UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-32195
GENWORTH FINANCIAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 33-1073076 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) | |
6620 West Broad Street Richmond, Virginia |
23230 | |
(Address of Principal Executive Offices) | (Zip Code) |
(804) 281-6000
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x | Accelerated Filer ¨ | |
Non-accelerated Filer ¨ | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At July 26, 2010, 489,335,077 shares of Class A Common Stock, par value $0.001 per share, were outstanding.
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in millions, except per share amounts)
(Unaudited)
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 1,470 | $ | 1,502 | $ | 2,940 | $ | 3,004 | ||||||||
Net investment income |
823 | 781 | 1,588 | 1,492 | ||||||||||||
Net investment gains (losses) |
(139 | ) | (53 | ) | (209 | ) | (823 | ) | ||||||||
Insurance and investment product fees and other |
256 | 253 | 512 | 544 | ||||||||||||
Total revenues |
2,410 | 2,483 | 4,831 | 4,217 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Benefits and other changes in policy reserves |
1,340 | 1,492 | 2,655 | 3,000 | ||||||||||||
Interest credited |
211 | 263 | 424 | 538 | ||||||||||||
Acquisition and operating expenses, net of deferrals |
499 | 456 | 974 | 897 | ||||||||||||
Amortization of deferred acquisition costs and intangibles |
179 | 212 | 363 | 459 | ||||||||||||
Interest expense |
109 | 114 | 224 | 210 | ||||||||||||
Total benefits and expenses |
2,338 | 2,537 | 4,640 | 5,104 | ||||||||||||
Income (loss) before income taxes |
72 | (54 | ) | 191 | (887 | ) | ||||||||||
Benefit for income taxes |
(5 | ) | (4 | ) | (98 | ) | (368 | ) | ||||||||
Net income (loss) |
77 | (50 | ) | 289 | (519 | ) | ||||||||||
Less: net income attributable to noncontrolling interests |
35 | | 69 | | ||||||||||||
Net income (loss) available to Genworth Financial, Inc.s common stockholders |
$ | 42 | $ | (50 | ) | $ | 220 | $ | (519 | ) | ||||||
Net income (loss) available to Genworth Financial, Inc.s common stockholders per common share: |
||||||||||||||||
Basic |
$ | 0.09 | $ | (0.11 | ) | $ | 0.45 | $ | (1.20 | ) | ||||||
Diluted |
$ | 0.08 | $ | (0.11 | ) | $ | 0.45 | $ | (1.20 | ) | ||||||
Weighted-average common shares outstanding: |
||||||||||||||||
Basic |
489.1 | 433.2 | 489.0 | 433.2 | ||||||||||||
Diluted |
494.2 | 433.2 | 493.9 | 433.2 | ||||||||||||
Supplemental disclosures: |
||||||||||||||||
Total other-than-temporary impairments |
$ | (24 | ) | $ | (476 | ) | $ | (101 | ) | $ | (1,073 | ) | ||||
Portion of other-than-temporary impairments included in other comprehensive income (loss) |
(27 | ) | 324 | (30 | ) | 324 | ||||||||||
Net other-than-temporary impairments |
(51 | ) | (152 | ) | (131 | ) | (749 | ) | ||||||||
Other investment gains (losses) |
(88 | ) | 99 | (78 | ) | (74 | ) | |||||||||
Total net investment gains (losses) |
$ | (139 | ) | $ | (53 | ) | $ | (209 | ) | $ | (823 | ) | ||||
See Notes to Condensed Consolidated Financial Statements
3
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share amounts)
June 30, 2010 |
December 31, 2009 |
|||||||
(Unaudited) | ||||||||
Assets |
||||||||
Investments: |
||||||||
Fixed maturity securities available-for-sale, at fair value |
$ | 53,386 | $ | 49,752 | ||||
Equity securities available-for-sale, at fair value |
199 | 159 | ||||||
Commercial mortgage loans |
7,208 | 7,499 | ||||||
Restricted commercial mortgage loans related to securitization entities |
535 | | ||||||
Policy loans |
1,467 | 1,403 | ||||||
Other invested assets |
4,042 | 4,702 | ||||||
Restricted other invested assets related to securitization entities ($373 at fair value) |
374 | | ||||||
Total investments |
67,211 | 63,515 | ||||||
Cash and cash equivalents |
4,586 | 5,002 | ||||||
Accrued investment income |
696 | 691 | ||||||
Deferred acquisition costs |
7,170 | 7,341 | ||||||
Intangible assets |
789 | 934 | ||||||
Goodwill |
1,313 | 1,324 | ||||||
Reinsurance recoverable |
17,279 | 17,332 | ||||||
Other assets |
1,024 | 954 | ||||||
Deferred tax asset |
| 92 | ||||||
Separate account assets |
10,284 | 11,002 | ||||||
Total assets |
$ | 110,352 | $ | 108,187 | ||||
Liabilities and stockholders equity |
||||||||
Liabilities: |
||||||||
Future policy benefits |
$ | 29,929 | $ | 29,469 | ||||
Policyholder account balances |
28,338 | 28,470 | ||||||
Liability for policy and contract claims |
6,302 | 6,567 | ||||||
Unearned premiums |
4,238 | 4,714 | ||||||
Other liabilities ($183 and $other liabilities related to securitization entities) |
6,287 | 6,298 | ||||||
Borrowings related to securitization entities ($51 at fair value) |
525 | | ||||||
Non-recourse funding obligations |
3,437 | 3,443 | ||||||
Short-term borrowings |
730 | 930 | ||||||
Long-term borrowings |
4,331 | 3,641 | ||||||
Deferred tax liability |
904 | 303 | ||||||
Separate account liabilities |
10,284 | 11,002 | ||||||
Total liabilities |
95,305 | 94,837 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 578 million and 577 million shares issued as of June 30, 2010 and December 31, 2009, respectively; 489 million shares outstanding as of June 30, 2010 and December 31, 2009 |
1 | 1 | ||||||
Additional paid-in capital |
12,078 | 12,034 | ||||||
Accumulated other comprehensive income (loss): |
||||||||
Net unrealized investment gains (losses): |
||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired |
208 | (1,151 | ) | |||||
Net unrealized gains (losses) on other-than-temporarily impaired securities |
(179 | ) | (247 | ) | ||||
Net unrealized investment gains (losses) |
29 | (1,398 | ) | |||||
Derivatives qualifying as hedges |
1,162 | 802 | ||||||
Foreign currency translation and other adjustments |
140 | 432 | ||||||
Total accumulated other comprehensive income (loss) |
1,331 | (164 | ) | |||||
Retained earnings |
3,221 | 3,105 | ||||||
Treasury stock, at cost (88 million shares as of June 30, 2010 and December 31, 2009) |
(2,700 | ) | (2,700 | ) | ||||
Total Genworth Financial, Inc.s stockholders equity |
13,931 | 12,276 | ||||||
Noncontrolling interests |
1,116 | 1,074 | ||||||
Total stockholders equity |
15,047 | 13,350 | ||||||
Total liabilities and stockholders equity |
$ | 110,352 | $ | 108,187 | ||||
See Notes to Condensed Consolidated Financial Statements
4
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Amounts in millions)
(Unaudited)
Common stock |
Additional paid-in capital |
Accumulated other comprehensive income (loss) |
Retained earnings |
Treasury stock, at cost |
Total Genworth Financial, Inc.s stockholders equity |
Noncontrolling interests |
Total stockholders equity |
|||||||||||||||||||||||
Balances as of December 31, 2009 |
$ | 1 | $ | 12,034 | $ | (164 | ) | $ | 3,105 | $ | (2,700 | ) | $ | 12,276 | $ | 1,074 | $ | 13,350 | ||||||||||||
Cumulative effect of change in accounting, net of taxes and other adjustments |
| | 91 | (104 | ) | | (13 | ) | | (13 | ) | |||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||
Net income (loss) |
| | | 220 | | 220 | 69 | 289 | ||||||||||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired |
| | 1,268 | | | 1,268 | 9 | 1,277 | ||||||||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities |
| | 68 | | | 68 | | 68 | ||||||||||||||||||||||
Derivatives qualifying as hedges |
| | 360 | | | 360 | | 360 | ||||||||||||||||||||||
Foreign currency translation and other adjustments |
| | (292 | ) | | | (292 | ) | (15 | ) | (307 | ) | ||||||||||||||||||
Total comprehensive income (loss) |
1,687 | |||||||||||||||||||||||||||||
Dividends to noncontrolling interests |
| | | | | | (21 | ) | (21 | ) | ||||||||||||||||||||
Stock-based compensation expense and exercises and other |
| 24 | | | | 24 | | 24 | ||||||||||||||||||||||
Other capital transactions |
| 20 | | | | 20 | | 20 | ||||||||||||||||||||||
Balances as of June 30, 2010 |
$ | 1 | $ | 12,078 | $ | 1,331 | $ | 3,221 | $ | (2,700 | ) | $ | 13,931 | $ | 1,116 | $ | 15,047 | |||||||||||||
5
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (CONTINUED)
(Amounts in millions)
(Unaudited)
Common stock |
Additional paid-in capital |
Accumulated other comprehensive income (loss) |
Retained earnings |
Treasury stock, at cost |
Total stockholders equity |
|||||||||||||||||
Balances as of December 31, 2008 |
$ | 1 | $ | 11,477 | $ | (3,062 | ) | $ | 3,210 | $ | (2,700 | ) | $ | 8,926 | ||||||||
Cumulative effect of change in accounting, net of taxes and other adjustments |
| | (349 | ) | 355 | | 6 | |||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||
Net income (loss) |
| | | (519 | ) | | (519 | ) | ||||||||||||||
Net unrealized gains (losses) on securities not other-than-temporarily impaired |
| | 1,378 | | | 1,378 | ||||||||||||||||
Net unrealized gains (losses) on other-than-temporarily impaired securities |
| | (14 | ) | | | (14 | ) | ||||||||||||||
Derivatives qualifying as hedges |
| | (213 | ) | | | (213 | ) | ||||||||||||||
Foreign currency translation and other adjustments |
| | 391 | | | 391 | ||||||||||||||||
Total comprehensive income (loss) |
1,023 | |||||||||||||||||||||
Stock-based compensation expense and exercises and other |
| 15 | | | | 15 | ||||||||||||||||
Balances as of June 30, 2009 |
$ | 1 | $ | 11,492 | $ | (1,869 | ) | $ | 3,046 | $ | (2,700 | ) | $ | 9,970 | ||||||||
See Notes to Condensed Consolidated Financial Statements
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
Six months ended June 30, |
||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 289 | $ | (519 | ) | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: |
||||||||
