The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included herein and with our
Current Report on Form 8-K filed on June 11, 2012 which reflected retrospective
changes in accounting for costs associated with acquiring or renewing insurance
contracts and changes in the treatment of future policy benefits for level
premium term life insurance products.
Cautionary note regarding forward-looking statements
This report contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by words such as "expects," "intends," "anticipates," "plans,"
"believes," "seeks," "estimates," "will" or words of similar meaning and
include, but are not limited to, statements regarding the outlook for our future
business and financial performance. Forward-looking statements are based on
management's current expectations and assumptions, which are subject to inherent
uncertainties, risks and changes in circumstances that are difficult to predict.
Actual outcomes and results may differ materially due to global political,
economic, business, competitive, market, regulatory and other factors and risks,
including the following:
• Risks relating to our businesses, including downturns and volatility in
global economies and equity and credit markets; downgrades or potential
downgrades in our financial strength or credit ratings; interest rate
fluctuations and levels; adverse capital and credit market conditions; the
impact on the potential extension, replacement or refinancing of our
credit facilities; the valuation of fixed maturity, equity and trading
securities; defaults, downgrades or other events impacting the value of
our fixed maturity securities portfolio; defaults on our commercial
mortgage loans or the mortgage loans underlying our investments in
commercial mortgage-backed securities and volatility in performance;
goodwill impairments; defaults by counterparties to reinsurance
arrangements or derivative instruments; an adverse change in risk-based
capital and other regulatory requirements; insufficiency of reserves;
legal constraints on dividend distributions by our subsidiaries;
competition; availability, affordability and adequacy of reinsurance; loss
of key distribution partners; regulatory restrictions on our operations
and changes in applicable laws and regulations; legal or regulatory
investigations or actions; the failure of or any compromise of the
security of our computer systems; the occurrence of natural or man-made
disasters or a pandemic; the effect of the enactment of the Dodd-Frank
Wall Street Reform and Consumer Protection Act; changes in the accounting
standards issued by the Financial Accounting Standards Board or other
standard-setting bodies; impairments of or valuation allowances against
our deferred tax assets; changes in expected morbidity and mortality rate;
accelerated amortization of deferred acquisition costs and present value
of future profits; reputational risks as a result of rate increases on
certain in-force long-term care insurance products; medical advances, such
as genetic research and diagnostic imaging, and related legislation;
unexpected changes in persistency rates; ability to continue to implement
actions to mitigate the impact of statutory reserve requirements; the
failure of demand for long-term care insurance to increase; political and
economic instability or changes in government policies; foreign exchange
rate fluctuations; unexpected changes in unemployment rates; unexpected
increases in mortgage insurance default rates or severity of defaults; the
significant portion of high loan-to-value insured international mortgage
loans which generally result in more and larger claims than lower
loan-to-value ratios; competition with government-owned and
government-sponsored enterprises ("GSEs") offering mortgage insurance;
changes in international regulations reducing demand for mortgage
insurance; increases in mortgage insurance default rates; failure to meet,
or have waived to the extent needed, the minimum statutory capital
requirements and hazardous financial condition standards; uncertain
results of continued investigations of insured U.S. mortgage loans;
possible rescissions of coverage and the results of objections to our
rescissions; the extent to which loan modifications and other similar programs may provide benefits to us; unexpected changes in unemployment
and underemployment rates in the United States; further deterioration in
economic conditions or a further decline in home prices in the United
States; problems associated with
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foreclosure process defects in the United States that may defer claim
payments; changes to the role or structure of Federal National Mortgage
Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation
("Freddie Mac"); competition with government-owned and
government-sponsored enterprises offering U.S. mortgage insurance; changes
in regulations that affect our U.S. mortgage insurance business; the
influence of Fannie Mae, Freddie Mac and a small number of large mortgage
lenders and investors; decreases in the volume of high loan-to-value
mortgage originations or increases in mortgage insurance cancellations in
the United States; increases in the use of alternatives to private
mortgage insurance in the United States and reductions by lenders in the
level of coverage they select; the impact of the use of reinsurance with
reinsurance companies affiliated with U.S. mortgage lending customers;
legal actions under the Real Estate Settlement Procedures Act of 1974
("RESPA"); and potential liabilities in connection with our U.S. contract
underwriting services;
• Other risks, including the risk that adverse market or other conditions
might further delay or impede the planned initial public offering ("IPO")
of our mortgage insurance business in Australia; the possibility that in
certain circumstances we will be obligated to make payments to General
Electric Company ("GE") under the tax matters agreement with GE even if
our corresponding tax savings are never realized and payments could be
accelerated in the event of certain changes in control; and provisions of
our certificate of incorporation and bylaws and the tax matters agreement
with GE may discourage takeover attempts and business combinations that
stockholders might consider in their best interests; and
• Risks relating to our common stock, including the suspension of dividends
and stock price fluctuations.
We undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future developments or otherwise.
Overview
Our business
We are a leading financial security company dedicated to providing insurance,
wealth management, investment and financial solutions to more than 15 million
customers, with a presence in more than 25 countries. We have the following
operating segments:
• U.S. Life Insurance. We offer and manage a variety of insurance and fixed
annuity products. Our primary insurance products include life and
long-term care insurance. For the three months ended June 30, 2012, our
U.S. Life Insurance segment's net income available to Genworth Financial,
Inc.'s common stockholders and net operating income available to Genworth
Financial, Inc.'s common stockholders were $53 million and $64 million,
respectively. For the six months ended June 30, 2012, our U.S. Life
Insurance segment's net income available to Genworth Financial, Inc.'s
common stockholders and net operating income available to Genworth
Financial, Inc.'s common stockholders were $111 million and $128 million,
respectively.
• International Protection. We are a leading provider of payment protection
coverages (referred to as lifestyle protection) in multiple European
countries. Our lifestyle protection insurance products primarily help
consumers meet specified payment obligations should they become unable to
pay due to accident, illness, involuntary unemployment, disability or
death. For the three months ended June 30, 2012, our International
Protection segment's net income available to Genworth Financial, Inc.'s
common stockholders and net operating income available to Genworth
Financial, Inc.'s common stockholders were both $3 million. For the six
months ended June 30, 2012, our International Protection segment's net
income available to Genworth Financial, Inc.'s common stockholders and net
operating income available to Genworth Financial, Inc.'s common
stockholders were $9 million and $8 million, respectively.
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• Wealth Management. We offer and manage a variety of wealth management
services, including investments, advisor support and practice management
services. For the three months ended June 30, 2012, our Wealth Management
segment's net income available to Genworth Financial, Inc.'s common
stockholders and net operating income available to Genworth Financial,
Inc.'s common stockholders were $27 million and $12 million, respectively.
For the six months ended June 30, 2012, our Wealth Management segment's
net income available to Genworth Financial, Inc.'s common stockholders and
net operating income available to Genworth Financial, Inc.'s common
stockholders were $39 million and $24 million, respectively.
• International Mortgage Insurance. We are a leading provider of mortgage
insurance products and related services in Canada, Australia, Mexico and
multiple European countries. Our products predominantly insure
prime-based, individually underwritten residential mortgage loans, also
known as flow mortgage insurance. On a limited basis, we also provide
mortgage insurance on a structured, or bulk, basis that aids in the sale
of mortgages to the capital markets and helps lenders manage capital and
risk. Additionally, we offer services, analytical tools and technology
that enable lenders to operate efficiently and manage risk. For the three
months ended June 30, 2012, our International Mortgage Insurance segment's
net income available to Genworth Financial, Inc.'s common stockholders and
net operating income available to Genworth Financial, Inc.'s common
stockholders were $83 million and $76 million, respectively. For the six
months ended June 30, 2012, our International Mortgage Insurance segment's
net income available to Genworth Financial, Inc.'s common stockholders and
net operating income available to Genworth Financial, Inc.'s common
stockholders were $90 million and $83 million, respectively.
• U.S. Mortgage Insurance. In the United States, we offer mortgage insurance
products predominantly insuring prime-based, individually underwritten
residential mortgage loans, also known as flow mortgage insurance. We
selectively provide mortgage insurance on a bulk basis with essentially
all of our bulk writings prime-based. Additionally, we offer services,
analytical tools and technology that enable lenders to operate efficiently
and manage risk. For the three months ended June 30, 2012, our U.S.
Mortgage Insurance segment's net loss available to Genworth Financial,
Inc.'s common stockholders and net operating loss available to Genworth
Financial, Inc.'s common stockholders were both $25 million. For the six
months ended June 30, 2012, our U.S. Mortgage Insurance segment's net loss
available to Genworth Financial, Inc.'s common stockholders and net
operating loss available to Genworth Financial, Inc.'s common stockholders
were $51 million and $68 million, respectively.
• Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products include our
variable annuity, variable life insurance, institutional, corporate-owned
life insurance and Medicare supplement insurance products. Institutional
products consist of funding agreements, funding agreements backing notes
("FABNs") and guaranteed investment contracts ("GICs"). In January 2011,
we discontinued new sales of retail and group variable annuities while
continuing to service our existing blocks of business. Effective
October 1, 2011, we completed the sale of our Medicare supplement
insurance business. For the three months ended June 30, 2012, our Runoff
segment's net loss available to Genworth Financial, Inc.'s common stockholders and net operating loss available to Genworth Financial,
Inc.'s common stockholders were $21 million and $6 million, respectively.
For the six months ended June 30, 2012, our Runoff segment's net income
available to Genworth Financial, Inc.'s common stockholders and net
operating income available to Genworth Financial, Inc.'s common
stockholders were $41 million and $29 million, respectively.
We also have Corporate and Other activities which include debt financing
expenses that are incurred at our holding company level, unallocated corporate
income and expenses, eliminations of inter-segment transactions and the results
of other non-core businesses that are managed outside of our operating segments.
For the three months ended June 30, 2012, Corporate and Other activities had a
net loss available to Genworth Financial, Inc.'s common stockholders and a net
operating loss available to Genworth Financial, Inc.'s common stockholders of
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$44 million each. For the six months ended June 30, 2012, Corporate and Other
activities had a net loss available to Genworth Financial, Inc.'s common
stockholders and a net operating loss available to Genworth Financial, Inc.'s
common stockholders of $116 million and $93 million, respectively.
Business trends and conditions
Our business is, and we expect will continue to be, influenced by a number of
industry-wide and product-specific trends and conditions.
General conditions and trends affecting our businesses
Financial and economic environment. The stability of both the financial markets
and global economies in which we operate impacts the sales, revenue growth and
profitability trends of our businesses. Equity markets and credit markets
generally experienced higher volatility while interest rate spreads were
generally stable to tighter during the second quarter of 2012. Although global
financial markets experienced some improvement during the first half of 2012,
the European debt crisis and concerns regarding global economies continued to
impact the rate of recovery.
The U.S. housing market reflected continuing stress and growing levels of
foreclosures with variations in performance by sub-market, including signs of
stabilization within certain regions while others declined. Unemployment and
underemployment levels in the United States remained relatively constant with
the fourth quarter of 2011 that experienced a slight decline in December 2011.
We expect unemployment and underemployment levels in the United States to
stabilize at elevated levels and gradually decrease over time though remain
elevated for an extended period. In Canada, the overall housing market benefited
from low interest rates and income and employment growth as unemployment levels
decreased slightly from the fourth quarter of 2011 and home prices increased
modestly. In Australia, the overall housing market declined in the second
quarter of 2012 after experiencing modest home price declines in 2011 and
unemployment remained consistent with the fourth quarter of 2011 with some
regional variations. There was modest economic growth in Australia in the first
half of 2012 as consumer confidence improved and interest rates declined. Europe
overall remained a slow growth or declining environment with lower lending
activity and reduced consumer spending, particularly in Greece, Spain, Portugal,
Ireland and Italy, in part as a result of the European debt crisis and actual or
anticipated austerity initiatives. See "-Trends and conditions affecting our
segments" below for a discussion regarding the impacts the financial markets and
global economies have on our businesses.
Slow or varied levels of economic growth, coupled with uncertain financial
markets and economic outlooks, changes in government policy, regulatory reforms
and other changes in market conditions, influenced, and we believe will continue
to influence, investment and spending decisions by consumers and businesses as
they adjust their consumption, debt, capital and risk profiles in response to
these conditions. These trends change as investor confidence in the markets and
the outlook for some consumers and businesses shift. As a result, our sales,
revenues and profitability trends of certain insurance and investment products
have been and could be further impacted negatively or positively going forward.
In particular, factors such as government spending, monetary policies, the
volatility and strength of the capital markets, anticipated tax policy changes
and the impact of global financial regulation reform will continue to affect
economic and business outlooks and consumer behaviors moving forward.
The U.S. government, Federal Reserve and other legislative and regulatory bodies
have taken certain actions to support the economy and capital markets, influence
interest rates, influence housing markets and mortgage servicing and provide
liquidity to promote economic growth. These include various mortgage
restructuring programs implemented or under consideration by the GSEs, lenders,
servicers and the U.S. government. Outside of the United States, various
governments previously took actions to stimulate economies, stabilize financial
systems and improve market liquidity. In aggregate, these actions had a positive
effect in the short term on these countries and their markets; however, there
can be no assurance as to the future level of impact these types of
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actions may have on the economic and financial markets, including levels of
volatility. A delayed economic recovery period, a U.S. or global recession or
regional or global financial crisis could materially and adversely affect our
business, financial condition and results of operations.
We manage our product offerings, investment and asset-liability management
strategies to moderate risk especially during periods of strained economic and
financial market conditions. In addition, we continue to review our product and
distribution management strategies to align with our strengths, profitability
targets and risk tolerance.
Credit and investment markets. Although continued weakness in Europe and lack of
clear direction for the U.S. economy weighed on financial markets, the overall
tone in the market was steady in the second quarter of 2012. European Central
Bank policies and actions were supportive overall and fears of a disorderly
Greek default were stemmed. A continued investor move toward quality pushed
government yields markedly lower during the second quarter of 2012, and created
demand for fixed-income products, especially investment grade. Spreads were
generally stable to tighter during the second quarter of 2012, particularly
outside of Europe. Supply was robust in both structured products and corporate
bonds as issuers took advantage of low treasury rates and a receptive market.
We recorded net other-than-temporary impairments of $39 million in the second
quarter of 2012 compared to $26 million in the second quarter of 2011. The
increase in the second quarter of 2012 was largely driven by impairments in our
corporate securities predominately attributable to a financial hybrid security
related to a bank in the United Kingdom that was downgraded to below investment
grade. While we have seen improvements in impairments of commercial mortgage
loans in 2012, impairments of structured securities in our investment portfolio
were slightly higher in the second quarter of 2012. Although economic conditions
may continue to negatively impact certain investment valuations, the underlying
collateral associated with our securities that have not been impaired continues
to perform.
Looking ahead, we believe the current credit environment provides us with
opportunities to invest across a variety of asset classes to meet our yield
requirements for our newer business although certain of our businesses have been
pressured in the low rate environment. The current environment will also provide
opportunities to continue execution of various risk management disciplines
involving further diversification within the investment portfolio. See
"-Investments and Derivative Instruments" for additional information on our
investment portfolio.
Trends and conditions affecting our segments
U.S. Life Insurance
Life insurance. Results of our life insurance business are impacted by sales,
mortality, persistency, investment yields, expenses, reinsurance and statutory
reserve requirements. Additionally, sales of our products and persistency of our
insurance in-force are dependent on competitive product features and pricing,
underwriting, effective distribution and customer service.
Life insurance sales increased 6% during the second quarter of 2012 compared to
the same period in 2011 reflecting an increase in sales of our universal life
insurance products, partially offset by a decrease in our term universal life
insurance sales. Our term universal life insurance sales reflected recent price
increases and narrower product offerings. Our universal life insurance sales
benefited from a combination of enhanced sales and marketing strategies,
consistent with efforts to shift our sales mix. Shifts in consumer demand,
relative pricing, return on capital or reinsurance decisions and other factors,
such as regulatory matters affecting universal life insurance policies with
secondary guarantees, could also affect our sales levels.
Throughout 2011, we experienced favorable mortality in our term life insurance
products as compared to priced mortality assumptions. In 2012, we have
experienced higher mortality than the prior year in our term life insurance
products, although still consistent with pricing. The majority of the higher
mortality originated from
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policies within their level-period with claims below established reinsurance
retention levels. Despite historically favorable experience, mortality levels
can deviate each period from historical trends as a result of such shifts in
claim mix. In addition, while less severe in 2012 than in prior years, we have
experienced lower persistency as compared to pricing assumptions for 10-year
term life insurance policies as they go through their post-level rate period. We
expect this trend in persistency to continue as these 10-year term life
insurance policies go through their post-level rate period and then moderate
thereafter.
Regulations XXX and AXXX require insurers to establish additional statutory
reserves for term life insurance policies with long-term premium guarantees and
for certain universal life insurance policies with secondary guarantees. This
increases the capital required to write these products. Despite this, committed
funding sources are in place for approximately 95% of our anticipated peak level
reserves currently required under Regulations XXX and AXXX. The alternatives
available to finance the increased reserve requirements on some of our in-force
books of business have over time become limited or more expensive.
In 2011, the National Association of Insurance Commissioners ("NAIC") formed a
Joint Working Group to review the statutory reserve requirements of Regulation
AXXX impacting certain universal life insurance policies with secondary
guarantees. In March 2012, the NAIC adopted a framework to address these
reserving issues, and subsequently retained an actuarial consultant to help
resolve the framework's proposal for addressing in-force business and business
that will be written in an interim period until the adoption of a
principles-based reserve approach. In July 2012, the Joint Working Group exposed
the new and in-force business proposals it developed for public comment, and it
is expected that the NAIC will adopt the Joint Working Group's proposals at an
upcoming meeting in 2012. If adopted without change, these proposals will
adversely impact the profitably of certain universal life products with
secondary guarantees absent substantial price increases. The new requirements
likely will cause us to revise our product offerings and increase utilization of
reinsurance for our new business. There can be no assurance that there will be
affordable reinsurance available or that we will be able to execute such
transactions.
Long-term care insurance. Results of our long-term care insurance business are
influenced by sales, morbidity, mortality, persistency, investment yields,
expenses and reinsurance. Additionally, sales of our products are impacted by
the relative competitiveness of our offerings based on product features and
pricing, including our ability to implement future rate actions as deemed
necessary.
Our long-term care insurance sales increased 15% in the second quarter of 2012
compared to the same period in 2011 from increased sales prior to new state
launches of our enhanced Privileged Choice Flex product. In July 2012, we
introduced changes to our individual long-term care insurance product to improve
profitability and reduce risk. Certain lifetime benefits coverages and limited
pay options will no longer be available, underwriting was further tightened,
first-year commissions were lowered and certain discounts were reduced or
eliminated effectively increasing average pricing by more than 20% on the
products impacted. In addition, we began filing for regulatory approval of a new
product, scheduled for early 2013 release, which will include several
transformational concepts such as gender distinct pricing for single applicants
and blood and lab underwriting requirements for all applicants. We continue to
evaluate new product pricing and have utilized reinsurance in the form of
coinsurance to improve profitability and capacity for new business. We are
currently reinsuring on a 40% coinsurance basis our most recent individual
long-term care insurance offerings.
Our loss ratio was 74% for the second quarter of 2012, 66% for the first quarter
of 2012 and 68% for the year ended December 31, 2011. Lower claim termination
rates, higher new claim severity and modestly higher new claim counts negatively
impacted the second quarter of 2011. We expect variations to continue quarter to
quarter.
Given the continued low interest rate environment, we continue active
asset-liability management including maintaining hedges on the majority of the
next ten years of long-term care insurance product cash flows.
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We continue pursuing initiatives to improve the risk and profitability profile
of our long-term care insurance business including: new product issuance and
service offerings; investing in care coordination capabilities; refining
underwriting requirements; maintaining tight expense management; actively
exploring additional reinsurance strategies; executing effective investment
strategies; and considering other actions to improve the performance of the
overall block. These efforts include evaluating the need for future in-force
rate increases, where warranted, on older issued policies. In this regard, we
began filing for a rate increase of 18% on two blocks of older long-term care
insurance policies in November 2010. As of June 30, 2012, we have received
approvals in 45 states which represent approximately 80% of the targeted
premiums. In the third quarter of 2012, we plan to request another round of
long-term care insurance in-force premium rate increases with the goal of
achieving an average premium increase in excess of 50% on the older generation
policies and an average premium increase in excess of 25% on an earlier series
of new generation policies over the next five years. Subject to regulatory
approval, this premium rate increase would generate approximately $200 million
to $300 million of additional annual premiums when fully implemented. The goal
of these rate actions is to mitigate losses on the older generation products
and, on the newer generation products which have generated positive operating
earnings to date, help offset lower than priced-for returns due to lower
interest rates, unfavorable business mix and lower lapse rates than expected.
The state approval process of an in-force rate increase and the amount of the
rate increase varies, and in certain states the decision to approve or decline
can take up to two years. Upon approval, premium increases may only occur on an
insured's billing anniversary date. Therefore, the benefits of any rate increase
may not be fully realized until the implementation is complete.
Changes in regulations or government programs, including long-term care
insurance rate action legislation could impact our long-term care insurance
business positively or negatively. As such, we continue to actively monitor
regulatory developments.
Fixed annuities. Results of our fixed annuities business are affected by
investment performance, interest rate levels, slope of the interest rate yield
curve, net interest spreads, mortality, policyholder surrenders, new product
sales and competitiveness of our offerings. Our competitive position within many
of our distribution channels and our ability to grow this business depends on
many factors, including product offerings and relative pricing.
In fixed annuities, sales may fluctuate as a result of consumer demand, changes
in interest rates, credit spreads, relative pricing, return on capital
decisions, and our disciplined approach to managing risk. We have re-priced
fixed annuities to maintain or increase spreads and targeted returns. Looking
ahead, we will continue to actively evaluate marketing and investment strategies
in the event that interest rates change. We have targeted distributors and
producers and maintained sales capabilities that align with our focused
strategy. We expect to continue to build these distribution relationships while
selectively adding or shifting towards other product offerings, including fixed
indexed annuities.
Refinements of product offerings and related pricing, including use of reduced
commission structures and disciplined investment strategies, support our target
of achieving appropriate risk-adjusted returns. Sales in the second quarter of
2012 were flat compared to the first quarter of 2012 as we continued our
disciplined approach to product pricing and risk management. We expect moderate
sales growth during the remainder of 2012.
International Protection
Growth and performance of our lifestyle protection insurance business is
dependent in part on economic conditions and other factors, including consumer
lending and spending levels, unemployment trends, client account penetration and
mortality and morbidity trends. Additionally, the types and mix of our products
will vary based on regulatory and consumer acceptance of our products.
Consumer lending levels remain challenged particularly given concerns regarding
the European debt crisis. Unemployment rates in Europe trended upwards slightly
during the second quarter of 2012 with regional variation. Additionally, we
experienced negative European gross domestic product growth in the first half of
2012.
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The profitability of our lifestyle protection insurance business declined during
the first half of 2012 as a result of significantly lower premiums driven by
lower consumer lending levels. Additionally, losses increased slightly with
lower but still favorable claim reserve adjustments while claim payments
remained at a consistent level. New claim registrations decreased in the second
quarter of 2012 from the first quarter of 2012 but remained consistent with
levels in the second quarter of 2011. We could see further increases in losses
if claim registrations increase particularly with continued rising unemployment
in Europe. Our declining premiums resulted in a loss ratio of 23% for the six
months ended June 30, 2012 compared to 15% for the six months ended June 30,
2011. The loss ratio was 24% in the second quarter of 2012 compared to 23% in
the first quarter of 2012.
Sales during the first half of 2012 decreased primarily in Southern Europe, most
notably in Italy, mainly as a result of stagnating economies across Europe,
which resulted in a decline in consumer lending where most of our insurance
coverages attach as banks tightened lending criteria and consumer demand
declined. Additionally, we continued to maintain risk management practices
resulting in the exit of certain client relationships. We are pursuing various
targeted initiatives to increase sales in existing markets, with focus on
distribution expansion, optimizing our product portfolio and selective new
client acquisition within our risk profile. However, depending on the severity
and length of these conditions, we could experience additional declines in sales
and ability to generate targeted growth in new sales.
With our focus on growth in select new markets and enhanced distribution
capabilities, we expect these efforts, coupled with sound risk and cost
management disciplines, to maintain or improve profitability and help offset the
impact of economic or employment pressures as well as lower levels of consumer
lending.
Wealth Management
Results of our wealth management business are impacted by the demand for asset
management products and related support services, investment performance and
equity market conditions.
Net flows in the second quarter of 2012 were negative primarily related to prior
year relative investment performance. In addition, we have experienced an
increased competitive landscape. To partially offset this negative trend, we
have introduced product enhancements, more competitive pricing and continued
efforts to streamline our operations. Depending upon the direction of equity and
fixed-income markets in the future, we could see either positive or negative
impacts on sales, net flows and assets under management.
On April 2, 2012, we completed the sale of our tax and accounting financial
advisor unit, Genworth Financial Investment Services ("GFIS"), for approximately
$79 million, plus contingent consideration, to Cetera Financial Group. We
recognized an after-tax gain of $15 million related to the sale.
International Mortgage Insurance
Results of our international mortgage insurance business are affected by changes
in regulatory environments, employment levels, consumer borrowing behavior,
lender mortgage-related strategies, including lender servicing practices, and
other economic and housing market influences, including interest rate trends,
home price appreciation or depreciation, mortgage origination volume, levels and
aging of mortgage delinquencies and movements in foreign currency exchange
rates.
Canada and Australia comprise approximately 98% of our international mortgage
insurance primary risk in-force with an estimated average effective
loan-to-value ratio of 58%. These established markets will continue to be key
drivers of revenues and earnings in our international mortgage insurance
business.
Our participation or entry in other international markets remains selective and
disciplined. During the second quarter of 2012, we became a minority shareholder
of a newly formed joint venture partnership in India. The joint venture will
offer mortgage guarantees against borrower defaults on housing loans from
mortgage lenders in India. The financial impact of this joint venture during
2012 is expected to be minimal.
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In Canada, during 2011 and the first half of 2012, favorable economic conditions
persisted with housing affordability benefiting from low interest rates and
income and employment growth. Since September 2010, the Bank of Canada has
maintained the overnight rate at 1.0% and we expect this rate to be maintained
near this level throughout 2012. The unemployment rate in Canada has gradually
decreased during the last two years and this trend continued in the first half
of 2012. We expect the unemployment rate to remain near current levels for the
remainder of 2012. Additionally, average home prices have remained stable after
increasing modestly during the first half of 2011. Average home prices increased
slightly during the first half of 2012 and we expect prices to remain stable for
the remainder of 2012, as a balanced housing market persists.
In January 2011, the Canadian government announced new mortgage rules that
became effective in March and April of 2011. These changes reduced the amount of
flow new insurance written in 2011 compared to 2010 levels primarily due to a
smaller market, particularly for high loan-to-value refinance transactions,
which was partially offset by improved market penetration. In June 2012, the
Canadian government announced further changes to the mortgage insurance
eligibility rules that became effective in early July 2012. The new rules
eliminate high loan-to-value refinancings and impose more stringent qualifying
criteria for insured mortgages by reducing the maximum amortization period to 25
years from 30 years. As a result, we expect new written premiums to decrease in
the second half of 2012 and in future periods.
During the first quarter of 2012, flow new insurance written in Canada remained
lower than the fourth quarter of 2011 primarily from a decrease in the size of
the high loan-to-value market and seasonal factors, which were partially offset
by a slight improvement in our market penetration. During the second quarter of
2012, flow new insurance written improved primarily from a seasonably larger
mortgage insurance market but remained below levels seen during the second
quarter of 2011. We expect our level of flow new insurance written in 2012 to
increase modestly from the 2011 levels with the expectation during the second
half of 2012 of higher share penetration and seasonality from mortgage closures.
As of June 30, 2012, our 2010 and 2011 books of business represent 20% of our
insurance in-force while our 2007 and 2008 book years, the two largest in our
portfolio, together represent 28% of our insurance in-force. As our 2007 and
2008 book years are largely past their peak earnings period, earned premiums in
Canada are expected to decline modestly in 2012 compared to 2011 reflecting
earnings from the smaller 2009, 2010 and 2011 books of business.
During 2011, losses in Canada increased from levels experienced during 2010
despite improving overall economic conditions and stable housing markets. While
the total number of delinquencies decreased during 2011, and we continued to
realize benefits from our loss mitigation activities, overall losses increased
as a result of higher severity on older books, particularly from Alberta. In
Alberta, the economy and housing market have not fully recovered to
pre-recession levels and continue to drive increased severity, although
conditions began to improve during the second half of 2011 and the first half of
2012. During the first quarter of 2012, losses were lower compared to the fourth
quarter of 2011 and further decreased during the second quarter of 2012 as both
the total number of delinquencies and the proportion of new delinquencies, net
of cures, from Alberta continued to decline. These improvements were partially
offset by increased severity on existing delinquencies. We expect our overall
loss levels in Canada to improve moderately through the remainder of 2012,
although loss levels may vary quarterly based on seasonal or event-driven
fluctuations.
In June 2011, the Canadian government passed legislation, that when effective,
will formalize existing mortgage insurance arrangements with private mortgage
insurers and terminate the existing agreement with the Canadian government,
including the elimination of the Canadian government guarantee fund. This
legislation does not change the current government guarantee of 90% provided on
mortgages we insure. We do not anticipate any significant impacts to our
business as a result of this legislation, however, a full assessment of the
impact on our business cannot be completed until the regulations are finalized.
