UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

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

For the quarterly period ended September 30, 2005March 31, 2006

OR

 

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

For the transition period from                      to                     

Commission file number 001-32195

 


LOGO

Genworth Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware  33-1073076

(State or Other Jurisdiction of

Incorporation or Organization)

  

(I.R.S. Employer

Identification Number)

6620 West Broad Street

Richmond, Virginia

  23230
(Address of Principal Executive Offices)  (Zip Code)

(804) 281-6000

(Registrant’s Telephone Number, Including Area Code)

 


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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer.

See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.Act. (Check one):

 

Large accelerated filer  xAccelerated filer  ¨Non-accelerated filer  ¨

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

At October 25, 2005, 343,720,672April 26, 2006, 456,015,464 shares of Class A Common Stock, par value $0.001 per share, and 127,066,559 shares of Class B Common Stock, par value $0.001 per share were outstanding.

 



TABLE OF CONTENTS

 

   Page

PART I—FINANCIAL INFORMATION

  

Item 1. Condensed Consolidated Financial Statements

  3

StatementCondensed Consolidated Statements of Earnings for the three and nine months ended September 30,March 31, 2006 and 2005 and 2004 (Unaudited)

  3

StatementCondensed Consolidated Statements of Financial Position as of September 30, 2005March 31, 2006 (Unaudited) and December 31, 20042005

  4

StatementCondensed Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity for the ninethree months ended September 30,March 31, 2006 and 2005 and 2004 (Unaudited)

  5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (Unaudited)

6

Notes to Condensed Consolidated Financial Statements (Unaudited)

  7

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

  1619

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  5448

Item 4. Controls and Procedures

  5648

PART II—OTHER INFORMATION

  

Item 1. Legal Proceedings

  5749

Item 1A. Risk Factors

51

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 6. Exhibits

  5951

Signatures

  6052

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GENWORTH FINANCIAL, INC.

STATEMENTCONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Dollar amountsAmounts in millions, except per share amounts)

(Unaudited)

 

     Three months
ended September 30,


    Nine months
ended September 30,


     2005

   2004

    2005

   2004

Revenues:

                      

Premiums

    $1,547   $1,523    $4,766   $4,953

Net investment income

     902    785     2,595    2,823

Net realized investment gains (losses)

     (7)   3     (13)   27

Policy fees and other income

     186    159     501    612
     


  

    


  

Total revenues

     2,628    2,470     7,849    8,415
     


  

    


  

Benefits and expenses:

                      

Benefits and other changes in policy reserves

     1,026    1,034     3,152    3,675

Interest credited

     364    328     1,051    1,088

Underwriting, acquisition, and insurance expenses, net of deferrals

     506    411     1,476    1,445

Amortization of deferred acquisition costs and intangibles

     217    230     618    830

Interest expense

     72    60     213    154
     


  

    


  

Total benefits and expenses

     2,185    2,063     6,510    7,192
     


  

    


  

Earnings from continuing operations before income taxes and accounting change

     443    407     1,339    1,223

Provision for income taxes

     136    136     425    424
     


  

    


  

Net earnings from continuing operations before accounting change

     307    271     914    799

Gain on sale of discontinued operations, net of taxes

     —      —       —      7
     


  

    


  

Net earnings before accounting change

     307    271     914    806

Cumulative effect of accounting change, net of taxes

     —      —       —      5
     


  

    


  

Net earnings

    $307   $271    $914   $811
     


  

    


  

Earnings per common share:

                      

Basic

    $0 .65   $0.55    $1.92   $1.66
     


  

    


  

Diluted

    $0.64   $0.55    $1.88   $1.65
     


  

    


  

   Three months ended
March 31,
 
       2006          2005     

Revenues:

   

Premiums

  $1,539  $1,605 

Net investment income

   924   851 

Net realized investment gains (losses)

   (22)  (6)

Policy fees and other income

   184   161 
         

Total revenues

   2,625   2,611 
         

Benefits and expenses:

   

Benefits and other changes in policy reserves

   1,035   1,075 

Interest credited

   373   340 

Acquisition and operating expenses, net of deferrals

   475   447 

Amortization of deferred acquisition costs and intangibles

   174   193 

Interest expense

   82   72 
         

Total benefits and expenses

   2,139   2,127 
         

Net earnings before income taxes and accounting change

   486   484 

Provision for income taxes

   156   162 
         

Net earnings before accounting change

   330   322 

Cumulative effect of accounting change, net of taxes

   4   —   
         

Net earnings

  $334  $322 
         

Earnings per common share:

