533   2,534

U.S. Life Insurance segment

   80,619   79,799

Runoff segment

   10,082   9,963

Corporate and Other activities

   —      6
  

 

 

   

 

 

 

Total assets

  $102,188  $100,923
  

 

 

   

 

 

 

(10)

         
(Amounts in millions)
 
June 30,
2019
  
December 31,
2018
 
Assets:
  
   
 
U.S. Mortgage Insurance segment
 $
3,977
  $
3,583
 
Canada Mortgage Insurance segment
  
5,272
   
5,038
 
Australia Mortgage Insurance segment
  
2,524
   
2,534
 
U.S. Life Insurance segment
  
81,002
   
79,799
 
Runoff segment
  
10,018
   
9,963
 
Corporate and Other activities
  
1,513
   
6
 
         
Total assets
 $
104,306
  $
100,923
 
         
(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-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

66
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 captioned
Int’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, its former chief executive officer, its former chief 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 captioned
Cohen v. McInerney, et al
. On February 23, 2016, the Court of Chancery of the State of Delaware consolidated these derivative suits under the caption
Genworth 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 IPO 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 officer as a defendant, based on the current chief financial officer’s alleged conduct in her former capacity as Genworth’s controller 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. The action is stayed pending the completion of the proposed China Oceanwide transaction.

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 captioned
Chopp 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 IPO of the business, and seeks unspecified damages, costs,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

attorneys’ fees and such equitable relief as the court may deem proper. We filed a motion to dismiss on November 14, 2016. The action is stayed pending the completion of the proposed China Oceanwide transaction.

67
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In December 2017, Genworth Financial International Holdings, LLC and Genworth Financial were named as defendants in an action captioned
AXA S.A. v. Genworth Financial International Holdings, Inc.,LLC et al.,
in the High Court of Justice, Business and Property Courts of England and Wales. In the action, AXA seeksinitially sought in excess of £28 million on an indemnity provided for in the 2015 agreement pursuant to which Genworth sold to AXA two insurance companies, Financial Insurance Company Limited (“FICL”) and Financial Assurance Company Limited (“FACL”), relating to alleged remediation it has paid to customers who purchased payment protection insurance.  AXA also alleges that it is incurring losses on an ongoing basis and therefore that further, significantly larger, sums will be demanded. In February 2018, we served a Particulars of Defence and counterclaim against AXA, and also served other counterclaims against various parties, including Santander Cards UK Limited (“Santander”), alleging that Santander is responsible for any remediation paid to payment protection insurance customers. AXA and Santander have applied to the court for orders dismissing or staying the counterclaims. A hearing on those applications was held in October 2018, and the court dismissed our counterclaims. On November 15, 2018, AXA amended its claim and updated its demand to £237 million. We filed our amended Particulars of Defence and amended counterclaim on December 13, 2018, seeking, among other forms of relief, a declaration that in the event we make any payment to AXA pursuant to the indemnity, we are subrogated to FICL’s and FACL’s rights against Santander with respect to those amounts. On February 25, 2019, AXA amended its claim and updated its demand to £265 million. AXA also alleges that it is incurring losses on an ongoing basis and therefore that further significantly larger sums will be demanded. The court held a case management conference and hearing on February 26, 2019. Santander, FICL and FACL consented to be joined as parties to the proceedings and consented to allow Genworth to amend its pleadings to include the subrogation declarations to reflect the additional parties. The court scheduled the points of principle hearing on liability and subrogation matters to commence on November 4, 2019 and conclude on November 12, 2019, and scheduled the quantum hearing to commence on March 9, 2020 and conclude on March 12, 2020. On March 29, 2019, AXA, FICL, FACL and Santander filed their respective responses to our amended counterclaim. On June 21, 2019, we filed an application to address certain deficiencies in AXA’s discovery production. On July 18, 2019, we reached an agreement with AXA and Santander regarding our discovery application. We intend to continue to vigorously defend this action.

In September 2018, Genworth Life and Annuity Insurance Company (“GLAIC”), our indirect wholly-owned subsidiary, was named as a defendant in a putative class action lawsuit pending in the United States District Court for the Eastern District of Virginia captioned
TVPX ARX INC., as Securities Intermediary for Consolidated Wealth Management, LTD. on behalf of itself and all others similarly situated v. Genworth Life and Annuity Insurance Company
. Plaintiff is allegingalleged unlawful and excessive cost of insurance charges were imposed on policyholders. The complaint asserts claims for breach of contract, alleging that Genworth improperly considerednon-mortality factors when calculating cost of insurance rates and failed to decrease cost of insurance charges in light of improved expectations of future mortality, and seeks unspecified compensatory damages, costs, and equitable relief. On October 29, 2018, we filed a motion to enforceenjoin the case in the Middle District of Georgia, and a motion to dismiss and motion to stay in the Eastern District of Virginia. We moved to enjoin the prosecution of the Eastern District of Virginia action on the basis that it involves claims released in a prior nationwide class action settlement that was approved by the Middle District of Georgia. Plaintiff filed an amended complaint on November 13, 2018. On November 16, 2018, the Eastern District of Virginia court stayed the case for 60 days. On December 6, 2018, we moved the Middle District of Georgia for leave to file our counterclaim, which alleges that plaintiff breached the covenant not to sue contained in the prior settlement agreement by filing its current action. On January 17, 2019, the Eastern District of Virginia court stayed the case for another 60 days or the date of the Middle District of Georgia’s ruling on our motions, whichever comes earlier. A hearing on our motion to enjoin and motion for

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

leave to file our counterclaim occurred on February 21, 2019. On March 15, 2019, the Middle District of Georgia granted our motion to enjoin and denied our motion for leave to file our counterclaim. As such, plaintiff is enjoined from pursuing its class action in the Eastern District of Virginia. On March 29, 2019, plaintiff filed a notice of appeal in the Middle District of Georgia, notifying the court of its appeal to the United States Court of Appeals for the Eleventh Circuit from the order granting our motion to enjoin. On March 29, 2019, we filed our notice of cross-appeal in the Middle District of Georgia, notifying the Court of our cross-appeal to the Eleventh Circuit from the portion of the order denying our motion for leave to file our counterclaim. On April 8, 2019, the Eastern District of Virginia lifted the stay in the case and

68
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
dismissed the case without prejudice, with leave for Plaintiffplaintiff to refile an amended complaint only if a final appellate court decision vacates the injunction and reverses the Middle District of Georgia’s opinion. On May 21, 2019, plaintiff filed its appeal and memorandum in support in the Eleventh Circuit. We filed our response to plaintiff’s appeal memorandum on July 3, 2019. We intend to continue to vigorously defend the dismissal of this action.

In September 2018, weGenworth Financial, Genworth Holdings, Genworth North America Corporation, Genworth Financial International Holdings, LLC and Genworth Life Insurance Company (“GLIC”) were named as a defendantdefendants in a putative class action lawsuit pending in the Court of Chancery of the State of Delaware captioned
Richard F. Burkhart, William E. Kelly, Richard S. Lavery, Thomas R. Pratt, Gerald Green, individually and on behalf of all other persons similarly situated v. Genworth et al
. Plaintiffs are allegingallege that Genworth Life Insurance Company (“GLIC”), our indirect wholly-owned subsidiary, failedGLIC paid dividends to its parent and engaged in certain reinsurance transactions causing it to maintain adequateinadequate capital capable of meeting its obligations to GLIC policyholders and agents. The complaint alleges causes of action for intentional fraudulent transfer and constructive fraudulent transfer, and seeks injunctive relief. We moved to dismiss this action in December 2018. On January 29, 2019, plaintiffs exercised their right to amend their complaint. On March 12, 2019, we moved to dismiss plaintiffs’ amended complaint. On April 26, 2019, plaintiffs filed a memorandum in opposition to our motion to dismiss, which we replied to on June 14, 2019. Oral argument on our motion to dismiss is scheduled for September 9, 2019. We intend to continue to vigorously defend this action.

In January 2019, Genworth Financial and GLIC were named as defendants in a putative class action lawsuit pending in the United States District Court for the Eastern District of Virginia captioned
Jerome Skochin, Susan
Skochin, and Larry Huber, individually and on behalf of all other persons similarly situated v. Genworth
Financial, Inc. and Genworth Life Insurance Company
. Plaintiffs seek to represent long-term care insurance policyholders, alleging that Genworth made misleading and inadequate disclosures regarding premium increases for long-term care insurance policies. The complaint asserts claims for breach of the implied covenant of good faith and fair dealing,contract, fraud, fraudulent inducement and violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (on behalf of the two named plaintiffs who are Pennsylvania residents), and seeks damages (including statutory treble damages under Pennsylvania law) in excess of $5 
$
5
million. On March 12, 2019, we moved to dismiss plaintiffs’ complaint. On March 26, 2019, plaintiffs filed a memorandum in opposition to our motion to dismiss, which we replied to on April 1, 2019. WeIn July 2019, the court heard oral arguments on our motion to dismiss.We intend to continue to vigorously defend this action.

action

.
At this time 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 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.

69
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(b) Commitments

As of March 31,June 30, 2019, we were committed to fund $747$903 million in limited partnership investments, $122$98 million in U.S. commercial mortgage loan investments and $30$90 million in private placement investments. As of March 31,June 30, 2019, we were also committed to fund $40$52 million of bank loan investments which had not yet been drawn.

(11)

(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:

  Net
unrealized
investment
gains		  Derivatives
qualifying as		  Foreign
currency
translation
and other		    

(Amounts in millions)

 (losses) (1)  hedges (2)  adjustments  Total 

Balances as of January 1, 2019

 $595  $1,781  $(332)  $2,044

OCI before reclassifications

  427   97   54  578

Amounts reclassified from (to) OCI

  (47)   (28)   —     (75) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Current period OCI

  380   69   54  503
 

 

 

  

 

 

  

 

 

  

 

 

 

Balances as of March 31, 2019 before noncontrolling interests

  975   1,850   (278)   2,547
 

 

 

  

 

 

  

 

 

  

 

 

 

Less: change in OCI attributable to noncontrolling interests

  32   —     23  55
 

 

 

  

 

 

  

 

 

  

 

 

 

Balances as of March 31, 2019

 $943  $1,850  $(301)  $2,492
 

 

 

  

 

 

  

 

 

  

 

 

 

                 
(Amounts in millions)
 
Net
unrealized
investment
gains
(losses)
(1)
  
Derivatives
qualifying as
hedges 
(2)
  
Foreign
currency
translation
and other
adjustments
  
Total
 
Balances as of April 1, 2019
 $
943
  $
1,850
  $
(301
) $
2,492
 
OCI before reclassifications
  
375
   
157
   
43
   
575
 
Amounts reclassified from (to) OCI
  
1
   
(24
)  
—  
   
(23
)
                 
Current period OCI
  
376
   
133
   
43
   
552
 
                 
Balances as of June 30, 2019 before noncontrolling interests
  
1,319
   
1,983
   
(258
)  
3,044
 
                 
Less: change in OCI attributable to noncontrolling interests
  
14
   
—  
   
17
   
31
 
                 
Balances as of June 30, 2019
 $
1,305
  $
1,983
  $
(275
) $
3,013
 
                 
(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.

  Net
unrealized
investment
gains		  Derivatives
qualifying as		  Foreign
currency
translation
and other		    

(Amounts in millions)

 (losses) (1)  hedges (2)  adjustments  Total 

Balances as of January 1, 2018

 $1,085  $2,065  $(123)  $3,027

Cumulative effect of changes in accounting

  164   14   (47)   131

OCI before reclassifications

  (348)   (126)   (87)   (561) 

Amounts reclassified from (to) OCI

  7   (26)   —     (19) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Current period OCI

  (341)   (152)   (87)   (580) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Balances as of March 31, 2018 before noncontrolling interests

  908   1,927   (257)   2,578
 

 

 

  

 

 

  

 

 

  

 

 

 

Less: change in OCI attributable to noncontrolling interests

  (9)   —     (40)   (49) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Balances as of March 31, 2018

 $917  $1,927  $(217)  $2,627
 

 

 

  

 

 

  

 

 

  

 

 

 

                 
(Amounts in millions)
 
Net
unrealized
investment
gains
(losses)
(1)
  
Derivatives
qualifying as
hedges 
(2)
  
Foreign
currency
translation
and other
adjustments
  
Total
 
Balances as of April 1, 2018
 $
917
  $
1,927
  $
(217
) $
2,627
 
OCI before reclassifications
  
(193
)
 		  
(39
)
 		  
(98
)  
(330
)
Amounts reclassified from (to) OCI
  
6
   
(25
)
 		  
—  
   
(19
)
                 
Current period OCI
  
(187
)
 		  
(64
)
 		  
(98
)  
(349
)
                 
Balances as of June 30, 2018 before noncontrolling interests
  
730
   
1,863
   
(315
)  
2,278
 
                 
Less: change in OCI attributable to noncontrolling interests
  
(6
)
 		  
—  
   
(43
)  
(49
)
                 
Balances as of June 30, 2018
 $
736
  $
1,863
  $
(272
) $
2,327
 
                 
(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.

70
Table of Contents
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
 
Balances as of January 1, 2019 $
595
  $
1,781
  $
(332
) $
2,044
 
OCI before reclassifications  
802
   
254
   
97
   
1,153
 
Amounts reclassified from (to) OCI  
(46
)
 		  
(52
)
 		  
—  
   
(98
)
                 
Current period OCI  
756
   
202
   
97
   
1,055
 
                 
Balances as of June 30, 2019 before noncontrolling interests  
1,351
   
1,983
   
(235
)  
3,099
 
                 
Less: change in OCI attributable to noncontrolling interests  
46
   
—  
   
40
   
86
 
                 
Balances as of June 30, 2019 $
1,305
  $
1,983
  $
(275
) $
3,013
 
                 
(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
 
Balances as of January 1, 2018
 $
1,085
  $
2,065
  $
(123
) $
3,027
 
Cumulative effect of changes in accounting
  
164
   
14
   
(47
)  
131
 
OCI before reclassifications
  
(541
)
 		  
(165
)
 		  
(185
)  
(891
)
Amounts reclassified from (to) OCI
  
13
   
(51
)
 		  
—  
   
(38
)
                 
Current period OCI
  
(528
)
 		  
(216
)
 		  
(185
)  
(929
)
                 
Balances as of June 30, 2018 before noncontrolling interests
  
721
   
1,863
   
(355
)  
2,229
 
                 
Less: change in OCI attributable to noncontrolling interests
  
(15
)
 		  
—  
   
(83
)  
(98
)
                 
Balances as of June 30, 2018
 $
736
  $
1,863
  $
(272
) $
2,327
 
                 
(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 in the charts above included $(2) million and $(14) million, respectively, net of taxes of $1 million and $5 million, respectively, related to a net unrecognized postretirement

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

benefit obligation as of March 31,June 30, 2019 and 2018. The amountbalance also includesincluded taxes of $(45) million and $(46) million, respectively, related to foreign currency translation adjustments as of March 31,June 30, 2019 and 2018. The March 31,balance as of June 30, 2018 balance included the impact of adopting new accounting guidance related to stranded tax effects.

71
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table shows reclassifications in (out) of accumulated other comprehensive income (loss), net of taxes, for the periods presented:

(Amounts in millions)

 Amount reclassified from accumulated
other comprehensive income		  

Affected line item in the

consolidated statements

of income

 Three months ended March 31, 
 2019  2018 

Net unrealized investment (gains) losses:

   

Unrealized (gains) losses on investments(1)

 $(60)  $8 Net investment (gains) losses

(Provision) benefit for income taxes

  13  (1)  (Provision) benefit for income taxes
 

 

 

  

 

 

  

Total

 $(47)  $ 7 
 

 

 

  

 

 

  

Derivatives qualifying as hedges:

   

Interest rate swaps hedging assets

 $(38)  $(35)  Net investment income

Interest rate swaps hedging assets

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

Benefit for income taxes

  16  14 Benefit for income taxes
 

 

 

  

 

 

  

Total

 $(28)  $(26)  
 

 

 

  

 

 

  

                   
 
Amount reclassified from accumulated
other comprehensive income (loss)
  
Affected line item in the
consolidated statements
of income
 
 
Three months ended June 30,
  
Six months ended June 30,
  
(Amounts in millions)
 
2019
  
2018
  
2019
  
2018
  
Net unrealized investment (gains) losses:
  
   
   
   
  
Unrealized (gains) losses on
investments
 
(1)
 $
2
  $
8
  $
(58
) $
16
  
Net investment (gains) losses
(Provision) benefit for income taxes
  
(1
)  
(2
)  
12
   
(3
) 
Provision for income taxes
                   
Total
 $
1
  $
6
  $
(46
) $
13
  
                   
Derivatives qualifying as hedges:
  
   
   
   
  
Interest rate swaps hedging assets
 $
(42
) $
(39
) $
(80
) $
(74
) 
Net investment income
Interest rate swaps hedging assets
  
4
   
—  
   
(2
)  
(5
) 
Net investment (gains) losses
Foreign currency swaps  
1
   
—  
   
1
   
—  
  Net investment income
Benefit for income taxes
  
13
   
14
   
29
   
28
  
Provision for income taxes
                   
Total
 $
(24
) $
(25
) $
(52
) $
(51
) 
                   
(1)

Amounts exclude adjustments to DAC, present value of future profits, sales inducements and benefit reserves.

(12)

(13) Condensed Consolidating Financial Information

Genworth Financial provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior and subordinated notes and the holders of the senior and subordinated notes, on an unsecured unsubordinated and subordinated basis, respectively, 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 outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior and subordinated notes indentures in respect of such senior and 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 has been prepared pursuant to rules regarding the preparation of consolidating financial information ofRegulation
 S-X.

The condensed consolidating financial information presents the condensed consolidating balance sheet information as of March 31,June 30, 2019 and December 31, 2018, the condensed consolidating income statement information and the condensed consolidating comprehensive income statement information for the three and six months ended June 30, 2019 and 2018 and the condensed consolidating cash flow statement information for the threesix months ended March 31,June 30, 2019 and 2018.

72
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

73
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating balance sheet information as of March 31,June 30, 2019:

   Parent     All Other    

(Amounts in millions)

  Guarantor  Issuer  Subsidiaries  Eliminations  Consolidated 

Assets

      

Investments:

      

Fixed maturity securitiesavailable-for-sale, at fair value

  $—    $—    $61,560 $(200)  $61,360

Equity securities, at fair value

   —     —     635  —     635

Commercial mortgage loans ($59 are restricted related to a securitization entity)

   —     —     6,988  —     6,988

Policy loans

   —     —     1,994  —     1,994

Other invested assets

   —     49  1,160  (1)   1,208

Investments in subsidiaries

   13,222  11,928  —     (25,150)   —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total investments

   13,222  11,977  72,337  (25,351)   72,185

Cash, cash equivalents and restricted cash

   —     361  1,860  —     2,221

Accrued investment income

   —     —     733  (7)   726

Deferred acquisition costs

   —     —     2,219  —     2,219

Intangible assets and goodwill

   —     —     265  —     265

Reinsurance recoverable

   —     —     17,257  —     17,257

Other assets

   (4)   55  482  (1)   532

Intercompany notes receivable

   —     231  —     (231)   —   

Deferred tax assets

   (11)   913  (329)   —     573

Separate account assets

   —     —     6,210  —     6,210
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  $13,207 $13,537 $101,034 $(25,590)  $102,188
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities and equity

      

Liabilities:

      

Future policy benefits

  $—    $—    $38,369 $—    $38,369

Policyholder account balances

   —     —     22,651  —     22,651

Liability for policy and contract claims

   —     —     10,536  —     10,536

Unearned premiums

   —     —     3,482  —     3,482

Other liabilities

   27  65  1,600  (10)   1,682

Intercompany notes payable

   106  200  125  (431)   —   

Non-recourse funding obligations

   —     —     311  —     311

Long-term borrowings

   —     3,570  465  —     4,035

Deferred tax liability

   —     —     30  —     30

Separate account liabilities

   —     —     6,210  —     6,210
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

   133  3,835  83,779  (441)   87,306
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity:

      

Common stock

   1  —     3  (3)   1

Additionalpaid-in capital

   11,989  9,096  18,429  (27,525)   11,989

Accumulated other comprehensive income (loss)

   2,492  2,521  2,515  (5,036)   2,492

Retained earnings

   1,292  (1,915)   (5,800)   7,715  1,292

Treasury stock, at cost

   (2,700)   —     —     —     (2,700) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

   13,074  9,702  15,147  (24,849)   13,074

Noncontrolling interests

   —     —     2,108  (300)   1,808
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total equity

   13,074  9,702  17,255  (25,149)   14,882
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities and equity

  $ 13,207 $ 13,537 $ 101,034 $(25,590)  $ 102,188
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                     
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Assets
  
   
   
   
   
 
Investments:
  
   
   
   
   
 
Fixed maturity securities
available-for-sale,
at fair value
 $
—  
  $
—  
  $
63,974
  $
(200
) $
63,774
 
Equity securities, at fair value
  
—  
   
—  
   
644
   
—  
   
644
 
Commercial mortgage loans ($56 are restricted related to a securitization entity)
  
—  
   
—  
   
7,019
   
—  
   
7,019
 
Policy loans
  
—  
   
—  
   
2,076
   
—  
   
2,076
 
Other invested assets
  
—  
   
49
   
1,493
   
(7
)  
1,535
 
Investments in subsidiaries
  
13,938
   
12,439
   
—  
   
(26,377
)  
—  
 
                     
Total investments
  
13,938
   
12,488
   
75,206
   
(26,584
)  
75,048
 
Cash, cash equivalents and restricted cash
  
—  
   
358
   
1,580
   
—  
   
1,938
 
Accrued investment income
  
—  
   
—  
   
630
   
(4
)  
626
 
Deferred acquisition costs
  
—  
   
—  
   
2,105
   
—  
   
2,105
 
Intangible assets and goodwill
  
—  
   
—  
   
244
   
—  
   
244
 
Reinsurance recoverable
  
—  
   
—  
   
17,211
   
—  
   
17,211
 
Other assets
  
5
   
55
   
505
   
(1
)  
564
 
Intercompany notes receivable
  
—  
   
273
   
—  
   
(273
)  
—  
 
Deferred tax assets
  
(35
)  
841
   
(423
)  
—  
   
383
 
Separate account assets
  
—  
   
—  
   
6,187
   
—  
   
6,187
 
                     
Total assets
 $
13,908
  $
14,015
  $
103,245
  $
(26,862
) $
104,306
 
                     
Liabilities and equity
  
   
   
   
   
 
Liabilities:
  
   
   
   
   
 
Future policy benefits
 $
—  
  $
—  
  $
39,583
  $
—  
  $
39,583
 
Policyholder account balances
  
—  
   
—  
   
22,673
   
—  
   
22,673
 
Liability for policy and contract claims
  
—  
   
—  
   
10,677
   
—  
   
10,677
 
Unearned premiums
  
—  
   
—  
   
3,488
   
—  
   
3,488
 
Other liabilities
  
—  
   
47
   
1,689
   
(13
)  
1,723
 
Intercompany notes payable
  
151
   
200
   
122
   
(473
)  
—  
 
Non-recourse
funding obligations
  
—  
   
—  
   
311
   
—  
   
311
 
Long-term borrowings
  
—  
   
3,571
   
473
   
—  
   
4,044
 
Deferred tax liability
  
—  
   
—  
   
28
   
—  
   
28
 
Separate account liabilities
  
—  
   
—  
   
6,187
   
—  
   
6,187
 
                     
Total liabilities
  
151
   
3,818
   
85,231
   
(486
)  
88,714
 
                     
Equity:
  
   
   
   
   
 
Common stock
  
1
   
—  
   
3
   
(3
)  
1
 
Additional
paid-in
capital
  
11,983
   
9,094
   
18,428
   
(27,522
)  
11,983
 
Accumulated other comprehensive income (loss)
  
3,013
   
2,982
   
3,051
   
(6,033
)  
3,013
 
Retained earnings
  
1,460
   
(1,879
)  
(5,603
)  
7,482
   
1,460
 
Treasury stock, at cost
  
(2,700
)  
—  
   
—  
   
—  
   
(2,700
)
                     
Total Genworth Financial, Inc.’s stockholders’ equity
  
13,757
   
10,197
   
15,879
   
(26,076
)  
13,757
 
Noncontrolling interests
  
—  
   
—  
   
2,135
   
(300
)  
1,835
 
                     
Total equity
  
13,757
   
10,197
   
18,014
   
(26,376
)  
15,592
 
                     
Total liabilities and equity
 $
13,908
  $
14,015
  $
103,245
  $
(26,862
) $
104,306
 
                     

74
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating balance sheet information as of December 31, 2018:

   Parent     All Other    

(Amounts in millions)

  Guarantor  Issuer  Subsidiaries  Eliminations  Consolidated 

Assets

      

Investments:

      

Fixed maturity securitiesavailable-for-sale, at fair value

  $—    $—    $ 59,861 $(200)  $59,661

Equity securities, at fair value

   —     —     655  —     655

Commercial mortgage loans ($62 are restricted related to a securitization entity)

   —     —     6,749  —     6,749

Policy loans

   —     —     1,861  —     1,861

Other invested assets

   —     86  1,104  (2)   1,188

Investments in subsidiaries

   12,570  11,462  —     (24,032)   —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total investments

   12,570  11,548  70,230  (24,234)   70,114

Cash, cash equivalents and restricted cash

   —     429  1,748  —     2,177

Accrued investment income

   —     —     679  (4)   675

Deferred acquisition costs

   —     —     3,263  —     3,263

Intangible assets and goodwill

   —     —     347  —     347

Reinsurance recoverable

   —     —     17,278  —     17,278

Other assets

   15  62  397  —     474

Intercompany notes receivable

   —     180  6  (186)   —   

Deferred tax assets

   14  907  (185)   —     736

Separate account assets

   —     —     5,859  —     5,859
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total assets

  $12,599 $13,126 $99,622 $(24,424)  $100,923
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Liabilities and equity

      

Liabilities:

      

Future policy benefits

  $—    $—    $37,940 $—    $37,940

Policyholder account balances

   —     —     22,968  —     22,968

Liability for policy and contract claims

   —     —     10,379  —     10,379

Unearned premiums

   —     —     3,546  —     3,546

Other liabilities

   27  97  1,565  (7)   1,682

Intercompany notes payable

   122  207  57  (386)   —   

Non-recourse funding obligations

   —     —     311  —     311

Long-term borrowings

   —     3,567  458  —     4,025

Deferred tax liability

   —     —     24  —     24

Separate account liabilities

   —     —     5,859  —     5,859
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities

   149  3,871  83,107  (393)   86,734
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Equity:

      

Common stock

   1  —     3  (3)   1

Additionalpaid-in capital

   11,987  9,095  18,425  (27,520)   11,987

Accumulated other comprehensive income (loss)

   2,044  2,144  2,060  (4,204)   2,044

Retained earnings

   1,118  (1,984)   (6,012)   7,996  1,118

Treasury stock, at cost

   (2,700)   —     —     —     (2,700) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

   12,450  9,255  14,476  (23,731)   12,450

Noncontrolling interests

   —     —     2,039  (300)   1,739
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total equity

   12,450  9,255  16,515  (24,031)   14,189
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total liabilities and equity

  $12,599 $13,126 $99,622 $(24,424)  $100,923
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                     
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Assets
  
   
   
   
   
 
Investments:
  
   
   
   
   
 
Fixed maturity securities
available-for-sale,
at fair value
 $
—  
  $
—  
  $
59,861
  $
(200
) $
59,661
 
Equity securities, at fair value
  
—  
   
—  
   
655
   
—  
   
655
 
Commercial mortgage loans ($62 are restricted related to a securitization entity)
  
—  
   
—  
   
6,749
   
—  
   
6,749
 
Policy loans
  
—  
   
—  
   
1,861
   
—  
   
1,861
 
Other invested assets
  
—  
   
86
   
1,104
   
(2
)  
1,188
 
Investments in subsidiaries
  
12,570
   
11,462
   
—  
   
(24,032
)  
—  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
  
12,570
   
11,548
   
70,230
   
(24,234
)  
70,114
 
Cash, cash equivalents and restricted cash
  
—  
   
429
   
1,748
   
—  
   
2,177
 
Accrued investment income
  
—  
   
—  
   
679
   
(4
)  
675
 
Deferred acquisition costs
  
—  
   
—  
   
3,263
   
—  
   
3,263
 
Intangible assets and goodwill
  
—  
   
—  
   
347
   
—  
   
347
 
Reinsurance recoverable
  
—  
   
—  
   
17,278
   
—  
   
17,278
 
Other assets
  
15
   
62
   
397
   
—  
   
474
 
Intercompany notes receivable
  
—  
   
180
   
6
   
(186
)  
—  
 
Deferred tax assets
  
14
   
907
   
(185
)  
—  
   
736
 
Separate account assets
  
—  
   
—  
   
5,859
   
—  
   
5,859
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 $
12,599
  $
13,126
  $
99,622
  $
(24,424
) $
100,923
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and equity
  
   
   
   
   
 
Liabilities:
  
   
   
   
   
 
Future policy benefits
 $
—  
  $
—  
  $
37,940
  $
—  
  $
37,940
 
Policyholder account balances
  
—  
   
—  
   
22,968
   
—  
   
22,968
 
Liability for policy and contract claims
  
—  
   
—  
   
10,379
   
—  
   
10,379
 
Unearned premiums
  
—  
   
—  
   
3,546
   
—  
   
3,546
 
Other liabilities
  
27
   
97
   
1,565
   
(7
)  
1,682
 
Intercompany notes payable
  
122
   
207
   
57
   
(386
)  
—  
 
Non-recourse
funding obligations
  
—  
   
—  
   
311
   
—  
   
311
 
Long-term borrowings
  
—  
   
3,567
   
458
   
—  
   
4,025
 
Deferred tax liability
  
—  
   
—  
   
24
   
—  
   
24
 
Separate account liabilities
  
—  
   
—  
   
5,859
   
—  
   
5,859
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
  
149
   
3,871
   
83,107
   
(393
)  
86,734
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity:
  
   
   
   
   
 
Common stock
  
1
   
—  
   
3
   
(3
)  
1
 
Additional
paid-in
capital
  
11,987
   
9,095
   
18,425
   
(27,520
)  
11,987
 
Accumulated other comprehensive income (loss)
  
2,044
   
2,144
   
2,060
   
(4,204
)  
2,044
 
Retained earnings
  
1,118
   
(1,984
)  
(6,012
)  
7,996
   
1,118
 
Treasury stock, at cost
  
(2,700
)  
—  
   
—  
   
—  
   
(2,700
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Genworth Financial, Inc.’s stockholders’ equity
  
12,450
   
9,255
   
14,476
   
(23,731
)  
12,450
 
Noncontrolling interests
  
—  
   
—  
   
2,039
   
(300
)  
1,739
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity
  
12,450
   
9,255
   
16,515
   
(24,031
)  
14,189
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
 $
12,599
  $
13,126
  $
99,622
  $
(24,424
) $
100,923
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

75
Table of Contents
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 March 31,June 30, 2019:

   Parent     All Other     

(Amounts in millions)

  Guarantor  Issuer  Subsidiaries   Eliminations  Consolidated 

Revenues:

       

Premiums

  $—    $—    $1,114  $—    $1,114

Net investment income

   (1)   3  831   (4)   829

Net investment gains (losses)

   —     (3)   77   —     74

Policy fees and other income

   —     —     188   (1)   187
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total revenues

   (1)   —     2,210   (5)   2,204
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Benefits and expenses:

       

Benefits and other changes in policy reserves

   —     —     1,301   —     1,301

Interest credited

   —     —     147   —     147

Acquisition and operating expenses, net of deferrals

   4  (2)   249   —     251

Amortization of deferred acquisition costs and intangibles

   —     —     91   —     91

Interest expense

   2  65  10   (5)   72
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Total benefits and expenses

   6  63  1,798   (5)   1,862
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Income (loss) before income taxes and equity in income of subsidiaries

   (7)   (63)   412   —     342

Provision (benefit) for income taxes

   21  (12)   103   —     112

Equity in income of subsidiaries

   202  120  —      (322)   —   
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Net income

   174  69  309   (322)   230

Less: net income attributable to noncontrolling interests

   —     —     56   —     56
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

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

  $174 $69 $253  $(322)  $174
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

                     
 
Parent
    
All Other
     
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Revenues:
  
   
   
   
   
 
Premiums
 $
—  
  $
—  
  $
1,126
  $
—  
  $
1,126
 
Net investment income
  
—  
   
1
   
854
   
(3
)  
852
 
Net investment gains (losses)
  
—  
   
(9
)  
(36
)  
—  
   
(45
)
Policy fees and other income
  
—  
   
2
   
223
   
(2
)  
223
 
                     
Total revenues
  
—  
   
(6
)  
2,167
   
(5
)  
2,156
 
                     
Benefits and expenses:
  
   
   
   
   
 
Benefits and other changes in policy reserves
  
—  
   
—  
   
1,270
   
—  
   
1,270
 
Interest credited
  
—  
   
—  
   
146
   
—  
   
146
 
Acquisition and operating expenses, net of deferrals
  
3
   
—  
   
244
   
—  
   
247
 
Amortization of deferred acquisition costs and intangibles
  
—  
   
—  
   
95
   
—  
   
95
 
Interest expense
  
1
   
65
   
12
   
(5
)  
73
 
                     
Total benefits and expenses
  
4
   
65
   
1,767
   
(5
)  
1,831
 
                     
Income (loss) before income taxes and equity in income of subsidiaries
  
(4
)  
(71
)  
400
   
—  
   
325
 
Provision (benefit) for income taxes
  
23
   
(14
)  
98
   
—  
   
107
 
Equity in income of subsidiaries
  
195
   
93
   
—  
   
(288
)  
—  
 
                     
Net income
  
168
   
36
   
302
   
(288
)  
218
 
Less: net income attributable to noncontrolling interests
  
—  
   
—  
   
50
   
—  
   
50
 
                     
Net income available to Genworth Financial, Inc.’s common stockholders
 $
168
  $
36
  $
252
  $
(288
) $
168
 
                     

76
Table of Contents
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 March 31,June 30, 2018:

  Parent     All Other    

(Amounts in millions)

 Guarantor  Issuer  Subsidiaries  Eliminations  Consolidated 

Revenues:

     

Premiums

 $—    $—    $1,140 $—    $1,140

Net investment income

  (1)   3  805  (3)   804

Net investment gains (losses)

  —     6  (37)   —     (31) 

Policy fees and other income

  —     —     203  (1)   202
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

  (1)   9  2,111  (4)   2,115
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Benefits and expenses:

     

Benefits and other changes in policy reserves

  —     —     1,311  —     1,311

Interest credited

  —     —     156  —     156

Acquisition and operating expenses, net of deferrals

  7  —     233  —     240

Amortization of deferred acquisition costs and intangibles

  —     —     104  —     104

Interest expense

  —     68  12  (4)   76
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total benefits and expenses

  7  68  1,816  (4)   1,887
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes and equity in income of subsidiaries

  (8)   (59)   295  —     228

Provision (benefit) for income taxes

  6  (17)   74  —     63

Equity in income of subsidiaries

  126  45  —     (171)   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  112  3  221  (171)   165

Less: net income attributable to noncontrolling interests

  —     —     53  —     53
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

 $112 $3 $168 $(171)  $112
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                     
 
Parent
    
All Other
   
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Revenues:
  
   
   
   
   
 
Premiums
 $
—  
  $
—  
  $
  1,136
  $
—  
  $
  1,136
 
Net investment income
  
—  
   
4
   
828
   
(4
)  
828
 
Net investment gains (losses)
  
—  
   
(8
)  
(6
)  
—  
   
(14
)
Policy fees and other income
  
—  
   
1
   
209
   
(1
)  
209
 
                     
Total revenues
  
—  
   
(3
)  
2,167
   
(5
)  
2,159
 
                     
Benefits and expenses:
  
   
   
   
   
 
Benefits and other changes in policy reserves
  
—  
   
—  
   
1,205
   
—  
   
1,205
 
Interest credited
  
—  
   
—  
   
152
   
—  
   
152
 
Acquisition and operating expenses, net of deferrals
  
7
   
—  
   
246
   
—  
   
253
 
Amortization of deferred acquisition costs and intangibles
  
—  
   
—  
   
112
   
—  
   
112
 
Interest expense
  
1
   
70
   
11
   
(5
)  
77
 
                     
Total benefits and expenses
  
8
   
70
   
1,726
   
(5
)  
1,799
 
                     
Income (loss) before income taxes and equity in income of subsidiaries
  
(8
)  
(73
)  
441
   
—  
   
360
 
Provision (benefit) for income taxes
  
32
   
(14
)  
93
   
—  
   
111
 
Equity in income of subsidiaries
  
230
   
151
   
—  
   
(381
)  
—  
 
                     
Net income
  
190
   
92
   
348
   
(381
)  
249
 
Less: net income attributable to noncontrolling interests
  
—  
   
—  
   
59
   
—  
   
59
 
                     
Net income available to Genworth Financial, Inc.’s common stockholders
 $
  190
  $
92
  $
289
  $
(381
) $
190
 
                     

77
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating income statement information for the six months ended June 30, 2019:
                     
 
Parent
    
All Other
     
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Revenues:
  
   
   
   
   
 
Premiums
 $
—  
  $
—  
  $
2,240
  $
—  
  $
2,240
 
Net investment income
  
(1
)  
4
   
1,685
   
(7
)  
1,681
 
Net investment gains (losses)
  
—  
   
(12
)  
41
   
—  
   
29
 
Policy fees and other income
  
—  
   
2
   
411
   
(3
)  
410
 
                     
Total revenues
  
(1
)  
(6
)  
4,377
   
(10
)  
4,360
 
                     
Benefits and expenses:
  
   
   
   
   
