Edgar Filing: GENWORTH FINANCIAL INC

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

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

For the transition period from to

Commission file number 001-32195

LOGO

GENWORTH FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		80-0873306
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

6620 West Broad Street Richmond, Virginia		23230
(Address of Principal Executive Offices)		(Zip Code)

(804) 281-6000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

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

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

As of April 27, 2017, 498,948,884 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements		3
Condensed Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016			3
Condensed Consolidated Statements of Income for the three months ended March 31, 2017 and 2016 (Unaudited)			4
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016 (Unaudited)			5
Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2017 and 2016 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		81

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		142

Item 4.	Controls and Procedures		142

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings		143

Item 1A.	Risk Factors		143

Item 6.	Exhibits		144

Signatures			145

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	March 31, 2017			December 31, 2016
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	60,597		$	60,572
Equity securities available-for-sale, at fair value		709			632
Commercial mortgage loans		6,107			6,111
Restricted commercial mortgage loans related to securitization entities		122			129
Policy loans		1,761			1,742
Other invested assets		2,272			2,071
Restricted other invested assets related to securitization entities, at fair value		84			312

Total investments		71,652			71,569
Cash and cash equivalents		3,018			2,784
Accrued investment income		717			659
Deferred acquisition costs		3,207			3,571
Intangible assets and goodwill		381			348
Reinsurance recoverable		17,681			17,755
Other assets		703			673
Separate account assets		7,327			7,299

Total assets	$	104,686		$	104,658

Liabilities and equity
Liabilities:
Future policy benefits	$	37,291		$	37,063
Policyholder account balances		25,383			25,662
Liability for policy and contract claims		9,295			9,256
Unearned premiums		3,370			3,378
Other liabilities ($3 and $1 of other liabilities are related to securitization entities)		2,657			2,916
Borrowings related to securitization entities ($13 and $12 are carried at fair value)		68			74
Non-recourse funding obligations		310			310
Long-term borrowings		4,194			4,180
Deferred tax liability		75			53
Separate account liabilities		7,327			7,299

Total liabilities		89,970			90,191

Commitments and contingencies
Equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 587 million shares issued as of March 31, 2017 and December 31, 2016; 499 million and 498 million shares outstanding as of March 31, 2017 and December 31, 2016, respectively		1			1
Additional paid-in capital		11,964			11,962

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		1,233			1,253
Net unrealized gains (losses) on other-than-temporarily impaired securities		10			9

Net unrealized investment gains (losses)		1,243			1,262

Derivatives qualifying as hedges		2,036			2,085
Foreign currency translation and other adjustments		(183	)		(253	)

Total accumulated other comprehensive income (loss)		3,096			3,094
Retained earnings		451			287
Treasury stock, at cost (88 million shares as of March 31, 2017 and December 31, 2016)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		12,812			12,644
Noncontrolling interests		1,904			1,823

Total equity		14,716			14,467

Total liabilities and equity	$	104,686		$	104,658

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)


	Three months ended March 31,
	2017			2016
Revenues:
Premiums	$	1,136		$	794
Net investment income		790			789
Net investment gains (losses)		34			(19	)
Policy fees and other income		211			221

Total revenues		2,171			1,785

Benefits and expenses:
Benefits and other changes in policy reserves		1,246			860
Interest credited		167			177
Acquisition and operating expenses, net of deferrals		270			394
Amortization of deferred acquisition costs and intangibles		94			99
Interest expense		62			105

Total benefits and expenses		1,839			1,635

Income from continuing operations before income taxes		332			150
Provision for income taxes		116			23

Income from continuing operations		216			127
Loss from discontinued operations, net of taxes		—			(19	)

Net income		216			108
Less: net income attributable to noncontrolling interests		61			55

Net income available to Genworth Financial, Inc.’s common stockholders	$	155		$	53

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
Basic	$	0.31		$	0.14

Diluted	$	0.31		$	0.14

Net income available to Genworth Financial, Inc.’s common stockholders per share:
Basic	$	0.31		$	0.11

Diluted	$	0.31		$	0.11

Weighted-average common shares outstanding:
Basic		498.6			498.0

Diluted		501.0			499.4

Supplemental disclosures:
Total other-than-temporary impairments	$	(1	)	$	(11	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		—			—

Net other-than-temporary impairments		(1	)		(11	)
Other investments gains (losses)		35			(8	)

Total net investment gains (losses)	$	34		$	(19	)

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)


	Three months ended March 31,
	2017			2016
Net income	$	216		$	108
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired		(12	)		807
Net unrealized gains (losses) on other-than-temporarily impaired securities		1			(4	)
Derivatives qualifying as hedges		(49	)		257
Foreign currency translation and other adjustments		119			216

Total other comprehensive income		59			1,276

Total comprehensive income		275			1,384
Less: comprehensive income attributable to noncontrolling interests		118			156

Total comprehensive income available to Genworth Financial, Inc.'s common stockholders	$	157		$	1,228

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in millions)

(Unaudited)


	Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)		Retained earnings		Treasury stock, at cost			Total Genworth Financial, Inc.'s stockholders' equity		Noncontrolling interests			Total equity
Balances as of December 31, 2016	$	1	$	11,962	$	3,094	$	287	$	(2,700	)	$	12,644	$	1,823		$	14,467
Cumulative effect of change in accounting, net of taxes		—		—		—		9		—			9		—			9
Comprehensive income:
Net income		—		—		—		155		—			155		61			216
Other comprehensive income, net of taxes		—		—		2		—		—			2		57			59

Total comprehensive income													157		118			275
Dividends to noncontrolling interests		—		—		—		—		—			—		(39	)		(39	)
Stock-based compensation expense and exercises and other		—		2		—		—		—			2		2			4

Balances as of March 31, 2017	$	1	$	11,964	$	3,096	$	451	$	(2,700	)	$	12,812	$	1,904		$	14,716