In Australia, economic growth slowed during 2011 given the economic impact of
pressures from higher interest rates, higher costs of living, higher exchange
rates and cautious consumer spending. This was particularly the case in coastal
tourism areas of Queensland where these pressures were exacerbated by the
flooding in January 2011. During the first half of 2012, Australia experienced
modest economic growth with some variation
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across sectors and regions, and both exchange rates and interest rates
decreased. The overall housing market in Australia remained flat during the
first quarter of 2012 and declined slightly during the second quarter of 2012
after experiencing some modest home price declines in 2011. On a regional basis,
variations were more pronounced, especially in Queensland and Western Australia
where average home prices declined 7% and 6%, respectively, in 2011. We expect
average national home prices to remain near current levels throughout 2012.
After a slight increase during 2011, unemployment levels stabilized during the
first half of 2012. We expect a modest increase in the unemployment rate during
the remainder of 2012. In the fourth quarter of 2011, the Reserve Bank of
Australia lowered the cash rate from 4.75% to 4.25%, in two separate decisions,
which had remained unchanged since December 2010. The Reserve Bank of Australia
further reduced the cash rate by 75 basis points to 3.50%, in two separate
decisions during the second quarter of 2012, as Australian and global economic
conditions have been somewhat weaker than expected.
Total mortgage market activity in Australia slowed during 2011 as consumers
became more cautious about higher interest rates and global economic uncertainty
together with the economic impact of natural disasters. Additionally, some
lenders were slow to return to the high loan-to-value market. These factors
resulted in a smaller high loan-to-value mortgage originations market.
First-time home buyers and refinance transactions increased in late 2011 from
improving consumer confidence and stable to declining interest rates in the
fourth quarter of 2011. During the first quarter of 2012, flow new insurance
written declined modestly from the fourth quarter of 2011, primarily from a
smaller mortgage originations market as a result of the expiration of certain
first-time home buyer concessions offered by local governments, and seasonal
factors. During the second quarter of 2012, flow new insurance written improved
to its highest level since the first quarter of 2010 primarily from a stronger
mortgage originations market driven by increased refinancing activity, however
this trend is not expected to continue. As a result, we expect our level of flow
new insurance written in 2012 to be modestly higher than 2011 levels. As of
June 30, 2012, our 2010 and 2011 books of business represented 18% of our
insurance in-force while our 2007, 2008 and 2009 book years, the three largest
in our portfolio, together represented 36% of our insurance in-force. We expect
the pressure on our earned premiums, as the large 2007 to 2009 book years mature
past their peak earnings period and subsequent smaller books season during 2012,
to be largely offset by higher net premiums written based on a higher
loan-to-value mix and pricing actions during the second quarter of 2012. Given
this and changes in external reinsurance, we anticipate earned premiums during
2012 to remain similar to 2011.
During 2011, losses began to increase following an improvement during 2010. This
was mainly driven by higher interest rates, lower retail spending and higher
reserves for claims anticipated from the natural disasters in early 2011,
particularly the flooding in Queensland. As a result, there was an increase in
the number of outstanding delinquencies and reserves as the cumulative impact of
the factors noted previously exerted pressure on elements of the portfolio.
Overall delinquencies and the delinquency rate peaked during the third quarter
of 2011 and have since trended downward, ending the second quarter of 2012 at a
level similar to the one experienced at the start of 2011. This improvement was
broad based across most regions, including Queensland. During the second half of
2011, we increased the intensity of our efforts to work with lenders to
accelerate the processing of older delinquencies through to resolution. The
extent of the rate of conversion from later stage delinquency to claim and
higher average paid claim amounts during the first quarter of 2012 led to higher
losses than previously anticipated. We now expect the higher rate of conversion
to claim and average paid claims to continue at least through the remainder of
2012. The higher losses were most pronounced in sub-segments of the Queensland
region, whose economy has been pressured, as well as our 2007 and 2008 vintages
which have higher concentrations of self-employed borrowers. We strengthened
loss reserves by $82 million during the first quarter of 2012 to reflect the
adverse change in frequency and severity experience that emerged during that
quarter. The reserve strengthening recognized that we expected to see an
elevated number of claims paid and higher average claim amounts continue into at
least the second quarter of 2012 before beginning to moderate in the second half
of 2012. During the second quarter of 2012, as expected, we paid a high number
of claims which also had a high average claim amount. Pressures from
sub-segments of the Queensland region and our 2007 and 2008 vintages continued
to be the primary drivers of losses in the second quarter of 2012 the impact of
which was partly offset by lower new delinquencies, net of cures. We expect our
overall loss levels in Australia during the remainder of the year to remain
similar to levels experienced during the second quarter of 2012.
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On April 17, 2012, we announced a new timeframe for completing our planned
minority IPO of up to 40% of our Australian mortgage insurance business, which
was originally expected to occur during 2012. We are now targeting completion of
the IPO in early 2013, subject to market conditions, valuation considerations
including business performance in Australia, and regulatory approvals. On
April 20, 2012, Moody's Investors Service ("Moody's) placed our Australian
mortgage insurance business on review for possible downgrade following our
announcement regarding an anticipated net operating loss in this business in the
first quarter of 2012 as a result of the elevated loss experience and higher
claims incidence and severity. Subsequently, Moody's extended the review period
to align it with its review of the overall mortgage insurance industry and, on
July 18, 2012 announced that its review of Australian mortgage insurers would
not be finalized until Moody's draft Global Methodology for Rating Mortgage
Insurers is finalized, which we expect to be finalized in 2012. See "Risk
Factors-A downgrade or a potential downgrade in our financial strength or credit
ratings could result in a loss of business and adversely affect our financial
condition and results of operations" in "Item 1A. Risk Factors" in our Annual
Report on Form 10-K, filed on February 27, 2012.
The overall economic environment in Europe continued to be dominated by concerns
about the fiscal health of the region, which has created uncertainty about the
timing and speed of economic recovery and renewed concerns about an economic
recession. While regional differences exist, the overall business climate and
the economic growth outlook in Europe remain pressured from the combination of
persistent high unemployment rates and low business and consumer confidence. As
a result, we have seen increasing delinquencies and lower cures driven by
prolonged economic stress, most notably in Ireland, contributing to increased
loss reserves in our European mortgage insurance business, which we expect to
continue through 2012. Specifically in Ireland, which represents less than 1% of
our international primary risk in-force, we experienced increasing delinquencies
and reserves in the second half of 2011 and during the first half of 2012 driven
by prolonged economic and housing market stress, and we expect this to continue
during 2012. We are actively working with lenders and have significantly reduced
our exposure and new business volumes from certain regions as we seek
opportunities to manage and mitigate our risk profile in Europe.
Over the past several years, our global loss mitigation operations have enhanced
both their capabilities and resources devoted to finding solutions that cure
delinquencies and help to keep borrowers in their homes. These efforts include
lender mortgage-related strategies, such as loan modification programs designed
to help borrowers maintain mortgage payments while they are experiencing
personal hardships. These programs allow lenders to maintain their relationship
with a borrower while retaining an interest earning asset. In addition, we have
developed asset management strategies designed to efficiently dispose of
properties when a borrower's hardship cannot be cured. Such efforts include
actively partnering with the lender and borrower to optimize the transition
process and taking early possession of properties to mitigate claim payments. As
a result, our loss mitigation activities have had a favorable impact on our
financial results as well as our relationships in the marketplace.
U.S. Mortgage Insurance
Results of our U.S. mortgage insurance business are affected by unemployment,
underemployment and other economic and housing market trends, interest rates,
home prices, mortgage origination volume mix and practices, the levels and aging
of mortgage delinquencies including seasonal variations, the inventory of unsold
homes and lender modification and other servicing efforts. These economic and
housing market trends are continuing to be adversely affected by ongoing
weakness in the domestic economy and related levels of unemployment and
underemployment. This has resulted in rising foreclosures, more borrowers
seeking loan modifications and elevated housing inventories which contributed to
the downward pressure on home values. Overall, we believe that home values have
reached their lowest levels and expect slow modest growth in these values
through the second half of 2012 and into 2013. At the same time, we also expect
unemployment and underemployment levels to stabilize at elevated levels and
gradually decrease over time though remain elevated for an extended period.
Given the trends of new delinquencies, reserves, new insurance written,
orginations and mortgage insurance penetration, and assuming no significant
deterioration in the U.S. housing market or material global economic downturns,
we believe these drivers continue to suggest a return to profitability at some
point in 2013.
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Over recent periods, the convergence of a weak housing market, tightened lending
standards, the lack of consumer confidence and the lack of liquidity in some
mortgage securitization markets, along with volatility in mortgage interest
rates, converged to drive a smaller mortgage origination market. Within the
private mortgage insurance market, over recent periods the mortgage insurance
penetration rate and overall market size was driven down by growth in Federal
Housing Administration ("FHA") originations, associated with multiple pricing,
underwriting and loan size factors, and the negative impact of GSE market fees
and loan level pricing which made private mortgage insurance solutions less
competitive with FHA solutions. We saw the private mortgage insurance
penetration rate remain essentially flat in the fourth quarter of 2011 and in
the first quarter of 2012. However, given the effects of prior and ongoing FHA
risk management actions, the private mortgage insurance penetration rate
increased in the second quarter of 2012. This pattern has been mitigated in part
by increased GSE loan level fees which can make private mortgage insurance less
attractive. Going forward, further GSE fee increases could limit the demand for
or competitiveness of private mortgage insurance. Considering both of these
trends, we still believe the industry can expect to regain market share over
time. In November 2011, federal legislation was enacted that extended the
authority of the FHA to insure loans with initial balances in amounts up to 125%
of median area home prices of up to and including $729,750. With this new
legislation in place, the FHA now has higher loan limits than do the GSEs in
certain metropolitan statistical areas. Accordingly, this could give the FHA a
competitive advantage over private mortgage insurance providers. The mortgage
insurance industry level of market penetration and eventual market size will
continue to be affected by any actions taken by the GSEs, the FHA or the U.S.
government impacting housing or housing finance policy, underwriting standards
or related reforms. The Housing and Economic Recovery Act of 2008 provided for
changes to, among other things, the regulatory authority and oversight of the
GSEs and the authority of the FHA including with respect to premium pricing,
maximum loan limits and down payment requirements. In addition, Fannie Mae and
Freddie Mac remain the largest purchasers and guarantors of mortgage loans in
the United States.
Although the overall insured market size is expected to be larger compared to
the prior year, our U.S. mortgage insurance market share declined slightly in
the second quarter of 2012 driven by the impact of competitor pricing and
underwriting guidelines. Meanwhile, we continue to manage the quality of new
business through prudent underwriting guidelines, which we modify from time to
time when circumstances warrant. In addition, we regularly monitor competitor
pricing and underwriting changes and their potential market impact. During the
second quarter of 2012, we announced reduced pricing and expanded underwriting
guidelines intended to increase our competiveness in the mortgage insurance
market. As of June 30, 2012, the Home Affordable Refinance Program ("HARP")
production, which is up substantially over prior quarters, accounted for
approximately $2.3 billion of insurance that is treated as a modification of the
coverage on existing insurance in-force rather than new insurance written. Loans
modified through HARP have extended amortization periods and reduced interest
rates which reduce borrower's monthly payments. Over time, these modified loans
are expected to result in extended premium streams and a lower incidence of
default.
While we continue to experience a decrease in the level of new delinquencies,
overall pressure on the housing market continues to adversely affect the
performance of our portfolio, particularly our 2005, 2006, 2007 and first half
of 2008 book years that we believe peaked in their delinquency development
during the first quarter of 2010. Albeit at a lower rate, delinquencies for
these book years continue to drive the level of new delinquencies being
reported. While the impact was originally concentrated in certain states and
alternative product types, during the last few years, the impact has shifted to
more traditional products reflecting the elevated unemployment and
underemployment levels throughout the United States. Beginning mid-2010, we saw
an increase in foreclosure starts as well as an increase in our paid claims as
late stage delinquency loans go through foreclosure. In addition, we saw wide
ranges in performance among loan servicers regarding the ability to modify
loans. Suspensions and delays of foreclosure actions in response to problems
associated with lender and servicer foreclosure process changes and defects have
caused, and could further cause, claim payments to be deferred to later periods
and potentially have an adverse impact on the timing of a recovery of the U.S.
residential mortgage market. Several major servicers reached agreement in
principle in February 2012 with the U.S. Department of Justice, various federal
agencies and 49 state attorneys general on origination and servicing practices,
and this could affect timelines for claims submissions or administration
actions. The effect on us of this agreement is uncertain at this time.
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Expanded efforts in the mortgage lending market to modify loans and improved
performance of our second half of 2008 and the 2009, 2010 and 2011 book years
compared with the performance of prior book years, resulted in continued
reductions in delinquency levels through the second quarter of 2012. However,
loan modification efforts remained challenged and aging of delinquencies
continued to increase through 2011 and through the first half of 2012; moreover,
both foreclosures and liquidations remained elevated through the same period,
thereby resulting in ongoing elevated levels of loss reserves and claims. If
employment levels remain pressured, home values experience further decline,
credit remains tight or interest rates increase, the ability to cure a
delinquent loan could be more difficult to achieve. In addition, while we
continue to execute on our loan modification strategy, during 2011 and through
the first half of 2012, we have seen the level of loan modification actions
moderating against the levels we experienced during the fourth quarter of 2010.
We also saw evidence of low levels of modification activity outside of
government programs and servicers distracted by various regulatory and legal
actions. Further reduction of loan modifications would have an adverse impact on
the ability of borrowers to cure a delinquent loan.
Our loss mitigation activities, including those relating to workouts, loan
modifications, pre-sales, rescissions, claims administration (including
curtailment of claim amounts) and targeted settlements, net of reinstatements,
which occurred during the six months ended June 30, 2012 resulted in a reduction
of expected losses of $320 million compared to $252 million during the six
months ended June 30, 2011.
Workouts and loan modifications, which related to loans representing 1% of our
primary risk in-force as of June 30, 2012, and occurred during the period then
ended, resulted in a reduction of expected losses during the six months ended
June 30, 2012 of $176 million compared to $195 million during the six months
ended June 30, 2011. Our workout and loan modification programs with various
lenders and servicers are designed to help borrowers in default regain current
repayment status on their mortgage loans, which ultimately allowed many of these
borrowers to remain in their homes. The loans that are subject to workouts and
loan modifications that were completed could be subject to potential re-default
by the underlying borrower at some future date. However, such borrower
re-defaults currently remain stable and in line with current experience levels.
In addition, pre-sales, claims administration and other non-cure workouts that
occurred during the six months ended June 30, 2012 resulted in a reduction of
expected losses of $129 million compared to $38 million that occurred during the
six months ended June 30, 2011.
As a result of investigation activities on certain insured delinquent loans, we
found some levels of misrepresentation and non-compliance with specific terms
and conditions of our underlying master insurance policies, as well as fraud.
These findings separately resulted in rescission actions that occurred during
the six months ended June 30, 2012 which reduced our expected losses at the time
of rescission by $15 million compared to $19 million that occurred during the
six months ended June 30, 2011. We expect limited benefit from rescission
actions in future periods.
Since 2010, benefits from loss mitigation activities have shifted from
rescissions to loan modifications and reviews of loan servicing and claims
administration compliance where we expect a majority of our loss mitigation
benefits to be achieved going forward. While we expect to continue evaluating
compliance of the insured or its loan servicer with respect to its servicing
obligations under our master policy for loans insured thereunder and may curtail
claim amounts payable based on our evaluations of such compliance, we cannot
give assurance on the extent or level at which such claim curtailments will
continue. Although loan servicers continue to pursue a wide range of approaches
to execute appropriate loan modifications, government-sponsored programs such as
Home Affordable Modification Program ("HAMP") continue to decline as alternative
programs have begun to gain momentum. With lower benefits from
government-sponsored programs and the limited impact from alternative programs
to date, we have experienced higher levels of loss reserves and/or paid claims.
On February 1, 2012, the Obama Administration announced that it would extend
HAMP for one year until December 31, 2013, and expand borrower eligibility by
loosening certain underwriting requirements. In addition, incentives paid to the
owner of a loan that qualifies for principal reduction under HAMP are being
increased and, for the first time, will be offered to the GSEs. However, to
date, the GSEs are not participating in this program.
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There can be no assurance that these changes will increase the number of loans
that are modified under HAMP, including mortgage loans we insure currently, or
that any such modifications will succeed in avoiding foreclosure. Depending upon
the mix of loss mitigation activity, market trends, employment levels in future
periods and other general economic impacts which influence the U.S. residential
housing market, we could see additional adverse loss reserve development going
forward. We expect the primary source of new reserves and losses to come from
new delinquencies.
We also participate in reinsurance programs in which we share portions of our
premiums associated with flow insurance written on loans originated or purchased
by lenders with captive insurance entities of these lenders in exchange for an
agreed upon level of loss coverage above a specified attachment point. For the
six months ended June 30, 2012, we recorded reinsurance recoveries of $27
million where cumulative losses have exceeded the attachment points in captive
reinsurance arrangements, primarily related to our 2004 through 2008 book years.
We have exhausted certain captive reinsurance tiers for these book years based
on loss development trends. While we continue to receive cash benefit from these
captive arrangements at the time of claim payment, this level of benefit is
expected to decline going forward as more captive trusts' assets are being
exhausted at a faster rate. The majority of our excess of loss captive
reinsurance arrangements are in runoff with no new books of business being added
going forward.
Genworth Mortgage Insurance Corporation ("GEMICO"), our primary U.S. mortgage
insurance subsidiary, continues to exceed the maximum risk-to-capital ratio of
25:1 established under North Carolina law and enforced by the North Carolina
Department of Insurance ("NCDOI"), which is GEMICO's domestic insurance
regulator. As of June 30, 2012 and December 31, 2011, GEMICO's risk-to-capital
ratio was approximately 34.3:1 and 32.9:1, respectively. Over at least the next
several quarters, we expect GEMICO's risk-to-capital ratio to continue to
increase. The amount of such increases will depend principally on the magnitude
of future losses incurred by GEMICO, the effectiveness of ongoing loss
mitigation activities and the amount of additional capital that is generated
within the business or capital support (if any) that we provide. Our estimate of
the amount and timing of future losses is inherently uncertain, requires
significant judgment and may change significantly over time.
Effective January 31, 2011, the NCDOI granted GEMICO a revocable two-year waiver
of compliance with its risk-to-capital requirement. The waiver, which the NCDOI
can modify or terminate at any time in its discretion, gives GEMICO the ability
to continue to write new business in North Carolina during the period covered by
the waiver, notwithstanding that GEMICO's risk-to-capital ratio exceeds 25:1. On
July 27, 2012, the NCDOI granted GEMICO an 18-month extension of the two-year
revocable waiver of compliance with its risk-to-capital requirement through July
31, 2014. Thirty-four of the states in which GEMICO operates do not impose their
own risk-to-capital requirements; consequently, GEMICO is permitted to continue
to write business in those states so long as it is permitted to write business
in North Carolina. Sixteen states (including North Carolina) impose their own
risk-to-capital requirements. Of these 16 states, 12 granted revocable waivers
(or the equivalent) of their risk-to-capital requirements to allow GEMICO to
continue to write new business. In two of these 12 states, such waivers are no
longer in effect as we exceeded alternative risk-to-capital limitations
contained in these waivers when they were granted to GEMICO. One of these two
states, the state of Florida, entered into a voluntary Consent Order with GEMICO
on July 9, 2012, whereby GEMICO agreed to the formal suspension of its license
to write new business in the state of Florida until such time as GEMICO
establishes that it again meets the requirement of the applicable Florida
risk-to-capital standards. The Consent Order further provides that if GEMICO
does not establish its compliance with Florida's requirement prior to July 9,
2014, GEMICO's license will expire necessitating a reapplication before it would
be authorized to write new business within the state of Florida. In December
2011, at the time GEMICO exceeded Florida's risk-to-capital standard, we began
writing new insurance in the state of Florida out of Genworth Residential
Mortgage Assurance Corporation ("GRMAC"), another one of our U.S. mortgage
insurance subsidiaries. Accordingly, we will continue writing new business out
of GRMAC in the state of Florida until GEMICO returns to compliance with that
state's risk-to-capital requirements. Even though GEMICO's risk-to-capital ratio
exceeded 25:1, GEMICO remains authorized to write new business in 44 states as
of June 30, 2012, pursuant to revocable waivers or the equivalent issued by
applicable states where necessary and with the approval of the GSEs.
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New insurance written in North Carolina and in the 34 states which do not impose
their own risk-to-capital requirements represented approximately 49% and 48%,
respectively, of our total new insurance written for the six months ended
June 30, 2012 and 2011. New insurance written in the other nine states that have
granted revocable waivers (or the equivalent) of their risk-to-capital
requirements represented approximately 35% and 31%, respectively, of total new
insurance written for the six months ended June 30, 2012 and 2011.
With the approval of state insurance regulators in the six remaining states
where GEMICO is not authorized to write new business and the GSEs, we began
writing new business through GRMAC in five of these states while continuing to
use Genworth Residential Mortgage Insurance Corporation of North Carolina to
write new business in the sixth state. Freddie Mac's and Fannie Mae's approvals
of this arrangement expire on December 31, 2012.
We plan to write new business through GRMAC in any other state that prohibits
GEMICO from writing new business, subject to the approval of applicable
insurance regulators and the GSEs and GRMAC continuing to satisfy its own
regulatory requirements. Depending upon volume, GRMAC currently has
approximately a full year of new business capacity. We continue to discuss our
ongoing use of these and other alternative arrangements with our state insurance
regulators and the GSEs.
Historically, we have actively managed the risk-to-capital ratios of our U.S.
mortgage insurance business in various ways, including through reinsurance
arrangements with our subsidiaries and by providing additional capital support
to our U.S. mortgage insurance subsidiaries (including through the contribution
of a portion of our common shares of Genworth MI Canada Inc.). Our existing
intercompany reinsurance arrangements are conducted through affiliated insurance
subsidiaries, and therefore, remain subject to regulation by state insurance
regulators who could decide to limit, or require the termination of, such
arrangements. Any decision to provide additional capital to support our U.S.
mortgage insurance subsidiaries is subject to a number of considerations,
including (i) the extent to which we are on track towards executing certain
capital reallocation transactions to support the redeployment of capital for the
benefit of our stockholders while maintaining appropriate risk buffers; (ii) our
ongoing analyses of risk scenarios and the value and return on providing such
capital support or pursuing other alternative arrangements or strategies;
(iii) our assessment and understanding of U.S. policy relating to housing
finance, the use of private mortgage insurance or the GSEs; and (iv) our
assessment of actions by competitors and the current views of the GSEs and state
regulators. Depending on the state of the U.S. economy and housing market along
with other factors, there is a range of potential additional capital needs that
our U.S. mortgage insurance subsidiaries might require, including some that
could be substantial. As a result, for a variety of reasons, there is no
assurance that we will or will not provide additional capital to support our
U.S. mortgage insurance subsidiaries in the future.
In response to the recent years' adverse operating results, we engaged in a
strategic review of our U.S. mortgage insurance business. While our U.S.
mortgage insurance business continues to write new business with expected
profitable returns on an ongoing basis, we evaluated (i) the maintenance of
ongoing operations and potential changes to the business as the private mortgage
insurance and broader housing finance markets evolve; (ii) the prospects
involved in ceasing to write new business but continuing to service the existing
policies in-force (commonly referred to as "runoff"); and (iii) the merits and
potential of entering into a strategic transaction involving the spinoff, merger
or sale of our U.S. mortgage insurance operations. Key considerations taken into
account by us in identifying and assessing alternatives included the efficiency
of capital required in the short- and medium-term under each of these options;
underlying embedded value within our U.S. mortgage insurance business;
maximization of capital deployment flexibility; maintenance of adequate
liquidity and financial flexibility; protection of the value, reputation,
ratings and regulatory relationships of our U.S. mortgage insurance business and
Genworth as a whole; and maximization of medium- to long-term shareholder value.
Each alternative we considered included challenges and opportunities from a
financial, operational, reputational and regulatory perspective. We will
continue to monitor these considerations and alternatives on a go forward basis
and our expectation currently is to continue operating our U.S. mortgage
insurance business with the benefit of regulatory waivers and the use of
alternative subsidiaries to generate new insurance written.
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Runoff
Results of our Runoff segment are affected by investment performance, interest
rate levels, net interest spreads, equity market conditions, mortality and
policyholder surrenders and scheduled maturities. In addition, the results of
our Runoff segment can significantly impact our results, regulatory capital
requirements, distributable earnings and liquidity.
In January 2011, we discontinued sales of our individual and group variable
annuities; however, we continue to service our existing block of business and
accept additional deposits on existing contracts. During 2012, equity market
volatility has caused fluctuations in the results of our variable annuity
products and regulatory capital requirements. In the future, equity market
performance and volatility could result in additional gains or losses in our
variable annuity products although associated hedging activities are expected to
mitigate most of these impacts. Volatility in the results of our variable
annuity products can result in favorable or unfavorable impacts on capital and
earnings. In addition to the use of hedging activities to mitigate impacts
related to equity market volatility and interest rate risks, we may pursue
reinsurance opportunities to further mitigate volatility in results.
The results of our institutional products are impacted by scheduled maturities,
as well as liquidity levels. However, we believe our liquidity planning and our
asset-liability management will largely mitigate this risk.
Effective October 1, 2011, we completed the sale of our Medicare supplement
insurance business for $276 million. We recognized an after-tax gain on the sale
of $36 million in the fourth quarter of 2011. The transaction included the sale
of Continental Life Insurance Company of Brentwood, Tennessee and its
subsidiary, American Continental Insurance Company, and the reinsurance of the
Medicare supplement insurance in-force business written by other Genworth life
insurance subsidiaries.
We expect to manage our runoff products for at least the next ten years. Several
factors may impact the time period for these products to runoff including the
specific policy types, economic conditions and management strategies.
Ratings
On June 27, 2012, Moody's downgraded the insurance financial strength rating of
our U.S. life insurance subsidiaries to "A3" from "A2" with a stable outlook and
placed our holding company and U.S. mortgage insurance business on review for
downgrade. These actions may adversely impact our business in various ways,
including resulting in lower sales, particularly for our life insurance
businesses; however, we are currently managing statutory performance through
lower sales in these businesses. Moody's currently rates our senior debt "Baa3,"
which is their lowest investment grade rating. Lowering our senior debt rating
may adversely impact our ability to raise capital at competitive rates,
including issuing debt, and may have other adverse commercial impacts. Our next
debt maturity is $600 million in June 2014. According to Moody's, the following
could lead to a confirmation of the holding company's ratings: 1) de-linkage
from the U.S. mortgage insurance business so that a downside scenario would not
impact holding company creditors or determination that a downside scenario would
have a modest impact on the group; or 2) capital actions that enhance holding
company financial flexibility without hurting long-term earnings power of the
company. On the other hand, the following could result in a downgrade of the
holding company's ratings: 1) failure to de-link the U.S. mortgage insurance
business from holding company creditors or determination that a downside
scenario would have more than a modest impact on the group; or 2) failure to
take capital actions that enhance holding company financial flexibility without
hurting long-term earnings power of the company. While we do not know when
Moody's will complete their review for downgrade, we expect the review to be
resolved in 2012.
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Consolidated Results of Operations
The following is a discussion of our consolidated results of operations and
should be read in conjunction with "-Business trends and conditions." For a
discussion of our segment results, see "-Results of Operations and Selected
Financial and Operating Performance Measures by Segment."
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth the consolidated results of operations for the
periods indicated:
Increase
(decrease) and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 1,302 $ 1,455 $ (153 ) (11 )%
Net investment income 846 881 (35 ) (4 )%
Net investment gains (losses) (34 ) (40 ) 6 15 %
Insurance and investment product fees and
other 409 359 50 14 %
Total revenues 2,523 2,655 (132 ) (5 )%
Benefits and expenses:
Benefits and other changes in policy
reserves 1,382 1,679 (297 ) (18 )%
Interest credited 194 204 (10 ) (5 )%
Acquisition and operating expenses, net
of deferrals 502 581 (79 ) (14 )%
Amortization of deferred acquisition
costs and intangibles 148 162 (14 ) (9 )%
Interest expense 131 134 (3 ) (2 )%
Total benefits and expenses 2,357 2,760 (403 ) (15 )%
Income (loss) before income taxes 166 (105 ) 271 NM (1)
Provision (benefit) for income taxes 57 (5 ) 62 NM (1)
Net income (loss) 109 (100 ) 209 NM (1)
Less: net income attributable to
noncontrolling interests 33 36 (3 ) (8 )%
Net income (loss) available to Genworth
Financial, Inc's common stockholders $ 76 $ (136 ) $ 212 156 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Premiums. Premiums consist primarily of premiums earned on insurance products
for life, long-term care and Medicare supplement insurance, single premium
immediate annuities and structured settlements with life contingencies,
lifestyle protection insurance and mortgage insurance.
• Our Runoff segment decreased $82 million driven by the sale of our
Medicare supplement insurance business in the fourth quarter of 2011.
• Our International Protection segment decreased $49 million, including a
decrease of $16 million attributable to changes in foreign exchange rates,
primarily due to lower premium volume driven by reduced levels of consumer
lending and our runoff block of business.
• Our International Mortgage Insurance segment decreased $12 million, including a decrease of $7 million attributable to changes in foreign
exchange rates, as a result of seasoning of our in-force blocks of
business in Canada, Australia and Europe and higher ceded reinsurance
premiums in Australia, partially offset by an increase in Australia from
an actuarial update to premium recognition factors in the current year
related to policy cancellation experience.
