GENWORTH FINANCIAL INC - Quarter Report: 2017 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2017

OR

 

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

For the transition period from                      to                     

Commission file number 001-32195

 

 

 

GENWORTH FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware		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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ☒    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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

As of October 26, 2017, 499,158,848 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

 

 

 

TABLE OF CONTENTS

 

				Page
PART I—FINANCIAL INFORMATION					3
Item 1.		Financial Statements			3
		Condensed Consolidated Balance Sheets as of September  30, 2017 (Unaudited) and December 31, 2016			3
		Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)			4
		Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)			5
		Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2017 and 2016 (Unaudited)			6
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)			7
		Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			88
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			173
Item 4.		Controls and Procedures			174
PART II—OTHER INFORMATION					174
Item 1.		Legal Proceedings			174
Item 1A.		Risk Factors			174
Item 6.		Exhibits			175
Signatures					176

 

2

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

		September 30, 2017				December 31, 2016
		(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value		$	62,552			$	60,572
Equity securities available-for-sale, at fair value			765				632
Commercial mortgage loans			6,268				6,111
Restricted commercial mortgage loans related to securitization entities			111				129
Policy loans			1,818				1,742
Other invested assets			1,590				2,071
Restricted other invested assets related to securitization entities, at fair value			—				312
Total investments			73,104				71,569
Cash and cash equivalents			2,836				2,784
Accrued investment income			639				659
Deferred acquisition costs			2,342				3,571
Intangible assets and goodwill			315				348
Reinsurance recoverable			17,553				17,755
Other assets			552				673
Deferred tax asset			24				—
Separate account assets			7,264				7,299
Total assets		$	104,629			$	104,658
Liabilities and equity
Liabilities:
Future policy benefits		$	38,022			$	37,063
Policyholder account balances			24,531				25,662
Liability for policy and contract claims			9,384				9,256
Unearned premiums			3,512				3,378
Other liabilities ($1 of other liabilities are related to securitization entities in each period)			2,002				2,916
Borrowings related to securitization entities ($12 are carried at fair value in each period)			59				74
Non-recourse funding obligations			310				310
Long-term borrowings			4,224				4,180
Deferred tax liability			234				53
Separate account liabilities			7,264				7,299
Total liabilities			89,542				90,191
Commitments and contingencies
Equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 588 million and 587 million shares issued as of September 30, 2017 and December 31, 2016, respectively; 499 million and 498 million shares outstanding as of September 30, 2017 and December 31, 2016, respectively			1				1
Additional paid-in capital			11,973				11,962
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired			1,098				1,253
Net unrealized gains (losses) on other-than-temporarily impaired securities			10				9
Net unrealized investment gains (losses)			1,108				1,262
Derivatives qualifying as hedges			2,052				2,085
Foreign currency translation and other adjustments			(125	)			(253	)
Total accumulated other comprehensive income (loss)			3,035				3,094
Retained earnings			760				287
Treasury stock, at cost (88 million shares as of September 30, 2017 and December 31, 2016)			(2,700	)			(2,700	)
Total Genworth Financial, Inc.’s stockholders’ equity			13,069				12,644
Noncontrolling interests			2,018				1,823
Total equity			15,087				14,467
Total liabilities and equity		$	104,629			$	104,658

See Notes to Condensed Consolidated Financial Statements

 

3

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Revenues:
Premiums		$	1,135			$	1,108			$	3,382			$	3,029
Net investment income			797				805				2,388				2,373
Net investment gains (losses)			85				20				220				31
Policy fees and other income			198				217				619				738
Total revenues			2,215				2,150				6,609				6,171
Benefits and expenses:
Benefits and other changes in policy reserves			1,344				1,662				3,796				3,715
Interest credited			164				173				494				523
Acquisition and operating expenses, net of deferrals			265				269				775				990
Amortization of deferred acquisition costs and intangibles			83				94				316				305
Interest expense			73				77				209				262
Total benefits and expenses			1,929				2,275				5,590				5,795
Income (loss) from continuing operations before income taxes			286				(125	)			1,019				376
Provision for income taxes			102				222				348				355
Income (loss) from continuing operations			184				(347	)			671				21
Income (loss) from discontinued operations, net of taxes			(9	)			15				(9	)			(25	)
Net income (loss)			175				(332	)			662				(4	)
Less: net income attributable to noncontrolling interests			68				48				198				151
Net income (loss) available to Genworth Financial, Inc.’s common stockholders		$	107			$	(380	)		$	464			$	(155	)
Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
Basic		$	0.23			$	(0.79	)		$	0.95			$	(0.26	)
Diluted		$	0.23			$	(0.79	)		$	0.94			$	(0.26	)
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share:
Basic		$	0.21			$	(0.76	)		$	0.93			$	(0.31	)
Diluted		$	0.21			$	(0.76	)		$	0.93			$	(0.31	)
Weighted-average common shares outstanding:
Basic			499.1				498.3				498.9				498.3
Diluted			501.6				498.3				501.2				498.3
Supplemental disclosures:
Total other-than-temporary impairments		$	(1	)		$	(2	)		$	(4	)		$	(35	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)			—				—				—				—
Net other-than-temporary impairments			(1	)			(2	)			(4	)			(35	)
Other investments gains (losses)			86				22				224				66
Total net investment gains (losses)		$	85			$	20			$	220			$	31

