10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 September 30, 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 ☒ No ☐

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 ☒ No ☐

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

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 October

, 2020, 505,594,794

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

Table of Contents

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION			3

Item 1.	Financial Statements		3

	Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019		3
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019 (Unaudited)		4
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (Unaudited)		5
	Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2020 and 2019 (Unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (Unaudited)		8
	Notes to Condensed Consolidated Financial Statements (Unaudited)		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		80

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		176

Item 4.	Controls and Procedures		177

PART II—OTHER INFORMATION			177

Item 1.	Legal Proceedings		177

Item 1A.	Risk Factors		177

Item 6.	Exhibits		179

Signatures			180

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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

inancial 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.

In the third quarter of 2020, we revised the product descriptions in our U.S. Mortgage Insurance segment to conform with industry convention and certain regulatory definitions. Prior year amounts have been reclassified to conform to the current year presentation.

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 at specified coverage percentages (“primary mortgage insurance”). We also selectively enter into insurance transactions with lenders and investors, under which we insure a portfolio of loans at or after origination (“pool mortgage insurance”).

•

Australia Mortgage Insurance.

In Australia, we offer lender mortgage insurance products which predominantly insure prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”) and selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

U.S. Life Insurance.

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

•

Runoff.

The Runoff segment includes the results of 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.

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.

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. In addition, 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.

Each reporting period, we assess our ability to continue as a going concern for one year from the date the financial statements are issued. As of September 30, 2020, Genworth Holdings has $740 million of unrestricted cash and cash equivalents. For the quarterly period ended September 30, 2020, our evaluation of our ability to meet our obligations included the following contractual obligations due within one year from the issue date of our unaudited condensed consolidated financial statements included herein:

•

Genworth Holdings has $338 million of its 7.20% senior notes maturing in February 2021 and $659 million of its 7.625% senior note

maturing in September 2021, excluding deferred amounts. We are currently in compliance with the terms of our debt agreements and interest payments on our senior notes are forecasted to be $144 million for the next twelve months. See note 9 for additional details on our long-term borrowings.

•

As part of the settlement agreement reached in July 2020 regarding the case titled

AXA S.A. v. Genworth Financial International Holdings, LLC et al.,

we issued a secured promissory note to AXA S.A. (“AXA”) that is due in 2022. Under the settlement, certain cash flows to Genworth Holdings, including dividends and capital raises, above defined thresholds must be paid to AXA until the promissory note is fully repaid. In addition, over the next year, we expect to pay AXA approximately $45 million consisting

of interest on the promissory note, assuming we do not make any pre-payments,

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

and a one-time payment on an unrelated liability associated with underwriting losses on a product sold by a distributor in our former lifestyle protection insurance business. See note 12 for additional details on the case. See note 14 for additional details related to the sale of our former lifestyle protection insurance business and amounts recorded related to discontinued operations.

We also evaluate other conditions and events and their relative significance in relation to our ability to meet our obligations. For example, Genworth Holdings expects to receive intercompany tax payments generated primarily from realized gains in the third quarter of 2020, among other transactions, and is expecting additional intercompany tax payments in future periods. In addition, we are exposed to risks associated with COVID-19, which has disrupted the global economy and financial markets, business operations, and consumer behavior and confidence.

•

Due to higher delinquencies and the impact to capital levels resulting from COVID-19, we do not expect to receive further dividends in 2020 from our mortgage insurance subsidiaries. In 2021, until the secured promissory note to AXA is paid, dividends above $

million from our U.S. mortgage insurance subsidiaries are subject to mandatory prepayment conditions.

In addition, the receipt of dividends

and sale proceeds above certain thresholds from ou

Australian mort

gage insurance business are also subject to mandatory

prepayment conditions.

•

Due to the uncertain macroeconomic conditions surrounding COVID-19, on September 30, 2020, Genworth and China Oceanwide agreed to a sixteenth waiver and agreement extending the merger deadline to no later than November 30, 2020. However, the consummation of this transaction is dependent on steps outside of our control; accordingly, the associated post-closing capital contributions from China Oceanwide have not been included in this evaluation.

Absent accessing additional liquidity through third party sources and/or the completion of the China Oceanwide transaction, Genworth Holdings expects to have a cash shortfall of approximately $215 million which raises doubt about our ability to meet our financial obligations for the next year. While conditions and events occurring and expected to occur raise doubt about our ability to meet our financial obligations for the next year, management’s plans alleviate this doubt.