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• Our U.S. Life Insurance segment decreased $5 million primarily
attributable to a decrease in our life insurance business of $33 million
related to our term life insurance products from higher ceded reinsurance
as a result of a new reinsurance treaty in the current year and from no
longer selling these products. Our fixed annuities business decreased $5
million from lower sales of our life-contingent products in the current
year. These decreases were partially offset by an increase of $33 million in our long-term care insurance business from growth due to new sales and
in-force rate actions.
• Our U.S. Mortgage Insurance segment decreased $5 million largely related to lower insurance in-force and lower premiums assumed from an affiliate
under an intercompany reinsurance agreement, partially offset by lower
ceded premiums related to our captive arrangements and less policy
coverage rescission activity.
Net investment income. Net investment income represents the income earned on our
investments. Weighted-average investment yields decreased to 4.9% for the three
months ended June 30, 2012 from 5.1% for the three months ended June 30, 2011.
The weighted-average investment yields decreased primarily as a result of lower
reinvestment yields and $12 million of lower bond calls and prepayments in the
current year, partially offset by higher average invested assets in longer
duration products. Net investment income for the three months ended June 30,
2012 also included $3 million of higher gains related to limited partnerships
accounted for under the equity method and lower income attributable to
reinsurance arrangements accounted for under the deposit method of accounting as
certain of these arrangements were in a lower gain position in the current year.
Net investment gains (losses). Net investment gains (losses) consist of realized
gains and losses from the sale or impairment of our investments and unrealized
and realized gains and losses from our trading securities and derivative
instruments. For further discussion of the change in net investment gains
(losses), see the comparison for this line item under "-Investments and
Derivative Instruments."
• We recorded $39 million of net other-than-temporary impairments during the
three months ended June 30, 2012 as compared to $26 million during the
three months ended June 30, 2011. Of total impairments for the three
months ended June 30, 2012 and 2011, $23 million and $17 million,
respectively, related to structured securities, including $14 million and
$9 million, respectively, related to sub-prime and Alt-A residential
mortgage-backed and asset-backed securities. Impairments related to
corporate securities were $15 million during the three months endedJune 30, 2012 predominately attributable to a financial hybrid security
related to a bank in the United Kingdom that was downgraded to below
investment grade. During the three months ended June 30, 2012 and 2011, we
recorded $1 million and $2 million, respectively, of impairments related
to limited partnership investments. During the three months ended June 30,
2011, we also recorded $4 million of impairments related to commercial
mortgage loans and $3 million of impairments related to real estate
held-for-investment.
• Net investment losses related to derivatives of $28 million during the
three months ended June 30, 2012 were primarily associated with embedded
derivatives related to variable annuity products with guaranteed minimum
withdrawal benefit ("GMWB") riders and credit default swaps. The GMWB
losses were primarily due to the policyholder funds underperformance as
compared to market indices and market losses resulting from increased
volatility. Additionally, there were losses associated with widening of
credit spreads associated with credit default swaps where we sold
protection to improve diversification and portfolio yield. These losses
were partially offset by gains attributable to decreases in long-term
interest rates that were related to a non-qualified derivative strategy to
mitigate interest rate risk. Additionally, there were gains associated
with our reinsurance embedded derivatives as a result of decreases in
long-term interest rates that increased the value of assets held by the
reinsurer. Net investment losses related to derivatives of $15 million during the three months ended June 30, 2011 were primarily associated with
embedded derivatives related to variable annuity products with GMWBs. The
GMWB losses were primarily due to the policyholder funds underperforming
the benchmark indices used for hedging as a result of market volatility.
Additionally, there were losses from derivatives used to hedge foreign
currency risk associated with near-term expected dividend
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payments and other cash flows from certain subsidiaries and to mitigate
foreign subsidiary macroeconomic risk.
• Net gains related to the sale of available-for-sale securities were $2 million during the three months ended June 30, 2012 compared to net losses
of $9 million during the three months ended June 30, 2011. We also
recorded $18 million of higher net gains related to trading securities
during the three months ended June 30, 2012 compared to the three months
ended June 30, 2011.
Insurance and investment product fees and other. Insurance and investment
product fees and other consist primarily of fees assessed against policyholder
and contractholder account values, surrender charges, cost of insurance assessed
on universal and term universal life insurance policies, advisory and
administration service fees assessed on investment contractholder account
values, broker/dealer commission revenues and other fees.
• Our U.S. Life Insurance segment increased $20 million mainly driven by our
life insurance business related to growth of our term universal and
universal life insurance products. The prior year included a gain of $17
million from the repurchase of notes secured by our non-recourse funding
obligations that did not recur.
• Our U.S. Mortgage Insurance segment increased $19 million largely from a
gain related to the termination of an external reinsurance arrangement in
the current year.
• Corporate and Other activities increased $18 million primarily attributable to higher income related to our reverse mortgage business.
• Our Wealth Management segment increased $8 million primarily attributable
to a $38 million gain recognized on the sale of our tax and accounting
financial advisor unit in the current year. This was partially offset by
lower fees due to the sale and negative net flows in the current year.
• Our Runoff segment decreased $6 million mainly associated with lower average account values of our variable annuity products in the current
year.
• Our International Mortgage Insurance segment decreased $5 million mainly
attributable to currency transactions related to a foreign branch in the
prior year.
• Our International Protection segment decreased $4 million mainly attributable to lower third-party administration fees in the current year
and non-functional currency transactions as a result of changes in foreign
exchange rates.
Benefits and other changes in policy reserves. Benefits and other changes in
policy reserves consist primarily of benefits paid and reserve activity related
to current claims and future policy benefits on insurance and investment
products for life, long-term care and Medicare supplement insurance, structured
settlements and single premium immediate annuities with life contingencies,
lifestyle protection insurance and claim costs incurred related to mortgage
insurance products.
• Our U.S. Mortgage Insurance segment decreased $352 million mainly from a
prior year reserve strengthening of $299 million that did not recur and
from lower new delinquencies in the current year. Net paid claims
increased principally related to continued aging of the delinquency
inventory volume and a significant reduction in ceded claims under captive
arrangements in the current year.
• Our Runoff segment decreased $55 million principally from the sale of our
Medicare supplement insurance business in the fourth quarter of 2011,
partially offset by an increase in our guaranteed minimum death benefit
("GMDB") reserves in our variable annuity products due to unfavorable
equity market impacts in the current year.
• Our U.S. Life Insurance segment increased $96 million primarily attributable to a $71 million increase in our long-term care insurance
business from the aging and growth of our in-force block and higher claims
and lower termination rates on older issued policies. Also included in the
increase was a reclassification of loss adjustment expenses of $10 million
from acquisition and operating expenses,
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net of deferrals, in the current year. Our life insurance business
increased $27 million principally related to growth of our term universal
and universal life insurance products, unfavorable mortality in our term
and term universal life insurance products compared to the prior year and
an unfavorable adjustment in our whole life insurance products from an
actuarial system conversion. These increases were partially offset by
higher ceded reinsurance in the current year and from our term and whole
life insurance products as we no longer sell these products. Our fixed
annuities business decreased $2 million largely attributable to lower
sales of our life-contingent products in the current year, partially
offset by unfavorable mortality.
• Our International Mortgage Insurance segment increased $8 million,
including a decrease of $3 million attributable to changes in foreign
exchange rates. Australia increased $6 million primarily from a higher
average reserve per delinquency in the current year driven by higher
frequency and severity assumptions. Claims paid also increased in the
current year as a result of an increase in both the number of claims and
the average claim payment. These increases were partially offset by lower
new delinquencies in the current year. Other Countries increased $5
million primarily from higher new delinquencies and continued aging of
existing delinquencies, particularly in Ireland and Italy, partially
offset by benefits from ongoing loss mitigation activities. In Canada,
losses decreased $3 million primarily driven by lower new delinquencies
and paid claims due to a shift in regional mix, with fewer claims from
Alberta, and higher benefits from loss mitigation activities. This
decrease was partially offset by a higher average reserve per delinquency
in the current year.
• Our International Protection segment increased $6 million, including a
decrease of $4 million attributable to changes in foreign exchange rates,
primarily driven by lower favorable claim reserve adjustments in the
current year. In addition, we reclassified loss adjustment expenses of $3
million from acquisition and operating expenses, net of deferrals, in the
current year.
Interest credited. Interest credited represents interest credited on behalf of
policyholder and contractholder general account balances. The decrease was
predominately related to a decrease of $10 million in our U.S. Life Insurance
segment primarily attributable to a decrease of $6 million in our fixed
annuities business from lower crediting rates in the current year and a decrease
of $4 million in our life insurance business related to the timing of
reinsurance activity in the prior year.
Acquisition and operating expenses, net of deferrals. Acquisition and operating
expenses, net of deferrals, represent costs and expenses related to the
acquisition and ongoing maintenance of insurance and investment contracts,
including commissions, policy issuance expenses and other underwriting and
general operating costs. These costs and expenses are net of amounts that are
capitalized and deferred, which are costs and expenses that are related directly
to the successful acquisition of new or renewal insurance policies and
investment contracts, such as first-year commissions in excess of ultimate
renewal commissions and other policy issuance expenses.
• Our International Protection segment decreased $30 million, including a
decrease of $10 million attributable to changes in foreign exchange rates,
as a result of lower paid commissions from a decline in new business,
lower profit commissions driven by higher claims and lower operating
expenses as a result of a cost-saving initiative in the prior year. In
addition, we reclassified loss adjustment expenses of $3 million to
benefits and other changes in policy reserves in the current year.
• Our Wealth Management segment decreased $28 million from lower commission
expenses due to the sale of our tax and accounting financial advisor unit
and negative net flows in the current year.
• Our Runoff segment decreased $16 million principally from the sale of our
Medicare supplement insurance business in the fourth quarter of 2011.
• Our U.S. Life Insurance segment decreased $14 million primarily
attributable to a $9 million decrease in our long-term care insurance
business from a reclassification of loss adjustment expenses of $10
million to benefits and other changes in policy reserves in the current
year, partially offset by growth of our in-force block. Our life insurance
business decreased $5 million primarily from lower expenses related to our
term life insurance products as we no longer sell these products.
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• Our U.S. Mortgage Insurance segment decreased $8 million related to lower
operating expenses as a result of a cost-saving initiative in 2011.
• Corporate and Other activities increased $19 million as a result of our
reverse mortgage business primarily related to broker commissions on
loans.
Amortization of deferred acquisition costs and intangibles. Amortization of
deferred acquisition costs and intangibles consists primarily of the
amortization of acquisition costs that are capitalized, present value of future
profits and capitalized software.
• Our International Protection segment decreased $15 million, including a
decrease of $3 million attributable to changes in foreign exchange rates,
mainly as a result of lower premium volume in the current year.
• Our Runoff segment decreased $3 million largely related to the sale of our
Medicare supplement insurance business in the fourth quarter of 2011,
partially offset by an increase in our variable annuity products from
unfavorable equity market impacts in the current year.
• Our U.S. Life Insurance segment increased $5 million principally from an
increase in our long-term care insurance business primarily related to
growth of our in-force block.
Interest expense. Interest expense represents interest related to our borrowings
that are incurred at our holding company or subsidiary level and our
non-recourse funding obligations and interest expense related to certain
reinsurance arrangements being accounted for as deposits.
• Corporate and Other activities decreased $2 million primarily attributable
to the maturity of senior notes in June 2011, partially offset by the debt
issuance in March 2012.
• Our International Protection segment decreased $2 million, including a
decrease of $1 million attributable to changes in foreign exchange rates,
mainly due to reinsurance arrangements accounted for under the deposit
method of accounting as certain of these arrangements were in a lower loss
position in the current year.
• Our U.S. Life Insurance segment decreased $1 million primarily related to
our life insurance business as a decrease from the repurchase and
repayment of non-recourse funding obligations was largely offset by higher
letter of credit fees in the current year.
• Our International Mortgage Insurance segment increased $2 million mainly
from the issuance of debt by our wholly-owned Australian mortgage
insurance subsidiary in June 2011.
Provision (benefit) for income taxes. The effective tax rate increased to 34.3%
for the three months ended June 30, 2012 from 4.8% for the three months ended
June 30, 2011. This increase in the effective tax rate was primarily
attributable to lower levels of taxed foreign income, tax favored investments
and the sale of our tax and accounting financial advisor unit, GFIS, in the
current year, partially offset by higher taxes in the prior year pursuant to a
Canadian legislative change. The three months ended June 30, 2012 included a
decrease of $2 million attributable to changes in foreign exchange rates.
Net income attributable to noncontrolling interests. Net income attributable to
noncontrolling interests represents the portion of income in a subsidiary
attributable to third parties.
Net income (loss) available to Genworth Financial, Inc.'s common stockholders.
We had net income available to Genworth Financial, Inc.'s common stockholders in
the current year compared to a net loss available to Genworth Financial, Inc.'s
common stockholders in the prior year primarily related to significantly lower
losses in our U.S. Mortgage Insurance segment in the current year as a result of
a reserve strengthening in the prior year that did not recur. For a discussion
of each of our segments and Corporate and Other activities, see the "-Results of
Operations and Selected Financial and Operating Performance Measures by
Segment." Included in net income available to Genworth Financial, Inc.'s common
stockholders for the three months ended June 30, 2012 was a decrease of $1
million, net of taxes, attributable to changes in foreign exchange rates.
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Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth the consolidated results of operations for the
periods indicated:
Increase
(decrease) and
Six months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 2,409 $ 2,892 $ (483 ) (17 )%
Net investment income 1,678 1,711 (33 ) (2 )%
Net investment gains (losses) 1 (68 ) 69 101 %
Insurance and investment product fees and other 861 688 173 25 %
Total revenues 4,949 5,223 (274 ) (5 )%
Benefits and expenses:
Benefits and other changes in policy reserves 2,614 3,092 (478 ) (15 )%
Interest credited 389 405 (16 ) (4 )%
Acquisition and operating expenses, net of
deferrals 1,032 1,144 (112 ) (10 )%
Amortization of deferred acquisition costs and
intangibles 420 313 107 34 %
Interest expense 226 261 (35 ) (13 )%
Total benefits and expenses 4,681 5,215 (534 ) (10 )%
Income before income taxes 268 8 260 NM (1)
Provision for income taxes 79 15 64 NM (1)
Net income (loss) 189 (7 ) 196 NM (1)
Less: net income attributable to noncontrolling
interests 66 70 (4 ) (6 )%
Net income (loss) available to Genworth
Financial, Inc's common stockholders $ 123 $ (77 ) $ 200 NM (1)
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Premiums
• Our U.S. Life Insurance segment decreased $195 million primarily as a
result of a decrease of $266 million in our life insurance business
related to our term life insurance products from higher ceded reinsurance
on certain term life insurance policies under a new reinsurance treaty as
part of a life block sale transaction in the current year and from no
longer selling these products. This decrease was partially offset by an
increase of $63 million in our long-term care insurance business due to
growth of our in-force block from new sales and in-force rate actions. Our
fixed annuities business increased $8 million from higher sales of our
life-contingent products in the current year.
• Our Runoff segment decreased $166 million driven by the sale of our
Medicare supplement insurance business in the fourth quarter of
2011.
• Our International Protection segment decreased $85 million, including a
decrease of $20 million attributable to changes in foreign exchange rates,
primarily due to lower premium volume driven by reduced levels of consumer
lending and our runoff block of business. The first quarter of 2012 also
included an unfavorable adjustment of $4 million related to a German
premium tax.
• Our International Mortgage Insurance segment decreased $27 million,
including a decrease of $6 million attributable to changes in foreign
exchange rates. Premiums decreased as a result of seasoning of our
in-force blocks of business in Canada, Australia and Europe and higher
ceded reinsurance premiums in Australia, partially offset by an increase
in Australia from an actuarial update to premium recognition factors in
the current year related to policy cancellation experience.
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• Our U.S. Mortgage Insurance segment decreased $10 million largely related
to lower insurance in-force and lower premiums assumed from an affiliate
under an intercompany reinsurance agreement, partially offset by lower
ceded reinsurance premiums related to our captive arrangements, the benefit of previously implemented rate increases and less policy coverage
rescission activity.
Net investment income. Net investment income represents the income earned on our
investments. Weighted-average investment yields were 4.8% and 5.0% for the six
months ended June 30, 2012 and 2011, respectively. The weighted-average
investment yields decreased primarily as a result of lower reinvestment yields
and $15 million of lower bond calls and prepayments in the current year,
partially offset by higher average invested assets in longer duration products.
Net investment income for the six months ended June 30, 2012 included $9 million
of higher gains related to limited partnerships accounted for under the equity
method and lower income attributable to reinsurance arrangements accounted for
under the deposit method of accounting as certain of these arrangements were in
a lower gain position in the current year.
Net investment gains (losses). For further discussion of the change in net
investment gains (losses), see the comparison for this line item under
"-Investments and Derivative Instruments."
• We recorded $56 million of net other-than-temporary impairments during the
six months ended June 30, 2012 as compared to $62 million for the six
months ended June 30, 2011. Of total impairments for the six months ended
June 30, 2012 and 2011, $38 million related to structured securities in
both periods, including $22 million and $24 million, respectively, related
to sub-prime and Alt-A residential mortgage-backed and asset-backed
securities. Impairments related to corporate securities were $15 million
during the six months ended June 30, 2012 predominately attributable to a
financial hybrid security related to a bank in the United Kingdom that was
downgraded to below investment grade. Impairments related to corporate
securities as a result of bankruptcies, receivership or concerns about the
issuer's ability to continue to make contractual payments or where we have
intent to sell were $14 million during the six months ended June 30, 2011.
During the six months ended June 30, 2012 and June 30, 2011, we recorded
$2 million and $5 million, respectively, of impairments related to
commercial mortgage loans and $1 million and $2 million, respectively, of
impairments related to limited partnership investments. During the six
months ended June 30, 2011, we also recorded $3 million of impairments
related to real estate held-for-investment.
• Net investment losses related to derivatives of $2 million during the six
months ended June 30, 2012 were primarily associated with foreign currency
risk and embedded derivatives related to variable annuity products with
GMWB riders. The GMWB losses were primarily due to the policyholder funds
underperformance as compared to market indices and market losses resulting
from increased volatility. Additionally, there were losses associated with
derivatives used to hedge foreign currency risk associated with near-term
expected dividend payments from certain subsidiaries and to mitigate
foreign subsidiary macroeconomic risk. These losses were partially offset
by gains from the narrowing of credit spreads associated with credit
default swaps where we sold protection to improve diversification and portfolio yield. In addition, there were gains attributable to decreases
in long-term interest rates that were related to a non-qualified
derivative strategy to mitigate interest rate risk. Net investment losses
related to derivatives of $25 million during the six months ended June 30,
2011 were primarily associated with embedded derivatives related to
variable annuity products with GMWBs. The GMWB losses were primarily due
to the policyholder funds underperforming the benchmark indices used for
hedging as a result of market volatility. Additionally, there were losses
from derivatives used to hedge foreign currency risk associated with
near-term expected dividend payments and other cash flows from certain
subsidiaries and to mitigate foreign subsidiary macroeconomic risk. These
losses were partially offset by gains related to a derivative strategy to
mitigate the interest rate risk associated with our statutory capital
position.
• Net gains related to the sale of available-for-sale securities were $19 million during the six months ended June 30, 2012 compared to net losses
of $11 million during the six months ended June 30, 2011. We recorded $18
million of lower gains related to trading securities during the six months
ended June 30, 2012 compared to the six months ended June 30, 2011. We
recorded $25 million of higher net gains related to securitization
entities during the six months ended June 30, 2012 compared to the six
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months ended June 30, 2011 primarily related to higher gains on trading
securities and derivatives. We also recorded a $5 million decrease in the
allowance related to commercial mortgage loans and a $2 million contingent
consideration adjustment during the six months ended June 30, 2012 mainly
related to the purchase of Altegris Capital, LLC. ("Altegris") in 2010.
Insurance and investment product fees and other
• Our U.S. Life Insurance segment increased $137 million mainly driven by
our life insurance business related to $88 million of gains on the
repurchase of notes secured by our non-recourse funding obligations
related to a life block sale transaction in the current year compared to a
$17 million gain in the prior year and growth of our term universal and
universal life insurance products. These increases were partially offset
by an unfavorable valuation adjustment in the current year.
• Corporate and Other activities increased $32 million primarily
attributable to higher income related to our reverse mortgage business.
• Our U.S. Mortgage Insurance segment increased $20 million from a gain
related to the termination of an external reinsurance arrangement in the
current year.
• Our Wealth Management segment increased $10 million primarily attributable
to a $38 million gain recognized on the sale of our tax and accounting
financial advisor unit in the second quarter of 2012 and favorable market
performance during the first quarter of 2012. These increases were
partially offset by lower fees due to the sale and negative net flows in
the current year.
• Our Runoff segment decreased $13 million mainly associated with lower average account values of our variable annuity products in the current
year.
• Our International Protection segment decreased $7 million attributable to
lower third-party administration fees in the current year and
non-functional currency transactions as a result of changes in foreign
exchange rates.
• Our International Mortgage Insurance segment decreased $6 million primarily related to currency transactions related to a foreign branch in
the prior year.
Benefits and other changes in policy reserves
• Our U.S. Mortgage Insurance segment decreased $434 million from a prior
year reserve strengthening of $299 million that did not recur and from
lower new delinquencies in the current year. Net paid claims increased
principally related to continued aging of the delinquency inventory volume
and a significant reduction in ceded claims under captive arrangements in
the current year, coupled with a lender portfolio settlement in the
current year.
• Our Runoff segment decreased $132 million principally from the sale of our
Medicare supplement insurance business in the fourth quarter of 2011.
• Our U.S. Life Insurance segment decreased $33 million primarily
attributable to a decrease of $170 million in our life insurance business
principally related to our term life insurance products from higher ceded
reinsurance in the current year. We initially ceded $209 million of
certain term life insurance reserves under a new reinsurance treaty as
part of a life block sale transaction. This decrease was partially offset
by growth in our term universal and universal life insurance products and
unfavorable mortality in our term universal life insurance product
compared to the prior year. Our long-term care insurance business
increased $129 million from the aging and growth of our in-force block and
higher claims and lower termination rates on older issued policies. Also
included in the increase in the current year was a reclassification of
loss adjustment expenses of $21 million from acquisition and operating
expenses, net of deferrals, and an $11 million increase in reserves
associated with a methodology change related to pending claims. These
increases were partially offset by a favorable actuarial
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adjustment of $16 million in the current year related to a multi-stage
system conversion. Our fixed annuities business increased $8 million
largely attributable to higher sales of our life-contingent products and
unfavorable mortality in the current year.
• Our International Mortgage Insurance segment increased $106 million,
including an increase of $3 million attributable to changes in foreign
exchange rates. Australia increased $102 million driven by a reserve
strengthening of $82 million in the first quarter of 2012 due to higher
than anticipated frequency and severity of claims paid from later stage
delinquencies from prior years, particularly in coastal tourism areas of
Queensland as a result of regional economic pressures as well as our 2007
and 2008 vintages which have a higher concentration of self-employed
borrowers. Claims paid also increased in the current year as a result of
an increase in both the number of claims and the average claim payment.
These increases were partially offset by lower new delinquencies in the
current year. Other Countries increased $11 million primarily from higher
new delinquencies and continued aging of existing delinquencies,
particularly in Ireland and Italy, partially offset by benefits from
ongoing loss mitigation activities. In Canada, losses decreased $7 million
primarily driven by lower new delinquencies and paid claims due to a shift
in regional mix, with fewer claims from Alberta, and higher benefits from
loss mitigation activities. These decreases were partially offset by a
higher average reserve per delinquency in the current year.
• Our International Protection segment increased $15 million, including a
decrease of $5 million attributable to changes in foreign exchange rates,
primarily driven by lower favorable claim reserve adjustments in the
current year. In addition, we reclassified loss adjustment expenses of $6
million from acquisition and operating expenses, net of deferrals, in the
current year.
Interest credited. The decrease was predominately related to a decrease of $14
million in our U.S. Life Insurance segment primarily attributable to lower
crediting rates on our fixed annuities.
Acquisition and operating expenses, net of deferrals
• Our International Protection segment decreased $55 million, including a
decrease of $13 million attributable to changes in foreign exchange rates,
as a result of lower paid commissions from a decline in new business,
lower profit commissions driven by higher claims and lower operating
expenses as a result of a cost-saving initiative in the prior year. In
addition, we reclassified loss adjustment expenses of $6 million to
benefits and other changes in policy reserves in the current year.
• Our Runoff segment decreased $43 million principally from the sale of our
Medicare supplement insurance business in the fourth quarter of 2011 and
from a $9 million charge from the discontinuance of our variable annuity
offerings in the prior year that did not recur.
• Our Wealth Management segment decreased $28 million primarily attributable
lower commission expenses from the sale of our tax and accounting
financial advisor unit and negative net flows in the current year.
• Our U.S. Life Insurance segment decreased $17 million primarily attributable to a $15 million decrease in our long-term care insurance
business from a reclassification of loss adjustment expenses of $21
million to benefits and other changes in policy reserves in the current
year, partially offset by growth of our in-force block. Our fixed
annuities business decreased $6 million primarily related to a favorable
adjustment of $4 million associated with guarantee funds in the current
year compared to a $4 million accrual related to guarantee funds in the
prior year. Partially offsetting these decreases was an increase in our
life insurance business of $4 million from a $13 million favorable
cumulative impact from a change in premium taxes in Virginia in the prior
year that did not recur and from growth of our term universal life
insurance product. These increases were partially offset by lower expenses
related to our term life insurance products as we no longer sell these
products.
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• Our U.S. Mortgage Insurance segment decreased $13 million related to lower
operating expenses as a result of a cost-saving initiative in 2011.
• Corporate and Other activities increased $47 million as a result of an increase of $32 million associated with our reverse mortgage business
primarily related to broker commissions on loans. The increase was also
attributable to higher unallocated expenses to our operating segments in
the current year and lower overall expenses in the prior year.
Amortization of deferred acquisition costs and intangibles
• Our U.S. Life Insurance segment increased $152 million principally from an
increase in our life insurance business of $140 million largely related to
our term life insurance products from higher ceded reinsurance as we wrote
off $142 million of deferred acquisition costs associated with certain
term life insurance policies under a new reinsurance treaty as part of a
life block sale transaction in the current year. Higher amortization of
deferred acquisition costs was also attributable to our term universal and
universal life insurance products due to growth, partially offset by lower
amortization due to lower lapses in our term life insurance products.
Lower amortization of present value of future profits in the current year
was primarily attributable to unfavorable mortality in an older block of
policies in our universal life insurance products and from lower lapses in
our term life insurance products. Our long-term care insurance business
increased $7 million primarily from growth of our in-force block. Our
fixed annuities business increased $5 million primarily from higher
amortization of deferred acquisition costs attributable to higher net
investment gains in the current year, partially offset by lower surrenders
in the current year.
• Our Runoff segment decreased $23 million largely related to the sale of our Medicare supplement insurance business in the fourth quarter of 2011
and from our variable annuity products from favorable equity market
impacts in the first quarter of 2012 and a $5 million favorable unlocking
driven by lower surrenders in the current year.
• Our International Protection segment decreased $20 million, including a
decrease of $3 million attributable to changes in foreign exchange rates,
mainly as a result of lower premium volume in the current year.
Interest expense
• Corporate and Other activities decreased $22 million primarily
attributable to a favorable adjustment of $20 million in the current year
related to the Tax Matters Agreement with our former parent company and
the maturity of senior notes in June 2011, partially offset by the debt
issuances in March 2012 and 2011.
• Our U.S. Life Insurance segment decreased $15 million related to our life
insurance business primarily from a favorable adjustment of $20 million in
the current year related to the Tax Matters Agreement with our former
parent company and from the repurchase and repayment of non-recourse
funding obligations in the current year. This decrease was partially
offset by the write-off of $8 million in deferred borrowing costs from the
repurchase and repayment of non-recourse funding obligations associated
with a life block sale transaction and higher letter of credit fees in the
current year.
• Our International Protection segment decreased $4 million, including a
decrease of $1 million attributable to changes in foreign exchange rates,
due to reinsurance arrangements accounted for under the deposit method of
accounting as certain of these arrangements were in a lower loss position
in the current year.
• Our International Mortgage Insurance segment increased $6 million from the
issuance of debt by our wholly-owned Australian mortgage insurance
subsidiary in June 2011.
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Provision for income taxes. The effective tax rate decreased to 29.5% for the
six months ended June 30, 2012 from 187.5% for the six months ended June 30,
2011. This decrease in the effective tax rate was primarily attributable to
higher taxes in the prior year pursuant to a Canadian legislative change,
partially offset by lower levels of taxed foreign income, tax favored
investments and the sale of our tax and accounting financial advisor unit, GFIS,
in the current year. The six months ended June 30, 2012 included a decrease of
$3 million attributable to changes in foreign exchange rates.
Net income (loss) available to Genworth Financial, Inc.'s common stockholders.We
had net income available to Genworth Financial, Inc.'s common stockholders in
the current year compared to a net loss available to Genworth Financial, Inc.'s
common stockholders in the prior year primarily related to significantly lower
losses in our U.S. Mortgage Insurance segment in the current year as a result of
a reserve strengthening in the prior year that did not recur and an increase in
our variable annuities from favorable equity market performance in the current
year. These increases were partially offset by a $41 million net loss related to
a life block sale transaction completed by our life insurance business and a
reserve strengthening in our Australian mortgage insurance business in the
current year. For a discussion of each of our segments and Corporate and Other
activities, see the "-Results of Operations and Selected Financial and Operating
Performance Measures by Segment." Included in net income available to Genworth
Financial, Inc.'s common stockholders for the six months ended June 30, 2012 was
a decrease of $5 million, net of taxes, attributable to changes in foreign
exchange rates.
