GENWORTH FINANCIAL INC - Quarter Report: 2018 June (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 June 30, 2018

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 July 24, 2018, 500,679,748 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 June  30, 2018 (Unaudited) and December 31, 2017			3
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017 (Unaudited)			4
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017 (Unaudited)			5
Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2018 and 2017 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			87
Item 3. Quantitative and Qualitative Disclosures About Market Risk			165
Item 4. Controls and Procedures			165
PART II—OTHER INFORMATION			166
Item 1. Legal Proceedings			166
Item 1A. Risk Factors			166
Item 6. Exhibits			167
Signatures			168

 

2

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

		June 30, 2018				December 31, 2017
		(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value		$	60,032			$	62,525
Equity securities, at fair value			758				820
Commercial mortgage loans			6,480				6,341
Restricted commercial mortgage loans related to securitization entities			90				107
Policy loans			1,872				1,786
Other invested assets			1,650				1,813
Total investments			70,882				73,392
Cash, cash equivalents and restricted cash			2,243				2,875
Accrued investment income			602				644
Deferred acquisition costs			3,086				2,329
Intangible assets and goodwill			354				301
Reinsurance recoverable			17,385				17,569
Other assets			574				453
Deferred tax asset			601				504
Separate account assets			6,750				7,230
Total assets		$	102,477			$	105,297
Liabilities and equity
Liabilities:
Future policy benefits		$	37,913			$	38,472
Policyholder account balances			23,366				24,195
Liability for policy and contract claims			9,665				9,594
Unearned premiums			3,669				3,967
Other liabilities			1,965				1,910
Borrowings related to securitization entities			28				40
Non-recourse funding obligations			310				310
Long-term borrowings			4,047				4,224
Deferred tax liability			23				27
Separate account liabilities			6,750				7,230
Total liabilities			87,736				89,969
Commitments and contingencies
Equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 589 million and 588 million shares issued as of June 30, 2018 and December 31, 2017, respectively; 501 million and 499 million shares outstanding as of June 30, 2018 and December 31, 2017, respectively			1				1
Additional paid-in capital			11,981				11,977
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired			726				1,075
Net unrealized gains (losses) on other-than-temporarily impaired securities			10				10
Net unrealized investment gains (losses)			736				1,085
Derivatives qualifying as hedges			1,863				2,065
Foreign currency translation and other adjustments			(272	)			(123	)
Total accumulated other comprehensive income (loss)			2,327				3,027
Retained earnings			1,301				1,113
Treasury stock, at cost (88 million shares as of June 30, 2018 and December 31, 2017)			(2,700	)			(2,700	)
Total Genworth Financial, Inc.’s stockholders’ equity			12,910				13,418
Noncontrolling interests			1,831				1,910
Total equity			14,741				15,328
Total liabilities and equity		$	102,477			$	105,297

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 June 30,								Six months ended June 30,
		2018				2017				2018				2017
Revenues:
Premiums		$	1,136			$	1,111			$	2,276			$	2,247
Net investment income			828				801				1,632				1,591
Net investment gains (losses)			(14	)			101				(45	)			135
Policy fees and other income			209				210				411				421
Total revenues			2,159				2,223				4,274				4,394
Benefits and expenses:
Benefits and other changes in policy reserves			1,205				1,206				2,516				2,452
Interest credited			152				163				308				330
Acquisition and operating expenses, net of deferrals			253				240				493				510
Amortization of deferred acquisition costs and intangibles			112				139				216				233
Interest expense			77				74				153				136
Total benefits and expenses			1,799				1,822				3,686				3,661
Income from continuing operations before income taxes			360				401				588				733
Provision for income taxes			111				130				174				246
Income from continuing operations			249				271				414				487
Loss from discontinued operations, net of taxes			—				—				—				—
Net income			249				271				414				487
Less: net income attributable to noncontrolling interests			59				69				112				130
Net income available to Genworth Financial, Inc.’s common stockholders		$	190			$	202			$	302			$	357
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
Basic		$	0.38			$	0.40			$	0.60			$	0.72
Diluted		$	0.38			$	0.40			$	0.60			$	0.71
Net income available to Genworth Financial, Inc.’s common stockholders per share:
Basic		$	0.38			$	0.40			$	0.60			$	0.72
Diluted		$	0.38			$	0.40			$	0.60			$	0.71
Weighted-average common shares outstanding:
Basic			500.6				499.0				500.1				498.8
Diluted			502.6				501.2				502.6				501.1
Supplemental disclosures:
Total other-than-temporary impairments		$	—			$	(2	)		$	—			$	(3	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)			—				—				—				—
Net other-than-temporary impairments			—				(2	)			—				(3	)
Other investments gains (losses)			(14	)			103				(45	)			138
Total net investment gains (losses)		$	(14	)		$	101			$	(45	)		$	135

