AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2010
REGISTRATION NO. 333-143494
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[LOGO]
Genworth/R/
Financial
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 63 54-0283385
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE) IDENTIFICATION NUMBER)
6610 W. BROAD STREET RICHMOND, VIRGINIA 23230 (804) 281-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL D. PAPPAS COPY TO:
ASSOCIATE GENERAL COUNSEL HEATHER C. HARKER, ESQ.
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY DYKEMA GOSSETT PLLC
6610 W. BROAD STREET 1300 I STREET, N.W.
RICHMOND, VIRGINIA 23230 WASHINGTON, DC 20005
(804) 281-6000 (202) 906-8649
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Continuously
on and after the effective date of this Post-Effective Amendment to the
Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
Large Accelerated Filer [_] Accelerated Filer [_]
Non-Accelerated Filer [X] Smaller Reporting Company [_]
(Do not check if a smaller reporting company)
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CALCULATION OF REGISTRATION FEE
================================================================================
AMOUNT TO PROPOSED PROPOSED AMOUNT OF
BE MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT* OFFERING PRICE FEE
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Certificates issued pursuant to Guaranteed
Income Annuity Contracts N/A N/A $60,000,000* $1,842**
================================================================================
* The proposed maximum aggregate offering price is estimated solely for the
purposes of determining the registration fee. The amount to be registered and
the proposed maximum offering price per unit are not applicable since these
securities are not issued in predetermined amounts or units.
** The registration fee was paid concurrently with the filing of Registrant's
initial Registration Statement on June 4, 2007.
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================================================================================
LIFEHARBOR/SM/ SERIES, GENWORTH FINANCIAL WEALTH MANAGEMENT
GROUP GUARANTEED INCOME ANNUITY CERTIFICATE
ISSUED BY
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
6610 WEST BROAD STREET
RICHMOND, VA 23230
TEL. 800.352.9910
MAY 3, 2010
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This prospectus describes the LifeHarbor/SM/ Series, Genworth Financial Wealth
Management Guaranteed Income Annuity Certificate issued by Genworth Life and
Annuity Insurance Company. The certificate is offered to clients participating
in the Genworth Financial Wealth Management Program, an investment advisory
program sponsored by Genworth Financial Wealth Management, Inc. The certificate
provides for guaranteed income for the life of a designated person based on the
certificate owner's advisory account in the Genworth Financial Wealth
Management Program, provided all conditions specified in the certificate are
met, regardless of how long you live or the actual performance or value of the
investments in the account. The certificate has no cash value and no surrender
value.
Prospective purchasers may apply to purchase a certificate through
broker-dealers that have entered into a selling agreement with Capital
Brokerage Corporation, the principal underwriter for the certificates. Capital
Brokerage Corporation will use its best efforts to sell the certificates, but
is not required to sell any specific number or dollar amount of certificates.
THIS PROSPECTUS PROVIDES IMPORTANT INFORMATION THAT A PROSPECTIVE PURCHASER OF
A CERTIFICATE SHOULD KNOW BEFORE INVESTING. PLEASE RETAIN THIS PROSPECTUS FOR
FUTURE REFERENCE.
The Securities and Exchange Commission ("SEC") has not approved or disapproved
these securities, nor has the SEC determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
This prospectus does not constitute an offering in any jurisdiction in which
such offering may not be lawfully made.
The certificate:
. Is NOT a bank deposit
. Is NOT FDIC insured
. Is NOT insured or endorsed by a bank or any government agency
. Is NOT available in every state
A purchase of the certificate is subject to certain risks. See "Risks
Associated With Purchasing a Certificate" on page 7. THE CERTIFICATE IS NOVEL
AND INNOVATIVE. WHILE THE INTERNAL REVENUE SERVICE HAS RECENTLY ISSUED
FAVORABLE PRIVATE LETTER RULINGS CONCERNING PRODUCTS SIMILAR TO THE CERTIFICATE
ISSUED BY OTHER INSURANCE COMPANIES, THESE RULINGS ARE NOT BINDING ON THE
INTERNAL REVENUE SERVICE WITH RESPECT TO THE CERTIFICATE. UNDER THE
CIRCUMSTANCES, YOU SHOULD THEREFORE CONSULT A TAX ADVISOR BEFORE PURCHASING A
CERTIFICATE.
1
TABLE OF CONTENTS
SUMMARY...................................................................................................................... 4
Preliminary Note Regarding Terms Used in this Prospectus.................................................................. 4
What is the Certificate?.................................................................................................. 4
How much will your Certificate cost?...................................................................................... 5
Can you cancel your Certificate?.......................................................................................... 5
What protection does the Certificate provide?............................................................................. 5
How does your Certificate work?........................................................................................... 6
How do you purchase a Certificate? How does it relate to Genworth Financial Wealth Management, Inc.?...................... 6
Designated Asset Allocation Models........................................................................................ 6
RISKS ASSOCIATED WITH PURCHASING A CERTIFICATE............................................................................... 7
Your Account may perform well enough so that you may not need the guarantee............................................... 7
The Contract may be terminated between us and GFWM........................................................................ 7
Strategists' changes may cause the asset allocation model to no longer be in compliance, potentially causing Certificate
termination............................................................................................................. 8
You may die before receiving payments from us............................................................................. 8
You may not live long enough to receive enough income to exceed the amount of total fees paid............................. 8
The Certificate does not protect the assets in your GFWM Account from your creditors...................................... 8
Early Withdrawals and Excess Withdrawals may substantially reduce your guarantee.......................................... 8
We reserve the right to change the Withdrawal Guarantee Factors on January 1st of each year............................... 8
You may choose to cancel your Certificate prior to a severe market downturn............................................... 8
Claims Paying Ability of the Company...................................................................................... 8
Tax Consequences.......................................................................................................... 8
THE CERTIFICATE.............................................................................................................. 9
MANAGEMENT OF YOUR GFWM ACCOUNT.............................................................................................. 10
THE ACCOUNT PHASE OF THE CERTIFICATE......................................................................................... 13
How are the Birthday and the date Withdrawals may begin being calculated?................................................. 13
How is the Initial Withdrawal Guarantee calculated?....................................................................... 13
How are increases to the Withdrawal Guarantee calculated?................................................................. 14
Other increases in the Withdrawal Guarantee............................................................................... 15
How are decreases to the Withdrawal Guarantee calculated?................................................................. 16
What are some things to consider in managing your Withdrawals from your Account?.......................................... 16
ASSET CHARGES................................................................................................................ 17
Will you pay the same amount (in dollars) for the Withdrawal Guarantee every quarter?..................................... 18
Will the fees you pay for advice and other services impact the guarantees under your Certificate?......................... 19
GUARANTEE PHASE UNDER THE CERTIFICATE........................................................................................ 19
What is Guaranteed Income? When will you receive payments?................................................................ 19
Alternative Annuity Payments.............................................................................................. 21
DEATH PROVISIONS UNDER THE CERTIFICATE....................................................................................... 21
DIVORCE PROVISIONS UNDER THE CERTIFICATE..................................................................................... 22
ILLUSTRATION OF HOW THE CERTIFICATE WORKS.................................................................................... 23
OTHER RISK FACTORS ASSOCIATED WITH PURCHASING A CERTIFICATE.................................................................. 24
Financial Condition of the Company........................................................................................ 24
Asset Allocation Issues................................................................................................... 24
2
SUSPENSION AND TERMINATION PROVISIONS OF THE CONTRACT AND THE CERTIFICATES......................................... 25
Suspension of the Contract...................................................................................... 25
Termination of the Contract..................................................................................... 25
Suspension of the Certificate................................................................................... 26
Termination of the Certificate.................................................................................. 26
MISCELLANEOUS PROVISIONS........................................................................................... 26
Periodic Communications to Certificate Owners................................................................... 26
Amendments to the Contract and Certificate...................................................................... 26
Assignment...................................................................................................... 26
Cancellation.................................................................................................... 26
Misstatements................................................................................................... 27
DETERMINING WHETHER A CERTIFICATE IS RIGHT FOR YOU................................................................. 27
TAXATION OF THE CERTIFICATE........................................................................................ 27
In General...................................................................................................... 27
Non-Qualified Certificates...................................................................................... 28
Qualified Certificates.......................................................................................... 30
ABOUT US........................................................................................................... 31
SALES OF THE CERTIFICATES.......................................................................................... 31
LEGAL PROCEEDINGS.................................................................................................. 32
ADDITIONAL INFORMATION............................................................................................. 33
Owner Questions................................................................................................. 33
Return Privilege................................................................................................ 33
State Regulation................................................................................................ 33
Evidence of Death, Age, Gender or Survival...................................................................... 33
LEGAL MATTERS...................................................................................................... 33
EXPERTS............................................................................................................ 33
WHERE YOU CAN FIND MORE INFORMATION................................................................................ 34
RELIANCE ON RULE 12H-7 UNDER THE SECURITIES EXCHANGE ACT OF 1934................................................... 34
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY........................................................................ 34
Cautionary Note Regarding Forward-looking Statements............................................................ 34
Business........................................................................................................ 34
Description of Physical Property................................................................................ 53
Risk Factors.................................................................................................... 53
Legal Proceedings............................................................................................... 62
Market for Genworth Life and Annuity Insurance Company's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities................................................................................ 62
Selected Financial Data......................................................................................... 62
Management Discussion and Analysis of Financial Condition and Results of Operations............................. 63
Quantitative and Qualitative Disclosures About Market Risk...................................................... 93
Management...................................................................................................... 95
Management Ownership of Genworth Life and Annuity Insurance Company............................................. 97
Executive Compensation.......................................................................................... 98
Security Ownership of Certain Beneficial Owners................................................................. 101
Related Party Transactions...................................................................................... 101
Financial Statements and Supplementary Data..................................................................... 102
DEFINITIONS........................................................................................................ 169
3
LIFEHARBOR/SM/ SERIES, GENWORTH FINANCIAL WEALTH MANAGEMENT
GROUP GUARANTEED INCOME ANNUITY CERTIFICATE
ISSUED BY
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
6610 WEST BROAD STREET
RICHMOND, VIRGINIA 23230
800.352.9910
SUMMARY
PRELIMINARY NOTE REGARDING TERMS USED IN THIS PROSPECTUS.
Certain terms used in this prospectus have specific and important meanings.
Some important terms are explained below, and in most cases the meaning of
other important terms is explained the first time they are used in the
prospectus. You will also find in the back of this prospectus a listing of all
of the terms, with the meaning of each term explained.
. The "Certificate" is the LifeHarbor/SM/ Series, Genworth Financial Wealth
Management Group Guaranteed Income Annuity Certificate issued by Genworth
Life and Annuity Insurance Company pursuant to the terms of a Group
Guaranteed Income Annuity Contract issued to Genworth Financial Wealth
Management, Inc. ("GFWM").
. "We," "us," "our" or the "Company" means Genworth Life and Annuity
Insurance Company.
. "You" or "yours" means the owner, or if applicable, the joint owners, of
the Certificate described in this prospectus. A sole owner of the
Certificate can be an individual or a non-natural person such as a trust.
Joint owners are permitted only when they are spouses as recognized by
applicable Federal law, unless the laws of the state in which the
Certificate is issued afford benefits of the marriage relationship to
certain persons who are not considered to be married for purposes of
Federal law ("civil union partners"). The terms "you," "yours," "Owner,"
and "Certificate Owner" may be used interchangeably in this prospectus.
. "Participant" or "Participants" means the person or persons, respectively,
named in the Certificate whose age is used for certain important purposes
under the Certificate, including determining the amount of the guaranteed
income provided by this Certificate.
The Certificate can be owned in the following ways:
. Sole Owner who is an individual and also the Participant.
. Sole Owner who is an individual and the Participant, with his or her
spouse as the Joint Participant.
. Joint Owners who are individuals and are the sole Joint Participants.
. A non-natural Owner (such as a trust), with an individual named as the
Participant.
. A non-natural Owner (such as a trust), with an individual named as
Participant and his or her spouse named as Joint Participant.
We believe that in most cases the Certificate will have a sole Owner who is the
only Participant. Therefore, for ease of reference, most of the discussions in
this prospectus assume you are the sole Owner and the only Participant under
the Certificate. In some places in the prospectus, however, we explain how
certain features of the Certificate differ if there are Joint Owners or Joint
Participants.
The following is a summary of the Certificate. You should read the entire
prospectus in addition to this summary.
WHAT IS THE CERTIFICATE?
Certificates are issued pursuant to the terms of the Group Guaranteed Income
Annuity Contract (the "Contract"), which is a group guaranteed income annuity
contract issued by the Company and owned by GFWM. Certificates are offered to
clients participating in the Genworth Financial Wealth Management Program (the
"GFWM Program"). Under the GFWM Program, client assets are invested in mutual
funds and/or exchange traded funds in accordance with designated asset
allocation models. The Certificate provides, under certain specified
conditions, for guaranteed minimum lifetime income based on the value of your
account in the GFWM Program (your "Account"), regardless of how long you live
or how the investments in the Account perform. The Certificate does not have a
cash value.
Provided all conditions of the Certificate and Contract are met, if the value
of the assets in your Account ("Account Value") falls below a specified minimum
amount, we will make annual payments to you for the rest of your life. The
amount of the
4
guaranteed annual payment you would receive may increase from time to time
based on your Account Value. It may also decrease if you take withdrawals from
your Account.
The guaranteed income provided by your Certificate is based on the age and life
of the Participant (or if there are Joint Participants, on the age and life of
the younger Joint Participant).
GFWM makes the asset allocation models available for your use. Subject to your
ability to impose reasonable restrictions on the management of the Account, the
assets in your Account are required to remain invested at all times in
accordance with one of the designated asset allocation models as discussed in
this prospectus or your Certificate may terminate and your guarantee may be
reduced to zero. GFWM is an affiliate of the Company, but neither we nor GFWM
manage the Account. Your Account is managed by your designated financial
advisor and administered by a custodian.
HOW MUCH WILL YOUR CERTIFICATE COST?
While your Certificate is in force, an asset charge (the "Asset Charge") is
periodically calculated and deducted from your Account Value. The Asset Charge
is calculated as a specified percentage of your Account Value at the time the
Asset Charge is calculated.
The Asset Charge pays for the insurance protections provided by the Certificate.
The guaranteed maximum Asset Charge we can ever charge for your Certificate is
shown below. We currently charge a lower amount, which is also shown below. For
an explanation of when we could increase the Asset Charge under your
Certificate, see "Will you pay the same amount (in dollars) for the Withdrawal
Guarantee every quarter?"
The guaranteed maximum Asset Charge for the Certificate,
as a percentage of your Account Value, on an annual basis,
is:
IF YOU
IF YOU HAVE A
HAVE A MODERATE
MODERATE GROWTH
ASSET ASSET
ALLOCATION ALLOCATION
MODEL MODEL
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Single Participant 2.00% 2.50%
Joint Participants (provides protection
during the lives of two spouses) 2.25% 2.75%
The current Asset Charge for the Certificate, as a percentage of your Account
Value on an annual basis, is:
IF YOU
IF YOU HAVE A
HAVE A MODERATE
MODERATE GROWTH
ASSET ASSET
ALLOCATION ALLOCATION
MODEL MODEL
--------------------------------------------------------------
Single Participant 0.85% 1.10%
Joint Participants (provides protection
during the lives of two spouses) 1.00% 1.25%
Detailed examples of how the Asset Charge is calculated in different
circumstances are set forth in the section of this prospectus entitled "Asset
Charge."
The Asset Charge is in addition to any charges that are imposed in connection
with advisory, custodial and other services, and charges imposed by the mutual
funds and exchange traded funds ("ETFs") in which your Account invests.
Premium taxes may be applicable in certain states. Premium tax applicability
and rates vary by state and may change. We reserve the right to deduct any such
tax from premium when received.
CAN YOU CANCEL YOUR CERTIFICATE?
You have the right to cancel your Certificate at any time without additional
charges. We will return the portion of the Asset Charge collected in advance
for the current billing period relating to the number of days remaining in the
billing period.
WHAT PROTECTION DOES THE CERTIFICATE PROVIDE?
The Certificate provides two fundamental protections to GFWM Program clients
against risks that are important to clients who consider the assets in their
Account a source or potential source for lifetime income in retirement or for
other long-term purposes. First, it protects the Certificate Owner from the
risk of outliving the assets in the Account. This risk is often called
"longevity risk." Second, it protects the Owner from downward fluctuations in
his or her retirement income due to changes in market performance. This is
known as "income volatility risk."
Both of these risks increase when you have poor market performance early in
retirement. The risk of retiring on the eve of a down market (or "point-in-time
risk") contributes greatly to both longevity and income volatility risk.
5
The Certificate does not provide a guarantee that your Account will retain a
certain value or that the value of your Account will remain steady or grow over
time. Instead, it provides for a guarantee, under certain specified conditions,
that regardless of the performance of the assets in your Account and regardless
of how long you live, you will be able to receive a guaranteed level of annual
income for life. Therefore, it is important for you to understand that while
the preservation of capital may be one of the goals of the underlying asset
management strategy of your Account, the achievement of that goal is not
guaranteed by this product.
HOW DOES YOUR CERTIFICATE WORK?
The Certificate has two phases: an "Account Phase" and a "Guarantee Phase."
During the Account Phase, you may make additional investments in your Account
and take withdrawals from your Account just as you would with any investment
advisory account (although certain withdrawals will reduce the amount of your
guaranteed minimum lifetime income under your Certificate). You are responsible
for managing your withdrawals during the Account Phase. After you (or if there
are Joint Participants, the younger Joint Participant) have turned age 65, you
can take annual withdrawals that do not exceed a specified amount (called the
"Withdrawal Guarantee") without reducing your guaranteed income. If your
Account Value falls below a specified minimum amount as a result of withdrawals
or poor investment performance, your Account will be closed and the Guarantee
Phase will begin. During the Guarantee Phase, we make fixed guaranteed annual
annuity payments ("Guaranteed Income Payments") to you for as long as you live.
However, the Guarantee Phase may never occur, depending on how long you live
and how well your investments perform.
NOTE: THE ACCOUNT PHASE IS CALLED THE "FUNDING PHASE" IN THE CERTIFICATE, AND
THE GUARANTEE PHASE IS CALLED THE "PAYOUT PHASE."
Your Withdrawal Guarantee when we issue your Certificate is your Account Value,
multiplied by the "Withdrawal Guarantee Factor" which is currently 5%. As
described in more detail below, the amount of the Withdrawal Guarantee may
increase on an annual basis during the Account Phase due to positive investment
performance or if you make additional investments in your Account, and will
decrease as a result of withdrawals before age 65 or withdrawals after age 65
in excess of the Withdrawal Guarantee.
The minimum Account Value for purposes of closing your Account and beginning
your Guarantee Phase is the greater of the most recently determined Withdrawal
Guarantee and $20,000. Your Guarantee Phase will also begin if you (or if there
are Joint Participants, the younger Joint Participant) reaches age 100.
Guaranteed Income Payments are equal to your Withdrawal Guarantee. (In some
circumstances, you may receive higher payments under the "Alternative Annuity
Payment" provision of the Certificate described below.)
HOW DO YOU PURCHASE A CERTIFICATE? HOW DOES IT RELATE TO GENWORTH FINANCIAL
WEALTH MANAGEMENT, INC.?
You may purchase a Certificate when you first open your Account or at any time
thereafter (prior to your or the younger Joint Participant's age 85). The
minimum size of your Account in order to purchase a Certificate is $50,000 for
mutual fund Accounts, $50,000 for the Genworth Financial Asset Management
("GFAM") 60/40 Strategy or GFAM 70/30 Strategy and $100,000 for ETF Accounts.
(The different types of Accounts are discussed below. See "Management of Your
GFWM Account" on page 10.) The Certificates are issued in accordance with the
terms of the Contract issued by us to GFWM. The Contract is a group guaranteed
income annuity contract. We will not issue Certificates to Owners (other than
in the case of an IRA) whose Account Values are greater than $2,000,000 (the
"Account Limit") without the approval of our home office at the address listed
on page 1 of this prospectus. If you invest an additional amount in your
Account (each additional investment is an "Addition") which brings your Account
Value over $2,000,000, we will suspend increases to the Withdrawal Guarantee
until you withdraw the excess amount from your Account. Similarly, if you make
an Addition when your Account Value is already over $2,000,000, we will suspend
increases to the Withdrawal Guarantee until you withdraw the entire amount of
the Addition. If an Owner has more than one Account with GFWM, we will apply
these limits to the aggregate Account Values relating to all of the
Certificates (other than in the case of an IRA) of the same Certificate Owner
(or beneficial owner) and reserve the right to limit the number of Certificates
(other than in the case of an IRA) held by the same Owner (or beneficial owner)
to three.
The Certificate is purchased under the Contract by clients participating in the
GFWM Program. You may elect to purchase a Certificate pursuant to the Contract
with GFWM by completing an election form or other form authorized by us. If
this form is accepted by us at our home office, we will issue a Certificate to
you describing your rights and obligations.
DESIGNATED ASSET ALLOCATION MODELS
The following is a list of the currently available professional asset managers
or "Strategists" that provide specific asset allocation models for use with the
Certificate. Each Strategist provides "moderate" and "moderate growth" asset
allocation models that can be used with the Certificate.
6
Mutual Fund Accounts:
. Callan Associates, Inc. (Domestic model)
. Callan Associates, Inc. (Global model)
. Callan Associates, Inc. (Hedged model)
. Goldman Sachs Asset Management
. JPMorgan Asset Management
. Litman/Gregory Asset Management (without GFWM mutual funds)
. Litman/Gregory Asset Management (with GFWM mutual funds)
. New Frontier Advisors
ETF Accounts:
. Avatar Associates
. New Frontier Advisors
. State Street Global Advisors
Combination Mutual Funds and ETFs:
. GFAM 60/40 Strategy
. GFAM 70/30 Strategy
Certificate holders whose Certificate is issued on or after September 1, 2010
may only invest assets in the GFAM 60/40 Strategy or the GFAM 70/30 Strategy.
See the "Management of Your GFWM Account" on page 10 of this prospectus.
RISKS ASSOCIATED WITH PURCHASING A CERTIFICATE
YOUR ACCOUNT MAY PERFORM WELL ENOUGH SO THAT YOU MAY NOT NEED THE GUARANTEE.
In general, the assets in your Account must be invested in accordance with one
of the asset allocation models. Oversight of the asset allocation models is
provided by GFWM. The actual development and maintenance is performed by the
Strategists (the currently-available Strategists are listed above), investment
management firms that are selected by GFWM through a due diligence process. The
asset allocation models, together with the limits on the amount you may
withdraw annually without reducing your Withdrawal Guarantee, are intended to
minimize the risk to the Company that we will have to make payments to you.
Accordingly, the risk against which the Certificate protects, i.e., that your
Account Value will be reduced below the greater of your most recently
determined Withdrawal Guarantee and $20,000 by withdrawals and/or poor
investment performance and that you live beyond the age when your Account value
is reduced below the greater of your most recently determined Withdrawal
Guarantee and $20,000, is likely to be small. In this case, you will have paid
us Asset Charges for the life of your Certificate and received no payments in
return.
THE CONTRACT MAY BE TERMINATED BETWEEN US AND GFWM.
There is a group Contract between us and GFWM. GFWM is an affiliated company.
Both GFWM and the Company are subsidiaries of Genworth Financial, Inc. The
Contract between GFWM and us may be terminated by either party for reasons
unrelated to any action or inaction by you. If the Contract between GFWM and us
is terminated, to preserve your Withdrawal Guarantee you must either:
. Withdraw your Account Value from your GFWM account and invest in another
advisory account offered by an investment adviser other than GFWM eligible
for coverage by a certificate similar in material respects to this
Certificate. (PLEASE NOTE: ANOTHER PRODUCT OFFERED BY AN INVESTMENT
ADVISER ELIGIBLE FOR COVERAGE IS NOT AVAILABLE AT THIS TIME AND MAY NOT BE
AVAILABLE IN THE FUTURE); or
. Withdraw your Account Value from your GFWM account and reinvest the
proceeds in a specified annuity contract we or one of our affiliates offer.
IN EITHER CASE ABOVE, YOUR NEW PRODUCT WILL PRESERVE THE AMOUNT OF THE
WITHDRAWAL GUARANTEE AT THE TIME UNDER YOUR CERTIFICATE. If you purchase a
specified annuity discussed above, you will NOT be assessed any sales or
surrender charges on the purchase or sale of the annuity. However, your new
product may have higher ongoing fees and charges than those currently assessed
by your GFWM Certificate.
In either case above, there may be tax consequences associated with the
withdrawals of your Account Value to either invest in another advisory account
eligible for coverage by another certificate, or to purchase a specified
annuity contract.
If you do not withdraw your Account Value and select one of the options listed
above, your Certificate will terminate 60 days after receiving notice of the
Contract termination between GFWM and us. If your Certificate terminates, you
will lose your Withdrawal Guarantee and you will not receive a refund of the
fees paid to us for the benefit. See the "Suspension and Termination Provisions
of the Contract and the Certificates" on page 25 of this prospectus.
7
STRATEGISTS' CHANGES MAY CAUSE THE ASSET ALLOCATION MODEL TO NO LONGER BE IN
COMPLIANCE, POTENTIALLY CAUSING CERTIFICATE TERMINATION.
Strategists may make changes to the asset allocation models that may cause the
asset allocation models to no longer be in compliance with the required
Risk-Return Profile. In addition, GFWM may remove Strategists. Under either
circumstance, you must change to another asset allocation model within your
Risk-Return Profile within 90 days of receipt of notice or your Certificate
will terminate. There may be tax consequences associated with a change to
another asset allocation model.
YOU MAY DIE BEFORE RECEIVING PAYMENTS FROM US.
This Certificate is designed to provide protection in many cases to GFWM
clients who live beyond life expectancy. Despite general societal increases in
longevity, you may not live beyond life expectancy which may decrease the
likelihood you will receive Guaranteed Income payments under the Certificate.
However, because the Certificate also protects against market risk, you do not
have to live beyond life expectancy to receive payments under the Certificate.
YOU MAY NOT LIVE LONG ENOUGH TO RECEIVE ENOUGH INCOME TO EXCEED THE AMOUNT OF
TOTAL FEES PAID.
This product is designed to provide protection to GFWM clients against the risk
of outliving the assets in their GFWM Account. However, even if you live long
enough to begin to receive Guaranteed Income, you may not live long enough to
receive enough income to exceed the amount of the total fees you have paid for
the Certificate.
THE CERTIFICATE DOES NOT PROTECT THE ASSETS IN YOUR GFWM ACCOUNT FROM YOUR
CREDITORS.
The assets in your Account are owned by you and not us. We have no control over
any of the assets in your Account. The assets in your Account are not subject
to our creditors. However, assets in your Account may be subject to being
directly attached by your creditors. Moreover, because you may at any time sell
the assets in your Account in your complete and sole discretion and without any
permission from us, you are entitled at any time to pledge those assets as
collateral for a loan. There is a risk that if you pledge the assets in your
Account as collateral for a loan and the value of the assets in your Account
decrease in value, your creditor may liquidate assets in your Account to pay
the loan. The liquidation of the Assets will be considered a Withdrawal from
your Account and it may reduce your Withdrawal Guarantee. Using the assets in
your Account as collateral for a loan, therefore, may cause you to lose the
protection afforded by the Certificate.
EARLY WITHDRAWALS AND EXCESS WITHDRAWALS MAY SUBSTANTIALLY REDUCE YOUR
GUARANTEE.
If you take withdrawals before age 65 (or in the case of Joint Participants,
the younger Participant's age 65), or if you take more than the Withdrawal
Guarantee in a given year after that date, you will adversely affect the
benefits under the Certificate.
WE RESERVE THE RIGHT TO CHANGE THE WITHDRAWAL GUARANTEE FACTORS ON
JANUARY 1/ST/ OF EACH YEAR.
We reserve the right to change the Withdrawal Guarantee Factors on
January 1/st/ of each year, including the right to reduce your current
Withdrawal Guarantee Factor. If we reduce your Withdrawal Guarantee Factor, it
is less likely that your Withdrawal Guarantee will increase on any subsequent
Birthday, even if your Account Value is increased due to positive investment
performance. Your current Withdrawal Guarantee will not be reduced if we lower
the Withdrawal Guarantee Factor. However, because we may change the Withdrawal
Guarantee Factor, it is possible that younger Certificate Owners will pay more
for the same benefit than older Certificate Owners (those Owners that are
closer to age 65).
YOU MAY CHOOSE TO CANCEL YOUR CERTIFICATE PRIOR TO A SEVERE MARKET DOWNTURN.
The Certificate is designed to protect you from outliving the assets in your
Account. If you terminate the Certificate before reaching the Guarantee Phase,
we will not make payments to you, even if subsequent market performance reduces
your Account Value below the minimum amount specified in your Certificate when
your Certificate was in force.
CLAIMS PAYING ABILITY OF THE COMPANY.
Any payments we are required to make to you under the Certificate will depend
on our long term ability to make such payments. See "Financial Condition of the
Company" on page 24 and "Genworth Life and Annuity Insurance Company" on page
34.
TAX CONSEQUENCES.
THE CERTIFICATE IS NOVEL AND INNOVATIVE. WHILE THE INTERNAL REVENUE SERVICE
("IRS") HAS RECENTLY ISSUED FAVORABLE PRIVATE LETTER RULINGS ("PLRS")
CONCERNING PRODUCTS SIMILAR TO THE CERTIFICATE ISSUED BY OTHER INSURANCE
COMPANIES, THESE RULINGS ARE NOT BINDING ON THE IRS WITH RESPECT TO THE
CERTIFICATE. We intend to treat your Certificate as an annuity
8
contract in reporting taxable income attributable to the Certificate to you and
to the Internal Revenue Service. Assuming the Certificate is correctly treated
as an annuity contract for tax purposes, guaranteed income payments made to you
after your Account Value has been reduced below the greater of your most
recently determined Withdrawal Guarantee and $20,000 or upon reaching age 100
(or the younger Participant's age 100) will be ordinary income to you that is
taxable to the extent provided under the tax rules for annuities. Effective for
payments from annuities received in 2013, there is an additional 3.8% tax on
the portion of the annuity payment that would otherwise be included in taxable
income. The new tax applies only to the extent that the taxpayer's adjusted
gross income (including annuity income) exceeds one of three threshhold
amounts. These amounts are not adjusted for inflation. For married taxpayers
filing jointly and surviving spouses, the threshhold is $250,000. For married
taxpayers filing separately, the threshhold is $125,000, and for all other
taxpayers, including single taxpayers, the threshhold is $200,000. If taxable
annuity income causes the taxpayer's adjusted gross income to rise above the
threshhold amount, only the portion exceeding the threshhold amount is subject
to the 3.8% tax. The new tax does not apply to distributions from a qualified
plan, including distributions otherwise subject to income tax, but such
distributions are counted towards the adjusted gross income threshhold. (It is
also possible that in certain circumstances your guaranteed income payments
might be subject to the 10% penalty tax imposed under Section 72(q) of the
Code, particularly with respect to guaranteed income payments received before
you reach age 59 1/2.) Similarly, if you exercise your right to liquidate your
Account and apply all of the proceeds to purchase the "Alternative Annuity
Payment option" described later in this prospectus, these payments should also
be treated as ordinary income that is taxable to the extent provided under the
tax rules for annuities. We believe that, in general, the tax treatment of
transactions involving investments in your Account more likely than not will be
the same as it would be in the absence of the Certificate. You should also be
aware that you may have tax consequences if your Strategist changes its asset
allocation models or if you are required to change your asset allocation model
because your current model no longer falls within the investment parameters
permitted by us. WE CAN PROVIDE NO ASSURANCES, HOWEVER, THAT A COURT WOULD
AGREE WITH THE FOREGOING INTERPRETATIONS OF THE LAW IF THE INTERNAL REVENUE
SERVICE WERE TO CHALLENGE THE FOREGOING TREATMENT. YOU SHOULD CONSULT A TAX
ADVISOR BEFORE PURCHASING A CERTIFICATE. See "Taxation of the Certificate" on
page 27 for further discussion of tax issues relating to the Certificate.
THE CERTIFICATE
The Certificate is a group guaranteed income annuity certificate offered to
clients of the GFWM Program. While you generally will not have personal contact
with representatives of GFWM, GFWM is a registered investment adviser that
serves as one of your investment advisers for this product for the limited
purpose of providing asset allocation models that meet the investment risk
criteria required to maintain the guaranteed minimum lifetime income benefits
that may be provided by the Certificate. Certificates are offered only to
participants in the GFWM Program whose assets are invested in accordance with
designated asset allocation models available under the GFWM Program. The
Certificates are designed for GFWM Program participants who intend to use the
investments in their Account as the basis for periodic withdrawals (such as
systematic withdrawal programs involving regular annual withdrawals of a
certain percentage of the Account Value) to provide income payments for
retirement or for other purposes. For more information about the GFWM Program,
you should talk to your Advisor and review the materials provided concerning
the GFWM Program.
As the owner of the group Contract under which the Certificates are offered,
GFWM is the entity responsible for administering the Certificate on your behalf
during the Account Phase. This responsibility includes obtaining your
instructions as to whether you want to use your Account Value to purchase the
"Alternative Annuity Payment" option described later in this prospectus, and if
so, how you want payments to be made to you. You may elect to purchase this
Alternative Annuity Payment option at any time before age 100 (or the younger
Participant's age 100). GFWM is also responsible for transferring to us your
Account Value at the time you elect to purchase the Alternative Annuity Payment
option. GFWM and/or your custodian may require your written authorization to
complete this transfer. Any delay in providing such authorization, if required,
may delay your income payments. GFWM makes available asset allocation models
for your use and administers your Certificate during the Account Phase of the
Certificate. GFWM is an affiliate of the Company, but neither we nor GFWM
manage your Account. Your account is managed by your own investment adviser and
administered by the custodian of your GFWM Account.
The Certificate provides for a guaranteed income over the remaining life of the
Participant (or in certain circumstances if there are Joint Participants, for
the remaining lives of both Joint Participants), based on the Withdrawal
Guarantee, should the Account Value drop below the greater of your most
recently determined Withdrawal Guarantee and $20,000. Provided all contractual
terms have been satisfied, we will make continuing payments for the lifetime of
the Participant (or in certain
9
circumstances if there are Joint Participants, for the remaining lives of both
Joint Participants) in the form of fixed annuity payments equal to the
Withdrawal Guarantee (or payments under the Alternative Annuity Payment option
amount if greater).
As noted above, in certain circumstances the Certificate will provide for a
guaranteed income over the remaining lives of Joint Participants. Joint
Participants are guaranteed to receive income payments over both of their
remaining lives only if they are the Joint Owners of the Certificate and are
spouses as recognized by applicable Federal law. You should be aware that the
laws of some states afford benefits of the marriage relationship to certain
persons who are not considered to be married for purposes of Federal law
("civil union partners") and that we permit civil union partners to be Joint
Participants under the Certificate when required by state law. However, you
should also be aware that restrictions imposed by federal tax law upon the
death of a Joint Owner or Joint Participant may limit the benefits of naming a
civil union partner as a Joint Owner and Joint Participant. In particular, in
situations where Joint Owners are civil union partners and one Joint Owner dies
before guaranteed income payments begin, a non-qualified Certificate is
required to terminate no later than the fifth anniversary of that individual's
death. Such termination could occur before the Certificate provides any
guaranteed income payments or prematurely terminate guaranteed income payments
while the Joint Participant is alive. Civil union partners considering
purchasing a Certificate should consult their tax and financial advisors before
purchasing a Certificate to determine whether such a Certificate is suitable to
their circumstances, particularly if the civil union partners are contemplating
the purchase of a non-qualified Certificate with Joint Owners or Joint
Participants.
MANAGEMENT OF YOUR GFWM ACCOUNT
The Certificate provides supplemental protection relating to your GFWM Program
investments by ensuring that, regardless of how your investments actually
perform or the actual value of your investments when you begin your withdrawal
program from your GFWM Account for retirement or other purposes, you will
receive predictable income payments for as long as you live.
The GFWM Program is offered through investment advisors (each, an "Advisor")
who generally act as a client's primary contact with respect to the GFWM
programs. The Advisor evaluates the client's needs and objectives, recommends a
risk return profile ("Risk-Return Profile") (frequently through the completion
by the client of a "Discovery Workbook" provided by GFWM), and consults with
the client concerning the client's participation in the GFWM Program. The
Advisor may also recommend a specific asset allocation model.
You should note that the Company issues the Certificates, but the Company is
not your investment adviser and does not provide investment advice to you in
connection with the Certificate.
Asset allocation models that correspond to two Risk-Return Profiles -- the
Moderate Risk-Return Profile and the Moderate Growth Risk-Return Profile -- are
designated for use with the Certificate. These two Risk-Return Profiles are
designed with several goals in mind. The Moderate Risk-Return Profile
corresponds to a "moderate" asset allocation strategy. The Moderate Growth
Risk-Return Profile corresponds to a "moderate growth" allocation strategy.
The Moderate Risk-Return Profile is considered a balanced allocation strategy
and is designed for current income and long-term capital appreciation. This
Profile is broadly diversified, with allocations to U.S. fixed income
instruments to provide current income and to U.S. and international equity
instruments to enhance diversification, protect the real value of principal and
enhance long-term returns. The target allocation mix is 60% equities and 40%
fixed income. The Moderate Growth Risk-Return Profile is considered a balanced
growth allocation and is designed for long-term capital appreciation, with a
secondary objective of moderate current income. Assets are predominately
allocated to U.S. equity instruments to provide long-term capital appreciation
and to protect the real value of principal. International instruments may be
included to provide diversification and enhance long-term returns. U.S. fixed
income instruments may be included to provide current income and
diversification. The target allocation mix is 70% - 75% equities and 25% - 30%
fixed income investments.
Your Account Value is required to remain invested at all times in accordance
with an asset allocation model with the same Risk-Return Profile as the model
you select when you purchase a Certificate. In other words, you may not switch
between the Moderate and the Moderate Growth Risk-Return Profiles and still
maintain the Withdrawal Guarantee. However, if your Certificate is issued prior
to September 1, 2010, you may switch from one Strategist's asset allocation
model to another Strategist's model that is within the same Risk-Return Profile.
The oversight of the asset allocation models is managed by GFWM. The actual
development and maintenance of the models is performed by Strategists retained
by GFWM. GFWM reviews such asset allocation models and monitors the execution
and maintenance of the asset allocation models. Neither we nor the provisions
of the Certificate determine or direct the management of the investments in
your Account. Investments in accordance with the various asset allocation
models are the same whether or not a client purchases the Certificate. If you
cancel your Certificate but choose to remain in the asset allocation model you
previously selected, no change will occur to the asset allocation model solely
because you canceled your Certificate with us.
10
Each of the Strategists provides asset allocation models that correspond to the
Moderate Risk-Return Profile and the Moderate Growth Risk-Return Profile. The
goal is to provide clients with a variety of asset allocation models for
attaining the client's investment objectives. The use of asset allocation
models is intended to reduce your market risk over time thereby reducing the
possibility that we will be required to make Guaranteed Income payments under
the Certificate.
You and your Advisor should review each Strategist's style and the available
asset allocation models prior to making the election of which model(s) to
follow in your own Account under the GFWM Program. Each of the Strategists is
evaluated periodically (typically quarterly) by GFWM and its investment
oversight committee to assess if the Strategist is performing its role of
developing and maintaining models properly. From time to time, GFWM adds
Strategists to or removes Strategists from the GFWM Program. Except as provided
in the following paragraph, your Account Value is required to remain invested
at all times in accordance with an asset allocation model of one of the
currently approved Strategists in the GFWM Program.
Clients may impose "reasonable restrictions" on the management of their
Accounts in accordance with an asset allocation model. Whether a particular
restriction is reasonable is a factual determination that will be made by GFWM
in the context of each requested restriction. In general, requests that an
Account not invest in a particular mutual fund or ETF and requests not to
invest Account assets in an asset class that has a small allocation under the
asset allocation model that the client has selected will be considered
reasonable. In contrast, restrictions that are fundamentally inconsistent with
the basic approach of an asset allocation model or that would result in an
investment allocation for the client that does not correspond to the
Risk-Return Profile to which the selected asset allocation model normally
corresponds would not be considered reasonable.
A table is set forth below which shows each Strategist available for each
Risk-Return Profile and the asset classes each Strategist currently recommends
for each available asset allocation model. Certain asset allocation models
provide for investments in mutual funds, others use ETFs, while others use a
combination of mutual funds and ETFs. The types of asset allocation models are
shown. All asset allocation models shown below are available to Certificates
issued prior to September 1, 2010. If your Certificate is issued on or after
September 1, 2010, you may only choose either the GFAM 60/40 Strategy or the
GFAM 70/30 Strategy.
MUTUAL FUNDS
-------------------------------------------------------------------------------------------------------------------------
STRATEGIST U.S. EQ INTL EQ EMG MKTS U.S. BONDS INTL BONDS EMG. BONDS REITS CASH OTHER
-------------------------------------------------------------------------------------------------------------------------
Moderate Callan (Global) 40.00% 17.00% 0.00% 38.00% 0.00% 0.00% 3.00% 2.00% 0.00%
Risk Return Callan (Domestic) 58.00% 0.00% 0.00% 38.00% 0.00% 0.00% 2.00% 2.00% 0.00%
Profile Callan (Hedged) 40.00% 17.00% 0.00% 30.94% 0.00% 0.00% 3.00% 2.00% 7.06%
Goldman Sachs Asset Management 32.40% 23.00% 5.90% 6.10% 20.20% 2.80% 3.30% 2.00% 4.30%
JP Morgan Asset Management 42.00% 14.00% 6.00% 27.00% 0.00% 2.00% 3.00% 2.00% 4.00%
Litman/Gregory Asset Management 25.50% 10.00% 0.00% 55.50% 0.00% 7.00% 0.00% 2.00% 0.00%
Litman/Gregory Asset Mgt AM
Funds 25.50% 11.00% 0.00% 56.50% 0.00% 5.00% 0.00% 2.00% 0.00%
New Frontier Advisors 32.67% 24.27% 0.00% 35.41% 0.00% 0.00% 5.65% 2.00% 0.00%
MUTUAL FUNDS
-----------------------------------------------------------------------------------------------------------------------------
STRATEGIST U.S. EQ INTL EQ EMG MKTS U.S. BONDS INTL BONDS EMG. BONDS REITS CASH OTHER
-----------------------------------------------------------------------------------------------------------------------------
Moderate Growth Callan (Global) 50.00% 21.00% 0.00% 23.00% 0.00% 0.00% 4.00% 2.00% 0.00%
Risk Return Callan (Domestic) 72.00% 0.00% 0.00% 22.00% 0.00% 0.00% 4.00% 2.00% 0.00%
Profile Goldman Sachs Asset Management 41.90% 30.70% 6.80% 3.20% 5.20% 2.80% 3.30% 2.00% 4.10%
JP Morgan Asset Management 51.00% 17.00% 8.00% 16.00% 0.00% 2.00% 4.00% 2.00% 0.00%
Litman/Gregory Asset Management 40.00% 15.00% 0.00% 36.00% 0.00% 7.00% 0.00% 2.00% 0.00%
Litman/Gregory Asset Mgt AM
Funds 41.50% 14.00% 0.00% 37.50% 0.00% 5.00% 0.00% 2.00% 0.00%
New Frontier Advisors 38.83% 32.78% 0.00% 19.81% 0.00% 0.00% 6.58% 2.00% 0.00%
ETFS
--------------------------------------------------------------------------------------------------------------------------
STRATEGIST U.S. EQ INTL EQ EMG MKTS U.S. BONDS INTL BONDS EMG. BONDS REITS CASH OTHER
--------------------------------------------------------------------------------------------------------------------------
Moderate Avatar Associates 39.20% 9.80% 4.50% 38.10% 0.00% 0.00% 2.60% 5.80% 0.00%
Risk Return New Frontier Advisors 33.81% 18.71% 4.54% 34.84% 1.21% 0.00% 3.89% 2.00% 1.00%
Profile State Street Global Advisors 39.00% 16.00% 4.00% 32.50% 1.50% 0.00% 3.00% 2.00% 2.00%
- ---------------------------------------------------------------------------------------------------------
Moderate Growth Avatar Associates 46.40% 14.20% 4.80% 23.10% 0.00% 0.00% 2.70% 8.80% 0.00%
Risk Return New Frontier Advisors 40.48% 24.52% 6.52% 20.73% 1.14% 0.00% 4.61% 2.00% 0.00%
Profile State Street Global Advisors 49.00% 20.00% 5.00% 18.00% 1.00% 0.00% 3.00% 2.00% 2.00%
11
COMBINATION MUTUAL FUNDS AND
ETFS
--------------------------------------------------------------------------------------------------------------------------
STRATEGISTS U.S. EQ INTL EQ EMG MKTS U.S. BONDS INTL BONDS EMG. BONDS REITS CASH OTHER
--------------------------------------------------------------------------------------------------------------------------
Moderate
Risk Return
Profile GFAM 60/40 Strategy 50.00% 10.00% 0.00% 36.00% 0.00% 0.00% 0.00% 4.00% 0.00%
--------------------------------------------------------------------------------------------------------------------------
Moderate Growth
Risk Return
Profile GFAM 70/30 Strategy 58.00% 12.00% 0.00% 28.00% 0.00% 0.00% 0.00% 2.00% 0.00%
U.S. EQUITIES -- this asset class is generally represented by investments in
the equity of U.S. publicly traded companies across various capitalization
ranges.
INTERNATIONAL EQUITIES -- this asset class is generally represented by
investments in the equity of publicly traded companies based in countries other
than the U.S., also referred to as "Developed Markets" which are typically
classified in the MSCI EAFE index. Exposure may include companies across
various capitalization ranges. (The Morgan Stanley Capital International
Europe, Australia and Far East Index (MSCI EAFE) is an unmanaged index holding
approximately 1,000 companies traded on 20 stock exchanges from around the
world, excluding the U.S.A., Canada, and Latin America.)
EMERGING MARKETS EQUITIES -- this asset class is generally represented by
investments in the equity of publicly traded companies based in emerging market
countries as typically classified in the MSCI Barra Emerging Markets index.
(The MSCI Emerging Markets Index is a free float-adjusted market capitalization
index. As of August 2005, the index consisted of the following 26 emerging
market country indices: Argentina, Brazil, Chile, China, Colombia, Czech
Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia,
Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa,
Taiwan, Thailand, Turkey and Venezuela.)
U.S. BONDS -- this asset class is generally represented by investments in
corporate and government bonds issued by companies and government entities
based in the United States.
INTERNATIONAL BONDS -- this asset class is generally represented by investments
in corporate and government bonds issued by companies and governments domiciled
outside of the U.S., also referred to as "Developed Markets." Securities from
countries classified as emerging markets are excluded.
EMERGING MARKETS BONDS -- this asset class is generally represented by
investments in corporate and government bonds issued by companies and
governments based in emerging market countries.
REITS -- this asset class is generally represented by investments in common
stocks and other publicly traded real estate securities, such as Real Estate
Investment Trusts ("REITs") and Real Estate Operating Companies.
CASH -- this asset class is generally represented by investments in money
market mutual fund vehicles and bank deposit accounts sponsored by custodial
entities for use as cash management vehicles.
OTHER -- this category is represented by investments in asset categories that
are not defined in the above classifications, including but not limited to such
areas as commodities, currencies and other specialty asset categories.
Each Strategist may change its asset allocation models, such as by revising the
percentages allocated to various asset classes and the specific mutual funds or
ETFs used for investing in a particular class. When your asset allocation model
is updated, GFWM will reallocate your Account Value in accordance with any
changes to the model you have selected. This means the allocation of your
Account Value, and potentially the securities, in which you are invested, will
change to reflect the allocations and securities in the updated model.
Reallocation transactions may have tax consequences. For example, any sales
resulting from a reallocation will be a taxable event, and you will not be able
to apply the proceeds therefrom to purchase new Account investments that
satisfy the revised asset allocation model(s) on a tax-free basis (unless your
Account is an IRA Account). The amount of your Guaranteed Income payments will
not be reduced if your investments are reallocated in accordance with the
revised model. If you do not accept the changes to your selected model (subject
to any reasonable restrictions you have imposed), the amount of Guaranteed
Income payments will be reduced or your Certificate may terminate. Upon any
termination any fees previously paid for the Certificate will not be returned
with the exception of the portion of that quarter's Asset Charge which is equal
to the number of days remaining in the quarter.
If a Strategist makes a change which causes the asset allocation model to no
longer fall within its corresponding specific Risk-Return Profile, then, within
90 days of receipt of notice, you must change to another asset allocation model
currently available within the Risk-Return Profile you selected at the time the
Certificate was issued. If you do not select another asset allocation model
within the notice period, your Certificate will terminate.
Strategists generally utilize either strategic (passive) or tactical (active)
asset allocation. Asset allocation models using strategic asset allocation are
generally revised on a quarterly or annual basis. Models using tactical asset
allocation are revised in accordance with the Strategist's perception of
changes in market conditions. Revisions of tactical models could take place
more or less frequently than quarterly. If you do not approve of changes made
by the Strategist, you may still keep your Withdrawal Guarantee if you switch
to another asset allocation
12
model available with the Risk-Return Profile selected at the time the
Certificate is issued. A Certificate Owner is permitted to switch models within
their Risk-Return Profile, including switching between mutual fund and ETF
Accounts, so long as the changes meet GFWM's account minimums and are made
between asset allocation models available within the Risk-Return Profile
selected at the time the Certificate is issued. Certificate Owners are NOT
currently permitted to switch between Profiles, although we reserve the right
to permit such switching in the future.
The asset allocation models offered by GFWM are subject to the same risks faced
by similar asset allocation models offered in the market, including, without
limitation, market risk (the risk of an overall down market), interest rate
risk (the risk that rising or declining interest rates will hurt your
investment returns), idiosyncratic risk (the risk that an individual asset will
hurt your returns) and concentration risk (the risk that due to concentrations
in a certain segment of the market which performs poorly, your returns are
lower than the overall market). The asset allocation models may not achieve
their respective investment objectives regardless of whether or not you
purchase the Certificate.
GFWM provides you or your Advisor with written descriptions of each of the
Strategists, an overview of the firm's key personnel, and a summary of the
prior performance of each Model. GFWM has software applications which provide
your Advisor with the capability of directly monitoring its client accounts,
downloading information concerning changes in the GFWM Program, and accessing
current information relating to the GFWM Program. You are provided with
custodial reports from an independent third-party custodian and quarterly
performance reports.
Your Advisor provides the specific advice to you concerning the Strategist(s)
and model(s) you chose. Your Advisor and/or you retain discretion to choose the
Strategist(s), and the model(s) from the approved list of asset allocation
models in order to maintain the Withdrawal Guarantee and the initial
Risk-Return Profile. YOU SHOULD UNDERSTAND, HOWEVER, THAT APPLICABLE FEDERAL
AND STATE LAWS AND REGULATIONS RELATING TO BROKER-DEALERS AND INSURANCE AGENTS
MAY PRECLUDE YOUR ADVISOR FROM PROVIDING ADVICE TO YOU REGARDING THE
CERTIFICATE.
THE ACCOUNT PHASE OF THE CERTIFICATE
As stated previously in this prospectus, the Certificate has two phases: an
"Account Phase" and "Guarantee Phase." The Account Phase is described in the
following section of this prospectus.
Important definitions you will need to understand are the following:
"Withdrawals" are any withdrawals from your Account that are not shown in the
Certificate as a "Withdrawal Exception." Amounts you may withdraw pursuant to
the Withdrawal Guarantee are "Guaranteed Withdrawals."
THE ACCOUNT PHASE BEGINS ON THE "CERTIFICATE DATE," WHICH IS THE DATE YOUR
CERTIFICATE IS ISSUED BY US. THERE ARE SEVERAL IMPORTANT ASPECTS OF THE ACCOUNT
PHASE YOU SHOULD UNDERSTAND. THEY ARE:
. Determination of the Birthday and the date you may begin taking Withdrawals
. Calculation of the initial Withdrawal Guarantee
. Calculating changes to your Withdrawal Guarantee
. Computing your Asset Charge
. Managing your Withdrawals
. Determining if and when the Guarantee Phase of your Certificate will begin.
HOW ARE THE BIRTHDAY AND THE DATE WITHDRAWALS MAY BEGIN BEING CALCULATED?
. If you are the sole Owner and Participant, the Birthday is the anniversary
of your date of birth each year. If there is also a Joint Participant, the
Birthday is the anniversary of the date of birth of the younger person. If
the younger Joint Participant dies before the other Participant, the
Birthday does not change.
. The date Withdrawals may begin is the date you reach age 65. On or after
this date, you may begin to take Guaranteed Withdrawals from your Account.
This date will be listed on your Certificate.
. If there is a Joint Participant (who must be the spouse, as recognized
under applicable Federal law, of the other Participant) on the
Certificate, the date Withdrawals may begin is the 65th birthday of the
younger person. If the younger person passed their 65th birthday before
the Certificate was purchased, this date is the Certificate Date.
. Once a Certificate is issued, we will not change the stated date
Withdrawals may begin other than for error correction. We reserve the
right to increase the age for Withdrawals from age 65 for Certificates not
yet issued.
HOW IS THE INITIAL WITHDRAWAL GUARANTEE CALCULATED?
WHAT IS THE WITHDRAWAL GUARANTEE? The Withdrawal Guarantee is the amount that
you may withdraw from your
13
Account each year after age 65 without reducing the guaranteed minimum lifetime
income under the Certificate. Understanding and managing the Withdrawal
Guarantee has a direct impact on the amount of Guaranteed Income payments (if
any) we will pay to you in the Guarantee Phase under the Certificate. You
should pay very close attention to the Withdrawal Guarantee over the life of
your Certificate and understand how it is computed and how it can increase and
decrease. Such calculations are described in the following sections.
WHAT IS THE WITHDRAWAL GUARANTEE FACTOR? The Withdrawal Guarantee Factor is
currently 5%. This Factor may be a percentage or mathematical formula used,
along with your Account Value, to determine your Withdrawal Guarantee. We
reserve the right to change the Factor on January 1st of each year. You will be
provided at least 30 days prior notice of any changes. If there is a Withdrawal
Guarantee Factor change, calculations using this new Factor will be compared to
the current Withdrawal Guarantee. If the result is lower, you will retain your
current Withdrawal Guarantee, (unless your Withdrawal Guarantee is impaired by
any Early Withdrawals or Excess Withdrawals). Therefore, the Initial Withdrawal
Guarantee cannot decrease as a result of a change in the Withdrawal Guarantee
Factor.
WHAT IS A WITHDRAWAL YEAR? You must have reached age 65 to have a Withdrawal
Year. Once you reach age 65, a Withdrawal Year is the year between two
Birthdays. It is the period during which you can take your annual Withdrawal
Guarantee.
WHAT IS A VALUATION DAY? Your Account will be invested in mutual funds and/or
ETF shares that are valued by the mutual funds or the ETFs in accordance with
applicable legal and regulatory requirements. GFWM will calculate your Account
Value and provide it to us on each day the New York Stock Exchange is open for
trading. These days are referred to as Valuation Days. If for any reason the
share value of one or more funds or ETFs is not available to GFWM on a
Valuation Day, GFWM will calculate your Account Value using the last share
price provided by the mutual fund or the ETFs.
Your initial Withdrawal Guarantee is equal to the Account Value on your
Certificate Date multiplied by the Withdrawal Guarantee Factor.
EXAMPLE: Assume in the following example that you are the sole Owner and
Participant and that you are invested in accordance with the Moderate
Risk-Return Profile with an Account Value of $500,000. In this case, your
initial Withdrawal Guarantee is:
$500,000, multiplied by the Withdrawal Guarantee Factor of 5%, for an
initial Withdrawal Guarantee of $25,000.
ARE YOU PERMITTED TO START TAKING GUARANTEED WITHDRAWALS IMMEDIATELY? If you
are over age 65 when the Certificate is issued, you may begin to take
Guaranteed Withdrawals immediately or at anytime thereafter. In that case, if
you take Withdrawals before your next Birthday, you are limited to an amount
proportional to the number of days until your next Birthday.
EXAMPLE: Assume in the following example that you are the sole Owner and
Participant and that you are invested in accordance with the Moderate
Risk-Return Profile with an Account Value of $500,000. Also assume that
today is March 31st, that your Birthday is July 1st and that you are
currently over 65 years old.
Your initial Withdrawal Guarantee is:
$500,000, multiplied by the Withdrawal Factor of 5%;
for an initial Withdrawal Guarantee of $25,000.
If you wish to take Guaranteed Withdrawals before your next Birthday, you
may Withdraw the following amount:
Existing Withdrawal Guarantee of $25,000, multiplied by 91 days until your
next Birthday, divided by 365, equals $6,232.88 in Guaranteed Withdrawals
you may take before your next Birthday.
In each Withdrawal Year following your Birthday, you may take the full
$25,000 amount of Guaranteed Withdrawals at any time during the year
(unless your Withdrawal Guarantee changes).
HOW ARE INCREASES TO THE WITHDRAWAL GUARANTEE CALCULATED?
INCREASES (IF ANY) MAY OCCUR ONLY ON YOUR BIRTHDAY. Increases to the
Withdrawal Guarantee can occur as a result of additional investments in your
Account that you make and by positive investment performance by your Account.
Each year on your Birthday, we will perform a calculation to see if your
Withdrawal Guarantee is increased. If your Account Value, multiplied by the
then current Withdrawal Guarantee Factor, equals an amount greater than your
current Withdrawal Guarantee, we will increase your Withdrawal Guarantee to the
higher amount. Once this increase occurs, your new Withdrawal Guarantee can
decrease only as set forth in the "How are Decreases to the Withdrawal
Guarantee calculated?" section below.
EXAMPLE: Assume in the following example that you are the sole Owner and
Participant, that your initial Account Value was $500,000 and that your
initial Withdrawal Guarantee was $25,000. Assume further that as a result of
additional investments you have made, Guaranteed
14
Withdrawals you have taken, gains and losses in your Account and the various
fees you have paid from your Account, your current Account Value on your
next Birthday is $600,000.
Your new Withdrawal Guarantee would be:
(1) The greater of your prior Withdrawal Guarantee of $25,000; and
(2) Your current Account Value of $600,000, multiplied by, the Withdrawal
Guarantee Factor of 5% equaling $30,000.
Since $30,000 is greater than $25,000, your new Withdrawal Guarantee is
$30,000.
As noted above in "How is the Withdrawal Guarantee Calculated? -- What is the
Withdrawal Guarantee Factor?," we reserve the right to change the Withdrawal
Guarantee Factor on January 1st of each year. If we reduce your Withdrawal
Guarantee Factor, it is less likely that your Withdrawal Guarantee will
increase on any subsequent Birthday. For example, if the Withdrawal Guarantee
Factor was 4% in the above Example instead of 5% and all of the other
assumptions were the same, the preceding Withdrawal Guarantee would not have
increased. The Example is restated below to show the effect of a reduction in
the Withdrawal Guarantee Factor from 5% to 4%:
EXAMPLE: Assume that you are the sole Owner and Participant, that your
initial Account Value was $500,000 and that your initial Withdrawal
Guarantee was $25,000. Assume further that as a result of additional
investments you have made, Guaranteed Withdrawals you have taken, gains and
losses in your Account and the various fees you paid from your Account, your
current Account Value on your next Birthday is $600,000.
Your new Withdrawal Guarantee would be:
(1) The greater of your prior Withdrawal Guarantee of $25,000; and
(2) Your current Account Value of $600,000, multiplied by the current
Withdrawal Guarantee Factor of 4%; equaling $24,000.
Since $25,000 is greater than $24,000, your current Withdrawal Guarantee of
$25,000 does not increase.
However, if instead of your Account Value on your next Birthday being
$600,000, it is $700,000, your Withdrawal Guarantee would increase, because
your current Account Value of $700,000, multiplied by the current Withdrawal
Guarantee Factor of 4% equals $28,000. Since $28,000 is greater than
$25,000, your Withdrawal Guarantee would increase to $28,000.
OTHER INCREASES IN THE WITHDRAWAL GUARANTEE.
Your Certificate will contain an endorsement, for which there is no additional
Asset Charge. The endorsement may serve to increase your Withdrawal Guarantee
on your Birthday, so long as you have not taken a Withdrawal from your Account
since your Certificate Date.
On your Birthday, if no Withdrawals have been taken since the Certificate Date,
the Withdrawal Guarantee will be the greater of: (1) the Withdrawal Guarantee
computed as described above; and (2) the Withdrawal Guarantee due to Total
Additions. "Total Additions" are described below:
Total Additions Feature:
"Additions" are amounts, not set forth as addition exceptions in the
Certificate, that are received and applied to your Account after the
Certificate Date. "Total Additions" is the sum of the initial Account Value
on the Certificate Date plus any Additions. The Withdrawal Guarantee is
equal to the total Withdrawal Guarantee that the Total Additions (including
the original payment) would purchase.
EXAMPLE: Assume that your Certificate Date was February 1/st/ of this year,
and that your initial Account Value and Withdrawal Guarantee were $100,000
and $5,000 respectively. Also assume that the market declined, bringing your
Account Value to $90,000 by July 1/st/. If you made a subsequent Addition of
$10,000 on August 1, and if you have not made any Withdrawals since the
Certificate Date, on your next Birthday (assume September 1/st/) your
Withdrawal Guarantee under this feature would be:
Total Additions (including original payment) x Withdrawal Guarantee Factor
($100,000 + $10,000) x 5% = $5,500
The importance of the Total Additions feature is that losses in your Account
due to poor investment performance are ignored for purposes of calculating
your Withdrawal Guarantee, so that you are more likely to get the benefit of
positive investment performance and Additions. However, it is important to
remember that the Total Additions feature only applies as long as you do not
take any Withdrawals from your Account.
90 Day Feature:
On the 90/th/ day following the Certificate Date, we will perform and apply
all calculations permitted to increase your Withdrawal Guarantee as if it
were your Birthday. This will only occur once during the term of your
Certificate.
15
EXAMPLE: Assume for this example that your Certificate Date is June 1,
2010. Your initial Account Value is $200,000 and your initial Withdrawal
Guarantee is $10,000. On August 29, 2010, 90 days after the Certificate
Date, your Account Value is $300,000 due to several Additions. Your new
Withdrawal Guarantee on the 90/th /Day would be $15,000.
$300,000 x 5% = $15,000
HOW ARE DECREASES TO THE WITHDRAWAL GUARANTEE CALCULATED?
Your Withdrawal Guarantee will decrease for two specific types of Withdrawals:
(1) an Early Withdrawal and (2) an Excess Withdrawal.
WHAT IS AN EARLY WITHDRAWAL? An Early Withdrawal is any Withdrawal prior to
age 65. Early Withdrawals may significantly lower your Withdrawal Guarantee;
therefore, you should carefully consider your decision to take Withdrawals
prior to age 65. The Certificate does not require us to warn you or provide you
with notice regarding potentially adverse consequences that may be associated
with any Withdrawals or other types of transactions involving your Account
Value.
If your Certificate is issued after age 65, you do not have to be concerned
about an Early Withdrawal.
Each time you make an Early Withdrawal, your Withdrawal Guarantee will be
reduced to the lower of: (1) an amount equal to the Withdrawal Guarantee you
would have if you bought a new Certificate on the day of the Early Withdrawal
and (2) your prior Withdrawal Guarantee. Here is an example:
EXAMPLE: Assume for this example that you purchased the Certificate at age
57 and that you are now age 58. Assume further that your current Withdrawal
Guarantee is $10,000 and that your Account Value yesterday was $215,000.
Your withdrawal today was $25,000 and your Account Value at the end of the
day today is $189,000 (a reduction being the result of the Withdrawal and
investment losses of $1,000).
Because you are under age 65, this is an Early Withdrawal. Your adjusted
Withdrawal Guarantee will be the lower of:
(1) Account Value of $189,000, multiplied by the then current Withdrawal
Guarantee Factor of 5%, equaling $9,450; and
(2) Withdrawal Guarantee yesterday of $10,000.
Because $9,450 is less than $10,000, your new Withdrawal Guarantee will be
$9,450.
WHAT IS AN EXCESS WITHDRAWAL? Once you are age 65 or more, an Excess
Withdrawal occurs each time you Withdraw more in a Withdrawal Year than your
Withdrawal Guarantee. An Excess Withdrawal may substantially reduce your
Withdrawal Guarantee. You should carefully consider the consequences of Excess
Withdrawals. The Certificate does not require us to warn you or provide you
with notice regarding potentially adverse consequences that may be associated
with any Withdrawals or other types of transactions involving your Account
Value.
Each time you make an Excess Withdrawal, your Withdrawal Guarantee will be
reduced to the lower of: (1) an amount equal to the Withdrawal Guarantee you
would have if you bought a new Certificate on that day and (2) your prior
Withdrawal Guarantee.
EXAMPLE: Assume that your current Withdrawal Guarantee is $20,000 and that
your Account Value yesterday was $390,000. Assume also that while you have
not taken any Withdrawals since your last Birthday, you decide to take a
$30,000 Withdrawal today. This is an Excess Withdrawal. If your Account
Value at the end of the day today is $360,000, your new Withdrawal Guarantee
will be:
The lower of:
(1) Account Value $360,000, multiplied by the current Withdrawal Guarantee
Factor of 5%, equaling $18,000; and
(2) Withdrawal Guarantee as of yesterday equal to $20,000.
Since $18,000 is lower than $20,000, your new Withdrawal Guarantee will be
$18,000.
In the case of an Early Withdrawal or an Excess Withdrawal, you will have 30
days to restore the Withdrawal Guarantee to the amount that was in effect prior
to the Early or Excess Withdrawal. To do so, you must do the following:
(1) Make additional payments to your Account equal to or greater than the
Early or Excess Withdrawal amount; and
(2) Request that we restore your Withdrawal Guarantee.
WHAT ARE SOME THINGS TO CONSIDER IN MANAGING YOUR WITHDRAWALS FROM YOUR ACCOUNT?
There are many factors that will influence your decision of when to take
Withdrawals from your Account, and in what amount. No two investors' situations
will be exactly the same. You should carefully weigh your decision to take
Withdrawals
16
from your Account, the timing of the Withdrawals and their amount. You should
consult with your Advisor and a tax advisor.
In addition to the advice you receive, here are a few things to consider.
First, Early Withdrawals and Excess Withdrawals will reduce your Withdrawal
Guarantee. The reduction may be substantial, especially if your Account Value
is significantly lower than it was when the Withdrawal Guarantee was last
computed or adjusted. Consider if you have other sources of income, especially
non-guaranteed income, before making such Withdrawals.
Second, once you are ready to take Guaranteed Withdrawals from your Account,
consider setting up a quarterly, monthly or other systematic withdrawal program
through your Advisor, custodian or other service provider. Doing so may help
limit the risk that you will make an Excess Withdrawal. You may plan to update
the systematic withdrawal each year on your Birthday in case your Withdrawal
Guarantee has increased.
Third, consider the timing of taking any Withdrawals. Because your Withdrawal
Guarantee can increase on your Birthday and is generally based on the Account
Value and the Withdrawal Guarantee Factor, the higher your Account Value is on
your Birthday, the more likely you will be to receive an increase in your
Withdrawal Guarantee. You might have a higher Withdrawal Guarantee if you defer
the Withdrawal until after your Birthday. MORE GENERALLY, ONCE YOU HAVE REACHED
AGE 65, YOU SHOULD CONSIDER THAT THE LONGER YOU WAIT TO BEGIN MAKING
WITHDRAWALS, THE LESS LIKELY YOU WILL BE TO BENEFIT FROM THE WITHDRAWAL
GUARANTEE. This is because your life expectancy will decrease as you get older,
so that there will be fewer years for Withdrawals to reduce your Account Value
to the level where we would be required to begin paying Guaranteed Income
payments, and in the event that we did begin making such payments, we would
make fewer payments before you die.
ASSET CHARGES
After you purchase your Certificate, you are required to pay the Asset Charge.
The Asset Charge is set forth in your Certificate, and is based on the asset
allocation model in accordance with which the assets in your Account are
invested, as well as whether you purchase the Certificate with yourself
designated as the sole Participant, or with you and your spouse designated as
Joint Participants. The Asset Charge will be deducted quarterly as a separate
charge from your Account and remitted to us. The sale or transfer of
investments in your GFWM Account to pay the Asset Charge will not be treated as
a Withdrawal for purposes of determining the Withdrawal Guarantee, but may have
tax consequences.
As of the Certificate Date, we will assess a full quarterly Asset Charge. This
full amount will be deducted from your Account at the end of the month. At the
beginning of the next calendar quarter, we will assess a quarterly Asset
Charge, in advance, based on the average Account Value during the previous
quarter. This may result in a slightly lower charge for Certificates which were
in force for only part of the prior quarter, to compensate for the full
quarterly fee billed in advance when the Certificate was purchased.
Set forth below are examples of how the initial and subsequent Asset Charge is
computed.
EXAMPLE: Assume that your Certificate Date is February 14, and your
initial Account Value is $100,000. Assume also that the Asset Charge is
1.25% annually.
You will be billed for the initial $312.50 full quarterly Asset Charge at
the end of February: Initial Account Value ($100,000) multiplied by the
Asset Charge (1.25%) /4 = $312.50.
At the end of March, you will be charged in advance for the second quarter
of the year, based on the average Account Value during the first quarter.
If your Account Value was constant each day through March 31 at $100,000,
your average balance for the first quarter would be $50,000, as the
Account was only open for one-half of the first quarter. Thus your Asset
Charge for the second quarter would be: Average Account Value ($50,000)
multiplied by Asset Charge (1.25%) /4 = $156.25.
Thereafter, at the end of each calendar quarter the Asset Charge will be
calculated based on the average Account Value for the entire prior quarter. If
you pay the quarterly Asset Charge and then cancel your Certificate during the
quarter, we will refund to you the portion of that quarter's Asset Charge which
is equal to the number of days remaining the in the quarter.
The guaranteed maximum Asset Charge we can ever charge for your Certificate is
shown below. We currently charge a lower amount, which is also shown below. For
an explanation of when we could increase the Asset Charge under your
Certificate, see "Will you pay the same amount (in dollars) for the Withdrawal
Guarantee every quarter?"
17
The guaranteed maximum Asset Charge, as a percentage
of the Account Value relating to a Certificate, is:
FOR ASSET
FOR ASSET ALLOCATION
ALLOCATION MODELS
MODELS CORRESPONDING
CORRESPONDING TO MODERATE
TO MODERATE GROWTH
RISK-RETURN RISK-RETURN
PROFILE PROFILE
-------------------------------------------------------------
Single Participant 2.00% 2.50%
Joint Participants (provides
protection during the lives of
two spouses) 2.25% 2.75%
Converting these charges to a dollar fee per $1,000 of
Account Value:
FOR ASSET
FOR ASSET ALLOCATION
ALLOCATION MODELS
MODELS CORRESPONDING
CORRESPONDING TO MODERATE
TO MODERATE GROWTH
RISK-RETURN RISK-RETURN
PROFILE PROFILE
-------------------------------------------------------------
Single Participant $20.00 $25.00
Joint Participants (provides
protection during the lives of
two spouses) $22.50 $27.50
The current Asset Charge, as a percentage of your Account Value is:
FOR ASSET
FOR ASSET ALLOCATION
ALLOCATION MODELS
MODELS CORRESPONDING
CORRESPONDING TO MODERATE
TO MODERATE GROWTH
RISK-RETURN RISK-RETURN
PROFILE PROFILE
-------------------------------------------------------------
Single Participant 0.85% 1.10%
Joint Participants (provides
protection during the lives of
two spouses) 1.00% 1.25%
Converting these charges to a dollar fee per $1,000 of
Account Value:
FOR ASSET
FOR ASSET ALLOCATION
ALLOCATION MODELS
MODELS CORRESPONDING
CORRESPONDING TO MODERATE
TO MODERATE GROWTH
RISK-RETURN RISK-RETURN
PROFILE PROFILE
------------------------------------------------------------
Single Participant $ 8.50 $11.00
Joint Participants (provides
protection during the life of
two spouses) $10.00 $12.50
The Asset Charge listed above is in addition to any charges that are imposed in
connection with advisory, custodial and other services (including any fees
charged by your Advisor) or charges imposed by the mutual funds and ETFs in
which your Account invests.
