We own our headquarters facility in Richmond, Virginia, which consists of approximately 461,190 square feet in four buildings, as well as several facilities in Lynchburg, Virginia with approximately 450,360 square feet. In addition, we lease approximately 273,508 square feet of office space in 15 locations throughout the United States. We also own two buildings outside the United States with approximately 108,260 square feet, and we lease approximately 338,340 square feet in 48 locations outside the United States.
The following table sets forth selected financial information. The selected financial information as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 has been derived from our consolidated financial statements, which have been audited by KPMG LLP and are included in “Item 8 - Financial Statements and Supplementary Data.” You should read this information in conjunction with the information under “
insurance and investment product fees and other, including surrender charges, mortality and expense risk charges, primarily from universal life insurance policies, and other administrative charges.
to the servicing of an insured loan that is not in compliance with obligations under our master policy. For non-cure related actions, including pre-sales, the estimated savings represent the difference between the full claim obligation and the actual amount paid. Loans subject to our loss mitigation actions, the results of which have been included in our reported estimated loss mitigation savings, are subject to re-default and may result in a potential claim in future periods, as well as potential future loss mitigation savings depending on the resolution of the re-defaulted loan. We believe that this information helps to enhance the understanding of the operating performance of our U.S. mortgage insurance business as loss mitigation activities specifically impact current and future loss reserves and level of claim payments.
An assumed tax rate of 35% is utilized in certain adjustments to net operating income and in the explanation of specific variances of operating performance.
The U.S. housing market showed signs of recovery during 2012 and 2013 with home prices rising in a number of regions and cities, but ongoing weakness in the U.S. economy continued to impact the rate of recovery. Unemployment and underemployment levels in the United States remained elevated in 2013. We expect unemployment and underemployment levels in the United States to remain at elevated levels relative to those prevailing before 2009 for an extended period and gradually decrease over time. In Canada, stable economic conditions have persisted with housing affordability benefiting from low interest rates and employment growth and average home prices increased modestly during 2013. The unemployment rate in Canada decreased slightly during 2013 and remains near its lowest level since December 2008. In Australia, the overall housing market generally improved as modest economic growth and low interest rates persisted, coupled with average home prices increasing across most regions during 2013, particularly in the fourth quarter of 2013 when it grew at the highest rate since early 2010. Unemployment in Australia increased slightly during 2013, reaching its highest level in three years. Europe remained a challenging region with slow growth or a declining economic environment with lower lending activity and reduced consumer spending, particularly in Greece, Spain, Portugal, Ireland and Italy, in part as a result of actual or anticipated austerity measures, but certain areas within Europe have shown a modest level of improvement during the second half of 2013. The Chinese economy had experienced significant growth over the past decade, but this growth slowed during 2013 as the new Chinese
We recorded net other-than-temporary impairments of $25 million during 2013 compared to $106 million during 2012. Impairments have decreased across almost all asset classes due to improving economic conditions. Increases in interest rates have lowered the value of our investments and derivatives, resulting in decreases in net unrealized investment gains on securities of $1,751 million and derivatives qualifying as hedges of $590 million in other comprehensive income for the year ended December 31, 2013. Economic conditions will continue to impact the valuation of our investment portfolios and the amount of other-than-temporary impairments.
Looking ahead, while we view the current credit environment as stable and corporate defaults are expected to remain low, company-specific spread widening could occur given an environment in which companies are rewarded to increase debt and return funds to shareholders. In addition, uncertainty relating to developments in emerging markets could continue to result in spread volatility in emerging market bonds. We believe the current credit environment provides us with opportunities to invest across a variety of asset classes, but our returns will continue to be pressured because of low interest rates. The current environment will also provide opportunities to continue execution of various risk management disciplines involving further diversification within the investment portfolio. See “-Investments and Derivative Instruments” for additional information on our investment portfolio.
Life insurance. Results of our life insurance business are impacted by sales, competitor actions, mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements. Additionally, sales of our products and persistency of our insurance in-force are dependent on competitive product features and pricing, underwriting, distribution and customer service. Shifts in consumer demand, competitors’ actions, relative pricing, return on capital or reinsurance decisions and other factors, such as regulatory matters affecting life insurance policy reserve levels, can also affect our sales levels.
Throughout 2012 and continuing into 2013, we experienced favorable mortality results in our term universal and term life insurance products as compared to priced mortality assumptions. Mortality levels may deviate each period from historical trends because of a variety of factors. We have experienced lower persistency in 2013 as compared to pricing assumptions for our 10-year term life insurance policies as they go through their post-level rate period. We expect this trend in persistency to continue as these 10-year term life insurance policies approach their post-level rate period and then moderate thereafter. As our 15-year term life insurance policies written in 1999 and 2000 approach their post-level rate period, if this block experiences lower persistency compared to pricing, we could expect additional amortization of DAC and lower profitability in our term life insurance products.
Regulations XXX and AXXX require insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and for certain universal life insurance policies with secondary guarantees. This increases the capital required to write these products. We have committed funding sources for approximately 95% of our anticipated peak level reserves currently required under Regulations XXX and AXXX. The NAIC adopted revised statutory reserving requirements for new and in-force secondary
guarantee universal life business subject to AG 38 provisions, which became effective December 31, 2012. These requirements reflected an agreement reached and developed by a NAIC Joint Working Group which included regulators from several states, including New York. The financial impact related to the revised statutory reserving requirements on our in-force reserves subject to the new guidance was not significant as of December 31, 2012. On September 11, 2013, the NYDFS announced that it no longer supported the agreement reached by the NAIC Working Group and that it would require New York licensed companies, including our New York domiciled insurance subsidiary, to use an alternative interpretation of AG 38 for universal life insurance products with secondary guarantees. We have been in discussions with the NYDFS about its alternative interpretation and recorded $80 million of additional statutory reserves as of December 31, 2013. We continue to work with the NYDFS to determine potential future impacts, if any. The NYDFS has not finalized a permanent update to the regulation. Depending on the final regulation, our New York domiciled insurance subsidiary’s statutory reserves could increase significantly over time.
Uncertainties associated with our continued use of U.S.-domiciled captive life reinsurance subsidiaries are primarily related to potential regulatory changes. During 2012, the NAIC began a review of the insurance industry’s use of captive life reinsurance subsidiaries and is considering changes to its model regulations. We are currently unable to predict the ultimate outcome of the NAIC’s review.
Our long-term care insurance sales decreased 38% during 2013 compared to 2012. The lower sales reflected various price and benefit actions taken in the second half of 2012 to improve product profitability and reduce risk. The lower sales also reflected changes to our ability to generate consumer leads through affinity relationships, including the fact that effective June 1, 2013, we no longer offer AARP-branded long-term care insurance products. Our pricing and benefit actions included the elimination of lifetime benefits coverage and limited pay options on new products, further tightening of underwriting and lowering of first-year commissions in certain channels, as well as a reduction or suspension of certain discounts, which effectively increased average pricing by more than 20% on the products impacted. In 2013, we took additional steps to further improve our profit and risk profile with the introduction of a new product and the suspension of sales of our individual long-term care insurance product in California. As of December 31, 2013, this new product, which includes gender distinct pricing for single applicants and blood and lab underwriting requirements for all applicants, has been
We will continue to focus on managing profitability and reducing risk of our long-term care insurance business, including implementation of new product pricing and benefit changes in addition to premium rate increases on our in-force business. In the fourth quarter of 2013, we began filing for regulatory approval of a new product, scheduled for release in 2014, subject to regulatory approvals. We have also utilized internal and external reinsurance in the form of coinsurance to manage risk and limit capital allocated to this business. We currently have a portion of this business reinsured internally by one of our Bermuda-domiciled captive life reinsurance subsidiaries. One of our strategic priorities in 2014 is to repatriate our long-term care insurance business into our U.S.-domiciled life insurance company. There will be no impact on our U.S. GAAP consolidated results of operations and financial condition as the financial impact of this reinsurance eliminates in consolidation and we anticipate a small impact on our U.S. life insurance company RBC ratio. External new business reinsurance levels vary and are dependent on a number of factors, including price, risk tolerance and capital levels. Over time, there can be no assurance that affordable reinsurance will continue to be available, if at all.
The annual loss ratios of our long-term care insurance business have ranged from 62% to 68% over the last five years and have been increasing over the past several years. We experience volatility in our loss ratios on a quarterly basis, which has produced loss ratios outside of the annual range, from period-to-period caused by variances in terminations, claim severity and changes in claim counts. In addition, we evaluate claim reserves (including the underlying assumptions, e.g., morbidity) and refine our estimates from time to time which may also cause volatility in our operating results and loss ratios.
series of new generation policies. As of December 31, 2013, we have received approvals in four states. The premium rate increases on these policies will help offset higher than priced-for loss ratios, which have been caused by lower than anticipated lapse rates and improvements in life expectancy. The approval process of an in-force rate increase and the amount and timing of the rate increase approved varies by state. In certain states, the decision to approve or disapprove a rate increase can take several years. Upon approval, insureds are provided with written notice of the increase and increases are generally applied on the insured’s policy anniversary date. Therefore, the benefits of any rate increase are not fully realized until the implementation cycle is complete.
Fixed annuities. Results of our fixed annuities business are affected by investment performance, interest rate levels, slope of the interest rate yield curve, net interest spreads, mortality, policyholder surrenders, expense and commission levels, new product sales, competitor actions and competitiveness of our offerings. Our competitive position within many of our distribution channels and our ability to grow this business depends on many factors, including product offerings and relative pricing.
Refinements of product offerings and related pricing, including ongoing evaluation of commission structures and changes in investment strategies, support our objective of achieving appropriate risk-adjusted returns. Fixed annuity sales increased 29% during 2013 compared to 2012 primarily attributable to competitive pricing while maintaining targeted returns and from an increase in interest rates in the second half of 2013.
Results of our international mortgage insurance business are affected by changes in regulatory environments, employment levels, consumer borrowing behavior, lender mortgage-related strategies, including lender servicing practices, and other economic and housing market influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels and aging of mortgage delinquencies and movements in foreign currency exchange rates.
Canada and Australia comprise approximately 98% of our international mortgage insurance primary risk in-force. These established markets will continue to be key drivers of revenues and earnings in our international mortgage insurance business. During 2013, foreign currencies weakened against the U.S. dollar, particularly in Canada and Australia, which negatively impacted the underlying reported results of our international mortgage insurance business. Further weakening of foreign currencies could negatively impact future results.
Our participation or entry in other international markets remains selective. During 2012, we became a minority shareholder of a newly-formed joint venture partnership in India. The joint venture offers mortgage guarantees against borrower defaults on housing loans from mortgage lenders in India. This joint venture had a minimal financial impact during 2012 and 2013 and is expected to have a similar minimal financial impact during the next several years.
In Canada, stable economic conditions have persisted with housing affordability benefiting from low interest rates and employment growth. The unemployment rate decreased slightly during 2013 and remains near its lowest level since December 2008. We expect the unemployment rate to stay near current levels in 2014. Additionally, average home prices increased modestly during 2012 and 2013 and we expect home prices to remain flat or decrease modestly in 2014, as a balanced housing market persists and consumers exercise restraint with debt levels. However, some market observers have expressed concerns about the strength of the Canadian
Over the past several years, the Canadian government implemented a series of revisions to the mortgage insurance eligibility rules, eliminating high loan-to-value refinancing transactions and imposing more stringent qualifying criteria for insured mortgages by reducing the maximum amortization period to 25 years from 30 years. These changes have reduced the premium opportunity for residential mortgage insurance, particularly for high loan-to-value refinance transactions. As a result, purchase transactions, which normally have higher premium rates compared to refinancing, currently comprise a higher percentage of our business and we expect this to continue in the future.
slightly during 2012 and 2013, reaching its highest level in three years. The unemployment rate is expected to increase modestly from current levels through 2014. The overall housing market in Australia improved during 2013. During 2013, average home prices improved across all regions and during the fourth quarter of 2013 grew at the highest rate since early 2010. We expect average national home prices to increase modestly in 2014. During recent years, the Reserve Bank of Australia has gradually lowered the official cash rate to 2.50%, with the latest interest rate cut occurring in August 2013, as Australian and global economic conditions were somewhat weaker than expected. This historically low level of interest rates is now below the low point reached during the global financial crisis when rates were lowered to 3.00%. While we do not expect cash rates to be reduced significantly from the current level in 2014, the Reserve Bank of Australia has indicated that it will continue to monitor the outlook and adjust policy as needed to support the broader economy.
reserves at the beginning of 2012, driven by prolonged economic and housing market stress. During the remainder of 2012, we observed a moderate improvement in outstanding delinquencies primarily driven by our loss mitigation efforts and lower number of new delinquencies. During the first nine months of 2013, new delinquencies remained at levels similar to those experienced in the second half of 2012. In the fourth quarter of 2013, delinquencies decreased by approximately 2,400 from lender settlements, primarily in Ireland. These settlements also had the benefit of reducing the outstanding risk in-force in Ireland by approximately 50%. We are actively working with lenders and have significantly reduced our exposure and new business volumes from certain European countries as we seek opportunities to manage and mitigate our risk profile in Europe.
In June 2013, the Federal Housing Finance Agency announced strategic priorities for the GSEs and indicated that there could be changes to the MI Eligibility Standards. We expect these changes could increase capital or asset requirements for mortgage insurers, including our U.S. mortgage insurance business. Currently, we do not know what these new eligibility standards will be or when they may be implemented. The NAIC is also reviewing the current Mortgage Guaranty Model Act, including minimum capital and surplus requirements for mortgage insurers through the MGIWG. The MGIWG has not established a date by which it must make proposals to change such requirements. However, as we learn more specific information about these activities, we continue to assess the potential impact, if any, that these new standards and requirements may have on our U.S. mortgage insurance business and evaluate the options potentially available to meet these new GSE requirements and any legislative or regulatory measures adopted as a result of the NAIC recommendations. If regulatory changes (including those under consideration by the GSEs and NAIC) or other business-related considerations indicate a contribution is required and appropriate, we could provide additional capital to GEMICO with an asset contribution or a cash contribution through a variety of means. In addition to the available funds held at the U.S. mortgage holding company, we have various alternatives available to us to manage GEMICO’s future capital position, including organic earnings growth; utilization of a portion of available deferred tax assets; possible reinsurance transactions; use of proceeds from the planned Australian IPO; issuance of convertible or exchangeable securities at the Genworth Financial and/or the Genworth Holdings levels; and other options that may be available.