See Notes to Condensed Consolidated Financial Statements

 

4

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

		Three months ended June 30,								Six months ended June 30,
		2018				2017				2018				2017
Net income		$	249			$	271			$	414			$	487
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired			(185	)			(72	)			(526	)			(84	)
Net unrealized gains (losses) on other-than-temporarily impaired securities			(2	)			—				(2	)			1
Derivatives qualifying as hedges			(64	)			28				(216	)			(21	)
Foreign currency translation and other adjustments			(98	)			61				(185	)			180
Total other comprehensive income (loss)			(349	)			17				(929	)			76
Total comprehensive income (loss)			(100	)			288				(515	)			563
Less: comprehensive income attributable to noncontrolling interests			10				87				14				205
Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders		$	(110	)		$	201			$	(529	)		$	358

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, 2017		$	1			$	11,977			$	3,027			$	1,113			$	(2,700	)		$	13,418			$	1,910			$	15,328
Cumulative effect of change in accounting, net of taxes			—				—				131				(114	)			—				17				—				17
Repurchase of subsidiary shares			—				—				—				—				—				—				(49	)			(49	)
Comprehensive income (loss):
Net income			—				—				—				302				—				302				112				414
Other comprehensive loss net of taxes			—				—				(831	)			—				—				(831	)			(98	)			(929	)
Total comprehensive income (loss)																							(529	)			14				(515	)
Dividends to noncontrolling interests			—				—				—				—				—				—				(50	)			(50	)
Stock-based compensation expense and exercises and other			—				4				—				—				—				4				6				10
Balances as of June 30, 2018		$	1			$	11,981			$	2,327			$	1,301			$	(2,700	)		$	12,910			$	1,831			$	14,741
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
Comprehensive income:
Net income			—				—				—				357				—				357				130				487
Other comprehensive income, net of taxes			—				—				1				—				—				1				75				76
Total comprehensive income																							358				205				563
Dividends to noncontrolling interests			—				—				—				—				—				—				(52	)			(52	)
Stock-based compensation expense and exercises and other			—				7				—				—				—				7				2				9
Balances as of June 30, 2017		$	1			$	11,969			$	3,095			$	653			$	(2,700	)		$	13,018			$	1,978			$	14,996

See Notes to Condensed Consolidated Financial Statements

 

