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Exhibit 99.1

Index to Condensed Consolidated Financial Statements

Genworth Financial Mortgage Insurance Pty Limited

 

     Page  

Financial Statements:

  

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (Unaudited)

     2   

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011 (Unaudited)

     3   

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (Unaudited)

     4   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2012 and 2011 (Unaudited)

     5   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (Unaudited)

     6   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     7   

 

1


Genworth Financial Mortgage Insurance Pty Limited

Condensed Consolidated Balance Sheets

(U.S. dollar amounts in thousands, except share amounts)

(Unaudited)

 

     September 30, 2012      December 31, 2011  

Assets

     

Investments:

     

Fixed maturity securities available-for-sale, at fair value

   $ 3,271,331       $ 2,695,515   

Short-term investments

     4,162         47,969   
  

 

 

    

 

 

 

Total investments

     3,275,493         2,743,484   
  

 

 

    

 

 

 

Cash and cash equivalents

     517,757         720,791   

Accrued investment income

     50,344         38,594   

Prepaid reinsurance premiums

     237         338   

Deferred acquisition costs

     54,711         55,807   

Net deferred tax asset

     3,918         7,218   

Goodwill

     7,773         7,665   

Intangible assets

     41,345         50,362   

Related party receivables

     8,577         8,458   

Other assets

     16,330         17,732   
  

 

 

    

 

 

 

Total assets

   $ 3,976,485       $ 3,650,449   
  

 

 

    

 

 

 

Liabilities and stockholders’ equity

     

Liabilities:

     

Reserve for losses and loss adjustment expenses

   $ 287,397       $ 272,028   

Unearned premiums

     1,111,048         1,046,449   

Related party payables

     121,410         88,938   

Long-term borrowings

     145,292         143,276   

Other liabilities and accrued expenses

     139,268         80,781   
  

 

 

    

 

 

 

Total liabilities

     1,804,415         1,631,472   
  

 

 

    

 

 

 

Commitments and contingencies

     

Stockholders’ equity:

     

Ordinary shares—No par value; 1,401,558,880 shares authorized and issued as of September 30, 2012 and December 31, 2011

     —           —     

Additional paid-in capital

     630,953         627,085   
  

 

 

    

 

 

 

Accumulated other comprehensive income (loss):

     

Net unrealized investment gains (losses):

     

Net unrealized gains (losses) on securities not other-than-temporarily impaired

     109,961         49,386   

Net unrealized gains (losses) on other-than-temporarily impaired securities

     —           —     
  

 

 

    

 

 

 

Net unrealized investment gains (losses)

     109,961         49,386   

Foreign currency translation adjustments

     497,147         468,800   
  

 

 

    

 

 

 

Total accumulated other comprehensive income (loss)

     607,108         518,186   

Retained earnings

     934,009         873,706   
  

 

 

    

 

 

 

Total stockholders’ equity

     2,172,070         2,018,977   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 3,976,485       $ 3,650,449   
  

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

2


Genworth Financial Mortgage Insurance Pty Limited

Condensed Consolidated Statements of Income

(U.S. dollar amounts in thousands)

(Unaudited)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012      2011      2012      2011  

Revenues:

           

Net premiums

   $ 94,639       $ 101,563       $ 276,782       $ 287,711   

Net investment income

     44,023         48,965         136,657         137,582   

Net investment gains

     2,768         24,291         4,420         25,571   

Other income

     992         1,430         2,363         3,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     142,422         176,249         420,222         454,056   
  

 

 

    

 

 

    

 

 

    

 

 

 

Losses and expenses:

           

Net losses and loss adjustment expenses

     45,822         50,269         237,142         139,453   

Acquisition and operating expenses, net of deferrals

     25,111         26,265         71,523         68,843   

Amortization of deferred acquisition costs and intangibles

     5,631         6,978         18,740         20,520   

Interest expense

     3,146         3,882         10,220         3,882   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total losses and expenses

     79,710         87,394         337,625         232,698   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     62,712         88,855         82,597         221,358   

Provision for income taxes

     15,737         42,624         22,294         83,981   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 46,975       $ 46,231       $ 60,303       $ 137,377   
  

 

 

    

 

 

    

 

 

    

 

 

 

Supplemental disclosures:

           

Total other-than-temporary impairments

   $ —         $ —         $ —         $ —     

Portion of other-than-temporary impairments included in other comprehensive income

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net other-than-temporary impairments

     —           —           —           —     

Net other investment gains

     2,768         24,291         4,420         25,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net investment gains

   $ 2,768       $ 24,291       $ 4,420       $ 25,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

3


Genworth Financial Mortgage Insurance Pty Limited

Condensed Consolidated Statements of Comprehensive Income

(U.S. dollar amounts in thousands)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012      2011     2012      2011  

Net income

   $ 46,975       $ 46,231      $ 60,303       $ 137,377   

Other comprehensive income (loss), net of taxes:

          

Net unrealized gains (losses) on securities not other-than-temporarily impaired

     15,287         28,845        60,575         56,304   

Net unrealized gains (losses) on other-than-temporarily impaired securities

     —           —          —           —     

Foreign currency translation and other adjustments

     28,060         (200,411     28,347         (111,364
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss)

     43,347         (171,566     88,922         (55,060
  

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss)

   $ 90,322       $ (125,335   $ 149,225       $ 82,317   
  

 

 

    

 

 

   

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


Genworth Financial Mortgage Insurance Pty Limited

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(U.S. dollar amounts in thousands)