Reconciliation of net income (loss) to net operating income (loss) available to
Genworth Financial, Inc.'s common stockholders
We had net operating income available to Genworth Financial, Inc.'s common
stockholders for the three months ended June 30, 2012 of $80 million compared to
a net operating loss available to Genworth Financial, Inc.'s common stockholders
for the three months ended June 30, 2011 of $113 million. We had net operating
income available to Genworth Financial, Inc.'s common stockholders for the six
months ended June 30, 2012 of $111 million compared to a net operating loss
available to Genworth Financial, Inc.'s common stockholders for the six months
ended June 30, 2011 of $38 million. We define net operating income (loss)
available to Genworth Financial, Inc.'s common stockholders as income (loss)
from continuing operations excluding net income attributable to noncontrolling
interests, after-tax net investment gains (losses) and other adjustments and
infrequent or unusual non-operating items. We exclude net investment gains
(losses) and infrequent or unusual non-operating items because we do not
consider them to be related to the operating performance of our segments and
Corporate and Other activities. A component of our net investment gains (losses)
is the result of impairments, the size and timing of which can vary
significantly depending on market credit cycles. In addition, the size and
timing of other investment gains (losses) can be subject to our discretion and
are influenced by market opportunities, as well as asset-liability matching
considerations. Infrequent or unusual non-operating items are also excluded from
net operating income (loss) available to Genworth Financial, Inc.'s common
stockholders if, in our opinion, they are not indicative of overall operating
trends. There were no infrequent or unusual non-operating items excluded from
net operating income (loss) available to Genworth Financial, Inc.'s common
stockholders during the periods presented other than a $15 million gain related
to the sale of our tax and accounting financial advisor unit in the second
quarter of 2012.
While some of these items may be significant components of net income (loss)
available to Genworth Financial, Inc.'s common stockholders in accordance with
U.S. generally accepted accounting principles ("U.S. GAAP"), we believe that net
operating income (loss) available to Genworth Financial, Inc.'s common
stockholders and measures that are derived from or incorporate net operating
income available to Genworth Financial, Inc.'s common stockholders, including
net operating income available to Genworth Financial, Inc.'s common stockholders
per common share on a basic and diluted basis, are appropriate measures that are
useful to investors because they identify the income (loss) attributable to the
ongoing operations of the business. However, net operating income (loss)
available to Genworth Financial, Inc.'s common stockholders and net operating
income (loss) available to Genworth Financial, Inc.'s common stockholders per
common share on a basic and diluted basis are not substitutes for net income
(loss) available to Genworth Financial, Inc.'s common
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stockholders or net income (loss) available to Genworth Financial, Inc.'s common
stockholders per common share on a basic and diluted basis determined in
accordance with U.S. GAAP. In addition, our definition of net operating income
(loss) available to Genworth Financial, Inc.'s common stockholders may differ
from the definitions used by other companies.
The following table includes a reconciliation of net income (loss) to net
operating income (loss) available to Genworth Financial, Inc.'s common
stockholders for the periods indicated:
Three months ended Six months ended
June 30, June 30,
(Amounts in millions) 2012 2011 2012 2011
Net income (loss) $ 109 $ (100 ) $ 189 $ (7 )
Less: net income attributable to
noncontrolling interests 33 36 66 70
Net income (loss) available to
Genworth Financial, Inc.'s common
stockholders 76 (136 ) 123 (77 )
Adjustments to net income (loss)
available to Genworth Financial,
Inc.'s common stockholders:
Net investment (gains) losses, net of
taxes and other adjustments 19 23 3 39
Gain on sale of business, net of taxes (15 ) - (15 ) -
Net operating income (loss) available
to Genworth Financial, Inc.'s common
stockholders $ 80 $ (113 ) $ 111 $ (38 )
Earnings (loss) per share
The following table provides basic and diluted net income (loss) available to
Genworth Financial, Inc.'s common stockholders and net operating income (loss)
available to Genworth Financial, Inc.'s common stockholders per common share for
the periods indicated:
Three months ended Six months ended
June 30, June 30,
(Amounts in millions, except per share amounts) 2012 2011 2012 2011
Net income (loss) available to Genworth Financial,
Inc.'s common stockholders per common share:
Basic $ 0.16 $ (0.28 ) $ 0.25 $ (0.16 )
Diluted $ 0.16 $ (0.28 ) $ 0.25 $ (0.16 )
Net operating income (loss) available to Genworth
Financial, Inc.'s common stockholders per common
share:
Basic $ 0.16 $ (0.23 ) $ 0.23 $ (0.08 )
Diluted $ 0.16 $ (0.23 ) $ 0.22 $ (0.08 )
Weighted-average common shares outstanding:
Basic 491.5 490.6 491.4 490.4
Diluted (1) 493.9 490.6 494.8 490.4
(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 net
loss available to Genworth Financial, Inc.'s common stockholders for the three and six months ended June 30, 2011, we were required to use basic
weighted-average common shares outstanding in the calculation for the three
and six months ended June 30, 2011 diluted loss per share, as the inclusion
of shares for stock options, restricted stock units and stock appreciation
rights of 3.7 million and 4.0 million, respectively, would have been
antidilutive to the calculation. If we had not incurred a net loss available
to Genworth Financial, Inc.'s common stockholders for the three and six
months ended June 30, 2011, dilutive potential common shares would have been
494.3 million and 494.4 million, respectively.
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Diluted weighted-average shares outstanding reflect the effects of potentially
dilutive securities including stock options, restricted stock units and other
equity-based compensation.
Results of Operations and Selected Financial and Operating Performance Measures
by Segment
Our chief operating decision maker evaluates segment performance and allocates
resources on the basis of net operating income (loss) available to Genworth
Financial, Inc.'s common stockholders. See note 10 in our "-Notes to Condensed
Consolidated Financial Statements" for a reconciliation of net operating income
(loss) available to Genworth Financial, Inc.'s common stockholders of our
segments and Corporate and Other activities to net income (loss) available to
Genworth Financial, Inc.'s common stockholders.
Management's discussion and analysis by segment also contains selected operating
performance measures including "sales," "assets under management" and "insurance
in-force" or "risk in-force" which are commonly used in the insurance and
investment industries as measures of operating performance.
Management regularly monitors and reports sales metrics as a measure of volume
of new and renewal business generated in a period. Sales refer to:
(1) annualized first-year premiums for term life and long-term care insurance;
(2) annualized first-year deposits plus 5% of excess deposits for universal and
term universal life insurance products; (3) 10% of premium deposits for
linked-benefits products; (4) new and additional premiums/deposits for fixed
annuities; (5) gross flows and net flows, which represent gross flows less
redemptions, for our wealth management business; (6) written premiums and
deposits, gross of ceded reinsurance and cancellations, and premium equivalents,
where we earn a fee for administrative services only business, for our lifestyle
protection insurance business; and (7) new insurance written for mortgage
insurance. Sales do not include renewal premiums on policies or contracts
written during prior periods. We consider annualized first-year premiums,
premium equivalents, new premiums/deposits, gross and net flows, written
premiums and new insurance written to be a measure of our operating performance
because they represent a measure of new sales of insurance policies or contracts
during a specified period, rather than a measure of our revenues or
profitability during that period.
Management regularly monitors and reports assets under management for our wealth
management business, insurance in-force and risk in-force. Assets under
management for our wealth management business represent third-party assets under
management that are not consolidated in our financial statements. Insurance
in-force for our life, international mortgage and U.S. mortgage insurance
businesses is a measure of the aggregate face value of outstanding insurance
policies as of the respective reporting date. For our risk in-force in our
international mortgage insurance business, we have computed an "effective" risk
in-force amount, which recognizes that the loss on any particular loan will be
reduced by the net proceeds received upon sale of the property. Effective risk
in-force has been calculated by applying to insurance in-force a factor of 35%
that represents our highest expected average per-claim payment for any one
underwriting year over the life of our businesses in Canada and Australia. Risk
in-force for our U.S. mortgage insurance business is our obligation that is
limited under contractual terms to the amounts less than 100% of the mortgage
loan value. We consider assets under management for our wealth management
business, insurance in-force and risk in-force to be a measure of our operating
performance because they represent a measure of the size of our business at a
specific date which will generate revenues and profits in a future period,
rather than a measure of our revenues or profitability during that period.
We also include information related to loss mitigation activities for our U.S.
mortgage insurance business. We define loss mitigation activities as
rescissions, cancellations, borrower loan modifications, repayment plans,
lender- and borrower-titled pre-sales, claims administration and other loan
workouts. Estimated savings related to
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rescissions are the reduction in carried loss reserves, net of premium refunds
and reinstatement of prior rescissions. Estimated savings related to loan
modifications and other cure related loss mitigation actions represent the
reduction in carried loss reserves. For non-cure related actions, including
pre-sales, the estimated savings represent the difference between the full claim
obligation and the actual amount paid. We believe that this information helps to
enhance the understanding of the operating performance of our U.S. mortgage
insurance business as loss mitigation activities specifically impact current and
future loss reserves and level of claim payments.
These operating measures enable us to compare our operating performance across
periods without regard to revenues or profitability related to policies or
contracts sold in prior periods or from investments or other sources.
The following discussions of our segment results of operations should be read in
conjunction with the "-Business trends and conditions."
Insurance and Wealth Management Division
Division results of operations
The following table sets forth the results of operations relating to our
Insurance and Wealth Management Division for the periods indicated. See below
for a discussion by segment.
Increase Increase
(decrease) and (decrease) and
Three months ended percentage Six months ended percentage
June 30, change June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
Net operating income available to
Genworth Financial, Inc.'s common
stockholders:
U.S. Life Insurance segment:
Life insurance $ 30 $ 57 $ (27 ) (47 )% $ 36 $ 99 $ (63 ) (64 )%
Long-term care insurance 14 18 (4 ) (22 )% 49 54 (5 ) (9 )%
Fixed annuities 20 25 (5 ) (20 )% 43 39 4 10 %
U.S. Life Insurance segment 64 100 (36 ) (36 )% 128 192 (64 ) (33 )%
International Protection segment 3 25 (22 ) (88 )% 8 50 (42 ) (84 )%
Wealth Management segment 12 13 (1 ) (8 )% 24 23 1 4 %
Total net operating income
available to Genworth Financial,
Inc.'s common stockholders 79 138 (59 ) (43 )% 160 265 (105 ) (40 )%
Adjustments to net operating income
available to Genworth Financial,
Inc.'s common stockholders:
Net investment gains (losses), net
of taxes and other adjustments (11 ) (19 ) 8 42 % (16 ) (29 ) 13 45 %
Gain on sale of business, net of
taxes 15 - 15 NM (1) 15 - 15
NM (1)
Net income available to Genworth
Financial, Inc.'s common
stockholders $ 83 $ 119 $ (36 ) (30 )% $ 159 $ 236 $ (77 ) (33 )%
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
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U.S. Life Insurance segment
Segment results of operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth the results of operations relating to our U.S.
Life Insurance segment for the periods indicated:
Increase
(decrease) and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 733 $ 738 $ (5 ) (1 )%
Net investment income 651 648 3 - %
Net investment gains (losses) (21 ) (33 ) 12 36 %
Insurance and investment product fees and
other 192 172 20 12 %
Total revenues 1,555 1,525 30 2 %
Benefits and expenses:
Benefits and other changes in policy
reserves 1,038 942 96 10 %
Interest credited 160 170 (10 ) (6 )%
Acquisition and operating expenses, net
of deferrals 169 183 (14 ) (8 )%
Amortization of deferred acquisition
costs and intangibles 82 77 5 6 %
Interest expense 24 25 (1 ) (4 )%
Total benefits and expenses 1,473 1,397 76 5 %
Income before income taxes 82 128 (46 ) (36 )%
Provision for income taxes 29 47 (18 ) (38 )%
Net income available to Genworth
Financial, Inc's common stockholders 53 81 (28 ) (35 )%
Adjustment to net income available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments 11 19 (8 ) (42 )%
Net operating income available to
Genworth Financial, Inc.'s common
stockholders $ 64 $ 100 $ (36 ) (36 )%
The following table sets forth net operating income available to Genworth
Financial, Inc.'s common stockholders for the businesses included in our U.S.
Life Insurance segment for the periods indicated:
Increase
(decrease) and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Net operating income available to Genworth
Financial, Inc.'s common stockholders:
Life insurance $ 30 $ 57 $ (27 ) (47 )%
Long-term care insurance 14 18 (4 ) (22 )%
Fixed annuities 20 25 (5 ) (20 )%
Total net operating income available to
Genworth Financial, Inc.'s common
stockholders $ 64 $ 100 $ (36 ) (36 )%
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Net operating income available to Genworth Financial, Inc.'s common stockholders
• Our life insurance business decreased $27 million principally from an $11
million gain on the repurchase of notes secured by our non-recourse
funding obligations in the prior year that did not recur, lower investment
income and unfavorable mortality in our term and term universal life
insurance products. These decreases were partially offset by growth of our
term universal life insurance product.
• Our long-term care insurance business decreased $4 million primarily from
higher claims and lower claim termination rates in older issued policies,
partially offset by premium growth of newer issued policies and in-force
rate actions.
• Our fixed annuities business decreased $5 million primarily related to
lower investment income and unfavorable mortality in the current year,
partially offset by lower interest credited.
Revenues
Premiums
• Our life insurance business decreased $33 million primarily related to our
term life insurance products from higher ceded reinsurance as a result of
a new reinsurance treaty in the current year and from no longer selling
these products.
• Our long-term care insurance business increased $33 million mainly attributable to growth of our in-force block from new sales and in-force
rate actions.
• Our fixed annuities business decreased $5 million primarily driven by lower sales of our life-contingent products in the current year.
Net investment income
• Our life insurance business decreased $11 million primarily from lower
gains of $4 million from limited partnerships accounted for under the
equity method, $4 million in lower bond calls and prepayments in the
current year and from a decrease in average invested assets.
• Our long-term care insurance business increased $26 million largely from
an increase in average invested assets due to growth of our in-force
block. Net investment income also included higher gains of $5 million from
limited partnerships accounted for under the equity method in the current
year.
• Our fixed annuities business decreased $12 million primarily attributable
to lower bond calls and prepayments of $6 million and lower reinvestment
yields, partially offset by higher gains of $2 million from limited
partnerships accounted for under the equity method in the current year.
Net investment gains (losses). For further discussion of the change in net
investment gains (losses), see the comparison for this line item under
"-Investments and Derivative Instruments."
• Net investment losses in our life insurance business decreased $6 million
primarily driven by lower net losses from the sale of investment
securities related to portfolio repositioning in the current year,
partially offset by higher impairments in the current year.
• In the current year, net gains from the sale of investment securities in
our long-term care insurance business were offset by impairments and
derivative losses. Net investment losses of $8 million in the prior year
were mainly from impairments.
• Net investment losses in our fixed annuities business increased $2 million
primarily from derivative losses and higher impairments in the current
year, partially offset by net gains from the sale of investment securities
in the current year compared to net losses in the prior year.
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Insurance and investment product fees and other. The increase was primarily
attributable to our life insurance business predominately from growth of our
term universal and universal life insurance products. The prior year included a
gain of $17 million from the repurchase of notes secured by our non-recourse
funding obligations that did not recur.
Benefits and expenses
Benefits and other changes in policy reserves
• Our life insurance business increased $27 million principally related to
growth of our term universal and universal life insurance products,
unfavorable mortality in our term and term universal life insurance
products compared to the prior year and a $5 million unfavorable
adjustment in our whole life insurance products from an actuarial system
conversion in the current year. These increases were partially offset by
higher ceded reinsurance in the current year and by our term and whole
life insurance products as we no longer sell these products.
• Our long-term care insurance business increased $71 million primarily from
the aging and growth of our in-force block and higher claims and lower
claim termination rates on older issued policies. Also included in the increase was a reclassification of loss adjustment expenses of $10 million
from acquisition and operating expenses, net of deferrals, in the current
year.
• Our fixed annuities business decreased $2 million largely attributable to
lower sales of our life-contingent products in the current year, partially
offset by unfavorable mortality.
Interest credited
• Our life insurance business decreased $4 million primarily related to the
timing of reinsurance activity in the prior year.
• Our fixed annuities business decreased $6 million largely related to lower
crediting rates in a low interest rate environment.
Acquisition and operating expenses, net of deferrals
• Our life insurance business decreased $5 million primarily from lower
expenses related to our term life insurance products as we no longer sell
these products.
• Our long-term care insurance business decreased $9 million primarily as a
result of a reclassification of loss adjustment expenses of $10 million to
benefits and other changes in policy reserves in the current year,
partially offset by growth of our in-force block.
Amortization of deferred acquisition costs and intangibles
• Our life insurance business increased $1 million as higher amortization of
deferred acquisition costs driven by favorable mortality in our universal
life insurance products was mostly offset by lower amortization of present
value of future profits in our universal life insurance products primarily
from unfavorable mortality in an older block of policies and in our term
life insurance products from lower lapses.
• Our long-term care insurance business increased $5 million primarily related to growth of our in-force block.
Interest expense. Interest expense decreased mainly related to our life
insurance business as a decrease from the repurchase and repayment of
non-recourse funding obligations was offset by higher letter of credit fees in
the current year.
Provision for income taxes. The effective tax rate decreased to 35.4% for the
three months ended June 30, 2012 from 36.7% for the three months ended June 30,
2011. The decrease in the effective tax rate is primarily attributable to state
income taxes.
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Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth the results of operations relating to our U.S.
Life Insurance segment for the periods indicated:
Increase
(decrease) and
Six months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 1,276 $ 1,471 $ (195 ) (13 )%
Net investment income 1,289 1,269 20 2 %
Net investment gains (losses) (23 ) (54 ) 31 57 %
Insurance and investment product fees and
other 455 318 137 43 %
Total revenues 2,997 3,004 (7 ) - %
Benefits and expenses:
Benefits and other changes in policy
reserves 1,824 1,857 (33 ) (2 )%
Interest credited 322 336 (14 ) (4 )%
Acquisition and operating expenses, net
of deferrals 338 355 (17 ) (5 )%
Amortization of deferred acquisition
costs and intangibles 305 153 152 99 %
Interest expense 36 51 (15 ) (29 )%
Total benefits and expenses 2,825 2,752 73 3 %
Income before income taxes 172 252 (80 ) (32 )%
Provision for income taxes 61 91 (30 ) (33 )%
Net income available to Genworth
Financial, Inc's common stockholders 111 161 (50 ) (31 )%
Adjustment to net income available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments 17 31 (14 ) (45 )%
Net operating income available to
Genworth Financial, Inc.'s common
stockholders $ 128 $ 192 $ (64 ) (33 )%
The following table sets forth net operating income for the businesses included
in our U.S. Life Insurance segment for the periods indicated:
Increase
(decrease) and
Six months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Net operating income available to Genworth
Financial, Inc.'s common stockholders:
Life insurance $ 36 $ 99 $ (63 ) (64 )%
Long-term care insurance 49 54 (5 ) (9 )%
Fixed annuities 43 39 4 10 %
Total net operating income available to
Genworth Financial, Inc.'s common
stockholders $ 128 $ 192 $ (64 ) (33 )%
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Net operating income available to Genworth Financial, Inc.'s common stockholders
• Our life insurance business decreased $63 million principally from a $41
million net loss related to a life block sale transaction in the current
year that included a loss related to a third-party reinsurance treaty and
gains associated with the repurchase of non-recourse funding obligations.
The decrease was also attributable to an $11 million gain related to the
repurchase of notes secured by our non-recourse funding obligations in the
prior year, lower investment income in the current year and an $8 million
favorable cumulative impact from a change in premium taxes in Virginia in
the prior year that did not recur. These decreases were partially offset
by a $13 million favorable adjustment related to the Tax Matters Agreement
with our former parent company in the current year and growth of our term
universal life insurance product.
• Our long-term care insurance business decreased $5 million primarily from
higher claims and lower claim termination rates in older issued policies,
partially offset by the premium growth of newer issued policies, in-force
rate actions and an unfavorable adjustment of $4 million related to the
accounting for interest rate swaps in the prior year that did not recur.
• Our fixed annuities business increased $4 million primarily related to a
$3 million favorable adjustment associated with guarantee funds in the
current year compared to a $3 million accrual related to guarantee funds
in the prior year. The increase was also attributable to lower interest
credited. These increases were partially offset by lower investment income
and unfavorable mortality in the current year.
Revenues
Premiums
• Our life insurance business decreased $266 million primarily related to
our term life insurance products from higher ceded reinsurance on certain
term life insurance policies under a new reinsurance treaty as part of a
life block sale transaction in the current year and from no longer selling
these products.
• Our long-term care insurance business increased $63 million mainly attributable to growth of our in-force block from new sales and in-force
rate actions.
• Our fixed annuities business increased $8 million primarily driven by higher sales of our life-contingent products in the current year.
Net investment income
• Our life insurance business decreased $12 million primarily from lower
bond calls and prepayments of $5 million and lower gains of $4 million
from limited partnerships accounted for under the equity method in the
current year and from a decrease in average invested assets.
• Our long-term care insurance business increased $52 million largely from
an increase in average invested assets due to growth of our in-force
block. Net investment income also included higher gains of $7 million from
limited partnerships accounted for under the equity method in the current
year. Included in the prior year was an unfavorable adjustment of $6
million related to the accounting for interest rate swaps that did not
recur.
• Our fixed annuities business decreased $20 million primarily attributable
to lower bond calls and prepayments of $7 million and lower reinvestment
yields, partially offset by higher gains of $7 million from limited
partnerships accounted for under the equity method in the current year.
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Net investment gains (losses). For further discussion of the change in net
investment gains (losses), see the comparison for this line item under
"-Investments and Derivative Instruments."
• Net investment losses in our long-term care insurance business decreased
$14 million predominately from higher derivative gains in the current year
and net losses from the sale of investment securities in the prior year
compared to no gains or losses in the current year. These decreases were
partially offset by higher impairments in the current year.
• Net investment losses in our fixed annuities business decreased $16 million primarily from higher derivative gains, lower net losses from the
sale of investment securities and lower impairments in the current year.
Insurance and investment product fees and other. The increase was primarily
attributable to our life insurance business from $88 million of gains on the
repurchase of notes secured by our non-recourse funding obligations related to a
life block sale transaction in the current year compared to a $17 million gain
in the prior year and growth of our term universal and universal life insurance
products. These increases were partially offset by an unfavorable valuation
adjustment in the current year.
Benefits and expenses
Benefits and other changes in policy reserves
• Our life insurance business decreased $170 million principally related to
higher ceded reinsurance in the current year. We initially ceded $209
million of certain term life insurance reserves under a new reinsurance
treaty as part of a life block sale transaction. This decrease was
partially offset by growth in our term universal and universal life
insurance products and unfavorable mortality in our term universal life
insurance product compared to the prior year.
• Our long-term care insurance business increased $129 million primarily
from the aging and growth of our in-force block and higher claims and
lower claim termination rates on older issued policies. Also included in
the increase was a reclassification of loss adjustment expenses of $21
million from acquisition and operating expenses, net of deferrals, and an
$11 million increase in reserves associated with a methodology change
related to pending claims in the current year. These increases were
partially offset by a favorable actuarial adjustment of $16 million in the
current year related to a multi-stage system conversion.
• Our fixed annuities business increased $8 million largely attributable to
higher sales of our life-contingent products and unfavorable mortality in
the current year.
Interest credited. The decrease is primarily related to our fixed annuities
business mainly from lower crediting rates in a low interest rate environment.
Acquisition and operating expenses, net of deferrals
• Our life insurance business increased $4 million primarily related to a
$13 million favorable cumulative impact from a change in premium taxes in
Virginia in the prior year that did not recur and from growth of our term
universal life insurance product. These increases were partially offset by
lower expenses related to our term life insurance products as we no longer
sell these products.
• Our long-term care insurance business decreased $15 million primarily as a
result of a reclassification of loss adjustment expenses of $21 million to
benefits and other changes in policy reserves in the current year,
partially offset by growth of our in-force block.
• Our fixed annuities business decreased $6 million primarily driven by a
favorable adjustment of $4 million associated with guarantee funds in the
current year compared to a $4 million accrual related to guarantee funds
in the prior year.
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Amortization of deferred acquisition costs and intangibles
• Our life insurance business increased $140 million principally related to
higher ceded reinsurance as we wrote off $142 million of deferred
acquisition costs associated with certain term life insurance policies
under a new reinsurance treaty as part of a life block sale transaction in
the current year. Higher amortization of deferred acquisition costs in the
current year was also attributable to our term universal and universal
life insurance products due to growth, partially offset by lower
amortization from lower lapses in our term life insurance products. Lower
amortization of present value of future profits in the current year was
primarily attributable to unfavorable mortality in an older block of
policies in our universal life insurance products and from lower lapses in
our term life insurance products.
• Our long-term care insurance business increased $7 million primarily from
growth of our in-force block.
• Our fixed annuities business increased $5 million primarily due to higher amortization of deferred acquisition costs attributable to higher net
investment gains in the current year, partially offset by lower surrenders
in the current year.
Interest expense. Interest expense decreased primarily related to our life
insurance business mostly from a $20 million favorable adjustment related to the
Tax Matters Agreement with our former parent company and from the repurchase and
repayment of non-recourse funding obligations in the current year. These
decreases were partially offset by the write-off of $8 million in deferred
borrowing costs from the repurchase and repayment of non-recourse funding
obligations associated with a life block sale transaction and higher letter of
credit fees in the current year.
Provision for income taxes. The effective tax rate decreased to 35.5% for the
six months ended June 30, 2012 from 36.1% for the six months ended June 30,
2011. The decrease in the effective tax rate was primarily attributable to state
income taxes.
U.S. Life Insurance selected operating performance measures
Life insurance
The following tables set forth selected operating performance measures regarding
our life insurance business as of or for the dates indicated:
Increase Increase
(decrease) and (decrease) and
Three months percentage Six months percentage
ended June 30, change ended June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
Term and whole life insurance (1)
Net earned premiums $ 189 $ 222 $ (33 ) (15 )% $ 178$ 444 $ (266 ) (60 )%
Term universal life insurance
Net deposits
$ 73 $ 45 $ 28
62 % $ 137$ 80$ 57 71 %
Sales (2)
32 35 (3 ) (9 )% 63 65 (2 ) (3 )%
Universal life insurance (1)
Net deposits $ 183 $ 153 $ 30 20 % $ 357 $ 311 $ 46 15 %
Sales: (2)
Universal life insurance 19 13 6 46 % 35 28 7 25 %
Linked-benefits 3 3 - - % 6 5 1 20 %
Total life insurance
Net earned premiums and deposits $ 445 $ 420 $ 25
6 % $ 672$ 835 $ (163 ) (20 )%
Sales: (2)
Term universal life insurance
32 35 (3 ) (9 )% 63 65 (2 ) (3 )%
Universal life insurance 19 13 6 46 % 35 28 7 25 %
Linked-benefits 3 3 - - % 6 5 1 20 %
(1) The prior period amounts have been re-presented to report whole life
insurance with term life insurance. Amounts for whole life insurance were
previously reported with universal life insurance.
(2) In the first quarter of 2012, we changed our definition of sales related to
our life insurance business. For term universal and universal life
insurance, sales represent annualized first-year deposits plus 5% of excess
deposits. For linked-benefits products, sales represent 10% of premium
deposits. The prior period amounts have been re-presented to conform to the
new definition.
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Percentage
As of June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Term and whole life insurance (1)
Life insurance in-force, net of reinsurance $ 387,333 $ 449,806 (14 )%
Life insurance in-force before reinsurance 554,019 583,007
(5 )%
Term universal life insurance
Life insurance in-force, net of reinsurance $ 119,687 $ 73,569 63 %
Life insurance in-force before reinsurance 127,640 74,107
72 %
Universal life insurance (1)
Life insurance in-force, net of reinsurance $ 43,232 $ 41,737 4 %
Life insurance in-force before reinsurance 50,083 47,990
4 %
Total life insurance
Life insurance in-force, net of reinsurance $ 550,252 $ 565,112 (3 )%
Life insurance in-force before reinsurance 731,742 705,104
4 %
(1) The prior period amounts have been re-presented to report whole life
insurance with term life insurance. Amounts for whole life insurance were
previously reported with universal life insurance.
Term and whole life insurance
Net earned premiums and our in-force block decreased mainly related to higher
ceded reinsurance on certain term life insurance policies in the current year
and from no longer selling these products.
Term universal life insurance
Net deposits and our in-force block have increased due to continued growth of
this product. Sales decreased as we suspended sales of our 15 year and 30 year
products in April 2012 and June 2012, respectively.
Universal life insurance
Net deposits and our in-force block have increased primarily attributable to
growth of our universal life insurance products. Sales have increased from the
introduction of new products in the prior year.