Amortization of fixed maturity discounts and premiums |
5 | 106 | ||||||
Net investment losses (gains) |
209 | 823 | ||||||
Charges assessed to policyholders |
(233 | ) | (211 | ) | ||||
Acquisition costs deferred |
(392 | ) | (368 | ) | ||||
Amortization of deferred acquisition costs and intangibles |
363 | 459 | ||||||
Deferred income taxes |
(173 | ) | (591 | ) | ||||
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments |
119 | 116 | ||||||
Stock-based compensation expense |
23 | 15 | ||||||
Change in certain assets and liabilities: |
||||||||
Accrued investment income and other assets |
24 | 30 | ||||||
Insurance reserves |
1,208 | 1,520 | ||||||
Current tax liabilities |
(211 | ) | 197 | |||||
Other liabilities and other policy-related balances |
(674 | ) | (208 | ) | ||||
Net cash from operating activities |
557 | 1,369 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from maturities and repayments of investments: |
||||||||
Fixed maturity securities |
2,057 | 1,892 | ||||||
Commercial mortgage loans |
263 | 381 | ||||||
Restricted commercial mortgage loans related to securitization entities |
27 | | ||||||
Proceeds from sales of investments: |
||||||||
Fixed maturity and equity securities |
2,393 | 1,663 | ||||||
Purchases and originations of investments: |
||||||||
Fixed maturity and equity securities |
(6,867 | ) | (2,700 | ) | ||||
Commercial mortgage loans |
(23 | ) | | |||||
Other invested assets, net |
1,491 | (348 | ) | |||||
Policy loans, net |
(64 | ) | (253 | ) | ||||
Net cash from investing activities |
(723 | ) | 635 | |||||
Cash flows from financing activities: |
||||||||
Deposits to universal life and investment contracts |
1,174 | 1,271 | ||||||
Withdrawals from universal life and investment contracts |
(1,734 | ) | (4,231 | ) | ||||
Short-term borrowings and other, net |
(285 | ) | (330 | ) | ||||
Repayment and repurchase of long-term borrowings |
| (739 | ) | |||||
Proceeds from the issuance of long-term borrowings |
660 | | ||||||
Redemption of non-recourse funding obligations |
(6 | ) | (12 | ) | ||||
Repayment of borrowings related to securitization entities |
(31 | ) | | |||||
Dividends paid to noncontrolling interests |
(21 | ) | | |||||
Net cash from financing activities |
(243 | ) | (4,041 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
(7 | ) | 83 | |||||
Net change in cash and cash equivalents |
(416 | ) | (1,954 | ) | ||||
Cash and cash equivalents at beginning of period |
5,002 | 7,328 | ||||||
Cash and cash equivalents at end of period |
$ | 4,586 | $ | 5,374 | ||||
See Notes to Condensed Consolidated Financial Statements
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Formation of Genworth and Basis of Presentation
Genworth Financial, Inc. (Genworth) was incorporated in Delaware on October 23, 2003. The accompanying condensed financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or where we are the primary beneficiary of a variable interest entity, which we refer to as the Company, we, us or our unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.
We have the following three operating segments:
| Retirement and Protection. We offer and manage a variety of protection, wealth management and retirement income products. Our primary protection products include: life, long-term care and Medicare supplement insurance. Additionally, we offer other senior supplemental products, as well as care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs and advisor services, financial planning services, fixed and variable deferred and immediate individual annuities and group variable annuities offered through retirement plans. |
| International. We offer mortgage and lifestyle protection insurance products and related services in multiple markets. We are a leading provider of mortgage insurance products in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk. We are a leading provider of payment protection coverages in multiple European countries, Canada and Mexico. Our lifestyle protection insurance products help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death. |
| U.S. Mortgage Insurance. In the U.S., we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively provide mortgage insurance on a structured, or bulk, basis with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk. |
We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of non-core businesses and non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist of funding agreements, funding agreements backing notes (FABNs) and guaranteed investment contracts (GICs).
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and rules and regulations of the U.S. Securities and Exchange Commission (SEC). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire
8
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2009 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.
(2) Accounting Pronouncements
Recently Adopted
Accounting for Transfers of Financial Assets
On January 1, 2010, we adopted new accounting guidance related to accounting for transfers of financial assets. This accounting guidance amends the previous 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. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements. The elimination of the qualifying special-purpose entity concept requires that these entities be considered for consolidation as a result of the new guidance related to variable interest entities (VIEs) as discussed below.
Improvements to Financial Reporting by Enterprises Involved with VIEs
On January 1, 2010, we adopted 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 that has the power to direct the activities of a VIE that most significantly impacts the VIEs economic performance and has the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. Upon adoption of this new accounting guidance, we were required to consolidate certain VIEs, including previously qualifying special-purpose entities and investment structures. We recorded a transition adjustment for the impact upon adoption to reflect the difference between the assets and liabilities of the newly consolidated entities and the amounts recorded for our interests in these entities prior to adoption. On January 1, 2010, we recorded a net cumulative effect adjustment of $104 million to retained earnings with a partial offset to accumulated other comprehensive income (loss) of $91 million related to the adoption of this new accounting guidance.
9
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The assets and liabilities of the newly consolidated entities were as follows as of January 1, 2010:
(Amounts in millions) |
Carrying value (1) | Adjustment for election of fair value option (2) |
Amounts recorded upon consolidation |
||||||||
Assets |
|||||||||||
Restricted commercial mortgage loans |
$ | 564 | $ | | $ | 564 | |||||
Restricted other invested assets |
409 | (30 | ) | 379 | |||||||
Accrued investment income |
2 | | 2 | ||||||||
Total assets |
975 | (30 | ) | 945 | |||||||
Liabilities |
|||||||||||
Other liabilities |
138 | | 138 | ||||||||
Borrowings related to securitization entities |
644 | (80 | ) | 564 | |||||||
Total liabilities |
782 | (80 | ) | 702 | |||||||
Net assets and liabilities of newly consolidated entities |
$ | 193 | $ | 50 | 243 | ||||||
Less: amortized cost of fixed maturity securities previously recorded (3) |
404 | ||||||||||
Cumulative effect adjustment to retained earnings upon adoption, pre-tax |
(161 | ) | |||||||||
Tax effect |
57 | ||||||||||
Net cumulative effect adjustment to retained earnings upon adoption |
$ | (104 | ) | ||||||||
(1) | Carrying value represents the amounts that would have been recorded in the consolidated financial statements on January 1, 2010 had we recorded the assets and liabilities in our financial statements from the date we first met the conditions for consolidation based on the criteria in the new accounting guidance. |
(2) | Amount represents the difference between book value and fair value of the investments and borrowings related to consolidated securitization entities where we have elected fair value option. |
(3) | Fixed maturity securities that were previously recorded had net unrealized investment losses of $91 million included in accumulated other comprehensive income (loss) as of December 31, 2009. |
For commercial mortgage loans, the carrying amounts represent the unpaid principal balance less any reserve. Restricted other invested assets are comprised of trading securities that are recorded at fair value. Trading securities represent asset-backed securities where we elected fair value option. Borrowings related to securitization entities are recorded at unpaid principal except for the borrowings related to entities where we elected fair value option for all assets and liabilities.
For certain entities consolidated upon adoption of the new accounting guidance on January 1, 2010, we elected fair value option to measure all assets and liabilities at current fair value with future changes in fair value being recording in income (loss). We elected fair value option for certain entities as a method to better present the offsetting changes in assets and liabilities related to third-party interests in those entities and eliminated the potential accounting mismatch between the measurement of the assets and derivatives of the entity compared to the borrowings issued by the entity. The entities where we did not elect fair value option did not have the same accounting mismatch since the assets held by the securitization entity and the borrowings of the entity were recorded at cost. See note 7 for additional information related to consolidation of VIEs.