Effective July 2013, Fannie Mae no longer purchases loans with down payments of less than 5% (subject to certain limited exceptions). Freddie Mac has had a similar policy in place since June 2011. We believe this will limit the demand for private mortgage insurance on loans with down payments below 5%. In addition, FHFA issued
We have reinsurance programs in place in which we share portions of our premiums associated with flow insurance written on loans originated or purchased by lenders with captive insurance entities of these lenders in exchange for an agreed upon level of loss coverage above a specified attachment point. We have exhausted certain captive reinsurance tiers for our 2004 through 2008 book years based on loss development trends. While we continue to receive cash benefits from these captive arrangements at the time of claim payment, the level of benefit is expected to continue to decline going forward due to exhaustion of reinsurance as more reinsurers satisfy their contractual obligations such that remaining risk is borne by GEMICO. All of our captive reinsurance arrangements are in runoff with no new books of business being added going forward. However, we will continue to consider new third-party reinsurance arrangements. In addition, in April 2013, GEMICO and other mortgage insurance companies agreed to settle with the CFPB to end the agency’s review of captive reinsurance arrangements in the mortgage insurance industry. As part of the settlement, GEMICO (and its affiliates, officers, employees and certain other related parties, including certain of Genworth Financial’s executive officers) are enjoined from entering into or revising certain reinsurance arrangements and violating any provisions of RESPA for a period of 10 years and GEMICO paid approximately $4 million.
We have taken steps to improve the financial condition of our U.S. mortgage insurance business throughout 2013. In April 2013, we completed our Capital Plan that provided additional capital support and other benefits to our U.S. mortgage insurance business. The Capital Plan included a cash contribution of $100 million, the transfer of ownership of our European mortgage insurance subsidiaries to GEMICO, our primary U.S. mortgage insurance subsidiary, and our holding company reorganization. In addition, in December 2013, Genworth Holdings issued $400 million of senior notes in anticipation of increased capital requirements expected to be
imposed by the GSEs in connection with their revised MI Eligibility Standards. As of December 31, 2013, Genworth Financial contributed $100 million of the proceeds to GEMICO with an additional $300 million contributed to a U.S. mortgage holding company. The $100 million contribution in December 2013 to GEMICO, coupled with other performance-related actions, lowered GEMICO’s risk-to-capital ratio to approximately 19.3:1 as of December 31, 2013. We expect the $300 million contributed into our U.S. mortgage holding company will be further contributed to GEMICO, to the extent needed, for the benefit of its capital position after the changes to the asset and capital requirements in the revised GSE MI Eligibility Standards are finalized. In connection with this additional $300 million contribution to GEMICO, we will also evaluate the overall performance of our U.S. mortgage insurance business and conditions existing in the U.S. mortgage insurance industry at the time we decide to make the contribution. If the $300 million had been contributed to GEMICO, its risk-to-capital ratio as of December 31, 2013 would have been lower by approximately four points. In addition to the available funds held at the U.S. mortgage holding company, we have various alternatives available to us to manage GEMICO’s future capital position, including organic earnings growth; utilization of a portion of available deferred tax assets; possible reinsurance transactions; use of proceeds from the planned Australian IPO; issuance of convertible or exchangeable securities at the Genworth Financial and/or the Genworth Holdings levels; and other options that may be available. While there is no assurance that our U.S. mortgage insurance subsidiaries would meet any revised GSE capital-related requirements by their effective date, we currently believe that we could implement one or more of these alternatives so that we would continue to be an eligible provider of mortgage insurance after any new GSE capital-related requirements would be in effect.
Consumer lending levels in Europe remain challenged particularly given concerns regarding various European economies and the effect of the European debt crisis. Unemployment rates increased slightly in the
fourth quarter of 2013 with regional variation; however, in aggregate, European gross domestic product grew in the fourth quarter of 2013, building on the growth in the third quarter of 2013 and reversing the negative trend experienced in 2012 and in the first half of 2013. Net operating income of our lifestyle protection insurance business in 2013 remained flat with 2012 as higher losses, lower premiums and lower net investment income were offset by lower operating and commission expenses and favorable taxes. New claim registrations decreased 18% in 2013 from 2012 levels. We could experience higher losses if claim registrations increase, particularly with continued rising unemployment in Europe. Our declining premiums in 2013 compared to 2012 contributed to a loss ratio of 25% for the year ended December 31, 2013 compared to 22% for year ended December 31, 2012.
In Southern Europe, stressed economies resulted in a decline in consumer lending where most of our insurance coverages attach as banks tightened lending criteria and consumer demand declined, while in Northern Europe consumer lending levels have stabilized. We have strengthened our focus in Europe on key strategic client relationships and are de-emphasizing our distribution with some other distributors where we are not expecting to achieve desired sales and profitability levels. This focus should enable us to better serve our strategic clients and promote improved profitability and a lower cost structure over time. Additionally, we continue to pursue expanding our geographical distribution into Latin America and China and have secured agreements with large insurance partners in both of these regions. We are currently working with these partners to establish product, distribution and servicing capabilities and anticipate bringing our products and services to the market in the near future.
Assuming the economies and lending environment in Europe are stable and do not improve in the near term, we expect our lifestyle protection insurance business to produce only slightly positive earnings in 2014. With our focus on enhanced distribution capabilities in Europe and growth in select new markets, we anticipate these efforts, coupled with sound risk and cost management disciplines, should, over time, improve profitability and help offset the impact of economic or employment pressures as well as lower levels of consumer lending in Europe. However, depending on the economic situation in Europe, we could experience additional declines in sales and operating results.
year ended December 31, 2013, we paid benefits related to these products of $1.3 billion. While we do not actively sell institutional products, we may periodically issue funding agreements for asset-liability matching purposes.
See notes 2, 4 and 17 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to the valuation of fixed maturity securities and a description of the fair value measurement requirements and level assignments.
assumptions about future events, materially different experience from expected results in persistency or loss development could result in a material increase or decrease to DAC amortization for this business. For the years ended December 31, 2013, 2012 and 2011, key assumptions were unlocked in our international mortgage insurance business to reflect our current expectation of future persistency and loss projections.
The DAC amortization methodology for our variable products (variable annuities and variable universal life insurance) includes a long-term average appreciation assumption of 8.5%. When actual returns vary from the expected 8.5%, we assume a reversion to the expected return over a three-year period. The assumed returns over this reversion to the expected return period are limited to the 85th percentile of historical equity market performance.
Continued low interest rates have impacted the margins on our fixed immediate annuity products. As of December 31, 2013 and 2012, we had margin of approximately $78 million and $73 million, respectively, on $6,526 million and $6,830 million, respectively, of net U.S. GAAP liability related to our fixed immediate annuity products. The risks we face include adverse variations in interest rates and/or mortality. As of December 31, 2013 and 2012, we had DAC of $28 million and $31 million, respectively, related to our immediate annuity products. Adverse experience in one or both of these risks could result in the DAC associated with our immediate annuity products being no longer fully recoverable as well as the establishment of additional benefit reserves. As of December 31, 2013, for our immediate annuity products, 50 basis points lower interest rates and 2% lower mortality, which we consider reasonably possible, would result in margin reduction of approximately $20 million and $26 million, respectively. Margin reduction below zero results in a charge to current period earnings. Any favorable variation would result in additional margin in our DAC loss recognition analysis and would result in higher income recognition over the remaining duration of the in-force block. As of December 31, 2013, we believe all of our other businesses have sufficient future income where the related DAC would be recoverable under adverse variations in morbidity, mortality, claim loss development, withdrawal or lapse rate, maintenance expense or interest rates that could be considered reasonably possible to occur.
For the years ended December 31, 2013 and 2011, there were no charges to income as a result of our DAC loss recognition testing. As part of a life block transaction in the third quarter of 2012, we recorded $39 million of additional DAC amortization to reflect loss recognition on certain term life insurance policies under a
reinsurance treaty. See notes 2 and 6 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to DAC.
Continued low interest rates, lower than expected termination rates and resulting higher than anticipated number of claims have impacted the margins on our acquired long-term care insurance business. As of December 31, 2013 and 2012, we had margin of approximately $156 million and $17 million, respectively, on $2,529 million and $2,657 million, respectively, of net U.S. GAAP liability related to our individual and group long-term care insurance products. The risks we face include adverse variations in morbidity, interest rates, lapse and mortality. Adverse variation in one or more of these risks could result in additional amortization of PVFP or the establishment of additional benefit reserves. As of December 31, 2013, adverse variation that we consider reasonably possible would result in an additional charge to income of up to approximately $41 million. However, more adverse variation could result in additional amortization of PVFP or establishment of additional benefit reserves, while any favorable variation would result in additional margin in our PVFP loss recognition analysis and would result in higher earnings recognition over the remaining duration of the in-force block. As of December 31, 2013, we believe all of our other businesses have sufficient future income where the related PVFP would be recoverable under adverse variations in morbidity, mortality, expected premiums, claim loss development, withdrawal or lapse rate, maintenance expense or interest rates that could be considered reasonably possible to occur.
For the operating income model, we determine fair value based on the present value of the most recent income projections for each reporting unit and calculate a terminal value utilizing a terminal growth rate. We
primarily utilize the operating income model to determine fair value for all reporting units except for our life and long-term care insurance reporting units. In addition to the operating income model, we also consider the valuation of our Canadian mortgage insurance subsidiary’s publicly traded stock price in determining fair value for that reporting unit. The significant assumptions in the operating income model include: income projections, which are dependent on new business production, customer behavior, operating expenses and market conditions; discount rate; and terminal growth rate.
The key assumptions that impact our evaluation of goodwill for our long-term care insurance reporting unit under our goodwill impairment assessment primarily relate to the discount rate utilized to determine the present
value of the projected cash flows and the valuation of new business. While the valuation of our in-force business for long-term care insurance is included in the fair value of the reporting unit, the in-force value does not contribute significant, incremental value to support goodwill. Based on a hypothetical acquisition under our goodwill impairment assessment, any difference in our current carrying value and the fair value of our in-force business would be associated with an intangible asset for the present value of future profits and would not create additional implied goodwill.
We utilized a discount rate for our long-term care insurance reporting unit of 14% based on our estimate of the weighted-average cost of capital that a hypothetical market participant would use in assessing the value of the business. The valuation of new business is determined by utilizing several inputs such as expected new business production for the next 10 years, which is primarily dependent on policyholder assumptions, expected investment returns and targeted capital levels. The inclusion of 10 years of new business production is based on our experience of actuarial appraisals for life insurance companies where this is a common assumption. Annual sales projections included in our determination of fair value for our long-term care insurance reporting unit were projected to increase to approximately $200 million over the first five years and remaining constant at approximately $200 million per year for the remainder of the 10 year new business projection period. These new business sales projections are relatively consistent with recent sales levels. Significant changes in the expected new business production that would be used by a hypothetical market participant could result in a future impairment of goodwill.
In our annual goodwill assessment of our life insurance reporting unit, we used our best estimate of the future performance of the business and discounted these projections using a 10% discount rate. We determined the discount rate assumption used in our valuation based on our estimate of the weighted-average cost of capital that a hypothetical market participant would use in assessing the value of the business. Based on our annual goodwill impairment testing, our life insurance reporting unit’s fair value exceeded book value by approximately 15% with a goodwill balance of $495 million.
As a result of relatively low sales for our life insurance reporting unit that continued during the fourth quarter of 2013, we lowered our near-term sales projections and evaluated the impact on fair value of the reporting unit. The near-term changes in sales reduced the fair value of our life insurance reporting unit, but the fair value still exceeds its book value by approximately 10%. However, future changes that would establish longer-term sales projections at levels similar to our near-term projections could result in a goodwill impairment for our life insurance reporting unit. The annual sales projections included in the determination of fair value for our life insurance reporting unit as of December 31, 2013 were projected to increase to approximately $220 million over the first five years and remaining constant at approximately $220 million per year for the remainder of the 10 year new business projection period with the mix of sales projected to be relatively evenly split between term and universal life insurance. While these projected sales are significantly higher than 2013 sales of $57 million, such sales levels are similar to recent historical sales levels and are projected to be attainable as a result of re-pricing certain products, introducing new products or features, certain sales growth initiatives, or a combination of these actions. Changes in projected new business volume as well as market conditions, new business product mix, or regulatory environment could have a significant impact on our life insurance reporting unit’s fair value and could result in recognizing a future goodwill impairment. As we consider our sales levels going forward, our projections may change, and we will continue to closely monitor any potential changes in our sales projections that could impact our goodwill impairment testing results for our life insurance reporting unit.
Health care experience is a factor we also consider in establishing reserves for our long-term care insurance business, but the cost of health care is not closely correlated to trends in long-term care insurance claim experience. Accordingly, increasing health care costs have not materially impacted our liability for future policy benefits or liability for policy and contract claims.
In addition to the sensitivities discussed above, certain books of business in both our U.S. and certain international mortgage insurance businesses have experienced higher losses as a result of the global economic environment. In our U.S. mortgage insurance business, our 2005 through 2008 books of business have been experiencing delinquencies and incurred losses substantially higher than those generated from previous book years we have written. Early loss development patterns from these book years indicate that we would expect a higher level of total losses generated. Variations we consider reasonably possible could include an increase of 10% in these expected losses over a three-year period ending December 31, 2016 that would result in a decrease in after-tax operating results of approximately $37 million. Additional adverse variation could result in additional negative impacts while favorable variations would result in improved margins. Regardless of the ultimate loss development pattern on these books, we expect they will continue to generate significant paid and incurred losses for at least the next two years and thus will continue to have a significant adverse impact on our operating results over these same periods.
In our international mortgage insurance business, we anticipate reduced levels of losses as a result of stable housing markets and economies. However, if housing markets and economies do not remain stable and instead deteriorate, we may experience increased losses. Variations we consider reasonably possible to occur could include an increase in projected losses for our international mortgage insurance business of between 45% and 50% over the next year. If changes at these levels were to occur, after-tax operating results could be negatively impacted by approximately $90 million to approximately $100 million over this same period based on current foreign exchange rates and leaving other assumptions constant. The potential for either additional adverse loss development or favorable loss development exists that could further impact our business underwriting margins.
As of December 31, 2013 and 2012, we had $4.1 billion and $4.3 billion, respectively, of unearned premiums, of which $2.8 billion and $3.1 billion, respectively, related to our international mortgage insurance business. We recognize international mortgage insurance unearned premiums over a period of up to 20 years, most of which are recognized between three and seven years from issue date. The recognition of earned premiums for our international mortgage insurance business involves significant estimates and assumptions as to future loss development and policy cancellations. These assumptions are based on our historical experience and our expectations of future performance, which are highly dependent on assumptions as to long-term macroeconomic conditions including interest rates, home price appreciation and the rate of unemployment. We regularly review our expected pattern of risk emergence and make adjustments based on actual experience and changes in our expectation of future performance with any adjustments reflected in current period income. For the years ended December 31, 2013, 2012 and 2011, increases to earned premiums in our international mortgage insurance business as a result of adjustments made to our expected pattern of risk emergence and policy cancellation assumptions were $12 million, $36 million and $46 million, respectively.
Our expected pattern of risk emergence for our international mortgage insurance business is subject to change given the inherent uncertainty as to the underlying loss development and policy cancellation assumptions and the long duration of our international mortgage insurance policy contracts. Actual experience that is different than expected for loss development or policy cancellations could result in a material increase or decrease in the recognition of earned premiums depending on the magnitude of the difference between actual and expected experience. Loss development and policy cancellation variations that could be considered reasonably possible to occur in the future could result in an increase in after-tax operating results of up to $90 million or a decrease in after-tax operating results of up to $29 million, depending on the magnitude of variation experienced and leaving other assumptions constant. It is important to note that the variation discussed above is not meant to be a best-case or worst-case scenario, and therefore, it is possible that future variation may exceed the amounts discussed above.