Management

believes that its

plans

along with existing cash and cash equivalents, will provide Genworth Holdings sufficient liquidity to meet its obligations and maintain business operations for one year from the issue date of the unaudited condensed consolidated financial statements. During the quarter ended September 30, 2020, we successfully executed a debt financing through our U.S. mortgage insurance business, a transaction we deemed probable in our previous assessment of our ability to continue as a going concern. Because of the uncertainty regarding the completion of the China Oceanwide transaction, we are actively taking steps toward raising capital by preparing for a possible public offering of our U.S. mortgage insurance business, subject to market conditions. In addition to a partial sale of our U.S. mortgage insurance business through a public offering, we are also evaluating the possibility of the issuance of convertible, equity-linked securities or another transaction, prior to our senior notes maturing in September 2021. We believe an equity transaction involving our U.S. mortgage insurance business, if needed, is probable of being effectively executed given the value of the U.S. mortgage insurance business, the healthy conditions of the relevant markets, historical investor interest and our successful history of similar transactions, among other factors. Our outside

financial

advisors agree with our assessment based on current conditions.

The impact of the ongoing coronavirus pandemic is very difficult to predict. Its related outcomes and impact on our business and the capital markets, and our ability to raise capital will depend on the length of the pandemic, economic impacts of social, global and political influences, and the shape of the economic recovery, among other

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

factors and uncertainties. While these risks exist, we believe the execution of our plan will provide sufficient funds to meet our obligations for one year following the issuance of our unaudited condensed consolidated financial statements.

(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 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 temporary 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 optional practical expedients and exceptions for applying generally accepted accounting principles to investments, derivatives or other transactions affected by reference rate reform such as those 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. In addition to the optional practical expedients, th

guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. We adopted this guidance prospectively and it did not have a significant impact on our condensed consolidated financial statements or disclosures. However, the amendments in this guidance may be elected over time through December 31, 2022 as reference rate reform activities occur and therefore, this guidance may impact our procedures, including 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 LIBO

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

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 sheet 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 September 30, 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).

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

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $31 million, net of deferred taxes of $9 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 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 $

565

million as of September 30, 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 do not expect a significant impact from this guidance on our condensed 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

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

We expect this guidance to be effective for us on January 1, 2023, subject to the FASB finalizing an additional one-year delay, using the modified retrospective method, with early adoption permitted, which we do not intend to elect. 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.

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Earnings (Loss) Per Share

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


	Three months ended September 30,					Nine months ended September 30,
	Three months ended September 30,					Nine months ended September 30,
(Amounts in millions, except per share amounts)	2020		20 19			2020			2019
Weighted-average shares used in basic earnings per share calculations		505.6		503.5			505.1			502.7
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		5.9		7.7			6.1			6.8

Weighted-average shares used in diluted earnings per share calculations		511.5		511.2			511.2			509.5

Income from continuing operations:
Income from continuing operations	$	435	$	138		$	465		$	464
Less: net income from continuing operations attributable to noncontrolling interests		18		10			35			45

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	417	$	128		$	430		$	419

Basic per share	$	0.83	$	0.25		$	0.85		$	0.83

Diluted per share	$	0.82	$	0.25		$	0.84		$	0.82

Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of taxes	$	1	$	(80	)	$	(519	)	$	42
Less: net income from discontinued operations attributable to noncontrolling interests		—		30			—			101

Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders	$	1	$	(110	)	$	(519	)	$	(59	)

Basic per share	$	—	$	(0.22	)	$	(1.03	)	$	(0.12	)

Diluted per share	$	—	$	(0.21	)	$	(1.02	)	$	(0.12	)

Net income (loss):
Income from continuing operations	$	435	$	138		$	465		$	464
Income (loss) from discontinued operations, net of taxes		1		(80	)		(519	)		42

Net income (loss)		436		58			(54	)		506
Less: net income attributable to noncontrolling interests		18		40			35			146

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	418	$	18		$	(89	)	$	360

Basic per share (1)	$	0.83	$	0.04		$	(0.18	)	$	0.72

Diluted per share (1)	$	0.82	$	0.04		$	(0.17	)	$	0.71

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

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) Investments

(a) Net Investment Income

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


	Three months ended September 30,						Nine months ended September 30,
(Amounts in millions)	2020			2019			2020			2019
Fixed maturity securities—taxable	$	632		$	631		$	1,855		$	1,878
Fixed maturity securities—non-taxable		2			2			5			6
Equity securities		3			4			7			13
Commercial mortgage loans		82			87			251			254
Policy loans		51			47			149			138
Other invested assets		79			62			192			180
Cash, cash equivalents, restricted cash and short-term investments		2			8			17			30

Gross investment income before expenses and fees		851			841			2,476			2,499
Expenses and fees		(24	)		(25	)		(70	)		(73	)

Net investment income	$	827		$	816		$	2,406		$	2,426

(b) Net Investment Gains (Losses)

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


	Three months ended September 30,						Nine months ended September 30,
(Amounts in millions)	2020			2019			2020			2019
Available-for-sale fixed maturity securities:
Realized gains	$	332		$	19		$	465		$	93
Realized losses		(2	)		(3	)		(8	)		(30	)