10
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The new accounting guidance related to consolidation of VIEs has been deferred for a reporting entitys interest in an entity that has all of the attributes of an investment company as long as there is no implicit or explicit obligation to fund losses of the entity. For entities that meet these criteria, the new accounting guidance related to VIE consolidation would not be applicable until further guidance is issued. Accordingly, we did not have any impact upon adoption related to entities that meet the deferral criteria, such as certain limited partnership and fund investments.
Fair Value Measurements and DisclosuresImproving Disclosures about Fair Value Measurements
On January 1, 2010, we adopted new accounting guidance requiring additional disclosures for significant transfers between Level 1 and 2 fair value measurements and clarifications to existing fair value disclosures related to the level of disaggregation, inputs and valuation techniques. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.
Not Yet Adopted
In July 2010, the Financial Accounting Standards Board (FASB) issued new accounting guidance that will require additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain additional disclosures in this new accounting guidance will be effective for us on December 31, 2010 with certain other additional disclosures that will be effective for us on March 31, 2011. We do not expect the adoption of this new accounting guidance to have a material impact on our consolidated financial statements.
In April 2010, the FASB issued new accounting guidance on how investments held through separate accounts affect an insurers consolidation analysis of those investments. 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 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, upon adoption of this new accounting guidance, we are required to bifurcate embedded credit derivatives that no longer qualify under the amended scope exception. In conjunction with our adoption, we elected fair value option for certain fixed maturity securities. This accounting guidance was effective for us on July 1, 2010. The impact upon adoption of this new accounting guidance was approximately $270 million, before taxes and other adjustments, and was recorded as a reduction in retained earnings with a corresponding increase in accumulated other comprehensive income (loss) on July 1, 2010.
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.
11
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(3) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted shares outstanding for the periods indicated:
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||
(Amounts in millions, except per share amounts) |
2010 | 2009 | 2010 | 2009 | ||||||||||
Net income (loss) |
$ | 77 | $ | (50 | ) | $ | 289 | $ | (519 | ) | ||||
Less: net income attributable to noncontrolling interests |
35 | | 69 | | ||||||||||
Net income (loss) available to Genworth Financial, Inc.s common stockholders |
$ | 42 | $ | (50 | ) | $ | 220 | $ | (519 | ) | ||||
Basic per common share: |
||||||||||||||
Net income (loss) |
$ | 0.16 | $ | (0.11 | ) | $ | 0.59 | $ | (1.20 | ) | ||||
Less: net income attributable to noncontrolling interests |
0.07 | | 0.14 | | ||||||||||
Net income (loss) available to Genworth Financial, Inc.s common stockholders (1) |
$ | 0.09 | $ | (0.11 | ) | $ | 0.45 | $ | (1.20 | ) | ||||
Diluted per common share: |
||||||||||||||
Net income (loss) |
$ | 0.16 | $ | (0.11 | ) | $ | 0.59 | $ | (1.20 | ) | ||||
Less: net income attributable to noncontrolling interests |
0.07 | | 0.14 | | ||||||||||
Net income (loss) available to Genworth Financial, Inc.s common stockholders (1) |
$ | 0.08 | $ | (0.11 | ) | $ | 0.45 | $ | (1.20 | ) | ||||
Weighted-average shares used in basic earnings (loss) per common share calculations |
489.1 | 433.2 | 489.0 | 433.2 | ||||||||||
Potentially dilutive securities: |
||||||||||||||
Stock options, restricted stock units and stock appreciation rights |
5.1 | | 4.9 | | ||||||||||
Weighted-average shares used in diluted earnings (loss) per common share calculations ( 2) |
494.2 | 433.2 | 493.9 | 433.2 | ||||||||||
(1) | May not total due to whole number calculation. |
(2) | Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss for the three and six months ended June 30, 2009, we were required to use basic weighted-average common shares outstanding in the calculation of the 2009 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.2 million and 0.6 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss for the three and six months ended June 30, 2009, dilutive potential common shares would have been 434.4 million and 433.8 million, respectively. |
12
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(4) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the periods indicated:
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
(Amounts in millions) |
2010 | 2009 | 2010 | 2009 | ||||||||||||
Fixed maturity securitiestaxable |
$ | 646 | $ | 604 | $ | 1,272 | $ | 1,227 | ||||||||
Fixed maturity securitiesnon-taxable |
16 | 28 | 32 | 58 | ||||||||||||
Commercial mortgage loans |
99 | 109 | 203 | 223 | ||||||||||||
Restricted commercial mortgage loans related to securitization |
10 | | 20 | | ||||||||||||
Equity securities |
5 | 3 | 7 | 6 | ||||||||||||
Other invested assets |
39 | (7 | ) | 37 | (106 | ) | ||||||||||
Restricted other invested assets related to securitization entities (1) |
| | 1 | | ||||||||||||
Policy loans |
28 | 52 | 55 | 96 | ||||||||||||
Cash, cash equivalents and short-term investments |
4 | 14 | 9 | 31 | ||||||||||||
Gross investment income before expenses and fees |
847 | 803 | 1,636 | 1,535 | ||||||||||||
Expenses and fees |
(24 | ) | (22 | ) | (48 | ) | (43 | ) | ||||||||
Net investment income |
$ | 823 | $ | 781 | $ | 1,588 | $ | 1,492 | ||||||||
(1) | See note 7 for additional information related to consolidated securitization entities. |
(b) Net Investment Gains (Losses)
The following table sets forth net investment gains (losses) for the periods indicated:
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
(Amounts in millions) |
2010 | 2009 | 2010 | 2009 | ||||||||||||
Available-for-sale securities: |
||||||||||||||||
Realized gains on sale |
$ | 53 | $ | 21 | $ | 76 | $ | 50 | ||||||||
Realized losses on sale |
(36 | ) | (48 | ) | (74 | ) | (111 | ) | ||||||||
Impairments: |
||||||||||||||||
Total other-than-temporary impairments |
(24 | ) | (476 | ) | (101 | ) | (1,073 | ) | ||||||||
Portion of other-than-temporary impairments recognized in other comprehensive income (loss) |
(27 | ) | 324 | (30 | ) | 324 | ||||||||||
Net other-than-temporary impairments |
(51 | ) | (152 | ) | (131 | ) | (749 | ) | ||||||||
Trading securities |
(4 | ) | 11 | 2 | (1 | ) | ||||||||||
Commercial mortgage loans |
(18 | ) | (5 | ) | (22 | ) | (11 | ) | ||||||||
Net gains (losses) related to securitization entities (1) |
(47 | ) | | (36 | ) | | ||||||||||
Derivative instruments (2) |
(38 | ) | 114 | (46 | ) | (7 | ) | |||||||||
Other |
2 | 6 | 22 | 6 | ||||||||||||
Net investment gains (losses) |
$ | (139 | ) | $ | (53 | ) | $ | (209 | ) | $ | (823 | ) | ||||
(1) | See note 7 for additional information related to consolidated securitization entities. |
(2) | See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses). |
13
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The aggregate fair value of securities sold at a loss during the three months ended June 30, 2010 and 2009 was $858 million and $367 million, respectively, which was approximately 96% and 89%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2010 and 2009 was $1,416 million and $737 million, respectively, which was approximately 95% and 87%, 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 other comprehensive income (loss) (OCI) as of the periods indicated:
As of or for the three months ended June 30, |
||||||||
(Amounts in millions) |
2010 | 2009 | ||||||
Cumulative credit loss beginning balance |
$ | 1,025 | $ | | ||||
Impact upon adoption of new accounting guidance |
| 1,204 | ||||||
Additions: |
||||||||
Other-than-temporary impairments not previously recognized |
11 | 56 | ||||||
Increases related to other-than-temporary impairments previously recognized |
32 | 95 | ||||||
Reductions: |
||||||||
Securities sold, paid down or disposed |
(90 | ) | (270 | ) | ||||
Securities where there is intent to sell |
| | ||||||
Cumulative credit loss ending balance |
$ | 978 | $ | 1,085 | ||||
As of or for the six months ended June 30, |
||||||||
(Amounts in millions) |
2010 | 2009 | ||||||
Cumulative credit loss beginning balance |
$ | 1,059 | $ | | ||||
Impact upon adoption of new accounting guidance |
| 1,204 | ||||||
Additions: |
||||||||
Other-than-temporary impairments not previously recognized |
31 | 56 | ||||||
Increases related to other-than-temporary impairments previously recognized |
78 | 95 | ||||||
Reductions: |
||||||||
Securities sold, paid down or disposed |
(190 | ) | (270 | ) | ||||
Securities where there is intent to sell |