See Notes to Condensed Consolidated Financial Statements

 

4

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Net income (loss)		$	175			$	(332	)		$	662			$	(4	)
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired			(89	)			72				(173	)			1,624
Net unrealized gains (losses) on other-than-temporarily impaired securities			—				5				1				6
Derivatives qualifying as hedges			(12	)			54				(33	)			448
Foreign currency translation and other adjustments			81				(1	)			261				223
Total other comprehensive income (loss)			(20	)			130				56				2,301
Total comprehensive income (loss)			155				(202	)			718				2,297
Less: comprehensive income attributable to noncontrolling interests			108				64				313				260
Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders		$	47			$	(266	)		$	405			$	2,037

See Notes to Condensed Consolidated Financial Statements

 

5

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in millions)

(Unaudited)

 

		Common stock				Additional paid-in capital				Accumulated other comprehensive income (loss)				Retained earnings				Treasury stock, at cost				Total Genworth Financial, Inc.’s stockholders’ equity				Noncontrolling interests				Total equity
Balances as of December 31, 2016		$	1			$	11,962			$	3,094			$	287			$	(2,700	)		$	12,644			$	1,823			$	14,467
Cumulative effect of change in accounting, net of taxes			—				—				—				9				—				9				—				9
Repurchase of subsidiary shares			—				—				—				—				—				—				(31	)			(31	)
Comprehensive income (loss):
Net income			—				—				—				464				—				464				198				662
Other comprehensive income (loss) net of taxes			—				—				(59	)			—				—				(59	)			115				56
Total comprehensive income																							405				313				718
Dividends to noncontrolling interests			—				—				—				—				—				—				(92	)			(92	)
Stock-based compensation expense and exercises and other			—				11				—				—				—				11				5				16
Balances as of September 30, 2017		$	1			$	11,973			$	3,035			$	760			$	(2,700	)		$	13,069			$	2,018			$	15,087
Balances as of December 31, 2015		$	1			$	11,949			$	3,010			$	564			$	(2,700	)		$	12,824			$	1,813			$	14,637
Return of capital to noncontrolling interests			—				—				—				—				—				—				(70	)			(70	)
Comprehensive income:
Net income (loss)			—				—				—				(155	)			—				(155	)			151				(4	)
Other comprehensive income, net of taxes			—				—				2,192				—				—				2,192				109				2,301
Total comprehensive income																							2,037				260				2,297
Dividends to noncontrolling interests			—				—				—				—				—				—				(126	)			(126	)
Stock-based compensation expense and exercises and other			—				10				—				—				—				10				1				11
Balances as of September 30, 2016		$	1			$	11,959			$	5,202			$	409			$	(2,700	)		$	14,871			$	1,878			$	16,749

See Notes to Condensed Consolidated Financial Statements

 