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Long-term care insurance
The following table sets forth selected operating performance measures regarding
our individual and group long-term care insurance products for the periods
indicated:
Increase Increase
(decrease) and (decrease) and
Three months ended percentage Six months ended percentage
June 30, change June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
Net earned premiums:
Individual long-term care
insurance $ 512 $ 482 $ 30 6 % $ 1,016 $ 959 $ 57 6 %
Group long-term care insurance 17 14 3 21 % 34 28 6 21 %
Total $ 529 $ 496 $ 33 7 % $ 1,050 $ 987 $ 63 6 %
Annualized first-year premiums
and deposits:
Individual long-term care
insurance $ 53 $ 50 $ 3 6 % $ 98 $ 96 $ 2 2 %
Group long-term care insurance 7 2 5 NM (1) 10 4 6 150 %
Total $ 60 $ 52 $ 8 15 % $ 108 $ 100 $ 8 8 %
Loss ratio 74 % 70 % 4 % 70 % 68 % 2 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
The loss ratio is the ratio of benefits and other changes in reserves less
tabular interest on reserves less loss adjustment expenses to net earned
premiums.
Net earned premiums increased mainly attributable to growth of our in-force
block from new sales and in-force rate actions.
The loss ratio increased primarily from lower new claim termination rates,
higher new claim severity and modestly higher new claim counts in the current
year, partially offset by favorable performance of newer issued policies and
in-force rate actions.
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Fixed annuities
The following table sets forth selected operating performance measures regarding
our fixed annuities as of or for the dates indicated:
As of or for the three As of or for the six
months ended June 30, months ended June 30,
(Amounts in millions) 2012 2011 2012 2011
Single premium deferred annuities
Account value, beginning of period $ 10,849 $ 10,660 $ 10,831 $ 10,819
Deposits 286 275 550 395
Surrenders, benefits and product
charges (314 ) (441 ) (644 ) (809 )
Net flows (28 ) (166 ) (94 ) (414 )
Interest credited 83 88 167 177
Account value, end of period $ 10,904 $ 10,582 $ 10,904 $ 10,582
Single premium immediate annuities
Account value, beginning of period $ 6,404 $ 6,411 $ 6,433 $ 6,528
Premiums and deposits 81 85 187 170
Surrenders, benefits and product
charges (235 ) (253 ) (472 ) (509 )
Net flows (154 ) (168 ) (285 ) (339 )
Interest credited 77 82 155 165
Effect of accumulated net unrealized
investment gains (losses) 100 59 124 30
Account value, end of period $ 6,427 $ 6,384 $ 6,427 $ 6,384
Structured settlements
Account value, net of reinsurance,
beginning of period $ 1,107 $ 1,113 $ 1,107 $ 1,113
Surrenders, benefits and product
charges (16 ) (14 ) (30 ) (29 )
Net flows (16 ) (14 ) (30 ) (29 )
Interest credited 15 14 29 29
Account value, net of reinsurance, end
of period $ 1,106 $ 1,113 $ 1,106$ 1,113
Total premiums from fixed annuities $ 15 $ 20 $ 48 $ 40
Total deposits on fixed annuities $ 352 $ 340 $ 689 $ 525
Single premium deferred annuities
Account value of our single premium deferred annuities increased as deposits and
interest credited outpaced surrenders. Sales have increased in the current year
driven by a more competitive offering.
Single premium immediate annuities
Account value of our single premium immediate annuities increased as premiums
and deposits, interest credited and net unrealized investment gains exceeded
surrenders. Sales continued to be pressured given the low interest rate
environment and other market conditions.
Structured settlements
We no longer solicit sales of structured settlements; however, we continue to
service our existing block of business.
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International Protection segment
Segment results of operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth the results of operations relating to our
International Protection segment for the periods indicated:
Increase
(decrease) and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 174 $ 223 $ (49 ) (22 )%
Net investment income 36 53 (17 ) (32 )%
Net investment gains (losses) 1 1 - - %
Insurance and investment product fees and
other - 4 (4 ) (100 )%
Total revenues 211 281 (70 ) (25 )%
Benefits and expenses:
Benefits and other changes in policy reserves 41 35 6 17 %
Acquisition and operating expenses, net of
deferrals 126 156 (30 ) (19 )%
Amortization of deferred acquisition costs
and intangibles 27 42 (15 ) (36 )%
Interest expense 14 16 (2 ) (13 )%
Total benefits and expenses 208 249 (41 ) (16 )%
Income before income taxes 3 32 (29 ) (91 )%
Provision for income taxes - 7 (7 ) (100 )%
Net income available to Genworth Financial,
Inc's common stockholders 3 25 (22 ) (88 )%
Adjustment to net income available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of taxes
and other adjustments - - - - %
Net operating income available to Genworth
Financial, Inc.'s common stockholders $ 3 $ 25 $ (22 ) (88 )%
Net operating income available to Genworth Financial, Inc.'s common stockholders
Net operating income available to Genworth Financial, Inc.'s common stockholders
decreased as a result of lower premiums, lower investment income and an increase
in reserves, partially offset by lower expenses.
Revenues
Premiums decreased primarily due to lower premium volume driven by reduced
levels of consumer lending and our runoff block of business. The three months
ended June 30, 2012 included a decrease of $16 million attributable to changes
in foreign exchange rates.
Net investment income decreased principally attributable to reinsurance
arrangements accounted for under the deposit method of accounting as certain of
these arrangements were in a lower gain position. The three months ended
June 30, 2012 included a decrease of $3 million attributable to changes in
foreign exchange rates.
Insurance and investment product fees and other decreased mainly attributable to
lower third-party administration fees in the current year and non-functional
currency transactions as a result of changes in foreign exchange rates.
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Benefits and expenses
Benefits and other changes in policy reserves increased primarily driven by
lower favorable claim reserve adjustments in the current year. In addition, we
reclassified loss adjustment expenses of $3 million from acquisition and
operating expenses, net of deferrals, in the current year. The three months
ended June 30, 2012 included a decrease of $4 million attributable to changes in
foreign exchange rates.
Acquisition and operating expenses, net of deferrals, decreased largely from
lower paid commissions related to a decline in new business, lower profit
commissions driven by higher claims and lower operating expenses as a result of
a cost-saving initiative in the prior year. In addition, we reclassified loss
adjustment expenses of $3 million to benefits and other changes in policy
reserves in the current year. The three months ended June 30, 2012 included a
decrease of $10 million attributable to changes in foreign exchange rates.
Amortization of deferred acquisition costs and intangibles decreased primarily
as a result of lower premium volume in the current year. The three months ended
June 30, 2012 included a decrease of $3 million attributable to changes in
foreign exchange rates.
Interest expense decreased mainly due to reinsurance arrangements accounted for
under the deposit method of accounting as certain of these arrangements were in
a lower loss position in the current year. The three months ended June 30, 2012
included a decrease of $1 million attributable to changes in foreign exchange
rates.
Provision for income taxes. The decrease in the income tax expense was primarily
attributable to changes in lower taxed foreign income. The three months ended
June 30, 2012 included a decrease of $1 million attributable to changes in
foreign exchange rates.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth the results of operations relating to our
International Protection segment for the periods indicated:
Increase
(decrease) and
Six months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 353 $ 438 $ (85 ) (19 )%
Net investment income 72 101 (29 ) (29 )%
Net investment gains (losses) 2 3 (1 ) (33 )%
Insurance and investment product fees and
other 2 9 (7 ) (78 )%
Total revenues 429 551 (122 ) (22 )%
Benefits and expenses:
Benefits and other changes in policy
reserves 82 67 15 22 %
Acquisition and operating expenses, net of
deferrals 253 308 (55 ) (18 )%
Amortization of deferred acquisition costs
and intangibles 58 78 (20 ) (26 )%
Interest expense 25 29 (4 ) (14 )%
Total benefits and expenses 418 482 (64 ) (13 )%
Income before income taxes 11 69 (58 ) (84 )%
Provision for income taxes 2 17 (15 ) (88 )%
Net income available to Genworth
Financial, Inc's common stockholders 9 52 (43 ) (83 )%
Adjustment to net income available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments (1 ) (2 ) 1 50 %
Net operating income available to Genworth
Financial, Inc.'s common stockholders $ 8 $ 50 $ (42 ) (84 )%
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Net operating income available to Genworth Financial, Inc.'s common stockholders
Net operating income available to Genworth Financial, Inc.'s common stockholders
decreased as a result of lower premiums, lower investment income and an increase
in reserves, partially offset by lower expenses. The six months ended June 30,
2012 included a decrease of $1 million attributable to changes in foreign
exchange rates.
Revenues
Premiums decreased primarily due to lower premium volume driven by reduced
levels of consumer lending and our runoff block of business. The first quarter
of 2012 also included an unfavorable adjustment of $4 million related to a
German premium tax. The six months ended June 30, 2012 included a decrease of
$20 million attributable to changes in foreign exchange rates.
Net investment income decreased principally attributable to reinsurance
arrangements accounted for under the deposit method of accounting as certain of
these arrangements were in a lower gain position. The six months ended June 30,
2012 included a decrease of $4 million attributable to changes in foreign
exchange rates.
Insurance and investment product fees and other decreased mainly attributable to
lower third-party administration fees in the current year and non-functional
currency transactions as a result of changes in foreign exchange rates.
Benefits and expenses
Benefits and other changes in policy reserves increased primarily driven by
lower favorable claim reserve adjustments in the current year. In addition, we
reclassified loss adjustment expenses of $6 million from acquisition and
operating expenses, net of deferrals, in the current year. The six months ended
June 30, 2012 included a decrease of $5 million attributable to changes in
foreign exchange rates.
Acquisition and operating expenses, net of deferrals, decreased largely from
lower paid commissions related to a decline in new business, lower profit
commissions driven by higher claims and lower operating expenses as a result of
a cost-saving initiative in the prior year. In addition, we reclassified loss
adjustment expenses of $6 million to benefits and other changes in policy
reserves in the current year. The six months ended June 30, 2012 included a
decrease of $13 million attributable to changes in foreign exchange rates.
Amortization of deferred acquisition costs and intangibles decreased primarily
as a result of lower premium volume in the current year. The six months ended
June 30, 2012 included a decrease of $3 million attributable to changes in
foreign exchange rates.
Interest expense decreased mainly due to reinsurance arrangements accounted for
under the deposit method of accounting as certain of these arrangements were in
a lower loss position in the current year. The six months ended June 30, 2012
included a decrease of $1 million attributable to changes in foreign exchange
rates.
Provision for income taxes. The effective tax rate decreased to 18.2% for the
six months ended June 30, 2012 from 24.6% for the six months ended June 30,
2011. This decrease in the effective tax rate was primarily attributable to
changes in lower taxed foreign income. The six months ended June 30, 2012
included a decrease of $1 million attributable to changes in foreign exchange
rates.
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International Protection selected operating performance measures
The following table sets forth selected operating performance measures regarding
our International Protection segment for the periods indicated:
Increase Increase
(decrease) and (decrease) and
Three months ended percentage Six months ended percentage
June 30, change June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
Lifestyle protection insurance:
Traditional indemnity premiums $ 246 $ 270 $ (24 ) (9 )% $ 474 $ 512 $ (38 ) (7 )%
Premium equivalents for
administrative services only
business 2 6 (4 ) (67 )% 4 12 (8 ) (67 )%
Reinsurance premiums assumed
accounted for under the deposit
method 169 193 (24 ) (12 )% 318 368 (50 ) (14 )%
Total $ 417 $ 469 $ (52 ) (11 )% $ 796 $ 892 $ (96 ) (11 )%
Loss ratio 24 % 16 % 8 % 23 % 15 % 8 %
The loss ratio is the ratio of incurred losses and loss adjustment expenses to
net earned premiums.
Sales declined from reduced levels of consumer lending as a result of
deteriorating economic conditions in certain regions. The three months and six
months ended June 30, 2012 included decreases of $34 million and $45 million,
respectively, attributable to changes in foreign exchange rates.
The loss ratio increased driven mainly by lower favorable claim reserve
adjustments in the current year and a decrease in premiums from lower volumes
driven by reduced levels of consumer lending and our runoff block of business.
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Wealth Management segment
Segment results of operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth the results of operations relating to our Wealth
Management segment for the periods indicated:
Increase
(decrease) and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Net investment gains (losses) $ - $ - $ - - %
Insurance and investment product fees and
other 122 114 8 7 %
Total revenues 122 114 8 7 %
Benefits and expenses:
Acquisition and operating expenses, net of
deferrals 64 92 (28 ) (30 )%
Amortization of deferred acquisition costs
and intangibles 1 1 - - %
Total benefits and expenses 65 93 (28 ) (30 )%
Income before income taxes 57 21 36 171 %
Provision for income taxes 30 8 22 NM (1)
Net income available to Genworth Financial,
Inc's common stockholders 27 13 14 108 %
Adjustments to net income available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of taxes
and other adjustments - - - - %
Gain on sale of business, net of taxes (15 ) - (15 ) NM (1)
Net operating income available to Genworth
Financial, Inc.'s common stockholders $ 12 $ 13 $ (1 ) (8 )%
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Net operating income available to Genworth Financial, Inc.'s common stockholders
Net operating income available to Genworth Financial, Inc.'s common stockholders
decreased slightly as the sale of our tax and accounting financial advisor unit,
GFIS, and lower average assets under management from unfavorable market
performance and negative net flows in the current year were largely offset by
growth of our Altegris alternative investment funds.
Revenues
Insurance and investment product fees and other increased primarily attributable
to a $38 million gain recognized on the sale of our tax and accounting financial
advisor unit in the current year. This was partially offset by lower fees due to
the sale and negative net flows in the current year. Negative flows in the three
months ended June 30, 2012 were $245 million primarily related to prior year
relative investment performance.
Benefits and expenses
Acquisition and operating expenses, net of deferrals, decreased largely from
lower commission expenses due to the sale of our tax and accounting financial
advisor unit and negative net flows in the current year.
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Provision for income taxes. The effective tax rate increased to 52.6% for the
three months ended June 30, 2012 from 38.1% for the three months ended June 30,
2011. The increase in the effective tax rate was primarily attributable to the
sale of our tax and accounting financial advisor unit, GFIS, in the current
year.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth the results of operations relating to our Wealth
Management segment for the periods indicated:
Increase
(decrease) and
Six months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Net investment gains (losses) $ - $ - $ - - %
Insurance and investment product fees and
other 234 224 10 4 %
Total revenues 234 224 10 4 %
Benefits and expenses:
Acquisition and operating expenses, net of
deferrals 156 184 (28 ) (15 )%
Amortization of deferred acquisition costs
and intangibles 2 2 - - %
Total benefits and expenses 158 186 (28 ) (15 )%
Income before income taxes 76 38 38 100 %
Provision for income taxes 37 15 22 147 %
Net income available to Genworth Financial,
Inc's common stockholders 39 23 16 70 %
Adjustments to net income available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of taxes
and other adjustments - - - - %
Gain on sale of business, net of taxes (15 ) - (15 ) NM (1)
Net operating income available to Genworth
Financial, Inc.'s common stockholders $ 24 $ 23 $ 1 4 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Net operating income available to Genworth Financial, Inc.'s common stockholders
Net operating income available to Genworth Financial, Inc.'s common stockholders
increased slightly as favorable market performance during the first quarter of
2012 were largely offset by the sale of our tax and accounting financial advisor
unit, GFIS, and negative net flows in the current year.
Revenues
Insurance and investment product fees and other increased primarily attributable
to a $38 million gain recognized on the sale of our tax and accounting financial
advisor unit in the second quarter of 2012 and favorable market performance
during the first quarter of 2012. These increases were partially offset by lower
fees due to the sale and negative net flows in the current year. Negative net
flows in the six months ended June 30, 2012 were $604 million primarily related
to the movement of a legacy block of managed accounts and from prior year
relative investment performance.
Benefits and expenses
Acquisition and operating expenses, net of deferrals, decreased largely from
lower commission expenses due to the sale of our tax and accounting financial
advisor unit and negative net flows in the current year.
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Provision for income taxes. The effective tax rate increased to 48.7% for the
six months ended June 30, 2012 from 39.5% for the six months ended June 30,
2011. The increase in the effective tax rate was primarily attributable to the
sale of our tax and accounting financial advisor unit, GFIS, in the current
year.
Wealth Management selected operating performance measures
The following table sets forth selected operating performance measures regarding
our Wealth Management segment as of or for the dates indicated:
As of or for the three As of or for the six
months ended June 30, months ended June 30,
(Amounts in millions) 2012 2011 2012 2011
Assets under management, beginning of
period $ 25,684 $ 25,551 $ 25,087 $ 24,740
Gross flows 1,228 1,807 2,744 3,865
Redemptions (1,473 ) (1,143 ) (3,348 ) (2,846 )
Net flows (245 ) 664 (604 ) 1,019
Market performance (348 ) (285 ) 608 171
Disposition (1) (2,771 ) - (2,771 ) -
Assets under management, end of period $ 22,320$ 25,930$ 22,320$ 25,930
(1) Relates to the sale of our tax and accounting financial advisor unit, GFIS,
on April 2, 2012. See note 11 in our "-Notes to Condensed Consolidated
Financial Statements" for additional information related to the sale.
Wealth Management results represent Genworth Financial Wealth Management, Inc.,
GFIS, Genworth Financial Trust Company, Centurion Financial Advisers, Inc.,
Quantivus Consulting, Inc. and the Altegris companies.
The decrease in assets under management was principally attributable to the sale
of our tax and accounting financial advisor unit on April 2, 2012. The decrease
was also driven by negative net flows in the three months ended June 30, 2012 of
$245 million primarily related to prior year relative investment performance, as
well as unfavorable market performance in the second quarter of 2012. During the
six months ended June 30, 2012, favorable market performance was mostly offset
by negative net flows. Negative net flows in the six months ended June 30, 2012
were $604 million primarily related to the movement of a legacy block of managed
accounts and from prior year relative investment performance.
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Global Mortgage Insurance Division
Division results of operations
The following table sets forth the results of operations relating to our Global
Mortgage Insurance Division for the periods indicated. See below for a
discussion by segment.
Increase Increase
(decrease) and Six months (decrease) and
Three months percentage ended percentage
ended June 30, change June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
Net operating income (loss)
available to Genworth Financial,
Inc.'s common stockholders:
International Mortgage Insurance
segment:
Canada $ 41 $ 28 $ 13 46 % $ 78 $ 79 $ (1 ) (1 )%
Australia 44 54 (10 ) (19 )% 23 106 (83 ) (78 )%
Other Countries (9 ) (4 ) (5 ) (125 )% (18 ) (8 ) (10 ) (125 )%
International Mortgage Insurance
segment 76 78 (2 ) (3 )% 83 177 (94 ) (53 )%
U.S. Mortgage Insurance segment (25 ) (255 ) 230
90 % (68 ) (338 ) 270 80 %
Total net operating income (loss)
available to Genworth Financial,
Inc.'s common stockholders 51 (177 ) 228 129 % 15 (161 ) 176 109 %
Adjustment to net operating income
(loss) available to Genworth
Financial, Inc.'s common
stockholders:
Net investment gains (losses), net
of taxes and other adjustments 7 4 3 75 % 24 5 19 NM (1)
Net income (loss) available to
Genworth Financial, Inc.'s common
stockholders $ 58 $ (173 ) $ 231 134 % $ 39 $ (156 ) $ 195 125 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
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International Mortgage Insurance segment
Segment results of operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth the results of operations relating to our
International Mortgage Insurance segment for the periods indicated:
Increase
(decrease) and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 256 $ 268 $ (12 ) (4 )%
Net investment income 94 99 (5 ) (5 )%
Net investment gains (losses) 11 5 6 120 %
Insurance and investment product fees and
other - 5 (5 ) (100 )%
Total revenues 361 377 (16 ) (4 )%
Benefits and expenses:
Benefits and other changes in policy
reserves 115 107 8 7 %
Acquisition and operating expenses, net
of deferrals 61 63 (2 ) (3 )%
Amortization of deferred acquisition
costs and intangibles 16 18 (2 ) (11 )%
Interest expense 8 6 2 33 %
Total benefits and expenses 200 194 6 3 %
Income before income taxes 161 183 (22 ) (12 )%
Provision for income taxes 45 66 (21 ) (32 )%
Net income 116 117 (1 ) (1 )%
Less: net income attributable to
noncontrolling interests 33 36 (3 ) (8 )%
Net income available to Genworth
Financial, Inc.'s common stockholders 83 81 2 2 %
Adjustment to net income available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments (7 ) (3 ) (4 ) (133 )%
Net operating income available to
Genworth Financial, Inc.'s common
stockholders $ 76 $ 78 $ (2 ) (3 )%
The following table sets forth net operating income (loss) available to Genworth
Financial, Inc.'s common stockholders for the businesses included in our
International Mortgage Insurance segment for the periods indicated:
Increase
(decrease) and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Net operating income available to Genworth
Financial, Inc.'s common stockholders:
Canada $ 41 $ 28 $ 13 46 %
Australia 44 54 (10 ) (19 )%
Other Countries (9 ) (4 ) (5 ) (125 )%
Total net operating income available to
Genworth Financial, Inc.'s common
stockholders $ 76 $ 78 $ (2 ) (3 )%
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Net operating income available to Genworth Financial, Inc.'s common stockholders
• The three months ended June 30, 2012 included a decrease of $1 million
attributable to changes in foreign exchange rates.
• Our Canadian mortgage insurance business increased from an unfavorable $12
million tax adjustment in the prior year and lower losses, partially
offset by lower premiums and investment income.
• Our Australian mortgage insurance business decreased primarily from higher
losses and interest expense, partially offset by higher premiums.
• Other Countries' net operating loss increased primarily from higher losses
in Ireland, where we experienced increased new delinquencies, and
continued aging of existing delinquencies as a result of a prolonged
economic downturn.
Revenues
Premiums
• Our Canadian mortgage insurance business decreased $9 million, including a
decrease of $5 million attributable to changes in foreign exchange rates,
principally from the seasoning of our in-force block of business.
• Our Australian mortgage insurance business was flat including a decrease
of $2 million attributable to changes in foreign exchange rates. Excluding
the effects of foreign exchange, premiums increased primarily from an
actuarial update to premium recognition factors in the current year
related to policy cancellation experience, partially offset by higher
ceded reinsurance premiums and lower premiums attributable to the
seasoning of our in-force block of business.
• Other Countries decreased $3 million primarily as a result of the
seasoning of our in-force block of business in Europe.
Net investment income
• Our Canadian mortgage insurance business decreased $3 million, including a
decrease of $1 million attributable to changes in foreign exchange rates,
mainly due to lower reinvestment yields and lower average invested assets.
• Our Australian mortgage insurance business was flat including a decrease of $1 million attributable to changes in foreign exchange rates. Excluding
the effects of foreign exchange, net investment income increased slightly
as higher average invested assets were largely offset by lower
reinvestment yields.
• Other Countries decreased $2 million primarily as a result of lower
average invested assets in the current year.
Net investment gains (losses). Other Countries increased $5 million in the
current year primarily related to higher realized gains from the sale of
securities in Europe.
Insurance and investment product fees and other. The decrease was primarily
attributable to Other Countries from currency transactions related to a foreign
branch in the prior year.
Benefits and expenses
Benefits and other changes in policy reserves
• Our Canadian mortgage insurance business decreased $3 million, including a
decrease of $1 million attributable to changes in foreign exchange rates,
primarily driven by lower new delinquencies, net of
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cures, and paid claims due to a shift in regional mix, with fewer claims
from Alberta, and higher benefits from loss mitigation activities. These
decreases were partially offset by a higher average reserve per
delinquency.
• Our Australian mortgage insurance business increased $6 million, including
a decrease of $2 million attributable to changes in foreign exchange
rates, primarily from a higher average reserve per delinquency in the
current year driven by higher frequency and severity assumptions. Claims
paid also increased in the current year as a result of an increase in both
the number of claims and the average claim payment. These increases were
partially offset by lower new delinquencies in the current year.
• Other Countries increased $5 million primarily from higher new delinquencies and continued aging of existing delinquencies, particularly
in Ireland and Italy. This increase was partially offset by benefits from
ongoing loss mitigation activities.
Interest expense. Interest expense increased mainly related to our Australian
mortgage insurance business from the issuance of debt by our wholly-owned
subsidiary in June 2011.
Provision for income taxes. The effective tax rate decreased to 28.0% for the
three months ended June 30, 2012 from 36.1% for the three months ended June 30,
2011. This decrease in the effective tax rate was primarily attributable to
higher taxes in the prior year pursuant to a Canadian legislative change,
partially offset by changes in lower taxed foreign income. The three months
ended June 30, 2012 included a decrease of $1 million attributable to changes in
foreign exchange rates.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth the results of operations relating to our
International Mortgage Insurance segment for the periods indicated:
Increase
(decrease) and
Six months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 503 $ 530 $ (27 ) (5 )%
Net investment income 191 194 (3 ) (2 )%
Net investment gains (losses) 13 9 4 44 %
Insurance and investment product fees and
other - 6 (6 ) (100 )%
Total revenues 707 739 (32 ) (4 )%
Benefits and expenses:
Benefits and other changes in policy
reserves 322 216 106 49 %
Acquisition and operating expenses, net
of deferrals 120 123 (3 ) (2 )%
Amortization of deferred acquisition
costs and intangibles 33 35 (2 ) (6 )%
Interest expense 18 12 6 50 %
Total benefits and expenses 493 386 107 28 %
Income before income taxes 214 353 (139 ) (39 )%
Provision for income taxes 58 102 (44 ) (43 )%
Net income 156 251 (95 ) (38 )%
Less: net income attributable to
noncontrolling interests 66 70 (4 ) (6 )%
Net income available to Genworth
Financial, Inc.'s common stockholders 90 181 (91 ) (50 )%
Adjustment to net income available to
Genworth Financial, Inc.'s common common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments (7 ) (4 ) (3 ) (75 )%
Net operating income available to
Genworth Financial, Inc.'s common common
stockholders $ 83 $ 177 $ (94 ) (53 )%
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The following table sets forth net operating income available to Genworth
Financial, Inc.'s common stockholders for the businesses included in our
International Mortgage Insurance segment for the periods indicated:
Increase
(decrease) and
Six months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Net operating income available to Genworth
Financial, Inc.'s common stockholders:
Canada $ 78 $ 79 $ (1 ) (1 )%
Australia 23 106 (83 ) (78 )%
Other Countries (18 ) (8 ) (10 ) (125 )%
Total net operating income available to
Genworth Financial, Inc. common
stockholders $ 83 $ 177 $ (94 ) (53 )%
Net operating income available to Genworth Financial, Inc.'s common stockholders
• The six months ended June 30, 2012 included a decrease of $4 million
attributable to changes in foreign exchange rates.
• Our Canadian mortgage insurance business decreased slightly as lower
premiums and investment income were largely offset by lower losses and
higher tax benefits in the current year.
• Our Australian mortgage insurance business decreased primarily driven by a
reserve strengthening, lower premiums and higher interest expense in the
current year, partially offset by higher investment income.
• Other Countries' net operating loss increased primarily from higher losses
in Ireland, where we experienced increased new delinquencies, and
continued aging of existing delinquencies as a result of a prolonged
economic downturn.
Revenues
Premiums
• Our Canadian mortgage insurance business decreased $20 million, including
a decrease of $7 million attributable to changes in foreign exchange
rates, principally from the seasoning of our in-force block of business.
• Our Australian mortgage insurance business decreased $2 million, including an increase of $2 million attributable to changes in foreign exchange
rates, primarily attributable to the seasoning of our in-force block of
business and higher ceded reinsurance premiums, partially offset by
increased premiums from an actuarial update to premium recognition factors
in the current year related to policy cancellation experience.
• Other Countries decreased $5 million, including a decrease of $1 million attributable to changes in foreign exchange rates, primarily as a result
of the seasoning of our in-force block of business in Europe.
Net investment income
• Our Canadian mortgage insurance business decreased $4 million, including a
decrease of $2 million attributable to changes in foreign exchange rates,
mainly due to lower average invested assets and lower reinvestment yields.
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• Our Australian mortgage insurance business increased $4 million, including
an increase of $1 million attributable to changes in foreign exchange
rates, largely from higher average invested assets, partially offset by
lower reinvestment yields.
• Other Countries decreased $3 million primarily as a result of lower average invested assets in the current year.
Net investment gains (losses). Other Countries increased $5 million in the
current year primarily related to higher realized gains from the sale of
securities in Europe.
Insurance and investment product fees and other. The decrease was primarily
attributable to Other Countries from currency transactions related to a foreign
branch in the prior year.
Benefits and expenses
Benefits and other changes in policy reserves
• Our Canadian mortgage insurance business decreased $7 million, including a
decrease of $2 million attributable to changes in foreign exchange rates,
primarily driven by lower new delinquencies, net of cures, and paid claims
due to a shift in regional mix, with fewer claims from Alberta, and higher
benefits from loss mitigation activities. These decreases were partially
offset by a higher average reserve per delinquency.
• Our Australian mortgage insurance business increased $102 million, including an increase of $6 million attributable to changes in foreign
exchange rates, primarily driven by reserve strengthening of $82 million
in the first quarter of 2012. The reserve strengthening was the result of
higher than anticipated frequency and severity of claims paid from later
stage delinquencies from prior years, particularly in coastal tourism
areas of Queensland as a result of regional economic pressures as well as
our 2007 and 2008 vintages which have a higher concentration of
self-employed borrowers. Claims paid also increased in the current year as
a result of an increase in both the number of claims and the average claim
payment. These increases were partially offset by lower new delinquencies
in the current year.
• Other Countries increased $11 million, including a decrease of $1 million
attributable to changes in foreign exchange rates, primarily from higher
new delinquencies and continued aging of existing delinquencies,
particularly in Ireland and Italy. This increase was partially offset by
benefits from ongoing loss mitigation activities.
