Edgar Filing: GENWORTH FINANCIAL INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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, 2019

☐	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 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 24, 2019, 503,314,344 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, 2019 (Unaudited) and December 31, 2018.			3
Condensed Consolidated Statements of Income for the three months ended March 31, 2019 and 2018 (Unaudited)			4
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018 (Unaudited)			5
Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2019 and 2018 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		74

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		133

Item 4.	Controls and Procedures		134

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings		134

Item 1A.	Risk Factors		134

Item 6.	Exhibits		134

Signatures			136

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	March 31,			December 31,
	2019			2018
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	61,360		$	59,661
Equity securities, at fair value		635			655
Commercial mortgage loans ($59 and $62 are restricted as of March 31, 2019 and December 31, 2018, respectively, related to a securitization entity)		6,988			6,749
Policy loans		1,994			1,861
Other invested assets		1,208			1,188

Total investments		72,185			70,114
Cash, cash equivalents and restricted cash		2,221			2,177
Accrued investment income		726			675
Deferred acquisition costs		2,219			3,263
Intangible assets and goodwill		265			347
Reinsurance recoverable		17,257			17,278
Other assets		532			474
Deferred tax asset		573			736
Separate account assets		6,210			5,859

Total assets	$	102,188		$	100,923

Liabilities and equity
Liabilities:
Future policy benefits	$	38,369		$	37,940
Policyholder account balances		22,651			22,968
Liability for policy and contract claims		10,536			10,379
Unearned premiums		3,482			3,546
Other liabilities		1,682			1,682
Non-recourse funding obligations		311			311
Long-term borrowings		4,035			4,025
Deferred tax liability		30			24
Separate account liabilities		6,210			5,859

Total liabilities		87,306			86,734

Commitments and contingencies

Equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 591 million and 589 million shares issued as of March 31, 2019 and December 31, 2018, respectively; 503 million and 501 million shares outstanding as of March 31, 2019 and December 31, 2018, respectively		1			1
Additional paid-in capital		11,989			11,987

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		932			585
Net unrealized gains (losses) on other-than-temporarily impaired securities		11			10

Net unrealized investment gains (losses)		943			595

Derivatives qualifying as hedges		1,850			1,781
Foreign currency translation and other adjustments		(301	)		(332	)

Total accumulated other comprehensive income (loss)		2,492			2,044
Retained earnings		1,292			1,118
Treasury stock, at cost (88 million shares as of March 31, 2019 and December 31, 2018)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		13,074			12,450
Noncontrolling interests		1,808			1,739

Total equity		14,882			14,189

Total liabilities and equity	$	102,188		$	100,923

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,
	2019		2018
Revenues:
Premiums	$	1,114	$	1,140
Net investment income		829		804
Net investment gains (losses)		74		(31	)
Policy fees and other income		187		202

Total revenues		2,204		2,115

Benefits and expenses:
Benefits and other changes in policy reserves		1,301		1,311
Interest credited		147		156
Acquisition and operating expenses, net of deferrals		251		240
Amortization of deferred acquisition costs and intangibles		91		104
Interest expense		72		76

Total benefits and expenses		1,862		1,887

Income before income taxes		342		228
Provision for income taxes		112		63

Net income		230		165
Less: net income attributable to noncontrolling interests		56		53

Net income available to Genworth Financial, Inc.’s common stockholders	$	174	$	112

Net income available to Genworth Financial, Inc.’s common stockholders per share:
Basic	$	0.35	$	0.22

Diluted	$	0.34	$	0.22

Weighted-average common shares outstanding:
Basic		501.2		499.6

Diluted		508.6		502.7

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

Net other-than-temporary impairments		—		—
Other investments gains (losses)		74		(31	)

Total net investment gains (losses)	$	74	$	(31	)

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,
	2019		2018
Net income	$	230	$	165
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired		379		(341	)
Net unrealized gains (losses) on other-than-temporarily impaired securities		1		—
Derivatives qualifying as hedges		69		(152	)
Foreign currency translation and other adjustments		54		(87	)

Total other comprehensive income (loss)		503		(580	)

Total comprehensive income (loss)		733		(415	)
Less: comprehensive income attributable to noncontrolling interests		111		4

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	622	$	(419	)

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in millions)

(Unaudited)


														Total
														Genworth
					Accumulated									Financial,
			Additional		other						Treasury			Inc.’s
	Common		paid-in		comprehensive			Retained			stock, at			stockholders’			Noncontrolling			Total
	stock		capital		income (loss)			earnings			cost			equity			interests			equity
Balances as of December 31, 2018	$	1	$	11,987	$	2,044		$	1,118		$	(2,700	)	$	12,450		$	1,739		$	14,189
Repurchase of subsidiary shares		—		—		—			—			—			—			(12	)		(12	)
Comprehensive income:
Net income		—		—		—			174			—			174			56			230
Other comprehensive income, net of taxes		—		—		448			—			—			448			55			503

Total comprehensive income															622			111			733
Dividends to noncontrolling interests		—		—		—			—			—			—			(28	)		(28	)
Stock-based compensation expense and exercises and other		—		2		—			—			—			2			(2	)		—

Balances as of March 31, 2019	$	1	$	11,989	$	2,492		$	1,292		$	(2,700	)	$	13,074		$	1,808		$	14,882

Balances as of December 31, 2017	$	1	$	11,977	$	3,027		$	1,113		$	(2,700	)	$	13,418		$	1,910		$	15,328
Cumulative effect of change in accounting, net of taxes		—		—		131			(114	)		—			17			—			17
Repurchase of subsidiary shares		—		—		—			—			—			—			(36	)		(36	)
Comprehensive income (loss):
Net income		—		—		—			112			—			112			53			165
Other comprehensive loss, net of taxes		—		—		(531	)		—			—			(531	)		(49	)		(580	)

Total comprehensive income (loss)															(419	)		4			(415	)
Dividends to noncontrolling interests		—		—		—			—			—			—			(36	)		(36	)
Stock-based compensation expense and exercises and other		—		2		—			—			—			2			2			4

Balances as of March 31, 2018	$	1	$	11,979	$	2,627		$	1,111		$	(2,700	)	$	13,018		$	1,844		$	14,862

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,
	2019			2018
Cash flows from operating activities:
Net income	$	230		$	165
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity securities discounts and premiums		(16	)		(25	)
Net investment (gains) losses		(74	)		31
Charges assessed to policyholders		(165	)		(178	)
Acquisition costs deferred		(17	)		(18	)
Amortization of deferred acquisition costs and intangibles		91			104
Deferred income taxes		75			26
Derivative instruments and limited partnerships		(30	)		(152	)
Stock-based compensation expense		7			7
Change in certain assets and liabilities:
Accrued investment income and other assets		(258	)		(45	)
Insurance reserves		301			377
Current tax liabilities		8			(39	)
Other liabilities, policy and contract claims and other policy-related balances		(18	)		(144	)

Net cash from operating activities		134			109

Cash flows from (used by) investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		902			934
Commercial mortgage loans		127			205
Restricted commercial mortgage loans related to a securitization entity		3			8
Proceeds from sales of investments:
Fixed maturity and equity securities		1,714			792
Purchases and originations of investments:
Fixed maturity and equity securities		(2,128	)		(2,013	)
Commercial mortgage loans		(370	)		(199	)
Other invested assets, net		17			104
Policy loans, net		12			2

Net cash from (used by) investing activities		277			(167	)

Cash flows from (used by) financing activities:
Deposits to universal life and investment contracts		198			255
Withdrawals from universal life and investment contracts		(581	)		(591	)
Proceeds from issuance of long-term debt		—			441
Repayment of borrowings related to a securitization entity		—			(8	)
Repurchase of subsidiary shares		(12	)		(36	)
Dividends paid to noncontrolling interests		(28	)		(36	)
Other, net		48			22

Net cash from (used by) financing activities		(375	)		47

Effect of exchange rate changes on cash, cash equivalents and restricted cash		8			(21	)

Net change in cash, cash equivalents and restricted cash		44			(32	)
Cash, cash equivalents and restricted cash at beginning of period		2,177			2,875

Cash, cash equivalents and restricted cash at end of period	$	2,221		$	2,843

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. (“Parent”), a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of Asia Pacific Insurance. China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash.