Net realized gains (losses) on available-for-sale fixed maturity securities		330			16			457			63

Impairments:
Total other-than-temporary impairments		—			—			—			—
Portion of other-than-temporary impairments included in other comprehensive income (loss)		—			—			—			—

Net other-than-temporary impairments		—			—			—			—

Net change in allowance for credit losses on available-for-sale fixed maturity securities		2			—			(5	)		—
Write-down of available-for-sale fixed maturity securities (1)		(4	)		—			(4	)		—
Net realized gains (losses) on equity securities sold		(3	)		6			(3	)		9
Net unrealized gains (losses) on equity securities still held		3			(4	)		(7	)		13
Limited partnerships		31			6			28			10
Commercial mortgage loans		(3	)		(1	)		(2	)		(1	)
Derivative instruments (2)		22			(29	)		(73	)		(71	)
Other		(3	)		4			(9	)		4

Net investment gains (losses)	$	375		$	(2	)	$	382		$	27

(1)	Represents write-down of securities we intend to sell or will be required to sell prior to recovery of the amortized cost basis.

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

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

See note 2 for a discussion of our policy for evaluating and measuring the allowance for credit losses related to our available-for-sale fixed maturity securities. The following table represents the allowance for credit losses aggregated by security type for available-for-sale fixed maturity investments as of and for the periods indicated:


	Three months ended September 30, 2020
(Amounts in millions)	Beginning balance		Increase from securities without allowance in previous periods		Increase (decrease) from securities with allowance in previous periods			Securities sold		Decrease due to change in intent or requirement to sell		Write-offs		Recoveries		Ending balance
Fixed maturity securities:
Non-U.S. corporate	$	4	$	—	$	(2	)	$	—	$	—	$	—	$	—	$	2
Commercial mortgage-backed		3		—		—			—		—		—		—		3

Total available-for-sale fixed maturity securities	$	7	$	—	$	(2	)	$	—	$	—	$	—	$	—	$	5


	Nine months ended September 30, 2020
(Amounts in millions)	Beginning balance		Increase from securities without allowance in previous periods		Increase (decrease) from securities with allowance in previous periods			Securities sold		Decrease due to change in intent or requirement to sell		Write-offs		Recoveries		Ending balance
Fixed maturity securities:
Non-U.S. corporate	$	—	$	4	$	(2	)	$	—	$	—	$	—	$	—	$	2
Commercial mortgage-backed		—		3		—			—		—		—		—		3

Total available-for-sale fixed maturity securities	$	—	$	7	$	(2	)	$	—	$	—	$	—	$	—	$	5

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


(Amounts in millions)	Three months ended September 30, 2019		Nine months ended September 30, 2019
Beginning balance	$	23	$	24
Reductions:
Securities sold, paid down or disposed		—		(1	)

Ending balance	$	23	$	23

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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)	September 30, 2020			December 31, 2019
Net unrealized gains (losses) on fixed maturity securities without an allowance for credit losses (1)	$	9,218		$	6,676
Net unrealized gains (losses) on fixed maturity securities with an allowance for credit losses (1)		(12	)		—
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(6,998	)		(4,789	)
Income taxes, net		(473	)		(406	)

Net unrealized investment gains (losses)		1,735			1,481
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		24			25

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	1,711		$	1,456

(1)	Excludes foreign exchange.

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 periods indicated:


	As of or for the three months ended September 30,


(Amounts in millions)	2020			2019
Beginning balance	$	1,811		$	1,305
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on fixed maturity securities		781			1,607
Adjustment to deferred acquisition costs		(9	)		(8	)
Adjustment to present value of future profits		2			1
Adjustment to sales inducements		(5	)		(4	)
Adjustment to benefit reserves		(566	)		(1,108	)
Provision for income taxes		(42	)		(104	)

Change in unrealized gains (losses) on investment securities		161			384
Reclassification adjustments to net investment (gains) losses, net of taxes of $70 and $4		(261	)		(13	)

Change in net unrealized investment gains (losses)		(100	)		371
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		—			1

Ending balance	$	1,711		$	1,675

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	As of or for the nine months ended September 30,


(Amounts in millions)	2020			2019
Beginning balance	$	1,456		$	595
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on fixed maturity securities		2,980			5,563
Adjustment to deferred acquisition costs		48			(1,049	)
Adjustment to present value of future profits		6			(54	)
Adjustment to sales inducements		(3	)		(35	)
Adjustment to benefit reserves		(2,260	)		(2,908	)
Provision for income taxes		(162	)		(331	)

Change in unrealized gains (losses) on investment securities		609			1,186
Reclassification adjustments to net investment (gains) losses, net of taxes of $95 and $16		(355	)		(59	)

Change in net unrealized investment gains (losses)		254			1,127
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		(1	)		47

Ending balance	$	1,711		$	1,675

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.