| | ||||||
Cumulative credit loss ending balance |
$ | 978 | $ | 1,085 | ||||
14
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(c) Unrealized Investment Gains and Losses
Net unrealized gains and losses on investment securities classified as available-for-sale and other invested assets are reduced by deferred income taxes and adjustments to present value of future profits, deferred acquisition costs and sales inducements that would have resulted had such gains and losses been realized. Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:
(Amounts in millions) |
June 30, 2010 | December 31, 2009 | ||||||
Net unrealized gains (losses) on investment securities: |
||||||||
Fixed maturity securities |
$ | 296 | $ | (2,245 | ) | |||
Equity securities |
7 | 20 | ||||||
Other invested assets |
(27 | ) | (29 | ) | ||||
Subtotal |
276 | (2,254 | ) | |||||
Adjustments to present value of future profits, deferred acquisition costs and sales inducements |
(162 | ) | 138 | |||||
Income taxes, net |
(37 | ) | 757 | |||||
Net unrealized investment gains (losses) |
77 | (1,359 | ) | |||||
Less: net unrealized investment gains (losses) attributable to noncontrolling interests |
48 | 39 | ||||||
Net unrealized investment gains (losses) attributable to Genworth |
$ | 29 | $ | (1,398 | ) | |||
The change in net unrealized gains (losses) on available-for-sale securities reported in accumulated other comprehensive income (loss) was as follows as of or for the periods indicated:
As of or for the three months ended June 30, |
||||||||
(Amounts in millions) |
2010 | 2009 | ||||||
Beginning balance |
$ | (860 | ) | $ | (4,095 | ) | ||
Cumulative effect of change in accounting |
| (349 | ) | |||||
Unrealized gains (losses) arising during the period: |
||||||||
Unrealized gains (losses) on investment securities |
1,498 | 2,261 | ||||||
Adjustment to deferred acquisition costs |
(80 | ) | (164 | ) | ||||
Adjustment to present value of future profits |
(51 | ) | (79 | ) | ||||
Adjustment to sales inducements |
(10 | ) | 1 | |||||
Provision for income taxes |
(480 | ) | (714 | ) | ||||
Change in unrealized gains (losses) on investment securities |
877 | 1,305 | ||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(11) and $(63) |
22 | 116 | ||||||
Change in net unrealized investment gains (losses) |
899 | 1,072 | ||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests |
10 | | ||||||
Ending balance |
$ | 29 | $ | (3,023 | ) | |||
15
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
As of or for the six months ended June 30, |
||||||||
(Amounts in millions) |
2010 | 2009 | ||||||
Beginning balance |
$ | (1,398 | ) | $ | (4,038 | ) | ||
Cumulative effect of change in accounting |
91 | (349 | ) | |||||
Unrealized gains (losses) arising during the period: |
||||||||
Unrealized gains (losses) on investment securities |
2,261 | 1,558 | ||||||
Adjustment to deferred acquisition costs |
(193 | ) | (184 | ) | ||||
Adjustment to present value of future profits |
(81 | ) | (70 | ) | ||||
Adjustment to sales inducements |
(26 | ) | | |||||
Provision for income taxes |
(700 | ) | (467 | ) | ||||
Change in unrealized gains (losses) on investment securities |
1,261 | 837 | ||||||
Reclassification adjustments to net investment (gains) losses, net of taxes of $(45) and $(284) |
84 | 527 | ||||||
Change in net unrealized investment gains (losses) |
1,436 | 1,015 | ||||||
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests |
9 | | ||||||
Ending balance |
$ | 29 | $ | (3,023 | ) | |||
(d) Fixed Maturity and Equity Securities
As of June 30, 2010, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
(Amounts in millions) |
Amortized cost or cost |
Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
|||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 3,422 | $ | 262 | $ | | $ | | $ | | $ | 3,684 | ||||||||
Tax-exempt |
1,407 | 39 | | (96 | ) | | 1,350 | |||||||||||||
Governmentnon-U.S. |
2,023 | 126 | | (3 | ) | | 2,146 | |||||||||||||
U.S. corporate |
22,529 | 1,332 | 7 | (489 | ) | (1 | ) | 23,378 | ||||||||||||
Corporatenon-U.S. |
12,572 | 494 | 12 | (279 | ) | | 12,799 | |||||||||||||
Residential mortgage-backed |
4,395 | 160 | 8 | (347 | ) | (261 | ) | 3,955 | ||||||||||||
Commercial mortgage-backed |
4,117 | 152 | 7 | (488 | ) | (62 | ) | 3,726 | ||||||||||||
Other asset-backed |
2,640 | 18 | | (297 | ) | (13 | ) | 2,348 | ||||||||||||
Total fixed maturity securities |
53,105 | 2,583 | 34 | (1,999 | ) | (337 | ) | 53,386 | ||||||||||||
Equity securities |
192 | 13 | | (6 | ) | | 199 | |||||||||||||
Total available-for-sale securities |
$ | 53,297 | $ | 2,596 | $ | 34 | $ | (2,005 | ) | $ | (337 | ) | $ | 53,585 | ||||||
16
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
As of December 31, 2009, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
(Amounts in millions) |
Amortized cost or cost |
Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||||||
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
Not other-than- temporarily impaired |
Other-than- temporarily impaired |
|||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 2,673 | $ | 25 | $ | | $ | (96 | ) | $ | | $ | 2,602 | |||||||
Tax-exempt |
1,606 | 42 | | (104 | ) | | 1,544 | |||||||||||||
Governmentnon-U.S. |
2,310 | 96 | | (22 | ) | | 2,384 | |||||||||||||
U.S. corporate |
21,598 | 628 | 3 | (814 | ) | (3 | ) | 21,412 | ||||||||||||
Corporatenon-U.S. |
12,530 | 366 | 11 | (356 | ) | | 12,551 | |||||||||||||
Residential mortgage-backed |
3,989 | 41 | 7 | (484 | ) | (326 | ) | 3,227 | ||||||||||||
Commercial mortgage-backed |
4,404 | 44 | 4 | (738 | ) | (97 | ) | 3,617 | ||||||||||||
Other asset-backed |
2,887 | 8 | | (466 | ) | (14 | ) | 2,415 | ||||||||||||
Total fixed maturity securities |
51,997 | 1,250 | 25 | (3,080 | ) | (440 | ) | 49,752 | ||||||||||||
Equity securities |
139 | 23 | | (3 | ) | | 159 | |||||||||||||
Total available-for-sale securities |
$ | 52,136 | $ | 1,273 | $ | 25 | $ | (3,083 | ) | $ | (440 | ) | $ | 49,911 | ||||||
17
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of June 30, 2010:
Less than 12 months | 12 months or more | |||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
Number of securities | ||||||||||||
Description of Securities |
||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||
Tax-exempt |
$ | 106 | $ | (3 | ) | 33 | $ | 272 | $ | (93 | ) | 93 | ||||||
Governmentnon-U.S. |
69 | (1 | ) | 30 | 34 | (2 | ) | 6 | ||||||||||
U.S. corporate |
1,257 | (47 | ) | 168 | 3,596 | (443 | ) | 304 | ||||||||||
Corporatenon-U.S. |
926 | (32 | ) | 163 | 1,774 | (247 | ) | 161 | ||||||||||
Residential mortgage-backed |
291 | (5 | ) | 76 | 1,097 | (603 | ) | 461 | ||||||||||
Commercial mortgage-backed |
79 | (4 | ) | 11 | 1,282 | (546 | ) | 277 | ||||||||||
Other asset-backed |
413 | (1 | ) | 28 | 969 | (309 | ) | 147 | ||||||||||
Subtotal, fixed maturity securities |
3,141 | (93 | ) | 509 | 9,024 | (2,243 | ) | 1,449 | ||||||||||
Equity securities |
51 | (5 | ) | 41 | 7 | (1 | ) | 8 | ||||||||||
Total for securities in an unrealized loss position |
$ | 3,192 | $ | (98 | ) | 550 | $ | 9,031 | $ | (2,244 | ) | 1,457 | ||||||
% Below costfixed maturity securities: |
||||||||||||||||||
<20% Below cost |
$ | 3,089 | $ | (71 | ) | 469 | $ | 6,602 | $ | (515 | ) | 763 | ||||||
20-50% Below cost |
51 | (20 | ) | 22 | 2,069 | (1,006 | ) | 406 | ||||||||||
>50% Below cost |
1 | (2 | ) | 18 | 353 | (722 | ) | 280 | ||||||||||
Total fixed maturity securities |
3,141 | (93 | ) | 509 | 9,024 | (2,243 | ) | 1,449 | ||||||||||
% Below costequity securities: |
||||||||||||||||||
<20% Below cost |
46 | (2 | ) | 40 | 7 | (1 | ) | 8 | ||||||||||
20-50% Below cost |
5 | (3 | ) | 1 | | | | |||||||||||
Total equity securities |
51 | (5 | ) | 41 | 7 | (1 | ) | 8 | ||||||||||
Total for securities in an unrealized loss position |
$ | 3,192 | $ | (98 | ) | 550 | $ | 9,031 | $ | (2,244 | ) | 1,457 | ||||||
Investment grade |
$ | 2,564 | $ | (81 | ) | 422 | $ | 7,203 | $ | (1,386 | ) | 959 | ||||||
Below investment grade |
628 | (17 | ) | 128 | 1,828 | (858 | ) | 498 | ||||||||||
Total for securities in an unrealized loss position |
$ | 3,192 | $ | (98 | ) | 550 | $ | 9,031 | $ | (2,244 | ) | 1,457 | ||||||
The investment securities in an unrealized loss position as of June 30, 2010 consisted of 2,007 securities and accounted for unrealized losses of $2,342 million. Of these unrealized losses of $2,342 million, 63% were investment grade (rated AAA through BBB-) and 25% were less than 20% below cost. The securities less than 20% below cost were primarily attributable to credit spreads that have widened since acquisition for certain mortgage-backed and asset-backed securities and corporate securities in the finance and insurance sector. Included in these unrealized losses as of June 30, 2010 was $337 million of unrealized losses on other-than-
18
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
temporarily impaired securities. Of the total unrealized losses on other-than-temporarily impaired securities, $332 million have been in an unrealized loss position for more than 12 months.