Balances as of December 31, 2015	$	1	$	11,949	$	3,010	$	564	$	(2,700	)	$	12,824	$	1,813		$	14,637
Comprehensive income:
Net income		—		—		—		53		—			53		55			108
Other comprehensive income, net of taxes		—		—		1,175		—		—			1,175		101			1,276

Total comprehensive income													1,228		156			1,384
Dividends to noncontrolling interests		—		—		—		—		—			—		(52	)		(52	)
Stock-based compensation expense and exercises and other		—		3		—		—		—			3		1			4

Balances as of March 31, 2016	$	1	$	11,952	$	4,185	$	617	$	(2,700	)	$	14,055	$	1,918		$	15,973

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)


	Three months ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	216		$	108
Less loss from discontinued operations, net of taxes		—			19
Adjustments to reconcile net income to net cash from operating activities:
Gain on sale of business		—			(20	)
Amortization of fixed maturity securities discounts and premiums and limited partnerships		(33	)		(38	)
Net investment (gains) losses		(34	)		19
Charges assessed to policyholders		(183	)		(191	)
Acquisition costs deferred		(22	)		(50	)
Amortization of deferred acquisition costs and intangibles		94			99
Deferred income taxes		93			7
Trading securities, held-for-sale investments and derivative instruments		365			21
Stock-based compensation expense		10			7
Change in certain assets and liabilities:
Accrued investment income and other assets		(79	)		(159	)
Insurance reserves		377			36
Current tax liabilities		(37	)		(8	)
Other liabilities, policy and contract claims and other policy-related balances		(112	)		406

Net cash from operating activities		655			256

Cash flows used by investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		1,060			840
Commercial mortgage loans		166			192
Restricted commercial mortgage loans related to securitization entities		6			6
Proceeds from sales of investments:
Fixed maturity and equity securities		2,173			905
Purchases and originations of investments:
Fixed maturity and equity securities		(2,710	)		(2,042	)
Commercial mortgage loans		(161	)		(200	)
Other invested assets, net		(676	)		34
Policy loans, net		—			10

Net cash used by investing activities		(142	)		(255	)

Cash flows used by financing activities:
Deposits to universal life and investment contracts		218			571
Withdrawals from universal life and investment contracts		(467	)		(517	)
Redemption of non-recourse funding obligations		—			(1,620	)
Repayment and repurchase of long-term debt		—			(326	)
Repayment of borrowings related to securitization entities		(7	)		(10	)
Dividends paid to noncontrolling interests		(39	)		(52	)
Other, net		(9	)		13

Net cash used by financing activities		(304	)		(1,941	)

Effect of exchange rate changes on cash and cash equivalents		25			31

Net change in cash and cash equivalents		234			(1,909	)
Cash and cash equivalents at beginning of period		2,784			5,993

Cash and cash equivalents at end of period		3,018			4,084
Less cash and cash equivalents held for sale at end of period		—			41

Cash and cash equivalents of continuing operations at end of period	$	3,018		$	4,043

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

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

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth’s stockholders voted on and approved a proposal to adopt the Merger Agreement. The transaction remains subject to closing conditions, including the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions. Both parties are engaging with the relevant regulators regarding the applications and the pending transaction. Genworth and China Oceanwide continue to target closing the transaction in the middle of 2017.

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

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

We operate our business through the following five operating segments:

•

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

•

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

•

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

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

•

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

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

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2016 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

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

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On January 1, 2017, we adopted new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance is consistent with our previous accounting practices and, accordingly, did not have any impact on our consolidated financial statements.

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

Accounting Pronouncements Not Yet Adopted

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

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

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

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Earnings Per Share

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


	Three months ended March 31,
(Amounts in millions, except per share amounts)	2017		2016
Weighted-average shares used in basic earnings per share calculations		498.6		498.0
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		2.4		1.4

Weighted-average shares used in diluted earnings per share calculations		501.0		499.4

Income from continuing operations:
Income from continuing operations	$	216	$	127
Less: income from continuing operations attributable to noncontrolling interests		61		55

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	155	$	72

Basic per share	$	0.31	$	0.14

Diluted per share	$	0.31	$	0.14

Loss from discontinued operations:
Loss from discontinued operations, net of taxes	$	—	$	(19	)
Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests		—		—

Loss from discontinued operations, net of taxes, available to Genworth Financial, Inc.'s common stockholders	$	—	$	(19	)

Basic per share	$	—	$	(0.04	)

Diluted per share	$	—	$	(0.04	)

Net income:
Income from continuing operations	$	216	$	127
Loss from discontinued operations, net of taxes		—		(19	)

Net income		216		108
Less: net income attributable to noncontrolling interests		61		55

Net income available to Genworth Financial, Inc.’s common stockholders	$	155	$	53

Basic per share	$	0.31	$	0.11

Diluted per share	$	0.31	$	0.11

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) Investments

(a) Net Investment Income

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


	Three months ended March 31,
(Amounts in millions)	2017			2016
Fixed maturity securities—taxable	$	641		$	641
Fixed maturity securities—non-taxable		3			3
Commercial mortgage loans		77			81
Restricted commercial mortgage loans related to securitization entities		2			2
Equity securities		8			5
Other invested assets		32			38
Restricted other invested assets related to securitization entities		—			2
Policy loans		42			35
Cash, cash equivalents and short-term investments		6			5

Gross investment income before expenses and fees		811			812
Expenses and fees		(21	)		(23	)

Net investment income	$	790		$	789

(b) Net Investment Gains (Losses)

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


	Three months ended March 31,
(Amounts in millions)	2017			2016
Available-for-sale securities:
Realized gains	$	63		$	16
Realized losses		(34	)		(23	)

Net realized gains (losses) on available-for-sale securities		29			(7	)

Impairments:
Total other-than-temporary impairments		(1	)		(11	)
Portion of other-than-temporary impairments included in other comprehensive income		—			—

Net other-than-temporary impairments		(1	)		(11	)

Trading securities		—			28
Commercial mortgage loans		1			1
Net gains (losses) related to securitization entities		2			8
Derivative instruments ⁽¹⁾		3			(38	)

Net investment gains (losses)	$	34		$	(19	)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended March 31, 2017 and 2016 was $876 million and $240 million, respectively, which was approximately 96% and 91%, respectively, of book value.