 
Benefits and other changes in policy reserves
  
—  
   
—  
   
2,571
   
—  
   
2,571
 
Interest credited
  
—  
   
—  
   
293
   
—  
   
293
 
Acquisition and operating expenses, net of deferrals
  
7
   
(2
)  
493
   
—  
   
498
 
Amortization of deferred acquisition costs and intangibles
  
—  
   
—  
   
186
   
—  
   
186
 
Interest expense
  
3
   
130
   
22
   
(10
)  
145
 
                     
Total benefits and expenses
  
10
   
128
   
3,565
   
(10
)  
3,693
 
                     
Income (loss) before income taxes and equity in income of subsidiaries  
(11
)  
(134
)  
812
   
—  
   
667
 
Provision (benefit) for income taxes
  
44
   
(26
)  
201
   
—  
   
219
 
Equity in income of subsidiaries
  
397
   
213
   
—  
   
(610
)  
—  
 
                     
Net income
  
342
   
105
   
611
   
(610
)  
448
 
Less: net income attributable to noncontrolling interests
  
—  
   
—  
   
106
   
—  
   
106
 
                     
Net income available to Genworth Financial, Inc.’s common stockholders
 $
342
  $
105
  $
505
  $
(610
) $
342
 
                     
78
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating income statement information for the six months ended June 30, 2018:
                     
 
Parent
    
All Other
   
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Revenues:
  
   
   
   
   
 
Premiums
 $
—  
  $
 —  
  $
  
2,276
  $
 —  
  $2,276
Net investment income
  
(1
)  
7
   
1,633
   
(7
)  
1,632
 
Net investment gains (losses)
  
—  
   
(2
)  
(43
)  
—  
   
(45
)
Policy fees and other income
  
—  
   
1
   
412
   
(2
)  
411
 
                     
Total revenues
  
(1
)  
6
   
4,278
   
(9
)  
4,274
 
                     
Benefits and expenses:
  
   
   
   
   
 
Benefits and other changes in policy reserves
  
—  
   
—  
   
2,516
   
—  
   
2,516
 
Interest credited
  
—  
   
—  
   
308
   
—  
   
308
 
Acquisition and operating expenses, net of deferrals
  
14
   
—  
   
479
   
—  
   
493
 
Amortization of deferred acquisition costs and intangibles
  
—  
   
—  
   
216
   
—  
   
216
 
Interest expense
  
1
   
138
   
23
   
(9
)  
153
 
                     
Total benefits and expenses
  
15
   
138
   
3,542
   
(9
)  
3,686
 
                     
Income (loss) before income taxes and equity in income of subsidiaries  
(16
)  
(132
)  
736
   
—  
   
588
 
Provision (benefit) for income taxes
  
38
   
(31
)  
167
   
—  
   
174
 
Equity in income of subsidiaries
  
356
   
196
   
—  
   
(552
)  
—  
 
                     
Net income
  
302
   
95
   
569
   
(552
)  
414
 
Less: net income attributable to noncontrolling interests
  
—  
   
—  
   
112
   
—  
   
112
 
                     
Net income available to Genworth Financial, Inc.’s common stockholders
 $
  302
  $
95
  $
457
  $
(552
) $
302
 
                     
79
Table of Contents
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 March 31,June 30, 2019:

  Parent     All Other       

(Amounts in millions)

 Guarantor�� Issuer  Subsidiaries  Eliminations  Consolidated 

Net income

 $174 $69 $309 $(322)  $230

Other comprehensive income, net of taxes:

     

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

  347  283  379  (630)   379

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

  1  1  1  (2)   1

Derivatives qualifying as hedges

  69  69  77  (146)   69

Foreign currency translation and other adjustments

  31  24  53  (54)   54
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive income

  448  377  510  (832)   503
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income

  622  446  819  (1,154)   733

Less: comprehensive income attributable to noncontrolling interests

  —     —     111  —     111
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

 $622 $446 $708 $(1,154)  $622
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                     
 
Parent
    
All Other
     
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Net income
 $
168
  $
36
  $
302
  $
(288
) $
218
 
Other comprehensive income (loss), net of taxes:  
   
   
   
   
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
  
362
   
311
   
376
   
(673
)  
376
 
Derivatives qualifying as hedges
  
133
   
133
   
148
   
(281
)  
133
 
Foreign currency translation and other adjustments
  
26
   
17
   
43
   
(43
)  
43
 
                     
Total other comprehensive income (loss)  
521
   
461
   
567
   
(997
)  
552
 
                     
Total comprehensive income
  
689
   
497
   
869
   
(1,285
)  
770
 
Less: comprehensive income attributable to noncontrolling interests
  
—  
   
—  
   
81
   
—  
   
81
 
                     
Total comprehensive income available to Genworth Financial, Inc.’s common stockholders
 $
689
  $
497
  $
788
  $
(1,285
) $
689
 
                     
The following table presents the condensed consolidating comprehensive income statement information for the three months ended March 31,June 30, 2018:

   Parent     All Other       

(Amounts in millions)

  Guarantor  Issuer  Subsidiaries  Eliminations  Consolidated 

Net income

  $112 $3 $221 $(171)  $165

Other comprehensive income (loss), net of taxes:

      

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

   (332)   (295)   (341)   627  (341) 

Derivatives qualifying as hedges

   (152)   (153)   (165)   318  (152) 

Foreign currency translation and other adjustments

   (47)   (36)   (88)   84  (87) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive income (loss)

   (531)   (484)   (594)   1,029  (580) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive loss

   (419)   (481)   (373)   858  (415) 

Less: comprehensive income attributable to noncontrolling interests

   —     —     4  —     4
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  $(419)  $(481)  $(377)  $858 $(419) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                     
 
Parent
    
All Other
     
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Net income
 $
190
  $
92
  $
348
  $
(381
) $
249
 
Other comprehensive income (loss), net of taxes:
  
   
   
   
   
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
  
(179
)  
(167
)  
(185
)  
346
   
(185
)
Net unrealized gains (losses) on other-than-temporarily impaired securities
  
(2
)  
(1
)  
(2
)  
3
   
(2
)
Derivatives qualifying as hedges
  
(64
)  
(64
)  
(68
)  
132
   
(64
)
Foreign currency translation and other adjustments
  
(55
)  
(46
)  
(97
)  
100
   
(98
)
                     
Total other comprehensive income (loss)
  
(300
)  
(278
)  
(352
)  
581
   
(349
)
                     
Total comprehensive loss
  
(110
)  
(186
)  
(4
)  
200
   
(100
)
Less: comprehensive income attributable to noncontrolling interests
  
—  
   
—  
   
10
   
—  
   
10
 
                     
Total comprehensive loss available to Genworth Financial, Inc.’s common stockholders
 $
(110
) $
(186
) $
(14
) $
200
  $
(110
)
                     

80
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating comprehensive income statement information for the six months ended June 30, 2019:
                     
 
Parent
    
All Other
     
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Net income
 $
342
  $
105
  $
611
  $
(610
) $
448
 
Other comprehensive income (loss), net of taxes:
  
   
   
   
   
 
Net unrealized gains (losses) on securities not other-than-
temporarily impaired
  
709
   
594
   
755
   
(1,303
)  
755
 
Net unrealized gains (losses) on other-than-temporarily
impaired securities
  
1
   
1
   
1
   
(2
)  
1
 
Derivatives qualifying as hedges
  
202
   
202
   
225
   
(427
)  
202
 
Foreign currency translation and other adjustments
  
57
   
41
   
96
   
(97
)  
97
 
                     
Total other comprehensive income (loss)
  
969
   
838
   
1,077
   
(1,829
)  
1,055
 
                     
Total comprehensive income  
1,311
   
943
   
1,688
   
(2,439
)  
1,503
 
Less: comprehensive income attributable to noncontrolling interests
  
—   
   
—  
   
192
   
—  
   
192
 
                     
Total comprehensive income available to Genworth Financial, Inc.’s
common stockholders		 $
1,311
  $
943
  $
1,496
  $
(2,439
) $
1,311
 
                     
The following table presents the condensed consolidating comprehensive income statement information for the six months ended June 30, 2018:
                     
 
Parent
    
All Other
     
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Net income
 $
302
  $
95
  $
569
  $
(552
) $
414
 
Other comprehensive income (loss), net of taxes:
  
   
   
   
   
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
  
(511
)  
(462
)  
(526
)  
973
   
(526
)
Net unrealized gains (losses) on other-than-temporarily impaired securities
  
(2
)  
(1
)  
(2
)  
3
   
(2
)
Derivatives qualifying as hedges
  
(216
)  
(217
)  
(233
)  
450
   
(216
)
Foreign currency translation and other adjustments
  
(102
)  
(82
)  
(185
)  
184
   
(185
)
                     
Total other comprehensive income (loss)
  
(831
)  
(762
)  
(946
)  
1,610
   
(929
)
                     
Total comprehensive loss
  
(529
)  
(667
)  
(377
)  
1,058
   
(515
)
Less: comprehensive income attributable to noncontrolling interests
  
—  
   
—  
   
14
   
—  
   
14
 
                     
Total comprehensive loss available to Genworth Financial, Inc.’s common stockholders
 $
(529
) $
(667
) $
(391
) $
1,058
  $
(529
)
                     
81
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the condensed consolidating cash flow statement information for the threesix months ended March 31,June 30, 2019:

  Parent     All Other       

(Amounts in millions)

 Guarantor  Issuer  Subsidiaries  Eliminations  Consolidated 

Cash flows from (used by) operating activities:

     

Net income

 $174 $69 $309 $(322)  $230

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

     

Equity in income from subsidiaries

  (202)   (120)   —     322  —   

Dividends from subsidiaries

  —     47  (47)   —     —   

Amortization of fixed maturity securities discounts and premiums

  —     2  (18)   —     (16) 

Net investment (gains) losses

  —     3  (77)   —     (74) 

Charges assessed to policyholders

  —     —     (165)   —     (165) 

Acquisition costs deferred

  —     —     (17)   —     (17) 

Amortization of deferred acquisition costs and intangibles

  —     —     91  —     91

Deferred income taxes

  26  (3)   52  —     75

Derivative instruments and limited partnerships

  —     (10)   (20)   —     (30) 

Stock-based compensation expense

  6  —     1  —     7

Change in certain assets and liabilities:

     

Accrued investment income and other assets

  19  —     (281)   4  (258) 

Insurance reserves

  —     —     301  —     301

Current tax liabilities

  15  (9)   2  —     8

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

  (18)   (18)   21  (3)   (18) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash from (used by) operating activities

  20  (39)   152  1  134
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from (used by) investing activities:

     

Proceeds from maturities and repayments of investments:

     

Fixed maturity securities

  —     —     902  —     902

Commercial mortgage loans

  —     —     127  —     127

Restricted commercial mortgage loans related to a securitization entity

  —     —     3  —     3

Proceeds from sales of investments:

     

Fixed maturity and equity securities

  —     —     1,714  —     1,714

Purchases and originations of investments:

     

Fixed maturity and equity securities

  —     —     (2,128)   —     (2,128) 

Commercial mortgage loans

  —     —     (370)   —     (370) 

Other invested assets, net

  —     29  (11)   (1)   17

Policy loans, net

  —     —     12  —     12

Intercompany notes receivable

  —     (51)   6  45  —   

Capital contributions to subsidiaries

  (3)   —     3  —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash from (used by) investing activities

  (3)   (22)   258  44  277
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows used by financing activities:

     

Deposits to universal life and investment contracts

  —     —     198  —     198

Withdrawals from universal life and investment contracts

  —     —     (581)   —     (581) 

Repurchase of subsidiary shares

  —     —     (12)   —     (12) 

Dividends paid to noncontrolling interests

  —     —     (28)   —     (28) 

Intercompany notes payable

  (16)   (7)   68  (45)   —   

Other, net

  (1)   —     49  —     48
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash used by financing activities

  (17)   (7)   (306)   (45)   (375) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

  —     —     8  —     8
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net change in cash, cash equivalents and restricted cash

  —     (68)   112  —     44

Cash, cash equivalents and restricted cash at beginning of period

  —     429  1,748  —     2,177
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash, cash equivalents and restricted cash at end of period

 $—    $361 $1,860 $—    $2,221
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                     
 
Parent
    
All Other
     
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Cash flows from (used by) operating activities:
  
   
   
   
   
 
Net income
 $
342
  $
105
  $
611
  $
(610
) $
448
 
Adjustments to reconcile net income to net cash from (used by) operating activities:
  
   
   
   
   
 
Equity in income from subsidiaries
  
(397
)  
(213
)  
—  
   
610
   
—  
 
Dividends from subsidiaries
  
—  
   
105
   
(105
)  
—  
   
—  
 
Amortization of fixed maturity securities discounts and premiums
  
—  
   
3
   
(57
)  
—  
   
(54
)
Net investment (gains) losses
  
—  
   
12
   
(41
)  
—  
   
(29
)
Charges assessed to policyholders
  
—  
   
—  
   
(364
)  
—  
   
(364
)
Acquisition costs deferred
  
—  
   
—  
   
(35
)  
—  
   
(35
)
Amortization of deferred acquisition costs and intangibles
  
—  
   
—  
   
186
   
—  
   
186
 
Deferred income taxes
  
49
   
74
   
11
   
—  
   
134
 
Derivative instruments and limited partnerships
  
—  
   
(30
)  
52
   
—  
   
22
 
Stock-based compensation expense
  
10
   
—  
   
2
   
—  
   
12
 
Change in certain assets and liabilities:
  
   
   
   
   
 
Accrued investment income and other assets
  
(1
)  
—  
   
(290
)  
1
   
(290
)
Insurance reserves
  
—  
   
—  
   
609
   
—  
   
609
 
Current tax liabilities
  
(4
)  
(40
)  
71
   
—  
   
27
 
Other liabilities, policy and contract claims and other policy-related balances
  
(18
)  
(3
)  
156
   
(6
)  
129
 
                     
Net cash from (used by) operating activities
  
(19
)  
13
   
806
   
(5
)  
795
 
                     
Cash flows used by investing activities:
  
   
   
   
   
 
Proceeds from maturities and repayments of investments:
  
   
   
   
   
 
Fixed maturity securities
  
—  
   
—  
   
1,929
   
—  
   
1,929
 
Commercial mortgage loans
  
—  
   
—  
   
285
   
—  
   
285
 
Restricted commercial mortgage loans related to a securitization entity
  
—  
   
—  
   
6
   
—  
   
6
 
Proceeds from sales of investments:
  
   
   
   
   
 
Fixed maturity and equity securities
  
—  
   
—  
   
2,859
   
—  
   
2,859
 
Purchases and originations of investments:
  
   
   
   
   
 
Fixed maturity and equity securities
  
—  
   
—  
   
(4,681
)  
—  
   
(4,681
)
Commercial mortgage loans
  
—  
   
—  
   
(561
)  
—  
   
(561
)
Other invested assets, net
  
—  
   
29
   
(261
)  
5
   
(227
)
Policy loans, net
  
—  
   
—  
   
39
   
—  
   
39
 
Intercompany notes receivable
  
—  
   
(93
)  
6
   
87
   
—  
 
Capital contributions to subsidiaries
  
(3
)  
—  
   
3
   
—  
   
—  
 
                     
Net cash used by investing activities
  
(3
)  
(64
)  
(376
)  
92
   
(351
)
                     
Cash flows from (used by) financing activities:
  
   
   
   
   
 
Deposits to universal life and investment contracts
  
—  
   
—  
   
444
   
—  
   
444
 
Withdrawals from universal life and investment contracts
  
—  
   
—  
   
(1,096
)  
—  
   
(1,096
)
Proceeds from the issuance of long-term debt
 
 
—
  
 
 
 
—
  
 
 
 
77
 
 
 
—
  
 
 
 
77
 
Repayment and repurchase of long-term debt
 
 
—
  
 
 
 
(1
)
 
 
(77
)
 
 
—
  
 
 
 
(78
)
Repurchase of subsidiary shares
  
—  
   
—  
   
(44
)  
—  
   
(44
)
Dividends paid to noncontrolling interests
  
—  
   
—  
   
(53
)  
—  
   
(53
)
Intercompany notes payable
  
29
   
(7
)  
65
   
(87
)  
—  
 
Other, net
  
(7
)  
(12
)  
74
   
—  
   
55
 
                     
Net cash from (used by) financing activities
  
22
   
(20
)  
(610
)  
(87
)  
(695
)
                     
Effect of exchange rate changes on cash, cash equivalents and restricted cash
  
—  
   
—  
   
12
   
—  
   
12
 
                     
Net change in cash, cash equivalents and restricted cash
  
—  
   
(71
)  
(168
)  
—  
   
(239
)
Cash, cash equivalents and restricted cash at beginning of period
  
—  
   
429
   
1,748
   
—  
   
2,177
 
                     
Cash, cash equivalents and restricted cash at end of period
 $
—  
  $
358
  $
1,580
  $
—  
  $
1,938
 
                     

82
Table of Contents
GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating cash flow statement information for the threesix months ended March 31,June 30, 2018:

  Parent     All Other       

(Amounts in millions)

 Guarantor  Issuer  Subsidiaries  Eliminations  Consolidated 

Cash flows from (used by) operating activities:

     

Net income

 $112 $3 $221 $(171)  $165

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

     

Equity in income from subsidiaries

  (126)   (45)   —     171  —   

Dividends from subsidiaries

  —     63  (63)   —     —   

Amortization of fixed maturity securities discounts and premiums

  —     1  (26)   —     (25) 

Net investment (gains) losses

  —     (6)   37  —     31

Charges assessed to policyholders

  —     —     (178)   —     (178) 

Acquisition costs deferred

  —     —     (18)   —     (18) 

Amortization of deferred acquisition costs and intangibles

  —     —     104  —     104

Deferred income taxes

  9  (47)   64  —     26

Derivative instruments and limited partnerships

  —     17  (169)   —     (152) 

Stock-based compensation expense

  8  —     (1)   —     7

Change in certain assets and liabilities:

     

Accrued investment income and other assets

  5  16  (63)   (3)   (45) 

Insurance reserves

  —     —     377  —     377

Current tax liabilities

  (23)   26  (42)   —     (39) 

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

  (13)   (19)   (117)   5  (144) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash from (used by) operating activities

  (28)   9  126  2  109
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows used by investing activities:

     

Proceeds from maturities and repayments of investments:

     

Fixed maturity securities

  —     —     934  —     934

Commercial mortgage loans

  —     —     205  —     205

Restricted commercial mortgage loans related to a securitization entity

  —     —     8  —     8

Proceeds from sales of investments:

     

Fixed maturity and equity securities

  —     —     792  —     792

Purchases and originations of investments:

     

Fixed maturity and equity securities

  —     —     (2,013)   —     (2,013) 

Commercial mortgage loans

  —     —     (199)   —     (199) 

Other invested assets, net

  —     —     106  (2)   104

Policy loans, net

  —     —     2  —     2

Intercompany notes receivable

  —     (56)   59  (3)   —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash used by investing activities

  —     (56)   (106)   (5)   (167) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash flows from (used by) financing activities:

     

Deposits to universal life and investment contracts

  —     —     255  —     255

Withdrawals from universal life and investment contracts

  —     —     (591)   —     (591) 

Proceeds from the issuance of long-term debt

  —     441  —     —     441

Repayment of borrowings related to a securitization entity

  —     —     (8)   —     (8) 

Repurchase of subsidiary shares

  —     —     (36)   —     (36) 

Dividends paid to noncontrolling interests

  —     —     (36)   —     (36) 

Intercompany notes payable

  31  (59)   25  3  —   

Other, net

  (3)   —     25  —     22
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash from (used by) financing activities

  28  382  (366)   3  47
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

  —     —     (21)   —     (21) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net change in cash, cash equivalents and restricted cash

  —     335  (367)   —     (32) 

Cash, cash equivalents and restricted cash at beginning of period

  —     795  2,080  —     2,875
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash, cash equivalents and restricted cash at end of period

 $—    $1,130 $1,713 $—    $2,843
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                     
 
Parent
    
All Other
     
(Amounts in millions)
 
Guarantor
  
Issuer
  
Subsidiaries
  
Eliminations
  
Consolidated
 
Cash flows from (used by) operating activities:
  
   
   
   
   
 
Net income
 $
302
  $
95
  $
569
  $
(552
) $
414
 
Adjustments to reconcile net income to net cash from (used by) operating activities:
  
   
   
   
   
 
Equity in income from subsidiaries
  
(356
)  
(196
)  
—  
   
552
   
—  
 
Dividends from subsidiaries
  
50
   
91
   
(141
)  
—  
   
—  
 
Amortization of fixed maturity securities discounts and premiums
  
—  
   
3
   
(65
)  
—  
   
(62
)
Net investment losses
  
—  
   
2
   
43
   
—  
   
45
 
Charges assessed to policyholders
  
—  
   
—  
   
(359
)  
—  
   
(359
)
Acquisition costs deferred
  
—  
   
—  
   
(40
)  
—  
   
(40
)
Amortization of deferred acquisition costs and intangibles
  
—  
   
—  
   
216
   
—  
   
216
 
Deferred income taxes
  
42
   
(117
)  
158
   
—  
   
83
 
Derivative instruments and limited partnerships
  
—  
   
22
   
(217
)  
—  
   
(195
)
Stock-based compensation expense
  
15
   
—  
   
1
   
—  
   
16
 
Change in certain assets and liabilities:
  
   
   
   
   
 
Accrued investment income and other assets
  
(1
)  
59
   
(147
)  
—  
   
(89
)
Insurance reserves
  
—  
   
—  
   
691
   
—  
   
691
 
Current tax liabilities
  
(27
)  
87
   
(97
)  
—  
   
(37
)
Other liabilities, policy and contract claims and other policy-related balances
  
(15
)  
(50
)  
(49
)  
(8
)  
(122
)
                     
Net cash from (used by) operating activities
  
10
   
(4
)  
563
   
(8
)  
561
 
                     
Cash flows used by investing activities:
  
   
   
   
   
 
Proceeds from maturities and repayments of investments:
  
   
   
   
   
 
Fixed maturity securities
  
—  
   
—  
   
1,979
   
—  
   
1,979
 
Commercial mortgage loans
  
—  
   
—  
   
350
   
—  
   
350
 
Restricted commercial mortgage loans related to a securitization entity
  
—  
   
—  
   
16
   
—  
   
16
 
Proceeds from sales of investments:
  
   
   
   
   
 
Fixed maturity and equity securities
  
—  
   
—  
   
1,920
   
—  
   
1,920
 
Purchases and originations of investments:
  
   
   
   
   
 
Fixed maturity and equity securities
  
—  
   
—  
   
(4,082
)  
—  
   
(4,082
)
Commercial mortgage loans
  
—  
   
—  
   
(489
)  
—  
   
(489
)
Other invested assets, net
  
—  
   
—  
   
85
   
8
   
93
 
Policy loans, net
  
—  
   
—  
   
15
   
—  
   
15
 
Intercompany notes receivable
  
—  
   
(10
)  
58
   
(48
)  
—  
 
Capital contributions to subsidiaries
  
(1
)  
—  
   
1
   
—  
   
—  
 
                     
Net cash used by investing activities
  
(1
)  
(10
)  
(147
)  
(40
)  
(198
)
                     
Cash flows used by financing activities:
  
   
   
   
   
 
Deposits to universal life and investment contracts
  
—  
   
—  
   
503
   
—  
   
503
 
Withdrawals from universal life and investment contracts
  
—  
   
—  
   
(1,177
)  
—  
   
(1,177
)
Proceeds from the issuance of long-term debt
  
—  
   
441
   
—  
   
—  
   
441
 
Repayment and repurchase of long-term debt
  
—  
   
(597
)  
—  
   
—  
   
(597
)
Repayment of borrowings related to a securitization entity
  
—  
   
—  
   
(12
)  
—  
   
(12
)
Repurchase of subsidiary shares
  
—  
   
—  
   
(49
)  
—  
   
(49
)
Dividends paid to noncontrolling interests
  
—  
   
—  
   
(50
)  
—  
   
(50
)
Intercompany notes payable
  
(7
)  
(59
)  
18
   
48
   
—  
 
Other, net
  
(2
)  
(19
)  
19
   
—  
   
(2
)
                     
Net cash used by financing activities
  
(9
)  
(234
)  
(748
)  
48
   
(943
)
                     
Effect of exchange rate changes on cash, cash equivalents and restricted cash
  
—  
   
—  
   
(52
)  
—  
   
(52
)
                     
Net change in cash, cash equivalents and restricted cash
  
—  
   
(248
)  
(384
)  
—  
   
(632
)
Cash, cash equivalents and restricted cash at beginning of period
  
—  
   
795
   
2,080
   
—  
   
2,875
 
                     
Cash, cash equivalents and restricted cash at end of period
 $
—  
  $
547
  $
1,696
  $
—  
  $
2,243
 
                     

83
Table of Contents
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 statutory results as of December 31, 2018, in accordance with applicable dividend restrictions, our subsidiaries could pay dividends of approximately $500 million to us in 2019 without obtaining regulatory approval, and the remaining net assets are considered restricted. While the $500 million is unrestricted, our insurance subsidiaries may not pay dividends to us in 2019 at this level if they need to retain capital for growth and to meet capital requirements and desired thresholds. As of March 31,June 30, 2019, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $12.7$13.4 billion and $11.7$12.2 billion, respectively.

84
Table of Contents
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 2018 Annual Report on Form10-K. References to “Genworth Financial,” “Genworth,” the “Company,” “we” or “our” herein 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 transactiontransactions with China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”) and, our discussions with regulators in connection therewith.therewith and any capital contribution resulting therefrom, as well as any statements regarding the potential disposition of our interest in Genworth MI Canada Inc. (“Genworth Canada”). 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
including: our inability to complete the transaction with China Oceanwide in a timely manner or at all; the parties’ inability to obtain regulatory approvals, clearances or extensions, or the possibility that such regulatory approvals may further delay the transaction with China Oceanwide or will not be received prior to November 30, 2019 (and either or both of the parties may not be willing to further waive their end date termination rights beyond November 30, 2019) or that materially burdensome or adverse regulatory conditions may be imposed or undesirable measures may be required in connection with any such regulatory approvals, clearances or extensions (including those conditions or measures that either or both of the parties may be unwilling to accept or undertake, as applicable) or that with continuing delays, circumstances may arise that make one or both parties unwilling to proceed with the transaction with China Oceanwide or unable to comply with the conditions to existing regulatory approvals; the risk that the parties will not be able to obtain other regulatory approvals, clearances or extensions, including in connection with a potential alternative funding structure or the current geo-political environment, or that one or more regulators may rescind or fail to extend existing approvals, or that the revocation by one regulator of approvals will lead to the revocation of approvals by other regulators; the parties’ inability to obtain any necessary regulatory approvals, clearances or extensions for the post-closing capital plan; the risk that a condition to the closing of the transaction with China Oceanwide may not be satisfied or that a condition to closing that is currently satisfied may not remain satisfied due to the delay in closing the transaction with China Oceanwide; risks relating to any potential disposition of Genworth Canada that are similar to the foregoing, including regulatory, legal or contractual restrictions that may impede Genworth’s ability to consummate a disposition of Genworth Canada, the right of China Oceanwide to reject the terms of any Genworth Canada sale, in which case the parties will each have the right to terminate the China Oceanwide transaction, as well as potential changes in market conditions generally or conditions relating to Genworth Canada’s industry or business that may impede any such sale; the risk that existing and potential legal proceedings may be instituted against us in connection with the transaction with China Oceanwide or the potential sale of Genworth Canada that may delay the transaction with China Oceanwide, make it more costly or ultimately preclude it; the risk that the proposed transactions disrupt our current plans and operations as a result of the announcement and consummation of the transactions; certain restrictions during the pendency of the transactions that may impact our ability to pursue certain business opportunities or strategic transactions; continued
85
Table of Contents
 •

risks related to the proposed transaction with China Oceanwideincluding: our inability to complete the transaction in a timely manner or at all; the parties’ inability to obtain regulatory approvals or clearances, or the possibility that such regulatory approvals may further delay the transaction or will not be received prior to June 30, 2019 (and either or both of the parties may not be willing to further waive their end date termination rights beyond June 30, 2019) or that materially burdensome or adverse regulatory conditions may be imposed or undesirable measures may be required in connection with any such regulatory approvals or clearances (including those conditions or measures that either or both of the parties may be unwilling to accept or undertake, as applicable); the risk that the parties will not be able to obtain other regulatory approvals or clearances, including in connection with a potential alternative funding structure or the currentgeo-political environment; the parties’ inability to obtain any necessary regulatory approvals or clearances for the post-closing capital plan; the risk that a closing condition of the transaction may not be satisfied; existing and potential legal proceedings may be instituted against us in connection with the transaction that may delay the transaction, make it more costly or ultimately preclude it; the risk that the proposed transaction disrupts our 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 our ability to pursue certain business opportunities or strategic transactions; continued availability of capital and financing to us before, or in the absence of, the consummation of the transaction;transactions; further rating agency actions and downgrades in our debt or financial strength ratings; changes in applicable laws or regulations; our ability to recognize the anticipated benefits of the transaction;transactions; the amount of the costs, fees, expenses and other charges related to the transaction,transactions, including costs and expenses related to conditions imposed in connection with regulatory approvals or clearances, which may be material; 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;

•

strategic risks in 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 stabilizing our U.S. life insurance businesses, debt obligations, cost savings, ratings and capital); our inability to attract buyers for any businesses or

strategic risks in the event the proposed transaction with China Oceanwide is not consummated
including: our inability to successfully execute alternative strategic plans to effectively address our current business challenges (including with respect to stabilizing our U.S. life insurance businesses, debt obligations, cost savings, ratings and capital); 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; adverse tax or accounting charges; and our ability to increase the capital needed in our mortgage insurance businesses in a timely manner and on anticipated terms, including through 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: inadequate reserves and the need to increase reserves (including as a result of any changes we may make in the future to our assumptions, methodologies or otherwise in connection with periodic or other reviews); risks related to the impact of our annual review of assumptions and methodologies relating to our long-term care insurance claim reserves and margin, including risks that additional information obtained in the future or other changes to assumptions or methodologies materially affect our margins; 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 may make to our assumptions, methodologies or otherwise in connection with periodic or other reviews); 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 the outcome of our annual review of the premium earnings pattern for our mortgage insurance businesses; and changes in valuation of fixed maturity and equity 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 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 (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;
86
Table of Contents
 

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; and adverse tax or accounting charges; and our ability to increase the capital needed in our mortgage insurance businesses in a timely manner and on anticipated terms, including through 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: inadequate reserves and the need to increase reserves (including as a result of any changes we may make in the future to our assumptions, methodologies or otherwise in connection with periodic or other reviews); risks related to the impact of our annual review of assumptions and methodologies relating to our long-term care insurance claim reserves and margin, including risks that additional information obtained in the future or other changes to assumptions or methodologies materially affect our margins; 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 may make to our assumptions, methodologies or otherwise in connection with periodic or other reviews); 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 the outcome of our annual review of the premium earnings pattern for our mortgage insurance businesses; and changes in valuation of fixed maturity and equity 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 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 (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 continue to 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;requirements; 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; changes in tax laws; 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 the ability to obtain further financing under an additional secured term loan or credit facility); future adverse rating agency actions, including with respect to rating downgrades or potential downgrades or being put on review for potential downgrade, 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

liquidity, financial strength ratings, credit and counterparty risks
including: insufficient internal sources to meet liquidity needs and limited or no access to capital (including the ability to obtain further financing under an additional secured term loan or credit facility); future adverse rating agency actions, including with respect to rating downgrades or potential downgrades or being put on review for potential downgrade, 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; competition, including in our mortgage insurance businesses from government and government-owned and government-sponsored enterprises (“GSEs”) offering mortgage insurance; the design and effectiveness of our disclosure controls and procedures and internal control over financial 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, its confidential information;
insurance and product-related risks
including: our inability to increase premiums and associated benefit reductions sufficiently, and in a timely manner, on our in-force long-term care insurance policies, and charge higher premiums on 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 and/or accept reduced benefits), including to offset any impact on our long-term care insurance margins; availability, affordability and adequacy of reinsurance to protect us against losses; 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 risk in-force with high loan-to-value ratios may not be sufficient to compensate us for the greater risks associated with those policies; decreases in the volume of high loan-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: 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
87
Table of Contents
 

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; competition, including in our mortgage insurance businesses from government and government-owned and government-sponsored enterprises (“GSEs”) offering mortgage insurance; the design and effectiveness of our disclosure controls and procedures and internal control over financial 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, its confidential information;

•

insurance and product-related risks including: our inability to increase premiums and associated benefit reductions sufficiently, and in a timely manner, on ourin-force long-term care insurance policies, and charge higher premiums on 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 and/or accept reduced benefits), including to offset any impact on our long term care insurance margins; availability, affordability and adequacy of reinsurance to protect us against losses; 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: 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.

risks relating to our common stock
including: the continued suspension of payment of dividends and stock price fluctuations.
We provide additional information regarding these risks and uncertainties in the Definitive Proxy Statement, filed with the U.S. Securities and Exchange Commission (“SEC”) on January 25, 2017, and our Annual Report on Form 10-K, filed with the SEC on February 27, 2019. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Accordingly, for the foregoing reasons, we caution you against relying on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

otherwise, except as may be required under applicable securities laws.

Strategic Update

We continue to focus on improving business performance, addressing financial leverage and increasing financial and strategic flexibility across the organization. Our strategy includes maximizing our opportunities in our mortgage insurance businesses and stabilizing our U.S. life insurance businesses.

China Oceanwide Transaction

On October 21, 2016, Genworth Financial, Inc. (“Genworth Financial”) entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“Parent”), a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect,a direct, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect,a direct, wholly-owned subsidiary of Asia Pacific Insurance (the “Merger”). 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 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 the Merger as soon as possible. In December 2018 and January 2019, we received the remaining approvals from our U.S. domestic insurance regulators. These approvals had multiple conditions, including but not limited to, the Merger being consummated without the purchase of Genworth Life and Annuity Insurance Company (“GLAIC”) from Genworth Life Insurance Company (“GLIC”) by a Genworth intermediate holding company, which had been initially proposed and which we refer to as the “GLAIC unstacking.” Our U.S. domestic regulatory approvals included the approval from the Delaware Department of Insurance (“DDOI”). Genworth Financial and China Oceanwide worked with the DDOI and other regulators to obtain approval of the Merger without the GLAIC unstacking throughout the second half of 2018. As part of the DDOI approval, Genworth Financial and China Oceanwide agreed, following the Merger, Genworth Holdings, Inc. (“Genworth Holdings”) will contribute $175 million to GLIC, which was previously committed by Genworth Financial to be used as partial consideration for the GLAIC unstacking. The $175 million was originally scheduled to be contributed in three equal tranches, with the first contribution completed by the end of March 2019, the second contribution completed by the end of September 2019 and the final contribution completed by the end of January 2020. Due to the delay in closing the Merger, we did not make the March 2019 contribution. We will work with the DDOI on a revised timeline for the first contribution and the remaining amounts due thereafter, depending on the timing of the closing of the Merger. In addition, at or before the closing of the Merger, GLAIC will purchase from GLIC
88
Table of Contents
an intercompany note with a principal amount of $200 million. This intercompany note was issued by Genworth Holdings to GLIC, with Genworth Holdings obligated to pay the principal amount on the maturity date of March 31, 2020. The purchase price will be at fair value, but not less than $200 million. No changes will be made to the existing terms of the intercompany note, other than Genworth Holdings will now pay GLAIC the principal amount of the note at maturity. Likewise, the amount will continue to be eliminated in consolidation.

In October 2018, the National Development and Reform Commission (“NDRC”) of the People’s Republic of China accepted China Oceanwide’s filing in connection with the Merger Agreement, which concluded NDRC’s review process and enables China Oceanwide to seek the clearance in China for currency conversion and the transfer of funds once all other regulatory approvals have been received.

In June 2018, the Committee on Foreign Investment in the United States (“CFIUS”) completed its review of the proposed transaction and concluded that there are no unresolved national security concerns with respect to the proposed transaction. The completion of the CFIUS review satisfied one of the conditions to closing the proposed transaction. In connection with the CFIUS review of the proposed transaction, Genworth Financial and China Oceanwide entered into an agreement to implement a data security risk mitigation plan, which includes, among other things, the use of a U.S. third-party service provider and an independent security monitor to protect the personal data of Genworth Financial’s policyholders and customers in the United States.

The closing of the Merger remains subject to other conditions and approvals, including the required regulatory approval in Canada. Despite multiple inquiries regarding status, the parties have not yet received any substantive guidance or timeframe for the Canadian review. In addition, China Oceanwide will need to receive clearance in China for currency conversion and the transfer of funds.

On April 29,June 30, 2019, Genworth Financial, Parent and Merger Sub entered into a tenthan eleventh waiver and agreement (“TenthEleventh Waiver and Agreement”) pursuant to which (i) Genworth Financial and Parent each agreed to waive until Juneno later than November 30, 2019 its right to terminate the Merger Agreement and abandon the Merger in accordance with the terms of the Merger Agreement.Agreement and (ii) China Oceanwide agreed to allow Genworth Financial to solicit interest for a potential disposition of Genworth Canada. The Tenthparties decided to consider strategic alternatives for Genworth Canada as a result of the absence of any substantive progress in discussions on the approval of the Merger with Canadian regulators. Consequently, the parties concluded that exploring a potential disposition of Genworth Financial’s interest in Genworth Canada is in the best interests of the parties. In addition, a potential sale would allow Genworth Financial to reduce its outstanding indebtedness and increase its financial flexibility, whether or not the China Oceanwide transaction is consummated.
The Eleventh Waiver and Agreement extended the ninthtenth waiver and agreement extension deadline of AprilJune 30, 2019 to allow additional time for the remaining regulatory approval, clearance and clearance processes.

extension processes and for the parties to explore disposition options for Genworth Canada. If Genworth Financial identifies a suitable sale transaction for Genworth Canada, China Oceanwide will have the right to accept or reject the terms of the Genworth Canada sale transaction. If China Oceanwide accepts the terms, the parties will seek to close the sale of Genworth Canada as promptly as possible, and the Merger concurrently or promptly thereafter. However, in the event China Oceanwide rejects the Genworth Canada sale transaction, the parties will each have the right to

accelerate the November 30, 2019 end date and terminate the Merger Agreement at that time.
On July 24, 2019, Genworth Holdings announced a solicitation of consents from the holders of its outstanding senior and junior subordinated notes (“July 2019 bond consent”) to create an express authorization for the sale of all or part of our non-U.S. mortgage insurance businesses or assets, including Genworth Canada. No assurance can be given regarding the completion of the July 2019 bond consent.
89
Table of Contents
China Oceanwide and Genworth have agreed on a capital investment plan under which China Oceanwide and/or its affiliates will contribute an aggregate of $1.5 billion to Genworth over time following consummation of the Merger. This contribution is subject to the closing of the Merger and the receipt of required regulatory approvals. The $1.5 billion contribution would be used to further improve our financial stability, which could include retiring debt due in 2020 and 2021 or enabling future growth opportunities. China Oceanwide has no current intention or future obligation to contribute additional capital to support our legacy long-term care insurance business. However, as discussed above, the parties have agreed following the closing of the Merger, Genworth Holdings would contribute $175 million in aggregate to GLIC over time.

