10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

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

For the quarterly period ended March 31, 2020

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

For the transition period from

Commission file number

001-32195

GENWORTH FINANCIAL, INC.

(Exact name of registrant as specified in its charter)


Delaware		80-0873306
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6620 West Broad Street Richmond , Virginia		23230
(Address of principal executive offices)		(Zip Code)

(804

)

281-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

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

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes

☐

No ☒

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, par value $.001 per share	GNW	New York Stock Exchange

As of April

, 2020, 505,126,098 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	March 31, 2020			December 31, 2019
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost of $54,136 and allowance for credit losses of $— as of March 31, 2020)	$	59,051		$	60,339
Equity securities, at fair value		188			239
Commercial mortgage loans (net of unamortized balance of loan origination fees and costs of $4 as of March 31, 2020 and December 31, 2019)		6,944			6,976
Less: Allowance for credit losses		(29	)		(13	)

Commercial mortgage loans, net		6,915			6,963
Policy loans		2,052			2,058
Other invested assets		2,465			1,632

Total investments		70,671			71,231
Cash, cash equivalents and restricted cash		2,483			3,341
Accrued investment income		707			654
Deferred acquisition costs		1,898			1,836
Intangible assets and goodwill		263			201
Reinsurance recoverable		17,122			17,103
Less: Allowance for credit losses		(42	)		—

Reinsurance recoverable, net		17,080			17,103
Other assets		456			443
Deferred tax asset		319			425
Separate account assets		4,967			6,108

Total assets	$	98,844		$	101,342

Liabilities and equity
Liabilities:
Future policy benefits	$	39,339		$	40,384
Policyholder account balances		22,313			22,217
Liability for policy and contract claims		11,132			10,958
Unearned premiums		1,722			1,893
Other liabilities		1,686			1,562
Non-recourse funding obligations		—			311
Long-term borrowings		2,851			3,277
Separate account liabilities		4,967			6,108

Total liabilities		84,010			86,710

Commitments and contingencies
Equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 593 million and 592 million shares issued as of March 31, 2020 and December 31, 2019, respectively; 505 million and 504 million shares outstanding as of March 31, 2020 and December 31, 2019, respectively		1			1
Additional paid-in capital		11,993			11,990
Accumulated other comprehensive income (loss)		3,815			3,433
Retained earnings		1,340			1,461
Treasury stock, at cost (88 million shares as of March 31, 2020 and December 31, 2019)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		14,449			14,185
Noncontrolling interests		385			447

Total equity		14,834			14,632

Total liabilities and equity	$	98,844		$	101,342

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)


	Three months ended March 31,
	2020			2019
Revenues:
Premiums	$	1,015		$	988
Net investment income		793			794
Net investment gains (losses)		(152	)		75
Policy fees and other income		181			187

Total revenues		1,837			2,044

Benefits and expenses:
Benefits and other changes in policy reserves		1,361			1,282
Interest credited		141			147
Acquisition and operating expenses, net of deferrals		249			237
Amortization of deferred acquisition costs and intangibles		116			81
Interest expense		52			60

Total benefits and expenses		1,919			1,807

Income (loss) from continuing operations before income taxes		(82	)		237
Provision (benefit) for income taxes		(10	)		69

Income (loss) from continuing operations		(72	)		168
Income from discontinued operations, net of taxes		—			62

Net income (loss)		(72	)		230
Less: net income (loss) from continuing operations attributable to noncontrolling interests		(6	)		20
Less: net income from discontinued operations attributable to noncontrolling interests		—			36

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(66	)	$	174

Net income (loss) available to Genworth Financial, Inc.’s common stockholders:
Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders		(66	)		148
Income from discontinued operations available to Genworth Financial, Inc.’s common common stockholders		—			26

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(66	)	$	174

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
Basic	$	(0.13	)	$	0.29

Diluted	$	(0.13	)	$	0.29

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share:
Basic	$	(0.13	)	$	0.35

Diluted	$	(0.13	)	$	0.34

Weighted-average common shares outstanding:
Basic		504.3			501.2

Diluted		504.3			508.6

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)


	Three months ended March 31,
	2020			2019
Net income (loss)		$ (72	)		$ 230

Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities without an allowance for credit losses		(320	)		—
Net unrealized gains (losses) on securities with an allowance for credit losses		—			—
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—			379
Net unrealized gains (losses) on other-than-temporarily impaired securities		—			1
Derivatives qualifying as hedges		753			69
Foreign currency translation and other adjustments		(98	)		54

Total other comprehensive income (loss)		335			503

Total comprehensive income		263			733
Less: comprehensive income (loss) attributable to noncontrolling interests		(53	)		111

Total comprehensive income available to Genworth Financial, Inc.’s common stockholders		$ 316			$ 622

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in millions)

(Unaudited)


	Three months ended March 31, 2020
	Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)		Retained earnings			Treasury stock, at cost			Total Genworth Financial, Inc.’s stockholders’ equity			Noncontrolling interests			Total equity
Balances as of December 31, 2019	$	1	$	11,990	$	3,433	$	1,461		$	(2,700)		$	14,185		$	447		$	14,632
Cumulative effect of change in accounting, net of taxes		—		—		—		(55	)		—			(55	)		—			(55	)
Comprehensive income (loss):
Net loss		—		—		—		(66	)		—			(66	)		(6	)		(72	)
Other comprehensive income (loss), net of taxes		—		—		382		—			—			382			(47	)		335

Total comprehensive income (loss)														316			(53	)		263
Dividends to noncontrolling interests		—		—		—		—			—			—			(9	)		(9	)
Stock-based compensation expense and exercises and other		—		3		—		—			—			3			—			3

Balances as of March 31, 2020	$	1	$	11,993	$	3,815	$	1,340		$	(2,700	)	$	14,449		$	385		$	14,834


	Three months ended March 31, 2019
	Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)		Retained earnings		Treasury stock, at cost			Total Genworth Financial, Inc.’s stockholders’ equity		Noncontrolling interests			Total equity
Balances as of December 31, 2018	$	1	$	11,987	$	2,044	$	1,118	$	(2,700	)	$	12,450	$	1,739		$	14,189
Repurchase of subsidiary shares		—		—		—		—		—			—		(12	)		(12	)
Comprehensive income:
Net income		—		—		—		174		—			174		56			230
Other comprehensive income, net of taxes		—		—		448		—		—			448		55			503

Total comprehensive income													622		111			733
Dividends to noncontrolling interests		—		—		—		—		—			—		(28	)		(28	)
Stock-based compensation expense and exercises and other		—		2		—		—		—			2		(2	)		—

Balances as of March 31, 2019	$	1	$	11,989	$	2,492	$	1,292	$	(2,700	)	$	13,074	$	1,808		$	14,882

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)


	Three months ended March 31,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(72	)	$	230
Less income from discontinued operations, net of taxes		—			(62	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Amortization of fixed maturity securities discounts and premiums		(35	)		(18	)
Net investment (gains) losses		152			(75	)
Charges assessed to policyholders		(158	)		(165	)
Acquisition costs deferred		(4	)		(9	)
Amortization of deferred acquisition costs and intangibles		116			81
Deferred income taxes		(11	)		51
Derivative instruments, limited partnerships and other		347			(32	)
Stock-based compensation expense		11			6
Change in certain assets and liabilities:
Accrued investment income and other assets		(107	)		(242	)
Insurance reserves		328			301
Current tax liabilities		(5	)		9
Other liabilities, policy and contract claims and other policy-related balances		118			27
Cash from operating activities—discontinued operations		—			32