Valuation of deferred tax assets. Deferred tax assets represent the tax benefit of future deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax assets are measured using the enacted tax rates expected to be in effect when such benefits are realized if there is no change in tax law. Under U.S. GAAP, we test the value of deferred tax assets for impairment on a quarterly basis at our taxpaying component level within each tax jurisdiction, consistent with our filed tax returns. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. In determining the need for a valuation allowance, we consider carryback capacity, reversal of existing temporary differences, future taxable income and tax planning strategies. Tax planning strategies are actions that are prudent and feasible, that an entity ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused. The determination of the valuation allowance for our deferred tax assets requires management to make certain judgments and assumptions regarding future operations that are based on our historical experience and our expectations of future
performance. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance, which is impacted by, but not limited to, policyholder behavior, competitor pricing, new product introductions, and specific industry and market conditions. Tax planning strategies are incorporated into our analysis and assessment. Based on our analysis, we believe it is more likely than not that the results of future operations and the implementation of tax planning strategies will generate sufficient taxable income to enable us to realize the deferred tax assets for which we have not established valuation allowances.
As of December 31, 2013, we had a net deferred tax liability of $206 million with a $312 million valuation allowance related to state deferred tax assets, foreign net operating losses and a specific federal separate tax return net operating loss deferred tax asset. We have a consolidated gross deferred tax asset of $1,762 million related to NOL carryforwards of $5,059 million as of December 31, 2013, which, if unused, will expire beginning in 2021. Foreign tax credit carryforwards amounted to $432 million as of December 31, 2013, which, if unused, will begin to expire in 2014.
Our U.S. Life Insurance segment increased $168 million primarily as a result of an increase of $142 million in our life insurance business from higher ceded reinsurance premiums on certain term life insurance policies as part of a life block transaction in 2012 that did not recur. This increase was partially offset by lapses and higher ceded reinsurance premiums of older term life insurance policies that outpaced sales of our new term life insurance products in 2013. Our long-term care insurance business increased $66 million mainly attributable to $42 million of increased premiums from in-force rate actions and growth of our in-force block from new sales, partially offset by $14 million of
Our U.S. Mortgage Insurance segment increased $5 million principally driven by lower ceded reinsurance premiums related to our captive arrangements and a lower accrual for premium refunds on delinquent loans in 2013. These increases were partially offset by lower premiums assumed from an affiliate under an intercompany reinsurance agreement that was terminated effective July 1, 2012.
Insurance and investment product fees and other. Insurance and investment product fees and other consist primarily of fees assessed against policyholder and contractholder account values, surrender charges, cost of insurance assessed on universal and term universal life insurance policies, advisory and administration service fees assessed on investment contractholder account values, broker/dealer commission revenues and other fees.
Our Runoff segment increased $9 million mainly attributable to the recapture of a reinsurance agreement related to our corporate-owned life insurance products in 2013, partially offset by lower average account values from outflows of our variable annuity products in 2013.
Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of benefits paid and reserve activity related to current claims and future policy benefits on insurance and investment products for life, long-term care and Medicare supplement insurance, structured settlements and single premium immediate annuities with life contingencies, lifestyle protection insurance and claim costs incurred related to mortgage insurance products.
Our U.S. Mortgage Insurance segment decreased $313 million primarily driven by a decline in new delinquencies and improvements in net cures and aging on existing delinquencies in 2013. Overall
Our Runoff segment decreased $5 million predominately from lower GMDB reserves in our variable annuity products due to favorable equity market performance in 2013.
Our U.S. Life Insurance segment increased $25 million primarily attributable to an increase of $77 million in our long-term care insurance business primarily from the aging and growth of our in-force block, partially offset by reduced benefits of $76 million from in-force rate actions. Additionally, benefits and changes in reserves in 2013 included $22 million of favorable reserve and other adjustments primarily related to the continuation of a multi-stage system conversion, a $17 million favorable adjustment for the refinement of the methodology for calculating incurred but not reported reserves to more fully reflect product-specific incidence rates and a $24 million unfavorable correction that increased reserves to reflect a benefit for policyholders related to an accumulated benefit option, totaling a net favorable adjustment of $15 million. In 2012, benefits and changes in reserves included $60 million of favorable reserve adjustments primarily related to the continuation of a multi-stage system conversion and an $8 million unfavorable adjustment related to a change in interest rate assumptions on claim reserves. Our life insurance business increased $22 million principally related to higher ceded reinsurance as we initially ceded $209 million of certain term life insurance reserves under a new reinsurance treaty as part of a life block transaction in 2012. This increase was partially offset by a $70 million favorable unlocking in our term universal and universal life insurance products related to mortality and interest assumptions in 2013 compared to a $31 million unfavorable unlocking related to interest assumptions in 2012. The increase was also partially offset by a $28 million favorable reserve correction in our term universal life insurance product, a $7 million favorable adjustment related to a refinement of the incurred but not reported reserve calculation in 2013 and mortality which was favorable to pricing and to the prior year. Our fixed annuities business decreased $74 million largely attributable to lower sales of our life-contingent products and favorable mortality in 2013 compared to 2012.
Corporate and Other activities decreased $55 million primarily attributable to a decrease of $87 million as a result of the sale of our reverse mortgage business on April 1, 2013. This decrease was partially offset by a $30 million make-whole payment related to the debt redemption in 2013.
Our International Protection segment decreased $50 million, including an increase of $9 million attributable to changes in foreign exchange rates, largely from lower profit commissions, lower paid commissions related to a decline in new business and lower operating expenses as a result of an ongoing cost-saving initiative. The decrease was also attributable to $3 million of reduced benefit costs driven by the closure of the U.K. pension plan in 2013. These decreases were partially offset by a restructuring charge of $3 million in 2013.
Corporate and Other activities decreased $5 million primarily attributable to lower software amortization in 2013.
Corporate and Other activities increased $10 million largely attributable to a favorable adjustment of $20 million in 2012 related to the Tax Matters Agreement with our former parent company that did not recur and from debt issuances in August and December of 2013. These increases were partially offset by the maturity of Genworth Holdings’ senior notes in June 2012 and repurchases of Genworth Holdings’ senior notes that mature in June 2014 of $100 million in the fourth quarter of 2012 and $15 million during June and August of 2013. Genworth Holdings also redeemed $350 million of its senior notes that were due in 2015.
Our U.S. Life Insurance segment decreased $190 million primarily as a result of a decrease of $322 million in our life insurance business related to our term life insurance products from higher ceded reinsurance on certain term life insurance policies under new reinsurance treaties as part of life block transactions in 2012 and from not offering these products until the fourth quarter of 2012. This decrease was partially offset by an increase of $123 million in our long-term care insurance business due to growth of our in-force block from new sales and in-force rate actions. Our fixed annuities business increased $9 million from higher sales of our life-contingent products in 2012.
The year ended December 31, 2012 included a decrease of $14 million attributable to changes in foreign exchange rates.
Net investment gains related to derivatives of $4 million in 2012 were primarily due to gains from the narrowing of credit spreads associated with credit default swaps where we sold protection to improve diversification and portfolio yield. These gains were partially offset by losses related to derivatives used to hedge foreign currency risk associated with near-term expected dividend payments from certain subsidiaries and to mitigate foreign subsidiary macroeconomic risk. Additionally, there were losses on embedded derivatives related to variable annuity products with GMWB riders primarily due to the policyholder funds underperformance of underlying variable annuity funds as compared to market indices and market losses resulting from volatility. Net investment losses related to derivatives of $99 million in 2011 were primarily associated with embedded derivatives related to variable annuity products with GMWB riders and credit default swaps. The GMWB losses were primarily attributable to underperformance of the underlying variable annuity funds as compared to market indices and market losses resulting from increased volatility. Additionally, there were losses from the change in market value of our credit default swaps due to widening credit spreads. These losses were partially offset by ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business attributable to significant long-term interest rate declines.
Corporate and Other activities increased $80 million primarily attributable to higher income related to our reverse mortgage business in 2012.
Our U.S. Mortgage Insurance segment increased $18 million principally from a gain related to the termination of an external reinsurance arrangement in 2012.
Our International Mortgage Insurance segment decreased $8 million primarily related to currency transactions related to a foreign branch closure in 2011.
Our International Protection segment decreased $8 million attributable to lower third-party administration fees in 2012 and non-functional currency transactions as a result of changes in foreign exchange rates.
Our Runoff segment decreased $197 million principally from the sale of our Medicare supplement insurance business in the fourth quarter of 2011 and a decrease in our GMDB reserves in our variable annuity products due to favorable equity market impacts in 2012.
Our International Mortgage Insurance segment increased $58 million, including a decrease of $2 million attributable to changes in foreign exchange rates. In Australia, losses increased $91 million mainly driven by a reserve strengthening of $82 million in the first quarter of 2012 due to higher than anticipated frequency and severity of claims paid from later stage delinquencies from prior years,
particularly in coastal tourism areas of Queensland as a result of regional economic pressures as well as our 2007 and 2008 vintages which have a higher concentration of self-employed borrowers. Claims paid also increased in 2012 as a result of an increase in both the number of claims and the average claim payment. These increases were partially offset by lower new delinquencies, net of cures, in 2012. Other Countries increased $2 million primarily from the continued aging of existing delinquencies, particularly in Ireland and Italy, and a higher average reserve per delinquency which were partially offset by benefits from ongoing loss mitigation activities. In Canada, losses decreased $35 million primarily driven by lower new delinquencies, net of cures, and higher benefits from loss mitigation activities. Claims paid also decreased due to a shift in regional mix, with fewer claims from Alberta. These decreases were partially offset by a higher average reserve per delinquency in 2012.
from a change in premium taxes in Virginia in 2011 that did not recur. Our fixed annuities business decreased $8 million primarily related to a favorable adjustment of $4 million associated with guarantee funds in 2012 compared to a $10 million accrual related to guarantee funds in 2011, partially offset by higher sales in 2012.
Corporate and Other activities increased $99 million as a result of an increase of $78 million associated with our reverse mortgage business primarily related to broker commissions on loans and higher unallocated expenses to our operating segments in 2012.
Corporate and Other activities recorded a goodwill impairment of $29 million in the fourth quarter of 2011 related to our reverse mortgage business.
Our International Mortgage Insurance segment increased $5 million from the issuance of debt by our wholly-owned Australian mortgage insurance subsidiary in June 2011.
Net income attributable to noncontrolling interests. The increase was primarily from a favorable adjustment of $58 million in the fourth quarter of 2012 associated with the finalization of the new government guarantee framework in Canada which resulted in the reversal of the accrued liability for exit fees.
impairments and gains (losses) on the sale of businesses, the early extinguishment of debt and insurance block transactions are also excluded from net operating income (loss) because in our opinion, they are not indicative of overall operating trends. Other non-operating items are also excluded from net operating income (loss) if, in our opinion, they are not indicative of overall operating trends.
We recorded after-tax goodwill impairments of $86 million related to our lifestyle protection insurance business in the third quarter of 2012 and $19 million related to our reverse mortgage business recorded in the fourth quarter of 2011. There was a $36 million gain related to the sale of our Medicare supplement insurance business recorded in the fourth quarter of 2011.
There were no infrequent or unusual items excluded from net operating income (loss) during the periods presented other than a $13 million after-tax expense recorded in the second quarter of 2013 related to restructuring costs.
Our chief operating decision maker evaluates segment performance and allocates resources on the basis of net operating income (loss). See note 20 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for a reconciliation of net operating income of our segments and Corporate and Other activities to net income available to Genworth Financial, Inc.’s common stockholders.
Our long-term care insurance business increased $66 million mainly attributable to $42 million of increased premiums from in-force rate actions and from growth of our in-force block from new sales, partially offset by $14 million of unfavorable adjustments in 2013.
Insurance and investment product fees and other. The decrease was principally attributable to our life insurance business related predominately to $124 million of gains on the repurchase of notes secured by our non-recourse funding obligations in 2012 that did not recur and from a decrease in our universal life insurance in-force block. These decreases were partially offset by an $8 million favorable unlocking in our universal life insurance products related to interest assumptions in 2013 and an unfavorable valuation adjustment in 2012 that did not recur.
correction that increased reserves to reflect a benefit for policyholders related to an accumulated benefit option, totaling a net favorable adjustment of $15 million. In 2012, benefits and changes in reserves included $60 million of favorable reserve adjustments primarily related to the continuation of a multi-stage system conversion and an $8 million unfavorable adjustment related to a change in interest rate assumptions on claim reserves.
Our fixed annuities business decreased $74 million largely attributable to lower sales of our life-contingent products and favorable mortality in 2013 compared to 2012.
Interest credited. The decrease in interest credited was principally related to our fixed annuities business driven by lower crediting rates in a low interest rate environment in 2013.
Our long-term care insurance business increased $25 million largely from growth of our in-force block, higher amortization of $4 million from an unfavorable adjustment primarily related to the continuation of a multi-stage system conversion and the write-off of computer software included in a restructuring charge in 2013.
Interest expense. Interest expense increased principally driven by our life insurance business largely related to a $20 million favorable adjustment in 2012 related to the Tax Matters Agreement with our former parent company that did not recur. This increase was partially offset by the write-off of $8 million in deferred borrowing costs from the repurchase and repayment of non-recourse funding obligations associated with a life block transaction in 2012 that did not recur.
Our life insurance business decreased $322 million primarily related to our term life insurance products from higher ceded reinsurance on certain term life insurance policies under new reinsurance treaty as part of a life block transaction in 2012 and from not offering these products until the fourth quarter of 2012.
Our long-term care insurance business increased $101 million largely from an increase in average invested assets due to growth of our in-force block. Net investment income also included higher gains of $11 million from limited partnerships accounted for under the equity method in 2012. These
Our long-term care insurance business had no net investment gains or losses in 2012 compared to net investment gains of $19 million in 2011. In 2012, derivative gains and net gains from the sale of investment securities were offset by impairments. Net investment gains in 2011 were mainly from net gains from the sale of investment securities and derivative gains, partially offset by impairments.
Our life insurance business decreased $111 million principally related to higher ceded reinsurance in 2012. We initially ceded $209 million of certain term life insurance reserves under a new reinsurance treaty as part of a life block transaction in the first quarter of 2012. The decrease was also attributable to a $17 million unfavorable claims adjustment in 2011 that did not recur from the use of the U.S. Social Security Administration’s Death Master File to identify certain life insurance policies where the covered person may be deceased but a claim had not yet been reported. These decreases were partially offset by growth of our term universal and universal life insurance products, a $31 million unfavorable unlocking in our term universal and universal life insurance products primarily related to interest assumptions in 2012 and less favorable mortality in our term and term universal life insurance products in 2012 compared to 2011.
been previously reported. The increase was also attributable to higher sales of our life-contingent products and unfavorable mortality in 2012 compared to 2011.