At this time Genworth Financial and China Oceanwide remain committed to satisfying the closing conditions under the Merger Agreement as soon as possible. However, ifan additional extension may be required to complete the potential disposition of Genworth Canada, and there is no guarantee such disposition will occur,
or China Oceanwide will consent to the terms of such disposition. If the parties are unable to satisfy the closing conditions by JuneNovember 30, 2019 and are unable to reach an agreement as to a further extension of the deadline, then either party may terminate the Merger Agreement pursuant to its terms.

If the China Oceanwide transaction is completed, we will be a standalone subsidiary and our senior management team will continue to lead the business from our current headquarters in Richmond, Virginia. Likewise,Other than a potential sale of Genworth Canada, we intend to maintain our existing portfolio of businesses, including our mortgage insurance businesses in Australia and Canada.businesses. Except for the specific monitoring and reporting required under the CFIUS data security risk mitigation plan, ourday-to-day operations are not expected to change as a result of this transaction.

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 and life insurance businesses and the charges we recorded in previous periods, absent
as well as the resulting lack of potential dividend capacity from our U.S. life insurance subsidiaries, our financial strength ratings have been downgraded. Absent any alternative commitment of external capital, we believe there would be: increased pressure on and potential further 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 and other limitations on our holding company liquidity and ability to service and/or refinance our holding company debt.

In the absence of the transaction with China Oceanwide, which we can neither predict nor guarantee, we may need to pursue strategic asset sales to address our debt maturities in 2020 and thereafter,thereafter. We have initiated a process to potentially sell Genworth Canada, and in the absence of the transaction with China Oceanwide, we may pursue other asset sales, including a potential salessale of our mortgage insurance businessesbusiness in Canada and/or Australia. We have and would continue to evaluate options to insulate our U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event the transaction with China Oceanwide cannot be completed. 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 resulting material adverse effect on our results of operations.

Ongoing Priorities

Stabilizing our U.S. life insurance businesses continues to be one of our long-term goals. We will continue to execute this objective primarily through our multi-year long-term care insurancein-force rate action plan.

Increased premiums and associated benefit reductions on our legacy long-term care insurance policies are critical to the business. As previously disclosed, we are no longer seeking an unstacking of GLAIC as part of our long-term care insurance strategy. 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

90
Table of Contents
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.

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 March 31,June 30, 2019 Compared to Three Months Ended March 31,June 30, 2018

We had net income available to Genworth Financial, Inc.’s common stockholders of $174$168 million and $112$190 million for the three months ended March 31,June 30, 2019 and 2018, respectively. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders was $121$204 million and $125$200 million for the three months ended March 31,June 30, 2019 and 2018, respectively.

Our U.S. Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $124$147 million and $111$137 million for the three months ended March 31,June 30, 2019 and 2018, respectively. The increase was primarily attributable to higher insurancein-force and an increase in investment income partially offset by higher operating costs in the current year.

The current year also included an $8 million favorable reserve adjustment. Included in the prior year was a $22 million favorable reserve adjustment. These favorable reserve adjustments were mostly associated with lower expected claim rates.

Our Canada Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $41 million and $49$46 million for the three months ended March 31,June 30, 2019 and 2018, respectively. The decrease was primarily driven by higher taxes and changes in foreign exchange rates in the current year and from lower earned premiums largely related to refinements in premium recognition factors in the prior year that did not recur and lower mortgage insurance written on prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”) in recent years. The decrease was also attributable to an increase in acquisition and operating expenses, which included higher stock-based compensation expense in the current year.

Our Australia Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $14$13 million and $19$22 million for the three months ended March 31,June 30, 2019 and 2018, respectively. The decrease was predominantly attributable to lower premiums largely from changes in foreign exchange rateshigher policy cancellations in the currentprior year mostly due to an initiative implemented in the second quarter of 2018 to more promptly identify loans that were discharged or refinanced and from the seasoning of our smaller, more recentin-force books of business. These decreases wereThe decrease was partially offset by lower contract fees amortization in the current year.

Our U.S. Life Insurance segment had an adjusted operating lossincome available to Genworth Financial, Inc.’s common stockholders of $5$66 million in bothand $57 million for the three months ended March 31,June 30, 2019 and 2018. The adjusted2018, respectively. Adjusted operating lossincome available to Genworth Financial, Inc.’s common stockholders for our long-term care insurance business decreased $12increased $15 million mainly attributable to $60$96 million of higher premiums and reduced benefits in the current year fromin-force rate actions approved and implemented and from favorable development on prior year incurred but not reported claims. ThisThe increase was also due to lower utilization of available benefits compared to the prior year. These increases were partially offset by lower claim terminations and higher severity and frequency of new claims, lower claim terminations and an increase in incremental reserves of $39 million recorded in connection with an accrual for profits followed by losses in the current year. The adjustedAdjusted operating lossincome available to Genworth Financial, Inc.’s common stockholders for our life insurance business increased $1$6 million mainly from a
reinsurance correction and refinement resulting in a net favorable impact of $17 million in the current year. This increase was partially offset by higher lapses primarily associated with our large
20-year
term life insurance block issued in 1999 entering its post-level premium period and the continued runoff of our term life insurance products and from higher lapses primarily associated within the large20-year term life insurance blocks entering the post-level premium periods. These increases were mostly offset bycurrent year. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased $12 million in our fixed annuities business predominantly attributable to lower mortality in the current year compared to the prior year and an unfavorable charge of $4 million in connection with loss recognition testing in our term and universal life insurancefixed immediate annuity products. Adjusted

operating income available to Genworth Financial, Inc.’s common stockholders decreased $11 million in our fixed annuities business predominantly attributable to $13 million of unfavorable charges in connection with loss recognition testing in our fixed immediate annuity products, partially offset by favorable mortality in the current year.

91
Table of Contents
Our Runoff segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $20$9 million and $10$13 million for the three months ended March 31,June 30, 2019 and 2018, respectively. The increasedecrease was predominantly from higher mortality and lower fee income driven mostly by a decline in the average account values in our variable annuity products, partially offset by favorable equity market performance in the current year.

Corporate and Other Activities had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $73$72 million and $59$75 million for the three months ended March 31,June 30, 2019 and 2018, respectively. The increasedecrease in the loss was principally related to $12lower interest expense and provisional tax
expense of $19 million in the prior year that did not recur, partially offset by $11 million of higher taxes in the current year associated with the Global Intangible Low Taxed Income (“GILTI”) provision of the Tax Cuts and Jobs Act (“TCJA”).
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
We had net income available to Genworth Financial, Inc.’s common stockholders of $342 million and $302 million for the six months ended June 30, 2019 and 2018, respectively. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders was $325 million for both the six months ended June 30, 2019 and 2018.
Our U.S. Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $271 million and $248 million for the six months ended June 30, 2019 and 2018, respectively. The increase was primarily attributable to higher insurance in-force and an increase in investment income, partially offset by higher operating costs in the current year. The current year also included an $8 million favorable reserve adjustment. Included in the prior year was a $22 million favorable reserve adjustment. These favorable reserve adjustments were mostly associated with lower expected claim rates.
Our Canada Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $82 million and $95 million for the six months ended June 30, 2019 and 2018, respectively. The decrease was primarily driven by lower earned premiums largely from
changes in foreign exchange rates in the current year, refinements in premium recognition factors in the prior year that did not recur and from $13the seasoning of our smaller, more recent
in-force
books of business. The decrease was also attributable to higher operating costs in the current year.
Our Australia Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $27 million and $41 million for the six months ended June 30, 2019 and 2018, respectively. The decrease was predominantly attributable to lower premiums largely from the seasoning of our smaller, more recent in-force books of business and from higher policy cancellations in the prior year. The decrease was partially offset by lower contract fees amortization in the current year.
Our U.S. Life Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $61 million and $52 million for the six months ended June 30, 2019 and 2018, respectively. Our long-term care insurance business had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $17 million for the six months ended June 30, 2019 compared to an adjusted operating loss of $10 million for the six months ended June 30, 2018. The increase to income in the current year from a loss in the prior year was predominantly attributable to $156 million of unfavorable provisional tax adjustments.higher premiums and reduced benefits in the current year from in-force rate actions approved and implemented and from favorable development on prior year incurred but not reported claims. These decreasesincreases were partially offset by higher severity and frequency of new claims, lower claim terminations and an increase in incremental reserves of $39 million recorded in connection with an accrual for profits followed by losses in the current year. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders for our life insurance business increased $5 million mainly from a
reinsurance correction and refinement resulting in a net favorable impact of $17 million in the current year.
92
Table of Contents
This increase was partially offset by higher lapses primarily associated with our large
20-year
term life insurance block issued in 1999 entering its post-level premium period and the continued runoff of our term life insurance products in the current year. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased $23 million in our fixed annuities business predominantly attributable to $17 million of unfavorable charges in connection with loss recognition testing in our fixed immediate annuity products and lower investment income, partially offset by lower interest credited in the current year
.
Our Runoff segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $29 million and $23 million for the six months ended June 30, 2019 and 2018, respectively. The increase was predominantly from favorable equity market performance, partially offset by lower fee income driven mostly by a decline in the average account values in our variable annuity products in the current year.
Corporate and Other Activities had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $145 million and $134 million for the six months ended June 30, 2019 and 2018, respectively. The increase in the loss was principally related to $23 million of higher taxes in the current year associated with the GILTI provision of the TCJA, partially offset by lower interest expense and operating costs in the current year.

year and provisional tax
expense of $19 million in the prior year that did not recur.

Significant Developments

The periods under review include, among others, the following significant developments.

U.S. Mortgage Insurance

PMIERs Compliance
. Our U.S. mortgage insurance business has been compliant with the original requirements under the private mortgage insurer eligibility requirements (“PMIERs”) since its introduction into the private mortgage insurance industry in 2015. These requirements set forth operational and financial requirements that mortgage insurers must meet in order to remain eligible to offer private mortgage insurance. On March 31, 2019, revisions to the original PMIERs became effective for our U.S. mortgage insurance business. The major revisions include the elimination of any credit for future premiums that had previously been allowed on insurance policies written in 2008 and earlier. Our U.S. mortgage insurance business had available assets of approximately
123% of the required assets under PMIERs as of June 30, 2019. The PMIERs sufficiency ratio was in excess of $650 million of available assets above the requirements as of June 30, 2019.
Market Share.
Our U.S. mortgage insurance business increased its estimated market share during the second quarter of 2019 compared to the first quarter of 2019. Market share of our U.S. mortgage insurance business is influenced by the execution of its go to market strategy, including, but not limited to, the ongoing rollout of its proprietary risk-based pricing engine, GenRATE, and its selective participation in forward commitment transactions.
New Insurance Written.
Our U.S. mortgage insurance business continues to grow its insurance in-force through higher new insurance written, which increased 39% during the three months ended June 30, 2019 compared to the three months ended June 30, 2018. This increase was primarily driven by the increase in the estimated market share and a larger private mortgage insurance available market.
Canada Mortgage Insurance
Regulatory Capital
. The Mortgage Insurer Capital Adequacy Test (“MICAT”) guideline was effective for our Canada mortgage insurance business on January 1, 2019. The MICAT guideline did not have a
93
Table of Contents
 •

PMIERs Compliance. Our U.S. mortgage insurance business has been compliant with the original requirements under the private mortgage insurer eligibility requirements (“PMIERs”) since its introduction into the private mortgage insurance industry in 2015. These requirements set forth operational and financial requirements that mortgage insurers must meet in order to remain eligible to offer private mortgage insurance. On March 31, 2019, revisions to the original PMIERs became effective for our U.S. mortgage insurance business. The major revisions include the elimination of any credit for future premiums that had previously been allowed on insurance policies written in 2008 and earlier. Our U.S. mortgage insurance business had available assets of approximately 123% of the required assets under PMIERs as of March 31, 2019. The PMIERs sufficiency ratio was in excess of $600 million of available assets above the requirements as of March 31, 2019.

•

Market Share. Our U.S. mortgage insurance business increased its market share during the first quarter of 2019 compared to the fourth quarter of 2018 principally from selective participation in forward commitment transactions and the continued successful rollout of its proprietary risk-based pricing engine, GenRATE. New insurance written increased 7% during the first quarter of 2019 compared to the first quarter of 2018 primarily driven by the increase in the estimated market share.

Canada Mortgage Insurance

•

Regulatory Capital. The Mortgage Insurer Capital Adequacy Test (“MICAT”) guideline was effective for our Canada mortgage insurance business on January 1, 2019. The MICAT guideline did not have a material impact on our regulatory solvency as of March 31,June 30, 2019, as the impact of the elimination of the one-time credit score update for 2015 and prior books more than offset the 5% increase in the total asset requirement on existing insurancein-force. In addition, we expect these new requirements shouldto permit our mortgage insurance business in Canada to more closely align its actual capital levels with its targeted operating range going forward, which mayand allow for meaningful levels of capital redeployment in addition to regular quarterly dividends. In the second quarter of 2019, Genworth Canada returned additional capital to all shareholders via share repurchases of approximately CAD$68 million and a special dividend of CAD$0.40 per share or approximately CAD$34 million in aggregate. As of March 31,June 30, 2019, our MICAT ratio under the framework was approximately 172%169%, which was above the supervisory target.

U.S. Life Insurance

•

In-force 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 and associated benefit reductions on older generation blocks of business 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 and associated benefit reductions on newer blocks of business, as needed, some of which may be significant, to help bring their loss ratios back towards their original pricing. For all of thesein-force rate action filings, we received 24 filing approvals from nine states in the first quarter of 2019, representing a weighted-average increase of 62% on approximately $241 million in annualizedin-force premiums, or approximately $150 million of incremental annual premiums.

In-force 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 and associated benefit reductions on older generation blocks of business 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 and associated benefit reductions on newer blocks of business, as needed, some of which may be significant, to help bring their loss ratios back towards their original pricing. For all of these in-force rate action filings, we received 56 filing approvals from 16 states during the six months ended June 30, 2019, representing a weighted-average increase of 49% on approximately $467 million in annualized in-force premiums, or approximately $228 million of incremental annual premiums. We also submitted 8 new filings in 4 states during the six months ended June 30, 2019 on approximately $79 million in annualized in-force premiums.
Liquidity, Capital Resources and Intercompany Obligations

•

International Dividends.During the first quarter of 2019, our international subsidiaries paid $47 million of dividends to Genworth Holdings, which was comprised of $28 million of ordinary dividends and $19 million of dividends attributable to share repurchases in our Canada and Australia mortgage insurance businesses. See “Item 2—Liquidity and Capital Resources” for additional details.

•

Genworth Holdings Cashand Targeted Cash Buffer. As of March 31, 2019, Genworth Holdings held $361 million of cash, cash equivalents and restricted cash and $44 million of unrestricted and restricted U.S. government securities. The $405 million combined cash and liquid assets is below our targeted cash buffer of two times expected annual external debt interest payments by approximately $100 million. See “Item 2—Liquidity and Capital Resources” for additional details.

•

Intercompany Note Maturity. Genworth Holdings currently has an intercompany note due to GLIC on March 31, 2020 with a principal amount of $200 million. In conjunction with the Merger with China Oceanwide and as discussed above, GLAIC will purchase from GLIC this intercompany note at fair value, but not less than $200 million.

Genworth Canada Debt Refinance.
On May 22, 2019, Genworth Canada issued at a premium, CAD$100 million fixed rate senior notes with an interest rate of 4.24% that matures in 2024. The offering represents a re-opening of the 4.24% senior notes originally issued in April 2014. In June 2019, the proceeds of the offering were used to early redeem approximately CAD$100 million of the 5.68% senior notes originally scheduled to mature in June 2020. As a result of the early redemption of Genworth Canada’s notes, we incurred a pre-tax loss of approximately $1 million, net of the portion attributable to noncontrolling interests.
International Dividends.
During the six months ended June 30, 2019, our international subsidiaries paid $105 million of dividends to Genworth Holdings, which included $53 million of dividends attributable to share repurchases in our Canada and Australia mortgage insurance businesses. See “Item 2—Liquidity and Capital Resources” for additional details.
Genworth Holdings Cash and Targeted Cash Buffer.
As of June 30, 2019, Genworth Holdings held $358 million of cash, cash equivalents and restricted cash and $45 million of unrestricted and restricted U.S. government securities. The $403 million combined cash and liquid assets is below our targeted cash buffer of two times expected annual external debt interest payments by approximately $100 million. See “Item 2—Liquidity and Capital Resources” for additional details.
Intercompany Note Maturity.
Genworth Holdings currently has an intercompany note due to GLIC on March 31, 2020 with a principal amount of $200 million. In conjunction with the Merger with China Oceanwide and as discussed above, GLAIC will purchase from GLIC this intercompany note at fair value, but not less than $200 million.
Financial Strength Ratings

There

On July 1, 2019, Standard & Poor’s Financial Services, LLC (“S&P”) revised its ratings criteria for insurance companies. Subsequently, on July 25, 2019, S&P downgraded the financial strength rating of Genworth Financial Mortgage Insurance Pty Limited, our principal Australia mortgage insurance subsidiary,
94
Table of Contents
from “A+” (Strong) to “A” (Strong). In addition to the change in criteria, the downgrade was based largely on Genworth Financial Mortgage Insurance Pty Limited’s weakened competitive position in the local market and a lack of diversification as a monoline insurer. Likewise, a decrease in revenues and earnings over the past five years raised concerns over the ability to withstand large shocks, in the view of S&P.
On June 19, 2019, Moody’s Investors Service, Inc. (“Moody’s”) upgraded the financial strength rating of Genworth Mortgage Insurance Corporation (“GMICO”), our principal U.S. mortgage insurance subsidiary, from “Ba1” (Questionable) to “Baa3” (Adequate). The upgrade of GMICO was based on its improving profitability, market position and healthy capital levels in relation to the GSEs’ requirements. Moody’s also downgraded the financial strength rating of GLAIC, one of our principal life insurance subsidiaries, from “Ba3” (Questionable) to “B1” (Poor). The downgrade of GLAIC was based on continuing earnings volatility and lower margins.
Other than described above, there were no changes in the financial strength ratings of our insurance subsidiaries subsequent to February 27, 2019, the date we filed our 2018 Annual Report on Form10-K. For a discussion of the financial strength ratings of our insurance subsidiaries, see “Item 1—Financial Strength Ratings” in our 2018 Annual Report on Form10-K.

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 the value of assets and liabilities. The U.S. and international financial markets in which we operate have been impacted by concerns regarding regulatory changes, global trade and modest global growth and the rate and strength of recovery.growth. During 2018, the global economy improved and most countries in which we conduct business saw improved levels of gross domestic product (“GDP”) growth. TheThis global growth continued into 2019, particularly in the U.S., which experienced better than expected GDP grewgrowth in the first quarterhalf of 2019, at an estimated 3.2%, driven in part by strong consumer spending. This GDP growth was unexpected given that many economic forecasts predicted the U.S. economy would slow down beginning in the first quarter of 2019 and continue this slower growth path for the remainder of the year. In spite of thethis better than expected first quarterhalf of 2019 GDP growth,results, many economic uncertainties remain, including, U.S. and China trade tensions, fluctuating oil prices, decliningand commodity prices, a negative inflation outlook and global growth concerns. Near term inflation remains relatively stable but long-term forecasts indicate signs of volatility, which has resulted in a negative outlook. Historic low interest rates began to rise in 2018 given actions taken by the U.S. Federal Reserve and other central banks, although long-term interest rates remain at low levels and interest rates

reversed course from their upward trend and declined during the first quarterhalf of 2019. The U.S. Federal Reserve did not increase rates during the firstsecond quarter of 2019 and signaled that they might not raise rates again untilare weighing a potential interest rate decrease in 2019 and/or 2020. Prior to the firstsecond quarter of 2019, the U.S. Federal Reserve projected twono additional rate increases in 2019 and one increase in 2020. The modification in the forecast relates to thereflects economic concerns relating to ongoing global trade tensions, declining commodity prices, slower global growth and a negative inflation outlook. Given this forecast, we expect interest rates will remain low as compared to historical norms. Likewise, we remain uncertain at the pace in which future interest rate increases or decreases will occur and its ultimate impact on our businesses. Near term inflation remains relatively stable but long-term forecasts indicate signs of volatility, which has resulted in a negative outlook. The U.S. Treasury yield curve steepened in the firstsecond quarter of 2019 with short-term interest rates decreasing at a higher rate than long-term interest rate decreases. Portions of the U.S. Treasury yield curve inverted in late MarchMay 2019 and continued through the end of the second quarter of 2019, as the yield on the U.S.10-year Treasury note dipped below the yield on the3-month Treasury bill, though subsequent to quarter end this inversion normalized.bill. Credit markets generally recovered fromalso experienced a brief period of volatility in May 2019, with spread widening seendue to escalating global trade tensions, but subsequently recovered in the fourth quarter of 2018, with spreads tightening in the first quarter ofJune 2019 driven mostly by healthy consumer demand, corporate profits,renewed optimism on trade, expectations on accommodative central bank policies and rebounding investor demand for bonds and lower government bond yields.bonds. 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 2018 Annual Report on Form10-K.

Varied levels of economic growth, coupled with uncertain economic outlooks, changes in government policy, regulatory and tax reforms, and other changes in market conditions, influenced, and we believe will
95
Table of Contents
continue to influence, investment and spending decisions by consumers and businesses as they weigh 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, further changes in tax policy and/or in U.S. tax legislation, international trade 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 U.S. Federal Reserve, other central banks and other legislative and regulatory bodies have taken certain actions in past years 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. These policies and actions have generally been supportive to the worldwide economy, however, a U.S. or global recession or regional or global financial crisis could occur which would 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 March 31,June 30, 2019 Compared to Three Months Ended March 31,June 30, 2018

The following table sets forth the consolidated results of operations for the periods indicated:

   Three months ended
March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Revenues:

        

Premiums

  $1,114  $1,140  $(26)    (2)% 

Net investment income

   829   804   25   3% 

Net investment gains (losses)

   74   (31)    105   NM (1) 

Policy fees and other income

   187   202   (15)    (7)% 
  

 

 

   

 

 

   

 

 

   

Total revenues

   2,204   2,115   89   4% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

   1,301   1,311   (10)    (1)% 

Interest credited

   147   156   (9)    (6)% 

Acquisition and operating expenses, net of deferrals

   251   240   11   5% 

Amortization of deferred acquisition costs and intangibles

   91   104   (13)    (13)% 

Interest expense

   72   76   (4)    (5)% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

   1,862   1,887   (25)    (1)% 
  

 

 

   

 

 

   

 

 

   

Income before income taxes

   342   228   114   50% 

Provision for income taxes

   112   63   49   78% 
  

 

 

   

 

 

   

 

 

   

Net income

   230   165   65   39% 

Less: net income attributable to noncontrolling interests

   56   53   3   6% 
  

 

 

   

 

 

   

 

 

   

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

  $174  $112  $62   55% 
  

 

 

   

 

 

   

 

 

   

                 
 
Three months ended
June 30,
  
Increase
(decrease) and
percentage
 change
 
(Amounts in millions)
 
    2019    
  
    2018    
  
2019 vs. 2018
 
Revenues:  
   
   
        
   
        
 
Premiums $
1,126
  $
1,136
  $
(10
)  
(1
)%
Net investment income  
852
   
828
   
24
   
3
%
 
Net investment gains (losses)  
(45
)  
(14
)  
(31
)  
NM
(1)
 
Policy fees and other income  
223
   
209
   
14
   
7
%
 
                 
Total revenues  
2,156
   
2,159
   
(3
)  
—   
%
                 
Benefits and expenses:  
   
   
   
 
Benefits and other changes in policy reserves  
1,270
   
1,205
   
65
   
5
%
 
Interest credited  
146
   
152
   
(6
)  
(4
)%
Acquisition and operating expenses, net of deferrals  
247
   
253
   
(6
)  
(2
)%
Amortization of deferred acquisition costs and intangibles  
95
   
112
   
(17
)  
(15
)%
Interest expense  
73
   
77
   
(4
)  
(5
)%
                 
Total benefits and expenses  
1,831
   
1,799
   
32
   
2
%
 
                 
Income before income taxes  
325
   
360
   
(35
)  
(10
)%
Provision for income taxes  
107
   
111
   
(4
)  
(4
)%
                 
Net income  
218
   
249
   
(31
)  
(12
)%
Less: net income attributable to noncontrolling interests  
50
   
59
   
(9
)  
(15
)%
                 
Net income available to Genworth Financial, Inc.’s common stockholders $
168
  $
190
  $
(22
)  
(12
)%
                 
(1)

We define “NM” as not meaningful for increases or decreases greater than 200%.

96
Table of Contents
Premiums.
Premiums are primarily 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 Australia Mortgage Insurance segment decreased $15$26 million predominantly from $8higher policy cancellations in the prior year mostly due to an initiative implemented in the second quarter of 2018 to more promptly identify loans that were discharged or refinanced and from the seasoning of our smaller, more recent in-force books of business. The three months ended June 30, 2019 included a decrease of $7 million ofattributable to changes in foreign exchange rates.
Our Canada Mortgage Insurance segment decreased $6 million primarily from changes attributable to foreign exchange rates in the current year and fromyear.
Our U.S. Mortgage Insurance segment increased $22 million mainly attributable to higher insurance in-force in the seasoning of our smaller, more recentin-force books of business.

current year.

Our U.S. Life Insurance segment decreased $13increased $1 million. Our long-term care insurance business decreased $3 million. The decrease wasincreased $8 million largely from policy terminations, partially offset by $17$24 million of increased premiums in the current year fromin-force rate actions approved and implemented.implemented, partially offset by policy terminations and policies entering paid-up status in the current year. Our life insurance business decreased $10$7 million mainly attributable to the continued runoff of our term life insurance products and higher reinsurance rates in the current year.

products.

Our Canada Mortgage Insurance segment decreased $13 million primarily from $7 million of changes attributable to foreign exchange rates in the current year, refinements in premium recognition factors in the prior year that did not recur and from the seasoning of our smaller, more recentin-force books of business.

Our U.S. Mortgage Insurance segment increased $15 million mainly attributable to higher insurancein-force in the current year.

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 equity and 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 $12increased $18 million mostly attributable to our life insurance business primarily fromdue to a decline in our term universal and $21 million favorable correction related to ceded premiums on
universal life insurancein-force blocks policies, partially offset by a favorable model refinement in the current year.

prior year that did not recur.

Our Runoff segment decreased $5$3 million principally from lower fee income driven mostly by a decline in the average account values in our variable annuity products 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 Runoff segment decreased $7 million primarily attributable to lower guaranteed minimum death benefit (“GMDB”) reserves in our variable annuity products due to favorable equity market performance in the current year.

Our U.S. Life Insurance segment decreased $2increased $48 million. Our long-term care insurance business decreased $1increased $22 million principally related to the aging of the in-force block (including higher frequency of new claims), higher severity of new claims, lower claim terminations and an increase in incremental reserves of $49 million recorded in connection with an accrual for profits followed by losses in the current year. These increases were partially offset by a $61 million higher favorable impact of $100 million from reduced benefits in the current year related toin-force rate actions approved and implemented and from

97
Table of Contents
favorable development on prior year incurred but not reported claims. The current year also included favorable utilization of available benefits. Our life insurance business increased $19 million primarily attributable to a favorable model refinement in the prior year that did not recur and higher mortality in the current year compared to the prior year. Our fixed annuities business increased $7 million largely attributable to $5 million of higher reserves in connection with loss recognition testing in our fixed immediate annuity products primarily as a result of a decrease in interest rates in the current year. The increase was also due to lower mortality in the current year compared to the prior year. These increases were partially offset by lower interest credited in the current year due to block runoff.
Our U.S. Mortgage Insurance segment increased $14 million. Benefits and other changes in policy reserves were zero in the current year but increased compared to the prior year incurred but not reported claims. This decrease was mostlyyear. Lower net benefits from cures and aging of existing delinquencies were offset by aging of thein-force block (including higher frequency ofa $10 million favorable reserve adjustment and a lower average reserve on new claims), lower claim terminations and higher severity of new claimsdelinquencies in the current year. The prior year also included a $28 million favorable reserve adjustment. These favorable reserve adjustments were mostly associated with lower expected claim rates.
Our life insurance business decreased $5Runoff segment increased $6 million primarily attributable to lowerhigher mortality in both our variable annuity and corporate-owned life insurance products in the current year compared to the prior year in our term and universal life insurance products. Our fixed annuities business increased $4 million largely attributable to $17 million of higher reserves in connection with loss recognition testing in our fixed immediate annuity products primarily as a result of portfolio management actions and from a decrease in the projected yield curve. These increases were partially offset by favorable mortality and lower interest credited in the current year due to block runoff.

year.

Our Australia Mortgage Insurance segment decreased $2$3 million largely from $3 million of changes attributable toin foreign exchange rates in the current year. Excluding the effects of changes in foreign exchange rates, benefits and other changes in policy reserves increased slightly mainly fromwere flat as higher reserves on new delinquencies net ofwere offset by higher reserve releases for cures in the current year.

Our U.S.Canada Mortgage Insurance segment was flat as a lower average reserve per delinquency wasnew delinquencies, net of cures, and modestly higher favorable development in our loss reserves were offset by a lower net benefit from cures and aging of existing delinquencies in the current year.

Our Canada Mortgage Insurance segment increased $1 million principally from a higher average reserve per delinquency, higher new delinquencies, net of cures, primarily attributable to increased losses in Alberta and from modestly lower favorable development in our loss reserves, mostly offset by changes in foreign exchange rates in the current year.

Interest credited.
Interest credited represents interest credited on behalf of policyholder and contractholder general account balances.

Our U.S. Life Insurance segment decreased $13$10 million. Our life insurance and fixed annuities businesses decreased $3$2 million and $10$8 million, respectively, primarily driven by a decline in average account values and lower crediting rates in the current year.

Our Runoff segment increased $4 million principally fromlargely related to higher account valuesinterest in our corporate-owned life insurance products 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.

Our U.S. Mortgage Insurance segment increased $7 The current year included a $2 million primarily attributable to higher operating costs driven mostly by increased salesearly redemption fee in the current year.

Our U.S. Life Insurance segment increased $7 million mostly related to $4 million of restructuring costs, which included the suspension of sales of our individual long-term care insurance products through sales intermediaries effective March 7, 2019. The remaining increase was mostly attributable to our long-term care insurance business largely from higher commissions and premium taxes associated with ourin-force rate action plan.

Our Canada Mortgage Insurance segment increased $3related to the repayment of CAD$100 million mainly driven by higher stock-based compensation expense and higher operating costsof the 5.68% senior notes originally scheduled to mature in the current year.

June 2020.

Corporate and Other activities decreased $4 million mainly driven by lower operating costs and a decrease in employee related expenses in the current year.

Amortization of deferred acquisition costs and intangibles.
Amortization of DAC and intangibles consists primarily of the amortization of acquisition costs that are capitalized, PVFP and capitalized software.

Our U.S. Life Insurance segment decreased $5$11 million primarily related to our life insurance business principally from our updated assumptions implementedan unfavorable model refinement in the fourth quarter of 2018, prior year that did not recur,
partially offset by an increase in DAC amortization from higher lapses primarily associated with theour large
20-year
term life insurance blocksblock issued in 1999 entering theits post-level premium periods. Theperiod and higher reinsurance rates in the current year also included a $10 million unfavorable model correction in our universal life insurance products.

year.

98
Table of Contents
Our Runoff segment decreased $5$4 million related to our variable annuity products mainly from favorable equity market performance in the current year.

Our Australia Mortgage Insurance segment decreased $2$3 million primarily from lower contract fees amortization and from changes in foreign exchange rates in the current year.

Interest expense.
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. The decrease was attributable to Corporate and Other activities which decreased $4$5 million largely driven by the redemption of $597 million of Genworth Holding’s senior notes in May 2018, partially offset by higher interest expense attributable to the term loan that Genworth Holdings closed in March 2018 and from our junior subordinated notes which had a higher floating rate of interest in the current year.

2018.

Provision for income taxes.
The effective tax rate increased to 32.7%32.9% for the three months ended March 31,June 30, 2019 from 27.6%30.8% for the three months ended March 31,June 30, 2018. The increase was principally driven by a tax

expense in the current year related to the GILTI provision of the TCJA. GILTI has an unfavorable impact on our current year effective tax rate due to the utilization of net operating loss carryforwards and projected taxable losses in the U.S. life insurance businesses without any offsetting foreign tax credit carryforwards. The unfavorable impact on the effective rate is expected to continue for the remainder of 2019 and into 2020.

2020 but is subject to change depending on variations in business results and a potential disposition of Genworth Canada.

Net income attributable to noncontrolling interests
. Net income attributable to noncontrolling interests represents the portion of equity in a subsidiary attributable to third parties.

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The following table sets forth the consolidated results of operations for the periods indicated:
                 
 
Six months ended
June 30,
  
Increase
(decrease) and
percentage 
change
 
(Amounts in millions)
 
2019
  
2018
  
2019 vs. 2018
 
Revenues:  
   
   
        
   
        
 
Premiums $
2,240
  $
2,276
  $
(36
)  
(2
)%
Net investment income  
1,681
   
1,632
   
49
   
3
%
 
Net investment gains (losses)  
29
   
(45
)  
74
   
164
%
Policy fees and other income  
410
   
411
   
(1
)  
—   
%
                 
Total revenues  
4,360
   
4,274
   
86
   
2
%
 
                 
Benefits and expenses:  
   
   
   
 
Benefits and other changes in policy reserves  
2,571
   
2,516
   
55
   
2
%
 
Interest credited  
293
   
308
   
(15
)  
(5
)%
Acquisition and operating expenses, net of deferrals  
498
   
493
   
5
   
1
%
 
Amortization of deferred acquisition costs and intangibles  
186
   
216
   
(30
)  
(14
)%
Interest expense  
145
   
153
   
(8
)  
(5
)%
                 
Total benefits and expenses  
3,693
   
3,686
   
7
   
—  
%
                 
Income before income taxes  
667
   
588
   
79
   
13
%
Provision for income taxes  
219
   
174
   
45
   
26
%
                 
Net income  
448
   
414
   
34
   
8
%
 
Less: net income attributable to noncontrolling interests  
106
   
112
   
(6
)  
(5
)%
                 
Net income available to Genworth Financial, Inc.’s common stockholders $
342
  $
302
  $
40
   
13
%
                 
99
Table of Contents
Premiums
Our Australia Mortgage Insurance segment decreased $41 million predominantly from the seasoning of our smaller, more recent in-force books of business and from higher policy cancellations in the prior year. The six months ended June 30, 2019 included a decrease of $15 million attributable to changes in foreign exchange rates.
Our Canada Mortgage Insurance segment decreased $19 million primarily from $13 million of changes attributable to foreign exchange rates in the current year, refinements in premium recognition factors in the prior year that did not recur and from the seasoning of our smaller, more recent in-force books of business.
Our U.S. Life Insurance segment decreased $12 million. Our long-term care insurance business increased $5 million. The increase was largely from $41 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in the current year. Our life insurance business decreased $17 million mainly attributable to the continued runoff of our term life insurance products and higher reinsurance rates in the current year.
Our U.S. Mortgage Insurance segment increased $37 million mainly attributable to higher insurance in-force in the current year.
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
Our Runoff segment decreased $8 million principally from lower fee income driven mostly by a decrease in the average account values in our variable annuity products in the current year.
Our U.S. Life Insurance segment increased $6 million mostly attributable to our life insurance business primarily driven by a $21 million favorable correction related to ceded premiums on
universal life insurance policies, partially offset by a favorable model refinement in the prior year that did not recur and a decline in our term universal and universal life insurance
in-force
blocks in the current year.
Benefits and other changes in policy reserves
Our U.S. Life Insurance segment increased $46 million. Our long-term care insurance business increased $21 million principally related to the aging of the in-force block (including higher frequency of new claims), higher severity of new claims, lower claim terminations and an increase in incremental reserves of $49 million recorded in connection with an accrual for profits followed by losses in the current year. These increases were partially offset by a higher favorable impact of $161 million from reduced benefits in the current year related to in-force rate actions approved and implemented and from favorable development on prior year incurred but not reported claims. Our life insurance business increased $14 million primarily attributable to a favorable model refinement in the prior year that did not recur. Our fixed annuities business increased $11 million largely attributable to $22 million of higher reserves in connection with loss recognition testing in our fixed immediate annuity products primarily as a result of portfolio management actions and from a decrease in the projected yield curve. This increase was partially offset by lower interest credited in the current year due to block runoff.
Our U.S. Mortgage Insurance segment increased $14 million primarily from a lower favorable reserve adjustment in the current year. We recorded a $10 million favorable reserve adjustment in the current
100
Table of Contents
year compared to a $28 million favorable reserve adjustment in the prior year. These adjustments were mostly associated with lower expected claim rates. The increase was also attributable to lower net benefits from cures and aging of existing delinquencies, partially offset by a lower average reserve on new delinquencies in the current year.
Our Canada Mortgage Insurance segment increased $1 million principally from a higher average reserve per delinquency, primarily attributable to increased losses in Alberta, mostly offset by lower new delinquencies, net of cures in the current year.
Our Australia Mortgage Insurance segment decreased $5 million from changes attributable to foreign exchange rates in the current year. Excluding the effects of changes in foreign exchange rates, benefits and other changes in policy reserves were flat as higher reserves on new delinquencies were offset by higher reserve releases for cures in the current year.
Our Runoff segment decreased $1 million primarily attributable to lower guaranteed minimum death benefit (“GMDB”) reserves in our variable annuity products due to favorable equity market performance, mostly offset by higher mortality in both our variable annuity and corporate-owned life insurance products in the current year.
Interest credited
Our U.S. Life Insurance segment decreased $23 million. The decrease was due to our life insurance and fixed annuities businesses, which decreased $5 million and $18 million, respectively, primarily driven by a decline in average account values and lower crediting rates in the current year.
Our Runoff segment increased $8 million largely related to higher interest in our corporate-owned life insurance products in the current year.
Acquisition and operating expenses, net of deferrals
Our U.S. Mortgage Insurance segment increased $6 million primarily attributable to higher operating costs driven mostly by increased sales in the current year.
Our Canada Mortgage Insurance segment increased $5 million mainly from higher operating costs
and from a $2 million early redemption fee related to the repayment of CAD$100 million of the 5.68% senior notes originally scheduled to mature in June 2020.
Corporate and Other activities decreased $6 million mainly driven by a decrease in employee related expenses and lower operating costs in the current year.
Amortization of deferred acquisition costs and intangibles
Our U.S. Life Insurance segment decreased $16 million driven mostly by our life insurance business principally from an unfavorable model refinement
in the prior year that did not recur, partially offset by higher lapses primarily associated with our large
20-year
term life insurance block issued in 1999 entering its post-level premium period and higher reinsurance rates in the current year.
Our Runoff segment decreased $9 million largely related to our variable annuity products mainly from favorable equity market performance in the current year.
Our Australia Mortgage Insurance segment decreased $5 million largely from lower contract fees amortization and from changes in foreign exchange rates in the current year.
Interest expense.
 The decrease was largely related to Corporate and Other activities, which decreased $9 million. The decrease was mostly attributable to the redemption of $597 million of Genworth Holdings’ senior notes in May 2018, partially offset by higher interest expense attributable to the term loan that Genworth Holdings closed in March 2018 and from our junior subordinated notes which had a higher floating rate of interest in the current year.
101
Table of Contents
Provision for income taxes.
The effective tax rate increased to 32.8% for the six months ended June 30, 2019 from 29.6% for the six months ended June 30, 2018. The increase in the effective tax rate was primarily attributable to tax expense in the current year related to the GILTI provision of the TCJA. GILTI has an unfavorable impact on our current year effective tax rate due to the utilization of net operating loss carryforwards and projected taxable losses in the U.S. life insurance businesses without any offsetting foreign tax credit carryforwards. The unfavorable impact on the effective rate is expected to continue for the remainder of 2019 and into 2020 but is subject to change depending on variations in business results and a potential disposition of Genworth Canada.
Use ofnon-Generally Accepted Accounting Principles (“GAAP”) measures

Reconciliation of net income to adjusted operating income available to Genworth Financial, Inc.’s common stockholders

We usenon-GAAP financial measures entitled “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders” and “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share.” Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share is derived from adjusted 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. We define adjusted 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 adjusted 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 adjusted 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, including adjusted 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 adjusted 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 adjusted 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. Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and adjusted

102
Table of Contents
operating income (loss) available to Genworth Financial, Inc.’s common stockholders per 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 share on a basic and diluted basis determined in accordance with U.S. GAAP. In addition, our definition of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.