6

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

		Nine months ended September 30,
		2017				2016
Cash flows from operating activities:
Net income (loss)		$	662			$	(4	)
Less loss from discontinued operations, net of taxes			9				25
Adjustments to reconcile net income (loss) to net cash from operating activities:
Gain on sale of business			—				(26	)
Amortization of fixed maturity securities discounts and premiums and limited partnerships			(107	)			(112	)
Net investment gains			(220	)			(31	)
Charges assessed to policyholders			(534	)			(574	)
Acquisition costs deferred			(67	)			(124	)
Amortization of deferred acquisition costs and intangibles			316				305
Deferred income taxes			234				173
Trading securities, held-for-sale investments and derivative instruments			716				759
Stock-based compensation expense			29				25
Change in certain assets and liabilities:
Accrued investment income and other assets			(21	)			(258	)
Insurance reserves			1,202				691
Current tax liabilities			(27	)			44
Other liabilities, policy and contract claims and other policy-related balances			(260	)			905
Net cash from operating activities			1,932				1,798
Cash flows used by investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities			3,396				2,646
Commercial mortgage loans			454				555
Restricted commercial mortgage loans related to securitization entities			18				27
Proceeds from sales of investments:
Fixed maturity and equity securities			3,269				4,064
Purchases and originations of investments:
Fixed maturity and equity securities			(6,709	)			(8,758	)
Commercial mortgage loans			(608	)			(405	)
Other invested assets, net			(521	)			(138	)
Policy loans, net			28				(80	)
Proceeds from sale of businesses, net of cash transferred			—				39
Payments for business purchased, net of cash acquired			(5	)			—
Net cash used by investing activities			(678	)			(2,050	)
Cash flows used by financing activities:
Deposits to universal life and investment contracts			902				1,028
Withdrawals from universal life and investment contracts			(2,003	)			(1,463	)
Redemption of non-recourse funding obligations			—				(1,620	)
Repayment and repurchase of long-term debt			—				(362	)
Repayment of borrowings related to securitization entities			(16	)			(37	)
Repurchase of subsidiary shares			(31	)			—
Return of capital to noncontrolling interests			—				(70	)
Dividends paid to noncontrolling interests			(92	)			(126	)
Other, net			(30	)			(49	)
Net cash used by financing activities			(1,270	)			(2,699	)
Effect of exchange rate changes on cash and cash equivalents			68				36
Net change in cash and cash equivalents			52				(2,915	)
Cash and cash equivalents at beginning of period			2,784				5,993
Cash and cash equivalents at end of period		$	2,836			$	3,078

See Notes to Condensed Consolidated Financial Statements

 

7

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

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

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). 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’s stockholders voted on and approved a proposal to adopt the Merger Agreement.

The transaction remains subject to closing conditions, including the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions. Both parties are engaging with the relevant regulators regarding the applications and the pending transaction.

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

We operate our business through the following five operating segments:

 

•

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

 

•

Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada.

 

•

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

 

8

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

•

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

 

•

Runoff. The Runoff segment includes the results of non-strategic products which have not been actively sold but we continue to service our existing blocks of business. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes and guaranteed investment contracts.

In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses 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. 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 2016 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On January 1, 2017, we adopted new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this new accounting guidance on a modified retrospective basis and recorded a previously disallowed deferred tax asset of $9 million with a corresponding increase to cumulative effect of change in accounting within retained earnings at adoption.

On January 1, 2017, we adopted new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. We did not have any significant impact from this guidance on our consolidated financial statements.

On January 1, 2017, we adopted new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call

 

9

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance is consistent with our previous accounting practices and, accordingly, did not have any impact on our consolidated financial statements.

On January 1, 2017, we adopted new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is consistent with our previous accounting for derivative contract novations and, accordingly, did not have any impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In August 2017, the Financial Accounting Standards Board (“the FASB”) issued new guidance intended to enable entities to better portray the economics of their derivative risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In certain situations, the amendments also simplify the application of hedge accounting. The guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating adopting this new guidance early and the impact it may have on our consolidated financial statements.

In May 2017, the FASB issued new guidance to clarify when to account for a change to share-based compensation as a modification. The new guidance requires modification accounting only if there are changes to the fair value, vesting conditions or classification, as a liability or equity, of the share-based compensation. The guidance is effective, prospectively, for us on January 1, 2018, accordingly, the guidance will not have any impact at adoption.

In March 2017, the FASB issued new guidance shortening the amortization period for the premium component of callable debt securities purchased at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements.

In February 2017, the FASB issued new guidance to clarify the accounting for gains and losses from the derecognition of nonfinancial assets and accounting for partial sales of nonfinancial assets. The new guidance clarifies when transferring ownership interests in a consolidated subsidiary holding nonfinancial assets is within scope. It also states that the reporting entity should identify each distinct nonfinancial asset and derecognize when a counterparty obtains control, and clarifies the accounting for partial sales. The new guidance is currently effective for us on January 1, 2018. We do not expect any significant impacts from this guidance on our consolidated financial statements.

In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance states goodwill impairment is equal to the difference between the carrying value and fair value of the reporting unit up to the amount of recorded goodwill. The new guidance is currently effective for us on January 1, 2020, with early adoption permitted for testing dates after January 1, 2017. We do not expect any significant impacts from this new guidance on our consolidated financial statements.

 

10

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In October 2016, the FASB issued new guidance related to the income tax effects of intra-entity transfers of assets other than inventory. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is currently effective for us on January 1, 2018. We are still in process of evaluating the impact the guidance may have on our consolidated financial statements, including any cumulative effect adjustment that will be recorded directly to retained earnings as of the beginning of the period of adoption.