We reserve the right to have the Asset Charges deducted through means other
than deduction from the Account.
WILL YOU PAY THE SAME AMOUNT (IN DOLLARS) FOR THE WITHDRAWAL GUARANTEE EVERY
QUARTER?
Only if your average Account Value multiplied by the Asset Charge percentage is
exactly the same amount (in dollars) every quarter will your actual fee remain
constant. Because the amount (in dollars) you pay us for the Withdrawal
Guarantee varies based in part on your Account Value, it will likely change
from quarter to quarter. Here are several examples:
EXAMPLE: Assume in the following example that your Asset Charge is 1.25%
and that you have an average Account Value of $500,000. In this case, your
quarterly Asset Charge for the Withdrawal Guarantee would be:
$500,000, multiplied by 1.25%, divided by 4, for a quarterly Asset Charge
of $1,562.50.
EXAMPLE, CONTINUED: Assume that over the next quarter due to Guaranteed
Withdrawals and due to poor market performance of the assets in your
Account, your average Account Value for the quarter was $400,000.
The quarterly Asset Charge for the Withdrawal Guarantee for the following
quarter would be:
$400,000, multiplied by 1.25%, divided by 4, for a quarterly Asset Charge
of $1,250.
EXAMPLE, CONTINUED: Assume now that over the next quarter you take no
Withdrawals, but your average Account Value, due to Additions and good
market performance, rises to $600,000 for the quarter.
The quarterly Asset Charge would be:
$600,000 multiplied by 1.25%, divided by 4, for a quarterly Asset Charge
of $1,875.
You should note that in these scenarios, your Withdrawal Guarantee would not
decline even though your Account Value declined as a result of the deduction of
the Asset Charge because the Asset Charge does not constitute an Early
Withdrawal or Excess Withdrawal. However, the resulting decrease in Account
Value will reduce the possibility that your Withdrawal Guarantee will increase
on your next Birthday,
18
because the Withdrawal Guarantee will increase only if your Account Value on
your next Birthday, multiplied by the Withdrawal Guarantee Factor, is greater
than your current Withdrawal Guarantee. Because the Asset Charge is computed
based on your average Account Value and not on the amount of the Withdrawal
Guarantee, the fee you pay will go down when the average Account Value
declines. Similarly, if your Account Value and Asset Charge have increased as
of a quarterly computation date, unless that date is a Birthday, your
Withdrawal Guarantee would not increase.
We reserve the right to change the Asset Charge. We will send you advance
written notice of such change at least 30 days before the change becomes
effective, which will be at the end of the next calendar quarter. Charges will
be assessed on the weighted average of the Account Value on the effective date
of the change at the old rate, and Additions at the new rate from the point of
the Addition forward. Thereafter the new rate will be used at the end of each
calendar quarter to calculate your Asset Charge and will be applied to your
entire average Account Value for the prior calendar quarter.
WILL THE FEES YOU PAY FOR ADVICE AND OTHER SERVICES IMPACT THE GUARANTEES UNDER
YOUR CERTIFICATE?
Yes, they might, since Withdrawals may reduce the guarantees under the
Certificate. However, the provisions of your Certificate allow for a certain
percentage of your Account Value to be paid each year for advisory and other
services rendered in connection with your GFWM Program without being considered
a Withdrawal (the "Withdrawal Exception"). (Any fees taken for custodial
services, and mutual fund or ETF expenses, are not considered to be for
"advisory and other services rendered in connection with your GFWM Program" and
typically are not withdrawn directly from your Account. Therefore, these fees
and expenses are not considered a Withdrawal for purposes of this Withdrawal
Exception provision.) However, if your actual fees for advice and other
services exceed this amount, the excess is considered a Withdrawal. Currently,
the Withdrawal Exception percentage is 1.55%. We monitor the fees you pay and
compare it to this percentage to see if you have exceeded the permitted amount.
The dollar amount of the Withdrawal Exception percentage is computed at the end
of each quarter in the same manner as the Asset Charge is calculated.
This means that if you are under age 65 and you exceed the Withdrawal Exception
percentage for the year, you will, in effect, have an Early Withdrawal. If you
are age 65 or over and exceed the Withdrawal Exception percentage, you will
have, in effect, an Excess Withdrawal if you also take the full Withdrawal
Guarantee that year. Both Early and Excess Withdrawals reduce your Withdrawal
Guarantee. Here is an example of the Withdrawal Exception:
EXAMPLE: Assume in the following example that for the current quarterly
billing cycle your average Account Value was $500,000 and that for the
quarter you paid $1,750 for advisory and other fees. Assume further that
the Withdrawal Exception percentage listed on your Certificate is 1.55%.
In this case, the amount of the Withdrawal Exception for the quarter is:
Average Account Value ($500,000), multiplied by the Withdrawal Exception
percentage (1.55%) divided by 4 (to compute a quarterly amount), equaling
$1,937.50. Since $1,750 is less than $1,937.50, you have not exceeded the
Withdrawal Exception. Had your advisory and other platform fees exceeded
$1,937.50, every dollar over that amount would count as a Withdrawal.
Any unused portion of the Withdrawal Exception in a Withdrawal Year does not
carry over to subsequent Withdrawal Years.
GUARANTEE PHASE UNDER THE CERTIFICATE
In the Guarantee Phase, there are two types of income provisions available
under the Certificate. You may elect only one and not both. They are the
Guaranteed Income and Alternative Annuity Payment option provisions. (The
Alternative Annuity Payment option is referred to as the "Base Income"
provision in the Certificate.) In both cases, your Account Value is transferred
to the Company as the premium payment for a fixed income annuity ("Annuity")
issued by the Company.
WHAT IS GUARANTEED INCOME? WHEN WILL YOU RECEIVE PAYMENTS?
You will begin to receive Guaranteed Income payments from us after your Account
Value is transferred to us as your premium payment to us on the Annuity
Exercise Date. There are three ways to reach the Annuity Exercise Date:
(1) your Account Value falls below your Withdrawal Guarantee, (2) your Account
Value falls below $20,000 or (3) you (or if there are Joint Participants, the
younger Joint Participant), reach age 100. In each case there will be a 30-day
Notice Period after the Annuity Exercise Date, during which you can still
cancel your Certificate. If you do not cancel your Certificate, your entire
Account Value will be paid to us at the end of the Notice Period. You will then
receive lifetime annual income payments
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equal to the Withdrawal Guarantee. You or your named beneficiary are guaranteed
to receive the premium amount back in the form of income payments even if you
were to die before such payments occur ("return of premium").
The three scenarios triggering Guaranteed Income payments (or Alternative
Annuity Payment option if these payments are greater than the Guaranteed Income
payment would be) are described below:
WHEN YOUR ACCOUNT VALUE FALLS BELOW THE WITHDRAWAL GUARANTEE. On the first
Valuation Day when your Account Value falls below the current Withdrawal
Guarantee, a 30-day Notice Period will begin in anticipation of paying us your
premium on the Latest Annuity Date (the date ending 30 days after the Annuity
Exercise Date). We will provide you written notice of the Notice Period. You do
not need to reply to us if you wish to continue to the Guarantee Phase at the
end of the Notice Period. In taking no action, you will allow this to occur
automatically. Only if you wish to cancel your Certificate or elect an
Alternative Annuity Payment option do you need to contact us. Or, you may
instead contact GFWM to cancel the Certificate. At the end of the notice
period, if no action has been taken, the Guarantee Phase will begin. Once the
Guarantee Phase begins, you may not elect an Alternative Annuity Payment option
or cancel the Certificate. YOU SHOULD CAREFULLY CONSIDER ALL OPTIONS DURING THE
NOTICE PERIOD. ELECTING AN ALTERNATIVE ANNUITY PAYMENT OPTION MAY OR MAY NOT BE
IN YOUR BEST INTEREST UNDER YOUR CURRENT CIRCUMSTANCES. WE RECOMMEND YOU SEEK
ADVICE FROM YOUR TAX ADVISER AND/OR YOUR FINANCIAL ADVISER PRIOR TO ELECTING TO
CANCEL THE CERTIFICATE OR ELECTING AN ALTERNATIVE ANNUITY PAYMENT OPTION.
At the end of the Notice Period, regardless of whether your Account Value
increased or decreased during the Notice Period, your Account Value will be
paid to us as premium. Your Guaranteed Income is established on that day and is
equal to the Withdrawal Guarantee on the Annuity Exercise Date.
We will then pay you the remaining amount of the current year's Guaranteed
Income, reduced by the amount of Withdrawals you have made since your last
Birthday. On each subsequent Birthday we will make payments to you equal to the
Withdrawal Guarantee. We will make other payment options available, such as
monthly or quarterly, so long as each scheduled payment is $100 or more.
EXAMPLE: Assume for this example that your Withdrawal Guarantee is $35,000,
that today is March 31st, that your Birthday is July 1st and that you have
made withdrawals of $25,000 since your last Birthday. Also assume that at
the end of the day today your Account Value fell to $34,500 due to a day of
negative stock and bond performance. Additionally, assume that your Account
Value at the end of the 30 day Notice Period is $35,250 due to a rise in the
market.
Your Account Value has fallen below your Withdrawal Guarantee, triggering
the 30-day Notice Period.
First day of the Notice Period: April 1st.
Notice Period ends: April 30th.
Actions required if you wish to move to the Guarantee Phase: None (unless
GFWM or your custodian requires your written authorization for transfer).
Premium paid to us on the Annuity Exercise Date of May 1st: $35,250.
Guaranteed Income Amount: $35,000 annually for life.
Payment we will make to you immediately: $10,000 (for the remaining annual
payment since your last Birthday).
Payment we will make to you on your next Birthday: $35,000.
Total amount guaranteed to be paid to you or your estate even if you die
immediately after May 1st: $35,250.
WHEN YOUR ACCOUNT VALUE FALLS BELOW $20,000 FOR YOUR GFWM ACCOUNT. If your
Account Value is less than $20,000 for your GFWM Account, the same procedure
applies as it would in the case of your Account Value falling below your
Withdrawal Guarantee, except that the triggering Account Value is $20,000, not
the Withdrawal Guarantee.
WHEN YOU REACH AGE 100. If the Notice Period has not yet been triggered by
your Account Value falling below your Withdrawal Guarantee or $20,000, it will
be triggered automatically when you are 30 days from reaching the age 100. In
the case of a Certificate issued with Joint Participants, this will be the
younger of the Participants reaching age 100. The same procedures apply to the
calculation of the Guaranteed Income in this case.
At any time prior to you (or the younger Participant in the case of Joint
Participants) reaching age 100, and even if your Account Value is greater than
your most recently determined Withdrawal Guarantee or $20,000, the Participant
may elect to begin receiving payments under the "Alternative Annuity Payment"
provision specified in the Certificate. Payments under the Alternative Annuity
Payment provision will be based on your Account Value at the time of the
election.
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ALTERNATIVE ANNUITY PAYMENTS
At any time before you reach age 100, you may elect the Alternative Annuity
Payment option under your Certificate. If you elect the Alternative Annuity
Payment option, you must liquidate all of the investments in your GFWM Account,
and apply this amount as premium to purchase the Alternative Annuity Payment
benefit. The Alternative Annuity Payments we will pay you will be at least
equal to an amount calculated by multiplying the Account Value by the annuity
rates guaranteed in your Certificate. We may make higher payments if the
applicable annuity rates we are using at the time to calculate annuity payments
are higher and would therefore result in higher annuity payments. These
payments are not the same as payments that might commence after your Account
Value decreases below the Minimum Amount had you not elected the Alternative
Annuity Payment option. If you elect the Alternative Annuity Payment option,
your Withdrawal Guarantee is reduced to zero.
DEATH PROVISIONS UNDER THE CERTIFICATE
The treatment of the Certificate upon the death of the Participant or Joint
Participant and the options available to the Owner or beneficiary at that time
depend on a number of factors. These include whether the Certificate is
Qualified or Non-Qualified, whether the Owner is a trust or other entity,
whether there is a Joint Owner, whether there is a Joint Participant, and
whether the Certificate is in the Account Phase or the Guarantee Phase.
A Qualified Contract is a contract that receives special tax treatment under
the Code, such as a contract held is an individual retirement account. A
Non-Qualified contract is a contract not receiving special tax treatment under
the Code.
For Non-Qualified Certificates and if you are the sole Owner and Participant or
if the Certificate Owner is a non-natural person:
. If you die (or if the Participant dies where the Certificate is owned by
a non-natural person) before the Annuity Exercise Date, your Certificate
terminates. We will make no payments to your beneficiary and will not
return any fees except for the portion of the current billing period's
fees for the number of days from your death until the end of the billing
period;
. If you die (or if the Participant dies where the Certificate is owned by
a non-natural person) on or after the Annuity Exercise Date, we will
calculate the remaining amount of premium that has not yet been paid to
you, and will make annual payments to your beneficiary in the same
amount that you were receiving while alive until the annuity payments
equal the amount of premium you paid for either the Base Income or
Guaranteed Income provision. If you have already been paid annuity
payments equal to or greater than your Premium, we will make no further
payments.
For Non-Qualified Certificates and there are Joint Owners:
. Each Owner is a Joint Participant with respect to the death of the other
Owner and a Participant with respect to their own death;
. The Joint Participant rules described below apply on death.
For Non-Qualified Certificates with Joint Participants during the Account Phase:
. If the Joint Participant dies before the Participant, the Certificate
will generally continue with the sole surviving Owner and Participant.
. The Certificate cannot be continued, if the Owner is not an individual.
If the Owner is an entity, the Certificate will terminate on the death
of either the Participant or Joint Participant.
. If the Owner and Participant dies before the Joint Participant, the
Joint Participant may continue the Certificate as Owner and Participant.
For Non-Qualified Certificates with Joint Participants during the Guarantee
Phase:
. If the Joint Participant dies before the Participant, we will continue
to make annuity payments to the Owner while the Participant is alive. If
the Participant then dies, the rule described below for the situation
where the Participant is the first to die will apply.
. If the Participant dies, we will calculate the remaining amount of
premium that has not yet been paid to the Owner, and will make annual
payments to the beneficiary in the same amount that the Owner was
receiving while the Participant was alive until annuity payments equal
the amount of premium paid for either the Base Income or Guaranteed
Income provision. If the Owner has already been paid annuity payments
equal to or greater than the Premium, we will make no further payments.
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For Qualified Certificates and there is no Joint Participant:
. If you die before the reaching the Guarantee Phase, your Certificate
terminates. We will make no payments to your beneficiary and will not
return any fees except for the portion of the current billing period's
fees for the number of days from your death until the end of the billing
period.
. If you die on or after reaching the Guarantee Phase, we will calculate
the remaining amount of premium that has not yet been paid to you, and
will make annual payments to your beneficiary in the same amount that
you were receiving while alive until the annuity payments equal the
amount of premium you paid for either the Base Income or Guaranteed
Income provision. If you have already been paid annuity payments equal
to or greater than your premium, we will make no further payments.
For Qualified Certificates with Joint Participants during the Account Phase:
. If the Joint Participant dies before the Participant, the Certificate
will continue with the same Participant.
. If the Participant dies before the Joint Participant and the sole
beneficiary of the Account is the Joint Participant, the Owner may
continue the Certificate with the Joint Participant as the new
Participant.
For Qualified Certificates with Joint Participants during the Guarantee
Phase:
. If the Joint Participant dies before the Participant, we will continue
to make annuity payments to the Owner while the Participant is alive.
If the Participant then dies, the rule described below for the
situation where the Participant is the first to die will apply.
. If the Participant dies, we will calculate the remaining amount of
premium that has not yet been paid to the Owner, and will make annual
payments to the Owner in the same amount that the Owner was receiving
while the Participant was alive until the annuity payments equal the
amount of Premium paid for either the Base Income or Guaranteed Income
provision. If the Owner has already been paid annuity payments equal
to or greater than the Premium, we will make no further payments.
In all events, the Certificates will be interpreted and administered in
accordance with the requirements of Sections 72(s) and 401(a)(9) of the
Code, as applicable.
DIVORCE PROVISIONS UNDER THE CERTIFICATE
In the event of a divorce whose decree affects a Certificate, we will require
written notice of the divorce in a manner acceptable to us. Options available
as a result of divorce include:
During the Account Phase:
If there was a sole Participant (Qualified or Non-Qualified Certificates, with
a natural person as Certificate Owner):
. If the Participant remains the sole Owner of the Account, there will be no
change to the Certificate.
. If the former spouse of the Participant becomes the sole Owner of the
Account, the Certificate may be reissued with the former spouse as Owner
or may be terminated, at their discretion. The Participant on the
Certificate may not be changed. If the former spouse of the Participant
becomes the Owner of the Certificate, the Certificate will terminate upon
the death of the former spouse who owns the Certificate.
. If the Account is divided between the Owner and the former spouse, the
Certificate may be reissued as two Certificates (one to each of the former
spouses), with the Withdrawal Guarantee divided in proportion to the
division of the assets in the Account. The Participant may not be changed,
nor is a Joint Participant permitted.
If there were Joint Participants (Qualified or Non-Qualified, with natural
person(s) as Certificate Owner):
. If both Joint Participants (the former spouses) divided the assets in the
Account, the Certificate may be reissued as two Certificates (one to each
of the former spouses), with the Withdrawal Guarantee divided in
proportion to the division of the assets in the Account. The Participants
may remain as Joint Participants or each may become the only Participant
on their respective Certificate. Once reissued, the Participants are not
permitted to be changed. If the Participants remain as Joint Participants,
the Certificate will, however, terminate upon the death of the former
spouse who owns such Certificate.
. If a former spouse becomes the sole Owner of the Certificate and the
Account, the Certificate may be reissued to reflect the new ownership with
the sole
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Certificate Owner as the sole Participant, or with the former spouses
remaining as Joint Participants. Once reissued, the Participants are not
permitted to be changed. If the Participants remain as Joint Participants,
the Certificate will, however, terminate upon the death of the former
spouse who owns such Certificate.
. In the case of divorce, if a Certificate with Joint Participants becomes a
Certificate with a sole Participant, the Asset Charge for a Certificate
with a sole Participant will thereafter be assessed.
In the case of a non-natural Certificate Owner:
. If the same non-natural Certificate Owner maintains ownership of the
Account, there will be no changes to the Certificate.
. If new non-natural Certificate Owners divide the ownership of the Account,
the Certificate's status will be handled on a case-by-case basis so as not
to violate Internal Revenue Service regulations.
Certificate Owners and Participants should consult with their own advisors to
assess the tax consequences associated with these divorce provisions.
ILLUSTRATION OF HOW THE CERTIFICATE WORKS
EXAMPLE #1: Assume for this example the following scenario: a 64 year old
client who buys the Certificate just before his 65/th/ Birthday, and takes
the full amount of his Withdrawal Guarantee immediately after his Birthday
each year and lives to age 95. In this scenario, the performance of the
assets in the Account is minus 9% for the first two years and positive 8%
each year thereafter. Performance is gross of investment advisory fees and
any fees assessed by the mutual funds and ETFs:
. Single Owner and Participant;
. Initial Account Value $500,000;
. Initial Withdrawal Guarantee of $25,000 (5% x $500,000);
. Buys Certificate just prior to his 65/th/ birthday and takes the full
amount of Guaranteed Withdrawals after his Birthday annually;
. Moderate Risk-Return Profile asset allocation model, Asset Charge of 0.85%;
. Mutual fund and/or ETF expenses of 1.00%
. Advisory, custodial and other services fees of 1.55%; and
. Account Investment performance (gross of fees) of MINUS 9% in years 1 and
2, and positive 8% per year thereafter for life.
Result:
. Client withdraws $25,000 per year from his Account;
. Several months after their 86/th/ Birthday, he moves to the Guarantee
Phase when the Account Value falls below their Withdrawal Guarantee of
$25,000; and
. We make annual $25,000 payments to the client from then until he dies at
age 95.
ILLUSTRATION OF EXAMPLE #1
[CHART]
[CHART]
EXAMPLE #1A: Assume for this example the same scenario except that the client
DOES NOT buy the Certificate:
. Single Owner and Participant;
. Account Value $500,000;
. Withdrawal Guarantee: none;
. Mutual fund and/or ETF expenses of 1.00%;
. Advisory, custodial and other services fees of 1.55%;
. Account investment performance (gross of fees) of MINUS 9% in years 1 and
2 and positive 8% per year thereafter for life; and
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. Withdrawals of $25,000 each year.
Result:
. Client withdraws $25,000 per year from his Account;
. Several months after his 89/th/ Birthday, the client runs out of money in
their Account; it takes longer for the client to run out of money in this
example because there are no fees being paid for the Certificate.
. We make no payments, since the client did not purchase a Certificate.
ILLUSTRATION OF EXAMPLE #1A
[CHART]
OTHER RISK FACTORS ASSOCIATED WITH PURCHASING A CERTIFICATE.
FINANCIAL CONDITION OF THE COMPANY.
Many financial services companies, including insurance companies, continue to
face challenges in this unprecedented market environment, and we are not immune
to those challenges. We know it is important for you to understand how the
market environment may impact our ability to meet guarantees under your
Certificate. The Certificate is not a separate account product, which means
that no assets are set aside in a segregated or "separate" account to satisfy
all obligations under the Certificates. Lifetime income payments (if any), or
Base Income payments (if any) will be paid from our general account and,
therefore, are subject to our claims paying ability. We issue other types of
insurance policies and financial products as well, such as group variable
annuities offered through retirement plans, term and universal life insurance,
Medicare supplement insurance, funding agreements and guaranteed investment
contracts ("GICs"), and we also pay our obligations under these products from
our assets in the general account. In the event of an insolvency or
receivership, payments we make from our general account to satisfy claims under
the contract would generally receive the same priority as our other policy
holder obligations.
OUR FINANCIAL CONDITION. As an insurance company, we are required by state
insurance regulation to hold a specified amount of reserves in order to meet
all the contractual obligations of our general account to our contract owners.
In order to meet our claims-paying obligations, we regularly monitor our
reserves to ensure we hold sufficient amounts to cover actual or expected
contract and claims payments. In addition, we actively hedge our investments in
our general account. However, it is important to note that there is no
guarantee that we will always be able to meet our claims paying obligations,
and that there are risks to purchasing any insurance product.
State insurance regulators also require insurance companies to maintain a
minimum amount of capital, which acts as a cushion in the event that the
insurer suffers a financial impairment, based on the inherent risks in the
insurer's operations. These risks include those associated with losses that we
may incur as the result of defaults on the payment of interest or principal on
our general account assets, which include, but are not limited to, bonds,
mortgages, general real estate investments, and stocks, as well as the loss in
value of these investments resulting from a loss in their market value.
The market effects on our investment portfolio has caused us to re-evaluate
product offerings. We continue to evaluate our investment portfolio to mitigate
market risk and actively manage the investments in the portfolio.
HOW TO OBTAIN MORE INFORMATION. We encourage both existing and prospective
contract owners to read and understand our financial statements. We prepare our
financial statements on both a statutory basis and according to United States
generally accepted accounting principles ("U.S. GAAP"). The audited
consolidated financial statements prepared in accordance with U.S. GAAP are
included in this prospectus beginning on page 102. You may obtain our audited
statutory financial statements and any unaudited statutory financial statements
that may be available by visiting our website at www.genworth.com.
You also will find on our website information on ratings assigned to us by one
or more independent rating organizations. These ratings are opinions of an
operating insurance company's financial capacity to meet the obligations of its
insurance and annuity contracts based on its financial strength and/or
claims-paying ability.
ASSET ALLOCATION ISSUES.
The asset allocation models eligible for coverage under the Certificate are
generally designed to provide consistent returns by reducing risk and,
accordingly, the use of such models may also limit the potential for your
investments to appreciate. You may earn a higher rate of return with an asset
allocation model not eligible for coverage under the Certificate.
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GFWM has agreed to certain investment parameters for those asset allocation
models eligible for use with the Certificate, which, in certain circumstances,
if not adhered to, may result in the termination of your Certificate.
If you become dissatisfied with the asset allocation model in accordance with
which the assets in your Account are invested, and you make Withdrawals to
invest in another investment account or other model not eligible for use with
the Certificate, the Withdrawals may reduce the Withdrawal Guarantee Amount;
for example, if you took Excess Withdrawals or Early Withdrawals in order to
invest in another investment account or model, your withdrawal Guarantee Amount
will be reduced, however, if you are over age 65 and you take a permitted
Withdrawal in order to invest in another investment account or model, your
Guarantee Amount will not be reduced. In addition, such Withdrawals may have
tax consequences. See "Taxation of the Certificate" on page 27 for a discussion
of the tax consequences of the Certificate.
SUSPENSION AND TERMINATION PROVISIONS OF THE CONTRACT AND THE CERTIFICATES
SUSPENSION OF THE CONTRACT.
Certificates are issued pursuant to the terms of the Contract. In certain
circumstances described below, we may suspend the Contract. Suspension of the
Contract may result in termination of the Contract in certain circumstances.
Suspension or termination of the Contract may reduce or eliminate the benefits
you may receive from your Certificate. How this may happen is described in the
following section.
We reserve the right to suspend the Contract in whole or in part if any of the
following events occur:
. non-compliance with any provision of this Contract;
. non-compliance with an applicable asset allocation model;
. violation of any rights or obligations imposed by law as determined by
governing regulatory and/or judicial bodies; or
. upon the occurrence of any additional Contract suspension events.
We will provide the Contract Owner with written notice that one of these
suspension events has occurred. The notice will indicate the scope of the
suspension and the date the suspension will begin. The suspension will not take
effect if the cause is cured within the pre-suspension cure period as shown in
your Certificate in a mutually acceptable manner. Your ability to pay Additions
to your Account may be restricted due to the suspension an indicated in the
notice described below. Contract suspension will not otherwise change or
suspend the calculation of the benefits or charges under your Certificate.
If the Contract is suspended, we will provide you with written notification of
the suspension. You will have the right, during the suspension cure period, to
preserve your Withdrawal Guarantee by transferring your Account Value to an
advisory account offered by an investment adviser other than GFWM eligible for
coverage by a certificate similar in material respects to the Certificate or to
an annuity contract that we, or one of our affiliates, offer. The charges for
these products may be higher than the Asset Charge imposed under your
Certificate. Upon such transfer, the Contract Owner will not charge any fees
for the transfer notwithstanding termination fees imposed by your Custodian
consistent with your custodian agreement. The Withdrawal Guarantee transferred
will be equal to the Withdrawal Guarantee on the Valuation Day of the transfer.
TERMINATION OF THE CONTRACT.
We reserve the right to terminate the Contract if any of the following occur:
. the Contract Owner fails to cure the cause of a Contract suspension within
the suspension cure period as shown on the Data Pages;
. the Contract Owner discontinues administration of this Contract without
arranging for a successor acceptable to us;
. there is a violation of any material rights or obligations imposed by law
as determined by governing regulatory and/or judicial bodies; or
. upon the occurrence of any additional Contract termination events.
We will provide you with written notice if one of these Contract termination
events occurs. The notice will state the reason(s) for the termination and that
we intend to terminate the Contract at the end of the Contract termination cure
period as shown in your Certificate. The termination will not take effect if
the cause is cured in a mutually acceptable manner prior to the intended
termination date. If the Contract does terminate, we will provide you with
written notification of Contract termination.
During the Contract termination cure period, you will have the right to
preserve the Withdrawal Guarantee by transferring your Account Values to an
advisory account offered by an investment adviser other than GFWM eligible for
coverage by a certificate similar in material respects to the Certificate or to
an
25
annuity contract we, or one of our affiliates, offer. The charges for these
products may be higher than the Asset Charge imposed under your Certificate.
Upon such transfer, the Contract Owner will not charge any fees for the
transfer. The Withdrawal Guarantee transferred will be equal to the Withdrawal
Guarantee on the Valuation Day of the transfer. Termination will not affect
your Certificate if it is in the Guarantee Phase. Upon termination of the
Contract, your Certificate, if it is in the Account Phase, will terminate.
We reserve the right to establish a higher Withdrawal Guarantee for certain
Certificates under this Contract in order to accommodate a transfer of a
Withdrawal Guarantee from a suspended or terminated Contract that we issued.
SUSPENSION OF THE CERTIFICATE.
If you transfer your Account Value to an asset allocation model offered by GFWM
but not listed on your Certificate, and we are notified of the transfer by GFWM
(or we learn of the transfer through any other means), if the transfer is the
first such transfer your Certificate will not be terminated but will be
suspended. If the transfer is the second such transfer your Certificate will be
terminated as described below in "Termination of the Certificate." We will
notify you that the suspension occurred and that it will last until the end of
the suspension cure period as shown in your Certificate. During the suspension
cure period, you may cure the suspension by transferring your Account Value to
an asset allocation model listed in your Certificate. Following such a
transfer, your Withdrawal Guarantee will be recalculated on the Valuation Day
following the suspension cure period using the Account Value multiplied by the
current Withdrawal Guarantee Factor for the attained age. This calculation will
occur as of the Valuation Day following the end of the suspension cure period
regardless of on which day during the cure period the transfer of the Account
Value occurs. THIS RECALCULATION COULD RESULT IN A DECREASE, WHICH COULD BE
SIGNIFICANT, IN THE AMOUNT OF YOUR WITHDRAWAL GUARANTEE. If you fail to
transfer your Account Value to an asset allocation model listed in the
Certificate by the end of the suspension cure period, your Certificate will
terminate.
If you pay an Addition to your Account when the Account already exceeds the
Account Limit, or if you pay an Addition that causes your Account to exceed the
Account Limit, your Certificate will be suspended. During the suspension cure
period, if your Account was already over the Account Limit, you may cure the
suspension by withdrawing the entire Addition. In the case of an Addition that
caused your Account to exceed the Account Limit, you may cure the suspension by
withdrawing the portion of your Account Value exceeding the Account Limit. In
neither case will the Withdrawal constitute an Early or Excess Withdrawal. If
the suspension cure period ends without such corrective action, your
Certificate will remain suspended until the amount needed to cure the
suspension is withdrawn from the Account. In this case, Early Withdrawals and
Excess Withdrawals will apply. Until the suspension is lifted, asset charges
will apply to the greater of the Account Limit and the Account Value prior to
the Addition.
TERMINATION OF THE CERTIFICATE.
Your Certificate will terminate if any of the following events occur:
. A second occurrence of your transferring your Account Value to an asset
allocation model not shown in your Certificate; or
. Failure to pay the Asset Charge.
MISCELLANEOUS PROVISIONS
PERIODIC COMMUNICATIONS TO CERTIFICATE OWNERS.
GFWM account statements will be provided to you periodically by GFWM, or
designated third party.
AMENDMENTS TO THE CONTRACT AND CERTIFICATE.
The Contract and Certificate may be amended to conform to changes in applicable
law or interpretations of applicable law, or to accommodate design changes.
Amendments (if any) to accommodate design changes will be applicable only with
respect to purchasers of new Certificates, unless the Company reasonably
determines the change would be favorable for all existing Certificate Owners.
Changes in the Contract and Certificate may need to be approved by the state
insurance departments. The consent of the Contract and/or Certificate Owner to
an amendment will be obtained to the extent required by law.
ASSIGNMENT.
You may not assign your interest in your Certificate during the Account Phase
or without Home Office prior approval during the Guarantee Phase.
CANCELLATION.
Once you purchase the Certificate, you can only cancel your Certificate by
(i) advising GFWM that you no longer wish the coverage and to stop payment of
the periodic fees from your Account or (ii) liquidating all of the investments
in your Account.
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MISSTATEMENTS.
If the age or Birthday of the Participant or any Joint Participant is
misstated, any Certificate benefits will be re-determined using the correct
age(s). If any overpayments have been made, future payments will be adjusted.
Any underpayments will be paid in full.
DETERMINING WHETHER A CERTIFICATE IS RIGHT FOR YOU
It is important to understand that the Certificate does not protect the actual
value of your investments in your Account. For example, if you invest $500,000
in your Account, and your Account Value has dropped to $400,000 on the
Withdrawal Exercise Date, we are not required to add $100,000 to your Account.
Rather, the Certificate guarantees that when you have reached the Withdrawal
Exercise Date, you may begin withdrawing guaranteed lifetime annual income
payments of $25,000 (5% of $500,000), rather than $20,000 (5% of $400,000).
It is also important to understand that even after you have reached the
Withdrawal Exercise Date and start taking Withdrawals from your Account, those
Withdrawals are made first from your own investments. We are required to start
using our own money to make annual annuity payments to you only if and when
your Account Value is less than the greater of your most recently determined
Withdrawal Guarantee and $20,000 or you reach the age of 100. We limit our risk
under the Certificate in this regard by limiting the amount you may withdraw
each year from your Account to your current Withdrawal Guarantee. If your
investment return on your Account over time is sufficient to generate gains
that can sustain constant 5% annual withdrawals or greater, your investments
will never be reduced below the greater of your most recently determined
Withdrawal Guarantee and $20,000.
There are many variables, however, other than average annual return on your
investments that will determine whether your investments generate enough gain
over time to sustain a 5% annual rate of systematic withdrawals on your
investments. Your Account Value may have declined over time before you reach
age 65, which means that your investments would have to produce an even greater
return after you reach age 65 to make up for the investment losses before that
date. Moreover, negative annual average investment returns early in retirement
can have a disproportionate impact on the ability of your retirement
investments to sustain systematic Withdrawals over an extended period.
Of course, even if your investments do not generate sufficient gains after you
reach age 65 to support 5% systematic annual Withdrawals and your actual
Account Value declines over time, your investments may not be reduced below the
greater of your most recently determined Withdrawal Guarantee and $20,000 for a
number of years. If you die before your investments are reduced, the strategy
of liquidating your retirement assets through a program of systematic
Withdrawals without the guarantee provided by the Certificate will have proved
to be an effective one. However, studies indicate that life spans are generally
continuing to increase, and therefore, while everyone wants to live a long
life, funding retirement through systematic withdrawals presents the risk of
outliving those withdrawals. The Certificate is designed to protect you against
the risk of living too long, commonly known as "longevity risk."
TAXATION OF THE CERTIFICATE
THE FOLLOWING IS A GENERAL DISCUSSION BASED ON OUR INTERPRETATION OF CURRENT
UNITED STATES FEDERAL INCOME TAX LAWS. THIS DISCUSSION DOES NOT ADDRESS ALL
POSSIBLE CIRCUMSTANCES THAT MAY BE RELEVANT TO THE TAX TREATMENT OF A
PARTICULAR CERTIFICATE HOLDER. IN GENERAL, THIS DISCUSSION DOES NOT ADDRESS THE
TAX TREATMENT OF TRANSACTIONS INVOLVING INVESTMENT ASSETS HELD IN YOUR ACCOUNT
EXCEPT INSOFAR AS THEY MAY BE AFFECTED BY THE HOLDING OF A CERTIFICATE.
FURTHER, IT DOES NOT ADDRESS THE CONSEQUENCES, IF ANY, OF HOLDING A CERTIFICATE
UNDER APPLICABLE FEDERAL ESTATE TAX LAWS OR STATE AND LOCAL INCOME AND
INHERITANCE TAX LAWS. YOU SHOULD ALSO BE AWARE THAT THE TAX LAWS MAY CHANGE,
POSSIBLY WITH RETROACTIVE EFFECT. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR
REGARDING THE POTENTIAL TAX IMPLICATIONS OF PURCHASING A CERTIFICATE IN LIGHT
OF YOUR PARTICULAR CIRCUMSTANCES.
IN GENERAL.
THE CERTIFICATE IS A NOVEL AND INNOVATIVE INSTRUMENT AND, TO DATE, ITS PROPER
CHARACTERIZATION AND CONSEQUENCES FOR FEDERAL INCOME TAX PURPOSES HAVE NOT BEEN
DIRECTLY ADDRESSED IN ANY CASES, ADMINISTRATIVE RULINGS OR OTHER PUBLISHED
AUTHORITIES. While the IRS has recently issued favorable private letter rulings
("PLRs") concerning products similar to the Certificate issued by other
insurance companies, these rulings are not binding on the IRS with respect to
the Certificate. Due to factual differences between the Certificate and the
products involved in these PLRs, and their non-precedential nature, the
analysis and rulings in the PLRs may not reflect the IRS' position with respect
to the tax treatment of the Certificate, now or in the future. We can give no
assurances that the IRS will agree with our interpretations regarding the
proper tax treatment of a Certificate or the effect (if any) of the purchase of
a Certificate on the tax treatment of any transactions in your Account, or that
a court will agree with our
27
interpretations if the IRS challenges them. YOU SHOULD CONSULT A TAX ADVISOR
BEFORE PURCHASING A CERTIFICATE.
If sold in connection with an Individual Retirement Account ("IRA"), a
Certificate is called a Qualified Certificate. If a Certificate is independent
of any formal retirement or pension plan, it is termed a Non-Qualified
Certificate. Different tax rules apply to Qualified Certificates and
Non-Qualified Certificates, and the tax rules applicable to Qualified
Certificates vary according to the type of IRA and the terms and conditions of
the plan.
NON-QUALIFIED CERTIFICATES.
TREATMENT OF A CERTIFICATE AS ANNUITY CONTRACT. Although there is no direct
guidance on this issue, we intend to treat a Non-Qualified Certificate as an
annuity contract for federal income tax purposes. It is possible that the IRS
will characterize Certificates as some type of financial derivative such as an
option or notional principal contract rather than an annuity, possibly with
different tax consequences than if they were treated as annuities. For example,
if a Certificate were treated as an option with respect to your Account assets,
dividends on investments in your Account that would otherwise constitute
"qualifying dividend income" might be ineligible for lower tax rates and you
may be unable to qualify for long-term capital gain treatment with respect to
investments in your Account. IN VIEW OF THE UNCERTAINTY OF THE TAX TREATMENT OF
A NON-QUALIFIED CERTIFICATE, HOLDERS OR BENEFICIARIES OF A NON-QUALIFIED
CERTIFICATE SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX
CONSEQUENCES TO THEM OF HOLDING A CERTIFICATE.
In order to be treated as an annuity contract for federal tax purposes, a
non-qualified annuity contract must contain certain provisions prescribing
distributions that must be made when an owner of the contract dies. We believe
that by its terms a Non-Qualified Certificate satisfies these requirements. In
all events, we will administer a Non-Qualified Certificate to comply with these
federal tax requirements.
We also intend to treat a Non-Qualified Certificate as an annuity contract that
is separate and apart from the assets in your Account for federal income tax
purposes. THERE IS NO AUTHORITY DIRECTLY AUTHORIZING THIS TREATMENT, HOWEVER,
AND YOU SHOULD CONSULT A TAX ADVISOR ON THIS ISSUE.
YOUR ACCOUNT. We believe that, in general, the tax consequences of
transactions involving the investments in your Account, including redemptions,
dispositions and distributions with respect to such investments, more likely
than not, will initially and, for most individuals, during the entire period a
Non-Qualified Certificate is in effect, be the same as such treatment would be
if the Account were not subject to a Certificate. (The tax consequences of
these transactions is beyond the scope of this prospectus. You should consult a
tax advisor for further information regarding such consequences.) Thus, we
believe, in general, that it is more likely than not that initially and, for
most individuals, during the entire period a Non-Qualified Certificate is in
effect, (1) distributions and dividends on investments in your Account will not
be treated as payments under your Certificate, but rather as distributions with
respect to such investments; (2) amounts received on redemption or disposition
of such investments will be treated as amounts realized on the sale or exchange
of the investments, rather than as distributions with respect to your
Certificate; and (3) the purchase of a Non-Qualified Certificate will not
automatically result in either (a) loss of the benefit of preferential income
tax rates currently applicable to dividends paid on investments in your Account
otherwise constituting "qualified dividend income" or (b) suspension of the
holding period for purposes of determining eligibility for long-term capital
gains treatment of any gains, or potential deferral of losses, when investments
in your Account are sold or exchanged, under the so-called "straddle" rules.
These conclusions are in part based on the low probability when your
Certificate is issued that your Account Value will reach the greater of your
most recently determined Withdrawal Guarantee and $20,000 and that you will
receive lifetime income payments of the Guaranteed Income thereafter.
THERE ARE NO PUBLISHED AUTHORITIES DIRECTLY SUPPORTING OUR CONCLUSIONS AND THE
RELEVANT GUIDANCE IS POTENTIALLY SUSCEPTIBLE TO DIFFERING INTERPRETATIONS THAT
MAY CAUSE THE IRS TO DISAGREE WITH OUR INTERPRETATIONS. IF THE IRS WERE TO
SUCCESSFULLY TAKE A DIFFERENT POSITION ON THESE ISSUES, IT COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE TAX CONSEQUENCES OF YOUR ACQUISITION, HOLDING
AND DISPOSITION OF INVESTMENTS IN YOUR ACCOUNT. FURTHERMORE, EVEN IF OUR
INTERPRETATIONS ARE CORRECT, IT IS POSSIBLE THAT THE TAX CONSEQUENCES UNDER THE
QUALIFIED DIVIDEND AND STRADDLE RULES COULD CHANGE DEPENDING ON CHANGES IN YOUR
CIRCUMSTANCES IN FUTURE YEARS, PARTICULARLY IF LOSSES ARE REALIZED AT A TIME
WHEN IT HAS BECOME LIKELY THAT YOUR ACCOUNT VALUE WILL REACH THE GREATER OF
YOUR MOST RECENTLY DETERMINED WITHDRAWAL GUARANTEE AND $20,000 AND YOU WILL
RECEIVE LIFETIME INCOME PAYMENTS OF THE GUARANTEED INCOME THEREAFTER. THE TAX
CONSEQUENCES COULD ALSO CHANGE DUE TO CHANGES IN THE TAX LAWS. GIVEN THE
NOVELTY OF A CERTIFICATE, YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE TAX
CONSEQUENCES, IF ANY, OF A NON-QUALIFIED CERTIFICATE UNDER THESE RULES AND
OTHER RELEVANT TAX PROVISIONS, BOTH AT THE TIME OF INITIAL PURCHASE AND IN
SUBSEQUENT YEARS.
28
The following discussion assumes that a Non-Qualified Certificate will be
treated as an annuity contract for federal tax purposes and that the
Certificate will have no effect on the tax treatment of transactions involving
the assets held in your Account.
GUARANTEED INCOME PAYMENTS. If your Non-Qualified Certificate is treated as an
annuity contract for federal tax purposes, Guaranteed Income payments should
generally be treated in part as taxable ordinary income and in part as
non-taxable recovery of your investment in the contract until you recover all
of your investment in the contract. The non-taxable portion of your Guaranteed
Income payments will generally be recoverable over your life expectancy, as
determined when such payments start. After you recover all of your investment
in the contract, Guaranteed Income payments will be taxable in full as ordinary
income. In determining the non-taxable portion of your Guaranteed Income
payments, your investment in the contract should include any Account Value paid
to us as a result of your Account Value being reduced below the greater of your
most recently determined Withdrawal Guarantee and $20,000 (or upon reaching age
100, if applicable) and, while not free from doubt, the aggregate Asset Charges
you have paid under your Certificate.
. PLEASE NOTE: ANY ACCOUNT VALUE PAID TO US AS A RESULT OF YOUR ACCOUNT
VALUE BEING REDUCED BELOW YOUR MINIMUM AMOUNT (OR UPON REACHING AGE 100,
IF APPLICABLE) MAY BE A TAXABLE EVENT AND THEREFORE CANNOT BE PAID TO US
ON A TAX-FREE BASIS. IN ADDITION, IT IS POSSIBLE THAT THE IRS MAY TAKE THE
POSITION THAT YOUR AGGREGATE ASSET CHARGES CONSTITUTE NONDEDUCTIBLE
EXPENSES THAT ARE NOT INCLUDIBLE IN YOUR INVESTMENT IN THE CONTRACT. AT
PRESENT, WE INTEND TO TREAT THE AGGREGATE ASSET CHARGES YOU HAVE PAID FOR
YOUR NON-QUALIFIED CERTIFICATE AS AMOUNTS INCLUDIBLE IN YOUR INVESTMENT IN
THE CONTRACT. You should consult a tax advisor as to the tax treatment of
Guaranteed Income payments since the propriety of this treatment is not
free from doubt.
. POTENTIAL PENALTY TAX: GUARANTEED INCOME PAYMENTS RECEIVED BY YOU PRIOR TO
THE TIME YOU ATTAIN AGE 591/2 WILL LIKELY BE SUBJECT TO THE 10% PENALTY
TAX IMPOSED UNDER SECTION 72(Q) OF THE CODE IN RESPECT OF AMOUNTS RECEIVED
UNDER AN ANNUITY CONTRACT. IN THIS REGARD, IT IS POSSIBLE THAT ANY
GUARANTEED INCOME PAYMENT RECEIVED BY A NON-NATURAL PERSON OWNER, SUCH AS
A TRUST, MAY BE SUBJECT TO THIS PENALTY IRRESPECTIVE OF WHEN SUCH PAYMENT
IS RECEIVED. Before purchasing a Certificate, you should consult a tax
advisor about the potential application of the Section 72(q) penalty tax
to your Guaranteed Income payments.
LIQUIDATION OF ACCOUNT INVESTMENTS TO PURCHASE THE ALTERNATIVE ANNUITY PAYMENT
OPTION. The liquidation of your Account investments to purchase the
Alternative Annuity Payment option will be a taxable event, and you will not be
able to apply the proceeds therefrom to purchase the Alternative Annuity
Payment option provided under a Non-Qualified Certificate on a tax-free basis.
TAXATION OF DISTRIBUTIONS UNDER ALTERNATIVE ANNUITY PAYMENT PROVISION. If you
exercise your right to liquidate your Account and apply all of the proceeds to
the Alternative Annuity Payment provision, we believe that distributions under
the Alternative Annuity Payment provision should be taxed as annuity
distributions. Thus, distributions under the Alternative Annuity Payment
provision will be taxed as ordinary income to the extent that the value is more
than your investment in the contract (discussed further below). Alternative
Annuity Payment distributions should generally be treated in part as taxable
ordinary income and in part as non-taxable recovery of your investment in the
contract. The non-taxable portion of your Alternative Annuity Payment
distributions will generally be recoverable over your life expectancy, as
determined when such distributions start. After you recover all of your
investment in the contract, Alternative Annuity Payment distributions will be
taxable in full as ordinary income.
If you exercise your right to liquidate your Account and apply all of the
proceeds to the Alternative Annuity Payment provision, your investment in the
contract should be equal to the Account Value applied to the Alternative
Annuity Payment provision plus, while not free from doubt, the aggregate Asset
Charges you previously paid under your Certificate. WITH RESPECT TO THE
INCLUSION OF THE AGGREGATE ASSET CHARGES YOU PREVIOUSLY PAID UNDER YOUR
CERTIFICATE IN YOUR INVESTMENT IN THE CONTRACT FOR THE ALTERNATIVE ANNUITY
PAYMENT PROVISION, IT IS POSSIBLE THAT THE IRS MAY TAKE THE POSITION THAT THE
AGGREGATE ASSET CHARGES YOU PREVIOUSLY PAID UNDER YOUR CERTIFICATE DO NOT
CONSTITUTE PART OF YOUR INVESTMENT IN THE CONTRACT WHEN YOU HAVE ELECTED THE
ALTERNATIVE ANNUITY PAYMENT ON THE THEORY THAT SUCH CHARGES DO NOT CONSTITUTE
AMOUNTS PAID FOR THE ALTERNATIVE ANNUITY PAYMENT. WHILE FOR TAX REPORTING
PURPOSES WE CURRENTLY INTEND TO INCLUDE ANY AGGREGATE ASSET CHARGES YOU
PREVIOUSLY PAID FOR YOUR CERTIFICATE IN THE INVESTMENT IN THE CONTRACT SHOULD
YOU ELECT THE ALTERNATIVE ANNUITY PAYMENT PROVISION, YOU SHOULD CONSULT A TAX
ADVISOR ON THIS MATTER AS IT IS NOT FREE FROM DOUBT.
PAYMENT OF THE ASSET CHARGE. Payment of the Asset Charge with proceeds from
the sale of investment assets held in your
29
Account may have tax consequences. You should consult a tax advisor for further
information.
REALLOCATIONS TO SATISFY REVISED ASSET ALLOCATION MODELS. You may be required
to liquidate or sell some or all of the investments in your Account in the
event that the asset allocation model(s) you have selected are changed. Any
such liquidation or sale will be a taxable event, and you will not be able to
apply the proceeds therefrom to purchase new Account investments that satisfy
the revised asset allocation model(s) on a tax-free basis.
QUALIFIED CERTIFICATES.
A Certificate may be used with traditional Individual Retirement Accounts and
Roth IRA Accounts (collectively, "IRA Accounts"). A Qualified Certificate may
be purchased by an IRA Account, including a brokerage account held under that
IRA Account. A Qualified Certificate is not available as an Individual
Retirement Annuity or for use with any other type of tax-qualified retirement
plan.
The tax rules applicable to Qualified Certificates vary according to the type
of IRA Account and the terms and conditions of the IRA Account. No attempt is
made here to provide more than general information about the use of the
Qualified Certificate with the IRA Account. Owners of IRA Accounts, as well as
beneficiaries, are cautioned that the rights of any person to any benefits
under such IRA Account may be subject to the terms and conditions of the IRA
Account itself or limited by applicable law, regardless of the terms and
conditions of the Qualified Certificate.
We reserve the right to discontinue offering the Certificates to new
Certificate Owners that plan to use the Certificates with IRA Accounts.
A Qualified Certificate is available only with respect to the IRA Account for
which the Qualified Certificate is purchased.
. A Qualified Certificate is intended for purchase only by the trustee
or custodian of an IRA Account.
. We are not responsible for determining whether a Qualified Certificate
complies with the terms and conditions of, or applicable law
governing, any IRA Account. You are responsible for making that
determination. Similarly, we are not responsible for administering any
applicable tax or other legal requirements applicable to your IRA
Account. You or a service provider for your IRA Account is responsible
for determining that distributions, beneficiary designations,
investment restrictions, charges and other transactions under a
Qualified Certificate are consistent with the terms and conditions of
your IRA Account and applicable law.
. If your spouse is a Joint Participant, your spouse must be your
beneficiary under your IRA Account.
. IRA Accounts may be subject to required minimum distribution rules.
The value of the guarantee provided by a Qualified Certificate may
have to be taken into account in determining your required minimum
distributions under the IRA Account. Withdrawals from your Account
taken to meet required minimum distribution requirements, in the
proportion of your Account Value to your overall IRA Account balance,
will be deemed to be within the contract limits for your Certificate.
The required minimum distribution shall not exceed the required
minimum distribution amount calculated under the Code and regulations
issued thereunder as in effect on the Certificate Date.
Numerous changes have been made to the income tax rules governing IRA Accounts
as a result of legislation enacted during the past several years, including
rules with respect to: maximum contributions, required distributions, penalty
taxes on early or insufficient distributions and income tax withholding on
distributions. The following are general descriptions of the various types of
IRA Accounts and of the use of the contracts in connection therewith.
INDIVIDUAL RETIREMENT ACCOUNTS. Code Sections 408 and 408A permit eligible
individuals to contribute to an individual retirement program known as an "IRA"
or "Roth IRA." These IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible and on the time when distributions
may commence. In addition, distributions from certain other types of qualified
plans may be placed on a tax-deferred basis into an IRA. Individuals may
establish Roth IRAs.
TAX ON CERTAIN DISTRIBUTIONS RELATING TO IRA ACCOUNTS. Distributions under a
Qualified Certificate may be paid to the IRA Account, if permitted under the
terms of the IRA Account, or directly to you. Distributions paid to the IRA
Account are not in and of themselves taxable.
In the case of distributions from a traditional IRA Account to you, including
payments to you from a Qualified Certificate, a ratable portion of the amount
received is taxable, generally based on the ratio of your cost basis (if any)
to your total accrued benefit under the IRA Account. Section 72(t) of the Code
imposes a 10% penalty tax on the taxable portion of any
30
distribution from IRA Accounts. To the extent amounts are not includable in
gross income because they have been properly rolled over to another IRA or to
another eligible qualified plan, no tax penalty will be imposed. The tax
penalty also will not apply to: (a) distributions made on or after the date on
which you reach age 59 1/2; (b) distributions following your death or
disability (for this purpose disability is as defined in Section 72(m)(7) of
the Code); (c) distributions that are part of substantially equal periodic
payments made not less frequently than annually for your life (or life
expectancy) or the joint lives (or joint life expectancies) of your and your
designated beneficiary; and (d) certain other distributions specified in the
Code.
Generally, distributions from a traditional IRA Account must commence no later
than April 1 of the calendar year following the year in which the individual
attains age 70 1/2. Required distributions must be over a period not exceeding
the life expectancy of the individual or the joint lives or life expectancies
of the individual and his or her designated beneficiary. Distribution
requirements also apply to IRAs (including Roth IRAs) upon the death of the IRA
owner. If the required minimum distributions are not made, a 50% penalty tax is
imposed as to the amount not distributed. Pursuant to special legislation,
required minimum distributions for the 2009 tax year generally are not required
and 2009 minimum distributions that otherwise would be required may be eligible
for rollover.
Special rules apply to participants' contributions to and withdrawals from
SIMPLE IRAs and Roth IRAs.
PAYMENT OF THE ASSET CHARGE. If you pay the Asset Charge for a Qualified
Certificate issued to your IRA Account from other assets in your IRA Account,
that payment will not be a "distribution" from your IRA Account under the Code.
If you pay the Asset Charge for a Qualified Certificate from other assets held
outside your IRA Account, the Asset Charge may have tax consequences and also
be treated as an additional contribution to your IRA Account. You should
consult a tax advisor for further information.
SEEK TAX ADVICE. The above description of federal income tax consequences of
the different types of IRAs which may be funded by a Qualified Certificate
offered by this prospectus is only a brief summary meant to alert you to the
issues and is not intended as tax advice. Anything less than full compliance
with the applicable rules, all of which are subject to change, may have adverse
tax consequences. Any person considering the purchase of a Certificate in
connection with an IRA Account should first consult a qualified tax advisor,
with regard to the suitability of a Qualified Certificate for the IRA Account.
ABOUT US
We are a stock life insurance company operating under a charter granted by the
Commonwealth of Virginia on March 21, 1871. We principally offer life insurance
policies and annuity contracts. We do business in 49 states and the District of
Columbia. Our principal offices are located at 6610 West Broad Street,
Richmond, Virginia 23230. We are obligated to pay all amounts promised under
the Contract and Certificates.
Capital Brokerage Corporation (which does business in Indiana as Genworth
Financial Brokerage Corporation) serves as principal underwriter for the
Certificates and is a broker/dealer registered with the SEC. Genworth North
America Corporation ("GNA") (formerly, GNA Corporation) directly owns the stock
of Capital Brokerage Corporation and the Company. GNA is directly owned by
Genworth Financial, Inc. ("Genworth"), a public company.
We are a charter member of the Insurance Marketplace Standards Association
("IMSA"). We may use the IMSA membership logo and language in our
advertisements, as outlined in IMSA's Marketing and Graphics Guidelines.
Companies that belong to IMSA subscribe to a set of ethical standards covering
the various aspects of sales and service for individually sold life insurance
and annuities.
Effective August 1, 2008, AssetMark Investment Services, Inc. changed its name
to Genworth Financial Wealth Management, Inc. ("GFWM"). GFWM is a California
corporation, owned by Genworth. GFWM is a registered investment advisor, and
provides consulting services to other advisors and investment advisory clients.
Its executive and administrative office is located at 2300 Contra Costa
Boulevard, Suite 600, Pleasant Hill, California 94523.
SALES OF THE CERTIFICATES
We have entered into an underwriting agreement with Capital Brokerage
Corporation (doing business in Indiana as Genworth Financial Brokerage
Corporation) (collectively, "Capital Brokerage Corporation") for the
distribution and sale of the Certificates. Pursuant to this agreement, Capital
Brokerage Corporation serves as principal underwriter for the Certificates,
offering them on a continuous basis. Capital Brokerage Corporation is located
at 6620 West Broad Street, Building 2, Richmond, Virginia 23230. Capital
Brokerage Corporation will use its best efforts to sell the Certificates, but
is not required to sell any specific number or dollar amount of Certificates.
Capital Brokerage Corporation was organized as a corporation under the laws of
the state of Washington in 1981 and is an affiliate of ours. Capital Brokerage
Corporation is registered as
31
a broker-dealer with the SEC under the Securities Exchange Act of 1934, as well
as with the securities commissions in the states in which it operates, and is a
member of the Financial Industry Regulatory Authority ("FINRA") (formerly, the
NASD, Inc.).
Capital Brokerage Corporation offers the Certificates through registered
representatives who are registered with FINRA and with the states in which they
do business. More information about Capital Brokerage Corporation and the
registered representatives is available at http://www.finra.org or by calling
800.289.9999. You can also obtain an investor brochure from FINRA describing
its Public Disclosure Program. Registered representatives with Capital
Brokerage Corporation are also licensed as insurance agents in the states in
which they do business and are appointed with us.
Capital Brokerage Corporation also enters into selling agreements with an
affiliated broker-dealer and unaffiliated broker-dealers to sell the
Certificates. The registered representatives of these selling firms are
registered with FINRA and with the states in which they do business, are
licensed as insurance agents in the states in which they do business and are
appointed with us.
We do not pay commissions to Capital Brokerage Corporation or to the affiliated
broker-dealer or unaffiliated broker-dealers for the promotion and sales of the
Certificates.
At times, Capital Brokerage Corporation may make other cash and non-cash
payments to selling firms, as well as receive payments from selling firms, for
expenses relating to the recruitment and training of personnel, periodic sales
meetings, the production of promotional sales literature and similar expenses.
These expenses may also relate to the synchronization of technology between the
Company, Capital Brokerage Corporation and the selling firm in order to
coordinate data for the sale and maintenance of the Certificates. In addition,
registered representatives may be eligible for non-cash compensation programs
offered by Capital Brokerage Corporation or an affiliated company, such as
conferences, trips, prizes and awards. The amount of other cash and non-cash
compensation paid by Capital Brokerage Corporation or its affiliated companies
ranges significantly among the selling firms. Likewise, the amount received by
Capital Brokerage Corporation from the selling firms ranges significantly.
You indirectly pay for the incentives described above through the fees and
charges imposed under the Certificates.
All payments made or received by Capital Brokerage Corporation to or from
selling firms come from or are allocated to the general assets of Capital
Brokerage Corporation or one of its affiliated companies. Therefore, regardless
of the amount paid or received by Capital Brokerage Corporation or one of its
affiliated companies, the amount of expenses you pay under the Certificate do
not vary because of such payments to or from such selling firms.
Although the Company and Capital Brokerage Corporation do not anticipate
discontinuing offering the Certificates, we do reserve the right to discontinue
offering the Certificates at any time.
LEGAL PROCEEDINGS
We face a significant 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 or may become subject to class actions and individual suits alleging,
among other things, issues relating to sales or underwriting practices, payment
of contingent or other sales commissions, claims payments and procedures,
product design, product disclosure, administration, additional premium charges
for premiums paid on a periodic basis, denial or delay of benefits, charging
excessive or impermissible fees on products, recommending unsuitable products
to customers and breaching fiduciary or other duties to customers. Plaintiffs
in class action and other lawsuits against us may seek very large or
indeterminate amounts, including punitive and treble damages, which may remain
unknown for substantial periods of time. In our investment-related operations,
we are subject to litigation involving commercial disputes with counterparties.
We are also subject to litigation arising out of our general business
activities such as our contractual and employment relationships. We are also
subject to various regulatory inquiries, such as information requests,
subpoenas and books and record examinations and market conduct and financial
examinations, from state and federal 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
and results of operations.
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
further investigations and have lawsuits filed against us. In addition,
increased regulatory scrutiny and any
32
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.
The Company shall, and may through insurance coverage, indemnify any directors
or officers who are a party to any proceeding by reason of the fact that he or
she was or is a director or officer of the Company against any liability
incurred by him or her in connection with such proceeding unless he or she
engaged in willful misconduct or a knowing violation of the criminal law or any
federal or state securities law. Such indemnification covers all judgments,
settlements, penalties, fines and reasonable expenses incurred with respect to
such proceeding. If the person involved is not a director or officer of the
Company, the board of directors may cause the Company to indemnify, or contract
to indemnify, to the same extent allowed for its directors and officers, such
person who was, is or may become a party to any proceeding, by reason of the
fact that he or she is or was an employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise.
Insofar as indemnification for liability arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the depositor in successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
Capital Brokerage Corporation and GFWM are not involved in any pending or
threatened lawsuits that are reasonably likely to have a material adverse
impact on us.
ADDITIONAL INFORMATION
OWNER QUESTIONS.
The obligations to Owners and Participants under the Contracts and Certificates
are ours. Please direct your questions and concerns to us at our Home Office.
RETURN PRIVILEGE.
Within the free-look period (generally 30 days) after you receive the
Certificate, you may cancel it for any reason by delivering or mailing it
postage prepaid to:
Genworth Life and Annuity Insurance Company
Annuity New Business
6610 West Broad Street
Richmond, Virginia 23230
If the Owner cancels the Certificate, the Certificate will be void.
STATE REGULATION.
As a life insurance company organized and operated under the laws of the
Commonwealth of Virginia, we are subject to provisions governing life insurers
and to regulation by the Virginia Commissioner of Insurance.
Our books and accounts are subject to review and examination by the State
Corporation Commission of the Commonwealth of Virginia at all times. That
Commission conducts a full examination of our operations at least every five
years.
EVIDENCE OF DEATH, AGE, GENDER OR SURVIVAL.
We may require proof of the age, gender, death or survival of any person or
persons before acting on any applicable Certificate provision.
LEGAL MATTERS
Certain advice regarding the validity of the securities as described in this
prospectus has been provided by Heather C. Harker.
Opinions may be issued in the future by counsel other than those listed above.
The name of such counsel, other than those listed above, will be included in a
prospectus supplement.
EXPERTS
The consolidated financial statements and financial statement schedules of
Genworth Life and Annuity Insurance Company and subsidiaries as of December 31,
2009 and 2008, and for each of the years in the three-year period ended
December 31, 2009, have been included herein in the registration statement in
reliance upon the reports of KPMG LLP, independent registered public accounting
firm, and upon the authority of said firm as experts in accounting and auditing.
33
WHERE YOU CAN FIND MORE INFORMATION
This prospectus, which constitutes part of the registration statement, does not
contain all the information set forth in the registration statement. Parts of
the registration statement are omitted from this prospectus in accordance with
the rules and regulations of the SEC.
The registration statement, including exhibits, contains additional relevant
information about us. You can read and copy any information we file at the SEC
public reference room at 100 F Street, N.E., Washington, D.C. 20549. You can
also request copies of our documents upon payment of a duplicating fee, by
writing the SEC's public reference room. You can obtain information regarding
the public reference room by calling the SEC at 1-800-SEC-0330. Our filings are
available to the public from commercial document retrieval services and over
the internet at http://www.sec.gov. (This uniform resource
locator (URL) is an inactive textual reference only and is not intended to
incorporate the SEC web site into this prospectus.)
RELIANCE ON RULE 12H-7 UNDER THE SECURITIES EXCHANGE ACT OF 1934
The SEC adopted rule 12h-7 under the Securities Exchange Act of 1934, as
amended ("Exchange Act") which went effective May 1, 2009. Rule 12h-7 exempts
insurance companies from filing reports under the Exchange Act when the
insurance company issues certain types of insurance products that are
registered under the Securities Act of 1933 and such products are regulated
under state law. The Certificates issued under Guaranteed Annuity Contracts
described in this prospectus fall within conditions of the exemption provided
under rule 12h-7. The Company is hereby providing notice that it is relying on
the exemption provided under rule 12h-7.
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This filing, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains certain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements may be identified by words such as
"expects," "intends," "anticipates," "plans," "believes," "seeks," "estimates,"
"will," or words of similar meaning and include, but are not limited to,
statements regarding the outlook for our future business and financial
performance. Forward-looking statements are based on management's current
expectations and assumptions, which are subject to inherent uncertainties,
risks and changes in circumstances that are difficult to predict. Actual
outcomes and results may differ materially due to global political, economic,
business, competitive, market, regulatory and other factors and risks,
including the items identified under "Risk Factors."
We undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future developments or otherwise.
Unless the context otherwise requires, "GLAIC," "we," "us" and "our" refer to
Genworth Life and Annuity Insurance Company and its subsidiaries.
BUSINESS
Overview
Genworth Life and Annuity Insurance Company is a stock life insurance company
operating under a charter granted by the Commonwealth of Virginia on March 21,
1871 as The Life Insurance Company of Virginia. An affiliate of our former
ultimate parent company acquired us on April 1, 1996 and ultimately contributed
the majority of the outstanding common stock to Genworth Life Insurance Company
("GLIC").
On May 31, 2004, we became a direct, wholly-owned subsidiary of GLIC while
remaining an indirect, wholly-owned subsidiary of Genworth. Until March 12,
2007, our preferred shares were owned by an affiliate, Brookfield Life
Assurance Company Limited. On March 12, 2007, we redeemed the remaining
outstanding preferred shares for par value of $110.0 million and paid $2.5
million in dividends on the redeemed preferred shares. On April 30, 2007, the
issued shares of preferred stock were retired.
Our principal offices are located at 6610 West Broad Street, Richmond, Virginia
23230.
On January 1, 2007, Federal Home Life Insurance Company ("FHL") and First
Colony Life Insurance Company ("FCL") merged with and into GLAIC. GLAIC was the
surviving entity. FHL and FCL were both stock life insurance companies
operating under charters granted by the Commonwealth of Virginia and both were
affiliates of the Company. We received regulatory approval from the State
Corporation Commission, Bureau of Insurance of the Commonwealth of Virginia for
these mergers.
Upon consummation of the FHL and FCL mergers, GLAIC transferred its ownership
of American Mayflower Life
34
Insurance Company of New York ("AML"), formerly a wholly-owned subsidiary of
FCL, to Genworth Life Insurance Company of New York ("GLICNY"), an affiliate,
in exchange for a non-majority ownership interest in GLICNY. AML merged into
GLICNY, with GLICNY being the surviving entity.
We are one of a number of subsidiaries of Genworth, a leading financial
security company dedicated to providing insurance, wealth management,
investment and financial solutions to more than 15 million customers, with a
presence in more than 25 countries. We have two operating segments: Protection
and Retirement Income, formerly known as Retirement Income and Institutional.
. PROTECTION. We offer customers term and universal life insurance and
Medicare supplement insurance.
. RETIREMENT INCOME. We offer customers a variety of wealth accumulation
and income distribution products. Wealth accumulation and income
distribution products principally include fixed and variable deferred and
immediate individual annuities and group variable annuities offered
through retirement plans.
We also have Corporate and Other activities which include unallocated corporate
income and expenses and the results of non-strategic products that are managed
outside of our operating segments. Our non-strategic products include our
institutional and corporate-owned life insurance products. Institutional
products consist of: funding agreements, funding agreements backing notes
("FABNs") and guaranteed investment contracts ("GICs").
On a consolidated basis, we had $4,327.7 million of total stockholder's equity
and $41,185.4 million of total assets as of December 31, 2009. For the year
ended December 31, 2009, our revenues were $1,910.4 million and we had a net
loss of $1.3 million.
As of April 9, 2010, our financial strength ratings were "A" (Strong) from
Standard & Poor's Financial Services LLC ("S&P"), "A2" (Good) from Moody's
Investors Service Inc. ("Moody's"), "A" (Excellent) from A.M. Best Company,
Inc. ("A.M. Best") and "A-" (Strong) from Fitch Ratings ("Fitch").
Positioning for the Future
We offer a variety of products and services that meet consumers' financial
security needs at various stages of their lives but concentrate our focus on
those products and services where we have leadership positions or can
differentiate based on: product innovation and value; risk expertise;
distribution strength; service effectiveness or cost efficiency. Consistent
with this strategy, we have concentrated our product and service offerings in
our life insurance product lines. We also selectively target certain annuity
product offerings. This approach is designed to help us achieve growth through
pursuit of the following key initiatives:
. DRIVE NEW BUSINESS WITH IMPROVED PROFITABILITY. As we focus on our
leadership business, we continue to concentrate on market segments that we
see as most attractive and that best fit with our strengths, profitability
targets and risk tolerance. We strive to maintain appropriate return and
risk thresholds in our product offerings through pricing actions and
changes in product design or distribution structures, as well as new
product introductions.
. OPTIMIZE INVESTMENT PORTFOLIO PERFORMANCE. We have restructured our
investment portfolio to help protect against the potential impact of a
prolonged recession or slow economic recovery, including the exit of
riskier investments. We have a disciplined asset-liability management
process that enables us to manage our assets and liabilities effectively.
We reduced exposures in several major asset classes, including the
financial sectors, and exited selected investments in limited
partnerships. We have a diversified investment portfolio and have shifted
certain investments towards industries that we believe will be less
impacted by economic cycles, such as utilities. We continue to identify
and limit certain exposure levels to maintain or achieve desired
diversification. We have begun reinvesting the substantial cash balances
we maintained through the uncertain market conditions that began in 2008
and continued into early 2009 to enhance investment income and yields. We
also pursue selected portfolio hedging strategies to enhance returns.
. CONTINUE ACTIVE RISK MANAGEMENT. We seek to adapt to changes and
proactively manage risk as it relates to our businesses. We have reviewed
our pricing and product designs and made adjustments as necessary.
. EXECUTE EFFECTIVE CAPITAL MANAGEMENT AND CAPITAL DEPLOYMENT. We pursue
capital management strategies to support the capitalization and targeted
ratings for us and our insurance subsidiaries. Our objective is to
maintain adequate levels of capital in the event of unforeseen events,
while still meeting our targeted goals. We have introduced new products
that are more capital efficient. We have achieved the generation of
statutory capital from profit emergence on our in-force business, as well
as from ongoing capital management and efficiency strategies such as use
of reinsurance, management of new business levels and
35
cost reductions. In addition, we continue to evaluate opportunities to
redeploy capital from lower returning blocks of business.
Growth Strategies
Our objectives are to increase revenues and income. Our strategy is centered
around life insurance, with a more targeted focus on annuities, Medicare
supplement insurance and other senior supplemental offerings. We are committed
to providing competitively-priced life insurance products that give consumers
greater flexibility. In 2009, we introduced a new term universal life insurance
product that is designed to replace our existing term life insurance products
and offers death benefit guarantee premiums and a similar value proposition to
traditional term life insurance but offers flexibility associated with
universal life coverage. This new product is designed to reduce capital
requirements and limit financing costs associated with existing term life
insurance products. We selectively target our annuity product lines and will
distribute annuity offerings through channels, distributors and advisors with
greatest growth opportunities and that are most clearly aligned with our
strategic objectives and risk appetite.
Our Business
Through our Protection and Retirement Income segments, we offer various forms
of life insurance, Medicare supplement insurance and retirement income
products. Protection products include term and universal life insurance and
Medicare supplement insurance. Retirement income products include variable
annuities, fixed deferred annuities and single premium immediate annuities.