In the first quarter of 2019, we revised how we tax the adjustments to reconcile net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders to align the tax rate used in the reconciliation to each segment’s local jurisdictional tax rate. Beginning in the first quarter of 2019, we used a tax rate of 27% and 30% for our Canada and Australia Mortgage Insurance segments, respectively, to tax effect their adjustments. Our domestic segments remain at a 21% tax rate. In 2018, we assumed a flat 21% tax rate on adjustments for all of our segments to reconcile net income (loss) available to Genworth Financial, Inc.’s common stockholders and adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. These adjustments are also net of the portion attributable to noncontrolling interests and net investment gains (losses) are adjusted for DAC and other intangible amortization and certain benefit reserves.

Prior year amounts have not been re-presented to reflect this revised presentation; however, the previous methodology would not have resulted in a materially different segment-level adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders.

The following table includes a reconciliation of net income available to Genworth Financial, Inc.’s common stockholders to adjusted operating income available to Genworth Financial, Inc.’s common stockholders for the periods indicated:

   Three months ended
March 31,		 

(Amounts in millions)

  2019  2018 

Net income

  $230 $165

Less: net income attributable to noncontrolling interests

   56  53
  

 

 

  

 

 

 

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

   174  112

Adjustments to net income available to Genworth Financial, Inc.’s common stockholders:

   

Net investment (gains) losses, net(1)

   (71)   17

Expenses related to restructuring

   4  — 

Taxes on adjustments

   14  (4) 
  

 

 

  

 

 

 

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders

  $121 $125
  

 

 

  

 

 

 

                 
 
Three months ended
June 30,
  
Six months ended
June 30,
 
(Amounts in millions)
 
  2019  
  
  2018  
  
  2019  
  
  2018  
 
Net income $
218
  $
249
  $
448
  $
414
 
Less: net income attributable to noncontrolling interests  
50
   
59
   
106
   
112
 
                 
Net income available to Genworth Financial, Inc.’s common stockholders  
168
   
190
   
342
   
302
 
Adjustments to net income available to Genworth Financial, Inc.’s
common stockholders:
  
   
   
   
 
Net investment (gains) losses, net 
(1)
  
43
   
12
   
(28
)  
29
 
(Gains) losses on early extinguishment of debt, net 
(2)
  
1
   
—  
   
1
   
—  
 
Expenses related to restructuring  
—  
   
—  
   
4
   
—  
 
Taxes on adjustments  
(8
)  
(2
)  
6
   
(6
)
                 
Adjusted operating income available to Genworth Financial, Inc.’s
common stockholders
 $
204
  $
200
  $
325
  $
325
 
                 
(1)

For the three months ended March 31,June 30, 2019 and 2018, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(2)$(3) million and $(3)$(1) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $5$1 million and $(11) $(1)

million, respectively.

For the six months ended June 30, 2019 and 2018, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(5) million and $(4) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $6 million and $(12) million, respectively.

We
(2)For the three and six months ended June 30, 2019, (gains) losses on the early extinguishment of debt were adjusted for the portion attributable to noncontrolling interests of $1 million.

103
Table of Contents
In the second quarter of 2019, we recorded apre-tax loss of $1 million, net of the portion attributable to noncontrolling interests, related to the early redemption of CAD$100 million of Genworth Canada’s senior notes originally scheduled to mature in June 2020. In the first quarter of 2019, we recorded a pre-tax expense of $4 million for the three months ended March 31, 2019 related to restructuring costs as we continue to evaluate and appropriately size our organizational needs and expenses. There were no infrequent or unusual items excluded from adjusted operating income during the periods presented.

Earnings per share

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

   Three months ended
March 31,		 

(Amounts in millions, except per share amounts)

  2019   2018 

Net income available to Genworth Financial, Inc.’s common stockholdersper share:

    

Basic

  $0.35  $0.22
  

 

 

   

 

 

 

Diluted

  $0.34  $0.22
  

 

 

   

 

 

 

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders per share:

    

Basic

  $0.24  $0.25
  

 

 

   

 

 

 

Diluted

  $0.24  $0.25
  

 

 

   

 

 

 

Weighted-average common shares outstanding:

    

Basic

   501.2   499.6
  

 

 

   

 

 

 

Diluted

   508.6   502.7
  

 

 

   

 

 

 

                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
(Amounts in millions, except per share amounts)
 
    2019    
  
    2018    
  
2019
  
2018
 
Net income available to Genworth Financial, Inc.’s common
stockholders per share:
  
   
   
   
 
Basic $
0.33
  $
0.38
  $
0.68
  $
0.60
 
                 
Diluted $
0.33
  $
0.38
  $
0.67
  $
0.60
 
                 
Adjusted operating income available to Genworth Financial,
Inc.’s common stockholders per share:
  
   
   
   
 
Basic $
0.40
  $
0.40
  $
0.65
  $
0.65
 
                 
Diluted $
0.40
  $
0.40
  $
0.64
  $
0.65
 
                 
Weighted-average common shares outstanding:
  
   
   
   
 
Basic  
503.4
   
500.6
   
502.3
   
500.1
 
                 
Diluted  
508.7
   
502.6
   
508.7
   
502.6
 
                 
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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. See note 910 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for a reconciliation of net income available to Genworth Financial, Inc.’s common stockholders to adjusted operating income available to Genworth Financial, Inc.’s common stockholders and a summary of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities.

We tax our international businesses at their local jurisdictional tax rates and our domestic businesses at the U.S. corporate federal income tax rate of 21%. Our segment tax methodology applies the respective jurisdictional or domestic tax rate to the
pre-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 withholding taxes and permanent differences between U.S. GAAP and local tax law. 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.

104
Table of Contents
Management’s discussion and analysis by segment contains selected operating performance measures including “sales” and “insurance
in-force”
or “risk
in-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 new insurance written for mortgage insurance products. Sales do not

include renewal premiums on policies or contracts written during prior periods. We consider new insurance written to be a measure of our operating performance because it represents 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 benefits and other changes in policy reserves 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 helps to enhance the understanding of the operating performance of our businesses.

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, the number of first-time homebuyers, and mortgage origination volume mix and practices; the levels and aging of mortgage delinquencies; the effect of seasonal variations; the inventory of unsold homes; loan modification and other servicing efforts; and 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, and the U.S. Congress, which impact housing or housing finance policy. In the
105
Table of Contents
past, these actions have included announced changes, or potential changes, to underwriting standards, FHA pricing, GSE guaranty fees, loan limits and alternative products such as those offered through Freddie Mac’s Integrated Mortgage Insurance (“IMAGIN”) and Fannie Mae’s Enterprise Paid Mortgage Insurance (“EPMI”) pilot programs, as well as low down payment programs available through the FHA or GSEs. For more information about the potential future impact, see “Item 1A—Risk Factors—Fannie Mae and Freddie Mac exert significant influence over the U.S. mortgage insurance market and changes to the role or structure of Freddie

Mac or Fannie Mae could have a material adverse impact on our U.S. mortgage insurance business,” and “—Risk Factors—The amount of mortgage insurance we write could decline significantly if alternatives to private mortgage insurance are used or lower coverage levels of mortgage insurance are selected” in our 2018 Annual Report on Form

10-K.

Estimated mortgage origination volume decreasedincreased during the firstsecond quarter of 2019 compared to the firstsecond quarter of 2018 primarily due to higherlower interest rates. The estimated private mortgage insurance available market was flatincreased in the firstsecond quarter of 2019 compared to the firstsecond quarter of 2018 mainly due to lower originations offset by higher private mortgage insurance penetration rates.originations. Our flow persistency was 86%82% during the firstsecond quarter of 2019 compared to 84%83% during the firstsecond quarter of 2018, due in part to the rise inlower interest rates. Our U.S. mortgage insurance estimated market share for the firstsecond quarter of 2019 increased compared to the fourthfirst quarter of 2018 driven primarily2019. Our market share is influenced by the execution of our selective participation in forward commitment transactions andgo to market strategy, including, but not limited to, the continued successfulongoing rollout of our proprietary risk-based pricing engine, GenRATE.GenRATE, and our selective participation in forward commitment transactions. However, our market share remains impacted by the negative ratings differential relative to our competitors, concerns expressed about Genworth’s financial condition, the proposed transaction with China Oceanwide and pricing competition. For more information on the potential impacts due to competition, see “Item 1A—Risk Factors—Competitors could negatively affect our ability to maintain or increase our market share and profitability,” and “—Risk Factors—Our reliance on key customer or distribution relationships could cause us to lose significant sales if one or more of those relationships terminate or are reduced”profitability” in our 2018 Annual Report on Form10-K.

The U.S. private mortgage insurance industry is highly competitive. There are currently six active mortgage insurers, including us. In the fourth quarter of 2018, our U.S. mortgage insurance business launched GenRATE, which provides lenders with a more granular approach to pricing for borrowers. All active U.S. mortgage insurers have now released proprietary risk-based pricing engines. We expect more new insurance written in the market to be priced using opaque pricing that will frequently provide a different price to lenders compared to prevailing rate cards. Given evolving market dynamics, we expect price competition to remain highly competitive.

New insurance written increased 7%39% during the firstsecond quarter of 2019 compared to the firstsecond quarter of 2018 largelyprimarily due to our higher estimated market share.share and a larger private mortgage insurance available market. Our largest customer accounted for a sizable percentage of our total new insurance written during the second quarter of 2019 and we expect this customer to exceed 10% of our total estimated new insurance written for 2019. No customer exceeded 10% of our new insurance written during 2018. Additionally, no customer had earned premiums that accounted for more than 10% of our U.S. mortgage insurance business total revenues in the second quarter of 2019 or the year ended December 31, 2018, and we estimate no customer will exceed 10% for the year ending December 31, 2019. The percentage of single premium new insurance written decreased during the firstsecond quarter of 2019 compared to the firstsecond quarter of 2018, reflecting our selective participation in this market. Future volumes of these products will vary depending in part on our evaluation of their risk return profile. We continue to manage the quality of new business through our underwriting guidelines, which we modify from time to time when circumstances warrant.

For more information on the potential impacts due to customer concentration, see “Item 1A—Risk Factors—Our reliance on key customer or distribution relationships could cause us to lose significant sales if one or more of those relationships terminate or are reduced” in our 2018 Annual Report on Form 10-K.

Our loss ratio was 8%zero for the three months ended March 31,June 30, 2019 compared to 9%(8)% for the three months ended March 31,June 30, 2018. The loss ratio decreased slightlyincreased primarily driven by higher net earned premiums attributable to increased insurancein-forcefrom a lower favorable reserve adjustment in the current year. LossesWe recorded a favorable reserve adjustment of $10 million and $28 million during the three months ended June 30, 2019 and 2018, respectively. These adjustments were flat as amostly associated with lower average reserve on new delinquencies was offset by a lower net benefit from cures and agingexpected claim rates.
106
Table of existing delinquencies in the current year.

Contents

As of June 30, 2019 and March 31, 2019, Genworth Mortgage Insurance Corporation’s (“GMICO”)GMICO’s risk-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 12.1:1 in each period, compared with arisk-to-capital ratio of approximately 12.5:1 as of December 31, 2018 and approximately 12.7:1 as of March 31, 2018. 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.

Under PMIERs, we are subject to 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 revised PMIERs was effective on March 31, 2019. As of June 30, 2019 and March 31, 2019, our U.S. mortgage insurance business had available assets of approximately 123% of the required assets under PMIERs in each period compared to approximately 129% under the previous PMIERs requirements as of December 31, 2018. The sufficiency ratioratios as of June 30, 2019 and March 31, 2019 waswere in excess of $650 million and $600 million of available assets above the PMIERs requirements, respectively, compared to $750 million of available assets above the previous PMIERs requirements as of December 31, 2018. This difference is primarily due to the elimination of any credit for future premiums in PMIERs that had previously been allowed on insurance policies written in 2008 or earlier. Reinsurance transactions provided an aggregate of approximately $490$470 million of PMIERs capital credit as of March 31,June 30, 2019.

107
Table of Contents
Segment results of operations

Three Months Ended March 31,June 30, 2019 Compared to Three Months Ended March 31,June 30, 2018

The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:

   Three months ended
March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Revenues:

        

Premiums

  $194  $179  $15   8% 

Net investment income

   28   21   7   33% 

Net investment gains (losses)

   —      —      —      —  % 

Policy fees and other income

   1   —      1   NM (1) 
  

 

 

   

 

 

   

 

 

   

Total revenues

   223   200   23   12% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

   16   16   —      —  % 

Acquisition and operating expenses, net of deferrals

   46   39   7   18% 

Amortization of deferred acquisition costs and intangibles

   4   4   —      —  % 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

   66   59   7   12% 
  

 

 

   

 

 

   

 

 

   

Income before income taxes

   157   141   16   11% 

Provision for income taxes

   33   30   3   10% 
  

 

 

   

 

 

   

 

 

   

Net income

   124   111   13   12% 

Adjustments to net income:

        

Net investment (gains) losses

   —      —      —      —  % 

Taxes on adjustments

   —      —      —      —  % 
  

 

 

   

 

 

   

 

 

   

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders

  $124  $111  $13   12% 
  

 

 

   

 

 

   

 

 

   

(1)

We define “NM” as not meaningful for increases or decreases greater than 200%.

                 
 
Three months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
  2019  
  
  2018  
  
2019 vs. 2018
 
Revenues:  
   
   
        
   
        
 
Premiums $
206
  $
184
  $
22
   
12
%
Net investment income  
28
   
23
   
5
   
22
%
Net investment gains (losses)  
—  
   
—  
   
—  
   
—   
%
Policy fees and other income  
1
   
1
   
—  
   
—   
%
                 
Total revenues  
235
   
208
   
27
   
13
%
                 
Benefits and expenses:  
   
   
   
 
Benefits and other changes in policy reserves  
—  
   
(14
)  
14
   
100
%
Acquisition and operating expenses, net of deferrals  
44
   
45
   
(1
)  
(2
)%
Amortization of deferred acquisition costs and intangibles  
4
   
3
   
1
   
33
%
                 
Total benefits and expenses  
48
   
34
   
14
   
41
%
                 
Income before income taxes  
187
   
174
   
13
   
7
%
 
Provision for income taxes  
40
   
37
   
3
   
8
%
 
                 
Net income  
147
   
137
   
10
   
7
%
 
Adjustments to net income:  
   
   
   
 
Net investment (gains) losses  
—  
   
—  
   
—  
   
—   
%
Taxes on adjustments  
—  
   
—  
   
—  
   
—   
%
                 
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders $
147
  $
137
  $
10
   
7
%
 
                 
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased primarily attributable to higher insurancein-force and an increase in investment income partially offset by higher operating costs in the current year.

The current year also included an $8 million favorable reserve adjustment. Included in the prior year was a $22 million favorable reserve adjustment. These favorable reserve adjustments were mostly associated with lower expected claim rates.

Revenues

Premiums increased mainly attributable to higher insurancein-force in the current year.

Net investment income increased primarily from higher average invested assets and investment yields in the current year.

Benefits and expenses

Benefits and other changes in policy reserves were flat aszero in the current year but increased compared to the prior year. Lower net benefits from cures and aging of existing delinquencies were offset by a $10 million
108
Table of Contents
favorable reserve adjustment and a lower average reserve on new delinquencies in the current year. The prior year also included a $28 million favorable reserve adjustment. These favorable reserve adjustments were mostly associated with lower expected claim rates.
Provision for income taxes.
The effective tax rate was 21.3% and 21.2% for the three months ended June 30, 2019 and 2018, respectively, consistent with the U.S. corporate federal income tax rate.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:
                 
 
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
  2019  
  
  2018  
  
2019 vs. 2018
 
Revenues:  
   
   
        
   
        
 
Premiums $
400
  $
363
  $
37
   
10
%
Net investment income  
56
   
44
   
12
   
27
%
Net investment gains (losses)  
—  
   
—  
   
—  
   
—   
%
Policy fees and other income  
2
   
1
   
1
   
100
%
                 
Total revenues  
458
   
408
   
50
   
12
%
                 
Benefits and expenses:  
   
   
   
 
Benefits and other changes in policy reserves  
16
   
2
   
14
   
NM
(1)
 
Acquisition and operating expenses, net of deferrals  
90
   
84
   
6
   
7
%
 
Amortization of deferred acquisition costs and intangibles  
8
   
7
   
1
   
14
%
                 
Total benefits and expenses  
114
   
93
   
21
   
23
%
                 
Income before income taxes  
344
   
315
   
29
   
9
%
 
Provision for income taxes  
73
   
67
   
6
   
9
%
 
                 
Net income  
271
   
248
   
23
   
9
%
 
Adjustments to net income:  
   
   
   
 
Net investment (gains) losses  
—  
   
—  
   
—  
   
—   
%
Taxes on adjustments  
—  
   
—  
   
—  
   
—   
%
                 
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders $
271
  $
248
  $
23
   
9
%
 
                 
(1)
We define “NM” as not meaningful for increases or decreases greater than 200%.
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly from higher insurance in-force and an increase in investment income, partially offset by higher operating costs in the current year. The current year also included an $8 million favorable reserve adjustment. Included in the prior year was a $22 million favorable reserve adjustment. These favorable reserve adjustments were mostly associated with lower expected claim rates.
Revenues
Premiums increased mainly attributable to higher insurance in-force in the current year.
109
Table of Contents
Net investment income increased primarily from higher average invested assets and investment yields in the current year.
Benefits and expenses
Benefits and other changes in policy reserves increased primarily from a lower favorable reserve adjustment in the current year. We recorded a $10 million favorable reserve adjustment in the current year compared to a $28 million favorable reserve adjustment in the prior year. These adjustments were mostly associated with lower expected claim rates. The increase was also attributable to lower net benefitbenefits from cures and aging of existing delinquencies, partially offset by a lower average reserve on new delinquencies in the current year.

Acquisition and operating expenses, net of deferrals, increased primarily attributable to higher operating costs driven mostly by increased sales in the current year.

Provision for income taxes.
The effective tax rate was 21.3% and 21.2% for both the threesix months ended March 31,June 30, 2019 and 2018, respectively, consistent with the U.S. corporate federal income tax rate.

U.S. Mortgage Insurance selected operating performance measures

The following table setstables set forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:

   As of or for the three
months ended
March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Primary insurancein-force(1)

  $170,400  $154,900  $15,500   10% 

Riskin-force

  $41,300  $37,500  $3,800   10% 

New insurance written

  $9,600  $9,000  $600   7% 

Net premiums written

  $193  $185  $8   4% 

                 
 
As of June 30,
  
Increase (decrease) and
percentage change
 
(Amounts in millions)
 
2019
  
2018
  
2019 vs. 2018
 
Primary insurance in-force
 (1)
 $
178,500
  $
159,500
  $
19,000
   
12
%
Risk in-force $
43,100
  $
38,700
  $
4,400
   
11
%
(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.

                                 
 
Three months ended
June 30,
  
Increase
(decrease) and
percentage
change
  
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
2019
  
2018
  
2019 vs. 2018
  
2019
  
2018
  
2019 vs. 2018
 
New insurance written $
15,800
  $
11,400
  $
4,400
   
39
% $
25,400
  $
20,400
  $
5,000
   
25
%
Net premiums written $
204
  $
191
  $
13
   
7
% $
397
  $
376
  $
21
   
6
%
Primary insurancein-force and riskin-force

Primary insurancein-force increased largely as a result of $15.8from $19.2 billion in higher mortgage insurance written on prime-based, individually underwritten residential mortgage loans (“flow insuranceinsurance”) in-force, which increased from $153.5$158.2 billion as of March 31,June 30, 2018 to $169.3$177.4 billion as of March 31,June 30, 2019 as a result of new insurance written and stable persistency, partially offset by lapses induring the current year. The increase in flow insurancein-force was partially offset by a decline of $0.3$0.2 billion in mortgage insurance on a bulk basis (“bulk insurance”)in-force, which decreased from $1.4$1.3 billion as of March 31,June 30, 2018 to $1.1 billion as of March 31,June 30, 2019 from cancellations and lapses. In addition, riskin-force increased primarily as a result of higher flow new insurance written.in-force. Flow persistency was 86%84% and 84%83% for the threesix months ended March 31,June 30, 2019 and 2018, respectively.

New insurance written

New

For the three and six months ended June 30, 2019, new insurance written increased primarily due to our higher estimated market share and a larger private mortgage insurance available market in the current year.

110
Table of Contents
Net premiums written

Net premiums written for the three and six months ended June 30, 2019 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
March 31,		  Increase (decrease) 
   2019  2018  2019 vs. 2018 

Loss ratio

   8%   9%   (1)% 

Expense ratio (net earned premiums)

   25%   24%   1% 

Expense ratio (net premiums written)

   26%   23%   3% 

                         
 
Three months ended
June 30,
  
Increase (decrease)
  
Six months ended
June 30,
  
Increase (decrease)
 
 
2019
  
2018
  
2019 vs. 2018
  
2019
  
2018
  
2019 vs. 2018
 
Loss ratio  
—  
%  
(8
)%  
8
%  
4
%  
—  
%  
4
%
Expense ratio (net earned premiums)  
24
%  
26
%  
(2
)%  
25
%  
25
%  
—  
%
Expense ratio (net premiums written)  
24
%  
25
%  
(1
)%  
25
%  
24
%  
1
%
The loss ratio is the ratio of benefits and other changes in policy reserves 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 decreased slightlyfor the three and six months ended June 30, 2019 increased primarily driven by higher net earned premiums attributable to increased insurancein-forcefrom a lower favorable reserve adjustment in the current year. Losses were flat asWe recorded a lower average$10 million favorable reserve on new delinquencies was offset by a lower net benefit from cures and aging of existing delinquenciesadjustment in the current year compared to a $28 million favorable reserve adjustment in the prior year.

These adjustments were mostly associated with lower expected claim rates. The current year favorable reserve adjustment of $10 million reduced the loss ratio by five percentage points for the three months ended June 30, 2019. The prior year favorable reserve adjustment of $28 million reduced the loss ratio by 15 percentage points and eight percentage points for the three and six months ended June 30, 2018, respectively.

The expense ratio (net earned premiums) increased slightlyfor the three months ended June 30, 2019 decreased mainly driven by higher operating costs, mostly offset by higher net earned premiums in the current year.

The expense ratio (net premiums written) decreased slightly for the three months ended June 30, 2019 largely due to higher net premiums written in the current year and increased slightly for the six months ended June 30, 2019 primarily due to higher operating costs, partially offset by higher net premiums written in the current year.

111
Table of Contents
Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our U.S. mortgage insurance portfolio as of the dates indicated:

   March 31,
2019		  December 31,
2018		  March 31,
2018		 

Primary insurance:

    

Insured loansin-force

   792,800  783,288  749,145

Delinquent loans

   16,206  17,159  20,602

Percentage of delinquent loans (delinquency rate)

   2.04%   2.19%   2.75% 

Flow loansin-force

   780,733  770,657  734,411

Flow delinquent loans

   15,764  16,670  20,007

Percentage of flow delinquent loans (delinquency rate)

   2.02%   2.16%   2.72% 

Bulk loansin-force

   12,067  12,631  14,734

Bulk delinquent loans(1)

   442  489  595

Percentage of bulk delinquent loans (delinquency rate)

   3.66%   3.87%   4.04% 

A minus andsub-prime loansin-force

   14,712  15,348  17,964

A minus andsub-prime delinquent loans

   2,530  2,727  3,557

Percentage of A minus andsub-prime delinquent loans (delinquency rate)

   17.20%   17.77%   19.80% 

Pool insurance:

    

Insured loansin-force

   4,470  4,535  4,961

Delinquent loans

   187  220  220

Percentage of delinquent loans (delinquency rate)

   4.18%   4.85%   4.43% 

             
 
June 30,
2019
  
December 31,
2018
  
June 30,
2018
 
Primary insurance:
  
   
   
 
Insured loans in-force  
818,358
   
783,288
   
762,727
 
Delinquent loans  
15,482
   
17,159
   
18,051
 
Percentage of delinquent loans (delinquency rate)  
1.89
%  
2.19
%  
2.37
%
             
Flow loans in-force  
806,739
   
770,657
   
748,497
 
Flow delinquent loans  
15,070
   
16,670
   
17,505
 
Percentage of flow delinquent loans (delinquency rate)  
1.87
%  
2.16
%  
2.34
%
             
Bulk loans in-force  
11,619
   
12,631
   
14,230
 
Bulk delinquent loans 
(1)
  
412
   
489
   
546
 
Percentage of bulk delinquent loans (delinquency rate)  
3.55
%  
3.87
%  
3.84
%
             
A minus and sub-prime loans in-force  
14,180
   
15,348
   
16,928
 
A minus and sub-prime delinquent loans  
2,367
   
2,727
   
3,058
 
Percentage of A minus and sub-prime delinquent loans (delinquency rate)  
16.69
%  
17.77
%  
18.06
%
             
Pool insurance:
  
   
   
 
Insured loans in-force  
4,331
   
4,535
   
4,774
 
Delinquent loans  
177
   
220
   
204
 
Percentage of delinquent loans (delinquency rate)  
4.09
%  
4.85
%  
4.27
%
(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 360347 as of March 31,June 30, 2019, 403 as of December 31, 2018 and 494445 as of March 31,June 30, 2018.

Delinquency and foreclosure levels that developed principally in our 2005 through 2008 book years have declined as the residential real estate market in the United States stabilized subsequent to those book years and strengthened during recent years. In addition, we experienced lower foreclosure starts during 2018, which continued in the first quarter of 2019. However, our 2005 through 2008 book years continue to make up the majority of our existing delinquencies as well as new delinquencies, therefore, we may experience variability in our delinquency rates.

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:

   March 31, 2019 

(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

   7,679  $29   $343   8% 

4 - 11 payments

   4,664   90    214   42% 

12 payments or more

   3,421   127    173   73% 
  

 

 

   

 

 

   

 

 

   

Total

   15,764  $246   $730   34% 
  

 

 

   

 

 

   

 

 

   

                 
 
June 30, 2019
 
(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  
7,629
  $
26
  $
341
   
8
%
4 - 11 payments  
4,162
   
75
   
190
   
39
%
12 payments or more  
3,279
   
121
   
167
   
72
%
                 
Total  
15,070
  $
222
  $
698
   
32
%
                 
(1)

Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.

   December 31, 2018 

(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

   8,360  $31   $365   8% 

4 - 11 payments

   4,591   88    208   42% 

12 payments or more

   3,719   142    188   76% 
  

 

 

   

 

 

   

 

 

   

Total

   16,670  $261   $761   34% 
  

 

 

   

 

 

   

 

 

   

112
Table of Contents
                 
 
December 31, 2018
 
(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  
8,360
  $
31
  $
365
   
8
%
4 - 11 payments  
4,591
   
88
   
208
   
42
%
12 payments or more  
3,719
   
142
   
188
   
76
%
                 
Total  
16,670
  $
261
  $
761
   
34
%
                 
(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

riskin-force as of

  

Percent of total

reserves as of

  Delinquency rate 
  March 31,  December 31,  March 31, 
   March 31, 2019  March 31, 2019 (1)  2019  2018  2018 

By Region:

      

Southeast(2)

   18%   22%   2.39%   2.63%   3.99% 

Pacific(3)

   17  10   1.29%   1.29%   1.36% 

South Central(4)

   16  12   1.97%   2.11%   2.79% 

Northeast(5)

   12  27   3.10%   3.43%   4.18% 

North Central(6)

   11  9   1.90%   1.98%   2.16% 

Great Lakes(7)

   11  6   1.62%   1.72%   1.86% 

Mid-Atlantic(8)

   6  5   2.11%   2.16%   2.47% 

New England(9)

   5  6   2.05%   2.23%   2.54% 

Plains(10)

   4  3   1.82%   1.87%   2.08% 
  

 

 

  

 

 

    

Total

   100%   100%   2.04%   2.19%   2.75% 
  

 

 

  

 

 

    

                     
 
Percent of primary
  
Percent of total
  
Delinquency rate
 
risk in-force as of
June 30, 2019
  
reserves as of
June 30, 2019
 (1)
  
June 30,
2019
  
December 31,
2018
  
June 30,
2018
 
By Region:  
   
   
   
   
 
Southeast
(2)
  
18
%  
21
%  
2.18
%  
2.63
%  
3.15
%
Pacific
(3)
  
17
   
10
   
1.22
%  
1.29
%  
1.30
%
South Central
(4)
  
16
   
11
   
1.79
%  
2.11
%  
2.30
%
Northeast
(5)
  
12
   
28
   
2.87
%  
3.43
%  
3.74
%
North Central
(6)
  
11
   
9
   
1.79
%  
1.98
%  
1.96
%
Great Lakes
(7)
  
11
   
7
   
1.56
%  
1.72
%  
1.72
%
Mid-Atlantic
(8)
  
6
   
5
   
1.81
%  
2.16
%  
2.19
%
New England
(9)
  
5
   
6
   
1.95
%  
2.23
%  
2.27
%
Plains
(10)
  
4
   
3
   
1.67
%  
1.87
%  
1.88
%
                     
Total  
100
%  
100
%  
1.89
%  
2.19
%  
2.37
%
                     
(1)

Total reserves were $280$254 million as of March 31,June 30, 2019.

(2)

Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee.

(3)

Alaska, California, Hawaii, Nevada, Oregon and Washington.

(4)

Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah.

(5)

New Jersey, New York and Pennsylvania.

(6)

Illinois, Minnesota, Missouri and Wisconsin.

(7)

Indiana, Kentucky, Michigan and Ohio.

(8)

Delaware, Maryland, Virginia, Washington D.C. and West Virginia.

(9)

Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

(10)

Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming.

   

Percent of primary

risk in-force as of

  

Percent of total

reserves as of

  Delinquency rate 
  March 31,  December 31,  March 31, 
   March 31, 2019  March 31, 2019 (1)  2019  2018  2018 

By State:

      

California

   10%   5%   1.27%   1.28%   1.27% 

Texas

   7%   5%   2.03%   2.29%   3.66% 

Florida

   6%   12%   2.61%   2.91%   6.60% 

Illinois

   5%   6%   2.23%   2.26%   2.47% 

New York

   5%   15%   3.42%   3.64%   4.38% 

Washington

   5%   2%   1.05%   1.04%   1.05% 

Michigan

   4%   2%   1.30%   1.40%   1.36% 

Pennsylvania

   4%   4%   2.37%   2.79%   3.09% 

Ohio

   4%   3%   1.82%   1.97%   2.12% 

North Carolina

   4%   3%   1.96%   2.27%   2.47% 

113
Table of Contents
                     
 
Percent of primary
  
Percent of total
  
Delinquency rate
 
risk in-force as of
June 30, 2019
  
reserves as of
June 30, 2019
 (1)
  
June 30,
2019
  
December 31,
2018
  
June 30,
2018
 
By State:  
   
   
   
   
 
California  
10
%  
5
%  
1.26
%  
1.28
%  
1.21
%
Texas  
7
%  
5
%  
1.86
%  
2.29
%  
2.77
%
Florida  
6
%  
12
%  
2.26
%  
2.91
%  
4.57
%
Illinois  
5
%  
6
%  
2.10
%  
2.26
%  
2.27
%
New York  
5
%  
16
%  
3.12
%  
3.64
%  
3.99
%
Washington  
5
%  
2
%  
0.90
%  
1.04
%  
1.05
%
Michigan  
4
%  
2
%  
1.28
%  
1.40
%  
1.26
%
Pennsylvania  
4
%  
4
%  
2.24
%  
2.79
%  
2.80
%
North Carolina  
4
%  
3
%  
1.82
%  
2.27
%  
2.15
%
Ohio  
3
%  
3
%  
1.69
%  
1.97
%  
1.98
%
(1)

Total reserves were $280$254 million as of March 31,June 30, 2019.

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 March 31,June 30, 2019:

(Amounts in millions)

  Average
rate		  Percent of total
reserves(1)		  Primary
insurance
in-force		   Percent
of total		  Primary
risk
in-force		   Percent
of total		 

Policy Year

         

2004 and prior

   6.09%   8.7%  $1,587   0.9%  $299   0.7% 

2005 - 2008

   5.47%   59.4   18,391   10.8  4,226   10.3

2009 - 2012

   4.28%   2.2   4,428   2.6  1,034   2.5

2013

   4.09%   2.2   5,204   3.1  1,278   3.1

2014

   4.45%   4.2   8,900   5.2  2,162   5.2

2015

   4.15%   5.9   17,652   10.4  4,281   10.4

2016

   3.88%   7.9   32,065   18.8  7,736   18.8

2017

   4.25%   6.6   34,400   20.2  8,398   20.4

2018

   4.77%   2.9   38,147   22.4  9,394   22.8

2019

   4.87%   —     9,581   5.6  2,385   5.8
   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total portfolio

   4.51%   100.0%  $170,355   100.0%  $41,193   100.0% 
   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

                         
(Amounts in millions)
 
Average
rate
  
Percent of total
reserves
 (1)
  
Primary
insurance
in-force
  
Percent
of total
  
Primary
risk
in-force
  
Percent
of total
 
Policy Year
  
   
   
   
   
   
 
2004 and prior  
6.10
%  
8.4
%
 		 $
1,515
   
0.9
% $
285
   
0.7
%
2005 - 2008  
5.47
%  
58.2
   
17,576
   
9.8
   
4,037
   
9.4
 
2009 - 2012  
4.29
%  
2.2
   
3,934
   
2.2
   
913
   
2.1
 
2013  
4.11
%  
1.8
   
4,755
   
2.7
   
1,162
   
2.7
 
2014  
4.45
%  
4.4
   
8,277
   
4.6
   
2,013
   
4.7
 
2015  
4.15
%  
6.2
   
16,648
   
9.3
   
4,023
   
9.3
 
2016  
3.89
%  
7.5
   
30,515
   
17.1
   
7,348
   
17.0
 
2017  
4.25
%  
7.2
   
33,245
   
18.6
   
8,087
   
18.8
 
2018  
4.77
%  
3.9
   
36,887
   
20.7
   
9,025
   
20.9
 
2019  
4.75
%  
0.2
   
25,129
   
14.1
   
6,191
   
14.4
 
                         
Total portfolio  
4.53
%  
100.0
% $
178,481
   
100.0
% $
43,084
   
100.0
%
                         
(1)

Total reserves were $280$254 million as of March 31,June 30, 2019.