   

Basic

  $0.72  $0.66 
         

Diluted

  $0.70  $0.65 
         

Weighted-average common shares outstanding:

   

Basic

   467.0   488.8 
         

Diluted

   479.5   494.3 
         

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

STATEMENTCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Dollar amounts in millions)

 

     September 30,
2005


   December 31,
2004


     (Unaudited)    

Assets

           

Investments:

           

Fixed maturities available-for-sale

    $53,569   $52,424

Equity securities available-for-sale

     366    374

Mortgage and other loans

     7,272    6,051

Policy loans

     1,353    1,224

Short-term investments

     26    247

Restricted investments held by securitization entities

     753    860

Other invested assets

     3,198    3,996
     


  

Total investments

     66,537    65,176

Cash and cash equivalents

     1,834    1,963

Accrued investment income

     749    733

Deferred acquisition costs

     5,391    5,020

Intangible assets

     778    780

Goodwill

     1,455    1,465

Reinsurance recoverable

     18,331    18,535

Other assets

     1,691    1,322

Separate account assets

     8,923    8,884
     


  

Total assets

    $105,689   $103,878
     


  

Liabilities and Stockholders’ Interest

           

Liabilities:

           

Future annuity and contract benefits

    $63,786   $61,698

Liability for policy and contract claims

     3,315    3,329

Unearned premiums

     3,567    3,597

Other policyholder liabilities

     518    638

Other liabilities

     5,337    6,792

Non-recourse funding obligations

     1,400    900

Short-term borrowings

     167    559

Long-term borrowings

     2,761    2,442

Senior notes underlying equity units

     600    600

Preferred stock

     100    100

Deferred tax liability

     1,177    624

Borrowings related to securitization entities

     710    849

Separate account liabilities

     8,923    8,884
     


  

Total liabilities

     92,361    91,012
     


  

Commitments and Contingencies

           

Stockholders’ interest:

           

Class A Common Stock, $0.001 par value; 1.5 billion shares authorized; 363 million shares issued; 147 million and 344 million shares outstanding as of September 30, 2005 and December 31, 2004, respectively

     —      —  

Class B Common Stock, $0.001 par value; 700 million shares authorized; 343 million and 127 million shares issued and outstanding as of September 30, 2005 and December 31, 2004, respectively

     —      —  

Additional paid-in capital

     10,651    10,612
     


  

Accumulated non-owner changes in stockholders’ interest:

           

Net unrealized investment gains

     1,040    1,019

Derivatives qualifying as hedges

     399    268

Foreign currency translation and other adjustments

     275    322
     


  

Total accumulated non-owner changes in stockholders’ interest

     1,714    1,609

Retained earnings

     1,463    645

Treasury stock, at cost (19 million shares as of September 30, 2005)

     (500)   —  
     


  

Total stockholders’ interest

     13,328    12,866
     


  

Total liabilities and stockholders’ interest

    $105,689   $103,878
     


  

   March 31,
2006
  December 31,
2005
 
   (Unaudited)    

Assets

   

Investments:

   

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

  $53,559  $53,937 

Equity securities available-for-sale, at fair value

   193   206 

Commercial mortgage loans

   7,854   7,558 

Policy loans

   1,362   1,350 

Restricted investments held by securitization entities

   —     685 

Other invested assets

   2,738   3,174 
         

Total investments

   65,706   66,910 

Cash and cash equivalents

   1,909   1,875 

Accrued investment income

   788   733 

Deferred acquisition costs

   5,817   5,586 

Intangible assets

   817   782 

Goodwill

   1,451   1,450 

Reinsurance recoverable

   18,003   18,245 

Other assets

   716   967 

Separate account assets

   9,700   9,106 
         

Total assets

  $104,907  $105,654 
         

Liabilities and stockholders’ equity

   

Liabilities:

   

Future annuity and contract benefits

  $63,632  $63,749 

Liability for policy and contract claims

   3,279   3,364 

Unearned premiums

   3,706   3,647 

Other policyholder liabilities

   443   507 

Other liabilities

   4,551   4,937 

Non-recourse funding obligations

   2,150   1,400 

Short-term borrowings

   380   152 

Long-term borrowings

   2,729   2,736 

Senior notes underlying equity units

   600   600 

Mandatorily redeemable preferred stock

   100   100 

Deferred tax liability

   1,159   1,386 

Borrowings related to securitization entities

   —     660 

Separate account liabilities

   9,700   9,106 
         

Total liabilities

   92,429   92,344 
         

Commitments and contingencies

   