(Unaudited)

 

     Additional
paid-in
capital
     Accumulated
other
comprehensive
income (loss)
    Retained
earnings
     Total
stockholders’
equity
 

Balances as of December 31, 2011

   $ 627,085       $ 518,186      $ 873,706       $ 2,018,977   
          

 

 

 

Comprehensive income (loss):

          

Net income

     —           —          60,303         60,303   

Net unrealized gains on investment securities

     —           60,575        —           60,575   

Foreign currency translation adjustments

     —           28,347        —           28,347   
          

 

 

 

Total comprehensive income (loss)

             149,225   

Capital contribution

     3,868         —          —           3,868   
  

 

 

    

 

 

   

 

 

    

 

 

 

Balances as of September 30, 2012

   $ 630,953       $ 607,108      $ 934,009       $ 2,172,070   
  

 

 

    

 

 

   

 

 

    

 

 

 
     Additional
paid-in
capital
     Accumulated
other
comprehensive
income (loss)
    Retained
earnings
     Total
stockholders’
equity
 

Balances as of December 31, 2010

   $ 621,929       $ 470,649      $ 753,591       $ 1,846,169   
          

 

 

 

Comprehensive income (loss):

          

Net income

     —           —          137,377         137,377   

Net unrealized gains on investment securities

     —           56,304        —           56,304   

Foreign currency translation adjustments

     —           (111,364     —           (111,364
          

 

 

 

Total comprehensive income (loss)

             82,317   

Capital contribution

     5,621         —          —           5,621   
  

 

 

    

 

 

   

 

 

    

 

 

 

Balances as of September 30, 2011

   $ 627,550       $ 415,589      $ 890,968       $ 1,934,107   
  

 

 

    

 

 

   

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

5


Genworth Financial Mortgage Insurance Pty Limited

Condensed Consolidated Statements of Cash Flows

(U.S. dollar amounts in thousands)

(Unaudited)

 

     Nine months ended
September 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 60,303      $ 137,377   

Adjustments to reconcile net income to net cash from operating activities:

    

Amortization of investment discounts and premiums

     4,817        (478

Net investment gains

     (4,420     (25,571

Acquisition costs deferred

     (13,075     (14,384

Amortization of deferred acquisition costs and intangibles

     18,740        20,520   

Deferred income taxes

     (21,283     (34

Corporate overhead allocation

     11,550        12,851   

Change in certain assets and liabilities:

    

Accrued investment income and other assets

     (4,934     (42,164

Reserve for losses and loss adjustment expenses

     13,191        55,284   

Unearned premiums

     49,191        (53,725

Other liabilities

     80,657        64,569   
  

 

 

   

 

 

 

Net cash from operating activities

     194,737        154,245   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities and repayments of fixed maturity securities and short-term investments

     427,896        1,228,863   

Purchases of fixed maturity securities and short-term investments

     (838,000     (808,339
  

 

 

   

 

 

 

Net cash from investing activities

     (410,104     420,524   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from the issuance of long-term debt

     —          147,617   
  

 

 

   

 

 

 

Net cash from financing activities

     —          147,617   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     12,333        (100,292
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (203,034     622,094   

Cash and cash equivalents at beginning of period

     720,791        272,092   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 517,757      $ 894,186   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

6


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

(1) Nature of Business, Formation of Genworth Mortgage and Basis of Presentation

Genworth Financial Mortgage Insurance Pty Limited (“Genworth Mortgage” or the “Company” as appropriate) offers mortgage insurance products in Australia and is headquartered in Sydney, Australia. In particular, the Company offers primary mortgage insurance, known as “lenders mortgage insurance,” or LMI, and portfolio credit enhancement policies. Until September 2011, Genworth Mortgage also offered LMI in New Zealand. The principal product is LMI, which is generally single premium business and provides 100% coverage of the loan amount in the event of a mortgage default. The nature of the Australian economy is that the majority of mortgages are originated through the country’s top four largest banks; therefore, the Company has a high concentration of business written for mortgages originating through these lenders.

The Company’s condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) disclosure requirements for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of operations and cash flow for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited financial statements and related notes contained in our 2011 year end financial statements on Form 8-K furnished on March 30, 2012.

The Company’s management has determined that the Company has one reportable operating segment, mortgage insurance.

The condensed consolidated financial statements are presented in U.S. dollars. The accompanying financial statements include Genworth Financial Mortgage Indemnity Limited and are prepared on a consolidated basis. All intercompany transactions have been eliminated in the consolidated financial statements.

Genworth Mortgage was incorporated in Australia on November 10, 2003. Prior to December 2011, Genworth Financial Mortgage Insurance Holdings Pty Limited owned 87% of the issued share capital of the Company and Genworth Financial Services Pty Ltd, which is 100% owned by the same immediate parent of Genworth Financial Mortgage Insurance Holding Pty Limited, owned 13% of the issued share capital of the Company. During December 2011, Genworth Financial Mortgage Insurance Holdings Pty Limited sold its remaining 87% of the issued share capital of the Company to Genworth Financial Services Pty Ltd. The ultimate parent company of Genworth Mortgage is Genworth Financial, Inc. (“Genworth”). Genworth was incorporated in Delaware on October 23, 2003. The Company is the principal operating entity of Genworth’s Australian mortgage insurance business.