Canada Mortgage Insurance segment

As described above in “—Strategic Update,” in connection with the Eleventh Waiver and Agreement, to facilitate the China Oceanwide transaction, the parties concluded that exploring a potential disposition of our mortgage insurance business in Canada, Genworth Canada, is in the best interests of the parties.
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 firstsecond quarter of 2019, the Canadian dollar weakened against the U.S. dollar compared to the firstsecond quarter of 2018, which negatively impacted the results of our mortgage insurance business in Canada as reported in U.S. dollars. Any future movement in foreign exchange rates could impact future results.

114
Table of Contents
The Canadian GDP is expected to have experienced modestmoderate growth in the firstsecond quarter of 2019 although lower than incompared to the firstsecond quarter of 2018, reflecting lower oil pricesincreases in exports, strong business and weakness in residential investment activity.and consumer consumption growth. The overnight interest rate in Canada remained flat at 1.75% in the firstsecond quarter of 2019. Canada’s unemployment rate increased slightlydeclined to 5.5% at the end of the second quarter of 2019 compared to 5.8% at the end of the first quarter of 2019 compared to 5.6% at the end of 2018 as workforce participation outpaced an increase in job creation.

driven by strong employment levels.

National home prices increased by 1% in the first quarter of 2019 by approximately 2% compared to the first quarter of 2018 led by gains in Ontario, particularly in the Greater Toronto Area. However, home prices were down by approximately 1% compared to the fourth quarter of 2018, mostly due to declines in British Columbia. National home sales in the first quarter of 2019 were down by approximately 3% compared to both the first and fourth quarters of 2018, mostly due to the slowdown in sales in British Columbia as a result of regulatory and housing policy changes.

Our mortgage insurance business in Canada experienced slightly higher losses in the firstsecond quarter of 2019 compared to the firstsecond quarter of 2018 largely driven by increases in both Ontario and Quebec, partially offset by declines in British Columbia and Alberta. National home sales in Canada increased in the second quarter of 2019 by approximately 6% compared to the second quarter of 2018 led by strong home sales in Ontario and Quebec, partially offset by decreases in British Columbia.

In our mortgage insurance business in Canada, losses were flat in the second quarter of 2019 compared to the second quarter of 2018 primarily from lower new delinquencies, net of cures and modestly higher favorable development in our loss reserves, offset by a higher average reserve per delinquency, andresulting from a higher newproportion of outstanding delinquencies net of cures, most pronounced in Alberta. TheAlberta, which carry a higher losses in the current year were also attributable to modestly lower favorable development in our loss reserves.average reserve amount. Our loss ratio in Canada was 15% for the firstsecond quarter of 2019. We expect our full year 2019 loss ratio to be the same or modestly higher than our full year 2018 loss ratio of 15% as economicoverall macroeconomic conditions continueare expected to normalize.

remain stable.

In the firstsecond quarter of 2019, flow new insurance written volumes were downup in our mortgage insurance business in Canada compared to the firstsecond quarter of 2018 primarily from a smallermodestly larger flow mortgage originations market due to regulatory changes and ongoing housing affordability pressure. The firstmarket. Excluding the effects of foreign exchange, earned premiums remained flat during the second quarter of 2018 included higher volumes from applications received in2019 compared to the fourthsecond quarter of 2017 resulting from an acceleration of housing demand ahead of regulatory changes. Earned premiums also decreased mainly from the seasoning of our smaller, more recentin-force books of business and from a favorable adjustment of $3 million relating to refinements in premium recognition factors in the first quarter of 2018 that did not recur.

2018.

Bulk new insurance written levels were higher in the firstsecond quarter of 2019 were slightly lower compared to the firstsecond quarter of 2018 primarily due to marginallyincreased customer demand, partially offset by a lower demand.average premium rate. Insurance written from bulk mortgage insurance varies from period to period based on a number of factors, including the amount of bulk mortgages lenders seek to insure, the competitiveness of our pricing and our risk appetite for such mortgage insurance.

We are subject to regulation under the Protection of Residential Mortgage or Hypothecary Insurance Act (Canada) (“PRMHIA”) and the Insurance Companies Act (Canada), under which our mortgage insurance business in Canada is required to meet a minimum MICAT ratio to support its outstanding mortgage insurancein-force per the MICAT guideline released by the Office of the Superintendent of Financial Institutions (“OSFI”) on August 9, 2018. The MICAT guideline was effective January 1, 2019 and replaced the guideline titled “Minimum Capital Test for Federally Regulated Property and Casualty Insurance Companies” and the capital advisory titled “Capital Requirements for Federally Regulated Mortgage Insurers.” The OSFI supervisory MICAT target ratio and the minimum MICAT ratio under PRMHIA are 150%. The primary changes included a 5% increase of the total asset requirement, elimination of the requirement to use updated credit scores for 2015 and prior book years and a transitional arrangement that provides aphase-in period for the increased capital required for insurance risk on outstanding insured mortgages as of December 31, 2018. We expect the benefit from the transitional arrangement to run off in the current year. The MICAT guideline did not have a material impact on our regulatory solvency as reported at March 31,June 30, 2019 as the impact of the elimination of the one-time credit score update for 2015 and prior books more than offset the 5% increase in the total asset requirement on existing insurancein-force. In addition, we expect these new requirements shouldto permit our mortgage insurance business in Canada to more closely align its actual capital levels with its targeted operating range going forward, which mayand allow for meaningful levels of capital redeployment in addition to regular quarterly dividends. In the second quarter of 2019, Genworth Canada returned additional capital to shareholders via share repurchases of approximately CAD$68 million and a special dividend of CAD$0.40 per share or approximately CAD$34 million in aggregate. As of March 31,June 30, 2019, our MICAT ratio under the framework was approximately 172%169%, which was above the supervisory target.

115
Table of Contents
On March 1, 2019, OSFI released a revised version of GuidelineB-21 Residential Mortgage Insurance Underwriting Practices and Procedures(“ (“B-21 Guideline”). The updates made to theB-21 Guideline are intended to align with GuidelineB-20 Residential Mortgage Underwriting Practices and Procedures(“ (“B-20 Guideline”), which sets out OSFI’s expectations for prudent residential mortgage underwriting by federally regulated financial institutions in the areas of income verification, property valuation, and fraud detection and prevention. Although the changes made to theB-21 Guideline are new for federally regulated mortgage insurers, we do not expect those changes to have a material impact given that federally regulated lenders have already been subject to the same rules since January 1, 2018 under theB-20 Guideline.

Canada’s2019-20 federal budget released on March 19, 2019 includes a new program called the First-Time Home Buyers Incentive (“FTHBI”) intended to help with housing affordability. Under the program, for qualifying borrowers, the Canada Mortgage and Housing Corporation (“CMHC”) will contribute up to 10% of the value of a newly built home or 5% of the value of a resale in exchange for a corresponding equity stake in the home. The FTHBI program is expected to launch in September 2019 and will require borrowers to meet minimum insured mortgage down payment requirements to ensure they are invested in their purchase. The program is capped at CAD$1.25 billion over three years, and the incentive will be further limited to households with a maximum combined income of CAD$120,000, with total borrowing limited to four times the income level. ManyThe specific details of the program’s details and guidelinesthis program are still unknown,being finalized and therefore it is prematuredetails announced to determine how this program may impactdate are subject to change. However, the Department of Finance has publicly stated that our mortgage insurance business in Canada. However, the business has confirmed that it isCanada will be eligible to participate in this program andwhen launched. The business is currentlyparticipating in discussionsconsultations with the DepartmentGovernment of Finance.

Canada and CMHC on this program and believes it is premature to determine the potential impact of this announcement and its ultimate impact on our mortgage insurance business in Canada.

116
Table of Contents
Segment results of operations

Three Months Ended March 31,June 30, 2019 Compared to Three Months Ended March 31,June 30, 2018

The following table sets forth the results of operations relating to our Canada Mortgage Insurance segment for the periods indicated:

   Three months ended
March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Revenues:

        

Premiums

  $126  $139  $(13)    (9)% 

Net investment income

   34   34   —      —  % 

Net investment gains (losses)

   (1)    (15)    14   93% 
  

 

 

   

 

 

   

 

 

   

Total revenues

   159   158   1   1% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

   19   18   1   6% 

Acquisition and operating expenses, net of deferrals

   20   17   3   18% 

Amortization of deferred acquisition costs and intangibles

   10   10   —      —  % 

Interest expense

   4   5   (1)    (20)% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

   53   50   3   6% 
  

 

 

   

 

 

   

 

 

   

Income before income taxes

   106   108   (2)    (2)% 

Provision for income taxes

   29   30   (1)    (3)% 
  

 

 

   

 

 

   

 

 

   

Net income

   77   78   (1)    (1)% 

Less: net income attributable to noncontrolling interests

   36   36   —      —  % 
  

 

 

   

 

 

   

 

 

   

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

   41   42   (1)    (2)% 

Adjustments to net income available to Genworth Financial, Inc.’scommon stockholders:

        

Net investment (gains) losses, net(1)

   —      9   (9)    (100)% 

Taxes on adjustments

   —      (2)    2   100% 
  

 

 

   

 

 

   

 

 

   

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders

  $41  $49  $(8)    (16)% 
  

 

 

   

 

 

   

 

 

   

                 
 
Three months ended
June 30,
  
Increase 
(decrease) and 
percentage 
change 
 
(Amounts in millions)
 
    2019    
  
    2018    
  
2019 vs. 2018
 
Revenues:  
   
   
   
 
Premiums $
125
  $
131
  $
(6
)  
(5
)%
Net investment income  
35
   
34
   
1
   
3
%
Net investment gains (losses)  
1
   
(15
)  
16
   
107
%
                 
Total revenues  
161
   
150
   
11
   
7
%
                 
Benefits and expenses:  
   
   
   
 
Benefits and other changes in policy reserves  
19
   
19
   
—  
   
—  
%
Acquisition and operating expenses, net of deferrals  
22
   
20
   
2
   
10
%
Amortization of deferred acquisition costs and intangibles  
11
   
11
   
—  
   
—  
%
Interest expense  
5
   
4
   
1
   
25
%
                 
Total benefits and expenses  
57
   
54
   
3
   
6
%
                 
Income before income taxes  
104
   
96
   
8
   
8
%
Provision for income taxes  
29
   
24
   
5
   
21
%
                 
Net income  
75
   
72
   
3
   
4
%
Less: net income attributable to noncontrolling interests  
35
   
32
   
3
   
9
%
                 
Net income available to Genworth Financial, Inc.’s common stockholders  
40
   
40
   
—  
   
—  
%
Adjustments to net income available to Genworth Financial, Inc.’s common stockholders:  
   
   
   
 
Net investment (gains) losses, net 
(2)
  
—  
   
8
   
(8
)  
(100
)%
(Gains) losses on early extinguishment of debt, net 
(3)
  
1
   
—  
   
1
   
NM
(1)
 
Taxes on adjustments  
—  
   
(2
)  
2
   
100
%
                 
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders $
41
  $
46
  $
(5
)  
(11
)%
                 
(1)

We define “NM” as not meaningful for increases or decreases greater than 200%.

(2)
For the three months ended March 31,June 30, 2019 and 2018, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $(1)$1 million and $(6)$(7) million, respectively.

(3)
For the three months ended June 30, 2019, (gains) losses on the early extinguishment of debt were adjusted for the portion attributable to noncontrolling interests of $1 million.
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily driven by higher taxes and changes in foreign exchange rates in the current year.
Revenues
Premiums decreased primarily from $6 million of changes attributable to foreign exchange rates in the current year.
117
Table of Contents
We had net investment gains in the current year compared to net investment losses in the prior year. Net investment gains in the current year were primarily driven by net realized gains from the sale of investment securities and derivative gains, mostly offset by a decrease in the fair value of preferred equity securities. Net investment losses in the prior year were primarily driven by derivative losses largely from hedging non-functional currency transactions and from changes in the fair value of equity securities, partially offset by derivative gains on interest rate swaps.
Benefits and expenses
Benefits and other changes in policy reserves were flat as lower new delinquencies, net of cures, and modestly higher favorable development in our loss reserves were offset by a higher average reserve per delinquency, primarily attributable to increased losses in Alberta in the current year.
Acquisition and operating expenses, net of deferrals, increased mainly driven by a $2 million early redemption fee related to the repayment of CAD$100 million of the 5.68% senior notes originally scheduled to mature in June 2020.
Provision for income taxes.
The effective tax rate increased to 27.6% for the three months ended June 30, 2019 from 25.5% for the three months ended June 30, 2018. The increase in the effective tax rate was primarily driven by an increase in expenses related to foreign withholding tax, partially offset by higher
benefits in the current year from dividends received deduction.
118
Table of Contents
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The following table sets forth the results of operations relating to our Canada Mortgage Insurance segment for the periods indicated:
                 
 
Six months ended
June 30,
  
Increase
 
(decrease) and
 
percentage
 
change
 
 
(Amounts in millions)
 
2019
  
2018
  
2019 vs. 2018
 
Revenues:
  
   
   
   
 
Premiums $
251
  $
270
  $
(19
)  
(7
)%
Net investment income  
69
   
68
   
1
   
1
%
 
Net investment gains (losses)  
—  
   
(30
)  
30
   
100
%
                 
Total revenues  
320
   
308
   
12
   
4
%
 
                 
Benefits and expenses:
  
   
   
   
 
Benefits and other changes in policy reserves  
38
   
37
   
1
   
3
%
 
Acquisition and operating expenses, net of deferrals  
42
   
37
   
5
   
14
%
Amortization of deferred acquisition costs and intangibles  
21
   
21
   
—  
   
—   
%
Interest expense  
9
   
9
   
—  
   
—   
%
                 
Total benefits and expenses  
110
   
104
   
6
   
6
%
 
                 
Income before income taxes  
210
   
204
   
6
   
3
%
 
Provision for income taxes  
58
   
54
   
4
   
7
%
 
                 
Net income  
152
   
150
   
2
   
1
%
 
Less: net income attributable to noncontrolling interests  
71
   
68
   
3
   
4
%
 
                 
Net income available to Genworth Financial, Inc.’s common
stockholders
  
81
   
82
   
(1
)  
(1
)%
Adjustments to net income available to Genworth Financial, Inc.’s
common stockholders:
  
   
   
   
 
Net investment (gains) losses, net 
(2)
  
—  
   
17
   
(17
)  
(100
)%
(Gains) losses on early extinguishment of debt, net 
(3)
  
1
   
—  
   
1
   
NM
(1) 
Taxes on adjustments  
—  
   
(4
)  
4
   
100
%
                 
Adjusted operating income available to Genworth Financial, Inc.’s
common stockholders
 $
82
  $
95
  $
(13
)  
(14
)%
                 
(1)
We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)
For the six months ended June 30, 2018, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $(13) million.
(3)
For the six months ended June 30, 2019, (gains) losses on the early extinguishment of debt were adjusted for the portion attributable to noncontrolling interests of $1 million.
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily driven by lower earned premiums largely from
changes in foreign exchange rates in the current year, and from lower earned premiums largely related to refinements in premium recognition factors in the prior year that did not recur and lower flow mortgage insurance written infrom the seasoning of our smaller, more recent years.
in-force
books of business. The decrease was also attributable to an increase in acquisition andhigher operating expenses, which included higher stock-based compensation expensecosts in the current year.

Revenues

Premiums decreased primarily from $7$13 million of changes attributable to foreign exchange rates in the current year, refinements in premium recognition factors in the prior year that did not recur and from the seasoning of our smaller, more recentin-force books of business.

119
Table of Contents
Net investment losses decreased primarily attributable to derivative gains (losses) were zero in the current year compared to losses in the prior year largelyas derivative gains from hedging
non-functional
currency transactions and derivativenet realized gains on interest rate floors, partiallyfrom the sale of investment securities were offset by derivative losses on interest rate swaps and losses from changes in the current year compared to gainsfair value of preferred equity securities. Net investment losses in the prior year. The decrease was also attributable to lower net investmentyear were primarily driven by derivative losses largely from hedging
non-functional
currency transactions and from changes in the fair value of equity securities, in the current year.

partially offset by derivative gains on interest rate swaps.

Benefits and expenses

Benefits and other changes in policy reserves increased slightly principally from a higher average reserve per delinquency, higher new delinquencies, net of cures, primarily attributable to increased losses in Alberta, and from modestly lower favorable development in our loss reserves, mostly offset by changes in foreign exchange rateslower new delinquencies, net of cures in the current year.

Acquisition and operating expenses, net of deferrals, increased mainly driven by higher stock-based compensation expense andfrom higher operating costs and from a $2 million early redemption fee related to the repayment of CAD$100 million of the 5.68% senior notes originally scheduled to mature in the current year.

June 2020.

Provision for income taxes.
The effective tax rate wasincreased to 27.6% and 27.4% for the threesix months ended March 31,June 30, 2019 and 2018, respectively, consistent with our jurisdictionalfrom 26.5% for the six months ended June 30, 2018. The increase in the effective tax rate of 27%.

was primarily driven by an increase in expenses related to foreign withholding tax, partially offset by higher benefits in the current year from dividends received deduction.

Canada Mortgage Insurance selected operating performance measures

The following table setstables set forth selected operating performance measures regarding our Canada Mortgage Insurance segment as of or for the dates indicated:

   As of or for the three
months ended
March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Primary insurancein-force

  $382,200  $384,600  $(2,400)    (1)% 

Riskin-force

  $133,800  $134,600  $(800)    (1)% 

New insurance written

  $2,900  $3,400  $(500)    (15)% 

Net premiums written

  $79  $92  $(13)    (14)% 

                 
 
As of June 30,
  
Increase
(decrease) and
percentage change
 
(Amounts in millions)
 
2019
  
2018
  
2019 vs. 2018
 
Primary insurance in-force $
395,700
  $
380,200
  $
15,500
   
        4
%
Risk in-force $
138,500
  $
133,100
  $
5,400
   
4
%
                                 
 
Three months ended
June 30,
  
Increase
(decrease) and
percentage
change
  
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
    2019    
  
    2018    
  
2019 vs. 2018
  
2019
  
2018
  
  2019 vs. 2018  
 
New insurance written $
5,800
  $
4,600
  $
1,200
   
26
% $
8,700
  $
8,000
  $
700
   
        9
%
Net premiums written $
145
  $
133
  $
12
   
9
% $
224
  $
225
  $
(1
)  
—  
%
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 six months ended March 31,June 30, 2019 and 2018, this factor was 35%.

Primary insurancein-force and riskin-force decreased largely from decreases increased primarily as a result of $14.1new flow and bulk insurance written as well as changes in foreign exchange rates. Insurance in-force and risk in-force included increases of $2.2 billion and $5.0$0.8 billion, respectively, attributable to changes in foreign exchange rates, partially offset by new flow and bulk mortgage insurance written.

rates.

120
Table of Contents
New insurance written

New insurance written decreasedfor the three and six months ended June 30, 2019 increased primarily from lowerhigher bulk insurance written largely due to increased customer demand and from higher flow mortgage insurance written, largely resulting fromattributable to a smallermodestly larger flow mortgage originations market due to regulatory changes and ongoing housing affordability pressure. The first quarter of 2018 included higher volumes from applications received in the fourth quarter of 2017 resulting from an acceleration of housing demand ahead of regulatory changes.market. The three and six months ended March 31,June 30, 2019 included a decreasedecreases of $100$300 million and $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. AsOur unearned premium reserves were $1.6 billion and $1.5 billion as of March 31,June 30, 2019 and December 31, 2018, our unearned premium reserves were $1.5 billionrespectively.
Excluding the effect of changes in each period.

Netforeign exchange rates, net premiums written decreasedincreased for the three and six months ended June 30, 2019 primarily from lowerhigher flow mortgageand bulk new insurance written and lower average premium rates on bulk mortgage insurance.written. The three and six months ended March 31,June 30, 2019 included a decreasedecreases of $5$6 million and $11 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 Canada Mortgage Insurance segment for the periods indicated:

   Three months ended March 31,  Increase (decrease) 
   2019  2018  2019 vs. 2018 

Loss ratio

   15%   13%   2% 

Expense ratio (net earned premiums)

   24%   20%   4% 

Expense ratio (net premiums written)

   39%   30%   9% 

                         
 
Three months ended
June 30,
  
Increase (decrease)
  
Six months ended
June 30,
  
Increase (decrease)
 
 
2019
 
  
2018
 
  
2019 vs. 2018
  
2019
  
2018
  
2019 vs. 2018
 
Loss ratio  
15
%  
15
%  
—  
%  
15
%  
14
%  
1
%
Expense ratio (net earned premiums)  
26
%  
23
%  
3
%
 		  
25
%  
21
%  
4
%
Expense ratio (net premiums written)  
22
%  
23
%  
(1
)%  
28
%  
26
%  
2
%
The loss ratio is the ratio of benefits and other changes in policy reserves 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 was flat for the three months ended June 30, 2019 as lower new delinquencies, net of cures, and modestly higher favorable development in our loss reserves were offset by a higher average reserve per delinquency. The loss ratio increased slightly for the six months ended June 30, 2019 primarily from a higher average reserve per delinquency, and highermostly offset by lower new delinquencies, net of cures most pronounced in Alberta, in the current year.

The expense ratio (net earned premiums) increased for the three months ended June 30, 2019 primarily attributable tofrom higher stock-based compensation and operating expenses andlargely from a $2 million early redemption fee related to the repayment of CAD$100 million of the 5.68% senior notes originally scheduled to mature in June 2020. The expense ratio (net earned premiums) increased for the six months ended June 30, 2019 primarily from lower earned premiums and higher operating costs, including the early redemption fee as discussed above.
The expense ratio (net premiums written) decreased slightly for the three months ended June 30, 2019 largely from higher net premiums written in the current year.

The expense ratio (net premiums written) increased largelyfor the six months ended June 30, 2019 primarily from higher stock-based compensation and operating expenses, and lowerincluding the early redemption fee, as discussed above, partially offset by higher net premiums written in the current year.

121
Table of Contents
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:

   March 31, 2019  December 31, 2018  March 31, 2018 

Primary insured loansin-force

   2,152,048  2,143,191  2,123,727

Delinquent loans

   1,760  1,684  1,723

Percentage of delinquent loans (delinquency rate)

   0.08%   0.08%   0.08% 

Flow loansin-force

   1,507,283  1,499,304  1,456,573

Flow delinquent loans

   1,384  1,310  1,385

Percentage of flow delinquent loans (delinquency rate)

   0.09%   0.09%   0.10% 

Bulk loansin-force

   644,765  643,887  667,154

Bulk delinquent loans

   376  374  338

Percentage of bulk delinquent loans (delinquency rate)

   0.06%   0.06%   0.05% 

             
 
June 30, 2019
  
December 31, 2018
  
June 30, 2018
 
Primary insured loans in-force
(1)
  
2,174,084
   
2,143,191
   
2,137,221
 
Delinquent loans  
1,701
   
1,684
   
1,742
 
Percentage of delinquent loans (delinquency rate)
(1)
  
0.08
%  
0.08
%  
0.08
%
Flow loans in-force  
1,523,128
   
1,499,304
   
1,470,826
 
Flow delinquent loans  
1,340
   
1,310
   
1,406
 
Percentage of flow delinquent loans (delinquency rate)  
0.09
%  
0.09
%  
0.10
%
Bulk loans in-force  
650,956
   
643,887
   
666,395
 
Bulk delinquent loans  
361
   
374
   
336
 
Percentage of bulk delinquent loans (delinquency rate)  
0.06
%  
0.06
%  
0.05
%

(1)
As part of an ongoing effort to improve the estimate of outstanding insurance exposure, we are receiving updated outstanding loans in-force in Canada from almost all of our customers. As a result, we estimate that the outstanding loans in-force were 901,000 as of June 30, 2019, 910, 000 as of December 31, 2018 and 935,000 as of June 30, 2018. This is based on the extrapolation of the amounts reported by lenders to the entire insured population. The corresponding insured delinquency rate was 0.19% as of June 30, 2019, 0.18% as of December 31, 2018 and 0.19% as of June 30, 2018.
Flow mortgage loansin-force increased from new policies written. The number of delinquent loans of our flow mortgage insurance increased compared to the fourth quarter of 2018 primarily driven by seasonally higher new delinquencies.

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

riskin-force as of

  Delinquency rate 
  March 31,  December 31,  March 31, 
   March 31, 2019  2019  2018  2018 

By province and territory:

     

Ontario

   47%   0.03%   0.03%   0.03% 

Alberta

   17  0.19%   0.18%   0.17% 

British Columbia

   14  0.04%   0.04%   0.04% 

Quebec

   13  0.09%   0.10%   0.10% 

Saskatchewan

   3  0.29%   0.28%   0.30% 

Nova Scotia

   2  0.13%   0.13%   0.15% 

Manitoba

   2  0.11%   0.10%   0.10% 

New Brunswick

   1  0.13%   0.10%   0.17% 

All other

   1  0.20%   0.19%   0.19% 
  

 

 

    

Total

   100%   0.08%   0.08%   0.08% 
  

 

 

    

                 
 
Percent of primary
risk in-force as of
June 30, 2019
  
Delinquency rate
 
June 30,
  
December 31,
  
June 30,
 
 
2019
  
2018
  
2018
 
By province and territory:  
   
   
   
 
Ontario  
47
%  
0.03
%  
0.03
%  
0.03
%
Alberta  
17
   
0.21
%  
0.18
%  
0.17
%
British Columbia  
14
   
0.04
%  
0.04
%  
0.04
%
Quebec  
13
   
0.07
%  
0.10
%  
0.10
%
Saskatchewan  
3
   
0.27
%  
0.28
%  
0.28
%
Nova Scotia  
2
   
0.13
%  
0.13
%  
0.15
%
Manitoba  
2
   
0.09
%  
0.10
%  
0.10
%
New Brunswick  
1
   
0.08
%  
0.10
%  
0.15
%
All other  
1
   
0.20
%  
0.19
%  
0.20
%
                 
Total  
100
%  
0.08
%  
0.08
%  
0.08
%
                 
Delinquency rates were flat compared to December 31, 2018 and March 31,June 30, 2018 reflecting regional housing market improvement primarily driven by stable macroeconomic conditions in most regions, offset by higher losses in Alberta.

As a part

122
Table of enhanced lender reporting, we receive updated outstanding loansin-force in Canada from almost all of our customers. Based on the data provided by lenders, the delinquency rate as of March 31, 2019 was 0.20%, reflecting a lower number of outstanding loans and related policiesin-force compared to our reported policiesin-force.

Contents

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 firstsecond quarter of 2019, the Australian dollar weakened against the U.S. dollar compared to firstthe second quarter of 2018, which negatively 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 GDP is expected to have experienced moderate growth in the firstsecond quarter of 2019, supported by growth in public demand, sustained expansion ofnon-mining business investment and an ongoing rise innon-resource resource exports. The cash rate remained flatwas reduced to 1.00% on July 2, 2019, down from 1.25% at the end of the second quarter of 2019 and 1.50% inat the end of the first quarter of 2019. The June 2019 unemployment rate remained flatincreased to 5.2% from 5.0% at 5.0% compared to December 2018.

the end of the first quarter of 2019.

Following consistent growth in 2017,In the second quarter of 2019, Australia home prices in Australia continued the 2018their year over year downward trend, with declineswhich began in the first quarter of 2019. March2018 after a period of robust home price appreciation. June 2019 home values were approximately 8% lower than in Marchcompared to June 2018, with declines experienced across the majority of the capital cities. The main drivers of the home price depreciation were the Sydney and Melbourne housing markets, with annual decreases of approximately 11%10% and 10%9%, respectively, for the first quarter of 2019.

respectively.

Our mortgage insurance business in Australia completed a review of its premium earnings pattern in the fourth quarter of 2018, which resulted in no changes to the earnings pattern adopted in the fourth quarter of 2017. The adjustment to our premium earnings pattern in the fourth quarter of 2017 was applied on a retrospective basis under U.S. GAAP, however, under local Australian Accounting Standards this adjustment was applied on a prospective basis. Due to this divergence in accounting application, the financial results and certain metrics, such as the loss ratio and expense ratios, for our mortgage insurance business in Australia were different between the two accounting standards in the first quarterhalf of 2019 and will be different in future periods.

Our mortgage insurance business in Australia had lower losses in the firstsecond quarter of 2019 compared to the firstsecond quarter of 2018 attributable to changes in foreign exchange rates. Excluding foreign exchange, losses were slightlyflat as higher primarily as a result of higherreserves on new delinquencies net ofwere offset by higher reserve releases for cures in the current year. The loss ratio in Australia for the three months ended March 31,June 30, 2019 was 34%. We still expect the full year 2019 loss ratio in Australia to be similar to the full year 2018 loss ratio of 30%, as higher delinquencies and lower cures traditionally experienced in the first half of the year are expected to normalize thereafter.

moderate in the second half of 2019.

In the firstsecond quarter of 2019, our mortgage insurance business in Australia experienced an increase in new insurance written volumes compared to the firstsecond quarter of 2018 primarily due to a higher level of bulk insurance transactions and higher mortgage originationflow volumes from certain key customers in the current year.

Gross written premiums were lowerhigher in the firstsecond quarter of 2019 compared to the firstsecond quarter of 2018 largely as a result of the timing of initial premiums received from a structured insurance transaction in the prior year, partially offset by higher flow and bulk new insurance written from increased key customer activity in the current year.year as housing markets stabilize. Earned premiums were lower in the firstsecond quarter of 2019 compared to the firstsecond quarter of 2018 primarily duefrom higher policy cancellations in the prior year mostly from an initiative implemented in the second quarter of 2018 to more promptly identify loans that were discharged or refinanced and from the seasoning of our smaller, more recentin-force books of business.

Our mortgage insurance business in Australia is concentrated in a small number of key customers. In November 2016, we entered into a new contract with our largest customer, effective January 1, 2017, with a term of three years. In November 2018, we entered into a new contract with our second largest customer, effective
123
Table of Contents
November 21, 2018, with a term of two years and the option to extend for an additional year at the customer’s discretion. In June 2018, we entered into a new contract with our third largest customer, effective July 1, 2018, with a term of three years. These twothree customers together represented 64%71% of our gross written premiums in the first quarterhalf of 2019.

On July 25, 2019, S&P downgraded the financial strength rating of Genworth Australia’s primary mortgage insurance subsidiary. Although the change in S&P’s rating has no immediate impact on the contractual arrangements between our mortgage insurance business in Australia and its customers, one key customer contract contains a provision that was triggered as a result of the ratings change, allowing that customer the option to terminate the contract. However, under this provision, our Australia mortgage insurance subsidiary has 30 days to demonstrate its credit strength and ensure that the potential termination right under this provision is not exercised. For additional details see “—Financial Strength Ratings.”

Our mortgage insurance business in Australia evaluates its capital position in relation to the Prescribed Capital Amount (“PCA”) as determined by the Australian Prudential Regulation Authority (“APRA”) and utilizes its Internal Capital Adequacy Assessment Process 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 March 31,June 30, 2019, the estimated PCA ratio of our mortgage insurance business in Australia was approximately 201%208%, representing an increase from 194%201% as of DecemberMarch 31, 2018,2019, largely resulting from portfolio seasoning and policy cancellations, partially offset by dividends paid, share repurchase activity and lower reinsurance credit.

activity.

Segment results of operations

Three Months Ended March 31,June 30, 2019 Compared to Three Months Ended March 31,June 30, 2018

The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated:

   Three months ended
March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Revenues:

        

Premiums

  $83  $98  $(15)    (15)% 

Net investment income

   16   17   (1)    (6)% 

Net investment gains (losses)

   12   (9)    21   NM (1) 

Policy fees and other income

   (1)    1   (2)    (200)% 
  

 

 

   

 

 

   

 

 

   

Total revenues

   110   107   3   3% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

   28   30   (2)    (7)% 

Acquisition and operating expenses, net of deferrals

   17   17   —      —  % 

Amortization of deferred acquisition costs and intangibles

   9   11   (2)    (18)% 

Interest expense

   2   2   —      —  % 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

   56   60   (4)    (7)% 
  

 

 

   

 

 

   

 

 

   

Income before income taxes

   54   47   7   15% 

Provision for income taxes

   16   14   2   14% 
  

 

 

   

 

 

   

 

 

   

Net income

   38   33   5   15% 

Less: net income attributable to noncontrolling interests

   20   17   3   18% 
  

 

 

   

 

 

   

 

 

   

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

   18   16   2   13% 

Adjustments to net income available to Genworth Financial, Inc.’scommon stockholders:

        

Net investment (gains) losses, net(2)

   (6)    4   (10)    NM (1) 

Taxes on adjustments

   2   (1)    3   NM (1) 
  

 

 

   

 

 

   

 

 

   

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders

  $14  $19  $(5)    (26)% 
  

 

 

   

 

 

   

 

 

   

                 
 
Three months ended
 

June 30,
  
Increase
 

(decrease) and
 

percentage
 

change
 
(Amounts in millions)
 
    2019    
  
    2018    
  
    2019 vs. 2018    
 
Revenues:
  
   
   
   
 
Premiums
 $
80
  $
106
  $
(26
)  
(25
)%
Net investment income
  
15
   
18
   
(3
)  
(17
)%
Net investment gains (losses)
  
1
   
12
   
(11
)  
(92
)%
                 
Total revenues
  
96
   
136
   
(40
)  
(29
)%
                 
Benefits and expenses:
  
   
   
   
 
Benefits and other changes in policy reserves
  
26
   
29
   
(3
)  
(10
)%
Acquisition and operating expenses, net of deferrals
  
17
   
17
   
—  
   
—   
%
Amortization of deferred acquisition costs and intangibles
  
9
   
12
   
(3
)  
(25
)%
Interest expense
  
2
   
2
   
—  
   
—   
%
                 
Total benefits and expenses
  
54
   
60
   
(6
)  
(10
)%
                 
Income before income taxes
  
42
   
76
   
(34
)  
(45
)%
Provision for income taxes
  
13
   
23
   
(10
)  
(43
)%
                 
Net income
  
29
   
53
   
(24
)  
(45
)%
Less: net income attributable to noncontrolling interests
  
15
   
27
   
(12
)  
(44
)%
                 
Net income available to Genworth Financial, Inc.’s common stockholders
  
14
   
26
   
(12
)  
(46
)%
Adjustments to net income available to Genworth Financial, Inc.’s
 
common stockholders:
  
   
   
   
 
Net investment (gains) losses, net 
(1)
  
(1
)  
(6
)  
5
   
83
%
Taxes on adjustments
  
—  
   
2
   
(2
)  
(100
)%
                 
Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders
 $
13
  $
22
  $
(9
)  
(41
)%
                 
(1)

For the three months ended June 30, 2018, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $6 million.

124
Table of Contents
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily related to lower premiums largely from higher policy cancellations in the prior year mostly due to an initiative implemented in the second quarter of 2018 to more promptly identify loans that were discharged or refinanced and from the seasoning of our smaller, more recent in-force books of business. The decrease was partially offset by lower contract fees amortization in the current year.
Revenues
Premiums decreased predominantly from higher policy cancellations in the prior year mostly due to an initiative implemented in the second quarter of 2018 to more promptly identify loans that were discharged or refinanced and from the seasoning of our smaller, more recent in-force books of business. The three months ended June 30, 2019 included a decrease of $7 million attributable to changes in foreign exchange rates.
Net investment income decreased largely from changes in foreign exchange rates, lower average invested assets and from lower investment yields in the current year.
Net investment gains decreased primarily from lower net realized gains from the sale of investment securities and from derivative losses in the current year.
Benefits and expenses
Benefits and other changes in policy reserves decreased largely from changes in foreign exchange rates in the current year. Excluding the effects of changes in foreign exchange rates, benefits and other changes in policy reserves were flat as higher reserves on new delinquencies were offset by higher reserve releases for cures in the current year.
Amortization of DAC and intangibles decreased primarily from lower contract fees amortization and from changes in foreign exchange rates in the current year.
Provision for income taxes.
The effective tax rate was 30.0% for both the three months ended June 30, 2019 and 2018, consistent with our jurisdictional rate.
125
Table of Contents
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated:
                 
 
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
    2019    
  
    2018    
  
    2019 vs. 2018    
 
Revenues:
  
   
   
   
 
Premiums $
163
  $
204
  $
(41
)  
(20
)%
Net investment income  
31
   
35
   
(4
)  
(11
)%
Net investment gains (losses)  
13
   
3
   
10
   
NM
(1) 
Policy fees and other income  
(1
)  
1
   
(2
)  
(200
)%
                 
Total revenues  
206
   
243
   
(37
)  
(15
)%
                 
Benefits and expenses:
  
   
   
   
 
Benefits and other changes in policy reserves  
54
   
59
   
(5
)  
(8
)%
Acquisition and operating expenses, net of deferrals  
34
   
34
   
—  
   
—   
%
Amortization of deferred acquisition costs and intangibles  
18
   
23
   
(5
)  
(22
)%
Interest expense  
4
   
4
   
—  
   
—   
%
                 
Total benefits and expenses  
110
   
120
   
(10
)  
(8
)%
                 
Income before income taxes  
96
   
123
   
(27
)  
(22
)%
Provision for income taxes  
29
   
37
   
(8
)  
(22
)%
                 
Net income  
67
   
86
   
(19
)  
(22
)%
Less: net income attributable to noncontrolling interests  
35
   
44
   
(9
)  
(20
)%
                 
Net income available to Genworth Financial, Inc.’s
common stockholders
  
32
   
42
   
(10
)  
(24
)%
Adjustments to net income available to GenworthFinancial, Inc.’s common stockholders:
  
   
   
   
 
Net investment (gains) losses, net 
(2)
  
(7
)  
(2
)  
(5
)  
NM
(1)
 
Taxes on adjustments  
2
   
1
   
1
   
100
%
                 
Adjusted operating income available to Genworth Financial, Inc.’s common
stockholders
 $
27
  $
41
  $
(14
)  
(34
)%
                 
(1)
We define “NM” as not meaningful for increases or decreases greater than 200%.

(2)

For the threesix months ended March 31,June 30, 2019 and 2018, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $6 million and $(5)$1 million, respectively.