Net cash from operating activities		680			134

Cash flows from (used by) investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		921			871
Commercial mortgage loans		139			130
Other invested assets		34			20
Proceeds from sales of investments:
Fixed maturity and equity securities		369			1,592
Purchases and originations of investments:
Fixed maturity and equity securities		(1,804	)		(1,976	)
Commercial mortgage loans		(107	)		(370	)
Other invested assets		(160	)		(94	)
Short-term investments, net		48			98
Policy loans, net		9			12
Cash used by investing activities—discontinued operations		—			(6	)

Net cash from (used by) investing activities		(551	)		277

Cash flows used by financing activities:
Deposits to universal life and investment contracts		180			198
Withdrawals from universal life and investment contracts		(493	)		(581	)
Redemption of non-recourse funding obligations		(315	)		—
Repayment and repurchase of long-term debt		(420	)		—
Repurchase of subsidiary shares		—			(12	)
Dividends paid to noncontrolling interests		(9	)		(14	)
Other, net		100			48
Cash used by financing activities—discontinued operations		—			(14	)

Net cash used by financing activities		(957	)		(375	)

Effect of exchange rate changes on cash, cash equivalents and restricted cash (includes $— and $5 related to discontinued operations)		(30	)		8

Net change in cash, cash equivalents and restricted cash		(858	)		44
Cash, cash equivalents and restricted cash at beginning of period		3,341			2,177

Cash, cash equivalents and restricted cash at end of period		2,483			2,221
Less cash, cash equivalents and restricted cash of discontinued operations at end of period		—			201

Cash, cash equivalents and restricted cash of continuing operations at end of period	$	2,483		$	2,020

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

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

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

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

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

We operate our business through the following four operating segments:

•

U.S. Mortgage Insurance.

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

•

Australia Mortgage Insurance.

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

•

U.S. Life Insurance.

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

•

Runoff.

The Runoff segment includes the results of products which have not been actively sold since 2011, but we continue to service our existing blocks of business. These products primarily include variable annuity, variable life insurance and corporate-owned life insurance, as well as funding agreements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

On December 12, 2019, we completed the sale of Genworth MI Canada Inc. (“Genworth Canada”), our former Canada mortgage insurance business, to an affiliate of Brookfield Business Partners L.P. (“Brookfield”) and received approximately $1.7

billion in net cash proceeds. Prior to the sale, in the third quarter of 2019, Genworth Canada was reported as discontinued operations and its financial position, results of operations and cash flows were separately reported for all periods presented. All prior periods reflected herein have been

re-presented

on this basis.

See note 14 for additional information related to discontinued operations.

Unless otherwise indicated, references to the condensed consolidated balance sheets, the condensed consolidated statements of income, the condensed consolidated statements of cash flows and the notes to the condensed consolidated financial statements, exclude amounts related to discontinued operations.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Potential impacts, risks and uncertainties of the coronavirus pandemic (“COVID-19”) may include investment valuations and impairments, commercial mortgage loan restructurings, deferred acquisition cost or intangible assets impairments or the acceleration of amortization, deferred tax asset recoverability

and

increases to insurance reserves, including higher claims reserves in our mortgage insurance businesses, among other matters. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes

contained in our 2019 Annual Report on Form

10-K.

Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On January 1, 2020, we adopted new accounting guidance related to disclosure requirements for defined benefit plans as part of the Financial Accounting Standards Board’s (the “FASB”) disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for defined benefit pension and other postretirement benefit plans. We adopted this new accounting guidance using the retrospective method, which did not have a significant impact on our condensed consolidated financial statements and disclosures.

On January 1, 2020, we adopted new accounting guidance related to fair value disclosure requirements as part of the FASB’s disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for fair value measurements. The guidance includes new disclosure requirements related to changes

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. We adopted this new accounting guidance using the prospective method for disclosures related to changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty and the retrospective method for all other disclosures. This accounting guidance did not impact our condensed consolidated financial statements but impacted our fair value disclosures.

In March 2020, the FASB issued new accounting guidance related to reference rate reform, which was effective for us on January 1, 2020. The guidance provides optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform, which includes the transition away from the London Interbank Offered Rate (“LIBOR”). This new guidance provides practical expedients for contracts affected by reference rate reform that impact the assessment of derivative hedge effectiveness and contract modifications, to include continuing hedge accounting when certain critical terms of a hedging relationship change and modifying certain effectiveness assessments to exclude certain potential sources of ineffectiveness, and is effective through December 31, 2022. We adopted this guidance prospectively and it did not have a significant impact on our condensed consolidated financial statements or disclosures but may impact our process for assessing the effectiveness of our cash flow hedging relationships, determined on an individual hedge basis, as we implement measures to transition away from LIBOR.

On January 1, 2020,

we adopted new accounting guidance related to accounting for credit losses on financial instruments. The guidance requires entities to recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most financial instruments not measured at fair value, which primarily includes our commercial mortgage loans, bank loan investments and reinsurance recoverables. The new guidance also requires the recognition of an allowance for expected credit losses as a liability in our consolidated balance sheet for

off-balance

credit exposures, including commitments to fund bank loan investments, private placement investments and commercial mortgage loans. The new guidance did not have a significant impact on other assets not measured at fair value. The FASB also issued an amendment to the guidance allowing entities to irrevocably elect the fair value option on an

instrument-by-instrument

basis for eligible instruments, which we did not elect.

For our commercial mortgage loans, we determine the adequacy of the allowance for credit losses utilizing an analytical model that provides various loss scenarios based on historical experience adjusted for current events, trends, economic conditions and reasonable and supportable forecasts that result in a loss in the loan portfolio over the estimated life of the loans. We revert to historical credit loss experience for periods beyond forecasts that are reasonable and supportable. The allowance for credit losses is measured on a collective basis with consideration for debt service coverage ratio,

debt-to-value,

property-type and geographic location. Key inputs into the analytical model include exposure, weighted-average life, return, historical loss rates and forecast scenarios. Actual amounts realized over time could differ from the amounts estimated for the allowance for credit losses reported in the condensed consolidated financial statements. Commercial mortgage loans are written off against the allowance to the extent principal or interest is deemed uncollectible. Accrued interest related to commercial mortgage loans is included in accrued investment income in our condensed consolidated balance sheet and had a carrying value of $24

million as of March 31, 2020. We do not measure an allowance for credit losses related to accrued interest as uncollectible accrued interest related to our commercial mortgage loans are written off after 90 days and once collectability is determined to be uncertain and not probable. Amounts written off related to accrued interest are recorded as a credit loss expense included in net investment gains (losses).

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We adopted the guidance related to our investments carried at amortized cost using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $23 million, net of deferred taxes of $6 million, for commercial mortgage loans and bank loan investments, with an offset to cumulative effect of change in accounting within retained earnings. See note 4 for additional disclosures related to commercial mortgage loans. We adopted the guidance related to our

off-balance

sheet credit exposures using the modified retrospective method and recorded an allowance related to lifetime expected credit losses

of $1 million, included in other liabilities in our condensed consolidated balance sheet, with an offset to cumulative effect of change in accounting within retained earnings.