Of the unrealized losses of $2,342 million, $1,468 million were related to structured securities and $552 million were related to corporate securities in the finance and insurance sector. Of the remaining gross unrealized losses of $322 million, $99 million were related to tax-exempt and governmentnon-U.S. securities and $223 million were primarily related to other corporate securities that were spread evenly across all other sectors with no individual sector exceeding $40 million.
Of the $1,468 million unrealized losses in structured securities, 41% were in residential mortgage-backed securities and 37% were in commercial mortgage-backed securities with the remainder in other asset-backed securities. Approximately 54% 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 ongoing concern about the housing market and unemployment, the fair value of these securities has declined due to credit spreads that have widened since acquisition. We examined the performance of the underlying collateral and developed our estimate of cash flows expected to be collected. In doing so, we identified certain securities where the non-credit portion of other-than-temporary impairments was recorded in OCI. Based on this evaluation, we determined that the unrealized losses on our mortgage-backed and asset-backed securities represented temporary impairments as of June 30, 2010.
Of the $552 million unrealized losses in the finance and insurance sector, most have been in an unrealized loss position for 12 months or more. Most of these securities have retained a credit rating of investment grade. A portion of the unrealized losses included securities where an other-than-temporary impairment was recorded in OCI. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these securities represented temporary impairments as of June 30, 2010. A subset of the securities issued by banks and other financial institutions represent investments in financial hybrid securities on which a debt impairment model was employed. Most of these securities retain a credit rating of investment grade. The majority of these securities were issued by foreign financial institutions. The fair value of these securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred. The remaining unrealized losses in our U.S. and non-U.S. corporate securities were evenly distributed across all other major industry types that comprise our corporate bond holdings.
Of the investment securities in an unrealized loss position for 12 months or more as of June 30, 2010, 686 securities were 20% or more below cost, of which 357 securities were also below investment grade (rated BB+ and below) and accounted for unrealized losses of $747 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 $260 million was recorded in OCI.
While certain securities included in the preceding table were considered other-than-temporarily impaired, we expect to recover the new amortized cost based on our estimate of cash flows to be collected. We do not intend to sell and it is not more likely than not that we will be required to sell these securities prior to recovering our amortized cost.
19
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Despite the considerable analysis and rigor employed on our structured securities, it is at least reasonably possible that the underlying collateral of these investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of asset-backed and mortgage-backed securities and potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. We expect our investments in corporate securities will continue to perform in accordance with our conclusions about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities.
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 | |||||||||||||||||
(Dollar amounts in millions) |
Fair value |
Gross unrealized losses |
Number of securities |
Fair value |
Gross unrealized losses |
Number of securities | ||||||||||||
Description of Securities |
||||||||||||||||||
Fixed maturity securities: |
||||||||||||||||||
U.S. government, agencies and government-sponsored enterprises |
$ | 1,759 | $ | (95 | ) | 81 | $ | 6 | $ | (1 | ) | 2 | ||||||
Tax-exempt |
152 | (6 | ) | 48 | 346 | (98 | ) | 113 | ||||||||||
Governmentnon-U.S. |
341 | (3 | ) | 60 | 105 | (19 | ) | 35 | ||||||||||
U.S. corporate |
2,823 | (81 | ) | 317 | 5,660 | (736 | ) | 510 | ||||||||||
Corporatenon-U.S. |
1,721 | (55 | ) | 221 | 2,245 | (301 | ) | 258 | ||||||||||
Residential mortgage-backed |
941 | (252 | ) | 256 | 1,012 | (558 | ) | 348 | ||||||||||
Commercial mortgage-backed |
714 | (64 | ) | 81 | 1,720 | (771 | ) | 345 | ||||||||||
Other asset-backed |
329 | (6 | ) | 43 | 1,727 | (474 | ) | 183 | ||||||||||
Subtotal, fixed maturity securities |
8,780 | (562 | ) | 1,107 | 12,821 | (2,958 | ) | 1,794 | ||||||||||
Equity securities |
2 | (1 | ) | 3 | 12 | (2 | ) | 9 | ||||||||||
Total for securities in an unrealized loss position |
$ | 8,782 | $ | (563 | ) | 1,110 | $ | 12,833 | $ | (2,960 | ) | 1,803 | ||||||
% Below costfixed maturity securities: |
||||||||||||||||||
<20% Below cost |
$ | 8,437 | $ | (245 | ) | 920 | $ | 9,699 | $ | (762 | ) | 1,055 | ||||||
20-50% Below cost |
267 | (137 | ) | 91 | 2,637 | (1,246 | ) | 455 | ||||||||||
>50% Below cost |
76 | (180 | ) | 96 | 485 | (950 | ) | 284 | ||||||||||
Total fixed maturity securities |
8,780 | (562 | ) | 1,107 | 12,821 | (2,958 | ) | 1,794 | ||||||||||
% Below costequity securities: |
||||||||||||||||||
<20% Below cost |
2 | (1 | ) | 3 | 11 | (1 | ) | 5 | ||||||||||
>50% Below cost |
| | | 1 | (1 | ) | 4 | |||||||||||
Total equity securities |
2 | (1 | ) | 3 | 12 | (2 | ) | 9 | ||||||||||
Total for securities in an unrealized loss position |
$ | 8,782 | $ | (563 | ) | 1,110 | $ | 12,833 | $ | (2,960 | ) | 1,803 | ||||||
Investment grade |
$ | 8,391 | $ | (320 | ) | 891 | $ | 10,897 | $ | (2,122 | ) | 1,390 | ||||||
Below investment grade |
391 | (243 | ) | 219 | 1,936 | (838 | ) | 413 | ||||||||||
Total for securities in an unrealized loss position |
$ | 8,782 | $ | (563 | ) | 1,110 | $ | 12,833 | $ | (2,960 | ) | 1,803 | ||||||
20
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The scheduled maturity distribution of fixed maturity securities as of June 30, 2010 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
(Amounts in millions) |
Amortized cost or cost |
Fair value | ||||
Due one year or less |
$ | 2,776 | $ | 2,801 | ||
Due after one year through five years |
11,367 | 11,696 | ||||
Due after five years through ten years |
8,494 | 8,877 | ||||
Due after ten years |
19,316 | 19,983 | ||||
Subtotal |
41,953 | 43,357 | ||||
Residential mortgage-backed |
4,395 | 3,955 | ||||
Commercial mortgage-backed |
4,117 | 3,726 | ||||
Other asset-backed |
2,640 | 2,348 | ||||
Total |
$ | 53,105 | $ | 53,386 | ||
As of June 30, 2010, $5,015 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.
As of June 30, 2010, securities issued by finance and insurance, utilities and energy, and consumernon-cyclical industry groups represented approximately 24%, 22% and 12% 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 June 30, 2010, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders equity.
(e) Commercial Mortgage Loans
Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of prepayments, amortization and allowance for loan losses.
21
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the periods indicated:
June 30, 2010 | December 31, 2009 | |||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||
Property Type |
||||||||||||||
Retail |
$ | 2,047 | 28 | % | $ | 2,115 | 28 | % | ||||||
Office |
1,971 | 27 | 2,025 | 27 | ||||||||||
Industrial |
1,903 | 26 | 1,979 | 26 | ||||||||||
Apartments |
812 | 11 | 832 | 11 | ||||||||||
Mixed use/other |
540 | 8 | 590 | 8 | ||||||||||
Total principal balance |
7,273 | 100 | % | 7,541 | 100 | % | ||||||||
Unamortized balance of loan origination fees and costs |
5 | 6 | ||||||||||||
Allowance for losses (1) |
(70 | ) | (48 | ) | ||||||||||
Total (2) |
$ | 7,208 | $ | 7,499 | ||||||||||
(1) | Included $13 million related to held-for-sale commercial mortgage loans as of June 30, 2010. |
(2) | Included held-for-sale mortgage loans of $37 million and $17 million as of June 30, 2010 and December 31, 2009, respectively. The held-for-sale mortgage loans as of December 31, 2009 represented interests in reverse mortgage loans. In the first quarter of 2010, we began reporting held-for-sale reverse mortgages in other invested assets. |
June 30, 2010 | December 31, 2009 | |||||||||||||
(Amounts in millions) |
Carrying value |
% of total |
Carrying value |
% of total |
||||||||||
Geographic Region |
||||||||||||||
Pacific |
$ | 1,937 | 27 | % | $ | 2,005 | 27 | % | ||||||
South Atlantic |
1,660 | 23 | 1,711 | 23 | ||||||||||
Middle Atlantic |
974 | 13 | 1,005 | 13 | ||||||||||
East North Central |
701 | 10 | 728 | 10 | ||||||||||
Mountain |
624 | 8 | 650 | 9 | ||||||||||
New England |
491 | 7 | 492 | 6 | ||||||||||
West North Central |
378 | 5 | 389 | 5 | ||||||||||
West South Central |
314 | 4 | 331 | 4 | ||||||||||
East South Central |
194 | 3 | 230 | 3 | ||||||||||
Total principal balance |
7,273 | 100 | % | 7,541 | 100 | % | ||||||||
Unamortized balance of loan origination fees and costs |
5 | 6 | ||||||||||||
Allowance for losses (1) |
(70 | ) | (48 | ) | ||||||||||
Total (2) |
$ | 7,208 | $ | 7,499 | ||||||||||
(1) | Included $13 million related to held-for-sale commercial mortgage loans as of June 30, 2010. |
(2) | Included held-for-sale mortgage loans of $37 million and $17 million as of June 30, 2010 and December 31, 2009, respectively. The held-for-sale mortgage loans as of December 31, 2009 represented interests in reverse mortgage loans. In the first quarter of 2010, we began reporting held-for-sale reverse mortgages in other invested assets. |
22
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
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.