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily driven by lower premiums largely from changes in foreign exchange rates in the current year and from the seasoning of our smaller, more recentin-force books of business. These decreases werebusiness and from higher policy cancellations in the prior year. The decrease was partially offset by lower contract fees amortization in the current year.

Revenues

Premiums decreased predominantly from $8 million of changes attributable to foreign exchange rates in the current year and from the seasoning of our smaller, more recentin-force books of business.

We had net investment gainsbusiness and from higher policy cancellations in the current year compared to net investment losses in the prior year. Net investment gains in the current year were primarily from net realized gains from the saleThe six months ended June 30, 2019 included a decrease of investment securities, derivative gains and from$15 million attributable to changes in the fair valueforeign exchange rates.

126
Table of equity securities. Contents
Net investment losses in the prior year were predominantly from changes in the fair value of equity securities.

Policy fees and other income decreased primarily attributable to foreign exchange losses onnon-Australian dollar denominated invested assets due tofrom changes in foreign exchange rates in the current year.

Net investment gains increased primarily from unrealized gains from changes in the fair value of equity securities in the current year compared to unrealized losses in the prior year, partially offset by lower gains from the sale of investment securities in the current year.
Benefits and expenses

Benefits and other changes in policy reserves decreased largely from $3$5 million of changes attributable to foreign exchange rates in the current year. Excluding the effects of changes in foreign exchange rates, benefits and other changes in policy reserves increased slightly mainly fromwere flat as higher reserves on new delinquencies net ofwere offset by higher reserve releases for cures in the current year.

Amortization of DAC and intangibles decreased primarilylargely from lower contract fees amortization and from changes in foreign exchange rates in the current year.

Provision for income taxes.
The effective tax rate was 30.0% for both the threesix months ended March 31,June 30, 2019 and 2018, consistent with our jurisdictional rate.

Australia Mortgage Insurance selected operating performance measures

Our mortgage insurance business in Australia currently has structured insurance transactions with three lenders where it is in a secondary loss position. The insurance portfolio metrics associated with these transactions, which include insurancein-force, riskin-force, new insurance written, loansin-force and delinquent loans, are excluded from the following tables. These arrangements represented approximately $157 million and $160 million of riskin-force of our mortgage insurance business as of March 31, 2019 and 2018, respectively.

June 30, 2019.

The following table setstables set forth selected operating performance measures regarding our Australia Mortgage Insurance segment as of or for the dates indicated:

   As of or for the three
months ended
March 31,		   Increase
(decrease) and
percentage change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Primary insurancein-force

  $219,200  $246,300  $(27,100)    (11)% 

Riskin-force

  $76,300  $85,700  $(9,400)    (11)% 

New insurance written

  $3,900  $3,400  $500   15% 

Net premiums written

  $52  $60  $(8)    (13)% 

                 
 
As of June 30,
  
Increase
(decrease) and
percentage change
 
(Amounts in millions)
 
2019
  
2018
  
2019 vs. 2018
 
Primary insurance in-force $
215,600
  $
229,400
  $
(13,800
)  
(6
)%
Risk in-force $
75,100
  $
79,900
  $
(4,800
)  
(6
)%
                                 
 
Three months ended
June 30,
  
Increase
(decrease) and
percentage
change
  
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
    2019    
  
    2018    
  
    2019 vs. 2018    
  
    2019    
  
    2018    
  
    2019 vs. 2018    
 
New insurance written $
4,900
  $
4,600
  $
300
   
7
% $
8,800
  $
8,000
  $
800
   
10
%
Net premiums written $
58
  $
56
  $
2
   
4
% $
110
  $
116
  $
(6
)  
(5
)%
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 six months ended March 31,June 30, 2019 and 2018, 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.

127
Table of Contents
Primary insurancein-force and riskin-force decreased primarily from decreases of $18.1 billion and $6.3 billion, respectively, due to changes in foreign exchange rates and from policy cancellations in the current year.

Primary insurance in-force and risk in-force included decreases of $11.6 billion and $4.0 billion, respectively, from changes in foreign exchange rates.

New insurance written

New insurance written increased mainly attributablefor the three and six months ended June 30, 2019 primarily due to new bulk insurance written and higher mortgage origination volume from certain key customers.customers in the current year as housing markets stabilized. The three and six months ended March 31,June 30, 2019 included a decreasedecreases of $300$500 million and $800 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 March 31,June 30, 2019 and December 31, 2018, our unearned premium reserves were $1.0 billion and $1.1 billion, respectively.

Net premiums written decreased primarily from $5 million

Excluding the impact of changes attributable toin foreign exchange rates, net premiums written increased for the three and six months ended June 30, 2019 primarily due to higher mortgage origination volume from certain key customers. The increase for the six months ended June 30, 2019 was partially offset by lower net premiums written on structured insurance due to the timing of initial premiums received from a transaction in the prior year, partially offset by higher mortgage origination volume from certain key customersyear. The three and six months ended June 30, 2019 included decreases of $5 million and $10 million, respectively, attributable to changes in the current year.

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 March 31,  Increase (decrease) 
   2019  2018  2019 vs. 2018 

Loss ratio

   34%   30%   4% 

Expense ratio (net earned premiums)

   31%   29%   2% 

Expense ratio (net premiums written)

   50%   47%   3% 

                         
 
Three months ended
June 30,
  
Increase (decrease)
  
Six months ended
June 30,
  
Increase (decrease)
 
 
2019
  
2018
  
2019 vs. 2018
  
2019
  
2018
  
2019 vs. 2018
 
Loss ratio  
34
%  
28
%  
6
%  
34
%  
29
%  
5
%
Expense ratio (net earned premiums)  
33
%  
27
%  
6
%  
32
%  
28
%  
4
%
Expense ratio (net premiums written)  
44
%  
50
%  
(6
)%  
47
%  
48
%  
(1
)%
The loss ratio is the ratio of benefits and other changes in policy reserves 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 increased for the three and six months ended June 30, 2019 primarily from higher new delinquencies, net of cures, in the current year. The increase was also attributable to lower earned premiums largely due todriven mainly by the seasoning of our smaller, more recentin-force books of business.

business and higher policy cancellations in the prior year. Losses were flat as higher reserves on new delinquencies were offset by higher reserve releases for cures in the current year.

The expense ratio (net earned premiumspremiums) increased for the three and net premiums written) increasedsix months ended June 30, 2019 primarily from lower earned/writtennet earned premiums as discussed above, partially offset by lower contract fees amortization in the current year.

128
Table of Contents
The expense ratio (net premiums written) decreased for the three and six months ended June 30, 2019 primarily from higher net premiums
written, as discussed above, and lower contract fees amortization 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 Australia mortgage insurance portfolio as of the dates indicated:

   March 31, 2019  December 31, 2018  March 31, 2018 

Primary insured loansin-force

   1,323,172  1,332,906  1,407,431

Delinquent loans

   7,490  7,145  6,958

Percentage of delinquent loans (delinquency rate)

   0.57%   0.54%   0.49% 

Flow loansin-force

   1,217,050  1,226,219  1,296,055

Flow delinquent loans

   7,265  6,931  6,735

Percentage of flow delinquent loans (delinquency rate)

   0.60%   0.57%   0.52% 

Bulk loansin-force

   106,122  106,687  111,376

Bulk delinquent loans

   225  214  223

Percentage of bulk delinquent loans (delinquency rate)

   0.21%   0.20%   0.20% 

             
 
June 30, 2019
  
December 31, 2018
  
June 30, 2018
 
Primary insured loans in-force  
1,308,811
   
1,332,906
   
1,354,614
 
Delinquent loans  
7,891
   
7,145
   
7,306
 
Percentage of delinquent loans (delinquency rate)  
0.60
%  
0.54
%  
0.54
%
Flow loans in-force  
1,200,603
   
1,226,219
   
1,247,229
 
Flow delinquent loans  
7,642
   
6,931
   
7,076
 
Percentage of flow delinquent loans (delinquency rate)  
0.64
%  
0.57
%  
0.57
%
Bulk loans in-force  
108,208
   
106,687
   
107,385
 
Bulk delinquent loans  
249
   
214
   
230
 
Percentage of bulk delinquent loans (delinquency rate)  
0.23
%  
0.20
%  
0.21
%
Flow loansin-force decreased primarily from policy cancellations. Flow delinquent loans increased compared to December 
31, 2018 and June 30, 2018 primarily from higher new delinquencies, net of cures, in the current year.

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

  Delinquency rate 
  March 31,  December 31,  March 31, 
   March 31, 2019  2019  2018  2018 

By state and territory:

     

New South Wales

   28%   0.41%   0.38%   0.33% 

Queensland

   23  0.74%   0.70%   0.67% 

Victoria

   22  0.42%   0.40%   0.39% 

Western Australia

   13  1.05%   0.98%   0.88% 

South Australia

   6  0.69%   0.68%   0.63% 

Australian Capital Territory

   3  0.19%   0.17%   0.18% 

Tasmania

   2  0.28%   0.31%   0.32% 

New Zealand

   2  0.04%   0.05%   0.06% 

Northern Territory

   1  0.76%   0.68%   0.52% 
  

 

 

    

Total

   100%   0.57%   0.54%   0.49% 
  

 

 

    

                 
 
Percent of primary
risk in-force as of
June 30, 2019
  
Delinquency rate
 
June 30,
2019
  
December 31,
2018
  
June 30,
2018
 
 
By state and territory:  
   
   
   
 
New South Wales  
27
%  
0.45
%  
0.38
%  
0.37
%
Queensland  
23
   
0.81
%  
0.70
%  
0.73
%
Victoria  
23
   
0.45
%  
0.40
%  
0.42
%
Western Australia  
13
   
1.10
%  
0.98
%  
0.99
%
South Australia  
6
   
0.68
%  
0.68
%  
0.67
%
Australian Capital Territory  
3
   
0.25
%  
0.17
%  
0.18
%
Tasmania  
2
   
0.31
%  
0.31
%  
0.34
%
New Zealand  
2
   
0.02
%  
0.05
%  
0.06
%
Northern Territory  
1
   
0.83
%  
0.68
%  
0.61
%
                 
Total  
100
%  
0.60
%  
0.54
%  
0.54
%
                 
Delinquency rates increased in the current year compared to December 31, 2018 and March 31,June 30, 2018 mainly from lower flow loansin-force as a result of policy cancellations and from higher new delinquencies, net of cures, in the current year.

129
Table of Contents
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.

Results of our U.S. life insurance businesses are also impacted by interest rates as our 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. Low interest rates also increase reinvestment risk as higher yielding investments mature and are replaced with lower yielding investments and put pressure on the profitability and returns. During the first half of 2019, long-duration risk free interest rates declined which impacted our reinvestment rates. If this decline continues, it may impact our loss recognition testing and DAC recoverability testing. 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 are significantly impacted by changes in interest rates. For a further discussion of the impact of interest rates on our U.S. life insurance businesses, see “Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in our 2018 Annual Report on Form 10-K.
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.annually typically during the third quarter of each year. We completed our annual review of claim reserve assumptions for our long-term care insurance business in the fourth quarter of 2018. See “Long-term care insurance” below for more details. Our liability for future policy benefits is reviewed at least annually as a part of our loss recognition testing.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. In the fourth quarter of 2018, we performed assumption reviews for our universal and term universal life insurance products as well as for our other U.S. life insurance products, including our long-term care insurance products, and completed our loss recognition testing. For our acquired block of long-term care insurance business and our fixed immediate annuity products, we monitor these blocks more frequently than annually given the premium deficiencies that existed in previous periods.

We expect to complete our annual review of long-term care insurance claim reserve assumptions in the third quarter of 2019 and we expect to complete our loss recognition and cash flow testing as well as assumption reviews in the fourth quarter of 2019.

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 provide our U.S. Life Insurance segment with improved platforms to support emerging accounting guidance and ongoing changes in capital regulations. Concurrently, actuarial processes and
130
Table of Contents
methodologies will be reviewed, and may result in additional refinements to our models and/or assumptions. Any material changes in balances, margins or income trends that may result from these activities will be disclosed accordingly. We intend to continue developing our modeling capabilities in our various businesses, including for our long-term care insurance projections where we migrated substantially all of our retained long-term care insurance business to this new modeling system in 2016 and 2017. The new modeling system values and forecasts associated liability cash flows and policyholder behavior at a more granular level than our previous system.

Results of our U.S. life insurance businesses are also impacted by interest rates. Low interest rates put pressure on the profitability and returns of these businesses as higher yielding investments mature and are 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 are significantly impacted by changes in interest rates. For a further discussion of the impact of interest rates on our U.S. life insurance businesses, see “Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in our 2018 Annual Report on Form10-K.

Our U.S. life insurance subsidiaries are subject to the National Association of Insurance Commissioners’ (“NAIC”) risk-based capital (“RBC”) standards and other minimum statutory capital and surplus requirements. As of December 31, 2018, the RBC of each of our U.S. life insurance subsidiaries exceeded the level of RBC that

would require any of them to take or become subject to any corrective action in their respective domiciliary state. However, the RBC ratio of our U.S. life insurance subsidiaries has declined over the past few years as a result of statutory losses driven by the declining performance of the business and increases in our statutory reserves, including results of Actuarial Guideline 38, cash flow testing and assumption reviews particularly in our long-term care insurance business. Any future statutory losses would decrease the RBC ratio of our U.S. life insurance subsidiaries. We continue to face challenges in our principal life insurance subsidiaries, particularly those subsidiaries that rely heavily on

in-force
rate actions as a source of earnings and capital. We may see variability in statutory results and a further decline in the RBC ratios of these subsidiaries given the time lag between the approval of
in-force
rate actions versus when the benefits from the
in-force
rate actions (including increased premiums and associated benefit reductions) are fully realized in our financial results. Further declines in the RBC ratio of our life insurance subsidiaries could result in heightened supervision and regulatory action.

Long-term care insurance

Results of our long-term care insurance business are influenced primarily by our ability to achievein-force rate actions, morbidity, mortality, persistency, investment yields, expenses, changes in regulations and reinsurance. 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. We completed our annual review of claim reserve assumptions and methodologies for our long-term care insurance business in the fourth quarter of 2018 and recorded higher claim reserves of $308 million and reinsurance recoverables of $17 million. Based on this review, we updated several assumptions and methodologies, including benefit utilization rates, claim termination rates and other assumptions. The primary impact related to increasing later duration utilization assumptions for claims with lifetime benefits.

Additional changes in assumptions or methodologies in our long-term care insurance claim reserves in the future could also impact our loss recognition and cash flow testing results. Our assumptions are sensitive to slight variability in actual experience and small changes in assumptions could result in decreases in the margin of our long-term care insurance blocks to at/or below zero in future years. To the extent, based on reviews, the margin of our long-term care insurance block, excluding the acquired block, is negative, we would be required to recognize a loss, by amortizing more DAC and/or establishing additional benefit reserves. For our acquired block of long-term care insurance, the impacts of adverse changes in assumptions would also be reflected as a loss if our margin for this block is reduced below zero by establishing additional benefit reserves. A significant decrease in our loss recognition testing margin of our long-term care insurance blocks could have a material adverse effect on our business, results of operations and financial condition.

In connection with the updated assumptions and methodologies that increased claim reserves on existing claims in the fourth quarter of 2018, we now establish higher claim reserves on new claims, which decreased earnings in the first quarterhalf of 2019 and we expect will decrease earnings going forward as higher reserves are recorded. Additionally,Also, average claim reserves for new claims are higher as the mix of claims continues to evolve, with
131
Table of Contents
an increasing number of policies with higher daily benefit amounts and higher inflation factors going on claim. The averageIn addition, although new claim reserve established incounts on our older long-term care insurance blocks of business will continue to decrease as the first quarterblocks run off, we are gaining more experience on our larger new blocks of 2019 was approximately 8% higher than the average new claim reserve established during the first quarter of 2018. Also, webusiness and expect continued growth in new claims on these blocks as our blockspolicyholders reach older attained ages with higher likelihood of business continue to age.

going on claim.

We experience volatility in our loss ratios caused by variances in policy terminations, claim terminations, claim severity and claim counts. Our approved
in-force
rate actions may also cause fluctuations in our loss ratios during the period whento the extent that reserves are adjusted to reflect policyholders electing benefit reductions or
non-forfeiture options within their policy coverage.
options. 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 for the threesix months ended March 31,June 30, 2019 and 2018 was 81%78% and 84%79%, respectively.

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 our

in-force
policies; managing expense levels; executing investment strategies targeting higher returns; and enhancing our financial and actuarial analytical capabilities. Executing on our multi-year long-term care insurance
in-force
rate action plan with increased premiums and associated benefit reductions on our legacy long-term care insurance policies is critical to the business. For an update on
in-force
rate actions, refer to “Significant Developments—U.S. Life Insurance.” As of March 31,June 30, 2019, we have suspended sales in Hawaii, Massachusetts, New Hampshire, Vermont and Montana, and will consider taking similar actions in the future in other states where we are unable to obtain satisfactory rate increases on
in-force
policies. We will also consider in the future, as we have in the past, litigation against states that decline actuarially justified rate increases. As of March 31, 2019, we were in litigation with one state that has refused to approve actuarially justifiedin-force rate actions.
The approval process for
in-force
rate increases and the amount and timing of the rate increases and associated benefit reductions approved vary by state. In certain states, the decision to approve or disapprove a rate increase can take a significant amount of time, and the approved amount may be phased in over time. After approval, insureds are provided with written notice of the increase and increases are generally applied on the insured’s next policy anniversary date. 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.

Our U.S. Life Insurance segment is taxed at 21%, the enacted tax rate under the TCJA. However, gains on forward starting swaps settled prior to the enactment of the TCJA are tax effected at 35% as they are amortized into net investment income. This will negatively impact our long-term care insurance business given the majority of our forward starting swaps are in this business.

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 is 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. The15-year coverage on the policies written in 2003 expired in 2018; therefore, any new claims will not have reinsurance coverage under this treaty. Since 2013, we have seen, and may continue to see, an increase in our benefit costs as policies with reinsurance coverage exhaust their benefits or terminate and policies which are not covered by reinsurance go on claim.

132
Table of Contents
Life insurance

Results of our life insurance business are impacted primarily by mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements, among other factors. Effective March 7, 2016, we suspended sales of our traditional life insurance products.

We review our life insurance assumptions in detail at least annually. In the fourth quarter of 2018, we performed our annual review of life insurance assumptions and completed our loss recognition testing for our universal and term universal life insurance products. As part of our assumption review in the fourth quarter of 2018, we recorded $91 million of
after-tax
charges in our universal and term universal life insurance products primarily driven by assumption changes due to lower expected growth in interest rates and emerging mortality experience primarily in our term universal life insurance product.

Mortality levels may deviate each period from historical trends. MortalityOverall mortality experience was lowerhigher in the firstsecond quarter of 2019 compared to the fourth quarter of 2018 and first quarter of 2018,2019 and second quarter of 2018; however, wemortality for our universal life insurance blocks was lower in the second quarter of 2019 compared to the second quarter of 2018. We have experienced higher mortality than our then current and priced for assumptions in recent years for our universal life insurance

blocks. We have also been experiencing higher mortality related charges resulting from an increase in rates charged by our reinsurance partners reflecting natural block aging and higher mortality compared to expectations. Our mortality experience for older ages and late-duration premium periods and conversion products is emerging. We will continue to regularly review our mortality assumptions 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. 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 level premium period term life insurance policies written in 1999 and 2000 transitioned 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 expect to experience volatility in DAC amortization, premiums and mortality experience, which we expect to reduce profitability 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 level premium period business written in 1999 and 2000. In the first quarterhalf of 2019 and the full yearsin 2018 and 2017, we experienced higher lapses and accelerated DAC amortization associated with our large15-year and20-year level premium period term life insurance blocks entering their post level guaranteed premium rate periods. We anticipate this trend will continue for the remainder of 2019 and 2020 with accompanying higher DAC amortization and lower profitability as largerour large 20-year term life insurance blocks issued in 1999 and 2000 reach the end of their level premium periods and will continue as our other blocks reach their post guaranteed level premium rate period, especially for our 2000 block.periods. As of March 31,June 30, 2019, our term life insurance products had a DAC balance of $1.3 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.

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, and expense and commission levels. Effective March 7, 2016, we suspended sales of our traditional fixed annuity products.

133
Table of Contents
We monitor and change crediting rates on fixed annuities on a regular basis to maintain spreads and targeted returns, if applicable. However, if interest rates remain at current levels or decrease, we could see declines in spreads which impact the margins on our products, particularly our fixed immediate annuity products. Due to the premium deficiency that existed in 2016, we continue to monitor our fixed immediate annuity products more frequently than annually and recorded additional charges during 2017, the fourth quarter of 2018 and the first quartertwo quarters of 2019. If interest rates decrease or 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 could result in the establishment of additional future policy benefit reserves and would be immediately reflected as a 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.

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 March 31,June 30, 2019 Compared to Three Months Ended March 31,June 30, 2018

The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:

   Three months ended
March 31,		   Increase
(decrease) and
percentage
change

(Amounts in millions)

  2019   2018   2019 vs. 2018

Revenues:

       

Premiums

  $709  $722  $(13)  (2)%

Net investment income

   701   688   13 2%

Net investment gains (losses)

   84   8   76 NM(1)

Policy fees and other income

   151   163   (12)  (7)%
  

 

 

   

 

 

   

 

 

  

Total revenues

   1,645   1,581   64 4%
  

 

 

   

 

 

   

 

 

  

Benefits and expenses:

       

Benefits and other changes in policy reserves

   1,236   1,238   (2)  —  %

Interest credited

   106   119   (13)  (11)%

Acquisition and operating expenses, net of deferrals

   148   141   7 5%

Amortization of deferred acquisition costs and intangibles

   66   71   (5)  (7)%

Interest expense

   5   4   1 25%
  

 

 

   

 

 

   

 

 

  

Total benefits and expenses

   1,561   1,573   (12)  (1)%
  

 

 

   

 

 

   

 

 

  

Net income before income taxes

   84   8   76 NM(1)

Provision for income taxes

   24   6   18 NM (1)
  

 

 

   

 

 

   

 

 

  

Net income

   60   2   58 NM(1)

Adjustments to net income:

       

Net investment (gains) losses, net(2)

   (86)    (9)    (77)  NM(1)

Expenses related to restructuring

   4   —      4 NM(1)

Taxes on adjustments

   17   2   15 NM(1)
  

 

 

   

 

 

   

 

 

  

Adjusted operating loss available to Genworth Financial, Inc.’scommon stockholders

  $(5)   $(5)   $—    —  %
  

 

 

   

 

 

   

 

 

  

                 
 
Three months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
    2019    
  
    2018    
  
2019 vs. 2018
 
 
Revenues:
  
   
   
   
 
Premiums $
713
  $
712
  $
1
   
—   
%
Net investment income  
724
   
707
   
17
   
2
%
 
Net investment gains (losses)  
(36
)  
(10
)  
(26
)  
NM
(1)
 
Policy fees and other income  
187
   
169
   
18
   
11
%
                 
Total revenues  
1,588
   
1,578
   
10
   
1
%
 
                 
Benefits and expenses:
  
   
   
   
 
Benefits and other changes in policy reserves  
1,211
   
1,163
   
48
   
4
%
 
Interest credited  
106
   
116
   
(10
)  
(9
)%
Acquisition and operating expenses, net of deferrals  
142
   
146
   
(4
)  
(3
)%
Amortization of deferred acquisition costs and intangibles  
67
   
78
   
(11
)  
(14
)%
Interest expense  
4
   
4
   
—  
   
—   
%
                 
Total benefits and expenses  
1,530
   
1,507
   
23
   
2
%
 
                 
Income before income taxes  
58
   
71
   
(13
)  
(18
)%
Provision for income taxes  
19
   
21
   
(2
)  
(10
)%
                 
Net income  
39
   
50
   
(11
)  
(22
)%
Adjustments to net income:
  
   
   
   
 
Net investment (gains) losses, net 
(2)
  
35
   
9
   
26
   
NM
(1)
 
Expenses related to restructuring  
(1
)  
—  
   
(1
)  
NM
(1)
 
Taxes on adjustments  
(7
)  
(2
)  
(5
)  
NM
(1)
 
                 
Adjusted operating income available to Genworth Financial, Inc.’s
common stockholders
 $
66
  $
57
  $
9
   
16
%
                 
(1)

We define “NM” as not meaningful for increases or decreases greater than 200%.

(2)

For the three months ended March 31,June 30, 2019 and 2018, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(1) million in each period.

134
Table of Contents
The following table sets forth adjusted operating income 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
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
2019
  
2018
  
2019 vs. 2018
 
 
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders:  
   
   
   
 
Long-term care insurance $
37
  $
22
  $
15
   
68
%
Life insurance  
10
   
4
   
6
   
150
%
Fixed annuities  
19
   
31
   
(12
)  
(39
)%
                 
Total adjusted operating income available to Genworth Financial, Inc.’s common stockholders $
66
  $
57
  $
9
   
16
%
                 
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders for our long-term care insurance business increased $15 million mainly attributable to $96 million of higher premiums and reduced benefits in the current year from
in-force
rate actions approved and implemented and from favorable development on prior year incurred but not reported claims. The increase was also due to lower utilization of available benefits compared to the prior year. These increases were partially offset by higher severity and frequency of new claims, lower claim terminations and an increase in incremental reserves of $39 million recorded in connection with an accrual for profits followed by losses in the current year.
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders for our life insurance business increased $6 million mainly from a reinsurance correction and refinement resulting in a net favorable impact of $17 million in the current year. This increase was partially offset by higher lapses primarily associated with our large
20-year
term life insurance block issued in 1999 entering its post-level premium period and the continued runoff of our term life insurance products in the current year.
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased $12 million in our fixed annuities business predominantly attributable to lower mortality in the current year compared to the prior year and an unfavorable charge of $4 million in connection with loss recognition testing in our fixed immediate annuity products.
Revenues
Premiums
Our long-term care insurance business increased $8 million largely from $24 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in the current year.
Our life insurance business decreased $7 million mainly attributable to the continued runoff of our term life insurance products.
Net investment income
Our long-term care insurance business increased $29 million largely from higher average invested assets in the current year.
135
Table of Contents
Our life insurance business increased $5 million principally related to higher favorable prepayment speed adjustments on mortgage-backed securities and higher yields and average invested assets in the current year.
Our fixed annuities business decreased $17 million largely attributable to lower average invested assets in the current year due to block runoff.
Net investment gains (losses)
Our long-term care insurance business had net investment losses of $15 million in the current year compared to net investment gains of $3 million in the prior year. The change to net investment losses in the current year was mainly driven by derivative losses in the current year compared to gains in the prior year and from current year losses from the sale of investment securities compared to gains in the prior year.
Net investment losses in our fixed annuities business increased $7 million primarily related to higher losses on embedded derivatives associated with our fixed indexed annuity products and higher unrealized losses from changes in the fair value of equity securities, partially offset by higher gains on derivatives in the current year.
Policy fees and other income.
The increase was mostly attributable to our life insurance business due to a $21 million favorable correction related to ceded premiums on
universal life insurance policies, partially offset by a favorable model refinement in the prior year that did not recur.
Benefits and expenses
Benefits and other changes in policy reserves
Our long-term care insurance business increased $22 million principally related to the aging of the in-force block (including higher frequency of new claims), higher severity of new claims, lower claim terminations and an increase in incremental reserves of $49 million recorded in connection with an accrual for profits followed by losses in the current year. These increases were partially offset by a higher favorable impact of $100 million from reduced benefits in the current year related to in-force rate actions approved and implemented and from favorable development on prior year incurred but not reported claims. The current year also included favorable utilization of available benefits.
Our life insurance business increased $19 million primarily attributable to a favorable model refinement in the prior year that did not recur and higher mortality in the current year compared to the prior year.
Our fixed annuities business increased $7 million largely attributable to $5 million of higher reserves in connection with loss recognition testing in our fixed immediate annuity products primarily as a result of a decrease in interest rates in the current year. The increase was also due to lower mortality in the current year compared to the prior year. These increases were partially offset by lower interest credited in the current year due to block runoff.
Interest credited.
The decrease in interest credited was due to our life insurance and fixed annuities businesses, which decreased $2 million and $8 million, respectively, primarily driven by a decline in average account values and lower crediting rates 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 an unfavorable model refinement in the prior year that did not
recur, partially offset by higher lapses primarily associated with our large
20-year
term life insurance block issued in 1999 entering its post-level premium period and higher reinsurance rates in the current year.
136
Table of Contents
Provision for income taxes.
The effective tax rate was 31.9% and 28.9% for the three months ended June 30, 2019 and 2018, respectively. The increase in the effective tax rate was largely attributable to higher tax expense in our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA in relation to lower pre-tax income in the current year.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:
                 
 
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
2019
  
2018
  
2019 vs. 2018
 
 
Revenues:
  
   
   
   
 
Premiums $
1,422
  $
1,434
  $
(12
)  
(1
)%
Net investment income  
1,425
   
1,395
   
30
   
2
%
 
Net investment gains (losses)  
48
   
(2
)  
50
   
NM
(1)
 
Policy fees and other income  
338
   
332
   
6
   
2
%
 
                 
Total revenues  
3,233
   
3,159
   
74
   
2
%
 
                 
Benefits and expenses:
  
   
   
   
 
Benefits and other changes in policy reserves  
2,447
   
2,401
   
46
   
2
%
 
Interest credited  
212
   
235
   
(23
)  
(10
)%
Acquisition and operating expenses, net of deferrals  
290
   
287
   
3
   
1
%
 
Amortization of deferred acquisition costs and intangibles  
133
   
149
   
(16
)  
(11
)%
Interest expense  
9
   
8
   
1
   
13
%
                 
Total benefits and expenses  
3,091
   
3,080
   
11
   
—   
%
                 
Income before income taxes  
142
   
79
   
63
   
80
%
Provision for income taxes  
43
   
27
   
16
   
59
%
                 
Net income  
99
   
52
   
47
   
90
%
Adjustments to net income:
  
   
   
   
 
Net investment (gains) losses, net 
(2)
  
(51
)  
—  
   
(51
)  
NM
(1)
 
Expenses related to restructuring  
3
   
—  
   
3
   
NM
(1)
 
Taxes on adjustments  
10
   
—  
   
10
   
NM
(1)
 
                 
Adjusted operating income available to Genworth Financial,
Inc.’s common stockholders
 $
61
  $
52
  $
9
   
17
%
                 
(1)
We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)
For the six months ended June 30, 2019 and 2018, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(3) million and $(2) million, and $(1) million, respectively.

137
Table of Contents
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:

   Three months ended
March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:

        

Long-term care insurance

  $(20)   $(32)   $12   38% 

Life insurance

   (2)    (1)    (1)    (100)% 

Fixed annuities

   17   28   (11)    (39)% 
  

 

 

   

 

 

   

 

 

   

Total adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

  $(5)   $(5)   $—      —  % 
  

 

 

   

 

 

   

 

 

   

                 
 
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
    2019    
  
    2018    
  
2019 vs. 2018
 
 
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:  
   
   
   
 
Long-term care insurance $
17
  $
(10
) $
27
   
NM
(1)
 
Life insurance  
8
   
3
   
5
   
167
%
Fixed annuities  
36
   
59
   
(23
)  
(39
)%
                 
Total adjusted operating income available to Genworth Financial, Inc.’s common stockholders $
61
  $
52
  $
9
   
17
%
                 
(1)
We define “NM” as not meaningful for increases or decreases greater than 200%.
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders

The

Our long-term care insurance business had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $17 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 decreased $12of $10 million mainlyin the prior year. The increase to income in the current year from a loss in the prior year was predominantly attributable to $60$156 million of higher premiums and reduced benefits in the current year fromin-force rate actions approved and implemented and from favorable development on prior year incurred but not reported claims. This wasThese increases were partially offset by lower claim terminations and higher severity and frequency of new claims, lower claim terminations and an increase in incremental reserves of $39 million recorded in connection with an accrual for profits followed by losses in the current year.

The adjusted

Adjusted operating lossincome available to Genworth Financial, Inc.’s common stockholders for our life insurance business increased $1$5 million mainly from a
reinsurance correction and refinement resulting in a net favorable impact of $17 million in the current year. This increase was partially offset by higher lapses primarily associated with our large
20-year
term life insurance block issued in 1999 entering its post-level premium period and the continued runoff of our term life insurance products higher lapses primarily associated with the large20-year term life insurance blocks entering the post-level premium periods and an $11 million unfavorable model correction in our universal life insurance products in the current year. These increases were mostly offset by lower mortality in the current year compared to the prior year in our term and universal life insurance products.

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased $11$23 million in our fixed annuities business predominantly attributable to $13$17 million of unfavorable charges in connection with loss recognition testing in our fixed immediate annuity products and lower investment income, partially offset by favorable mortalitylower interest credited in the current year.

Revenues

Premiums

Our long-term care insurance business decreased $3increased $5 million. The decreaseincrease was largely from policy terminations, partially offset by $17$41 million of increased premiums in the current year fromin-force rate actions approved and implemented.

implemented, partially offset by policy terminations and policies entering paid-up status in the current year.

Our life insurance business decreased $10$17 million mainly attributable to the continued runoff of our term life insurance products and higher reinsurance rates in the current year.

138
Table of Contents
Net investment income

Our long-term care insurance business increased $24$53 million largely from higher average invested assets and higher gains from limited partnerships in the current year.

Our life insurance business increased $9$14 million principally related to higher favorable prepayment speed adjustments on mortgage-backed securities and higher yields and average invested assets in the current year. The increase was also attributable to a favorable prepayment speed adjustment on mortgage-backed securities in the current year compared to an unfavorable prepayment speed adjustment in the prior year.

Our fixed annuities business decreased $20$37 million largely attributable to lower average invested assets in the current year due to block runoff.

Net investment gains (losses)

Net investment gains in our long-term care insurance business increased $74$56 million primarily related to net gains from the sale of investment securities in the current year compared to net losses in the prior year and from higher unrealized gains onfrom changes in the fair value of equity securities, partially offset by derivative losses in the current year relatedcompared to changesgains in fair value.

the prior year.

Net investment gains in our life insurance business increased $5$4 million primarily related to higher net gains from the sale of investment securities in the current year compared to net losses in the prior year, partially offset by lower gains on embedded derivatives associated with our indexed universal life insurance products.

Net investment losses in our fixed annuities business increased $3$10 million primarily related to higher losses on embedded derivatives related to our fixed indexed annuity products and an increase in unrealized losses from changes in the fair value of equity securities, partially offset by gains on derivatives in the current year compared to gains in the prior year, partially offset by derivative gains in the current year compared to derivative losses in the prior year.

Policy fees and other income. The decrease was
Policy fees and other income increased mostly attributable to our life insurance business primarily fromdriven by a $21 million favorable correction related to ceded premiums on
universal life insurance policies, partially offset by a favorable model refinement in the prior year that did not recur and a decline 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 decreased $1increased $21 million principally related to the aging of the in-force block (including higher frequency of new claims), higher severity of new claims, lower claim terminations and an increase in incremental reserves of $49 million recorded in connection with an accrual for profits followed by losses in the current year. These increases were partially offset by a $61 million higher favorable impact of $161 million from reduced benefits in the current year related toin-force rate actions approved and implemented and from favorable development on prior year incurred but not reported claims. This decrease was mostly offset by aging of thein-force block (including higher frequency of new claims), lower claim terminations and higher severity of new claims in the current year.

Our life insurance business decreased $5increased $14 million primarily attributable to lower mortalitya favorable model refinement in the current year compared to the prior year in our term and universal life insurance products.

that did not recur.

Our fixed annuities business increased $4$11 million largely attributable to $17$22 million of higher reserves in connection with loss recognition testing in our fixed immediate annuity products primarily as a result of portfolio management actions and from a decrease in the projected yield curve. These increases wereThis increase was partially offset by favorable mortality and lower interest credited in the current year due to block runoff.

Interest credited.credited
. The decrease in interest credited was due to our life insurance and fixed annuities businesses, which decreased $3$5 million and $10$18 million, respectively, primarily driven by a decline in average account values and lower crediting rates in the current year.

Acquisition and operating expenses, net

139
Table of deferrals.The increase was predominantly related to $4 million in restructuring costs in our U.S. Life Insurance segment, which included the suspension of sales of our individual long-term care insurance products through sales intermediaries effective March 7, 2019. The remaining increase was mostly attributable to our long-term care insurance business largely from higher commissions and premium taxes associated with ourin-force rate action plan.

Contents

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 our updated assumptions implementedan unfavorable model refinement in the fourth quarter of 2018,prior year that did not
recur, partially offset by an increase in DAC amortization from higher lapses primarily associated with theour large
20-year
term life insurance blocksblock issued in 1999 entering theits post-level premium periods. Theperiod and higher reinsurance rates in the current year also included a $10 million unfavorable model correction in our universal life insurance products.

year.

Provision for income taxes.
The effective tax rate was 28.5%29.9% and 78.6%34.6% for the threesix months ended March 31,June 30, 2019 and 2018, respectively. The decrease in the effective tax rate was largely attributable to higherpre-tax income in the current year. The prior year higher effective tax rate reflects $5 million of tax expense attributable to our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA in relation to low pre-tax income.

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 for the periodsdates indicated:

   Three months ended
March 31,		  Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019  2018  2019 vs. 2018 

Net earned premiums:

     

Individual long-term care insurance

  $599  $603  $(4)   (1)% 

Group long-term care insurance

   29   28   1   4% 
  

 

 

  

 

 

  

 

 

  

Total

  $628  $631  $(3)   —  % 
  

 

 

  

 

 

  

 

 

  

Loss ratio

   81%   84%   (3)%  

                                 
 
Three months ended
June 30,
  
Increase
(decrease) and
percentage
change
  
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
  2019  
  
  2018  
  
2019 vs. 2018
  
2019
  
2018
  
2019 vs. 2018
 
Net earned premiums:  
   
   
   
   
   
   
   
 
Individual long-term care insurance $
610
  $
604
  $
6
   
1
% $
1,209
  $
1,207
  $
2
   
—   
%
Group long-term care insurance  
30
   
28
   
2
   
7
%  
59
   
56
   
3
   
5
%
                                 
Total $
640
  $
632
  $
8
   
1
% $
1,268
  $
1,263
  $
5
   
—  
%
                                 
Loss ratio  
74
%  
75
%  
(1
)%  
   
78
%  
79
%  
(1
)%  
 
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 and six months ended June 30, 2019 largely from policy terminations, partially offset by $17$24 million and $41 million, respectively, of increased premiums in the current year fromin-force rate actions approved and implemented.

implemented, partially offset by policy terminations and policies entering paid-up status in the current year.