The allowance for credit losses for reinsurance recoverables is evaluated based on historical loss experience adjusted for current events and reasonable and supportable forecasts from both internal and external sources. The allowance is measured by reinsurer, taking into consideration the reinsured product type and collateral type, and is calculated based on an externally reported probability of default corresponding to the reinsurer’s credit rating and the expected duration of the reinsurer’s contractual obligation to reimburse us for ceded claims on the underlying policies. Our estimate of the allowance reflects consideration for collateral securing the reinsurance agreements and expected recoveries of amounts previously charged off and expected to be charged off. We also consider other credit risk factors, including, among other factors, the historical frequency and severity of the associated insurance claims, aging of recoverables and regulatory, legal and economic factors, to determine if an additional incremental allowance for credit losses is required. No reversion adjustments are necessary as the starting point for our allowance for credit losses reflects historical loss experience covering the expected duration of the reinsurer’s contractual obligation to reimburse us. If available facts and circumstances indicate the reinsurance recoverable does not reflect expectations consistent with the collective analysis, the reinsurance recoverable is assessed on a separate basis. Write-offs of reinsurance recoverables are deducted from the allowance in the period the reinsurance recoverable is determined to be uncollectible. We adopted the guidance related to our reinsurance recoverables using the modified retrospective method and recorded an allowance related to lifetime expected credit losses

of $

million, net of deferred taxes of $

million, with an offset to cumulative effect of change in accounting within retained earnings. See note 8 for additional disclosures related to reinsurance recoverables.

The new guidance retains most of the existing impairment guidance for

available-for-sale

fixed maturity securities but amends the presentation of credit losses to reflect an allowance for credit losses as opposed to a write-down of the amortized cost of the investment and permits the reversal of credit losses through net income (loss) when reassessing changes in credit losses each reporting period.

Available-for-sale

fixed maturity securities in an unrealized loss position are evaluated to determine whether the decline in fair value is related to credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency/agencies and adverse conditions specifically related to the security, among other factors. If a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Estimating the cash flows expected to be collected is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments. When developing the estimate of cash flows expected to be collected, we utilize an analytical model that provides for various loss scenarios and consider the industry sector, current levels of subordination, geographic location and other relevant characteristics of the security or underlying assets, as well as reasonable and supportable forecasts. Losses are written off against the allowance when deemed uncollectible or when we intend to sell or expect we will be required to sell a security prior to recovering our amortized cost. We exclude accrued interest related to

available-for-sale

fixed maturity

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

securities from the estimate of allowance for credit losses. Accrued interest is included in accrued investment income in our condensed consolidated balance sheet and had a carrying value of $555 million as of March 31, 2020. We do not measure an allowance for credit losses related to accrued interest as uncollectible accrued interest related to our

available-for-

sale fixed maturity securities are written off after 90 days and once collectability is determined to be uncertain and not probable. Amounts written off related to accrued interest are recorded as a credit loss expense included in net investment gains (losses). We adopted the guidance related to our

available-for-sale

fixed maturity securities for which a previous other-than-temporary impairment was recognized prior to the date of adoption using the prospective method and the modified retrospective method for all other

available-for-sale

fixed maturity securities, which did not have any impact upon adoption.

Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued new accounting guidance related to simplifying the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is currently effective for us on January 1, 2021 using the retrospective method or modified retrospective method for certain changes and prospective method for all other changes, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements and disclosures.

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

•

assumptions will no longer be

locked-in

at contract inception and all cash flow assumptions used to estimate the liability for future policy benefits (except the discount rate) will be reviewed at least annually in the same period each year or more frequently if actual experience indicates a change is required. Changes will be recorded in net income (loss) using a retrospective approach with a cumulative

catch-up

adjustment by recalculating the net premium ratio (which will be capped at 100%) using actual historical and updated future cash flow assumptions;

•

the discount rate used to determine the liability for future policy benefits will be a current upper-medium grade (low credit risk) fixed-income instrument yield, which is generally interpreted to mean a

single-A

rated bond rate for the same duration, and is required to be reviewed quarterly, with changes in the discount rate recorded in other comprehensive income (loss);

•

the provision for adverse deviation and the premium deficiency test will be eliminated;

•

market risk benefits associated with deposit-type contracts will be measured at fair value with changes related to instrument-specific credit risk recorded in other comprehensive income (loss) and remaining changes recorded in net income (loss);

•

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

•

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

This guidance is effective for us on January 1, 2022 using the modified retrospective method, with early adoption permitted. Given the nature and extent of the changes to our operations, this guidance is expected to have a significant impact on our condensed consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Earnings (Loss) Per Share

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


	Three months ended March 31,
(Amounts in millions, except per share amounts)	2020			2019
Weighted-average shares used in basic earnings (loss) per share calculations		504.3			501.2
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		—			7.4
Weighted-average shares used in diluted earnings (loss) per share calculations (1)		504.3			508.6
Income (loss) from continuing operations:
Income (loss) from continuing operations	$	(72	)	$	168
Less: net income (loss) from continuing operations attributable to noncontrolling interests		(6	)		20
Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	(66	)	$	148
Basic per share	$	(0.13	)	$	0.29
Diluted per share	$	(0.13	)	$	0.29
Income from discontinued operations:
Income from discontinued operations, net of taxes	$	—		$	62
Less: net income from discontinued operations attributable to noncontrolling interests		—			36
Income from discontinued operations available to Genworth Financial, Inc.’s common stockholders	$	—		$	26
Basic per share	$	—		$	0.05
Diluted per share	$	—		$	0.05
Net income (loss):
Income (loss) from continuing operations	$	(72	)	$	168
Income from discontinued operations, net of taxes		—			62
Net income (loss)		(72	)		230
Less: net income (loss) attributable to noncontrolling interests		(6	)		56
Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(66	)	$	174
Basic per share (2)	$	(0.13	)	$	0.35
Diluted per share	$	(0.13	)	$	0.34

(1)

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months ended March 31, 2020, we were required to use basic weighted-average common shares outstanding as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 5.4 million would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months ended March 31, 2020, dilutive potential weighted-average common shares outstanding would have been 509.7 million.

(2)	May not total due to whole number calculation.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) Investments

(a) Net Investment Income

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


	Three months ended March 31,
(Amounts in millions)	2020			2019
Fixed maturity securities—taxable	$	622		$	613
Fixed maturity securities—non-taxable		2			2
Equity securities		2			4
Commercial mortgage loans		85			82
Policy loans		49			46
Other invested assets		47			59
Cash, cash equivalents, restricted cash and short-term investments		11			11

Gross investment income before expenses and fees		818			817
Expenses and fees		(25	)		(23	)

Net investment income	$	793		$	794

(b) Net Investment Gains (Losses)

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


	Three months ended March 31,
(Amounts in millions)	2020			2019
Available-for-sale fixed maturity securities:
Realized gains	$	14		$	79
Realized losses		(1	)		(21	)

Net realized gains (losses) on available-for-sale fixed maturity securities		13			58

Impairments:
Total other-than-temporary impairments		—			—
Portion of other-than-temporary impairments included in othercomprehensive income		—			—

Net other-than-temporary impairments		—			—

Net change in allowance for credit losses on available-for-sale fixed maturity securities		—			—
Net realized gains (losses) on equity securities sold		—			3
Net unrealized gains (losses) on equity securities still held		(19	)		12
Limited partnerships		(40	)		15
Commercial mortgage loans		—			(1	)
Derivative instruments (1)		(105	)		(12	)
Other		(1	)		—

Net investment gains (losses)	$	(152	)	$	75

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following represents the activity for credit losses recognized in net income on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (“OCI”) as of and for the three months ended March 31, 2019:


(Amounts in millions)
Beginning balance	$	24
Other-than-temporary impairments not previously recognized		—
Increases related to other-than-temporary impairments previously recognized		—
Reductions:
Securities sold, paid down or disposed		(1	)

Ending balance	$	23

Net unrealized gains and losses on

available-for-sale

investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:


(Amounts in millions)	March 31, 2020			December 31, 2019
Net unrealized gains (losses) on fixed maturity securities without an allowance for credit losses (1)	$	4,957		$	6,676
Net unrealized gains (losses) on fixed maturity securities with an allowance for credit losses (1)		—			—
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(3,478	)		(4,789	)
Income taxes, net		(318	)		(406	)

Net unrealized investment gains (losses)		1,161			1,481
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		21			25

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	1,140		$	1,456

(1)	Excludes foreign exchange.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The change in net unrealized gains (losses) on

available-for-sale

investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the three months ended March 31:


(Amounts in millions)	2020			2019
Beginning balance	$	1,456		$	595
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on fixed maturity securities		(1,712	)		1,999
Adjustment to deferred acquisition costs		168			(989	)
Adjustment to present value of future profits		(1	)		(53	)
Adjustment to sales inducements		36			(19	)
Adjustment to benefit reserves		1,108			(388	)
Provision for income taxes		87			(123	)

Change in unrealized gains (losses) on investment securities		(314	)		427
Reclassification adjustments to net investment (gains) losses, net of taxes of $1 and $13		(6	)		(47	)

Change in net unrealized investment gains (losses)		(320	)		380
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		(4	)		32

Ending balance	$	1,140		$	943

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity Securities

As of March 31, 2020, the amortized cost or cost, gross unrealized gains (losses), allowance for credit losses and fair value of our fixed maturity securities classified as

available-for-sale

were as follows:


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses			Allowance for credit losses		Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	4,041	$	1,730	$	—		$	—	$	5,771
State and political subdivisions		2,495		374		(5	)		—		2,864
Non-U.S. government		1,118		92		(9	)		—		1,201
U.S. corporate:
Utilities		4,333		556		(22	)		—		4,867
Energy		2,426		51		(385	)		—		2,092
Finance and insurance		7,179		548		(104	)		—		7,623
Consumer—non-cyclical		5,006		725		(46	)		—		5,685
Technology and communications		3,000		312		(37	)		—		3,275
Industrial		1,304		72		(31	)		—		1,345
Capital goods		2,420		272		(28	)		—		2,664
Consumer—cyclical		1,628		134		(43	)		—		1,719
Transportation		1,344		152		(23	)		—		1,473
Other		295		40		(1	)		—		334

Total U.S. corporate		28,935		2,862		(720	)		—		31,077

Non-U.S. corporate:
Utilities		757		24		(16	)		—		765
Energy		1,158		42		(102	)		—		1,098
Finance and insurance		2,023		128		(40	)		—		2,111
Consumer—non-cyclical		639		43		(8	)		—		674
Technology and communications		1,021		96		(8	)		—		1,109
Industrial		877		63		(29	)		—		911
Capital goods		546		25		(10	)		—		561
Consumer—cyclical		362		12		(12	)		—		362
Transportation		554		62		(13	)		—		603
Other		1,475		155		(25	)		—		1,605

Total non-U.S. corporate		9,412		650		(263	)		—		9,799

Residential mortgage-backed		2,032		258		(17	)		—		2,273
Commercial mortgage-backed		2,876		169		(64	)		—		2,981
Other asset-backed		3,227		12		(154	)		—		3,085

Total available-for-sale fixed maturity securities	$	54,136	$	6,147	$	(1,232	)	$	—	$	59,051

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2019, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as

available-for-sale

were as follows:


			Gross unrealized gains				Gross unrealized losses
(Amounts in millions)	Amortized cost or cost		Not other-than- temporarily impaired		Other-than- temporarily impaired		Not other-than- temporarily impaired			Other-than- temporarily impaired		Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	4,073	$	952	$	—	$	—		$	—	$	5,025
State and political subdivisions		2,394		355		—		(2	)		—		2,747
Non-U.S. government		1,235		117		—		(2	)		—		1,350
U.S. corporate:
Utilities		4,322		675		—		—			—		4,997
Energy		2,404		303		—		(8	)		—		2,699
Finance and insurance		6,977		798		—		(1	)		—		7,774
Consumer—non-cyclical		4,909		796		—		(4	)		—		5,701
Technology and communications		2,883		363		—		(1	)		—		3,245
Industrial		1,271		125		—		—			—		1,396
Capital goods		2,345		367		—		(1	)		—		2,711
Consumer—cyclical		1,590		172		—		(2	)		—		1,760
Transportation		1,320		187		—		(1	)		—		1,506
Other		292		30		—		—			—		322

Total U.S. corporate		28,313		3,816		—		(18	)		—		32,111

Non-U.S. corporate:
Utilities		779		50		—		—			—		829
Energy		1,140		179		—		—			—		1,319
Finance and insurance		2,087		232		—		—			—		2,319
Consumer—non-cyclical		631		55		—		(2	)		—		684
Technology and communications		1,010		128		—		—			—		1,138
Industrial		896		92		—		—			—		988
Capital goods		565		40		—		—			—		605
Consumer—cyclical		373		24		—		—			—		397
Transportation		557		73		—		(1	)		—		629
Other		1,431		188		—		(2	)		—		1,617

Total non-U.S. corporate		9,469		1,061		—		(5	)		—		10,525

Residential mortgage-backed		2,057		199		15		(1	)		—		2,270
Commercial mortgage-backed		2,897		137		—		(8	)		—		3,026
Other asset-backed		3,262		30		—		(7	)		—		3,285

Total available-for-sale fixed maturity securities	$	53,700	$	6,667	$	15	$	(43	)	$	—	$	60,339

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our fixed maturity securities, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of March 31, 2020:


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
Fixed maturity securities:
State and political subdivisions	$	106	$	(5	)		18	$	—	$	—			—	$	106	$	(5	)		18
Non-U.S. government		156		(9	)		27		—		—			—		156		(9	)		27
U.S. corporate		7,358		(685	)		1,157		139		(35	)		16		7,497		(720	)		1,173
Non-U.S. corporate		3,257		(258	)		537		17		(5	)		3		3,274		(263	)		540
Residential mortgage-backed		304		(16	)		59		13		(1	)		6		317		(17	)		65
Commercial mortgage-backed		894		(60	)		152		9		(4	)		3		903		(64	)		155
Other asset-backed		2,353		(130	)		455		245		(24	)		64		2,598		(154	)		519

Total for fixed maturity securities inan unrealized loss position	$	14,428	$	(1,163	)		2,405	$	423	$	(69	)		92	$	14,851	$	(1,232	)		2,497

% Below cost:
<20% Below cost	$	13,585	$	(752	)		2,258	$	357	$	(38	)		79	$	13,942	$	(790	)		2,337
20%-50% Below cost		784		(338	)		134		63		(28	)		11		847		(366	)		145
>50% Below cost		59		(73	)		13		3		(3	)		2		62		(76	)		15

Total for fixed maturity securities inan unrealized loss position	$	14,428	$	(1,163	)		2,405	$	423	$	(69	)		92	$	14,851	$	(1,232	)		2,497

Investment grade	$	13,122	$	(927	)		2,171	$	313	$	(42	)		77	$	13,435	$	(969	)		2,248
Below investment grade		1,306		(236	)		234		110		(27	)		15		1,416		(263	)		249

Total for fixed maturity securities inan unrealized loss position	$	14,428	$	(1,163	)		2,405	$	423	$	(69	)		92	$	14,851	$	(1,232	)		2,497

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of March 31, 2020:


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
U.S. corporate:
Utilities	$	582	$	(22	)		112	$	—	$	—			—	$	582	$	(22	)		112
Energy		1,443		(364	)		240		56		(21	)		9		1,499		(385	)		249
Finance and insurance		1,911		(104	)		259		—		—			—		1,911		(104	)		259
Consumer—non- cyclical		678		(39	)		108		36		(7	)		2		714		(46	)		110
Technology andcommunications		772		(37	)		116		—		—			—		772		(37	)		116
Industrial		473		(31	)		63		—		—			—		473		(31	)		63
Capital goods		489		(25	)		84		12		(3	)		1		501		(28	)		85
Consumer—cyclical		585		(39	)		102		35		(4	)		4		620		(43	)		106
Transportation		420		(23	)		71		—		—			—		420		(23	)		71
Other		5		(1	)		2		—		—			—		5		(1	)		2

Subtotal, U.S. corporate securities		7,358		(685	)		1,157		139		(35	)		16		7,497		(720	)		1,173

Non-U.S. corporate:
Utilities		279		(16	)		37		—		—			—		279		(16	)		37
Energy		591		(102	)		66		—		—			—		591		(102	)		66
Finance and insurance		649		(40	)		117		—		—			—		649		(40	)		117
Consumer—non- cyclical		136		(6	)		50		5		(2	)		1		141		(8	)		51
Technology andcommunications		189		(8	)		48		—		—			—		189		(8	)		48
Industrial		384		(29	)		57		—		—			—		384		(29	)		57
Capital goods		208		(10	)		24		—		—			—		208		(10	)		24
Consumer—cyclical		197		(12	)		43		—		—			—		197		(12	)		43
Transportation		162		(12	)		33		7		(1	)		1		169		(13	)		34
Other		462		(23	)		62		5		(2	)		1		467		(25	)		63

Subtotal, non-U.S. corporate securities		3,257		(258	)		537		17		(5	)		3		3,274		(263	)		540

Total for corporate securities in anunrealized loss position	$	10,615	$	(943	)		1,694	$	156	$	(40	)		19	$	10,771	$	(983	)		1,713

We did not recognize an allowance for credit losses on securities in an unrealized loss position. Based on a qualitative and quantitative review of the issuers of the securities, we believe the decline in fair value is largely

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

due to recent market volatility and is not indicative of credit losses. The issuers continue to make timely principal and interest payments. For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost.


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
Fixed maturity securities:
State and political subdivisions	$	91	$	(2	)		14	$	—	$	—			—	$	91	$	(2	)		14
Non-U.S. government		224		(2	)		20		—		—			—		224		(2	)		20
U.S. corporate		123		(5	)		27		302		(13	)		33		425		(18	)		60
Non-U.S. corporate		79		(1	)		12		62		(4	)		7		141		(5	)		19
Residential mortgage-backed		22		(1	)		10		—		—			—		22		(1	)		10
Commercial mortgage-backed		381		(5	)		51		14		(3	)		3		395		(8	)		54
Other asset-backed		532		(2	)		97		439		(5	)		115		971		(7	)		212

Total for fixed maturity securities in an unrealized loss position	$	1,452	$	(18	)		231	$	817	$	(25	)		158	$	2,269	$	(43	)		389

% Below cost:
<20% Below cost	$	1,452	$	(18	)		231	$	807	$	(20	)		155	$	2,259	$	(38	)		386
20%-50% Below cost		—		—			—		10		(5	)		3		10		(5	)		3

Total for fixed maturity securities in an unrealized loss position	$	1,452	$	(18	)		231	$	817	$	(25	)		158	$	2,269	$	(43	)		389

Investment grade	$	1,408	$	(14	)		223	$	702	$	(15	)		145	$	2,110	$	(29	)		368
Below investment grade		44		(4	)		8		115		(10	)		13		159		(14	)		21

Total for fixed maturity securities in an unrealized loss position	$	1,452	$	(18	)		231	$	817	$	(25	)		158	$	2,269	$	(43	)		389

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
U.S. corporate:
Energy	$	54	$	(3	)		10	$	80	$	(5	)		10	$	134	$	(8	)		20
Finance and insurance		—		—			—		34		(1	)		4		34		(1	)		4
Consumer—non-cyclical		34		(1	)		9		93		(3	)		9		127		(4	)		18
Technology and communications		—		—			—		18		(1	)		2		18		(1	)		2
Capital goods		35		(1	)		8		—		—			—		35		(1	)		8
Consumer—cyclical		—		—			—		54		(2	)		6		54		(2	)		6
Transportation		—		—			—		23		(1	)		2		23		(1	)		2

Subtotal, U.S. corporate securities		123		(5	)		27		302		(13	)		33		425		(18	)		60

Non-U.S. corporate:
Consumer—non-cyclical		—		—			—		31		(2	)		3		31		(2	)		3
Transportation		—		—			—		25		(1	)		3		25		(1	)		3
Other		79		(1	)		12		6		(1	)		1		85		(2	)		13

Subtotal, non-U.S. corporate securities		79		(1	)		12		62		(4	)		7		141		(5	)		19

Total for corporate securities in anunrealized loss position	$	202	$	(6	)		39	$	364	$	(17	)		40	$	566	$	(23	)		79

The scheduled maturity distribution of fixed maturity securities as of March 31, 2020 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	$	1,415	$	1,421
Due after one year through five years		8,835		8,949
Due after five years through ten years		12,207		12,642
Due after ten years		23,544		27,700

Subtotal		46,001		50,712
Residential mortgage-backed		2,032		2,273
Commercial mortgage-backed		2,876		2,981
Other asset-backed		3,227		3,085

Total	$	54,136	$	59,051

As of March 31, 2020, securities issued by finance and insurance,

consumer—non-cyclical,

utilities and technology and communications industry groups represented approximately 23%, 15%, 14% and 11%,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of March 31, 2020, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of principal payments, amortization and allowance for credit losses.

We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:


	March 31, 2020						December 31, 2019
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	2,566			37	%	$	2,590			37	%
Industrial		1,646			24			1,670			24
Office		1,641			23			1,632			23
Apartments		548			8			541			8
Mixed use		279			4			281			4
Other		264			4			266			4

Subtotal		6,944			100	%		6,980			100	%

Unamortized balance of loan origination fees		—						(4	)
Allowance for credit losses		(29	)					(13	)

Total	$	6,915					$	6,963

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	March 31, 2020						December 31, 2019
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
South Atlantic	$	1,699			24	%	$	1,715			25	%
Pacific		1,648			24			1,673			24
Middle Atlantic		980			14			992			14
Mountain		763			11			753			11
West North Central		485			7			488			7
East North Central		453			7			455			6
West South Central		451			6			433			6
New England		255			4			257			4
East South Central		210			3			214			3

Subtotal		6,944			100	%		6,980			100	%

Unamortized balance of loan origination fees		—						(4	)
Allowance for credit losses		(29	)					(13	)

Total	$	6,915					$	6,963

The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:


	March 31, 2020
(Amounts in millions)	31 - 60 days past due			61 - 90 days past due			Greater than 90 days past due			Total past due			Current			Total
Property type:
Retail	$	—		$	—		$	—		$	—		$	2,566		$	2,566
Industrial		—			—			—			—			1,646			1,646
Office		—			—			—			—			1,641			1,641
Apartments		—			—			—			—			548			548
Mixed use		—			—			—			—			279			279
Other		—			—			—			—			264			264

Total amortized cost	$	—		$	—		$	—		$	—		$	6,944		$	6,944

% of total commercial mortgage loans		—	%		—	%		—	%		—	%		100	%		100	%

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2019
(Amounts in millions)	31 - 60 days past due			61 - 90 days past due			Greater than 90 days past due			Total past due			Current			Total
Property type:
Retail	$	—		$	—		$	—		$	—		$	2,590		$	2,590
Industrial		—			—			—			—			1,670			1,670
Office		—			—			—			—			1,632			1,632
Apartments		—			—			—			—			541			541
Mixed use		—			—			—			—			281			281
Other		—			—			—			—			266			266

Total recorded investment	$	—		$	—		$	—		$	—		$	6,980		$	6,980

% of total commercial mortgage loans		—	%		—	%		—	%		—	%		100	%		100	%

For a discussion of our policy related to placing commercial mortgage loans on

non-accrual

status, see Note 2—Summary of Significant Accounting Policies included in the Notes to Consolidated Financial Statements in our 2019 Annual Report on Form

10-K.