In December 2009, we began reporting our institutional and corporate-owned life
insurance products, previously included in our Retirement Income and Protection
segments, respectively, in Corporate and Other activities, as they were deemed
non-strategic. All prior period amounts have been re-presented.
The following table sets forth financial information regarding our segments as
of or for the periods indicated:
AS OF OR FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------------------------
(AMOUNTS IN MILLIONS) 2009 2008 2007
-------------------------------------------------------------
REVENUES:
Protection $ 1,412.1 $ 1,362.1 $ 1,820.8
Retirement Income 443.7 407.6 591.6
Corporate and Other 54.6 (81.9) 240.9
--------- --------- ---------
Total revenues $ 1,910.4 $ 1,687.8 $ 2,653.3
-------------------------------------------------------------
NET INCOME (LOSS):
Protection $ 27.2 $ (51.7) $ 240.2
Retirement Income (31.1) (152.8) 75.9
Corporate and Other 2.6 (204.8) 7.6
--------- --------- ---------
Total net income (loss) $ (1.3) $ (409.3) $ 323.7
-------------------------------------------------------------
ASSETS:
Protection $15,299.1 $14,926.2 $14,879.9
Retirement Income 22,404.9 21,357.2 24,939.1
Corporate and Other 3,481.4 5,087.4 6,158.1
--------- --------- ---------
Total assets $41,185.4 $41,370.8 $45,977.1
-------------------------------------------------------------
In addition to measuring revenues, net income (loss) and assets in terms of
operating performance, management also monitors and reports sales and insurance
in-force metrics each period.
Management regularly monitors and reports sales metrics as a measure of volume
of new and renewal business generated in a period. Sales refer to:
(1) annualized first-year premiums for term life insurance and Medicare
supplement insurance; and (2) new and additional premiums/deposits for
universal life insurance, fixed annuities and variable products. Sales do not
include renewal premiums on policies or contracts written during prior periods.
We consider annualized first-year premiums and new premiums/deposits to be a
measure of our operating performance because they represent a measure of new
sales of insurance policies or contracts during a specified period, rather than
a measure of our revenues or profitability during that period.
Management regularly monitors and reports insurance in-force. Insurance
in-force for our life insurance is a measure of the aggregate face value of
outstanding insurance policies as of the respective reporting date. We consider
insurance in-force to be a measure of our operating performance because it
represents a measure of the size of our business at a specific date, rather
than a measure of our revenues or profitability during that period.
These operating measures enable us to compare our operating performance across
periods without regard to revenues or profitability related to policies or
contracts sold in prior periods or from investments or other sources.
36
Protection
Through our Protection segment we offer term and universal life insurance and
Medicare supplement insurance.
LIFE INSURANCE
Our life insurance business markets and sells products that provide a personal
financial safety net for individuals and their families. These products provide
protection against financial hardship after the death of an insured and may
also offer a savings element that can be used to help accumulate funds to meet
future financial needs. In 2009, we implemented new marketing strategies and
enhanced sales support services and product offerings that allow our producers
to effectively sell to our targeted middle market consumer segment. Our sales
support efforts provide case management services for producers and marketing
programs focused on middle market consumers who purchase policies with face
amounts under $1 million. These services include a simplified fulfillment
process and underwriting which enable high volume, low-cost processing for
lower average policy sizes supporting our targeted markets.
PRODUCTS
Our principal life insurance products are term life and universal life. We also
have a runoff block of whole life insurance. Term life insurance products
provide coverage with guaranteed level premiums for a specified period of time
and generally have little or no buildup of cash value. We have been a leading
provider of term life insurance for more than two decades and are a leader in
marketing through brokerage general agencies ("BGAs") in the U.S. In 2009, we
introduced a new term universal life insurance product that is designed to
replace new sales of our existing term life insurance products. The new term
universal life insurance product offers death benefit guarantee premiums that
are competitive with traditional term life insurance premiums for comparable
durations. This new product also provides greater flexibility typically
associated with universal life insurance coverage while reducing related
non-economic capital requirements and financing costs relative to traditional
term life insurance.
We also offer other universal life insurance products that are designed to
provide permanent protection for the life of the insured and may include a
buildup of cash value that can be used to meet particular financial needs
during the policyholder's lifetime.
UNDERWRITING AND PRICING
Underwriting and pricing are significant drivers of profitability in our life
insurance business, and we have established rigorous underwriting and pricing
practices. We have generally reinsured risks in excess of $5.0 million per
life. From time to time, we may reinsure any risk depending on the pricing
terms of available reinsurance. We set pricing assumptions for expected claims,
lapses, investment returns, expenses and customer demographics based on our
experience and other factors.
We price our life insurance policies based primarily upon our historical
experience. We target individuals primarily in preferred risk categories, which
include healthier individuals who generally have family histories that do not
present increased mortality risk. We also have significant expertise in
evaluating people with health problems and offer appropriately priced coverage
based on stringent underwriting criteria.
DISTRIBUTION
We offer life insurance products through an extensive network of independent
BGAs throughout the U.S. and through financial intermediaries and insurance
marketing organizations. We believe there are opportunities to expand our sales
through each of these and other distribution channels.
COMPETITION
Competition in our life insurance business comes from many sources, including
many traditional insurance companies as well as non-traditional providers, such
as banks and structured finance or private equity markets. The life insurance
market is highly fragmented. Competitors have multiple access points to the
market through BGAs, financial institutions, career sales agents, multi-line
exclusive agents, e-retail and other life insurance distributors. We operate
primarily in the BGA channel and have built additional capabilities in other
channels. We believe our competitive advantage in the term life insurance
market comes from our long history serving this market, our service excellence,
underwriting expertise and pricing on smaller face amounts as our average
policy size is less than $400,000. We believe that this past success will help
with sales of our new term universal life insurance product as it will be sold
primarily through existing BGA and other channels.
37
The following table sets forth selected financial information regarding our
life insurance products as of or for the years ended December 31:
(AMOUNTS IN MILLIONS) 2009 2008 2007
----------------------------------------------------------------------------------
TERM LIFE INSURANCE
Net earned premiums $ 840.9 $ 819.2 $ 782.3
Annualized first-year premiums 49.8 57.3 70.0
Life insurance in-force, net of reinsurance 347,046.6 391,581.9 385,212.9
Life insurance in-force before reinsurance 506,811.9 514,527.6 516,608.7
----------------------------------------------------------------------------------
UNIVERSAL AND WHOLE LIFE INSURANCE
Net earned premiums and deposits $ 424.3 $ 507.5 $ 540.6
Universal life annualized first-year deposits 21.8 35.7 43.3
Universal life excess deposits 74.5 123.7 169.0
Life insurance in-force, net of reinsurance 38,600.1 41,422.9 40,000.1
Life insurance in-force before reinsurance 45,130.2 45,980.2 46,826.4
----------------------------------------------------------------------------------
TOTAL LIFE INSURANCE
Net earned premiums and deposits $ 1,265.2 $ 1,326.7 $ 1,322.9
Annualized first-year premiums 49.8 57.3 70.0
Annualized first-year deposits 21.8 35.7 43.3
Excess deposits 74.5 123.7 169.0
Life insurance in-force, net of reinsurance 385,646.7 433,004.8 425,213.0
Life insurance in-force before reinsurance 551,942.1 560,507.8 563,435.1
----------------------------------------------------------------------------------
ACCIDENT AND HEALTH INSURANCE
PRODUCTS
The primary product in this line is Medicare supplement insurance. Our Medicare
supplement insurance provides coverage for Medicare-qualified expenses that are
not covered by Medicare because of applicable deductibles or maximum limits.
UNDERWRITING AND PRICING
Where permitted by state law, we segment our Medicare supplement applicants
into risk pools based on age, gender, smoking status and geography. These risk
classifications allow us to mitigate business mix risk by pricing separately
for each risk classification. We perform profitability analyses annually by
risk pool and request rate changes from state regulators to maintain our
pricing profitability. In the few situations where state law does not permit
these underwriting procedures, we issue policies on a guaranteed basis based on
pricing models that account for guaranteed issue requirements in these states.
DISTRIBUTION
These products are sold to individuals through dedicated sales specialists as
well as selected independent distributors.
COMPETITION
In addition to competing with other insurance companies, we also compete with
non-insurance alternatives to funding including government programs such as
Medicaid designed for the impoverished, continuing care retirement communities
and reliance on family members to provide for care. Our product competes by
providing peace of mind and independence to our policyholder and effectively
reducing the family burden associated with other care alternatives.
The following table sets forth selected financial information regarding our
accident and health insurance for the years ended December 31:
(AMOUNTS IN MILLIONS) 2009 2008 2007
-------------------------------------------------
Net earned premiums $74.6 $80.0 $86.7
Annualized first-year premiums 7.4 6.9 6.9
-------------------------------------------------
Retirement Income
We are focused on helping individuals create dependable income streams for life
or for a specified period of time and helping them save and invest to achieve
financial goals. We pursue this goal in both individual retail and group
markets. We believe our product designs, investment strategy requirements,
hedging disciplines and use of reinsurance reduce some of the risks to insurers
that generally accompany traditional products with guaranteed minimum death
benefits ("GMDBs"), guaranteed minimum withdrawal benefits ("GMWBs") and
certain types of guaranteed annuitization benefits. We are targeting people who
are focused on building a personal retirement plan with portability or are
moving from the accumulation to the distribution phase of their retirement
planning.
38
FEE-BASED PRODUCTS
Variable annuities and variable life insurance
We offer variable annuities that provide customers with a variety of investment
options in a separate account format. The contractholder bears the risk
associated with the performance of investments in the separate account. In
addition, some of our variable annuities permit customers to allocate assets to
a guaranteed interest account managed within our general account.
Variable annuities generally provide us fees including mortality and expense
risk charges and, in some cases, administrative charges. The fees equal a
percentage of the contractholder's policy account value and as of December 31,
2009, range from 0.75% to 4.05% per annum depending on the features and options
within a contract.
Our variable annuity contracts generally provide a basic GMDB which provides a
minimum account value to be paid upon the annuitant's death. Contractholders
may also have the option to purchase riders that provide enhanced death
benefits. Assuming every annuitant died on December 31, 2009, as of that date,
contracts with death benefit features not covered by reinsurance had an account
value of $6,348.4 million and a related death benefit exposure of $610.2
million net amount at risk.
Some of our variable annuity products provide the contractholder with a
guaranteed minimum income stream that they cannot outlive, along with an
opportunity to participate in market appreciation.
As a solution to the trend of employers moving away from traditional
defined benefit retirement plans to defined contribution plans such as 401(k)
plans, we have introduced to the qualified plan market a group variable annuity
with guaranteed retirement income features. This product is designed to
offer participants the ability to secure guaranteed retirement income with
growth potential during the accumulation phase while maintaining liquidity; and
during the distribution phase, to provide guaranteed annual income with upside
growth potential with varying degrees of liquidity with respect to underlying
assets.
We discontinued selling variable life insurance policies on May 1, 2008;
however, we continue to service existing policies.
DISTRIBUTION
We distribute our variable annuity products through banks, national brokerage
firms and independent broker/dealers. We also distribute our group variable
annuity product through broker/dealers and through defined contribution plan
record keepers. We continue to work with additional record keepers to adopt our
group variable annuity product on their platforms.
COMPETITION
There are numerous competitors in this market within all major distribution
channels through which we sell. Our variable annuity products enable consumers
to opt for lifetime guaranteed income beginning immediately or on a deferred
basis. We target specific consumer and distributor segments with our offerings.
The following table sets forth selected financial information regarding our
fee-based retail products as of or for the years ended December 31:
(AMOUNTS IN MILLIONS) 2009 2008 2007
--------------------------------------------------------------------------------------
VARIABLE ANNUITIES
Account value, net of reinsurance, beginning of period $6,063.2 $ 6,245.1 $3,865.5
Deposits 616.9 2,029.1 2,305.7
Surrenders, benefits and product charges (682.4) (717.0) (453.4)
-------- --------- --------
Net flows (65.5) 1,312.1 1,852.3
Interest credited and investment performance 832.2 (1,494.0) 527.3
-------- --------- --------
Account value, net of reinsurance, end of period $6,829.9 $ 6,063.2 $6,245.1
--------------------------------------------------------------------------------------
VARIABLE LIFE INSURANCE
Account value, net of reinsurance, beginning of period $ 266.6 $ 402.7 $ 390.2
Deposits 12.7 16.9 23.9
Surrenders, benefits and product charges (39.8) (42.0) (53.4)
-------- --------- --------
Net flows (27.1) (25.1) (29.5)
Interest credited and investment performance 58.5 (111.0) 42.0
-------- --------- --------
Account value, net of reinsurance, end of period $ 298.0 $ 266.6 $ 402.7
--------------------------------------------------------------------------------------
39
SPREAD-BASED PRODUCTS
Fixed annuities
We offer fixed single premium deferred annuities which require a single premium
payment at time of issue and provide an accumulation period and an annuity
payout period. The annuity payout period in these products may be defined as
either a defined number of years, the annuitant's lifetime or the longer of a
defined number of years or the annuitant's lifetime. During the accumulation
period, we credit the account value of the annuity with interest earned at a
crediting rate guaranteed for no less than one year at issue, but which may be
guaranteed for up to six years, and thereafter is subject to annual crediting
rate resets at our discretion. The rate credited is based upon competitive
factors and prevailing market rates, subject to statutory minimums. Our fixed
annuity contracts are supported by the claims paying ability of the issuing
insurance company, and the accrual of interest during the accumulation period
is generally on a tax-deferred basis to the owner. The majority of our fixed
annuity contractholders retain their contracts for five to ten years.
Single premium immediate annuities
In exchange for a single premium, immediate annuities provide a fixed amount of
income for either a defined number of years, the annuitant's lifetime or the
longer of a defined number of years or the annuitant's lifetime.
Structured settlements
Structured settlement annuity contracts provide an alternative to a lump sum
settlement, generally in a personal injury lawsuit or workers compensation
claim, and typically are purchased by property and casualty insurance companies
for the benefit of an injured claimant. The structured settlements provide
scheduled payments over a fixed period or, in the case of a life-contingent
structured settlement, for the life of the claimant with a guaranteed minimum
period of payments. In the third quarter of 2006, we discontinued sales of our
structured settlement annuities while continuing to service our retained and
reinsured blocks of business.
DISTRIBUTION
We distribute our spread-based products through banks, national brokerage and
financial firms, independent broker/dealers and BGAs.
COMPETITION
We compete with a large number of life insurance companies in the single
premium immediate annuity marketplace. We continue to see long-term growth
prospects for single premium immediate annuities based on demographics. We
believe long-term experience with mortality and longevity, combined with
disciplined risk management, contribute to competitiveness in how we segment
and price our products for our targeted markets.
We have certain bank distribution relationships through which we distribute our
fixed annuity products and we have expanded our efforts to distribute through
independent channels, including BGAs. Sales of fixed annuities are strongly
linked to current interest rates, which affect the relative competitiveness of
alternative products, such as certificates of deposit and money market funds.
We have experienced fluctuations in sales levels for this product and expect
these fluctuations to continue in the future based on our strategic focus,
desired targeted returns and risk disciplines.
40
The following table sets forth selected financial information regarding our
spread-based retail products as of or for the years ended December 31:
(AMOUNTS IN MILLIONS) 2009 2008 2007
-------------------------------------------------------------------------------------
FIXED ANNUITIES
Account value, net of reinsurance, beginning of period $ 788.1 $1,012.8 $1,244.4
Deposits 1.6 3.6 5.6
Surrenders, benefits and product charges (111.8) (264.9) (204.1)
-------- -------- --------
Net flows (110.2) (261.3) (198.5)
Transfer of AML -- -- (80.3)
Interest credited 29.1 36.6 47.2
-------- -------- --------
Account value, net of reinsurance, end of period $ 707.0 $ 788.1 $1,012.8
-------------------------------------------------------------------------------------
SINGLE PREMIUM IMMEDIATE ANNUITIES
Account value, net of reinsurance, beginning of period $2,696.0 $2,695.3 $2,779.7
Premiums and deposits 112.1 258.7 235.1
Surrenders, benefits and product charges (414.0) (408.1) (308.1)
-------- -------- --------
Net flows (301.9) (149.4) (73.0)
Transfer of AML -- -- (157.5)
Interest credited 143.7 150.1 146.1
-------- -------- --------
Account value, net of reinsurance, end of period $2,537.8 $2,696.0 $2,695.3
-------------------------------------------------------------------------------------
STRUCTURED SETTLEMENTS
Account value, net of reinsurance, beginning of period $ 396.1 $ 395.1 $ 399.6
Premiums and deposits 6.8 1.1 23.0
Surrenders, benefits and product charges (20.3) (20.7) (20.1)
-------- -------- --------
Net flows (13.5) (19.6) 2.9
Transfer of AML -- -- (28.2)
Interest credited 21.0 20.6 20.8
-------- -------- --------
Account value, net of reinsurance, end of period $ 403.6 $ 396.1 $ 395.1
-------------------------------------------------------------------------------------
Corporate and Other
Our Corporate and Other activities include unallocated corporate income and
expenses and the results of non-strategic products that are managed outside our
operating segments. In December 2009, we began reporting our institutional and
corporate-owned life insurance products, previously included in our Retirement
Income and Protection segments, respectively, in Corporate and Other
activities, as they were deemed non-strategic.
Our institutional products consist of funding agreements, FABNs and GICs, which
are deposit-type products that pay a guaranteed return to the contractholder on
specified dates. We manage the outstanding issuances from a program registered
with the SEC offered both to institutional and retail investors. The registered
notes program was discontinued in May 2009 and all SEC reporting obligations
under the registered notes program were suspended. We had no new institutional
sales in 2009 and are pursuing the issuance of our institutional products on an
opportunistic basis in the current market environment.
Marketing
As Genworth has positioned itself as a specialty insurance provider, we as part
of Genworth, position, promote and differentiate our products and services
through product value and innovation, risk management expertise, specialized
support and technology for our distributors and innovative marketing programs
tailored to particular consumer groups.
We offer a range of products that are designed to meet the needs of consumers
throughout the various stages of their lives. We are selective in the products
we offer and strive to maintain appropriate return and risk thresholds when we
expand the scope of our product offerings. We also have developed sophisticated
technological approaches that enhance performance by automating key processes
and reducing response times, expenses and process variations. These approaches
also make it easier for our customers and distributors to do business with us.
Genworth has focused its marketing approach on promoting its product and
service value proposition along with its brand to key constituencies, including
sales intermediaries, employees, investors and consumers. We seek to build
recognition of Genworth's offerings and brand and maintain good
41
relationships with leading distributors by providing a high level of
specialized and differentiated distribution support, such as product training,
advanced marketing and sales solutions, financial product design for affluent
customers and technology solutions that support the distributors' sales efforts
and by pursuing joint business improvement efforts. In addition, Genworth
sponsors various advisory councils with independent sales intermediaries and
dedicated sales specialists to gather their feedback on industry trends, new
product ideas, approaches to improve service and ways to enhance our
relationships.
Risk Management
Risk management is a critical part of our business. We have an enterprise risk
management framework that includes risk management processes relating to
product development and management, asset-liability management, investment
activities, portfolio diversification, underwriting and risk mitigation,
financial databases and information systems and operational capabilities. The
risk management framework includes the assessment of risks, a proactive
decision process to determine which risks are acceptable to be retained,
appropriate risk and reward considerations and the ongoing monitoring and
management of those risks. We have emphasized our adherence to risk management
disciplines and leveraged these efforts into a competitive advantage in the
distribution and management of our products.
PRODUCT DEVELOPMENT AND MANAGEMENT
Our risk management process begins with the development and introduction of new
products and services. We have established a product development process that
specifies a series of required analyses, reviews and approvals for any new
product. For each proposed product, this process includes a review of the
market opportunity and competitive landscape, major pricing assumptions and
methodologies, return expectations and potential distributions, reinsurance
strategies, underwriting criteria, legal, compliance and business risks and
potential mitigating actions. Before we introduce a new product, we establish a
monitoring program with specific performance targets and leading indicators,
which we monitor frequently to identify any deviations from expected
performance so that we can take corrective action when necessary. Significant
product introductions, measured either by volume or level of risk, require
approval by our senior management team at either the business or enterprise
level.
We use a similar process to introduce variations to existing products and to
offer existing products in new markets and through new distribution channels.
Product performance reviews include an analysis of the major drivers of
profitability, underwriting performance and variations from expected results
including an in-depth experience analysis of the product's major risk factors.
Other areas of focus include the regulatory and competitive environments and
other emerging factors that may be affecting product performance.
In addition, we initiate special reviews when a product's performance fails to
meet the indicators we established during that product's introductory review
process for subsequent reviews of in-force blocks of business. If a product
does not meet our performance criteria, we consider adjustments in pricing,
design and marketing or ultimately discontinuing sales of that product. We
review our underwriting, pricing, distribution and risk selection strategies on
a regular basis to ensure that our products remain competitive and consistent
with our marketing and profitability objectives.
ASSET-LIABILITY MANAGEMENT
We maintain segmented investment portfolios for the majority of our product
lines. This enables us to perform an ongoing analysis of the interest rate and
credit risks associated with each major product line, in addition to the
interest rate and credit risks for our overall enterprise. We analyze the
behavior of our liability cash flows across a wide variety of scenarios,
reflecting policy features and expected policyholder behavior. We also analyze
the cash flows of our asset portfolios across the same scenarios. We believe
this analysis shows the sensitivity of both our assets and liabilities to
changes in economic environments and enables us to manage our assets and
liabilities more effectively. In addition, we deploy hedging programs to
mitigate certain economic risks associated with our assets, liabilities and
capital. For example, we actively hedge the equity, interest rate and market
volatility risks in our variable annuity products.
PORTFOLIO DIVERSIFICATION
We use new business and in-force product limits to manage our risk
concentrations and to manage product, business level, geographic and other risk
exposures. In addition, our assets are managed within limitations to control
credit risk and to avoid excessive concentration in our investment portfolio.
We seek diversification in our investment portfolio by investing in multiple
asset classes, tailored to match the cash flow characteristics of our
liabilities. In the recent adverse market environment, we are monitoring
existing exposures and reducing some exposures, where appropriate.
42
UNDERWRITING AND RISK MITIGATION
Underwriting guidelines for all products are routinely reviewed and adjusted as
needed to ensure policyholders are provided with the appropriate premium and
benefit structure. We seek external reviews from the reinsurance and consulting
communities and are able to utilize their experience to calibrate our
risk-taking to expected outcomes.
Our risk mitigation activities include ensuring that new policies are issued
based on accurate information that we receive and that policy benefit payments
are paid in accordance with the policy contract terms.
FINANCIAL DATABASES AND INFORMATION SYSTEMS
Our extensive financial databases and innovative information systems technology
are important tools in our risk management. We have substantial experience in
offering individual life insurance products, and we have developed a large
database of claims experience, particularly in preferred risk classes, which
provides significant predictive experience for mortality.
We use advanced and, in some cases, proprietary technology to manage variations
in our underwriting process. We perform portfolio analysis on an ongoing basis
to determine if modifications are required to our product offerings,
underwriting guidelines or premium rates.
OPERATIONAL CAPABILITIES
We have several risk management programs in place to ensure the continued
operation of our businesses in the event of potential disruptive natural or
man-made events. Business continuity plans are regularly reviewed and tested.
All data is backed up on a nightly basis to alternative locations that are
geographically separated.
Operations and Technology
SERVICE AND SUPPORT
We benefit from Genworth's dedicated teams of service and support personnel,
supplemented by an outsourcing provider in India who provides back-office
support to our sales intermediaries. We use advanced and, in some cases,
proprietary, technology to provide product design and underwriting support, and
we operate service centers that leverage technology, integrated processes and
process management techniques.
In our Protection and Retirement Income segments, we interact directly and
cost-effectively with our independent sales intermediaries and dedicated sales
specialists through secure websites that have enabled them to transact business
with us electronically, obtain information about our products, submit
applications, check application and account status and view commission
information. We also provide our independent sales intermediaries and dedicated
sales specialists with account information to disseminate to their customers
through the use of industry-standard communications.
OPERATING CENTERS
We have centralized most of our operations and have established scalable,
low-cost operating centers in Virginia. In addition, through an arrangement
with an outsourcing provider, we have a substantial team of professionals in
India who provide a variety of services to us, including customer service,
transaction processing, and functional support including finance, investment
research, actuarial, risk and marketing resources to our insurance operations.
TECHNOLOGY CAPABILITIES AND PROCESS IMPROVEMENT
We rely on Genworth's proprietary processes for project approval, execution,
risk management and benefit verification as part of our approach to technology
investment. Genworth's technology team is experienced in large-scale project
delivery, including many insurance administration system consolidations and the
development of Internet-based servicing capabilities. Genworth continually
manages technology costs by standardizing its technology infrastructure,
consolidating application systems, reducing servers and storage devices and
managing project execution risks.
We believe we have greatly enhanced our operating efficiency, generated
significant cost savings and created competitive advantages by using a variety
of process efficiency approaches and tools designed to address all aspects of
process management. These enable us to more effectively operate processes,
improve our process performance and build new processes. We are focused on
driving our process and project execution and championing process management
disciplines. We tailor the application of our approaches to the specific needs
of each project or process resulting in more effective execution.
Reserves
We calculate and maintain reserves for estimated future benefit payments to our
policyholders and contractholders in accordance with U.S. GAAP and industry
accounting practices. We release these reserves as those future obligations are
extinguished. The reserves we establish reflect estimates and actuarial
assumptions with regard to our future experience. These estimates and actuarial
assumptions involve the exercise of significant judgment that is subjected to a
variety of internal
43
and external independent reviews. Our future financial results depend
significantly upon the extent to which our actual future experience is
consistent with the assumptions we have used in pricing our products and
determining our reserves. Many factors can affect future experience, including
economic and social conditions, inflation, healthcare costs and changes in
doctrines of legal liability and damage awards in litigation. Therefore, we
cannot determine with complete precision the ultimate amounts we will pay for
actual future benefits or the timing of those payments.
Reinsurance
We follow the industry practice of reinsuring portions of our insurance risks
with reinsurance companies. We use reinsurance both to diversify our risks and
to manage loss exposures. Reinsurance is also used to improve capital
efficiency of certain products, as well as available capital and surplus at the
legal entity or enterprise levels. The use of reinsurance permits us to write
policies in amounts larger than the risk we are willing to retain, and also to
write a larger volume of new business.
We cede insurance primarily on a treaty basis, under which risks are ceded to a
reinsurer on specific blocks of business where the underlying risks meet
certain predetermined criteria. To a lesser extent, we cede insurance risks on
a facultative basis, under which the reinsurer's prior approval is required on
each risk reinsured. Use of reinsurance does not discharge us, as the insurer,
from liability on the insurance ceded. We, as the insurer, are required to pay
the full amount of our insurance obligations even in circumstances where we are
entitled or able to receive payments from our reinsurer. The principal
reinsurers to which we cede risks have A.M. Best financial strength ratings
ranging from "A+" to "A-." Prior to the completion of Genworth's initial public
offering ("IPO"), we entered into reinsurance transactions with Union Fidelity
Life Insurance Company ("UFLIC"), an affiliate of our former parent, which
resulted in a significant concentration of reinsurance risk with UFLIC, whose
obligations to us are secured by trust accounts as described in note 7 in our
consolidated financial statements under "Financial Statements and Supplementary
Data."
The following table sets forth our exposure to our principal reinsurers,
including reinsurance recoverable as of December 31, 2009 and the A.M. Best
ratings of those reinsurers as of that date:
REINSURANCE
(AMOUNTS IN MILLIONS) RECOVERABLE A.M. BEST RATING
------------------------------------------------------------------
UFLIC/(1)/ $7,193.3 A-
GLIC 463.7 A
Employers Reassurance Corporation 82.9 A-
SCOR Global Life Reinsurance Company 54.9 A-
Munich American Reassurance Company 53.2 A+
------------------------------------------------------------------
/(1)/Prior to Genworth's IPO, we entered into several significant reinsurance
transactions with UFLIC ceding in-force blocks of structured settlements
and substantially all of our in-force blocks of variable annuities. See
note 7 in our consolidated financial statements under "Financial
Statements and Supplementary Data."
Financial Strength Ratings
Ratings with respect to financial strength are an important factor in
establishing the competitive position of insurance companies. Ratings are
important to maintaining public confidence in us and our ability to market our
products. Rating organizations review the financial performance and condition
of most insurers and provide opinions regarding financial strength, operating
performance and ability to meet obligations to policyholders. Short-term
financial strength ratings are an assessment of the credit quality of an issuer
with respect to an instrument considered short-term in the relevant market,
typically one year or less.
As of April 9, 2010, we were rated by A.M. Best, S&P, Moody's and Fitch as
follows:
COMPANY A.M. BEST RATING S&P RATING MOODY'S RATING FITCH RATING
-----------------------------------------------------------------------------------------------
Long-term financial strength rating A (Excellent) A (Strong) A2 (Good) A- (Strong)
Short-term financial strength rating Not rated A-1 (Strong) P-1 (Superior) Not rated
-----------------------------------------------------------------------------------------------
44
The ratings shown do not apply to the safety or performance of underlying
portfolios of variable products, which will fluctuate and could lose value.
The A.M. Best, S&P, Moody's and Fitch ratings included are not designed to be,
and do not serve as, measures of protection or valuation offered to investors.
These financial strength ratings should not be relied on with respect to making
an investment in our securities.
A.M. Best states that the "A" (Excellent) rating is assigned to those companies
that have, in its opinion, an excellent ability to meet their ongoing
obligations to policyholders. The "A" (Excellent) rating is the third-highest
of 15 ratings assigned by A.M. Best, which range from "A++" to "F."
S&P states that an insurer rated "A" (Strong) has strong financial security
characteristics. The "A" range is the third-highest of nine financial strength
rating ranges assigned by S&P, which range from "AAA" to "R." A plus (+) or
minus (-) shows relative standing in a rating category. These suffixes are not
added to ratings in the "AAA" category or to ratings below the "CCC" category.
Accordingly, the "A" rating is the sixth-highest of S&P's 21 ratings
categories. The short-term "A-1" rating is the highest rating and shows the
capacity to meet financial commitments on short-term policy obligations is
strong.
Moody's states that insurance companies rated "A" (Good) offer good financial
security. The "A" (Good) range is the third-highest of nine financial strength
rating ranges assigned by Moody's, which range from "Aaa" to "C." Numeric
modifiers are used to refer to the ranking within the group, with 1 being the
highest and 3 being the lowest. These modifiers are not added to ratings in the
"Aaa" category or to ratings below the "Caa" category. Accordingly, the "A2"
rating is the sixth- highest of Moody's 21 ratings categories. The short-term
rating "P-1" is the highest rating and shows superior ability for repayment of
short-term debt obligations.
Fitch states that "A" (Strong) rated insurance companies are viewed as
possessing strong capacity to meet policyholder and contract obligations. The
"A" rating category is the third-highest of eight financial strength rating
categories, which range from "AAA" to "C." The symbol (+) or (-) may be
appended to a rating to indicate the relative position of a credit within a
rating category. These suffixes are not added to ratings in the "AAA" category
or to ratings below the "CCC" category. Accordingly, the "A-" rating is the
seventh-highest of Fitch's 21 ratings categories.
A.M. Best, S&P, Moody's and Fitch review their ratings periodically and we
cannot assure you that we will maintain our current ratings in the future.
Other agencies may also rate our company or our insurance subsidiaries on a
solicited or an unsolicited basis.
Investments
As of December 31, 2009, we had total cash, cash equivalents and invested
assets of $18,116.3 million. We manage our assets to meet diversification,
credit quality, yield and liquidity requirements of our policy and contract
liabilities by investing primarily in fixed maturity securities, including
government, municipal and corporate bonds, mortgage-backed and other
asset-backed securities. We also hold mortgage loans on commercial real estate
and other invested assets, which include short-term investments, trading
securities, derivatives and limited partnerships. In all cases, our investments
are required to comply with restrictions imposed by applicable laws and
insurance regulatory authorities.
The following table sets forth our cash, cash equivalents and invested assets
as of December 31:
2009 2008
--------------- ---------------
CARRYING % OF CARRYING % OF
(AMOUNTS IN MILLIONS) VALUE TOTAL VALUE TOTAL
----------------------------------------------------------------------------------------
Fixed maturity securities, available-for-sale:
Public $ 7,225.8 39.9% $ 6,604.7 34.4%
Private 4,023.0 22.2 4,167.0 21.7
Other invested assets 2,607.4 14.4 2,991.8 15.6
Commercial mortgage loans 2,363.3 13.0 2,704.1 14.1
Policy loans 515.7 2.8 505.8 2.6
Equity securities, available-for-sale 101.3 0.6 90.0 0.5
Cash and cash equivalents 1,279.8 7.1 2,120.2 11.1
--------- ----- --------- -----
Total cash, cash equivalents and invested assets $18,116.3 100.0% $19,183.6 100.0%
----------------------------------------------------------------------------------------
For a discussion of our investments, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Consolidated Balance
Sheets."
45
Our primary investment objective is to meet our obligations to policyholders
and contractholders by investing in a diversified, high quality portfolio,
comprised of income producing securities and other assets. Our investment
strategy focuses primarily on:
. mitigating interest rate risk through management of asset durations
relative to policyholder and contractholder obligations;
. selecting assets based on fundamental, research-driven strategies;
. emphasizing fixed-income, low-volatility assets while pursuing active
strategies to enhance yield;
. maintaining sufficient liquidity to meet unexpected financial obligations;
. regularly evaluating our asset class mix and pursuing additional
investment classes; and
. continuously monitoring asset quality.
We are exposed to two primary sources of investment risk:
. credit risk, relating to the uncertainty associated with the continued
ability of a given issuer to make timely payments of principal and
interest and
. interest rate risk, relating to the market price and cash flow variability
associated with changes in market interest rates.
We manage credit risk by analyzing issuers, transaction structures and any
associated collateral. We monitor credit risk and continually measure the
probability of credit default and estimated loss in the event of such a
default, which provides us with early notification of worsening credits. We
also manage credit risk through industry and issuer diversification and asset
allocation practices. For commercial mortgage loans, we manage credit risk
through geographic, property type and product type diversification and asset
allocation.
We mitigate interest rate risk through rigorous management of the relationship
between the duration of our assets and the duration of our liabilities, seeking
to minimize risk of loss in both rising and falling interest rate environments.
For further information on our management of interest rate risk, see
"Quantitative and Qualitative Disclosures About Market Risk."
FIXED MATURITY SECURITIES
Fixed maturity securities, which were primarily classified as
available-for-sale, including tax-exempt bonds, consisted principally of
publicly traded and privately placed debt securities, and represented 62.1% and
56.2% of total cash, cash equivalents and invested assets as of December 31,
2009 and 2008, respectively.
We invest in privately placed fixed maturity securities to increase
diversification and obtain higher yields than can ordinarily be obtained with
comparable public market securities. Generally, private placements provide us
with protective covenants, call protection features and, where applicable, a
higher level of collateral. However, our private placements are generally not
freely transferable because of restrictions imposed by federal and state
securities laws, the terms of the securities and the characteristics of the
private market.
The following table presents our public, private and total fixed maturity
securities by the Nationally Recognized Statistical Rating Organizations
("NRSRO") designations and/or equivalent ratings, as well as the percentage,
based upon fair value, that each designation comprises. Certain fixed maturity
securities that are not rated by the NRSRO are shown based upon the equivalent
National Association of Insurance Commissioners ("NAIC") designation or, in
limited circumstances, internally prepared credit evaluations.
46
DECEMBER 31,
----------------------------------------------------
(AMOUNTS IN MILLIONS) 2009 2008
--------------------- ------------------------- -------------------------
AMORTIZED FAIR % OF AMORTIZED FAIR % OF
RATING AGENCY DESIGNATION COST VALUE TOTAL COST VALUE TOTAL
---------------------------------------------------------------------------------------------------
PUBLIC FIXED MATURITY SECURITIES
--------------------------------
AAA/AA/A $ 5,178.2 $ 5,060.5 70.0% $ 5,320.0 $ 4,600.7 69.7%
BBB 1,534.6 1,493.1 20.7 1,961.7 1,581.9 23.9
BB 375.5 322.3 4.5 332.4 258.6 3.9
B 234.6 155.8 2.1 134.6 106.8 1.6
CCC and lower 359.6 194.1 2.7 68.1 56.7 0.9
--------- --------- ----- --------- --------- -----
Total public fixed maturity securities $ 7,682.5 $ 7,225.8 100.0% $ 7,816.8 $ 6,604.7 100.0%
---------------------------------------------------------------------------------------------------
PRIVATE FIXED MATURITY SECURITIES
---------------------------------
AAA/AA/A $ 2,353.0 $ 2,078.6 51.7% $ 3,458.1 $ 2,551.4 61.2%
BBB 1,626.3 1,442.9 35.9 1,747.8 1,381.9 33.2
BB 496.7 406.1 10.1 259.0 198.7 4.8
B 98.4 53.8 1.3 53.6 33.0 0.8
CCC and lower 72.1 41.6 1.0 1.5 2.0 --
--------- --------- ----- --------- --------- -----
Total private fixed maturity securities $ 4,646.5 $ 4,023.0 100.0% $ 5,520.0 $ 4,167.0 100.0%
---------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITY SECURITIES
-------------------------------
AAA/AA/A $ 7,531.2 $ 7,139.1 63.5% $ 8,778.1 $ 7,152.1 66.4%
BBB 3,160.9 2,936.0 26.1 3,709.5 2,963.8 27.5
BB 872.2 728.4 6.5 591.4 457.3 4.3
B 333.0 209.6 1.8 188.2 139.8 1.3
CCC and lower 431.7 235.7 2.1 69.6 58.7 0.5
--------- --------- ----- --------- --------- -----
Total fixed maturity securities $12,329.0 $11,248.8 100.0% $13,336.8 $10,771.7 100.0%
---------------------------------------------------------------------------------------------------
Based upon fair value, public fixed maturity securities represented 64.2% and
61.3% of total fixed maturity securities as of December 31, 2009 and 2008,
respectively. Private fixed maturity securities represented 35.8% and 38.7% of
total fixed maturity securities as of December 31, 2009 and 2008, respectively.
We diversify our fixed maturity securities by security sector. Our investments
in mortgage-backed securities include securities collateralized by sub-prime
and Alt-A loans. Sub-prime loans are loans considered alternative credit as
broadly determined by a combination of FICO score, loan-to-value ratio and
other collateral data. Alt-A loans are loans considered alternative or low
documentation. The following table sets forth the fair value of our fixed
maturity securities by sector as well as the percentage of the total fixed
maturity securities holdings that each security sector comprised as of
December 31:
2009 2008
--------------- ---------------
FAIR % OF FAIR % OF
(AMOUNTS IN MILLIONS) VALUE TOTAL VALUE TOTAL
-------------------------------------------------------------------------------------------------
U.S. government, agencies and government-sponsored enterprises $ 654.5 5.8% $ 174.2 1.6%
Government -- non-U.S. 154.6 1.4 162.2 1.5
U.S. corporate 5,473.9 48.6 5,383.3 50.0
Corporate -- non-U.S. 1,525.2 13.6 1,337.1 12.4
Residential mortgage-backed/(1)/ 1,157.4 10.3 1,278.5 11.9
Commercial mortgage-backed 786.7 7.0 852.8 7.9
Other asset-backed 1,496.5 13.3 1,583.6 14.7
--------- ----- --------- -----
Total fixed maturity securities $11,248.8 100.0% $10,771.7 100.0%
-------------------------------------------------------------------------------------------------
/(1)/As of December 31, 2009 and 2008, our residential mortgage-backed
securities included $242.6 million and $345.8 million, respectively,
collateralized by sub-prime residential mortgage loans and $218.1 million
and $218.1 million, respectively, collateralized by Alt-A residential
mortgage loans.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information.
47
The following table sets forth the major industry types that comprise our
corporate bond holdings, based primarily on industry codes established in the
Barclays Capital Aggregate Index (formerly known as the Lehman Aggregate
Index), as well as the percentage of the total corporate bond holdings that
each industry comprised as of December 31:
2009 2008
-------------- --------------
FAIR % OF FAIR % OF
(AMOUNTS IN MILLIONS) VALUE TOTAL VALUE TOTAL
--------------------------------------------------------------
Finance and insurance $1,861.2 26.6% $1,976.2 29.4%
Utilities and energy 1,510.4 21.6 1,489.3 22.2
Consumer -- non-cyclical 759.0 10.8 818.1 12.2
Capital goods 562.2 8.0 500.8 7.4
Consumer -- cyclical 410.7 5.9 413.5 6.1
Industrial 350.0 5.0 404.0 6.0
Transportation 307.4 4.4 280.2 4.2
Technology and communications 284.3 4.1 343.0 5.1
Other 953.9 13.6 495.3 7.4
-------- ----- -------- -----
Total $6,999.1 100.0% $6,720.4 100.0%
--------------------------------------------------------------
We diversify our corporate bond holdings by industry and issuer. The portfolio
does not have significant exposure to any single issuer. As of December 31,
2009, our combined corporate bond holdings in the ten issuers to which we had
the greatest exposure were $1,063.9 million, which was approximately 5.9% of
our total cash, cash equivalents and invested assets. The exposure to the
largest single issuer of corporate bonds held as of December 31, 2009 was
$167.4 million, which was less than 1% of our total cash, cash equivalents and
invested assets.
COMMERCIAL MORTGAGE LOANS AND OTHER INVESTED ASSETS
Our mortgage loans are collateralized by commercial properties, including
multi-family residential buildings. Commercial mortgage loans are primarily
stated at principal amounts outstanding, net of deferred expenses and allowance
for loan loss.
We diversify our commercial mortgage loans by both property type and geographic
region. See note 3 to our consolidated financial statements under "Financial
Statements and Supplementary Data" for additional information on distribution
across property type and geographic region for commercial mortgage loans, as
well as information on our interest in equity securities and other invested
assets.
Selected financial information regarding our other invested assets and
derivative instruments as of December 31, 2009 and 2008 is included under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Investment and Derivative Instruments."
Regulation
Our businesses are subject to extensive regulation and supervision.
GENERAL
Our insurance operations are subject to a wide variety of laws and regulations.
State insurance laws and regulations ("Insurance Laws") regulate most aspects
of our U.S. insurance businesses, and our U.S. insurers are regulated by the
insurance departments of the states in which they are domiciled and licensed.
Our insurance products, and thus our businesses, also are affected by U.S.
federal, state and local tax laws, and the tax laws of non-U.S. jurisdictions.
Insurance products that constitute "securities," such as variable annuities and
variable life insurance, also are subject to U.S. federal and state and
non-U.S. securities laws and regulations. The SEC, FINRA, state securities
authorities and non-U.S. authorities regulate and supervise these products.
Our securities operations, including our insurance products that are regulated
as securities, are subject to U.S. federal and state and non-U.S. securities
and related laws. The SEC, state securities authorities, FINRA and similar
non-U.S. authorities are the principal regulators of these operations.
The primary purpose of the Insurance Laws affecting our insurance and
securities businesses, and the securities laws affecting our variable annuity
products, variable life insurance products, registered FABNs, broker/dealers
and advisory businesses, is to protect our policyholders, contractholders and
clients, not our stockholders. These Insurance Laws are regularly re-examined
and any changes to these laws or new laws may be more restrictive or otherwise
adversely affect our operations.
In addition, insurance and securities regulatory authorities (including state
law enforcement agencies and attorneys general) periodically make inquiries
regarding compliance with insurance, securities and other laws and regulations,
and we
48
cooperate with such inquiries and take corrective action when warranted.
Our distributors and institutional customers also operate in regulated
environments. Changes in the regulations that affect their operations may
affect our business relationships with them and their decision to distribute or
purchase our subsidiaries' products.
INSURANCE REGULATION
We are licensed and regulated in all jurisdictions in which we conduct
insurance business. The extent of this regulation varies, but Insurance Laws
generally govern the financial condition of insurers, including standards of
solvency, types and concentrations of permissible investments, establishment
and maintenance of reserves, credit for reinsurance and requirements of capital
adequacy, and the business conduct of insurers, including marketing and sales
practices and claims handling. In addition, Insurance Laws usually require the
licensing of insurers and agents, and the approval of policy forms, related
materials and the rates for certain lines of insurance.
The Insurance Laws applicable to us are described below.
INSURANCE HOLDING COMPANY REGULATION
All jurisdictions in which we conduct business have enacted legislation
requiring each insurer (except captive insurers) in a holding company system to
register with the insurance regulatory authority of its domiciliary
jurisdiction and furnish that regulatory authority various information
concerning the operations of, and the interrelationships and transactions
among, companies within its holding company system that may materially affect
the operations, management or financial condition of the insurers within the
system. These Insurance Laws regulate transactions between insurers and their
affiliates, sometimes mandating prior notice to the regulator and/or regulatory
approval. Generally, these Insurance Laws require that all transactions between
an insurer and an affiliate be fair and reasonable, and that the insurer's
statutory surplus following such transaction be reasonable in relation to its
outstanding liabilities and adequate to its financial needs. The payment of
dividends or other distributions is regulated by the Insurance Laws of the
State Corporation Commission, Bureau of Insurance of the Commonwealth of
Virginia, and we may not pay an "extraordinary" dividend or distribution, or
pay a dividend except out of earned surplus, without prior regulatory approval.
In general, an "extraordinary" dividend or distribution is defined as a
dividend or distribution that, together with other dividends and distributions
made within the preceding 12 months, exceeds the greater (or, in some
jurisdictions, the lesser) of:
. 10% of the statutory surplus as of the immediately prior year end or
. the statutory net gain from operations during the prior calendar year.
In addition, insurance regulators may prohibit the payment of ordinary
dividends or other payments by our insurers if they determine that such payment
could be adverse to our policyholders or contractholders.
PERIODIC REPORTING
GLAIC, including our life insurance subsidiaries, must file reports, including
detailed annual financial statements, with insurance regulatory authorities in
each jurisdiction in which we do business, and our operations and accounts are
subject to periodic examination by such authorities.
POLICY FORMS
Our policy forms are subject to regulation in every jurisdiction in which we
transact insurance business. In most jurisdictions, policy forms must be filed
prior to their use, and in some jurisdictions, forms must be approved prior to
use.
MARKET CONDUCT REGULATION
The Insurance Laws of jurisdictions govern the marketplace activities of
insurers, affecting the form and content of disclosure to consumers, product
illustrations, advertising, product replacement, sales and underwriting
practices, and complaint and claims handling, and these provisions are
generally enforced through periodic market conduct examinations.
STATUTORY EXAMINATIONS
Insurance departments conduct periodic detailed examinations of the books,
records, accounts and business practices of domestic insurers. These
examinations generally are conducted in cooperation with insurance departments
of two or three other states or jurisdictions representing each of the NAIC
zones, under guidelines promulgated by the NAIC.
In the three-year period ended December 31, 2009, neither GLAIC nor our life
insurance subsidiaries had received any material adverse findings resulting
from any insurance department examinations.
49
GUARANTY ASSOCIATIONS AND SIMILAR ARRANGEMENTS
Most jurisdictions in which we are licensed require insurers to participate in
guaranty associations which pay contractual benefits owed under the policies of
impaired or insolvent insurers. These associations levy assessments, up to
prescribed limits, on each member insurer in a jurisdiction on the basis of the
proportionate share of the premiums written by such insurer in the lines of
business in which the impaired, insolvent or failed insurer is engaged. Some
jurisdictions permit member insurers to recover assessments paid through full
or partial premium tax offsets. Aggregate assessments levied against us were
not material to our consolidated financial statements.
POLICY AND CONTRACT RESERVE SUFFICIENCY ANALYSIS
The Insurance Laws of our domiciliary jurisdictions require us to conduct
annual analyses of the sufficiency of our life and health insurance and annuity
reserves. Other jurisdictions where insurers are licensed may have certain
reserve requirements that differ from those of our domiciliary jurisdictions.
In each case, a qualified actuary must submit an opinion stating that the
aggregate statutory reserves, when considered in light of the assets held with
respect to such reserves, make good and sufficient provision for the insurer's
associated contractual obligations and related expenses. If such an opinion
cannot be provided, the insurer must establish additional reserves by
transferring funds from surplus. We submit these opinions annually to our
insurance regulatory authorities.
SURPLUS AND CAPITAL REQUIREMENTS
Insurance regulators have the discretionary authority, in connection with
maintaining the licensing of GLAIC and our life insurance subsidiaries, to
limit or restrict insurers from issuing new policies, or policies having a
dollar value over certain thresholds, if, in the regulators' judgment, the
insurer is not maintaining a sufficient amount of surplus or is in a hazardous
financial condition. We seek to maintain new business and capital management
strategies to support meeting related regulatory requirements. In addition, we
do not believe that the current or anticipated levels of our statutory surplus
present a material risk that any regulator would limit the types or values of
new policies that we may issue.
RISK-BASED CAPITAL
The NAIC has established Risk-Based Capital ("RBC") standards for U.S. life
insurers, as well as a risk-based capital model act ("RBC Model Act"). All 50
states and the District of Columbia have adopted the RBC Model Act or a
substantially similar law or regulation. The RBC Model Act requires that life
insurers annually submit a report to state regulators regarding their RBC based
upon four categories of risk: asset risk, insurance risk, interest rate and
market risk, and business risk. The capital requirement for each is generally
determined by applying factors which vary based upon the degree of risk to
various asset, premium and reserve items. The formula is an early warning tool
to identify possible weakly capitalized companies for purposes of initiating
further regulatory action.
If an insurer's RBC fell below specified levels, it would be subject to
different degrees of regulatory action depending upon the level, ranging from
requiring the insurer to propose actions to correct the capital deficiency to
placing the insurer under regulatory control. As of December 31, 2009, GLAIC
and each of our life insurance subsidiaries exceeded the level of RBC that
would require us to take or become subject to any corrective action.
STATUTORY ACCOUNTING PRINCIPLES
U.S. insurance regulators developed statutory accounting principles ("SAP") as
a basis of accounting used to monitor and regulate the solvency of insurers.
Since insurance regulators are primarily concerned with ensuring an insurer's
ability to pay its current and future obligations to policyholders, statutory
accounting conservatively values the assets and liabilities of insurers,
generally in accordance with standards specified by the insurer's domiciliary
jurisdiction. Uniform statutory accounting practices are established by the
NAIC and are generally adopted by regulators in the various U.S. jurisdictions.
Due to differences in methodology between SAP and U.S. GAAP, the values for
assets, liabilities and equity reflected in financial statements prepared in
accordance with U.S. GAAP are materially different from those reflected in
financial statements prepared under SAP.
REGULATION OF INVESTMENTS
We are subject to Insurance Laws that require diversification of our investment
portfolio and which limit the proportion of our investments in certain asset
categories, such as non-investment grade fixed maturity securities, equity real
estate, other equity investments and derivatives. Assets invested contrary to
such regulatory limitations must be treated as non-admitted assets for purposes
of measuring surplus, and, in some instances, would require divestiture of such
non-complying investments. We believe our investments comply with these
Insurance Laws.
FEDERAL REGULATION
Most of our variable annuity products, some of our fixed guaranteed products,
and all of our variable life insurance products, as well as our FABNs issued as
part of our registered
50
notes program are "securities" within the meaning of federal and state
securities laws, are registered under the Securities Act of 1933 and are
subject to regulation by the SEC. These products may also be indirectly
regulated by FINRA as a result of FINRA's regulation of broker/dealers and may
be regulated by state securities authorities. Federal and state securities
regulation similar to that discussed below under "-- Securities Regulation"
affects investment advice and sales and related activities with respect to
these products. In addition, although the federal government does not
comprehensively regulate the business of insurance, federal legislation and
administrative policies in several areas, including taxation, financial
services regulation, and pension and welfare benefits regulation, can also
significantly affect the insurance industry. In addition, in 2009, the SEC
adopted a rule that would require most equity-indexed annuities to register as
securities. In response to a court action challenging the rule, the SEC agreed
to delay the rule's effective date until it addresses certain procedural
deficiencies in the rule's adoption. The rule is now expected to become
effective two years after its republication in the Federal Register.
FEDERAL INITIATIVES
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often, and increasingly, have an impact
on the business in a variety of ways. From time to time, federal measures are
proposed which may significantly affect the insurance business, including
limitations on antitrust immunity, tax incentives for lifetime annuity payouts,
simplification bills affecting tax-advantaged or tax-exempt savings and
retirement vehicles, and proposals to modify or make permanent the estate tax
repeal enacted in 2001. In addition, various forms of direct federal regulation
of insurance have been proposed in recent years, and this has continued to be
the case as Congress considers broader financial regulatory reform in the wake
of the recent financial crisis.
The House of Representatives in December 2009 passed the Wall Street Reform and
Consumer Protection Act of 2009. A similarly broad financial services reform
bill has been developed in the Senate, but no action has been taken to date.
The House bill would create a Federal Office of Insurance within the Treasury
Department to monitor the insurance industry, but at the present time this
office would have no regulatory authority. In addition, the House bill would
establish a Consumer Financial Protection Agency, which could impose new sales
conduct and licensing standards and change the competitive balance between
banks and insurers in terms of their respective exposures to state enforcement
of consumer regulations. Under the House bill, the Consumer Financial
Protection Agency would be prohibited from exercising its authority with
respect to persons regulated by state insurance regulators but would have the
power to regulate the non-insurance activities of such persons and the consumer
financial activities of non-insurance subsidiaries of insurers, and it would
have the power to consult with the SEC about consumer products regulated by the
SEC, which would include annuities that are treated as securities.
The regulatory reform effort could also include heightened regulatory oversight
over insurers whose failure could pose a "systemic risk" to the financial
system. The various proposals differ on how an insurer may be deemed
systemically risky and the consequences of being so designated, such as
heightened federal supervision pertaining to solvency and risk management,
including with respect to subsidiaries that are otherwise already regulated.
We cannot predict whether any of the proposals described above will be adopted
or what impact, if any, such proposals, if adopted as laws, may have on our
business, financial condition or results of operations.
CHANGES IN TAX LAWS
Changes in tax laws could make some of our products less attractive to
consumers. For example, the gradual increase in the federal estate tax
exclusion amount, begun in 2001, which led to a temporary repeal of the federal
estate tax in 2010, which we believe has resulted in reduced sales, and could
continue to adversely affect sales and surrenders of some of our estate
planning products, including survivorship/second-to-die life insurance
policies. The federal estate tax is currently scheduled to be reinstated for
estates of decedents dying after December 31, 2010, and Congress may introduce
legislation in early 2010 that will reinstate the federal estate tax. The Jobs
and Growth Tax Relief Reconciliation Act of 2003, which lowered the federal
income tax rate on capital gains and certain ordinary dividends, may provide an
incentive for certain of our customers and potential customers to shift assets
into mutual funds and away from our products including annuities that are
designed to defer taxes payable on investment returns. On the other hand,
individual income tax rates are scheduled to revert to previous levels in tax
years beginning after 2010, possibly positively influencing investors to buy
our products, and the 2010 expiration of favorable income tax rates for
dividend income could increase interest in our products. However, the Obama
Administration has proposed changes to the federal income tax laws that would
preserve such favorable dividend and capital gain rates. There are also
proposals that would decrease a life insurance company's "dividends received
deduction" on its separate account products and decrease the interest deduction
of any business that owns life insurance.
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OTHER LAWS AND REGULATIONS
SECURITIES REGULATION
Certain of our policies, contracts and services offered are subject to
regulation under federal and state securities laws and regulations of the SEC,
state securities regulators and FINRA. In addition, some of our insurance
company separate accounts are registered under the Investment Company Act of
1940. Some variable annuity contracts and all of our variable life insurance
policies, as well as our FABNs issued as part of our registered notes program
are registered under the Securities Act of 1933.
These laws and regulations are primarily intended to protect investors in the
securities markets and generally grant supervisory agencies broad
administrative powers, including the power to limit or restrict the conduct of
business for failure to comply with such laws and regulations. In such event,
the possible sanctions that may be imposed include suspension of individual
employees, limitations on the activities in which the investment adviser or
broker/dealer may engage, suspension or revocation of the investment adviser or
broker/ dealer registration, censure or fines. We may also be subject to
similar laws and regulations in the states in which we offer the products
described above or conduct other securities-related activities.
We also serve as the depositor for variable annuity contracts and other debt
securities that rely on certain exemptions from registration under the
Investment Company Act of 1940 and the Securities Act of 1933. Nevertheless,
certain provisions of the Investment Company Act of 1940 and the Securities Act
of 1933 may apply to these products issued under certain circumstances.
The Investment Company Act of 1940, the Investment Advisers Act of 1940, the
Securities Exchange Act of 1934 and the Securities Act of 1933, including the
rules and regulations promulgated thereunder, are subject to change, which may
affect us and any products we issue.
The SEC, FINRA, state attorneys general and other federal offices may conduct
periodic examinations, in addition to special or targeted examinations of us
and/or specific products. These examinations or inquiries may include, but are
not necessarily limited to, product disclosures and sales issues, financial and
accounting disclosure and operational issues. Often examinations are "sweep
exams" whereby the regulator reviews current issues facing the financial or
insurance industry as a whole.
The SEC adopted rule 12h-7 under the Exchange Act effective May 1, 2009. Rule
12h-7 exempts insurance companies from filing reports under the Exchange Act
when the insurance company issues certain types of securities that are
registered under the Securities Act of 1933 and such products are also
regulated under state law. GLAIC has elected to rely on the exemption provided
under rule 12h-7, and has elected to suspend the filing of reports under the
Exchange Act.
ENVIRONMENTAL CONSIDERATIONS
As an owner and operator of real property, we are subject to extensive U.S.
federal and state environmental laws and regulations. Potential environmental
liabilities and costs in connection with any required remediation of such
properties is also an inherent risk in property ownership and operation. In
addition, we hold equity interests in companies, and have made loans secured by
properties, that could potentially be subject to environmental liabilities. We
routinely have environmental assessments performed with respect to real estate
being acquired for investment and real property to be acquired through
foreclosure. We cannot provide assurance that unexpected environmental
liabilities will not arise. However, based upon information currently available
to us, we believe that any costs associated with compliance with environmental
laws and regulations or any remediation of such properties will not have a
material adverse effect on our business, financial condition or results of
operations.
ERISA CONSIDERATIONS
We provide certain products and services to employee benefit plans that are
subject to ERISA or the Internal Revenue Code. As such, our activities are
subject to the restrictions imposed by ERISA and the Internal Revenue Code,
including the requirement under ERISA that fiduciaries must perform their
duties solely in the interests of ERISA plan participants and beneficiaries,
and fiduciaries may not cause or permit a covered plan to engage in certain
prohibited transactions with persons who have certain relationships with
respect to such plans. The applicable provisions of ERISA and the Internal
Revenue Code are subject to enforcement by the U.S. Department of Labor, the
IRS, and the Pension Benefit Guaranty Corporation.
USA PATRIOT ACT
The USA PATRIOT Act of 2001 (the "Patriot Act"), enacted in response to the
terrorist attacks on September 11, 2001, contains anti-money laundering and
financial transparency laws and mandates the implementation of various new
regulations applicable to broker/dealers and other financial services companies
including insurance companies. The Patriot Act seeks to promote cooperation
among financial institutions, regulators and law enforcement entities in
identifying parties who may be involved in terrorism or money laundering.
Anti-money laundering laws outside of the U.S. contain similar
52
provisions. The increased obligations of financial institutions to identify
their customers, watch for and report suspicious transactions, respond to
requests for information by regulatory authorities and law enforcement
agencies, and share information with other financial institutions, require the
implementation and maintenance of internal practices, procedures and controls.
We believe that we have implemented, and that we maintain, appropriate internal
practices, procedures and controls to enable us to comply with the provisions
of the Patriot Act. Certain additional requirements became applicable under the
Patriot Act in May 2006 through a U.S. Treasury regulation which required that
certain insurers have anti-money laundering compliance plans in place. We
believe our plan complies with these requirements.
PRIVACY OF CONSUMER INFORMATION
U.S. federal and state laws and regulations require financial institutions,
including insurance companies, to protect the security and confidentiality of
consumer financial information and to notify consumers about the companies'
policies and practices relating to their collection and disclosure of consumer
information and their policies relating to protecting the security and
confidentiality of that information. Similarly, federal and state laws and
regulations also govern the disclosure and security of consumer health
information. In particular, regulations promulgated by the U.S. Department of
Health and Human Services regulate the disclosure and use of protected health
information by health insurers and others, the physical and procedural
safeguards employed to protect the security of that information, and the
electronic transmission of such information. Congress and state legislatures
are expected to consider additional legislation relating to privacy and other
aspects of consumer information.
DESCRIPTION OF PHYSICAL PROPERTIES
We conduct our business from various facilities host of which are leased except
for one building in Richmond, Virginia, and several facilities in Lynchburg,
Virginia which we own.
RISK FACTORS
You should carefully consider the following risks. These risks could materially
affect our business, results of operations or financial condition or cause our
actual results to differ materially from those expected or those expressed in
any forward-looking statements made by us or on our behalf. These risks are not
exclusive, and additional risks to which we are subject include, but are not
limited to, the factors mentioned under "Cautionary note regarding
forward-looking statements" and the risks of our businesses described elsewhere
in this filing for the year ended December 31, 2009.
DOWNTURNS AND VOLATILITY IN ECONOMIES AND EQUITY AND CREDIT MARKETS COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Our results of operations are materially affected by the state of the economy
in which we operate and conditions in the capital markets we access. Factors
such as higher unemployment, lower consumer spending, lower business
investment, higher government spending, the volatility and strength of the
capital markets and inflation all affect the business and economic environment
and, ultimately, the amount and profitability of our business. The recessionary
state and the volatility of the economy have fueled uncertainty and downturns
in mortgage markets have contributed to increased volatility in our business
and results of operations. This uncertainty and volatility has impacted, and
may continue to impact, the demand for certain financial and insurance
products. As a result, we have experienced, and may continue to experience, an
elevated incidence of claims and lapses or surrenders of policies, and some of
our policyholders may choose to defer paying insurance premiums or stop paying
insurance premiums altogether.
If equity and credit markets experience heightened volatility and turmoil,
issuers that have exposure to the mortgage and credit markets would be
particularly affected. These events would have an adverse effect on us, in part
because we have exposure to such issuers in our investment portfolio and also
because such events can influence customer behavior. Our revenues would decline
if there are significant impairments in our investment portfolio or the equity
markets erode the profitability of our retirement income products impacted by
those markets.
In addition, given continuing challenges in market conditions, issuers of the
fixed-income securities and commercial mortgage loans that we own may default
on principal and interest payments. Economic downturns like the one recently
experienced could cause significant declines in the value of our fixed maturity
securities portfolio and could lead to a higher rate of defaults on our
fixed-income security portfolio, as well as declines in certain other asset
classes and corporate bond sectors, that could adversely affect our financial
results. Securities that are less liquid could also become more difficult to
value and could be hard to dispose of in that type of economic environment.
The economic downturn has had, and will continue to have, an adverse effect on
our ability to efficiently access capital markets
53
for capital management purposes, including the issuance of fixed and floating
rate non-recourse funding obligations for purposes of supporting our term and
universal life insurance products. If credit markets remain tight, this is
likely to have a continuing adverse impact on our profitability, liquidity and
access to funding opportunities.
Downturns and volatility in equity markets may also discourage purchases of
separate account products, such as variable annuities, that have returns linked
to the performance of the equity markets and may cause some existing customers
to withdraw cash values or reduce investments in these products. In addition,
if the performance of the underlying mutual funds in the separate account
products experience downturns and volatility for an extended period of time,
the payment of any living benefit guarantee available in certain variable
annuity products may have an adverse effect on us, because more payments will
be required to come from general account assets than from contractholder
separate account investments. Continued equity market volatility could result
in additional losses in our variable annuity products and associated hedging
program which will further challenge our ability to recover deferred
acquisition costs ("DAC") on these products and could lead to additional
write-offs of DAC, as well as increased hedging costs.
Our revenues and returns from our separately managed account products and
services could also be impacted by downturns and volatility in equity markets.
Because these products and services generate fees generally from the value of
assets under management, a decline in the equity markets could reduce our
revenues by reducing the value of the investment assets we manage. Downturns in
equity markets could also lead to an increase in liabilities associated with
secondary guarantee features, such as guaranteed minimum benefits on separate
account products, where we have equity market risk exposure.
A DOWNGRADE OR A POTENTIAL DOWNGRADE IN OUR FINANCIAL STRENGTH OR CREDIT
RATINGS COULD RESULT IN A LOSS OF BUSINESS AND ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Financial strength ratings, which various rating agencies publish as measures
of an insurance company's ability to meet contractholder and policyholder
obligations, are important to maintaining public confidence in our products,
the ability to market our products and our competitive position. See "Business
-- Financial Strength Ratings" for a complete description of our current
ratings.
A ratings downgrade could occur for a variety of reasons, including reasons
specifically related to Genworth, generally related to our industry or the
broader financial services industry or as a result of changes by the rating
agencies in their methodologies or rating criteria. A negative outlook on our
ratings or a downgrade in any of our financial strength or credit ratings, the
announcement of a potential downgrade, or customer concerns about the
possibility of a downgrade, could have a material adverse effect on our
business, financial condition and results of operations. These direct or
indirect effects could include:
. reducing new sales of insurance products, annuities and other investment
products;
. requiring us to modify some of our existing products or services to remain
competitive, or introduce new products or services;
. adversely affecting our relationships with key distributors, independent
sales intermediaries and our dedicated sales specialists, including the
loss of exclusivity under certain agreements with our independent sales
intermediaries;
. materially increasing the number or amount of policy surrenders and
withdrawals by contractholders and policyholders;
. requiring us to post additional collateral or terminate contracts under
the terms of the International Swaps and Derivatives Association
agreements with derivative counterparties, or to provide support in the
form of collateral, capital contributions or letters of credit under the
terms of certain of our reinsurance, securitization and other agreements;
and
. adversely affecting our ability to maintain reinsurance assumed or obtain
new reinsurance or obtain it on reasonable pricing terms;
INTEREST RATE FLUCTUATIONS AND LEVELS COULD ADVERSELY AFFECT OUR BUSINESS AND
PROFITABILITY.
Our insurance and investment products are sensitive to interest rate
fluctuations and expose us to the risk that falling interest rates or credit
spreads will reduce our margin or the difference between the returns we earn on
the investments that support our obligations under these products and the
amounts that we must pay to policyholders and contractholders. Because we may
reduce the interest rates we credit on most of these products only at limited,
pre-established intervals, and because some contracts have guaranteed minimum
interest crediting rates, declines in interest rates have adversely affected,
and may continue to adversely affect, the profitability of these products.
During periods of increasing market interest rates, we may offer higher
crediting rates on interest-sensitive products, such as
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universal life insurance and fixed annuities, and we may increase crediting
rates on in-force products to keep these products competitive. In addition,
rapidly rising interest rates may cause increased policy surrenders,
withdrawals from life insurance policies and annuity contracts and requests for
policy loans, as policyholders and contractholders shift assets into higher
yielding investments. Increases in crediting rates, as well as surrenders and
withdrawals, could have an adverse effect on our financial condition and
results of operations.
Our term life insurance products also expose us to the risk of interest rate
fluctuations. The pricing and expected future profitability of these products
are based in part on expected investment returns. Over time, term life
insurance products generally produce positive cash flows as customers pay
periodic premiums, which we invest as they are received. Low interest rates
reduce our ability to achieve our targeted investment margins and may adversely
affect the profitability of our term life insurance products.
Interest rate fluctuations also could have an adverse effect on the results of
our investment portfolio. During periods of declining market interest rates,
the interest we receive on variable interest rate investments decreases. In
addition, during those periods, we are forced to reinvest the cash we receive
as interest or return of principal on our investments in lower-yielding
high-grade instruments or in lower-credit instruments to maintain comparable
returns. Issuers of fixed-income securities may also decide to prepay their
obligations in order to borrow at lower market rates, which exacerbates the
risk that we may have to invest the cash proceeds of these securities in
lower-yielding or lower-credit instruments.
ADVERSE CAPITAL AND CREDIT MARKET CONDITIONS MAY SIGNIFICANTLY AFFECT OUR
ACCESS TO CAPITAL AND MAY AFFECT OUR ABILITY TO MEET LIQUIDITY OR REFINANCING
REQUIREMENTS IN THE FUTURE.
In the event market or other conditions have an adverse impact on our capital
and liquidity needs beyond expectations and the sources outlined do not satisfy
our needs, we could have to seek additional funding. Funding sources could
potentially include the generation of proceeds from the sale of assets
(including assets in our investment portfolio or blocks of business). All such
funding sources can have various impacts on our financial condition, including
book value, and results of operations.
The availability of additional funding will depend on a variety of factors such
as market conditions, regulatory considerations, the general availability of
credit, the overall availability of credit to the financial services industry,
the level of activity and availability of reinsurers or acquirers of assets,
our credit ratings and credit capacity and the performance of and outlook for
our business. Market conditions may make it difficult to obtain funding or
complete asset sales to generate additional liquidity, especially on short
notice. Our access to funding may be further impaired if our credit or
financial strength ratings are negatively impacted.
OUR VALUATION OF FIXED MATURITY, EQUITY AND TRADING SECURITIES MAY INCLUDE
METHODOLOGIES, ESTIMATIONS AND ASSUMPTIONS THAT ARE SUBJECT TO DIFFERING
INTERPRETATIONS AND COULD RESULT IN CHANGES TO INVESTMENT VALUATIONS THAT MAY
MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS OR FINANCIAL CONDITION.
Fixed maturity, equity and trading securities are reported at fair value on our
consolidated balance sheets. They represent the majority of our total cash,
cash equivalents and invested assets. Our portfolio of fixed maturity
securities consists primarily of investment grade securities. During periods of
market disruption, including periods of volatile asset pricing, credit-spread
volatility, illiquidity and reduced transparency of market participant
valuation inputs, certain of our investment securities, such as our Alt-A and
sub-prime mortgage-backed securities, become difficult to value. There may be
certain asset classes that were in active markets with significant observable
data that become illiquid due to the economic environment. In these cases,
valuing our investment securities may require more subjectivity and management
judgment. As a result, valuations may include inputs and assumptions that are
less observable or require greater estimation, as well as valuation methods
that are more sophisticated or require greater estimation, thereby resulting in
values that are less certain and may vary significantly from the value at which
the investments may be ultimately sold. The methodologies, estimates and
assumptions we use in valuing our investment securities evolve over time and
are subject to different interpretation (including based on developments in
relevant accounting literature), all of which can lead to changes in the value
of our investment securities. Rapidly changing and unprecedented credit and
equity market conditions could materially impact the valuation of investment
securities as reported within our consolidated financial statements, and the
period-to-period changes in value could vary significantly. Decreases in value
may have a material adverse effect on our results of operations or financial
condition.
DEFAULTS, DOWNGRADES OR OTHER EVENTS IMPACTING THE VALUE OF OUR FIXED MATURITY
SECURITIES PORTFOLIO MAY REDUCE OUR INCOME.
We are subject to the risk that the issuers or guarantors of fixed maturity
securities we own may default on principal or interest payments they owe us. As
of December 31, 2009, fixed
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maturity securities of $11,248.8 million in our investment portfolio
represented 62.1% of our total cash, cash equivalents and invested assets.