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


(Amounts in millions)	2017			2016
Beginning balance	$	42		$	64
Reductions:
Securities sold, paid down or disposed		(1	)		(1	)

Ending balance	$	41		$	63

(c) Unrealized Investment Gains and Losses

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


(Amounts in millions)	March 31, 2017			December 31, 2016
Net unrealized gains (losses) on investment securities:
Fixed maturity securities	$	3,983		$	3,656
Equity securities		49			12

Subtotal⁽¹⁾		4,032			3,668
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(1,994	)		(1,611	)
Income taxes, net		(703	)		(711	)

Net unrealized investment gains (losses)		1,335			1,346
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		92			84

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	1,243		$	1,262

⁽¹⁾	Excludes foreign exchange.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income was as follows as of and for the three months ended March 31:


(Amounts in millions)	2017			2016
Beginning balance	$	1,262		$	1,254
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		392			1,596
Adjustment to deferred acquisition costs		(305	)		(142	)
Adjustment to present value of future profits		(5	)		(34	)
Adjustment to sales inducements		(5	)		(19	)
Adjustment to benefit reserves		(68	)		(174	)
Provision for income taxes		(2	)		(436	)

Change in unrealized gains (losses) on investment securities		7			791
Reclassification adjustments to net investment (gains) losses, net of taxes of $10 and $(6)		(18	)		12

Change in net unrealized investment gains (losses)		(11	)		803
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		8			—

Ending balance	$	1,243		$	2,057

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity and Equity Securities

As of March 31, 2017, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:


			Gross unrealized gains				Gross unrealized losses
(Amounts in millions)	Amortized cost or cost		Not other-than- temporarily impaired		Other-than- temporarily impaired		Not other-than- temporarily impaired			Other-than- temporarily impaired		Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	4,837	$	681	$	—	$	(25	)	$	—	$	5,493
State and political subdivisions		2,565		191		—		(46	)		—		2,710
Non-U.S. government		1,722		106		—		(11	)		—		1,817
U.S. corporate:
Utilities		4,215		456		—		(36	)		—		4,635
Energy		2,192		166		—		(19	)		—		2,339
Finance and insurance		5,882		465		—		(31	)		—		6,316
Consumer—non-cyclical		4,380		441		—		(28	)		—		4,793
Technology and communications		2,520		150		—		(27	)		—		2,643
Industrial		1,223		86		—		(9	)		—		1,300
Capital goods		2,085		236		—		(12	)		—		2,309
Consumer—cyclical		1,480		96		—		(14	)		—		1,562
Transportation		1,105		86		—		(14	)		—		1,177
Other		331		19		—		(1	)		—		349

Total U.S. corporate		25,413		2,201		—		(191	)		—		27,423

Non-U.S. corporate:
Utilities		985		44		—		(9	)		—		1,020
Energy		1,281		122		—		(8	)		—		1,395
Finance and insurance		2,445		151		—		(7	)		—		2,589
Consumer—non-cyclical		701		20		—		(9	)		—		712
Technology and communications		968		50		—		(6	)		—		1,012
Industrial		924		56		—		(4	)		—		976
Capital goods		563		25		—		(3	)		—		585
Consumer—cyclical		451		11		—		(1	)		—		461
Transportation		632		67		—		(6	)		—		693
Other		2,600		187		—		(6	)		—		2,781

Total non-U.S. corporate		11,550		733		—		(59	)		—		12,224

Residential mortgage-backed		4,139		264		12		(11	)		—		4,404
Commercial mortgage-backed		3,250		97		4		(49	)		—		3,302
Other asset-backed		3,231		15		1		(23	)		—		3,224

Total fixed maturity securities		56,707		4,288		17		(415	)		—		60,597
Equity securities		667		55		—		(13	)		—		709

Total available-for-sale securities	$	57,374	$	4,343	$	17	$	(428	)	$	—	$	61,306

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:


			Gross unrealized gains				Gross unrealized losses
(Amounts in millions)	Amortized cost or cost		Not other-than- temporarily impaired		Other-than- temporarily impaired		Not other-than- temporarily impaired			Other-than- temporarily impaired		Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	5,439	$	647	$	—	$	(50	)	$	—	$	6,036
State and political subdivisions		2,515		182		—		(50	)		—		2,647
Non-U.S. government		2,024		101		—		(18	)		—		2,107
U.S. corporate:
Utilities		4,137		454		—		(41	)		—		4,550
Energy		2,167		157		—		(24	)		—		2,300
Finance and insurance		5,719		424		—		(46	)		—		6,097
Consumer—non-cyclical		4,335		433		—		(34	)		—		4,734
Technology and communications		2,473		157		—		(32	)		—		2,598
Industrial		1,161		76		—		(14	)		—		1,223
Capital goods		2,043		228		—		(13	)		—		2,258
Consumer—cyclical		1,455		92		—		(17	)		—		1,530
Transportation		1,121		86		—		(17	)		—		1,190
Other		332		17		—		(1	)		—		348

Total U.S. corporate		24,943		2,124		—		(239	)		—		26,828

Non-U.S. corporate:
Utilities		940		40		—		(11	)		—		969
Energy		1,234		109		—		(12	)		—		1,331
Finance and insurance		2,413		134		—		(9	)		—		2,538
Consumer—non-cyclical		711		17		—		(14	)		—		714
Technology and communications		953		44		—		(10	)		—		987
Industrial		928		39		—		(9	)		—		958
Capital goods		518		21		—		(4	)		—		535
Consumer—cyclical		434		10		—		(2	)		—		442
Transportation		619		65		—		(7	)		—		677
Other		2,967		190		—		(13	)		—		3,144

Total non-U.S. corporate		11,717		669		—		(91	)		—		12,295

Residential mortgage-backed		4,122		259		10		(12	)		—		4,379
Commercial mortgage-backed		3,084		98		3		(56	)		—		3,129
Other asset-backed		3,170		15		1		(35	)		—		3,151