The loss ratio decreased slightly for the three and six months ended June 30, 2019 largely related to the decreaseincrease in premiums, mostly offset by the higher benefits and other changes in reserves partially offset by the lower premiums as discussed above.

140
Table of Contents
Life insurance

The following table setstables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:

   As of or for the three
months ended March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Term and whole life insurance

        

Net earned premiums

  $81  $91  $(10)    (11)% 

Life insurancein-force, net of reinsurance

   95,245   102,100   (6,855)    (7)% 

Life insurancein-force before reinsurance

   427,879   454,051   (26,172)    (6)% 

Term universal life insurance

        

Net deposits

  $58  $61  $(3)    (5)% 

Life insurancein-force, net of reinsurance

   114,894   117,967   (3,073)    (3)% 

Life insurancein-force before reinsurance

   115,691   118,810   (3,119)    (3)% 

Universal life insurance

        

Net deposits

  $76  $132  $(56)    (42)% 

Life insurancein-force, net of reinsurance

   34,961   36,472   (1,511)    (4)% 

Life insurancein-force before reinsurance

   39,785   41,642   (1,857)    (4)% 

Total life insurance

        

Net earned premiums and deposits

  $215  $284  $(69)    (24)% 

Life insurancein-force, net of reinsurance

   245,100   256,539   (11,439)    (4)% 

Life insurancein-force before reinsurance

   583,355   614,503   (31,148)    (5)% 

                                 
 
Three months
ended June 30,
  
Increase
(decrease) and
percentage
change
  
Six months
ended June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
  2019  
  
  2018  
  
2019 vs. 2018
 
  
  2019  
  
  2018  
  
2019 vs. 2018
 
 
Term and whole life insurance
  
   
   
   
   
   
   
   
 
Net earned premiums $
73
  $
80
  $
(7
)  
(9
)% $
154
  $
171
  $
(17
)  
(10
)%
Term universal life insurance
  
   
   
   
   
   
   
   
 
Net deposits  
59
   
61
   
(2
)  
(3
)%  
117
   
122
   
(5
)  
(4
)%
Universal life insurance
  
   
   
   
   
   
   
   
 
Net deposits  
141
   
126
   
15
   
12
%  
217
   
258
   
(41
)  
(16
)%
Total life insurance
  
   
   
   
   
   
   
   
 
                                 
Net earned premiums and deposits $
273
  $
267
  $
6
   
2
% $
488
  $
551
  $
(63
)  
(11
)%
                                 
             
 
As of June 30,
  
Percentage
change
 
(Amounts in millions)
 
2019
  
2018
  
2019 vs. 2018
 
Term and whole life insurance
  
   
   
 
Life insurance in-force, net of reinsurance $
91,386
  $
100,475
   
(9
)%
Life insurance in-force before reinsurance $
419,246
  $
447,429
   
(6
)%
Term universal life insurance
  
   
   
 
Life insurance in-force, net of reinsurance $
114,214
  $
117,141
   
(2
)%
Life insurance in-force before reinsurance $ 
114,999
  $
117,957
   
(3
)%
Universal life insurance
  
   
   
 
Life insurance in-force, net of reinsurance $
34,581
  $
36,054
   
(4
)%
Life insurance in-force before reinsurance $
39,357
  $
41,136
   
(4
)%
Total life insurance
  
   
   
 
Life insurance in-force, net of reinsurance $
240,181
  $
253,670
   
(5
)%
Life insurance in-force before reinsurance $
573,602
  $
606,522
   
(5
)%
We no longer solicit sales of our traditional life insurance products; however, we continue to service our existing blocks of business.

Term and whole life insurance

Net earned premiums decreased for the three and life insurancein-force decreasedsix months ended June 30, 2019 mainly attributable to the continued runoff of our term life insurance products in the current year. Earned premiums also decreased due toyear as well as higher reinsurance rates for the six months ended June 30, 2019. Life insurance in-force also decreased as a result of higher lapses primarily associated with a large 20-year term life insurance block issued in 1999 entering its post-level premium period and the continued runoff of our term life insurance products in the current year.

Universal life insurance

Net deposits increased for the three months ended June 30, 2019 principally from higher renewals in the current year. Net deposits decreased during the six months ended June 30, 2019 primarily attributable to $50$100 million of funding agreements issued with the Federal Home Loan Bank of Atlanta in the prior year that did not recurcompared to $50 million in the current year and from the continued runoff of ourin-force block in the current year.

block.

141
Table of Contents
Fixed annuities

The following table sets forth selected operating performance measures regarding our fixed annuities business as of or for the dates indicated:

   As of or for the three
months ended March 31,		 

(Amounts in millions)

  2019   2018 

Account value, beginning of period

  $14,348  $16,401

Deposits

   29   22

Surrenders, benefits and product charges

   (516)    (536) 
  

 

 

   

 

 

 

Net flows

   (487)    (514) 

Interest credited and investment performance

   142   106

Effect of accumulated net unrealized investment gains (losses)

   106   (112) 
  

 

 

   

 

 

 

Account value, end of period

  $14,109  $15,881
  

 

 

   

 

 

 

                 
 
As of or for the three
months ended June 30,
  
As of or for the six
months ended June 30,
 
(Amounts in millions)
 
    2019    
  
    2018    
  
    2019    
  
    2018    
 
Account value, beginning of period $
14,109
  $
15,881
  $
14,348
  $
16,401
 
Premiums and deposits  
16
   
22
   
45
   
44
 
Surrenders, benefits and product charges  
(486
)  
(593
)  
(1,002
)  
(1,129
)
                 
Net flows  
(470
)  
(571
)  
(957
)  
(1,085
)
Interest credited and investment performance  
119
   
128
   
261
   
234
 
Effect of accumulated net unrealized investment gains (losses)  
117
   
(66
)  
223
   
(178
)
                 
Account value, end of period $
13,875
  $
15,372
  $
13,875
  $
15,372
 
                 
We no longer solicit sales of our traditional fixed annuity products; however, we continue to service our existing block of business.

Account value decreased compared to March 31, 2019 and December 31, 2018 as surrenders and benefits exceeded interest credited and net unrealized investment gains.

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. 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.

142
Table of Contents
Segment results of operations

Three Months Ended March 31,June 30, 2019 Compared to Three Months Ended March 31,June 30, 2018

The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:

   Three months ended
March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Revenues:

        

Net investment income

  $47  $42  $5   12% 

Net investment gains (losses)

   —      (14)    14   100% 

Policy fees and other income

   35   40   (5)    (13)% 
  

 

 

   

 

 

   

 

 

   

Total revenues

   82   68   14   21% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

   1   8   (7)    (88)% 

Interest credited

   41   37   4   11% 

Acquisition and operating expenses, net of deferrals

   13   15   (2)    (13)% 

Amortization of deferred acquisition costs and intangibles

   2   7   (5)    (71)% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

   57   67   (10)    (15)% 
  

 

 

   

 

 

   

 

 

   

Income before income taxes

   25   1   24   NM (1) 

Provision for income taxes

   5   —      5   NM (1) 
  

 

 

   

 

 

   

 

 

   

Net income

   20   1   19   NM (1) 

Adjustments to net income:

        

Net investment (gains) losses, net(2)

   —      12   (12)    (100)% 

Taxes on adjustments

   —      (3)    3   100% 
  

 

 

   

 

 

   

 

 

   

Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders

  $20  $10  $10   100% 
  

 

 

   

 

 

   

 

 

   

                 
 
Three months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
    2019    
  
    2018    
  
2019 vs. 2018
 
 
Revenues:
  
   
   
   
 
Net investment income $
47
  $
43
  $
4
   
9
%
 
Net investment gains (losses)  
(4
)  
(1
)  
(3
)  
NM
(1)
 
Policy fees and other income  
35
   
38
   
(3
)  
(8
)%
                 
Total revenues  
78
   
80
   
(2
)  
(3
)%
                 
Benefits and expenses:
  
   
   
   
 
Benefits and other changes in policy reserves  
13
   
7
   
6
   
86
%
Interest credited  
40
   
36
   
4
   
11
%
Acquisition and operating expenses, net of deferrals  
13
   
14
   
(1
)  
(7
)%
Amortization of deferred acquisition costs and intangibles  
4
   
8
   
(4
)  
(50
)%
                 
Total benefits and expenses  
70
   
65
   
5
   
8
%
 
                 
Income before income taxes  
8
   
15
   
(7
)  
(47
)%
Provision for income taxes  
1
   
3
   
(2
)  
(67
)%
                 
Net income  
7
   
12
   
(5
)  
(42
)%
Adjustments to net income:
  
   
   
   
 
Net investment (gains) losses, net 
(2)
  
2
   
1
   
1
   
100
%
Taxes on adjustments  
—  
   
—  
   
—  
   
—  
%
                 
Adjusted operating income available to Genworth Financial, Inc.’s
common stockholders
 $
9
  $
13
  $
(4
)  
(31
)%
                 
(1)

We define “NM” as not meaningful for increases or decreases greater than 200%.

(2)

For the three months ended March 31, 2018,June 30, 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(2) million.

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increaseddecreased predominantly from higher mortality and lower fee income driven mostly by a decline in the average account values in our variable annuity products, partially offset 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 losses increased in the priorcurrent year were largely relatedprimarily due to derivative losses partially offset by gains on embedded derivatives associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”).

compared to gains in the prior year. This increase was partially offset by derivative gains in the current year compared to derivative losses in the prior year.

143
Table of Contents
Policy fees and other income decreased principally from lower fee income driven mostly by a decline in the average account values in our variable annuity products in the current year.

Benefits and expenses

Benefits and other changes in policy reserves increased primarily attributable to higher mortality in both our variable annuity and corporate-owned life insurance products in the current year.
Interest credited increased largely related to higher interest in our corporate-owned life insurance products in the current year.
Amortization of DAC and intangibles decreased related to our variable annuity products mainly from favorable equity market performance in the current year.
Provision for income taxes.
The effective tax rate was 15.8% and 18.9% for the three months ended June 30, 2019 and 2018, respectively. The decrease was primarily the result of a higher benefit from tax favored items in relation to lower pre-tax income in the current year.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:
                 
 
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
 
(Amounts in millions)
 
    2019    
  
    2018    
  
2019 vs. 2018
 
 
Revenues:
  
   
   
   
 
Net investment income $
94
  $
85
  $
9
   
11
%
Net investment gains (losses)  
(4
)  
(15
)  
11
   
73
%
Policy fees and other income  
70
   
78
   
(8
)  
(10
)%
                 
Total revenues  
160
   
148
   
12
   
8
%
                 
Benefits and expenses:
  
   
   
   
 
Benefits and other changes in policy reserves  
14
   
15
   
(1
)  
(7
)%
Interest credited  
81
   
73
   
8
   
11
%
Acquisition and operating expenses, net of deferrals  
26
   
29
   
(3
)  
(10
)%
Amortization of deferred acquisition costs and intangibles  
6
   
15
   
(9
)  
(60
)%
                 
Total benefits and expenses  
127
   
132
   
(5
)  
(4
)%
                 
Income before income taxes  
33
   
16
   
17
   
106
%
Provision for income taxes  
6
   
3
   
3
   
100
%
                 
Net income  
27
   
13
   
14
   
108
%
Adjustments to net income:
  
   
   
   
 
Net investment (gains) losses, net 
(1)
  
2
   
13
   
(11
)  
(85
)%
Taxes on adjustments  
—  
   
(3
)  
3
   
100
%
                 
Adjusted operating income available to Genworth Financial, Inc.’s
common stockholders
 $
29
  $
23
  $
6
   
26
%
                 
(1)
For the six months ended June 30, 2019 and 2018, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(2) million in each period.
144
Table of Contents
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased predominantly from favorable equity market performance, partially offset by lower fee income driven mostly by a decline in the average account values in our variable annuity products 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 losses decreased principally from lower derivative losses, partially offset by lower gains on embedded derivatives associated with our variable annuity products with GMWBs in the current year.
Policy fees and other income decreased principally from lower fee income driven mostly by a decrease in the average account values in our variable annuity products in the current year.
Benefits and expenses
Benefits and other changes in policy reserves decreased slightly primarily attributable to lower GMDB reserves in our variable annuity products due to favorable equity market performance, mostly offset by higher mortality in both our variable annuity and corporate-owned life insurance products in the current year.

Interest credited increased largely related to higher account valuesinterest in our corporate-owned life insurance products in the current year.

Amortization of deferred acquisition costsDAC and intangibleintangibles decreased related to our variable annuity products mainly from favorable equity market performance in the current year.

Provision for income taxes.
The provision for income taxeseffective tax rate increased to 18.4% for the threesix months ended March 31,June 30, 2019 from 16.6% for the six months ended June 30, 2018. The increase was primarily attributable to higher pre-tax income, partially offset by a higher benefit from tax favored items in the result of higherpre-tax income.

current 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 March 31,         		 

(Amounts in millions)

  2019   2018 

Account value, beginning of period

  $4,918  $5,884

Deposits

   7   7

Surrenders, benefits and product charges

   (161)    (208) 
  

 

 

   

 

 

 

Net flows

   (154)    (201) 

Interest credited and investment performance

   349   (64) 
  

 

 

   

 

 

 

Account value, end of period

  $5,113  $5,619
  

 

 

   

 

 

 

                 
 
As of or for the three
months ended June 30,
  
As of or for the six
months ended June 30,
 
(Amounts in millions)
 
    2019    
  
    2018    
  
    2019    
  
    2018    
 
Account value, beginning of period $
5,113
  $
5,619
  $
4,918
  $
5,884
 
Deposits  
6
   
5
   
13
   
12
 
Surrenders, benefits and product charges  
(158
)  
(203
)  
(319
)  
(411
)
                 
Net flows  
(152
)  
(198
)  
(306
)  
(399
)
Interest credited and investment performance  
160
   
48
   
509
   
(16
)
                 
Account value, end of period $
5,121
  $
5,469
  $
5,121
  $
5,469
 
                 
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.

145
Table of Contents
Account value increased compared to March 31, 2019 and December 31, 2018 primarily related to favorable equity market performance, partially offset by surrenders in the current year.

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 March 31,        		 

(Amounts in millions)

  2019   2018 

Funding Agreements

    

Account value, beginning of period

  $381  $260

Surrenders and benefits

   (78)    (76) 
  

 

 

   

 

 

 

Net flows

   (78)    (76) 

Interest credited

   2   1
  

 

 

   

 

 

 

Account value, end of period

  $305  $185
  

 

 

   

 

 

 

                 
 
As of or for the three
months ended June 30,
  
As of or for the six
months ended June 30,
 
(Amounts in millions)
 
    2019    
  
    2018    
  
    2019    
  
    2018    
 
FABNs
(1)
and Funding Agreements
  
   
   
   
 
Account value, beginning of period $
305
  $
185
  $
381
  $
260
 
Surrenders and benefits  
(2
)  
(6
)  
(80
)  
(82
)
                 
Net flows  
(2
)  
(6
)  
(80
)  
(82
)
Interest credited  
2
   
1
   
4
   
2
 
                 
Account value, end of period $
305
  $
180
  $
305
  $
180
 
                 

(1)
Funding agreements backing notes
Account value related to our institutional products decreased compared to December 31, 2018 mainly attributable to scheduled maturities of certain funding agreements in the current year.

146
Table of Contents
Corporate and Other Activities

Results of operations

Three Months Ended March 31,June 30, 2019 Compared to Three Months Ended March 31,June 30, 2018

The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:

   Three months ended
March 31,		   Increase
(decrease) and
percentage
change		 

(Amounts in millions)

  2019   2018   2019 vs. 2018 

Revenues:

        

Premiums

  $2  $2  $—      —  % 

Net investment income

   3   2   1   50% 

Net investment gains (losses)

   (21)    (1)    (20)    NM (1) 

Policy fees and other income

   1   (2)    3   150% 
  

 

 

   

 

 

   

 

 

   

Total revenues

   (15)    1   (16)    NM (1) 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

   1   1   —      —  % 

Acquisition and operating expenses, net of deferrals

   7   11   (4)    (36)% 

Amortization of deferred acquisition costs and intangibles

   —      1   (1)    (100)% 

Interest expense

   61   65   (4)    (6)% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

   69   78   (9)    (12)% 
  

 

 

   

 

 

   

 

 

   

Loss before income taxes

   (84)    (77)    (7)    (9)% 

Provision (benefit) for income taxes

   5   (17)    22   129% 
  

 

 

   

 

 

   

 

 

   

Net loss

   (89)    (60)    (29)    (48)% 

Adjustments to net loss:

        

Net investment (gains) losses

   21   1   20   NM (1) 

Taxes on adjustments

   (5)    —      (5)    NM (1) 
  

 

 

   

 

 

   

 

 

   

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

  $(73)   $(59)   $(14)    (24)% 
  

 

 

   

 

 

   

 

 

   

                 
 
Three months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
 
(Amounts in millions)
 
  2019  
  
  2018  
  
2019 vs. 2018
 
 
Revenues:  
   
   
   
 
Premiums $
2
  $
3
  $
(1
)  
(33
)%
Net investment income  
3
   
3
   
—  
   
—  
%
Net investment gains (losses)  
(7
)  
—  
   
(7
)  
NM
(1)
 
Policy fees and other income  
—  
   
1
   
(1
)  
(100
)%
                 
Total revenues  
(2
)  
7
   
(9
)  
(129
)%
                 
Benefits and expenses:  
   
   
   
 
Benefits and other changes in policy reserves  
1
   
1
   
—  
   
—  
%
Acquisition and operating expenses, net of deferrals  
9
   
11
   
(2
)  
(18
)%
Interest expense  
62
   
67
   
(5
)  
(7
)%
                 
Total benefits and expenses  
72
   
79
   
(7
)  
(9
)%
                 
Loss before income taxes  
(74
)  
(72
)  
(2
)  
(3
)%
Provision for income taxes  
5
   
3
   
2
   
67
%
                 
Net loss  
(79
)  
(75
)  
(4
)  
(5
)%
Adjustments to net loss:  
   
   
   
 
Net investment (gains) losses  
7
   
—  
   
7
   
NM
(1)
 
Expenses related to restructuring  
1
   
—  
   
1
   
NM
(1)
 
Taxes on adjustments  
(1
)  
—  
   
(1
)  
NM
(1)
 
                 
Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders $
(72
) $
(75
) $
3
   
4
%
 
                 
(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 lower interest expense and provisional tax
expense of $19 million in the prior year that did not recur, partially offset by $11 million of higher taxes in the current year associated with the GILTI provision of the TCJA.
Revenues
Net investment losses in the current year were predominantly related to derivative losses.
Benefits and expenses
Interest expense decreased largely driven by the redemption of $597 million of Genworth Holding’s senior notes in May 2018.
The increase in the provision for income taxes was principally driven by a current year tax expense related to the GILTI provision of the TCJA. GILTI has an unfavorable impact on our current year tax provision due to
147
Table of Contents
the utilization of net operating loss carryforwards and projected taxable losses in the U.S. life insurance businesses without any offsetting foreign tax credit carryforwards. The higher taxes associated with GILTI are expected to continue for the remainder of 2019 and into 2020 but are subject to change depending on variations in business results and the potential disposition of Genworth Canada. The increase was also attributable to tax benefits from foreign tax credits
and discrete tax adjustments in the prior year that did not recur and higher taxes from unrealized gains on equity securities in the current year. These increases were partially offset by provisional tax expense of $19 million in the prior year related to a revaluation of deferred tax assets and liabilities on our foreign subsidiaries that did not recur.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:
                 
 
Six months ended
June 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
 
  2019  
  
  2018  
  
2019 vs. 2018
 
Revenues:  
   
   
   
 
Premiums $
4
  $
5
  $
(1
)  
(20
)%
Net investment income  
6
   
5
   
1
   
20
%
Net investment gains (losses)  
(28
)  
(1
)  
(27
)  
NM
(1)
 
Policy fees and other income  
1
   
(1
)  
2
   
200
%
                 
Total revenues  
(17
)  
8
   
(25
)  
NM
(1)
 
                 
Benefits and expenses:  
   
   
   
 
Benefits and other changes in policy reserves  
2
   
2
   
—  
   
—  
%
Acquisition and operating expenses, net of deferrals  
16
   
22
   
(6
)  
(27
)%
Amortization of deferred acquisition costs and intangibles  
—  
   
1
   
(1
)  
(100
)%
Interest expense  
123
   
132
   
(9
)  
(7
)%
                 
Total benefits and expenses  
141
   
157
   
(16
)  
(10
)%
                 
Loss before income taxes  
(158
)  
(149
)  
(9
)  
(6
)%
Provision (benefit) for income taxes  
10
   
(14
)  
24
   
171
%
                 
Net loss  
(168
)  
(135
)  
(33
)  
(24
)%
Adjustments to net loss:  
   
   
   
 
Net investment (gains) losses  
28
   
1
   
27
   
NM
(1)
 
Expenses related to restructuring  
1
   
—  
   
1
   
NM
(1)
 
Taxes on adjustments  
(6
)  
—  
   
(6
)  
NM
(1)
 
                 
Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders $
(145
) $
(134
) $
(11
)  
(8
)%
                 
(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 increased primarily related to $12$23 million of higher taxes in the current year associated with the GILTI provision of the TCJA, and from $13 million of unfavorable provisional tax adjustments. These decreases were partially offset by lower interest expense and operating costs in the current year.

year and provisional tax

expense of $19 million in the prior year that did not recur.
Revenues

Net investment losses increased predominantly from higher derivative losses in the current year.

148
Table of Contents
Benefits and expenses

Acquisition and operating expenses, net of deferrals, decreased mainly driven by lower operating costs and a decrease in employee related expenses and lower operating costs in the current year.

Interest expense decreased largely driven by the redemption of $597 million of Genworth Holding’sHoldings’ senior notes in May 2018, partially offset by higher interest expense attributable to the term loan that Genworth Holdings closed in March 2018 and from our junior subordinated notes which had a higher floating rate of interest in the current year.

We had a current year tax expense compared to a prior year tax benefit. The effectivecurrent year tax rate decreased to (5.3)% for the three months ended March 31, 2019 from 22.0% for the three months ended March 31, 2018. The decreaseexpense was principally driven by a tax expense in the current year related to the GILTI provision of the TCJA and from unfavorable provisional tax adjustments in relation to a higherpre-tax loss.TCJA. GILTI has an unfavorable impact on our current year tax provision due to the utilization of net operating loss carryforwards and projected taxable losses in the U.S. life insurance businesses without any offsetting foreign tax credit carryforwards. The unfavorable impact on the effective rate ishigher taxes associated with GILTI are expected to continue for the remainder of 2019 and into 2020.

2020 but are subject to change depending on variations in business results and the potential disposition of Genworth Canada. The prior year tax benefit was mostly attributable to foreign tax credits, partially offset by provisional tax

expense of $19 million related to a revaluation of deferred tax assets and liabilities on our foreign subsidiaries.
Investments and Derivative Instruments

Trends and conditions

Investments—credit and investment markets

The U.S. Federal Reserve increased its benchmark lending rate four times in 2018. 

Ongoing global trade tensions, declining commodity prices, slower global growth and a negative inflation outlook drove the central bank
U.S. Federal Reserve to revisecontinue to shift its interest rate pathpolicy in the firstsecond quarter of 2019. The U.S. Federal Reserve now projectsis weighing a potential interest rate cut in 2019 and/or 2020 and has maintained its current projection of no rate increases in 2019. The U.S. Federal Reserve’s latest projection is a change from its March 2019 and forecastsprojection of one rate increase in 2020, a meaningful change from its December 2018 projection of two rate increases in 2019 and one in 2020. The U.S. Federal Reserve’s policyprojected interest rate revision coupled with more accommodative monetary policiespolices from other
non-U.S.
central banks drove both domestic and foreign government bond yields lower in the firstsecond quarter of 2019, with short-term interest rate declines outpacing decreases in long-term interest rates. Portions of the U.S. Treasury yield curve inverted in late MarchMay 2019 and continued through the end of the second quarter of 2019, as the yield on the U.S.
10-year
Treasury note dipped below the yield on the
3-month
Treasury bill, though subsequent to quarter end this inversion normalized.bill. Credit markets generally recovered fromalso saw a brief period of volatility in May 2019, with spread widening seendue to escalating U.S. and China trade tensions and a short-lived tariff threat with Mexico, but subsequently recovered in the fourth quarter of 2018, with spreads tightening in the first quarter ofJune 2019 driven mostly by healthy consumer demand, corporate profits,renewed optimism on trade, expectations of accommodative central bank policies and rebounding investor demand for bonds and lower government bond yields.

bonds.

The nature, timing and implications of the United Kingdom’s proposed withdrawal from the European Union (“Brexit”) remain uncertain. On April 10, 2019, the European Union Council approved a negotiation extension with a deadline of October 31, 2019. During the second quarter of 2019, the then-current United Kingdom Prime Minister announced she was stepping down and subsequent to the second quarter of 2019, a new Prime Minister was elected to assume the position. While thisthe Brexit extension removes the near-term risks of the United Kingdom leaving the European Union with neither a trade agreement nor a transition period in place, it still leaves many open items and uncertainties. Likewise,uncertainties, particularly given the United Kingdom will be required to participate in the European Union Parliamentary elections from May 23, 2019 through May 26, 2019 unless the United Kingdom Parliament approveselection of a withdrawal package before that time.

new Prime Minster and an unknown Brexit strategy.

Our investment portfolio maintainsmaintained approximately $2.4$2.7 billion of United Kingdom exposure, or approximately 3%4% of total invested assets. We holdassets as of June 30, 2019. These assets were primarily U.S. dollar-denominated fixed-income investments and we held no direct United Kingdom sovereign exposure. These assets are almost exclusively fixed income instruments and are primarily U.S. dollar denominated.

While the ultimate range of Brexit outcomes could lead to potential credit devaluation or rating agency downgrades of our United Kingdom related exposures, at this time, we do not believe there is a material risk of investment impairments arising from the various Brexit scenarios.

149
Table of Contents
As of March 31,June 30, 2019, our fixed maturitiesmaturity securities portfolio, which was 97% investment grade, comprised 85% of our total investment portfolio.

Derivatives

Several of our master swap agreements containpreviously contained credit downgrade provisions that allowallowed either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength

rating iswas below the limit defined in the applicable agreement. Beginning in 2018, we renegotiated with many of our counterparties to remove the credit downgrade provisions from the master swap agreements entirely or replace it

them with a provision that allows the counterparty to terminate derivative transactions if the RBC ratio of the applicable insurance company goes below a certain threshold. During 2019, we successfully completed these negotiations, therefore, none of our master swap agreements have credit downgrade provisions as of June 30, 2019. As of March 31,June 30, 2019, the RBC ratios of the respective insurance companies were above the thresholds negotiated in the applicable master swap agreements and therefore, no counterparty has anyhad rights under a traditional ratings-based trigger and one counterparty has rightsto take action against us under the RBC trigger but has not exercised its right to terminate or revise the terms of its transactions with us.

threshold provisions.

As of March 31,June 30, 2019, $10.4$9.7 billion notional of our derivatives portfolio was cleared through the Chicago Mercantile Exchange (“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 March 31,June 30, 2019, we posted initial margin of $233$217 million to our clearing agents, which represented approximately $70$65 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. As of March 31,June 30, 2019, $14.2$15.0 billion notional of our derivatives portfolio was in bilateralover-the-counter (“OTC”) derivative transactions pursuant to which we have posted aggregate independent amounts of $318$294 million and are holding collateral from counterparties in the amount of $74$87 million. We have notional
150
Table of $3.0 billion 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 derivative transactions could be limited.

Contents

Investment results

The following table setstables 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 March 31,  Increase (decrease) 
   2019  2018  2019 vs. 2018 

(Amounts in millions)

  Yield  Amount  Yield  Amount  Yield  Amount 

Fixed maturity securities—taxable

   4.5%  $643  4.4%  $635  0.1%  $8

Fixed maturitysecurities—non-taxable

   6.1%   2  3.7%   3  2.4%   (1) 

Equity securities

   5.6%   9  5.1%   10  0.5%   (1) 

Commercial mortgage loans

   4.8%   81  5.2%   82  (0.4)%   (1) 

Restricted commercial mortgage loans related toa securitization entity

   6.7%   1  7.8%   2  (1.1)%   (1) 

Policy loans

   9.5%   46  9.6%   43  (0.1)%   3

Other invested assets(1)

   33.5%   59  39.6%   39  (6.1)%   20

Cash, cash equivalents, restricted cash andshort-term investments

   2.0%   12  1.3%   12  0.7%   —   
   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

   4.8%   853  4.8%   826  —  %   27

Expenses and fees

   (0.1)%   (24)   (0.2)%   (22)   0.1%   (2) 
   

 

 

   

 

 

   

 

 

 

Net investment income

   4.7%  $829  4.6%  $804  0.1%  $25
   

 

 

   

 

 

   

 

 

 

Average invested assets and cash

   $70,355  $70,699  $(344) 
   

 

 

   

 

 

   

 

 

 

                         
 
Three months ended June 30,
  
  Increase (decrease)  
 
 
2019
  
2018
  
2019 vs. 2018
 
(Amounts in millions)
 
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
 
Fixed maturity securities—taxable  
4.6
% $
665
   
4.5
% $
651
   
0.1
% $
14
 
Fixed maturity securities—non-taxable  
6.1
%  
2
   
3.8
%  
3
   
2.3
%  
(1
)
Equity securities  
6.3
%  
10
   
5.1
%  
10
   
1.2
%  
—  
 
Commercial mortgage loans  
4.8
%  
84
   
4.8
%  
77
   
—  
%  
7
 
Restricted commercial mortgage loans related to
a securitization entity
  
7.0
%  
1
   
8.4
%  
2
   
(1.4
)%  
(1
)
Policy loans  
8.8
%  
45
   
9.0
%  
41
   
(0.2
)%  
4
 
Other invested assets 
(1)
  
28.7
%  
59
   
49.3
%  
53
   
(20.6
)%  
6
 
Cash, cash equivalents, restricted cash and
short-term investments
  
1.9
%  
11
   
1.7
%  
14
   
0.2
%  
(3
)
                         
Gross investment income before expenses and fees  
5.0
%  
877
   
4.8
%  
851
   
0.2
%  
26
 
Expenses and fees  
(0.2
)%  
(25
)  
(0.1
)%  
(23
)  
(0.1
)%  
(2
)
                         
Net investment income  
4.8
% $
852
   
4.7
% $
828
   
0.1
% $
24
 
                         
Average invested assets and cash  
  $
70,752
   
  $
70,466
   
  $
286
 
                         
                         
 
Six months ended June 30,
  
Increase (decrease)
 
 
2019
  
2018
  
2019 vs. 2018
 
(Amounts in millions)
 
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
 
Fixed maturity securities—taxable  
4.5
% $
1,308
   
4.5
% $
1,286
   
—  
% $
22
 
Fixed maturity securities—non-taxable  
6.1
%  
4
   
3.8
%  
6
   
2.3
%  
(2
)
Equity securities  
5.9
%  
19
   
5.2
%  
20
   
0.7
%  
(1
)
Commercial mortgage loans  
4.8
%  
165
   
5.0
%  
159
   
(0.2
)%  
6
 
Restricted commercial mortgage loans related to
a securitization entity
  
6.8
%  
2
   
8.1
%  
4
   
(1.3
)%  
(2
)
Policy loans  
9.2
%  
91
   
9.3
%  
84
   
(0.1
)%  
7
 
Other invested assets 
(1)
  
31.1
%  
118
   
44.0
%  
92
   
(12.9
)%  
26
 
Cash, cash equivalents, restricted cash and
short-term investments
  
2.0
%  
23
   
1.5
%  
26
   
0.5
%  
(3
)
                         
Gross investment income before expenses and fees  
4.9
%  
1,730
   
4.8
%  
1,677
   
0.1
%  
53
 
Expenses and fees  
(0.1
)%  
(49
)  
(0.2
)%  
(45
)  
0.1
%  
(4
)
                         
Net investment income  
4.8
% $
1,681
   
4.6
% $
1,632
   
0.2
% $
49
 
                         
Average invested assets and cash  
  $
70,598
   
  $
70,529
   
  $
69
 
                         
(1)

Investment income for other invested assets includes amortization of terminated cash flow hedges, which have no corresponding book value within the yield calculation.

calculation and includes limited partnership investments, which are primarily equity-based and do not have fixed returns by period.

Yields are based on net investment income as reported under U.S. GAAP and are consistent with how we measure our investment performance for management purposes. Yields are annualized, for interim periods, and
151
Table of Contents
are calculated as net investment income as a percentage of average quarterly asset carrying values except for fixed maturity 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 March 31,June 30, 2019, annualized weighted-average investment yields increased slightly primarilyprincipally from higher investment income on higher average invested assets. Net investment income included $5 million of higher prepayment speed adjustments on mortgage-backed securities and $4 million of higher income related to inflation-driven volatility on U.S. Government Treasury Inflation Protected Securities (“TIPS”). The three months ended June 30, 2019 included a decrease of $3 million attributable to $13changes in foreign exchange rates.

For the six months ended June 30, 2019, annualized weighted-average investment yields increased primarily driven by higher investment income on higher average invested assets. Net investment income included $14 million of higher limited partnership income and $10 million of higher prepayment speed adjustments on mortgage-backed securities, partially offset by $4 million lower average invested assets.

income related to inflation-driven volatility on TIPS. The six months ended June 30, 2019 included a decrease of $6 million attributable to changes in foreign exchange rates.

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

   Three months ended
March 31,		 

(Amounts in millions)

  2019   2018 

Available-for-sale securities:

    

Realized gains

  $81  $7

Realized losses

   (22)    (16) 
  

 

 

   

 

 

 

Net realized gains (losses) onavailable-for-sale securities

   59   (9) 
  

 

 

   

 

 

 

Impairments:

    

Total other-than-temporary impairments

   —      —   

Portion of other-than-temporary impairments recognized inother comprehensive income

   —      —   
  

 

 

   

 

 

 

Net realized gains (losses) on equity securities sold

   3   2

Net unrealized gains (losses) on equity securities still held

   8   (18) 

Limited partnerships

   15   7

Commercial mortgage loans

   (1)    —   

Derivative instruments

   (10)    (13) 
  

 

 

   

 

 

 

Net investment gains (losses)

  $74  $(31) 
  

 

 

   

 

 

 

                 
 
Three months ended
June 30,
  
Six months ended
June 30,
 
(Amounts in millions)
 
  2019  
  
  2018  
  
  2019  
  
  2018  
 
Available-for-sale fixed maturity securities:  
   
   
   
 
Realized gains $
5
  $
13
  $
86
  $
20
 
Realized losses  
(6
)  
(21
)  
(28
)  
(37
)
                 
Net realized gains (losses) on available-for-sale fixed maturity securities  
(1
)  
(8
)  
58
   
(17
)
                 
Impairments:  
   
   
   
 
Total other-than-temporary impairments  
—  
   
—  
   
—  
   
—  
 
Portion of other-than-temporary impairments included in other comprehensive income (loss)  
—  
   
—  
   
—  
   
—  
 
                 
Net other-than-temporary impairments  
—  
   
—  
   
—  
   
—  
 
                 
Net realized gains (losses) on equity securities sold  
—  
   
8
   
3
   
10
 
Net unrealized gains (losses) on equity securities still held  
(12
)  
3
   
(4
)  
(15
)
Limited partnerships  
(11
)  
(2
)  
4
   
5
 
Commercial mortgage loans  
1
   
—  
   
—  
   
—  
 
Derivative instruments  
(22
)  
(15
)  
(32
)  
(28
)
                 
Net investment gains (losses) $
(45
) $
(14
) $
29
  $
(45
)
                 
Three Months Ended March 31,June 30, 2019 Compared to Three Months Ended March 31,June 30, 2018

We recorded net unrealized losses on equity securities during the three months ended June 30, 2019 largely related to our Canada Mortgage Insurance segment principally from losses on preferred equity securities whose values are influenced by Canadian bond yields, which saw a decrease in the second quarter of 2019. The three months ended June 30, 2019 also included mark to market adjustments resulting in higher net losses of $9 million on limited partnerships compared to the three months ended June 30, 2018. The three months ended June 30, 2018 included net unrealized gains from changes in the fair value of equity securities driven principally by favorable equity market performance.
152
Table of Contents
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
We recorded net realized gains of $59$58 million related toduring the six months ended June 30, 2019 primarily from the sale ofavailable-for-sale U.S. government, agencies and government-sponsored enterprises securities primarily driven by the sale of Separate Trading of Registered Interest and Principal of Securities, cash tenders and investment exchanges from merger and acquisition activity compared to $9$17 million of net realized losses during the threesix months ended March 31,June 30, 2018.

The change in net unrealized gains (losses) on equity securities is largely related to favorable equity market performance in the current year compared to a slightly unfavorable equity market in the prior year.

We recorded higher net gains on limited partnership investments in the current year principally from favorable equity market performance.