Events reducing the value of our investment portfolio other than on a temporary
basis could have a material adverse effect on our business, results of
operations and financial condition. Levels of write-downs or impairments are
impacted by our assessment of the financial condition of the issuer, whether or
not the issuer is expected to pay its principal and interest obligations or
circumstances that would require us to sell securities which have declined in
value. Recent volatility and uncertainty in the sub-prime and Alt-A residential
market have resulted in increased delinquency rates and these developments have
had an adverse impact on our investments in securities backed by sub-prime and
Alt-A residential mortgage loans. The credit quality of our hybrid securities
may be adversely impacted by the level and type of government support,
including the risk that these institutions could be nationalized or be
restricted from making discretionary payments of principal or interest. If we
determine to reposition or realign portions of the portfolio where we determine
to sell certain securities in an unrealized loss position, then we will incur
an other-than-temporary impairment charge.
DEFAULTS ON OUR COMMERCIAL MORTGAGE LOANS OR THE MORTGAGE LOANS UNDERLYING OUR
INVESTMENTS IN COMMERCIAL MORTGAGE-BACKED SECURITIES AND VOLATILITY IN
PERFORMANCE MAY ADVERSELY AFFECT OUR PROFITABILITY.
Our commercial mortgage loans and investments in commercial mortgage-backed
securities face default risk. Commercial mortgage loans are stated on our
consolidated balance sheets at unpaid principal balance, adjusted for any
unamortized premium or discount, deferred fees or expenses, and are net of
impairments and valuation allowances. We establish valuation allowances for
estimated impairments as of the balance sheet date based on information, such
as the market value of the underlying real estate securing the loan, any
third-party guarantees on the loan balance or any cross collateral agreements
and their impact on expected recovery rates. Commercial mortgage-backed
securities are stated on our balance sheet at fair value. The performance of
our commercial mortgage loans and commercial mortgage-backed securities
investments, however, may fluctuate in the future. In addition, some of our
commercial mortgage loans and the underlying mortgage loans supporting our
investments in commercial mortgage-backed securities have balloon payment
maturities. An increase in the default rate of our commercial mortgage loans
could have a material adverse effect on our business, results of operations and
financial condition.
Further, any concentration of geographic or sector exposure in our commercial
mortgage loans or the mortgage loans underlying our investments in commercial
mortgage-backed securities may have adverse effects on our investment
portfolios and consequently on our consolidated results of operations or
financial condition. While we seek to mitigate this risk by having a broadly
diversified portfolio, events or developments that have a negative effect on
any particular geographic region or sector may have a greater adverse effect on
the investment portfolios to the extent that the portfolios are exposed.
WE MAY BE REQUIRED TO RECOGNIZE IMPAIRMENTS IN THE VALUE OF OUR GOODWILL, WHICH
WOULD INCREASE OUR EXPENSES AND REDUCE OUR U.S. GAAP PROFITABILITY.
Goodwill represents the excess of the amount we paid to acquire our
subsidiaries and other businesses over the fair value of their net assets at
the date of the acquisition. Under U.S. GAAP, we test the carrying value of
goodwill for impairment at least annually at the "reporting unit" level, which
is either an operating segment or a business one level below the operating
segment. Goodwill is impaired if the fair value of the reporting unit as a
whole is less than the fair value of the identifiable assets and liabilities of
the reporting unit, plus the carrying value of goodwill, at the date of the
test. For example, goodwill may become impaired if the fair value of a
reporting unit as a whole were to decline by an amount greater than the decline
in the value of its individually identifiable assets and liabilities. This may
occur for various reasons, including changes in actual or expected income or
cash flows of a reporting unit or generation of income by a reporting unit at a
lower rate of return than similar businesses or for decreases in our market
capitalization. If any portion of our goodwill becomes impaired, we would be
required to recognize the amount of the impairment as a non-cash expense in the
current period. See note 6 in our consolidated financial statements under
"Financial Statements and Supplementary Data" for additional information
related to goodwill.
THE SOUNDNESS OF OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY AFFECT US.
We routinely execute transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks, investment banks and
other institutional clients. Many of these transactions expose us to credit
risk in the event of default of our counterparty or client. For example, we
hedge various business risks using derivative instruments, including options
and interest rate swaps with a number of counterparties. If our counterparties
fail or refuse to honor their obligations, our hedges of the related risk will
be ineffective. Such failure could have an adverse effect on our financial
condition and results of operations.
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AN ADVERSE CHANGE IN OUR RISK-BASED CAPITAL AND OTHER REGULATORY REQUIREMENTS
COULD RESULT IN A DECLINE IN OUR RATINGS, INCREASED SCRUTINY BY REGULATORS AND
HAVE AN ADVERSE IMPACT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
PROSPECTS.
We are subject to RBC standards and other minimum statutory capital and surplus
requirements imposed under the laws of our state of domicile. The RBC
standards, which are based upon the RBC Model Act adopted by the NAIC, require
us to report our results of RBC calculations annually to the state departments
of insurance and the NAIC. Changes in SAP relating to RBC calculations could
adversely impact our ability to meet minimum RBC and statutory capital and
surplus requirements. In addition, defaults, impairments or declines in the
NAIC designations in our investment portfolio and a decline in our results of
operations as recorded in accordance with SAP would have an adverse impact on
our RBC levels.
Our failure to meet applicable RBC requirements or minimum statutory capital
and surplus requirements could subject us to further examination or corrective
action imposed by state insurance regulators, including limitations on our
ability to write additional business, state supervision, seizure or liquidation.
An adverse change in our RBC or other minimum regulatory requirements also
could cause rating agencies to downgrade our financial strength ratings, which
would have an adverse impact on our ability to write and retain business.
Certain actions by regulators or rating agencies could have a material adverse
effect on our financial condition and results of operations.
IF OUR RESERVES FOR FUTURE POLICY CLAIMS ARE INADEQUATE, WE MAY BE REQUIRED TO
INCREASE OUR RESERVE LIABILITIES, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
We calculate and maintain reserves for estimated future payments of claims to
our policyholders and contractholders in accordance with U.S. GAAP and industry
accounting practices. We release these reserves as those future obligations are
extinguished. The reserves we establish reflect estimates and actuarial
assumptions with regard to our future experience. These estimates and actuarial
assumptions involve the exercise of significant judgment. Our future financial
results depend significantly upon the extent to which our actual future
experience is consistent with the assumptions we have used in pricing our
products and determining our reserves. Many factors can affect future
experience, including economic and social conditions, inflation, healthcare
costs, policyholder persistency (resulting in adverse claims experience), and
changes in doctrines of legal liability and damage awards in litigation.
Therefore, we cannot determine with precision the ultimate amounts we will pay
for actual claims or the timing of those payments.
We regularly monitor our reserves. If we conclude that our reserves are
insufficient to cover actual or expected policy and contract benefits and claim
payments, we would be required to increase our reserves and incur charges for
the period in which we make the determination, which would adversely affect our
results of operations and financial condition and may put additional strain on
our available liquidity.
COMPETITORS COULD NEGATIVELY AFFECT OUR ABILITY TO MAINTAIN OR INCREASE OUR
MARKET SHARE AND PROFITABILITY.
Our businesses are subject to intense competition. We believe the principal
competitive factors in the sale of our products are product features, product
investment returns, price, commission structure, marketing and distribution
arrangements, brand, reputation, financial strength ratings and service. In
many of our product lines, we face competition from competitors that have
greater market share or breadth of distribution, offer a broader range of
products, services or features, assume a greater level of risk, have lower
profitability expectations or have higher financial strength ratings than we
do. Many competitors offer similar products and use similar distribution
channels. The substantial expansion of banks' and insurance companies'
distribution capacities and expansion of product features in recent years have
intensified pressure on margins and production levels and have increased the
level of competition in many of our businesses. Consolidation among banks,
insurance companies and other financial services companies could also have an
adverse effect on our financial condition and results of operations if the
surviving entity requires more favorable terms than we had previously been
offering to one or more of the combined companies or if it elects not to
continue to do business with us following the consolidation. The appointment of
a receiver to rehabilitate or liquidate a significant competitor could also
negatively impact our businesses if such appointment were to impact consumer
confidence in industry products and services.
REINSURANCE MAY NOT BE AVAILABLE, AFFORDABLE OR ADEQUATE TO PROTECT US AGAINST
LOSSES.
As part of our overall risk and capital management strategy, we have
historically purchased reinsurance from external reinsurers as well as provided
internal reinsurance support for certain risks underwritten by our various
business segments. The availability and cost of reinsurance protection are
impacted by our operating and financial performance as well as conditions
beyond our control. For example, volatility in the equity markets and the
related impacts on asset values required to fund liabilities may
57
reduce the availability of certain types of reinsurance and make it more costly
when it is available, as reinsurers are less willing to take on credit risk in
a volatile market. Accordingly, we may be forced to incur additional expenses
for reinsurance or may not be able to obtain sufficient new reinsurance on
acceptable terms, which could adversely affect our ability to write future
business or obtain statutory capital credit for new reinsurance.
IF THE COUNTERPARTIES TO OUR REINSURANCE ARRANGEMENTS OR TO THE DERIVATIVE
INSTRUMENTS WE USE TO HEDGE OUR BUSINESS RISKS DEFAULT OR FAIL TO PERFORM, WE
MAY BE EXPOSED TO RISKS WE HAD SOUGHT TO MITIGATE, WHICH COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We use reinsurance and derivative instruments to mitigate our risks in various
circumstances. Reinsurance does not relieve us of our direct liability to our
policyholders, even when the reinsurer is liable to us. Accordingly, we bear
credit risk with respect to our reinsurers. We cannot assure you that our
reinsurers will pay the reinsurance recoverable owed to us now or in the future
or that they will pay these recoverables on a timely basis. A reinsurer's
insolvency, inability or unwillingness to make payments under the terms of its
reinsurance agreement with us could have an adverse effect on our financial
condition and results of operations.
Prior to the completion of Genworth's IPO, we ceded to UFLIC substantially all
of our in-force structured settlements block of business and variable annuity
business. UFLIC has established trust accounts for our benefit to secure its
obligations under the reinsurance arrangements, and General Electric Capital
Corporation ("GE Capital"), an indirect subsidiary of General Electric Company,
has agreed to maintain UFLIC's RBC above a specified minimum level. If UFLIC
becomes insolvent notwithstanding this agreement, and the amounts in the trust
accounts are insufficient to pay UFLIC's obligations to us, our financial
condition and results of operations could be materially adversely affected.
In addition, we use derivative instruments to hedge various business risks. We
enter into a variety of derivative instruments, including options and interest
rate swaps with a number of counterparties. If our counterparties fail or
refuse to honor their obligations under the derivative instruments, our hedges
of the related risk will be ineffective. This failure could have an adverse
effect on our financial condition and results of operations.
OUR FOCUS ON KEY DISTRIBUTION RELATIONSHIPS MAY EXPOSE US TO REDUCED SALES IN
THE FUTURE.
Although we distribute our products through a wide variety of distribution
models, we do maintain relationships with key distribution partners. These
distribution partners are an integral part of our business model. If capital,
credit and equity markets experience extreme volatility, we are at risk that
key distribution partners may merge, change their distribution model affecting
how our products are sold, or terminate their distribution contract with us. In
addition, timing of key distributor adoption of our new product offerings may
impact sales of those products. Distributors may elect to reduce or terminate
their distribution relationships with us if there are adverse developments in
our business, adverse rating agency actions or concerns about market-related
risks. Any termination or material change in relationship with a key
distribution partner could have a material adverse affect on our future sales
for one or more product lines.
WE ARE HEAVILY REGULATED AND CHANGES IN REGULATION MAY REDUCE OUR PROFITABILITY
AND LIMIT OUR GROWTH.
We are subject to a wide variety of laws and regulations. State insurance laws
regulate most aspects of our insurance businesses, and we are regulated by the
insurance departments of the states in which we are domiciled and licensed.
Insurance regulatory authorities have broad administrative powers with respect
to, among other things:
. licensing companies and agents to transact business;
. calculating the value of assets to determine compliance with statutory
requirements;
. mandating certain insurance benefits;
. regulating certain premium rates;
. reviewing and approving policy forms;
. regulating unfair trade and claims practices, including through the
imposition of restrictions on marketing and sales practices, distribution
arrangements and payment of inducements;
. establishing and revising statutory capital and reserve requirements and
solvency standards;
. fixing maximum interest rates on insurance policy loans and minimum rates
for guaranteed crediting rates on life insurance policies and annuity
contracts;
. approving future rate increases;
. approving changes in control of insurance companies;
. restricting the payment of dividends and other transactions between
affiliates; and
. regulating the types, amounts and valuation of investments.
58
State insurance regulators and the NAIC regularly re-examine existing laws and
regulations applicable to insurance companies and their products. Changes in
these laws and regulations, or in interpretations thereof, can be made for the
benefit of the consumer at the expense of the insurer and thus could have an
adverse effect on our financial condition and results of operations.
LEGAL AND REGULATORY INVESTIGATIONS AND ACTIONS ARE COMMON IN THE INSURANCE
BUSINESS AND MAY RESULT IN FINANCIAL LOSSES AND HARM OUR REPUTATION.
We face a significant 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, payment of contingent or other sales commissions, claims payments
and procedures, product design, product disclosure, administration, additional
premium charges for premiums paid on a periodic basis, denial or delay of
benefits, charging excessive or impermissible fees on products, recommending
unsuitable products to customers, and breaching fiduciary or other duties to
customers. 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. Plaintiffs in class action and other
lawsuits against us may seek very large or indeterminate amounts, including
punitive and treble damages, which may remain unknown for substantial periods
of time. We are also subject to various regulatory inquiries, such as
information requests, subpoenas and books and record examinations, from state,
federal 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 and results of operations.
For further discussion of current investigations and proceedings in which we
are involved, see "Legal Proceedings." We cannot assure you that these
investigations and proceedings will not have a material adverse effect on our
business, financial condition or results of operations. It is also possible
that we could become subject to further investigations and have lawsuits filed
or enforcement actions initiated against us. In addition, 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.
OUR COMPUTER SYSTEMS MAY FAIL OR THEIR SECURITY MAY BE COMPROMISED, WHICH COULD
DAMAGE OUR BUSINESS AND ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Our business is highly dependent upon the effective operation of our computer
systems. We rely on these systems throughout our business for a variety of
functions, including processing claims and applications, providing information
to customers and distributors, performing actuarial analyses and maintaining
financial records. Despite the implementation of security and back-up measures,
our computer systems may be vulnerable to physical or electronic intrusions,
computer viruses or other attacks, programming errors and similar disruptive
problems. The failure of these systems for any reason could cause significant
interruptions to our operations, which could result in a material adverse
effect on our business, financial condition or results of operations.
We retain confidential information in our computer systems, and we rely on
sophisticated commercial technologies to maintain the security of those
systems. Anyone who is able to circumvent our security measures and penetrate
our computer systems could access, view, misappropriate, alter, or delete any
information in the systems, including personally identifiable customer
information and proprietary business information. In addition, an increasing
number of states require that customers be notified if a security breach
results in the disclosure of personally identifiable customer information. Any
compromise of the security of our computer systems that results in
inappropriate disclosure of personally identifiable customer information could
damage our reputation in the marketplace, deter people from purchasing our
products, subject us to significant civil and criminal liability and require us
to incur significant technical, legal and other expenses.
THE OCCURRENCE OF NATURAL OR MAN-MADE DISASTERS OR A PANDEMIC COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are exposed to various risks arising out of natural disasters, including
earthquakes, hurricanes, floods and tornadoes, and man-made disasters,
including acts of terrorism and military actions and pandemics. For example, a
natural or man-made disaster or a pandemic could lead to unexpected changes in
persistency rates as policyholders and contractholders who are affected by the
disaster may be unable to meet their contractual
59
obligations, such as payment of premiums on our insurance policies and deposits
into our investment products. They could also significantly increase our
mortality and morbidity experience above the assumptions we used in pricing our
insurance and investment products. The continued threat of terrorism and
ongoing military actions may cause significant volatility in global financial
markets, and a natural or man-made disaster or a pandemic could trigger an
economic downturn in the areas directly or indirectly affected by the disaster.
These consequences could, among other things, result in a decline in business
and increased claims from those areas, as well as an adverse effect on home
prices in those areas, which could result in increased loss experience in our
mortgage insurance businesses. Disasters or a pandemic also could disrupt
public and private infrastructure, including communications and financial
services, which could disrupt our normal business operations.
A natural or man-made disaster or a pandemic could also disrupt the operations
of our counterparties or result in increased prices for the products and
services they provide to us. For example, a natural or man-made disaster or a
pandemic could lead to increased reinsurance prices and potentially cause us to
retain more risk than we otherwise would retain if we were able to obtain
reinsurance at lower prices. In addition, a disaster or a pandemic could
adversely affect the value of the assets in our investment portfolio if it
affects companies' ability to pay principal or interest on their securities.
See "-- We may face losses if there are significant deviations from our
assumptions regarding the future persistency of our insurance policies and
annuity contracts."
WE MAY FACE LOSSES IF MORBIDITY RATES OR MORTALITY RATES DIFFER SIGNIFICANTLY
FROM OUR PRICING EXPECTATIONS.
We set prices for our insurance and some annuity products based upon expected
claims and payment patterns, using assumptions for, among other things,
morbidity rates, or likelihood of sickness, and mortality rates, or likelihood
of death, of our policyholders and contractholders. The long-term profitability
of these products depends upon how our actual experience compares with our
pricing assumptions. For example, if morbidity rates are higher, or mortality
rates are lower, than our pricing assumptions, we could be required to make
greater payments under annuity contracts than we had projected. Conversely, if
mortality rates are higher than our pricing assumptions, we could be required
to make greater payments under our life insurance policies and annuity
contracts with GMDBs than we had projected.
WE MAY BE REQUIRED TO ACCELERATE THE AMORTIZATION OF DEFERRED ACQUISITION COSTS
AND THE PRESENT VALUE OF FUTURE PROFITS, WHICH WOULD INCREASE OUR EXPENSES AND
REDUCE PROFITABILITY.
DAC represents costs that vary with and are primarily related to the sale and
issuance of our insurance policies and investment contracts that are deferred
and amortized over the estimated life of the related insurance policies and
investment contracts. These costs include commissions in excess of ultimate
renewal commissions, solicitation and printing costs, sales material and some
support costs, such as underwriting and contract and policy issuance expenses.
Under U.S. GAAP, DAC is subsequently amortized to income, over the lives of the
underlying contracts, in relation to the anticipated recognition of premiums or
gross profits. In addition, when we acquire a block of insurance policies or
investment contracts, we assign a portion of the purchase price to the right to
receive future net cash flows from existing insurance and investment contracts
and policies. This intangible asset, called the present value of future profits
("PVFP"), represents the actuarially estimated present value of future cash
flows from the acquired policies. We amortize the value of this intangible
asset in a manner similar to the amortization of DAC.
Our amortization of DAC and PVFP generally depends upon anticipated profits
from investments, surrender and other policy and contract charges, mortality,
morbidity and maintenance expense margins. Unfavorable experience with regard
to expected expenses, investment returns, mortality, morbidity, withdrawals or
lapses may cause us to increase the amortization of DAC or PVFP, or both, or to
record a charge to increase benefit reserves.
We regularly review DAC and PVFP to determine if they are recoverable from
future income. If these costs are not recoverable, they are charged to expenses
in the financial period in which we make this determination. For example, if we
determine that we are unable to recover DAC from profits over the life of a
block of insurance policies or annuity contracts, or if withdrawals or
surrender charges associated with early withdrawals do not fully offset the
unamortized acquisition costs related to those policies or annuities, we would
be required to recognize the additional DAC amortization as an expense in the
current period. Equity market volatility could result in additional losses in
our variable annuity products and associated hedging program which will
challenge our ability to recover DAC on these products and could lead to
further write-offs of DAC.
60
MEDICAL ADVANCES, SUCH AS GENETIC RESEARCH AND DIAGNOSTIC IMAGING, AND RELATED
LEGISLATION COULD ADVERSELY AFFECT THE FINANCIAL PERFORMANCE OF OUR LIFE
INSURANCE AND ANNUITY BUSINESSES.
Genetic research includes procedures focused on identifying key genes that
render an individual predisposed to specific diseases, such as particular types
of cancer and other diseases. Other medical advances, such as diagnostic
imaging technologies, also may be used to detect the early onset of diseases
such as cancer and cardiovascular disease. We believe that if individuals learn
through medical advances that they are predisposed to particular conditions
that may reduce life longevity, they will be more likely to purchase our life
insurance policies or not to permit existing policies to lapse. In contrast, if
individuals learn that they lack the genetic predisposition to develop the
conditions that reduce longevity, they will be less likely to purchase our life
insurance products but more likely to purchase certain annuity products. In
addition, such individuals that are existing policyholders will be more likely
to permit their policies to lapse.
If we were to gain access to the same genetic or medical information as our
prospective policyholders and contractholders, then we would be able to take
this information into account in pricing our life insurance policies and
annuity contracts. However, there have been a number of legislative and
regulatory actions and proposals that make, or could make, genetic and other
medical information confidential and unavailable to insurance companies.
Pursuant to these legislative and regulatory actions and proposals, prospective
policyholders and contractholders would only disclose this information if they
chose to do so voluntarily. These factors could lead us to reduce sales of
products affected by these legislative and regulatory actions and proposals and
could result in a deterioration of the risk profile of our portfolio, which
could lead to payments to our policyholders and contractholders that are higher
than we anticipated.
Medical advances could also lead to new forms of preventive care. Preventive
care could extend the life and improve the overall health of individuals. If
this were to occur, the duration of payments under certain of our annuity
products likely would increase, thereby reducing profitability in that business.
WE MAY FACE LOSSES IF THERE ARE SIGNIFICANT DEVIATIONS FROM OUR ASSUMPTIONS
REGARDING THE FUTURE PERSISTENCY OF OUR INSURANCE POLICIES AND ANNUITY
CONTRACTS.
The prices and expected future profitability of our insurance and deferred
annuity products are based in part upon expected patterns of premiums, expenses
and benefits, using a number of assumptions, including those related to
persistency, which is the probability that a policy or contract will remain
in-force from one period to the next. The effect of persistency on
profitability varies for different products. For most of our life insurance and
deferred annuity products, actual persistency that is lower than our
persistency assumptions could have an adverse impact on profitability,
primarily because we would be required to accelerate the amortization of
expenses we deferred in connection with the acquisition of the policy or
contract. For our universal life insurance policies, increased persistency that
is the result of the sale of policies by the insured to third parties that
continue to make premium payments on policies that would otherwise have lapsed,
also known as life settlements, could have an adverse impact on profitability
because of the higher claims rate associated with settled policies.
Because our assumptions regarding persistency experience are inherently
uncertain, reserves for future policy benefits and claims may prove to be
inadequate if actual persistency experience is different from those
assumptions. Although some of our products permit us to increase premiums
during the life of the policy or contract, we cannot guarantee that these
increases would be sufficient to maintain profitability or that such increases
would be approved by regulators. Moreover, many of our products do not permit
us to increase premiums or limit those increases during the life of the policy
or contract. Significant deviations in experience from pricing expectations
regarding persistency could have an adverse effect on the profitability of our
products.
WE CANNOT PROVIDE ASSURANCE THAT WE WILL BE ABLE TO CONTINUE TO IMPLEMENT
ACTIONS TO MITIGATE THE IMPACT OF REGULATIONS XXX OR AXXX AND AS A RESULT WE
MAY INCUR HIGHER OPERATING COSTS THAT COULD HAVE AN ADVERSE EFFECT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We have increased term and universal life insurance statutory reserves in
response to the Model Regulation entitled "Valuation of Life Insurance
Policies," commonly known as "Regulation XXX," and the Valuation of Life
Insurance Policies Regulation, as clarified by Actuarial Guideline 38 (more
commonly known as "Regulation AXXX") and have taken steps to mitigate the
impact the regulations have had on our business, including increasing premium
rates and implementing capital solutions. We cannot provide assurance that we
will be able to continue to implement actions to mitigate further impacts of
Regulations XXX or AXXX on our term and universal life insurance products.
Recent market conditions have limited the capacity or increased prices for
these reserve funding options. If capacity continues to be limited for a
prolonged period of time, our ability to obtain new funding for these
structures may be hindered. Additionally, we cannot provide assurance that
there will not be regulatory, tax or other
61
challenges to the actions we have taken to date. The result of those potential
challenges could require us to increase statutory reserves or incur higher
operating and/or tax costs.
LEGAL PROCEEDINGS
We face a significant 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, payment of contingent or other sales commissions, claims payments
and procedures, product design, product disclosure, administration, additional
premium charges for premiums paid on a periodic basis, denial or delay of
benefits, charging excessive or impermissible fees on products, recommending
unsuitable products to customers and breaching fiduciary or other duties to
customers. Plaintiffs in class action and other lawsuits against us may seek
very large or indeterminate amounts, including punitive and treble damages,
which may remain unknown for substantial periods of time. In our
investment-related operations, we are subject to litigation involving
commercial disputes with counterparties. We are also subject to litigation
arising out of our general business activities such as our contractual and
employment relationships. 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 and federal 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 and results of operations.
MARKET FOR GENWORTH LIFE AND ANNUITY INSURANCE COMPANY'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of December 31, 2009, all of our common stock, our sole class of common
equity on the date hereof, was owned by GLIC. Accordingly, there was no public
trading market for our common equity.
As previously discussed, our ability to pay dividends is restricted by state
insurance law.
Selected Financial Data
The following table sets forth selected financial information. The selected
financial information as of December 31, 2009 and 2008, and for the years ended
December 31, 2009, 2008 and 2007 has been derived from our consolidated
financial statements, which have been audited by KPMG LLP and are included in
"Financial Statements and Supplementary Data." You should read this information
in conjunction with the information under "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and our consolidated
financial statements, the related notes and the accompanying independent
registered public accounting firm's report, which are included in "Financial
Statements and Supplementary Data."
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS) 2009 2008 2007 2006 2005
-----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME INFORMATION
Revenues $ 1,910.4 $ 1,687.8 $ 2,653.3 $ 2,635.1 $ 2,483.6
Income (loss) before cumulative effect of change in accounting principle (1.3) (409.3) 323.7 359.6 270.6
CONSOLIDATED BALANCE SHEET INFORMATION
Total investments $16,836.5 $17,063.4 $20,173.7 $20,142.5 $17,728.2
Separate account assets 10,086.3 8,501.9 12,005.8 10,383.4 8,777.3
Reinsurance recoverable 8,216.0 8,490.7 8,670.6 9,386.8 10,187.0
All other assets 6,046.6 7,314.8 5,127.0 4,591.3 4,336.1
--------- --------- --------- --------- ---------
Total assets $41,185.4 $41,370.8 $45,977.1 $44,504.0 $41,028.6
-----------------------------------------------------------------------------------------------------------------------------
Policyholder liabilities $21,559.7 $24,253.6 $24,056.2 $24,776.8 $23,918.2
Separate account liabilities 10,086.3 8,501.9 12,005.8 10,383.4 8,777.3
Non-recourse funding obligations 3,543.0 3,555.0 3,555.0 2,765.0 1,400.0
All other liabilities 1,668.7 1,843.3 2,073.7 2,135.1 2,327.6
--------- --------- --------- --------- ---------
Total liabilities $36,857.7 $38,153.8 $41,690.7 $40,060.3 $36,423.1
-----------------------------------------------------------------------------------------------------------------------------
62
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS) 2009 2008 2007 2006 2005
----------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $ (664.1) $(1,603.6) $ (333.3) $ 22.0 $ 81.7
Total stockholder's equity 4,327.7 3,217.0 4,286.4 4,443.7 4,605.5
STATUTORY FINANCIAL INFORMATION/(1)/
Statutory capital and surplus/(2)/ $3,707.9 $ 3,284.5 $2,496.0 $2,498.9 $2,085.0
Asset valuation reserve 23.2 127.1 170.1 158.5 156.9
----------------------------------------------------------------------------------------------------
/(1)/We derived the Statutory Financial Information from Annual Statements of
our insurance company subsidiaries that were filed with the insurance
departments in states where we are domiciled and were prepared in
accordance with statutory accounting practices prescribed or permitted by
the insurance departments in states where we are domiciled. These
statutory accounting practices vary in certain material respects from U.S.
GAAP.
/(2)/Combined statutory capital and surplus includes surplus notes issued by
certain of our life insurance subsidiaries.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our consolidated financial condition
and results of operations should be read in conjunction with our audited
consolidated financial statements and related notes included in "Financial
Statements and Supplementary Data."
Overview
OUR BUSINESS
We are one of a number of subsidiaries of Genworth, a leading financial
security company dedicated to providing insurance, wealth management,
investment and financial solutions to more than 15 million customers, with a
presence in more than 25 countries. We have two operating segments: Protection
and Retirement Income, formerly known as Retirement Income and Institutional.
. PROTECTION. We offer customers term and universal life insurance and
Medicare supplement insurance.
. RETIREMENT INCOME. We offer customers a variety of wealth accumulation
and income distribution products. Wealth accumulation and income
distribution products principally include fixed and variable deferred and
immediate individual annuities and group variable annuities offered
through retirement plans.
We also have Corporate and Other activities which include unallocated corporate
income and expenses and non-strategic products that are managed outside of our
operating segments. Our non-strategic products include our institutional and
corporate-owned life insurance products. Institutional products consist of:
funding agreements, FABNs and GICs.
REVENUES AND EXPENSES
Our revenues consist primarily of the following:
. PROTECTION. The revenues in our Protection segment consist primarily of:
. net premiums earned on individual term life insurance and Medicare
supplement insurance policies;
. net investment income and net investment gains (losses) allocated to
this segment; and
. policy fees and other income, including mortality and expense risk
charges and surrender charges, primarily from universal life insurance
policies and other administrative charges.
. RETIREMENT INCOME. The revenues in our Retirement Income segment consist
primarily of:
. net premiums earned on single premium immediate annuities with life
contingencies;
. net investment income and net investment gains (losses) allocated to
this segment; and
. policy fees and other income, including surrender charges and mortality
and expense risk charges, primarily from variable annuity contracts and
other administrative charges.
. CORPORATE AND OTHER. The revenues in Corporate and Other consist
primarily of:
. unallocated net investment income and net investment gains (losses) and
. income from non-strategic products.
We allocate net investment gains (losses) from Corporate and Other to our
Protection and Retirement Income segments using an approach based principally
upon the investment portfolios established to support the segment's products
and targeted capital levels.
63
Our expenses consist primarily of the following:
. benefits provided to policyholders and contractholders and changes in
reserves;
. interest credited on general account balances;
. acquisition and operating expenses, including commissions, marketing
expenses, policy and contract servicing costs, overhead and other general
expenses that are not capitalized (shown net of deferrals);
. amortization of DAC and other intangible assets;
. interest and other financing expenses; and
. income taxes.
We allocate corporate expenses to each of our operating segments using a
methodology that includes allocated capital.
Business trends and conditions
Our business is, and we expect will continue to be, influenced by a number of
industry-wide and product-specific trends and conditions.
GENERAL CONDITIONS AND TRENDS AFFECTING OUR BUSINESSES
Financial and economic environment. As a financial security company, the
stability of both the financial markets and the economy in which we operate
impacts our sales, revenue growth and trends in profitability of our
businesses. Beginning in 2008, we saw a slowing economy, rising unemployment,
falling real estate values and reduced consumer spending in virtually all the
markets in which we operate. Modest economic growth has returned in the second
half of 2009. Financial markets have improved during the second half of 2009,
with solid performance, lower volatility in equity markets, narrowing spreads
and better credit performance in many sectors of the debt markets, reversing a
significant percentage of the declines experienced in 2008.
We believe that the market conditions experienced since 2008 combined with slow
economic growth have influenced, and will continue to influence, investment and
spending decisions as both consumers and businesses adjust their consumption,
debt and risk profiles in response to those conditions. We have seen an adverse
impact on sales, revenues and profitability trends of certain insurance and
investment products in 2009 related to some of these market conditions. Other
factors such as government spending, monetary policies, regulatory initiatives,
the volatility and strength of the capital markets, anticipated tax policy
changes and the uncertainty surrounding U.S. healthcare reform can affect
economic and business outlooks and consumer behaviors.
In our Protection and Retirement Income segments, we saw consumers more willing
to return to investing in equity markets and purchase or evaluate other
protection and retirement offerings. In certain markets, we have seen an
increase in sales and assets under management which indicate select trends may
be improving. However, we could experience an increase in lapses or surrenders
of policies in our life insurance products if our policyholders need cash.
In response to recent market conditions, we increased pricing in multiple
targeted markets and products. We have also adjusted our investment and
asset-liability management strategies in an attempt to reduce risk during
recent economic and financial market conditions. In addition, we have refined
our product and distribution management strategies to best fit with our
strengths, profitability targets and risk tolerance. These and other company
actions seek to enhance our competitive position as well as our capital
flexibility and liquidity as discussed under "-- Liquidity and Capital
Resources."
Since late 2008, the U.S. government, Federal Reserve and other legislative and
regulatory bodies have taken a variety of other actions to stabilize the
capital markets and provide needed liquidity to promote economic growth. There
can be no assurance as to what impact any of these actions will or have had on
the economic and financial markets, including levels of volatility. A prolonged
economic recovery period or global recessionary setback could materially and
adversely affect our business, financial condition and results of operations.
Volatility in credit and investment markets. Market conditions showed lower
volatility and continued signs of improvement in the fourth quarter of 2009.
Early signs of recovery in the economy and generally favorable third quarter of
2009 corporate earnings led to greater investor confidence and another quarter
of positive equity and credit market performance. Rising demand for
fixed-income products during the fourth quarter of 2009 led to further
compression in credit spreads. Market stability was further reflected in the
muted response to bankruptcy and default events during the fourth quarter of
2009 as compared to more volatile responses to such events earlier in 2008 and
in 2009. The market for asset-backed securities also improved as risk
sensitivity declined and demand for higher-yielding short-term investments
returned. As a result, liquidity premiums were lower in many sectors and a
clear differentiation between the performance of individual credits returned.
Despite overall market improvement, challenging levels of unemployment and
continued economic uncertainty still weigh on commercial real estate and
consumer-related asset performance, although the rate of decline for the
consumer-related asset sectors continues to slow.
64
While the marketplace is still experiencing a decline in the performance of
collateral underlying certain structured securities, corporate impairments have
decreased significantly in 2009. We recorded net other-than-temporary
impairments of $365.5 million during the year ended December 31, 2009.
Impairments recorded in the latter portion of 2009 were lower than the levels
experienced in the second half of 2008 and the first quarter of 2009 as market
improvements have continued and we expect losses to trend down. Additionally,
for the year ended December 31, 2009, losses related to limited partnerships
increased to $78.9 million. However, in the second half of 2009, we saw a
decline in losses related to limited partnerships from the second quarter of
2009. Although economic conditions may continue to negatively impact our
investment valuation, the underlying collateral associated with assets that
have not been impaired continues to perform.
We believe that the current credit environment provides us with opportunities
to invest across a variety of asset classes to meet our yield requirements, as
well as to continue our diversification and de-risking efforts within the
investment portfolio. See "-- Investments and Derivative Instruments" for
additional information on our investment portfolio.
TRENDS AND CONDITIONS AFFECTING OUR PRODUCTS
Life insurance. Results in our life insurance business are impacted by sales,
mortality, persistency, investment yields and statutory reserve requirements.
Additionally, sales of our products and persistency of our insurance in-force
are dependent on competitive product features and pricing, distribution and
customer service.
There has been an overall decline in life insurance sales for the industry
given recent market conditions. Consistent with the industry, our life
insurance sales trended down during 2008 and through the first half of 2009,
although we saw an increase in sales during the third and fourth quarters of
2009 as compared to the second quarter of 2009. In our universal life insurance
products, we anticipate that new premium sales may decline or remain flat
before returning to a growth profile as we introduce new life insurance
products that are more capital efficient and priced to achieve targeted
returns. In our term life insurance products, we have continued to execute on
our refined "main street" market focus (characterized primarily by face amounts
of $1 million or below). In addition, we have introduced a new term universal
life insurance product that is designed to and will replace new sales of our
current traditional term life insurance products. As a result, sales of our
traditional term insurance will decline and will be replaced by term universal
life insurance sales. We believe our recently introduced new term universal
life product offers a similar value proposition to the consumer as our
traditional term life product and is competitively priced for the main street
market and we have seen positive initial trends in overall submitted policies.
However, the growth rate will ultimately depend upon the timing of distributor
(existing BGA and other distributors) and consumer adoption.
Beginning in late 2008 and continuing through 2009, we have seen favorable
mortality in our life insurance products as compared to priced mortality.
Additionally, we have experienced lower persistency in term life insurance
policies going into their post-level rate period (10 and 15 years after policy
issue) and expect this trend to continue as certain blocks of business reach
the post-level rate period.
During 2009, certain competitors have increased prices and exited certain
product features in the life insurance market, particularly in policies with
longer guarantee periods and no lapse guarantees, which could benefit our
competitiveness and returns over time. Competitors have made pricing
adjustments, in part, to address Regulations XXX and AXXX which require
insurers to establish additional statutory reserves for term life insurance
policies with long-term premium guarantees and certain universal life insurance
policies with secondary guarantees, which increase the capital required to
write these products. The solutions for the increased reserve requirements on
some of our in-force books of business have become more limited and expensive,
which has and may continue to negatively impact the respective product margins,
and therefore, our results of operations. Related to our in-force contracts, we
have committed funding sources for approximately 95.0% of our anticipated peak
level reserves required under Regulations XXX and AXXX so unfunded reserve
exposure is minimal. In addition, as noted above, we have also introduced
product modifications to our universal life insurance products which provide
shorter guarantee periods, thereby reducing the capital requirements and
mitigating the level of future additional statutory reserve funding
requirements. We have introduced a new term universal life insurance product
that is designed to replace new sales of our existing term life insurance
products. The new term universal life insurance product offers death benefit
guarantee premiums that are competitive with traditional term insurance
premiums for comparable durations. The new term universal life insurance
product also provides the greater flexibility associated with universal life
coverage. These new products are designed to reduce capital requirements and
limit financing costs associated with existing products and thereby improve the
profitability of new business.
Retirement income. Results for our Retirement Income segment are affected by
investment performance, interest rate levels, slope of the interest rate yield
curve, net interest spreads, equity market conditions, mortality, policyholder
lapses and new product sales. Our competitive position within many of our
distribution channels and our ability to grow this business
65
depends on many factors, including product features, ratings and competitive
strength. Product features include current and minimum crediting rates on our
spread-based products, surrender charges and guaranteed benefit features in
variable annuity products which provide a guaranteed death or living benefits
to the consumer.
Recent product changes and sales of annuity products reflect a more targeted
growth strategy. We have scaled back certain product features that reduce risk
in our variable annuity products and have more selectively targeted
distributors and sales personnel supporting our annuity products due to the
adverse market conditions and our risk appetite, profitability and capital
strategies reflecting this more targeted growth strategy. In addition, in late
2008 and early 2009, due to adverse market conditions, our operating results
and ratings downgrades, certain firms elected to suspend sales of fixed and
variable annuity products issued by one or more of our subsidiaries. The
largest impact of these suspensions was on our fixed annuity offerings through
large financial institutions. As a result of the market recovery and our
improved financial performance, several firms have lifted their suspension and
are once again offering our products. Additionally, in the second half of 2009,
we have expanded our distribution relationships with new financial
institutions, independent financial planners and BGAs and we expect to continue
to expand with the BGA and independent financial planner channels, and
introduce new product offerings.
In fixed annuities, we are distributing through BGAs, independent financial
planners and select financial institutions, complementing our overall product
suite. Sales may fluctuate as we are offering these products opportunistically.
We may reduce crediting rates on deferred annuities and have re-priced
immediate annuities to maintain spreads and targeted returns. Since the second
half of 2008, spreads on fixed annuity products have declined related to lower
short-term rates and from holding higher cash balances to manage through
challenging market conditions. We anticipate improvement in spreads as cash is
reinvested at higher yields in the near term.
In variable annuities, market pressures in late 2008 and early 2009 increased
our expected death and living benefit costs, the costs of our hedging programs
and the level of capital we may need to support these products. The significant
declines and increased volatility in the equity markets during the second half
of 2008 and the first quarter of 2009 negatively impacted our results of
operations through accelerated amortization of DAC and increased reserves.
However, the improvement in the equity markets during the second half of 2009
favorably impacted our results through lower amortization of DAC and lower
reserves. In the future, equity market performance and volatility could result
in additional gains or losses in our variable annuity products and associated
hedging program which would impact our results of operations.
We continue to offer variable annuity products with living benefit features,
such as those described above. However, in response to the volatility in equity
markets, certain product features have been scaled back to reduce risk and
costs have been increased to the consumer. These product changes are similar to
actions taken by many of our competitors. We believe the benefits offered by
these products remain attractive to consumers within our target markets as we
experienced increased sales in these products during the second half of 2009.
Critical Accounting Estimates
The accounting estimates discussed in this section are those that we consider
to be particularly critical to an understanding of our consolidated financial
statements because their application places the most significant demands on our
ability to judge the effect of inherently uncertain matters on our financial
results. For all of these policies, we caution that future events rarely
develop exactly as forecasted, and management's best estimates may require
adjustment.
Valuation of fixed maturity securities. Our portfolio of fixed maturity
securities is comprised primarily of investment grade securities, which are
carried at fair value.
Fair value measurements are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect our view of market assumptions in the absence of
observable market information. We utilize valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. All
assets carried at fair value are classified and disclosed in one of the
following three categories:
. Level 1 -- Quoted prices for identical instruments in active markets.
. Level 2 -- Quoted prices for similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not
active; and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
. Level 3 -- Instruments whose significant value drivers are unobservable.
Estimates of fair values for fixed maturity securities are obtained primarily
from industry-standard pricing methodologies utilizing market observable
inputs. For our less liquid securities, such as our privately placed
securities, we utilize independent market data to employ alternative valuation
methods commonly used in the financial services industry to
66
estimate fair value. Based on the market observability of the inputs used in
estimating the fair value, the pricing level is assigned.
Security pricing is applied using a hierarchy approach. The vast majority of
our fixed maturity securities use Level 2 inputs for the determination of fair
value. These fair values are obtained primarily from industry-standard pricing
methodologies utilizing market observable information, when available. Because
many fixed-income securities do not trade on a daily basis, fair value is
determined using industry-standard methodologies by applying available market
information through processes such as benchmark curves, benchmarking of
like-securities, sector groupings, quotes from market participants and matrix
pricing. Observable information is compiled and integrates relevant credit
information, perceived market movements and sector news. Additionally, security
prices are periodically back-tested to validate and/or refine models as
conditions warrant. Market indicators and industry and economic events are also
monitored as triggers to obtain additional data. For certain structured
securities with limited trading activity, industry-standard pricing
methodologies utilize adjusted market information, such as index prices or
discounting expected future cash flows, to estimate fair value. These measures
are not deemed observable for a particular security and results in the
measurement being classified as Level 3.
Where specific market information is unavailable for certain securities, such
as privately placed securities, internally developed pricing models produce
estimates of fair value primarily utilizing Level 2 inputs along with certain
Level 3 inputs. The internally developed models include matrix pricing. The
pricing matrix begins with current treasury rates and uses credit spreads
received from third-party sources to estimate fair value. The credit spreads
incorporate the issuer's industry or issuer-specific credit characteristics and
the security's time to maturity, if warranted. Remaining un-priced securities
are valued using an estimate of fair value based on indicative market prices
that include significant unobservable inputs not based on, nor corroborated by,
market information, including the utilization of non-binding broker quotes.
The following table sets forth the fair value of our fixed maturity securities
portfolio by pricing source as of December 31, 2009:
(AMOUNTS IN MILLIONS) TOTAL LEVEL 1 LEVEL 2 LEVEL 3
------------------------------------------------------------------------------------------
Fixed maturity securities:
Priced via industry-standard pricing methodologies $ 9,050.6 $-- $7,110.8 $1,939.8
Priced via indicative market prices 214.3 -- -- 214.3
Priced via internally developed models 1,983.9 -- 1,388.0 595.9
--------- --- -------- --------
Total fixed maturity securities $11,248.8 $-- $8,498.8 $2,750.0
------------------------------------------------------------------------------------------
See note 2 in our consolidated financial statements under "Financial Statements
and Supplementary Data" for additional information related to the valuation of
fixed maturity securities.
Other-than-temporary impairments on available-for-sale securities. As of each
balance sheet date, we evaluate securities in an unrealized loss position for
other-than-temporary impairments. For debt securities, we consider all
available information relevant to the collectability of the security, including
information about past events, current conditions, and reasonable and
supportable forecasts, when developing the estimate of cash flows expected to
be collected. For equity securities, we recognize an impairment charge in the
period in which we determine that the security will not recover to book value
within a reasonable period.
On April 1, 2009, we adopted new accounting guidance related to investments
that amended the requirement for management to positively assert the ability
and intent to hold a debt security to recovery in determining whether an
impairment was other-than-temporary and replaced that provision with the
assertion that management does not intend to sell or it is not more likely than
not that we will be required to sell a security prior to recovery. Prior to the
adoption of the new accounting guidance related to investments, management
would only authorize the sale of securities not deemed to be
other-than-temporarily impaired in response to unforeseen events. If evidence
of the conditions or events resulting in our change in intent to hold to
recovery was insufficient to prove the events could not have been foreseen, the
sale of the security would have been prohibited to ensure consistency with
management's previous assertion of having the intent and ability to hold the
security to recovery. Subsequent to the adoption of the new accounting guidance
related to investments, management may decide to sell certain securities as a
part of our normal portfolio management. See note 2 in our consolidated
financial statements under "Financial Statements and Supplementary Data" for
additional information related to other-than-temporary impairments on
available-for-sale securities and accounting changes related to
other-than-temporary impairments.
Derivatives. We enter into freestanding derivative transactions primarily to
manage the risk associated with variability in cash flows or changes in fair
values related to our financial assets and liabilities. Additionally, we
purchase
67
investment securities, issue certain insurance policies and engage in certain
reinsurance contracts that have embedded derivatives. The associated financial
statement risk is the volatility in net income which can result from:
(i) changes in the fair value of derivatives not qualifying as accounting
hedges; (ii) changes in the fair value of embedded derivatives required to be
bifurcated from the related host contract; (iii) ineffectiveness of designated
hedges; and (iv) counterparty default. Accounting for derivatives is complex,
as evidenced by significant authoritative interpretations of the primary
accounting standards which continue to evolve. See notes 2 and 4 in our
consolidated financial statements under "Financial Statements and Supplementary
Data" for an additional description of derivative instruments and fair value
measurements of derivative instruments.
Deferred acquisition costs. DAC represents costs that vary with, and are
primarily related to, the sale and issuance of our insurance policies and
investment contracts which are deferred and amortized over the estimated life
of the related insurance policies. These costs include commissions in excess of
ultimate renewal commissions, solicitation and printing costs, sales material
and some support costs, such as underwriting and contract and policy issuance
expenses. DAC is subsequently amortized to expense over the lives of the
underlying contracts, in relation to the anticipated recognition of premiums or
gross profits.
The amortization of DAC for traditional long-duration insurance products
(including guaranteed renewable term life, life-contingent structured
settlements and immediate annuities and Medicare supplement insurance) is
determined as a level proportion of premium based on commonly accepted
actuarial methods and reasonable assumptions about mortality, morbidity, lapse
rates, expenses, and future yield on related investments, established when the
contract or policy is issued. U.S. GAAP requires that assumptions for these
types of products not be modified (or unlocked) unless recoverability testing
deems them to be inadequate. Amortization is adjusted each period to reflect
policy lapse or termination rates as compared to anticipated experience.
Accordingly, we could experience accelerated amortization of DAC if policies
terminate earlier than originally assumed.
Amortization of DAC for annuity contracts without significant mortality risk
and for investment and universal life insurance products is based on expected
gross profits. Expected gross profits are adjusted quarterly to reflect actual
experience to date or for the unlocking of underlying key assumptions based on
experience studies such as mortality, withdrawal or lapse rates, investment
margin or maintenance expenses. The estimation of expected gross profits is
subject to change given the inherent uncertainty as to the underlying key
assumptions employed and the long duration of our policy or contract
liabilities. Changes in expected gross profits reflecting the unlocking of
underlying key assumptions could result in a material increase or decrease in
the amortization of DAC depending on the magnitude of the change in underlying
assumptions. Significant factors that could result in a material increase or
decrease in DAC amortization for these products include material changes in
withdrawal or lapse rates, investment spreads or mortality assumptions. For the
years ended December 31, 2009, 2008 and 2007, key assumptions were unlocked in
our Protection and Retirement Income segments to reflect our current
expectation of future investment spreads, lapse rates, mortality and
reinsurance costs.
The DAC amortization methodology for our variable products (variable annuities
and variable universal life insurance) includes a long-term equity market
average appreciation assumption of 8.5%. When actual returns vary from the
expected 8.5%, we assume a reversion to the expected return over a three-year
period. The assumed returns over this reversion to the expected return period
are limited to the 85th percentile of historical market performance.
We regularly review DAC to determine if it is recoverable from future income as
part of our loss recognition testing. For deposit products, if the current
present value of estimated future gross profits is less than the unamortized
DAC for a line of business, a charge to income is recorded for additional DAC
amortization, and for certain products, an increase in benefit reserves may be
required. For other products, if the benefit reserves plus anticipated future
premiums and interest income for a line of business are less than the current
estimate of future benefits and expenses (including any unamortized DAC), a
charge to income is recorded for additional DAC amortization and potentially an
increase in benefit reserves, to address any premium deficiency. The
establishment of such a reserve is subject to inherent uncertainty and requires
significant judgment and estimates to determine the present values of future
premium and expected losses and expenses of our businesses. As of December 31,
2009, we believe all of our businesses have sufficient future income where the
related DAC is recoverable based on our best estimates of morbidity, mortality,
claim loss development, withdrawal or lapse rate, maintenance expense or
interest rates expected to occur.
In 2009, loss recognition testing of our fee-based products in our Retirement
Income segment resulted in an increase in amortization of DAC of $49.0 million
reflecting unfavorable equity market performance.
In 2008, loss recognition testing of our fee-based products in our Retirement
Income segment resulted in an increase in amortization of DAC of $46.1 million
reflecting unfavorable equity market performance.
68
Continued low interest rates have reduced the recoverability margins on our
immediate annuity products. Additional adverse variations in interest rates
and/or mortality that we considered reasonably likely to occur in the future
could result in the DAC associated with our immediate annuity products being no
longer fully recoverable as well as requiring the establishment of additional
benefit reserves. As of December 31, 2009, adverse variation that we consider
reasonably likely would result in an additional charge to income of
approximately $16.0 million. However, more adverse variation could result in
additional amortization of DAC or the establishment of additional benefit
reserves, while any favorable variation would result in additional margin in
our DAC loss recognition analysis and would result in higher income recognition
over the remaining duration of the in-force block. We expect future sales of
profitable immediate annuities will improve margins, which would reduce the
likelihood that adverse variation in key assumptions would result in lower
margin in our DAC loss recognition analysis.
As of December 31, 2009, we believe all of our other businesses have sufficient
future income where the related DAC would be recoverable under adverse
variations in morbidity, mortality, claim loss development, withdrawal or lapse
rate, maintenance expense or interest rates that could be considered reasonably
likely to occur. See notes 2 and 5 in our consolidated financial statements
under "Financial Statements and Supplementary Data" for additional information
related to DAC.
Present value of future profits. In conjunction with the acquisition of a
block of insurance policies or investment contracts, a portion of the purchase
price is assigned to the right to receive future gross profits arising from
existing insurance and investment contracts. This intangible asset, called
PVFP, represents the actuarially estimated present value of future cash flows
from the acquired policies. PVFP is amortized, net of accreted interest, in a
manner similar to the amortization of DAC.
We regularly review our assumptions and periodically test PVFP for
recoverability in a manner similar to our treatment of DAC. As of December 31,
2009, we believe all of our businesses have sufficient future income where the
related PVFP is recoverable based on our best estimates of morbidity,
mortality, withdrawal or lapse rate, maintenance expense and interest rates
that are expected to occur.
As of December 31, 2009, we believe all of our other businesses have sufficient
future income where the related PVFP would be recoverable under adverse
variations in morbidity, mortality, withdrawal or lapse rate, maintenance
expense or interest rates that could be considered reasonably likely to occur.
For the years ended December 31, 2009, 2008 and 2007, there were no charges to
income as a result of our PVFP recoverability or loss recognition testing. See
notes 2 and 6 in our consolidated financial statements under "Financial
Statements and Supplementary Data" for additional information related to PVFP.
Goodwill. Goodwill represents the excess of the amounts paid to acquire a
business over the fair value of its net assets at the date of acquisition.
Subsequent to acquisition, goodwill could become impaired if the fair value of
a reporting unit as a whole were to decline below the value of its individually
identifiable assets and liabilities. This may occur for various reasons,
including changes in actual or expected income or cash flows of a reporting
unit or generation of income by a reporting unit at a lower rate of return than
similar businesses.
Under U.S. GAAP, we test the carrying value of goodwill for impairment at least
annually at the "reporting unit" level, which is either an operating segment or
a business one level below the operating segment. Under certain circumstances,
interim impairment tests may be required if events occur or circumstances
change that would more likely than not reduce the fair value of a reporting
unit below its carrying value.
The determination of fair value for our reporting units is primarily based on
an income approach whereby we use discounted cash flows for each reporting
unit. When available, and as appropriate, we use market approaches or other
valuation techniques to corroborate discounted cash flow results. The
discounted cash flow model used for each reporting unit is based on either:
operating income or statutory distributable income, depending on the reporting
unit being valued.
For the operating income model, we determine fair value based on the present
value of the most recent income projections for each reporting unit and
calculate a terminal value utilizing a terminal growth rate. The significant
assumptions in the operating income model include: income projections,
including the underlying assumptions; discount rate; and terminal growth rate.
For the statutory distributable income model, we determine fair value based on
the present value of projected statutory net income and changes in required
capital to determine distributable income for the respective reporting unit.
The significant assumptions in the statutory distributable income model
include: required capital levels; income projections, including the underlying
assumptions; discount rate; new business projection period; and new business
production growth.
The cash flows used to determine fair value are dependent on a number of
significant assumptions based on our historical experience, our expectations of
future performance and
69
expected economic environment. Our estimates are subject to change given the
inherent uncertainty in predicting future performance and cash flows, which are
impacted by such things as policyholder behavior, competitor pricing, new
product introductions and specific industry and market conditions.
Additionally, the discount rate used is based on our judgment of the
appropriate rate for each reporting unit based on the relative risk associated
with the projected cash flows.
There were no goodwill impairment charges recorded in 2009. However, continued
deteriorating or adverse market conditions for certain businesses may have a
significant impact on the fair value of our reporting units and could result in
future impairments of goodwill. More specifically, our risks associated with
future goodwill impairments relate to our Protection segment.
Insurance liabilities and reserves. We calculate and maintain reserves for the
estimated future payment of claims to our policyholders and contractholders
based on actuarial assumptions and in accordance with industry practice and
U.S. GAAP. Many factors can affect these reserves, including economic and
social conditions, mortality and morbidity trends, inflation, healthcare costs,
changes in doctrines of legal liability and damage awards in litigation.
Therefore, the reserves we establish are necessarily based on estimates,
assumptions and our analysis of historical experience. Our results depend
significantly upon the extent to which our actual claims experience is
consistent with the assumptions we used in determining our reserves and pricing
our products. Our reserve assumptions and estimates require significant
judgment and, therefore, are inherently uncertain. We cannot determine with
precision the ultimate amounts that we will pay for actual claims or the timing
of those payments.
Insurance reserves differ for long- and short-duration insurance policies.
Measurement of long-duration insurance reserves is based on approved actuarial
methods, and includes assumptions about expenses, mortality, morbidity, lapse
rates and future yield on related investments. Short-duration contracts are
accounted for based on actuarial estimates of the amount of loss inherent in
that period's claims, including losses incurred for which claims have not been
reported. Short-duration contract loss estimates rely on actuarial observations
of ultimate loss experience for similar historical events.
Valuation of deferred tax assets. Deferred tax assets represent the tax
benefit of future deductible temporary differences and operating loss and tax
credit carryforwards. Deferred tax assets are measured using the enacted tax
rates expected to be in effect when such benefits are realized if there is no
change in tax law. Under U.S. GAAP, we test the value of deferred tax assets
for impairment on a quarterly basis at our taxpaying component level within
each tax jurisdiction, consistent with our filed tax returns. Deferred tax
assets are reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion, or all, of
the deferred tax assets will not be realized. In determining the need for a
valuation allowance, we consider carryback capacity, reversal of existing
temporary differences, future taxable income and tax planning strategies. The
determination of the valuation allowance for our deferred tax assets requires
management to make certain judgments and assumptions regarding future
operations that are based on our historical experience and our expectations of
future performance. Our judgments and assumptions are subject to change given
the inherent uncertainty in predicting future performance, which is impacted by
such things as policyholder behavior, competitor pricing, new product
introductions, and specific industry and market conditions.
Contingent liabilities. A liability is contingent if the amount is not
presently known, but may become known in the future as a result of the
occurrence of some uncertain future event. We estimate our contingent
liabilities based on management's estimates about the probability of outcomes
and their ability to estimate the range of exposure. Accounting standards
require that a liability be recorded if management determines that it is
probable that a loss has occurred and the loss can be reasonably estimated. In
addition, it must be probable that the loss will be confirmed by some future
event. As part of the estimation process, management is required to make
assumptions about matters that are by their nature highly uncertain.
The assessment of contingent liabilities, including legal and income tax
contingencies, involves the use of critical estimates, assumptions and
judgments. Management's estimates are based on their belief that future events
will validate the current assumptions regarding the ultimate outcome of these
exposures. However, there can be no assurance that future events, such as court
decisions or IRS positions, will not differ from management's assessments.
Whenever practicable, management consults with third-party experts (including
attorneys, accountants and claims administrators) to assist with the gathering
and evaluation of information related to contingent liabilities. Based on
internally and/or externally prepared evaluations, management makes a
determination whether the potential exposure requires accrual in the
consolidated financial statements.
Consolidated Results of Operations
The following is a discussion of our consolidated results of operations and
should be read in conjunction with "-- Business trends and conditions."
70
The following table sets forth the consolidated results of operations:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS) 2009 2008 2007
-----------------------------------------------------------------------------------------------------------------
Revenues:
Premiums $ 982.4 $1,068.5 $1,063.2
Net investment income 644.7 948.3 1,189.9
Net investment gains (losses) (315.9) (936.7) (91.1)
Policy fees and other income 599.2 607.7 491.3
-------- -------- --------
Total revenues 1,910.4 1,687.8 2,653.3
-----------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Benefits and other changes in policy reserves 1,032.7 1,138.8 1,105.4
Interest credited 339.7 450.7 541.3
Acquisition and operating expenses, net of deferrals 247.0 270.2 244.2
Amortization of deferred acquisition costs and intangibles 241.0 244.0 151.4
Interest expense 91.7 168.1 205.1
-------- -------- --------
Total benefits and expenses 1,952.1 2,271.8 2,247.4
-----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in net income (loss) of
unconsolidated subsidiary (41.7) (584.0) 405.9
Provision (benefit) for income taxes (36.0) (212.3) 101.3
-------- -------- --------
Net income (loss) before equity in net income (loss) of unconsolidated subsidiary (5.7) (371.7) 304.6
Equity in net income (loss) of unconsolidated subsidiary 4.4 (37.6) 19.1
-------- -------- --------
Net income (loss) $ (1.3) $ (409.3) $ 323.7
-----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) AND
PERCENTAGE CHANGE
-----------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS) 2009 VS. 2008 2008 VS. 2007
-----------------------------------------------------------------------------------------------------------------------
Revenues:
Premiums $ (86.1) (8.1)% $ 5.3 0.5%
Net investment income (303.6) (32.0)% (241.6) (20.3)%
Net investment gains (losses) 620.8 66.3% (845.6) NM/(1)/
Policy fees and other income (8.5) (1.4)% 116.4 23.7%
------- -------
Total revenues 222.6 13.2% (965.5) (36.4)%
-----------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Benefits and other changes in policy reserves (106.1) (9.3)% 33.4 3.0%
Interest credited (111.0) (24.6)% (90.6) (16.7)%
Acquisition and operating expenses, net of deferrals (23.2) (8.6)% 26.0 10.6%
Amortization of deferred acquisition costs and intangibles (3.0) (1.2)% 92.6 61.2%
Interest expense (76.4) (45.5)% (37.0) (18.0)%
------- -------
Total benefits and expenses (319.7) (14.1)% 24.4 1.1%
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in net income (loss) of
unconsolidated subsidiary 542.3 92.9% (989.9) NM/(1)/
Provision (benefit) for income taxes 176.3 83.0% (313.6) NM/(1)/
------- -------
Net income (loss) before equity in net income (loss) of unconsolidated subsidiary 366.0 98.5% (676.3) NM/(1)/
Equity in net income (loss) of unconsolidated subsidiary 42.0 111.7% (56.7) NM/(1)/
------- -------
Net income (loss) $ 408.0 99.7% $(733.0) NM/(1)/
-----------------------------------------------------------------------------------------------------------------------
/(1)/We define "NM" as not meaningful for increases or decreases greater than
200%.
2009 COMPARED TO 2008
Premiums. Premiums consist primarily of premiums earned on insurance products
for life and Medicare supplement insurance, single premium immediate annuities
and structured settlements with life contingencies.
. Our Protection segment increased $12.9 million driven by in-force growth
of our term life insurance from new sales and renewal premiums. This was
partially offset by an increase in ceded reinsurance and a decrease in
Medicare supplement insurance premiums as lapses exceeded new sales.
. Our Retirement Income segment decreased $99.1 million primarily as a
result of lower life-contingent sales of our single premium immediate
annuity products in the current market environment.
Net investment income. Net investment income represents the income earned on
our investments.
. Our Protection segment decreased $150.3 million mainly due to lower
investment yields on assets backing our non-recourse funding obligations
supporting certain term and universal life insurance reserves. Net
investment income in 2009 also included $26.8 million of higher losses
related to limited partnerships accounted for under the equity method.
. Our Retirement Income segment decreased $29.2 million mainly attributable
to lower yields from holding higher cash balances to cover near term
obligations and portfolio repositioning activities. Net investment income
in 2009 also included $14.7 million of higher losses related to limited
partnerships accounted for under the equity method.
. Corporate and Other activities decreased $124.1 million as a result of
lower yields on floating rate investments primarily from holding higher
cash balances as well as a decrease in average invested assets.
Net investment gains (losses). Net investment gains (losses) consist of
realized gains and losses from the sale or impairment of our investments,
unrealized and realized gains and losses from our trading securities, fair
value hedging relationships, non-qualifying derivatives and embedded
derivatives. For further discussion of the change in net investment gains
(losses), see the comparison for this line item under "-- Investments and
Derivative Instruments."
. We recorded $365.5 million of net other-than-temporary impairments in 2009
as compared to $820.7 million in 2008. Of total impairments, $236.4
million and $563.7 million related to residential mortgage-backed and
asset-backed securities for the years ended December 31, 2009 and 2008,
respectively. Impairments related to corporate fixed maturity
71
securities which were a result of bankruptcies, receivership or concerns
about the issuer's ability to continue to make contractual payments or
intent to sell were $16.6 million in 2009 compared to $228.2 million in
2008. We also recorded $89.8 million of impairments related to financial
hybrid securities primarily from banks in the U.S. and U.K. during 2009.
. Net investment gains related to derivatives were $112.1 million in 2009 as
compared to net investment losses of $87.9 million in 2008. The gains in
2009 primarily related to $88.5 million of gains in embedded derivative
liabilities associated with our variable annuity products with GMWBs
exceeding the change in value of derivative instruments used for
mitigating this risk, $24.5 million in gains from the limited guarantee
provided by Genworth and $6.5 million of gains from credit default swaps
utilized to improve our diversification and portfolio yield. These gains
were partially offset by $5.0 million of losses related to non-qualified
interest rate swaps and $2.3 million in losses due to hedge
ineffectiveness. Net investment losses from derivatives in 2008 were
primarily from losses in embedded derivative liabilities associated with
our variable annuity products with GMWBs exceeding the change in value of
derivative instruments used for mitigating this risk.
. We recorded $41.6 million of losses related to the sale of
available-for-sale securities in 2009 compared to $24.5 million of losses
related to the sale of available-for-sale securities in 2008. We also
recorded $13.9 million of net investment losses related to the sale of
limited partnerships in 2009.
Policy fees and other income. Policy fees and other income consist primarily
of fees assessed against policyholder and contractholder account values,
surrender charges and cost of insurance assessed on universal life insurance
policies and other fees.
. Our Protection segment increased $20.4 million mainly attributable to an
increase in cost of insurance charges, including a favorable unlocking
related to estimated gross profit assumptions in our universal life
insurance products in 2009.
. Our Retirement Income segment decreased $7.5 million mainly from the
unfavorable market impact in the first half of 2009 on our fee-based
products.
. Corporate and Other activities decreased $21.4 million as a result of
lower income from the early retirement of institutional contracts at a
discount to contract values in 2009.
Benefits and other changes in policy reserves. Benefits and other changes in
policy reserves consist primarily of benefits paid and reserve activity related
to current claims and future policy benefits on insurance and investment
products for life insurance, Medicare supplement insurance and structured
settlements and single premium immediate annuities with life contingencies.
. Our Protection segment increased $25.2 million principally attributable to
growth of our term life insurance in-force block partially offset by lower
production and an increase in ceded reserves from a new reinsurance treaty.
. Our Retirement Income segment decreased $131.5 million largely
attributable to our life-contingent single premium immediate annuity
products driven by a decline in sales in 2009. Our guaranteed minimum
benefit liabilities for our variable annuity contracts also decreased
driven by improved market performance, partially offset by an increase in
guaranteed minimum death benefit claims during 2009.
Interest credited. Interest credited represents interest credited on behalf of
policyholder and contractholder general account balances.
. Our Protection segment increased $3.1 million mainly as a result of an
increase in account values in universal life insurance.
. Our Retirement Income segment decreased $9.9 million primarily from lower
account values on fixed annuities associated with surrenders more than
offsetting sales. Additionally, crediting rates were reset to lower rates
as certain annuities reach the end of their initial crediting rate
guarantee period.
. Corporate and Other activities decreased $104.2 million primarily from our
institutional products attributable to the impact of lower rates on
interest paid on our floating rate policyholder liabilities and a decrease
in average outstanding liabilities.
Acquisition and operating expenses, net of deferrals. Acquisition and operating
expenses, net of deferrals, represent costs and expenses related to the
acquisition and ongoing maintenance of insurance and investment contracts,
including commissions, policy issuance expenses and other underwriting and
general operating costs. These costs and expenses are net of amounts that are
capitalized and deferred, which are primarily costs and expenses that vary with
and are primarily related to the sale and issuance of our insurance policies
and investment contracts, such as first-year commissions in excess of ultimate
renewal commissions and other policy issuance expenses.
72
. Our Protection segment decreased $2.4 million largely driven by a decrease
in commissions in our Medicare supplement insurance business. Partially
offsetting this decrease was an increase in expenses from lower deferrals
related to our term life insurance.
. Our Retirement Income segment decreased $10.2 million primarily as a
result of a decrease in costs associated with a decline in sales of our
spread-based products in 2009.
. Corporate and Other activities decreased $10.6 million mainly from higher
allocated expenses in 2009.
Amortization of deferred acquisition costs and intangibles. Amortization of
deferred acquisition costs and intangibles consists primarily of the
amortization of acquisition costs that are capitalized, present value of future
profits and capitalized software.
. Our Protection segment decreased $13.4 million primarily related to our
universal life insurance products from a favorable adjustment in 2009 to
estimated gross profits and from a favorable unlocking related to
estimated gross profit assumptions in 2009 as compared to 2008. These
decreases were partially offset by an increase in amortization related to
our term life insurance products driven by growth of the in-force block
and higher lapses in 2009.
. Our Retirement Income segment increased $10.1 million primarily as a
result of increased amortization of DAC from gains in 2009 related to
embedded derivatives associated with our variable annuity products with
GMWBs as compared to losses in 2008. The prior year also included a
favorable unlocking of $10.8 million associated with lower lapse rate
assumptions. Higher amortization related to loss recognition testing of
$46.1 million in 2008 was largely offset by $49.0 million recorded in 2009.
Interest expense. Interest expense represents interest related to our
non-recourse funding obligations. Interest expense decreased mainly as a result
of a decrease in average floating rates paid on the non-recourse funding
obligations reflecting the decline in the underlying index rate.
Provision (benefit) for income taxes. The effective tax rate increased to
86.3% for the year ended December 31, 2009 from 36.4% for the year ended
December 31, 2008. This increase in the effective tax rate was primarily
attributable to the recognition of tax benefits on a pre-tax loss in 2009,
which was partially offset by changes in uncertain tax positions in 2009.
Net income (loss)
. Our Protection segment increased primarily as a result of a decrease in
impairments in our investment portfolio, a decrease in interest expense
paid on our non-recourse funding obligations and an increase in cost of
insurance charges. These increases were partially offset by a decrease in
net investment income from lower yields on investments.
. Our Retirement Income segment increased primarily as a result of improved
market performance in our fee-based products in 2009.
. Corporate and Other activities increased primarily as a result of a
decrease in impairments in our investment portfolio.
2008 COMPARED TO 2007
Premiums
. Our Protection segment increased $28.4 million driven by in-force growth
of our term life insurance from new sales and renewal premiums. This was
partially offset by lower experience rating refunds from reinsurance
transactions with one of our reinsurers. Also offsetting the increase was
a decrease in Medicare supplement insurance premiums as lapses exceeded
new sales.
. Our Retirement Income segment decreased $23.1 million primarily as a
result of a decrease in our structured settlement annuities which are in
runoff and a decrease in life-contingent single premium immediate annuity
sales.
Net investment income
. Our Protection segment decreased $87.3 million mainly due to lower
investment yields on assets backing our non-recourse funding obligations
supporting certain term and universal life insurance reserves. Net
investment income in 2008 included a $6.7 million loss related to limited
partnerships as compared to a $19.1 million gain in 2007 reflecting
current year losses from limited partnerships accounted for under the
equity method. The current year included less investment income from bond
calls and commercial mortgage loan prepayments as compared to the prior
year.
. Our Retirement Income segment decreased $60.2 million mainly attributable
to a decrease related to spread-based products from a decline in yield and
average invested assets. Net investment income in 2008 included a $26.9
million loss related to limited
73
partnerships as compared to a $13.5 million gain in 2007 reflecting current
year losses from limited partnerships accounted for under the equity
method. The current year included less investment income from bond calls
and commercial mortgage loan prepayments as compared to the prior year.
. Corporate and Other activities decreased $94.1 million mainly as a result
of lower yields on floating rate investments related to our institutional
products and from holding higher cash balances.
Net investment gains (losses). For further discussion of the change in net
investment gains (losses), see the comparison for this line item under "--
Investments and Derivative Instruments."
. We incurred $623.2 million of credit and/or cash flow related impairments
and $197.5 million related to a change in intent to hold securities to
recovery during the year ended December 31, 2008. Of total impairments,
$354.9 million related to sub-prime and Alt-A residential mortgage-backed
and asset-backed securities as a result of management's expectations of an
adverse change in the underlying cash flows. In addition, $189.1 million
of impairments related to sub-prime and Alt-A residential mortgage-backed
and asset-backed securities as a result of management's change of intent
to hold securities to recovery. We also had $139.3 million of impairments
related to financial services companies which were a result of
bankruptcies, receivership or concerns about the issuer's ability to
continue to make contractual payments.
. Net investment losses from derivatives were primarily from losses in
embedded derivative liabilities associated with our variable annuity
products with GMWBs exceeding the change in value of derivative
instruments used for mitigating this risk.
Policy fees and other income
. Our Protection segment decreased $1.5 million mainly attributable to lower
cost of insurance charges from higher surrenders in universal life
insurance in the fourth quarter of 2008.