Interest expense. Interest expense increased mainly related to our Australian
mortgage insurance business from the issuance of debt by our wholly-owned
subsidiary in June 2011.
Provision for income taxes. The effective tax rate decreased to 27.1% for the
six months ended June 30, 2012 from 28.9% for the six months ended June 30,
2011. This decrease in the effective tax rate was primarily attributable to
higher taxes in the prior year pursuant to a Canadian legislative change,
partially offset by changes in lower taxed foreign income. The six months ended
June 30, 2012 included a decrease of $2 million attributable to changes in
foreign exchange rates.
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International Mortgage Insurance selected operating performance measures
The following tables set forth selected operating performance measures regarding
our International Mortgage Insurance segment as of or for the dates indicated:
Increase
(decrease) and
As of June 30, percentage change
(Amounts in millions) 2012 2011 2012 vs. 2011
Primary insurance in-force:
Canada $ 281,700 $ 264,700 $ 17,000 6 %
Australia 286,200 296,200 (10,000 ) (3 )%
Other Countries 31,400 37,000 (5,600 ) (15 )%
Total $ 599,300 $ 597,900 $ 1,400 - %
Risk in-force:
Canada $ 98,600 $ 92,600 $ 6,000 6 %
Australia 100,200 103,700 (3,500 ) (3 )%
Other Countries 4,300 5,300 (1,000 ) (19 )%
Total $ 203,100 $ 201,600 $ 1,500 1 %
Increase Increase
(decrease) and (decrease) and
Three months ended percentage Six months ended percentage
June 30, change June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
New insurance written:
Canada $ 18,800 $ 7,900 $ 10,900 138 % $ 22,800 $ 13,400 $ 9,400 70 %
Australia 8,500 9,000 (500 ) (6 )% 16,500 15,500 1,000 6 %
Other Countries 500 900 (400 ) (44 )% 800 1,600 (800 ) (50 )%
Total $ 27,800 $ 17,800 $ 10,000 56 % $ 40,100 $ 30,500 $ 9,600 31 %
Net premiums written:
Canada $ 175 $ 155 $ 20 13 % $ 254 $ 256 $ (2 ) (1 )%
Australia 103 90 13 14 % 205 151 54 36 %
Other Countries 7 12 (5 ) (42 )% 13 22 (9 ) (41 )%
Total $ 285 $ 257 $ 28 11 % $ 472 $ 429 $ 43 10 %
Primary insurance in-force and risk in-force
Our businesses in Canada and Australia currently provide 100% coverage on the
majority of the loans we insure in those markets. For the purpose of
representing our risk in-force, we have computed an "effective" risk in-force
amount, which recognizes that the loss on any particular loan will be reduced by
the net proceeds received upon sale of the property. Effective risk in-force has
been calculated by applying to insurance in-force a factor that represents our
highest expected average per-claim payment for any one underwriting year over
the life of our businesses in Canada and Australia. For the three and six months
ended June 30, 2012 and 2011, this factor was 35%.
Primary insurance in-force and risk in-force increased in Canada primarily as a
result of several large bulk transactions in the second quarter of 2012.
Excluding the effects of foreign exchange, primary insurance in-force and risk
in-force in Australia also increased primarily as a result of flow new insurance
written in a larger mortgage originations market, mainly driven by refinance
activity, partially offset by lower bulk new insurance written. In Other
Countries, the decrease was mainly attributable to ongoing loss mitigation
activities in Europe
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and to no new business being written in Ireland and Spain. Primary insurance
in-force and risk in-force included decreases of $32.8 billion and $10.6
billion, respectively, attributable to changes in foreign exchange rates as of
June 30, 2012.
New insurance written
For the three and six months ended June 30, 2012, new insurance written in
Canada increased primarily as a result of several large bulk transactions in the
second quarter of 2012 which were partially offset by lower flow new insurance
written primarily attributable to a smaller mortgage originations market,
particularly for high loan-to-value refinance transactions as a result of the
government guarantee product changes in March 2011. In Australia, the increase
in flow new insurance was largely attributable to a larger mortgage originations
market, mainly driven by refinance activity, which was mostly offset by a
decline in bulk transactions in the current year. In Other Countries, new
insurance written declined due to lower volume from existing lenders in Europe
and no new business being written in Ireland and Spain. The three and six months
ended June 30, 2012 included decreases of $0.7 billion and $0.5 billion,
respectively, attributable to changes in foreign exchange rates.
Net premiums written
Most of our international mortgage insurance policies provide for single
premiums at the time that loan proceeds are advanced. We initially record the
single premiums to unearned premium reserves and recognize the premiums earned
over time in accordance with the expected pattern of risk emergence. As of
June 30, 2012, our unearned premium reserves were $2.9 billion, including a
decrease of $156 million attributable to changes in foreign exchange rates,
compared to $3.1 billion as of June 30, 2011. Our unearned premium reserves
decreased primarily from the seasoning of our older large in-force blocks of
business.
For the three months ended June 30, 2012, net premiums written increased in
Canada from several large bulk transactions in the second quarter of 2012 which
were partially offset by lower flow written premiums. The decrease in flow
written premiums was the result of a smaller mortgage originations market,
particularly for high loan-to-value refinance transactions, and lower average
price, partially offset by a shift in mix with purchases comprising a higher
proportion of new mortgage originations. Net premiums written increased in
Australia primarily from higher flow volume, partially offset by lower bulk
transactions and higher ceded reinsurance premiums in the current year. In Other
Countries, net premiums written decreased primarily from lower flow new
insurance written in Europe, particularly in Italy, in the current year. The
three months ended June 30, 2012 included a decrease of $9 million attributable
to changes in foreign exchange rates.
For the six months ended June 30, 2012, net premiums written increased in
Australia from higher flow volume and higher flow average price, partially
offset by lower bulk transactions and higher ceded reinsurance premiums in the
current year. Excluding the effects of foreign exchange, net premiums written
increased in Canada from several large bulk transactions in the second quarter
of 2012, partially offset by lower flow written premiums. In Other Countries,
net premiums written decreased attributable to lower flow new insurance written
in Europe, particularly in Italy, in the current year. The six months ended
June 30, 2012 included a decrease of $6 million attributable to changes in
foreign exchange rates.
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Loss and expense ratios
The following table sets forth the loss and expense ratios for our International
Mortgage Insurance segment for the dates indicated:
Three months ended June 30, Increase (decrease) Six months ended June 30, Increase (decrease)
2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011Loss ratio:
Canada 32 % 33 % (1 )% 35 % 35 % - %
Australia 54 % 48 % 6 % 101 % 47 % 54 %
Other Countries 129 % 59 % 70 % 129 % 61 % 68 %
Total 45 % 40 % 5 % 64 % 41 % 23 %
Expense ratio:
Canada 22 % 25 % (3 )% 30 % 30 % - %
Australia 29 % 32 % (3 )% 29 % 38 % (9 )%
Other Countries 131 % 108 % 23 % 146 % 110 % 36 %
Total 27 % 32 % (5 )% 33 % 37 % (4 )%
The loss ratio is the ratio of incurred losses and loss adjustment expenses to
net earned premiums. The expense ratio is the ratio of general expenses to net
premiums written. In our business, general expenses consist of acquisition and
operating expenses, net of deferrals, and amortization of deferred acquisition
costs and intangibles.
The increase in the loss ratio for the three months ended June 30, 2012 was
primarily attributable to higher losses in Australia from a higher average
reserve per delinquency in the current year driven by higher frequency and
severity assumptions. In Other Countries, the loss ratio increased as a result
of increased losses from higher new delinquencies and continued aging of
existing delinquencies, particularly in Ireland and Italy, and lower net earned
premiums. In Canada, the loss ratio decreased slightly as lower losses were
partially offset by a decrease in net earned premiums.
For the six months ended June 30, 2012, the increase in the loss ratio was
primarily attributable to a reserve strengthening in Australia in the current
year and higher losses in Europe. In Australia, we strengthened reserves by $82
million in the first quarter of 2012 due to higher than anticipated frequency
and severity of claims paid from later stage delinquencies from prior years,
particularly in coastal tourism areas of Queensland as a result of regional
economic pressures as well as our 2007 and 2008 vintages which have a higher
concentration of self-employed borrowers. In Other Countries, the loss ratio
increased as a result of increased losses from higher new delinquencies and
continued aging of existing delinquencies, particularly in Ireland and Italy,
and lower net earned premiums. In Canada, the loss ratio was flat as lower
losses were offset by lower net earned premiums.
For the three months ended June 30, 2012, the decrease in the expense ratio in
Canada and Australia was primarily attributable to higher net premiums written
while general expenses remained at consistent levels with the prior year. In
Other Countries, the increase in the expense ratio was attributable to lower net
premiums written, partially offset by lower general expenses in the current
year.
For the six months ended June 30, 2012, the decrease in the expense ratio in
Australia was primarily attributable to higher net premiums written while
general expenses remained at consistent levels with the prior year. In Other
Countries, the increase in the expense ratio was attributable to lower net
premiums written, partially offset by lower general expenses in the current
year.
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Delinquent loans
The following table sets forth the number of loans insured, the number of
delinquent loans and the delinquency rate for our international mortgage
insurance portfolio as of the dates indicated:
June 30, 2012 December 31, 2011 June 30, 2011
Canada:
Primary insured loans in-force 1,452,408 1,362,092 1,326,690
Delinquent loans 2,408 2,752 3,281
Percentage of delinquent loans
(delinquency rate) 0.17 % 0.20 % 0.25 %
Flow loan in-force 1,091,543 1,064,942 1,029,844
Flow delinquent loans 2,125 2,477 2,956
Percentage of flow delinquent
loans (delinquency rate) 0.19 % 0.23 % 0.29 %
Bulk loans in-force 360,865 297,150 296,846
Bulk delinquent loans (1) 283 275 325
Percentage of bulk delinquent
loans (delinquency rate) 0.08 % 0.09 % 0.11 %
Australia:
Primary insured loans in-force 1,449,648 1,437,380 1,453,012
Delinquent loans 7,527 7,874 8,193
Percentage of delinquent loans
(delinquency rate) 0.52 % 0.55 % 0.56 %
Flow loan in-force 1,304,944 1,289,200 1,301,648
Flow delinquent loans 7,253 7,626 7,995
Percentage of flow delinquent
loans (delinquency rate) 0.56 % 0.59 % 0.61 %
Bulk loans in-force 144,704 148,180 151,364
Bulk delinquent loans (1) 274 248 198
Percentage of bulk delinquent
loans (delinquency rate) 0.19 % 0.17 % 0.13 %
Other Countries:
Primary insured loans in-force 207,670 217,141 224,309
Delinquent loans 12,431 12,258 11,021
Percentage of delinquent loans
(delinquency rate) 5.99 % 5.65 % 4.91 %
Flow loan in-force 143,614 149,036 155,350
Flow delinquent loans 8,443 8,919 8,119
Percentage of flow delinquent
loans (delinquency rate) 5.88 % 5.98 % 5.23 %
Bulk loans in-force 64,056 68,105 68,959
Bulk delinquent loans (1) 3,988 3,339 2,902
Percentage of bulk delinquent
loans (delinquency rate) 6.23 % 4.90 % 4.21 %
Total:
Primary insured loans in-force 3,109,726 3,016,613 3,004,011
Delinquent loans 22,366 22,884 22,495
Percentage of delinquent loans
(delinquency rate) 0.72 % 0.76 % 0.75 %
Flow loan in-force 2,540,101 2,503,178 2,486,842
Flow delinquent loans 17,821 19,022 19,070
Percentage of flow delinquent
loans (delinquency rate) 0.70 % 0.76 % 0.77 %
Bulk loans in-force 569,625 513,435 517,169
Bulk delinquent loans (1) 4,545 3,862 3,425
Percentage of bulk delinquent
loans (delinquency rate) 0.80 % 0.75 % 0.66 %
(1) Included loans where we were in a secondary loss position for which no
reserve was established due to an existing deductible. Excluding these
loans, bulk delinquent loans were 4,519 as of June 30, 2012, 3,840 as of
December 31, 2011 and 3,403 as of June 30, 2011.
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In Canada, flow and bulk loans in-force increased primarily from continued
growth. In Australia, flow loans in-force increased marginally during the
current year as new policies written exceeded policy cancellations. In Other
Countries, flow and bulk loans in-force decreased primarily from loss mitigation
activities in Europe and Mexico. In Canada, flow delinquent loans decreased in
the current year compared to December 31, 2011 primarily as a result of lower
new delinquencies, net of cures. In Australia, flow delinquent loans decreased
in the current year compared to December 31, 2011 as elevated volumes of claims
paid and an improved cure rate more than offset new delinquencies. In Other
Countries, flow delinquent loans decreased primarily from loss mitigation
activities in the current year.
U.S. Mortgage Insurance segment
Segment results of operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth the results of operations relating to our U.S.
Mortgage Insurance segment for the periods indicated:
Increase
(decrease) and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 137 $ 142 $ (5 ) (4 )%
Net investment income 13 26 (13 ) (50 )%
Net investment gains (losses) - 1 (1 ) (100 )%
Insurance and investment product fees
and other 20 1 19 NM (1)
Total revenues 170 170 - - %
Benefits and expenses:
Benefits and other changes in policy
reserves 174 526 (352 ) (67 )%
Acquisition and operating expenses, net
of deferrals 33 41 (8 ) (20 )%
Amortization of deferred acquisition
costs and intangibles 2 1 1 100 %
Total benefits and expenses 209 568 (359 ) (63 )%
Loss before income taxes (39 ) (398 ) 359 90 %
Benefit for income taxes (14 ) (144 ) 130 90 %
Net loss available to Genworth
Financial, Inc.'s common stockholders (25 ) (254 ) 229 90 %
Adjustment to net loss available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments - (1 ) 1 100 %
Net operating loss available to Genworth
Financial, Inc.'s common stockholders $ (25 ) $ (255 ) $ 230 90 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Net operating loss available to Genworth Financial, Inc.'s common stockholders
The decrease in the net operating loss available to Genworth Financial, Inc.'s
common stockholders was mainly related to a reserve strengthening in the second
quarter of 2011 that did not recur. The decrease was also attributable to lower
new delinquencies, partially offset by continued aging of existing delinquencies
in the current year.
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Revenues
Premiums decreased driven by lower insurance in-force and lower premiums assumed
from an affiliate under an intercompany reinsurance agreement which was
terminated effective July 1, 2012, partially offset by lower ceded reinsurance
premiums related to our captive arrangements and less policy coverage rescission
activity.
Net investment income decreased primarily from lower investment yields as a
result of holding higher cash balances to meet claims-paying needs and lower
average invested assets.
Insurance and investment product fees and other income increased from a gain
related to the termination of an external reinsurance arrangement in the current
year.
Benefits and expenses
Benefits and other changes in policy reserves decreased due to a decrease in
change in reserves of $427 million, partially offset by an increase in net paid
claims of $75 million. The decrease in change in reserves was primarily driven
by a reserve strengthening in the prior year that did not recur. In the second
quarter of 2011, we strengthened reserves by $299 million primarily related to a
decline in cure rates during the second quarter of 2011 for delinquent loans and
continued aging of existing delinquencies. Of the reserve strengthening,
approximately $102 million was associated with worsening trends in recent
experience. These trends were associated with a range of factors, including
reduced opportunities to mitigate losses through loan modification actions due
to a higher percentage of early stage delinquencies shifting to a more aged
delinquency status. Specifically, reduced cure rates were driven by lower levels
of borrower self-cures and lender loan modifications outside of
government-sponsored modification programs. In addition, our expectations going
forward include further deterioration in cure rates from a continuation of
current market trends and an ongoing weakness in the U.S. residential real
estate market. Accordingly, these expectations going forward resulted in an
additional reserve strengthening of approximately $197 million in the second
quarter of 2011. The decrease in change in reserves was also driven by lower new
delinquencies in the current year. The increase in net paid claims was
attributable to continued aging of the delinquency inventory volume and a
significant reduction in ceded claims under captive arrangements in the current
year.
Acquisition and operating expenses, net of deferrals, decreased primarily from
lower operating expenses as a result of a cost-saving initiative in 2011.
Benefit for income taxes. The effective tax rate decreased to 35.9% for the
three months ended June 30, 2012 from 36.2% for the three months ended June 30,
2011. The rate remained flat from the prior year.
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Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth the results of operations relating to our U.S.
Mortgage Insurance segment for the periods indicated:
Increase
(decrease) and
Six month ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 274 $ 284 $ (10 ) (4 )%
Net investment income 36 59 (23 ) (39 )%
Net investment gains (losses) 27 2 25 NM (1)
Insurance and investment product fees
and other 22 2 20 NM (1)
Total revenues 359 347 12 3 %
Benefits and expenses:
Benefits and other changes in policy
reserves 371 805 (434 ) (54 )%
Acquisition and operating expenses, net
of deferrals 67 80 (13 ) (16 )%
Amortization of deferred acquisition
costs and intangibles 3 3 - - %
Total benefits and expenses 441 888 (447 ) (50 )%
Loss before income taxes (82 ) (541 ) 459 85 %
Benefit for income taxes (31 ) (204 ) 173 85 %
Net loss available to Genworth
Financial, Inc.'s common stockholders (51 ) (337 ) 286 85 %
Adjustment to net loss available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments (17 ) (1 ) (16 ) NM (1)
Net operating loss available to
Genworth Financial, Inc.'s common
stockholders $ (68 ) $ (338 ) $ 270 80 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Net operating loss available to Genworth Financial, Inc.'s common stockholders
The decrease in the net operating loss available to Genworth Financial, Inc.'s
common stockholders was mainly related to a reserve strengthening in the second
quarter of 2011 that did not recur. The decrease was also attributable to lower
new delinquencies, partially offset by continued aging of existing delinquencies
in the current year.
Revenues
Premiums decreased driven by lower insurance in-force and lower premiums assumed
from an affiliate under an intercompany reinsurance agreement which was
terminated effective July 1, 2012, partially offset by lower ceded reinsurance
premiums related to our captive arrangements, the benefit of previously
implemented rate increases and less policy coverage rescission activity.
Net investment income decreased from lower yield from holding higher cash
balances to meet claims-paying needs and lower invested assets.
The increase in net investment gains was primarily driven by higher gains on the
sale of investments from portfolio repositioning activities in the current year.
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Insurance and investment product fees and other income increased from a gain
related to the termination of an external reinsurance arrangement in the current
year.
Benefits and expenses
Benefits and other changes in policy reserves decreased due to a decrease in
change in reserves of $535 million, partially offset by an increase in net paid
claims of $101 million. The decrease in change in reserves was primarily driven
by a reserve strengthening in the prior year that did not recur. In the second
quarter of 2011, we strengthened reserves by $299 million primarily related to a
decline in cure rates during the second quarter of 2011 for delinquent loans and
continued aging of existing delinquencies. Of the reserve strengthening,
approximately $102 million was associated with worsening trends in recent
experience. These trends were associated with a range of factors, including
reduced opportunities to mitigate losses through loan modification actions due
to a higher percentage of early stage delinquencies shifting to a more aged
delinquency status. Specifically, reduced cure rates were driven by lower levels
of borrower self-cures and lender loan modifications outside of
government-sponsored modification programs. In addition, our expectations going
forward include further deterioration in cure rates from a continuation of
current market trends and an ongoing weakness in the U.S. residential real
estate market. Accordingly, these expectations going forward resulted in an
additional reserve strengthening of approximately $197 million in the second
quarter of 2011. The decrease in change in reserves was also driven by lower new
delinquencies in the current year. The increase in net paid claims was
attributable to continued aging of the delinquency inventory volume and a
significant reduction in ceded claims under captive arrangements, coupled with a
net $9 million portfolio settlement with one of our lenders in the current year.
Acquisition and operating expenses, net of deferrals, decreased primarily from
lower operating expenses as a result of a cost-saving initiative in 2011.
Benefit for income taxes. The effective tax rate increased to 37.8% for the six
months ended June 30, 2012 from 37.7% for the six months ended June 30, 2011.
The rate remained flat from the prior year.
U.S. Mortgage Insurance selected operating performance measures
The following tables set forth selected operating performance measures regarding
our U.S. Mortgage Insurance segment as of or for the dates indicated:
Increase (decrease) and
As of June 30, percentage change
(Amounts in millions) 2012 2011 2012 vs. 2011
Primary insurance in-force $ 112,000 $ 120,900 $ (8,900 ) (7 )%
Risk in-force 26,600 28,300 (1,700 ) (6 )%
Increase Increase
(decrease) and (decrease) and
Three months ended percentage Six months ended percentage
June 30, change June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
New insurance written $ 3,600 $ 1,900 $ 1,700 89 % $ 6,600$ 4,300$ 2,300 53 %
Net premiums written
139 145 (6 ) (4 )% 281 287 (6 ) (2 )%
Primary insurance in-force and risk in-force
Primary insurance in-force decreased primarily as a result of rescission and
other loss mitigation actions and a decline in our mortgage insurance market
share due to tighter mortgage insurance guidelines and our pricing
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structure. These decreases were partially offset by an increase in new insurance
written. In addition, risk in-force decreased due to tighter mortgage insurance
guidelines as well as a continued weak housing market and reduced mortgage
credit liquidity. Flow persistency was 82% and 86% for the six months ended
June 30, 2012 and 2011, respectively.
New insurance written
New insurance written increased for the three months and six months ended
June 30, 2012 primarily driven by an increase in the mortgage insurance
refinance market, partially offset by a decline in our mortgage insurance market
share due to tighter mortgage insurance guidelines and our pricing structure.
Net premiums written
For the three and six months ended June 30, 2012, net premiums written decreased
due to lower assumed reinsurance premiums, partially offset by higher new
insurance written.
Loss and expense ratios
The following table sets forth the loss and expense ratios for our U.S. Mortgage
Insurance segment for the dates indicated:
Three months ended Six months ended
June 30, Increase (decrease) June 30, Increase (decrease)
2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
Loss ratio 127 % 369 % (242 )% 135 % 283 % (148 )%
Expense ratio 25 % 29 % (4 )% 25 % 29 % (4 )%
The loss ratio is the ratio of incurred losses and loss adjustment expenses to
net earned premiums. The expense ratio is the ratio of general expenses to net
premiums written. In our business, general expenses consist of acquisition and
operating expenses, net of deferrals, and amortization of deferred acquisition
costs and intangibles.
The loss ratio for the three and six months ended June 30, 2012 decreased
primarily attributable to a decrease in change in reserves. In the second
quarter of 2011, we strengthened reserves by $299 million primarily related to a
decline in cure rates during the second quarter of 2011 for delinquent loans and
continued aging of existing delinquencies. Of the reserve strengthening,
approximately $102 million was associated with worsening trends in recent
experience. These trends were associated with a range of factors, including
reduced opportunities to mitigate losses through loan modification actions due
to a higher percentage of early stage delinquencies shifting to a more aged
delinquency status. Specifically, reduced cure rates were driven by lower levels
of borrower self-cures and lender loan modifications outside of
government-sponsored modification programs. In addition, our expectations going
forward include further deterioration in cure rates from a continuation of
current market trends and an ongoing weakness in the U.S. residential real
estate market. Accordingly, these expectations going forward resulted in an
additional reserve strengthening of approximately $197 million in the second
quarter of 2011. The decrease in change in reserves was also driven by lower new
delinquencies in the current year. These decreases were partially offset by an
increase in net paid claims attributable to continued aging of the delinquency
inventory volume and a significant reduction in ceded claims under captive
arrangements. The six months ended June 30, 2012 also included a net $9 million
portfolio settlement with one of our lenders.
The expense ratio decreased for the three and six months ended June 30, 2012
primarily from lower operating expenses as a result of a cost-saving initiative
in 2011, as well as lower written premiums.
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Delinquent loans
The following table sets forth the number of loans insured, the number of
delinquent loans and the delinquency rate for our U.S. mortgage insurance
portfolio as of the dates indicated:
June 30, December 31, June 30,
2012 2011 2011
Primary insurance:
Insured loans in-force 679,817 714,467 746,740
Delinquent loans 74,683 87,007 87,464
Percentage of delinquent loans (delinquency
rate) 10.99 % 12.18 % 11.71 %
Flow loan in-force 607,133 633,246 658,251
Flow delinquent loans 71,878 83,931 84,442
Percentage of flow delinquent loans
(delinquency rate) 11.84 % 13.25 % 12.83 %
Bulk loans in-force 72,684 81,221 88,489
Bulk delinquent loans (1) 2,805 3,076 3,022
Percentage of bulk delinquent loans
(delinquency rate) 3.86 % 3.79 % 3.42 %
A minus and sub-prime loans in-force 63,230 68,487 73,211
A minus and sub-prime loans delinquent loans 16,796 19,884 20,284
Percentage of A minus and sub-prime
delinquent loans (delinquency rate) 26.56 % 29.03 % 27.71 %
Pool insurance:
Insured loans in-force 13,562 14,418 16,943
Delinquent loans 679 778 931
Percentage of delinquent loans (delinquency
rate) 5.01 % 5.40 % 5.49 %
(1) Included loans where we were in a secondary loss position for which no
reserve was established due to an existing deductible. Excluding these
loans, bulk delinquent loans were 1,381 as of June 30, 2012, 1,592 as of
December 31, 2011 and 1,569 as of June 30, 2011.
Delinquency and foreclosure levels that developed principally in our 2006, 2007
and 2008 book years have remained high as the United States continues to
experience an economic recession and weakness in its residential real estate
market, particularly in Florida, California, Arizona and Nevada. These trends
also continue to be especially evident within these book years in our A minus,
Alt-A, adjustable rate mortgages and certain 100% loan-to-value products.
However, we have seen a decline in new delinquencies and improvement in cures.
The following tables set forth flow delinquencies, direct case reserves and risk
in-force by aged missed payment status in our U.S. mortgage insurance portfolio
as of the dates indicated:
June 30, 2012
Direct case Risk Reserves as %
(Dollar amounts in millions) Delinquencies reserves (1) in-force of risk in-force
Payments in default:
3 payments or less 16,252 $ 149 $ 646 23 %
4 - 11 payments 19,878 532 878 61 %
12 payments or more 35,748 1,273 1,746 73 %
Total 71,878 $ 1,954 $ 3,270 60 %
(1) Direct flow case reserves exclude loss adjustment expenses, incurred but not
reported and reinsurance reserves.
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December 31, 2011
Direct case Risk Reserves as %
(Dollar amounts in millions) Delinquencies reserves (1) in-force of risk in-force
Payments in default:
3 payments or less 21,272 $ 193 $ 835 23 %
4 - 11 payments 24,493 646 1,075 60 %
12 payments or more 38,166 1,360 1,870 73 %
Total 83,931 $ 2,199 $ 3,780 58 %
(1) Direct flow case reserves exclude loss adjustment expenses, incurred but not
reported and reinsurance reserves.
Primary insurance delinquency rates differ from region to region in the United
States at any one time depending upon economic conditions and cyclical growth
patterns. The tables below set forth our primary delinquency rates for the
various regions of the United States and the ten largest states by our risk
in-force as of the dates indicated. Delinquency rates are shown by region based
upon the location of the underlying property, rather than the location of the
lender.
Percent of primary Percent of total Delinquency rate
risk in-force as of reserves as of June 30, December 31, June 30,
June 30, 2012 June 30, 2012 (1) 2012 2011 2011
By Region:
Southeast (2) 22 % 35 % 15.61 % 17.10 % 16.37 %
South Central (3) 16 10 8.54 % 10.15 % 9.90 %
Northeast (4) 15 14 12.52 % 12.80 % 11.71 %
North Central (5) 12 12 10.56 % 11.89 % 11.36 %
Pacific (6) 11 12 11.01 % 12.52 % 13.29 %
Great Lakes (7) 9 7 8.06 % 9.00 % 8.49 %
New England (8) 5 3 9.66 % 10.59 % 10.36 %
Mid-Atlantic (9) 5 4 9.88 % 10.73 % 10.12 %
Plains (10) 5 3 6.72 % 7.87 % 7.75 %
Total 100 % 100 % 10.99 % 12.18 % 11.71 %
(1) Total reserves were $2,234 million as of June 30, 2012.
(2) Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South
Carolina and Tennessee.
(3) Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah.
(4) New Jersey, New York and Pennsylvania.
(5) Illinois, Minnesota, Missouri and Wisconsin.
(6) Alaska, California, Hawaii, Nevada, Oregon and Washington.
(7) Indiana, Kentucky, Michigan and Ohio.
(8) Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.
(9) Delaware, Maryland, Virginia, Washington D.C. and West Virginia.
(10) Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and
Wyoming.
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Percent of primary Percent of total Delinquency rate
risk in-force as of reserves as of June 30, December 31, June 30,
June 30, 2012 June 30, 2012 (1) 2012 2011 2011
By State:
Florida 7 % 25 % 27.92 % 29.30 % 28.35 %
New York 7 % 6 % 10.71 % 10.66 % 9.71 %
Texas 7 % 3 % 6.99 % 8.34 % 7.61 %
California 6 % 6 % 8.75 % 10.86 % 12.24 %
Illinois 5 % 8 % 15.42 % 16.70 % 15.90 %
New Jersey 4 % 5 % 18.93 % 19.07 % 17.73 %
North Carolina 4 % 3 % 10.59 % 11.89 % 10.93 %
Pennsylvania 4 % 3 % 10.86 % 11.85 % 10.81 %
Georgia 4 % 4 % 12.77 % 14.79 % 14.70 %
Ohio 3 % 2 % 8.12 % 8.73 % 8.00 %
(1) Total reserves were $2,234 million as of June 30, 2012.