Total fixed maturity securities		57,014		4,095		14		(551	)		—		60,572
Equity securities		628		31		—		(27	)		—		632

Total available-for-sale securities	$	57,642	$	4,126	$	14	$	(578	)	$	—	$	61,204

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of March 31, 2017:


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	861	$	(25	)		41	$	—	$	—			—	$	861	$	(25	)		41
State and political subdivisions		564		(28	)		96		142		(18	)		12		706		(46	)		108
Non-U.S. government		345		(11	)		35		—		—			—		345		(11	)		35
U.S. corporate		4,601		(155	)		630		509		(36	)		68		5,110		(191	)		698
Non-U.S. corporate		1,493		(41	)		221		298		(18	)		41		1,791		(59	)		262
Residential mortgage-backed		675		(10	)		104		56		(1	)		31		731		(11	)		135
Commercial mortgage-backed		1,067		(48	)		153		16		(1	)		7		1,083		(49	)		160
Other asset-backed		847		(6	)		150		344		(17	)		67		1,191		(23	)		217

Subtotal, fixed maturity securities		10,453		(324	)		1,430		1,365		(91	)		226		11,818		(415	)		1,656
Equity securities		86		(5	)		160		105		(8	)		48		191		(13	)		208

Total for securities in an unrealized loss position	$	10,539	$	(329	)		1,590	$	1,470	$	(99	)		274	$	12,009	$	(428	)		1,864

% Below cost—fixed maturity securities:
<20% Below cost	$	10,453	$	(324	)		1,430	$	1,325	$	(78	)		220	$	11,778	$	(402	)		1,650
20%-50% Below cost		—		—			—		40		(13	)		6		40		(13	)		6

Total fixed maturity securities		10,453		(324	)		1,430		1,365		(91	)		226		11,818		(415	)		1,656

% Below cost—equity securities:
<20% Below cost		83		(4	)		151		105		(8	)		48		188		(12	)		199
20%-50% Below cost		3		(1	)		9		—		—			—		3		(1	)		9

Total equity securities		86		(5	)		160		105		(8	)		48		191		(13	)		208

Total for securities in an unrealized loss position	$	10,539	$	(329	)		1,590	$	1,470	$	(99	)		274	$	12,009	$	(428	)		1,864

Investment grade	$	10,163	$	(318	)		1,390	$	1,172	$	(79	)		216	$	11,335	$	(397	)		1,606
Below investment grade		376		(11	)		200		298		(20	)		58		674		(31	)		258

Total for securities in an unrealized loss position	$	10,539	$	(329	)		1,590	$	1,470	$	(99	)		274	$	12,009	$	(428	)		1,864

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of March 31, 2017:


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
U.S. corporate:
Utilities	$	784	$	(35	)		118	$	21	$	(1	)		4	$	805	$	(36	)		122
Energy		253		(5	)		37		204		(14	)		25		457		(19	)		62
Finance and insurance		1,140		(25	)		151		99		(6	)		14		1,239		(31	)		165
Consumer—non-cyclical		825		(28	)		105		—		—			—		825		(28	)		105
Technology and communications		450		(19	)		62		89		(8	)		13		539		(27	)		75
Industrial		181		(5	)		27		46		(4	)		5		227		(9	)		32
Capital goods		321		(11	)		48		6		(1	)		1		327		(12	)		49
Consumer—cyclical		335		(12	)		43		31		(2	)		5		366		(14	)		48
Transportation		295		(14	)		37		13		—			1		308		(14	)		38
Other		17		(1	)		2		—		—			—		17		(1	)		2

Subtotal, U.S. corporate securities		4,601		(155	)		630		509		(36	)		68		5,110		(191	)		698

Non-U.S. corporate:
Utilities		232		(8	)		23		14		(1	)		1		246		(9	)		24
Energy		84		(2	)		17		83		(6	)		14		167		(8	)		31
Finance and insurance		265		(5	)		44		27		(2	)		7		292		(7	)		51
Consumer—non-cyclical		238		(9	)		24		—		—			—		238		(9	)		24
Technology and communications		197		(5	)		27		18		(1	)		1		215		(6	)		28
Industrial		91		(2	)		12		46		(2	)		6		137		(4	)		18
Capital goods		66		(1	)		10		28		(2	)		2		94		(3	)		12
Consumer—cyclical		60		(1	)		14		—		—			—		60		(1	)		14
Transportation		95		(5	)		15		25		(1	)		2		120		(6	)		17
Other		165		(3	)		35		57		(3	)		8		222		(6	)		43

Subtotal, non-U.S. corporate securities		1,493		(41	)		221		298		(18	)		41		1,791		(59	)		262

Total for corporate securities in an unrealized loss position	$	6,094	$	(196	)		851	$	807	$	(54	)		109	$	6,901	$	(250	)		960

As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to increased market volatility, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 3% as of March 31, 2017.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fixed Maturity Securities In A Continuous Unrealized Loss Position For 12 Months Or More

Of the $78 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB” and approximately 77% of the unrealized losses were related to investment grade securities as of March 31, 2017. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 5% as of March 31, 2017. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of March 31, 2017:


	Investment Grade
	20% to 50%										Greater than 50%
(Dollar amounts in millions)	Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities		Fair value		Gross unrealized losses		% of total gross unrealized losses			Number of securities
Fixed maturity securities:
State and political subdivisions	$	9	$	(3	)		1	%		1	$	—	$	—		—	%		—
Structured securities:
Other asset-backed		29		(9	)		2			4		—		—		—			—

Total structured securities		29		(9	)		2			4		—		—		—			—

Total	$	38	$	(12	)		3	%		5	$	—	$	—		—	%		—


	Below Investment Grade
	20% to 50%										Greater than 50%
(Dollar amounts in millions)	Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities		Fair value		Gross unrealized losses		% of total gross unrealized losses			Number of securities
Fixed maturity securities:
Non-U.S. government	$	2	$	(1	)		—	%		1	$	—	$	—		—	%		—

Total	$	2	$	(1	)		—	%		1	$	—	$	—		—	%		—

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Structured Securities

Of the $9 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, none related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. economy.