In January 2016, the FASB issued new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Changes to the current financial instruments accounting primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, will be measured at fair value with changes in fair value recognized in net income (loss). As of September 30, 2017, we have approximately $45 million of cumulative unrealized gains related to equity securities included in accumulated other comprehensive income as well as approximately $25 million of gains related to limited partnership investments currently recorded at cost, that will be reclassed to cumulative effect of change in accounting within retained earnings upon adoption of this new accounting guidance. The new guidance also clarifies that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with other deferred tax assets. This new guidance will be effective for us on January 1, 2018. We are still in process of evaluating the full impact the guidance may have on our consolidated financial statements.

 

11

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,
(Amounts in millions, except per share amounts)		2017				2016				2017				2016
Weighted-average shares used in basic earnings (loss) per share calculations			499.1				498.3				498.9				498.3
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights			2.5				—				2.3				—
Weighted-average shares used in diluted earnings (loss) per share calculations (1)			501.6				498.3				501.2				498.3
Income (loss) from continuing operations:
Income (loss) from continuing operations		$	184			$	(347	)		$	671			$	21
Less: income from continuing operations attributable to noncontrolling interests			68				48				198				151
Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders		$	116			$	(395	)		$	473			$	(130	)
Basic per share		$	0.23			$	(0.79	)		$	0.95			$	(0.26	)
Diluted per share		$	0.23			$	(0.79	)		$	0.94			$	(0.26	)
Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of taxes		$	(9	)		$	15			$	(9	)		$	(25	)
Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests			—				—				—				—
Income (loss) from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders		$	(9	)		$	15			$	(9	)		$	(25	)
Basic per share		$	(0.02	)		$	0.03			$	(0.02	)		$	(0.05	)
Diluted per share		$	(0.02	)		$	0.03			$	(0.02	)		$	(0.05	)
Net income (loss):
Income (loss) from continuing operations		$	184			$	(347	)		$	671			$	21
Income (loss) from discontinued operations, net of taxes			(9	)			15				(9	)			(25	)
Net income (loss)			175				(332	)			662				(4	)
Less: net income attributable to noncontrolling interests			68				48				198				151
Net income (loss) available to Genworth Financial, Inc.’s common stockholders		$	107			$	(380	)		$	464			$	(155	)
Basic per share		$	0.21			$	(0.76	)		$	0.93			$	(0.31	)
Diluted per share		$	0.21			$	(0.76	)		$	0.93			$	(0.31	)

 

(1)

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2016, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million and 1.8 million, respectively, would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months and nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million and 500.1 million, respectively.

 

12

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)		2017				2016				2017				2016
Fixed maturity securities—taxable		$	640			$	655			$	1,930				1,930
Fixed maturity securities—non-taxable			3				3				9				9
Commercial mortgage loans			78				79				231				237
Restricted commercial mortgage loans related to securitization entities			3				3				7				8
Equity securities			9				8				26				20
Other invested assets			39				34				106				105
Restricted other invested assets related to securitization entities			—				—				1				3
Policy loans			39				38				120				107
Cash, cash equivalents and short-term investments			10				5				26				16
Gross investment income before expenses and fees			821				825				2,456				2,435
Expenses and fees			(24	)			(20	)			(68	)			(62	)
Net investment income		$	797			$	805			$	2,388			$	2,373

(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)		2017				2016				2017				2016
Available-for-sale securities:
Realized gains		$	40			$	39			$	177			$	205
Realized losses			(10	)			(24	)			(55	)			(75	)
Net realized gains (losses) on available-for-sale securities			30				15				122				130
Impairments:
Total other-than-temporary impairments			(1	)			(2	)			(4	)			(35	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)			—				—				—				—
Net other-than-temporary impairments			(1	)			(2	)			(4	)			(35	)
Trading securities			—				(4	)			1				40
Commercial mortgage loans			1				(1	)			3				1
Net gains (losses) related to securitization entities			1				2				5				(51	)
Derivative instruments (1)			54				10				93				(52	)
Contingent consideration adjustment			—				—				—				(2	)
Net investment gains (losses)		$	85			$	20			$	220			$	31

 

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

 

13

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended September 30, 2017 and 2016 was $286 million and $293 million, respectively, which was approximately 97% and 95%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2017 and 2016 was $1,390 million and $833 million, respectively, which was approximately 96% and 93%, respectively, of book value.