At a special meeting held on March 7, 2017, Genworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement. The closing of the transaction remains subject to other closing conditions and approvals.

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.

•

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 are no longer actively sold but we continue to service our existing blocks of business. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of funding agreements and funding agreements backing notes.

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

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 2018 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, 2019, we adopted new accounting guidance related to benchmark interest rates used in derivative hedge accounting. The guidance adds an additional permissible U.S. benchmark interest rate, the Secured Overnight Financing Rate, for hedge accounting purposes. We adopted this new accounting guidance using the prospective method, which did not have any impact on our condensed consolidated financial statements and disclosures.

On January 1, 2019, we adopted new accounting guidance related to accounting for nonemployee share-based payments. The guidance aligns the measurement and classification of share-based payments to nonemployees issued in exchange for goods or services with the guidance for share-based payments to employees, with certain exceptions. We adopted this new accounting guidance using the modified retrospective method. This guidance is consistent with our previous accounting practices and, accordingly, had no impact on our condensed consolidated financial statements at adoption.

On January 1, 2019, we adopted new accounting guidance related to shortening the amortization period of certain callable debt securities held at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. We adopted this new accounting guidance using the modified retrospective method, which had no significant impact on our condensed consolidated financial statements at adoption.

On January 1, 2019, we adopted new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a right-of-use asset and a corresponding lease liability on the balance sheet. We adopted this new accounting guidance using the effective date transition method, which

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

permits entities to apply the new lease standard using a modified retrospective transition approach at the date of adoption. As such, historical periods will continue to be measured and presented under the previous guidance while current and future periods will be subject to this new accounting guidance. The package of practical expedients was also elected upon adoption. Upon adoption we recorded a $60 million right-of-use asset related to operating leases and a $63 million lease liability. In addition, we de-recognized accrued rent expense of $3 million recorded under the previous accounting guidance. The right-of-use asset and the lease liability are included in other assets and other liabilities, respectively, but do not have a material impact on our condensed consolidated balance sheet as of March 31, 2019. The initial measurement of our right-of-use asset had no significant initial direct costs, prepaid lease payments or lease incentives; therefore, a cumulative-effect adjustment was not recorded to the opening retained earnings balance as a result of the change in accounting principle.

Our leased assets are predominantly classified as operating leases and consist of office space in 14 locations primarily in the United States, Canada and Australia. Lease payments included in the calculation of our lease liability include fixed amounts contained within each rental agreement and variable lease payments that are based upon an index or rate. We have elected to combine lease and non-lease components, as permitted under this new accounting guidance, as a result, non-lease components are included in the calculation of our lease liability as opposed to being separated and accounted for as consideration under the new revenue recognition standard. Our remaining lease terms range from 1 to 14 years and have a weighted-average remaining lease term of 7.6 years as of March 31, 2019. The implicit rate of our lease agreements was not readily determinable; therefore, we utilized our incremental borrowing rate to discount future lease payments. The weighted-average discount rate was 6.24% as of March 31, 2019.

Our aggregate annual rental expense for all leases under the previous guidance was approximately $11 million. Annual rental expense and future minimum lease payments are not expected to be materially different under this new accounting guidance.

Accounting Pronouncements Not Yet Adopted

In August 2018, the Financial Accounting Standards Board (“the FASB”) issued new accounting guidance that significantly changes the recognition and measurement of long-duration insurance contracts and expands disclosure requirements, which impacts our life insurance deferred acquisition costs (“DAC”) and liabilities. In accordance with the guidance, the more significant changes include:

•

assumptions will no longer be locked-in at contract inception and all cash flow assumptions used to estimate the liability for future policy benefits will be reviewed at least annually in the same period each year or more frequently if actual experience indicates a change is required;

•

changes in cash flow assumptions (except the discount rate) will be recorded in net income (loss) using a retrospective approach with a cumulative catch-up adjustment by recalculating the net premium ratio (which will be capped at 100%) using actual historical and updated future cash flow assumptions;

•

the discount rate used to determine the liability for future policy benefits will be a current upper-medium grade (low credit risk) fixed-income instrument yield, which is generally interpreted to mean a single-A rated bond rate for the same duration, and is required to be reviewed quarterly, with changes in the discount rate recorded in other comprehensive income (loss);

•

the provision for adverse deviation and the premium deficiency test will be eliminated;

•

market risk benefits associated with deposit-type contracts will be measured at fair value with changes recorded in net income (loss);

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

the amortization method for DAC will generally be on a straight-line basis over the expected contract term; and

•

disclosures will be greatly expanded to include significant assumptions and product liability rollforwards.

The guidance is currently effective for us on January 1, 2021 using the modified retrospective method, with early adoption permitted. We are in process of evaluating the new guidance and the impact it will have on our condensed consolidated financial statements.

In August 2018, the FASB issued new accounting guidance related to disclosure requirements for defined benefit plans as part of its disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for defined benefit pension and other postretirement benefit plans. The guidance is currently effective for us on January 1, 2020 using the retrospective method, with early adoption permitted. We do not expect any significant impact from this guidance on our condensed consolidated financial statements and disclosures.

In August 2018, the FASB issued new accounting guidance related to fair value disclosure requirements as part of its disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for fair value measurements. The guidance includes new disclosure requirements related to the change in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance is currently effective for us on January 1, 2020 using the prospective method for certain disclosures and the retrospective method for all other disclosures. Early adoption of either the entire standard or only the provisions that eliminate or modify the requirements is permitted. We are in process of evaluating the impact the guidance may have on our condensed consolidated financial statements and disclosures.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Earnings Per Share

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


	Three months ended
	March 31,
(Amounts in millions, except per share amounts)	2019		2018
Weighted-average shares used in basic earnings per share calculations		501.2		499.6
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		7.4		3.1

Weighted-average shares used in diluted earnings per share calculations		508.6		502.7

Net income:
Net income	$	230	$	165
Less: net income attributable to noncontrolling interests		56		53

Net income available to Genworth Financial, Inc.’s common stockholders	$	174	$	112

Basic earnings per share:
Net income	$	0.46	$	0.33
Less: net income attributable to noncontrolling interests		0.11		0.11