While we consider the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of the underlying collateral. Our examination of the historical performance of the securitization trust included consideration of the following factors for each class of securities issued by the trust: (i) the payment history, including failure to make scheduled payments; (ii) current payment status; (iii) current and historical outstanding balances; (iv) current levels of subordination and losses incurred to date; and (v) characteristics of the underlying collateral. Our examination of the historical performance of the underlying collateral included: (i) historical default rates, delinquency rates, voluntary and involuntary prepayments and severity of losses, including recent trends in this information; (ii) current payment status; (iii) loan to collateral value ratios, as applicable; (iv) vintage; and (v) other underlying characteristics such as current financial condition.

We use our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of March 31, 2017.

Despite the considerable analysis and rigor employed on our structured securities, it is reasonably possible that the underlying collateral of these investments may perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

State and political subdivisions

As indicated above, $3 million of gross unrealized losses were related to a state and political subdivisions fixed maturity security that has been in a continuous loss position for more than 12 months and was greater than 20% below cost. The unrealized loss for this security was 24% below cost, primarily related to widening of credit spreads since acquisition as a result of higher risk premiums being attributed to this security from uncertainty related to special revenues supporting this type of obligation as well as certain securities having longer duration that may be viewed as less desirable in the current market place. Additionally, the fair value of this security class has been negatively impacted as a result of having certain bond insurers associated with the security. In our analysis of impairment for this security, we expect to recover our amortized cost from the cash flows of the underlying security before any guarantee support. However, the existence of these guarantees may negatively impact the value of the debt security in certain instances. We performed an analysis of this security and the underlying activities that are expected to support the cash flows and determined we expect to recover our amortized cost.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	1,074	$	(50	)		37	$	—	$	—			—	$	1,074	$	(50	)		37
State and political subdivisions		644		(32	)		109		142		(18	)		12		786		(50	)		121
Non-U.S. government		497		(18	)		51		—		—			—		497		(18	)		51
U.S. corporate		5,221		(190	)		711		662		(49	)		94		5,883		(239	)		805
Non-U.S. corporate		2,257		(66	)		330		408		(25	)		57		2,665		(91	)		387
Residential mortgage-backed		725		(11	)		100		58		(1	)		35		783		(12	)		135
Commercial mortgage-backed		1,091		(55	)		168		25		(1	)		9		1,116		(56	)		177
Other asset-backed		1,069		(13	)		184		328		(22	)		68		1,397		(35	)		252

Subtotal, fixed maturity securities		12,578		(435	)		1,690		1,623		(116	)		275		14,201		(551	)		1,965
Equity securities		119		(9	)		182		114		(18	)		47		233		(27	)		229

Total for securities in an unrealized loss position	$	12,697	$	(444	)		1,872	$	1,737	$	(134	)		322	$	14,434	$	(578	)		2,194

% Below cost—fixed maturity securities:
<20% Below cost	$	12,578	$	(435	)		1,690	$	1,543	$	(90	)		267	$	14,121	$	(525	)		1,957
20%-50% Below cost		—		—			—		80		(26	)		8		80		(26	)		8
>50% Below cost		—		—			—		—		—			—		—		—			—

Total fixed maturity securities		12,578		(435	)		1,690		1,623		(116	)		275		14,201		(551	)		1,965

% Below cost—equity securities:
<20% Below cost		118		(8	)		167		101		(14	)		38		219		(22	)		205
20%-50% Below cost		1		(1	)		15		13		(4	)		9		14		(5	)		24

Total equity securities		119		(9	)		182		114		(18	)		47		233		(27	)		229

Total for securities in an unrealized loss position	$	12,697	$	(444	)		1,872	$	1,737	$	(134	)		322	$	14,434	$	(578	)		2,194

Investment grade	$	12,339	$	(432	)		1,657	$	1,354	$	(108	)		250	$	13,693	$	(540	)		1,907
Below investment grade		358		(12	)		215		383		(26	)		72		741		(38	)		287

Total for securities in an unrealized loss position	$	12,697	$	(444	)		1,872	$	1,737	$	(134	)		322	$	14,434	$	(578	)		2,194

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
U.S. corporate:
Utilities	$	855	$	(39	)		130	$	21	$	(2	)		5	$	876	$	(41	)		135
Energy		190		(5	)		30		276		(19	)		38		466		(24	)		68
Finance and insurance		1,438		(38	)		177		113		(8	)		15		1,551		(46	)		192
Consumer—non-cyclical		921		(34	)		117		—		—			—		921		(34	)		117
Technology and communications		507		(22	)		70		126		(10	)		17		633		(32	)		87
Industrial		226		(7	)		38		77		(7	)		10		303		(14	)		48
Capital goods		322		(12	)		50		6		(1	)		1		328		(13	)		51
Consumer—cyclical		431		(16	)		56		26		(1	)		6		457		(17	)		62
Transportation		302		(16	)		41		17		(1	)		2		319		(17	)		43
Other		29		(1	)		2		—		—			—		29		(1	)		2

Subtotal, U.S. corporate securities		5,221		(190	)		711		662		(49	)		94		5,883		(239	)		805

Non-U.S. corporate:
Utilities		240		(10	)		32		14		(1	)		1		254		(11	)		33
Energy		105		(3	)		18		91		(9	)		16		196		(12	)		34
Finance and insurance		474		(8	)		79		71		(1	)		16		545		(9	)		95
Consumer—non-cyclical		308		(14	)		30		—		—			—		308		(14	)		30
Technology and communications		232		(9	)		34		28		(1	)		2		260		(10	)		36
Industrial		165		(5	)		21		91		(4	)		10		256		(9	)		31
Capital goods		104		(2	)		14		28		(2	)		2		132		(4	)		16
Consumer—cyclical		90		(2	)		17		—		—			—		90		(2	)		17
Transportation		106		(5	)		16		25		(2	)		2		131		(7	)		18
Other		433		(8	)		69		60		(5	)		8		493		(13	)		77

Subtotal, non-U.S. corporate securities		2,257		(66	)		330		408		(25	)		57		2,665		(91	)		387

Total for corporate securities in an unrealized loss position	$	7,478	$	(256	)		1,041	$	1,070	$	(74	)		151	$	8,548	$	(330	)		1,192

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The scheduled maturity distribution of fixed maturity securities as of March 31, 2017 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.