(2) Accounting Pronouncements

Recently adopted

On January 1, 2012, we adopted new accounting guidance requiring presentation of the components of net income (loss), the components of other comprehensive income (loss) (“OCI”) and total comprehensive income either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. We chose to present two separate but consecutive statements and adopted this new guidance retrospectively. The Financial Accounting Standards Board (“FASB”) issued an amendment relating to this new guidance for presentation of the reclassification of items out of accumulated other comprehensive income into net income that removed this requirement until further guidance is issued. The adoption of this new accounting guidance did not have any impact on our consolidated financial results.

 

7


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

On January 1, 2012, we adopted new accounting guidance related to fair value measurements. This new accounting guidance clarified existing fair value measurement requirements and changed certain fair value measurement principles and disclosure requirements. The adoption of this accounting guidance did not have any impact on our consolidated financial statements.

On January 1, 2012, we adopted new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. Acquisition costs include costs that are related directly to the successful acquisition of our insurance policies, which are deferred and amortized in accordance with the expected pattern of risk emergence. These costs include costs incurred in the acquisition, underwriting and processing of new business including printing costs, sales material and, some support costs such as underwriting and contract and policy issuance expenses. Deferred acquisition costs (“DAC”) relating to each underwriting year is charged against revenue over time in accordance with the expected pattern of risk emergence. We adopted this new guidance retrospectively, which reduced retained earnings and stockholders’ equity by $35 million as of January 1, 2011, and reduced net income by $4 million, $2 million and $2 million for the years ended December 31, 2011, 2010 and 2009, respectively. This new guidance results in lower amortization and fewer deferred costs, specifically related to underwriting, inspection and processing for contracts that are not issued, as well as advertising and customer solicitation.

 

8


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

The following table presents the balance sheet as of December 31, 2011 reflecting the impact of the accounting change that was retrospectively adopted on January 1, 2012:

 

    

As

Originally

    

Effect of

DAC

    As  

(U.S. dollar amounts in thousands)

   Reported      Change     Adjusted  

Assets

       

Total investments

   $ 2,743,484       $ —        $ 2,743,484   

Cash and cash equivalents

     720,791         —          720,791   

Accrued investment income

     38,594         —          38,594   

Prepaid reinsurance premiums

     338         —          338   

Deferred acquisition costs

     111,261         (55,454     55,807   

Net deferred tax asset

     —           7,218        7,218   

Goodwill

     7,665         —          7,665   

Intangible assets

     50,362         —          50,362   

Related party receivables

     8,458         —          8,458   

Other assets

     17,732         —          17,732   
  

 

 

    

 

 

   

 

 

 

Total assets

   $ 3,698,685       $ (48,236   $ 3,650,449   
  

 

 

    

 

 

   

 

 

 

Liabilities and stockholders’ equity

       

Liabilities:

       

Reserve for losses and loss adjustment expenses

   $ 272,028       $ —        $ 272,028   

Unearned premiums

     1,046,449         —          1,046,449   

Net deferred tax liability

     9,417         (9,417 )     —     

Related party payables

     88,938         —          88,938   

Long-term borrowings

     143,276         —          143,276   

Other liabilities and accrued expenses

     80,781         —          80,781   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     1,640,889         (9,417     1,631,472   
  

 

 

    

 

 

   

 

 

 

Stockholders’ equity:

       

Ordinary shares

     —           —          —     

Additional paid-in capital

     627,085         —          627,085   

Accumulated other comprehensive income (loss):

       

Net unrealized investment gains (losses):

       

Net unrealized gains (losses) on securities not other-than-temporarily impaired

     49,386         —          49,386   

Net unrealized gains (losses) on other-than-temporarily impaired securities

     —           —          —     
  

 

 

    

 

 

   

 

 

 

Net unrealized investment gains (losses)

     49,386         —          49,386   
  

 

 

    

 

 

   

 

 

 

Foreign currency translation and other adjustments

     475,783         (6,983     468,800   
  

 

 

    

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     525,169         (6,983     518,186   

Retained earnings

     905,542         (31,836     873,706   
  

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     2,057,796         (38,819     2,018,977   
  

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,698,685       $ (48,236   $ 3,650,449   
  

 

 

    

 

 

   

 

 

 

 

9


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

The following table presents the income statement for the three months ended September 30, 2011 reflecting the impact of the accounting change that was retrospectively adopted on January 1, 2012:

 

     As Originally      Effect of     As  

(U.S. dollar amounts in thousands)

   Reported      DAC Change     Adjusted  

Revenues:

       

Net premiums

   $ 101,563       $ —        $ 101,563   

Net investment income

     48,965         —          48,965   

Net investment gains

     24,291         —          24,291   

Other income

     1,430         —          1,430   
  

 

 

    

 

 

   

 

 

 

Total revenues

     176,249         —          176,249   
  

 

 

    

 

 

   

 

 

 

Losses and expenses:

       

Net losses and loss adjustment expenses

     50,269         —          50,269   

Acquisition and operating expenses, net of deferrals

     15,592         10,673        26,265   

Amortization of deferred acquisition costs and intangibles

     12,369         (5,391     6,978   

Interest expense

     3,882         —          3,882   
  

 

 

    

 

 

   

 

 

 

Total losses and expenses

     82,112         5,282        87,394   
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     94,137         (5,282     88,855   

Provision for income taxes

     44,209         (1,585     42,624   
  

 

 

    

 

 

   

 

 

 

Net income

   $ 49,928       $ (3,697   $ 46,231   
  

 

 

    

 

 

   

 

 

 