Net income available to Genworth Financial, Inc.’s common stockholders	$	0.35	$	0.22

Diluted earnings per share:
Net income	$	0.45	$	0.33
Less: net income attributable to noncontrolling interests		0.11		0.10

Net income available to Genworth Financial, Inc.’s common stockholders⁽¹⁾	$	0.34	$	0.22

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

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)	2019			2018
Fixed maturity securities—taxable	$	643		$	635
Fixed maturity securities—non-taxable		2			3
Equity securities		9			10
Commercial mortgage loans		81			82
Restricted commercial mortgage loans related to a securitization entity		1			2
Policy loans		46			43
Other invested assets		59			39
Cash, cash equivalents, restricted cash and short-term investments		12			12

Gross investment income before expenses and fees		853			826
Expenses and fees		(24	)		(22	)

Net investment income	$	829		$	804

(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)	2019			2018
Available-for-sale securities:
Realized gains	$	81		$	7
Realized losses		(22	)		(16	)

Net realized gains (losses) on available-for-sale securities		59			(9	)

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

Net realized gains (losses) on equity securities sold		3			2
Net unrealized gains (losses) on equity securities still held		8			(18	)
Limited partnerships		15			7
Commercial mortgage loans		(1	)		—
Derivative instruments⁽¹⁾		(10	)		(13	)

Net investment gains (losses)	$	74		$	(31	)

⁽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, 2019 and 2018 was $763 million and $619 million, respectively, which was approximately 97% and 98%, 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)	2019			2018
Beginning balance	$	24		$	32
Reductions:
Securities sold, paid down or disposed		(1	)		(4	)

Ending balance	$	23		$	28

(c) Unrealized Investment Gains and Losses

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


(Amounts in millions)	March 31, 2019			December 31, 2018
Net unrealized gains (losses) on fixed maturity securities ⁽¹⁾	$	3,714		$	1,775
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(2,401	)		(952	)
Income taxes, net		(300	)		(190	)

Net unrealized investment gains (losses)		1,013			633
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		70			38

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	943		$	595

⁽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)	2019			2018
Beginning balance	$	595		$	1,085
Cumulative effect of changes in accounting:
Stranded tax effects		—			189
Recognition and measurement of financial assets and liabilities, net of taxes of $— and $18		—			(25	)

Total cumulative effect of changes in accounting		—			164

Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		1,999			(1,681	)
Adjustment to deferred acquisition costs		(989	)		442
Adjustment to present value of future profits		(53	)		36
Adjustment to sales inducements		(19	)		20
Adjustment to benefit reserves		(388	)		740
Provision for income taxes		(123	)		95

Change in unrealized gains (losses) on investment securities		427			(348	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $13 and $(1)		(47	)		7

Change in net unrealized investment gains (losses)		380			(341	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		32			(9	)

Ending balance	$	943		$	917

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity Securities

As of March 31, 2019, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as available-for-sale were as follows:


			Gross unrealized gains				Gross unrealized losses
	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	$	4,116	$	619	$	—	$	(4	)	$	—	$	4,731
State and political subdivisions		2,329		223		—		(6	)		—		2,546
Non-U.S. government		2,403		121		—		(6	)		—		2,518
U.S. corporate:
Utilities		4,296		426		—		(37	)		—		4,685
Energy		2,447		186		—		(15	)		—		2,618
Finance and insurance		6,883		405		—		(37	)		—		7,251
Consumer—non-cyclical		4,905		407		—		(55	)		—		5,257
Technology and communications		2,832		161		—		(19	)		—		2,974
Industrial		1,194		67		—		(12	)		—		1,249
Capital goods		2,283		225		—		(19	)		—		2,489
Consumer—cyclical		1,579		83		—		(16	)		—		1,646
Transportation		1,271		107		—		(16	)		—		1,362
Other		379		33		—		(1	)		—		411

Total U.S. corporate		28,069		2,100		—		(227	)		—		29,942

Non-U.S. corporate:
Utilities		1,100		36		—		(9	)		—		1,127
Energy		1,327		124		—		(4	)		—		1,447
Finance and insurance		2,434		129		—		(9	)		—		2,554
Consumer—non-cyclical		699		19		—		(9	)		—		709
Technology and communications		1,151		52		—		(6	)		—		1,197
Industrial		920		56		—		(3	)		—		973
Capital goods		644		21		—		(3	)		—		662
Consumer—cyclical		537		8		—		(4	)		—		541
Transportation		756		65		—		(6	)		—		815
Other		2,127		139		—		(6	)		—		2,260

Total non-U.S. corporate		11,695		649		—		(59	)		—		12,285

Residential mortgage-backed		2,762		181		13		(6	)		—		2,950
Commercial mortgage-backed		2,946		64		—		(48	)		—		2,962
Other asset-backed		3,422		18		1		(15	)		—		3,426

Total available-for-sale fixed maturity securities	$	57,742	$	3,975	$	14	$	(371	)	$	—	$	61,360

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2018, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as available-for-sale were as follows:


			Gross unrealized gains				Gross unrealized losses
	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	$	4,175	$	473	$	—	$	(17	)	$	—	$	4,631
State and political subdivisions		2,406		168		—		(22	)		—		2,552
Non-U.S. government		2,345		72		—		(24	)		—		2,393
U.S. corporate:
Utilities		4,439		331		—		(95	)		—		4,675
Energy		2,382		101		—		(64	)		—		2,419
Finance and insurance		6,705		249		—		(132	)		—		6,822
Consumer—non-cyclical		4,891		294		—		(137	)		—		5,048
Technology and communications		2,823		110		—		(78	)		—		2,855
Industrial		1,230		41		—		(33	)		—		1,238
Capital goods		2,277		165		—		(51	)		—		2,391
Consumer—cyclical		1,592		53		—		(48	)		—		1,597
Transportation		1,283		78		—		(41	)		—		1,320
Other		376		24		—		(3	)		—		397

Total U.S. corporate		27,998		1,446		—		(682	)		—		28,762

Non-U.S. corporate:
Utilities		1,056		17		—		(32	)		—		1,041
Energy		1,320		72		—		(23	)		—		1,369
Finance and insurance		2,391		72		—		(40	)		—		2,423
Consumer—non-cyclical		756		8		—		(25	)		—		739
Technology and communications		1,168		23		—		(26	)		—		1,165
Industrial		926		36		—		(17	)		—		945
Capital goods		615		10		—		(10	)		—		615
Consumer—cyclical		532		1		—		(13	)		—		520
Transportation		689		46		—		(15	)		—		720
Other		2,218		105		—		(23	)		—		2,300

Total non-U.S. corporate		11,671		390		—		(224	)		—		11,837

Residential mortgage-backed		2,888		160		13		(17	)		—		3,044
Commercial mortgage-backed		3,054		43		—		(81	)		—		3,016
Other asset-backed		3,444		10		1		(29	)		—		3,426

Total available-for-sale fixed maturity securities	$	57,981	$	2,762	$	14	$	(1,096	)	$	—	$	59,661