Stockholders’ equity:

   

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 490 million and 404 million shares issued as of March 31, 2006 and December 31, 2005, respectively; 456 million and 385 million shares outstanding as of March 31, 2006 and December 31, 2005, respectively

   —     —   

Class B common stock, $0.001 par value; 700 million shares authorized; zero and 86 million shares issued and outstanding as of March 31, 2006 and December 31, 2005, respectively

   —     —   

Additional paid-in capital

   10,682   10,671 
         

Accumulated other comprehensive income:

   

Net unrealized investment gains

   223   760 

Derivatives qualifying as hedges

   280   389 

Foreign currency translation and other adjustments

   237   255 
         

Total accumulated other comprehensive income

   740   1,404 

Retained earnings

   2,035   1,735 

Treasury stock, at cost (34 million and 19 million shares as of March 31, 2006 and December 31, 2005, respectively)

   (979)  (500)
         

Total stockholders’ equity

   12,478   13,310 
         

Total liabilities and stockholders’ equity

  $104,907  $105,654 
         

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

STATEMENT(Dollar amounts in millions)

(Unaudited)

    Additional
paid-in
capital
  Accumulated other
comprehensive
income
  Retained
earnings
  

Treasury

stock, at

cost

  

Total

stockholders’

equity

 

Balances as of December 31, 2004

  $10,612  $1,608  $646  $—    $12,866 

Comprehensive income (loss):

       

Net earnings

      322    322 

Net unrealized gains (losses) on investment securities

     (172)    (172)

Derivatives qualifying as hedges

     (2)    (2)

Foreign currency translation and other adjustments

     24     24 
          

Total comprehensive income (loss)

        172 

Acquisition of treasury stock

       (500)  (500)

Dividends to stockholders

      (31)   (31)

Stock-based compensation

   10      10 

Capital contribution from GE

   3      3 
                     

Balances as of March 31, 2005

  $10,625  $1,458  $937  $(500) $12,520 
                     

    Additional
paid-in
capital
  Accumulated other
comprehensive
income
  Retained
earnings
  

Treasury

stock, at

cost

  

Total

stockholders’

equity

 

Balances as of December 31, 2005

  $10,671  $1,404  $1,735  $(500) $13,310 

Comprehensive income (loss):

       

Net earnings

      334    334 

Net unrealized gains (losses) on investment securities

     (537)    (537)

Derivatives qualifying as hedges

     (109)    (109)

Foreign currency translation and other adjustments

     (18)    (18)
          

Total comprehensive income (loss)

        (330)

Acquisition of treasury stock

       (479)  (479)

Dividends to stockholders

      (34)   (34)

Stock-based compensation

   7      7 

Capital contribution from GE

   4      4 
                     

Balances as of March 31, 2006

  $10,682  $740  $2,035  $(979) $12,478 
                     

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in millions)

(Unaudited)

 

     

Nine months

ended September 30,


 
     2005

   2004

 

Cash flows from operating activities:

            

Net earnings

    $914   $811 

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

            

Amortization of investment discounts and premiums

     42    55 

Net realized investment losses (gains)

     13    (27)

Charges assessed to policyholders

     (248)   (218)

Acquisition costs deferred

     (832)   (695)

Amortization of deferred acquisition costs and intangibles

     618    830 

Deferred income taxes

     483    (1,203)

Corporate overhead allocation

     —      15 

Gain on sale of discontinued operations, net of taxes

     —      (7)

Cumulative effect of accounting change, net of taxes

     —      (5)

Change in certain assets and liabilities:

            

Accrued investment income and other assets, net

     (457)   714 

Insurance reserves

     2,013    2,262 

Other liabilities and other policy-related balances

     (172)   960 

Tax liabilities

     (170)   939 
     


  


Net cash from operating activities

     2,204    4,431 
     


  


Cash flows from investing activities:

            

Proceeds from maturities and repayments of investments:

            

Fixed maturities

     3,750    4,550 

Mortgage, policy and other loans

     770    668 

Other invested assets

     24    11 

Proceeds from sales and securitizations of investments:

            

Fixed maturities and equity securities

     2,914    3,483 

Other invested assets

     103    179 

Purchases and originations of investments:

            

Fixed maturities and equity securities

     (8,136)   (11,321)

Mortgage, policy and other loans

     (2,137)   (991)

Other invested assets

     (144)   (196)

Payments for businesses purchased, net of cash acquired

     —      (9)

Proceeds from the sale of discontinued operations

     —      10 

Short-term investment activity, net

     221    (646)
     


  


Net cash from investing activities

     (2,635)   (4,262)
     


  


Cash flows from financing activities:

            

Proceeds from issuance of investment contracts

     6,359    4,834 

Redemption and benefit payments on investment contracts

     (5,899)   (5,081)

Short-term borrowing activity, net

     (45)   (2,400)

Proceeds from issuance of non-recourse funding obligations

     500    —   

Proceeds from long-term borrowings

     348    1,895 

Net commercial paper borrowings

     (348)   500 

Cash transferred as part of our corporate reorganization

     —      (838)

Dividends paid to stockholders

     (93)   (1,581)

Stock-based compensation awards exercised

     (2)   —   

Acquisition of treasury stock from former majority stockholder

     (500)   —   

Capital contribution received from former majority stockholder

     19    1,894 
     


  


Net cash from financing activities

     339    (777)
     


  


Effect of exchange rate changes on cash and cash equivalents

     (37)   24 
     


  


Net change in cash and cash equivalents

     (129)   (584)

Cash and cash equivalents at beginning of period

     1,963    1,982 
     


  


Cash and cash equivalents at end of period

    $1,834   $1,398 
     


  


   

Three months

ended March 31,

 
   2006  2005 

Cash flows from operating activities:

   

Net earnings

  $334  $322 

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

   

Amortization of fixed maturity discounts and premiums

   6   14 

Net realized investment losses (gains)

   22   6 

Charges assessed to policyholders

   (86)  (77)

Cumulative effect of accounting policy change

   (4)  —   

Acquisition costs deferred

   (289)  (261)

Amortization of deferred acquisition costs and intangibles

   173   193 

Deferred income taxes

   123   112 

Change in certain assets and liabilities:

   

Accrued investment income and other assets, net

   33   (208)

Insurance reserves

   739   556 

Current tax liabilities

   141   (23)

Other liabilities and other policy-related balances

   (421)  99 
         

Net cash from operating activities

   771   733 
         

Cash flows from investing activities:

   

Proceeds from maturities and repayments of investments:

   

Fixed maturities

   1,338   904 

Mortgage loans

   249   195 

Proceeds from sales of investments:

   

Fixed maturities and equity securities

   1,336   871 

Purchases and originations of investments:

   

Fixed maturities and equity securities

   (3,006)  (2,172)

Mortgage loans

   (545)  (427)

Other invested assets, net

   (9)  181 

Policy loans, net

   (12)  (8)
         

Net cash from investing activities

   (649)  (456)
         

Cash flows from financing activities:

   

Proceeds from issuance of investment contracts

   2,056   1,666 

Redemption and benefit payments on investment contracts

   (2,597)  (1,896)

Short-term borrowing activity, net

   —     (15)

Proceeds from issuance of non-recourse funding obligations

   750   —   

Net commercial paper borrowings

   229   —   

Dividends paid to stockholders

   (35)  (32)

Acquisition of treasury stock

   (479)  (500)

Capital contribution received from GE

   —     2 
         

Net cash from financing activities

   (76)  (775)

Effect of exchange rate changes on cash and cash equivalents

   (12)  (4)
         

Net change in cash and cash equivalents

   34   (502)

Cash and cash equivalents at beginning of period

   1,875   1,963 
         

Cash and cash equivalents at end of period

  $1,909  $1,461 
         

See Notes to Financial Statements

In connection with our corporate reorganization on May 24, 2004, we completed several non-cash transactions with our parent. These transactions included the transfer of the assets and liabilities of entities that did not remain with Genworth, as well as non-cash consideration paid to our then-sole stockholder through the issuance of debt and other liabilities. The following table details these transactions as well as other non-cash items:

Supplemental schedule of non-cash investing and financing activities

   

Nine months ended

September 30,


 

(Dollar amounts in millions)


  2005

  2004

 
   (Unaudited) 

Excluded net assets:

         

Assets (net of cash of $838) excluded in our corporate reorganization

  $        —    $21,896 

Liabilities excluded in corporate reorganization

   —     (20,965)
   

  