Under these principles, we may have two types of impaired loans: loans requiring specific allowances for losses ($5 million for the six months ended June 30, 2010 and $21 million for the year ended December 31, 2009) and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition (none for the six months ended June 30, 2010 and for the year ended December 31, 2009).
Average investment in specifically impaired loans was $3 million and $10 million as of June 30, 2010 and December 31, 2009, respectively, and there was no interest income recognized on these loans while they were considered impaired.
The following table presents the activity in the allowance for losses during the periods indicated:
(Amounts in millions) |
Three months ended June 30, 2010 |
Six months ended June 30, 2010 | ||||
Beginning balance |
$ | 52 | $ | 48 | ||
Provision (1) |
18 | 22 | ||||
Release |
| | ||||
Ending balance |
$ | 70 | $ | 70 | ||
(1) | Included $13 million related to held-for-sale commercial mortgage loans. |
(f) Restricted Commercial Mortgage Loans Related To Securitization Entities
The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the date indicated:
June 30, 2010 | |||||||
(Amounts in millions) |
Carrying value |
% of total |
|||||
Property Type |
|||||||
Retail |
$ | 195 | 37 | % | |||
Industrial |
131 | 24 | |||||
Office |
122 | 23 | |||||
Apartments |
66 | 12 | |||||
Mixed use/other |
23 | 4 | |||||
Total principal balance |
537 | 100 | % | ||||
Allowance for losses |
(2 | ) | |||||
Total |
$ | 535 | |||||
23
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
June 30, 2010 | |||||||
(Amounts in millions) |
Carrying value |
% of total |
|||||
Geographic Region |
|||||||
South Atlantic |
$ | 197 | 37 | % | |||
Pacific |
95 | 18 | |||||
Middle Atlantic |
72 | 13 | |||||
East North Central |
57 | 11 | |||||
Mountain |
36 | 7 | |||||
East South Central |
33 | 6 | |||||
West North Central |
33 | 6 | |||||
West South Central |
13 | 2 | |||||
New England |
1 | | |||||
Total principal balance |
537 | 100 | % | ||||
Allowance for losses |
(2 | ) | |||||
Total |
$ | 535 | |||||
See note 7 for additional information related to consolidated securitization entities.
(g) Restricted Other Invested Assets Related To Securitization Entities
We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities whereby the changes in fair value are recorded in current period income (loss). The trading securities are comprised of asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables. See note 7 for additional information related to consolidated securitization entities.
(5) Derivative Instruments
Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as derivatives not designated as hedges in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as derivatives designated as hedges, which include both cash flow and fair value hedges.
24
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The following table sets forth our positions in derivative instruments as of the dates indicated:
Derivative assets | Derivative liabilities | ||||||||||||||||
Balance sheet classification |
Fair value | Balance sheet classification |
Fair value | ||||||||||||||
(Amounts in millions) |
June 30, 2010 |
December 31, 2009 |
June 30, 2010 |
December 31, 2009 | |||||||||||||
Derivatives designated as hedges |
|||||||||||||||||
Cash flow hedges: |
|||||||||||||||||
Interest rate swaps |
Other invested assets |
$ | 540 | $ | 72 | Other liabilities |
$ | 9 | $ | 114 | |||||||
Inflation indexed swaps |
Other invested assets |
1 | | Other liabilities |
22 | 21 | |||||||||||
Foreign currency swaps |
Other invested assets |
140 | 101 | Other liabilities |
| | |||||||||||
Total cash flow hedges |
681 | 173 | 31 | 135 | |||||||||||||
Fair value hedges: |
|||||||||||||||||
Interest rate swaps |
Other invested assets |
124 | 132 | Other liabilities |
11 | 15 | |||||||||||
Foreign currency swaps |
Other invested assets |
20 | 24 | Other liabilities |
| | |||||||||||
Total fair value hedges |
144 | 156 | 11 | 15 | |||||||||||||
Total derivatives designated as hedges |
825 | 329 | 42 | 150 | |||||||||||||
Derivatives not designated as hedges |
|||||||||||||||||
Interest rate swaps |
Other invested assets |
509 | 505 | Other liabilities |
41 | 59 | |||||||||||
Interest rate swaps related to |
Restricted other invested assets |
| | Other liabilities |
23 | | |||||||||||
Interest rate swaptions |
Other invested assets |
4 | 54 | Other liabilities |
| 67 | |||||||||||
Credit default swaps |
Other invested assets |
2 | 11 | Other liabilities |
27 | 3 | |||||||||||
Credit default swaps related to |
Restricted other invested assets |
| | Other liabilities |
159 | | |||||||||||
Equity index options |
Other invested assets |
97 | 39 | Other liabilities |
| 2 | |||||||||||
Financial futures |
Other invested assets |
| | Other liabilities |
| | |||||||||||
Other foreign currency contracts |
Other invested assets |
6 | 8 | Other liabilities |
| | |||||||||||
Reinsurance embedded derivatives (2) |
Other assets | 2 | | Other liabilities |
| | |||||||||||
GMWB embedded derivatives |
Reinsurance recoverable (3) |
9 | (5 | ) | Policyholder account balances (4) |
447 | 175 | ||||||||||
Total derivatives not designated as hedges |
629 | 612 | 697 | 306 | |||||||||||||
Total derivatives |
$ | 1,454 | $ | 941 | $ | 739 | $ | 456 | |||||||||
(1) | See note 7 for additional information related to consolidated securitization entities. |
(2) | Represents embedded derivatives associated with certain reinsurance agreements. |
(3) | Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (GMWB) liabilities. |
(4) | Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. |
25
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements. The amounts recognized for derivative counterparty collateral retained by us was recorded in other invested assets with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us.
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
(Notional in millions) |
Measurement | December 31, 2009 | Additions | Maturities/ terminations |
June 30, 2010 | ||||||||||
Derivatives designated as hedges |
|||||||||||||||
Cash flow hedges: |
|||||||||||||||
Interest rate swaps |
Notional | $ | 9,479 | $ | 1,382 | $ | (206 | ) | $ | 10,655 | |||||
Inflation indexed swaps |
Notional | 376 | 157 | (6 | ) | 527 | |||||||||
Foreign currency swaps |
Notional | 491 | | | 491 | ||||||||||
Total cash flow hedges |
10,346 | 1,539 | (212 | ) | 11,673 | ||||||||||
Fair value hedges: |
|||||||||||||||
Interest rate swaps |
Notional | 2,366 | | (139 | ) | 2,227 | |||||||||
Foreign currency swaps |
Notional | 85 | | | 85 | ||||||||||
Total fair value hedges |
2,451 | | (139 | ) | 2,312 | ||||||||||
Total derivatives designated as hedges |
12,797 | 1,539 | (351 | ) | 13,985 | ||||||||||
Derivatives not designated as hedges |
|||||||||||||||
Interest rate swaps |
Notional | 6,474 | 2,345 | (577 | ) | 8,242 | |||||||||
Interest rate swaps related to securitization entities |
Notional | | 138 | (3 | ) | 135 | |||||||||
Interest rate swaptions |
Notional | 5,100 | 200 | (5,100 | ) | 200 | |||||||||
Credit default swaps |
Notional | 1,090 | 50 | | 1,140 | ||||||||||
Credit default swaps related to securitization entities |
Notional | | 322 | (5 | ) | 317 | |||||||||
Equity index options |
Notional | 912 | 397 | (614 | ) | 695 | |||||||||
Financial futures |
Notional | 5,822 | 3,696 | (5,019 | ) | 4,499 | |||||||||
Other foreign currency contracts |
Notional | 521 | 73 | | 594 | ||||||||||
Reinsurance embedded derivatives |
Notional | | 47 | | 47 | ||||||||||
Total derivatives not designated as hedges |
19,919 | 7,268 | (11,318 | ) | 15,869 | ||||||||||
Total derivatives |
$ | 32,716 | $ | 8,807 | $ | (11,669 | ) | $ | 29,854 | ||||||
(Number of policies) |
Measurement | December 31, 2009 | Additions | Terminations | June 30, 2010 | ||||||
Derivatives not designated as hedges |
|||||||||||
GMWB embedded derivatives |
Policies | 47,543 | 2,244 | (1,445 | ) | 48,342 |
Approximately $1.1 billion of notional value above is related to derivatives with counterparties that can be terminated at the option of the derivative counterparty and represented a net fair value asset of $148 million as of June 30, 2010.