. Our Retirement Income segment increased $23.2 million mainly from growth
of our Income Distribution Series products where growth in account values
were partially offset by reductions related to the severe market decline
in 2008. This increase was partially offset by a reclassification in 2008
of embedded derivative costs related to our GMWB products previously
reported in net investment gains (losses).
. Corporate and Other activities increased $94.7 million mainly from the
early retirement of institutional contracts at a discount to contract
values.
Benefits and other changes in policy reserves
. Our Protection segment decreased $6.9 million principally attributable to
a decrease in Medicare supplement insurance from policy terminations on
the block. Partially offsetting this decrease was an increase from
unfavorable reserve adjustments to reflect the underlying experience and
higher mortality in universal life insurance as compared to the prior
year. Also offsetting the decrease was an increase from growth of our term
life insurance in-force block.
. Our Retirement Income segment increased $40.3 million mainly resulting
from an increase in our guaranteed minimum benefit liabilities for our
variable annuity contracts driven by declines in the equity markets and an
increase in mortality claims. Also contributing to the increase was
unfavorable mortality in life-contingent single premium immediate
annuities and an increase in amortization of sales inducements driven by
unfavorable market impacts and a larger block of business in our fee-based
products. These increases were partially offset by a decrease from our
runoff block of life-contingent structured settlements.
Interest credited
. Our Protection segment increased $1.8 million mainly as a result of an
increase in account values in our universal life insurance products.
. Our Retirement Income segment decreased $13.8 million primarily from our
spread-based products as a result of lower account values on fixed
annuities associated with surrenders more than offsetting sales.
Additionally, crediting rates were reset to lower rates as certain
annuities reach the end of their initial crediting rate guarantee period.
. Corporate and Other activities decreased $78.6 million primarily from our
institutional products attributable to the impact of lower rates on
interest paid on our floating rate policyholder liabilities and a decrease
in average outstanding liabilities.
74
Acquisition and operating expenses, net of deferrals
. Our Protection segment increased $17.6 million largely driven by an
increase in expenses from growth of in-force business in term life
insurance.
. Our Retirement Income segment increased $10.1 million primarily as a
result of growth in our Income Distribution Series products.
Amortization of deferred acquisition costs and intangibles
. Our Protection segment increased $9.6 million mainly driven by continued
growth of insurance in-force, higher mortality and lapses and a policy
valuation system input correction in a small block of term life insurance
policies in the current year. Offsetting these increases was lower
amortization of $12.3 million from a revision to estimated gross profit
assumptions in our universal life insurance products in the current year
as compared to $5.7 million in the prior year.
. Our Retirement Income segment increased $80.9 million primarily as a
result of increased amortization of DAC due to declines in the equity
markets, including $46.1 million from loss recognition testing in 2008.
Partially offsetting this increase was a decrease in amortization from
derivative losses related to our GMWB products and a favorable unlocking
of $10.8 million in the current year associated with lower lapse rate
assumptions.
Interest expense. Interest expense decreased mainly as a result of a decrease
in average floating rates paid on the non-recourse funding obligations
reflecting the decline in the underlying index rate.
Provision (benefit) for income taxes. The effective tax rate increased to
36.4% for the year ended December 31, 2008 from 25.0% for the year ended
December 31, 2007. This increase in the effective tax rate was primarily
attributable to the recognition of tax benefits on a pre-tax loss in the
current year, which was partially offset by reduced benefits attributable to
favorable examination developments and changes in estimates.
Net income (loss)
. Our Protection segment decreased primarily as a result of a decrease in
net investment income partially offset by lower interest expense
reflecting the decline in the underlying index rate and growth in term and
universal life insurance in-force. The current year also included
unfavorable reserve adjustments.
. Our Retirement Income segment decreased primarily as a result of lower net
investment income, an increase in reserves from unfavorable mortality and
higher DAC amortization from volatility in the equity markets and
unfavorable unlocking driven by unfavorable lapses in the current year.
These decreases were partially offset by growth in our Income Distribution
Series products.
. Corporate and Other activities decreased primarily as a result of lower
net investment income and increased impairments. Partially offsetting the
decrease was an increase in income from the early retirement of
institutional contracts at a discount to contract values and a decrease in
interest credited attributable to the impact of lower rates on interest
paid on our floating rate policyholder liabilities and a decrease in
average outstanding liabilities.
75
Investments and Derivative Instruments
INVESTMENT RESULTS
The following table sets forth information about our investment income,
excluding net investment gains (losses), for each component of our investment
portfolio for the periods indicated:
YEARS ENDED DECEMBER 31, INCREASE (DECREASE)
----------------------------------------------- -------------------------------
2009 2008 2007 2009 VS. 2008 2008 VS. 2007
-------------- ------------- --------------- - -------------- --------------
(AMOUNTS IN MILLIONS) YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------------------------------------------- ----- ------ ----- ------ ----- -------- - ----- ------- ----- -------
Fixed maturity securities -- taxable 4.5% $567.0 5.2% $773.6 6.0% $ 928.0 (0.7)% $(206.6) (0.8)% $(154.4)
Commercial mortgage loans 5.3% 136.7 6.0% 168.4 6.4% 183.8 (0.7)% (31.7) (0.4)% (15.4)
Equity securities 1.9% 1.8 4.4% 3.5 10.2% 3.9 (2.5)% (1.7) (5.8)% (0.4)
Other invested assets (7.8)% (77.8) (2.5)% (27.5) 3.1% 40.7 (5.3)% (50.3) (5.6)% (68.2)
Policy loans 6.2% 31.8 6.2% 29.7 6.1% 28.2 -- % 2.1 0.1% 1.5
Cash, cash equivalents and short-term
investments 0.3% 8.8 1.8% 26.1 5.9% 30.3 (1.5)% (17.3) (4.1)% (4.2)
------ ------ -------- ------- -------
Gross investment income before expenses
and fees 3.3% 668.3 4.6% 973.8 5.9% 1,214.9 (1.3)% (305.5) (1.3)% (241.1)
Expenses and fees (0.1)% (23.6) (0.1)% (25.5) (0.1)% (25.0) -- % 1.9 -- % (0.5)
------ ------ -------- ------- -------
Net investment income 3.2% $644.7 4.5% $948.3 5.8% $1,189.9 (1.3)% $(303.6) (1.3)% $(241.6)
--------------------------------------------------------------------------------------------------------------------------------
Yields for fixed maturity and equity securities are based on weighted-average
amortized cost or cost, respectively. Yields for other invested assets, which
include securities lending activity, are calculated net of the corresponding
securities lending liability. All other yields are based on average carrying
values.
The decrease in overall investment yield in 2009 was primarily attributable to
lower yields on floating rate investments and reduced yields from holding
higher cash and short-term investment balances to cover near term obligations
and portfolio repositioning activities. Net investment income for years ended
December 31, 2009 and 2008 included $78.9 million and $34.8 million,
respectively, of losses related to limited partnerships accounted for under the
equity method.
For the year ended December 31, 2008, the overall investment yields decreased
primarily attributable to lower yields on floating rate investments supporting
floating rate policyholder liabilities and non-recourse funding obligations.
Additionally, we held higher cash and short-term investment balances to cover
near term obligations and portfolio repositioning activities. Net investment
income for years ended December 31, 2008 and 2007 included $34.8 million of
losses and $32.8 million of gains, respectively, related to limited
partnerships accounted for under the equity method.
The following table sets forth net investment gains (losses) for the years
ended December 31:
(AMOUNTS IN MILLIONS) 2009 2008 2007
-------------------------------------------------------------------------------------------
Available-for-sale securities:
Realized gains on sale $ 28.5 $ 31.7 $ 9.8
Realized losses on sale (70.1) (56.2) (30.2)
Impairments:
Total other-than-temporary impairments (592.1) (820.7) (62.4)
Portion of other-than-temporary impairments included in OCI 226.6 -- --
------- ------- ------
Net other-than-temporary impairments (365.5) (820.7) (62.4)
------- ------- ------
Derivative instruments 112.1 (87.9) (3.7)
Commercial mortgage loans (10.3) (0.5) (1.9)
Trading securities (1.5) 2.6 (2.6)
Other (9.1) (5.7) (0.1)
------- ------- ------
Net investment gains (losses) $(315.9) $(936.7) $(91.1)
-------------------------------------------------------------------------------------------
76
2009 COMPARED TO 2008
. We recorded $365.5 million of net other-than-temporary impairments in 2009
as compared to $820.7 million in 2008. Of total impairments, $236.4
million and $563.7 million related to residential mortgage-backed and
asset-backed securities for the years ended December 31, 2009 and 2008,
respectively. Impairments related to corporate fixed maturity securities
which were a result of bankruptcies, receivership or concerns about the
issuer's ability to continue to make contractual payments or intent to
sell were $16.6 million in 2009 compared to $228.2 million in 2008. We
also recorded $89.8 million of impairments related to financial hybrid
securities primarily from banks in the U.S. and the U.K. during 2009.
. Net investment gains related to derivatives were $112.1 million in 2009 as
compared to net investment losses of $87.9 million in 2008. The gains in
2009 primarily related to $88.5 million of gains in embedded derivative
liabilities associated with our variable annuity products with GMWBs
exceeding the change in value of derivative instruments used for
mitigating this risk, $24.5 million in gains from the limited guarantee
provided by Genworth and $6.5 million of gains from credit default swaps
utilized to improve our diversification and portfolio yield. These gains
were partially offset by $5.0 million of losses related to non-qualified
interest rate swaps and $2.3 million in losses due to hedge
ineffectiveness. Net investment losses from derivatives in 2008 were
primarily from losses in embedded derivative liabilities associated with
our variable annuity products with GMWBs exceeding the change in value of
derivative instruments used for mitigating this risk.
. We recorded $41.6 million of losses related to the sale of
available-for-sale securities in 2009 compared to $24.5 million of losses
related to the sale of available-for-sale securities in 2008. We also
recorded $13.9 million of net investment losses related to the sale of
limited partnerships in 2009.
. The aggregate fair value of securities sold at a loss during the years
ended December 31, 2009 and 2008 was $483.0 million from the sale of 146
securities and $443.9 million from the sale of 192 securities,
respectively, which was approximately 87.9% and 88.8%, respectively, of
book value. The loss on sales of securities in the year ended December 31,
2009 was primarily driven by widening credit spreads. Generally,
securities that are sold at a loss represent either small dollar amounts
or percentage losses upon disposition. However, in certain circumstances,
events may occur during the period that changed our intent to hold
specific securities and thus result in our disposition of the security at
a loss. Examples of these events include unforeseen issuer-specific events
or conditions and shifts in risk or uncertainty of certain securities. Of
the securities that were sold at a loss during the year ended December 31,
2009, the average period of time those securities had been continuously in
an unrealized position was approximately 11 months. The securities sold at
a loss in 2009 included 23 in the financial services sector that were sold
for a total loss of $32.6 million due to portfolio repositioning. Of the
securities that were sold at a loss during 2008, the average period of
time those securities had been continuously in an unrealized loss position
was approximately six months. The securities sold at a loss in 2008
included 29 in the financial services sector that were sold for a total
loss of $11.2 million. Given the significant unanticipated turmoil
experienced in the financial services sector in the third quarter of 2008
and the U.S. government's response, our strategy for these securities
changed. All holdings in issuers of these securities that could not be
sold in the third quarter of 2008 were written down as
other-than-temporarily impaired in the third quarter of 2008 due to
decline, and concerns about further declines, in value.
2008 COMPARED TO 2007
. For the year ended December 31, 2008, net investment losses increased
principally from an increase in impairments. We incurred $623.2 million of
credit and/or cash flow related impairments and $197.5 million related to
a change in intent to hold securities to recovery. Of total impairments,
$354.9 million related to sub-prime and Alt-A residential mortgage-backed
and asset-backed securities as a result of management's expectations of an
adverse change in the underlying cash flows. In addition, $189.1 million
of impairments related to sub-prime and Alt-A residential mortgage-backed
and asset-backed securities as a result of management's change of intent
to hold securities to recovery. We also had $139.3 million of impairments
related to financial services companies which were a result of
bankruptcies, receivership or concerns about the issuer's ability to
continue to make contractual payments.
. Net investment losses from derivatives were primarily from losses in
embedded derivative liabilities associated
77
with our variable annuity products with GMWBs exceeding the change in value
of derivative instruments used for mitigating this risk during 2008.
. The aggregate fair value of securities sold at a loss during the years
ended December 31, 2008 and 2007 was $443.9 million from the sale of 192
securities and $1,334.6 million from the sale of 345 securities,
respectively, which was approximately 88.8% and 97.5%, respectively, of
book value. Generally, securities that are sold at a loss represent either
small dollar amounts or percentage losses upon disposition. However, in
certain circumstances, events may occur during the period that change our
intent to hold specific securities and thus results in our disposition of
the security at a loss. Examples of these events include unforeseen
issuer-specific events or conditions and shifts in risk or uncertainty of
certain securities. Of the securities that were sold at a loss during
2008, the average period of time those securities had been continuously in
an unrealized loss position was approximately six months. The securities
sold at a loss in 2008 included 29 in the financial services sector
totaling $11.2 million. Given the significant unanticipated turmoil
experienced in the financial services sector in the third quarter of 2008
and the U.S. government's response, our strategy for these securities
changed. All holdings in issuers of these securities that could not be
sold in the third quarter of 2008 were written down as
other-than-temporarily impaired in the third quarter of 2008 due to
decline, and concerns about further declines, in value. Of the securities
that were sold at a loss in 2007, there were no individual transactions
that produced losses considered material to the consolidated financial
statements.
INVESTMENT PORTFOLIO
The following table sets forth our cash, cash equivalents and invested assets
as of December 31:
2009 2008
------------------------ - ------------------------
(AMOUNTS IN MILLIONS) CARRYING VALUE % OF TOTAL CARRYING VALUE % OF TOTAL
--------------------------------------------------------------------------------- -------------------------
Fixed maturity securities, available-for-sale:
Public $ 7,225.8 39.9% $ 6,604.7 34.4%
Private 4,023.0 22.2 4,167.0 21.7
Other invested assets 2,607.4 14.4 2,991.8 15.6
Commercial mortgage loans 2,363.3 13.0 2,704.1 14.1
Policy loans 515.7 2.8 505.8 2.6
Equity securities, available-for-sale 101.3 0.6 90.0 0.5
Cash and cash equivalents 1,279.8 7.1 2,120.2 11.1
--------- ----- - --------- -----
Total cash, cash equivalents and invested assets $18,116.3 100.0% $19,183.6 100.0%
--------------------------------------------------------------------------------------------------------------
For a discussion of the change in cash, cash equivalents and invested assets,
see the comparison for this line item under "-- Consolidated Balance Sheets."
We have fixed maturity, equity and trading securities, derivatives, embedded
derivatives, securities held as collateral and certain other financial
instruments, which are carried at fair value. Fair value is the price that
would be received to sell an asset in an orderly transaction between market
participants at the measurement date. See note 2 in our consolidated financial
statements under "Financial Statements and Supplementary Data" for additional
information regarding fair value measurement and classification of fair value
measurements into level categories. As of December 31, 2009, approximately
23.8% 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.
78
The following tables set forth our investments that are measured at fair value
on a recurring basis as of December 31:
2009
--------------------------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS) TOTAL LEVEL 1 LEVEL 2 LEVEL 3
--------------------------------------------------------------------------------------------------------------
Investments:
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises $ 654.5 $ -- $ 644.3 $ 10.2
Government -- non-U.S. 154.6 -- 154.6 --
U.S. corporate 5,473.9 -- 5,164.8 309.1
Corporate -- non-U.S. 1,525.2 -- 1,336.6 188.6
Residential mortgage-backed 1,157.4 -- 507.8 649.6
Commercial mortgage-backed 786.7 -- 10.8 775.9
Other asset-backed 1,496.5 -- 679.9 816.6
--------- ----- -------- --------
Total fixed maturity securities 11,248.8 -- 8,498.8 2,750.0
--------- ----- -------- --------
Equity securities 101.3 31.4 64.8 5.1
--------- ----- -------- --------
Other invested assets:
Trading securities 33.5 -- 12.0 21.5
Restricted other invested assets 297.6 -- 271.1 26.5
Derivative assets 196.8 -- 132.3 64.5
Securities lending collateral 175.8 -- 175.8 --
Derivatives counterparty collateral 13.6 -- 13.6 --
--------- ----- -------- --------
Total other invested assets 717.3 -- 604.8 112.5
--------- ----- -------- --------
Total investments $12,067.4 $31.4 $9,168.4 $2,867.6
--------------------------------------------------------------------------------------------------------------
2008
--------------------------------------------------------------------------------------------------------------
(AMOUNTS IN MILLIONS) TOTAL LEVEL 1 LEVEL 2 LEVEL 3
--------------------------------------------------------------------------------------------------------------
Investments:
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises $ 174.2 $ -- $ 167.2 $ 7.0
Government -- non-U.S. 162.2 -- 143.8 18.4
U.S. corporate 5,383.3 -- 4,346.3 1,037.0
Corporate -- non-U.S. 1,337.1 -- 895.6 441.5
Residential mortgage-backed 1,278.5 -- 447.8 830.7
Commercial mortgage-backed 852.8 -- 36.0 816.8
Other asset-backed 1,583.6 -- 829.4 754.2
--------- ----- -------- --------
Total fixed maturity securities 10,771.7 -- 6,866.1 3,905.6
--------- ----- -------- --------
Equity securities 90.0 22.9 12.2 54.9
--------- ----- -------- --------
Other invested assets:
Trading securities 62.1 -- 23.6 38.5
Restricted other invested assets 338.9 -- 167.1 171.8
Derivative assets 620.7 -- 510.4 110.3
Securities lending collateral 128.0 -- 128.0 --
Derivatives counterparty collateral 176.3 -- 176.3 --
--------- ----- -------- --------
Total other invested assets 1,326.0 -- 1,005.4 320.6
--------- ----- -------- --------
Total investments $12,187.1 $22.9 $7,883.7 $4,281.1
--------------------------------------------------------------------------------------------------------------
Securities lending and derivatives counterparty collateral presented above only
include collateral that is held in the form of securities with any remaining
collateral balance representing cash.
79
The following tables present additional information about investments 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 REALIZED AND
UNREALIZED GAINS
(LOSSES) TOTAL GAINS
--------------------- (LOSSES)
PURCHASES, INCLUDED IN
BEGINNING SALES ENDING NET INCOME
BALANCE ISSUANCES BALANCE (LOSS)
AS OF INCLUDED IN AND TRANSFER AS OF ATTRIBUTABLE
JANUARY 1, NET INCOME INCLUDED SETTLEMENTS, TRANSFER OUT OF DECEMBER 31, TO ASSETS
(AMOUNTS IN MILLIONS) 2009 (LOSS) IN OCI NET IN TO LEVEL 3 LEVEL 3 2009 STILL HELD
---------------------------------------------------------------------------------------------------------------------
Fixed maturity securities:
U.S. government, agencies
and government-
sponsored enterprises $ 7.0 $ -- $ (0.2) $ 3.4 $ -- $ -- $ 10.2 $ --
Government -- non-U.S. 18.4 -- -- -- -- (18.4) -- --
U.S. corporate 1,037.0 26.4 92.6 (315.9) 66.9 (597.9) 309.1 1.2
Corporate -- non-U.S. 441.5 (9.4) 55.0 (63.2) 103.8 (339.1) 188.6 --
Residential mortgage-
backed 830.7 23.6 3.3 (206.3) 2.9 (4.6) 649.6 20.1
Commercial mortgage-
backed 816.8 (1.4) 94.6 (47.3) 29.0 (115.8) 775.9 (1.5)
Other asset-backed 754.2 1.4 171.7 (269.1) 203.3 (44.9) 816.6 4.1
-------- ------- ------ ------- ------ --------- -------- ------
Total fixed maturity
securities 3,905.6 40.6 417.0 (898.4) 405.9 (1,120.7) 2,750.0 23.9
-------- ------- ------ ------- ------ --------- -------- ------
Equity securities 54.9 (0.1) 1.9 (0.5) -- (51.1) 5.1 (0.2)
-------- ------- ------ ------- ------ --------- -------- ------
Other invested assets:
Trading securities 38.5 0.9 -- (21.6) 3.7 -- 21.5 0.4
Restricted other invested
assets 171.8 (0.4) 14.2 (52.6) -- (106.5) 26.5 --
Derivative assets 110.3 (104.5) -- 36.8 21.9 -- 64.5 (96.6)
-------- ------- ------ ------- ------ --------- -------- ------
Total other invested assets 320.6 (104.0) 14.2 (37.4) 25.6 (106.5) 112.5 (96.2)
-------- ------- ------ ------- ------ --------- -------- ------
Total Level 3 investments $4,281.1 $ (63.5) $433.1 $(936.3) $431.5 $(1,278.3) $2,867.6 $(72.5)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL REALIZED AND
UNREALIZED GAINS
(LOSSES) TOTAL GAINS
--------------------- (LOSSES)
PURCHASES, INCLUDED IN
BEGINNING SALES ENDING NET INCOME
BALANCE ISSUANCES BALANCE (LOSS)
AS OF INCLUDED IN AND TRANSFER AS OF ATTRIBUTABLE
JANUARY 1, NET INCOME INCLUDED SETTLEMENTS, TRANSFER OUT OF DECEMBER 31, TO ASSETS
(AMOUNTS IN MILLIONS) 2008 (LOSS) IN OCI NET IN TO LEVEL 3 LEVEL 3 2008 STILL HELD
---------------------------------------------------------------------------------------------------------------
Fixed maturity securities $2,044.2 $(618.8) $(682.8) $(392.4) $4,793.8 $(1,238.4) $3,905.6 $(607.2)
Equity securities 5.1 0.8 (0.7) 24.7 25.0 -- 54.9 --
Other invested assets/(1)/ 227.2 247.4 (14.8) (271.7) 231.6 (99.1) 320.6 248.8
-------- ------- ------- ------- -------- --------- -------- -------
Total Level 3 investments $2,276.5 $(370.6) $(698.3) $(639.4) $5,050.4 $(1,337.5) $4,281.1 $(358.4)
---------------------------------------------------------------------------------------------------------------------------
/(1)/Includes certain trading securities, restricted other invested assets and
derivatives.
As included in the Level 3 tables above, the total fixed maturity securities
classified as Level 3 measurements decreased by $1,155.6 million for the year
ended December 31, 2009. The decrease in fixed maturity securities classified
as Level 3 was primarily due to an increase in the activity for certain
securities causing these securities to no longer require Level 3 classification
as a result of being illiquid. Sales of securities classified as Level 3 and
the decrease in significance of non-observable inputs associated with private
securities also contributed to the decrease. Partially offsetting these
decreases was an increase, or net transfer in, of securities where the fair
value measurement was classified as Level 3 for the year ended December 31,
2009 but was not previously classified as Level 3. The change in classification
primarily resulted from a change in observability of inputs for certain
mortgage-backed and asset-backed securities based on the lack of market
observable inputs for these securities.
80
For the securities classified as Level 3 at the end of the period, the current
market conditions for these securities have resulted in little or no trading
activity or other market observable data and requires the use of significant
unobservable inputs to estimate fair value. Accordingly, these resulting fair
value measurements have been classified as Level 3.
Fixed maturity and equity securities
As of December 31, 2009, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our fixed maturity and equity securities classified
as available-for-sale were as follows:
GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES
--------------------------- --------------------------
AMORTIZED NOT OTHER-THAN- OTHER-THAN- NOT OTHER-THAN- OTHER-THAN-
COST OR TEMPORARILY TEMPORARILY TEMPORARILY TEMPORARILY
(AMOUNTS IN MILLIONS) COST IMPAIRED IMPAIRED IMPAIRED IMPAIRED
--------------------- --------- --------------- ----------- --------------- -----------
- - --------------------------------------------------------
Fixed maturity securities:
U.S. government, agencies and government-sponsored
enterprises $ 649.7 $ 11.5 $ -- $ (6.7) $ --
Government -- non-U.S. 148.9 12.2 -- (6.5) --
U.S. corporate 5,551.7 122.9 -- (200.7) --
Corporate -- non-U.S. 1,616.1 40.4 11.0 (142.3) --
Residential mortgage-backed 1,555.9 19.2 1.3 (243.3) (175.7)
Commercial mortgage-backed 1,125.5 6.2 0.8 (311.3) (34.5)
Other asset-backed 1,681.2 5.4 -- (179.1) (11.0)
--------- ------ ----- --------- -------
Total fixed maturity securities 12,329.0 217.8 13.1 (1,089.9) (221.2)
Equity securities 90.5 10.9 -- (0.1) --
--------- ------ ----- --------- -------
Total available-for-sale securities $12,419.5 $228.7 $13.1 $(1,090.0) $(221.2)
---------------------------------------------------------------------------------------------------------------------------
FAIR
(AMOUNTS IN MILLIONS) VALUE
--------------------- ---------
- ---------
Fixed maturity securities:
U.S. government, agencies and government-sponsored
enterprises $ 654.5
Government -- non-U.S. 154.6
U.S. corporate 5,473.9
Corporate -- non-U.S. 1,525.2
Residential mortgage-backed 1,157.4
Commercial mortgage-backed 786.7
Other asset-backed 1,496.5
---------
Total fixed maturity securities 11,248.8
Equity securities 101.3
---------
Total available-for-sale securities $11,350.1
------------------------------------------------------------------
As of December 31, 2008, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our fixed maturity and equity securities classified
as available-for-sale were as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
(AMOUNTS IN MILLIONS) COST OR COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------------------------------------------
Fixed maturity securities:
U.S. government, agencies and government sponsored entities $ 158.3 $15.9 $ -- $ 174.2
Government -- non-U.S. 178.7 3.9 (20.4) 162.2
U.S. corporate 6,209.1 30.7 (856.5) 5,383.3
Corporate -- non-U.S. 1,815.1 3.7 (481.7) 1,337.1
Residential mortgage-backed 1,688.6 17.1 (427.2) 1,278.5
Commercial mortgage-backed 1,425.1 5.6 (577.9) 852.8
Other asset-backed 1,861.9 3.9 (282.2) 1,583.6
--------- ----- --------- ---------
Total fixed maturity securities 13,336.8 80.8 (2,645.9) 10,771.7
Equity securities 99.6 0.9 (10.5) 90.0
--------- ----- --------- ---------
Total available-for-sale securities $13,436.4 $81.7 $(2,656.4) $10,861.7
---------------------------------------------------------------------------------------------------------------
Fixed maturity securities increased $477.1 million primarily as a result of
lower unrealized losses primarily from an improvement in market performance and
an increase in purchases of fixed maturity securities as we reinvested cash.
81
As of December 31, 2009, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our mortgage-backed and asset-backed securities
collateralized by sub-prime residential mortgage loans were as follows:
AMORTIZED GROSS GROSS
COST OR UNREALIZED UNREALIZED FAIR
(AMOUNTS IN MILLIONS) COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
Rating:
AAA $ 21.1 $ -- $ (4.4) $ 16.7
AA 58.2 -- (18.9) 39.3
------ ---- ------- ------
Subtotal 79.3 -- (23.3) 56.0
A 15.5 -- (4.7) 10.8
BBB 18.0 -- (9.1) 8.9
BB 83.0 -- (42.2) 40.8
B 78.6 -- (40.5) 38.1
CCC and lower 187.7 0.2 (99.9) 88.0
------ ---- ------- ------
Total sub-prime securities $462.1 $0.2 $(219.7) $242.6
-----------------------------------------------------------------------
As of December 31, 2008, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our mortgage-backed and asset-backed securities
collateralized by sub-prime residential mortgage loans were as follows:
AMORTIZED GROSS GROSS
COST OR UNREALIZED UNREALIZED
(AMOUNTS IN MILLIONS) COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------
Rating:
AAA $103.2 $ -- $ (24.9) $ 78.3
AA 167.8 -- (64.2) 103.6
------ ---- ------- ------
Subtotal 271.0 -- (89.1) 181.9
A 49.0 -- (20.2) 28.8
BBB 110.1 -- (49.5) 60.6
BB 56.7 -- (29.6) 27.1
B 11.3 -- (3.0) 8.3
CCC and lower 50.8 0.2 (11.9) 39.1
------ ---- ------- ------
Total sub-prime securities $548.9 $0.2 $(203.3) $345.8
---------------------------------------------------------------------------
Our sub-prime securities are principally backed by first lien mortgages. We do
not have any exposure to interest margin deals, highly leveraged transactions
or collateralized debt obligation-squared investments.
As of December 31, 2009, the fair value of our mortgage-backed and asset-backed
securities collateralized by sub-prime residential mortgage loans by vintage
and fair value level were as follows:
(AMOUNTS IN MILLIONS) TOTAL LEVEL 1 LEVEL 2 LEVEL 3
---------------------------------------------------------------
Vintage:
2004 and prior $ 37.3 $-- $-- $ 37.3
2005 61.0 -- -- 61.0
2006 116.8 -- -- 116.8
2007 27.5 -- -- 27.5
------ --- --- ------
Total sub-prime securities $242.6 $-- $-- $242.6
---------------------------------------------------------------
82
As of December 31, 2009, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our mortgage-backed and asset-backed securities
collateralized by Alt-A residential mortgage loans were as follows:
AMORTIZED GROSS GROSS
COST OR UNREALIZED UNREALIZED FAIR
(AMOUNTS IN MILLIONS) COST GAINS LOSSES VALUE
-------------------------------------------------------------------
Rating:
AAA $ 38.3 $ -- $ (7.5) $ 30.8
AA 24.4 -- (10.3) 14.1
------ ---- ------- ------
Subtotal 62.7 -- (17.8) 44.9
A 40.3 -- (9.8) 30.5
BBB 49.1 -- (22.5) 26.6
BB 7.5 -- (3.8) 3.7
B 56.6 -- (29.1) 27.5
CCC and lower 149.3 0.6 (65.0) 84.9
------ ---- ------- ------
Total Alt-A securities $365.5 $0.6 $(148.0) $218.1
-------------------------------------------------------------------
As of December 31, 2008, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our mortgage-backed and asset-backed securities
collateralized by Alt-A residential mortgage loans were as follows:
AMORTIZED GROSS GROSS
COST OR UNREALIZED UNREALIZED
(AMOUNTS IN MILLIONS) COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------------
Rating:
AAA $166.5 $ -- $ (62.9) $103.6
AA 45.4 -- (17.3) 28.1
------ ---- ------- ------
Subtotal 211.9 -- (80.2) 131.7
A 18.7 0.9 (9.0) 10.6
BBB 62.0 -- (31.6) 30.4
BB 35.3 -- (11.4) 23.9
B 8.9 -- (0.3) 8.6
CCC and lower 12.1 2.2 (1.4) 12.9
------ ---- ------- ------
Total Alt-A securities $348.9 $3.1 $(133.9) $218.1
-----------------------------------------------------------------------
As of December 31, 2009, the fair value of our mortgage-backed and asset-backed
securities collateralized by Alt-A residential mortgage loans by vintage and
fair value level were as follows:
(AMOUNTS IN MILLIONS) TOTAL LEVEL 1 LEVEL 2 LEVEL 3
-----------------------------------------------------------
Vintage:
2004 and prior $ 65.6 $-- $-- $ 65.6
2005 68.1 -- -- 68.1
2006 44.4 -- -- 44.4
2007 40.0 -- -- 40.0
------ --- --- ------
Total Alt-A securities $218.1 $-- $-- $218.1
-----------------------------------------------------------
Our investments in sub-prime residential mortgage-backed and asset-backed
securities decreased primarily as a result of principal payment activity
coupled with widening spreads. Gross unrealized losses in our sub-prime and
Alt-A residential mortgage-backed and asset-backed securities as of
December 31, 2009 were primarily a result of widening spreads as a result of
marketplace uncertainty arising from higher defaults in sub-prime and Alt-A
residential mortgage loans, partially offset by lower asset balances. As of
December 31, 2009, we expect to recover our amortized cost on the securities
included in the charts above and do not intend to sell or it was not more
likely than not that we will be required to sell these securities prior to
recovering our amortized cost. Accordingly, we determined that the unrealized
losses on these securities represented temporary impairments as of December 31,
2009.
83
As of December 31, 2009, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our commercial mortgage-backed securities were as
follows:
AMORTIZED GROSS GROSS
COST OR UNREALIZED UNREALIZED FAIR
(AMOUNTS IN MILLIONS) COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------
Rating:
AAA $ 471.3 $3.0 $ (42.1) $432.2
AA 173.4 -- (54.9) 118.5
-------- ---- ------- ------
Subtotal 644.7 3.0 (97.0) 550.7
A 177.7 0.1 (86.2) 91.6
BBB 83.7 3.0 (36.5) 50.2
BB 131.2 -- (70.1) 61.1
B 48.2 0.2 (30.7) 17.7
CCC and lower 40.0 0.7 (25.3) 15.4
-------- ---- ------- ------
Total commercial mortgage-backed securities $1,125.5 $7.0 $(345.8) $786.7
----------------------------------------------------------------------------------------
As of December 31, 2008, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our commercial mortgage-backed securities were as
follows:
AMORTIZED GROSS GROSS
COST OR UNREALIZED UNREALIZED
(AMOUNTS IN MILLIONS) COST GAINS LOSSES FAIR VALUE
--------------------------------------------------------------------------------------------
Rating:
AAA $ 793.8 $1.2 $(241.6) $553.4
AA 189.7 -- (96.1) 93.6
-------- ---- ------- ------
Subtotal 983.5 1.2 (337.7) 647.0
A 267.8 0.1 (147.4) 120.5
BBB 154.1 4.2 (82.8) 75.5
BB 16.8 -- (8.6) 8.2
B 2.3 -- (1.0) 1.3
CCC and lower 0.6 0.1 (0.4) 0.3
-------- ---- ------- ------
Total commercial mortgage-backed securities $1,425.1 $5.6 $(577.9) $852.8
--------------------------------------------------------------------------------------------
As of December 31, 2009, the fair value of our commercial mortgage-backed
securities by vintage and fair value level were as follows:
(AMOUNTS IN MILLIONS) TOTAL LEVEL 1 LEVEL 2 LEVEL 3
--------------------------------------------------------------------------------
Vintage:
2004 and prior $205.3 $-- $ 0.5 $204.8
2005 98.4 -- 0.1 98.3
2006 281.5 -- -- 281.5
2007 198.5 -- 7.2 191.3
2008 -- -- -- --
2009 3.0 -- 3.0 --
------ --- ----- ------
Total commercial mortgage-backed securities $786.7 $-- $10.8 $775.9
--------------------------------------------------------------------------------
84
As of December 31, 2009, the fair value of all mortgage-backed and asset-backed
securities not collateralized by sub-prime residential mortgage loans, Alt-A
residential mortgage loans or commercial mortgage loans by vintage and fair
value level were as follows:
(AMOUNTS IN MILLIONS) TOTAL LEVEL 1 LEVEL 2 LEVEL 3
------------------------------------------------------------------------------------------------
Vintage:
2004 and prior $ 319.8 $-- $ 176.0 $ 143.8
2005 404.3 -- 84.3 320.0
2006 495.5 -- 285.0 210.5
2007 612.2 -- 286.5 325.7
2008 173.8 -- 173.8 --
2009 187.6 -- 182.1 5.5
-------- --- -------- --------
Total other mortgage-backed and asset-backed securities $2,193.2 $-- $1,187.7 $1,005.5
------------------------------------------------------------------------------------------------
The following table presents the gross unrealized losses and fair values of our
investment securities, aggregated by investment type and length of time that
individual investment securities have been in a continuous unrealized loss
position, as of December 31, 2009:
LESS THAN 12 MONTHS
------------------------------------------------------------------ --------------------------------
GROSS NUMBER
UNREALIZED OF
(DOLLAR AMOUNTS IN MILLIONS) FAIR VALUE LOSSES SECURITIES
------------------------------------------------------------------ ---------- ---------- ----------
DESCRIPTION OF SECURITIES
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises $ 319.5 $ (6.1) 30
Government -- non-U.S. -- -- --
U.S. corporate 781.3 (16.0) 117
Corporate -- non-U.S. 106.7 (4.6) 22
Residential mortgage-backed 248.8 (132.7) 101
Commercial mortgage-backed 81.6 (16.3) 29
Other asset-backed 193.6 (0.7) 21
-------- ------- ---
Subtotal, fixed maturity securities 1,731.5 (176.4) 320
Equity securities -- -- --
-------- ------- ---
Total for securities in an unrealized loss position $1,731.5 $(176.4) 320
------------------------------------------------------------------ ---------- ---------- ----------
% Below cost -- fixed maturity securities:
(less than)20% Below cost $1,569.6 $ (32.1) 232
20-50% Below cost 120.9 (67.7) 41
(greater than)50% Below cost 41.0 (76.6) 47
-------- ------- ---
Total fixed maturity securities 1,731.5 (176.4) 320
-------- ------- ---
% Below cost -- equity securities:
(less than)20% Below cost -- -- --
-------- ------- ---
Total equity securities -- -- --
-------- ------- ---
Total for securities in an unrealized loss position $1,731.5 $(176.4) 320
------------------------------------------------------------------ ---------- ---------- ----------
Investment grade $1,559.4 $ (50.5) 216
Below investment grade 172.1 (125.9) 104
-------- ------- ---
Total for securities in an unrealized loss position $1,731.5 $(176.4) 320
------------------------------------------------------------------------------------------------------
12 MONTHS OR MORE
------------------------------------------------------------------ --------------------------------
GROSS NUMBER
UNREALIZED OF
(DOLLAR AMOUNTS IN MILLIONS) FAIR VALUE LOSSES SECURITIES
------------------------------------------------------------------ ---------- ---------- ----------
DESCRIPTION OF SECURITIES
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises $ 6.2 $ (0.6) 2
Government -- non-U.S. 31.8 (6.5) 11
U.S. corporate 1,558.3 (184.7) 256
Corporate -- non-U.S. 696.3 (137.7) 78
Residential mortgage-backed 508.2 (286.3) 205
Commercial mortgage-backed 585.7 (329.5) 193
Other asset-backed 981.2 (189.4) 140
-------- --------- ---
Subtotal, fixed maturity securities 4,367.7 (1,134.7) 885
Equity securities -- (0.1) 1
-------- --------- ---
Total for securities in an unrealized loss position $4,367.7 $(1,134.8) 886
------------------------------------------------------------------ ---------- ---------- ----------
% Below cost -- fixed maturity securities:
(less than)20% Below cost $3,207.4 $ (237.0) 466
20-50% Below cost 912.4 (442.9) 228
(greater than)50% Below cost 247.9 (454.8) 191
-------- --------- ---
Total fixed maturity securities 4,367.7 (1,134.7) 885
-------- --------- ---
% Below cost -- equity securities:
(less than)20% Below cost -- (0.1) 1
-------- --------- ---
Total equity securities -- (0.1) 1
-------- --------- ---
Total for securities in an unrealized loss position $4,367.7 $(1,134.8) 886
------------------------------------------------------------------ ---------- ---------- ----------
Investment grade $3,766.1 $ (748.2) 649
Below investment grade 601.6 (386.6) 237
-------- --------- ---
Total for securities in an unrealized loss position $4,367.7 $(1,134.8) 886
-----------------------------------------------------------------------------------------------------
The investment securities in an unrealized loss position as of December 31,
2009 consisted of 1,206 securities and accounted for unrealized losses of
$1,311.2 million. Of these unrealized losses of $1,311.2 million, 60.9% were
investment grade (rated "AAA" through "BBB-") and 20.5% were less than 20%
below cost. The securities less than 20% below cost were primarily attributable
to widening credit spreads and a depressed market for certain structured
mortgage securities. Included in these unrealized losses as of December 31,
2009 was $221.2 million of unrealized losses on other-than-temporarily impaired
securities. Of the total unrealized losses on other-than-temporarily impaired
securities, $81.8 million have been in an unrealized loss position for more
than 12 months.
85
Of the unrealized losses of $1,311.2 million, $954.9 million were related to
structured securities and $232.9 million were related to corporate securities
in the finance and insurance sector. The remaining amount of $123.4 million was
spread evenly across all other sectors.
Of the $954.9 million unrealized losses in structured securities, 36.2% were in
commercial mortgage-backed securities and 43.9% were in residential
mortgage-backed securities with the remainder in other asset-backed securities.
Approximately 52.9% of the total unrealized losses in structured securities
were on securities that have retained investment grade ratings. Most of these
securities have been in an unrealized loss position for 12 months or more.
Given the current market conditions and limited trading on these securities,
the fair value of these securities has declined due to widening credit spreads
and high premiums for illiquidity. We examined the performance of the
underlying collateral and developed our estimate of cash flows expected to be
collected. In doing so, we identified certain securities where the non-credit
portion of other-than-temporary impairments was recorded in OCI. Based on this
evaluation, we determined that the unrealized losses on our mortgage-backed and
asset-backed securities represented temporary impairments as of December 31,
2009.
Of the $232.9 million unrealized losses in the finance and insurance sector,
most have been in an unrealized loss position for 12 months or more. Most of
these securities have retained a credit rating of investment grade. None of
these unrealized losses included securities where an other-than-temporary
impairment was recorded in OCI. The remaining unrealized losses in our U.S. and
non-U.S. corporate securities were evenly distributed across all other major
industry types that comprise our corporate bond holdings. Given the current
market conditions, including current financial industry events and uncertainty
around global economic conditions, the fair value of these securities has
declined due to widening credit spreads. In our examination of these
securities, we considered all available evidence, including the issuers'
financial condition and current industry events to develop our conclusion on
the amount and timing of the cash flows expected to be collected. A subset of
the securities issued by banks and other financial institutions represent
investments in financial hybrid securities on which a debt impairment model was
employed. Most of these securities retain a credit rating of investment grade.
About half of these securities were issued by foreign financial institutions.
The fair value of these securities has been impacted by widening credit spreads
which reflect current financial industry events including uncertainty
surrounding the level and type of government support of European financial
institutions, potential capital restructuring of these institutions, the risk
that income payments may be deferred and the risk that these institutions could
be nationalized. Based on this evaluation, we determined that the unrealized
losses on these securities represented temporary impairments as of December 31,
2009.
Of the investment securities in an unrealized loss position for 12 months or
more as of December 31, 2009, 419 securities were 20% or more below cost, of
which 169 securities were also below investment grade (rated "BB+" and below)
and accounted for unrealized losses of $363.3 million. These securities were
primarily structured securities or securities issued by corporations in the
finance and insurance sector. Included in this amount are
other-than-temporarily impaired securities where the non-credit loss of $47.2
million was recorded in OCI.
As of December 31, 2009, we expect to recover our amortized cost on the
securities included in the chart above and do not intend to sell, or it is not
more likely than not that we will be required to sell, these securities prior
to recovering our amortized cost.
Despite the considerable analysis and rigor employed on our structured
securities, it is at least reasonably possible that the underlying collateral
of these investments will perform worse than current market expectations. Such
events may lead to adverse changes in cash flows on our holdings of
asset-backed and mortgage-backed securities and potential future write-downs
within our portfolio of mortgage-backed and asset-backed securities. While we
expect our investments in corporate securities will continue to perform in
accordance with our conclusions about the amount and timing of estimated cash
flows, it is at least reasonably possible that issuers of our investments in
corporate securities will perform worse than current expectations. Such events
may lead us to recognize potential future write-downs within our portfolio of
corporate securities.
86
Commercial mortgage loans
The following tables set forth additional information regarding our commercial
mortgage loans as of December 31:
2009
------------------------------------------------------------
NUMBER OF
TOTAL LOAN DELINQUENT NUMBER OF DELINQUENT AVERAGE LOAN-
(LOAN AMOUNTS IN MILLIONS) BALANCE/(1)/ LOAN BALANCE LOANS LOANS TO-VALUE/(2)/
----------------------------------------------------------------------------------------
LOAN YEAR
---------
2004 and prior $1,066.6 $1.3 404 1 48.4%
2005 432.8 -- 94 -- 63.5%
2006 358.9 -- 72 -- 68.0%
2007 484.7 -- 55 -- 87.5%
2008 29.3 -- 6 -- 78.8%
-------- ---- --- --
Total $2,372.3 $1.3 631 1 62.5%
----------------------------------------------------------------------------------------
/(1)/Excludes $4.0 million of net premiums on commercial mortgage loans
acquired from third parties.
/(2)/Represents loan-to-value as of December 31, 2009.
2008
-----------------------------------------------------------
NUMBER OF
TOTAL LOAN DELINQUENT NUMBER OF DELINQUENT AVERAGE LOAN-
(LOAN AMOUNTS IN MILLIONS) BALANCE/(1)/ LOAN BALANCE LOANS LOANS TO-VALUE/(2)/
----------------------------------------------------------------------------------------
LOAN YEAR
---------
2004 and prior $1,206.6 $-- 447 -- 44.6%
2005 455.3 -- 98 -- 56.8%
2006 388.6 -- 76 -- 57.4%
2007 621.6 -- 58 -- 61.9%
2008 29.9 -- 6 -- 69.7%
-------- --- --- --
Total $2,702.0 $-- 685 -- 52.7%
----------------------------------------------------------------------------------------
/(1)/Excludes $7.3 million of net premiums on commercial mortgage loans
acquired from third parties.
/(2)/Represents loan-to-value as of December 31, 2009.
We diversify our commercial mortgage loans by property type and geographic
region, as well as year of origination. See note 3 to our consolidated
financial statements under "Financial Statements and Supplementary Data" for
additional information on distribution across property type and geographic
region for our commercial mortgage loans.
The following table presents the activity in the allowance for losses during
the years ended December 31:
(AMOUNTS IN MILLIONS) 2009 2008 2007
--------------------------------------------
Balance as of January 1 $ 7.4 $6.9 $ 5.3
Provision (release) 7.6 0.5 1.9
Transfer of AML -- -- (0.3)
----- ---- -----
Balance as of December 31 $15.0 $7.4 $ 6.9
--------------------------------------------
The allowance for losses included reserve adjustments associated with
commercial mortgage loans that were classified as held-for-sale in our
commercial mortgage warehouse facility. The increase in the provision during
2009 was related to a change in reserving assumptions to reflect the current
market environment. During 2008, we transferred the loans within the commercial
mortgage warehouse facility to our general account and reclassified the loans
as held-for-investment and, as a result, the lower of cost or market reserve
was released.
87
Other invested assets
The following table sets forth the carrying values of our other invested assets
as of December 31:
2009 2008
---------------------------------------- ------------------------- ------------------------
(AMOUNTS IN MILLIONS) CARRYING VALUE % OF TOTAL CARRYING VALUE % OF TOTAL
---------------------------------------- -------------- ---------- -------------- ----------
Short-term investments $1,247.6 47.8% $ 924.5 30.9%
Investment in unconsolidated subsidiary 381.4 14.7 219.1 7.3
Restricted other invested assets 297.6 11.4 338.9 11.3
Derivatives 196.8 7.5 620.7 20.7
Securities lending collateral 175.8 6.7 128.0 4.3
Limited partnerships 153.5 5.9 286.5 9.6
Derivatives counterparty collateral 112.0 4.3 384.9 12.9
Trading securities 33.5 1.3 62.1 2.1
Other investments 9.2 0.4 27.1 0.9
-------- ----- -------- -----
Total other invested assets $2,607.4 100.0% $2,991.8 100.0%
--------------------------------------------------------------------------------------------
Our investments in derivatives and derivative counterparty collateral decreased
primarily as a result of an increase in long-term interest rates. Limited
partnership investments decreased primarily from sales and unrealized
depreciation and returned capital, partially offset by calls on outstanding
commitments. The increase in short-term investments was related to additional
purchases in 2009.
Derivatives
The following table sets forth our positions in derivative instruments as of
December 31:
DERIVATIVE ASSETS DERIVATIVE LIABILITIES
----------------------------- -------------------------------------------- -------------------------------------------------
BALANCE FAIR VALUE BALANCE FAIR VALUE
SHEET --------------- SHEET -------------
(AMOUNTS IN MILLIONS) CLASSIFICATION 2009 2008 CLASSIFICATION 2009 2008
----------------------------- ----------------------------- ------ ------ ----------------------------------- ------ ------
DERIVATIVES DESIGNATED AS
HEDGES
Fair value hedges:
Interest rate swaps Other invested assets $ 99.9 $178.0 Other liabilities $ 6.8 $ 19.3
------ ------ ------ ------
Total fair value hedges 99.9 178.0 6.8 19.3
------ ------ ------ ------
Total derivatives
designated as hedges 99.9 178.0 6.8 19.3
------ ------ ------ ------
DERIVATIVES NOT DESIGNATED AS
HEDGES
Interest rate swaps Other invested assets 34.1 332.4 Other liabilities 32.2 42.8
Credit default swaps Other invested assets 0.7 -- Other liabilities -- 5.1
Equity index options Other invested assets 32.2 104.9 Other liabilities 2.4 --
Financial futures Other invested assets -- -- Other liabilities -- --
Limited guarantee Other invested assets 29.9 5.4 Other liabilities -- --
GMWB embedded derivatives Reinsurance recoverable/(1)/ (3.7) 14.9 Policyholder account balances/(2)/ 156.6 784.8
------ ------ ------ ------
Total derivatives not
designated as hedges 93.2 457.6 191.2 832.7
------ ------ ------ ------
Total derivatives $193.1 $635.6 $198.0 $852.0
------------------------------------------------------------------------------------------------------------------------------
/(1)/Represents the embedded derivatives associated with the reinsured portion
of our GMWB liabilities.
/(2)/Represents the embedded derivatives associated with our GMWB liabilities,
excluding the impact of reinsurance.
88
The activity associated with derivative instruments can generally be measured
by the change in notional value over the periods presented. However, for equity
index options, the change between periods is best illustrated by the number of
contracts, and for GMWB embedded derivatives, the change between periods is
best illustrated by the number of policies. The following tables represent
activity associated with derivative instruments as of the dates indicated:
MATURITIES/
(NOTIONAL IN MILLIONS) MEASUREMENT DECEMBER 31, 2008 ADDITIONS TERMINATIONS DECEMBER 31, 2009
-----------------------------------------------------------------------------------------------------------------------
DERIVATIVES DESIGNATED AS HEDGES
Fair value hedges:
Interest rate swaps Notional $2,228.2 $ -- $ (589.9) $1,638.3
-------- -------- --------- --------
Total fair value hedges 2,228.2 -- (589.9) 1,638.3
-------- -------- --------- --------
Total derivatives designated as hedges 2,228.2 -- (589.9) 1,638.3
-------- -------- --------- --------
DERIVATIVES NOT DESIGNATED AS HEDGES
Interest rate swaps Notional 2,232.0 570.5 (651.5) 2,151.0
Credit default swaps Notional 56.1 -- -- 56.1
Financial futures Notional 1,278.8 4,304.0 (1,278.8) 4,304.0
Limited guarantee Notional 250.0 -- -- 250.0
-------- -------- --------- --------
Total derivatives not designated as hedges 3,816.9 4,874.5 (1,930.3) 6,761.1
-------- -------- --------- --------
Total derivatives $6,045.1 $4,874.5 $(2,520.2) $8,399.4
-----------------------------------------------------------------------------------------------------------------------
(NUMBER OF CONTRACTS OR POLICIES) MEASUREMENT DECEMBER 31, 2008 ADDITIONS TERMINATIONS DECEMBER 31, 2009
-----------------------------------------------------------------------------------------------------------------------
DERIVATIVES NOT DESIGNATED AS HEDGES
Equity index options Contracts 422,000 595,000 (220,000) 797,000
GMWB embedded derivatives Policies 38,069 4,531 (1,289) 41,311
-----------------------------------------------------------------------------------------------------------------------
The increase in the notional value of derivatives was primarily due to a
$3,025.2 million notional increase in non-qualifying exchange-traded futures
related to the downgrade in credit ratings in the second quarter of 2009. The
increases were partially offset by a $670.9 million notional decrease in
interest rate swaps associated with our GMWB hedging strategy.
Consolidated Balance Sheets
Total assets. Total assets decreased $185.4 million from $41,370.8 million as
of December 31, 2008 to $41,185.4 million as of December 31, 2009.
. Cash, cash equivalents and invested assets decreased $1,067.3 million
primarily due to a decrease in other invested assets and commercial
mortgage loans partially offset by an increase in fixed maturity
securities. Cash decreased $840.4 million from the purchases of
investments and the scheduled maturities and early retirement of
institutional contracts. Other invested assets decreased $384.4 million
primarily driven by a decrease in derivatives and derivatives counterparty
collateral. Commercial mortgage loans decreased $340.8 million as
collections exceeded originations. Partially offsetting these decreases
was an increase of $477.1 million in our fixed maturity securities
portfolio resulting primarily from improved market performance and an
increase in purchases of fixed maturity securities as we reinvested cash.
. Deferred acquisition costs decreased $114.7 million primarily from lower
deferrals in 2009 and lower unrealized losses.
. Intangible assets decreased $149.7 million primarily from lower unrealized
losses related to our universal life insurance products.
. Reinsurance recoverable decreased $274.7 million primarily driven by
runoff of our structured settlements.
. Separate account assets increased $1,584.4 million primarily as a result
of favorable market performance of the underlying securities.
Total liabilities. Total liabilities decreased $1,296.1 million from $38,153.8
million as of December 31, 2008 to $36,857.7 million as of December 31, 2009.
. Our policyholder-related liabilities decreased $2,693.9 million largely
attributable to scheduled maturities and early retirement of institutional
contracts. Also contributing to the decrease was a decrease in our
fee-based products from improvements in equity markets and runoff of our
structured settlements.
. Other liabilities decreased $437.2 million from a decrease in derivative
counterparty collateral, a decrease in current taxes and a decrease in
outstanding investment trading activity due to timing.
89
. Deferred income tax liability increased $262.6 million from a decrease in
unrealized investment losses.
. Separate account liabilities increased $1,584.4 million primarily as a
result of favorable market performance of the underlying securities.
Total stockholders' equity. Total stockholders' equity increased $1,110.7
million from $3,217.0 million as of December 31, 2008 to $4,327.7 million as of
December 31, 2009.
. We reported a net loss of $1.3 million for the year ended December 31,
2009.
. Accumulated other comprehensive loss decreased $939.5 million primarily
attributable to a decrease of $973.2 million in net unrealized investment
losses primarily from improved market performance during 2009.
. Retained earnings decreased $16.0 million from a deemed dividend related
to the assumption of a liability for tax contingency reserves from our
indirect parent, GNA, and losses related to the sale of investment
securities to affiliates.
Liquidity and Capital Resources
The principal liquidity requirements for our insurance operations are our
contractual obligations to contractholders and annuitants. Contractual
obligations include payments of claims under outstanding insurance policies and
annuities, contract withdrawals and surrender benefits. The primary sources for
meeting these contractual obligations are investment activities and cash
generated from operating activities.
We maintain a master promissory note and committed line of credit with an
indirect parent, GNA, of $500.0 million in total. The master promissory note
and committed line of credit provide liquidity to meet normal variation in cash
requirements. In addition, the master promissory note is structured to provide
us the ability to lend to GNA at a comparable short-term investment return. GNA
owed us $0.5 million as of December 31, 2009 and 2008 which was included in
other assets in the consolidated balance sheet.
The following table sets forth our condensed consolidated cash flows for the
years ended December 31:
(AMOUNTS IN MILLIONS) 2009 2008 2007
----------------------------------------------------------------------------------------
Net cash from operating activities $ 393.4 $ 790.3 $ 342.2
Net cash from investing activities 839.9 859.9 (954.0)
Net cash from financing activities (2,073.7) (146.4) 804.4
--------- -------- -------
Net increase (decrease) in cash and cash equivalents $ (840.4) $1,503.8 $ 192.6
----------------------------------------------------------------------------------------
Our principal sources of cash include sales of our products and services,
income from our investment portfolio and proceeds from sales of investments. As
an insurance business, we typically generate positive cash flows from operating
activities, as premiums collected from our insurance products and income
received from our investments exceed policy acquisition costs, benefits paid,
redemptions and operating expenses. These positive cash flows are then invested
to support the obligations of our insurance and investment products and
required capital supporting these products. Our cash flows from operating
activities are affected by the timing of premiums, fees and investment income
received and expenses paid. Cash flows from operating activities decreased in
2009 primarily driven by the decrease in other liabilities and policy-related
balances associated with the timing of settlements. We also had significant
terminations of derivatives that resulted in higher cash inflows in 2008 that
did not recur in 2009.
In analyzing our cash flow, we focus on the change in the amount of cash
available and used in investing activities. Cash flows from investing
activities decreased in 2009 as purchases of investments exceeded proceeds from
maturities and sales of fixed maturity securities. In 2008 we were holding
higher cash balances to cover near term obligations; however, in 2009, we began
reinvesting this cash.
Changes in cash from financing activities primarily relate to the issuance of,
and redemptions and benefit payments on, universal life insurance and
investment contracts and the issuance and repayment of borrowings and
non-recourse funding obligations, dividends and other capital transactions.
Cash from financing activities decreased in 2009 as redemptions of our
investment contracts increased primarily from scheduled maturities and the
early retirement of institutional contracts.
We engage in certain securities lending transactions for the purpose of
enhancing the yield on our investment securities portfolio, which require the
borrower to provide collateral, consisting of cash and government securities,
on a daily basis in amounts equal to or exceeding 102% of the fair value of the
applicable securities loaned. We maintain effective control over all loaned
securities and, therefore, continue to report such securities as fixed maturity
securities on the consolidated
90
balance sheets. Cash and non-cash collateral, such as a security, received by
us on securities lending transactions is reflected in other invested assets
with an offsetting liability recognized in other liabilities for the obligation
to return the collateral. Any cash collateral received is reinvested by our
custodian based upon the investment guidelines provided within our agreement.
The reinvested cash collateral is primarily invested in U.S. and foreign
government securities, U.S. government agency securities, asset-backed
securities and corporate debt securities, all of which have scheduled
maturities of less than three years. As of December 31, 2009 and 2008, the fair
value of securities loaned under the securities lending program was $170.6
million and $121.0 million, respectively. As of December 31, 2009 and 2008, the
fair value of collateral held under the securities lending program was $175.8
million and $128.0 million, respectively, and the obligation to return
collateral of $176.0 million and $128.2 million, respectively, was included in
other liabilities in the consolidated balance sheets.
Insurance companies are restricted by various state insurance laws as to the
aggregate amount of dividends they may pay to their parent in any consecutive
twelve-month period without regulatory approval. Dividends in excess of the
prescribed limits or the earned surplus are deemed "extraordinary" and require
formal state insurance department approval. Based on statutory results as of
December 31, 2009, in accordance with applicable dividend regulations, we could
pay $403.3 million in dividends in 2010 without obtaining regulatory approval.
However, given the current market conditions, we cannot give assurance that we
will pay any dividends.
During 2005, we transferred approximately $499.0 million of investment
securities to an affiliated special purpose entity ("SPE"), whose sole purpose
is to securitize these investment securities and issue secured notes to various
affiliated companies. The securitized investments are owned in their entirety
by the SPE and are not available to satisfy the claims of our creditors. The
value of those securities was $297.6 million and $338.9 million as of
December 31, 2009 and 2008, respectively.
In June 2008, we became a member of the Federal Home Loan Bank of
Atlanta ("FHLB-Atlanta") allowing us to take advantage of the various services
provided by the FHLB-Atlanta, as well as a new source for funding agreement
sales.
We also entered into letters of credit with financial institutions to fund the
statutory reserves of our term and universal life insurance products. If these
financial institutions fail to honor these letters of credit, we could
experience a significant reduction in capital, which in turn, could materially
adversely affect our ability to write new business and our financial condition.
Capital resources and financing activities
As of December 31, 2009, we had $3.5 billion of fixed and floating rate
non-recourse funding obligations outstanding backing additional statutory
reserves. Of these obligations, $1.7 billion were guaranteed by third-party
financial guaranty insurance companies and the interest rates on these
obligations are subject to rate resets triggered by negative rating agency
action on the third-party financial guaranty insurance companies that guarantee
these obligations. During 2008, the rates on those $1.7 billion of non-recourse
funding obligations were contractually reset to the highest margin to the
related underlying index rates.
As of December 31, 2009, we had approximately $323.1 million of GICs
outstanding. Substantially all of these contracts allow for the payment of
benefits at contract value to ERISA plans prior to contract maturity in the
event of death, disability, retirement or change in investment election. These
contracts also provide for early termination by the contractholder but are
subject to an adjustment to the contract value for changes in the level of
interest rates from the time the GIC was issued plus an early withdrawal
penalty. We carefully underwrite these risks before issuing a GIC to a plan and
historically have been able to effectively manage our exposure to these benefit
payments. Our GICs typically credit interest at a fixed interest rate and have
a fixed maturity generally ranging from two to nine years. We did not
experience any significant levels of early termination requests in 2009.
Additionally, during 2009, we completed several transactions to increase our
liquidity and capital flexibility. We reduced sales of certain insurance
products as part of the refinement of our specialist strategy. Additionally, we
continued to utilize reinsurance arrangements throughout 2009 to provide us
with some additional capital capacity. We have also initiated a number of
strategies to begin reinvesting the substantial cash balances we maintained
through the recent uncertain market conditions to enhance investment yields.
We believe our anticipated cash flows from operations will provide us with
sufficient capital flexibility and liquidity to meet our future operating
requirements and committed line of credit, as well as optimize our capital
structure. In addition, we actively monitor our liquidity position, liquidity
generation options and the credit markets given changing market conditions.
However, we cannot predict with any certainty the impact to us from any further
disruptions in the credit markets or further downgrades by one or more of the
rating agencies of the financial strength ratings of us or our insurance
company subsidiaries and/or the credit rating of Genworth. The availability of
additional funding will depend on a variety of factors such as market
conditions, regulatory considerations, the
91
general availability of credit, the overall availability of credit to the
financial services industry, the level of activity and availability of
reinsurers, our credit ratings and credit capacity and the performance of and
outlook for our business.
Contractual obligations and commercial commitments
We have obligations to third parties that we entered into in the ordinary
course of our operations. These obligations, as of December 31, 2009, are set
forth in the table below. However, we do not believe that our cash flow
requirements can be assessed based upon this analysis of these obligations as
the funding of these future cash obligations will be from future cash flows
from premiums, deposits, fees and investment income that are not reflected
herein. Future cash outflows, whether they are contractual obligations or not,
also will vary based upon our future needs. Although some outflows are fixed,
others depend on future events. Examples of fixed obligations include our
obligations to pay principal and interest on fixed-rate borrowings. Examples of
obligations that will vary include obligations to pay interest on variable-rate
borrowings and insurance liabilities that depend on future interest rates and
market performance. Many of our obligations are linked to cash-generating
contracts. These obligations include payments to contractholders that assume
those contractholders will continue to make deposits in accordance with the
terms of their contracts. In addition, our operations involve significant
expenditures that are not based upon "commitments."
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------------
2011- 2013- 2015 AND
(AMOUNTS IN MILLIONS) TOTAL 2010 2012 2014 THEREAFTER
-------------------------------------------------------------------------------------
Borrowings and interest/(1)/ $ 4,902.0 $ -- $ -- $ -- $ 4,902.0
Securities lending/(2)/ 176.0 176.0 -- -- --
Limited partnership commitments/(3)/ 63.0 28.1 16.3 11.6 7.0
Insurance liabilities/(4)/ 11,128.6 1,396.2 2,233.8 1,688.3 5,810.3
Unrecognized tax benefits/(5)/ 43.2 -- 20.1 22.8 0.3
--------- -------- -------- -------- ---------
Total contractual obligations $16,312.8 $1,600.3 $2,270.2 $1,722.7 $10,719.6
-------------------------------------------------------------------------------------
/(1)/Includes payments of principal and interest on our non-recourse funding
obligations as described in note 10 to our consolidated financial
statements under "Financial Statements and Supplementary Data." For our
U.S. domiciled insurance companies, any payment of principal, including by
redemption, or interest on our non-recourse funding obligations are
subject to regulatory approval. River Lake Insurance Company IV Limited, a
Bermuda domiciled insurance company, may repay principal of up to 15% of
its capital without prior approval. The total amount for borrowings and
interest in this table does not equal the amounts on our consolidated
balance sheet due to interest included in the table that is expected to be
payable in future years.
/(2)/The timing for the return of the collateral associated with our securities
lending program is uncertain; therefore, the return of collateral is
reflected as being due in 2010.
/(3)/Includes amounts we are committed to fund for interests in limited
partnerships.
/(4)/Includes estimated claim and benefit, policy surrender and commission
obligations offset by expected future deposits and premiums on in-force
insurance policies and investment contracts. Estimated claim and benefit
obligations are based on mortality, morbidity and lapse assumptions
comparable with our historical experience. The obligations in this table
have not been discounted at present value. In contrast to this table, our
obligations reported in our consolidated balance sheets are recorded in
accordance with U.S. GAAP where the liabilities are discounted consistent
with the present value concept under accounting guidance related to
accounting and reporting by insurance enterprises, as applicable.
Therefore, the estimated obligations for insurance liabilities presented
in this table significantly exceed the liabilities recorded in reserves
for future policy benefits and the liability for policy and contract
claims. Due to the significance of the assumptions used, the amounts
presented could materially differ from actual results. We have not
included separate account obligations as these obligations are legally
insulated from general account obligations and will be fully funded by
cash flows from separate account assets. We expect to fully fund the
obligations for insurance liabilities from cash flows from general account
investments and future deposits and premiums.
/(5)/Includes the settlement of uncertain tax positions, with related interest,
based on the estimated timing of the resolution of income tax examinations
in multiple jurisdictions. See notes 2 and 11 to our consolidated
financial statements under "Financial Statements and Supplementary Data"
for a discussion of uncertain tax positions.
Off-Balance Sheet Transactions
We have used off-balance sheet securitization transactions to mitigate and
diversify our asset risk position and to adjust the asset class mix in our
investment portfolio by reinvesting securitization proceeds in accordance with
our approved investment guidelines.
The transactions we have used involved securitizations of some of our
receivables and investments that were secured by commercial mortgage loans,
fixed maturity securities or other receivables, consisting primarily of policy
loans. Total securitized assets remaining as of December 31, 2009 and 2008 were
$208.1 million and $242.0 million, respectively.
There were no off-balance sheet securitization transactions in 2009, 2008 or
2007.
92
We have arranged for the assets that we have transferred in securitization
transactions to be serviced by us directly, or pursuant to arrangements with a
third-party service provider. Servicing activities include ongoing review,
credit monitoring, reporting and collection activities.
Genworth has entered into credit support arrangements in connection with our
securitization transactions. Pursuant to these arrangements, as of December 31,
2009, Genworth provided limited recourse for a maximum of $117.4 million of
credit losses. In 2009, Genworth paid $0.9 million associated with one of these
arrangements. The related securitization structure terminated in the fourth
quarter of 2009 upon final payments made by the structure. As of December 31,
2009, Genworth has not been required to make any payments under the credit
support agreements for the two remaining arrangements. These agreements will
remain in place throughout the life of the related entities.
Inflation
We do not believe that inflation has had a material effect on our results of
operations, except insofar as inflation may affect interest rates.
New Accounting Standards
For a discussion of recently adopted and not yet adopted accounting standards,
see note 2 in our consolidated financial statements under "Financial Statements
and Supplementary Data."
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 and equity prices.
Market risk is directly influenced by the volatility and liquidity in the
markets in which the related underlying financial instruments are traded. The
following is a discussion of our market risk exposures and our risk management
practices.
Credit markets experienced reduced liquidity, higher volatility and widening
credit spreads across asset classes, mainly the result of marketplace
uncertainty arising from higher defaults in sub-prime and Alt-A mortgage loan
collateral underlying residential mortgage-backed securities, higher market
expectations for defaults in commercial mortgage-backed securities and high
levels of credit rating downgrades and government intervention in the financial
sector of the corporate bond market during the second half of 2008 and the
first quarter of 2009. Beginning in the second quarter of 2009, these
conditions showed signs of improvement across most asset classes and that
improvement continued in the second half of 2009. See "-- Business trends and
conditions" and "-- Investments and Derivative Instruments" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further discussion of recent market conditions.
We enter into market-sensitive instruments primarily for purposes other than
trading. The carrying value of our investment portfolio as of December 31, 2009
and 2008 was $16,836.5 million and $17,063.4 million, respectively, of which
66.8% and 63.1%, respectively, was invested in fixed maturity securities. The
primary market risk to our investment portfolio is interest rate risk
associated with investments in fixed maturity securities. We mitigate the
market risk associated with our fixed maturity securities portfolio by closely
matching the duration of our fixed maturity securities with the duration of the
liabilities that those securities are intended to support.
We are exposed to equity risk on our holdings of common stocks and other
equities, as well as risk on products where we have equity market risk
exposure. We manage equity price risk through industry and issuer
diversification, asset allocation techniques and hedging strategies.
We use derivative instruments, such as interest rate swaps, financial futures
and option-based financial instruments, as part of our risk management
strategy. We use these derivatives to mitigate certain risks, including
interest rate risk and equity risk, by:
. reducing the risk between the timing of the receipt of cash and its
investment in the market;
. converting the asset duration to match the duration of the liabilities;
. reducing our exposure to fluctuations in equity market indices that
underlie some of our products; and
. protecting against the early termination of an asset or liability.
As a matter of policy, we have not and will not engage in derivative
market-making, speculative derivative trading or other speculative derivatives
activities.
SENSITIVITY ANALYSIS
Sensitivity analysis measures the impact of hypothetical changes in interest
rates and other market rates or prices on the profitability of market-sensitive
financial instruments.
The following discussion about the potential effects of changes in interest
rates and equity market prices is based on so-called "shock-tests," which model
the effects of interest rate and
93
equity market price shifts on our financial condition and results of
operations. Although we believe shock tests provide the most meaningful
analysis permitted by the rules and regulations of the SEC, they are
constrained by several factors, including the necessity to conduct the analysis
based on a single point in time and by their inability to include the
extraordinarily complex market reactions that normally would arise from the
market shifts modeled. Although the following results of shock tests for
changes in interest rates and equity market prices may have some limited use as
benchmarks, they should not be viewed as forecasts. These forward-looking
disclosures also are selective in nature and address only the potential impacts
on our financial instruments. For the purpose of this sensitivity analysis we
excluded the potential impacts on our insurance liabilities that are not
considered financial instruments, with the exception of those insurance
liabilities that have embedded derivatives that are required to be bifurcated
in accordance with U.S. GAAP. They do not include a variety of other potential
factors that could affect our business as a result of these changes in interest
rates and equity market prices.
Interest Rate Risk
One means of assessing exposure of our fixed maturity securities portfolio to
interest rate changes is a duration-based analysis that measures the potential
changes in market value resulting from a hypothetical change in interest rates
of 100 basis points across all maturities. This is sometimes referred to as a
parallel shift in the yield curve. Under this model, with all other factors
constant and assuming no offsetting change in the value of our liabilities, we
estimated that such an increase in interest rates would cause the market value
of our fixed-income securities portfolio to decline by approximately $468.8
million before the effect of deferred taxes, DAC and PVFP, based on our
securities positions as of December 31, 2009.
We performed a similar sensitivity analysis on our derivative portfolio and
noted that a 100 basis point increase in interest rates resulted in a decrease
in fair value of $146.7 million based on our derivatives portfolio as of
December 31, 2009. We also performed a similar sensitivity analysis on our
embedded derivatives associated with our GMWB liabilities and noted that a 100
basis point increase in interest rates resulted in a decrease of $86.3 million
based on our embedded derivative liabilities as of December 31, 2009.