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity Securities

As of September 30, 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	$	3,318	$	1,474	$	—		$	—		$	4,792
State and political subdivisions		2,591		525		(1	)		—			3,115
Non-U.S. government		1,276		126		(7	)		—			1,395
U.S. corporate:
Utilities		4,294		924		(1	)		—			5,217
Energy		2,581		238		(54	)		—			2,765
Finance and insurance		7,611		1,135		(11	)		—			8,735
Consumer—non-cyclical		5,160		1,210		(2	)		—			6,368
Technology and communications		2,993		537		(3	)		—			3,527
Industrial		1,363		189		(1	)		—			1,551
Capital goods		2,558		503		(4	)		—			3,057
Consumer—cyclical		1,794		252		(2	)		—			2,044
Transportation		1,325		271		(15	)		—			1,581
Other		346		43		—			—			389

Total U.S. corporate		30,025		5,302		(93	)		—			35,234

Non-U.S. corporate:
Utilities		860		75		—			—			935
Energy		1,192		163		(7	)		—			1,348
Finance and insurance		2,319		312		(12	)		(1	)		2,618
Consumer—non-cyclical		712		95		(1	)		—			806
Technology and communications		1,066		190		—			—			1,256
Industrial		935		134		(1	)		—			1,068
Capital goods		571		61		(6	)		—			626
Consumer—cyclical		400		38		(2	)		—			436
Transportation		571		87		(9	)		(1	)		648
Other		1,562		241		(1	)		—			1,802

Total non-U.S. corporate		10,188		1,396		(39	)		(2	)		11,543

Residential mortgage-backed		1,825		250		—			—			2,075
Commercial mortgage-backed		2,775		228		(24	)		(3	)		2,976
Other asset-backed		3,254		48		(16	)		—			3,286

Total available-for-sale fixed maturity securities	$	55,252	$	9,349	$	(180	)	$	(5	)	$	64,416

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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- t han- temporarily impaired		Not other-than- temporarily impaired			Other- t han- 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

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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 for which an allowance for credit losses has not been recorded, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of September 30, 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	$	66	$	(1	)		10	$	—	$	—			—	$	66	$	(1	)		10
Non-U.S. government		103		(7	)		16		—		—			—		103		(7	)		16
U.S. corporate		1,475		(82	)		228		95		(11	)		10		1,570		(93	)		238
Non-U.S. corporate		589		(27	)		106		7		(1	)		2		596		(28	)		108
Commercial mortgage-backed		430		(22	)		68		1		(1	)		1		431		(23	)		69
Other asset-backed		675		(10	)		159		308		(6	)		67		983		(16	)		226

Total for fixed maturity securities in an unrealized loss position	$	3,338	$	(149	)		587	$	411	$	(19	)		80	$	3,749	$	(168	)		667

% Below cost:
<20% Below cost	$	3,264	$	(122	)		569	$	401	$	(16	)		78	$	3,665	$	(138	)		647
20%-50% Below cost		74		(27	)		18		10		(3	)		2		84		(30	)		20

Total for fixed maturity securities in an unrealized loss position	$	3,338	$	(149	)		587	$	411	$	(19	)		80	$	3,749	$	(168	)		667

Investment grade	$	2,631	$	(85	)		472	$	338	$	(9	)		70	$	2,969	$	(94	)		542
Below investment grade		707		(64	)		115		73		(10	)		10		780		(74	)		125

Total for fixed maturity securities in an unrealized loss position	$	3,338	$	(149	)		587	$	411	$	(19	)		80	$	3,749	$	(168	)		667

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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 for which an allowance for credit losses has not been recorded, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of September 30, 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	$	24	$	(1	)		6	$	—	$	—			—	$	24	$	(1	)		6
Energy		557		(45	)		84		52		(9	)		6		609		(54	)		90
Finance and insurance		373		(11	)		42		—		—			—		373		(11	)		42
Consumer—non-cyclical		93		(2	)		12		—		—			—		93		(2	)		12
Technology and communications		100		(3	)		12		—		—			—		100		(3	)		12
Industrial		72		(1	)		6		—		—			—		72		(1	)		6
Capital goods		33		(3	)		7		14		(1	)		1		47		(4	)		8
Consumer—cyclical		86		(1	)		21		29		(1	)		3		115		(2	)		24
Transportation		137		(15	)		38		—		—			—		137		(15	)		38

Subtotal, U.S. corporate securities		1,475		(82	)		228		95		(11	)		10		1,570		(93	)		238

Non-U.S. corporate:
Energy		179		(7	)		18		—		—			—		179		(7	)		18
Finance and insurance		196		(5	)		34		—		—			—		196		(5	)		34
Consumer—non-cyclical		—		—			—		7		(1	)		2		7		(1	)		2
Industrial		29		(1	)		4		—		—			—		29		(1	)		4
Capital goods		59		(6	)		11		—		—			—		59		(6	)		11
Consumer—cyclical		22		(2	)		11		—		—			—		22		(2	)		11
Transportation		59		(5	)		15		—		—			—		59		(5	)		15
Other		45		(1	)		13		—		—			—		45		(1	)		13

