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As Of Filer Filing For·On·As Docs:Size Issuer Agent 3/12/07 Genworth Life & Annuity Ins Co 8-K:8,9 3/12/07 10:1.6M Donnelley … Solutions/FA |
Document/Exhibit Description Pages Size 1: 8-K Current Report HTML 28K 3: EX-23 Consent of Experts or Counsel HTML 10K 4: EX-99.1 Miscellaneous Exhibit HTML 262K 5: EX-99.2 Miscellaneous Exhibit HTML 53K 6: EX-99.3 Miscellaneous Exhibit HTML 34K 7: EX-99.4 Miscellaneous Exhibit HTML 221K 8: EX-99.5 Miscellaneous Exhibit HTML 20K 9: EX-99.6 Miscellaneous Exhibit HTML 774K 10: EX-99.7 Miscellaneous Exhibit HTML 61K 2: EX-12 Statement re: Computation of Ratios HTML 23K
| Exhibit 99.5 |
Exhibit 99.5
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. The following is a discussion of our market risk exposures and our risk management practices.
We enter into market-sensitive instruments primarily for purposes other than trading. The carrying value of our investment portfolio as of December 31, 2006 and 2005 was $20,142.5 million and $17,728.2 million, respectively, of which 79.2% and 76.5%, respectively, was invested in fixed maturities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturities. We mitigate the market risk associated with our fixed maturities portfolio by closely matching the duration of our fixed maturities with the duration of the liabilities that those securities are intended to support.
We are exposed to equity risk on our holdings of common stocks and other equities. We manage equity price risk through industry and issuer diversification and asset allocation techniques.
We may use derivative financial instruments, such as interest rate and option-based financial instruments, as part of our risk management strategy. We use these derivatives to mitigate certain risks, including interest rate risk, currency risk and equity risk, by:
| • | reducing the risk between the timing of the receipt of cash and its investment in the market; |
| • | converting the asset duration to match the duration of the liabilities; and |
| • | protecting against the early termination of an asset or liability. |
As a matter of policy, we have not and will not engage in derivative market-making, speculative derivative trading or other speculative derivatives activities.
Sensitivity analysis
Sensitivity analysis measures the impact of hypothetical changes in interest rates and other market rates or prices on the profitability of market-sensitive financial instruments.
The following discussion about the potential effects of changes in interest rates and equity market prices is based on so-called “shock-tests,” which model the effects of interest rate and equity market price shifts on our financial condition and results of operations. Although we believe shock tests provide the most meaningful analysis permitted by the rules and regulations of the SEC, they are constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by their inability to include the extraordinarily complex market reactions that normally would arise from the market shifts modeled. Although the following results of shock tests for changes in interest rates and equity market prices may have some limited use as benchmarks, they should not be viewed as forecasts. These forward-looking disclosures also are selective in nature and address only the potential impacts on our financial instruments. They do not include a variety of other potential factors that could affect our business as a result of these changes in interest rates and equity market prices.
One means of assessing exposure of our fixed maturities portfolio to interest rate changes is a duration-based analysis that measures the potential changes in market value resulting from a hypothetical change in interest rates of 100 basis points across all maturities. This is sometimes referred to as a parallel shift in the yield curve. Under this model, with all other factors constant and assuming no offsetting change in the value of our liabilities, we estimated that such an increase in interest rates would cause the market value of our fixed income securities portfolio to decline by approximately $349.0 million, based on our securities positions as of December 31, 2006.
One means of assessing exposure to changes in equity market prices is to estimate the potential changes in market values on our equity investments resulting from a hypothetical broad-based decline in equity market prices of 10%. Under this model, with all other factors constant, we estimated that such a decline in equity market prices would not have a material impact on the market value of our equity investments based on our equity positions as of December 31, 2006. In addition, fluctuations in equity market prices affect our revenues and returns from our separate account products, which depend upon fees that are related primarily to the value of assets under management. However, we do not expect these fluctuations to have a material impact on our consolidated financial statements.
Derivative counterparty credit risk
We manage derivative counterparty credit risk on an individual counterparty basis, which means that gains and losses are netted for each counterparty to determine the amount at risk. When a counterparty exceeds credit exposure limits in terms of amounts owed to us, typically as the result of changes in market conditions, no additional transactions are executed until the exposure with that counterparty is reduced to an amount that is within the established limit. The swaps that are executed under master swap agreements containing mutual credit downgrade provisions that provide the ability to require assignment or replacement in the event either party’s unsecured debt rating is downgraded to or below Moody’s “Baa” or S&P’s “BBB.”
Swaps and purchased options with contractual maturities longer than one year are conducted within the credit policy constraints provided in the table below. Our policy permits us to enter into derivative transactions with counterparties rated “A2” by Moody’s and “A” by S&P’s if the agreements governing such transactions require both parties to provide collateral in certain circumstances.
The following table sets forth derivative counterparty credit limits by credit rating:
| (Amounts in millions) |
|||||||||||
| S&P Rating |
Moody’s rating | Long-term (exposures over one year) net of collateral(1) |
Aggregate limits (including those under one year) net of collateral(1) |
Aggregate limit (gross of collateral)(1) | |||||||
| AAA |
Aaa | $ | 50.0 | $ | 125.0 | $ | 300.0 | ||||
| AA- |
Aa3 | 25.0 | 100.0 | 250.0 | |||||||
| A |
A2 | 15.0 | 90.0 | 200.0 | |||||||
| (1) |
Credit exposure limits noted in this table are set by Genworth, our ultimate parent, and apply in the aggregate to all companies that are consolidated into Genworth. |
| This ‘8-K’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| Filed on / For Period End: | 3/12/07 | 10-K | ||
| 12/31/06 | 10-K | |||
| 12/31/05 | 10-K | |||
| List all Filings | ||||