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

 

		As of or for the three months ended September 30,								As of or for the nine months ended September 30,
(Amounts in millions)		2017				2016				2017				2016
Beginning balance		$	38			$	62			$	42			$	64
Additions:
Other-than-temporary impairments not previously recognized			—				—				—				1
Reductions:
Securities sold, paid down or disposed			(5	)			(8	)			(9	)			(11	)
Ending balance		$	33			$	54			$	33			$	54

(c) Unrealized Investment Gains and Losses

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

 

(Amounts in millions)		September 30, 2017				December 31, 2016
Net unrealized gains (losses) on investment securities:
Fixed maturity securities		$	4,878			$	3,656
Equity securities			49				12
Subtotal (1)			4,927				3,668
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves			(3,134	)			(1,611	)
Income taxes, net			(619	)			(711	)
Net unrealized investment gains (losses)			1,174				1,346
Less: net unrealized investment gains (losses) attributable to noncontrolling interests			66				84
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.		$	1,108			$	1,262

 

(1)	Excludes foreign exchange.

 

14

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

		As of or for the three months ended September 30,
(Amounts in millions)		2017				2016
Beginning balance		$	1,180			$	2,789
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities			(10	)			228
Adjustment to deferred acquisition costs			(1	)			(17	)
Adjustment to present value of future profits			(3	)			3
Adjustment to sales inducements			—				(6	)
Adjustment to benefit reserves			(92	)			(81	)
Provision for income taxes			36				(41	)
Change in unrealized gains (losses) on investment securities			(70	)			86
Reclassification adjustments to net investment (gains) losses, net of taxes of $10 and $4			(19	)			(9	)
Change in net unrealized investment gains (losses)			(89	)			77
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests			(17	)			6
Ending balance		$	1,108			$	2,860

 

		As of or for the nine months ended September 30,
(Amounts in millions)		2017				2016
Beginning balance		$	1,262			$	1,254
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities			1,377				3,584
Adjustment to deferred acquisition costs			(1,047	)			(291	)
Adjustment to present value of future profits			(36	)			(26	)
Adjustment to sales inducements			(11	)			(46	)
Adjustment to benefit reserves			(429	)			(612	)
Provision for income taxes			51				(917	)
Change in unrealized gains (losses) on investment securities			(95	)			1,692
Reclassification adjustments to net investment (gains) losses, net of taxes of $41 and $33			(77	)			(62	)
Change in net unrealized investment gains (losses)			(172	)			1,630
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests			(18	)			24
Ending balance		$	1,108			$	2,860

 

15

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(d) Fixed Maturity and Equity Securities

As of September 30, 2017, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

						Gross unrealized gains								Gross unrealized losses
(Amounts in millions)		Amortized cost or cost				Not other-than- temporarily impaired				Other-than- temporarily impaired				Not other-than- temporarily impaired				Other-than- temporarily impaired				Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	4,893			$	784			$	—			$	(7	)		$	—			$	5,670
State and political subdivisions			2,639				247				—				(26	)			—				2,860
Non-U.S. government			2,143				107				—				(24	)			—				2,226
U.S. corporate:
Utilities			4,382				556				—				(15	)			—				4,923
Energy			2,243				207				—				(10	)			—				2,440
Finance and insurance			6,051				547				—				(11	)			—				6,587
Consumer—non-cyclical			4,330				508				—				(10	)			—				4,828
Technology and communications			2,558				193				—				(11	)			—				2,740
Industrial			1,247				102				—				(3	)			—				1,346
Capital goods			2,067				263				—				(9	)			—				2,321
Consumer—cyclical			1,506				111				—				(6	)			—				1,611
Transportation			1,188				124				—				(6	)			—				1,306
Other			358				24				—				(2	)			—				380
Total U.S. corporate			25,930				2,635				—				(83	)			—				28,482
Non-U.S. corporate:
Utilities			1,022				45				—				(5	)			—				1,062
Energy			1,330				140				—				(7	)			—				1,463
Finance and insurance			2,524				177				—				(5	)			—				2,696
Consumer—non-cyclical			692				27				—				(3	)			—				716
Technology and communications			945				71				—				(2	)			—				1,014
Industrial			979				81				—				(2	)			—				1,058
Capital goods			556				33				—				(2	)			—				587
Consumer—cyclical			518				10				—				(1	)			—				527
Transportation			650				71				—				(3	)			—				718
Other			2,594				193				—				(5	)			—				2,782
Total non-U.S. corporate			11,810				848				—				(35	)			—				12,623
Residential mortgage-backed			3,950				255				14				(10	)			—				4,209
Commercial mortgage-backed			3,346				105				2				(39	)			—				3,414
Other asset-backed			3,052				20				1				(5	)			—				3,068
Total fixed maturity securities			57,763				5,001				17				(229	)			—				62,552
Equity securities			720				59				—				(14	)			—				765
Total available-for-sale securities		$	58,483			$	5,060			$	17			$	(243	)		$	—			$	63,317

 

16