Subtotal, non-U.S. corporate securities		589		(27	)		106		7		(1	)		2		596		(28	)		108

Total for corporate securities in an unrealized loss position	$	2,064	$	(109	)		334	$	102	$	(12	)		12	$	2,166	$	(121	)		346

We did not recognize an allowance for credit losses on securities in an unrealized loss position included in the tables above. Based on a qualitative and quantitative review of the issuers of the securities, we believe the decline in fair value is largely 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 without

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

an allowance for credit losses, 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.

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


	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

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of December 31, 2019:


	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 an unrealized loss position	$	202	$	(6	)		39	$	364	$	(17	)		40	$	566	$	(23	)		79

The scheduled maturity distribution of fixed maturity securities as of September 30, 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	$	1,476	$	1,499
Due after one year through five years		9,646		10,265
Due after five years through ten years		13,164		14,863
Due after ten years		23,112		29,452

Subtotal		47,398		56,079
Residential mortgage-backed		1,825		2,075
Commercial mortgage-backed		2,775		2,976
Other asset-backed		3,254		3,286

Total	$	55,252	$	64,416

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of September 30, 2020, securities issued by finance and insurance, consumer—non-cyclical, utilities and technology and communications industry groups represented approximately 24%, 15%, 13% and 10%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of September 30, 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:


	September 30, 2020						December 31, 2019
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	2,481			36	%	$	2,590			37	%
Industrial		1,685			24			1,670			24
Office		1,625			24			1,632			23
Apartments		566			8			541			8
Mixed use		292			4			281			4
Other		262			4			266			4

Subtotal		6,911			100	%		6,980			100	%

Unamortized balance of loan origination fees		—						(4	)
Allowance for credit losses		(31	)					(13	)

Total	$	6,880					$	6,963

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	September 30, 2020						December 31, 2019
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
South Atlantic	$	1,761			25	%	$	1,715			25	%
Pacific		1,571			23			1,673			24
Middle Atlantic		993			14			992			14
Mountain		776			11			753			11
West North Central		481			7			488			7
East North Central		451			7			455			6
West South Central		427			6			433			6
New England		262			4			257			4
East South Central		189			3			214			3

Subtotal		6,911			100	%		6,980			100	%

Unamortized balance of loan origination fees		—						(4	)
Allowance for credit losses		(31	)					(13	)

Total	$	6,880					$	6,963

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


	September 30, 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	$	4		$	—		$	10		$	14		$	2,467		$	2,481
Industrial		—			—			—			—			1,685			1,685
Office		—			—			—			—			1,625			1,625
Apartments		—			—			—			—			566			566
Mixed use		—			—			—			—			292			292
Other		—			—			—			—			262			262

Total amortized cost	$	4		$	—		$	10		$	14		$	6,897		$	6,911

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

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	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 September 30, 2020, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of September 30, 2020.

As of December 31, 2019, we had

commercial mortgage loans on non-accrual status.

During the nine months ended September 30, 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 September 30,				Nine months ended September 30,
(Amounts in millions)	2020		2019		2020		2019
Allowance for credit losses:
Beginning balance	$	28	$	11	$	13	$	9
Cumulative effect of change in accounting		—		—		16		—
Provision		3		1		2		3
Write-offs		—		—		—		—
Recoveries		—		—		—		—

Ending balance	$	31	$	12	$	31	$	12

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

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based on “normalized” annual income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio is not used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

The following tables set forth commercial mortgage loans by year of origination and credit quality indicator as of September 30, 2020:


(Amounts in millions)	2020		2019		2018		2017		2016		2015 and prior		Total
Debt-to-value:
0% - 50%	$	9	$	15	$	38	$	108	$	131	$	2,307	$	2,608
51% - 60%		29		33		191		289		141		734		1,417
61% - 75%		373		746		758		330		223		448		2,878
76% - 100%		—		—		8		—		—		—		8
Greater than 100%		—		—		—		—		—		—		—

Total amortized cost	$	411	$	794	$	995	$	727	$	495	$	3,489	$	6,911

Debt service coverage ratio:
Less than 1.00	$	—	$	—	$	33	$	3	$	—	$	123	$	159
1.00 - 1.25		41		12		106		73		13		252		497
1.26 - 1.50		69		357		260		96		87		405		1,274
1.51 - 2.00		251		356		503		320		266		1,214		2,910
Greater than 2.00		50		69		93		235		129		1,495		2,071