Net deposits and sales decreased from our modification and re-pricing of certain product offerings that we
Net earned premiums increased mainly attributable to growth of our in-force block from new sales and in-force rate actions.
Account value of our single premium deferred annuities increased as deposits and interest credited outpaced surrenders. Sales increased in 2012 driven by a more competitive offering.
Account value of our single premium immediate annuities increased as premiums and deposits, interest credited and net unrealized investment gains exceeded surrenders. Sales were pressured in 2012 given the low interest rate environment and other market conditions.
The following table sets forth the results of operations relating to our Global Mortgage Insurance Division. See below for a discussion by segment.
The following table sets forth net operating income (loss) for the businesses included in our International Mortgage Insurance segment for the periods indicated:
Our Australian mortgage insurance business increased primarily from higher premiums and lower losses as 2012 included a reserve strengthening that did not recur, partially offset by lower net investment income and higher operating expenses in 2013.
The year ended December 31, 2013 also included a decrease of $20 million attributable to changes in foreign exchange rates primarily in Australia.
Provision for income taxes. The effective tax rate increased to 25.9% for the year ended December 31, 2013 from 25.5% for the year ended December 31, 2012. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income, partially offset by changes in uncertain tax positions in Australia. The year ended December 31, 2013 included a decrease of $4 million attributable to changes in foreign exchange rates.
Our Canadian mortgage insurance business increased primarily from a favorable adjustment of $78 million associated with the finalization of the new government guarantee framework in the fourth quarter of 2012 and lower losses, partially offset by lower premiums and net investment income in 2012.
Net investment gains (losses). The decrease in net investment gains was largely driven by our Australian mortgage insurance business primarily related to net realized losses from the sale of securities in 2012 compared to net realized gains in 2011, partially offset by higher net realized gains from the sale of securities in Canada and Other Countries.
Our Canadian mortgage insurance business decreased $191 million, including a decrease of $7 million attributable to changes in foreign exchange rates, largely from a favorable adjustment of $186 million from the reversal of the accrued liability for exit fees related to the modification of the Government Guarantee Agreement in the fourth quarter of 2012.
Provision for income taxes. The effective tax rate decreased to 25.5% for the year ended December 31, 2012 from 30.1% for the year ended December 31, 2011. The decrease in the effective tax rate was primarily attributable to lower taxed foreign income, as well as 2011 changes in uncertain Australian tax positions and a
Canadian legislative change. The year ended December 31, 2012 included a decrease of $4 million attributable to changes in foreign exchange rates.
Net income attributable to noncontrolling interests. The increase was primarily from a favorable adjustment of $58 million from the reversal of the accrued liability for exit fees related to the modification of the Government Guarantee Agreement in the fourth quarter of 2012.
(1) As of December 31, 2013 and 2012, risk in-force excluded $316 million and $213 million, respectively, of risk in-force in Europe ceded under quota share reinsurance agreements.
In Other Countries, primary insurance in-force and risk in-force included increases of $900 million and $100 million attributable to changes in foreign exchange rates, respectively. The decrease in Other Countries was mainly attributable to lender settlements in Ireland.
New insurance written in Canada decreased primarily as a result of lower bulk transactions in 2013. Flow new insurance written in Canada also declined mainly attributable to a smaller mortgage originations market, particularly for high loan-to-value refinance transactions, as a result of the changes to mortgage insurance eligibility rules under the government guarantee which took effect in July 2012. The year ended December 31, 2013 included a decrease of $800 million attributable to changes in foreign exchange rates in Canada.
In Other Countries, net premiums written increased primarily from lower ceded reinsurance premiums and a bulk transaction in 2013. The year ended December 31, 2013 included an increase of $1 million attributable to changes in foreign exchange rates in Other Countries.
Primary insurance in-force and risk in-force increased in Canada primarily as a result of several large bulk transactions in 2012. In Australia, primary insurance in-force and risk in-force also increased primarily as a result of flow new insurance written in a larger high loan-to-value mortgage originations market driven by increased refinance activity and improved affordability from recent interest rate declines, partially offset by lower bulk new insurance written. In Other Countries, the decrease was mainly attributable to ongoing loss mitigation activities in Europe and lower volume from existing lenders in Europe. Primary insurance in-force and risk in-force included increases of $12.4 billion and $4.1 billion, respectively, attributable to changes in foreign exchange rates as of December 31, 2012.
The increase in the loss ratio for the year ended December 31, 2012 was primarily attributable to a reserve strengthening in Australia in 2012 and higher losses and lower earned premiums in Europe. In Australia, we strengthened reserves by $82 million in the first quarter of 2012 due to higher than anticipated frequency and severity of claims paid from later stage delinquencies from prior years, particularly in coastal tourism areas of Queensland as a result of regional economic pressures as well as our 2007 and 2008 vintages which have a higher concentration of self-employed borrowers. In Other Countries, the loss ratio increased as a result of increased
losses from the continued aging of existing delinquencies, particularly in Ireland and Italy, and lower net earned premiums. In Canada, the loss ratio decreased as a result of lower losses, partially offset by lower net earned premiums.
In Canada, risk in-force in the 95.01% and above category increased primarily as a result of flow new insurance written. In Canada, risk in-force in the 80.00% and below category decreased primarily as a result of lower bulk transactions in 2013. In Australia, overall risk in-force in all loan-to-value categories decreased primarily as a result of changes in foreign exchange rates in 2013. Excluding the effects of foreign exchange, risk in-force increased in Australia primarily as a result of flow new insurance written. In Other Countries, overall
risk in-force in all loan-to-value categories decreased primarily as a result of lender settlements in Ireland in 2013, partially offset by new business volume. Risk in-force included a decrease of $22.5 billion attributable to changes in foreign exchange rates as of December 31, 2013.
Our delinquency management process begins with notification by the loan servicer of a delinquency on an insured loan. “Delinquency” is defined in our master policies as the borrower’s failure to pay when due an amount equal to the scheduled monthly mortgage payment under the terms of the mortgage. Generally, the master policies require an insured to notify us of a delinquency no later than 30 days after the borrower has been in default by three monthly payments. We generally consider a loan to be delinquent and establish required reserves if the borrower has failed to make a scheduled mortgage payment. Borrowers default for a variety of reasons, including a reduction of income, unemployment, divorce, illness, inability to manage credit and interest rate levels. Borrowers may cure delinquencies by making all of the delinquent loan payments, agreeing to a loan modification, or by selling the property in full satisfaction of all amounts due under the mortgage. In most cases, delinquencies that are not cured result in a claim under our policy. The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our international mortgage insurance portfolio as of December 31:
(1) Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 4,030, 4,395 and 3,840 as of December 31, 2013, 2012 and 2011, respectively.
In Canada, flow loans in-force increased primarily from new policies written and flow delinquent loans decreased primarily as a result of lower new delinquencies, net of cures. Bulk loans in-force decreased primarily from the expiration of several large bulk transactions in 2013.
In Other Countries, flow loans in-force and flow delinquent loans decreased mainly from lender settlements in Ireland in 2013.
Insurance and investment product fees and other income decreased primarily from a gain related to the termination of an external reinsurance arrangement in 2012.
decreases were partially offset by lower ceded reinsurance premiums related to our captive reinsurance arrangements.
Provision (benefit) for income taxes. The effective tax rate increased to 42.1% for the year ended December 31, 2012 from 37.0% for the year ended December 31, 2011. The increase in the effective tax rate was primarily attributable to state income taxes and the increase in tax favored investment benefits in relation to pre-tax results.
New insurance written increased primarily driven by an increase in the mortgage refinance originations and increased penetration in the mortgage insurance origination market.
The decrease in the loss ratio was primarily attributable to a decrease in reserves, partially offset by an increase in net paid claims. The decrease in reserves was primarily driven by lower new delinquencies in 2012 and a reserve strengthening in 2011 that did not recur. In 2011, we strengthened reserves by $299 million primarily related to a decline in cure rates during the second quarter of 2011 for delinquent loans and continued aging of existing delinquencies. Of the reserve strengthening, approximately $102 million was associated with worsening trends in recent experience. These trends were associated with a range of factors, including reduced opportunities to mitigate losses through loan modification actions due to a higher percentage of early stage delinquencies shifting to a more aged delinquency status. Specifically, reduced cure rates were driven by lower levels of borrower self-cures and lender loan modifications outside of government-sponsored modification programs. In addition, our expectations at that time included further deterioration in cure rates and an ongoing weakness in the U.S. residential real estate market. Accordingly, these expectations resulted in an additional reserve strengthening of approximately $197 million in the second quarter of 2011. The increase in net paid claims was attributable to continued aging of the delinquency inventory volume and a significant reduction in ceded claims under captive arrangements.
The expense ratio was flat as lower operating expenses as a result of a cost-saving initiative in 2011 were offset by lower written premiums in 2012.
(2) Alt-A loans are originated under programs in which there is a reduced level of verification or disclosure of the borrower’s income or assets and a higher historical and expected delinquency rate than standard documentation loans.
(3) Standard also includes loans with reduced or different documentation requirements that meet specifications of GSE approved underwriting systems with historical and expected delinquency rates consistent with our standard portfolio.
Delinquency and foreclosure levels that developed principally in our 2005 through 2008 book years have declined as the United States experienced improvement in its residential real estate market. We also have seen a decline in new delinquencies and lower foreclosure starts in 2013.
The following table sets forth the dispersion of our total reserves and primary insurance in-force and risk in-force by year of policy origination and average annual mortgage interest rate as of December 31, 2013:
Typically, claim activity is not spread evenly throughout the coverage period of a primary insurance book of business. Based upon our experience, the majority of claims on primary U.S. mortgage insurance loans occur in the third through seventh years after loan origination. Historically, few claims were paid during the first two years after loan origination. However, the pattern of claims frequency can be affected by factors such as deteriorating economic conditions that can result in increasing claims which was the case with our 2007 and 2006 books, but we expect the pattern of claims frequency within our 2009 book to return to that of a more traditional claim trend level. Primary insurance written for the period from January 1, 2006 through December 31, 2010 represented 49% of our primary insurance in-force as of December 31, 2013. Historically, traditional primary loans reach their expected peak claim level within a three- to seven-year period. Therefore, the primary loans written during the five-year period ended December 31, 2010, are now within or past their peak claim period. Our A minus and sub-prime loans continue to have earlier incidences of default than our prime loans. Based upon FICO at loan closing, A minus and sub-prime loans represented 5% and 7% of our primary risk in-force as of December 31, 2013 and 2012, respectively.
Primary mortgage insurance claims paid, including loss adjustment expenses, for the year ended December 31, 2013 were $899 million, compared to $1,098 million and $942 million for the years ended December 31, 2012 and 2011, respectively. Pool insurance claims paid for the year ended December 31, 2013 were $5 million, compared to $7 million or less for the years ended December 31, 2012 and 2011.
The ratio of the claim paid to the current risk in-force for a loan is referred to as “claim severity.” The current risk in-force is equal to the unpaid principal amount multiplied by the coverage percentage. The main determinants of claim severity are the age of the mortgage loan, the value of the underlying property, accrued interest on the loan, expenses advanced by the insured and foreclosure expenses. These amounts depend partly
Net operating income was flat as lower premiums and net investment income were offset by lower operating expenses in 2013. The year ended December 31, 2013 included an increase of $3 million attributable to changes in foreign exchange rates.
Benefits and other changes in policy reserves increased primarily driven by lower favorable claim reserve adjustments, partially offset by lower paid claims from a decrease in new claim registrations in 2013. The year ended December 31, 2013 included an increase of $4 million attributable to changes in foreign exchange rates.
The goodwill impairment charge recorded during the third quarter of 2012 wrote off the entire goodwill balance for our lifestyle protection insurance business.
Net premiums written declined primarily due to lower premiums from our runoff clients and from reduced levels of consumer lending as a result of deteriorating economic conditions in certain regions, partially offset by sales growth in Germany, Italy, Sweden and Norway in 2013. The year ended December 31, 2013 included an increase of $15 million attributable to changes in foreign exchange rates.
Net premiums written declined primarily due to lower premiums from our runoff clients and from reduced levels of consumer lending as a result of deteriorating economic conditions in certain regions, partially offset by sales growth in Norway, Sweden, Finland and Germany in 2012. The year ended December 31, 2012 included a decrease of $45 million attributable to changes in foreign exchange rates.
The loss ratio increased mainly driven by lower favorable claim reserve adjustments in 2012 and a decrease in premiums from lower volumes driven by reduced levels of consumer lending and lower premiums from the exit of certain client bank relationships. These increases were partially offset by lower claims paid from a decrease in new claim registrations in 2012.
Net investment gains in 2012 were principally from gains on embedded derivatives associated with our variable annuity products with GMWBs, partially offset by derivative losses, net losses from the sale of investment securities and impairments. Net investment losses in 2011 were largely related to losses on embedded derivatives associated with our variable annuity products with GMWBs and impairments, partially offset by derivative gains and net gains from the sale of investment securities.
Benefits and other changes in policy reserves decreased primarily attributable to the sale of our Medicare supplement insurance business in the fourth quarter of 2011 and from a decrease in our GMDB reserves in our variable annuity products due to favorable equity market performance in 2012.
Acquisition and operating expenses, net of deferrals, decreased principally from the sale of our Medicare supplement insurance business in the fourth quarter of 2011, a $9 million charge from the discontinuance of our variable annuity offerings in 2011 that did not recur and lower production of our variable annuity products in 2012 due to block runoff.
Amortization of DAC and intangibles decreased largely related to the sale of our Medicare supplement insurance business in the fourth quarter of 2011. Our variable annuity products were flat as favorable equity market impacts in 2012 and a $9 million favorable unlocking driven by lower surrenders were offset by higher net investment gains on embedded derivatives associated with our variable annuity products with GMWBs and a $13 million unfavorable unlocking related to our annual review of assumptions.
Provision (benefit) for income taxes. The effective tax rate decreased to 28.4% for the year ended December 31, 2012 from 36.2% for the year ended December 31, 2011. The decrease in the effective tax rate was primarily attributable to the sale of a subsidiary in 2011 that did not recur and changes in tax favored investments.
In our traditional variable annuities, the decrease in account value was primarily the result of surrenders outpacing favorable equity market performance and interest credited. We no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts.
We reported a lower net operating loss in 2012 compared to 2011 primarily as a result of higher tax benefits and lower interest expense, partially offset by higher operating expenses in 2012.
Net investment losses increased primarily related to an increase in derivative losses and higher losses from the sale of securities related to portfolio repositioning in 2012, partially offset by lower impairments in 2012.
Acquisition and operating expenses, net of deferrals, increased as a result of $78 million associated with our reverse mortgage business primarily related to broker commissions on loans and higher unallocated expenses to our operating segments in 2012.