The following table presents the income statement for the nine months ended September 30, 2011 reflecting the impact of the accounting change that was retrospectively adopted on January 1, 2012:

 

     As Originally      Effect of     As  

(U.S. dollar amounts in thousands)

   Reported      DAC Change     Adjusted  

Revenues:

       

Net premiums

   $ 287,711       $ —        $ 287,711   

Net investment income

     137,582         —          137,582   

Net investment gains

     25,571         —          25,571   

Other income

     3,192         —          3,192   
  

 

 

    

 

 

   

 

 

 

Total revenues

     454,056         —          454,056   
  

 

 

    

 

 

   

 

 

 

Losses and expenses:

       

Net losses and loss adjustment expenses

     139,453         —          139,453   

Acquisition and operating expenses, net of deferrals

     48,780         20,063        68,843   

Amortization of deferred acquisition costs and intangibles

     35,256         (14,736     20,520   

Interest expense

     3,882         —          3,882   
  

 

 

    

 

 

   

 

 

 

Total losses and expenses

     227,371         5,327        232,698   
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     226,685         (5,327     221,358   

Provision for income taxes

     85,579         (1,598     83,981   
  

 

 

    

 

 

   

 

 

 

Net income

   $ 141,106       $ (3,729   $ 137,377   
  

 

 

    

 

 

   

 

 

 

 

10


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

The following table presents the cash flows from operating activities for the nine months ended September 30, 2011 reflecting the impact of the accounting change that was retrospectively adopted on January 1, 2012:

 

     As Originally     Effect of     As  

(U.S. dollar amounts in thousands)

   Reported     DAC Change     Adjusted  

Cash flows from operating activities:

      

Net income

   $ 141,106      $ (3,729   $ 137,377   

Adjustments to reconcile net income to net cash from operating activities:

      

Amortization of investment discounts and premiums

     (478     —          (478

Net investment gains

     (25,571     —          (25,571

Acquisition costs deferred

     (34,447     20,063        (14,384

Amortization of deferred acquisition costs and intangibles

     35,256        (14,736     20,520   

Deferred income taxes

     1,564        (1,598     (34

Corporate overhead allocation

     12,851        —          12,851   

Change in certain assets and liabilities:

      

Accrued investment income and other assets

     (42,164     —          (42,164

Reserve for losses and loss adjustment expenses

     55,284        —          55,284   

Unearned premiums

     (53,725     —          (53,725

Other liabilities

     64,569        —          64,569   
  

 

 

   

 

 

   

 

 

 

Net cash from operating activities

   $ 154,245      $ —        $ 154,245  
  

 

 

   

 

 

   

 

 

 

Not Yet Adopted

In July 2012, 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. This new accounting guidance has an effective date of January 1, 2013, with early adoption permitted in certain circumstances. We do not expect the adoption of this accounting guidance to have an impact on our consolidated financial statements.

In December 2011, the FASB issued new accounting guidance for disclosures about offsetting assets and liabilities. The new guidance requires an entity to disclose information about offsetting and related arrangements to enable users to understand the effect of those arrangements on its financial position. These new disclosure requirements will be effective for us on January 1, 2013 and are not expected to have any impact on our consolidated financial statements.

 

11


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

(3) Investments

(a) Net Investment Income

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 

(U.S. dollar amounts in thousands)

   2012     2011     2012     2011  

Fixed maturity securities

   $ 40,065      $ 40,688      $ 118,665      $ 125,883   

Cash and cash equivalents

     5,056        9,527        20,977        15,426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     45,121        50,215        139,642        141,309   

Expenses and fees

     (1,098     (1,250     (2,985     (3,727
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 44,023      $ 48,965      $ 136,657      $ 137,582   
  

 

 

   

 

 

   

 

 

   

 

 

 

(b) Net Investment Gains

The net investment gains were as follows for the periods indicated:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 

(U.S. dollar amounts in thousands)

   2012     2011      2012     2011  

Available-for-sale investment securities:

         

Realized gains on sale

   $ 3,457      $ 24,291       $ 7,017      $ 25,797   

Realized losses on sale

     (689     —           (2,597     (226
  

 

 

   

 

 

    

 

 

   

 

 

 

Net realized gains (losses) on available-for-sales securities

     2,768        24,291         4,420        25,571   
  

 

 

   

 

 

    

 

 

   

 

 

 

Impairments:

         

Total other-than-temporary impairments

     —          —           —          —     

Portion of other-than-temporary impairments included in other comprehensive income

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net other-than-temporary impairments

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net investment gains

   $ 2,768      $ 24,291       $ 4,420      $ 25,571   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company generally intends to hold securities in unrealized loss positions until they recover. However, from time to time, the intent on an individual security may change, based upon market or other unforeseen developments. In such instances, the Company sells securities in the ordinary course of managing its portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which the intent to hold the securities to recovery no longer exists. In the three months ended September 30, 2012 the aggregate fair value of securities sold at a loss was $20 million. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2012 and 2011 was $33 million and $30 million, respectively, which was approximately 93% and 99%, respectively, of book value.