Total amortized cost	$	411	$	794	$	995	$	727	$	495	$	3,489	$	6,911

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

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

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


	September 30, 2020
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100%			Total
Property type:
Retail	$	940		$	557		$	984		$	—		$	—		$	2,481
Industrial		775			310			600			—			—			1,685
Office		513			337			767			8			—			1,625
Apartments		220			85			261			—			—			566
Mixed use		106			63			123			—			—			292
Other		54			65			143			—			—			262

Total amortized cost	$	2,608		$	1,417		$	2,878		$	8		$	—		$	6,911

% of total		38	%		20	%		42	%		—	%		—	%		100	%

Weighted-average debt service coverage ratio		2.31			1.81			1.57			1.42			—			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

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


	September 30, 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	$	61		$	134		$	585		$	1,100		$	601		$	2,481
Industrial		23			66			218			704			674			1,685
Office		28			111			238			770			478			1,625
Apartments		11			24			177			182			172			566
Mixed use		3			18			37			118			116			292
Other		33			144			19			36			30			262

Total amortized cost	$	159		$	497		$	1,274		$	2,910		$	2,071		$	6,911

% of total		2	%		7	%		19	%		42	%		30	%		100	%

Weighted-average debt-to-value		57	%		61	%		63	%		59	%		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	%

(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, for limited partnerships measured at fair value, 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 September 30,

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2020 and December 31, 2019, the total carrying value of these investments was $823 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.

(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.

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


	Derivative assets					Derivative liabilities
		Fair value					Fair value
(Amounts in millions)	Balance sheet classification	September 30, 2020		December 31, 2019		Balance sheet classification	September 30, 2020		December 31, 2019
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Other invested assets	$	708	$	197	Other liabilities	$	4	$	10
Foreign currency swaps	Other invested assets		10		4	Other liabilities		—		—

Total cash flow hedges			718		201			4		10

Total derivatives designated as hedges			718		201			4		10

Derivatives not designated as hedges
Equity index options	Other invested assets		67		81	Other liabilities		—		—
Financial futures	Other invested assets		—		—	Other liabilities		—		—
Other foreign currency contracts	Other invested assets		19		8	Other liabilities		5		1
GMWB embedded derivatives	Reinsurance recoverable (1)		35		20	Policyholder account balances (2)		508		323
Fixed index annuity embedded derivatives	Other assets		—		—	Policyholder account balances (3)		432		452
Indexed universal life embedded derivatives	Reinsurance recoverable		—		—	Policyholder account balances (4)		25		19

Total derivatives not designated as hedges			121		109			970		795

Total derivatives		$	839	$	310		$	974	$	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.

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

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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			September 30, 2020
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps		Notional	$	8,968	$	1,844	$	(2,616	)	$	8,196
Foreign currency swaps		Notional		110		—		—			110

Total cash flow hedges				9,078		1,844		(2,616	)		8,306

Total derivatives designated as hedges				9,078		1,844		(2,616	)		8,306

Derivatives not designated as hedges
Interest rate swaps		Notional		4,674		—		—			4,674
Equity index options		Notional		2,451		1,527		(1,849	)		2,129
Financial futures		Notional		1,182		4,362		(4,275	)		1,269
Other foreign currency contracts		Notional		628		5,689		(4,687	)		1,630

Total derivatives not designated as hedges				8,935		11,578		(10,811	)		9,702

Total derivatives			$	18,013	$	13,422	$	(13,427	)	$	18,008


(Number of policies)	Measurement		December 31, 2019		Additions		Maturities/ terminations			September 30, 2020
Derivatives not designated as hedges
GMWB embedded derivatives		Policies		25,623		—		(1,452	)		24,171
Fixed index annuity embedded derivatives		Policies		15,441		—		(1,511	)		13,930
Indexed universal life embedded derivatives		Policies		884		—		(37	)		847

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.

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The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 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	$	(246	)	$	50	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		10			—	Interest expense		—	Net investment gains (losses)
Foreign currency swaps		(7	)		—	Net investment income		—	Net investment gains (losses)

Total	$	(243	)	$	54		$	—

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 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	$	406		$	41	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		(23	)		—	Interest expense		—	Net investment gains (losses)
Foreign currency swaps		5			1	Net investment income		—	Net investment gains (losses)

Total	$	388		$	46		$	—

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The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 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	$	738		$	139		Net investment income	$	—		Net investment gains (losses)
Interest rate swaps hedging assets		—			8		Net investment gains (losses)		—		Net investment gains (losses)
Interest rate swaps hedging liabilities		(52	)		—		Interest expense		—		Net investment gains (losses)
Foreign currency swaps		6			—		Net investment income		—		Net investment gains (losses)

Total	$	692		$	147			$	—

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 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	$	759		$	121		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		(55	)		—		Interest expense		—		Net investment gains (losses)
Foreign currency swaps		4			—		Net investment income		—		Net investment gains (losses)
Foreign currency swaps		—			—		Net investment gains (losses)		2		Net investment gains (losses)