The principal amount, weighted-average interest rate and fair value by
maturity, of our variable rate non-recourse funding obligations were as follows
as of December 31, 2009:
WEIGHTED-
PRINCIPAL AVERAGE INTEREST FAIR
(AMOUNTS IN MILLIONS) AMOUNT RATE VALUE/(2)/
-----------------------------------------------------------------------------
Maturity/(1)/:
River Lake Insurance Company IV, 2028 $ 528.0 0.66% $ 286.2
River Lake Insurance Company, 2033 1,100.0 1.55% 579.5
River Lake Insurance Company II, 2035 850.0 1.24% 437.5
River Lake Insurance Company III, 2036 750.0 1.76% 355.8
Rivermont Insurance Company I, 2050 315.0 2.33% 61.8
-------- --------
Total $3,543.0 1.51% $1,720.8
-----------------------------------------------------------------------------
/(1)/There are no maturities over the next five years.
/(2)/The valuation methodology used is based on then current coupon, revalued
based on the LIBOR rate set and current spread assumption based on
commercially available data. The model is a floating rate coupon model
using the spread assumption to derive the valuation.
Equity Market Risk
One means of assessing exposure to changes in equity market prices is to
estimate the potential changes in market values on our equity investments
resulting from a hypothetical broad-based decline in equity market prices of
10%. Under this model, with all other factors constant, we estimated that such
a decline in equity market prices would cause the market value of our equity
investments to decline by approximately $8.4 million based on our equity
positions as of December 31, 2009.
We performed a similar sensitivity analysis on our equity market derivatives
and noted that a 10% decline in equity market prices would result in a decrease
in fair value of $77.5 million based on our equity market derivatives as of
December 31, 2009. We also performed a similar sensitivity analysis on our
embedded derivatives associated with our GMWB liabilities and noted that a 10%
decline in equity market prices would result in an increase in fair value of
$67.6 million based on our embedded derivative liabilities as of December 31,
2009.
Fluctuations in equity market prices also affect our variable annuity products,
which depend upon fees that are related primarily to the value of assets under
management. Continued equity market volatility could adversely impact our
revenues
94
and returns of these products. In addition, material losses in our variable
annuity products and associated hedging program could challenge our ability to
recover DAC on these products and could lead to further write-offs of DAC.
DERIVATIVE COUNTERPARTY CREDIT RISK
We manage our derivative counterparty credit risk on an individual counterparty
basis, which means that gains and losses are netted for each counterparty to
determine the amount at risk. We have set individual counterparty limits and
consider our exposure to each counterparty by taking into account the specific
exposures of each of our subsidiaries to such counterparty on an aggregate
basis. If a counterparty exceeds credit exposure limits in terms of amounts
owed to us, unless an exception is granted by management, no additional
transactions are executed until the exposure with that counterparty is reduced
to an amount that is within the established limit. All of our master swap
agreements contain credit downgrade provisions that allow a party to assign or
terminate derivative transactions if the other party's long-term unsecured debt
rating or financial strength rating is below the limit defined in the
applicable agreement.
Swaps and purchased options are conducted within the credit policy constraints
provided in the table below. Our policy permits us to enter into derivative
transactions with counterparties rated "A2" by Moody's and "A" by S&P if the
agreements governing such transactions require both parties to provide
collateral in certain circumstances.
The following table sets forth derivative counterparty credit limits by credit
rating as of December 31, 2009:
(AMOUNTS IN MILLIONS)
--------------------------------------------------------------------------------------------
LONG-TERM AGGREGATE LIMITS
(EXPOSURES OVER (INCLUDING THOSE
ONE YEAR) NET OF UNDER ONE YEAR) AGGREGATE LIMIT
S&P RATING MOODY'S RATING COLLATERAL/(1)/ NET OF COLLATERAL/(1)/ (GROSS OF COLLATERAL)/(1)/
--------------------------------------------------------------------------------------------
AAA Aaa $50.0 $125.0 $300.0
AA- Aa3 25.0 100.0 250.0
A A2 15.0 90.0 200.0
--------------------------------------------------------------------------------------------
/(1)/Credit exposure limits noted in this table are set by Genworth, our
ultimate parent, and apply in the aggregate to all companies that are
consolidated into Genworth.
MANAGEMENT
Executive Officers and Directors
We are managed by a board of directors. The following table sets forth the
name, age (as of December 31, 2009), and principal occupations during the past
five years of each our executive officers and directors.
Pamela S. Schutz 55 Chairperson of the Board and President since May 1998 and Chief Executive Office since June
2000. In addition, Ms. Schutz serves as Executive Vice President of U.S. Life Insurance and
Wealth Management Division for Genworth Financial, Inc., the Company's ultimate parent.
Ms. Schutz received a B.A. from Briarcliff College and an M.S. in Business from American
University in Washington, D.C.
-----------------------------------------------------------------------------------------------------------------------
Paul A. Haley 52 Director and Senior Vice President and Chief Actuary since January 2002. Mr. Haley also
currently serves as Senior Vice President Fixed Annuity and ALM Leader of Retirement &
Protection, Genworth Financial, Inc., a position he has held since December 2009. Prior to that,
he held a number of actuarial and risk roles. Mr. Haley received his B.A. in mathematics from
Rutgers College in New Brunswick, NJ. He became a Fellow of the Society of Actuaries in
1987 and a Member of the American Academy of Actuaries in 1988.
-----------------------------------------------------------------------------------------------------------------------
95
Ronald P. Joelson 51 Director and Senior Vice President and Chief Investment Officer since February 2009. Director
and Senior Vice President and Chief Investment Officer of Genworth since November 2008.
Mr. Joelson also serves as Senior Vice President and Chief Investment Officer for Genworth
Financial, Inc. Prior to joining the Company, Mr. Joelson served as Managing Director of
Insurance Strategic Markets at JP Morgan Chase in New York City from July 2007 to
November 2008. From 1984-2007, Mr. Joelson held a number of investment and business
positions at Prudential Financial in Newark, New Jersey. Mr. Joelson received a BA from
Hamilton College and an MBA in Finance and Accounting from Columbia University's
Graduate School of Business.
-----------------------------------------------------------------------------------------------------------------------------
Leon E. Roday 56 Director since June 1999 and Senior Vice President since May 1998. Mr. Roday has served as
Senior Vice President, General Counsel and Secretary of our parent company, Genworth
Financial, Inc. since its initial public offering in May 1994. Previously he served as Senior Vice
President, General Counsel and Secretary of GE Financial Assurance Holdings, Inc. our former
parent, since 1996. Mr. Roday received his B.A. from the University of California in Santa
Barbara and a J.D. from Brooklyn Law School.
-----------------------------------------------------------------------------------------------------------------------------
Geoffrey S. Stiff 57 Director since April 1996 and Senior Vice President since March 1999. Mr. Stiff has held
various leadership roles within the Company. In addition to his role as Director and Senior
Vice President, Mr. Stiff leads product management of the U.S. life insurance companies with
focus on risk, inforce management and product profitability. These products include Term Life,
Universal Life, Long-Term Care, Fixed Annuity, Variable Annuity, and Retirement Annuities.
Mr. Stiff also serves as a Director for the Genworth Variable Insurance Trust. Mr. Stiff
received a bachelor's degree in accounting from Bentley College in Waltham, Massachusetts
and a master's degree in management from the MIT Sloan School of Management in
Cambridge, Massachusetts.
-----------------------------------------------------------------------------------------------------------------------------
Thomas E. Duffy 54 Senior Vice President, General Counsel and Secretary since September 2002. Mr. Duffy
received a B.A. in Economics from Fordham College and a J.D. from Fordham University Law
School.
-----------------------------------------------------------------------------------------------------------------------------
Christopher J. Grady 53 Senior Vice President since June 2007. Mr. Grady is also President, Distribution and Marketing
of Genworth Financial's U.S. Life Insurance Companies. Prior to joining Genworth in 2007,
Mr. Grady was Managing Director and National Sales Manager for Merrill Lynch's Consumer
Finance Group.
-----------------------------------------------------------------------------------------------------------------------------
Kelly L. Groh 41 Senior Vice President and Chief Financial Officer since August 2008. Prior to becoming Chief
Financial Officer, Ms. Groh joined Genworth Financial, Inc. in 1996 where she served various
roles until becoming Chief Financial Officer of the Company. Ms. Groh is a licensed CPA and
has a B.A. in Business Administration, Accounting from the University of Washington, in
Seattle.
-----------------------------------------------------------------------------------------------------------------------------
Patrick B. Kelleher 52 Senior Vice President since March 2007. Prior to joining Genworth Financial, Inc. in January
2007, Mr. Kelleher was Executive Vice President and Chief Financial Officer of Transamerica
Reinsurance in Charlotte, North Carolina, a reinsurance provider and division of Transamerica
Occidental Life Insurance Company, which is a member of the AEGON Group, a life
insurance and pension company. He had served in this capacity since 1998. Mr. Kelleher
received a bachelor's degree from Franklin & Marshall College.
-----------------------------------------------------------------------------------------------------------------------------
James H. Reinhart 45 Senior Vice President since December 2004. Mr. Reinhart currently serves as the SVP of
Marketing for the Retirement and Protection segment of Genworth Financial, Inc., where he
has served in this role since 2007. Since 2004, Mr. Reinhart has served in various roles for
Genworth, including Chief Operating Officer of Operations and IT for Retirement Income &
Investments. Mr. Reinhart graduated from the United States Naval Academy with a B.S. in
electrical engineering. He also received an M.S. in electrical engineering from the University of
Maryland, as well as his MBA from the Harvard Graduate School of Business Administration.
-----------------------------------------------------------------------------------------------------------------------------
96
Thomas M. Stinson 46 Senior Vice President since May 2000. Mr. Stinson has held various roles with the Company.
In addition to serving as Senior Vice President of the Company, Mr. Stinson also currently
serves as President of Insurance Products, Retirement & Protection at Genworth Financial, our
ultimate parent. In this role, Mr. Stinson is responsible for product development and
management of Genworth's Life Insurance, Long Term Care Insurance, Care Support Service
and Annuity products. He also has oversight of Genworth's Medicare Supplement and Equity
Access businesses, and Genworth's affinity relationship with AARP. Mr. Stinson received a
BSBA and MBA from the University of Missouri -- Columbia.
---------------------------------------------------------------------------------------------------------------------
Jac J. Amerell 47 Vice President and Controller since March 2006. Prior to joining Genworth, Mr. Amerell
served in various finance roles at Northwestern Mutual Life Insurance Company and prior
thereto as Senior Manager with PricewaterhouseCoopers. Mr. Amerell is a CPA and has a
B.B.A. and Masters in Accounting from the University of Wisconsin.
---------------------------------------------------------------------------------------------------------------------
Gary T. Prizzia 47 Treasurer since March 2000. Mr. Prizzia has a B.S. in Accounting and an MBA in International
Business.
---------------------------------------------------------------------------------------------------------------------
The principal business address of each listed above, unless otherwise
indicated, is Genworth Life and Annuity Insurance Company, 6610 West Broad
Street, Richmond, Virginia 23230.
(1) The principal business address for Mr. Joelson is Genworth Life and Annuity
Insurance Company 3001 Summer Street, 2nd Floor, Stamford, Connecticut 06905.
(2) The principal business address for Messrs. Kelleher, Roday and Prizzia is
Genworth Life and Annuity Insurance Company, 6620 West Broad Street, Richmond,
Virginia 23230.
Executive officers serve at the pleasure of the Board of Directors and
directors are elected annually by Genworth Life and Annuity Insurance Company's
shareholder.
MANAGEMENT OWNERSHIP OF GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
None of our directors or Named Executives (as defined under "Executive
Compensation" below) owns any shares of common stock, preferred stock or other
equity securities issued by us or by our parent or subsidiaries other than
Genworth. The following table sets forth information as of March 19, 2010,
regarding the beneficial ownership of Genworth's common stock by:
-- the Named Executives;
-- each of the Company's directors; and
-- all the directors and executive officers of the Company as a group.
Beneficial ownership is determined in accordance with the rules of the SEC.
Except as indicated in the footnotes to the table below, directors and
executive officers possess sole voting and investment power with respect to all
shares set forth by their name. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of common
stock issuable upon the exercise of stock options or stock appreciation rights
("SARs") or upon the conversion of restricted stock units ("RSUs") held by that
person that are currently exercisable or convertible, or are exercisable or
convertible within 60 days of March 19, 2010 are deemed to be issued and
outstanding. These shares, however, are not deemed outstanding for purposes of
computing percentage ownership of each other stockholder.
Security Ownership of Directors and Named Executives
AMOUNT OF GENWORTH COMMON STOCK PERCENTAGE OF OUTSTANDING
AND NATURE OF BENEFICIAL OWNERSHIP GENWORTH STOCK
-------------------------------------------------------------------------------------
NAME *
-------------------------------------------------------------------------------------
Pamela S. Schutz/(1)/ 430,332 *
-------------------------------------------------------------------------------------
Kelly L. Groh/(2)/ 10,072 *
-------------------------------------------------------------------------------------
97
AMOUNT OF GENWORTH COMMON STOCK PERCENTAGE OF OUTSTANDING
AND NATURE OF BENEFICIAL OWNERSHIP GENWORTH STOCK
-------------------------------------------------------------------------------------------------------
Paul A. Haley 14,443 *
-------------------------------------------------------------------------------------------------------
Ronald P. Joelson/(3)/ 39,647 *
-------------------------------------------------------------------------------------------------------
Patrick B. Kelleher/(4)/ 83,059 *
-------------------------------------------------------------------------------------------------------
Leon E. Roday/(5)/ 155,921 *
-------------------------------------------------------------------------------------------------------
Geoffrey S. Stiff 9,705 *
-------------------------------------------------------------------------------------------------------
Thomas S. Stinson 64,096 *
-------------------------------------------------------------------------------------------------------
All Directors and Executive Officers of 850,123 *
Genworth Life & Annuity as a group-12
-------------------------------------------------------------------------------------------------------
* Less than 1%
/(1)/ Includes (a) 143,530 shares of common stock issuable upon the exercise of
stock options that are vested or will vest within 60 days of March 19,
2010. Ms. Schutz holds 396,730 SARs that are vested or will vest within
60 days of March 19, 2010, all of which have a base price in excess of
the closing price of Genworth's common stock on March 19, 2010.
/(2)/ Includes 873 shares held in a personal 401(k) account and 1,820 shares
held in a personal investment account.
/(3)/ Includes 39,647 shares of common stock issuable upon the exercise of
60,334 SARs that are vested or will vest within 60 days of March 19, 2010
(the number of shares issuable upon exercise of SARs is calculated based
on the excess of the closing price of Genworth's common stock on March
19, 2010 over the base price of the SARs).
/(4)/ Includes 64,932 shares of common stock issuable upon the exercise of
162,514 SARs that are vested or will vest within 60 days of March 19,
2010 (the number of shares issuable upon exercise of SARs is calculated
based on the excess of the closing price of Genworth's common stock on
March 19, 2010 over the base price of the SARs).
/(5)/ Includes (a) 80,297 shares of common stock issuable upon the exercise of
stock options that are vested or will vest within 60 days of March 19,
2010 and (b) 16,460 shares of common stock issuable upon the exercise of
249,430 SARs that are vested or will vest within 60 days of March 19,
2010 (the number of shares issuable upon exercise of SARs is calculated
based on the excess of the closing price of Genworth's common stock on
March 19, 2010 over the base price of the SARs). Also includes 20 shares
held in trusts for children.
EXECUTIVE COMPENSATION
Our executive officers also serve as executives of one or more affiliated
companies of Genworth. Overall compensation for officers of Genworth is
reviewed by Genworth's Management Development and Compensation Committee (the
"Compensation Committee") which consists solely of "independent" directors
under the applicable rules of the New York Stock Exchange. Genworth's
Compensation Committee has the following responsibilities:
-- monitoring our management resources, structure, succession planning,
development and selection process as well as the performance of key
executives;
-- reviewing and approving our executive compensation and broad-based
incentive compensation plans; and
-- overseeing risks related to compensation plans and programs.
Under its charter, the Compensation Committee has authority to delegate any of
its responsibilities to subcommittees as the Compensation Committee may deem
appropriate in its sole discretion.
Genworth's compensation program for executive officers consists of four key
elements: base salary, an annual incentive, an annual long-term equity grant
(in the form of stock appreciation rights ("SARs"), stock options and
restricted stock units ("RSUs")), and a three-year performance plan which we
refer to as a "mid-term" plan. Additionally, Genworth provides certain other
benefits to its executive officers to ensure competitive compensation and
benefits consistent with the marketplace and Genworth's guiding principles.
Retirement benefits also fulfill an important role within Genworth's overall
executive compensation programs because they provide a competitive financial
security component that supports attraction and retention of talent. Genworth
maintains the Genworth Retirement and Savings Plan (the "Retirement and Savings
Plan"), a tax-qualified, defined contribution plan in which a substantial
majority of Genworth's U.S. employees, including the Chief Executive Officer,
the Chief Financial Officer and the three most highly
98
compensated officers of the Company (collectively the "Named Executives") are
eligible to participate. In addition, Genworth offers the following
non-qualified retirement and deferred compensation plans available to the Named
Executives:
-- Genworth Financial, Inc. Supplemental Executive Retirement Plan ( the
"SERP");
-- Genworth Financial, Inc. Retirement and Savings Restoration Plan (the
"Restoration Plan"); and
-- Genworth Financial, Inc. Deferred Compensation Plan (the "Deferred
Compensation Plan").
Compensation shown below is based on a pro-rata basis adjusted for each
individual's time devoted to duties as an officer of one or more of our
affiliates. The percentage of time dedicated to us as of 2009, 2008 and 2007
for each Named Executive is listed in footnote 1 of the table below. All of our
Named Executives are also employees of one or more affiliates of Genworth and
receive no compensation in addition to their compensation as employees.
The following table sets forth certain information regarding the portion of
compensation paid to the Named Executives for services provided to the Company
during or with respect to the fiscal years 2009, 2008 and 2007. The
Compensation shown below is adjusted on a pro-rata basis in accordance with
each Name Executive's time allocated to services to the Company.
CHANGE IN
PENSION VALUE
AND
NON-EQUITY NONQUALIFIED
STOCK OPTION INCENTIVE PLAN DEFERRED ALL OTHER
NAME AND BONUS AWARDS AWARDS COMPENSATION COMPENSATION COMPENSATION
PRINCIPAL POSITION/1/ YEAR SALARY($) ($) ($)/5/ ($)/6/ ($)/7/ EARNINGS ($)/8/ ($)/9/ TOTAL ($)
---------------------------------------------------------------------------------------------------------------------------
Pamela S. Schutz
Chairperson of the
Board, President 2009 305,819 -- -- 316,882 377,600 89,692 47,143 1,137,136
and Chief 2008 276,545 -- 78,432 238,186 -- 32,661 54,663 680,487
Executive Officer 2007 334,389 -- 964,350 345,318 403,200 114,932 92,481 2,254,670
---------------------------------------------------------------------------------------------------------------------------
Kelly L. Groh
Senior Vice
President and 2009 125,122 132,600/2/ -- 90,352 53,040 5,956 26,125 433,195
Chief Financial 2008 102,744 -- 27,360 31,158 40,000 4,449 22,821 228,532
Officer 2007 -- -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------
Patrick B. Kelleher 2009 109,897 122,500/2/ -- 348,804 122,500 21,900 19,071 744,672
Senior Vice 2008 105,354 156,000/3,4/ 49,248 87,242 -- 16,733 29,613 444,190
President 2007 88,332 72,000 358,656 140,422 86,400 12,493 18,779 777,082
---------------------------------------------------------------------------------------------------------------------------
Leon E. Roday
Director and 2009 139,203 139,650/2/ -- 83,026 105,350 33,972 51,622 552,823
Senior Vice 2008 135,443 55,200/3,4/ 35,568 63,008 -- 20,827 42,231 352,277
President 2007 127,437 -- 181,895 70,274 88,800 27,449 43,788 539,643
---------------------------------------------------------------------------------------------------------------------------
Thomas M. Stinson 2009 131,179 131,600/2/ -- 271,914 90,475 13,021 22,213 660,402
Senior Vice 2008 7,959 -- 3,101 3,531 3,000 606 1,164 19,361
President 2007 0 -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------
/1/Ms. Schutz's percentage of time dedicated to us for the years 2009, 2008 and
2007 was 47.2%, 43.0% and 56.0%, respectively. Ms. Groh's percentage of time
dedicated to us for 2009 and 2008 was 44.2% and 40%, respectively. Ms. Groh
did not serve in her current role in 2007 and no time was specifically
dedicated to us in 2007. Mr Kelleher's percentage of time dedicated to us
for the years 2009, 2008 and 2007 was 24.5%, 24.0% and 24.0%, respectively.
Mr Roday's percentage of time dedicated to us for the years 2009, 2008 and
2007 was 24.5%, 24.0% and 24.0%, respectively. Mr Stinson's percentage of
time dedicated to us for the years 2009, 2008 and 2007 was 32.9%, 2.0% and
0.0%, respectively.
/2/Reflects a pro-rated portion of transition incentives paid in November 2009.
In the fall of 2008, the Compensation Committee approved special transition
incentives to certain key managers. Continuity of leadership in those roles
was deemed to be in the best interests of Genworth's stock holders during a
critical transition period of unprecedented economic and financial market
turmoil. The transition incentives were paid based on continued satisfactory
performance and leadership through the transition incentive period.
/3/Reflects the pro-rated portion of a discretionary incentive payment to Mr.
Kelleher of $108,000 and Mr. Roday of $55,200 for 2008.
/4/Upon hire in 2007, Mr. Kelleher was awarded a hiring bonus in the pro-rated
amount of $72,000 payable in 2007, and $48,000 payable in 2008.
/5/Reflects the aggregate grant date fair value of RSUs, computed in accordance
with FASB ASC Topic 718. Also reflects the aggregate grant date fair value
of Performance Stock Units (PSUs) granted to the Named Executives in 2007,
computed in accordance with FASB ASC Topic 718 and based on the grant
99
date fair value of the underlying shares and the probable outcome of
performance-based vesting conditions, excluding the effect of estimated
forfeitures. The pro-rated value of the awards at the grant date assuming that
the highest level of performance conditions will be achieved is $1,741,824 for
Ms. Schutz, $474,440 for Mr. Kelleher and $298,598 for Mr. Roday. The
performance-based vesting conditions were not met, and the PSUs were cancelled
without payment to the Named Executives.
/6/Reflects the aggregate pro-rated grant date fair value of SARs and stock
options, granted in 2007, 2008 and 2009 based on the Black-Scholes
option-pricing model for use in valuing executive stock options in
accordance with FASB ASC Topic 718. The assumptions used in determining the
grant date fair values of the SARs and stock options are set forth in the
notes to Genworth's consolidated financial statements, which are included in
Genworth's Annual Report on Form 10-K for 2009 filed with the SEC and may be
found on www.sec.gov or www.genworth.com. The reference to the Form 10-K
filing, Genworth's website and the SEC's website is an inactive textual
reference only and is not intended to incorporate Genworth's Form 10-K
filing, Genworth's website or the SEC web site into this prospectus.
In August 2009, the Compensation Committee approved a special grant of SARs or
stock options with accelerated vesting based on stock price performance
("Performance Accelerated SARs and Stock Options") to certain key executives.
The Performance-Accelerated SARs and Stock Options vest on the fourth
anniversary of the grant date, subject to earlier vesting in one-third
increments based on the closing trading price of Genworth's common stock
exceeding certain specified amounts ($12, $16, and $20, respectively) for 20
consecutive trading days. For purposes of determining the fair value of
Performance-Accelerated SARs and Stock Options, Genworth used the Monte-Carlo
Simulation. The Performance-Accelerated SARs and Stock Options grant-date fair
value was $5.28 which will be amortized over a 1.4 year derived service period.
The actual value, if any, that a Named Executive may realize upon exercise of
SARs or stock options will depend on the excess of the stock price over the
base value on the date of exercise, so there is no assurance that the value
realized by a Named Executive will be at or near the value estimated by the
Black-Scholes option-pricing model or the Monte-Carlo Simulation.
/7/Reflects the value of cash incentives paid pursuant to our annual incentive
program.
/8/Reflects the change during 2009 in actuarial present values of each of the
Named Executive's accumulated benefits under the SERP.
/9/See the All Other Compensation -- Details table below.
All Other Compensation -- Details
COMPANY
CONTRIBUTIONS LIFE
TO THE INSURANCE
RETIREMENT PREMIUMS EXECUTIVE COMPANY FINANCIAL EXECUTIVE TOTAL
PLANS ($)/1/ ($)/2/ PHYSICAL CAR/3/ COUNSELING ANNUITY/4/ ($)
------------------------------------------------------------------------------------------------
Pamela S. Schutz 2009 21,597 17,831 -- -- 7,715 -- 47,143
------------------------------------------------------------------------------------------------
Kelly L. Groh 2009 13,011 481 1,326 6,571 4,736 -- 26,125
------------------------------------------------------------------------------------------------
Patrick B. Kelleher 2009 13,608 1,458 -- -- 4,005 -- 19,071
------------------------------------------------------------------------------------------------
Leon E. Roday 2009 13,375 9,007 735 -- 4.005 24,500 51,622
------------------------------------------------------------------------------------------------
Thomas M. Stinson 2009 12,219 841 987 4,641 3,525 -- 22,213
/1/Reflects contributions made on behalf of the Named Executives for each of
the following programs: (i) company matching contributions made in 2009 to
the 401(k) feature of the Retirement and Savings Plan; and (ii) company
contributions made in 2010, which are based on 2009 earnings, to the defined
contribution pension feature of the Retirement and Savings Plan and to the
Restoration Plan.
/2/Represents premium payments we made in 2009 for the following programs:
(i) Leadership Life Program - an individually owned universal life insurance
policy provided to all of our executives; and (ii) Executive Life Program -
a $1 million company-owned life insurance policy for which the participating
Named Executive may identify a beneficiary for payment by us in the event of
his or her death.
/3/Reflects the pro-rated direct costs Genworth paid for a company car, reduced
by the value of any business use of the vehicle.
/4/Reflects a pro-rated payment made to Mr. Roday pursuant to an executive
annuity program, the obligation for which Genworth assumed upon acquisition
of a predecessor company. The 2009 amount also reflects an additional
pro-rated payment to a new annuity contribution program entered into with
Mr. Roday in 2009.
100
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below are the names and addresses of the persons who beneficially own
more than 5% of the Company's common stock. All of the Company's issued shares
of preferred stock was retired on April 30, 2007.
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
TITLE OF BENEFICIAL BENEFICIAL PERCENT OF
CLASS OWNER OWNERSHIP CLASS
------------------------------------------------------
Common Genworth 25,651 100%
Stock, par Life shares
value $1,000 Insurance owned
per share Company/1/ beneficially/2/
------------------------------------------------------
/1/ The address of Genworth Life Insurance Company is 6604 West Broad Street,
Richmond, Virginia 23230.
/2/ The shares of the Company's common stock listed above are owned directly
by an indirect wholly-owned subsidiary of Genworth Financial, Inc.
Genworth Life Insurance Company owns 100% of the outstanding shares of the
Company.
RELATED PARTY TRANSACTIONS
We and other direct and indirect subsidiaries of Genworth are parties to an
amended and restated services and shared expenses agreement under which each
company agrees to provide and each company agrees to receive certain general
services. These services include, but are not limited to, data processing,
communications, marketing public relations, advertising, investment management,
human resources, accounting, actuarial, legal, administration of agent and
agency matters, purchasing, underwriting and claims. Under the terms of the
agreement, settlements are made quarterly.
Under this agreement, amounts incurred for these items aggregated $171.7
million, $268.8 million and $326.0 million for the years ended December 31,
2009, 2008 and 2007, respectively. We also charged affiliates for certain
services and for the use of facilities and equipment, which aggregated to $26.7
million, $118.1 million and $115.3 million for the years ended December 31,
2009, 2008 and 2007, respectively.
We pay Genworth, our ultimate parent, for investment related services. We paid
$18.6 million, $20.5 million and $15.7 million to Genworth in 2009, 2008 and
2007, respectively.
We pay interest on outstanding amounts under a credit funding with GNA, our
indirect parent. For the years ended December 31, 2009 and 2008, we incurred no
interest expense under this agreement. Interest expense under this agreement
was $0.5 million for the year ended December 31, 2007. We pay interest at the
cost of funds of GNA, which was 0.2%, 1.5% and 4.4%, for the years ended
December 31, 2009, 2008 and 2007, respectively. GNA owed us $0.5 million as of
December 31, 2009 and 2008, which was included in other assets in the
consolidated balance sheets. During 2009, there were no borrowings. During
2008, we borrowed and then repaid $271.8 million to GNA and as of December 31,
2008, there were no amounts outstanding under this agreement.
Additionally, we sell investment securities to affiliates in the normal course
of business. The sale of securities to affiliates are recorded at fair value
with gains recorded in additional paid-in capital as a deemed capital
contribution and losses recorded in retained earnings as a deemed dividend. For
the years ended December 31, 2009, 2008, and 2007, we recorded $10.2 million,
$4.9 million and $50.4 million, respectively, in retained earnings related to
losses associated with the sale of securities to affiliates.
101
Financial Statements and Supplementary Data
Genworth Life and Annuity Insurance Company and Subsidiaries
Index to Consolidated Financial Statements
Page
----
Financial Statements:
Report of KPMG LLP, Independent Registered Public Accounting Firm.................................. 103
Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007............. 104
Consolidated Balance Sheets as of December 31, 2009 and 2008....................................... 105
Consolidated Statements of Changes in Stockholder's Equity for the years ended December 31, 2009,
2008 and 2007.................................................................................... 106
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007......... 107
Notes to Consolidated Financial Statements......................................................... 108
Report of KPMG LLP, Independent Registered Public Accounting Firm, on Financial Statement
Schedules........................................................................................ 166
Schedule I, Summary of investments-other than investments in related parties....................... 167
Schedule III, Supplemental Insurance Information................................................... 168
102
Report of Independent Registered Public Accounting Firm
The Board of Directors
Genworth Life and Annuity Insurance Company:
We have audited the accompanying consolidated balance sheets of Genworth
Life and Annuity Insurance Company and subsidiaries (the Company) as of
December 31, 2009 and 2008, and the related consolidated statements of income,
changes in stockholder's equity, and cash flows for each of the years in the
three-year period ended December 31, 2009. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Genworth
Life and Annuity Insurance Company and subsidiaries as of December 31, 2009 and
2008, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2009, in conformity with U.S.
generally accepted accounting principles.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for other-than-temporary impairments in 2009.
/s/ KPMG LLP
Richmond, Virginia
April 13, 2010
103
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
(Amounts in millions)
Years ended December 31,
- ----------------------------
2009 2008 2007
-------- -------- --------
Revenues:
Premiums.................................................................... $ 982.4 $1,068.5 $1,063.2
Net investment income....................................................... 644.7 948.3 1,189.9
Net investment gains (losses)............................................... (315.9) (936.7) (91.1)
Policy fees and other income................................................ 599.2 607.7 491.3
-------- -------- --------
Total revenues........................................................... 1,910.4 1,687.8 2,653.3
-------- -------- --------
Benefits and expenses:
Benefits and other changes in policy reserves............................... 1,032.7 1,138.8 1,105.4
Interest credited........................................................... 339.7 450.7 541.3
Acquisition and operating expenses, net of deferrals........................ 247.0 270.2 244.2
Amortization of deferred acquisition costs and intangibles.................. 241.0 244.0 151.4
Interest expense............................................................ 91.7 168.1 205.1
-------- -------- --------
Total benefits and expenses.............................................. 1,952.1 2,271.8 2,247.4
-------- -------- --------
Income (loss) before income taxes and equity in net income (loss) of
unconsolidated subsidiary................................................. (41.7) (584.0) 405.9
Provision (benefit) for income taxes........................................ (36.0) (212.3) 101.3
-------- -------- --------
Net income (loss) before equity in net income (loss) of unconsolidated
subsidiary................................................................ (5.7) (371.7) 304.6
Equity in net income (loss) of unconsolidated subsidiary.................... 4.4 (37.6) 19.1
-------- -------- --------
Net income (loss)........................................................... $ (1.3) $ (409.3) $ 323.7
======== ======== ========
Supplemental disclosures:
Total other-than-temporary impairments...................................... $ (592.1) $ (820.7) $ (62.4)
Portion of other-than-temporary impairments included in other comprehensive
income (loss)............................................................. 226.6 -- --
-------- -------- --------
Net other-than-temporary impairments........................................ (365.5) (820.7) (62.4)
Other investment gains (losses)............................................. 49.6 (116.0) (28.7)
-------- -------- --------
Total net investment gains (losses)......................................... $ (315.9) $ (936.7) $ (91.1)
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements
104
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in millions, except share and per share amounts)
December 31,
--------------------
2009 2008
--------- ---------
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value......................... $11,248.8 $10,771.7
Equity securities available-for-sale, at fair value................................. 101.3 90.0
Commercial mortgage loans........................................................... 2,363.3 2,704.1
Policy loans........................................................................ 515.7 505.8
Other invested assets ($297.6 and $338.9 restricted)................................ 2,607.4 2,991.8
--------- ---------
Total investments............................................................ 16,836.5 17,063.4
Cash and cash equivalents............................................................... 1,279.8 2,120.2
Accrued investment income............................................................... 152.8 158.7
Deferred acquisition costs.............................................................. 3,180.1 3,294.8
Intangible assets....................................................................... 491.8 641.5
Goodwill................................................................................ 450.9 450.9
Reinsurance recoverable................................................................. 8,216.0 8,490.7
Other assets............................................................................ 491.2 648.7
Separate account assets................................................................. 10,086.3 8,501.9
--------- ---------
Total assets................................................................. $41,185.4 $41,370.8
========= =========
Liabilities and stockholder's equity
Liabilities:
Future policy benefits.............................................................. $ 9,885.1 $ 9,936.2
Policyholder account balances....................................................... 11,362.5 14,017.3
Liability for policy and contract claims............................................ 294.9 280.9
Unearned premiums................................................................... 17.2 19.2
Other liabilities ($299.4 and $396.5 restricted).................................... 1,082.3 1,519.5
Non-recourse funding obligations.................................................... 3,543.0 3,555.0
Deferred income tax liability....................................................... 586.4 323.8
Separate account liabilities........................................................ 10,086.3 8,501.9
--------- ---------
Total liabilities............................................................ 36,857.7 38,153.8
--------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock ($1,000 par value, 50,000 shares authorized, 25,651 shares
issued and outstanding)........................................................... 25.6 25.6
Additional paid-in capital.......................................................... 4,686.7 4,686.7
--------- ---------
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-
temporarily impaired....................................................... (546.7) (1,649.7)
Net unrealized gains (losses) on other-than-temporarily impaired
securities................................................................. (129.8) --
--------- ---------
Net unrealized investment gains (losses)......................................... (676.5) (1,649.7)
Derivatives qualifying as hedges................................................. 12.4 46.1
--------- ---------
Total accumulated other comprehensive income (loss)................................. (664.1) (1,603.6)
Retained earnings................................................................... 279.5 108.3
--------- ---------
Total stockholder's equity................................................... 4,327.7 3,217.0
--------- ---------
Total liabilities and stockholder's equity................................... $41,185.4 $41,370.8
========= =========
See Accompanying Notes to Consolidated Financial Statements
105
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholder's Equity
(Amounts in millions)
Accumulated
Additional other Total
Preferred Common paid-in comprehensive Retained stockholder's
stock stock capital income (loss) earnings equity
--------- ------ ---------- ------------- -------- -------------
Balances as of December 31, 2006................ $ 110.0 $25.6 $4,025.3 $ 22.0 $ 260.8 $ 4,443.7
---------
Comprehensive income (loss):
Net income................................... -- -- -- -- 323.7 323.7
Net unrealized gains (losses) on investment
securities................................. -- -- -- (359.9) -- (359.9)
Derivatives qualifying as hedges............. -- -- -- 4.6 -- 4.6
---------
Total comprehensive income (loss)............... (31.6)
Redemption of preferred stock................... (110.0) -- -- -- -- (110.0)
Dividends and other transactions with
stockholder................................... -- -- 46.3 -- (62.0) (15.7)
------- ----- -------- --------- ------- ---------
Balances as of December 31, 2007................ -- 25.6 4,071.6 (333.3) 522.5 4,286.4
---------
Comprehensive income (loss):
Net loss..................................... -- -- -- -- (409.3) (409.3)
Net unrealized gains (losses) on investment
securities................................. -- -- -- (1,311.5) -- (1,311.5)
Derivatives qualifying as hedges............. -- -- -- 41.2 -- 41.2
---------
Total comprehensive income (loss)............... (1,679.6)
Capital contribution............................ -- -- 610.9 -- -- 610.9
Other transactions with stockholder............. -- -- 4.2 -- (4.9) (0.7)
------- ----- -------- --------- ------- ---------
Balances as of December 31, 2008................ -- 25.6 4,686.7 (1,603.6) 108.3 3,217.0
---------
Cumulative effect of change in accounting, net
of taxes and other adjustments................ -- -- -- (188.4) 188.5 0.1
Comprehensive income (loss):
Net loss..................................... -- -- -- -- (1.3) (1.3)
Net unrealized gains (losses) on securities
not other-than-temporarily impaired........ -- -- -- 1,143.9 -- 1,143.9
Net unrealized gains (losses) on other-than-
temporarily impaired securities............ -- -- -- 17.7 -- 17.7
Derivatives qualifying as hedges............. -- -- -- (33.7) -- (33.7)
---------
Total comprehensive income (loss)............... 1,126.6
Other transactions with stockholder............. -- -- -- -- (16.0) (16.0)
------- ----- -------- --------- ------- ---------
Balances as of December 31, 2009................ $ -- $25.6 $4,686.7 $ (664.1) $ 279.5 $ 4,327.7
======= ===== ======== ========= ======= =========
See Accompanying Notes to Consolidated Financial Statements
106
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in millions)
Years ended December 31,
-------------------------------
2009 2008 2007
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)................................................................ $ (1.3) $ (409.3) $ 323.7
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Net investment losses (gains)................................................ 315.9 936.7 91.1
Equity in net (income) loss of unconsolidated subsidiary..................... (4.4) 37.6 (19.1)
Charges assessed to policyholders............................................ (394.2) (364.3) (349.5)
Net increase (decrease) in trading securities and derivative instruments..... (149.8) 199.8 (94.9)
Amortization of fixed maturity discounts and premiums........................ 60.0 36.7 (7.4)
Acquisition costs deferred................................................... (185.6) (399.9) (488.3)
Amortization of deferred acquisition costs and intangibles................... 241.0 244.0 151.4
Deferred income taxes........................................................ (289.7) (108.4) 215.7
Change in certain assets and liabilities:
Accrued investment income and other assets................................... 43.0 (105.3) (139.6)
Insurance reserves........................................................... 699.6 819.2 707.5
Other liabilities and other policy-related balances.......................... 58.9 (96.5) (48.4)
--------- --------- ---------
Net cash from operating activities............................................... 393.4 790.3 342.2
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities.................................................... 1,605.4 1,812.5 2,419.7
Commercial mortgage loans.................................................... 247.2 297.1 505.6
Proceeds from sales of investments:
Fixed maturity and equity securities......................................... 1,586.6 1,152.1 1,477.1
Purchases and originations of investments:
Fixed maturity and equity securities......................................... (2,336.2) (1,305.4) (4,477.9)
Commercial mortgage loans.................................................... -- (31.4) (692.1)
Other invested assets, net....................................................... (253.2) (1,026.0) (148.2)
Cash related to transfer of subsidiary to an affiliate........................... -- -- (27.0)
Policy loans, net................................................................ (9.9) (39.0) (11.2)
--------- --------- ---------
Net cash from investing activities............................................... 839.9 859.9 (954.0)
--------- --------- ---------
Cash flows from financing activities:
Deposits to universal life and investment contracts.............................. 1,421.8 3,999.4 4,582.0
Withdrawals from universal life and investment contracts......................... (3,448.7) (4,746.8) (4,450.9)
Proceeds from short-term borrowings and other, net............................... (34.7) 272.8 518.2
Payments on short-term borrowings................................................ -- (271.8) (522.4)
Proceeds from issuance of non-recourse funding obligations....................... -- -- 790.0
Redemption of non-recourse funding obligations................................... (12.0) -- --
Capital contribution from parent................................................. -- 600.0 --
Capital contribution to unconsolidated subsidiary................................ (0.1) -- --
Redemption of preferred stock.................................................... -- -- (110.0)
Dividends paid to stockholders................................................... -- -- (2.5)
--------- --------- ---------
Net cash from financing activities............................................... (2,073.7) (146.4) 804.4
--------- --------- ---------
Net change in cash and cash equivalents.......................................... (840.4) 1,503.8 192.6
Cash and cash equivalents at beginning of year...................................... 2,120.2 616.4 423.8
--------- --------- ---------
Cash and cash equivalents at end of year............................................ $ 1,279.8 $ 2,120.2 $ 616.4
========= ========= =========
See Accompanying Notes to Consolidated Financial Statements
107
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2009, 2008 and 2007
(1) Formation and Nature of Business
(a) Formation
Genworth Life and Annuity Insurance Company (the "Company," "GLAIC," "we,"
"us" or "our" unless the context otherwise requires) is a stock life insurance
company operating under a charter granted by the Commonwealth of Virginia on
March 21, 1871 as The Life Insurance Company of Virginia. An affiliate of our
former ultimate parent company acquired us on April 1, 1996 and ultimately
contributed the majority of the outstanding common stock to Genworth Life
Insurance Company ("GLIC").
On May 31, 2004, we became a direct, wholly-owned subsidiary of GLIC while
remaining an indirect, wholly-owned subsidiary of Genworth Financial, Inc.
("Genworth"). Until March 12, 2007, our preferred shares were owned by an
affiliate, Brookfield Life Assurance Company Limited ("BLAC"). On March 12,
2007, we redeemed the remaining outstanding preferred shares for par value of
$110.0 million and paid $2.5 million in dividends on the redeemed preferred
shares. On April 30, 2007, the issued shares of preferred stock were retired.
On January 1, 2007, Federal Home Life Insurance Company ("FHL") and First
Colony Life Insurance Company ("FCL") merged with and into GLAIC. GLAIC was the
surviving entity. FHL and FCL were both stock life insurance companies
operating under charters granted by the Commonwealth of Virginia and both were
affiliates of the Company. We received regulatory approval from the State
Corporation Commission, Bureau of Insurance of the Commonwealth of Virginia for
these mergers.
Upon consummation of the FHL and FCL mergers, GLAIC transferred its
ownership of American Mayflower Life Insurance Company of New York ("AML"),
formerly a wholly-owned subsidiary of FCL, to Genworth Life Insurance Company
of New York ("GLICNY"), an affiliate, in exchange for a non-majority ownership
interest in GLICNY. AML merged into GLICNY, with GLICNY being the surviving
entity.
On January 1, 2007, we transferred assets of $1,377.2 million, including
cash and cash equivalents of $27.0 million and liabilities of $1,091.2 million
of AML to GLICNY in exchange for an investment in GLICNY of $334.4 million,
representing a 34.5% investment in GLICNY. Additionally, $2.1 million was
recorded related to net unrealized investment gains and derivative items in
equity related to the transfer. The transfer was recorded at book value as the
entities were under common control, and accordingly, the difference of $46.3
million between the book value of AML and the investment in GLICNY was recorded
as additional paid-in capital. Our investment in GLICNY is recorded under the
equity method of accounting. As of December 31, 2009 and 2008, the carrying
value of our investment in GLICNY was $381.4 million and $219.1 million,
respectively, and was included in other invested assets. See note 20 for
further discussion of our investment in GLICNY.
The accompanying condensed consolidated financial statements include the
historical operations and accounts of the Company and its subsidiaries which
include: Assigned Settlement, Inc., GNWLAAC Real Estate Holding, LLC, Jamestown
Life Insurance Company, River Lake Insurance Company ("River Lake I"), River
Lake Insurance Company II ("River Lake II"), River Lake Insurance Company III
("River Lake III"), River Lake Insurance Company IV Limited ("River Lake IV"),
River Lake Insurance Company V ("River Lake V"), LLC, River Lake Insurance
Company VI ("River Lake VI"), River Lake Insurance Company VII ("River Lake
VII") and Rivermont Life Insurance Company I ("Rivermont I"). All intercompany
accounts and transactions have been eliminated in consolidation.
(b) Nature of Business
We have two segments: (i) Protection; and (ii) Retirement Income, formerly
known as Retirement Income and Institutional.
108
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Protection products are intended to provide protection against financial
hardship primarily after the death of an insured and to protect income and
assets from other adverse economic impacts of significant health care costs.
Our principal product lines under the Protection segment are term life
insurance, universal life insurance and Medicare supplement insurance.
Retirement income products include fixed and variable deferred and immediate
individual annuities and group variable annuities offered through retirement
plans. On May 1, 2008, we discontinued the sales of variable life insurance
policies, however, we continue to service existing policies. In 2006, we
discontinued the sale of structured settlement annuities.
We distribute our products through three primary channels: financial
intermediaries (banks, securities brokerage firms and independent
broker/dealers), independent producers (brokerage general agencies, affluent
market producer groups and specialized brokers) and dedicated sales specialists
(affiliated networks of both accountants and personal financial advisors). We
also distribute a limited number of products through a direct sales force and
defined contribution plan record keepers.
We also have Corporate and Other activities which include unallocated
corporate income and expenses and non-strategic products that are managed
outside of our operating segments. Our non-strategic products include our
institutional and corporate-owned life insurance products. Institutional
products consist of: funding agreements, funding agreements backing notes
("FABNs") and guaranteed investment contracts ("GICs").
In December 2009, we began reporting our institutional and corporate-owned
life insurance products, previously included in our Retirement Income and
Protection segments, respectively, in Corporate and Other activities, as they
were deemed non-strategic. All prior period amounts have been re-presented.
(2) Summary of Significant Accounting Policies
Our consolidated financial statements have been prepared on the basis of
U.S. generally accepted accounting principles ("U.S. GAAP"). 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. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified to conform to the current year
presentation. Any material subsequent events have been considered for
disclosure through April 13, 2010, which is the date the financial statements
were issued.
(a) Premiums
For traditional long-duration insurance contracts, we report premiums as
earned when due. For short-duration insurance contracts, we report premiums as
revenue over the terms of the related insurance policies on a pro-rata basis or
in proportion to expected claims.
Premiums received under annuity contracts without significant mortality risk
and premiums received on investment and universal life insurance products are
not reported as revenues, but rather as deposits, and are included in
liabilities for policyholder account balances.
(b) Net Investment Income and Net Investment Gains and Losses
Investment income is recognized when earned. Investment gains and losses are
calculated on the basis of specific identification.
109
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Investment income on mortgage-backed and asset-backed securities is
initially based upon yield, cash flow and prepayment assumptions at the date of
purchase. Subsequent revisions in those assumptions are recorded using the
retrospective or prospective method. Under the retrospective method, used for
mortgage-backed and asset-backed securities of high credit quality (ratings
equal to or greater than "AA" or that are backed by a U.S. agency) which cannot
be contractually prepaid, amortized cost of the security is adjusted to the
amount that would have existed had the revised assumptions been in place at the
date of purchase. The adjustments to amortized cost are recorded as a charge or
credit to net investment income. Under the prospective method, which is used
for all other mortgage-backed and asset-backed securities, future cash flows
are estimated and interest income is recognized going forward using the new
internal rate of return.
(c) Policy Fees and Other Income
Policy fees and other income consist primarily of insurance charges assessed
on universal life insurance contracts, fees assessed against policyholder
account values and surrender fee income. For universal life insurance
contracts, charges to contractholder accounts for cost of insurance are
recognized as revenue when due. Variable product fees are charged to variable
annuity contractholders and variable life insurance policyholders based upon
the daily net assets of the contractholder's and policyholder's account values,
respectively, and are recognized as revenue when charged. Surrender fees are
recognized as income when the contract or policy is surrendered.
(d) Investment Securities
At the time of purchase, we designate our investment securities as either
available-for-sale or trading and report them in our consolidated balance
sheets at fair value. Our portfolio of fixed maturity securities is comprised
primarily of investment grade securities. Changes in the fair value of
available-for-sale investments, net of the effect on deferred acquisition costs
("DAC"), present value of future profits ("PVFP") and deferred income taxes,
are reflected as unrealized investment gains or losses in a separate component
of accumulated other comprehensive income (loss). Realized and unrealized gains
and losses related to trading securities are reflected in net investment gains
(losses). Trading securities are included in other invested assets in our
consolidated balance sheets.
Other-Than-Temporary Impairments On Available-For-Sale Securities
As of each balance sheet date, we evaluate securities in an unrealized loss
position for other-than-temporary impairments. For debt securities, we consider
all available information relevant to the collectability of the security,
including information about past events, current conditions, and reasonable and
supportable forecasts, when developing the estimate of cash flows expected to
be collected. More specifically for mortgage-backed and asset-backed
securities, we also utilize performance indicators of the underlying assets
including default or delinquency rates, loan to collateral value ratios,
third-party credit enhancements, current levels of subordination, vintage and
other relevant characteristics of the security or underlying assets to develop
our estimate of cash flows. Estimating the cash flows expected to be collected
is a quantitative and qualitative process that incorporates information
received from third-party sources along with certain internal assumptions and
judgments regarding the future performance of the underlying collateral. Where
possible, this data is benchmarked against third-party sources.
Prior to adoption of new accounting guidance related to the recognition and
presentation of other-than-temporary impairments on April 1, 2009, we generally
recognized an other-than-temporary impairment on debt securities in an
unrealized loss position when we did not expect full recovery of value or did
not have the intent
110
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
and ability to hold such securities until they had fully recovered their
amortized cost. The recognition of other-than-temporary impairments prior to
April 1, 2009 represented the entire difference between the amortized cost and
fair value with this difference being recorded in net income (loss) as an
adjustment to the amortized cost of the security.
Beginning on April 1, 2009, we recognize other-than-temporary impairments on
debt securities in an unrealized loss position when one of the following
circumstances exists:
. we do not expect full recovery of our amortized cost based on the
estimate of cash flows expected to be collected,
. we intend to sell a security or
. it is more likely than not that we will be required to sell a security
prior to recovery.
For other-than-temporary impairments recognized during the period, we
present the total other-than-temporary impairments, the portion of
other-than-temporary impairments included in other comprehensive income (loss)
("OCI") and the net other-than-temporary impairments as supplemental disclosure
presented on the face of our consolidated statements of income.
Total other-than-temporary impairments are calculated as the difference
between the amortized cost and fair value that emerged in the current period.
For other-than-temporarily impaired securities where we do not intend to sell
the security and it is not more likely than not that we will be required to
sell the security prior to recovery, total other-than-temporary impairments are
adjusted by the portion of other-than-temporary impairments recognized in OCI
("non-credit"). Net other-than-temporary impairments recorded in net income
(loss) represent the credit loss on the other-than-temporarily impaired
securities with the offset recognized as an adjustment to the amortized cost to
determine the new amortized cost basis of the securities.
For securities that were deemed to be other-than-temporarily impaired and a
non-credit loss was recorded in OCI, the amount recorded as an unrealized gain
(loss) represents the difference between the current fair value and the new
amortized cost for each period presented. The unrealized gain (loss) on an
other-than-temporarily impaired security is recorded as a separate component in
OCI until the security is sold or until we record an other-than-temporary
impairment where we intend to sell the security or will be required to sell the
security prior to recovery.
To estimate the amount of other-than-temporary impairment attributed to
credit losses on debt securities where we do not intend to sell the security
and it is not more likely than not that we will be required to sell the
security prior to recovery, we determine our best estimate of the present value
of the cash flows expected to be collected from a security by discounting these
cash flows at the current effective yield on the security prior to recording
any other-than-temporary impairment. If the present value of the discounted
cash flows is lower than the amortized cost of the security, the difference
between the present value and amortized cost represents the credit loss
associated with the security with the remaining difference between fair value
and amortized cost recorded as a non-credit other-than-temporary impairment in
OCI.
The evaluation of other-than-temporary impairments is subject to risks and
uncertainties and is intended to determine the appropriate amount and timing
for recognizing an impairment charge. The assessment of whether such impairment
has occurred is based on management's best estimate of the cash flows expected
to be collected at the individual security level. We regularly monitor our
investment portfolio to ensure that securities that may be
other-than-temporarily impaired are identified in a timely manner and that any
impairment charge is recognized in the proper period.
111
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
While the other-than-temporary impairment model for debt securities
generally includes fixed maturity securities, there are certain hybrid
securities that are classified as fixed maturity securities where the
application of a debt impairment model depends on whether there has been any
evidence of deterioration in credit of the issuer. Under certain circumstances,
evidence of deterioration in credit of the issuer may result in the application
of the equity impairment model.
For equity securities, we recognize an impairment charge in the period in
which we determine that the security will not recover to book value within a
reasonable period. We determine what constitutes a reasonable period on a
security-by-security basis based upon consideration of all the evidence
available to us, including the magnitude of an unrealized loss and its
duration. In any event, this period does not exceed 18 months for common equity
securities. We measure other-than-temporary impairments based upon the
difference between the amortized cost of a security and its fair value.
(e) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. We have fixed maturity, equity and
trading securities, derivatives, embedded derivatives, securities held as
collateral, separate account assets and certain other financial instruments,
which are carried at fair value.
Fair value measurements are based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect our view of market assumptions in the absence of
observable market information. We utilize valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. All
assets and liabilities carried at fair value are classified and disclosed in
one of the following three categories:
. Level 1--Quoted prices for identical instruments in active markets.
. Level 2--Quoted prices for similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not
active; and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
. Level 3--Instruments whose significant value drivers are unobservable.
Level 1 primarily consists of financial instruments whose value is based on
quoted market prices such as exchange-traded derivatives and actively traded
mutual fund investments.
Level 2 includes those financial instruments that are valued using
industry-standard pricing methodologies, models or other valuation
methodologies. These models are primarily industry-standard models that
consider various inputs, such as interest rate, credit spread and foreign
exchange rates for the underlying financial instruments. All significant inputs
are observable, or derived from observable information, in the marketplace or
are supported by observable levels at which transactions are executed in the
marketplace. Financial instruments in this category primarily include: certain
public and private corporate fixed maturity and equity securities; government
or agency securities; certain mortgage-backed and asset-backed securities;
securities held as collateral; and certain non-exchange-traded derivatives such
as interest rate or cross currency swaps.
Level 3 is comprised of financial instruments whose fair value is estimated
based on industry-standard pricing methodologies and internally developed
models utilizing significant inputs not based on, nor corroborated by, readily
available market information. In limited instances, this category may also
utilize non-binding broker
112
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
quotes. This category primarily consists of certain less liquid fixed maturity,
equity and trading securities and certain derivative instruments where we
cannot corroborate the significant valuation inputs with market observable data.
As of each reporting period, all assets and liabilities recorded at fair
value are classified in their entirety based on the lowest level of input that
is significant to the fair value measurement. Our assessment of the
significance of a particular input to the fair value measurement in its
entirety requires judgment, and considers factors specific to the asset or
liability, such as the relative impact on the fair value as a result of
including a particular input. We review the fair value hierarchy
classifications each reporting period. Changes in the observability of the
valuation attributes may result in a reclassification of certain financial
assets or liabilities. Such reclassifications are reported as transfers in and
out of Level 3 at the beginning fair value for the reporting period in which
the changes occur.
The vast majority of our fixed maturity and equity securities use Level 2
inputs for the determination of fair value. These fair values are obtained
primarily from industry-standard pricing methodologies based on market
observable information. Certain structured securities valued using
industry-standard pricing methodologies utilize significant unobservable inputs
to estimate fair value, resulting in the fair value measurements being
classified as Level 3. We also utilize internally developed pricing models to
produce estimates of fair value primarily utilizing Level 2 inputs along with
certain Level 3 inputs. The internally developed models include matrix pricing
where we discount expected cash flows utilizing market interest rates obtained
from market sources based on the credit quality and duration of the instrument
to determine fair value. For securities that may not be reliably priced using
internally developed pricing models, we estimate fair value using indicative
market prices. These prices are indicative of an exit price, but the
assumptions used to establish the fair value may not be observable, or
corroborated by market observable information, and represent Level 3 inputs.
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. The fair value of separate account assets is based on the
quoted prices of the underlying fund investments and, therefore, represents
Level 1 pricing.
The fair value of derivative instruments primarily utilizes Level 2 inputs.
Certain derivative instruments are valued using significant unobservable inputs
and are classified as Level 3 measurements. The classification of fair value
measurements for derivative instruments, including embedded derivatives
requiring bifurcation, was determined based on consideration of several inputs
including: closing exchange or over-the-counter market price quotations; time
value and volatility factors underlying options; foreign exchange rates; market
interest rates; and non-performance risk. For product-related embedded
derivatives, we also include certain policyholder assumptions in the
determination of fair value.
For assets carried at fair value, the non-performance of the counterparties
is considered in the determination of fair value measurement for those assets.
Similarly, the fair value measurement of a liability must reflect the entity's
own non-performance risk. Therefore, the impact of non-performance risk, as
well as any potential credit enhancements (e.g., collateral), has been
considered in the fair value measurement of both assets and liabilities. The
liabilities recorded at fair value include derivative and guaranteed minimum
withdrawal benefits ("GMWB") liabilities.
We continually assess the non-performance risk on our liabilities recorded
at fair value and will make adjustments in future periods as additional
information is obtained that would indicate such an adjustment is necessary to
accurately present the fair value measurement in accordance with U.S. GAAP.
113
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
(f) Commercial Mortgage Loans
Commercial mortgage loans are generally stated at principal amounts
outstanding, net of deferred expenses and allowance for loan loss. Interest on
loans is recognized on an accrual basis at the applicable interest rate on the
principal amount outstanding. Loan origination fees and direct costs, as well
as premiums and discounts, are amortized as level yield adjustments over the
respective loan terms. Unamortized net fees or costs are recognized upon early
repayment of the loans. Loan commitment fees are generally deferred and
amortized on an effective yield basis over the term of the loan. Impaired loans
are generally carried on a non-accrual status. Loans are ordinarily placed on
non-accrual status when, in management's opinion, the collection of principal
or interest is unlikely, or when the collection of principal or interest is 90
days or more past due.
The allowance for loan losses is maintained at a level that management
determines is adequate to absorb estimated probable incurred losses in the loan
portfolio. Management's evaluation process to determine the adequacy of the
allowance utilizes an analytical model based on historical loss experience
adjusted for current events, trends and economic conditions. The actual amounts
realized could differ in the near term from the amounts assumed in arriving at
the allowance for loan losses reported in the consolidated financial statements.
All losses of principal are charged to the allowance for loan losses in the
period in which the loan is deemed to be uncollectible. Additions and
reductions are made to the allowance through periodic provisions or benefits to
net investment gains (losses).
(g) Securities Lending Activity
We engage in certain securities lending transactions for the purpose of
enhancing the yield on our investment securities portfolio, which require the
borrower to provide collateral, consisting of cash and government securities,
on a daily basis, in amounts equal to or exceeding 102% of the fair value of
the applicable securities loaned. We maintain effective control over all loaned
securities and, therefore, continue to report such securities as fixed maturity
securities on the consolidated balance sheets. Cash and non-cash collateral,
such as a security, received by us on securities lending transactions is
reflected in other invested assets with an offsetting liability recognized in
other liabilities for the obligation to return the collateral. Any cash
collateral received is reinvested by our custodian based upon the investment
guidelines provided within our agreement. The reinvested cash collateral is
primarily invested in U.S. and foreign government securities, U.S. government
agency securities, asset-backed securities and corporate debt securities, all
of which have scheduled maturities of less than three years. As of December 31,
2009 and 2008, the fair value of securities loaned under the securities lending
program was $170.6 million and $121.0 million, respectively. As of December 31,
2009 and 2008, the fair value of collateral held under the securities lending
program was $175.8 million and $128.0 million, respectively, and the obligation
to return collateral of $176.0 million and $128.2 million, respectively, was
included in other liabilities in the consolidated balance sheets. We had no
non-cash collateral as of December 31, 2009 and 2008.
(h) Cash and Cash Equivalents
Certificates of deposit, money market funds and other time deposits with
original maturities of 90 days or less are considered cash equivalents in the
consolidated balance sheets and consolidated statements of cash flows. Items
with maturities greater than 90 days but less than one year at the time of
acquisition are considered short-term investments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
(i) Deferred Acquisition Costs
Acquisition costs include costs that vary with, and are primarily related
to, the acquisition of insurance and investment contracts. Such costs are
deferred and amortized as follows:
Long-Duration Contracts. Acquisition costs include commissions in excess of
ultimate renewal commissions, solicitation and printing costs, sales material
and some support costs, such as underwriting and contract and policy issuance
expenses. Amortization for traditional long-duration insurance products is
determined as a level proportion of premium based on commonly accepted
actuarial methods and reasonable assumptions about mortality, morbidity, lapse
rates, expenses and future yield on related investments established when the
contract or policy is issued. Amortization is adjusted each period to reflect
policy lapse or termination rates as compared to anticipated experience.
Amortization for annuity contracts without significant mortality risk and for
investment and universal life insurance products is based on estimated gross
profits. Estimated gross profits are adjusted quarterly to reflect actual
experience to date or for the unlocking of underlying key assumptions based on
experience studies.
Short-Duration Contracts. Acquisition costs consist primarily of commissions
and premium taxes and are amortized ratably over the terms of the underlying
policies.
We regularly review all of these assumptions and periodically test DAC for
recoverability. For deposit products, if the current present value of estimated
future gross profits is less than the unamortized DAC for a line of business, a
charge to income is recorded for additional DAC amortization, and for certain
products, an increase in benefit reserves may be required. For other products,
if the benefit reserve plus anticipated future premiums and interest income for
a line of business are less than the current estimate of future benefits and
expenses (including any unamortized DAC), a charge to income is recorded for
additional DAC amortization or for increased benefit reserves. For the years
ended December 31, 2009 and 2008, we recorded a charge to DAC as a result of
our loss recognition and DAC recoverability testing of $49.0 million and $46.1
million, respectively. For the year ended December 31, 2007, there were no
charges to income recorded as a result of our DAC recoverability or loss
recognition testing.
(j) Intangible Assets
Present Value of Future Profits. In conjunction with the acquisition of a
block of insurance policies or investment contracts, a portion of the purchase
price is assigned to the right to receive future gross profits arising from
existing insurance and investment contracts. This intangible asset, called
PVFP, represents the actuarially estimated present value of future cash flows
from the acquired policies. PVFP is amortized, net of accreted interest, in a
manner similar to the amortization of DAC.
We regularly review all of these assumptions and periodically test PVFP for
recoverability. For deposit products, if the current present value of estimated
future gross profits is less than the unamortized PVFP for a line of business,
a charge to income is recorded for additional PVFP amortization. For other
products, if the benefit reserve plus anticipated future premiums and interest
income for a line of business are less than the current estimate of future
benefits and expenses (including any unamortized PVFP), a charge to income is
recorded for additional PVFP amortization or for increased benefit reserves.
For the years ended December 31, 2009, 2008 and 2007, no charges to income were
recorded as a result of our PVFP recoverability or loss recognition testing.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Deferred Sales Inducements to Contractholders. We defer sales inducements to
contractholders for features on variable annuities that entitle the
contractholder to an incremental amount to be credited to the account value
upon making a deposit, and for fixed annuities with crediting rates higher than
the contract's expected ongoing crediting rates for periods after the
inducement. Deferred sales inducements to contractholders are reported as a
separate intangible asset and amortized in benefits and other changes in policy
reserves using the same methodology and assumptions used to amortize DAC.
Software. Purchased software and certain application development costs
related to internally developed software are capitalized above de minimus
thresholds. When the software is ready for its intended use, the amounts
capitalized are amortized over the expected useful life, not to exceed five
years.
(k) Goodwill
Goodwill is not amortized but is tested for impairment at least annually and
between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of the reporting unit below its carrying
value. We test goodwill using a fair value approach, which requires the use of
estimates and judgment, at the "reporting unit" level. A reporting unit is the
operating segment, or a business one level below that operating segment (the
"component" level) if discrete financial information is prepared and regularly
reviewed by management at the component level. We recognize an impairment
charge for any amount by which the carrying amount of a reporting unit's
goodwill exceeds its fair value.
The determination of fair value for our reporting units is primarily based
on an income approach whereby we use discounted cash flows for each reporting
unit. When available, and as appropriate, we use market approaches or other
valuation techniques to corroborate discounted cash flow results. The
discounted cash flow model used for each reporting unit is based on either:
operating income or statutory distributable income, depending on the reporting
unit being valued.
The cash flows used to determine fair value are dependent on a number of
significant management assumptions based on our historical experience, our
expectations of future performance and expected economic environment. Our
estimates are subject to change given the inherent uncertainty in predicting
future performance and cash flows, which are impacted by such things as
policyholder behavior, competitor pricing, new product introductions and
specific industry and market conditions. Additionally, the discount rate used
in our discounted cash flow approach is based on management's judgment of the
appropriate rate for each reporting unit based on the relative risk associated
with the projected cash flows.
For the years ended December 31, 2009, 2008 and 2007, no charges were
recorded as a result of our goodwill impairment testing. See note 6 for
additional information related to goodwill.
(l) Reinsurance
Premium revenue, benefits and acquisition and operating expenses, net of
deferrals, are reported net of the amounts relating to reinsurance ceded to and
assumed from other companies. Amounts due from reinsurers for incurred and
estimated future claims are reflected in the reinsurance recoverable asset. The
cost of reinsurance is accounted for over the terms of the related treaties
using assumptions consistent with those used to account for the underlying
reinsured policies. Premium revenue, benefits and acquisition and operating
expenses, net of deferrals, for reinsurance contracts that do not qualify for
reinsurance accounting are accounted for under the deposit method of accounting.
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GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
(m) Derivatives
Derivative financial instruments are used to manage risk through one of four
principal risk management strategies including: (i) liabilities; (ii) invested
assets; (iii) portfolios of assets or liabilities; and (iv) forecasted
transactions.
On the date we enter into a derivative contract, management designates the
derivative as a hedge of the identified exposure (fair value or cash flow). If
a derivative does not qualify for hedge accounting, the changes in its fair
value and all scheduled periodic settlement receipts and payments are reported
in income.
We formally document all relationships between hedging instruments and
hedged items, as well as our risk management objective and strategy for
undertaking various hedge transactions. In this documentation, we specifically
identify the asset, liability or forecasted transaction that has been
designated as a hedged item, state how the hedging instrument is expected to
hedge the risks related to the hedged item, and set forth the method that will
be used to retrospectively and prospectively assess the hedging instrument's
effectiveness and the method that will be used to measure hedge
ineffectiveness. We generally determine hedge effectiveness based on total
changes in fair value of the hedged item attributable to the hedged risk and
the total changes in fair value of the derivative instrument.
We discontinue hedge accounting prospectively when: (i) it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of a hedged item; (ii) the derivative expires or is sold,
terminated or exercised; (iii) the derivative is de-designated as a hedge
instrument; or (iv) it is probable that the forecasted transaction will not
occur.
For all qualifying and highly effective cash flow hedges, the effective
portion of changes in fair value of the derivative instrument is reported as a
component of OCI. The ineffective portion of changes in fair value of the
derivative instrument is reported as a component of income. When hedge
accounting is discontinued because it is probable that a forecasted transaction
will not occur, the derivative continues to be carried in the consolidated
balance sheets at its fair value, and gains and losses that were accumulated in
OCI are recognized immediately in income. When the hedged forecasted
transaction is no longer probable, but is reasonably possible, the accumulated
gain or loss remains in OCI and is recognized when the transaction affects
income; however, prospective hedge accounting for the transaction is
terminated. In all other situations in which hedge accounting is discontinued
on a cash flow hedge, amounts previously deferred in OCI are reclassified into
income when income is impacted by the variability of the cash flow of the
hedged item.
For all qualifying and highly effective fair value hedges, the changes in
fair value of the derivative instrument are reported in income. In addition,
changes in fair value attributable to the hedged portion of the underlying
instrument are reported in income. When hedge accounting is discontinued
because it is determined that the derivative no longer qualifies as an
effective fair value hedge, the derivative continues to be carried in the
consolidated balance sheets at its fair value, but the hedged asset or
liability will no longer be adjusted for changes in fair value. In all other
situations in which hedge accounting is discontinued, the derivative is carried
at its fair value in the consolidated balance sheets, with changes in its fair
value recognized in the current period as income.
We may enter into contracts that are not themselves derivative instruments
but contain embedded derivatives. For each contract, we assess whether the
economic characteristics of the embedded derivative are clearly and closely
related to those of the host contract and determine whether a separate
instrument with the same terms as the embedded instrument would meet the
definition of a derivative instrument.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
If it is determined that the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic
characteristics of the host contract, and that a separate instrument with the
same terms would qualify as a derivative instrument, the embedded derivative is
separated from the host contract and accounted for as a stand-alone derivative.
Such embedded derivatives are recorded in the consolidated balance sheets at
fair value and are classified consistent with their host contract. Changes in
their fair value are recognized in the current period in income. If we are
unable to properly identify and measure an embedded derivative for separation
from its host contract, the entire contract is carried in the consolidated
balance sheets at fair value, with changes in fair value recognized in the
current period in income.
Changes in the fair value of non-qualifying derivatives, including embedded
derivatives, changes in fair value of certain derivatives and related hedged
items in fair value hedge relationships and hedge ineffectiveness on cash flow
hedges are reported in net investment gains (losses).
(n) Separate Accounts
The separate account assets represent funds for which the investment income
and investment gains and losses accrue directly to the variable annuity
contractholders and variable life insurance policyholders. We assess mortality
and expense risk fees and administration charges on the assets allocated to the
separate accounts. The separate account assets are carried at fair value and
are equal to the liabilities that represent the contractholders' and
policyholders' equity in those assets.
(o) Insurance Reserves
Future Policy Benefits
We include insurance-type contracts, such as traditional life insurance, in
the liability for future policy benefits. Insurance-type contracts are broadly
defined to include contracts with significant mortality and/or morbidity risk.
The liability for future benefits of insurance contracts is the present value
of such benefits less the present value of future net premiums based on
mortality, morbidity and other assumptions, which are appropriate at the time
the policies are issued or acquired. These assumptions are periodically
evaluated for potential reserve deficiencies. Reserves for cancelable accident
and health insurance are based upon unearned premiums, claims incurred but not
reported and claims in the process of settlement. This estimate is based on our
historical experience and that of the insurance industry, adjusted for current
trends. Any changes in the estimated liability are reflected in income as the
estimates are revised.
Policyholder Account Balances
We include investment-type contracts and our universal life insurance
contracts in the liability for policyholder account balances. Investment-type
contracts are broadly defined to include contracts without significant
mortality or morbidity risk. Payments received from sales of investment
contracts are recognized by providing a liability equal to the current account
value of the policyholders' contracts. Interest rates credited to investment
contracts are guaranteed for the initial policy term with renewal rates
determined as necessary by management.
(p) Liability for Policy and Contract Claims
The liability for policy and contract claims represents the amount needed to
provide for the estimated ultimate cost of settling claims relating to insured
events that have occurred on or before the end of the respective
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GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
reporting period. The estimated liability includes requirements for future
payments of: (a) claims that have been reported to the insurer; (b) claims
related to insured events that have occurred but that have not been reported to
the insurer as of the date the liability is estimated; and (c) claim adjustment
expenses. Claim adjustment expenses include costs incurred in the claim
settlement process such as legal fees and costs to record, process and adjust
claims.