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Less than 12 months							12 months or more							Total
			Gross							Gross							Gross
	Fair		unrealized			Number of		Fair		unrealized			Number of		Fair		unrealized			Number of
(Dollar amounts in millions)	value		losses			securities		value		losses			securities		value		losses			securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsoredenterprises	$	—	$	—			—	$	229	$		(4)		31	$	229	$		(4)		31
State and political subdivisions		11		—			3		259		(6	)		60		270		(6	)		63
Non-U.S. government		62		—			11		331		(6	)		36		393		(6	)		47
U.S. corporate		1,247		(37	)		153		5,003		(190	)		698		6,250		(227	)		851
Non-U.S. corporate		354		(6	)		57		1,922		(53	)		296		2,276		(59	)		353
Residential mortgage-backed		46		(1	)		9		476		(5	)		85		522		(6	)		94
Commercial mortgage-backed		168		(4	)		22		933		(44	)		143		1,101		(48	)		165
Other asset-backed		981		(10	)		209		707		(5	)		162		1,688		(15	)		371

Total for fixed maturity securities in an unrealized loss position	$	2,869	$	(58	)		464	$	9,860	$	(313	)		1,511	$	12,729	$	(371	)		1,975

% Below cost:
<20% Below cost	$	2,869	$	(58	)		464	$	9,839	$	(304	)		1,505	$	12,708	$	(362	)		1,969
20%-50% Below cost		—		—			—		18		(6	)		3		18		(6	)		3
>50% Below cost		—		—			—		3		(3	)		3		3		(3	)		3

Total for fixed maturity securities in an unrealized loss position	$	2,869	$	(58	)		464	$	9,860	$	(313	)		1,511	$	12,729	$	(371	)		1,975

Investment grade	$	2,639	$	(51	)		434	$	9,439	$	(292	)		1,446	$	12,078	$	(343	)		1,880
Below investment grade		230		(7	)		30		421		(21	)		65		651		(28	)		95

Total for fixed maturity securities in an unrealized loss position	$	2,869	$	(58	)		464	$	9,860	$	(313	)		1,511	$	12,729	$	(371	)		1,975

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, 2019:


	Less than 12 months							12 months or more							Total
			Gross							Gross							Gross
	Fair		unrealized			Number of		Fair		unrealized			Number of		Fair		unrealized			Number of
(Dollar amounts in millions)	value		losses			securities		value		losses			securities		value		losses			securities
Description of Securities
U.S. corporate:
Utilities	$	217	$	(7	)		22	$	697	$	(30	)		103	$	914	$	(37	)		125
Energy		60		—			15		368		(15	)		49		428		(15	)		64
Finance and insurance		203		(5	)		27		1,398		(32	)		198		1,601		(37	)		225
Consumer— non-cyclical		313		(13	)		27		813		(42	)		104		1,126		(55	)		131
Technology and communications		95		(4	)		17		446		(15	)		66		541		(19	)		83
Industrial		98		(2	)		10		193		(10	)		27		291		(12	)		37
Capital goods		87		(2	)		15		359		(17	)		48		446		(19	)		63
Consumer—cyclical		59		—			12		397		(16	)		53		456		(16	)		65
Transportation		99		(3	)		7		316		(13	)		49		415		(16	)		56
Other		16		(1	)		1		16		—			1		32		(1	)		2

Subtotal, U.S. corporatesecurities		1,247		(37	)		153		5,003		(190	)		698		6,250		(227	)		851

Non-U.S. corporate:
Utilities		24		—			2		259		(9	)		30		283		(9	)		32
Energy		29		—			4		187		(4	)		26		216		(4	)		30
Finance and insurance		39		—			9		475		(9	)		73		514		(9	)		82
Consumer— non-cyclical		38		(1	)		9		208		(8	)		25		246		(9	)		34
Technology and communications		89		(2	)		7		136		(4	)		28		225		(6	)		35
Industrial		8		—			4		135		(3	)		18		143		(3	)		22
Capital goods		23		—			4		116		(3	)		16		139		(3	)		20
Consumer—cyclical		37		(1	)		6		128		(3	)		25		165		(4	)		31
Transportation		38		(1	)		6		102		(5	)		18		140		(6	)		24
Other		29		(1	)		6		176		(5	)		37		205		(6	)		43

Subtotal, non-U.S. corporatesecurities		354		(6	)		57		1,922		(53	)		296		2,276		(59	)		353

Total for corporate securities in an unrealized loss position	$	1,601	$	(43	)		210	$	6,925	$	(243	)		994	$	8,526	$	(286	)		1,204

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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Less than 12 months							12 months or more							Total
			Gross							Gross							Gross
	Fair		unrealized			Number of		Fair		unrealized			Number of		Fair		unrealized			Number of
(Dollar amounts in millions)	value		losses			securities		value		losses			securities		value		losses			securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsoredenterprises	$	545	$	(8	)		17	$	161	$	(9	)		26	$	706	$	(17	)		43
State and political subdivisions		371		(10	)		63		233		(12	)		57		604		(22	)		120
Non-U.S. government		261		(7	)		51		508		(17	)		35		769		(24	)		86
U.S. corporate		9,975		(472	)		1,342		2,449		(210	)		365		12,424		(682	)		1,707
Non-U.S. corporate		4,172		(150	)		614		1,274		(74	)		209		5,446		(224	)		823
Residential mortgage-backed		363		(6	)		57		579		(11	)		96		942		(17	)		153
Commercial mortgage-backed		758		(19	)		115		870		(62	)		130		1,628		(81	)		245
Other asset-backed		1,597		(23	)		326		604		(6	)		137		2,201		(29	)		463

Total for fixed maturity securities inan unrealized loss position	$	18,042	$	(695	)		2,585	$	6,678	$	(401	)		1,055	$	24,720	$	(1,096	)		3,640

% Below cost—fixed maturitysecurities:
<20% Below cost	$	18,008	$	(685	)		2,581	$	6,624	$	(383	)		1,045	$	24,632	$	(1,068	)		3,626
20%-50% Below cost		34		(10	)		4		54		(18	)		10		88		(28	)		14

Total for fixed maturity securities inan unrealized loss position	$	18,042	$	(695	)		2,585	$	6,678	$	(401	)		1,055	$	24,720	$	(1,096	)		3,640

Investment grade	$	16,726	$	(615	)		2,393	$	6,508	$	(379	)		1,024	$	23,234	$	(994	)		3,417
Below investment grade		1,316		(80	)		192		170		(22	)		31		1,486		(102	)		223

Total for fixed maturity securities inan unrealized loss position	$	18,042	$	(695	)		2,585	$	6,678	$	(401	)		1,055	$	24,720	$	(1,096	)		3,640

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Less than 12 months							12 months or more							Total
			Gross							Gross							Gross
	Fair		unrealized			Number of		Fair		unrealized			Number of		Fair		unrealized			Number of
(Dollar amounts in millions)	value		losses			securities		value		losses			securities		value		losses			securities
Description of Securities
U.S. corporate:
Utilities	$	1,246	$	(61	)		173	$	343	$	(34	)		60	$	1,589	$	(95	)		233
Energy		944		(47	)		135		152		(17	)		23		1,096		(64	)		158
Finance and insurance		2,393		(92	)		326		688		(40	)		95		3,081		(132	)		421
Consumer—non-cyclical		1,826		(101	)		203		389		(36	)		55		2,215		(137	)		258
Technology and communications		1,135		(51	)		152		263		(27	)		34		1,398		(78	)		186
Industrial		506		(27	)		63		74		(6	)		13		580		(33	)		76
Capital goods		704		(31	)		103		184		(20	)		27		888		(51	)		130
Consumer—cyclical		738		(35	)		123		162		(13	)		26		900		(48	)		149
Transportation		435		(25	)		60		179		(16	)		31		614		(41	)		91
Other		48		(2	)		4		15		(1	)		1		63		(3	)		5