Total	$	708		$	127			$	2

The following tables provide a reconciliation of current period changes, net of applicable income taxes, for these

designated

derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the periods indicated:


	Three months ended September 30,
(Amounts in millions)	2020			2019
Derivatives qualifying as effective accounting hedges as of July 1	$	2,677		$	1,983
Current period increases (decreases) in fair value, net of deferred taxes of $52 and $(82)		(191	)		306
Reclassification to net (income) loss, net of deferred taxes of $19 and $16		(35	)		(30	)

Derivatives qualifying as effective accounting hedges as of September 30	$	2,451		$	2,259

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	Nine months ended September 30,
(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 $(148) in both periods		544			560
Reclassification to net (income) loss, net of deferred taxes of $52 and $45		(95	)		(82	)

Derivatives qualifying as effective accounting hedges as of September 30	$	2,451		$	2,259

The total of derivatives designated as cash flow hedges of $2,451 million, net of taxes, recorded in stockholders’ equity as of September 30, 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, $127 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 nine months ended September 30, 2020 and 2019, we reclassified $7 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.

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 September 30,						Classification of gain (loss) recognized in net income (loss)
(Amounts in millions)	2020			2019
Interest rate swaps	$	1		$	(2	)	Net investment gains (losses)
Equity index options		7			1		Net investment gains (losses)
Financial futures		(41	)		35		Net investment gains (losses)
Other foreign currency contracts		12			(10	)	Net investment gains (losses)
GMWB embedded derivatives		54			(44	)	Net investment gains (losses)
Fixed index annuity embedded derivatives		(18	)		(14	)	Net investment gains (losses)
Indexed universal life embedded derivatives		3			1		Net investment gains (losses)

Total derivatives not designated as hedges	$	18		$	(33	)

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(Amounts in millions)	Nine months ended September 30,						Classification of gain (loss) recognized in net income (loss)
(Amounts in millions)	2020			2019
Interest rate swaps	$	(11	)	$	(6	)	Net investment gains (losses)
Equity index options		(2	)		28		Net investment gains (losses)
Financial futures		97			8		Net investment gains (losses)
Other foreign currency contracts		9			(17	)	Net investment gains (losses)
GMWB embedded derivatives		(153	)		(21	)	Net investment gains (losses)
Fixed index annuity embedded derivatives		(31	)		(72	)	Net investment gains (losses)
Indexed universal life embedded derivatives		10			1		Net investment gains (losses)

Total derivatives not designated as hedges	$	(81	)	$	(79	)

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:


	September 30, 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	$	804		$	9		$	795		$	291		$	11		$	280
Gross amounts offset in the balance sheet		—			—			—			—			—			—

Net amounts presented in the balance sheet		804			9			795			291			11			280
Gross amounts not offset in the balance sheet:
Financial instruments (3)		(5	)		(5	)		—			(7	)		(7	)		—
Collateral received		(663	)		—			(663	)		(179	)		—			(179	)
Collateral pledged		—			(489	)		489			—			(405	)		405
Over collateralization		13			485			(472	)		18			401			(383	)

Net amount	$	149		$	—		$	149		$	123		$	—		$	123

(1)	Included $1 million of accruals on derivatives classified as other assets as of December 31, 2019 and does not include amounts related to embedded derivatives as of September 30, 2020 and December 31, 2019.

(2)	Does not include amounts related to embedded derivatives as of September 30, 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 .

Table of Contents

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, that security is valued using market information for similar securities, which is also a market approach. When market information is not available for a specific security (or similar securities) 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 for public securities, 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 similar 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, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	September 30, 2020			December 31, 2019
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost of $55,252 and allowance for credit losses of $5 as of September 30, 2020)	$	64,416		$	60,339
Equity securities, at fair value		629			239
Commercial mortgage loans (net of unamortized balance of loan origination fees and costs of $4 as of September 30, 2020 and December 31, 2019)		6,911			6,976
Less: Allowance for credit losses		(31	)		(13	)

Commercial mortgage loans, net		6,880			6,963
Policy loans		2,153			2,058
Other invested assets		2,402			1,632

Total investments		76,480			71,231
Cash, cash equivalents and restricted cash		2,780			3,341
Accrued investment income		650			654
Deferred acquisition costs		1,623			1,836
Intangible assets and goodwill		209			201
Reinsurance recoverable		16,832			17,103
Less: Allowance for credit losses		(44	)		—

Reinsurance recoverable, net		16,788			17,103
Other assets		445			443
Deferred tax asset		250			425
Separate account assets		5,700			6,108

Total assets	$	104,925		$	101,342

Liabilities and equity
Liabilities:
Future policy benefits	$	41,995		$	40,384
Policyholder account balances		22,731			22,217
Liability for policy and contract claims		11,373			10,958
Unearned premiums		1,846			1,893
Other liabilities		1,913			1,386
Non-recourse funding obligations		—			311
Long-term borrowings		3,570			3,277
Separate account liabilities		5,700			6,108
Liabilities related to discontinued operations		565			176