 

12


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

(c) Unrealized Investment Gains (Losses)

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

 

(U.S. dollar amounts in thousands)

   September 30,
2012
    December 31,
2011
 

Net unrealized gains (losses) on available-for-sale investment securities:

    

Fixed maturity securities

   $ 157,277      $ 70,536   

Deferred income taxes

     (47,316     (21,150
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

   $ 109,961      $ 49,386   
  

 

 

   

 

 

 

The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:

 

     As of or for the
three months ended
September 30,
 

(U.S. dollar amounts in thousands)

   2012     2011  

Beginning balance

   $ 94,674      $ 22,189   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     24,605        66,020   

Provision for deferred taxes

     (7,380     (20,171
  

 

 

   

 

 

 

Change in unrealized gains (losses)

     17,225        45,849   

Reclassification adjustments to net investment gains, net of taxes of $830 and $7,287

     (1,938     (17,004
  

 

 

   

 

 

 

Ending balance

   $ 109,961      $ 51,034   
  

 

 

   

 

 

 

The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:

 

     As of or for the
nine months ended
September 30,
 

(U.S. dollar amounts in thousands)

   2012     2011  

Beginning balance

   $ 49,386      $ (5,270

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     91,161        106,413   

Provision for deferred taxes

     (27,492     (32,209
  

 

 

   

 

 

 

Change in unrealized gains (losses)

     63,669        74,204   

Reclassification adjustments to net investment gains, net of taxes of $1,326 and $7,671

     (3,094     (17,900
  

 

 

   

 

 

 

Ending balance

   $ 109,961      $ 51,034   
  

 

 

   

 

 

 

 

13


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

(d) Fixed Maturity Securities

As of September 30, 2012, the amortized cost or cost, gross unrealized gains (losses) and fair value of the fixed maturity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains on securities     Gross unrealized losses on securities        

(U.S. dollar amounts in thousands)

  Amortized
cost or
cost
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

Government—non-U.S.

  $ 443,840      $ 25,373      $ —        $ (25   $ —        $ 469,188   

Corporate—U.S.

    3,613        115        —          —          —          3,728   

Corporate—non-U.S.

    2,617,030        131,620        —          (568     —          2,748,082   

Residential mortgage-backed securities

    50,333        —          —          —          —          50,333   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 3,114,816      $ 157,108      $ —        $ (593   $ —        $ 3,271,331   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2011, the amortized cost or cost, gross unrealized gains (losses) and fair value of the fixed maturity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains on securities     Gross unrealized losses on securities        

(U.S. dollar amounts in thousands)

  Amortized
cost or
cost
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

Government—non-U.S.

  $ 360,793      $ 15,528      $ —        $ (4   $ —        $ 376,317   

Corporate—U.S.

    57,299        2,363        —          (200     —          59,462   

Corporate—non-U.S.

    2,157,291        59,439        —          (6,629     —          2,210,101   

Residential mortgage-backed securities

    49,635        —          —          —          —          49,635   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 2,625,018      $ 77,330      $ —        $ (6,833   $ —        $ 2,695,515   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

The following table presents the fair values and gross unrealized losses of investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of September 30, 2012:

 

     Less than 12 months      12 months or more      Total  

(U.S. dollar amounts in thousands)

   Fair
value
     Gross
unrealized
losses
    Number of
securities
     Fair
value
     Gross
unrealized
losses
    Number of
securities
     Fair
value
     Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                       

Fixed maturity securities:

                       

Government—non-U.S.

   $ 451       $ (8     1      $ 424       $ (17     1       $ 875       $ (25     2  

Corporate—U.S.

     —           —          —           —           —          —           —           —          —     

Corporate—non-U.S.

     17,492         (7     3         12,820         (561     3         30,312         (568     6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total for securities in an unrealized loss position

   $ 17,943       $ (15     4       $ 13,244       $ (578     4       $ 31,187       $ (593     8   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                       

<20% Below cost

   $ 17,943       $ (15     4       $ 13,244       $ (578     4       $ 31,187       $ (593     8   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total for securities in an unrealized loss position

   $ 17,943       $ (15     4       $ 13,244       $ (578     4       $ 31,187       $ (593     8   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Investment grade

   $ 17,943       $ (15     4       $ 13,244       $ (578     4       $ 31,187       $ (593     8   

Below investment grade

     —           —          —           —           —          —           —           —          —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total for securities in an unrealized loss position

   $ 17,943       $ (15     4       $ 13,244       $ (578     4       $ 31,187       $ (593     8   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

As indicated in the table above, all of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to credit spreads that have widened since acquisition for corporate securities primarily in the finance and insurance and consumer non-cyclical sectors. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 0.1% as of September 30, 2012.

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

Of the $0.6 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB-” and 100% were investment grade as of September 30, 2012. These unrealized losses were attributable to the widening of credit spreads for these securities since acquisition, primarily associated with corporate securities in the finance and insurance sector. The average fair value percentage below cost for these securities was approximately 4% as of September 30, 2012.

We expect our investments in corporate securities will continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities.

Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these 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 cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these securities represented temporary impairments as of September 30, 2012.

 

15


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

The following table presents the fair values and gross unrealized losses of investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2011:

 

    Less than 12 months     12 months or more     Total  

(U.S. dollar amounts in thousands)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

Government—non-U.S.

  $ —        $ —          —        $ 409      $ (4     1      $ 409      $ (4     1   

Corporate—U.S.

    11,797       (64     4        12,140        (136     1        23,937        (200     5   

Corporate—non-U.S.