26
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Cash Flow Hedges
Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) pay U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure on liabilities denominated in foreign currencies; (v) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed-rate bond purchases and/or interest income; and (vi) other instruments to hedge the cash flows of various forecasted transactions.
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended June 30, 2010:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain
(loss) reclassified into net income (loss) from OCI |
Classification of gain (loss) reclassified into net income (loss) |
Gain
(loss) recognized in net income (loss) (1) |
Classification of gain (loss) recognized in net income (loss) | ||||||||||
Interest rate swaps hedging assets |
$ | 599 | $ | 4 | Net investment income |
$ | 15 | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities |
(3 | ) | 1 | Interest expense | | Net investment gains (losses) | |||||||||
Foreign currency |
6 | (2 | ) | Interest expense | | Net investment gains (losses) | |||||||||
Total |
$ | 602 | $ | 3 | $ | 15 | |||||||||
(1) | Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended June 30, 2009:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain
(loss) reclassified into net income (loss) from OCI |
Classification of gain (loss) reclassified into net income (loss) |
Gain
(loss) recognized in net income (loss) (1) |
Classification of gain (loss) recognized in net income (loss) | |||||||||||
Interest rate swaps hedging assets |
$ | (177 | ) | $ | 3 | Net investment income |
$ | (4 | ) | Net investment gains (losses) | ||||||
Interest rate swaps hedging assets |
| 2 | Net investment gains (losses) |
| Net investment gains (losses) | |||||||||||
Foreign currency |
(1 | ) | (5 | ) | Interest expense | | Net investment gains (losses) | |||||||||
Total |
$ | (178 | ) | $ | | $ | (4 | ) | ||||||||
(1) |
Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness. |
27
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the six months ended June 30, 2010:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain
(loss) reclassified into net income (loss) from OCI |
Classification of gain (loss) reclassified into net income (loss) |
Gain
(loss) recognized in net income (loss) (1) |
Classification of gain (loss) recognized in net income (loss) | ||||||||||
Interest rate swaps hedging assets |
$ | 563 | $ | 8 | Net investment income |
$ | 12 | Net investment gains (losses) | |||||||
Interest rate swaps hedging assets |
| 1 | Net investment gains (losses) |
| Net investment gains (losses) | ||||||||||
Interest rate swaps hedging liabilities |
(3 | ) | 1 | Interest expense | | Net investment gains (losses) | |||||||||
Foreign currency |
7 | (4 | ) | Interest expense | | Net investment gains (losses) | |||||||||
Total |
$ | 567 | $ | 6 | $ | 12 | |||||||||
(1) | Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness. |
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the six months ended June 30, 2009:
(Amounts in millions) |
Gain (loss) recognized in OCI |
Gain
(loss) reclassified into net income (loss) from OCI |
Classification of gain (loss) reclassified into net income (loss) |
Gain
(loss) recognized in net income (loss) (1) |
Classification of gain (loss) recognized in net income (loss) | |||||||||||
Interest rate swaps hedging assets |
$ | (322 | ) | $ | 8 | Net investment income |
$ | (10 | ) | Net investment gains (losses) | ||||||
Interest rate swaps hedging assets |
| 5 | Net investment gains (losses) |
| Net investment gains (losses) | |||||||||||
Foreign currency |
(13 | ) | (8 | ) | Interest expense | | Net investment gains (losses) | |||||||||
Total |
$ | (335 | ) | $ | 5 | $ | (10 | ) | ||||||||
(1) |
Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness. |
The total of derivatives designated as cash flow hedges of $1.2 billion, net of taxes, recorded in stockholders equity as of June 30, 2010 is expected to be reclassified to future net income (loss), concurrently with and primarily offsetting changes in interest expense and interest income on floating-rate instruments and interest income on future fixed-rate bond purchases. Of this amount, $8 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2045. No amounts were reclassified to net income (loss) during the six months ended June 30, 2010 in connection with forecasted transactions that were no longer considered probable of occurring.
28
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Fair Value Hedges
Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income (loss). In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income (loss). We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (iii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iv) other instruments to hedge various fair value exposures of investments.
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended June 30, 2010:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) | ||||||||||||
Interest rate swaps hedging assets |
$ | 1 | Net investment gains (losses) |
$ | (3 | ) | Net investment income |
$ | (1 | ) | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities |
(6 | ) | Net investment gains (losses) |
25 | Interest credited | 6 | Net investment gains (losses) | |||||||||||
Foreign currency |
(2 | ) | Net investment gains (losses) |
1 | Interest credited | 2 | Net investment gains (losses) | |||||||||||
Total |
$ | (7 | ) | $ | 23 | $ | 7 | |||||||||||
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended June 30, 2009:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) | ||||||||||||
Interest rate swaps hedging assets |
$ | 4 | Net investment gains (losses) |
$ | (4 | ) | Net investment income |
$ | (6 | ) | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities |
(50 | ) | Net investment gains (losses) |
23 | Interest credited | 51 | Net investment gains (losses) | |||||||||||
Foreign currency |
(2 | ) | Net investment gains (losses) |
| Interest credited | 1 | Net investment gains (losses) | |||||||||||
Total |
$ | (48 | ) | $ | 19 | $ | 46 | |||||||||||
29
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the six months ended June 30, 2010:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) | ||||||||||||
Interest rate swaps hedging assets |
$ | 2 | Net investment gains (losses) |
$ | (6 | ) | Net investment income |
$ | (2 | ) | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities |
(7 | ) | Net investment gains (losses) |
50 | Interest credited | 7 | Net investment gains (losses) | |||||||||||
Foreign currency |
(4 | ) | Net investment gains (losses) |
2 | Interest credited | 4 | Net investment gains (losses) | |||||||||||
Total |
$ | (9 | ) | $ | 46 | $ | 9 | |||||||||||
The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the six months ended June 30, 2009:
Derivative instrument | Hedged item | |||||||||||||||||
(Amounts in millions) |
Gain (loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) |
Other impacts to net income (loss) |
Classification of other impacts to net income (loss) |
Gain (loss) recognized in net income (loss) |
Classification of gain (loss) recognized in net income (loss) | ||||||||||||
Interest rate swaps hedging assets |
$ | 6 | Net investment gains (losses) |
$ | (8 | ) | Net investment income |
$ | (10 | ) | Net investment gains (losses) | |||||||
Interest rate swaps hedging liabilities |
(59 | ) | Net investment gains (losses) |
42 | Interest credited | 62 | Net investment gains (losses) | |||||||||||
Foreign currency |
(13 | ) | Net investment gains (losses) |
1 | Interest credited | 11 | Net investment gains (losses) | |||||||||||
Total |
$ | (66 | ) | $ | 35 | $ | 63 | |||||||||||
The difference between the gain (loss) recognized for the derivative instruments and the hedged items presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the income (loss) effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged items. There were no amounts excluded from the measurement of effectiveness.
Derivatives Not Designated As Hedges
We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps, swaptions and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; and (vi) foreign currency forward contracts to mitigate certain currency risk. Additionally, we provide GMWBs on certain
30
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
products that are required to be bifurcated as embedded derivatives and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.
We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap. See note 7 for additional information related to consolidated securitization entities.