Subtotal, U.S. corporatesecurities		9,975		(472	)		1,342		2,449		(210	)		365		12,424		(682	)		1,707

Non-U.S. corporate:
Utilities		404		(19	)		58		173		(13	)		24		577		(32	)		82
Energy		439		(15	)		64		136		(8	)		20		575		(23	)		84
Finance and insurance		899		(25	)		151		294		(15	)		52		1,193		(40	)		203
Consumer—non-cyclical		377		(16	)		51		102		(9	)		14		479		(25	)		65
Technology and communications		611		(24	)		75		50		(2	)		12		661		(26	)		87
Industrial		275		(11	)		48		72		(6	)		8		347		(17	)		56
Capital goods		226		(7	)		27		69		(3	)		13		295		(10	)		40
Consumer—cyclical		268		(11	)		42		117		(2	)		19		385		(13	)		61
Transportation		232		(7	)		27		67		(8	)		11		299		(15	)		38
Other		441		(15	)		71		194		(8	)		36		635		(23	)		107

Subtotal, non-U.S. corporatesecurities		4,172		(150	)		614		1,274		(74	)		209		5,446		(224	)		823

Total for corporate securities in an unrealized loss position	$	14,147	$	(622	)		1,956	$	3,723	$	(284	)		574	$	17,870	$	(906	)		2,530

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The scheduled maturity distribution of fixed maturity securities as of March 31, 2019 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.


	Amortized
	cost or		Fair
(Amounts in millions)	cost		value
Due one year or less	$	2,005	$	2,021
Due after one year through five years		10,826		11,105
Due after five years through ten years		12,265		12,770
Due after ten years		23,516		26,126

Subtotal		48,612		52,022
Residential mortgage-backed		2,762		2,950
Commercial mortgage-backed		2,946		2,962
Other asset-backed		3,422		3,426

Total	$	57,742	$	61,360

As of March 31, 2019, securities issued by finance and insurance, consumer—non-cyclical and utilities industry groups represented approximately 24%, 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, 2019, 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, 2019						December 31, 2018
	Carrying			% of			Carrying			% of
(Amounts in millions)	value			total			value			total
Property type:
Retail	$	2,548			37	%	$	2,463			37	%
Industrial		1,678			24			1,659			25
Office		1,671			24			1,548			23
Apartments		520			7			495			7
Mixed use		254			4			254			4
Other		272			4			281			4

Subtotal		6,943			100	%		6,700			100	%

Unamortized balance of loan origination fees and costs		(4	)					(4	)
Allowance for losses		(10	)					(9	)

Total	$	6,929					$	6,687


	March 31, 2019						December 31, 2018
	Carrying			% of			Carrying			% of
(Amounts in millions)	value			total			value			total
Geographic region:
South Atlantic	$	1,739			25	%	$	1,709			26	%
Pacific		1,705			25			1,684			25
Middle Atlantic		1,020			15			950			14
Mountain		688			10			667			10
West North Central		486			7			470			7
East North Central		449			6			405			6
West South Central		369			5			364			6
New England		267			4			228			3
East South Central		220			3			223			3

Subtotal		6,943			100	%		6,700			100	%

Unamortized balance of loan origination fees and costs		(4	)					(4	)
Allowance for losses		(10	)					(9	)

Total	$	6,929					$	6,687

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, 2019
							Greater than
	31 - 60 days			61 - 90 days			90 days past			Total
(Amounts in millions)	past due			past due			due			past due			Current			Total
Property type:
Retail	$	—		$	—		$	—		$	—		$	2,548		$	2,548
Industrial		—			—			—			—			1,678			1,678
Office		—			—			3			3			1,668			1,671
Apartments		—			—			—			—			520			520
Mixed use		—			—			—			—			254			254
Other		—			—			—			—			272			272

Total recorded investment	$	—		$	—		$	3		$	3		$	6,940		$	6,943

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


	December 31, 2018
							Greater than
	31 - 60 days			61 - 90 days			90 days past			Total
(Amounts in millions)	past due			past due			due			past due			Current			Total
Property type:
Retail	$	3		$	—		$	—		$	3		$	2,460		$	2,463
Industrial		—			—			—			—			1,659			1,659
Office		—			—			3			3			1,545			1,548
Apartments		—			—			—			—			495			495
Mixed use		—			—			—			—			254			254
Other		—			—			—			—			281			281

Total recorded investment	$	3		$	—		$	3		$	6		$	6,694		$	6,700

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

As of March 31, 2019 and December 31, 2018, we had no commercial 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, 2019 and December 31, 2018.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of March 31, 2019 and December 31, 2018, our commercial mortgage loans greater than 90 days past due included one impaired loan with a carrying value of $3 million. This loan was modified and the modification was considered to be a troubled debt restructuring. As part of this troubled debt restructuring, we forgave default interest, penalties and fees, and modified the original contractual interest rate but we did not forgive the outstanding principal amount owed by the borrower. This loan’s collateral has an appraised value in excess of the carrying amount and the current carrying amount of this loan is expected to be recoverable.

During the three months ended March 31, 2019 and the year ended December 31, 2018, we also modified or extended one and two additional commercial mortgage loans, respectively, with a total carrying value of

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

$11 million and $12 million, respectively. All of these modifications or extensions were based on current market interest rates and did not result in any forgiveness of the outstanding principal amount owed by the borrower.

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)	2019		2018
Allowance for credit losses:
Beginning balance	$	9	$	9
Charge-offs		—		—
Recoveries		—		—
Provision		1		—

Ending balance	$	10	$	9

Ending allowance for individually impaired loans	$	—	$	—

Ending allowance for loans not individually impaired that were evaluated collectively for impairment	$	10	$	9

Recorded investment:
Ending balance	$	6,943	$	6,348

Ending balance of individually impaired loans	$	3	$	6

Ending balance of loans not individually impaired that were evaluated collectively for impairment	$	6,940	$	6,342

As of March 31, 2019 and December 31, 2018, we had one individual impaired loan within the office property type with a recorded investment and unpaid principal balance of $3 million and as of March 31, 2018, we had one individual impaired loan with an unpaid principal balance of $6 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 is not used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	March 31, 2019
													Greater
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			than 100% ⁽¹⁾			Total
Property type:
Retail	$	877		$	537		$	1,119		$	15		$	—		$	2,548
Industrial		738			290			634			14			2			1,678
Office		588			371			712			—			—			1,671
Apartments		208			90			217			5			—			520
Mixed use		104			45			105			—			—			254
Other		43			68			161			—			—			272

Total recorded investment	$	2,558		$	1,401		$	2,948		$	34		$	2		$	6,943

% of total		37	%		20	%		43	%		—	%		—	%		100	%

Weighted-average debt service coverage ratio		2.42			1.80			1.58			1.46			0.88			1.93

⁽¹⁾	Included a loan with a recorded investment of $2 million in good standing, where the borrower continued to make timely payments, with a loan-to-value of 104%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.