(Amounts in millions)	Amortized cost or cost		Fair value
Due one year or less	$	1,755	$	1,776
Due after one year through five years		10,322		10,764
Due after five years through ten years		11,969		12,386
Due after ten years		22,041		24,741

Subtotal		46,087		49,667
Residential mortgage-backed		4,139		4,404
Commercial mortgage-backed		3,250		3,302
Other asset-backed		3,231		3,224

Total	$	56,707	$	60,597

As of March 31, 2017, $10,978 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of March 31, 2017, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 23%, 14% and 14%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of March 31, 2017, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	March 31, 2017						December 31, 2016
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	2,181			36	%	$	2,178			36	%
Industrial		1,531			25			1,533			25
Office		1,423			23			1,430			23
Apartments		462			8			455			7
Mixed use		237			4			245			4
Other		287			4			284			5

Subtotal		6,121			100	%		6,125			100	%

Unamortized balance of loan origination fees and costs		(3	)					(2	)
Allowance for losses		(11	)					(12	)

Total	$	6,107					$	6,111

	March 31, 2017						December 31, 2016
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
South Atlantic	$	1,592			26	%	$	1,546			25	%
Pacific		1,547			25			1,567			27
Middle Atlantic		895			15			915			15
Mountain		543			9			554			9
West North Central		426			7			435			7
East North Central		390			6			388			6
West South Central		319			5			311			5
East South Central		205			4			206			3
New England		204			3			203			3

Subtotal		6,121			100	%		6,125			100	%

Unamortized balance of loan origination fees and costs		(3	)					(2	)
Allowance for losses		(11	)					(12	)

Total	$	6,107					$	6,111

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	March 31, 2017
(Amounts in millions)	31 - 60 days past due			61 - 90 days past due			Greater than 90 days past due			Total past due			Current			Total
Property type:
Retail	$	—		$	—		$	—		$	—		$	2,181		$	2,181
Industrial		—			—			—			—			1,531			1,531
Office		—			—			—			—			1,423			1,423
Apartments		—			—			—			—			462			462
Mixed use		—			—			—			—			237			237
Other		—			—			—			—			287			287

Total recorded investment	$	—		$	—		$	—		$	—		$	6,121		$	6,121

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

	December 31, 2016
(Amounts in millions)	31 - 60 days past due			61 - 90 days past due			Greater than 90 days past due			Total past due			Current			Total
Property type:
Retail	$	—		$	—		$	—		$	—		$	2,178		$	2,178
Industrial		1			—			12			13			1,520			1,533
Office		—			—			—			—			1,430			1,430
Apartments		—			—			—			—			455			455
Mixed use		—			—			—			—			245			245
Other		—			—			—			—			284			284

Total recorded investment	$	1		$	—		$	12		$	13		$	6,112		$	6,125

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

As of March 31, 2017 and December 31, 2016, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of March 31, 2017 and December 31, 2016.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of March 31, 2017, we have no commercial mortgage loans past due and have no loans that are individually impaired.

During the three months ended March 31, 2017 and the year ended December 31, 2016, we modified or extended 2 and 16 commercial mortgage loans, respectively, with a total carrying value of $2 million and $85 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower, except during the year ended December 31, 2016, one loan with a carrying value of $1 million at the time of modification was considered a troubled debt restructuring. This loan was sold in the fourth quarter of 2016.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 March 31,
(Amounts in millions)	2017			2016
Allowance for credit losses:
Beginning balance	$	12		$	15
Charge-offs		—			—
Recoveries		—			—
Provision		(1	)		—

Ending balance	$	11		$	15

Ending allowance for individually impaired loans	$	—		$	—

Ending allowance for loans not individually impaired that were evaluated collectively for impairment	$	11		$	15

Recorded investment:
Ending balance	$	6,121		$	6,196

Ending balance of individually impaired loans	$	—		$	19

Ending balance of loans not individually impaired that were evaluated collectively for impairment	$	6,121		$	6,177

As of March 31, 2017, we had no individually impaired commercial mortgage loans. As of March 31, 2016, we had two individually impaired commercial mortgage loans. One loan was included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million. The other loan was included within the industrial property type with a recorded investment of $14 million, an unpaid principal balance of $15 million and charge-offs of $1 million. As of December 31, 2016, we had one individually impaired loan within the industrial property type with a recorded investment of $12 million, an unpaid principal balance of $15 million and charge-offs of $3 million.

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

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


	March 31, 2017
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100%			Total
Property type:
Retail	$	722		$	530		$	918		$	11		$	—		$	2,181
Industrial		607			428			494			2			—			1,531
Office		429			312			653			29			—			1,423
Apartments		189			91			177			5			—			462
Mixed use		64			86			87			—			—			237
Other		62			15			210			—			—			287

Total recorded investment	$	2,073		$	1,462		$	2,539		$	47		$	—		$	6,121

% of total		34	%		24	%		41	%		1	%		—	%		100	%

Weighted-average debt service coverage ratio		2.21			1.88			1.61			0.89			—			1.87


	December 31, 2016
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100% ⁽¹⁾			Total
Property type:
Retail	$	743		$	511		$	913		$	11		$	—		$	2,178
Industrial		605			430			484			14			—			1,533
Office		431			310			656			26			7			1,430
Apartments		188			89			173			5			—			455
Mixed use		67			87			91			—			—			245
Other		60			30			194			—			—			284