Management considers the liability for policy and contract claims provided
to be satisfactory to cover the losses that have occurred. Management monitors
actual experience, and where circumstances warrant, will revise its
assumptions. The methods of determining such estimates and establishing the
reserves are reviewed continuously and any adjustments are reflected in
operations in the period in which they become known. Future developments may
result in losses and loss expenses greater or less than the liability for
policy and contract claims provided.
(q) Income Taxes
We determine deferred tax assets and/or liabilities by multiplying the
differences between the financial reporting and tax reporting bases for assets
and liabilities by the enacted tax rates expected to be in effect when such
differences are recovered or settled, if there is no change in the law. The
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
For the period beginning January 1, 2004, and ending on the date of the
transfer of our outstanding capital stock to Genworth, we were included in the
consolidated federal income tax return of General Electric ("GE"). During this
period, we were subject to a tax sharing arrangement that allocated taxes on a
separate company basis, but provided benefit for current utilization of losses
and credits.
Subsequent to the transfer of our outstanding capital stock to Genworth, we
file a consolidated life insurance federal income tax return with our parent,
GLIC, and its other life insurance affiliates. We are subject to a separate tax
sharing agreement, as approved by state insurance regulators, which allocates
taxes on a separate company basis but provides benefit for current utilization
of losses and credits. Intercompany balances are settled at least annually.
We are party to an assumption agreement with our indirect parent company,
Genworth North America Corporation ("GNA"), whereby GNA assumes responsibility
for any tax contingencies (that will not give rise to future reversals) on our
behalf. These contingencies are reflected as an expense of the Company when
incurred and are included in current tax expense. The Company recognizes the
corresponding amount as a change in stockholder's equity since the liability
for the contingency is assumed by GNA.
(r) Variable Interest Entities
We are involved in certain entities that are considered variable interest
entities ("VIEs") as defined under U.S. GAAP, and, accordingly, we evaluate the
VIE to determine whether we are the primary beneficiary and are required to
consolidate the assets and liabilities of the entity. The determination of the
primary beneficiary for a VIE can be complex and requires management judgment
regarding the expected results of the entity and how those results are absorbed
by beneficial interest holders.
Our primary involvement related to VIEs includes securitization transactions
and certain investments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
We have retained interests in VIEs where we are the servicer and transferor
of certain assets that were sold to a newly created VIE. Additionally, for
certain securitization transactions, we were the transferor of certain assets
that were sold to a newly created VIE but did not retain any beneficial
interest in the VIE other than acting as the servicer of the underlying assets.
We hold investments in certain structures that are considered VIEs. Our
investments represent beneficial interests that are primarily in the form of
structured securities or alternative investments. Our involvement in these
structures typically represent a passive investment in the returns generated by
the VIE and typically do not result in having significant influence over the
economic performance of the VIE.
As of December 31, 2009 and 2008, we were not required to consolidate any
VIEs where there are third-party beneficial interest holders.
(s) Accounting Changes
Fair Value Measurements and Disclosures--Measuring Liabilities At Fair Value
On October 1, 2009, we adopted new accounting guidance related to measuring
liabilities at fair value. This accounting guidance clarified techniques for
measuring the fair value of liabilities when quoted market prices for the
identical liability are not available. The adoption of this new accounting
guidance did not have a material impact on our consolidated financial
statements.
Fair Value Measurements and Disclosures--Investments In Certain Entities
That Calculate Net Asset Value Per Share
On October 1, 2009, we adopted new accounting guidance related to fair value
measurements and disclosures that provided guidance on the fair value
measurement in certain entities that calculate net asset value per share. The
adoption of this new accounting guidance did not have a material impact on our
consolidated financial statements.
The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles
On July 1, 2009, we adopted new accounting guidance related to the
codification of accounting standards and the hierarchy of U.S. GAAP established
by the Financial Accounting Standards Board (the "FASB"). This accounting
guidance established two levels of U.S. GAAP, authoritative and
nonauthoritative. The FASB Accounting Standards Codification (the
"Codification") is the source of authoritative, nongovernmental U.S. GAAP,
except for rules and interpretive releases of the U.S. Securities and Exchange
Commission ("SEC"), which are also sources of authoritative U.S. GAAP for SEC
registrants. All other accounting literature is nonauthoritative. The adoption
of this new accounting guidance did not have a material impact on our
consolidated financial statements.
Subsequent Events
On June 30, 2009, we adopted new accounting guidance related to accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This accounting
guidance required the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date. The adoption of this
new accounting guidance did not have a material impact on our consolidated
financial statements.
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GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Recognition and Presentation of Other-Than-Temporary Impairments
On April 1, 2009, we adopted new accounting guidance related to the
recognition and presentation of other-than-temporary impairments. This
accounting guidance amended the other-than-temporary impairment guidance for
debt securities and modified the presentation and disclosure requirements for
other-than-temporary impairment disclosures for debt and equity securities.
This accounting guidance also amended the requirement for management to
positively assert the ability and intent to hold a debt security to recovery to
determine whether an other-than-temporary impairment exists and replaced this
provision with the assertion that we do not intend to sell or it is not more
likely than not that we will be required to sell a security prior to recovery.
Additionally, this accounting guidance modified the presentation of
other-than-temporary impairments for certain debt securities to only present
the impairment loss in net income (loss) that represents the credit loss
associated with the other-than-temporary impairment with the remaining
impairment loss being presented in OCI. On April 1, 2009, we recorded a net
cumulative effect adjustment of $188.5 million to retained earnings with an
offset to accumulated other comprehensive income (loss) of $188.4 million
related to the adoption of this new accounting guidance. The following
summarizes the components for the cumulative effect adjustment:
Accumulated other
comprehensive Total stockholder's
(Amounts in millions) income (loss) Retained earnings equity
--------------------- ----------------- ----------------- -------------------
Investment securities.................. $(301.6) $ 301.6 $ --
Adjustment to DAC...................... 3.6 (4.5) (0.9)
Adjustment to PVFP..................... 5.9 (5.8) 0.1
Adjustment to certain benefit reserves. -- 0.6 0.6
Provision for income taxes............. 103.7 (103.4) 0.3
------- ------- -----
Net cumulative effect adjustment....... $(188.4) $ 188.5 $ 0.1
======= ======= =====
Determining Fair Value When the Volume and Level of Activity For the Asset
Or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly
On April 1, 2009, we adopted new accounting guidance related to determining
fair value when the volume and level of activity for the asset or liability
have significantly decreased and identifying transactions that are not orderly.
This accounting guidance provided additional guidance for determining fair
value when the volume or level of activity for an asset or liability has
significantly decreased and identified circumstances that indicate a
transaction is not orderly. The adoption of this new accounting guidance did
not have a material impact on our consolidated financial statements.
Fair Value Measurements of Certain Nonfinancial Assets and Liabilities
On January 1, 2009, we adopted new accounting guidance related to fair value
measurements of certain nonfinancial assets and liabilities, such as impairment
testing of goodwill and indefinite-lived intangible assets. The adoption of
this new accounting guidance did not have a material impact on our consolidated
financial statements.
Disclosures About Derivative Instruments and Hedging Activities
On January 1, 2009, we adopted new accounting guidance related to
disclosures about derivative instruments and hedging activities. This statement
required enhanced disclosures about an entity's derivative and hedging
activities. The adoption of this new accounting guidance did not have a
material impact on our consolidated financial statements.
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GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Business Combinations
On January 1, 2009, we adopted new accounting guidance related to business
combinations. This accounting guidance established principles and requirements
for how an acquirer recognizes and measures certain items in a business
combination, as well as disclosures about the nature and financial effects of a
business combination. The adoption of this new accounting guidance did not have
a material impact on our consolidated financial statements.
Transfers of Financial Assets and Interests In Variable Interest Entities
On December 31, 2008, we adopted new accounting guidance related to
disclosures by public entities about transfers of financial assets and
interests in VIEs. This new accounting guidance amends the disclosure
requirements regarding transfers of financial assets and involvement in VIEs to
require additional disclosures for public entities. The adoption of this new
accounting guidance did not have a material impact on our consolidated
financial statements.
Credit Derivatives and Certain Guarantees
On December 31, 2008, we adopted new accounting guidance related to
disclosures about credit derivatives and certain guarantees. This accounting
guidance requires certain disclosures by sellers of credit derivatives and
requires additional disclosure about the current status of the
payment/performance risk of guarantees. The adoption of this new accounting
guidance did not have a material impact on our consolidated financial
statements.
Other-Than-Temporary Impairments On Available-For-Sale Securities
On October 14, 2008, the Office of the Chief Accountant at the SEC, issued a
letter to the FASB that stated, given the debt characteristics of hybrid
securities, they would not object to the application of a debt impairment model
to hybrid investments provided there has been no evidence of deterioration in
credit of the issuer. A debt impairment model could be used for filings
subsequent to October 14, 2008, until the FASB further addresses the
appropriate impairment model. As a result, management began using and will
continue to use the debt impairment model as long as there has been no evidence
of deterioration in credit of the issuer as of the balance sheet date.
Other-Than-Temporary Impairments of Certain Structured Securities
On October 1, 2008, we adopted new accounting guidance related to impairment
guidance. This accounting guidance amends the impairment guidance to require
all available information be used to produce our best estimate of cash flows
rather than relying exclusively upon what a market participant would use to
determine the current fair value. The adoption of this new accounting guidance
did not have a material impact on our consolidated financial statements.
Determining Fair Value When A Market Is Not Active
On September 30, 2008, we adopted new accounting guidance related to
determining the fair value of a financial asset when the market for that asset
is not active. The accounting guidance provides guidance and clarification on
how management's internal assumptions, observable market information and market
quotes are considered in inactive markets. The adoption of this new accounting
guidance did not have a material impact on our consolidated financial
statements.
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GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Fair Value Measurements
On January 1, 2008, we adopted new accounting guidance related to fair value
measurements. This accounting guidance defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. The adoption of this new accounting guidance did not have a
material impact on our consolidated financial statements. Additionally, on
January 1, 2008, we elected the partial adoption of this accounting guidance to
allow an entity to delay the application until January 1, 2009 for certain
non-financial assets and liabilities. Under the provisions of the accounting
guidance, we will delay the application for fair value measurements used in the
impairment testing of goodwill and indefinite-lived intangible assets and
eligible non-financial assets and liabilities included within a business
combination. The adoption of this new accounting guidance did not have a
material impact on our consolidated financial statements.
Fair Value Option For Financial Assets and Financial Liabilities
On January 1, 2008, we adopted new accounting guidance related to the fair
value option for financial assets and financial liabilities. This accounting
guidance provides an option, on specified election dates, to report selected
financial assets and liabilities, including insurance contracts, at fair value.
Subsequent changes in fair value for designated items are reported in income in
the current period. The adoption of this new accounting guidance did not impact
our consolidated financial statements as no items were elected for measurement
at fair value upon initial adoption. We will continue to evaluate eligible
financial assets and liabilities on their election dates. Any future elections
will be disclosed in accordance with the provisions outlined in the accounting
guidance.
Amendment to Guidance For Offsetting of Amounts Related To Certain Contracts
On January 1, 2008, we adopted new accounting guidance for offsetting of
amounts related to certain contracts. This accounting guidance allows fair
value amounts recognized for collateral to be offset against fair value amounts
recognized for derivative instruments that are executed with the same
counterparty under certain circumstances. It also requires an entity to
disclose the accounting policy decision to offset, or not to offset, fair value
amounts. We do not, and have not previously, offset the fair value amounts
recognized for derivatives with the amounts recognized as collateral.
Accounting For Uncertainty In Income Taxes
On January 1, 2007, we adopted new accounting guidance related to accounting
for uncertainty in income taxes. This accounting guidance clarifies the
criteria that must be satisfied to recognize the financial statement benefit of
a position taken in our tax returns. The criteria for recognition in the
consolidated financial statements require an affirmative determination that it
is more likely than not, based on a tax position's technical merits, that we
are entitled to the benefit of that position.
Upon adoption of this new accounting guidance on January 1, 2007, the total
amount of unrecognized tax benefits was $74.3 million, of which, $53.3 million,
if recognized, would affect the effective tax rate.
Accounting By Insurance Enterprises For DAC In Connection With Modifications
Or Exchanges of Insurance Contracts
On January 1, 2007, we adopted new accounting guidance related to accounting
by insurance enterprises for DAC in connection with modifications or exchanges
of insurance contracts. This accounting guidance provides
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
guidance on accounting for DAC and other balances on an internal replacement,
defined broadly as a modification in product benefits, features, rights or
coverages that occurs by the exchange of an existing contract for a new
contract, or by amendment, endorsement or rider to an existing contract, or by
the election of a benefit, feature, right or coverage within an existing
contract. The adoption of this new accounting guidance had no impact on our
consolidated financial statements.
(t) Accounting Pronouncements Not Yet Adopted
In March 2010, the FASB issued new accounting guidance clarifying the scope
exception for embedded credit derivatives and when those features would be
bifurcated from the host contract. Under the new accounting guidance, only
embedded credit derivative features that are in the form of subordination of
one financial instrument to another would not be subject to the bifurcation
requirements. Accordingly, entities will be required to bifurcate any embedded
credit derivative features that no longer qualify under the amended scope
exception, or, for certain investments, an entity can elect fair value option
and record the entire investment at fair value. This accounting guidance will
be effective for us on July 1, 2010. Upon adoption, any changes in the carrying
value of impacted items will be recorded directly in retained earnings. We have
not yet determined the impact this accounting guidance will have on our
consolidated financial statements.
In January 2010, the FASB issued new accounting guidance to require
additional disclosures about purchases, sales, issuances, and settlements in
the rollforward of Level 3 fair value measurements. This new accounting
guidance will be effective for us on January 1, 2011. We do not expect the
adoption of this new accounting guidance to have a material impact on our
consolidated financial statements.
In June 2009, the FASB issued new accounting guidance related to accounting
for transfers of financial assets. This accounting guidance amends the current
guidance on transfers of financial assets by eliminating the qualifying
special-purpose entity concept, providing certain conditions that must be met
to qualify for sale accounting, changing the amount of gain or loss recognized
on certain transfers and requiring additional disclosures. This accounting
guidance will be effective for us on January 1, 2010 and shall apply to
transfers that occur on or after the effective date. The adoption of this
accounting guidance did not have a material impact on our consolidated
financial statements. However, the elimination of the qualifying special
purpose entity concept requires that these entities be considered for
consolidation as a result of the new guidance related to VIEs as discussed
below.
In June 2009, the FASB issued new accounting guidance for determining which
enterprise, if any, has a controlling financial interest in a VIE and requires
additional disclosures about involvement in VIEs. Under this new accounting
guidance, the primary beneficiary of a VIE is the enterprise which has the
power to direct the activities of a VIE that most significantly impacts the
VIE's economic performance and has the obligation to absorb losses or receive
benefits that could potentially be significant to the VIE. This accounting
guidance will be effective for us on January 1, 2010. Upon adoption of this new
accounting guidance, we will be required to consolidate certain VIEs, including
previously qualified special-purpose entities and investment structures. We
will record a transition adjustment for the impact upon adoption to reflect the
difference between the assets and liabilities of the newly consolidated
entities and the amounts recorded for our interests in these entities prior to
adoption. We anticipate the impact upon adoption of this new accounting
guidance will not be material to retained earnings on January 1, 2010, but will
increase total assets and total liabilities approximately $100.0 million.
124
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
(3) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the years ended
December 31:
(Amounts in millions) 2009 2008 2007
--------------------- ------ ------ --------
Fixed maturity securities--taxable.................. $567.0 $773.6 $ 928.0
Commercial mortgage loans........................... 136.7 168.4 183.8
Equity securities................................... 1.8 3.5 3.9
Other invested assets............................... (77.8) (27.5) 40.7
Policy loans........................................ 31.8 29.7 28.2
Cash, cash equivalents and short-term investments... 8.8 26.1 30.3
------ ------ --------
Gross investment income before expenses and fees. 668.3 973.8 1,214.9
Expenses and fees................................... (23.6) (25.5) (25.0)
------ ------ --------
Net investment income............................ $644.7 $948.3 $1,189.9
====== ====== ========
(b) Net Investment Gains (Losses)
Net investment gains (losses) were as follows for the years ended
December 31:
(Amounts in millions) 2009 2008 2007
--------------------- ------- ------- ------
Available-for-sale securities:
Realized gains on sale...................................... $ 28.5 $ 31.7 $ 9.8
Realized losses on sale..................................... (70.1) (56.2) (30.2)
Impairments:
Total other-than-temporary impairments...................... (592.1) (820.7) (62.4)
Portion of other-than-temporary impairments included in OCI. 226.6 -- --
------- ------- ------
Net other-than-temporary impairments........................ (365.5) (820.7) (62.4)
------- ------- ------
Derivative instruments......................................... 112.1 (87.9) (3.7)
Commercial mortgage loans...................................... (10.3) (0.5) (1.9)
Trading securities............................................. (1.5) 2.6 (2.6)
Other.......................................................... (9.1) (5.7) (0.1)
------- ------- ------
Net investments gains (losses).............................. $(315.9) $(936.7) $(91.1)
======= ======= ======
Derivative instruments primarily consist of changes in the fair value of
non-qualifying derivatives, including embedded derivatives, changes in fair
value of certain derivatives and related hedged items in fair value hedge
relationships and hedge ineffectiveness on qualifying derivative instruments.
See note 4 for additional information on the impact of derivative instruments
included in net investment gains (losses).
We generally intend to hold securities in unrealized loss positions until
they recover. However, from time to time, our intent on an individual security
may change, based upon market or other unforeseen developments. In such
instances, we sell securities in the ordinary course of managing our portfolio
to meet diversification, credit quality, yield and liquidity requirements. If a
loss is recognized from a sale subsequent to a balance sheet date due to these
unexpected developments, the loss is recognized in the period in which we
determined that we have the intent to sell the securities or it is more likely
than not that we will be required to sell the securities prior to
125
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
recovery. The aggregate fair value of securities sold at a loss during the
years ended December 31, 2009, 2008 and 2007 was $483.0 million, $443.9 million
and $1,334.6 million, respectively, which was approximately 87.9%, 88.8% and
97.5%, respectively, of book value.
The following represents the activity for credit losses recognized in net
income (loss) on debt securities where an other-than-temporary impairment was
identified and a portion of other-than-temporary impairments was included in
OCI as of and for the year ended December 31:
(Amounts in millions) 2009
--------------------- -------
Cumulative credit losses, beginning balance.......................... $ --
Adoption of new accounting guidance related to other-than-temporary
impairments........................................................ 456.2
Additions:
Other-than-temporary impairments not previously recognized........ 48.7
Increases related to other-than-temporary impairments previously
recognized...................................................... 86.1
Reductions:
Securities sold, paid down or disposed............................ (213.8)
Securities where there is intent to sell.......................... (3.9)
-------
Cumulative credit losses, ending balance............................. $ 373.3
=======
(c) Unrealized Investment Gains and Losses
Net unrealized gains and losses on investment securities classified as
available-for-sale and other invested assets are reduced by deferred income
taxes and adjustments to DAC and PVFP that would have resulted had such gains
and losses been realized. Net unrealized gains and losses on available-for-sale
investment securities reflected as a separate component of accumulated other
comprehensive income (loss) were as follows as of December 31:
(Amounts in millions) 2009 2008 2007
--------------------- --------- --------- -------
Net unrealized gains (losses) on investment securities:
Fixed maturity securities............................ $(1,080.2) $(2,565.1) $(508.1)
Equity securities.................................... 10.8 (9.6) 3.5
Restricted other invested assets..................... (1.7) (57.6) (15.3)
Investment in unconsolidated subsidiary.............. (28.5) (152.5) (10.5)
Other invested assets................................ (0.1) 0.7 --
--------- --------- -------
Subtotal......................................... (1,099.7) (2,784.1) (530.4)
--------- --------- -------
Adjustments to DAC and PVFP............................. 63.5 311.4 12.3
Deferred income taxes, net.............................. 359.7 823.0 179.9
--------- --------- -------
Net unrealized investment gains (losses)................ $ (676.5) $(1,649.7) $(338.2)
========= ========= =======
126
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
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 years ended December 31:
(Amounts in millions) 2009 2008 2007
--------------------- --------- --------- -------
Beginning balance.............................................................. $(1,649.7) $ (338.2) $ 21.7
Cumulative effect of change in accounting...................................... (188.4) -- --
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities.......................... 1,567.5 (3,097.8) (673.8)
Adjustment to DAC........................................................... (131.8) 150.8 14.8
Adjustment to PVFP.......................................................... (125.6) 148.3 27.7
Provision for deferred income taxes......................................... (420.5) 938.5 219.4
--------- --------- -------
Change in unrealized gains (losses) on investment securities............ 889.6 (1,860.2) (411.9)
Reclassification adjustments to net investment (gains) losses, net of deferred
taxes of $(146.5), $(295.4) and $(28.0)...................................... 272.0 548.7 52.0
--------- --------- -------
Ending balance................................................................. $ (676.5) $(1,649.7) $(338.2)
========= ========= =======
(d) Fixed Maturity and Equity Securities
As of December 31, 2009, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our fixed maturity and equity securities classified
as available-for-sale were as follows:
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..................... $ 649.7 $ 11.5 $ -- $ (6.7) $ -- $ 654.5
Government--non-U.S............... 148.9 12.2 -- (6.5) -- 154.6
U.S. corporate.................... 5,551.7 122.9 -- (200.7) -- 5,473.9
Corporate--non-U.S................ 1,616.1 40.4 11.0 (142.3) -- 1,525.2
Residential mortgage-backed....... 1,555.9 19.2 1.3 (243.3) (175.7) 1,157.4
Commercial mortgage-backed........ 1,125.5 6.2 0.8 (311.3) (34.5) 786.7
Other asset-backed................ 1,681.2 5.4 -- (179.1) (11.0) 1,496.5
--------- ------ ----- --------- ------- ---------
Total fixed maturity
securities.................. 12,329.0 217.8 13.1 (1,089.9) (221.2) 11,248.8
Equity securities.................... 90.5 10.9 -- (0.1) -- 101.3
--------- ------ ----- --------- ------- ---------
Total available-for-sale
securities.................. $12,419.5 $228.7 $13.1 $(1,090.0) $(221.2) $11,350.1
========= ====== ===== ========= ======= =========
127
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
As of December 31, 2008, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our fixed maturity and equity securities classified
as available-for-sale were as follows:
Gross Gross
Amortized unrealized unrealized
(Amounts in millions) cost or cost gains losses Fair value
--------------------- ------------ ---------- ---------- ----------
Fixed maturity securities:
U.S. government, agencies and government-sponsored
entities.......................................... $ 158.3 $15.9 $ -- $ 174.2
Government--non-U.S................................. 178.7 3.9 (20.4) 162.2
U.S. corporate...................................... 6,209.1 30.7 (856.5) 5,383.3
Corporate--non-U.S.................................. 1,815.1 3.7 (481.7) 1,337.1
Residential mortgage-backed......................... 1,688.6 17.1 (427.2) 1,278.5
Commercial mortgage-backed.......................... 1,425.1 5.6 (577.9) 852.8
Other asset-backed.................................. 1,861.9 3.9 (282.2) 1,583.6
--------- ----- --------- ---------
Total fixed maturity securities................. 13,336.8 80.8 (2,645.9) 10,771.7
Equity securities...................................... 99.6 0.9 (10.5) 90.0
--------- ----- --------- ---------
Total available-for-sale securities............. $13,436.4 $81.7 $(2,656.4) $10,861.7
========= ===== ========= =========
128
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The following table presents the gross unrealized losses and fair values of our
investment securities, aggregated by investment type and length of time that
individual investment securities have been in a continuous unrealized loss
position, as of December 31, 2009:
Less than 12 months 12 months or more
-------------------------------- --------------------------------
Gross Gross
unrealized Number of unrealized Number of
(Dollar amounts in millions) Fair value losses securities Fair value losses securities
---------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-
sponsored enterprises................... $ 319.5 $ (6.1) 30 $ 6.2 $ (0.6) 2
Government--non-U.S....................... -- -- -- 31.8 (6.5) 11
U.S. corporate............................ 781.3 (16.0) 117 1,558.3 (184.7) 256
Corporate--non-U.S........................ 106.7 (4.6) 22 696.3 (137.7) 78
Residential mortgage-backed............... 248.8 (132.7) 101 508.2 (286.3) 205
Commercial mortgage-backed................ 81.6 (16.3) 29 585.7 (329.5) 193
Other asset-backed........................ 193.6 (0.7) 21 981.2 (189.4) 140
-------- ------- --- -------- --------- ---
Subtotal, fixed maturity securities....... 1,731.5 (176.4) 320 4,367.7 (1,134.7) 885
Equity securities............................ -- -- -- -- (0.1) 1
-------- ------- --- -------- --------- ---
Total for securities in an unrealized loss
position................................... $1,731.5 $(176.4) 320 $4,367.7 $(1,134.8) 886
======== ======= === ======== ========= ===
% Below cost--fixed maturity securities:
(less than)20% Below cost................. $1,569.6 $ (32.1) 232 $3,207.4 $ (237.0) 466
20-50% Below cost......................... 120.9 (67.7) 41 912.4 (442.9) 228
(greater than)50% Below cost.............. 41.0 (76.6) 47 247.9 (454.8) 191
-------- ------- --- -------- --------- ---
Total fixed maturity securities........... 1,731.5 (176.4) 320 4,367.7 (1,134.7) 885
-------- ------- --- -------- --------- ---
% Below cost--equity securities:
(less than)20% Below cost................. -- -- -- -- (0.1) 1
-------- ------- --- -------- --------- ---
Total equity securities................... -- -- -- -- (0.1) 1
-------- ------- --- -------- --------- ---
Total for securities in an unrealized loss
position................................... $1,731.5 $(176.4) 320 $4,367.7 $(1,134.8) 886
======== ======= === ======== ========= ===
Investment grade............................. $1,559.4 $ (50.5) 216 $3,766.1 $ (748.2) 649
Below investment grade....................... 172.1 (125.9) 104 601.6 (386.6) 237
-------- ------- --- -------- --------- ---
Total for securities in an unrealized loss
position................................... $1,731.5 $(176.4) 320 $4,367.7 $(1,134.8) 886
======== ======= === ======== ========= ===
The investment securities in an unrealized loss position as of December 31,
2009 consisted of 1,206 securities and accounted for unrealized losses of
$1,311.2 million. Of these unrealized losses of $1,311.2 million, 60.9% were
investment grade (rated "AAA" through "BBB-") and 20.5% were less than 20%
below cost. The securities less than 20% below cost were primarily attributable
to widening credit spreads and a depressed market for certain structured
mortgage securities. Included in these unrealized losses as of December 31,
2009 was $221.2 million of unrealized losses on other-than-temporarily impaired
securities. Of the total unrealized losses on other-than-temporarily impaired
securities, $81.8 million have been in an unrealized loss position for more
129
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
than 12 months. Of the unrealized losses of $1,311.2 million, $954.9 million
were related to structured securities and $232.9 million were related to
corporate securities primarily in the finance and insurance sector. The
remaining amount of $123.4 million was spread evenly across all other sectors.
Of the $954.9 million unrealized losses in structured securities, 36.2% were in
commercial mortgage-backed securities and 43.9% were in residential
mortgage-backed securities with the remainder in other asset-backed securities.
Approximately 52.9% of the total unrealized losses in structured securities
were on securities that have retained investment grade ratings. Most of these
securities have been in an unrealized loss position for 12 months or more.
Given the current market conditions and limited trading on these securities,
the fair value of these securities has declined due to widening credit spreads
and high premiums for illiquidity. We examined the performance of the
underlying collateral and developed our estimate of cash flows expected to be
collected. In doing so, we identified certain securities where the non-credit
portion of other-than-temporary impairments was recorded in OCI. Based on this
evaluation, we determined that the unrealized losses on our mortgage-backed and
asset-backed securities represented temporary impairments as of December 31,
2009.
Of the $232.9 million unrealized losses in the finance and insurance sector,
most have been in an unrealized loss position for 12 months or more. Most of
these securities have retained a credit rating of investment grade. None of
these unrealized losses included securities where an other-than-temporary
impairment was recorded in OCI. The remaining unrealized losses in our U.S. and
non-U.S. corporate securities were evenly distributed across all other major
industry types that comprise our corporate bond holdings. Given the current
market conditions, including current financial industry events and uncertainty
around global economic conditions, the fair value of these securities has
declined due to widening credit spreads. In our examination of these
securities, we considered all available evidence, including the issuers'
financial condition and current industry events to develop our conclusion on
the amount and timing of the cash flows expected to be collected. A subset of
the securities issued by banks and other financial institutions represent
investments in financial hybrid securities on which a debt impairment model was
employed. Most of these securities retain a credit rating of investment grade.
About half of these securities were issued by foreign financial institutions.
The fair value of these securities has been impacted by widening credit spreads
which reflect current financial industry events including uncertainty
surrounding the level and type of government support of European financial
institutions, potential capital restructuring of these institutions, the risk
that income payments may be deferred and the risk that these institutions could
be nationalized. Based on this evaluation, we determined that the unrealized
losses on these securities represented temporary impairments as of December 31,
2009.
Of the investment securities in an unrealized loss position for 12 months or
more as of December 31, 2009, 419 securities were 20% or more below cost, of
which 169 securities were also below investment grade (rated "BB+" and below)
and accounted for unrealized losses of $363.3 million. These securities were
primarily structured securities or securities issued by corporations in the
finance and insurance sector. Included in this amount are
other-than-temporarily impaired securities where the non-credit loss of $47.2
million was recorded in OCI.
As of December 31, 2009, we expect to recover our amortized cost on the
securities included in the chart above and do not intend to sell, or it is not
more likely than not that we will be required to sell, these securities prior
to recovering our amortized cost.
Despite the considerable analysis and rigor employed on our structured
securities, it is at least reasonably possible that the underlying collateral
of these investments will perform worse than current market expectations. Such
events may lead to adverse changes in cash flows on our holdings of
asset-backed and mortgage-backed securities and potential future write-downs
within our portfolio of mortgage-backed and asset-backed securities. While we
expect our investments in corporate securities will continue to perform in
accordance with our conclusions about the amount and timing of estimated cash
flows, it is at least reasonably possible that issuers of our investments in
corporate securities will perform worse than current expectations. Such events
may lead us to recognize potential future write-downs within our portfolio of
corporate securities.
130
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The following table presents the gross unrealized losses and fair values of
our investment securities, aggregated by investment type and length of time
that individual investment securities have been in a continuous unrealized loss
position, as of December 31, 2008:
Less than 12 months 12 months or more
-------------------------------- --------------------------------
Gross Gross
unrealized Number of unrealized Number of
(Dollar amounts in millions) Fair value losses securities Fair value losses securities
---------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Description of Securities
Fixed maturity securities:
Government--non-U.S..................... $ 105.9 $ (14.9) 51 $ 8.3 $ (5.5) 12
U.S. corporate.......................... 2,357.5 (264.7) 428 2,115.4 (591.8) 367
Corporate--non-U.S...................... 561.9 (118.3) 148 675.4 (363.4) 109
Residential mortgage-backed............. 170.3 (36.8) 62 623.7 (389.7) 200
Commercial mortgage-backed.............. 163.1 (38.3) 82 673.0 (540.0) 260
Other asset-backed...................... 171.0 (12.4) 28 1,420.1 (270.1) 130
-------- ------- --- -------- --------- -----
Subtotal, fixed maturity securities..... 3,529.7 (485.4) 799 5,515.9 (2,160.5) 1,078
Equity securities.......................... 25.3 (10.1) 3 1.7 (0.4) 4
-------- ------- --- -------- --------- -----
Total for securities in an unrealized loss
position................................. $3,555.0 $(495.5) 802 $5,517.6 $(2,160.9) 1,082
======== ======= === ======== ========= =====
% Below cost--fixed maturity securities:
(less than)20% Below cost............... $3,016.3 $(241.1) 595 $2,957.6 $ (326.2) 436
20-50% Below cost....................... 494.0 (222.7) 175 2,079.2 (1,030.9) 433
(greater than)50% Below cost............ 19.4 (21.6) 29 479.1 (803.4) 209
-------- ------- --- -------- --------- -----
Total fixed maturity securities......... 3,529.7 (485.4) 799 5,515.9 (2,160.5) 1,078
-------- ------- --- -------- --------- -----
% Below cost--equity securities:
(less than)20% Below cost............... 1.9 (0.4) 1 1.0 (0.2) 1
20-50% Below cost....................... 23.4 (9.7) 2 0.7 (0.2) 3
-------- ------- --- -------- --------- -----
Total equity securities................. 25.3 (10.1) 3 1.7 (0.4) 4
-------- ------- --- -------- --------- -----
Total for securities in an unrealized loss
position................................. $3,555.0 $(495.5) 802 $5,517.6 $(2,160.9) 1,082
======== ======= === ======== ========= =====
Investment grade........................... $3,269.5 $(436.1) 625 $5,251.9 $(2,021.8) 969
Below investment grade..................... 285.5 (59.4) 177 265.7 (139.1) 113
-------- ------- --- -------- --------- -----
Total for securities in an unrealized loss
position................................. $3,555.0 $(495.5) 802 $5,517.6 $(2,160.9) 1,082
======== ======= === ======== ========= =====
131
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The scheduled maturity distribution of fixed maturity securities as of
December 31, 2009 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
(Amounts in millions) or cost Fair value
--------------------- -------------- ----------
Due one year or less................... $ 335.9 $ 341.7
Due after one year through five years.. 2,777.6 2,770.4
Due after five years through ten years. 1,551.8 1,544.2
Due after ten years.................... 3,301.1 3,151.9
--------- ---------
Subtotal............................ 7,966.4 7,808.2
Residential mortgage-backed............ 1,555.9 1,157.4
Commercial mortgage-backed............. 1,125.5 786.7
Other asset-backed..................... 1,681.2 1,496.5
--------- ---------
Total............................... $12,329.0 $11,248.8
========= =========
As of December 31, 2009, $1,398.0 million of our investments (excluding
mortgage and asset-backed securities) were subject to certain call provisions.
As of December 31, 2009, securities issued by finance and insurance,
utilities and energy, and consumer--non-cyclical industry groups represented
approximately 26.6%, 21.6% and 10.8% of our domestic and foreign corporate
fixed maturity securities portfolio, respectively. No other industry group
comprised more than 10% of our investment portfolio. This portfolio is widely
diversified among various geographic regions in the U.S. and internationally,
and is not dependent on the economic stability of one particular region.
As of December 31, 2009, we did not hold any fixed maturity securities which
individually exceeded 10% of stockholder's equity.
As of December 31, 2009 and 2008, $8.5 million and $8.8 million,
respectively, of securities were on deposit with various state government
insurance departments in order to comply with relevant insurance regulations.
(e) Commercial Mortgage Loans
Our mortgage loans are collateralized by commercial properties, including
multi-family residential buildings. The carrying value of commercial mortgage
loans is stated at original cost net of prepayments, amortization and allowance
for loan losses.
132
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
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
December 31:
2009 2008
------------------------ ------------------------
(Amounts in millions) Carrying value % of total Carrying value % of total
--------------------- -------------- ---------- -------------- ----------
Property Type
Office............................................... $ 677.5 28.5% $ 729.4 26.9%
Industrial........................................... 659.1 27.7 709.7 26.2
Retail............................................... 544.5 22.9 711.9 26.3
Hotel................................................ 253.8 10.7 254.7 9.4
Apartments........................................... 225.5 9.5 277.0 10.2
Mixed use/other...................................... 15.9 0.7 26.6 1.0
-------- ----- -------- -----
Total principal balance........................... 2,376.3 100.0% 2,709.3 100.0%
===== =====
Unamortized balance of loan origination fees and
costs........................................... 2.0 2.2
Allowance for losses.............................. (15.0) (7.4)
-------- --------
Total............................................. $2,363.3 $2,704.1
======== ========
2009 2008
------------------------ ------------------------
(Amounts in millions) Carrying value % of total Carrying value % of total
--------------------- -------------- ---------- -------------- ----------
Geographic Region
Pacific.............................................. $ 654.1 27.5% $ 690.7 25.5%
South Atlantic....................................... 653.0 27.5 801.5 29.6
Middle Atlantic...................................... 291.5 12.3 347.4 12.8
East North Central................................... 240.2 10.1 268.0 9.9
Mountain............................................. 138.4 5.8 171.3 6.3
West North Central................................... 116.4 4.9 128.9 4.8
New England.......................................... 115.4 4.9 117.5 4.3
East South Central................................... 90.2 3.8 98.5 3.6
West South Central................................... 77.1 3.2 85.5 3.2
-------- ----- -------- -----
Total principal balance........................... 2,376.3 100.0% 2,709.3 100.0%
===== =====
Unamortized balance of loan origination fees and
costs........................................... 2.0 2.2
Allowance for losses.............................. (15.0) (7.4)
-------- --------
Total............................................. $2,363.3 $2,704.1
======== ========
For the years ended December 31, 2009 and 2008, there were no mortgage
originations. As of December 31, 2009 and 2008, our total mortgage holdings
secured by real estate in California was $468.2 million and $490.6 million,
respectively, which was 19.7% and 18.1%, respectively, of our total mortgage
holdings.
"Impaired" loans are defined by U.S. GAAP as loans for which it is probable
that the lender will be unable to collect all amounts due according to original
contractual terms of the loan agreement.
133
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Under these principles, we may have two types of "impaired" loans: loans
requiring specific allowances for losses ($1.9 million as of December 31, 2009)
and loans expected to be fully recoverable because the carrying amount has been
reduced previously through charge-offs or deferral of income recognition (none
as of December 31, 2009). There were no impaired loans as of December 31, 2008.
Average investment in specifically impaired loans was $1.7 million for the
year ended December 31, 2009 and there was no interest income recognized on
these loans while they were considered impaired. There were no non-income
producing commercial mortgage loans as of December 31, 2008 or 2007.
The following table presents the activity in the allowance for losses during
the years ended December 31:
(Amounts in millions) 2009 2008 2007
--------------------- ----- ---- -----
Balance as of January 1... $ 7.4 $6.9 $ 5.3
Provision................. 7.6 0.5 1.9
Transfer of AML........... -- -- (0.3)
----- ---- -----
Balance as of December 31. $15.0 $7.4 $ 6.9
===== ==== =====
(f) Other Invested Assets
The following table sets forth the carrying values of our other invested
assets as of December 31:
2009 2008
------------------------ ------------------------
(Amounts in millions) Carrying value % of total Carrying value % of total
--------------------- -------------- ---------- -------------- ----------
Short-term investments.................. $1,247.6 47.8% $ 924.5 30.9%
Investment in unconsolidated subsidiary. 381.4 14.7 219.1 7.3
Restricted other invested assets........ 297.6 11.4 338.9 11.3
Derivatives............................. 196.8 7.5 620.7 20.7
Securities lending collateral........... 175.8 6.7 128.0 4.3
Limited partnerships.................... 153.5 5.9 286.5 9.6
Derivatives counterparty collateral..... 112.0 4.3 384.9 12.9
Trading securities...................... 33.5 1.3 62.1 2.1
Other investments....................... 9.2 0.4 27.1 0.9
-------- ----- -------- -----
Total other invested assets.......... $2,607.4 100.0% $2,991.8 100.0%
======== ===== ======== =====
Restricted other invested assets
On August 19, 2005, we transferred approximately $499.0 million of
investment securities to an affiliated special-purpose entity ("SPE") whose
sole purpose is to securitize these investment securities and issue secured
notes (the "Secured Notes") to various affiliated companies. The securitized
investments are owned in their entirety by the SPE and are not available to
satisfy the claims of our creditors. However, we are entitled to principal and
interest payments made on the Secured Notes we hold. Under U.S. GAAP, the
transaction is accounted for as a secured borrowing. Accordingly, the Secured
Notes are included within our consolidated financial statements as
available-for-sale fixed maturity securities and the liability equal to the
proceeds received upon transfer has been included in other liabilities.
Additionally, the investment securities transferred are included in other
invested assets and are shown as restricted assets.
134
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
As of December 31, 2009, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our restricted other invested assets were as follows:
Amortized Gross Gross
cost unrealized unrealized
(Amounts in millions) or cost gains losses Fair value
--------------------- --------- ---------- ---------- ----------
Fixed maturity securities:
Foreign other............................. $269.2 $2.1 $(4.1) $267.2
U.S. corporate............................ 30.1 0.5 (0.2) 30.4
------ ---- ----- ------
Total restricted other invested assets. $299.3 $2.6 $(4.3) $297.6
====== ==== ===== ======
As of December 31, 2008, the amortized cost or cost, gross unrealized gains
(losses) and fair value of our restricted other invested assets were as follows:
Amortized Gross Gross
cost unrealized unrealized
(Amounts in millions) or cost gains losses Fair value
--------------------- --------- ---------- ---------- ----------
Fixed maturity securities:
Foreign other............................. $361.5 $0.9 $(56.3) $306.1
U.S. corporate............................ 35.0 0.9 (3.1) 32.8
------ ---- ------ ------
Total restricted other invested assets. $396.5 $1.8 $(59.4) $338.9
====== ==== ====== ======
Expected maturities may differ from scheduled contractual maturities because
issuers of securities may have the right to call or prepay obligations with or
without call or prepayment penalties. The scheduled maturity distribution of
the restricted other invested assets was as follows as of December 31, 2009:
Amortized
cost
(Amounts in millions) or cost Fair value
--------------------- --------- ----------
Due in one year or less................... $ 70.7 $ 70.7
Due after one year through five years..... 116.4 116.9
Due after five years through ten years.... 74.5 74.5
Due after ten years....................... 37.7 35.5
------ ------
Total restricted other invested assets. $299.3 $297.6
====== ======
As of December 31, 2009, $54.2 million of our restricted other invested
assets were subject to certain call provisions.
As of December 31, 2009, we did not hold any restricted other invested
assets which individually exceeded 10% of stockholder's equity.
(4) Derivative Instruments
Our business activities routinely deal with fluctuations in interest rates,
equity prices and other asset and liability prices. We use derivative
instruments to mitigate or reduce certain of these risks. We have established
policies for managing each of these risks, including prohibition on derivatives
market-making and other speculative derivatives activities. These policies
require the use of derivative instruments in concert with other
135
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
techniques to reduce or mitigate these risks. While we use derivatives to
mitigate or reduce risks, certain derivatives do not meet the accounting
requirements to be designated as hedging instruments and are denoted as
"derivatives not designated as hedges" in the following disclosures. For
derivatives that meet the accounting requirements to be designated as hedges,
the following disclosures for these derivatives are denoted as "derivatives
designated as hedges," which include both cash flow and fair value hedges.
The following table sets forth our positions in derivative instruments as of
December 31:
Derivative assets Derivative liabilities
-------------------------------- ----------------------------
Balance Fair value Balance Fair value
sheet -------------- sheet -------------
(Amounts in millions) classification 2009 2008 classification 2009 2008
--------------------- ----------------- ------ ------ -------------- ------ ------
Derivatives designated as hedges
Fair value hedges:
Other invested Other
Interest rate swaps.................. assets $ 99.9 $178.0 liabilities $ 6.8 $ 19.3
------ ------ ------ ------
Total fair value hedges.............. 99.9 178.0 6.8 19.3
------ ------ ------ ------
Total derivatives designated as
hedges............................. 99.9 178.0 6.8 19.3
------ ------ ------ ------
Derivatives not designated as hedges
Other invested Other
Interest rate swaps..................... assets 34.1 332.4 liabilities 32.2 42.8
Other invested Other
Credit default swaps.................... assets 0.7 -- liabilities -- 5.1
Other invested Other
Equity index options.................... assets 32.2 104.9 liabilities 2.4 --
Other invested Other
Financial futures....................... assets -- -- liabilities -- --
Other invested Other
Limited guarantee....................... assets 29.9 5.4 liabilities -- --
Policyholder
Reinsurance account
GMWB embedded derivatives............... recoverable/(1)/ (3.7) 14.9 balances/(2)/ 156.6 784.8
------ ------ ------ ------
Total derivatives not designated as
hedges............................. 93.2 457.6 191.2 832.7
------ ------ ------ ------
Total derivatives.................... $193.1 $635.6 $198.0 $852.0
====== ====== ====== ======
--------
/(1)/Represents the embedded derivatives associated with the reinsured portion
of our GMWB liabilities.
/(2)/Represents the embedded derivatives associated with our GMWB liabilities,
excluding the impact of reinsurance.
The fair value of derivative positions presented above was not offset by the
respective collateral amounts retained or provided under these agreements. The
amounts recognized for derivative counterparty collateral retained by us was
recorded in other invested assets with a corresponding amount recorded in other
liabilities to represent our obligation to return the collateral retained by us.
136
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The activity associated with derivative instruments can generally be
measured by the change in notional value over the periods presented. However,
for equity index options, the change between periods is best illustrated by the
number of contracts, and for GMWB embedded derivatives, the change between
periods is best illustrated by the number of policies. The following tables
represent activity associated with derivative instruments as of the dates
indicated:
Maturities/
(Notional in millions) Measurement December 31, 2008 Additions terminations December 31, 2009
---------------------- ----------- ----------------- --------- ------------ -----------------
Derivatives designated as hedges
Fair value hedges:
Interest rate swaps.................. Notional $2,228.2 $ -- $ (589.9) $1,638.3
-------- -------- --------- --------
Total fair value hedges.............. 2,228.2 -- (589.9) 1,638.3
-------- -------- --------- --------
Total derivatives designated as
hedges............................. 2,228.2 -- (589.9) 1,638.3
-------- -------- --------- --------
Derivatives not designated as hedges
Interest rate swaps..................... Notional 2,232.0 570.5 (651.5) 2,151.0
Credit default swaps.................... Notional 56.1 -- -- 56.1
Financial futures....................... Notional 1,278.8 4,304.0 (1,278.8) 4,304.0
Limited guarantee....................... Notional 250.0 -- -- 250.0
-------- -------- --------- --------
Total derivatives not designated as
hedges............................. 3,816.9 4,874.5 (1,930.3) 6,761.1
-------- -------- --------- --------
Total derivatives.................... $6,045.1 $4,874.5 $(2,520.2) $8,399.4
======== ======== ========= ========
(Number of contracts or policies) Measurement December 31, 2008 Additions Terminations December 31, 2009
--------------------------------- ----------- ----------------- --------- ------------ -----------------
Derivatives not designated as hedges
Equity index options................. Contracts 422,000 595,000 (220,000) 797,000
GMWB embedded derivatives............ Policies 38,069 4,531 (1,289) 41,311
As a result of rating agency actions taken in April 2009, credit downgrade
provisions were triggered in our master swap agreements with certain derivative
counterparties and we terminated $883.0 million notional value, of which $812.0
million was replaced or renegotiated. Approximately $125.0 million of notional
value remained with counterparties that can be terminated at the option of the
derivative counterparty and represented a net fair value asset of $9.8 million
as of December 31, 2009.
The following table provides a reconciliation of current period changes, net
of applicable income taxes, for these designated derivatives presented in the
separate component of stockholder's equity labeled "derivatives qualifying as
hedges," for the years ended December 31:
(Amounts in millions) 2009 2008 2007
--------------------- ------ ----- -----
Derivatives qualifying as effective accounting hedges as of January 1. $ 46.1 $ 4.9 $ 0.3
Current period increases (decreases) in fair value.................... (33.7) 41.1 4.7
Reclassification to net (income) loss................................. -- 0.1 (0.1)
------ ----- -----
Derivatives qualifying as effective accounting hedges as of
December 31......................................................... $ 12.4 $46.1 $ 4.9
====== ===== =====
137
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Derivatives qualifying as effective accounting hedges contain $11.9 million
and $45.7 million, net of taxes, as of December 31, 2009 and 2008,
respectively, from our investment in GLICNY. The $11.9 million, net of taxes,
recorded in stockholder's equity as of December 31, 2009 is expected to be
reclassified to future income through our equity in income of unconsolidated
subsidiary. The remaining $0.5 million, net of taxes, is expected to be
reclassified to future income, 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. No amounts were
reclassified to income during the years ended December 31, 2009, 2008 or 2007
in connection with forecasted transactions that were no longer considered
probable of occurring.
Fair Value Hedges
Certain derivative instruments are designated as fair value hedges. The
changes in fair value of these instruments are recorded in net income (loss).
In addition, changes in the fair value attributable to the hedged portion of
the underlying instrument are reported in net income (loss). We designate and
account for the following as fair value hedges when they have met the
effectiveness requirements: (i) interest rate swaps to convert fixed rate
investments to floating rate investments; (ii) interest rate swaps to convert
fixed rate liabilities into floating rate liabilities; and (iii) other
instruments to hedge various fair value exposures of investments.
The following table provides information about the pre-tax income (loss)
effects of fair value hedges and related hedged items for the year ended
December 31, 2009:
Derivative instrument Hedged item
---------------------------------------------------------------- -------------------------------
Gain (loss) Classification Classification Gain (loss) Classification
recognized in of gain (loss) Other impacts of other recognized in of gain (loss)
net income recognized in to net impacts to net income recognized in
(Amounts in millions) (loss) net income (loss) income (loss) net income (loss) (loss) net income (loss)
--------------------- ------------- ----------------- ------------- ------------------ ------------- -----------------
Interest rate swaps Net investment Net investment Net investment
hedging assets...... $ 5.3 gains (losses) $(8.9) income $(5.6) gains (losses)
Interest rate swaps Net investment Net investment
hedging liabilities. (46.6) gains (losses) 75.3 Interest credited 44.5 gains (losses)
------ ----- -----
Total.............. $(41.3) $66.4 $38.9
====== ===== =====
The difference between the gain (loss) recognized for the derivative
instrument and the hedged item presented above represents the net
ineffectiveness of the fair value hedging relationships. The other impacts
presented above represent the net income (loss) effects of the derivative
instruments that are presented in the same location as the income activity from
the hedged item. There were no amounts excluded from the measurement of
effectiveness.
For the years ended December 31, 2008 and 2007, the ineffectiveness related
to our fair value hedges was immaterial. There were no amounts excluded from
the measure of effectiveness in either year.
Derivatives Not Designated As Hedges
We also enter into certain non-qualifying derivative instruments such as:
(i) interest rate swaps and financial futures to mitigate interest rate risk as
part of managing regulatory capital positions; (ii) credit default swaps to
enhance yield and replicate characteristics of investments with similar terms
and credit risk; and (iii) equity index options, interest rate swaps and
financial futures to mitigate the risks associated with liabilities that have
guaranteed minimum benefits. Additionally, we provide GMWBs on certain products
that are required to be bifurcated as embedded derivatives.
138
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The following table provides the pre-tax gain (loss) recognized in net
income (loss) for the effects of derivatives not designated as hedges for the
years ended December 31:
Classification of gain (loss) recognized
(Amounts in millions) 2009 2008 2007 in net income (loss)
--------------------- ------- ------- ------ ----------------------------------------
Interest rate swaps..................... $(238.2) $ 312.4 $ 1.9 Net investment gains (losses)
Credit default swaps.................... 6.5 (6.5) -- Net investment gains (losses)
Equity index options.................... (114.1) 269.7 21.9 Net investment gains (losses)
Financial futures....................... (199.7) 83.7 (2.5) Net investment gains (losses)
Limited guarantee....................... 24.5 (18.5) 8.9 Net investment gains (losses)
GMWB embedded derivatives............... 635.5 (727.5) (34.7) Net investment gains (losses)
------- ------- ------
Total derivatives not designated as
hedges............................. $ 114.5 $ (86.7) $ (4.5)
======= ======= ======
Derivative Counterparty Credit Risk
As of December 31, 2009 and 2008, net fair value assets by counterparty
totaled $126.0 million and $554.4 million, respectively. As of December 31,
2009 and 2008, net fair value liabilities by counterparty totaled $0.5 million
and $0.8 million, respectively. As of December 31, 2009 and 2008, we retained
collateral of $112.0 million and $384.9 million, respectively, related to these
agreements, including over collateralization of $9.8 million and $30.1 million,
respectively, from certain counterparties. As of December 31, 2009 and 2008, we
posted no collateral to derivative counterparties.
All of our master swap agreements contain credit downgrade provisions that
allow either party to assign or terminate derivative transactions if the other
party's long-term unsecured debt rating or financial strength rating is below
the limit defined in the applicable agreement. If the downgrade provisions had
been triggered as of December 31, 2009 and 2008, we could have been allowed to
claim up to $23.8 million and $199.5 million, respectively, from counterparties
and required to disburse up to $0.5 million and $0.8 million, respectively.
This represents the net fair value of gains and losses by counterparty, less
available collateral held.
Credit Derivatives
We sell protection under single name credit default swaps and credit default
swap index tranches in combination with purchasing securities to replicate
characteristics of similar investments based on the credit quality and term of
the credit default swap. Credit default triggers for both indexed reference
entities and single name reference entities follow the Credit Derivatives
Physical Settlement Matrix published by the International Swaps and Derivatives
Association. Under these terms, credit default triggers are defined as
bankruptcy, failure to pay or restructuring, if applicable. Our maximum
exposure to credit loss equals the notional value for credit default swaps and
the par value of debt instruments with embedded credit derivatives. If a credit
event occurs, we are typically required to pay the protection holder the full
notional value less a recovery rate determined at auction. For debt instruments
with embedded credit derivatives, the security's principal is typically reduced
by the net amount of default for any referenced entity defaults.
139
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The following table sets forth our credit default swaps where we sell
protection on single name reference entities and the fair values as of
December 31:
2009 2008
--------------------------- ---------------------------
Notional Notional
(Amounts in millions) value Assets Liabilities value Assets Liabilities
--------------------- -------- ------ ----------- -------- ------ -----------
Reference entity credit rating and maturity:
AAA
Matures after one year through five years.. $ 6.0 $ -- $-- $ 6.0 $-- $0.5
A
Matures after one year through five years.. 16.5 0.1 -- 16.5 -- 1.4
Matures after five years through ten years. 5.0 -- -- 5.0 -- 0.3
BBB
Matures after one year through five years.. 23.6 0.6 -- 23.6 -- 2.8
Matures after five years through ten years. 5.0 -- -- 5.0 -- 0.1
----- ---- --- ----- --- ----
Total credit default swaps on single name
reference entities....................... $56.1 $0.7 $-- $56.1 $-- $5.1
===== ==== === ===== === ====
(5) Deferred Acquisition Costs
The following table presents the activity impacting DAC as of and for the
years ended December 31:
(Amounts in millions) 2009 2008 2007
--------------------- -------- -------- --------
Unamortized balance as of January 1............................... $3,137.3 $2,955.5 $2,668.1
Costs deferred................................................. 185.6 399.9 488.3
Amortization, net of interest accretion........................ (203.0) (202.0) (97.8)
Transfer of AML................................................ -- -- (103.1)
Cumulative effect adjustment/(1)/.............................. (4.5) -- --
Reinsurance transactions with an affiliate/(2)/................ 35.4 (16.1) --
-------- -------- --------
Unamortized balance as of December 31............................. 3,150.8 3,137.3 2,955.5
Accumulated effect of net unrealized investment (gains) losses. 29.3 157.5 6.7
-------- -------- --------
Balance as of December 31......................................... $3,180.1 $3,294.8 $2,962.2
======== ======== ========
--------
/(1)/On April 1, 2009, we adopted a new accounting standard related to the
recognition of other-than-temporary impairments. The adoption of this
standard had a net unfavorable impact of $0.9 million on DAC.
/(2)/See note 7 for a discussion of reinsurance transactions with an affiliate.
We regularly review DAC to determine if it is recoverable from future
income. Loss recognition testing of our fee-based products in our Retirement
Income segment resulted in an increase in amortization of DAC of $49.0 million
and $46.1 million in 2009 and 2008, respectively, reflecting unfavorable equity
market performance. As of December 31, 2009, we believe all of our other
businesses have sufficient future income where the related DAC is recoverable.
140
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
(6) Intangible Assets and Goodwill
The following table presents our intangible assets as of December 31:
2009 2008
-------------------- --------------------
Gross Gross
carrying Accumulated carrying Accumulated
(Amounts in millions) amount amortization amount amortization
--------------------- -------- ------------ -------- ------------
PVFP.......................................... $725.3 $(316.0) $ 850.8 $(290.5)
Capitalized software.......................... 159.3 (101.9) 139.5 (89.4)
Deferred sales inducements to contractholders. 42.6 (17.5) 41.6 (10.5)
Other......................................... 2.5 (2.5) 2.5 (2.5)
------ ------- -------- -------
Total...................................... $929.7 $(437.9) $1,034.4 $(392.9)
====== ======= ======== =======
Amortization expense related to PVFP, capitalized software and other
intangible assets for the years ended December 31, 2009, 2008 and 2007 was
$38.0 million, $42.0 million and $53.6 million, respectively. Amortization
expense related to deferred sales inducements of $7.0 million, $6.9 million and
$1.8 million for the years ended December 31, 2009, 2008 and 2007,
respectively, was included in benefits and other changes in policy reserves.
(a) Present Value of Future Profits
The following table presents the activity in PVFP as of and for the years
ended December 31:
(Amounts in millions) 2009 2008 2007
--------------------- ------ ------ ------
Unamortized balance as of January 1............................... $406.4 $438.0 $512.6
Amortization................................................... (47.8) (55.9) (75.2)
Interest accreted at 5.7%, 5.8% and 5.6%....................... 22.3 24.3 26.5
Cumulative effect adjustment/(1)/.............................. (5.8) -- --
Transfer of AML................................................ -- -- (25.5)
Amount transferred due to a reinsurance transaction............ -- -- (0.4)
------ ------ ------
Unamortized balance as of December 31............................. 375.1 406.4 438.0
Accumulated effect of net unrealized investment (gains) losses. 34.2 153.9 5.6
------ ------ ------
Balance as of December 31......................................... $409.3 $560.3 $443.6
====== ====== ======
--------
/(1)/On April 1, 2009, we adopted a new accounting standard related to the
recognition of other-than-temporary impairments. The adoption of this
standard had a net favorable impact of $0.1 million on PVFP.
The percentage of the December 31, 2009 PVFP balance net of interest
accretion, before the effect of unrealized investment gains or losses,
estimated to be amortized over each of the next five years is as follows:
2010. 8.6%
2011. 8.2%
2012. 6.9%
2013. 5.2%
2014. 4.6%
141
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Amortization expense for PVFP in future periods will be affected by
acquisitions, dispositions, net investment gains (losses) or other factors
affecting the ultimate amount of gross profits realized from certain lines of
business. Similarly, future amortization expense for other intangibles will
depend on future acquisitions, dispositions and other business transactions.
(b) Goodwill
Our goodwill balance for the Protection segment was $450.9 million as of
December 31, 2009 and 2008.
Goodwill impairment losses
There were no goodwill impairment charges recorded in 2009, 2008 or 2007.
However, continued deteriorating or adverse market conditions for certain
businesses may have a significant impact on the fair value of our reporting
units and could result in future impairments of goodwill.
(7) Reinsurance
We reinsure a portion of our policy risks to other insurance companies in
order to reduce our ultimate losses and to diversify our exposures. We also
assume certain policy risks written by other insurance companies. Reinsurance
accounting is followed for assumed and ceded transactions when there is
adequate risk transfer. Otherwise, the deposit method of accounting is followed.
Reinsurance does not relieve us from our obligations to policyholders. In
the event that the reinsurers are unable to meet their obligations, we remain
liable for the reinsured claims. We monitor both the financial condition of
individual reinsurers and risk concentrations arising from similar geographic
regions, activities and economic characteristics of reinsurers to lessen the
risk of default by such reinsurers. Other than the relationship discussed below
with Union Fidelity Life Insurance Company ("UFLIC"), we also have significant
concentrations of reinsurance with reinsurers that could have a material impact
on our financial position. As of December 31, 2009, approximately 25.8% of our
reinsured life insurance was ceded to two other companies.
As of December 31, 2009, the maximum amount of individual ordinary life
insurance normally retained by us on any one individual life policy was $5.0
million.
On April 15, 2004, we entered into reinsurance transactions in which we
ceded to UFLIC substantially all of our in-force blocks of variable annuities
and structured settlements, excluding the RetireReady/SM/ Retirement Answer
Variable Annuity product for contracts in-force prior to January 1, 2004. UFLIC
also assumed any benefit or expense resulting from third-party reinsurance that
we had on this block of business. As of December 31, 2009 and 2008, we had $3.1
billion and $3.0 billion, respectively, in retained assets that were
attributable to the separate account portion of the variable annuity business
and will make any payments with respect to that separate account portion
directly from these assets. The reinsurance transactions with UFLIC were
reported on our tax returns at fair value as determined for tax purposes,
giving rise to a net reduction in current and deferred income tax liabilities
and resulting in a net tax benefit. Under these reinsurance agreements, we
continue to perform various management, administration and support services and
receive an expense allowance from UFLIC to reimburse us for costs we incur to
service the reinsured blocks. Actual costs and expense allowance amounts are
determined by expense studies conducted periodically. Although we are not
relieved of our primary obligations to the contractholders, the reinsurance
transactions with UFLIC transfer the future financial results of the reinsured
blocks to UFLIC. As of December 31, 2009 and 2008, we had a reinsurance
recoverable of $7,193.3 million and $7,389.7 million, respectively associated
with UFLIC.
142
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
To secure the payment of its obligations to us under these reinsurance
agreements, UFLIC has established trust accounts to maintain an aggregate
amount of assets with a statutory book value at least equal to the statutory
general account reserves attributable to the reinsured business less an amount
required to be held in certain claims paying accounts. A trustee administers
the trust accounts and we are permitted to withdraw from the trust accounts
amounts due to us pursuant to the terms of the reinsurance agreements that are
not otherwise paid by UFLIC. In addition, pursuant to a Capital Maintenance
Agreement, General Electric Capital Corporation ("GE Capital"), an indirect
subsidiary of GE, agreed to maintain sufficient capital in UFLIC to maintain
UFLIC's risk-based capital ("RBC") at not less than 150% of its company action
level, as defined from time to time by the National Association of Insurance
Commissioners ("NAIC").
We also have reinsurance ceded to BLAC. In 2009, we ceded to BLAC $64,274.2
million of term life insurance in a transaction that did not qualify for
reinsurance accounting and as such was accounted for under the deposit method
of accounting. As part of this reinsurance transaction, we receive a ceding
commission of $35.0 million which was accounted for as a deposit liability. In
2009, we ceded to BLAC $2,902.9 million of universal life insurance. As part of
this reinsurance transaction, we transferred DAC of $31.4 million. In the
fourth quarter of 2008, we ceded to BLAC $11,433.3 of term life insurance and
transferred DAC of $16.1 million; however, in 2009, we recaptured all of the
term life insurance that had been ceded to BLAC in the fourth quarter of 2008
and the DAC recapture associated with this transaction was $35.4 million. As of
December 31, 2009 and 2008, total life insurance ceded to BLAC was $67,177.1
million and $24,846.0 million, respectively.
We monitor both the financial condition of individual reinsurers and risk
concentrations arising from similar geographic regions, activities and economic
characteristics of reinsurers to lessen the risk of default by such reinsurers.
Other than with UFLIC, as of December 31, 2009, we had no significant
concentrations of variable annuity net at risk reinsurance with any one
reinsurer that could have a material impact on our results of operations.
The following table sets forth net life insurance in-force as of December 31:
(Amounts in millions) 2009 2008 2007
--------------------- ----------- ----------- -----------
Direct life insurance in-force........ $ 552,476.5 $ 561,124.7 $ 563,131.3
Amounts assumed from other companies.. 97,649.3 90,883.2 80,205.1
Amounts ceded to other companies/(1)/. (293,873.7) (303,820.9) (226,524.7)
----------- ----------- -----------
Net life insurance in-force........... $ 356,252.1 $ 348,187.0 $ 416,811.7
=========== =========== ===========
Percentage of amount assumed to net... 27.4% 26.1% 19.2%
=========== =========== ===========
--------
/(1)/Includes amounts accounted for under the deposit method.
The following table sets forth the effects of reinsurance on premiums
written and earned for the years ended December 31:
Written Earned
---------------------------- ----------------------------
(Amounts in millions) 2009 2008 2007 2009 2008 2007
--------------------- -------- -------- -------- -------- -------- --------
Direct.............................. $1,126.9 $1,240.6 $1,267.1 $1,128.8 $1,242.8 $1,269.9
Assumed............................. 172.8 254.3 148.5 172.8 249.3 58.8
Ceded............................... (338.3) (438.1) (375.2) (319.2) (423.6) (265.5)
-------- -------- -------- -------- -------- --------
Net premiums........................ $ 961.4 $1,056.8 $1,040.4 $ 982.4 $1,068.5 $1,063.2
======== ======== ======== ======== ======== ========
Percentage of amount assumed to net. 17.6% 23.3% 5.5%
======== ======== ========
143
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Reinsurance recoveries recognized as a reduction of benefits and other
changes in policy reserves amounted to $1,039.1 million, $1,135.4 million and
$1,098.5 million during 2009, 2008 and 2007, respectively.
(8) Insurance Reserves
Future Policy Benefits
The following table sets forth our recorded liabilities and the major
assumptions underlying our future policy benefits as of December 31:
Mortality/
morbidity Interest rate
(Amounts in millions) assumption assumption 2009 2008
--------------------- ---------- ------------- -------- --------
Structured settlements with life contingencies.. /(1)/ 4.0% - 9.25% $5,408.7 $5,459.6
Traditional life insurance contracts............ /(2)/ 2.5% - 7.5% 2,348.8 2,245.1
Annuity contracts with life contingencies....... /(1)/ 4.0% - 9.25% 1,993.1 2,092.5
Supplementary contracts with life contingencies. /(1)/ 4.0% - 9.25% 52.9 54.6
Accident and health insurance contracts......... /(3)/ 4.5% - 7.0% 81.6 84.4
-------- --------
Total future policy benefits................. $9,885.1 $9,936.2
======== ========
--------
/(1)/Assumptions for limited-payment contracts come from either the United
States Population Table, 1983 Group Annuitant Mortality Table or 1983
Individual Annuitant Mortality Table or a-2000 Mortality Table.
/(2)/Principally modifications of the 1965-70 or 1975-80 Select and Ultimate
Tables, 1958, 1980 and 2001 Commissioner's Standard Ordinary Tables, 1980
Commissioner's Extended Term Table and (IA) Standard Table 1996 (modified).
/(3)/The 1958 & 1980 Commissioner's Standard Ordinary Tables and the 2000 U.S.
Annuity Table.
Assumptions as to persistency are based on company experience.
Policyholder Account Balances
The following table sets forth our recorded liabilities for policyholder
account balances as of December 31:
(Amounts in millions) 2009 2008
--------------------- --------- ---------
FABNs, funding agreements and GICs................. $ 2,638.5 $ 4,328.4
Annuity contracts.................................. 2,320.4 3,240.7
Structured settlements without life contingencies.. 1,377.3 1,441.2
Supplementary contracts without life contingencies. 240.3 239.7
Variable universal life insurance contracts........ 22.0 25.5
--------- ---------
Total investment contracts...................... 6,598.5 9,275.5
Universal life insurance contracts................. 4,764.0 4,741.8
--------- ---------
Total policyholder account balances............. $11,362.5 $14,017.3
========= =========
Certain Nontraditional Long-Duration Contracts
Our variable annuity contracts provide a basic guaranteed minimum death
benefit ("GMDB") which provides a minimum account value to be paid upon the
annuitant's death. Some variable annuity contracts may
144
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
permit contractholders to have the option to purchase through riders, at an
additional charge, enhanced death benefits. Our separate account guarantees are
primarily death benefits, but we also have some GMWBs and guaranteed
annuitization benefits.
As of December 31, 2009 and 2008, our liability associated with certain
nontraditional long-duration contracts was approximately $7,120.3 million and
$6,253.7 million, respectively.
The following table sets forth total account values, net of reinsurance,
with death benefit and living benefit guarantees as of December 31:
(Dollar amounts in millions) 2009 2008
---------------------------- -------- --------
Account values with death benefit guarantees (net of reinsurance):
Standard death benefits (return of net deposits) account value.......... $2,431.8 $3,275.4
Net amount at risk...................................................... $ 98.7 $ 764.8
Average attained age of contractholders................................. 69 69
Enhanced death benefits (step-up, roll-up, payment protection) account
value................................................................. $3,916.6 $1,955.0
Net amount at risk...................................................... $ 511.5 $ 750.6
Average attained age of contractholders................................. 69 69
Account values with living benefit guarantees:
GMWBs................................................................... $5,100.7 $2,734.7
Guaranteed annuitization benefits....................................... $ 818.8 $1,129.7
The GMDB liability for our variable annuity contracts with death benefits,
net of reinsurance, was $11.5 million and $31.3 million as of December 31, 2009
and 2008, respectively.
The assets supporting the separate accounts of the variable contracts are
primarily mutual fund equity securities and are reflected in our consolidated
balance sheets at fair value and reported as summary total separate account
assets with an equivalent summary total reported for liabilities. Amounts
assessed against the contractholders for mortality, administrative and other
services are included in revenues. Changes in liabilities for minimum
guarantees are included in benefits and other changes in policy reserves.
Net investment income, net investment gains (losses) and the related
liability changes associated with the separate account are offset within the
same line item in the consolidated statements of income. There were no gains or
losses on transfers of assets from the general account to the separate accounts.
The contracts underlying the GMWB and guaranteed annuitization benefits are
considered "in the money" if the contractholder's benefit base, defined as the
greater of the contract value or the protected value, is greater than the
account value. As of December 31, 2009 and 2008, our exposure related to GMWB
and guaranteed annuitization benefit contracts that were considered "in the
money" was $682.9 million and $1,092.2 million, respectively. For GMWBs and
guaranteed annuitization benefits, the only way the contractholder can monetize
the excess of the benefit base over the account value of the contract is upon
annuitization and the amount to be paid by us will either be in the form of a
lump sum, or over the annuity period for certain GMWBs and guaranteed
annuitization benefits.
145
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Account balances of variable annuity contracts with living benefit
guarantees were invested in separate account investment options as follows as
of December 31:
(Amounts in millions) 2009 2008
--------------------- -------- --------
Balanced funds....... $3,371.5 $2,681.3
Equity funds......... 1,420.6 502.3
Bond funds........... 852.8 588.8
Money market funds... 129.6 72.4
Other................ 145.0 19.6
-------- --------
Total............. $5,919.5 $3,864.4
======== ========
(9) Liability for Policy and Contract Claims
The following table sets forth changes in the liability for policy and
contract claims for the years ended December 31:
(Amounts in millions) 2009 2008 2007
--------------------- ------- ------- -------
Balance as of January 1................ $ 280.9 $ 263.1 $ 279.3
Less reinsurance recoverables.......... (112.0) (113.6) (119.4)
------- ------- -------
Net balance as of January 1......... 168.9 149.5 159.9
------- ------- -------
Amounts related to transfer of AML..... -- -- (3.2)
Incurred related to insured events of:
Current year........................ 565.3 365.5 449.2
Prior years......................... 29.6 36.6 (80.0)
------- ------- -------
Total incurred.................. 594.9 402.1 369.2
------- ------- -------
Paid related to insured events of:
Current year........................ (548.6) (345.1) (309.9)
Prior years......................... (45.1) (37.6) (66.5)
------- ------- -------
Total paid...................... (593.7) (382.7) (376.4)
------- ------- -------
Net balance as of December 31....... 170.1 168.9 149.5
------- ------- -------
Add reinsurance recoverables........... 124.8 112.0 113.6
------- ------- -------
Balance as of December 31.............. $ 294.9 $ 280.9 $ 263.1
======= ======= =======
As described in note 2, we establish reserves for the ultimate cost of
settling claims on reported and unreported insured events that have occurred on
or before the respective reporting period. These liabilities are associated
primarily with our life and long-term care insurance products and represent our
best estimates of the liabilities at the time based on known facts, historical
trends of claim payments and other external factors, such as various trends in
economic conditions, mortality, morbidity and medical costs.