	December 31, 2018
													Greater
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			than 100% ⁽¹⁾			Total
Property type:
Retail	$	866		$	565		$	1,017		$	15		$	—		$	2,463
Industrial		749			279			615			14			2			1,659
Office		585			373			588			2			—			1,548
Apartments		206			95			189			5			—			495
Mixed use		105			36			113			—			—			254
Other		43			78			160			—			—			281

Total recorded investment	$	2,554		$	1,426		$	2,682		$	36		$	2		$	6,700

% of total		38	%		21	%		40	%		1	%		—	%		100	%

Weighted-average debt service coverage ratio		2.42			2.04			1.59			1.38			0.88			2.00

⁽¹⁾	Included a loan with a recorded investment of $2 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, 2019
													Greater
(Amounts in millions)	Less than 1.00			1.00 - 1.25			1.26 - 1.50			1.51 - 2.00			than 2.00			Total
Property type:
Retail	$	35		$	155		$	572		$	1,216		$	570		$	2,548
Industrial		22			69			259			667			661			1,678
Office		53			56			203			836			523			1,671
Apartments		4			24			108			191			193			520
Mixed use		3			18			52			80			101			254
Other		13			133			52			40			34			272

Total recorded investment	$	130		$	455		$	1,246		$	3,030		$	2,082		$	6,943

% of total		2	%		7	%		18	%		43	%		30	%		100	%

Weighted-average loan-to-value		56	%		61	%		64	%		59	%		42	%		55	%


	December 31, 2018
													Greater
(Amounts in millions)	Less than 1.00			1.00 - 1.25			1.26 - 1.50			1.51 - 2.00			than 2.00			Total
Property type:
Retail	$	43		$	157		$	448		$	1,234		$	581		$	2,463
Industrial		22			75			233			653			676			1,659
Office		57			56			156			765			514			1,548
Apartments		4			24			104			168			195			495
Mixed use		3			19			51			80			101			254
Other		13			134			50			50			34			281

Total recorded investment	$	142		$	465		$	1,042		$	2,950		$	2,101		$	6,700

% of total		2	%		7	%		16	%		44	%		31	%		100	%

Weighted-average loan-to-value		57	%		61	%		62	%		59	%		42	%		54	%

(f) Restricted Commercial Mortgage Loans Related To A Securitization Entity

We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to a securitization entity. Our primary economic interest in this securitization entity represents the excess interest of the commercial mortgage loans.

(g) Limited Partnerships or Similar Entities

Limited partnerships are accounted for at fair value when our partnership interest is considered minor (generally less than 3% ownership in the limited partnerships) and we exercise no influence over operating and financial policies. If our ownership percentage exceeds that threshold, limited partnerships are accounted for using the equity method of accounting. In applying either method, we use financial information provided by the investee generally on a one-to-three month lag. However, we consider whether an adjustment to the estimated fair value is necessary when the measurement date is not aligned with our reporting date.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2019 and December 31, 2018, the total carrying value of these investments was $445 million and $394 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.

(5) Derivative Instruments

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

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
	Balance	March 31,		December 31,		Balance	March 31,		December 31,
(Amounts in millions)	sheet classification	2019		2018		sheet classification	2019		2018
Derivatives designated ashedges
Cash flow hedges:
Interest rate swaps	Other invested assets	$	59	$	42	Other liabilities	$	49	$	102
Foreign currency swaps	Other invested assets		3		6	Other liabilities		—		—

Total cash flow hedges			62		48			49		102

Total derivativesdesignated as hedges			62		48			49		102

Derivatives not designated ashedges
Interest rate swaps in a foreign currency	Other invested assets		46		74	Other liabilities		—		—
Interest rate caps and floors	Other invested assets		13		7	Other liabilities		—		—
Foreign currency swaps	Other invested assets		—		—	Other liabilities		13		23
Equity index options	Other invested assets		60		39	Other liabilities		—		—
Financial futures	Other invested assets		—		—	Other liabilities		—		—
Equity return swaps	Other invested assets		—		—	Other liabilities		1		1
Other foreign currencycontracts	Other invested assets		6		10	Other liabilities		25		42
GMWB embedded derivatives	Reinsurancerecoverable ⁽¹⁾		18		20	Policyholderaccount balances ⁽²⁾		295		337
Fixed index annuity embeddedderivatives	Other assets		—		—	Policyholderaccount balances ⁽³⁾		423		389
Indexed universal life embedded derivatives	Reinsurancerecoverable		—		—	Policyholderaccount balances ⁽⁴⁾		13		12

Total derivatives notdesignated as hedges			143		150			770		804

Total derivatives		$	205	$	198		$	819	$	906

⁽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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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


		December 31,				Maturities/			March 31,
(Notional in millions)	Measurement	2018		Additions		terminations			2019
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Notional	$	9,924	$	—	$	(654	)	$	9,270
Foreign currency swaps	Notional		80		35		(22	)		93

Total cash flow hedges			10,004		35		(676	)		9,363

Total derivatives designated as hedges			10,004		35		(676	)		9,363

Derivatives not designated as hedges
Interest rate swaps	Notional		4,674		—		—			4,674
Interest rate swaps in a foreign currency	Notional		2,565		98		(44	)		2,619
Interest rate caps and floors	Notional		2,624		84		(38	)		2,670
Foreign currency swaps	Notional		453		—		(2	)		451
Equity index options	Notional		2,628		503		(580	)		2,551
Financial futures	Notional		1,415		1,759		(1,968	)		1,206
Equity return swaps	Notional		17		1		—			18
Other foreign currency contracts	Notional		1,080		1,386		(1,414	)		1,052

Total derivatives not designated as hedges			15,456		3,831		(4,046	)		15,241

Total derivatives		$	25,460	$	3,866	$	(4,722	)	$	24,604


		December 31,				Maturities/			March 31,
(Number of policies)	Measurement	2018		Additions		terminations			2019
Derivatives not designated as hedges
GMWB embedded derivatives	Policies		27,886		—		(577	)		27,309
Fixed index annuity embedded derivatives	Policies		16,464		—		(213	)		16,251
Indexed universal life embedded derivatives	Policies		929		—		(11	)		918

Cash Flow Hedges

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

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, 2019:


				Gain (loss)
				reclassified into		Classification of gain	Gain (loss)		Classification of gain
	Gain (loss)			net income		(loss) reclassified into	recognized in		(loss) recognized in
(Amounts in millions)	recognized in OCI			from OCI		net income	net income		net income
Interest rate swaps hedging assets	$	137		$	38	Net investment income	$	—	Net investment gains (losses)
Interest rate swaps hedging assets		—			6	Net investment gains (losses)		—	Net investment gains (losses)
Interest rate swaps hedging liabilities		(12	)		—	Interest expense		—	Net investment gains (losses)
Foreign currency swaps		(3	)		—	Net investment income		2	Net investment gains (losses)

Total	$	122		$	44		$	2

The following table provides information about the pre-tax income effects of cash flow hedges for the three months ended March 31, 2018:


				Gain (loss)
				reclassified into		Classification of gain	Gain (loss)		Classification of gain
	Gain (loss)			net income		(loss) reclassified into	recognized in		(loss) recognized in
(Amounts in millions)	recognized in OCI			from OCI		net income	net income		net income
Interest rate swaps hedging assets	$	(173	)	$	35	Net investment income	$	—	Net investment gains (losses)
Interest rate swaps hedging assets		—			5	Net investment gains (losses)		—	Net investment gains (losses)
Interest rate swaps hedging liabilities		17			—	Interest expense		—	Net investment gains (losses)
Foreign currency swaps		(1	)		—	Net investment income		—	Net investment gains (losses)

Total	$	(157	)	$	40		$	—

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)	2019			2018
Derivatives qualifying as effective accounting hedges as of January 1	$	1,781		$	2,065
Cumulative effect of changes in accounting:
Stranded tax effects		—			12
Changes to the hedge accounting model, net of deferred taxes of $— and $(1)		—			2

Total cumulative effect of changes in accounting		—			14

Current period increases (decreases) in fair value, net of deferred taxes of $(25) and $34		97			(126	)
Reclassification to net (income), net of deferred taxes of $16 and $14		(28	)		(26	)

Derivatives qualifying as effective accounting hedges as of March 31	$	1,850		$	1,927

The total of derivatives designated as cash flow hedges of $1,850 million, net of taxes, recorded in stockholders’ equity as of March 31, 2019 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, $109 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, 2019 and 2018, we reclassified $4 million and $3 million, respectively, to net income in connection with forecasted transactions that were no longer considered probable of occurring.

Derivatives Not Designated As Hedges

We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iii) interest rate swaps in a foreign currency and interest rate caps and floors where the hedging relationship does not qualify for hedge accounting; (iv) 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 (v) 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 derivatives. We also offer fixed index annuity and indexed universal life insurance products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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)	2019			2018
Interest rate swaps	$	(1	)	$	(1	)	Net investment gains (losses)
Interest rate swaps in a foreign currency		(23	)		—		Net investment gains (losses)
Interest rate caps and floors		6			—		Net investment gains (losses)
Equity index options		17			(15	)	Net investment gains (losses)
Financial futures		(44	)		(24	)	Net investment gains (losses)
Equity return swaps		—			(5	)	Net investment gains (losses)
Other foreign currency contracts		9			8		Net investment gains (losses)
Foreign currency swaps		10			(8	)	Net investment gains (losses)
GMWB embedded derivatives		45			14		Net investment gains (losses)
Fixed index annuity embedded derivatives		(38	)		8		Net investment gains (losses)
Indexed universal life embedded derivatives		1			5		Net investment gains (losses)

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

Derivative Counterparty Credit Risk

Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:


	March 31, 2019									December 31, 2018
	Derivatives			Derivatives			Net			Derivatives			Derivatives			Net
(Amounts in millions)	assets⁽¹⁾			liabilities⁽²⁾			derivatives			assets⁽¹⁾			liabilities⁽²⁾			derivatives
Amounts presented in the balance sheet:
Gross amounts recognized	$	196		$	89		$	107		$	185		$	169		$	16
Gross amounts offset in the balance sheet		—			—			—			—			—			—

Net amounts presented in the balance sheet		196			89			107			185			169			16
Gross amounts not offset in the balance sheet:
Financial instruments ⁽³⁾		(40	)		(40	)		—			(66	)		(66	)		—
Collateral received		(66	)		—			(66	)		(84	)		—			(84	)
Collateral pledged		—			(428	)		428			—			(536	)		536
Over collateralization		2			380			(378	)		10			433			(423	)

Net amount	$	92		$	1		$	91		$	45		$	—		$	45

⁽¹⁾	Included $9 million and $6 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives as of March 31, 2019 and December 31, 2018, respectively.

⁽²⁾	Included $1 million of accruals on derivatives included in other liabilities as of March 31, 2019 and does not include amounts related to embedded derivatives as of March 31, 2019 and December 31, 2018.

⁽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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Several 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, financial strength rating or risk-based capital ratio is below the limit defined in the applicable agreement. If the provisions defined in these agreements had been triggered as of March 31, 2019 and December 31, 2018, we could have been allowed to claim $92 million and $45 million, respectively, or have been required to disburse up to $1 million as of March 31, 2019. The chart above excludes embedded derivatives as those derivatives are not subject to master netting arrangements. As of March 31, 2019, no counterparties exercised their rights to terminate or revise the terms of their transactions with us.

(6) Fair Value of Financial Instruments

Assets and liabilities that are reflected in the accompanying unaudited condensed consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash, cash equivalents and restricted cash, short-term investments, investment securities, separate accounts, securities held as collateral and derivative instruments. Apart from certain of our borrowings and certain marketable securities, few of the instruments are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following represents our estimated fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:


	March 31, 2019
	Notional amount			Carrying amount		Fair value
(Amounts in millions)	Notional amount			Carrying amount		Total		Level 1		Level 2		Level 3
Assets:
Commercial mortgage loans			⁽¹⁾	$	6,929	$	7,038	$	—	$	—	$	7,038
Restricted commercial mortgage loans			⁽¹⁾		59		63		—		—		63
Bank loan investments			⁽¹⁾		294		293		—		—		293
Liabilities:
Long-term borrowings			⁽¹⁾		4,035		3,564		—		3,420		144
Non-recourse funding obligations			⁽¹⁾		311		215		—		—		215
Investment contracts			⁽¹⁾		12,663		13,241		—		—		13,241
Other firm commitments:
Commitments to fund limited partnerships		747			—		—		—		—		—
Commitments to fund bank loan investments		40			—		—		—		—		—
Ordinary course of business lendingcommitments		152			—		—		—		—		—

	December 31, 2018
	Notional amount			Carrying amount		Fair value
(Amounts in millions)	Notional amount			Carrying amount		Total		Level 1		Level 2		Level 3
Assets:
Commercial mortgage loans			⁽¹⁾	$	6,687	$	6,737	$	—	$	—	$	6,737
Restricted commercial mortgage loans			⁽¹⁾		62		66		—		—		66
Bank loan investments			⁽¹⁾		248		248		—		—		248
Liabilities:
Long-term borrowings			⁽¹⁾		4,025		3,577		—		3,434		143
Non-recourse funding obligations			⁽¹⁾		311		215		—		—		215
Investment contracts			⁽¹⁾		13,105		13,052		—		—		13,052
Other firm commitments:
Commitments to fund limited partnerships		539			—		—		—		—		—
Commitments to fund bank loan investments		33			—		—		—		—		—
Ordinary course of business lendingcommitments		73			—		—		—		—		—

⁽¹⁾	These financial instruments do not have notional amounts.

Recurring Fair Value Measurements

We have fixed maturity, short-term investments, equity securities, limited partnerships, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Limited partnerships

Limited partnerships are valued based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the underlying instrument. We utilize the net asset value (“NAV”) of the underlying fund statements as a practical expedient for fair value.

Fixed maturity, short-term investments and equity securities

The fair value of fixed maturity, short-term investments and equity securities are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or broker quotes, which use a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. In certain cases where market information is not available for a specific security but is available for similar securities, a security is valued using that market information for similar securities, which is also a market approach. When market information is not available for a specific security or is available but such information is less relevant or reliable, an income approach or a combination of a market and income approach is utilized. For securities with optionality, such as call or prepayment features (including mortgage-backed or asset-backed securities), an income approach may be used. In addition, a combination of the results from market and income approaches may be used to estimate fair value. These valuation techniques may change from period to period, based on the relevance and availability of market data.