Total liabilities		89,693			86,710

Commitments and contingencies
Equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 594 million and 592 million shares issued as of September 30, 2020 and December 31, 2019, respectively; 506 million and 504 million shares outstanding as of September 30, 2020 and December 31, 2019, respectively		1			1
Additional paid-in capital		11,997			11,990
Accumulated other comprehensive income (loss)		4,141			3,433
Retained earnings		1,317			1,461
Treasury stock, at cost (88 million shares as of September 30, 2020 and December 31, 2019)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		14,756			14,185
Noncontrolling interests		476			447

Total equity		15,232			14,632

Total liabilities and equity	$	104,925		$	101,342


	Three months ended September 30, 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 June 30, 2020	$	1	$	11,996	$	4,447		$	899	$	(2,700	)	$	14,643		$	445		$	15,088
Comprehensive income (loss):
Net income		—		—		—			418		—			418			18			436
Other comprehensive income (loss), net of taxes		—		—		(306	)		—		—			(306	)		13			(293	)

Total comprehensive income														112			31			143
Stock-based compensation expense and exercises and other		—		1		—			—		—			1			—			1

Balances as of September 30, 2020	$	1	$	11,997	$	4,141		$	1,317	$	(2,700	)	$	14,756		$	476		$	15,232


	Three months ended September 30, 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 June 30, 2019	$	1	$	11,983	$	3,013		$	1,460	$	(2,700	)	$	13,757		$	1,835		$	15,592
Comprehensive income (loss):
Net income		—		—		—			18		—			18			40			58
Other comprehensive income (loss), net of taxes		—		—		609			—		—			609			(26	)		583

Total comprehensive income														627			14			641
Dividends to noncontrolling interests		—		—		—			—		—			—			(96	)		(96	)
Stock-based compensation expense and exercises and other		—		3		—			—		—			3			5			8

Balances as of September 30, 2019	$	1	$	11,986	$	3,622		$	1,478	$	(2,700	)	$	14,387		$	1,758		$	16,145


	Nine months ended September 30,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(54	)	$	506
Less (income) loss from discontinued operations, net of taxes		519			(42	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Amortization of fixed maturity securities discounts and premiums		(97	)		(93	)
Net investment gains		(382	)		(27	)
Charges assessed to policyholders		(479	)		(532	)
Acquisition costs deferred		(9	)		(22	)
Amortization of deferred acquisition costs and intangibles		310			277
Goodwill impairment		5			—
Deferred income taxes		166			106
Derivative instruments, limited partnerships and other		88			121
Stock-based compensation expense		22			17
Change in certain assets and liabilities:
Accrued investment income and other assets		(183	)		(327	)
Insurance reserves		1,034			906
Current tax liabilities		6			36
Other liabilities, policy and contract claims and other policy-related balances		769			348
Cash from (used by) operating activities—discontinued operations		(263	)		334

Net cash from operating activities		1,452			1,608

Cash flows used by investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		2,760			2,734
Commercial mortgage loans		479			395
Other invested assets		108			106
Proceeds from sales of investments:
Fixed maturity and equity securities		3,270			3,024
Purchases and originations of investments:
Fixed maturity and equity securities		(7,179	)		(5,805	)
Commercial mortgage loans		(414	)		(682	)
Other invested assets		(318	)		(349	)
Short-term investments, net		(12	)		(16	)
Policy loans, net		27			51
Cash used by investing activities—discontinued operations		—			(6	)

Net cash used by investing activities		(1,279	)		(548	)

Cash flows used by financing activities:
Deposits to universal life and investment contracts		693			637
Withdrawals from universal life and investment contracts		(1,408	)		(1,699	)
Redemption of non-recourse funding obligations		(315	)		—
Proceeds from issuance of long-term debt		767			—
Repayment and repurchase of long-term debt		(493	)		(3	)
Repurchase of subsidiary shares		—			(22	)
Dividends paid to noncontrolling interests		(9	)		(55	)
Other, net		31			(24	)
Cash used by financing activities—discontinued operations		—			(76	)

Net cash used by financing activities		(734	)		(1,242	)

Effect of exchange rate changes on cash, cash equivalents and restricted cash (includes $— and $8 related to discontinued operations)		—			(4	)

Net change in cash, cash equivalents and restricted cash		(561	)		(186	)
Cash, cash equivalents and restricted cash at beginning of period		3,341			2,177

Cash, cash equivalents and restricted cash at end of period		2,780			1,991
Less cash, cash equivalents and restricted cash of discontinued operations at end of period		—			362

Cash, cash equivalents and restricted cash of continuing operations at end of period	$	2,780		$	1,629