6

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

		Six months ended June 30,
		2018				2017
Cash flows from operating activities:
Net income		$	414			$	487
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity securities discounts and premiums			(62	)			(76	)
Net investment (gains) losses			45				(135	)
Charges assessed to policyholders			(359	)			(365	)
Acquisition costs deferred			(40	)			(44	)
Amortization of deferred acquisition costs and intangibles			216				233
Deferred income taxes			83				166
Trading securities, limited partnerships and derivative instruments			(195	)			431
Stock-based compensation expense			16				18
Change in certain assets and liabilities:
Accrued investment income and other assets			(89	)			(23	)
Insurance reserves			691				806
Current tax liabilities			(37	)			(32	)
Other liabilities, policy and contract claims and other policy-related balances			(122	)			(158	)
Net cash from operating activities			561				1,308
Cash flows used by investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities			1,979				2,358
Commercial mortgage loans			350				307
Restricted commercial mortgage loans related to securitization entities			16				11
Proceeds from sales of investments:
Fixed maturity and equity securities			1,920				2,587
Purchases and originations of investments:
Fixed maturity and equity securities			(4,082	)			(4,733	)
Commercial mortgage loans			(489	)			(431	)
Other invested assets, net			93				(638	)
Policy loans, net			15				21
Payments for business purchased, net of cash acquired			—				(5	)
Net cash used by investing activities			(198	)			(523	)
Cash flows used by financing activities:
Deposits to universal life and investment contracts			503				429
Withdrawals from universal life and investment contracts			(1,177	)			(1,091	)
Proceeds from issuance of long-term debt			441				—
Repayment and repurchase of long-term debt			(597	)			—
Repayment of borrowings related to securitization entities			(12	)			(12	)
Repurchase of subsidiary shares			(49	)			—
Dividends paid to noncontrolling interests			(50	)			(52	)
Other, net			(2	)			(29	)
Net cash used by financing activities			(943	)			(755	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash			(52	)			39
Net change in cash, cash equivalents and restricted cash			(632	)			69
Cash, cash equivalents and restricted cash at beginning of period			2,875				2,784
Cash, cash equivalents and restricted cash at end of period		$	2,243			$	2,853

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 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 Financial’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 and funding agreements backing notes.

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 2017 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, 2018, we early adopted new accounting guidance on the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”), or “stranded tax effects.” Under current U.S. GAAP, deferred tax assets and liabilities are adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the period that the changes were enacted. This also includes situations in which the related tax effects were originally recognized in other comprehensive income as opposed to income from continuing

 

9

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

operations. The following summarizes the components for the cumulative effect adjustment recorded on January 1, 2018 related to the adoption of this new accounting guidance:

 

		Accumulated other comprehensive income (loss)
(Amounts in millions)		Net unrealized investment gains (losses)				Derivatives qualifying as hedges				Foreign currency translation and other adjustments				Retained earnings				Total stockholders’ equity
Deferred taxes:
Net unrealized gains on investment securities		$	192			$	—			$	—			$	(192	)		$	—
Net unrealized gains on derivatives			—				12				—				(12	)			—
Investment in foreign subsidiaries			(3	)			—				(46	)			49				—
Accrued commission and general expenses			—				—				(1	)			1				—
Cumulative effect of changes in accounting		$	189			$	12			$	(47	)		$	(154	)		$	—

The accounting for the temporary differences related to investment in foreign subsidiaries recorded in accumulated other comprehensive income (loss) at adoption of the TCJA, were provisional. Therefore, additional reclassification adjustments may be recorded in future periods as tax effects of the TCJA on related temporary differences are finalized. However, no reclassification adjustments were recorded in the second quarter of 2018. Other than those effects related to the TCJA, our policy is to release stranded tax effects from accumulated other comprehensive income (loss) using the portfolio approach for items related to investments and derivatives, and upon disposition of a subsidiary for items related to outside basis differences.

On January 1, 2018, we early adopted new accounting guidance related to the hedge accounting model. The new guidance amends the hedge accounting model 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 and removed the requirements to separately measure and report hedge ineffectiveness. We adopted this new accounting using the modified retrospective method and recognized a gain of $2 million in accumulated other comprehensive income with a corresponding decrease to retained earnings at adoption. This gain was the cumulative amount of hedge ineffectiveness related to active hedges that was previously included in earnings.

On January 1, 2018, we adopted new accounting guidance that clarifies 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. We adopted this new accounting guidance prospectively and therefore, the guidance did not have any impact at adoption.

On January 1, 2018, we adopted new accounting guidance that clarifies the scope and accounting for gains and losses from the derecognition of nonfinancial assets or an in substance nonfinancial asset that is not a business 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. We adopted this new accounting guidance using the modified retrospective method, which had no impact on our consolidated financial statements at adoption.

 

10

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On January 1, 2018, we early adopted new accounting 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. We adopted this new accounting guidance prospectively and will apply it to our 2018 goodwill impairment test.