We utilize certain third-party data providers when determining fair value. We consider information obtained from pricing services as well as broker quotes in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information. We also use various methods to obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received, including an understanding of the assumptions and inputs utilized to determine the appropriate fair value. For pricing services, we analyze the prices provided by our primary pricing services to other readily available pricing services and perform a detailed review of the assumptions and inputs from each pricing service to determine the appropriate fair value when pricing differences exceed certain thresholds. We evaluate changes in fair value that are greater than certain pre-defined thresholds each month to further aid in our review of the accuracy of fair value measurements and our understanding of changes in fair value, with more detailed reviews performed by the asset managers responsible for the related asset class associated with the security being reviewed. A pricing committee provides additional oversight and guidance in the evaluation and review of the pricing methodologies used to value our investment portfolio.

In general, we first obtain valuations from pricing services. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for identical securities are not readily observable and these securities are not typically valued by pricing services. If prices are unavailable from public pricing services, we obtain broker quotes. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models.

For pricing services, we obtain an understanding of the pricing methodologies and procedures for each type of instrument. Additionally, on a monthly basis we review a sample of securities, examining the pricing service’s

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

assumptions to determine if we agree with the service’s derived price. When available, we also evaluate the prices sampled as compared to other public prices. If a variance greater than a pre-defined threshold is noted, additional review of the price is executed to ensure accuracy. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.

For private fixed maturity securities, we utilize an income approach where we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction and value all private fixed maturity securities at par that have less than 12 months to maturity. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. To evaluate the reasonableness of the internal model, we review a sample of private fixed maturity securities each month. In that review we compare the modeled prices to the prices of similar public securities in conjunction with analysis on current market indicators. If a pricing variance greater than a pre-defined threshold is noted, additional review of the price is executed to ensure accuracy. At the end of each month, all internally modeled prices are compared to the prior month prices with an evaluation of all securities with a month-over-month change greater than a pre-defined threshold. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating and public bond spread as Level 3. In general, increases (decreases) in credit spreads will decrease (increase) the fair value for our fixed maturity securities.

For broker quotes, we consider the valuation methodology utilized by the third party and analyze a sample each month to assess reasonableness given then-current market conditions. Additionally, for broker quotes on certain structured securities, we validate prices received against other publicly available pricing sources. Broker quotes are typically based on an income approach given the lack of available market data. As the valuation typically includes significant unobservable inputs, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.

For remaining securities priced using internal models, we determine fair value using an income approach. We analyze a sample each month to assess reasonableness given then-current market conditions. We maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.

A summary of the inputs used for our fixed maturity, short-term investments and equity securities based on the level in which instruments are classified is included below. We have combined certain classes of instruments together as the nature of the inputs is similar.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Level 1 measurements

Equity securities. The primary inputs to the valuation of exchange-traded equity securities include quoted prices for the identical instrument.

Short-term investments. Short-term investments primarily include commercial paper and other highly liquid debt instruments. The fair value of short-term investments classified as Level 1 is based on quoted prices for the identical instrument.

Separate account assets. The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.

Level 2 measurements

Fixed maturity securities

•

Third-party pricing services: In estimating the fair value of fixed maturity securities, approximately 91% of our portfolio is priced using third-party pricing sources as of March 31, 2019. These pricing services utilize industry-standard valuation techniques that include market-based approaches, income-based approaches, a combination of market-based and income-based approaches or other proprietary, internally generated models as part of the valuation processes. These third-party pricing vendors maximize the use of publicly available data inputs to generate valuations for each asset class. Priority and type of inputs used may change frequently as certain inputs may be more direct drivers of valuation at the time of pricing. Examples of significant inputs incorporated by third-party pricing services may include sector and issuer spreads, seasoning, capital structure, security optionality, collateral data, prepayment assumptions, default assumptions, delinquencies, debt covenants, benchmark yields, trade data, dealer quotes, credit ratings, maturity and weighted-average life. We conduct regular meetings with our third-party pricing services for the purpose of understanding the methodologies, techniques and inputs used by the third-party pricing providers.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents a summary of the significant inputs used by our third-party pricing services for certain fair value measurements of fixed maturity securities that are classified as Level 2 as of March 31, 2019:


(Amounts in millions)	Fair value		Primary methodologies	Significant inputs
U.S. government, agencies and government-sponsored enterprises	$	4,731	Price quotes from trading desk, broker feeds	Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread

State and political subdivisions	$	2,494	Multi-dimensional attribute-based modeling systems, third-party pricing vendors	Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes

Non-U.S. government	$	2,502	Matrix pricing, spread priced to benchmark curves, price quotes from market makers	Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources

U.S. corporate	$	26,748	Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, internal models, OAS-based models	Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports

Non-U.S. corporate	$	10,123	Multi-dimensional attribute-based modeling systems, OAS-based models, price quotes from market makers	Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources

Residential mortgage-backed	$	2,915	OAS-based models, To Be Announced pricing models, single factor binomial models, internally priced	Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports

Commercial mortgage-backed	$	2,864	Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model	Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports

Other asset-backed	$	3,224	Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers, internal models	Spreads to daily updated swaps curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports

•

Internal models: A portion of our non-U.S. government, U.S. corporate and non-U.S. corporate securities are valued using internal models. The fair value of these fixed maturity securities were

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

$16 million, $1,031 million and $588 million, respectively, as of March 31, 2019. Internally modeled securities are primarily private fixed maturity securities where we use market observable inputs such as an interest rate yield curve, published credit spreads for similar securities based on the external ratings of the instrument and related industry sector of the issuer. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps and liquidity premiums are established using inputs from market participants.

Equity securities. The primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active.

Securities lending collateral

The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.

Short-term investments

The fair value of short-term investments classified as Level 2 is determined after considering prices obtained by third-party pricing services.

Level 3 measurements

Fixed maturity securities

•

Internal models: A portion of our state and political subdivisions, U.S. corporate, non-U.S. corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are valued using internal models. The primary inputs to the valuation of the bond population include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, duration, call provisions, issuer rating, benchmark yields and credit spreads. Certain private fixed maturity securities are valued using an internal model using market observable inputs such as interest rate yield curve, as well as published credit spreads for similar securities where there are no external ratings of the instrument and include a significant unobservable input. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps are established using inputs from market participants. For structured securities, the primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, weighted-average coupon, weighted-average maturity, issuer rating, structure of the security, expected prepayment speeds and volumes, collateral type, current and forecasted loss severity, average delinquency rates, vintage of the loans, geographic region, debt service coverage ratios, payment priority with the tranche, benchmark yields and credit spreads. The fair value of our Level 3 fixed maturity securities priced using internal models was $3,660 million as of March 31, 2019.

•

Broker quotes: A portion of our state and political subdivisions, U.S. corporate, non-U.S. corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are valued using broker quotes. Broker quotes are obtained from third-party providers that have current market knowledge to provide a reasonable price for securities not routinely priced by third-party pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was $464 million as of March 31, 2019.