Total recorded investment	$	2,094		$	1,457		$	2,511		$	56		$	7		$	6,125

% of total		34	%		24	%		41	%		1	%		—	%		100	%

Weighted-average debt service coverage ratio		2.20			1.88			1.61			0.80			(0.07	)		1.87

⁽¹⁾	Included a loan with a recorded investment of $7 million in good standing, where the borrower continued to make timely payments, with a loan-to-value of 105%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	March 31, 2017
(Amounts in millions)	Less than 1.00			1.00 - 1.25			1.26 - 1.50			1.51 - 2.00			Greater than 2.00			Total
Property type:
Retail	$	61		$	198		$	433		$	915		$	574		$	2,181
Industrial		52			109			237			635			498			1,531
Office		84			115			175			610			439			1,423
Apartments		19			21			44			226			152			462
Mixed use		2			6			19			127			83			237
Other		1			147			54			65			20			287

Total recorded investment	$	219		$	596		$	962		$	2,578		$	1,766		$	6,121

% of total		4	%		10	%		16	%		41	%		29	%		100	%

Weighted-average loan-to-value		59	%		60	%		59	%		58	%		45	%		55	%


	December 31, 2016
(Amounts in millions)	Less than 1.00			1.00 - 1.25			1.26 - 1.50			1.51 - 2.00			Greater than 2.00			Total
Property type:
Retail	$	67		$	204		$	425		$	899		$	583		$	2,178
Industrial		71			113			236			599			514			1,533
Office		91			117			172			609			441			1,430
Apartments		19			22			44			217			153			455
Mixed use		2			9			19			128			87			245
Other		1			148			60			55			20			284

Total recorded investment	$	251		$	613		$	956		$	2,507		$	1,798		$	6,125

% of total		4	%		10	%		16	%		41	%		29	%		100	%

Weighted-average loan-to-value		61	%		60	%		59	%		58	%		45	%		55	%

As of March 31, 2017 and December 31, 2016, we did not have any floating rate commercial mortgage loans.

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to securitization entities.

(g) Restricted Other Invested Assets Related To Securitization Entities

We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities and whereby the changes in fair value are recorded in current period income. The trading securities comprise asset-backed securities, including highly rated bonds that are primarily backed by credit card receivables.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(h) Limited Partnerships or Similar Entities

Investments in partnerships or similar entities are generally considered VIEs when the equity group lacks sufficient financial control. Generally, these investments are limited partner or non-managing member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of March 31, 2017 and December 31, 2016, the total carrying value of these investments was $188 million and $178 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.

(5) Derivative Instruments

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Derivative assets					Derivative liabilities
		Fair value					Fair value

(Amounts in millions)	Balance sheet classification	March 31, 2017		December 31, 2016		Balance sheet classification	March 31, 2017		December 31, 2016
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Other invested assets	$	227	$	237	Other liabilities	$	241	$	203
Foreign currency swaps	Other invested assets		4		4	Other liabilities		—		—

Total cash flow hedges			231		241			241		203

Total derivatives designated as hedges			231		241			241		203

Derivatives not designated as hedges
Interest rate swaps	Other invested assets		338		359	Other liabilities		132		146
Foreign currency swaps	Other invested assets		1		—	Other liabilities		3		5
Credit default swaps related to securitization entities	Restricted other invested assets		—		—	Other liabilities		1		1
Equity index options	Other invested assets		77		72	Other liabilities		—		—
Financial futures	Other invested assets		—		—	Other liabilities		—		—
Equity return swaps	Other invested assets		—		1	Other liabilities		5		1
Other foreign currency contracts	Other invested assets		28		35	Other liabilities		26		27
GMWB embedded derivatives	Reinsurance recoverable ⁽¹⁾		15		16	Policyholder account balances ⁽²⁾		275		303
Fixed index annuity embedded derivatives	Other assets		—		—	Policyholder account balances ⁽³⁾		361		344
Indexed universal life embedded derivatives	Reinsurance recoverable		—		—	Policyholder account balances ⁽⁴⁾		12		11

Total derivatives not designated as hedges			459		483			815		838

Total derivatives		$	690	$	724		$	1,056	$	1,041

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

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

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

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

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

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB, fixed index annuity embedded derivatives and indexed

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

universal life embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:


(Notional in millions)	Measurement		December 31, 2016		Additions		Maturities/ terminations			March 31, 2017
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps		Notional	$	11,570	$	—	$	(71	)	$	11,499
Foreign currency swaps		Notional		22		—		—			22

Total cash flow hedges				11,592		—		(71	)		11,521

Total derivatives designated as hedges				11,592		—		(71	)		11,521

Derivatives not designated as hedges
Interest rate swaps		Notional		4,679		—		—			4,679
Foreign currency swaps		Notional		201		29		—			230
Credit default swaps		Notional		39		—		—			39
Credit default swaps related to securitization entities		Notional		312		—		—			312
Equity index options		Notional		2,396		523		(443	)		2,476
Financial futures		Notional		1,398		1,509		(1,449	)		1,458
Equity return swaps		Notional		165		103		(150	)		118
Other foreign currency contracts		Notional		3,130		484		(221	)		3,393

Total derivatives not designated as hedges				12,320		2,648		(2,263	)		12,705

Total derivatives			$	23,912	$	2,648	$	(2,334	)	$	24,226


(Number of policies)	Measurement		December 31, 2016		Additions		Maturities/ terminations			March 31, 2017
Derivatives not designated as hedges
GMWB embedded derivatives		Policies		33,238		—		(751	)		32,487
Fixed index annuity embedded derivatives		Policies		17,549		—		(125	)		17,424
Indexed universal life embedded derivatives		Policies		1,074		1		(22	)		1,053

Cash Flow Hedges

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about the pre-tax income effects of cash flow hedges for the three months ended March 31, 2017:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income from OCI		Classification of gain (loss) reclassified into net income	Gain (loss) recognized in net income⁽¹⁾		Classification of gain (loss) recognized in net income

Interest rate swaps hedging assets	$	(49	)	$	30	Net investment income	$	—	Net investment gains (losses)