Investment portfolio

The following table sets forth our cash, cash equivalents, restricted cash and invested assets as of the dates indicated:

   March 31, 2019  December 31, 2018 

(Amounts in millions)

  Carrying value   % of total  Carrying value   % of total 

Fixed maturity securities,available-for-sale:

       

Public

  $42,585   57%  $41,857   58% 

Private

   18,775   25  17,804   25

Equity securities

   635   1  655   1

Commercial mortgage loans

   6,929   9  6,687   8

Restricted commercial mortgage loans related to a securitization entity

   59   —     62   —   

Policy loans

   1,994   3  1,861   3

Other invested assets

   1,208   2  1,188   2

Cash, cash equivalents and restricted cash

   2,221   3  2,177   3
  

 

 

   

 

 

  

 

 

   

 

 

 

Total cash, cash equivalents, restricted cash and invested assets

  $74,406   100%  $72,291   100% 
  

 

 

   

 

 

  

 

 

   

 

 

 

                 
 
June 30, 2019
  
December 31, 2018
 
(Amounts in millions)
 
  Carrying value
  
% of total
  
  Carrying value
  
% of total
 
Fixed maturity securities, available-for-sale:  
   
   
   
 
Public $
44,013
   
57
% $
41,857
   
58
%
Private  
19,761
   
26
   
17,804
   
25
 
Equity securities  
644
   
1
   
655
   
1
 
Commercial mortgage loans  
6,963
   
9
   
6,687
   
8
 
Restricted commercial mortgage loans related to a securitization entity  
56
   
—  
   
62
   
—  
 
Policy loans  
2,076
   
3
   
1,861
   
3
 
Other invested assets  
1,535
   
2
   
1,188
   
2
 
Cash, cash equivalents and restricted cash  
1,938
   
2
   
2,177
   
3
 
                 
Total cash, cash equivalents, restricted cash and invested assets $
76,986
   
100
% $
72,291
   
100
%
                 
For a discussion of the change in cash, cash equivalents, restricted cash 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 and equity securities, derivatives, embedded derivatives, securities held as collateral and certain other financial instruments, which are carried at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. As of March 31,June 30, 2019, approximately 6%7% of our investment holdings recorded at fair value were 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.

153
Table of Contents
Fixed maturity securities

As of March 31,June 30, 2019, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity 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-sponsored enterprises

 $4,116 $619 $—    $(4)  $—    $4,731

State and political subdivisions

  2,329  223  —     (6)   —     2,546

Non-U.S. government

  2,403  121  —     (6)   —     2,518

U.S. corporate:

      

Utilities

  4,296  426  —     (37)   —     4,685

Energy

  2,447  186  —     (15)   —     2,618

Finance and insurance

  6,883  405  —     (37)   —     7,251

Consumer—non-cyclical

  4,905  407  —     (55)   —     5,257

Technology and communications

  2,832  161  —     (19)   —     2,974

Industrial

  1,194  67  —     (12)   —     1,249

Capital goods

  2,283  225  —     (19)   —     2,489

Consumer—cyclical

  1,579  83  —     (16)   —     1,646

Transportation

  1,271  107  —     (16)   —     1,362

Other

  379  33  —     (1)   —     411
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  28,069  2,100  —     (227)   —     29,942
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

      

Utilities

  1,100  36  —     (9)   —     1,127

Energy

  1,327  124  —     (4)   —     1,447

Finance and insurance

  2,434  129  —     (9)   —     2,554

Consumer—non-cyclical

  699  19  —     (9)   —     709

Technology and communications

  1,151  52  —     (6)   —     1,197

Industrial

  920  56  —     (3)   —     973

Capital goods

  644  21  —     (3)   —     662

Consumer—cyclical

  537  8  —     (4)   —     541

Transportation

  756  65  —     (6)   —     815

Other

  2,127  139  —     (6)   —     2,260
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate

  11,695  649  —     (59)   —     12,285
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed(1)

  2,762  181  13  (6)   —     2,950

Commercial mortgage-backed

  2,946  64  —     (48)   —     2,962

Other asset-backed

  3,422  18  1  (15)   —     3,426
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalavailable-for-sale fixedmaturity securities

 $57,742 $3,975 $14 $(371)  $—    $61,360
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
   
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-sponsoredenterprises
 $
4,151
  $
837
  $
—  
  $
(1
) $
—  
  $
4,987
 
State and political subdivisions  
2,319
   
317
   
—  
   
—  
   
—  
   
2,636
 
Non-U.S. government  
2,496
   
155
   
—  
   
(2
)  
—  
   
2,649
 
U.S. corporate:
  
   
   
   
   
   
 
Utilities  
4,327
   
565
   
—  
   
(13
)  
—  
   
4,879
 
Energy  
2,468
   
255
   
—  
   
(10
)  
—  
   
2,713
 
Finance and insurance  
6,974
   
633
   
—  
   
(10
)  
—  
   
7,597
 
Consumer—non-cyclical  
4,954
   
616
   
—  
   
(18
)  
—  
   
5,552
 
Technology and communications  
2,893
   
269
   
—  
   
(6
)  
—  
   
3,156
 
Industrial  
1,242
   
98
   
—  
   
(4
)  
—  
   
1,336
 
Capital goods  
2,323
   
303
   
—  
   
(6
)  
—  
   
2,620
 
Consumer—cyclical  
1,619
   
127
   
—  
   
(5
)  
—  
   
1,741
 
Transportation  
1,263
   
152
   
—  
   
(4
)  
—  
   
1,411
 
Other  
356
   
40
   
—  
   
—  
   
—  
   
396
 
                         
Total U.S. corporate  
28,419
   
3,058
   
—  
   
(76
)  
—  
   
31,401
 
                         
Non-U.S. corporate:
  
   
   
   
   
   
 
Utilities  
1,114
   
54
   
—  
   
(3
)  
—  
   
1,165
 
Energy  
1,349
   
168
   
—  
   
(1
)  
—  
   
1,516
 
Finance and insurance  
2,438
   
191
   
—  
   
(1
)  
—  
   
2,628
 
Consumer—non-cyclical  
674
   
40
   
—  
   
(4
)  
—  
   
710
 
Technology and communications  
1,179
   
94
   
—  
   
—  
   
—  
   
1,273
 
Industrial  
936
   
81
   
—  
   
—  
   
—  
   
1,017
 
Capital goods  
663
   
33
   
—  
   
(1
)  
—  
   
695
 
Consumer—cyclical  
542
   
16
   
—  
   
(1
)  
—  
   
557
 
Transportation  
761
   
82
   
—  
   
(2
)  
—  
   
841
 
Other  
2,061
   
186
   
—  
   
(2
)  
—  
   
2,245
 
                         
Total non-U.S. corporate  
11,717
   
945
   
—  
   
(15
)  
—  
   
12,647
 
                         
Residential mortgage-backed 
(1)
  
2,511
   
215
   
14
   
(2
)  
—  
   
2,738
 
Commercial mortgage-backed  
2,882
   
121
   
—  
   
(14
)  
—  
   
2,989
 
Other asset-backed  
3,699
   
38
   
—  
   
(10
)  
—  
   
3,727
 
                         
Total available-for-sale fixed
maturity securities
 $
58,194
  $
5,686
  $
14
  $
(120
) $
—  
  $
63,774
 
                         
(1)

Fair value included $18$12 million collateralized byAlt-A residential mortgage loans and $22 million collateralized bysub-prime residential mortgage loans.

154
Table of Contents
As of December 31, 2018, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified asavailable-for-sale were as follows:

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

(Amounts in millions)

 cost  impaired  impaired  impaired  impaired  value 

Fixed maturity securities:

      

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

 $4,175 $473 $—    $(17)  $—    $4,631

State and political subdivisions

  2,406  168  —     (22)   —     2,552

Non-U.S. government

  2,345  72  —     (24)   —     2,393

U.S. corporate:

      

Utilities

  4,439  331  —     (95)   —     4,675

Energy

  2,382  101  —     (64)   —     2,419

Finance and insurance

  6,705  249  —     (132)   —     6,822

Consumer—non-cyclical

  4,891  294  —     (137)   —     5,048

Technology and communications

  2,823  110  —     (78)   —     2,855

Industrial

  1,230  41  —     (33)   —     1,238

Capital goods

  2,277  165  —     (51)   —     2,391

Consumer—cyclical

  1,592  53  —     (48)   —     1,597

Transportation

  1,283  78  —     (41)   —     1,320

Other

  376  24  —     (3)   —     397
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total U.S. corporate

  27,998  1,446  —     (682)   —     28,762
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Non-U.S. corporate:

      

Utilities

  1,056  17  —     (32)   —     1,041

Energy

  1,320  72  —     (23)   —     1,369

Finance and insurance

  2,391  72  —     (40)   —     2,423

Consumer—non-cyclical

  756  8  —     (25)   —     739

Technology and communications

  1,168  23  —     (26)   —     1,165

Industrial

  926  36  —     (17)   —     945

Capital goods

  615  10  —     (10)   —     615

Consumer—cyclical

  532  1  —     (13)   —     520

Transportation

  689  46  —     (15)   —     720

Other

  2,218  105  —     (23)   —     2,300
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalnon-U.S. corporate

  11,671  390  —     (224)   —     11,837
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Residential mortgage-backed(1)

  2,888  160  13  (17)   —     3,044

Commercial mortgage-backed

  3,054  43  —     (81)   —     3,016

Other asset-backed

  3,444  10  1  (29)   —     3,426
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Totalavailable-for-sale fixedmaturity securities

 $57,981 $2,762 $14 $(1,096)  $—    $59,661
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

                         
   
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 $
4,175
  $
473
  $
—  
  $
(17
) $
—  
  $
4,631
 
State and political subdivisions  
2,406
   
168
   
—  
   
(22
)  
—  
   
2,552
 
Non-U.S. government  
2,345
   
72
   
—  
   
(24
)  
—  
   
2,393
 
U.S. corporate:
  
   
   
   
   
   
 
Utilities  
4,439
   
331
   
—  
   
(95
)  
—  
   
4,675
 
Energy  
2,382
   
101
   
—  
   
(64
)  
—  
   
2,419
 
Finance and insurance  
6,705
   
249
   
—  
   
(132
)  
—  
   
6,822
 
Consumer—non-cyclical  
4,891
   
294
   
—  
   
(137
)  
—  
   
5,048
 
Technology and communications  
2,823
   
110
   
—  
   
(78
)  
—  
   
2,855
 
Industrial  
1,230
   
41
   
—  
   
(33
)  
—  
   
1,238
 
Capital goods  
2,277
   
165
   
—  
   
(51
)  
—  
   
2,391
 
Consumer—cyclical  
1,592
   
53
   
—  
   
(48
)  
—  
   
1,597
 
Transportation  
1,283
   
78
   
—  
   
(41
)  
—  
   
1,320
 
Other  
376
   
24
   
—  
   
(3
)  
—  
   
397
 
                         
Total U.S. corporate  
27,998
   
1,446
   
—  
   
(682
)  
—  
   
28,762
 
                         
Non-U.S. corporate:
  
   
   
   
   
   
 
Utilities  
1,056
   
17
   
—  
   
(32
)  
—  
   
1,041
 
Energy  
1,320
   
72
   
—  
   
(23
)  
—  
   
1,369
 
Finance and insurance  
2,391
   
72
   
—  
   
(40
)  
—  
   
2,423
 
Consumer—non-cyclical  
756
   
8
   
—  
   
(25
)  
—  
   
739
 
Technology and communications  
1,168
   
23
   
—  
   
(26
)  
—  
   
1,165
 
Industrial  
926
   
36
   
—  
   
(17
)  
—  
   
945
 
Capital goods  
615
   
10
   
—  
   
(10
)  
—  
   
615
 
Consumer—cyclical  
532
   
1
   
—  
   
(13
)  
—  
   
520
 
Transportation  
689
   
46
   
—  
   
(15
)  
—  
   
720
 
Other  
2,218
   
105
   
—  
   
(23
)  
—  
   
2,300
 
                         
Total non-U.S. corporate  
11,671
   
390
   
—  
   
(224
)  
—  
   
11,837
 
                         
Residential mortgage-backed 
(1)
  
2,888
   
160
   
13
   
(17
)  
—  
   
3,044
 
Commercial mortgage-backed  
3,054
   
43
   
—  
   
(81
)  
—  
   
3,016
 
Other asset-backed  
3,444
   
10
   
1
   
(29
)  
—  
   
3,426
 
                         
Total available-for-sale fixed
maturity securities
 $
57,981
  $
2,762
  $
14
  $
(1,096
) $
—  
  $
59,661
 
                         
(1)

Fair value included $19 million collateralized byAlt-A residential mortgage loans and $22 million collateralized bysub-prime residential mortgage loans.

Fixed maturity securities increased by $1.7$4.1 billion compared to December 31, 2018 principally from higher net unrealized gains attributable to a decrease in interest rates in the current year.

155
Table of Contents
Commercial mortgage loans

The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:

   March 31, 2019 

(Dollar amounts in millions)

  Total recorded
investment		   Number of
loans		   Loan-to-value (1)  Delinquent
principal balance		   Number of
delinquent
loans		 

Loan Year

         

2008 and prior

  $1,264   443   39%  $3   1

2009

   —      —      —  %   —      —   

2010

   48   10   37%   —      —   

2011

   186   45   40%   —      —   

2012

   462   80   45%   —      —   

2013

   643   120   48%   —      —   

2014

   754   131   52%   —      —   

2015

   871   139   58%   —      —   

2016

   547   95   61%   —      —   

2017

   764   143   66%   —      —   

2018

   1,035   165   69%   —      —   

2019

   369   40   73%   —      —   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

  $6,943   1,411   55%  $3   1
  

 

 

   

 

 

    

 

 

   

 

 

 

                     
 
June 30, 2019
 
(Dollar amounts in millions)
 
Total recorded
investment
  
Number of
loans
  
Loan-to-value 
(1)
  
Delinquent
principal balance
  
Number of
delinquent 
loans
 
Loan Year
  
   
   
   
   
 
2008 and prior $
1,186
   
419
   
38
% $
—  
   
—  
 
2009  
—  
   
—  
   
—  
%  
—  
   
—  
 
2010  
48
   
10
   
37
%  
—  
   
—  
 
2011  
183
   
45
   
40
%  
—  
   
—  
 
2012  
445
   
79
   
44
%  
—  
   
—  
 
2013  
621
   
118
   
48
%  
—  
   
—  
 
2014  
740
   
130
   
52
%  
—  
   
—  
 
2015  
865
   
139
   
57
%  
—  
   
—  
 
2016  
543
   
95
   
60
%  
—  
   
—  
 
2017  
758
   
142
   
65
%  
—  
   
—  
 
2018  
1,030
   
165
   
69
%  
—  
   
—  
 
2019  
559
   
72
   
71
%  
—  
   
—  
 
                     
Total $
6,978
   
1,414
   
55
% $
—  
   
—  
 
                     
(1)

Represents weighted-averageloan-to-value as of March 31,June 30, 2019.

   December 31, 2018 

(Dollar amounts in millions)

  Total recorded
investment		   Number of
loans		   Loan-to-value (1)  Delinquent
principal balance		   Number of
delinquent
loans		 

Loan Year

         

2008 and prior

  $1,310   459   39%  $3   1

2009

   —      —      —  %   —      —   

2010

   50   11   37%   —      —   

2011

   193   46   41%   —      —   

2012

   476   81   45%   —      —   

2013

   656   122   48%   3   1

2014

   772   133   53%   —      —   

2015

   877   139   58%   —      —   

2016

   553   96   61%   —      —   

2017

   773   144   66%   —      —   

2018

   1,040   165   69%   —      —   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

  $6,700   1,396   54%  $6   2
  

 

 

   

 

 

    

 

 

   

 

 

 

                     
 
December 31, 2018
 
(Dollar amounts in millions)
 
Total recorded
investment
  
Number of
loans
  
Loan-to-value
 (1)
  
Delinquent
principal balance
  
Number of
delinquent
loans
 
Loan Year
  
   
   
   
   
 
2008 and prior $
1,310
   
459
   
39
% $
3
   
1
 
2009  
—  
   
—  
   
—  
%  
—  
   
—  
 
2010  
50
   
11
   
37
%  
—  
   
—  
 
2011  
193
   
46
   
41
%  
—  
   
—  
 
2012  
476
   
81
   
45
%  
—  
   
—  
 
2013  
656
   
122
   
48
%  
3
   
1
 
2014  
772
   
133
   
53
%  
—  
   
—  
 
2015  
877
   
139
   
58
%  
—  
   
—  
 
2016  
553
   
96
   
61
%  
—  
   
—  
 
2017  
773
   
144
   
66
%  
—  
   
—  
 
2018  
1,040
   
165
   
69
%  
—  
   
—  
 
                     
Total $
6,700
   
1,396
   
54
% $
6
   
2
 
                     
(1)

Represents weighted-averageloan-to-value as of December 31, 2018.

156
Table of Contents
Other invested assets

The following table sets forth the carrying values of our other invested assets as of the dates indicated:

   March 31, 2019  December 31, 2018 

(Amounts in millions)

  Carrying value   % of total  Carrying value   % of total 

Limited partnerships

  $462   38%  $409   34% 

Bank loan investments

   294   25  248   21

Derivatives

   187   15  178   15

Short-term investments

   139   12  230   19

Securities lending collateral

   106   9  102   9

Other investments

   20   1  21   2
  

 

 

   

 

 

  

 

 

   

 

 

 

Total other invested assets

  $1,208   100%  $1,188   100% 
  

 

 

   

 

 

  

 

 

   

 

 

 

                 
 
June 30, 2019
  
December 31, 2018
 
(Amounts in millions)
 
Carrying value
  
    % of total
  
Carrying value
  
    % of total
 
Limited partnerships $
512
   
34
% $
409
   
34
%
Bank loan investments  
337
   
22
   
248
   
21
 
Derivatives  
280
   
18
   
178
   
15
 
Short-term investments  
273
   
18
   
230
   
19
 
Securities lending collateral  
113
   
7
   
102
   
9
 
Other investments  
20
   
1
   
21
   
2
 
                 
Total other invested assets $
1,535
   
100
% $
1,188
   
100
%
                 
Limited partnerships increased primarily from additional capital investments, and from net unrealized gains, partially offset by return of capital on our investments in the current year. Derivatives increased largely from a decrease in interest rates in the current year. Bank loan investments increased from funding of additional investments, partially offset by principal repayments in the current year. Short-term investments decreasedincreased principally due to net sales and maturitiespurchases in our Australia and Canada Mortgage 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 embedded derivatives, 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,
2018		   Additions   Maturities/
terminations		  March 31,
2019		 

Derivatives designated as hedges

         

Cash flow hedges:

         

Interest rate swaps

   Notional   $9,924  $—     $(654)  $9,270

Foreign currency swaps

   Notional    80   35   (22)   93
    

 

 

   

 

 

   

 

 

  

 

 

 

Total cash flow hedges

     10,004   35   (676)   9,363
    

 

 

   

 

 

   

 

 

  

 

 

 

Total derivatives designated as hedges

     10,004   35   (676)   9,363
    

 

 

   

 

 

   

 

 

  

 

 

 

Derivatives not designated as hedges

         

Interest rate swaps

   Notional    4,674   —      —     4,674

Interest rate swaps in a foreign currency

   Notional    2,565   98   (44)   2,619

Interest rate caps and floors

   Notional    2,624   84   (38)   2,670

Foreign currency swaps

   Notional    453   —      (2)   451

Equity index options

   Notional    2,628   503   (580)   2,551

Financial futures

   Notional    1,415   1,759   (1,968)   1,206

Equity return swaps

   Notional    17   1   —     18

Other foreign currency contracts

   Notional    1,080   1,386   (1,414)   1,052
    

 

 

   

 

 

   

 

 

  

 

 

 

Total derivatives not designated as hedges

     15,456   3,831   (4,046)   15,241
    

 

 

   

 

 

   

 

 

  

 

 

 

Total derivatives

    $25,460  $3,866  $(4,722)  $24,604
    

 

 

   

 

 

   

 

 

  

 

 

 

(Number of policies)

  Measurement   December 31,
2018		   Additions   Maturities/
terminations		  March 31,
2019		 

Derivatives not designated as hedges

         

GMWB embedded derivatives

   Policies    27,886   —      (577)   27,309

Fixed index annuity embedded derivatives

   Policies    16,464   —      (213)   16,251

Indexed universal life embedded derivatives

   Policies    929   —      (11)   918

                   
(Notional in millions)
 
Measurement
 
December 31,
2018
  
Additions
  
Maturities/
terminations
  
June 30,
2019
 
Derivatives designated as hedges
   
   
   
   
 
Cash flow hedges:   
   
   
   
 
Interest rate swaps Notional $
9,924
  $
469
  $
(1,338
) $
9,055
 
Foreign currency swaps Notional  
80
   
52
   
(22
)  
110
 
                   
Total cash flow hedges   
10,004
   
521
   
(1,360
)  
9,165
 
                   
Total derivatives designated as hedges   
10,004
   
521
   
(1,360
)  
9,165
 
                   
Derivatives not designated as hedges
   
   
   
   
 
Interest rate swaps Notional  
4,674
   
—  
   
—  
   
4,674
 
Interest rate swaps in a foreign currency Notional  
2,565
   
187
   
(77
)  
2,675
 
Interest rate caps and floors Notional  
2,624
   
160
   
(66
)  
2,718
 
Foreign currency swaps Notional  
453
   
—  
   
(2
)  
451
 
Equity index options Notional  
2,628
   
939
   
(1,035
)  
2,532
 
Financial futures Notional  
1,415
   
3,029
   
(3,217
)  
1,227
 
Equity return swaps Notional  
17
   
2
   
(2
)  
17
 
Other foreign currency contracts Notional  
1,080
   
2,925
   
(2,704
)  
1,301
 
                   
Total derivatives not designated as hedges   
15,456
   
7,242
   
(7,103
)  
15,595
 
                   
Total derivatives  $
25,460
  $
7,763
  $
(8,463
) $
24,760
 
                   
                   
(Number of policies)
 
Measurement
 
December 31,
2018
  
Additions
  
Maturities/
terminations
  
June 30,
2019
 
Derivatives not designated as hedges
   
   
   
   
 
GMWB embedded derivatives Policies  
27,886
   
—  
   
(1,139
)  
26,747
 
Fixed index annuity embedded derivatives Policies  
16,464
   
—  
   
(410
)  
16,054
 
Indexed universal life embedded derivatives Policies  
929
   
—  
   
(21
)  
908
 
157
Table of Contents
The decrease in the notional value of derivatives was primarily attributable to terminations of interest rate swaps that support our long-term care insurance business, partially offset by an increase in other foreign currency contracts used to hedge foreign currency risk associated with expected dividend payments from foreign subsidiaries and an increase in both interest rate swaps in a foreign currency and interest rate caps and floors related to our hedging strategy to mitigate interest rate risk associated with our regulatory capital position.

The number of policies related to our embedded derivatives decreased as these products are no longer being offered and continue to runoff.

Consolidated Balance Sheets

Total assets
. Total assets increased $1,265$3,383 million from $100,923 million as of December 31, 2018 to $102,188$104,306 million as of March 31,June 30, 2019.

Cash, cash equivalents, restricted cash and invested assets increased $2,115 million primarily from increases of $1,699 million, $239 million and $133 million in fixed maturity securities, commercial mortgage loans and policy loans, respectively. The increase in fixed maturity securities was

 

•

Cash, cash equivalents, restricted cash and invested assets increased $4,695 million primarily from increases of $4,113 million, $347 million, $276 million and $215 million in fixed maturity securities, other invested assets, commercial mortgage loans and policy loans, respectively. The increase in fixed maturity securities was predominantly related to higher market values as a result ofunrealized gains principally from a decrease in interest rates, partially offset by net sales of fixed maturity securities in the current year. The increase in other invested assets was primarily from higher market values of derivative assets driven mostly by a decrease in interest rates and an increase in limited partnership and bank loan investments in the current year. Commercial mortgage loans increased from higher originations and lower prepayments in the current year. The increase in policy loans was principally driven by new loans offered through our corporate-owned life insurance policies collateralized by the cash surrender value of the policy.

These increases were partially offset by a decrease in cash, cash equivalents and restricted cash of $239 million largely from higher net withdrawals on our universal life and investment contracts
and higher origination funding of commercial mortgage loans, along with an increase in funding of limited partnership and bank loan investments in the current year.

DAC decreased $1,044$1,158 million predominantly related to our U.S. Life Insurance segment. We are required to analyze the impacts from net unrealized investment gains and losses on ouravailable-for-sale investment securities backing insurance assets and 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 on available-for-sale investment securities within the statements of comprehensive income and changes in equity. During the threesix months ended March 31,June 30, 2019, due primarily to a decrease in interest rates increasing unrealized investment gains, we decreased the DAC balance of our U.S. Life Insurance segment by $975$1,015 million, resulting in a cumulative decrease of $1,470$1,510 million to the DAC balance as of March 31,June 30, 2019, with an offsetting amount recorded in other comprehensive income (loss). The decrease was also attributable to amortization, net of interest and deferrals, in our U.S. Life Insurance segment in the current year.

Deferred tax asset decreased $163$353 million primarily due to higher unrealized gains on investments and derivatives in the current year.

Separate account assets increased $351$328 million primarily due to favorable equity market performance partially offset by net cash outflows mostly in our variable annuity business as the business continues to run off.

current year.

Total liabilities
. Total liabilities increased $572$1,980 million from $86,734 million as of December 31, 2018 to $87,306$88,714 million as of March 31,June 30, 2019.

Future policy benefits increased $429$1,643 million primarily driven by our long-term insurance business largely from agingshadow accounting adjustments associated with the recognition of thein-force block. In addition, as discussed above, the decrease in interest rates increased our higher unrealized investments gains. As a result, weThe shadow accounting adjustments increased future policy benefits by approximately $306$1,446 million, mostly in our long-term care insurance business, with an offsetting amount recorded in other comprehensive income (loss).

158
Table of Contents
insurance business, with an offsetting amount recorded in other comprehensive income (loss). The increase was also attributable to aging of our long-term care insurance in-force block in the current year.
Policyholder account balances decreased $317$295 million largely as a result of surrenders and benefits in our fixed annuities business and from scheduled maturities of certain funding agreements in our institutional products in the current year.

These decreases were partially offset by an increase associated with shadow accounting adjustments in connection with the recognition of the higher unrealized gains mostly in our universal life insurance products in the current year.

Liability for policy and contract claims increased $157$298 million due principally to our long-term care insurance business primarily from aging of thein-force block (including higher frequency of new claims) and higher severity of new claims, partially offset by favorable development on prior year incurred but not reported claims and favorable claim terminations in the current year. These increases were partially offset by lower delinquencies in our U.S. mortgage insurance business along with timing differences in claim disbursements and lower claim frequency in our life insurance products in the current year.

Total equity
. Total equity increased $693$1,403 million from $14,189 million as of December 31, 2018 to $14,882$15,592 million as of March 31,June 30, 2019.

We reported net income available to Genworth Financial, Inc.’s common stockholders of $174$342 million for the threesix months ended March 31,June 30, 2019.

Net unrealized gains (losses) and derivatives qualifying as hedges increased $348$710 million and $69$202 million, respectively, primarily from a decrease in interest rates in the current year.

Noncontrolling interests increased $69$96 million predominantly related to total comprehensive income attributable to noncontrolling interests of $111$192 million, partially offset by dividends to noncontrolling interests of $28$53 million and the repurchase of shares of $12$44 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 threesix months ended March 31:

(Amounts in millions)

  2019   2018 

Net cash from operating activities

  $134  $109

Net cash from (used by) investing activities

   277   (167) 

Net cash from (used by) financing activities

   (375)    47
  

 

 

   

 

 

 

Net increase (decrease) in cash before foreign exchange effect

  $36  $(11) 
  

 

 

   

 

 

 

June 30:

         
(Amounts in millions)
 
2019
  
2018
 
Net cash from operating activities $
795
  $
561
 
Net cash used by investing activities  
(351
)  
(198
)
Net cash used by financing activities  
(695
)  
(943
)
         
Net decrease in cash before foreign exchange effect $
(251
) $
(580
)
         
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 typically 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
159
Table of Contents
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; deposits from Federal Home Loan Banks (“FHLBs”); the issuance and acquisition of debt and equity securities; the issuance and repayment or repurchase of borrowings andnon-recourse funding obligations; and other capital transactions.

We had higher cash inflows from operating activities in the current year mainly attributable to posting lower collateral with counterparties related to our derivative positionscounterparties and lower tax payments, partially offset by new policy loans issued in our corporate-owned life insurance product in the current year.

We had cash inflowshigher cash outflows from investing activities in the current year mainly driven by net purchases of short-term investments in the current year compared to net sales in the prior year. We also had higher commercial mortgage loan originations which outpaced repayments in the current year. These outflows were partially offset by net sales of fixed maturity and equity securities partially offset by commercial mortgage loan originations outpacing repayments. We had cash outflows from investing activitiesin the current year compared to net purchases in the prior year primarily driven by commercial mortgage loan originations and net purchases of fixed maturity securities, partially offset by net sales of short-term investments.

year.

We had lower cash outflows from financing activities in the current year principally driven by the redemption of $597 million of Genworth Holdings’ senior notes in May 2018 and lower net withdrawals from our investment contracts. We had cash inflows from financing activitiescontracts in the priorcurrent year, largely frompartially offset by $441 million of net proceeds in the prior year from the term loan closed in March 2018, partially offset by net withdrawals from our investment contracts.

2018.

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.

Genworth—holding company

Genworth Financial and Genworth Holdings each act 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 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 mortgage insurance 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 address 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
160
Table of Contents
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 debt obligations, 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 $361$358 million and $429 million of cash, cash equivalents and restricted cash as of March 31,June 30, 2019 and December 31, 2018, respectively, which included approximately $7 million and $16 million of restricted cash, in each period.respectively. Genworth Holdings also held $44$45 million and $75 million in U.S. government securities as of March 31,June 30, 2019 and December 31, 2018, respectively, which included approximately $37 million and $42 million respectively, of restricted assets.assets in each period. The $405$403 million of cash and liquid assets as of March 31,June 30, 2019 is below our targeted cash buffer of two times expected annual external debt interest payments, as described below. In addition, Genworth Holdings has an intercompany note with a principal amount of $200 million due on March 31, 2020.

During the threesix months ended March 31,June 30, 2019 and 2018, we received common stock dividends from our international subsidiaries of $47$105 million and $63$91 million, respectively. Dividends in the first quarter of 2019 included proceeds of $14 million that we received through our participation in Normal Course Issuer Bid (“NCIB”) transactions completed by Genworth MI Canada Inc. (“Genworth Canada”) during the fourth quarter of 2018.

Regulated insurance subsidiaries

The liquidity requirements of our regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to us, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements.

Our insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. Our insurance subsidiaries’ principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income, including commissions, cost of insurance, mortality, expense and surrender charges, contract underwriting fees, investment management fees and dividends and distributions from their subsidiaries. The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets.

Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar duration such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. As of March 31,June 30, 2019, our total cash, cash equivalents, restricted cash and invested assets were $74.4$77.0 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership investments and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 38% of the carrying value of our total cash, cash equivalents, restricted cash and invested assets as of March 31,June 30, 2019.

161
Table of Contents
As of March 31,June 30, 2019, and December 31, 2018, our U.S. mortgage insurance business was compliant with the PMIERs capital requirements, with a prudent buffer. Reinsurance transactions provided an aggregate of approximately $490$470 million of PMIERs capital credit as of March 31,June 30, 2019. 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, including additional reinsurance transactions and contributions of holding company cash.

In February 2019, Genworth Mortgage Insurance Australia Limited (“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 purchase of 38.6 million shares pursuant to thisbuy-back is covered by shareholder approval obtained in 2018. The remaining shares to be repurchased pursuant to thisbuy-back will be subject to shareholder approval at its Annual General Meeting on May 9, 2019. The total number of shares to be purchased by Genworth Australia under the program will depend on business and market conditions, the prevailing share price, market volumes and other considerations. In the first quarter of 2019, Genworth Australia repurchased approximately 12 million sharescredit risk transfer transactions.

We are evaluating options for AUD$29 million. As the majority shareholder, we participated inon-market sales transactions during thebuy-back period to maintaina potential dividend from our ownership position of approximately 52.1% and received $9 million in cash, $5 million of which was paid to Genworth Holdings as a dividend in the first quarter of 2019 with the remainder expected to be paid as a dividend to Genworth HoldingsU.S. mortgage insurance business in the second quarterhalf of 2019. If Genworth Australia decidesHowever, we have not made a final decision and will need to repurchase additional shares throughconsider progress on thebuy-back program, we plan transaction with China Oceanwide and capital requirements of our U.S. mortgage insurance subsidiaries, in addition to participate in orderother factors, which are subject to maintain our ownership at its current level.

change. 

In April 2019, Genworth Canada announced acceptance by the Toronto Stock Exchange (“TSX”) of its Notice of Intention to Make an NCIB. Pursuant to the NCIB, Genworth Canada may, if considered advisable, purchase from time to time through May 6, 2020, up to an aggregate of approximately 4.4 million of its issued and outstanding common shares. IfIn the second quarter of 2019, Genworth Canada decides to purchaserepurchased approximately 1.7 million of its shares for CAD$68 million through the NCIB. We participated in the NCIB we intend to participate in order to maintain our overall ownership atposition of approximately 56.9% and received $28 million in cash, $20 million of which was paid to Genworth Holdings as a dividend and $8 million of which was retained by GMICO.
In February 2019, Genworth Mortgage Insurance Australia Limited (“Genworth Australia”) announced its current level.

intention to commence an

on-market
share
buy-back
program for shares up to a maximum aggregate amount of AUD$100 million. Pursuant to the program, Genworth Australia repurchased approximately 25 million shares for AUD$64 million. As the majority shareholder, we participated in
on-market
sales transactions during the
buy-back
period to maintain our ownership position of approximately 52.0% and received $23 million in cash, $19 million of which was paid as dividends to Genworth Holdings with the remainder expected to be paid as a dividend to Genworth Holdings in the third quarter of 2019. In lieu of continuing with further share
buy-backs
under this program, on July 31, 2019, Genworth Australia declared an unfranked special dividend of AUD$0.219 per share payable to shareholders in August 2019, part of which constitutes the remaining AUD$36 million of the buy-back program.
Capital resources and financing activities

On July 24, 2019, Genworth Holdings announced a solicitation of consents from the holders of its outstanding senior and junior subordinated notes to create an express authorization for the sale of all or part of our non-U.S. mortgage insurance businesses or assets, including Genworth Canada. No assurance can be given regarding the completion of the July 2019 bond consent.
On May 22, 2019, Genworth Canada issued at a premium, CAD$100 million fixed rate senior notes with an interest rate of 4.24% that matures in 2024. The offering represents a re-opening of the 4.24% senior notes originally issued in April 2014. The total amount issued and outstanding associated with these senior notes after this most recent offering is CAD$263 million. The senior notes are redeemable at the option of Genworth Canada, in whole or in part, at any time. In June 2019, Genworth Canada used the proceeds of the offering to early redeem approximately CAD$100 million of the 5.68% senior notes originally scheduled to mature in June 2020 and incurred an early redemption fee of CAD$3 million.
162
Table of Contents
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. Our cash management target is to maintain a cash buffer of two times expected annual external debt interest payments. During the first quarter of 2019, we fellwere below our targeted cash buffer by approximately $100 million mostly due to semi-annual interest payments and fromwe remained below our targeted cash buffer by the timingsame amount in the second quarter of certain cash payouts related to employee compensation expenses.2019. We may move below or above our targeted cash buffer during any given quarter due to the timing of cash outflows and inflows or from future actions. We continue to evaluate our target level of liquidity as circumstances warrant. 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. In connection with the Eleventh Waiver and Agreement, to facilitate the China Oceanwide transaction, the parties concluded that exploring a potential disposition of Genworth Canada is in the best interests of the parties. Another possible benefit of a

sale of Genworth Canada would be the opportunity to use the proceeds to satisfy future debt maturities. In the absence of the transaction with China Oceanwide, we may need to pursue other potential asset sales to address our debt maturities in 2020 and thereafter, including a potential salessale of our mortgage insurance businessesbusiness in Canada and Australia. We have and would continue to evaluate options to insulate our U.S. mortgage insurance business 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—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 2018 Annual Report on Form
10-K.

Contractual obligations and commercial commitments

There

Other than the Genworth Canada debt issuance and repayment described above, there have been no material additions or changes to our contractual obligations as compared to the amounts disclosed within our 2018 Annual Report on Form10-K filed on February 27, 2019. For additional details related to our commitments, see note 10 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements.

”

Securitization Entities

There were nooff-balance sheet securitization transactions during the threesix months ended March 31,June 30, 2019 or 2018.

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. Except as
163
Table of Contents
disclosed below, there were no other material changes in our market risks since December 31, 2018. 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, including changes in interest rates.

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. As of March 31,June 30, 2019, the U.S. dollar strengthened against the Australian dollar and weakened against the currencies in Canada and AustraliaCanadian dollar compared to the respective balance sheet raterates as of December 31, 2018. In the firstsecond quarter of 2019, the U.S. dollar strengthened against the currencies in Canada and Australia compared to theirthe respective average rates in the firstsecond quarter of 2018. 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.

Item 4. Controls and Procedures

Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures

As of March 31,June 30, 2019, 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 March 31,June 30, 2019.

Changes in Internal Control Over Financial Reporting During the Quarter Ended March 31,June 30, 2019

During the three months ended March 31,June 30, 2019, 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 1011 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 2018 Annual Report on Form10-K, 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. There have been no material changes to the risk factors set forth in the above-referenced filing as of March 31,June 30, 2019.

164
Table of Contents
Item 6.

Exhibits

Number

 

Description

Number
Description
 2.1 
    2.1
 31.1 
  10.1§
  10.2§
  10.3§
  10.4§
  10.5§
  10.6§
  31.1
 31.2 
  31.2
 32.1 
  32.1

Number

 

Description

 
32.2
 
101.INS 
101.INS
XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH 
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document

§Management contract or compensatory plan or arrangement.
165
Table of Contents
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: July 31, 2019
By:/s/    Matthew D. Farney
  

GENWORTH FINANCIAL, INC.

(Registrant)

Date: May 1, 2019
By:

/s/

Matthew D. Farney

Matthew D. Farney

Vice President and Controller

(Principal Accounting Officer)

136

166