Yields are based on net investment income as reported under U.S. GAAP and are consistent with how we measure our investment performance for management purposes. Yields are annualized, for interim periods, and are calculated as net investment income as a percentage of average quarterly asset carrying values except for fixed maturity and equity securities, derivatives and derivative counterparty collateral, which exclude unrealized fair value adjustments and securities lending activity, which is included in other invested assets and is calculated net of the corresponding securities lending liability.
The decrease in overall weighted-average investment yields in 2012 was primarily attributable to lower reinvestment yields and lower income attributable to reinsurance arrangements accounted for under the deposit method of accounting as certain of these arrangements were in a lower gain position in 2012, partially offset by higher average invested assets in longer duration products and $17 million of higher gains related to limited partnerships compared to 2011. Net investment income in 2012 also included $6 million of lower bond calls and prepayments compared to 2011.
The aggregate fair value of securities sold at a loss during the years ended December 31, 2012 and 2011 was $1,491 million from the sale of 286 securities and $1,884 million from the sale of 326 securities, respectively, which was approximately 92% and 93%, respectively, of book value. The loss on sales of securities in 2012 was primarily driven by widening credit spreads. Generally, securities that are sold at a loss represent either small dollar amounts or percentage losses upon disposition. The securities sold at a loss during 2012 included one U.S. corporate security sold for a total loss of $8 million and one municipal bond sold for a total loss of $4 million in the first quarter of 2012, three foreign bonds sold for a total loss of $5 million in the second quarter of 2012, one foreign corporate security that was sold for a total loss of $2 million in the third quarter of 2012 and five asset-backed securities that were sold for a total loss of $17 million and three U.S. corporate securities that were sold for a total loss of $11 million in the fourth quarter of 2012 related to portfolio repositioning activities. The securities sold at a loss during 2011 included two U.S. corporate securities that were sold for a total loss of $11 million in the first quarter of 2011, one foreign corporate security that was sold for a total loss of $11 million in the second quarter of 2011, one U.S. corporate security that was sold for a total loss of $4 million in the third quarter of 2011 and one commercial mortgage obligation that was sold for a total loss of $10 million, one U.S. corporate security that was sold for a total loss of $10 million, one equity security that was sold for a total loss of $7 million and one foreign bond that was sold for a total loss of $4 million in the fourth quarter of 2011 related to portfolio repositioning activities.
We hold fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral and certain other financial instruments, which are carried at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. As of December 31, 2013, approximately 10% of our investment holdings recorded at fair value was based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 17 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to fair value.
As of December 31, 2013, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:
(1) Fair value included municipal bonds of $218 million related to special revenue bonds, $72 million related to general obligation bonds and $5 million related to other municipal bonds.
(1) Fair value included municipal bonds of $206 million related to special revenue bonds, $82 million related to general obligation bonds and $6 million related to other municipal bonds.
The majority of our unrealized losses were related to securities held in our U.S. Life Insurance segment. Our U.S. Mortgage Insurance segment had gross unrealized losses of $44 million and $31 million as of December 31, 2013 and 2012, respectively.
Our exposure in peripheral European countries consists of fixed maturity securities and trading bonds in Greece, Portugal, Ireland, Italy and Spain. Investments in these countries are primarily made to support our international businesses and to diversify our U.S. corporate fixed maturity securities with European bonds denominated in U.S. dollars. The following table sets forth the fair value of our exposure to these peripheral European countries as of December 31:
During 2013, we reduced our exposure to the peripheral European countries by $31 million to $591 million with unrealized gains of $18 million. As of December 31, 2013, our exposure was diversified with direct exposure to local economies of $240 million, indirect exposure through debt issued by subsidiaries outside of the European periphery of $79 million and exposure to multinational companies where the majority of revenues come from outside of the country of domicile of $272 million.
Derivatives and derivatives counterparty collateral decreased primarily attributable to changes in the long-term interest rate environment in 2013. Trading securities decreased primarily attributable to sales in 2013.
The increase in the notional value of derivatives was primarily attributable to a $3.5 billion notional increase in qualified interest rate swaps related to our interest rate hedging strategy associated with our long-term care insurance products. This increase was partially offset by a $1.5 billion notional decrease in interest rate swaps and financial futures associated with our institutional products, a $0.9 billion notional decrease related to a non-qualified derivative strategy to mitigate interest rate risk associated with our statutory capital positions and a $0.4 billion notional decrease related to hedges of the GMWB liability on our variable annuity products.
Total liabilities. Total liabilities decreased $3.1 billion from $95.5 billion as of December 31, 2012 to $92.4 billion as of December 31, 2013.
Our policyholder-related liabilities decreased $1.1 billion primarily as a result of scheduled maturities in our institutional products and higher benefit payments in our annuity products. Our U.S. mortgage insurance business decreased due to lower delinquencies and higher paid claims in 2013. Our international mortgage insurance business decreased mainly related to lower unearned premiums from changes in foreign exchange rates in 2013. These decreases were partially offset by an increase in our long-term care insurance business from growth of our in-force block and higher claims in 2013.
Long-term borrowings increased $385 million from two issuances of senior notes with principal of $400 million each during 2013. This increase was partially offset by the repayment of $365 million of senior notes during 2013 and unfavorable changes in foreign exchange on our Canadian and Australian debt.
Total stockholders’ equity. Total stockholders’ equity decreased $2.2 billion from $17.8 billion as of December 31, 2012 to $15.6 billion as of December 31, 2013.
We reported net income available to Genworth Financial, Inc.’s common stockholders of $560 million for the year ended December 31, 2013.
Accumulated other comprehensive income (loss) decreased $2.7 billion predominately attributable to lower net unrealized investment gains and derivatives qualifying as hedges mainly related to changes in the long-term interest rate environment. Foreign currency translation also decreased as the U.S. dollar strengthened during 2013.
Our principal sources of cash include sales of our products and services, income from our investment portfolio and proceeds from sales of investments. As an insurance business, we typically generate positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed policy acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. We had higher net cash inflows from operating activities during 2013 compared to 2012 primarily as a result of lower tax settlements in 2012.
We also have a repurchase program in which we sell an investment security at a specified price and agree to repurchase that security at another specified price at a later date. See note 2 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to our repurchase program.
borrowings or securities issuances are their principal sources of cash to meet their obligations. Insurance laws and regulations regulate the payment of dividends and other distributions to Genworth Financial and Genworth Holdings by their insurance subsidiaries. We expect dividends paid by the insurance subsidiaries will vary depending on strategic objectives, regulatory requirements and business performance.
The primary uses of funds at Genworth Financial and Genworth Holdings include payment of holding company general operating expenses (including taxes), payment of principal, interest and other expenses on current and any future borrowings, payments under current and any future guarantees (including guarantees of certain subsidiary obligations), payment of amounts owed to GE under the Tax Matters Agreement, payments to subsidiaries (and, in the case of Genworth Holdings, to Genworth Financial) under tax sharing agreements, contributions to subsidiaries, repurchases of debt and equity securities, potentially payments for acquisitions, payment of dividends on Genworth Financial common stock (to the extent declared by Genworth Financial’s Board of Directors) and, in the case of Genworth Holdings, loans, dividends or other distributions to Genworth Financial. We do not have any long-term debt maturities until June 2014, when $485 million of Genworth Holdings’ long-term notes mature. Net proceeds of approximately $360 million from the wealth management sale are being held at Genworth Holdings, and together with cash on hand, will be used to repay the 2014 debt at maturity or before. We may from time to time seek to repurchase or redeem outstanding notes (including the notes maturing in June 2014) for cash in open market purchases, tender offers, privately negotiated transactions or otherwise.
Genworth Holdings had $1,219 million and $843 million of cash and cash equivalents as of December 31, 2013 and 2012, respectively. Included in the balance as of December 31, 2013 was approximately $360 million from the net proceeds of the wealth management sale, which together with cash on hand, will be used to pay off the 2014 debt at maturity or before. Genworth Holdings also held $150 million in U.S. government securities as of December 31, 2013 and 2012, respectively.
Genworth Holdings provided capital support to some of its insurance subsidiaries in the form of guarantees of certain obligations, in some cases subject to annual scheduled adjustments, totaling up to $1,265 million as of December 31, 2013. We believe Genworth Holdings’ insurance subsidiaries have adequate reserves to cover the underlying obligations. This capital support primarily included:
A capital support agreement of up to $260 million with one of Genworth Holdings’ insurance subsidiaries to fund claims to support its international mortgage insurance business in Mexico;
A capital support agreement of up to $100 million, as part of the Capital Plan for the U.S. mortgage insurance subsidiaries, to be provided to GEMICO in the future in the event that certain adverse events occur; and
A capital support agreement of up to $150 million, as part of the Capital Plan for the U.S. mortgage insurance subsidiaries, to guarantee the receipt by GEMICO of intercompany payments in the normal course from our subsidiaries by June 30, 2017. As of December 31, 2013, the amount outstanding under this guarantee was $104 million.
We also provided guarantees to third parties for the performance of certain obligations of our subsidiaries. We estimate that our potential obligations under such guarantees were $30 million as of December 31, 2013.
Our international insurance subsidiaries paid dividends of $317 million, $240 million and $414 million during the years ended December 31, 2013, 2012 and 2011, respectively. Our domestic insurance subsidiaries paid dividends of $418 million (none of which were deemed “extraordinary”), $374 million ($175 million of which were deemed “extraordinary”) and $12 million (none of which were deemed “extraordinary”), respectively, during the years ended December 31, 2013, 2012 and 2011.
As of December 31, 2013, each of our life insurance subsidiaries exceeded the minimum required RBC levels. The consolidated RBC ratio of our U.S. domiciled life insurance subsidiaries was approximately 485% of the company action level as of December 31, 2013.
We have taken steps to improve the financial condition of our U.S. mortgage insurance business throughout 2013. In April 2013, we completed our Capital Plan that provided additional capital support and other benefits to our U.S. mortgage insurance business. The Capital Plan included a cash contribution of $100 million, the transfer of ownership of our European mortgage insurance subsidiaries to GEMICO, our primary U.S. mortgage insurance subsidiary, and our holding company reorganization. In addition, in December 2013, Genworth Holdings issued $400 million of senior notes in anticipation of increased capital requirements expected to be imposed by the GSEs in connection with their revised MI Eligibility Standards. As of December 31, 2013, Genworth Financial contributed $100 million of the proceeds to GEMICO with an additional $300 million contributed to a U.S. mortgage holding company. The $100 million contribution in December 2013 to GEMICO, coupled with other performance-related actions, lowered GEMICO’s risk-to-capital ratio to approximately 19.3:1 as of December 31, 2013. We expect the $300 million contributed into our U.S. mortgage holding company will be further contributed to GEMICO, to the extent needed, for the benefit of its capital position after the changes to the asset and capital requirements in the revised GSE MI Eligibility Standards are finalized. In connection with this additional $300 million contribution to GEMICO, we will also evaluate the overall performance of our U.S. mortgage insurance business and conditions existing in the U.S. mortgage insurance industry at the time we decide to make the contribution.
On September 26, 2013, Genworth Holdings entered into a $300 million multicurrency revolving credit facility, which matures in September 2016, with a $100 million sublimit for letters of credit. The proceeds of the loans may be used for working capital and general corporate purposes. As of December 31, 2013, there were no amounts outstanding under the credit facility. The obligations under the credit agreement are unsecured and payment of Genworth Holdings’ obligations is fully and unconditionally guaranteed by Genworth Financial.
used to satisfy all or part of the higher capital requirements expected to be imposed by the GSEs as part of the anticipated revisions to the MI Eligibility Standards. We expect the $300 million contributed into our U.S. mortgage holding company will be further contributed to GEMICO, to the extent needed, for the benefit of its capital position after the changes to the asset and capital requirements in the revised GSE MI Eligibility Standards are finalized. In connection with this additional $300 million contribution to GEMICO, we will also evaluate the overall performance of our U.S. mortgage insurance business and conditions existing in the U.S. mortgage insurance industry at the time we decide to make the contribution.
During 2013 and 2012, River Lake Insurance Company, our indirect wholly-owned subsidiary, repaid $28 million and $11 million, respectively, of its total outstanding floating rate subordinated notes due in 2033.
We enter into obligations with third parties in the ordinary course of our operations. These obligations, as of December 31, 2013, are set forth in the table below. However, we do not believe that our cash flow requirements can be assessed based upon this analysis of these obligations as the funding of these future cash obligations will be from future cash flows from premiums, deposits, fees and investment income that are not reflected in the following table. Future cash outflows, whether they are contractual obligations or not, also will vary based upon our future needs. Although some outflows are fixed, others depend on future events. Examples of fixed obligations include our obligations to pay principal and interest on fixed rate borrowings. Examples of obligations that will vary include obligations to pay interest on variable rate borrowings and insurance liabilities that depend on future interest rates and market performance. Many of our obligations are linked to cash-generating contracts. These obligations include payments to contractholders that assume those contractholders will continue to make deposits in accordance with the terms of their contracts. In addition, our operations involve significant expenditures that are not based upon “commitments.”
We have used off-balance sheet securitization transactions to mitigate and diversify our asset risk position and to adjust the asset class mix in our investment portfolio by reinvesting securitization proceeds in accordance with our approved investment guidelines. The transactions we have used involved securitizations of some of our receivables and investments that were secured by commercial mortgage loans, fixed maturity securities or other receivables, consisting primarily of policy loans. Total securitized assets remaining as of December 31, 2013 and 2012 were $461 million and $575 million, respectively, including $314 million and $424 million, respectively, of securitized assets required to be consolidated.
Securitization transactions typically result in gains or losses that are included in net investment gains (losses) in our consolidated financial statements. There were no off-balance sheet securitization transactions executed in 2013, 2012 or 2011.
Financial support for certain securitization entities was provided under credit support agreements that remain in place throughout the life of the related entities. Assets with credit support were funded by demand notes that were further enhanced with support provided by a third party. We previously provided limited recourse for a maximum of $40 million of credit losses related to one of our commercial mortgage loan entities that was required to be consolidated. As a result of a clean up call being exercised on this securitization entity during the fourth quarter of 2013, we effectively no longer have any limited recourse outstanding as of December 31, 2013.
Financial Statement Schedules as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011:
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Genworth Financial, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
To implement the reorganization, Genworth Holdings formed Genworth Financial and Genworth Financial, in turn, formed Sub XLII, Inc. (“Merger Sub”). The holding company structure was implemented pursuant to Section 251(g) of the General Corporation Law of the State of Delaware (“DGCL”) by the merger of Merger Sub with and into Genworth Holdings (the “Merger”). Genworth Holdings survived the Merger as a direct, 100% owned subsidiary of Genworth Financial and each share of Genworth Holdings Class A Common Stock, par value $0.001 per share (“Genworth Holdings Class A Common Stock”), issued and outstanding immediately prior to the Merger and each share of Genworth Holdings Class A Common Stock held in the treasury of Genworth Holdings immediately prior to the Merger converted into one issued and outstanding or treasury, as applicable, share of Genworth Financial Class A Common Stock, par value $0.001 per share, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the Genworth Holdings Class A Common Stock being converted.
Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business.