    219,358        (1,706     20        45,517        (4,923     5        264,875        (6,629     25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 231,155      $ (1,770     24      $ 58,066      $ (5,063     7      $ 289,221      $ (6,833     31   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 231,155     $ (1,770     24      $ 54,189      $ (3,905     6      $ 285,344      $ (5,675     30   

20%-50% Below cost

    —          —          —          3,877        (1,158     1        3,877        (1,158     1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 231,155      $ (1,770     24      $ 58,066      $ (5,063     7      $ 289,221      $ (6,833     31   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 231,155      $ (1,770     24      $ 58,066      $ (5,063     7      $ 289,221      $ (6,833     31   

Below investment grade

    —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 231,155      $ (1,770     24      $ 58,066      $ (5,063     7      $ 289,221      $ (6,833     31   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The scheduled maturity distribution of fixed maturity securities as of September 30, 2012 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.

 

(U.S. dollar amounts in thousands)

   Amortized
cost or
cost
    
Fair

value
 

Due one year or less

   $ 361,893       $ 365,538   

Due after one year through five years

     2,027,325         2,125,315   

Due after five years through ten years

     651,588         705,946   

Due after ten years

     23,677         24,199   
  

 

 

    

 

 

 

Subtotal

     3,064,483         3,220,998   

Residential mortgage-backed securities

     50,333         50,333   
  

 

 

    

 

 

 

Total

   $ 3,114,816       $ 3,271,331   
  

 

 

    

 

 

 

As of September 30, 2012, $18 million of investments were subject to certain call provisions. Typically, call provisions provide the issuer the ability to redeem a security, prior to its stated maturity, at or above par.

(e) Investment Concentrations

As of September 30, 2012, securities issued by finance and insurance industry groups and foreign state government represented approximately 17% and 31%, respectively, of the corporate fixed maturity securities portfolio held by the Company.

As of September 30, 2012, the Company held $314 million in corporate fixed maturity securities issued by the Queensland Treasury Corporation, $290 million in corporate fixed maturity securities issued by the New South Wales Treasury Corporation and $217 million in corporate fixed maturity securities issued by the National Australia Bank Limited, which comprised 14%, 13% and 10%, respectively, of total stockholders’ equity. No other single issuer exceeded 10% of total stockholders’ equity.

 

16


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

(4) Fair Value Measurements

Recurring Fair Value Measurements

We have fixed maturity securities 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.

Fixed maturity securities

The valuations of fixed maturity securities are determined using a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information.

We utilize certain third-party data providers when determining fair value. We consider information obtained from third-party pricing services (“pricing services”) as well as third-party broker provided prices, or broker quotes, in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by pricing services and broker quotes, management determines the fair value of our investment securities after considering all relevant and available information. We also use various methods to obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received, including an understanding of the assumptions and inputs utilized to determine the appropriate fair value. Additionally, we evaluate significant changes in fair value each month to further aid in our review of the accuracy our fair value measurements and understanding of changes in fair value, where more detailed reviews are performed by the asset managers responsible for the related asset class associated with the security being reviewed.

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

For pricing services, we obtain an understanding of the pricing methodologies and procedures for each type of instrument. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.

For private fixed maturity securities, we utilize an internal model to determine fair value and utilize public bond spreads by sector, rating and maturity to develop the market rate that would be utilized for a similar public bond. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. In certain instances, we utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction. We assign each security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized and whether external ratings are available for our private placement to determine whether the spreads utilized would be considered observable inputs. During the second quarter of 2012, we began classifying private securities without an external rating as Level 3. In general, increases (decreases) in credit spreads will decrease (increase) the fair value for our fixed maturity securities. To determine the significance of unobservable inputs, we calculate the impact on the valuation from the unobservable input and will classify a security as Level 3 when the impact on the valuation exceeds 10%.

 

17


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

For broker quotes, we consider the valuation methodology utilized by the third party, but the valuation typically includes significant unobservable inputs. Accordingly, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.

For remaining securities priced using internal models, we maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.

The following table summarizes the primary sources considered when determining fair value of each class of fixed maturity securities as of September 30, 2012:

 

(U.S. dollar amounts in thousands)

   Total      Level 1      Level 2      Level 3  

Government—non-U.S.:

           

Pricing services

   $ 468,313       $ —         $ 468,313       $ —     

Internal models

     875         —           —           875   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total government—non-U.S.

     469,188         —           468,313         875   
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate—U.S.:

           

Pricing services

     3,728         —           3,728         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate—U.S.

     3,728         —           3,728         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate—non-U.S.:

           

Pricing services

     2,748,082         —           2,748,082         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate—non-U.S.

     2,748,082         —           2,748,082         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Residential mortgage-backed securities:

           

Internal models

     50,333         —           —           50,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage-backed securities

     50,333         —           —           50,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

   $ 3,271,331       $ —         $ 3,220,123       $ 51,208   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the primary sources considered when determining fair value of each class of fixed maturity securities as of December 31, 2011:

 

(U.S. dollar amounts in thousands)

   Total      Level 1      Level 2      Level 3  

Government—non-U.S.:

           

Pricing services

   $ 375,478       $ —         $ 375,478       $ —     

Internal models

     839         —           —           839   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total government—non-U.S.

     376,317         —           375,478         839   
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate—U.S.:

           

Pricing services

     59,462         —           59,462         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate—U.S.

     59,462         —           59,462         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate—non-U.S.:

           

Pricing services

     2,210,101         —           2,210,101         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate—non-U.S.

     2,210,101         —           2,210,101         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Residential mortgage-backed securities:

           

Internal models

     49,635         —           —           49,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage-backed securities

     49,635         —           —           49,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

   $ 2,695,515       $ —         $ 2,645,041       $ 50,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated:

 

     September 30, 2012  

(U.S. dollar amounts in thousands)

   Total      Level 1      Level 2      Level 3  

Assets

           

Investments:

           

Fixed maturity securities:

           

Government—non-U.S.