On January 1, 2018, we adopted new accounting guidance related to the classification and presentation of changes in restricted cash. The new guidance requires that changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents be shown in the statements of cash flows and requires additional disclosures related to restricted cash and restricted cash equivalents. We adopted this new accounting guidance retrospectively and modified the line item descriptions on our consolidated balance sheets and statements of cash flows in our consolidated financial statements. The other impacts from this new accounting guidance did not have a significant impact on our consolidated financial statements or disclosures.

On January 1, 2018, we adopted new accounting 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. We adopted this new accounting guidance using the modified retrospective method, which did not have any significant impact on our consolidated financial statements or disclosures at adoption.

On January 1, 2018, we adopted new accounting guidance related to the classification of certain cash payments and cash receipts on our statement of cash flows. The guidance reduces diversity in practice related to eight specific cash flow issues. We adopted this new accounting guidance retrospectively. We will reclassify a $20 million make-whole premium that was incurred in the first quarter of 2016 previously included in the operating activities section of the statement of cash flows, within the line item “other liabilities, policy and contract claims and other policy-related balances” to the financing activities section within the line item “repayment and repurchase of long-term debt” in our 2018 annual consolidated financial statements filed on Form 10-K. The reclassification will result in an increase in net cash used by financing activities and an increase in net cash from operating activities. The remaining specific cash flow issues did not have a significant impact on our consolidated financial statements.

On January 1, 2018, we adopted new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Changes to 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, are measured at fair value with changes in fair value recognized in net income. 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. We adopted this new accounting guidance using the modified retrospective method and reclassified, after adjustments for deferred acquisition costs (“DAC”) and other intangible amortization and certain benefit reserves, taxes and noncontrolling interests, $25 million of gains related to equity securities from accumulated other comprehensive income and $17 million of gains related to limited partnerships previously recorded at cost to cumulative effect of change in accounting within retained earnings.

On January 1, 2018, we adopted new accounting guidance related to revenue from contracts with customers. The key principle of the new guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. Insurance contracts are specifically excluded from this new

 

11

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

guidance. The Financial Accounting Standards Board (“the FASB”) has clarified the scope that all of our insurance contracts, including mortgage insurance and investment contracts are excluded from the scope of this new guidance. We adopted this new accounting guidance using the modified retrospective method, which did not have any significant impact on our consolidated financial statements at adoption.

Accounting Pronouncements Not Yet Adopted

In June 2018, the FASB issued new guidance related to accounting for nonemployee share-based payments. The guidance aligns the measurement and classification of share-based payments to nonemployees issued in exchange for goods or services with the guidance for share-based payments to employees, with certain exceptions. The guidance is currently effective for us on January 1, 2019 using the modified retrospective method, with early adoption permitted. While we are still evaluating the full impact, at this time we do not expect any impacts from this new guidance on our consolidated financial statements.

In March 2017, the FASB issued new guidance shortening the amortization period of certain callable debt securities held 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 using the modified retrospective method, with early adoption permitted. While we are still evaluating the full impact, at this time we do not expect any significant impact from this guidance on our consolidated financial statements.

In June 2016, the FASB issued new guidance related to accounting for credit losses on financial instruments. The guidance requires that entities recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most debt instruments not measured at fair value, which would primarily include our commercial mortgage loans and reinsurance receivables. The new guidance retains most of the existing impairment guidance for available-for-sale debt securities but amends the presentation of credit losses to be presented as an allowance as opposed to a write-down and permits the reversal of credit losses when reassessing changes in the credit losses each reporting period. The new guidance is effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019. Upon adoption, the modified retrospective method will be used and a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption will be recorded. We are in process of evaluating the impact the guidance may have on our consolidated financial statements.

In February 2016, the FASB issued new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a right-to-use asset and a corresponding liability on the balance sheet. The guidance is effective for us on January 1, 2019, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the period adopted in the financial statements, with certain practical expedients available, which we are in the processes of evaluating. While we are still evaluating the full impact, at this time we do not expect any significant impact from this guidance on our consolidated financial statements.