The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Three months ended June 30, | Classification of gain (loss) recognized in net income (loss) | |||||||||
(Amounts in millions) |
2010 | 2009 | ||||||||
Interest rate swaps |
$ | 63 | $ | 164 | Net investment gains (losses) | |||||
Interest rate swaps related to securitization entities (1) |
(9 | ) | | Net investment gains (losses) | ||||||
Interest rate swaptions |
35 | (338 | ) | Net investment gains (losses) | ||||||
Credit default swaps |
(32 | ) | 35 | Net investment gains (losses) | ||||||
Credit default swaps related to securitization entities (1) |
(46 | ) | | Net investment gains (losses) | ||||||
Equity index options |
50 | (71 | ) | Net investment gains (losses) | ||||||
Financial futures |
105 | (163 | ) | Net investment gains (losses) | ||||||
Inflation indexed swaps |
| 4 | Net investment gains (losses) | |||||||
Other foreign currency contracts |
2 | 8 | Net investment gains (losses) | |||||||
Reinsurance embedded derivatives |
2 | | Net investment gains (losses) | |||||||
GMWB embedded derivatives |
(278 | ) | 479 | Net investment gains (losses) | ||||||
Total derivatives not designated as hedges |
$ | (108 | ) | $ | 118 | |||||
(1) | See note 7 for additional information related to consolidated securitization entities. |
31
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
Six months ended June 30, | Classification of gain (loss) recognized in net income (loss) | |||||||||
(Amounts in millions) |
2010 | 2009 | ||||||||
Interest rate swaps |
$ | 57 | $ | 246 | Net investment gains (losses) | |||||
Interest rate swaps related to securitization entities (1) |
(12 | ) | | Net investment gains (losses) | ||||||
Interest rate swaptions |
57 | (579 | ) | Net investment gains (losses) | ||||||
Credit default swaps |
(27 | ) | 21 | Net investment gains (losses) | ||||||
Credit default swaps related to securitization entities (1) |
(41 | ) | | Net investment gains (losses) | ||||||
Equity index options |
23 | (55 | ) | Net investment gains (losses) | ||||||
Financial futures |
72 | (84 | ) | Net investment gains (losses) | ||||||
Inflation indexed swaps |
| (4 | ) | Net investment gains (losses) | ||||||
Foreign currency swaps |
| 6 | Net investment gains (losses) | |||||||
Other foreign currency contracts |
(1 | ) | 10 | Net investment gains (losses) | ||||||
Reinsurance embedded derivatives |
2 | | Net investment gains (losses) | |||||||
GMWB embedded derivatives |
(242 | ) | 440 | Net investment gains (losses) | ||||||
Total derivatives not designated as hedges |
$ | (112 | ) | $ | 1 | |||||
(1) | See note 7 for additional information related to consolidated securitization entities. |
Derivative Counterparty Credit Risk
As of June 30, 2010 and December 31, 2009, net fair value assets by counterparty totaled $1.3 billion and $739 million, respectively. As of June 30, 2010 and December 31, 2009, net fair value liabilities by counterparty totaled $192 million and $74 million, respectively. As of June 30, 2010 and December 31, 2009, we retained collateral of $1.1 billion and $647 million, respectively, related to these agreements, including over collateralization of $6 million and $10 million, respectively, from certain counterparties. As of June 30, 2010 and December 31, 2009, we posted $12 million and $121 million, respectively, of collateral to derivative counterparties, including over collateralization of $3 million and $46 million, respectively. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.
Except for derivatives related to securitization entities, all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other partys 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 June 30, 2010 and December 31, 2009, we could have been allowed to claim up to $292 million and $102 million, respectively, from counterparties and required to disburse up to $1 million in both periods. This represented the net fair value of gains and losses by counterparty, less available collateral held, and did not include any fair value gains or losses for derivatives related to securitization entities.
32
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Credit DerivativesSell Protection
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. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction. For debt instruments with embedded credit derivatives, the securitys principal is typically reduced by the net amount of default for any referenced entity defaults.
In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we were required to consolidate in 2010. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity. See note 9 for information on the third-party borrowings related to consolidated securitization entities.
The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:
June 30, 2010 | December 31, 2009 | |||||||||||||||||
(Amounts in millions) |
Notional value |
Assets | Liabilities | Notional value |
Assets | Liabilities | ||||||||||||
Reference entity credit rating and maturity: |
||||||||||||||||||
AAA |
||||||||||||||||||
Matures after one year through five years |
$ | 5 | $ | | $ | | $ | 6 | $ | | $ | | ||||||
AA |
||||||||||||||||||
Matures after one year through five years |
11 | | | 5 | | | ||||||||||||
A |
||||||||||||||||||
Matures after one year through five years |
32 | | | 32 | 1 | | ||||||||||||
Matures after five years through ten years |
10 | | | 10 | | | ||||||||||||
BBB |
||||||||||||||||||
Matures after one year through five years |
68 | 1 | | 73 | 1 | | ||||||||||||
Matures after five years through ten years |
29 | | 1 | 29 | | | ||||||||||||
Total credit default swaps on single name reference entities |
$ | 155 | $ | 1 | $ | 1 | $ | 155 | $ | 2 | $ | | ||||||
33
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:
June 30, 2010 | December 31, 2009 | |||||||||||||||||
(Amounts in millions) |
Notional value |
Assets | Liabilities | Notional value |
Assets | Liabilities | ||||||||||||
Index tranche attachment/detachment point and maturity: |
||||||||||||||||||
9% 12% matures after one year through five years (1) |
$ | 300 | $ | | $ | 13 | $ | 50 | $ | | $ | | ||||||
9% 12% matures after five years through ten years (2) |
| | | 250 | 1 | 1 | ||||||||||||
10% 15% matures after five years through ten years (3) |
250 | | 6 | 250 | | 2 | ||||||||||||
12% 22% matures after five years through ten years (4) |
248 | | 6 | 248 | 4 | | ||||||||||||
15% 30% matures after five years through ten years (5) |
127 | | 1 | 127 | 2 | | ||||||||||||
Total credit default swap index tranches |
925 | | 26 | 925 | 7 | 3 | ||||||||||||
Customized credit default swap index tranches related to securitization entities: |
||||||||||||||||||
Portion backing third-party borrowings maturing 2017 (6) |
17 | | 9 | | | | ||||||||||||
Portion backing our interest maturing 2017 (7) |
300 | | 150 | | | | ||||||||||||
Total customized credit default swap index tranches related to securitization entities |
317 | | 159 | | | | ||||||||||||
Total credit default swaps on index tranches |
$ | 1,242 | $ | | $ | 185 | $ | 925 | $ | 7 | $ | 3 | ||||||
(1) | The current attachment/detachment as of June 30, 2010 and December 31, 2009 was 9% 12%. |
(2) | The current attachment/detachment as of June 30, 2010 and December 31, 2009 was 9% 12%. |
(3) | The current attachment/detachment as of June 30, 2010 and December 31, 2009 was 10% 15%. |
(4) | The current attachment/detachment as of June 30, 2010 and December 31, 2009 was 12% 22%. |
(5) | The current attachment/detachment as of June 30, 2010 and December 31, 2009 was 14.8% 30.3%. |
(6) | Original notional value was $39 million. |
(7) | Original notional value was $300 million. |
The following table sets forth our holding of available-for-sale fixed maturity securities that include embedded credit derivatives and the fair values as of the dates indicated:
June 30, 2010 | December 31, 2009 | |||||||||||||||||
(Amounts in millions) |
Par value |
Amortized cost or cost |
Fair value |
Par value |
Amortized cost or cost |
Fair value | ||||||||||||
Credit rating: |
||||||||||||||||||
AA |
||||||||||||||||||
Matures after five years through ten years |
$ | 100 | $ | 100 | $ | 96 | $ | 100 | $ | 100 | $ | 96 | ||||||
BBB |
||||||||||||||||||
Matures after five years through ten years (1) |
| | | 100 | 100 | 76 | ||||||||||||
BB |
||||||||||||||||||
Matures after five years through ten years (1) |
| | | 200 | 228 | 148 | ||||||||||||
Total available-for-sale fixed maturity securities that include embedded credit derivatives |
$ | 100 | $ | 100 | $ | 96 | $ | 400 | $ | 428 | $ | 320 | ||||||
(1) | The amounts in 2009 related to certain VIEs that were consolidated on January 1, 2010. See note 7 for additional information related to consolidated securitization entities. |
34
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
(6) Fair Value of Financial Instruments
Assets and liabilities that are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and cash equivalents, investment securities, separate accounts, securities held as collateral and derivative instruments. Other financial assets and liabilitiesthose not carried at fair valueare 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.
Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates.
Other invested assets. Based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the related instrument. Primarily represents short-term investments, limited partnerships accounted for under the cost method and bank loans.
Short-term borrowings. Based on carrying value which approximates fair value since the borrowings are based on variable interest rates that are reset monthly.
Long-term borrowings. Based on market quotes or comparable market transactions.
Non-recourse funding obligations. Based on the then current coupon, revalued based on the London Interbank Offered Rate (LIBOR) set and current spread assumption based on commercially available data. The model is a floating rate coupon model using the spread assumption to derive the valuation.
Borrowings related to securitization entities. Based on market quotes or comparable market transactions.
Investment contracts. Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products.
35
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
The following represents the fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:
(Amounts in millions) |
June 30, 2010 | December 31, 2009 | ||||||||||||||||||
Notional amount |
Carrying amount |
Fair value |
Notional amount |
Carrying amount |
Fair value | |||||||||||||||
Assets: |
||||||||||||||||||||
Commercial mortgage loans |
$ | (1) | $ | 7,208 | $ | 7,211 | $ | (1) | $ | 7,499 | $ | 7,213 | ||||||||
Restricted commercial mortgage loans (2) |
(1) | 535 | 554 | (1) | | | ||||||||||||||
Other invested assets |
(1) | 328 | 332 | (1) | 1,766 | 1,769 | ||||||||||||||
Liabilities: |
||||||||||||||||||||
Short-term borrowings (3) |
(1) | 730 | 730 | (1) | 930 | 930 | ||||||||||||||
Long-term borrowings (3) |
(1) | 4,331 | 4,127 | (1) | 3,641 | 3,291 | ||||||||||||||
Non-recourse funding obligations (3) |
(1) | 3,437 | 1,468 | (1) | 3,443 | 1,674 | ||||||||||||||
Borrowings related to securitization |