The following table sets forth the dispersion of our total reserves and primary
insurance in-force and risk in-force by year of policy origination and average
annual mortgage interest rate as of June 30, 2012:
Primary Primary
Average Percent of total
insurance Percent risk Percent
(Amounts in millions)
rate reserves (1) in-force of total in-force of total
Policy Year
2001 and prior 7.74 % 2.0 % $ 2,203 2.0 % $ 555 2.1 %
2002 6.63 % 1.5 1,690 1.5 422 1.6
2003 5.64 % 3.7 6,916 6.2 1,151 4.4
2004 5.88 % 4.6 4,734 4.2 1,091 4.1
2005 5.95 % 12.7 8,170 7.3 2,123 8.0
2006 6.39 % 19.1 11,076 9.9 2,750 10.4
2007 6.43 % 38.8 25,053 22.4 6,208 23.5
2008 6.01 % 17.0 22,817 20.4 5,697 21.6
2009 5.08 % 0.3 5,987 5.3 1,140 4.3
2010 4.66 % 0.2 7,542 6.7 1,613 6.1
2011 4.44 % 0.1 9,309 8.3 2,126 8.1
2012 3.97 % - 6,521 5.8 1,525 5.8
Total portfolio 5.84 % 100.0 % $ 112,018 100.0 % $ 26,401 100.0 %
(1) Total reserves were $2,234 million as of June 30, 2012.
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Corporate and Runoff Division
Division results of operations
The following table sets forth the results of operations relating to our
Corporate and Runoff Division for the periods indicated. See below for a
discussion by segment.
Increase Increase
(decrease) and (decrease) and
Three months ended percentage Six months percentage
June 30, change ended June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011 2012 2011 2012 vs. 2011
Net operating income (loss) available
to Genworth Financial, Inc.'s common
stockholders:
Runoff segment $ (6 ) $ 18 $ (24 ) (133 )% $ 29$ 19 $ 10
53 %
Corporate and Other activities (44 ) (92 ) 48 52 % (93 ) (161 ) 68
42 %
Total net operating loss available to
Genworth Financial, Inc.'s common
stockholders (50 ) (74 ) 24 32 % (64 ) (142 ) 78 55 %
Adjustment to net operating loss
available to Genworth Financial,
Inc.'s common stockholders:
Net investment gains (losses), net of
taxes and other adjustments (15 ) (8 ) (7 ) (88 )% (11 ) (15 ) 4
27 %
Net loss available to Genworth
Financial, Inc.'s common stockholders $ (65 ) $ (82 ) $ 17 21 % $ (75 ) $ (157 ) $ 82 52 %
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Runoff segment
Segment results of operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth the results of operations relating to our Runoff
segment for the periods indicated:
Increase
(decrease) and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 2 $ 84 $ (82 ) (98 )%
Net investment income 36 37 (1 ) (3 )%
Net investment gains (losses) (25 ) (11 ) (14 ) (127 )%
Insurance and investment product fees and
other 51 57 (6 ) (11 )%
Total revenues 64 167 (103 ) (62 )%
Benefits and expenses:
Benefits and other changes in policy
reserves 14 69 (55 ) (80 )%
Interest credited 34 34 - - %
Acquisition and operating expenses, net
of deferrals 21 37 (16 ) (43 )%
Amortization of deferred acquisition
costs and intangibles 17 20 (3 ) (15 )%
Interest expense 1 1 - - %
Total benefits and expenses 87 161 (74 ) (46 )%
Income (loss) before income taxes (23 ) 6 (29 ) NM (1)
Benefit for income taxes (2 ) (6 ) 4 67 %
Net income (loss) available to Genworth
Financial, Inc.'s common stockholders (21 ) 12 (33 ) NM (1)
Adjustment to net income (loss) available
to Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments 15 6 9 150 %
Net operating income (loss) available to
Genworth Financial, Inc.'s common
stockholders $ (6 ) $ 18 $ (24 ) (133 )%
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Net operating income (loss) available to Genworth Financial, Inc.'s common
stockholders
We had a net operating loss available to Genworth Financial, Inc.'s common
stockholders in the current year compared to net operating income in the prior
year primarily related to our variable annuity products largely driven by
unfavorable equity market performance and lower tax benefits in the current
year. The prior year included operating income from our Medicare supplement
insurance business that was sold in the fourth quarter of 2011.
Revenues
Premiums decreased driven by the sale of our Medicare supplement insurance
business in the fourth quarter of 2011.
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Net investment income decreased as higher policy loan income was more than
offset by the sale of our Medicare supplement insurance business in the fourth
quarter of 2011.
Net investment losses increased largely related to our institutional products
principally from higher derivative losses, higher impairments and lower net
investment gains from the sale of investment securities in the current year. The
increase in net investment losses was also attributable to our variable annuity
products from higher losses on embedded derivatives associated with our variable
annuity products with GMWBs, partially offset by higher net gains from the sale
of investment securities and higher derivative gains in the current year.
Insurance and investment product fees and other decreased mainly attributable to
lower average account values of our variable annuity products in the current
year.
Benefits and expenses
Benefits and other changes in policy reserves decreased primarily attributable
to the sale of our Medicare supplement insurance business in the fourth quarter
of 2011, partially offset by an increase in our GMDB reserves in our variable
annuity products due to unfavorable equity market impacts in the current year.
Acquisition and operating expenses, net of deferrals, decreased principally from
the sale of our Medicare supplement insurance business in the fourth quarter of
2011.
Amortization of deferred acquisition costs and intangibles decreased largely
related to the sale of our Medicare supplement insurance business in the fourth
quarter of 2011, partially offset by an increase in our variable annuity
products from unfavorable equity market impacts in the current year.
Benefit for income taxes. The effective tax rate increased to 8.7% for the three
months ended June 30, 2012 from (100.0)% for the three months ended June 30,
2011. The increase in the effective tax rate was primarily related to changes in
uncertain tax positions.
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Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth the results of operations relating to our Runoff
segment for the periods indicated:
Increase
(decrease) and
Six months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Premiums $ 3 $ 169 $ (166 ) (98 )%
Net investment income 74 71 3 4 %
Net investment gains (losses) 17 (11 ) 28 NM (1)
Insurance and investment product fees and
other 103 116 (13 ) (11 )%
Total revenues 197 345 (148 ) (43 )%
Benefits and expenses:
Benefits and other changes in policy
reserves 15 147 (132 ) (90 )%
Interest credited 67 69 (2 ) (3 )%
Acquisition and operating expenses, net
of deferrals 40 83 (43 ) (52 )%
Amortization of deferred acquisition
costs and intangibles 13 36 (23 ) (64 )%
Interest expense 1 1 - - %
Total benefits and expenses 136 336 (200 ) (60 )%
Income before income taxes 61 9 52 NM (1)
Provision (benefit) for income taxes 20 (5 ) 25 NM (1)
Net income available to Genworth
Financial, Inc.'s common stockholders 41 14 27 193 %
Adjustment to net income available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments (12 ) 5
(17 ) NM (1)
Net operating income available to
Genworth Financial, Inc.'s common
stockholders $ 29 $ 19 $ 10 53 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Net operating income available to Genworth Financial, Inc.'s common stockholders
Net operating income available to Genworth Financial, Inc.'s common stockholders
increased primarily related to our variable annuity products largely driven by a
$7 million charge from the discontinuance of our variable annuity offerings in
the prior year that did not recur. These increases were partially offset by
lower tax benefits in the current year.
Revenues
Premiums decreased driven by the sale of our Medicare supplement insurance
business in the fourth quarter of 2011.
Net investment income increased primarily from higher policy loan income in the
current year, partially offset by the sale of our Medicare supplement insurance
business in the fourth quarter of 2011.
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We had net investment gains in the current year compared to net investment
losses in the prior year principally from higher gains on embedded derivatives
associated with our variable annuity products with GMWBs and higher net gains
from the sale of investment securities, partially offset by higher derivative
losses in the current year.
Insurance and investment product fees and other decreased mainly attributable to
lower average account values of our variable annuity products in the current
year.
Benefits and expenses
Benefits and other changes in policy reserves decreased primarily attributable
to the sale of our Medicare supplement insurance business in the fourth quarter
of 2011.
Interest credited decreased principally related to our institutional products as
a result of lower interest paid on our floating rate policyholder liabilities
due to lower interest rates and a decrease in average outstanding liabilities.
Acquisition and operating expenses, net of deferrals, decreased principally from
the sale of our Medicare supplement insurance business in the fourth quarter of
2011 and from a $9 million charge from the discontinuance of our variable
annuity offerings in the prior year that did not recur.
Amortization of deferred acquisition costs and intangibles decreased largely
related to the sale of our Medicare supplement insurance business in the fourth
quarter of 2011. The decrease was also attributable to our variable annuity
products principally from favorable equity market impacts during the first
quarter of 2012 and a $5 million favorable unlocking driven by lower surrenders
in the current year.
Provision (benefit) for income taxes. The effective tax rate increased to 32.8%
for the six months ended June 30, 2012 from (55.6)% for the six months ended
June 30, 2011. The increase in the effective tax rate was primarily related to
changes in uncertain tax positions.
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Runoff selected operating performance measures
Variable annuity and variable life insurance products
The following table sets forth selected operating performance measures regarding
our variable annuity and variable life insurance products as of or for the dates
indicated:
As of or for the three As of or for the six
months ended months ended
June 30, June 30,
(Amounts in millions) 2012 2011 2012 2011
Income Distribution Series (1)
Account value, beginning of period $ 6,398 $ 6,687 $ 6,265 $ 6,590
Deposits 20 33 46 150
Surrenders, benefits and product charges (168 ) (171 ) (342 ) (356 )
Net flows (148 ) (138 ) (296 ) (206 )
Interest credited and investment
performance (21 ) 57 260 222
Account value, end of period $ 6,229 $ 6,606 $ 6,229 $ 6,606
Traditional variable annuities
Account value, net of reinsurance,
beginning of period $ 1,819 $ 2,096 $ 1,766 $ 2,078
Deposits 3 3 6 20
Surrenders, benefits and product charges (81 ) (100 )
(170 ) (188 )
Net flows (78 ) (97 ) (164 ) (168 )
Interest credited and investment
performance (38 ) 13 101 102
Account value, net of reinsurance, end of
period $ 1,703 $ 2,012
$ 1,703$ 2,012
Variable life insurance
Account value, beginning of period $ 305 $ 319 $ 284 $ 313
Deposits 2 3 5 6
Surrenders, benefits and product charges (10 ) (11 )
(18 ) (22 )
Net flows (8 ) (8 ) (13 ) (16 )
Interest credited and investment
performance (4 ) 3 22 17
Account value, end of period $ 293 $ 314 $ 293 $ 314
(1) The Income Distribution Series products are comprised of our deferred and
immediate variable annuity products, including those variable annuity
products with rider options that provide guaranteed income benefits,
including GMWBs and certain types of guaranteed annuitization benefits.
These products do not include fixed single premium immediate annuities or
deferred annuities, which may also serve income distribution needs.
Income Distribution Series
Account value related to our income distribution series products decreased
mainly attributable to surrenders outpacing deposits. Unfavorable equity market
performance during the second quarter of 2012 partially offset the favorable
equity market performance during the first quarter of 2012. We no longer solicit
sales of our variable annuities; however, we continue to service our existing
block of business and accept additional deposits on existing contracts.
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Traditional variable annuities
In our traditional variable annuities, the decrease in account value was
primarily the result of surrenders outpacing deposits. The favorable equity
market performance during the first quarter of 2012 was partially offset by
unfavorable equity market performance during the second quarter of 2012. We no
longer solicit sales of our variable annuities; however, we continue to service
our existing block of business and accept additional deposits on existing
contracts.
Variable life insurance
We no longer solicit sales of variable life insurance; however, we continue to
service our existing block of business.
Institutional products
The following table sets forth selected operating performance measures regarding
our institutional products as of or for the dates indicated:
As of or for the three As of or for the six
months ended June 30, months ended June 30,
(Amounts in millions) 2012 2011 2012 2011
GICs, FABNs and Funding Agreements
Account value, beginning of period $ 2,594 $ 3,317 $ 2,623 $ 3,717
Surrenders and benefits (385 ) (312 ) (440 ) (747 )
Net flows (385 ) (312 ) (440 ) (747 )
Interest credited 18 28 39 61
Foreign currency translation (6 ) 10 (1 ) 12
Account value, end of period $ 2,221 $ 3,043 $ 2,221$ 3,043
Account value related to our institutional products decreased from the prior
year mainly attributable to scheduled maturities of these products. Interest
credited declined due to a decrease in average outstanding liabilities and lower
average crediting rates. We had no new sales in the current year as we explore
the issuance of our institutional contracts on an opportunistic basis.
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Corporate and Other Activities
Results of operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth the results of operations relating to Corporate
and Other activities for the periods indicated:
Increase
(decrease)
and
Three months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Net investment income $ 16 $ 18 $ (2 ) (11 )%
Net investment gains (losses) - (3 ) 3 100 %
Insurance and investment product fees and
other 24 6 18 NM (1)
Total revenues 40 21 19 90 %
Benefits and expenses:
Acquisition and operating expenses, net
of deferrals 28 9 19 NM (1)
Amortization of deferred acquisition
costs and intangibles 3 3 - - %
Interest expense 84 86 (2 ) (2 )%
Total benefits and expenses 115 98 17 17 %
Loss before income taxes (75 ) (77 ) 2 3 %
Provision (benefit) for income taxes (31 ) 17 (48 ) NM (1)
Net loss available to Genworth Financial,
Inc.'s common stockholders (44 ) (94 ) 50 53 %
Adjustment to net loss available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments - 2 (2 ) (100 )%
Net operating loss available to Genworth
Financial, Inc.'s common stockholders $ (44 ) $ (92 ) $ 48
52 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Net operating loss available to Genworth Financial, Inc.'s common stockholders
We reported a lower net operating loss available to Genworth Financial, Inc.'s
common stockholders in the current year compared to the prior year primarily as
a result of higher tax benefits in the current year.
Revenues
Net investment losses increased primarily related to higher net losses from the
sale of investment securities related to portfolio repositioning and derivative
losses, partially offset by lower impairments in the current year.
Insurance and investment product fees and other increased mainly attributable to
higher income related to our reverse mortgage business.
Benefits and expenses
Acquisition and operating expenses, net of deferrals, increased mainly as a
result of our reverse mortgage business primarily related to broker commissions
on loans.
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Interest expense decreased mainly attributable to the maturity of senior notes
in June 2011, partially offset by the debt issuance in March 2012.
The increase in the income tax benefit was primarily related to higher tax
benefits allocated to Corporate and Other activities which offset tax expense
reported by the operating business segments in the current year.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth the results of operations relating to Corporate
and Other activities for the periods indicated:
Increase
(decrease) and
Six months ended percentage
June 30, change
(Amounts in millions) 2012 2011 2012 vs. 2011
Revenues:
Net investment income $ 16 $ 17 $ (1 ) (6 )%
Net investment gains (losses) (35 ) (17 ) (18 ) (106 )%
Insurance and investment product fees and
other 45 13 32 NM (1)
Total revenues 26 13 13 100 %
Benefits and expenses:
Acquisition and operating expenses, net
of deferrals 58 11 47 NM (1)
Amortization of deferred acquisition
costs and intangibles 6 6 - - %
Interest expense 146 168 (22 ) (13 )%
Total benefits and expenses 210 185 25 14 %
Loss before income taxes (184 ) (172 ) (12 ) (7 )%
Benefit for income taxes (68 ) (1 ) (67 ) NM (1)
Net loss available to Genworth Financial,
Inc.'s common stockholders (116 ) (171 ) 55 32 %
Adjustment to net loss available to
Genworth Financial, Inc.'s common
stockholders:
Net investment (gains) losses, net of
taxes and other adjustments 23 10 13 130 %
Net operating loss available to Genworth
Financial, Inc.'s common stockholders $ (93 ) $ (161 ) $ 68
42 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Net operating loss available to Genworth Financial, Inc.'s common stockholders
We reported a lower net operating loss available to Genworth Financial, Inc.'s
common stockholders in the current year compared to the prior year primarily as
a result of higher tax benefits and lower interest expense, partially offset by
higher operating expenses in the current year.
Revenues
Net investment losses increased primarily related to higher net losses from the
sale of investment securities related to portfolio repositioning and derivative
losses, partially offset by lower impairments in the current year.
Insurance and investment product fees and other increased mainly attributable to
higher income related to our reverse mortgage business.
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Benefits and expenses
Acquisition and operating expenses, net of deferrals, increased as a result of
$32 million associated with our reverse mortgage business primarily related to
broker commissions on loans. There was also an increase from higher unallocated
expenses to our operating segments in the current year and lower overall
expenses in the prior year.
Interest expense decreased mainly attributable to a $20 million favorable
adjustment in the current year related to the Tax Matters Agreement with our
former parent company and the maturity of senior notes in June 2011, partially
offset by the debt issuances in March 2012 and 2011.
The increase in the income tax benefit was primarily related to higher tax
benefits allocated to Corporate and Other activities which offset tax expense
reported by the operating business segments in the current year.
Investments and Derivative Instruments
Investment results
The following tables set forth information about our investment income,
excluding net investment gains (losses), for each component of our investment
portfolio for the periods indicated:
Three months ended June 30, Increase (decrease)
2012 2011 2012 vs. 2011
(Amounts in millions) Yield Amount Yield Amount Yield Amount
Fixed maturity securities-taxable 4.9 % $ 669 5.2 % $ 693 (0.3 )% $ (24 )
Fixed maturity
securities-non-taxable 3.3 % 3 4.1 % 10 (0.8 )% (7 )
Commercial mortgage loans 5.7 % 85 5.6 % 92 0.1 % (7 )
Restricted commercial mortgage
loans related to securitization
entities 7.6 % 7 7.8 % 9 (0.2 )% (2 )
Equity securities 5.7 % 6 11.7 % 10 (6.0 )% (4 )
Other invested assets 16.2 % 56 16.9 % 55 (0.7 )% 1
Restricted other invested assets
related to securitization entities 0.1 % - 0.2 % - (0.1 )% -
Policy loans 7.8 % 31 7.9 % 30 (0.1 )% 1
Cash, cash equivalents and
short-term investments 0.9 % 10 0.7 % 6 0.2 % 4
Gross investment income before
expenses and fees 5.0 % 867 5.3 % 905 (0.3 )% (38 )
Expenses and fees (0.1 )% (21 ) (0.2 )% (24 ) 0.1 % 3
Net investment income 4.9 % $ 846 5.1 % $ 881 (0.2 )% $ (35 )
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Six months ended June 30, Increase (decrease)
2012 2011 2012 vs. 2011
(Amounts in millions) Yield Amount Yield Amount Yield Amount
Fixed maturity securities-taxable 4.9 % $ 1,329 5.1 %
$ 1,363 (0.2 )% $ (34 )
Fixed maturity securities-non-taxable 3.3 % 7 4.1 % 21 (0.8 )% (14 )
Commercial mortgage loans 5.6 % 169 5.6 % 184 - % (15 )
Restricted commercial mortgage loans
related to securitization entities 8.1 % 16 7.7 % 19 0.4 % (3 )
Equity securities 5.0 % 10 7.6 % 13 (2.6 )% (3 )
Other invested assets 15.5 % 109 13.5 % 89 2.0 % 20
Restricted other invested assets
related to securitization entities 0.2 % - 0.2 % - - % -
Policy loans 7.9 % 62 7.9 % 59 - % 3
Cash, cash equivalents and short-term
investments 0.9 % 20 0.7 % 12 0.2 % 8
Gross investment income before
expenses and fees 4.9 % 1,722 5.1 % 1,760 (0.2 )% (38 )
Expenses and fees (0.1 )% (44 ) (0.1 )% (49 ) - % 5
Net investment income 4.8 % $ 1,678 5.0 % $ 1,711 (0.2 )% $ (33 )
Yields for fixed maturity and equity securities are based on weighted-average
amortized cost or cost, respectively. Yields for other invested assets, which
include securities lending activity, are calculated net of the corresponding
securities lending liability. All other yields are based on average carrying
values.
For the three months ended June 30, 2012, the decrease in overall
weighted-average investment yields was primarily as a result of lower
reinvestment yields and $12 million of lower bond calls and prepayments in the
current year, partially offset by higher average invested assets in longer
duration products. Net investment income for the three months ended June 30,
2012 also included $3 million of higher gains related to limited partnerships
accounted for under the equity method and lower income attributable to
reinsurance arrangements accounted for under the deposit method of accounting as
certain of these arrangements were in a lower gain position in the current year.
For the six months ended June 30, 2012, the decrease in overall weighted-average
investment yields was primarily as a result of lower reinvestment yields and $15
million of lower bond calls and prepayments in the current year, partially
offset by higher average invested assets in longer duration products. Net
investment income for the six months ended June 30, 2012 included $9 million of
higher gains related to limited partnerships accounted for under the equity
method and lower income attributable to reinsurance arrangements accounted for
under the deposit method of accounting as certain of these arrangements were in
a lower gain position in the current year.
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The following table sets forth net investment gains (losses) for the periods
indicated:
Three months ended Six months ended
June 30, June 30,
(Amounts in millions) 2012 2011 2012 2011
Available-for-sale securities:
Realized gains $ 21 $ 25 $ 84 $ 54
Realized losses (19 ) (34 ) (65 ) (65 )
Net realized gains (losses) on
available-for-sale securities 2 (9 ) 19 (11 )
Impairments:
Total other-than-temporary impairments (42 ) (28 ) (58 ) (59 )
Portion of other-than-temporary
impairments included in other
comprehensive income (loss) 3 2 2 (3 )
Net other-than-temporary impairments (39 ) (26 ) (56 ) (62 )
Trading securities 32 14 7 25
Commercial mortgage loans 3 2 5 1
Net gains (losses) related to
securitization entities (4 ) (5 ) 30 5
Derivative instruments (28 ) (15 ) (2 ) (25 )
Contingent consideration adjustment - - (2 ) -
Other - (1 ) - (1 )
Net investment gains (losses) $ (34 ) $ (40 )
$ 1 $ (68 )
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
• We recorded $39 million of net other-than-temporary impairments during the
three months ended June 30, 2012 as compared to $26 million for the three
months ended June 30, 2011. Of total impairments for the three months
ended June 30, 2012 and 2011, $23 million and $17 million, respectively,
related to structured securities, including $14 million and $9 million,
respectively, related to sub-prime and Alt-A residential mortgage-backed
and asset-backed securities. Impairments related to corporate securities
were $15 million during the three months ended June 30, 2012 predominately
attributable to a financial hybrid security related to a bank in the
United Kingdom that was downgraded to below investment grade. During the
three months ended June 30, 2012 and 2011, we recorded $1 million and $2
million, respectively, of impairments related to limited partnership
investments. During the three months ended June 30, 2011, we also recorded
$4 million of impairments related to commercial mortgage loans and $3
million of impairments related to real estate held-for-investment.
• Net investment losses related to derivatives of $28 million during the
three months ended June 30, 2012 were primarily associated with embedded
derivatives related to variable annuity products with GMWB riders and
credit default swaps. The GMWB losses were primarily due to the
policyholder funds underperformance as compared to market indices and
market losses resulting from increased volatility. Additionally, there
were losses associated with widening of credit spreads associated with credit default swaps where we sold protection to improve diversification
and portfolio yield. These losses were partially offset by gains
attributable to decreases in long-term interest rates that were related to
a non-qualified derivative strategy to mitigate interest rate risk.
Additionally, there were gains associated with our reinsurance embedded
derivatives as a result of decreases in long-term interest rates that
increased the value of assets held by the reinsurer. Net investment losses
related to derivatives of $15 million during the three months ended
June 30, 2011 were primarily associated with embedded derivatives related
to variable annuity products with GMWBs. The GMWB losses were primarily
due to the policyholder funds underperforming the benchmark indices used
for hedging as a result of market volatility. Additionally, there were
losses from derivatives used to hedge foreign currency risk associated
with near-term expected dividend payments and other cash flows from
certain subsidiaries and to mitigate foreign subsidiary macroeconomic
risk.
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• Net gains related to the sale of available-for-sale securities were $2
million during the three months ended June 30, 2012 compared to net losses
of $9 million during the three months ended June 30, 2011. We also
recorded $18 million of higher net gains related to trading securities
during the three months ended June 30, 2012.
• The aggregate fair value of securities sold at a loss during the three months ended June 30, 2012 and 2011 was $326 million from the sale of 66
securities and $294 million from the sale of 78 securities, respectively,
which was approximately 95% and 91%, respectively, of book value. The loss
on sales of securities during the three months ended June 30, 2012 was
primarily driven by widening credit spreads. Generally, securities that
are sold at a loss represent either small dollar amounts or percentage
losses upon disposition. The securities sold at a loss in the second
quarter of 2012 included three foreign bonds that were sold for a total
loss of $5 million related to portfolio repositioning activities. The
securities sold at a loss in the second quarter of 2011 included one
foreign corporate security that was sold for a total loss of $11 million
related to portfolio repositioning activities.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
• We recorded $56 million of net other-than-temporary impairments during the
six months ended June 30, 2012 as compared to $62 million for the six
months ended June 30, 2011. Of total impairments for the six months ended
June 30, 2012 and 2011, $38 million related to structured securities in
both periods, including $22 million and $24 million, respectively, related
to sub-prime and Alt-A residential mortgage-backed and asset-backed
securities. Impairments related to corporate securities were $15 million
during the six months ended June 30, 2012 predominately attributable to a
financial hybrid security related to a bank in the United Kingdom that was
downgraded to below investment grade. Impairments related to corporate
securities as a result of bankruptcies, receivership or concerns about the
issuer's ability to continue to make contractual payments or where we have
intent to sell were $14 million during the six months ended June 30, 2011.
During the six months ended June 30, 2012 and 2011, we recorded $2 million
and $5 million, respectively, of impairments related to commercial
mortgage loans and $1 million and $2 million, respectively, of impairments
related to limited partnership investments. During the six months ended
June 30, 2011, we also recorded $3 million of impairments related to real
estate held-for-investment.
• Net investment losses related to derivatives of $2 million during the six
months ended June 30, 2012 were primarily associated with foreign currency
risk and embedded derivatives related to variable annuity products with
GMWB riders. The GMWB losses were primarily due to the policyholder funds
underperformance as compared to market indices and market losses resulting
from increased volatility. Additionally, there were losses associated with
derivatives used to hedge foreign currency risk associated with near-term
expected dividend payments from certain subsidiaries and to mitigate
foreign subsidiary macroeconomic risk. These losses were partially offset
by gains from the narrowing of credit spreads associated with credit
default swaps where we sold protection to improve diversification and portfolio yield. In addition, there were gains attributable to decreases
in long-term interest rates that were related to a non-qualified
derivative strategy to mitigate interest rate risk. Net investment losses
related to derivatives of $25 million during the six months ended June 30,
2011 were primarily associated with embedded derivatives related to
variable annuity products with GMWBs. The GMWB losses were primarily due
to the policyholder funds underperforming the benchmark indices used for
hedging as a result of market volatility. Additionally, there were losses
from derivatives used to hedge foreign currency risk associated with
near-term expected dividend payments and other cash flows from certain
subsidiaries and to mitigate foreign subsidiary macroeconomic risk. These
losses were partially offset by gains related to a derivative strategy to
mitigate the interest rate risk associated with our statutory capital
position.
• Net gains related to the sale of available-for-sale securities were $19 million during the six months ended June 30, 2012 compared to net losses
of $11 million during the six months ended June 30, 2011. We recorded $18
million of lower gains related to trading securities during the six months
ended June 30, 2012 compared to the six months ended June 30, 2011. We
recorded $25 million of higher net
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gains related to securitization entities during the six months ended
June 30, 2012 compared to the six months ended June 30, 2011 primarily
related to higher gains on trading securities and derivatives. We also
recorded a $5 million decrease in the allowance related to commercial
mortgage loans and a $2 million contingent consideration adjustment during
the six months ended June 30, 2012 mainly related to the purchase of
Altegris in 2010.
• The aggregate fair value of securities sold at a loss during the six
months ended June 30, 2012 and 2011 was $683 million from the sale of 158
securities and $691 million from the sale of 145 securities, respectively,
which was approximately 93% of book value for both periods. The loss on
sales of securities during the six months ended June 30, 2012 was
primarily driven by widening credit spreads. Generally, securities that are sold at a loss represent either small dollar amounts or percentage
losses upon disposition. The securities sold at a loss during the six
months ended June 30, 2012 included one corporate security sold for a total loss of $8 million and one municipal bond sold for a total loss of
$4 million in the first quarter of 2012 and three foreign bonds sold for a
total loss of $5 million in the second quarter of 2012 related to
portfolio repositioning activities. The securities sold at a loss during
the six months ended June 30, 2011 included two U.S. corporate securities
that were sold for a total loss of $11 million in the first quarter of
2011 and one foreign corporate security that was sold for a total loss of
$11 million in the second quarter of 2011 related to portfolio
repositioning activities.