 

12

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3) Earnings Per Share

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

 

		Three months ended June 30,								Six months ended June 30,
(Amounts in millions, except per share amounts)		2018				2017				2018				2017
Weighted-average shares used in basic earnings per share calculations			500.6				499.0				500.1				498.8
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights			2.0				2.2				2.5				2.3
Weighted-average shares used in diluted earnings per share calculations			502.6				501.2				502.6				501.1
Income from continuing operations:
Income from continuing operations		$	249			$	271			$	414			$	487
Less: income from continuing operations attributable to noncontrolling interests			59				69				112				130
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders		$	190			$	202			$	302			$	357
Basic per share		$	0.38			$	0.40			$	0.60			$	0.72
Diluted per share		$	0.38			$	0.40			$	0.60			$	0.71
Loss from discontinued operations:
Loss from discontinued operations, net of taxes		$	—			$	—			$	—			$	—
Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests			—				—				—				—
Loss from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders		$	—			$	—			$	—			$	—
Basic per share		$	—			$	—			$	—			$	—
Diluted per share		$	—			$	—			$	—			$	—
Net income:
Income from continuing operations		$	249			$	271			$	414			$	487
Loss from discontinued operations, net of taxes			—				—				—				—
Net income			249				271				414				487
Less: net income attributable to noncontrolling interests			59				69				112				130
Net income available to Genworth Financial, Inc.’s common stockholders		$	190			$	202			$	302			$	357
Basic per share		$	0.38			$	0.40			$	0.60			$	0.72
Diluted per share		$	0.38			$	0.40			$	0.60			$	0.71

 

13

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 June 30,								Six months ended June 30,
(Amounts in millions)		2018				2017				2018				2017
Fixed maturity securities—taxable		$	651			$	649			$	1,286			$	1,290
Fixed maturity securities—non-taxable			3				3				6				6
Equity securities			10				9				20				17
Commercial mortgage loans			77				76				159				153
Restricted commercial mortgage loans related to securitization entities			2				2				4				4
Policy loans			41				39				84				81
Other invested assets			53				35				92				67
Restricted other invested assets related to securitization entities			—				1				—				1
Cash, cash equivalents and short-term investments			14				10				26				16
Gross investment income before expenses and fees			851				824				1,677				1,635
Expenses and fees			(23	)			(23	)			(45	)			(44	)
Net investment income		$	828			$	801			$	1,632			$	1,591

(b) Net Investment Gains (Losses)

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

 

		Three months ended June 30,								Six months ended June 30,
(Amounts in millions)		2018				2017				2018				2017
Available-for-sale securities:
Realized gains		$	13			$	74			$	20			$	137
Realized losses			(21	)			(11	)			(37	)			(45	)
Net realized gains (losses) on available-for-sale securities			(8	)			63				(17	)			92
Impairments:
Total other-than-temporary impairments			—				(2	)			—				(3	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)			—				—				—				—
Net other-than-temporary impairments			—				(2	)			—				(3	)
Net realized gains (losses) on equity securities sold			8				—				10				—
Net unrealized gains (losses) on equity securities still held			3				—				(15	)			—
Trading securities			—				1				—				1
Limited partnerships			(2	)			—				5				—
Commercial mortgage loans			—				1				—				2
Net gains (losses) related to securitization entities			—				2				—				4
Derivative instruments (1)			(15	)			36				(28	)			39
Net investment gains (losses)		$	(14	)		$	101			$	(45	)		$	135

 

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

 

14

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 June 30, 2018 and 2017 was $640 million and $228 million, respectively, which was approximately 97% and 95%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2018 and 2017 was $1,259 million and $1,104 million, respectively, which was approximately 97% and 96%, respectively, of book value.

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

 

		As of or for the three months ended June 30,								As of or for the six months ended June 30,
(Amounts in millions)		2018				2017				2018				2017
Beginning balance		$	28			$	41			$	32			$	42
Reductions:
Securities sold, paid down or disposed			(3	)			(3	)			(7	)			(4	)
Ending balance		$	25			$	38			$	25			$	38

(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)		June 30, 2018				December 31, 2017
Net unrealized gains (losses) on investment securities:
Fixed maturity securities		$	2,555			$	5,125
Equity securities			—				69
Subtotal (1)			2,555				5,194
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves			(1,549	)			(3,451	)
Income taxes, net			(230	)			(583	)
Net unrealized investment gains (losses)			776				1,160
Less: net unrealized investment gains (losses) attributable to noncontrolling interests			40				75
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.		$	736			$	1,085

 

(1)	Excludes foreign exchange.