As of March 31, 2020 and December 31, 2019, we had no commercial mortgage loans on

non-accrual

status.

During the three months ended March 31, 2020 and the year ended December 31, 2019, we did not have any modifications or extensions that were considered troubled debt restructurings.

The following table sets forth the allowance for credit losses related to commercial mortgage loans as of or for the periods indicated:


	Three months ended March 31,
(Amounts in millions)	2020		2019
Allowance for credit losses:
Beginning balance	$	13	$	9
Cumulative effect of change in accounting		16		—
Provision		—		—
Write-offs		—		—
Recoveries		—		1

Ending balance	$	29	$	10

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the

debt-to-value

and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average

debt-to-value

ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower

debt-to-value

indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual income of the property compared to the payments required under the terms of the

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

loan. Normalization allows for the removal of annual

one-time

events such as capital expenditures, prepaid or late real estate tax payments or

non-recurring

third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio is not used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

The following tables set forth the

debt-to-value

of commercial mortgage loans by property type as of the dates indicated:


	March 31, 2020
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100%			Total
Property type:
Retail	$	956		$	587		$	1,023		$	—		$	—		$	2,566
Industrial		787			323			536			—			—			1,646
Office		550			353			738			—			—			1,641
Apartments		220			110			218			—			—			548
Mixed use		103			70			106			—			—			279
Other		55			69			140			—			—			264

Total amortized cost	$	2,671		$	1,512		$	2,761		$	—		$	—		$	6,944

% of total		38	%		22	%		40	%		—	%		—	%		100	%

Weighted-average debt service coverage ratio		2.31			1.82			1.55			—			—			1.90


	December 31, 2019
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100%			Total
Property type:
Retail	$	986		$	579		$	1,025		$	—		$	—		$	2,590
Industrial		808			337			525			—			—			1,670
Office		529			380			723			—			—			1,632
Apartments		211			110			220			—			—			541
Mixed use		104			70			107			—			—			281
Other		56			69			141			—			—			266

Total recorded investment	$	2,694		$	1,545		$	2,741		$	—		$	—		$	6,980

% of total		39	%		22	%		39	%		—	%		—	%		100	%

Weighted-average debt service coverage ratio		2.32			1.81			1.55			—			—			1.90

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	March 31, 2020
(Amounts in millions)	Less than 1.00			1.00 - 1.25			1.26 - 1.50			1.51 - 2.00			Greater than 2.00			Total
Property type:
Retail	$	65		$	138		$	601		$	1,126		$	636		$	2,566
Industrial		24			50			217			655			700			1,646
Office		41			113			273			745			469			1,641
Apartments		16			31			130			186			185			548
Mixed use		3			18			37			105			116			279
Other		34			146			19			31			34			264

Total amortized cost	$	183		$	496		$	1,277		$	2,848		$	2,140		$	6,944

% of total		3	%		7	%		18	%		41	%		31	%		100	%

Weighted-average debt-to-value		58	%		61	%		63	%		58	%		41	%		54	%


	December 31, 2019
(Amounts in millions)	Less than 1.00			1.00 - 1.25			1.26 - 1.50			1.51 - 2.00			Greater than 2.00			Total
Property type:
Retail	$	68		$	141		$	596		$	1,148		$	637		$	2,590
Industrial		24			51			221			658			716			1,670
Office		44			89			277			751			471			1,632
Apartments		16			32			129			175			189			541
Mixed use		4			16			37			107			117			281
Other		34			147			20			31			34			266

Total recorded investment	$	190		$	476		$	1,280		$	2,870		$	2,164		$	6,980

% of total		3	%		7	%		18	%		41	%		31	%		100	%

Weighted-average debt-to-value		59	%		61	%		63	%		58	%		41	%		54	%

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables set forth commercial mortgage loans by year of origination and credit quality indicator as of March 31, 2020:


(Amounts in millions)	2020		2019		2018		2017		2016		2015 and prior		Total
Debt-to-value:
0% - 50%	$	4	$	11	$	33	$	104	$	118	$	2,401	$	2,671
51% - 60%		12		29		170		280		149		872		1,512
61% - 75%		91		763		800		351		240		516		2,761
76% - 100%		—		—		—		—		—		—		—
Greater than 100%		—		—		—		—		—		—		—

Total amortized cost	$	107	$	803	$	1,003	$	735	$	507	$	3,789	$	6,944


Debt service coverage ratio:
Less than 1.00	$	—	$	—	$	34	$	3	$	—	$	146	$	183
1.00 - 1.25		24		12		107		74		13		266		496
1.26 - 1.50		16		360		261		97		88		455		1,277
1.51 - 2.00		53		358		507		324		275		1,331		2,848
Greater than 2.00		14		73		94		237		131		1,591		2,140

Total amortized cost	$	107	$	803	$	1,003	$	735	$	507	$	3,789	$	6,944


Write-offs, gross	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Recoveries		—		—		—		—		—		—		—

Write-offs, net	$	—	$	—	$	—	$	—	$	—	$	—	$	—

(f) Limited Partnerships or Similar Entities

Limited partnerships are accounted for at fair value when our partnership interest is considered minor (generally less than 3% ownership in the limited partnerships) and we exercise no influence over operating and financial policies. If our ownership percentage exceeds that threshold, limited partnerships are accounted for using the equity method of accounting. In applying either method, we use financial information provided by the investee generally on a

one-to-three

month lag. However, we consider whether an adjustment to the estimated fair value is necessary when the measurement date is not aligned with our reporting date.

Investments in limited partnerships or similar entities are generally considered VIEs when the equity group lacks sufficient financial control. Generally, these investments are limited partner or

non-managing

member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of March 31, 2020 and December 31, 2019, the total carrying value of these investments was $654 million and $616 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(5) Derivative Instruments

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

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)	Balance sheet classification	March 31, 2020		December 31, 2019		Balance sheet classification	March 31, 2020		December 31, 2019
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Other invested assets	$	1,002	$	197	Other liabilities	$	—	$	10
Foreign currency swaps	Other invested assets		21		4	Other liabilities		—		—

Total cash flow hedges			1,023		201			—		10

Total derivatives designated as hedges			1,023		201			—		10

Derivatives not designated as hedges
Equity index options	Other invested assets		62		81	Other liabilities		—		—
Financial futures	Other invested assets		—		—	Other liabilities		—		—
Other foreign currency contracts	Other invested assets		16		8	Other liabilities		14		1
GMWB embeddedderivatives	Reinsurance recoverable (1)		47		20	Policyholder account balances (2)		691		323
Fixed index annuity embedded derivatives	Other assets		—		—	Policyholder account balances (3)		413		452
Indexed universal lifeembedded derivatives	Reinsurance recoverable		—		—	Policyholder account balances (4)		21		19

Total derivatives not designated as hedges			125		109			1,139		795

Total derivatives		$	1,148	$	310		$	1,139	$	805

(1)	Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.