   $ 469,188       $ —         $ 468,313       $ 875   

Corporate—U.S.

     3,728         —           3,728         —     

Corporate—non-U.S.

     2,748,082         —           2,748,082         —     

Residential mortgage-backed securities

     50,333         —           —           50,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

   $ 3,271,331       $ —         $ 3,220,123       $ 51,208   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  

(U.S. dollar amounts in thousands)

   Total      Level 1      Level 2      Level 3  

Assets

           

Investments:

           

Fixed maturity securities:

           

Government—non-U.S.

   $ 376,317       $ —         $ 375,478       $ 839   

Corporate—U.S.

     59,462         —           59,462         —     

Corporate—non-U.S.

     2,210,101         —           2,210,101         —     

Residential mortgage-backed securities

     49,635         —           —           49,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

   $ 2,695,515       $ —         $ 2,645,041       $ 50,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:

 

    Beginning
balance
as of
July 1,
2012
    Total realized
and
unrealized gains
(losses)
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
    Ending
balance
as of
September 30,
2012
    Total gains
(losses)
included in
net income
attributable
to assets
still held
 

(U.S. dollar amounts in thousands)

    Included
in net
income
    Included
in OCI
                 

Fixed maturity securities:

                     

Government—non-U.S.

  $ 852      $ —        $ 23      $ —        $ —        $ —        $ —        $ —        $ —        $ 875      $ —     

Residential mortgage-backed securities

    49,654        —          679        —          —          —          —          —          —          50,333        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 50,506      $ —        $ 702      $ —        $ —        $ —        $ —        $ —        $ —        $ 51,208      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Beginning
balance
as of
July 1,
2011
    Total realized
and
unrealized gains
(losses)
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
    Ending
balance

as of
September 30,
2011
    Total gains
(losses)
included in
net income
attributable
to assets
still held
 

(U.S. dollar amounts in thousands)

    Included
in net
income
    Included
in OCI
                 

Fixed maturity securities:

                     

Government—non-U.S.

  $ 880      $ —        $ (70   $ —        $ —        $ —        $ —        $ —        $ —        $ 810      $ —     

Residential mortgage-backed securities

    51,977        —          (4,879     —          —          —          —          —          —          47,098        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 52,857      $ —        $ (4,949   $ —        $ —        $ —        $ —        $ —        $ —        $ 47,908      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

    Beginning
balance
as of
January 1,
2012
    Total realized
and
unrealized gains
(losses)
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
    Ending
balance
as of
September 30,
2012
    Total gains
(losses)
included in
net income
attributable
to assets
still held
 

(U.S. dollar amounts in thousands)

    Included
in net
income
    Included
in OCI
                 

Fixed maturity securities:

                     

Government—non-U.S.

  $ 839      $ —        $ 36      $ —        $ —        $ —        $ —        $ —        $ —        $ 875      $ —     

Residential mortgage-backed securities

    49,635        —          698        —          —          —          —          —          —          50,333        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 50,474      $ —        $ 734      $ —        $ —        $ —        $ —        $ —        $ —        $ 51,208      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Beginning
balance
as of
January 1,
2011
    Total realized
and
unrealized gains
(losses)
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
    Ending
balance
as of
September 30,
2011
    Total gains
(losses)
included in
net income
attributable
to assets
still held
 

(U.S. dollar amounts in thousands)

    Included
in net
income
    Included
in OCI
                 

Fixed maturity securities:

                     

Government—non-U.S.

  $ 835      $ —        $ (25   $ —        $ —        $ —        $ —        $ —        $ —        $ 810      $ —     

Residential mortgage-backed securities

    49,715        —          (2,617     —          —          —          —          —          —          47,098        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 50,550      $ —        $ (2,642   $ —        $ —        $ —        $ —        $ —        $ —        $ 47,908      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either net investment gains within the consolidated statements of income or OCI within stockholders’ equity based on the appropriate accounting treatment for the instrument.

Purchases, sales, issuances and settlements represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity consists of purchases and sales of fixed maturity securities.

The amount presented for unrealized gains (losses) for assets still held as of the reporting date primarily represents accretion on certain fixed maturity securities which were recorded in net investment gains.

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 September 30, 2012:

 

(U.S. dollar amounts in thousands)

   Fair value      Unobservable input    Range

Assets:

        

Fixed maturity securities

        

Residential mortgage-backed securities

   $ 50,333       Credit spreads    50bps – 100bps

 

20


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

(5) Reserve for Losses and Loss Adjustment Expenses

The following table sets forth changes in the reserve for losses and loss adjustment expenses for the dates indicated:

 

     As of or for the  
     nine months ended  
     September 30,  

(U.S. dollar amounts in thousands)

   2012     2011  

Balance as of January 1

   $ 272,028      $ 205,934   

Incurred related to insured events of:

    

Current year

     157,931        154,677   

Prior years

     79,211        (15,224
  

 

 

   

 

 

 

Total incurred

     237,142        139,453   
  

 

 

   

 

 

 

Paid related to insured events of:

    

Current year

     (16,679     (10,468

Prior years

     (207,272     (73,701
  

 

 

   

 

 

 

Total paid

     (223,951     (84,169
  

 

 

   

 

 

 

Impact of foreign currency translation

     2,178        (13,997
  

 

 

   

 

 

 

Balance as of September 30

   $ 287,397      $ 247,221   
  

 

 

   

 

 

 

For the nine months ended September 30, 2012, total incurred losses increased $98 million, primarily driven by reserve strengthening of $82 million in the first quarter of 2012 to reflect an adverse change in frequency and severity experience. The reserve strengthening was the result of higher than anticipated frequency and severity of claims paid from later stage delinquencies from prior years, particularly in coastal tourism areas of Queensland as a result of regional economic pressures, as well as our 2007 and 2008 vintages which have a higher concentration of self-employed borrowers. This increase was partially offset by lower new delinquencies, net of cures.