Insurance and investment product fees and other consist primarily of insurance charges assessed on universal and term universal life insurance contracts and fees assessed against customer account values. For universal and term universal life insurance contracts, charges to policyholder accounts for cost of insurance are recognized as revenue when due. Variable product fees are charged to variable annuity contractholders and
variable life insurance policyholders based upon the daily net assets of the contractholder’s and policyholder’s account values and are recognized as revenue when charged. Policy surrender fees are recognized as income when the policy is surrendered.
recognized in OCI (“non-credit”). Net other-than-temporary impairments recorded in net income (loss) represent the credit loss on the other-than-temporarily impaired securities with the offset recognized as an adjustment to the amortized cost to determine the new amortized cost basis of the securities.
over the term of the loan. Commercial mortgage loans are considered past due when contractual payments have not been received from the borrower by the required payment date.
In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary.
Under the securities lending program in the United States, the borrower is required to provide collateral, which can consist of cash or government securities, on a daily basis in amounts equal to or exceeding 102% of the applicable securities loaned. Currently, we only accept cash collateral from borrowers under the program. Cash collateral received by us on securities lending transactions is reflected in other invested assets with an offsetting liability recognized in other liabilities for the obligation to return the collateral. Any cash collateral received is reinvested by our custodian based upon the investment guidelines provided within our agreement. In
the United States, the reinvested cash collateral is primarily invested in a money market fund approved by the National Association of Insurance Commissioners (“NAIC”), U.S. and foreign government securities, U.S. government agency securities, asset-backed securities and corporate debt securities. As of December 31, 2013 and 2012, the fair value of securities loaned under our securities lending program in the United States was $191 million and $194 million, respectively. As of December 31, 2013 and 2012, the fair value of collateral held under our securities lending program in the United States was $187 million and the offsetting obligation to return collateral of $199 million and $203 million, respectively, was included in other liabilities in the consolidated balance sheets. We did not have any non-cash collateral provided by the borrower in our securities lending program in the United States as of December 31, 2013 and 2012.
Acquisition costs include costs that are related directly to the successful acquisition of new and renewal insurance policies and investment contracts. Such costs are deferred and amortized as follows:
issuance expenses. Amortization for traditional long-duration insurance products is determined as a level proportion of premium based on commonly accepted actuarial methods and reasonable assumptions about mortality, morbidity, lapse rates, expenses and future yield on related investments established when the contract or policy is issued. Amortization is adjusted each period to reflect policy lapse or termination rates as compared to anticipated experience. Amortization for annuity contracts without significant mortality risk and for investment and universal life insurance products is based on expected gross profits. Expected gross profits are adjusted quarterly to reflect actual experience to date or for the unlocking of underlying key assumptions relating to future gross profits based on experience studies.
We regularly review all of these assumptions and periodically test DAC for recoverability. For deposit products, if the current present value of expected future gross profits is less than the unamortized DAC for a line of business, a charge to income is recorded for additional DAC amortization, and for certain products, an increase in benefit reserves may be required. For other products, if the benefit reserve plus anticipated future premiums and interest income for a line of business are less than the current estimate of future benefits and expenses (including any unamortized DAC), a charge to income is recorded for additional DAC amortization or for increased benefit reserves. See note 6 for additional information related to DAC including loss recognition and recoverability.
We discontinue hedge accounting prospectively when: (i) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) the derivative is de-designated as a hedge instrument; or (iv) it is no longer probable that the forecasted transaction will occur.
For all qualifying and highly effective fair value hedges, the changes in fair value of the derivative instrument are reported in income. In addition, changes in fair value attributable to the hedged portion of the underlying instrument are reported in income. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative continues to be carried in the consolidated balance sheets at its fair value, but the hedged asset or liability will no longer be adjusted for changes in fair value. In all other situations in which hedge accounting is discontinued, the derivative is carried at its fair value in the consolidated balance sheets, with changes in its fair value recognized in current period income.
Most of our reserves for additional insurance and annuitization benefits are calculated by applying a benefit ratio to accumulated contractholder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past and anticipated future experience. The projections utilize stochastic scenarios of separate account returns incorporating reversion to the mean, as well as assumptions for mortality and lapses. Some of our minimum guarantees, mainly GMWBs, are accounted for as embedded derivatives; see notes 5 and 17 for additional information on these embedded derivatives and related fair value measurement disclosures.
Management considers the liability for policy and contract claims provided to be satisfactory to cover the losses that have occurred. Management monitors actual experience, and where circumstances warrant, will revise its assumptions. The methods of determining such estimates and establishing the reserves are reviewed
Effective with the period beginning January 1, 2011, our companies elected to file a single U.S. consolidated income tax return (the “life/non-life consolidated return”). The election was made with the filing of the first life/non-life consolidated return, which was filed in September 2012. All companies domesticated in the United States and our Bermuda and Guernsey subsidiaries which have elected to be taxed as U.S. domestic companies were included in the life/non-life consolidated return as allowed by the tax law and regulations. The tax sharing agreement previously applicable only to the U.S. life insurance entities was terminated with the filing of the life/non-life consolidated return and those entities adopted the tax sharing agreement previously applicable to only the non-life entities (hereinafter the “life/non-life tax sharing agreement”). The two agreements were identical in all material respects. The life/non-life tax sharing agreement was provided to the appropriate state insurance regulators for approval. Intercompany balances relating to the impacts of the life/non-life tax sharing agreement were settled with the insurance companies after approval was received from the insurance regulators. Intercompany balances under all agreements are settled at least annually. For years before 2011, our U.S. non-life insurance entities were included in the consolidated federal income tax return of Genworth and subject to a tax sharing arrangement that allocated tax on a separate company basis but provided benefit for current utilization of losses and credits. Also, our U.S. life insurance entities filed a consolidated life insurance federal income tax return, and were subject to a separate tax sharing agreement, as approved by state insurance regulators, which allocated taxes on a separate company basis but provided benefit for current utilization of losses and credits.
Our subsidiaries based in Bermuda and Guernsey are treated as U.S. insurance companies under provisions of the U.S. Internal Revenue Code, are included in the life/non-life consolidated return, and have adopted the life/non-life tax sharing agreement. Jurisdictions outside the United States in which our various subsidiaries incur significant taxes include Australia, Canada and the United Kingdom.
On July 17, 2013, we adopted new accounting guidance to provide additional flexibility in the benchmark interest rates used when applying hedge accounting. The new guidance permits the use of the Federal Funds Effective Swap Rate as a benchmark interest rate for hedge accounting purposes and removes certain restrictions on being able to apply hedge accounting for similar hedges using different benchmark interest rates. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.
On January 1, 2013, we adopted new accounting guidance related to the presentation of the reclassification of items out of accumulated other comprehensive income into net income. The adoption of this accounting guidance impacted our disclosures only and did not impact our consolidated results.
In July 2012, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance on testing indefinite-lived intangible assets for impairment. The new guidance permits the use of a qualitative assessment prior to, and potentially instead of, the quantitative impairment test for indefinite-lived intangible assets. We elected to early adopt this new accounting guidance effective October 1, 2012. The adoption of this accounting guidance did not have an impact on our consolidated financial statements.
On January 1, 2012, we adopted new accounting guidance related to repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removed the requirement to consider a transferor’s ability to fulfill its contractual rights from the criteria used to determine effective control and was effective for us prospectively for any transactions occurring on or after January 1, 2012. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.
In June 2013, the FASB issued new accounting guidance on the scope, measurement and disclosure requirements for investment companies. The new guidance clarifies the characteristics of an investment company, provides comprehensive guidance for assessing whether an entity is an investment company, requires investment companies to measure noncontrolling ownership interest in other investment companies at fair value rather than using the equity method of accounting and requires additional disclosures. These new requirements will be effective for us on January 1, 2014 and are not expected to have a material impact on our consolidated financial statements.
Basic and diluted earnings per share are calculated by dividing each income category presented below by the weighted-average basic and diluted shares outstanding for the periods indicated:
For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of cash flows to be collected. We do not intend to sell and it is not more likely than not that we will be required to sell these securities prior to recovering our amortized cost. See the following for further discussion of gross unrealized losses by asset class.
As indicated in the table above, $106 million of gross unrealized losses were related to U.S. government, agencies and government-sponsored enterprises securities that have been in a continuous loss position for more than 12 months and were greater than 20% below cost. The unrealized losses for U.S. government, agencies and government-sponsored enterprises securities represent long-term, zero coupon Treasury bonds. An increase in Treasury yields since the bonds were purchased resulted in a decrease in the market value of these securities. We expect that these securities will accrete up to par value over time.
Of the total unrealized losses of $16 million for corporate fixed maturity securities presented in the tables above, $13 million, or 81%, related to issuers in the finance and insurance sector that were 24% below cost on average. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of December 31, 2013. The $13 million of unrealized losses related to the finance and insurance industry related to financial hybrid securities on which a debt impairment model was employed. Most of our hybrid securities retained a credit rating of investment grade. The fair value of these hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred. We continue to receive our contractual payments and expect to fully recover our amortized cost.
Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of December 31, 2013.
Despite the considerable analysis and rigor employed on our structured securities, it is at least reasonably possible that the underlying collateral of these investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.
(3) Amounts that have been in a continuous loss position for 12 months or more included $119 million of unrealized losses on other-than-temporarily impaired securities.
The scheduled maturity distribution of fixed maturity securities as of December 31, 2013 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.
As of December 31, 2013, 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.
As of December 31, 2013 and 2012, $50 million and $1,049 million, respectively, of securities were on deposit with various state or foreign government insurance departments in order to comply with relevant insurance regulations. The decrease from 2012 to 2013 related to the Government Guarantee Agreement in Canada whereby the requirement for the government guarantee fund was terminated and the amount held in the fund reverted back to us on January 1, 2013. See note 19 for additional information related to the termination of the Government Guarantee Agreement in Canada.
As of December 31, 2013 and 2012, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of December 31, 2013 and 2012.
As of and for the years ended December 31, 2013 and 2012, we modified or extended 33 and 38 commercial mortgage loans, respectively, with a total carrying value of $165 million and $279 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.
(1) Included $2 million of impaired loans, $5 million of delinquent loans and $99 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 119%.
(1) Included $136 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 144%.
We have consolidated securitization entities that hold commercial mortgage loans that are recorded as restricted commercial mortgage loans related to securitization entities. See note 18 for additional information related to consolidated securitization entities.
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB and fixed index annuity 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:
The difference between the gain (loss) recognized for the derivative instrument and the hedged item presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the net income effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged item. There were no amounts excluded from the measurement of effectiveness.
The following tables present additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of December 31:
(2) Included $7 million of accruals on derivatives classified as other liabilities and does not include amounts related to embedded derivatives and derivatives related to securitization entities.
(1) Included $47 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives.
Except for derivatives related to securitization entities, almost all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If the downgrade provisions had been triggered as of December 31, 2013 and 2012, we could have been allowed to claim or required to disburse up to the net amounts shown in the last column of the charts above. The charts above exclude embedded derivatives and derivatives related to securitization entities as those derivatives are not subject to master netting arrangements.
(4) The current attachment/detachment as of December 31, 2013 and 2012 was 14.8% - 30.3%.
We regularly review DAC to determine if it is recoverable from future income. As of December 31, 2013, we believe all of our businesses have sufficient future income and therefore the related DAC is recoverable. As part of a life block transaction in the third quarter of 2012, we recorded $39 million of additional DAC amortization to reflect loss recognition on certain term life insurance policies under a reinsurance treaty. As of December 31, 2012, we believe all of our other businesses have sufficient future income and therefore the related DAC was recoverable.
In the first quarter of 2012, we also wrote off $142 million of DAC associated with certain term life insurance policies under a new reinsurance treaty as part of a life block transaction. The write off was included in amortization, net of interest accretion.
Amortization expense related to PVFP, capitalized software and other intangible assets for the years ended December 31, 2013, 2012 and 2011 was $118 million, $104 million and $133 million, respectively. Amortization expense related to deferred sales inducements of $24 million, $29 million and $22 million, respectively, for the years ended December 31, 2013, 2012 and 2011 was included in benefits and other changes in policy reserves.
The percentage of the December 31, 2013 PVFP balance net of interest accretion, before the effect of unrealized investment gains or losses, estimated to be amortized over each of the next five years is as follows:
During the fourth quarter of 2011, as a result of our reorganized operating segments, our reverse mortgage business was newly identified as a separate reporting unit. Previously, this business was a component of the long-term care insurance reporting unit. Due to historical business performance and recent adverse developments within the industry that negatively impacted the valuation of the business, we impaired all of the goodwill related to our reverse mortgage business reported in Corporate and Other activities in the fourth quarter of 2011. The key assumptions utilized in this valuation included expected future business performance and the discount rate, both of which were adversely impacted as a result of the recent industry developments.
Effective October 1, 2011, we completed the sale of our Medicare supplement insurance business for total proceeds of $276 million. The sale resulted in an after-tax gain of $36 million. Our Medicare supplement insurance business was included in our Runoff segment. The transaction included the sale of Continental Life Insurance Company of Brentwood, Tennessee and its subsidiary, American Continental Insurance Company, and the reinsurance of the Medicare supplement insurance in-force business written by other Genworth life insurance subsidiaries.
(c) Principally modifications of the Society of Actuaries 1965-70 or 1975-80 Select and Ultimate Tables, 1941, 1958, 1980 and 2001 Commissioner’s Standard Ordinary Tables, 1980 Commissioner’s Extended Term table and (IA) Standard Table 1996 (modified).
(3) The amounts relate to the sale of our Medicare supplement insurance business in 2011. See note 8 for additional information.
As described in note 2, we establish reserves for the ultimate cost of settling claims on reported and unreported insured events that have occurred on or before the respective reporting period. These liabilities are associated primarily with our mortgage, lifestyle protection and long-term care insurance products and represent our best estimates of the liabilities at the time based on known facts, historical trends of claim payments and other external factors, such as various trends in economic conditions, housing prices, employment rates, mortality, morbidity and medical costs.
For 2013, the decrease in the ending liability for policy and contract claims was primarily related to our U.S. Mortgage Insurance segment and our International Mortgage Insurance segment, partially offset by an increase in our long-term insurance business. In 2013, the liability in our U.S. Mortgage Insurance segment decreased to $1,482 million from $2,009 million as of December 31, 2012 due to lower new delinquencies and improvements in net cures and aging on existing delinquencies in 2013. Loss mitigation actions that occurred during 2013 resulted in a reduction of expected losses of $563 million. In 2013, the liability in our International Mortgage Insurance segment decreased to $378 million from $516 million as of December 31, 2012 primarily from a prior year reserve strengthening in our Australian mortgage insurance business due to higher than anticipated frequency and severity of claims paid from later stage delinquencies that did not recur and from lower new delinquencies in 2013. Partially offsetting these decreases was an increase in the liability in our long-term care insurance business which increased to $4,999 million from $4,655 million as of December 31, 2012 largely from growth and aging of the in-force block.