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

(3)	Represents the embedded derivatives associated with our fixed index annuity liabilities.

(4)	Represents the embedded derivatives associated with our indexed universal life liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, fixed index annuity embedded derivatives and indexed universal life embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:


(Notional in millions)	Measurement		December 31, 2019		Additions		Maturities/ terminations			March 31, 2020
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps		Notional	$	8,968	$	1,158	$	(1,102	)	$	9,024
Foreign currency swaps		Notional		110		—		—			110

Total cash flow hedges				9,078		1,158		(1,102	)		9,134

Total derivatives designated as hedges				9,078		1,158		(1,102	)		9,134

Derivatives not designated as hedges
Interest rate swaps		Notional		4,674		—		—			4,674
Equity index options		Notional		2,451		509		(531	)		2,429
Financial futures		Notional		1,182		1,651		(1,266	)		1,567
Other foreign currency contracts		Notional		628		1,819		(1,308	)		1,139

Total derivatives not designated as hedges				8,935		3,979		(3,105	)		9,809

Total derivatives			$	18,013	$	5,137	$	(4,207	)	$	18,943


(Number of policies)	Measurement		December 31, 2019		Additions		Maturities/ terminations			March 31, 2020
Derivatives not designated as hedges
GMWB embedded derivatives		Policies		25,623		—		(561	)		25,062
Fixed index annuity embedded derivatives		Policies		15,441		—		(317	)		15,124
Indexed universal life embedded derivatives		Policies		884		—		(18	)		866

Cash Flow Hedges

Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; and (v) other instruments to hedge the cash flows of various forecasted transactions.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about the

pre-tax

income (loss) effects of cash flow hedges for the three months ended March 31, 2020:


(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)		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	1,041		$	43		Net investment income	$	—		Net investment gains (losses)
Interest rate swaps hedging assets		—			4		Net investment gains (losses)		—		Net investment gains (losses)
Interest rate swaps hedging liabilities		(63	)		—		Interest expense		—		Net investment gains (losses)
Foreign currency swaps		17			—		Net investment income		—		Net investment gains (losses)

Total	$	995		$	47			$	—

The following table provides information about the

pre-tax

income (loss) effects of cash flow hedges for the three months ended March 31, 2019:


(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)		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	137		$	38		Net investment income	$	—		Net investment gains (losses)
Interest rate swaps hedging assets		—			6		Net investment gains (losses)		—		Net investment gains (losses)
Interest rate swaps hedging liabilities		(12	)		—		Interest expense		—		Net investment gains (losses)
Foreign currency swaps		(3	)		—		Net investment income		—		Net investment gains (losses)
Forward currency swaps		—			—		Net investment gains (losses)		2		Net investment gains (losses)

Total	$	122		$	44			$	2

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three months ended March 31,
(Amounts in millions)	2020			2019
Derivatives qualifying as effective accounting hedges as of January 1	$	2,002		$	1,781
Current period increases (decreases) in fair value, net of deferred taxes of $(212) and $(25)		783			97
Reclassification to net (income) loss, net of deferred taxes of $17 and $16		(30	)		(28	)

Derivatives qualifying as effective accounting hedges as of March 31	$	2,755		$	1,850

The total of derivatives designated as cash flow hedges of $2,755 million, net of taxes, recorded in stockholders’ equity as of March 31, 2020 is expected to be reclassified to net income (loss) in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $120 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 2057. During the three months ended March 31, 2020 and 2019, we reclassified $2 million and $4 million, respectively, to net income (loss) in connection with forecasted transactions that were no longer considered probable of occurring.

Derivatives Not Designated As Hedges

We also enter into certain

non-qualifying

derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iii) interest rate caps where the hedging relationship does not qualify for hedge accounting; (iv) foreign currency forward contracts to mitigate currency risk associated with

non-functional

currency investments held by certain foreign subsidiaries; and (v) foreign currency options and forward contracts to mitigate currency risk associated with future dividends or other cash flows from certain foreign subsidiaries to our holding company. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity and indexed universal life insurance products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides the

pre-tax

gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:


	Three months ended March 31,						Classification of gain (loss) recognized in net income (loss)
(Amounts in millions)	2020			2019
Interest rate swaps	$	(10	)	$	(1	)		Net investment gains (losses)
Equity index options		(13	)		17			Net investment gains (losses)
Financial futures		261			(44	)		Net investment gains (losses)
Other foreign currency contracts		(47	)		—			Net investment gains (losses)
GMWB embedded derivatives		(336	)		45			Net investment gains (losses)
Fixed index annuity embedded derivatives		32			(38	)		Net investment gains (losses)
Indexed universal life embedded derivatives		4			1			Net investment gains (losses)

Total derivatives not designated as hedges	$	(109	)	$	(20	)

Derivative Counterparty Credit Risk

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


	March 31, 2020									December 31, 2019
(Amounts in millions)	Derivative assets (1)			Derivative liabilities (2)			Net derivatives			Derivative assets (1)			Derivative liabilities (2)			Net derivatives
Amounts presented in the balance sheet:
Gross amounts recognized	$	1,102		$	14		$	1,088		$	291		$	11		$	280
Gross amounts offset in the balance sheet		—			—			—			—			—			—

Net amounts presented in the balance sheet		1,102			14			1,088			291			11			280
Gross amounts not offset in the balance sheet:
Financial instruments (3)		—			—			—			(7	)		(7	)		—
Collateral received		(1,016	)		—			(1,016	)		(179	)		—			(179	)
Collateral pledged		—			(451	)		451			—			(405	)		405
Over collateralization		42			437			(395	)		18			401			(383	)

Net amount	$	128		$	—		$	128		$	123		$	—		$	123

(1)	Included $1 million of accruals on derivatives classified as other assets as of March 31, 2020 and December 31, 2019 and does not include amounts related to embedded derivatives as of March 31, 2020 and December 31, 2019.

(2)	Does not include amounts related to embedded derivatives as of March 31, 2020 and December 31, 2019.

(3)	Amounts represent derivative assets and/or liabilities that are presented gross within the balance sheet but are held with the same counterparty where we have a master netting arrangement. This adjustment results in presenting the net asset and net liability position for each counterparty.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(6) Fair Value of Financial Instruments

Recurring Fair Value Measurements

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

Fixed maturity, short-term investments and equity securities

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

Further, while we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information.

In general, we first obtain valuations from pricing services. If prices are unavailable from public pricing services, we obtain broker quotes. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for identical securities are not readily observable and these securities are not typically valued by pricing services.

Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.

Broker quotes are typically based on an income approach given the lack of available market data. As the valuation typically includes significant unobservable inputs, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.

For private fixed maturity securities, we utilize an income approach where we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating or public bond spread as Level 3. In general, a significant increase (decrease) in credit spreads would have resulted in a significant decrease (increase)

the fair value for our fixed maturity securities as of March 31, 2020.

For remaining securities priced using internal models, we determine fair value using an income approach. We maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.

Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing and/or rating, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from third-party pricing sources to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.

A summary of the inputs used for our fixed maturity

securities

, short-term investments and equity securities based on the level in which instruments are classified is included below. We have combined certain classes of instruments together as the nature of the inputs is similar.

Level 1 measurements

Equity securities.

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

Separate account assets.

The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.