The increase in prior year reserves of $79 million was primarily attributable to the reserve strengthening in the first quarter of 2012 and from the aging of delinquencies. For the nine months ended September 30, 2011, $15 million was released from prior year reserves primarily driven by realized benefits from our ongoing loss mitigation activities.

Paid claims also increased throughout 2012 as a result of an elevated number of claims paid, particularly in the third quarter, combined with an increase in the average claim payment as we experienced a higher rate of conversion from later stage delinquency to claim.

(6) Securitization Entities

Part of the Company’s product offering includes portfolio credit enhancement policies to Australian regulated lenders that have originated housing loans for securitization in the Australian, European and U.S. markets. Portfolio mortgage insurance serves as an important form of credit enhancement for the Australian securitization market and the Company’s portfolio credit enhancement coverage is generally purchased for low loan-to-value, seasoned loans written by regulated institutions.

As of September 30, 2012 and December 31, 2011, the Company had a maximum exposure to loss from the provision of portfolio credit enhancement to securitization trusts sponsored by third parties of $153 million and $172 million, respectively. The exchange rate for calculating the maximum exposure to loss of translating the Australian dollar into the U.S. dollar as of September 30, 2012 and December 31, 2011 was $1.04 and $1.02 respectively. This exposure was calculated based on the expectation of a 1 in 250 year event. The Company has applied the Australian Prudential Regulation Authority (“APRA”) stress scenario to calculate this exposure. The Company holds sufficient capital resources to meet this obligation were it to occur.

 

21


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

(7) Statutory Accounting

The Company prepares financial statements for its regulator, APRA, in accordance with the accounting practices prescribed by the regulator, which is a comprehensive basis of accounting other than U.S. GAAP.

The balance sheet is recorded under Australian accounting standards and a prudential adjustment is made to derive the APRA capital base, being the tax-effected difference between the insurance liabilities under APRA and Australian accounting standards.

The Company’s APRA net income after tax, capital base, minimum capital requirement and solvency ratio were as follows as of and for the year ended December 31:

 

(U.S. dollar amounts in thousands)

   2011  

APRA net income after tax

   $ 259,132   
  

 

 

 

APRA capital base

   $ 2,414,629   

APRA minimum capital requirement

   $ 1,544,272   

APRA solvency ratio

     1.56   

The above APRA net income after tax, capital base, minimum capital requirement and solvency ratio are the combined amounts of Genworth Financial Mortgage Insurance Pty Limited and its wholly-owned subsidiary, Genworth Financial Mortgage Indemnity Limited.

Under the prudential regulation framework in Australia, mortgage insurers are required to establish a catastrophic risk charge defined as a 1 in 250 year event. APRA specifies a formula to quantify this event. The Company is required to maintain adequate capital to fund this charge, in addition to normal insurance liabilities, by ensuring that its capital base exceeds its minimum capital requirement at all times.

As of September 30, 2012, the APRA solvency ratio was 1.37.

In February 2012, the Company amended the reinsurance agreements with Genworth Mortgage Insurance Corporation (“GEMICO”) and Brookfield Life Assurance Company Limited (“Brookfield”), affiliated companies, whereby Brookfield assumed obligations from GEMICO with respect to an additional layer of private mortgage guarantee insurance. The amendment was effective January 1, 2012 and approved by the North Carolina Department of Insurance in February 2012. The Company also renewed and expanded its external reinsurance program with a group of non-affiliated reinsurers with coverage effective January 1, 2012. Consistent with the Company’s capital management plan of obtaining external reinsurance to replace internal reinsurance, the Company terminated its reinsurance agreement with GEMICO, effective July 2012 which lowered the capital ratio but remained in compliance with regulatory requirements.

The Company’s ability to pay dividends to Genworth Financial Mortgage Insurance Holdings Pty Limited is allowable if the following apply:

 

   

the Company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend;

 

   

it is fair and reasonable to the Company’s shareholders as a whole; and

 

   

it does not materially prejudice the Company’s ability to pay its creditors.

Any dividend above four preceding quarters’ earnings requires prior approval from APRA. In addition, any dividend payment must result in the Company continuing to meet the APRA minimum capital requirement.

 

22


Genworth Financial Mortgage Insurance Pty Limited

Notes to Condensed Consolidated Financial Statements

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

(9) Planned Minority Initial Public Offering

On April 17, 2012, Genworth, the Company’s ultimate parent, announced a new timeframe (early 2013) for completing its planned minority initial public offering (“IPO”) of up to 40% of its Australian mortgage insurance business, which was originally expected to occur during 2012. While the performance of the business is recovering, the increasing regulatory capital expectations and uncertain market conditions in Australia for IPOs can impact valuation and timing. Execution of an IPO is subject to market, valuation and regulatory consideration and Genworth does not now expect an IPO of its Australian mortgage insurance business to occur prior to late 2013.

 

23