 

15

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 June 30,
(Amounts in millions)		2018				2017
Beginning balance		$	917			$	1,243
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities			(905	)			995
Adjustment to deferred acquisition costs			467				(741	)
Adjustment to present value of future profits			20				(28	)
Adjustment to sales inducements			9				(6	)
Adjustment to benefit reserves			162				(269	)
Provision for income taxes			54				17
Change in unrealized gains (losses) on investment securities			(193	)			(32	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $(2) and $21			6				(40	)
Change in net unrealized investment gains (losses)			(187	)			(72	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests			(6	)			(9	)
Ending balance		$	736			$	1,180

 

		As of or for the six months ended June 30,
(Amounts in millions)		2018				2017
Beginning balance		$	1,085			$	1,262
Cumulative effect of changes in accounting:
Stranded tax effects			189				—
Recognition and measurement of financial assets and liabilities, net of taxes of $18 and $—			(25	)			—
Total cumulative effect of changes in accounting			164				—
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities			(2,586	)			1,387
Adjustment to deferred acquisition costs			909				(1,046	)
Adjustment to present value of future profits			56				(33	)
Adjustment to sales inducements			29				(11	)
Adjustment to benefit reserves			902				(337	)
Provision for income taxes			149				15
Change in unrealized gains (losses) on investment securities			(541	)			(25	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $(3) and $31			13				(58	)
Change in net unrealized investment gains (losses)			(528	)			(83	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests			(15	)			(1	)
Ending balance		$	736			$	1,180

 

16

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(d) Fixed Maturity and Equity Securities

As of June 30, 2018, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as available-for-sale were as follows:

 

						Gross unrealized gains								Gross unrealized losses
(Amounts in millions)		Amortized cost or cost				Not other-than- temporarily impaired				Other-than- temporarily impaired				Not other-than- temporarily impaired				Other-than- temporarily impaired				Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises		$	4,733			$	632			$	—			$	(12	)		$	—			$	5,353
State and political subdivisions			2,699				195				—				(39	)			—				2,855
Non-U.S. government			2,347				69				—				(36	)			—				2,380
U.S. corporate:
Utilities			4,550				395				—				(66	)			—				4,879
Energy			2,160				139				—				(29	)			—				2,270
Finance and insurance			6,095				288				—				(108	)			—				6,275
Consumer—non-cyclical			4,298				323				—				(80	)			—				4,541
Technology and communications			2,709				133				—				(61	)			—				2,781
Industrial			1,244				59				—				(20	)			—				1,283
Capital goods			2,216				185				—				(40	)			—				2,361
Consumer—cyclical			1,538				66				—				(31	)			—				1,573
Transportation			1,200				83				—				(31	)			—				1,252
Other			337				18				—				(1	)			—				354
Total U.S. corporate			26,347				1,689				—				(467	)			—				27,569
Non-U.S. corporate:
Utilities			962				22				—				(22	)			—				962
Energy			1,316				101				—				(18	)			—				1,399
Finance and insurance			2,471				102				—				(36	)			—				2,537
Consumer—non-cyclical			709				11				—				(18	)			—				702
Technology and communications			992				30				—				(15	)			—				1,007
Industrial			943				46				—				(12	)			—				977
Capital goods			603				15				—				(7	)			—				611
Consumer—cyclical			527				2				—				(7	)			—				522
Transportation			690				48				—				(11	)			—				727
Other			2,454				128				—				(24	)			—				2,558
Total non-U.S. corporate			11,667				505				—				(170	)			—				12,002
Residential mortgage-backed			3,426				156				13				(28	)			—				3,567
Commercial mortgage-backed			3,387				46				—				(84	)			—				3,349
Other asset-backed			2,966				7				1				(17	)			—				2,957
Total available-for-sale fixed maturity securities		$	57,572			$	3,299			$	14			$	(853	)		$	—			$	60,032

 

17