Level 2 measurements

Fixed maturity securities

•

Third-party pricing services:

In estimating the fair value of fixed maturity securities, approximately 91% of our portfolio was priced using third-party pricing sources as of March 31, 2020. These pricing services utilize industry-standard valuation techniques that include market-based approaches, income-based approaches, a combination of market-based and income-based approaches or other proprietary, internally generated models as part of the valuation processes. These third-party pricing vendors maximize the use of publicly available data inputs to generate valuations for each asset class. Priority

The following table presents a summary of the significant inputs used by our third-party pricing services for certain fair value measurements of fixed maturity securities that are classified as Level 2 as of March 31, 2020:

(Amounts in millions)

Fair value

Primary methodologies

Significant inputs

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

5,771

Price quotes from trading desk, broker feeds

Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread

State and political subdivisions

2,781

Multi-dimensional attribute-based modeling systems, third-party pricing vendors

Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes

Non-U.S.

ernment

1,185

Matrix pricing, spread priced to benchmark curves, price quotes from market makers

Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources

U.S. corporate

27,844

Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, OAS-
based models

Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports

Non-U.S.

corporate

7,702

Multi-dimensional attribute-based modeling systems, OAS-based models, price quotes from market makers

Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources

Residential m

rtgage-backed

2,249

OAS-based models, single factor binomial models, internally priced

Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports

Commercial mortgage-backed

2,981

Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model

Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports

Other asset-backed

2,967

Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers

Spreads to daily updated swaps curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

Internal models:

A portion of our

non-U.S.

government, U.S. corporate and

non-U.S.

corporate securities are valued using internal models. The fair value of these fixed maturity securities was $15 million, $1,120 million and $568 million, respectively, as of March 31, 2020. Internally modeled securities are primarily private fixed maturity securities where we use market observable inputs such as an interest rate yield curve, published credit spreads for similar securities based on the external ratings of the instrument and related industry sector of the issuer. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps and liquidity premiums are established using inputs from market participants.

Equity securities.

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

Securities lending collateral

The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.

Short-term investments

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

Level 3 measurements

Fixed maturity securities

•

Broker quotes:

A portion of our state and political subdivisions,

non-U.S.

government, U.S. corporate,

non-U.S.

corporate, residential mortgage-backed and other asset-backed securities are valued using broker quotes. Broker quotes are obtained from third-party providers that have current market knowledge to provide a reasonable price for securities not routinely priced by third-party pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was $675 million as of March 31, 2020.

•

Internal models:

A portion of our state and political subdivisions, U.S. corporate,

non-U.S.

corporate, residential mortgage-backed and other asset-backed securities are valued using internal models. The primary inputs to the valuation of the bond population include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, duration, call provisions, issuer rating, benchmark yields and credit spreads. Certain private fixed maturity securities are valued using an internal model using market observable inputs such as the interest rate yield curve, as well as published credit spreads for similar securities, which includes significant unobservable inputs. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps are established using inputs from market participants. For structured securities, the primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, weighted-average coupon, weighted-average maturity, issuer rating, structure of the security, expected prepayment speeds and volumes, collateral type, current and forecasted loss severity, average delinquency rates, vintage of the loans,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

geographic region, debt service coverage ratios, payment priority with the tranche, benchmark yields and credit spreads. The fair value of our Level 3 fixed maturity securities priced using internal models was $3,193 million as of March 31, 2020.

Equity securities.

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

Net asset value

Limited partnerships

Limited partnerships are valued based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the underlying instrument. We utilize the net asset value (“NAV”) f

rom

the underlying fund statements as a practical expedient for fair value.

Derivatives

We consider counterparty collateral arrangements and rights of

set-off

when evaluating our net credit risk exposure to our derivative counterparties. Accordingly, we are permitted to include consideration of these arrangements when determining whether any incremental adjustment should be made for both the counterparty’s and our

non-performance

risk in measuring fair value for our derivative instruments. As a result of these counterparty arrangements, we determined that any adjustment for credit risk would not be material and we have not recorded any incremental adjustment for our

non-performance

risk or the

non-performance

risk of the derivative counterparty for our derivative assets or liabilities.

Interest rate swaps.

The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2.

Interest rate caps.

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

Foreign currency swaps.

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

Equity index options.

We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rates, equity index volatility, equity index and time value component associated with the optionality in the derivative. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3. As of March 31, 2020, a significant increase (decrease) in the equity index volatility discussed above would have resulted in a significantly higher (lower) fair value measurement.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Financial futures.

The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.

Equity return swaps.

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

Other foreign currency contracts.

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

GMWB embedded derivatives

We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. We determine fair value using an internal model based on the various inputs noted above.

Non-performance

risk is integrated into the discount rate used to value GMWB liabilities. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to reflect an adjustment for the

non-performance

risk of the GMWB liabilities. As of March 31, 2020 and December 31, 2019, the impact of

non-performance

risk resulted in a lower fair value of our GMWB liabilities of $112 million and $62 million, respectively.

We classify the GMWB valuation as Level 3 based on having significant unobservable inputs, with equity index volatility and

non-performance

risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase in

non-performance

risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value. As of March 31, 2020, a significant change in the unobservable inputs discussed above would have resulted in a significantly lower or higher fair value measurement.

Fixed index annuity embedded derivatives

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate

non-performance

risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease. As of March 31, 2020, a significant change in the unobservable inputs discussed above would have resulted in a significantly lower or higher fair value measurement.

Indexed universal life embedded derivatives

We have indexed universal life insurance products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate

non-performance

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	March 31, 2020
(Amounts in millions)	Total		Level 1		Level 2		Level 3		NAV (1)
Assets
Investments:
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	5,771	$	—	$	5,771	$	—	$	—
State and political subdivisions		2,864		—		2,781		83		—
Non-U.S. government		1,201		—		1,200		1		—
U.S. corporate:
Utilities		4,867		—		4,024		843		—
Energy		2,092		—		1,968		124		—
Finance and insurance		7,623		—		7,113		510		—
Consumer—non-cyclical		5,685		—		5,597		88		—
Technology and communications		3,275		—		3,214		61		—
Industrial		1,345		—		1,308		37		—
Capital goods		2,664		—		2,574		90		—
Consumer—cyclical		1,719		—		1,540		179		—
Transportation		1,473		—		1,430		43		—
Other		334		—		196		138		—

Total U.S. corporate		31,077		—		28,964		2,113		—

Non-U.S. corporate:
Utilities		765		—		410		355		—
Energy		1,098		—		862		236		—
Finance and insurance		2,111		—		1,888		223		—
Consumer—non-cyclical		674		—		616		58		—
Technology and communications		1,109		—		1,082		27		—
Industrial		911		—		819		92		—
Capital goods		561		—		426		135		—
Consumer—cyclical		362		—		198		164		—
Transportation		603		—		495		108		—
Other		1,605		—		1,474		131		—

Total non-U.S. corporate		9,799		—		8,270		1,529		—

Residential mortgage-backed		2,273		—		2,249		24		—
Commercial mortgage-backed		2,981		—		2,981		—		—
Other asset-backed		3,085		—		2,967		118		—

Total fixed maturity securities		59,051		—		55,183		3,868		—

Equity securities		188		43		95		50		—

Other invested assets:
Derivative assets:
Interest rate swaps		1,002		—		1,002		—		—


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements		3
Condensed Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019			3
Condensed Consolidated Statements of Income for the three months ended March 31, 2020 and 2019 (Unaudited)			4
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019 (Unaudited)			5
Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2020 and 2019 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		67

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		140

Item 4.	Controls and Procedures		140

PART II—OTHER INFORMATION			141

Item 1.	Legal Proceedings		141

Item 1A.	Risk Factors		141

Item 6.	Exhibits		142

Signatures			143