We experienced lower levels of incurred losses primarily in our U.S. mortgage, international mortgage and life insurance businesses, which decreased by $313 million, $201 million and $132 million, respectively, from 2012 to 2013. Incurred losses in our U.S. mortgage insurance business have moderated due to lower new delinquencies and improvements in net cures and aging on existing delinquencies in 2013. Our international mortgage insurance business improved in Australia and Canada primarily as a result of lower new delinquencies in 2013. In Australia, the prior year reserve strengthening due to higher than anticipated frequency and severity of claims paid from later stage delinquencies did not recur. Our life insurance business improved as a result of continued mortality improvement in 2013.
During 2013, we also paid lower claims in our U.S. mortgage, life and international mortgage insurance businesses of $202 million, $196 million and $144 million, respectively. Paid claims in our U.S. mortgage insurance business have moderated due to lower new delinquencies and improvements in net cures and aging on existing delinquencies in 2013. Lower paid claims in our life insurance business were a result of continued mortality improvement in 2013 compared to 2012 and lower severity in 2013. In our international mortgage insurance business, Australia and Canada also had lower paid claims primarily as a result of a decline in the number of claims as well as the average paid claim amount in 2013. These decreases were partially offset by an increase of $111 million in paid claims of our long-term care insurance business from the aging and growth of our in-force block.
the reserves in prior periods. Of this amount, we decreased prior year claim reserves related to our U.S. Mortgage Insurance segment by $63 million from $2,009 million as of December 31, 2012 primarily from improvements in net cures in 2013. For our other businesses, the remaining unfavorable development of $19 million in 2013 related to refinements to our estimates as part of our reserving process on both reported and unreported insured events occurring in the prior year that were not significant.
During 2012, we strengthened our prior year reserves by $237 million as a result of changes in estimates related to prior year insured events and the development of information and trends not previously known when establishing the reserves in prior periods. Of this amount, we increased prior year claim reserves in our International Mortgage Insurance segment by $142 million from $553 million as of December 31, 2011. During 2012, our Australian mortgage insurance business strengthened reserves due to higher than anticipated frequency and severity of claims paid from later stage delinquencies from prior years, particularly in coastal tourism areas of Queensland as a result of regional economic pressures as well as our 2007 and 2008 vintages which have a higher concentration of self-employed borrowers. In 2012, we also increased prior year claim reserves related to our long-term care insurance business by $93 million from $4,130 million as of December 31, 2011. We experienced an increase in severity and duration of claims associated with observed loss development, particularly in older issued policies, partially offset by refinements to our estimated claim reserves. For our other businesses, the remaining unfavorable development of $2 million in 2012 related to refinements to our estimates as part of our reserving process on both reported and unreported insured events occurring in the prior year that were not significant.
We provide retiree health benefits to domestic employees hired prior to January 1, 2005 who meet certain service requirements. Under this plan, retirees over 65 years of age receive a subsidy towards the purchase of a Medigap policy, and retirees under 65 years of age receive medical benefits similar to our employees’ medical benefits. In December 2009, we announced that eligibility for retiree medical benefits will be limited to associates who are within 10 years of retirement eligibility as of January 1, 2010. This resulted in a negative plan amendment which will be amortized over the average future service of the participants. We also provide retiree life and long-term care insurance benefits. The plans are funded as claims are incurred. As of December 31, 2013 and 2012, the accumulated postretirement benefit obligation associated with these benefits was $79 million and $88 million, respectively, which we accrued in other liabilities in the consolidated balance sheets. In 2013, we recognized an increase of $11 million in OCI. In 2012, we recognized a decrease of $3 million in OCI related to these benefits. In 2013, we also recognized a $1 million gain related to reduced benefit costs driven by fewer participants due to the sale of our wealth management and reverse mortgage businesses and an expense reduction plan announced in June 2013.
In September 2013, Genworth Financial and Genworth Holdings entered into a Credit Agreement (the “Credit Agreement”) which provides Genworth Holdings with a $300 million multicurrency revolving credit facility, with a $100 million sublimit for letters of credit. The credit facility is available on a revolving basis until September 26, 2016, unless the commitments are terminated earlier either at the request of Genworth Holdings or by the lenders as a result of any event of default. On no more than two occasions during the term of the facility, Genworth Holdings may request each lender to extend the maturity date of its commitment for an additional one-year period. Genworth Holdings’ request will be granted if lenders (including any new lenders replacing non-consenting lenders) holding more than 50% of the commitments consent to the requested extension(s). The proceeds of the loans may be used for working capital and general corporate purposes. As of December 31, 2013, there was no amount outstanding under the credit facility. The obligations under the Credit Agreement are unsecured and payment of Genworth Holdings’ obligations is fully and unconditionally guaranteed by Genworth Financial.
each case a margin that fluctuates based upon the ratings assigned from time to time by Moody’s Investors Service, Inc. and Standard & Poor’s Rating Group to Genworth Holdings’ senior unsecured long-term indebtedness for borrowed money that is not guaranteed by any other person other than Genworth Financial or subject to any other credit enhancement. Genworth Holdings will also pay a commitment fee at a rate that varies with Genworth Holdings’ senior unsecured long-term indebtedness ratings and that is calculated on the average daily unused amount of the commitments, payable quarterly in arrears.
The Credit Agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type. These include negative covenants limiting the ability of Genworth Holdings and its subsidiaries, to: (1) create liens other than permitted liens; (2) in the case of Genworth Holdings and Genworth Life Insurance Company (“Genworth Life”), merge into or consolidate with any other person or permit any person to merge into or consolidate with them unless Genworth Holdings or Genworth Life, as applicable, is the surviving person; (3) sell, transfer, lease, or otherwise dispose of all or substantially all of the assets of Genworth Holdings and its subsidiaries, taken as a whole, and the equity interest in or assets of Genworth Life, subject to certain excluded transactions; (4) enter into certain transactions with affiliates; and (5) enter into certain restrictive agreements. In addition, Genworth Financial agrees not to permit Priority Indebtedness (as defined in the Credit Agreement) to exceed 7.5% of its consolidated total capitalization (as defined in the Credit Agreement) as of the end of any fiscal quarter ending on and after September 30, 2013.
(2) Senior notes issued by our majority-owned subsidiary, Genworth MI Canada Inc. (“Genworth Canada”).
In September 2005, we issued the 2015 Notes. The 2015 Notes were Genworth Holdings’ direct, unsecured obligations and ranked equally in right of payment with all of its existing and future unsecured and unsubordinated obligations. The net proceeds of $348 million from the issuance of the 2015 Notes were used to reduce our outstanding commercial paper borrowings.
In June 2001, GE Financial Assurance Holdings, Inc. issued ¥60.0 billion of unsecured senior notes through a public offering at a price of ¥59.9 billion. ¥3.0 billion of the notes were retired during 2004. We entered into arrangements to swap our obligations under these notes to a U.S. dollar obligation with a notional principal amount of $491 million and bearing interest at a rate of 4.84% per annum. We assumed this obligation under these notes in 2004 in connection with our corporation formation and IPO. During the second quarter of 2011, we repaid ¥57.0 billion of senior notes that matured in June 2011, plus accrued and unpaid interest. In addition, the arrangements to swap our obligations under these notes to a U.S. dollar obligation matured. Upon maturity of these swaps, we received $212 million from the derivative counterparty resulting in a net repayment of $491 million of principal related to these notes.
In November 2006, we issued fixed-to-floating rate junior notes having an aggregate principal amount of $600 million, with an annual interest rate equal to 6.15% payable semi-annually, until November 15, 2016, at which point the annual interest rate will be equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 2.0025% payable quarterly, until the notes mature in November 2066 (“2066 Notes”). Subject to certain conditions, Genworth Holdings has the right, on one or more occasions, to defer the payment of interest on the 2066 Notes during any period of up to 10 years without giving rise to an event of default and without permitting acceleration under the terms of the 2066 Notes. Genworth Holdings will not be required to settle deferred interest payments until it has deferred interest for five years or made a payment of current interest. In the event of our bankruptcy, holders will have a limited claim for deferred interest.
The 2066 Notes will be subordinated to all existing and future senior, subordinated and junior subordinated debt of Genworth Holdings, except for any future debt that by its terms is not superior in right of payment, and will be effectively subordinated to all liabilities of our subsidiaries.
As part of our corporate formation, we issued 5.25% Series A Preferred Stock (“Series A Preferred Stock”). On June 1, 2011, we redeemed all the remaining outstanding shares of our Series A Preferred Stock at a price of $50 per share, plus unpaid dividends accrued to the date of redemption, for $57 million.
The floating rate notes have been deposited into a series of trusts that have issued money market or term securities. Both principal and interest payments on the money market and term securities are guaranteed by a third-party insurance company. The holders of the money market or term securities cannot require repayment from us or any of our subsidiaries, other than the River Lake and Rivermont Insurance Companies, as applicable, the direct issuers of the notes. We have provided a limited guarantee to Rivermont Insurance Company (“Rivermont I”), where under adverse interest rate, mortality or lapse scenarios (or combination thereof), we may be required to provide additional funds to Rivermont I. Genworth Life and Annuity Insurance Company, our wholly-owned subsidiary, has agreed to indemnify the issuers and the third-party insurer for certain limited costs related to the issuance of these obligations.
redemption event, in accordance with the priority of payments. During the three months ended September 30, 2012, as part of a life block transaction, we acquired $270 million of non-recourse funding obligations issued by River Lake IV, which were accounted for as redemptions of our non-recourse funding obligations and resulted in a U.S. GAAP after-tax gain of approximately $21 million. The life block transaction also resulted in higher after-tax DAC amortization of $25 million reflecting loss recognition associated with a third-party reinsurance treaty plus additional expenses. The combined transactions resulted in a U.S. GAAP after-tax loss of $6 million in the three months ended September 30, 2012 which was included in our U.S. Life Insurance segment. In December 2012, we repaid the remaining outstanding non-recourse funding obligations issued by River Lake IV of $235 million.
Our current income tax payable was $132 million as of December 31, 2013 and our current income tax receivable was $99 million as of December 31, 2012.
NOL carryforwards amounted to $5,059 million as of December 31, 2013, and, if unused, will expire beginning in 2021. Of this amount, $24 million will result in a benefit recorded in APIC when realized. Foreign tax credit carryforwards amounted to $432 million as of December 31, 2013, and, if unused will begin to expire in 2014.
In 2012, we increased our deferred tax liability by $36 million, with an offset to additional paid-in capital related to an unsupported tax balance that arose prior to our IPO. In 2013, we identified further adjustments to our deferred tax liability that arose prior to our IPO and increased it by an additional $17 million, with an offset to additional paid-in capital.
2004 Genworth Financial, Inc. Omnibus Incentive Plan (the “2004 Omnibus Incentive Plan”). In May 2012, the 2012 Genworth Financial, Inc. Omnibus Incentive Plan (the “2012 Omnibus Incentive Plan,” together with the 2004 Omnibus Incentive Plan, the “Omnibus Incentive Plans”) was approved by stockholders. Under the 2012 Omnibus Incentive Plan, we are authorized to grant 16 million equity awards, plus a number of additional shares not to exceed 25 million underlying awards outstanding under the prior Plan. From and after May 2012, no further awards have been or will be granted under the 2004 Omnibus Incentive Plan and the 2004 Omnibus Incentive Plan will remain in effect only as long as awards granted thereunder remain outstanding.
The following table contains the stock option and SAR weighted-average grant date fair value information and related valuation assumptions for the years ended December 31:
(1) For purposes of determining the fair value of 1.2 million shares of performance-accelerated SARs that were issued in January 2013, we used a Monte-Carlo Simulation technique. Monte-Carlo Simulation is a method used to simulate future stock price movements in order to determine the fair value due to unique vesting and exercising provisions. The performance-accelerated SARs have a derived service period of one year on average and have a grant price of $7.90. The performance-accelerated SARs vest on the third anniversary of the grant date but are subject to earlier vesting on or after the one year anniversary of the grant date based on the closing price of our Class A Common Stock exceeding certain specified amounts ($12.00, $16.00 and $20.00, respectively) for 45 consecutive trading days. Based on the closing price of our Class A Common Stock, the first tranche at $12.00 vested in January 2014.
During 2013 and 2012, we granted SARs with exercise prices ranging from $7.90 to $9.06 and $4.48 to $8.88, respectively. These SARs have a feature that places a cap on the amount of gain that can be recognized
The following table summarizes stock option activity as of December 31, 2013 and 2012:
(2) These shares have an aggregate intrinsic value for total options and exercisable options of $8 million each.
(3) These shares have an aggregate intrinsic value for total options and exercisable options of $9 million each.
(4) These shares have an aggregate intrinsic value for total options and exercisable options of $2 million each.
The following table summarizes the status of our other equity-based awards as of December 31, 2013 and 2012:
As of December 31, 2013 and 2012, total unrecognized stock-based compensation expense related to non-vested awards not yet recognized was $30 million and $32 million, respectively. This expense is expected to be recognized over a weighted-average period of two years.
In connection with the IPO of Genworth Canada in July 2009, our indirect subsidiary, Genworth Canada, granted stock options and other equity-based awards to its Canadian employees. As of December 31, 2013, Genworth Canada had outstanding 986,908 of stock options and 176,852 of RSUs and performance stock units (“PSUs”) and 44,736 of DSUs, all of which were vested. Genworth Canada also granted 20,153 executive deferred stock units (“EDSUs”) during 2013, all of which were outstanding as of December 31, 2013. The EDSUs were introduced as part of a share-based compensation plan intended for executive level employees entitling them to receive an amount equal to the fair value of Genworth Canada stock. As of December 31, 2012, Genworth Canada had outstanding 1,027,130 of stock options and 142,972 of RSUs and PSUs and 34,412 of DSUs, all of which were vested. For the years ended December 31, 2013 and 2012, we recorded stock-based compensation expense of $11 million and $3 million, respectively. For the year ended December 31, 2011, we recorded a benefit from stock-based compensation of $1 million. For the years ended December 31, 2013, 2012 and 2011, we estimated total unrecognized expense of $3 million, $1 million and $1 million, respectively, related to these awards.
Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.
Other invested assets. 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. Primarily represents short-term investments and limited partnerships accounted for under the cost method. The fair value of short-term investments typically does not include significant unobservable inputs and approximate our amortized cost basis. As a result, short-term investments are classified as Level 2. Cost method limited partnerships typically include significant unobservable inputs as a result of being relatively illiquid with limited market activity for similar instruments and are classified as Level 3.
Investment contracts. Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products. Given the significant unobservable inputs associated with policyholder behavior and current market rate assumptions used to discount the expected future cash flows, we classify these
We have fixed maturity, equity and trading securities, 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.
Financial futures. The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.
component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate, foreign currency exchange rate volatility and foreign equity index volatility inputs, the derivative is classified as Level 3. As foreign currency exchange rate volatility and foreign equity index volatility increases, the change in our valuation of these options will be favorable for purchase options and unfavorable for options sold. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.
We offer fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.