Investment portfolio
The following table sets forth our cash, cash equivalents and invested assets as
of the dates indicated:
June 30, 2012 December 31, 2011
(Amounts in millions) Carrying value % of total Carrying value % of total
Fixed maturity securities,
available-for-sale:
Public $ 46,168 60 % $ 45,420 59 %
Private 13,623 18 12,875 17
Commercial mortgage loans 5,875 8 6,092 8
Other invested assets 4,512 5 4,819 6
Policy loans 1,619 2 1,549 2
Equity securities,
available-for-sale 431 1 361 -
Restricted other invested assets
related to securitization
entities 391 1 377 1
Restricted commercial mortgage
loans related to securitization
entities 382 - 411 1
Cash and cash equivalents 3,874 5 4,488 6
Total cash, cash equivalents and
invested assets $ 76,875 100 % $ 76,392 100 %
For a discussion of the change in cash, cash equivalents and invested assets,
see the comparison for this line item under "-Consolidated Balance Sheets." See
note 4 in our "-Notes to Condensed Consolidated Financial Statements" for
additional information related to our investment portfolio.
We hold fixed maturity, equity and trading securities, derivatives, embedded
derivatives, securities held as collateral and certain other financial
instruments, which are carried at fair value. Fair value is the price that would
be received to sell an asset in an orderly transaction between market
participants at the measurement date. As of June 30, 2012, approximately 10% of
our investment holdings recorded at fair value was based on significant inputs
that were not market observable and were classified as Level 3 measurements. See
note 6 in our "-Notes to Condensed Consolidated Financial Statements" for
additional information related to fair value.
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Fixed maturity and equity securities
As of June 30, 2012, 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
Amortized Not other-than- Other-than- Not other-than- Other-than-
cost or temporarily temporarily temporarily temporarily Fair
(Amounts in millions) cost impaired impaired impaired impaired value
Fixed maturity securities:
U.S. government, agencies and
government-sponsored
enterprises $ 3,915 $ 1,071 $ - $ (1 ) $ - $ 4,985
Tax-exempt (1) 348 13 - (51 ) - 310
Government-non-U.S. (2) 2,278 228 - (1 ) - 2,505
U.S. corporate (2), (3) 22,840 2,891 16 (201 ) (1 ) 25,545
Corporate-non-U.S. (2) 13,764 958 - (137 ) - 14,585
Residential mortgage-backed (4) 5,792 547 8 (196 ) (175 ) 5,976
Commercial mortgage-backed 3,297 152 3 (146 ) (38 ) 3,268
Other asset-backed (4) 2,678 31 - (90 ) (2 ) 2,617
Total fixed maturity securities 54,912 5,891 27 (823 ) (216 ) 59,791
Equity securities 422 21 - (12 ) - 431
Total available-for-sale securities $ 55,334 $ 5,912 $ 27 $ (835 ) $ (216 ) $ 60,222
(1) Fair value included municipal bonds of $218 million related to special
revenue bonds, $80 million related to general obligation bonds and $12
million related to other municipal bonds.
(2) Fair value included $582 million of European periphery exposure.
(3) Fair value included municipal bonds of $919 million related to special
revenue bonds and $413 million related to general obligation bonds.
(4) Fair value included $351 million collateralized by sub-prime residential
mortgage loans and $255 million collateralized by Alt-A residential mortgage
loans.
As of December 31, 2011, 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
Amortized Not other-than- Other-than- Not other-than- Other-than-
cost or temporarily temporarily temporarily temporarily Fair
(Amounts in millions) cost impaired impaired impaired impaired value
Fixed maturity securities:
U.S. government, agencies and
government-sponsored
enterprises $ 3,946 $ 918 $ - $ (1 ) $ - $ 4,863
Tax-exempt (1) 564 15 - (76 ) - 503
Government-non-U.S. (2) 2,017 196 - (2 ) - 2,211
U.S. corporate (2), (3) 23,024 2,542 18 (325 ) (1 ) 25,258
Corporate-non-U.S. (2) 13,156 819 - (218 ) - 13,757
Residential mortgage-backed (4) 5,695 446 9 (252 ) (203 ) 5,695
Commercial mortgage-backed 3,470 157 4 (179 ) (52 ) 3,400
Other asset-backed (4) 2,686 18 - (95 ) (1 ) 2,608
Total fixed maturity securities 54,558 5,111 31 (1,148 ) (257 ) 58,295
Equity securities 356 19 - (14 ) - 361
Total available-for-sale
securities $ 54,914 $ 5,130 $ 31 $ (1,162 ) $ (257 ) $ 58,656
(1) Fair value included municipal bonds of $296 million related to special
revenue bonds, $185 million related to general obligation bonds and $22
million related to other municipal bonds.
(2) Fair value included $689 million of European periphery exposure.
(3) Fair value included municipal bonds of $881 million related to special
revenue bonds and $416 million related to general obligation bonds.
(4) Fair value included $362 million collateralized by sub-prime residential
mortgage loans and $261 million collateralized by Alt-A residential mortgage
loans.
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Fixed maturity securities increased $1.5 billion primarily as a result of the
change in interest rates and as purchases exceeded maturities in the current
year.
The majority of our unrealized losses were related to securities held within our
U.S. Life Insurance segment. Our U.S. Mortgage Insurance segment had gross
unrealized losses of $51 million and $81 million as of June 30, 2012 and
December 31, 2011, respectively.
Our exposure in peripheral European countries consist of fixed maturity
securities and trading bonds in Greece, Portugal, Ireland, Italy and Spain.
Investments in these countries are primarily made to support our international
businesses and to diversify our U.S. corporate fixed maturity securities with
European bonds denominated in U.S. dollars. The following table sets forth the
fair value of our exposure to these peripheral European countries as of the
periods indicated:
June 30, 2012
(Amounts in millions) Sovereign Debt Non-Financial Financial-Hybrids Financial-Non-Hybrids Total
Spain $ 13 $ 119 $ 26 $ 82 $ 240
Ireland 3 142 - 24 169
Italy 3 160 - 1 164
Portugal - 18 - - 18
Greece - 1 - - 1
Total $ 19 $ 440 $ 26 $ 107 $ 592
December 31, 2011
(Amounts in millions) Sovereign Debt Non-Financial Financial-Hybrids Financial-Non-Hybrids Total
Spain $ 13 $ 147 $ 24 $ 89 $ 273
Ireland 3 194 - 23 220
Italy 2 165 - 11 178
Portugal - 25 - - 25
Greece - 1 - 2 3
Total $ 18 $ 532 $ 24 $ 125 $ 699
During the second quarter of 2012, financial markets showed signs of improvement
despite mixed economic signals from the United States and Europe. While European
Central Bank policies and actions were clearly supportive and fears of a
disorderly Greek default were stemmed, a lack of fundamental economic strength
in Europe weighed on financial markets. During the six months ended June 30,
2012, we reduced our exposure to the peripheral European countries by $107
million to $592 million with unrealized losses of $56 million. Our exposure as
of June 30, 2012 was diversified with direct exposure to local economies of $231
million, indirect exposure through debt issued by subsidiaries outside of the
European periphery of $130 million and exposure to multinational companies where
the majority of revenues come from outside of the country of domicile of $231
million.
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Commercial mortgage loans
The following tables set forth additional information regarding our commercial
mortgage loans as of the dates indicated:
June 30, 2012
Delinquent Number of
Total recorded Number of principal delinquent
(Dollar amounts in millions) investment loans Loan-to-value (1) balance loans
Loan Year
2004 and prior $ 1,566 697 45 % $ - -
2005 1,293 295 61 % 15 4
2006 1,188 268 68 % - -
2007 1,034 175 74 % 67 2
2008 263 56 73 % 4 1
2009 - - - % - -
2010 100 17 59 % - -
2011 290 55 64 % - -
2012 184 34 64 % - -
Total $ 5,918 1,597 61 % $ 86 7
(1) Represents weighted-average loan-to-value as of June 30, 2012.
December 31, 2011
Delinquent Number of
Total recorded Number of principal delinquent
(Dollar amounts in millions) investment loans
Loan-to-value (1) balance loans
Loan Year
2004 and prior $ 1,805 792 49 % $ 19 2
2005 1,366 302 63 % 3 1
2006 1,208 268 71 % - -
2007 1,099 180 75 % - -
2008 267 56 75 % - -
2009 - - - % - -
2010 101 17 63 % - -
2011 294 55 65 % - -
Total $ 6,140 1,670 63 % $ 22 3
(1) Represents weighted-average loan-to-value as of December 31, 2011.
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The following table sets forth the allowance for credit losses and recorded
investment in commercial mortgage loans as of or for the periods indicated:
Three months ended Six months ended
June 30, June 30,
(Amounts in millions) 2012 2011 2012 2011
Allowance for credit losses:
Beginning balance $ 49 $ 58 $ 51 $ 59
Charge-offs - (4 ) (1 ) (5 )
Recoveries - - - -
Provision (3 ) 3 (4 ) 3
Ending balance $ 46 $ 57 $ 46 $ 57
Ending allowance for individually
impaired loans $ - $ - $ - $ -
Ending allowance for loans not
individually impaired that were
evaluated collectively for impairment $ 46 $ 57 $ 46 $ 57
Recorded investment:
Ending balance $ 5,918 $ 6,485 $ 5,918 $ 6,485
Ending balance of individually impaired
loans $ - $ 13
$ - $ 13
Ending balance of loans not
individually impaired that were
evaluated collectively for impairment $ 5,918 $ 6,472
$ 5,918$ 6,472
The charge-offs during 2012 were related to individually impaired commercial
mortgage loans.
Restricted commercial mortgage loans related to securitization entities
See note 4 in our "-Notes to Condensed Consolidated Financial Statements" for
additional information related to restricted commercial mortgage loans related
to securitization entities.
Other invested assets
The following table sets forth the carrying values of our other invested assets
as of the dates indicated:
June 30, 2012 December 31, 2011
(Amounts in millions) Carrying value % of total Carrying value % of total
Derivatives $ 1,599 35 % $ 1,485 31 %
Derivatives counterparty collateral 1,218 27 1,023 21
Trading securities 752 17 788 16
Limited partnerships 357 8 344 7
Short-term investments 276 6 657 14
Securities lending collateral 175 4 406 9
Other investments 135 3 116 2
Total other invested assets $ 4,512 100 % $ 4,819 100 %
Short-term investments decreased as maturities were reinvested in cash
equivalents and longer term securities. Securities lending collateral decreased
primarily due to a decrease in demand for the securities lending program in the
United States. Our investments in derivatives and derivative counterparty
collateral increased primarily attributable to the long-term interest rate
environment.
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Derivatives
The activity associated with derivative instruments can generally be measured by
the change in notional value over the periods presented. However, for GMWB
embedded derivatives, the change between periods is best illustrated by the
number of policies. The following tables represent activity associated with
derivative instruments as of the dates indicated:
December 31, Maturities/ June 30,
(Notional in millions) Measurement 2011 Additions terminations 2012
Derivatives designated as
hedges
Cash flow hedges:
Interest rate swaps Notional $ 12,399 $ - $ (122 ) $ 12,277
Forward bond purchase
commitments Notional 504 - - 504
Inflation indexed swaps Notional 544 8 - 552
Foreign currency swaps Notional - 109 - 109
Total cash flow hedges 13,447 117 (122 ) 13,442
Fair value hedges:
Interest rate swaps Notional 1,039 - (272 ) 767
Foreign currency swaps Notional 85 - - 85
Total fair value hedges 1,124 - (272 ) 852
Total derivatives designated
as hedges 14,571 117 (394 ) 14,294
Derivatives not designated as
hedges
Interest rate swaps Notional 7,200 1,359 (796 ) 7,763
Interest rate swaps related to
securitization entities Notional 117 - (6 ) 111
Credit default swaps Notional 1,110 100 (130 ) 1,080
Credit default swaps related
to securitization entities Notional 314 - (2 ) 312
Equity index options Notional 522 503 (558 ) 467
Financial futures Notional 2,924 2,626 (3,365 ) 2,185
Equity return swaps Notional 326 17 (194 ) 149
Other foreign currency
contracts Notional 779 358 (1,069 ) 68
Reinsurance embedded
derivatives Notional 228 39 - 267
Total derivatives not
designated as hedges 13,520
5,002 (6,120 ) 12,402
Total derivatives $ 28,091 $ 5,119 $ (6,514 ) $ 26,696
December 31, Maturities/ June 30,
(Number of policies) Measurement 2011 Additions terminations 2012
Derivatives not designated as
hedges
GMWB embedded derivatives Policies 47,714 4 (1,323 ) 46,395
Fixed index annuity embedded
derivatives Policies 433 333 (6 ) 760
The decrease in the notional value of derivatives was primarily attributable to
a $0.8 billion notional decrease in interest rate swaps and a $0.7 billion
notional decrease in derivatives used to hedge foreign currency and equity
market risk. In addition, there was a $0.2 billion notional decrease in
non-qualifying interest rate swaps related to our interest rate hedging strategy
associated with our long-term care insurance products and a $0.2 billion
notional decrease in the derivatives used to hedge embedded derivative
liabilities associated with our variable annuity products. These decreases were
partially offset by a $0.5 billion notional increase in derivatives used to
mitigate interest rate risk associated with our statutory capital position.
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Consolidated Balance Sheets
Total assets. Total assets decreased $0.3 billion from $112.2 billion as of
December 31, 2011 to $112.5 billion as of June 30, 2012.
• Cash, cash equivalents and invested assets increased $0.5 billion
primarily from an increase of $1.1 billion in invested assets and a
decrease of $0.6 billion in cash and cash equivalents. Our fixed maturity
securities portfolio increased $1.5 billion primarily as a result of a
decrease in interest rates and purchases exceeding maturities in the
current year. Other invested assets decreased $0.3 billion primarily
driven by a decrease in short-term investments as maturities were
reinvested longer term and a decrease in demand for the securities lending
program in the United States. These decreases were partially offset by an
increase in derivatives and derivatives counterparty collateral largely
attributable to the long-term interest rate environment. Commercial
mortgage loans decreased $0.2 billion as collections exceeded
originations.
• Separate account assets decreased $0.1 billion primarily as death and
surrender benefits exceeded favorable market performance in the current
year.
Total liabilities. Total liabilities decreased $0.4 billion from $96.0 billion
as of December 31, 2011 to $95.6 billion as of June 30, 2012.
• Our policyholder-related liabilities increased $0.3 billion. Our long-term
care insurance business increased from growth of our in-force block and
higher claims. Our life insurance business increased from growth of our
term universal and universal life insurance products. Our international
mortgage insurance business increased from a reserve strengthening in the
current year in Australia which was partially offset by higher paid
claims. These increases were partially offset by a decrease in our
institutional products from scheduled maturities and from our annuity
products from benefit payments. Our U.S. mortgage insurance business also
decreased due to lower delinquencies in the current year.
• Other liabilities decreased $0.5 billion primarily related to decreased demand for the securities lending program in the United States and our
repurchase program, partially offset by an increase in derivatives
counterparty collateral largely attributable to the long-term interest
rate environment.
• Long-term borrowings increased $0.1 billion principally from the issuance
of $350 million of senior notes in March 2012.
• Non-recourse funding obligations decreased $0.7 billion mainly from the repayment of the non-recourse funding obligations issued by River Lake
Insurance Company III ("River Lake III") as part of the life block sale
transaction in the current year and also from other repurchases and
repayments during 2012.
• Separate account liabilities decreased $0.1 billion primarily as death and
surrender benefits exceeded favorable market performance in the current
year.
Total stockholders' equity. Total stockholders' equity increased $0.8 billion
from $16.2 billion as of December 31, 2011 to $17.0 billion as of June 30, 2012.
• Accumulated other comprehensive income (loss) increased $0.6 billion
predominately attributable to higher net unrealized investment gains of
$0.5 billion.
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Liquidity and Capital Resources
Liquidity and capital resources represent our overall financial strength and our
ability to generate cash flows from our businesses, borrow funds at competitive
rates and raise new capital to meet our operating and growth needs.
Genworth Financial and subsidiaries
The following table sets forth our condensed consolidated cash flows for the six
months ended June 30:
(Amounts in millions) 2012 2011
Net cash from operating activities $ 220 $
842
Net cash from investing activities (106 )
(6 )
Net cash from financing activities (725 ) (1,169 )
Net decrease in cash before foreign exchange effect $ (611 ) $ (333 )
Our principal sources of cash include sales of our products and services, income
from our investment portfolio and proceeds from sales of investments. As an
insurance business, we typically generate positive cash flows from operating
activities, as premiums collected from our insurance products and income
received from our investments exceed policy acquisition costs, benefits paid,
redemptions and operating expenses. These positive cash flows are then invested
to support the obligations of our insurance and investment products and required
capital supporting these products. Our cash flows from operating activities are
affected by the timing of premiums, fees and investment income received and
benefits and expenses paid. We had lower cash inflows from operating activities
during the six months ended June 30, 2012 compared to six months ended June 30,
2011 primarily as a result of a decrease from higher paid claims related to our
U.S. mortgage and long-term care insurance businesses, a decrease in payables
associated with the timing of payments and higher tax settlements in the current
year.
In analyzing our cash flow, we focus on the change in the amount of cash
available and used in investing activities. We had higher cash outflows from
investing activities during the six months ended June 30, 2012 compared to the
six months ended June 30, 2011 from higher purchases of fixed maturity
securities in the current year, partially offset by cash inflows from other
invested assets in the current year compared to cash outflows in the prior year.
Changes in cash from financing activities primarily relate to the issuance of,
and redemptions and benefit payments on, universal life insurance and investment
contracts; the issuance and acquisition of debt and equity securities; the
issuance and repayment or repurchase of borrowings and non-recourse funding
obligations; and dividends to our stockholders and other capital transactions.
We had lower net cash outflows from financing activities during the six months
ended June 30, 2012 primarily related to lower redemptions of our investment
contracts in the current year.
In the United States and Canada, we engage in certain securities lending
transactions for the purpose of enhancing the yield on our investment securities
portfolio. We maintain effective control over all loaned securities and,
therefore, continue to report such securities as fixed maturity securities on
the consolidated balance sheets. We are currently indemnified against
counterparty credit risk by the intermediary.
Under the securities lending program in the United States, the borrower is
required to provide collateral, which can consist of cash or government
securities, on a daily basis in amounts equal to or exceeding 102% of the
applicable securities loaned. Currently, we only accept cash collateral from
borrowers under the program. Cash collateral received by us on securities
lending transactions is reflected in other invested assets with an offsetting
liability recognized in other liabilities for the obligation to return the
collateral. Any cash collateral received is reinvested by our custodian based
upon the investment guidelines provided within our agreement. In the United
States, the reinvested cash collateral is primarily invested in a money market
fund approved by the
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NAIC, U.S. and foreign government securities, U.S. government agency securities,
asset-backed securities and corporate debt securities. As of June 30, 2012 and
December 31, 2011, the fair value of securities loaned under our securities
lending program in the United States was $0.2 billion and $0.4 billion,
respectively. As of June 30, 2012 and December 31, 2011, the fair value of
collateral held under our securities lending program in the United States was
$0.2 billion and $0.4 billion, respectively, and the offsetting obligation to
return collateral of $0.2 billion and $0.4 billion, respectively, was included
in other liabilities in the consolidated balance sheets. We did not have any
non-cash collateral provided by the borrower in our securities lending program
in the United States as of June 30, 2012 and December 31, 2011.
Under our securities lending program in Canada, the borrower is required to
provide collateral consisting of government securities on a daily basis in
amounts equal to or exceeding 105% of the fair value of the applicable
securities loaned. Securities received from counterparties as collateral are not
recorded on our consolidated balance sheet given that the risk and rewards of
ownership is not transferred from the counterparties to us in the course of such
transactions. Additionally, there was no cash collateral as cash collateral is
not permitted as an acceptable form of collateral under the program. In Canada,
the lending institution must be included on the approved Securities Lending
Borrowers List with the Canadian regulator and the intermediary must be rated at
least "AA-" by Standard & Poor's Financial Services LLC. As of June 30, 2012 and
December 31, 2011, the fair value of securities loaned under our securities
lending program in Canada was $0.3 billion.
We also have a repurchase program in which we sell an investment security at a
specified price and agree to repurchase that security at another specified price
at a later date. Repurchase agreements are treated as collateralized financing
transactions and are carried at the amounts at which the securities will be
subsequently reacquired, including accrued interest, as specified in the
respective agreement. The market value of securities to be repurchased is
monitored and collateral levels are adjusted where appropriate to protect the
counterparty and us against credit exposure. Cash received is invested in fixed
maturity securities. As of June 30, 2012 and December 31, 2011, the fair value
of securities pledged under the repurchase program was $1.3 billion and $1.7
billion, respectively, and the repurchase obligation of $1.2 billion and $1.5
billion, respectively, was included in other liabilities in the consolidated
balance sheets.
Genworth Financial, Inc.-holding company
We conduct all our operations through our operating subsidiaries. Our principal
sources of cash include proceeds from the issuance of debt and equity
securities, including borrowings pursuant to our credit facility, dividends from
our subsidiaries, payments to us under our tax sharing arrangements with our
subsidiaries and sales of assets. Insurance laws and regulations regulate the
payment of dividends and other distributions to us by our insurance
subsidiaries. We expect dividends paid to us by our insurance subsidiaries will
vary depending on strategic objectives, regulatory requirements and business
performance.
Our primary uses of funds at our holding company level include payment of
general operating expenses, payment of principal, interest and other expenses
related to holding company debt, payment of dividends on our common stock (to
the extent declared by our Board of Directors), amounts we owe to GE under the
Tax Matters Agreement, contributions to subsidiaries, repurchase of stock, and,
potentially, acquisitions. In November 2008, our Board of Directors decided to
suspend the payment of dividends on our common stock indefinitely. The
declaration and payment of future dividends to holders of our common stock will
be at the discretion of our Board of Directors and will be dependent on many
factors including the receipt of dividends from our operating subsidiaries, our
financial condition and operating results, the capital requirements of our
subsidiaries, legal requirements, regulatory constraints, our credit and
financial strength ratings and such other factors as the Board of Directors
deems relevant.
Our holding company had $1.0 billion and $0.9 billion of cash and cash
equivalents as of June 30, 2012 and December 31, 2011, respectively. Our holding
company also held $150 million and $40 million in highly liquid securities as of
June 30, 2012 and December 31, 2011, respectively.
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During the six months ended June 30, 2012, we received dividends from our
subsidiaries of $187 million. These dividends included $57 million from one of
our subsidiaries representing a portion of the proceeds from the sale of GFIS
that was completed in the second quarter of 2012 and $100 million ($38 million
of which was deemed "extraordinary") from one of our U.S. life insurance
subsidiaries representing a portion of the proceeds from the sale of our
Medicare supplement insurance business that was completed in the fourth quarter
of 2011.
Regulated insurance subsidiaries
The liquidity requirements of our regulated insurance subsidiaries principally
relate to the liabilities associated with their various insurance and investment
products, operating costs and expenses, the payment of dividends to us,
contributions to their subsidiaries, payment of principal and interest on their
outstanding debt obligations and income taxes. Liabilities arising from
insurance and investment products include the payment of benefits, as well as
cash payments in connection with policy surrenders and withdrawals, policy loans
and obligations to redeem funding agreements.
Our insurance subsidiaries have used cash flows from operations and investment
activities to fund their liquidity requirements. Our insurance subsidiaries'
principal cash inflows from operating activities are derived from premiums,
annuity deposits and insurance and investment product fees and other income,
including commissions, cost of insurance, mortality, expense and surrender
charges, contract underwriting fees, investment management fees and dividends
and distributions from their subsidiaries. The principal cash inflows from
investment activities result from repayments of principal, investment income
and, as necessary, sales of invested assets.
Our insurance subsidiaries maintain investment strategies intended to provide
adequate funds to pay benefits without forced sales of investments. Products
having liabilities with longer durations, such as certain life and long-term
care insurance policies, are matched with investments having similar duration
such as long-term fixed maturity securities and commercial mortgage loans.
Shorter-term liabilities are matched with fixed maturity securities that have
short- and medium-term fixed maturities. In addition, our insurance subsidiaries
hold highly liquid, high quality short-term investment securities and other
liquid investment grade fixed maturity securities to fund anticipated operating
expenses, surrenders and withdrawals. As of June 30, 2012, our total cash, cash
equivalents and invested assets were $76.9 billion. Our investments in privately
placed fixed maturity securities, commercial mortgage loans, policy loans,
limited partnership interests and select mortgage-backed and asset-backed
securities are relatively illiquid. These asset classes represented
approximately 29% of the carrying value of our total cash, cash equivalents and
invested assets as of June 30, 2012.
As of June 30, 2012, we had approximately $126 million of GICs outstanding.
Substantially all of these contracts allow for the payment of benefits at
contract value to Employee Retirement Income Security Act plans prior to
contract maturity in the event of death, disability, retirement or change in
investment election. These contracts also provide for early termination by the
contractholder but are subject to an adjustment to the contract value for
changes in the level of interest rates from the time the GIC was issued plus an
early withdrawal penalty. We carefully underwrite these risks before issuing a
GIC to a plan and historically have been able to effectively manage our exposure
to these benefit payments. Our GICs typically credit interest at a fixed
interest rate and have a fixed maturity generally ranging from two to six years.
Capital resources and financing activities
We have a five-year revolving credit facility that matures in August 2012. This
facility bears variable interest rates based on one-month London Interbank
Offered Rate plus a margin and we have access to $930 million under this
facility. As of June 30, 2012, we had no borrowings under this facility;
however, we utilized $34 million under this facility primarily for the issuance
of letters of credit for the benefit of one of our lifestyle protection
insurance subsidiaries. We had a five-year revolving credit facility of $930
million that matured in
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May 2012 and we did not renew that credit facility. As we approach the maturity
date for our August credit facility, we do not currently plan to extend or
replace that credit facility but may pursue a new credit facility in the future
depending on terms, costs and macro market conditions. As of December 31, 2011,
we had no borrowings under either of these facilities; however, we utilized $257
million under these facilities primarily for the issuance of letters of credit
for the benefit of one of our life insurance subsidiaries.
We repaid $222 million of senior notes with an interest rate equal to 5.65% per
year payable semi-annually that matured in June 2012.
In March 2012, we priced a $350 million reopening of our 7.625% senior notes due
in September 2021. The notes were offered as additional debt securities under an
indenture, as supplemented from time to time, pursuant to which we have
previously issued $400 million aggregate principal amount of our 7.625% senior
notes due in September 2021. The notes are our direct, unsecured obligations and
rank equally with all of our existing and future unsecured and unsubordinated
obligations. The notes were issued at a public offering price of 103% of
principal amount, with a yield to maturity of 7.184%. The net proceeds of $358
million from the issuance of the new notes were used for general corporate
purposes, including increasing liquidity at the holding company level.
As of June 30, 2012, we had $2.6 billion of fixed and floating rate non-recourse
funding obligations outstanding backing additional statutory reserves. In
January 2012, as part of a life block sale transaction, we repurchased $475
million of our non-recourse funding obligations issued by River Lake III, our
indirect wholly-owned subsidiary, resulting in a U.S. GAAP after-tax gain of
approximately $52 million. In connection with the repurchase, we ceded certain
term life insurance policies to a third-party reinsurer resulting in a U.S. GAAP
after-tax loss, net of amortization of deferred acquisition costs, of $93
million. The combined transactions resulted in a U.S. GAAP after-tax loss of
approximately $41 million in the three months ended June 30, 2012 which was
included in our U.S. Life Insurance segment. In February and March 2012, we
repaid the remaining non-recourse funding obligations issued by River Lake III
of $176 million.
We believe existing holding company cash combined with proceeds from the
issuance of debt, dividends from our subsidiaries, permitted payments to us
under our tax sharing arrangements with our subsidiaries and sales of assets
will provide us with sufficient capital flexibility and liquidity to meet our
future operating requirements. We actively monitor our liquidity position,
liquidity generation options and the credit markets given changing market
conditions. In addition, we currently manage holding company liquidity to
maintain a minimum balance of two times annual debt interest payments and
currently expect to maintain an additional excess of $350 million through the
end of 2012. We cannot predict with any certainty the impact to us from any
future disruptions in the credit markets or further downgrades by one or more of
the rating agencies of the financial strength ratings of our insurance company
subsidiaries and/or the credit ratings of our holding company. The availability
of additional funding will depend on a variety of factors such as market
conditions, regulatory considerations, the general availability of credit, the
overall availability of credit to the financial services industry, the level of
activity and availability of reinsurance, our credit ratings and credit capacity
and the performance of and outlook for our business.
Contractual obligations and commercial commitments
We enter into obligations with third parties in the ordinary course of our
operations. However, we do not believe that our cash flow requirements can be
assessed based upon analysis of these obligations as the funding of these future
cash obligations will be from future cash flows from premiums, deposits, fees
and investment income that are not reflected herein. Future cash outflows,
whether they are contractual obligations or not, also will vary based upon our
future needs. Although some outflows are fixed, others depend on future events.
Examples of fixed obligations include our obligations to pay principal and
interest on fixed rate borrowings. Examples of obligations that will vary
include obligations to pay interest on variable rate borrowings and insurance
liabilities that depend on future interest rates and market performance. Many of
our obligations are linked to cash-generating contracts. These obligations
include payments to contractholders that assume those contractholders will
continue to make deposits in accordance with the terms of their contracts. In
addition, our operations involve significant expenditures that are not based
upon "commitments."
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There have been no material additions or changes to our contractual obligations
and commercial commitments as set forth in our Current Report on Form 8-K filed
on June 11, 2012, except as discussed above under "-Capital resources and
financing activities."
Securitization Entities
There were no off-balance sheet securitization transactions during the six
months ended June 30, 2012 or 2011.
New Accounting Standards
For a discussion of recently adopted and not yet adopted accounting standards,
see note 2 in our "-Notes to Condensed Consolidated Financial Statements."