For 2009, the increase in the ending liability for policy and contract
claims was primarily attributable to our life insurance products from an
increase in average policy claim amounts as compared to 2008.
During 2009, 2008 and 2007, we strengthened (reduced) reserves by $29.6
million, $36.6 million and $(80.0) million, respectively, as a result of
changes in estimates related to prior year insured events and the
146
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
development of information and trends not previously known when establishing
the reserves in prior periods. In 2009, we strengthened claim reserves related
to our life insurance by $31.6 million from $213.4 million as of December 31,
2008. In 2008, we strengthened claim reserves related to our life insurance by
$36.0 million from $187.8 million as of December 31, 2007. Consistent with our
reserving methodology, the strengthening includes a reclassification from
future policy benefit reserves, which includes a provision for expected claims
from policy inception. This provision is reclassified to claim reserves upon
commencement of actual claim activity. Additionally, the strengthening includes
refinements to our estimated claims reserves for timing, amount and duration of
claims associated with observed loss development. For our other businesses, the
remaining development related to refinements on both reported and unreported
insured events occurring in the prior year as part of our reserving process.
While the liability for policy and contract claims represents our current
best estimates, there may be additional adjustments to these amounts based on
information and trends not presently known. Such adjustments, reflecting any
variety of new and adverse or favorable trends, could possibly be significant,
exceeding the currently recorded reserves by an amount that could be material
to our results of operations, financial condition and liquidity.
(10) Non-Recourse Funding Obligations
We issued non-recourse funding obligations in connection with our capital
management strategy related to our term and universal life insurance products.
The following table sets forth the non-recourse funding obligations (surplus
notes) of our wholly-owned, special-purpose consolidated captive insurance
subsidiaries as of December 31:
(Amounts in millions)
---------------------
Issuance 2009 2008
-------- -------- --------
River Lake I/(1)/, due 2033... $ 600.0 $ 600.0
River Lake I/(2)/, due 2033... 500.0 500.0
River Lake II/(1)/, due 2035.. 300.0 300.0
River Lake II/(2)/, due 2035.. 550.0 550.0
River Lake III/(1)/, due 2036. 500.0 500.0
River Lake III/(2)/, due 2036. 250.0 250.0
River Lake IV/(2)/, due 2028.. 528.0 540.0
Rivermont I/(1)/, due 2050.... 315.0 315.0
-------- --------
Total...................... $3,543.0 $3,555.0
======== ========
--------
/(1)/Accrual of interest based on one-month LIBOR that resets every 28 days
plus a fixed margin. However, in the fourth quarter of 2008, the accrual
of interest was based on a fixed rate. Beginning in January 2009, the
accrual of interest was based on one-month LIBOR that resets every 28 days
plus a fixed margin.
/(2)/Accrual of interest based on one-month LIBOR that resets on a specified
date each month plus a contractual margin.
The floating rate notes have been deposited into a series of trusts that
have issued money market or term securities. Both principal and interest
payments on the money market and term securities are guaranteed by a
third-party insurance company. The holders of the money market or term
securities cannot require repayment from us or any of our subsidiaries, other
than the River Lake and Rivermont Insurance Companies, as applicable,
147
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
the direct issuers of the notes. Genworth has provided a limited guarantee to
Rivermont I, where under adverse interest rate, mortality or lapse scenarios
(or combination thereof), which we consider remote, Genworth may be required to
provide additional funds to Rivermont I. We have agreed to indemnify the
issuers and the third-party insurer for certain limited costs related to the
issuance of these obligations.
Any payment of principal, including by redemption, or interest on the notes
may only be made with the prior approval of the Director of Insurance of the
state of South Carolina in accordance with the terms of its licensing orders
and in accordance with applicable law, except for non-recourse funding
obligations issued by River Lake IV, a Bermuda domiciled insurance company.
River Lake IV may repay principal up to 15% of its capital without prior
approval. The holders of the notes have no rights to accelerate payment of
principal of the notes under any circumstances, including without limitation,
for nonpayment or breach of any covenant. Each issuer reserves the right to
repay the notes that it has issued at any time, subject to prior regulatory
approval. On March 25, 2009, River Lake IV repaid $12.0 million of its total
outstanding $40.0 million Class B Floating Rate Subordinated Notes due May 25,
2028 following an early redemption event, in accordance with the priority of
payments. On March 25, 2010, River Lake IV repaid $6.0 million of its total
outstanding $28.0 million Class B Floating Rate Subordinated Notes due May 25,
2028 following an early redemption event, in accordance with the priority of
payments.
Of these obligations, $1.7 billion were guaranteed by third-party financial
guaranty insurance companies and the interest rates on these obligations are
subject to rate resets triggered by negative rating agency actions on the
third-party financial guaranty insurance companies that guarantee these
obligations. During 2008, the rates on those $1.7 billion of non-recourse
funding obligations were contractually reset to the highest margin to the
related underlying index rates.
The weighted average interest rate on the non-recourse funding obligations
as of December 31, 2009 and 2008 was 1.5% and 3.8%, respectively, reflecting
the decline in the underlying index rate.
(11) Income Taxes
The total provision (benefit) for income taxes was as follows for the years
ended December 31:
(Amounts in millions) 2009 2008 2007
--------------------- ------- ------- -------
Current federal income tax.................... $ 257.0 $(107.7) $(107.6)
Deferred federal income tax................... (289.2) (101.9) 213.2
------- ------- -------
Total federal income tax................... (32.2) (209.6) 105.6
------- ------- -------
Current state income tax...................... (3.3) 3.8 (6.8)
Deferred state income tax..................... (0.5) (6.5) 2.5
------- ------- -------
Total state income tax..................... (3.8) (2.7) (4.3)
------- ------- -------
Total provision (benefit) for income taxes. $ (36.0) $(212.3) $ 101.3
======= ======= =======
The current federal income tax (payable) receivable was $(59.2) million and
$160.9 million and the current state income tax receivable (payable) was $6.0
million and $2.9 million as of December 31, 2009 and 2008, respectively, and
was included in other assets and other liabilities in the consolidated balance
sheets.
In 2009, we recorded $5.8 million in retained earnings as a deemed dividend
related to the assumption of a liability for tax contingency reserves from our
indirect parent, GNA. The dividend was offset by a decrease in tax expense
resulting in no net impact to total stockholder's equity. In 2008, we recorded
$4.2 million in additional paid-in capital as a deemed capital contribution
related to the assumption of a liability for tax contingency
148
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
reserves by our indirect parent, GNA. The contribution was offset by an
increase in tax expense resulting in no net impact to total stockholder's
equity. In 2007, we recorded $9.1 million in retained earnings as a deemed
dividend related to the assumption of a liability for tax contingency reserves
from our indirect parent, GNA. The dividend was offset by a decrease in tax
expense resulting in no net impact to total stockholder's equity. Additionally,
in 2007, we recorded $52.7 million in retained earnings related to deferred
taxes on prior year ceding commissions.
The reconciliation of the federal statutory tax rate to the effective income
tax rate was as follows for the years ended December 31:
2009 2008 2007
---- ---- ----
Statutory U.S. federal income tax rate................ 35.0% 35.0% 35.0%
Increase (reduction) in rate resulting from:
State income tax, net of federal income tax effect. 6.0 0.4 (0.3)
Benefit on tax favored investments................. 42.2 1.0 (8.8)
Interest on uncertain tax positions................ 2.7 0.2 (1.0)
Other, net......................................... 0.4 (0.2) 0.1
---- ---- ----
Effective rate........................................ 86.3% 36.4% 25.0%
==== ==== ====
The components of the net deferred income tax liability were as follows as
of December 31:
(Amounts in millions) 2009 2008
--------------------- -------- --------
Assets:
Investments.................................... $ 108.0 $ 183.2
Net unrealized losses on investment securities. 359.7 823.0
Accrued expenses............................... 0.6 8.5
Net operating loss carryforwards............... 454.3 136.0
Other.......................................... 76.3 52.4
-------- --------
Total deferred income tax assets........... 998.9 1,203.1
-------- --------
Liabilities:
Insurance reserves............................. 542.2 422.8
Net unrealized gains on derivatives............ 0.2 0.1
PVFP........................................... 125.2 139.3
DAC............................................ 869.1 876.9
Other.......................................... 48.6 87.8
-------- --------
Total deferred income tax liabilities...... 1,585.3 1,526.9
-------- --------
Net deferred income tax liability.......... $ 586.4 $ 323.8
======== ========
Based on our analysis, we believe it is more likely than not that the
results of future operations and the implementation of tax planning strategies
will generate sufficient taxable income to enable us to realize the remaining
deferred tax assets. Accordingly, no valuation allowance for deferred tax
assets is deemed necessary.
Net operating loss ("NOL") carryforwards amounted to $1,298.0 million as of
December 31, 2009, and if unused, will expire beginning in 2022.
149
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
A reconciliation of the beginning and ending amount of unrecognized tax
benefits was as follows:
(Amounts in millions) 2009 2008 2007
--------------------- ------ ----- ------
Balance as of January 1...................... $ 67.8 $51.0 $ 74.3
Tax positions related to the current period:
Gross additions........................... 54.3 1.7 0.5
Gross reductions.......................... (1.7) (1.7) --
Tax positions related to the prior years:
Gross additions........................... 0.3 19.8 0.5
Gross reductions.......................... (12.8) (2.4) (24.0)
Settlements.................................. -- (0.6) (0.3)
------ ----- ------
Balance as of December 31.................... $107.9 $67.8 $ 51.0
====== ===== ======
The total amount of unrecognized tax benefits was $107.9 million as of
December 31, 2009, of which $40.8 million, if recognized, would affect the
effective rate on operations.
We recognize accrued interest and penalties related to unrecognized tax
benefits as components of income tax expense. During the years ended
December 31, 2009, 2008 and 2007, we incurred approximately $(1.8) million,
$0.4 million and $(3.4) million, respectively, of interest and penalties. We
had approximately $0.9 million and $2.7 million, respectively, of interest and
penalties accrued as of December 31, 2009 and 2008.
We file U.S. federal income tax returns and various state income tax
returns. With few exceptions, we are no longer subject to U.S. federal income
tax examinations for years prior to 2000. Potential state and local
examinations for those years are generally restricted to results that are based
on closed U.S. federal examinations. The Internal Revenue Service ("IRS") is
currently reviewing our U.S. income tax returns for the 2007 and 2008 tax
years. Certain issues from the 2005 and 2006 audit cycle have been timely
protested and will be subject to review by the IRS appeals division. For those
companies that filed consolidated returns with our former parent, GE, in 2003
and 2004 before Genworth's initial public offering ("IPO") (which included the
pre-IPO related transactions), the portion of the GE consolidated return
allocated to such companies is still subject to IRS examination. Certain issues
from the 2000 through 2004 audit cycle are agreed upon with the IRS appeals
division and are in the process of being prepared for review by the Joint
Committee of Taxation.
We believe it is reasonably possible that in 2010, as a result of our open
audits and appeals, up to $84.7 million of unrecognized tax benefits related to
certain life insurance deductions will be recognized.
(12) Supplemental Cash Flow Information
Net cash (paid) received for taxes was $(51.3) million, $56.7 million and
$213.3 million for the years ended December 31, 2009, 2008 and 2007,
respectively. Cash paid for interest related to our non-recourse funding
obligations was $72.6 million, $162.4 million and $177.0 million for the years
ended December 31, 2009, 2008 and 2007, respectively.
For a discussion of capital contributions paid to our unconsolidated
subsidiary and capital contributions received from our parent, see note 17.
150
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The following table details these transactions as well as other non-cash
items for the years ended December 31:
(Amounts in millions) 2009 2008 2007
--------------------- ----- ----- ----
Supplemental schedule of non-cash investing and financing activities:
Capital contribution from parent................................... $ -- $10.9 $ --
Capital contribution to unconsolidated subsidiary.................. 51.7 -- --
Tax contingencies and other tax related items...................... 5.8 (4.2) 9.1
----- ----- ----
Total non-cash transactions........................................ $57.5 $ 6.7 $9.1
===== ===== ====
(13) Related Party Transactions
We and other direct and indirect subsidiaries of Genworth are parties to an
amended and restated services and shared expenses agreement under which each
company agrees to provide and each company agrees to receive certain general
services. These services include, but are not limited to, data processing,
communications, marketing, public relations, advertising, investment
management, human resources, accounting, actuarial, legal, administration of
agent and agency matters, purchasing, underwriting and claims. Under the terms
of the agreement, settlements are made quarterly.
Under this agreement, amounts incurred for these items aggregated $171.7
million, $268.8 million and $326.0 million for the years ended December 31,
2009, 2008 and 2007, respectively. We also charged affiliates for certain
services and for the use of facilities and equipment, which aggregated $26.7
million, $118.1 million and $115.3 million for the years ended December 31,
2009, 2008 and 2007, respectively.
We pay Genworth, our ultimate parent, for investment related services. We
paid $18.6 million, $20.5 million and $15.7 million to Genworth in 2009, 2008
and 2007, respectively.
We pay interest on outstanding amounts under a credit funding agreement with
GNA, our indirect parent. For the years ended December 31, 2009 and 2008, we
incurred no interest expense under this agreement. Interest expense under this
agreement was $0.5 million for the year ended December 31, 2007. We pay
interest at the cost of funds of GNA, which was 0.2%, 1.5% and 4.4%, for the
years ended December 31, 2009, 2008 and 2007, respectively. GNA owed us $0.5
million as of December 31, 2009 and 2008, which was included in other assets in
the consolidated balance sheets. During 2009, there were no borrowings. During
2008, we borrowed and then repaid $271.8 million to GNA and as of December 31,
2008, there were no amounts outstanding under this agreement.
Additionally, we sell investment securities to affiliates in the normal
course of business. The sale of securities to affiliates are recorded at fair
value with gains recorded in additional paid-in capital as a deemed capital
contribution and losses recorded in retained earnings as a deemed dividend. For
the years ended December 31, 2009, 2008 and 2007, we recorded $10.2 million,
$4.9 million and $50.4 million, respectively, in retained earnings related to
losses associated with the sale of securities to affiliates.
(14) Fair Value of Financial Instruments
Assets and liabilities that are reflected in the accompanying consolidated
financial statements at fair value are not included in the following disclosure
of fair value; such items include cash and cash equivalents, investment
securities, separate accounts, securities held as collateral and derivative
financial instruments. Other
151
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
financial assets and liabilities--those not carried at fair value--are
discussed below. Apart from certain of our borrowings and certain marketable
securities, few of the instruments discussed below are actively traded and
their fair values must often be determined using models. The fair value
estimates are made at a specific point in time, based upon available market
information and judgments about the financial instruments, including estimates
of the timing and amount of expected future cash flows and the credit standing
of counterparties. Such estimates do not reflect any premium or discount that
could result from offering for sale at one time our entire holdings of a
particular financial instrument, nor do they consider the tax impact of the
realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent markets.
The basis on which we estimate fair value is as follows:
Commercial mortgage loans. Based on recent transactions and/or discounted
future cash flows, using current market rates.
Other invested assets. Based on comparable market transactions, discounted
future cash flows, quoted market prices and/or estimates using the most recent
data available for the related instrument. Primarily represents short-term
investments, limited partnerships accounted for under the cost method and bank
loans.
Borrowings and related instruments. Based on market quotes or comparable
market transactions.
Investment contracts. Based on expected future cash flows, discounted at
current market rates for annuity contracts or institutional products.
The following represents the fair value of financial assets and liabilities
as of December 31:
2009 2008
------------------------------- --------------------------------
Notional Carrying Notional Carrying
(Amounts in millions) amount amount Fair value amount amount Fair value
--------------------- -------- -------- ---------- -------- -------- ----------
Assets:
Commercial mortgage loans..................... $ /(1)/ $2,363.3 $2,291.8 $ /(1)/ $2,704.1 $2,501.2
Other invested assets......................... /(1)/ 1,298.6 1,305.1 /(1)/ 992.9 1,006.6
Liabilities:
Borrowings and related instruments:...........
Non-recourse funding obligations/(2)/..... /(1)/ 3,543.0 1,720.8 /(1)/ 3,555.0 2,757.0
Investment contracts.......................... /(1)/ 6,598.5 6,885.3 /(1)/ 9,275.5 8,340.6
Other firm commitments:
Commitments to fund limited
partnerships................................ 63.0 -- -- 111.4 -- --
--------
/(1)/These financial instruments do not have notional amounts.
/(2)/See note 10.
Recurring Fair Value Measurements
We have fixed maturity, equity and trading securities, derivatives, embedded
derivatives, securities held as collateral, separate account assets and certain
other financial instruments, which are carried at fair value.
152
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
For derivative liabilities, we consider the counterparty collateral
arrangements and rights of set-off when determining whether any incremental
adjustment should be made for our non-performance risk. As a result of these
counterparty arrangements, we determined no adjustment for our non-performance
risk was required to the derivative liabilities of $41.4 million and $67.2
million as of December 31, 2009 and 2008, respectively.
For GMWB liabilities recorded at fair value of $156.6 million and $784.8
million as of December 31, 2009 and 2008, respectively, non-performance risk is
integrated into the discount rate. The discount rate utilized in our valuation
was based on the swap curve, which included the credit risk of an instrument
rated "AA" and incorporated the non-performance risk of our GMWB liabilities.
The impact of non-performance risk on our GMWB valuation was $1.0 million and
$24.8 million as of December 31, 2009 and 2008, respectively, as a result of
our discount rate being higher than the U.S. Treasury curve.
To determine whether the use of the swap curve was the appropriate discount
rate to reflect the non-performance risk of the GMWB liabilities, we evaluate
the non-performance risk in our liabilities based on a hypothetical exit market
transaction as there is no exit market for these types of liabilities. A
hypothetical exit market can be viewed as a hypothetical transfer of the
liability to another similarly rated insurance company which would closely
resemble a reinsurance transaction. Another hypothetical exit market
transaction can be viewed as a hypothetical transaction from the perspective of
the GMWB policyholder. After considering all relevant factors in assessing
whether any additional adjustment to the discount rate for non-performance risk
was necessary, including assumptions we expect market participants would
utilize in a hypothetical exit market transaction, we determined that no
incremental adjustment to the discount rate was necessary for our GMWB
liabilities that are recorded at fair value. We believe that a hypothetical
exit market participant would use a similar discount rate to value the
liabilities and would not incorporate changes in non-performance risk in the
discount rate other than the implied credit spread incorporated in the swap
curve.
153
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The following tables set forth our assets and liabilities that were measured
at fair value on a recurring basis as of December 31:
2009
--------------------------------------
(Amounts in millions) Total Level 1 Level 2 Level 3
--------------------- --------- --------- -------- --------
Assets
Investments:
Fixed maturity securities:
U.S. government, agencies and government-
sponsored enterprises.......................... $ 654.5 $ -- $ 644.3 $ 10.2
Government--non-U.S.............................. 154.6 -- 154.6 --
U.S. corporate................................... 5,473.9 -- 5,164.8 309.1
Corporate--non-U.S............................... 1,525.2 -- 1,336.6 188.6
Residential mortgage-backed...................... 1,157.4 -- 507.8 649.6
Commercial mortgage-backed....................... 786.7 -- 10.8 775.9
Other asset-backed............................... 1,496.5 -- 679.9 816.6
--------- --------- -------- --------
Total fixed maturity securities.................. 11,248.8 -- 8,498.8 2,750.0
--------- --------- -------- --------
Equity securities................................... 101.3 31.4 64.8 5.1
--------- --------- -------- --------
Other invested assets:
Trading securities............................... 33.5 -- 12.0 21.5
Restricted other invested assets................. 297.6 -- 271.1 26.5
Derivative assets................................ 196.8 -- 132.3 64.5
Securities lending collateral.................... 175.8 -- 175.8 --
Derivatives counterparty collateral.............. 13.6 -- 13.6 --
--------- --------- -------- --------
Total other invested assets...................... 717.3 -- 604.8 112.5
--------- --------- -------- --------
Reinsurance recoverable/(1)/............................ (3.7) -- -- (3.7)
Separate account assets................................. 10,086.3 10,086.3 -- --
--------- --------- -------- --------
Total assets..................................... $22,150.0 $10,117.7 $9,168.4 $2,863.9
========= ========= ======== ========
Liabilities
Policyholder account balances/(2)/...................... $ 156.6 $ -- $ -- $ 156.6
Derivative liabilities.................................. 41.4 -- 38.1 3.3
--------- --------- -------- --------
Total liabilities................................ $ 198.0 $ -- $ 38.1 $ 159.9
========= ========= ======== ========
--------
/(1)/Represents embedded derivatives associated with the reinsured portion of
our GMWB liabilities.
/(2)/Represents embedded derivatives associated with our GMWB liabilities,
excluding the impact of reinsurance.
154
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
2008
------------------------------------
(Amounts in millions) Total Level 1 Level 2 Level 3
--------------------- --------- -------- -------- --------
Assets
Investments:
Fixed maturity securities:
U.S. government, agencies and government-
sponsored enterprises.......................... $ 174.2 $ -- $ 167.2 $ 7.0
Government--non-U.S.............................. 162.2 -- 143.8 18.4
U.S. corporate................................... 5,383.3 -- 4,346.3 1,037.0
Corporate--non-U.S............................... 1,337.1 -- 895.6 441.5
Residential mortgage-backed...................... 1,278.5 -- 447.8 830.7
Commercial mortgage-backed....................... 852.8 -- 36.0 816.8
Other asset-backed............................... 1,583.6 -- 829.4 754.2
--------- -------- -------- --------
Total fixed maturity securities.................. 10,771.7 -- 6,866.1 3,905.6
--------- -------- -------- --------
Equity securities................................... 90.0 22.9 12.2 54.9
--------- -------- -------- --------
Other invested assets:
Trading securities............................... 62.1 -- 23.6 38.5
Restricted other invested assets................. 338.9 -- 167.1 171.8
Derivative assets................................ 620.7 -- 510.4 110.3
Securities lending collateral.................... 128.0 -- 128.0 --
Derivatives counterparty collateral.............. 176.3 -- 176.3 --
--------- -------- -------- --------
Total other invested assets...................... 1,326.0 -- 1,005.4 320.6
--------- -------- -------- --------
Reinsurance recoverable/(1)/............................ 14.9 -- -- 14.9
Separate account assets................................. 8,501.9 8,501.9 -- --
--------- -------- -------- --------
Total assets/(2)/................................ $20,704.5 $8,524.8 $7,883.7 $4,296.0
========= ======== ======== ========
Liabilities
Policyholder account balances/(3)/...................... $ 784.8 $ -- $ -- $ 784.8
Derivative liabilities.................................. 67.2 -- 67.2 --
--------- -------- -------- --------
Total liabilities/(4)/........................... $ 852.0 $ -- $ 67.2 $ 784.8
========= ======== ======== ========
--------
/(1)/Represents embedded derivatives associated with the reinsured portion of
our GMWB liabilities. The balance as of December 31, 2008 has been revised
to include this amount.
/(2)/Total assets have been revised to include the reinsured portion of our
GMWB liabilities.
/(3)/Represents embedded derivatives associated with our GMWB liabilities,
excluding the impact of reinsurance. The balance as of December 31, 2008
has been revised to exclude the impact of reinsurance.
/(4)/Total liabilities have been revised to exclude the reinsured portion of
our GMWB liabilities.
155
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
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)
unrealized gains Purchases, included in
Beginning (losses) sales Ending net income
- balance ------------------- issuances balance (loss)
as of Included in and Transfer as of attributable
January 1, net income Included settlements, Transfer out of December 31, to assets
(Amounts in millions) 2009 (loss) in OCI net in Level 3 Level 3 2009 still held
--------------------- ---------- ----------- -------- ------------ ---------- --------- ------------ ------------
Fixed maturity securities:
U.S. government,
agencies and
government-
sponsored
enterprises......... $ 7.0 $ -- $ (0.2) $ 3.4 $ -- $ -- $ 10.2 $ --
Government--
non-U.S............. 18.4 -- -- -- -- (18.4) -- --
U.S. corporate........ 1,037.0 26.4 92.6 (315.9) 66.9 (597.9) 309.1 1.2
Corporate--non-U.S.... 441.5 (9.4) 55.0 (63.2) 103.8 (339.1) 188.6 --
Residential mortgage-
backed.............. 830.7 23.6 3.3 (206.3) 2.9 (4.6) 649.6 20.1
Commercial mortgage-
backed.............. 816.8 (1.4) 94.6 (47.3) 29.0 (115.8) 775.9 (1.5)
Other asset-backed.... 754.2 1.4 171.7 (269.1) 203.3 (44.9) 816.6 4.1
-------- ------- ------ ------- ------ --------- -------- ------
Total fixed maturity
securities.......... 3,905.6 40.6 417.0 (898.4) 405.9 (1,120.7) 2,750.0 23.9
-------- ------- ------ ------- ------ --------- -------- ------
Equity securities........ 54.9 (0.1) 1.9 (0.5) -- (51.1) 5.1 (0.2)
-------- ------- ------ ------- ------ --------- -------- ------
Other invested assets:
Trading securities.... 38.5 0.9 -- (21.6) 3.7 -- 21.5 0.4
Restricted other
invested assets..... 171.8 (0.4) 14.2 (52.6) -- (106.5) 26.5 --
Derivative assets..... 110.3 (104.5) -- 36.8 21.9 -- 64.5 (96.6)
-------- ------- ------ ------- ------ --------- -------- ------
Total other invested
assets.............. 320.6 (104.0) 14.2 (37.4) 25.6 (106.5) 112.5 (96.2)
-------- ------- ------ ------- ------ --------- -------- ------
Reinsurance
recoverable/(1)/....... 14.9 (19.3) -- 0.7 -- -- (3.7) (19.3)
-------- ------- ------ ------- ------ --------- -------- ------
Total Level 3 assets..... $4,296.0 $ (82.8) $433.1 $(935.6) $431.5 $(1,278.3) $2,863.9 $(91.8)
======== ======= ====== ======= ====== ========= ======== ======
--------
/(1)/Represents embedded derivatives associated with the reinsured portion of
our GMWB liabilities. The balance as of January 1, 2009 has been revised
to include this amount.
156
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Total gains
Total realized and (losses)
unrealized gains Purchases, included in
Beginning (losses) sales Ending net income
- balance ------------------- issuances balance (loss)
as of Included in and Transfer as of attributable
January 1, net income Included settlements, Transfer out of December 31, to assets
(Amounts in millions) 2008 (loss) in OCI net in Level 3 Level 3 2008 still held
--------------------- ---------- ----------- -------- ------------ ---------- --------- ------------ ------------
Fixed maturity securities.. $2,044.2 $(618.8) $(682.8) $(392.4) $4,793.8 $(1,238.4) $3,905.6 $(607.2)
Equity securities.......... 5.1 0.8 (0.7) 24.7 25.0 -- 54.9 --
Other invested assets/(1)/. 227.2 247.4 (14.8) (271.7) 231.6 (99.1) 320.6 248.8
Reinsurance
recoverable/(2)/......... -- -- -- 14.9 -- -- 14.9 --
-------- ------- ------- ------- -------- --------- -------- -------
Total Level 3 assets....... $2,276.5 $(370.6) $(698.3) $(624.5) $5,050.4 $(1,337.5) $4,296.0 $(358.4)
======== ======= ======= ======= ======== ========= ======== =======
--------
/(1)/Includes certain trading securities, restricted other invested assets and
derivatives.
/(2)/Represents embedded derivatives associated with the reinsured portion of
our GMWB liabilities. The balance as of December 31, 2008 has been revised
to include this amount.
The following table presents 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 and for
the dates indicated:
Total (gains)
Total realized and losses
unrealized (gains) Purchases, included in
Beginning losses sales Ending net (income)
balance --------------------- issuances balance loss
as of Included in and Transfer as of attributable
January 1, net (income) Included settlements, Transfer out of December 31, to liabilities
(Amounts in millions) 2009 loss in OCI net in Level 3 Level 3 2009 still held
--------------------- ---------- ------------ -------- ------------ ---------- -------- ------------ --------------
Policyholder account
balances/(1)/........... $784.8 $(654.8) $-- $26.6 $-- $-- $156.6 $(640.7)
Other liabilities/(2)/.... -- 4.3 -- (1.0) -- -- 3.3 4.3
------ ------- --- ----- --- --- ------ -------
Total Level 3 liabilities. $784.8 $(650.5) $-- $25.6 $-- $-- $159.9 $(636.4)
====== ======= === ===== === === ====== =======
Total (gains)
Total realized and losses
unrealized (gains) Purchases, included in
Beginning losses sales Ending net (income)
balance --------------------- issuances balance loss
as of Included in and Transfer as of attributable
January 1, net (income) Included settlements, Transfer out of December 31, to liabilities
(Amounts in millions) 2008 loss in OCI net in Level 3 Level 3 2008 still held
--------------------- ---------- ------------ -------- ------------ ---------- -------- ------------ --------------
Policyholder account
balances/(3)/........... $30.3 $725.1 $-- $29.4 $-- $-- $784.8 $728.1
----- ------ --- ----- --- --- ------ ------
Total Level 3 liabilities. $30.3 $725.1 $-- $29.4 $-- $-- $784.8 $728.1
===== ====== === ===== === === ====== ======
--------
/(1)/Represents embedded derivatives associated with our GMWB liabilities,
excluding the impact of reinsurance. The balance as of January 1, 2009 has
been revised to exclude the impact of reinsurance.
/(2)/Represents derivative liabilities.
/(3)/Represents embedded derivatives associated with our GMWB liabilities,
excluding the impact of reinsurance. The balance as of December 31, 2008
has been revised to exclude the impact of reinsurance.
157
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Realized and unrealized gains (losses) on Level 3 assets and liabilities are
primarily reported in either net investment gains (losses) within the
consolidated statements of income or OCI within stockholder's equity based on
the appropriate accounting treatment for the instrument.
Purchases, sales, issuances and settlements, net, represent the activity
that occurred during the period that results in a change of the asset or
liability but does not represent changes in fair value for the instruments held
at the beginning of the period. Such activity primarily consists of purchases
and sales of fixed maturity, equity and trading securities and purchases and
settlements of derivative instruments.
Purchases, sales, issuances and settlements, net, presented for policyholder
account balances represents the issuances and settlements of embedded
derivatives associated with our GMWB liabilities where: issuances are
characterized as the change in fair value associated with the product fees
recognized that are attributed to the embedded derivative to equal the expected
future benefit costs upon issuance; and settlements are characterized as the
change in fair value upon exercising the embedded derivative instrument,
effectively representing a settlement of the embedded derivative instrument. We
have shown these changes in fair value separately based on the classification
of this activity as effectively issuing and settling the embedded derivative
instrument with all remaining changes in the fair value of these embedded
derivative instruments being shown separately in the category labeled "included
in net (income) loss" in the tables presented above.
The amount presented for unrealized gains (losses) for assets and
liabilities still held as of the reporting date primarily represents
impairments for available-for-sale securities, accretion on certain fixed
maturity securities, changes in fair value of trading securities and certain
derivatives and changes in fair value of embedded derivatives associated with
our GMWB liabilities that existed as of the reporting date, which were recorded
in net investment gains (losses).
Non-Recurring Fair Value Measurements
We hold investments in bank loans that are recorded at the lower of cost or
fair value and are recorded in other invested assets. As of December 31, 2009,
no bank loans were recorded at fair value as cost was lower than their
respective fair values, and therefore, there were no fair value loss
adjustments for the year ended December 31, 2009. As of December 31, 2008, all
bank loans were recorded at fair value, which was lower than their respective
cost. Accordingly, for the year ended December 31, 2008, we recorded $5.7
million of fair value loss adjustments which were included in net investment
gains (losses) in the consolidated statement of income. Fair value for bank
loans was determined using inputs based on market observable information and
was classified as Level 2.
(15) Non-Controlled Entities
We have used third-party entities to facilitate asset securitizations.
Disclosure requirements related to off-balance sheet arrangements encompass a
broader array of arrangements than those at risk for consolidation. These
arrangements include transactions with conduits that are sponsored by third
parties.
158
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Total securitized assets were as follows as of December 31:
(Amounts in millions) 2009 2008
--------------------- ------ ------
Assets secured by:
Commercial mortgage loans... $ 83.6 $ 92.3
Fixed maturity securities... 53.3 62.9
Other receivables........... 71.2 86.8
------ ------
Total securitized assets. $208.1 $242.0
====== ======
We evaluated the economic, liquidity and credit risk related to the above
Qualified Special Purpose Entities ("QSPEs") and believed that the likelihood
was remote that any such arrangements could have had a significant adverse
effect on our results of operations, liquidity or financial position. Financial
support for certain QSPEs was provided under credit support agreements in which
Genworth provided limited recourse for a maximum of $117.4 million of credit
losses as of December 31, 2008. Assets with credit support were funded by
demand notes that were further enhanced with support provided by a third-party.
In 2009, Genworth paid $0.9 million associated with one of these arrangements.
The related securitization structure terminated in the fourth quarter of 2009
upon final payments made by the structure. As of December 31, 2009, Genworth
has not been required to make any payments under the credit support agreements
for the two remaining arrangements. These agreements will remain in place
throughout the life of the related entities.
Sales of securitized assets to QSPEs typically result in a gain or loss
amounting to the net of sales proceeds, the carrying amount of net assets sold,
the fair value of servicing rights and retained interests and an allowance for
losses. There were no off-balance sheet securitization transactions in 2009,
2008 and 2007.
Amounts recognized in our consolidated financial statements related to our
historical securitization activity with QSPEs were as follows as of December 31:
2009 2008
---------- ----------
Fair Fair
(Amounts in millions) Cost value Cost value
--------------------- ---- ----- ---- -----
Retained interests--assets. $2.0 $5.5 $6.3 $14.5
Servicing assets........... -- -- -- --
Recourse liability......... -- -- -- --
---- ---- ---- -----
Total................... $2.0 $5.5 $6.3 $14.5
==== ==== ==== =====
Retained interests. In certain securitization transactions, we retained an
interest in transferred assets. Those interests take various forms and may be
subject to credit, prepayment and interest rate risks. When we securitized
receivables, we determined the fair value based on discounted cash flow models
that incorporate, among other things, assumptions including credit losses,
prepayment speeds and discount rates. These assumptions were based on our
experience, market trends and anticipated performance related to the particular
assets securitized. Our retained interests are reflected as available-for-sale
fixed maturity securities.
Servicing assets. Following a securitization transaction, we retained the
responsibility for servicing the receivables, and as such, were entitled to
receive an ongoing fee based on the outstanding principal balances of the
receivables. There were no servicing assets nor liabilities recorded as the
benefits of servicing the assets were adequate to compensate an independent
servicer for its servicing responsibilities.
159
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
Recourse liability. As described previously, under credit support
agreements, we provided recourse for credit losses in special purpose entities.
We provided for expected credit losses under these agreements and such amounts
approximated fair value.
As a result of the entities being considered QSPEs, we do not currently
evaluate these entities for consolidation. However, these entities will be
considered for consolidation as a result of new accounting guidance for
consolidation of VIEs. See note 2 for more information related to the new
accounting guidance and expected impact upon adoption.
(16) Restrictions on Dividends
Insurance companies are restricted by state regulations as to the aggregate
amount of dividends they may pay to their parent in any consecutive
twelve-month period without regulatory approval. Generally, dividends may be
paid out of earned surplus without approval with thirty days prior written
notice within certain limits. The limits are generally based on the greater of
10% of the prior year surplus or prior year net gain from operations. Dividends
in excess of the prescribed limits on our earned surplus require formal
approval from the State Corporation Commission, Bureau of Insurance of the
Commonwealth of Virginia. Based on statutory results as of December 31, 2009,
we are able to distribute $403.3 million in dividends in 2010 without obtaining
regulatory approval. Based on statutory results as of December 31, 2009, we
estimate our insurance subsidiaries could pay dividends of approximately $7.4
million to us in 2010 without obtaining regulatory approval. However, we do not
expect our insurance subsidiaries to pay dividends to us in 2010 at this level
as they retain capital for growth and to meet capital requirements.
There were no common stock dividends declared in 2009, 2008 or 2007.
In addition to the common stock dividends, we declared and paid preferred
stock dividends. Dividends on the Series A Preferred Stock were cumulative and
payable semi-annually when, and if, declared by the Board of Directors at an
annual rate of 8.0% of the par value. On January 22, 2007, the Board of
Directors authorized the redemption of the 110,000 outstanding shares of Series
A Preferred Stock for par value of $110.0 million and $2.2 million in accrued
dividends on the redeemed shares. On March 12, 2007, we redeemed the remaining
outstanding preferred shares for par value of $110.0 million and paid $2.5
million in dividends on the redeemed preferred shares. On April 30, 2007, the
issued shares of preferred stock were retired.
(17) Supplemental Statutory Financial Data
We file financial statements with state insurance regulatory authorities and
the NAIC that are prepared on an accounting basis prescribed or permitted by
such authorities. Statutory accounting practices differ from U.S. GAAP in
several respects, causing differences in reported net income and stockholder's
equity. Permitted statutory accounting practices encompass all accounting
practices not so prescribed but that have been specifically allowed by state
insurance authorities. Our insurance subsidiaries have no material permitted
accounting practices, except for River Lake V, River Lake VI and River Lake
VII. River Lake V and River Lake VII were granted permitted accounting
practices from the state of Vermont to carry their reserves on a U.S. GAAP
basis. River Lake VI was granted a permitted accounting practice from the state
of Delaware to record a portion of the undrawn amount of its existing letter of
credit and any additional letters of credit as gross paid-in and contributed
surplus, thereby including such amounts in its statutory surplus. The amount of
the letters of credit recorded as gross paid-in and contributed surplus is
equal to the excess of statutory reserves less the economic reserves.
160
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The tables below include our combined statutory net income (loss) and
statutory capital and surplus:
Years ended December 31,
-------------------------
(Amounts in millions) 2009 2008 2007
--------------------- ------- ------- -------
GLAIC and our life insurance subsidiaries, excluding captive life
reinsurance subsidiaries........................................ $ 260.5 $(245.7) $ 325.1
Captive life reinsurance subsidiaries combined statutory net loss. (154.2) (330.2) (413.3)
------- ------- -------
Combined statutory net income (loss)........................... $ 106.3 $(575.9) $ (88.2)
======= ======= =======
As of December 31,
-----------------
(Amounts in millions) 2009 2008
--------------------- -------- --------
Combined statutory capital and surplus. $1,983.0 $1,971.0
Statutory net income (loss) from our captive life reinsurance subsidiaries
relates to the reinsurance of term and universal life insurance statutory
reserves assumed from GLAIC. These reserves are, in turn, funded through the
issuance of surplus notes (non-recourse funding obligations) to third parties
or secured by a third-party letter of credit. Accordingly, the combined
statutory net income (loss) and distributable income of GLAIC and our life
insurance subsidiaries are not affected by the statutory net loss of the
captives, except to the extent dividends are received from captives. The
combined statutory capital and surplus of GLAIC and our life insurance
subsidiaries does not include the capital and surplus of our captive life
reinsurance subsidiaries of $1,724.9 million and $1,313.5 million as of
December 31, 2009 and 2008, respectively. Capital and surplus of our captive
life reinsurance subsidiaries, excluding River Lake V, River Lake VI and River
Lake VII, includes surplus notes (non-recourse funding obligations) as further
described in note 10.
On February 24, 2009, GLIC delivered to GLICNY a capital contribution of
$150.0 million on behalf of itself and GLAIC in proportion to their ownership
interests of 65.5% and 34.5%, respectively. Accordingly, the portion of the
contribution attributable to GLAIC was $51.8 million, of which, $51.7 million
consisted of securities. On December 30, 2008, GLIC delivered to GLICNY a
capital contribution of $31.5 million on behalf of itself and GLAIC in
proportion to their ownership interests of 65.5% and 34.5%, respectively.
Accordingly, the portion of the contribution attributable to GLAIC was $10.9
million.
The NAIC has adopted RBC requirements to evaluate the adequacy of statutory
capital and surplus in relation to risks associated with: (i) asset risk;
(ii) insurance risk; (iii) interest rate and market risk; and (iv) business
risk. The RBC formula is designated as an early warning tool for the states to
identify possible under-capitalized companies for the purpose of initiating
regulatory action. In the course of operations, management periodically
monitors the RBC level of GLAIC and our subsidiaries. As of December 31, 2009
and 2008, GLAIC and each of our life insurance subsidiaries exceeded the
minimum required RBC levels.
(18) Segment Information
We conduct our operations in two business segments: (1) Protection, which
includes term and universal life insurance and Medicare supplement insurance;
and (2) Retirement Income, which principally includes fixed and variable
deferred and immediate individual annuities and group variable annuities
offered through retirement plans. We also have Corporate and Other activities
which include income and expenses not allocated to the segments as well as
non-strategic products.
161
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
We allocate net investment gains (losses) from Corporate and Other
activities to our Protection and Retirement Income segments using an approach
based principally upon the investment portfolios established to support each of
those segments' products and targeted capital levels.
We use the same accounting policies and procedures to measure segment income
(loss) and assets as we use to measure our consolidated net income (loss) and
assets. Segment income represents the basis on which the performance of our
business is assessed by management. Premiums and fees, other income, benefits,
acquisition and operating expenses and policy-related amortization are
attributed directly to each operating segment. Net investment income and
invested assets are allocated based on the assets required to support the
underlying liabilities and capital of the products included in each segment.
See note 1 for further discussion of our principal product lines within the
aforementioned segments.
The following is a summary of our segments and Corporate and Other
activities as of or for the year ended December 31, 2009:
Retirement Corporate
(Amounts in millions) Protection Income and Other Consolidated
--------------------- ---------- ---------- --------- ------------
Premiums................................................... $ 933.0 $ 49.1 $ 0.3 $ 982.4
Net investment income...................................... 371.7 216.6 56.4 644.7
Net investment gains (losses).............................. (258.0) 17.7 (75.6) (315.9)
Policy fees and other income............................... 365.4 160.3 73.5 599.2
--------- --------- -------- ---------
Total revenues.......................................... 1,412.1 443.7 54.6 1,910.4
--------- --------- -------- ---------
Benefits and other changes in policy reserves.............. 798.8 233.7 0.2 1,032.7
Interest credited.......................................... 222.2 67.2 50.3 339.7
Acquisition and operating expenses, net of deferrals....... 160.9 75.5 10.6 247.0
Amortization of deferred acquisition costs and intangibles. 102.9 134.3 3.8 241.0
Interest expense........................................... 92.5 -- (0.8) 91.7
--------- --------- -------- ---------
Total benefits and expenses............................. 1,377.3 510.7 64.1 1,952.1
--------- --------- -------- ---------
Income (loss) before income taxes and equity in net income
(loss) of unconsolidated subsidiary...................... 34.8 (67.0) (9.5) (41.7)
Provision (benefit) for income taxes....................... 7.6 (35.9) (7.7) (36.0)
--------- --------- -------- ---------
Income (loss) before equity in net income (loss) of
unconsolidated subsidiary................................ 27.2 (31.1) (1.8) (5.7)
Equity in net income (loss) of unconsolidated subsidiary... -- -- 4.4 4.4
--------- --------- -------- ---------
Net income (loss).......................................... $ 27.2 $ (31.1) $ 2.6 $ (1.3)
========= ========= ======== =========
Total assets............................................... $15,299.1 $22,404.9 $3,481.4 $41,185.4
========= ========= ======== =========
162
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The following is a summary of our segments and Corporate and Other
activities as of or for the year ended December 31, 2008:
Retirement Corporate
(Amounts in millions) Protection Income and Other Consolidated
--------------------- ---------- ---------- --------- ------------
Premiums................................................... $ 919.9 $ 148.2 $ 0.4 $ 1,068.5
Net investment income...................................... 522.0 245.8 180.5 948.3
Net investment gains (losses).............................. (424.9) (154.1) (357.7) (936.7)
Policy fees and other income............................... 345.1 167.7 94.9 607.7
--------- --------- -------- ---------
Total revenues.......................................... 1,362.1 407.6 (81.9) 1,687.8
--------- --------- -------- ---------
Benefits and other changes in policy reserves.............. 773.4 365.2 0.2 1,138.8
Interest credited.......................................... 219.2 77.1 154.4 450.7
Acquisition and operating expenses, net of deferrals....... 163.2 85.7 21.3 270.2
Amortization of deferred acquisition costs and intangibles. 116.4 124.2 3.4 244.0
Interest expense........................................... 168.1 -- -- 168.1
--------- --------- -------- ---------
Total benefits and expenses............................. 1,440.3 652.2 179.3 2,271.8
--------- --------- -------- ---------
Income (loss) before income taxes and equity in net income
(loss) of unconsolidated subsidiary...................... (78.2) (244.6) (261.2) (584.0)
Provision (benefit) for income taxes....................... (26.5) (91.8) (94.0) (212.3)
--------- --------- -------- ---------
Income (loss) before equity in net income (loss) of
unconsolidated subsidiary................................ (51.7) (152.8) (167.2) (371.7)
Equity in net income (loss) of unconsolidated subsidiary... -- -- (37.6) (37.6)
--------- --------- -------- ---------
Net income (loss).......................................... $ (51.7) $ (152.8) $ (204.8) $ (409.3)
========= ========= ======== =========
Total assets............................................... $14,926.2 $21,357.2 $5,087.4 $41,370.8
========= ========= ======== =========
163
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
The following is a summary of our segments and Corporate and Other
activities as of the year ended December 31, 2007:
Retirement Corporate
(Amounts in millions) Protection Income and Other Consolidated
--------------------- ---------- ---------- --------- ------------
Premiums.................................................... $ 891.5 $171.3 $ 0.4 $1,063.2
Net investment income....................................... 609.3 305.9 274.7 1,189.9
Net investment gains (losses)............................... (26.6) (30.1) (34.4) (91.1)
Policy fees and other income................................ 346.6 144.5 0.2 491.3
-------- ------ ------ --------
Total revenues........................................... 1,820.8 591.6 240.9 2,653.3
-------- ------ ------ --------
Benefits and other changes in policy reserves............... 780.5 324.8 0.1 1,105.4
Interest credited........................................... 217.4 90.9 233.0 541.3
Acquisition and operating expenses, net of deferrals........ 145.6 75.6 23.0 244.2
Amortization of deferred acquisition costs and intangibles.. 106.8 43.3 1.3 151.4
Interest expense............................................ 204.6 -- 0.5 205.1
-------- ------ ------ --------
Total benefits and expenses.............................. 1,454.9 534.6 257.9 2,247.4
-------- ------ ------ --------
Income before income taxes and equity in net income of
unconsolidated subsidiary................................. 365.9 57.0 (17.0) 405.9
Provision (benefit) for income taxes........................ 125.7 (18.9) (5.5) 101.3
-------- ------ ------ --------
Income (loss) before equity in net income of unconsolidated
subsidiary................................................ 240.2 75.9 (11.5) 304.6
-------- ------ ------ --------
Equity in net income of unconsolidated subsidiary........... -- -- 19.1 19.1
-------- ------ ------ --------
Net income.................................................. $ 240.2 $ 75.9 $ 7.6 $ 323.7
======== ====== ====== ========
(19) Commitments and Contingencies
(a) Litigation
We face the risk of litigation and regulatory investigations and actions in
the ordinary course of operating our businesses, including class action
lawsuits. Our pending legal and regulatory actions include proceedings specific
to us and others generally applicable to business practices in the industries
in which we operate. 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. A substantial legal liability or a significant
regulatory action against us could have an adverse effect on our financial
condition and results of operations. Moreover, even if we ultimately prevail in
the litigation, regulatory action or investigation, we could suffer significant
reputational harm, which could have an adverse effect on our business,
financial condition or results of operations. At this time, it is not feasible
to predict, nor to determine the ultimate outcomes of all pending
investigations and legal proceedings, nor to provide reasonable ranges of
potential losses.
(b) Commitments
As of December 31, 2009, we were committed to fund $63.0 million in limited
partnership investments.
In December 2007, GLAIC entered into a $550.0 million Letter of Credit and
Reimbursement Agreement (the "LOC Agreement") as guarantor with River Lake V, a
direct subsidiary, and a third-party bank that served as the administrative
agent. Genworth, our ultimate parent, guaranteed the complete and timely
performance of all
164
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 2009, 2008 and 2007
of River Lake V's obligations under the LOC Agreement, which was terminated on
September 11, 2008. It was replaced with letters of credit issued by other
third-party banks that required Genworth to provide parental support under
certain circumstances in an amount up to $100.0 million. After the downgrade of
its holding company, Genworth fully satisfied this obligation in December 2008.
Therefore, there was no outstanding commitment as of December 31, 2009.
On April 7, 2009, GLAIC entered into a reinsurance treaty with River Lake
VII, a subsidiary of GLAIC, effective January 1, 2009 (the "Reinsurance Treaty
I"). In conjunction with the Reinsurance Treaty I, on April 7, 2009, River Lake
VII delivered to GLAIC a $580.0 million conditional letter of credit issued by
a third-party bank.
On December 30, 2008, GLAIC entered into a reinsurance treaty with River
Lake VI, a subsidiary of GLAIC, effective October 1, 2008 (the "Reinsurance
Treaty"). In conjunction with the Reinsurance Treaty, on December 30, 2008,
River Lake VI delivered to GLAIC a $200.0 million conditional letter of credit
issued by a third-party bank.
(c) Guarantees
We guaranteed the payment of certain structured settlement benefits sold by
Assigned Settlement, Inc., our wholly-owned subsidiary, from March 2004 through
December 2005 which were funded by products of our parent and one of our
affiliates. The structured settlement reserves related to this guarantee were
$274.1 million as of December 31, 2009.
(20) Investment in Unconsolidated Subsidiary
Our investment in GLICNY is recorded under the equity method of accounting.
As of December 31, 2009 and 2008, the carrying value of our investment in
GLICNY was $381.4 million and $219.1 million, respectively, and was included in
other invested assets.
The tables below provide summarized financial information for GLICNY as of
or for the years ended December 31:
Years ended December 31,
----------------------
(Amounts in millions) 2009 2008 2007
--------------------- ------ ------- ------
Net investment income. $298.4 $ 314.1 $301.4
Total revenues........ $411.1 $ 325.0 $511.3
Net income (loss)..... $ 12.8 $(108.9) $ 54.4
As of December 31,
-----------------
(Amounts in millions) 2009 2008
--------------------- -------- --------
Total assets............... $9,686.7 $9,128.0
Total liabilities.......... $8,581.1 $8,493.1
Total stockholders' equity. $1,105.6 $ 634.9
165
Report of Independent Registered Public Accounting Firm
The Board of Directors
Genworth Life and Annuity Insurance Company:
Under date of April 13, 2010, we reported on the consolidated balance sheets
of Genworth Life and Annuity Insurance Company and subsidiaries (the Company)
as of December 31, 2009 and 2008, and the related consolidated statements of
income, changes in stockholder's equity, and cash flows for each of the years
in the three-year period ended December 31, 2009, which are included herein. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules included herein. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for other-than-temporary impairments in 2009.
/s/ KPMG LLP
Richmond, Virginia
April 13, 2010
166
Schedule I
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Summary of investments--other than investments in related parties
(Amounts in millions)
As of December 31, 2009, the amortized cost or cost, fair value and carrying
value of our invested assets were as follows:
Amortized
cost or Carrying
Type of Investment cost Fair value value
------------------ --------- ---------- ---------
Fixed maturity securities:
Bonds:
U.S. government, agencies and authorities..... $ 649.7 $ 654.5 $ 654.5
Government--non-U.S........................... 148.9 154.6 154.6
Public utilities.............................. 747.3 758.1 758.1
All other corporate bonds..................... 10,535.9 9,430.5 9,430.5
--------- --------- ---------
Total fixed maturity securities............ 12,081.8 10,997.7 10,997.7
Equity securities.................................... 90.5 101.3 101.3
Commercial mortgage loans............................ 2,363.3 xxxxx 2,363.3
Policy loans......................................... 515.7 xxxxx 515.7
Other invested assets/(1)/........................... 2,261.1 xxxxx 2,226.0
--------- --------- ---------
Total investments.......................... $17,312.4 xxxxx $16,204.0
========= ========= =========
--------
/(1)/The amount shown in the consolidated balance sheet for other invested
assets differs from amortized cost or cost presented, as other invested
assets include certain assets with a carrying amount that differs from
amortized cost or cost.
See Accompanying Report of Independent Registered Public Accounting Firm
167
Schedule III
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY AND SUBSIDIARIES
Supplemental Insurance Information
(Amounts in millions)
Deferred Policyholder Liability for
Acquisition Future Policy Account Policy and Unearned
Segment Costs Benefits Balances Contract Claims Premiums
------- ----------- ------------- ------------ --------------- --------
December 31, 2009
Protection.......... $2,698.2 $2,430.5 $ 4,901.6 $283.1 $17.2
Retirement Income... 477.6 7,454.6 3,822.4 11.8 --
Corporate and Other. 4.3 -- 2,638.5 -- --
-------- -------- --------- ------ -----
Total........... $3,180.1 $9,885.1 $11,362.5 $294.9 $17.2
======== ======== ========= ====== =====
December 31, 2008
Protection.......... $2,675.1 $2,329.6 $ 4,865.8 $264.8 $19.2
Retirement Income... 611.7 7,606.6 4,823.1 16.1 --
Corporate and Other. 8.0 -- 4,328.4 -- --
-------- -------- --------- ------ -----
Total........... $3,294.8 $9,936.2 $14,017.3 $280.9 $19.2
======== ======== ========= ====== =====
Interest Amortization
Credited and Acquisition of Deferred
Net Benefits and and Operating Acquisition
Premium Investment Other Changes in Expenses, Net Costs and Premiums
Segment Revenue Income Policy Reserves of Deferrals Intangibles Written
------- -------- ---------- ---------------- ------------- ------------ --------
December 31, 2009
Protection.......... $ 933.0 $ 371.7 $1,021.0 $160.9 $102.9 $ 912.0
Retirement Income... 49.1 216.6 300.9 75.5 134.3 49.1
Corporate and Other. 0.3 56.4 50.5 10.6 3.8 0.3
-------- -------- -------- ------ ------ --------
Total........... $ 982.4 $ 644.7 $1,372.4 $247.0 $241.0 $ 961.4
======== ======== ======== ====== ====== ========
December 31, 2008
Protection.......... $ 919.9 $ 522.0 $ 992.6 $163.2 $116.4 $ 908.2
Retirement Income... 148.2 245.8 442.3 85.7 124.2 148.2
Corporate and Other. 0.4 180.5 154.6 21.3 3.4 0.4
-------- -------- -------- ------ ------ --------
Total........... $1,068.5 $ 948.3 $1,589.5 $270.2 $244.0 $1,056.8
======== ======== ======== ====== ====== ========
December 31, 2007
Protection.......... $ 891.5 $ 609.3 $ 997.9 $145.6 $106.8 $ 868.8
Retirement Income... 171.3 305.9 415.7 75.6 43.3 171.2
Corporate and Other. 0.4 274.7 233.1 23.0 1.3 0.4
-------- -------- -------- ------ ------ --------
Total........... $1,063.2 $1,189.9 $1,646.7 $244.2 $151.4 $1,040.4
======== ======== ======== ====== ====== ========
See Accompanying Report of Independent Registered Public Accounting Firm
168
DEFINITIONS
The following is a listing of defined terms.
ACCOUNT -- The account in which the assets in each investment portfolio owned
by the Certificate Owner(s) and covered under the Certificate are held. The
Account is managed according to the asset allocation model(s) shown in the
Certificate.
ACCOUNT VALUE -- The value of the assets in the Account, as determined as of
the close of business on a Valuation Day. For purposes of the Certificate, once
determined on a Valuation Day, the Account Value does not change until the next
Valuation Day.
ADDITION -- An amount, not set forth as an Addition exception in the
Certificate, received and applied to the Account after the Certificate Date.
ADVISORS -- Investment advisors who act as the primary contact for clients
under the GFWM Program.
ALTERNATIVE ANNUITY PAYMENT -- The annual payment under the Alternative Annuity
provision of your Certificate paid by us to the Certificate Owner(s). This
provision is referred to as "Base Income" in your Certificate.
ANNUITY -- Benefits to be provided in the form of a series of payments for the
life of the named Participant as determined under the terms of the Certificate.
ANNUITY EXERCISE DATE -- The earliest of the following three dates: the date
the Account Value is less than the Withdrawal Guarantee, the date the Account
Value is less than $20,000, and the date the Participant (or if there are Joint
Participants, the younger Joint Participant) reaches age 100, less the number
of days in the Notice Period.
ASSET ALLOCATION MODEL -- One of the asset allocation model portfolios created
by investment management firms and made available by GFWM.
ASSET CHARGE -- The asset charge periodically calculated and deducted from your
Account Value or assessed through another means of payment pursuant to the
terms of the Certificate and while the Certificate is in force.
BIRTHDAY -- The end of day each year on the anniversary of the date of birth of
the Participant (or if there are Joint Participants, the younger Joint
Participant).
CERTIFICATE -- A no cash value certificate issued by the Company to the
Certificate Owner(s) pursuant to the terms of the Contract. The Certificate
describes the Withdrawal Guarantee as well as the Certificate Owner's rights
and obligations with respect to the Guaranteed Income to be paid when the
Account Value reaches the Minimum Amount. The Certificate also describes the
Certificate Owner's rights and obligations with respect to the Alternative
Annuity Payment provision available under the Annuity.
CERTIFICATE DATE -- The Valuation Day as of which a Certificate becomes
effective as shown on the Certificate.
CERTIFICATE OWNER(S) -- The person(s) or entity named on the Certificate.
"You," "your" or "Owner" refers to the Certificate Owner.
CODE -- The Internal Revenue Code of 1986, as amended.
COMPANY -- Genworth Life and Annuity Insurance Company, the issuer of the
Contract and Certificate (also referred to as "we", "us" or "our").
CONTRACT -- The group guaranteed income annuity contract issued by the Company
to GFWM with any attached riders, endorsements and Certificates.
EARLY WITHDRAWAL -- Any Withdrawal prior to the date you turn age 65 (or the
younger Participant's age 65 in the case of Joint Participants).
EXCESS WITHDRAWAL -- On or after the date you turn age 65 (or the younger
Participant's age 65 in the case of Joint Participants) and before the Latest
Annuity Date, the portion of all Withdrawals during a Withdrawal Year that is
in excess of the Withdrawal Guarantee.
GENWORTH -- Genworth Financial, Inc., the parent of the Company.
GFWM -- Genworth Financial Wealth Management, Inc.
GFWM PROGRAM -- The program through which the Certificates are exclusively
available.
GUARANTEED INCOME -- The guaranteed annual payment as determined by the last
recorded Withdrawal Guarantee payable under the Guaranteed Income provision by
us to the Certificate Owner(s).
GUARANTEED WITHDRAWALS -- Amounts you may withdraw from your Account pursuant
to the Withdrawal Guarantee.
HOME OFFICE -- Our Home Office that is located at the address shown on the
Certificate cover page.
169
JOINT PARTICIPANT -- The person whose age, together with the age of the other
Joint Participant (if any), determines the Withdrawal Guarantee under each
Certificate.
LATEST ANNUITY DATE -- The Annuity Exercise Date PLUS the Notice Period.
1940 ACT -- The Investment Company Act of 1940, as amended.
NOTICE PERIOD -- The length of time as shown on the Certificate prior to the
Latest Annuity Date during which you may still cancel your Certificate.
PARTICIPANT -- The person whose age is used to determine the Withdrawal
Guarantee under each Certificate.
RISK-RETURN PROFILE -- A risk return profile in mutual fund and/or ETF wrap
accounts provided under the GFWM Program.
QUALIFIED ACCOUNT -- An Account listed under the Qualified Accounts provision
receiving special tax treatment under the Code.
SECURITIES ACT -- The Securities Act of 1933, as amended.
SPOUSES -- Legally married under applicable Federal law.
STRATEGIST -- An institutional investment management firm hired by GFWM that
makes recommendations as to asset allocation models.
TOTAL ADDITIONS -- The sum of the initial Account Value on the Certificate Date
plus any Additions.
VALUATION DAY -- Each day on which the New York Stock Exchange is open for
regular trading.
WITHDRAWAL -- Any disbursement from the Account other than Withdrawal
Exceptions.
WITHDRAWAL EXCEPTIONS -- Disbursements shown on the Certificate that will not
be treated as Withdrawals.
WITHDRAWAL GUARANTEE -- After the date you turn age 65 (or the younger
Participant's age 65 in the case of Joint Participants), the maximum amount the
Certificate Owner may withdraw from the Account Value in a Withdrawal Year
without reducing Guaranteed Income.
WITHDRAWAL GUARANTEE FACTOR -- A factor used in the calculation of the
Withdrawal Guarantee as shown on the tables located on the Certificate.
WITHDRAWAL YEAR -- The first Withdrawal Year is the period of time between the
Withdrawal Exercise Date and the first Birthday following the Withdrawal
Exercise Date. Subsequent Withdrawal Years are the one-year periods beginning
on each Birthday.
170
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
Certificates, other than any underwriting discounts and commissions, are as
follows (except for the Securities and Exchange Commission Filing Fee, all
amounts shown are estimates):
Securities and Exchange Commission $ 1,842 (based on a total of $60,000,000 Proposed
Registration Fees................ Maximum Aggregate Offering)
Printing and engraving............. $ 10,000
Accounting fees and expenses....... $ 10,000
Legal fees and expenses............ $300,000
Miscellaneous...................... $ 10,000
--------
Total expenses (approximate).... $331,842
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 13.1-876 and 13.1-881 of the Code of Virginia, in brief, allow a
corporation to indemnify any person made party to a proceeding because such
person is or was a director, officer, employee, or agent of the corporation,
against liability incurred in the proceeding if: (1) he conducted himself in
good faith; and (2) he believed that (a) in the case of conduct in his official
capacity with the corporation, his conduct was in its best interests; and
(b) in all other cases, his conduct was at least not opposed to the
corporation's best interests and (3) in the case of any criminal proceeding, he
had no reasonable cause to believe his conduct was unlawful. The termination of
a proceeding by judgment, order, settlement or conviction is not, of itself,
determinative that the director, officer, employee, or agent of the corporation
did not meet the standard of conduct described. A corporation may not indemnify
a director, officer, employee, or agent of the corporation in connection with a
proceeding by or in the right of the corporation, in which such person was
adjudged liable to the corporation, or in connection with any other proceeding
charging improper personal benefit to such person, whether or not involving
action in his official capacity, in which such person was adjudged liable on
the basis that personal benefit was improperly received by him. Indemnification
permitted under these sections of the Code of Virginia in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Genworth Life and Annuity Insurance Company's Articles of Incorporation
provide that Genworth Life and Annuity Insurance Company shall, and may through
insurance coverage, indemnify any directors or officers who are a party to any
proceeding by reason of the fact that he or she was or is a director or officer
of Genworth Life and Annuity Insurance Company against any liability incurred
by him or her in connection with such proceeding, unless he or she engaged in
willful misconduct or a knowing violation of the criminal law or any federal or
state securities law. Such indemnification covers all judgments, settlements,
penalties, fines and reasonable expenses incurred with respect to such
proceeding. If the person involved is not a director or officer of Genworth
Life and Annuity Insurance Company, the board of directors may cause Genworth
Life and Annuity Insurance Company to indemnify, or contract to indemnify, to
the same extent allowed for its directors and officers, such person who was, is
or may become a party to any proceeding, by reason of the fact that he or she
is or was an employee or agent of Genworth Life and Annuity Insurance Company,
or is or was serving at the request of Genworth Life and Annuity Insurance
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise.
1
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers or persons controlling Genworth Life
and Annuity Insurance Company pursuant to the foregoing provisions, Genworth
Life and Annuity Insurance Company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
* * *
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
1.1 Form of Underwriting Agreement. Previously filed on February 28, 2008
with Pre-Effective Amendment No. 2 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
1.2 Form of Broker-Dealer Sales Agreement. Previously filed on February
28, 2008 with Pre-Effective Amendment No. 2 to Form S-1 for Genworth
Life and Annuity Insurance Company, Registration No. 333-143494.
2 Not applicable.
3.1 Amended and Restated Articles of Incorporation of Genworth Life and
Annuity Insurance Company. Previously filed on March 31, 2007 with
Post-Effective Amendment No. 6 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-67902.
3.2 Amended and Restated By-laws of Genworth Life and Annuity Insurance
Company. Previously filed on March 31, 2007 with Post-Effective
Amendment No. 6 to Form S-1 for Genworth Life and Annuity Insurance
Company, Registration No. 333-67902.
4.1 Form of Contract. Previously filed on February 28, 2008 with
Pre-Effective Amendment No. 2 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
4.2 Form of Certificate. Previously filed on February 28, 2008 with
Pre-Effective Amendment No. 2 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
4.3 Form of 90 Day Withdrawal Guarantee Calculation Endorsement.
Previously filed on March 6, 2009 with Post-Effective Amendment No. 1
to Form S-1 for Genworth Life and Annuity Insurance Company,
Registration No. 333-143494.
4.4 Form of Guaranteed Income Step-Up Endorsement. Previously filed on
March 6, 2010 with Post-Effective Amendment No. 1 to Form S-1 for
Genworth Life and Annuity Insurance Company, Registration No.
333-143494
4.5 Form of Application. Previously filed on February 28, 2008 with
Pre-Effective Amendment No. 2 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
5 Opinion of Re Legality. Previously filed on March 6, 2009 with
Post-Effective Amendment No. 1 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
6 Reserved.
7 Not applicable.
8 Opinion Re tax matters (included in Exhibit 5).
9 Not applicable.
10 Form of Administrative Services Agreement. Previously filed on
February 28, 2008 with Pre-Effective Amendment No. 2 to Form S-1 for
Genworth Life and Annuity Insurance Company, Registration
No. 333-143494.
11 Not applicable.
2
12 Statement of Ratio of Income to Fixed Charges. Filed herewith.
13 Not applicable.
14 Not applicable.
15 Not applicable.
16 Not applicable.
17 Not applicable.
18 Not applicable.
19 Not applicable.
20 Not applicable.
21 Subsidiaries of the Registrant. Previously filed on March 6, 2009
with Post-Effective Amendment No. 1 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494
22 Not applicable.
23.1 Consent of Counsel. Filed herewith.
23.2 Consent of Experts. Filed herewith.
24 Power of Attorney. Filed herewith.
25 Not applicable.
26 Not applicable.
27 Not applicable.
(b) Financial Statement Schedules. Not applicable.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from low or high end estimated offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b), if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or
any material change to such information in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
3
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for the purpose of determining liability under the Securities
Act of 1933 to any purchaser:
(i) If the registrant is subject to Rule 430C ((S)230.430C of this
chapter), each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A ((S)230.430A of this chapter), shall be deemed to
be part of and included in the registration statement as of the date it
is first used after effectiveness. Provided, however, that no statement
made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with
a time of contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or prospectus
that was part of the registration or made in any such document
immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant
under the Securities Act of 1933 to any purchaser in the initial
distribution of the securities:
The undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant to
Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii) The portion of any other free writing prospectus relating to
the offering containing materials or information about the undersigned
registrant or their securities provided by or on behalf of the
undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 3 to the Registration Statement has been signed on
its behalf by the undersigned thereunto duly authorized, in the County of
Henrico in the Commonwealth of Virginia, on the 13/th/ day of April, 2010.
GENWORTH LIFE AND ANNUITY INSURANCE COMPANY
(Registrant)
By: /s/ MICHAEL P. COGSWELL
-------------------------------------
MICHAEL P. COGSWELL
VICE PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 3 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ PAMELA S. SCHUTZ* Chairperson of the Board, President and April 13, 2010
------------------------ Chief Executive Officer
PAMELA S. SCHUTZ
/s/ PAUL A. HALEY* Director, Senior Vice President and April 13, 2010
------------------------ Chief Actuary
PAUL A. HALEY
/s/ RONALD P. JOELSON* Director, Senior Vice President and April 13, 2010
------------------------ Chief Investment Officer
RONALD P. JOELSON
/s/ LEON E. RODAY* Director and Senior Vice President April 13, 2010
------------------------
LEON E. RODAY
/s/ GEOFFREY S. STIFF* Director and Senior Vice President April 13, 2010
------------------------
GEOFFREY S. STIFF
/s/ KELLY L. GROH* Senior Vice President and Chief April 13, 2010
------------------------ Financial Officer
KELLY L. GROH
/s/ JAC J. AMERELL* Vice President and Controller April 13, 2010
------------------------
JAC J. AMERELL
*By: /s/ MICHAEL P. COGSWELL , pursuant to Powers of April 13, 2010
------------------------- Attorney executed on December 16,
MICHAEL P. COGSWELL 2009, filed herewith.
5
EXHIBIT INDEX
1.1 Form of Underwriting Agreement. Previously filed on February 28, 2008
with Pre-Effective Amendment No. 2 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
1.2 Form of Broker-Dealer Sales Agreement. Previously filed on February
28, 2008 with Pre-Effective Amendment No. 2 to Form S-1 for Genworth
Life and Annuity Insurance Company, Registration No. 333-143494.
2 Not applicable.
3.1 Amended and Restated Articles of Incorporation of Genworth Life and
Annuity Insurance Company. Previously filed on March 31, 2007 with
Post-Effective Amendment No. 6 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-67902.
3.2 Amended and Restated By-laws of Genworth Life and Annuity Insurance
Company. Previously filed on March 31, 2007 with Post-Effective
Amendment No. 6 to Form S-1 for Genworth Life and Annuity Insurance
Company, Registration No. 333-67902.
4.1 Form of Contract. Previously filed on February 28, 2008 with
Pre-Effective Amendment No. 2 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
4.2 Form of Certificate. Previously filed on February 28, 2008 with
Pre-Effective Amendment No. 2 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
4.3 Form of 90 Day Withdrawal Guarantee Calculation Endorsement.
Previously filed on March 6, 2009 with Post-Effective Amendment No. 1
to Form S-1 for Genworth Life and Annuity Insurance Company,
Registration No. 333-143494.
4.4 Form of Guaranteed Income Step-Up Endorsement. Previously filed on
March 6, 2010 with Post-Effective Amendment No. 1 to Form S-1 for
Genworth Life and Annuity Insurance Company, Registration No.
333-143494
4.5 Form of Application. Previously filed on February 28, 2008 with
Pre-Effective Amendment No. 2 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
5 Opinion of Re Legality. Previously filed on March 6, 2009 with
Post-Effective Amendment No. 1 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494.
6 Reserved.
7 Not applicable.
8 Opinion Re tax matters (included in Exhibit 5).
9 Not applicable.
10 Form of Administrative Services Agreement. Previously filed on
February 28, 2008 with Pre-Effective Amendment No. 2 to Form S-1 for
Genworth Life and Annuity Insurance Company, Registration
No. 333-143494.
11 Not applicable.
12 Statement of Ratio of Income to Fixed Charges. Filed herewith.
13 Not applicable.
14 Not applicable.
15 Not applicable.
16 Not applicable.
6
17 Not applicable.
18 Not applicable.
19 Not applicable.
20 Not applicable.
21 Subsidiaries of the Registrant. Previously filed on March 6, 2009
with Post-Effective Amendment No. 1 to Form S-1 for Genworth Life and
Annuity Insurance Company, Registration No. 333-143494
22 Not applicable.
23.1 Consent of Counsel. Filed herewith.
23.2 Consent of Experts. Filed herewith.
24 Power of Attorney. Filed herewith.
25 Not applicable.
26 Not applicable.
27 Not applicable.
(b) Financial Statement Schedules. Not applicable.
7