Interest rate swaps hedging assets		—			1	Net investment gains (losses)		—	Net investment gains (losses)

Interest rate swaps hedging liabilities		4			—	Interest expense		—	Net investment gains (losses)

Total	$	(45	)	$	31		$	—

⁽¹⁾	Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income effects of cash flow hedges for the three months ended March 31, 2016:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income from OCI		Classification of gain (loss) reclassified into net income	Gain (loss) recognized in net income⁽¹⁾		Classification of gain (loss) recognized in net income
Interest rate swaps hedging assets	$	457		$	25	Net investment income	$	6	Net investment gains (losses)
Interest rate swaps hedging assets		—			1	Net investment gains (losses)		—	Net investment gains (losses)
Interest rate swaps hedging liabilities		(31	)		—	Interest expense		—	Net investment gains (losses)
Inflation indexed swaps		(3	)		2	Net investment income		—	Net investment gains (losses)
Forward currency swaps		(1	)		—	Net investment income		—	Net investment gains (losses)

Total	$	422		$	28		$	6

⁽¹⁾	Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three months ended March 31,
(Amounts in millions)	2017			2016
Derivatives qualifying as effective accounting hedges as of January 1	$	2,085		$	2,045
Current period increases (decreases) in fair value, net of deferred taxes of $16 and $(147)		(29	)		275
Reclassification to net (income), net of deferred taxes of $11 and $10		(20	)		(18	)

Derivatives qualifying as effective accounting hedges as of March 31	$	2,036		$	2,302

The total of derivatives designated as cash flow hedges of $2,036 million, net of taxes, recorded in stockholders’ equity as of March 31, 2017 is expected to be reclassified to net income in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $89 million, net of taxes, is expected to be reclassified to net income in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2057. During the three months ended March 31, 2017, there was approximately $1 million reclassified to net income in connection with forecasted transactions that were no longer considered probable of occurring.

Fair Value Hedges

Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income. In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income. We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (ii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iii) other instruments to hedge various fair value exposures of investments.

We did not have any fair value hedges as of March 31, 2017 and 2016.

Derivatives Not Designated As Hedges

We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; (vi) foreign currency swaps, options and forward contracts to mitigate currency risk associated with non-functional currency investments held by certain foreign subsidiaries and future dividends or other cash flows from certain foreign subsidiaries to our holding company; and (vii) equity index options to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

derivatives. We also offer fixed index annuity and indexed universal life products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap.

The following tables provide the pre-tax gain (loss) recognized in net income for the effects of derivatives not designated as hedges for the periods indicated:


	Three months ended March 31,						Classification of gain (loss) recognized in net income
(Amounts in millions)	2017			2016
Interest rate swaps	$	2		$	15		Net investment gains (losses)
Interest rate swaps related to securitization entities		—			(5	)	Net investment gains (losses)
Credit default swaps		—			(1	)	Net investment gains (losses)
Credit default swaps related to securitization entities		2			9		Net investment gains (losses)
Equity index options		13			(3	)	Net investment gains (losses)
Financial futures		(17	)		7		Net investment gains (losses)
Equity return swaps		(8	)		2		Net investment gains (losses)
Other foreign currency contracts		(5	)		(2	)	Net investment gains (losses)
Foreign currency swaps		3			10		Net investment gains (losses)
GMWB embedded derivatives		33			(78	)	Net investment gains (losses)
Fixed index annuity embedded derivatives		(20	)		3		Net investment gains (losses)
Indexed universal life embedded derivatives		1			2		Net investment gains (losses)

Total derivatives not designated as hedges	$	4		$	(41	)

Derivative Counterparty Credit Risk

Most of our derivative arrangements require the posting of collateral by the counterparty upon meeting certain net exposure thresholds. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:


	March 31, 2017									December 31, 2016
(Amounts in millions)	Derivatives assets⁽¹⁾			Derivatives liabilities⁽²⁾			Net derivatives			Derivatives assets⁽¹⁾			Derivatives liabilities⁽²⁾			Net derivatives
Amounts presented in the balance sheet:
Gross amounts recognized	$	711		$	436		$	275		$	724		$	387		$	337
Gross amounts offset in the balance sheet		—			—			—			—			—			—

Net amounts presented in the balance sheet		711			436			275			724			387			337
Gross amounts not offset in the balance sheet:
Financial instruments ⁽³⁾		(282	)		(282	)		—			(172	)		(172	)		—
Collateral received		(348	)		—			(348	)		(467	)		—			(467	)
Collateral pledged		—			(428	)		428			—			(557	)		557
Over collateralization		—			274			(274	)		1			344			(343	)

Net amount	$	81		$	—		$	81		$	86		$	2		$	84

⁽¹⁾	Included $36 million and $16 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives as of March 31, 2017 and December 31, 2016, respectively.

⁽²⁾	Included $29 million and $5 million of accruals on derivatives classified as other liabilities and does not include amounts related to embedded derivatives and derivatives related to securitization entities as of March 31, 2017 and December 31, 2016, respectively.

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

Except for derivatives related to securitization entities, almost all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If downgrade provisions had been triggered as a result of downgrades of our counterparties, we could have claimed up to $81 million and $86 million as of March 31, 2017 and December 31, 2016, respectively, or have been required to disburse up to $2 million as of December 31, 2016. There were no amounts that we would have been required to disburse as of March 31, 2017. The chart above excludes embedded derivatives and derivatives related to securitization entities as those derivatives are not subject to master netting arrangements.

Credit Derivatives

We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

default swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction.

In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we consolidate. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity.

The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:


	March 31, 2017						December 31, 2016
(Amounts in millions)	Notional value		Assets		Liabilities		Notional value		Assets		Liabilities
Investment grade
Matures in less than one year	$	19	$	—	$	—	$	—	$	—	$	—
Matures after one year through five years		20		—		—		39		—		—

Total credit default swaps on single name reference entities	$	39	$	—	$	—	$	39	$	—	$	—

The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:

March 31, 2017

December 31, 2016

(Amounts in millions)

Notional
value

Assets

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company