We record certain borrowings related to securitization entities at fair value. The fair value of these borrowings is determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determine fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may impact the valuation. After considering all relevant inputs, we determine fair value of the borrowings using the net valuation of the underlying assets and derivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 3. Increases in the valuation of the underlying assets or decreases in the derivative liabilities will result in an increase in the fair value of these borrowings.
(3) Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
(1) The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credits spreads.
(1) Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
Issuances and settlements presented for policyholder account balances represent the issuances and settlements of embedded derivatives associated with our GMWB liabilities where: issuances are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance and settlements are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income)” in the tables presented above.
Certain classes of instruments classified as Level 3 are excluded below as a result of not being material or due to limitations in being able to obtain the underlying inputs used by certain third-party sources, such as broker quotes, used as an input in determining fair value. The following table presents a summary of the significant unobservable inputs used for certain fair value measurements that are based on internal models and classified as Level 3 as of December 31, 2013:
We previously provided limited recourse for a maximum of $40 million of credit losses related to one of our commercial mortgage loan entities that was required to be consolidated. As a result of a clean up call being exercised on this securitization entity during the fourth quarter of 2013, we effectively no longer have any limited recourse outstanding as of December 31, 2013.
For VIEs related to asset securitization transactions, we consolidate three securitization entities as a result of our involvement in the entities’ design or having certain decision making ability regarding the assets held by the securitization entity. These securitization entities were designed to have significant limitations on the types of assets owned and the types and extent of permitted activities and decision making rights. The three securitization entities that were consolidated are comprised of two securitization entities backed by commercial mortgage loans and one backed by residual interests in certain policy loan securitization entities.
mortgage loan securitization entity, our primary economic interest represents the excess interest of the commercial mortgage loans and the subordinated notes of the securitization entity.
The following table shows the activity presented in our consolidated statement of income related to the consolidated securitization entities for the years ended December 31:
(2) Principal amount not applicable. Notional balance was $115 million and $117 million as of December 31, 2013 and 2012, respectively.
Our domestic insurance subsidiaries paid dividends of $418 million (none of which were deemed “extraordinary”), $374 million ($175 million of which were deemed “extraordinary”), and $12 million (none of which were deemed “extraordinary”) during 2013, 2012 and 2011, respectively. Our international insurance subsidiaries paid dividends of $317 million, $240 million and $414 million during 2013, 2012 and 2011, respectively.
Permitted statutory accounting practices encompass all accounting practices not so prescribed but that have been specifically allowed by state insurance authorities. Our U.S. domiciled insurance subsidiaries have no material permitted accounting practices, except for River Lake Insurance Company VI (“River Lake VI”), River Lake Insurance Company VII (“River Lake VII”), River Lake Insurance Company VIII (“River Lake VIII”),
The impact of these permitted practices on our combined U.S. domiciled life insurance subsidiaries’ statutory capital and surplus was $450 million and $598 million as of December 31, 2013 and 2012, respectively. If they had not used a permitted practice, no regulatory event would have been triggered.
The NAIC adopted revised statutory reserving requirements for new and in-force secondary guarantee universal life business subject to Actuarial Guideline 38 (more commonly known as “AG 38”) provisions, effective December 31, 2012. These requirements reflected an agreement reached and developed by a NAIC Joint Working Group which included regulators from several states, including New York. The financial impact related to the revised statutory reserving requirements on our in-force reserves subject to the new guidance was not significant as of December 31, 2012. On September 11, 2013, the New York Department of Financial Services (the “NYDFS”) announced that it no longer supported the agreement reached by the NAIC Working Group and that it would require New York licensed companies to use an alternative interpretation of AG 38 for universal life insurance products with secondary guarantees. We have been in discussions with the NYDFS about its alternative interpretation and recorded $80 million of additional statutory reserves as of December 31, 2013. We continue to work with the NYDFS to determine potential future impacts, if any. The NYDFS has not finalized a permanent update to the regulation.
For regulatory purposes, our U.S. mortgage insurance subsidiaries are required to maintain a statutory contingency reserve. Annual additions to the statutory contingency reserve must equal the greater of: (i) 50% of earned premiums or (ii) the required level of policyholders position, as defined by state insurance laws. These contingency reserves generally are held until the earlier of: (i) the time that loss ratios exceed 35% or (ii) 10 years. The statutory contingency reserves for our U.S. mortgage insurance subsidiaries were approximately $59 million and $6 million, respectively, as of December 31, 2013 and 2012 and, are included in the table above containing combined statutory capital and surplus balances.
Mortgage insurers are not subject to the NAIC’s RBC requirements but certain states and other regulators impose another form of capital requirement on mortgage insurers requiring maintenance of a risk-to-capital ratio not to exceed 25:1. As of December 31, 2013, the risk-to-capital ratio of GEMICO, our primary U.S. mortgage insurance subsidiary, was 19.3:1, which was below the maximum risk-to-capital ratio of 25:1 established under North Carolina law and enforced by the North Carolina Department of Insurance (“NCDOI”), which is
GEMICO’s domestic insurance regulator, compared with a risk- to-capital ratio of 36.9:1 as of December 31, 2012. Fifteen other states maintain similar risk-to-capital requirements. GEMICO was not required by the NCDOI to refile its prior statutory annual statements as a result of the correction of the premium refund accrual error; therefore, the risk-to-capital ratio has accordingly not been restated, and was presented as filed. Had we been required to refile our statutory annual statements, GEMICO’s risk-to-capital ratio would have been approximately five points higher as of December 31, 2012.
GEMICO initially returned to compliance with maximum state regulatory risk-to-capital ratios of 25:1 as of April 30, 2013, and because it remains below the maximum risk-to-capital requirements, GEMICO does not currently face the associated limitations on its ability to write new business. As of January 20, 2014, all new business is being written out of GEMICO. Previously, beginning in 2010 through April 2013, GEMICO had exceeded its regulatory risk-to-capital levels and operated pursuant to regulatory forbearance (typically in the form of a waiver or the regulatory equivalent thereof) or we instead operated through affiliated insurers that met applicable state regulatory requirements and where we had obtained GSE approval of the affiliates as eligible insurers (subject to specified conditions). In Florida, we had been using an affiliated insurer because the state suspended GEMICO’s authority to write business there due to non-compliance with applicable risk-to-capital standards, but during the fourth quarter of 2013, the suspension was lifted and we obtained reauthorization of GEMICO’s authority to write business in Florida. Of the waivers and required approvals previously relied upon by GEMICO, four state waivers (one of which is North Carolina, which permits us to write in other states with no explicit risk-to-capital requirements so long as North Carolina, as our domiciliary regulator, permits us to write) do not expire until July 31, 2014 (although the company plans to allow those waiver to expire pursuant to their terms in 2014); two state waivers expired by their terms on December 31, 2013; and each GSE’s approval in connection with the use of an alternative affiliated insurer (and the limitations imposed on the business contained therein) expired by their respective terms on December 31, 2013.
On January 31, 2013, our European mortgage insurance subsidiaries received a $21 million cash capital contribution. We then subsequently contributed the shares of our European mortgage insurance subsidiaries with
Our international insurance subsidiaries do not have any material accounting practices that differ from local regulatory requirements other than one of our insurance subsidiaries domiciled in Bermuda, which was granted approval from the Bermuda Monetary Authority to record a parental guarantee as statutory capital related to an internal reinsurance agreement. The amount recorded as statutory capital is equal to the excess of NAIC statutory reserves less the economic reserves up to the amount of the guarantee resulting in an increase in statutory capital of $359 million and $338 million as of December 31, 2013 and 2012, respectively.
We operate through three divisions: U.S. Life Insurance, Global Mortgage Insurance and Corporate and Other. Under these divisions, there are five operating business segments. The U.S. Life Insurance Division includes the U.S. Life Insurance segment. The Global Mortgage Insurance Division includes the International Mortgage Insurance and U.S. Mortgage Insurance segments. The Corporate and Other Division includes the International Protection and Runoff segments and Corporate and Other activities. Our operating business segments are as follows: (1) U.S. Life Insurance, which includes our life insurance, long-term care insurance and fixed annuities businesses; (2) International Mortgage Insurance, which includes mortgage insurance-related products and services; (3) U.S. Mortgage Insurance, which includes mortgage insurance-related products and services; (4) International Protection Insurance, which includes our lifestyle protection insurance business; and (5) Runoff, which includes the results of non-strategic products which are no longer actively sold. 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, FABNs and GICs.
The following is a summary of revenues of major product groups for our segments and Corporate and Other activities for the years ended December 31:
Our unaudited quarterly results of operations for the year ended December 31, 2012 are summarized in the table below.
procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 (“RESPA”) or related state anti-inducement laws, and mortgage insurance policy rescissions and curtailments, and breaching fiduciary or other duties to customers, including but not limited to breach of customer information. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations.
In early 2006 as part of an industry-wide review, one of our U.S. mortgage insurance subsidiaries received an administrative subpoena from the Minnesota Department of Commerce, which has jurisdiction over insurance matters, with respect to our reinsurance arrangements, including captive reinsurance transactions with lender-affiliated reinsurers. Since 2006, the Minnesota Department of Commerce has periodically requested additional information. We are engaged in discussions with the Minnesota Department of Commerce to resolve the review and we will continue to cooperate as appropriate with respect to any follow-up requests or inquiries. Inquiries from other regulatory bodies with respect to the same subject matter have been resolved or dormant for a number of years.
unspecified monetary damages, including restitution. The McCarn case was dismissed by the Court with prejudice as to our subsidiary and certain other defendants on November 9, 2012. On July 3, 2012, the Rulison case was voluntarily dismissed by the plaintiffs. The Barlee case was dismissed by the Court with prejudice as to our subsidiary and certain other defendants on February 27, 2013. The Manners case was dismissed by voluntary stipulation in March 2013. In early May, 2013, the Samp and Orange cases were dismissed with prejudice as to our subsidiary. Plaintiffs appealed both of those dismissals, but have since withdrawn those appeals. The White case was dismissed by the court without prejudice on June 20, 2013, and on July 5, 2013 plaintiffs filed a second amended complaint again naming our U.S. mortgage insurance subsidiary as a defendant. On July 22, 2013, we moved to dismiss the second amended complaint. In the Riddle, Hill, Ba and Cunningham cases, the defendants’ motions to dismiss were denied, but the Court in the Riddle, Hill and Cunningham cases limited discovery at this stage to issues surrounding whether the case should be dismissed on statute of limitations grounds. In the Hill case, on December 17, 2013 we moved for summary judgment dismissing the complaint. In the Riddle case, in late November, 2013, the Court granted our motion for summary judgment dismissing the case. Plaintiffs have appealed that dismissal. The Menichino case was dismissed by the court without prejudice as to our subsidiary and certain other defendants on July 19, 2013. Plaintiffs filed a second amended complaint again naming our U.S. mortgage insurance subsidiary as a defendant and we moved to dismiss the second amended complaint. We intend to vigorously defend the remaining actions.
In December 2009, one of our non-insurance subsidiaries, one of the subsidiary’s officers and Genworth Financial, Inc. were named in a putative class action lawsuit captioned Michael J. Goodman and Linda Brown v. Genworth Financial Wealth Management, Inc., et al., in the United States District Court for the Eastern District of New York. Plaintiffs allege securities law and other violations involving the selection of mutual funds by our subsidiary on behalf of certain of its Private Client Group clients. The lawsuit seeks unspecified monetary damages and other relief. In response to our motion to dismiss the complaint in its entirety, the Court granted the motion to dismiss the state law fiduciary duty claim and denied the motion to dismiss the remaining federal claims. Oral argument on plaintiffs’ motion to certify a class was conducted on January 30, 2013, but the Court has not yet issued a decision. We will continue to vigorously defend this action.
As previously disclosed, in April 2012, two of our U.S. mortgage insurance subsidiaries were named as respondents in two arbitrations, one brought by Bank of America, N.A. and one brought by Countrywide Home Loans, Inc. and Bank of America, N.A. as claimants. Claimants alleged breach of contract and breach of the covenant of good faith and fair dealing and sought in excess of $834 million of damages, as well as interest, punitive damages and a declaratory judgment relating to our denial, curtailment and rescission of mortgage insurance coverage. Subject to GSE approval, we reached an agreement on December 31, 2013 to resolve a portion of both arbitrations with respect to rescission practices. Under the agreement, Genworth, Bank of America, N.A and Countrywide Home Loans, Inc. have agreed to a fixed number of loans for which Genworth will reinstate mortgage insurance coverage representing a portion of the loans with rescinded coverage. Going forward, as to the loans insured by Genworth that are the subject of the agreement, including those loans that were the subject of the arbitrations, Genworth has agreed to cease all future rescission activity and pay a percentage of the claim amount otherwise payable, with no obligation for the remaining percentage. Genworth’s net economic impact of the terms of settlement fall within its previously established reserve amounts for reinstatements and had no income statement impact in the fourth quarter of 2013. The agreement resolves substantially all outstanding claims related to the rescissions of coverage on loans originated or acquired by Bank of America, N.A and Countrywide Home Loans, Inc. prior to 2009. Genworth believes that the rescission settlement resolves approximately $800 million of alleged damages and that claimants’ remaining demand is in excess of $150 million relating to curtailment and denial practices; however, we are unable to estimate the precise remaining disputed amount, in part because we continue to curtail claims, and claimants’ demand
(1) Net of adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
(1) Amounts exclude adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves.
In July 2009, Genworth Canada, our indirect subsidiary, completed the IPO of its common shares and Brookfield Life Assurance Company Limited (“Brookfield”), our indirect wholly-owned subsidiary, beneficially owned 57.5% of the common shares of Genworth Canada.
The assets and liabilities associated with discontinued operations prior to the sale were segregated in the consolidated balance sheets. The major assets and liability categories were as follows as of December 31:
On April 1, 2013, in connection with the reorganization discussed in note 1: (a) Genworth Financial provided a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior notes and the holders of the senior notes, on an unsecured unsubordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior notes indenture in respect of such senior notes and (b) Genworth Financial provided a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding subordinated notes and the holders of the subordinated notes, on an unsecured subordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, the outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the subordinated notes indenture in respect of the subordinated notes.
The following table presents the condensed consolidating balance sheet information as of December 31, 2013:
The following table presents the condensed consolidating income statement information for the year ended December 31, 2012:
The following table presents the condensed consolidating cash flow statement information for the year ended December 31, 2011:
Genworth Financial is a holding company whose subsidiaries provide life, long-term care and mortgage insurance, as well as annuities and other investment products.
The obligations under Genworth Holdings’ credit agreement are unsecured and payment of Genworth Holdings’ obligations is fully and unconditionally guaranteed by Genworth Financial.
As of December 31, 2013 and 2012, Genworth Financial had a deferred tax asset of $26 million and $64 million, respectively, primarily comprised of share-based compensation. These amounts are undiscounted pursuant to the applicable rules governing deferred taxes. Genworth Financial’s current income tax payable was $6 million as of December 31, 2013. Net cash received for taxes was $5 million for the year ended December 31, 2013.