Net assets transferred to former majority stockholder in connection with corporate reorganization

  $—    $931 
   

  


Other non-cash transactions in connection with our corporate reorganization:

         

Issuance of senior notes underlying equity units

  $—    $600 

Issuance of Series A preferred stock

   —     100 

Issuance of contingent note

   —     550 

Issuance of intercompany note

   —     2,400 
   

  


Total other non-cash transactions in connection with our corporate reorganization

  $—    $3,650 
   

  


Non-cash transactions subsequent to our corporate reorganization

         

Stock-based compensation

  $36  $18 

Dividends declared not yet paid

   35   32 
   

  


Total non-cash transactions subsequent to our corporate reorganization

  $71  $50 
   

  


See Notes toCondensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware inon October 23, 2003 in preparation for the corporate reorganization of certain insurance and related subsidiaries of General Electric Company (“GE”) and thean initial public offering of Genworth common stock, which was completed on May 28, 2004 (“IPO”) which were completed in May 2004.. In connection with the IPO, Genworth acquired substantially all of the assets and liabilities of GE Financial Assurance Holdings, Inc. (“GEFAHI”). Prior to its IPO, Genworth was a wholly-owned subsidiary of GEFAHI. GEFAHI is an indirect subsidiary of General Electric Capital Corporation (“GE Capital”), which in turn is an indirect subsidiary of GE. Prior to the corporate reorganization, GEFAHI was a holding company for a group of companies that provide life insurance, long-term care insurance, group life and health insurance, annuities, and other investment products and U.S. mortgage insurance. At the same time, Genworth also acquired certain other insurance businesses previously owned by other GE subsidiaries. These businesses included international mortgage insurance, payment protection insurance, a Bermuda reinsurer, and mortgage contract underwriting.

In consideration for the assets and liabilities Genworth acquired in connection with the corporate reorganization, Genworth issued to GEFAHI 489.5 million shares of its Class B Common Stock, $600 million of its 6.00% Equity Units (“Equity Units”), $100 million of its 5.25% Series A Cumulative Preferred Stock (“Series A Preferred Stock”) which is mandatorily redeemable, a $2.4 billion short-term note, and a $550 million contingent non-interest-bearing note (“Contingent Note”). We refinanced the $2.4 billion note with $1.9 billion of senior notes and $500 million of commercial paper shortly after the IPO and we repaid the Contingent Note in December 2004. The liabilities Genworth assumed included ¥60 billion aggregate principal amount of 1.6% notes due 2011 issued by GEFAHI. The transactions above, which are accounted for at book value as transfers between entities under common control, are referred to as our corporate reorganization. Class A Common Stock and Class B Common Stock have identical voting rights, except Class B shares also have approval rights over certain corporate actions and rights with respect to the election and removal of directors. Shares of Class B Common Stock convert automatically into shares of Class A Common Stock when they are held by any person other than GE or an affiliate of GE or when GE no longer beneficially owns at least 10% of our outstanding common stock. As a result, all of the 146.4 million shares of common stock sold in Genworth’s IPO consisted of Class A Common Stock.

In September 2005 and in March 2005, GE completed secondary public offerings of 116.2 million and 80.5 million shares of our Class B Common Stock, respectively. The 196.7 million shares were automatically converted to Class A Common Stock upon the sale of these shares to the public. Concurrently with the March 2005 secondary offering, we repurchased 19.4 million shares of Class B Common Stock from GE at a price of $25.811 per share (a price equal to the net proceeds per share received by the selling stockholder from the underwriters), which were automatically converted to Class A Common Stock upon the transfer of these shares to us and recorded at cost as treasury stock in the unaudited Statement of Financial Position. We did not receive any of the proceeds from these secondary offerings. As of September 30, 2005, approximately 73% of our common stock was owned by public shareholders and approximately 27% of our common stock was beneficially owned by GE.

For the periods prior to our corporate reorganization, the accompanying financial statements include the accounts of certain indirect subsidiaries and businesses of GE that represent the predecessor of Genworth. The companies and businesses included in the predecessor financial statements are GEFAHI, Financial Insurance Company Ltd., FIG Ireland Ltd., WorldCover Direct Ltd., RD Plus S.A., CFI Administrators Ltd., Financial Assurance Company Ltd., Financial Insurance Group Services Ltd., Consolidated Insurance Group Ltd., Viking Insurance Co. Ltd., GE Mortgage Insurance Ltd., GE Mortgage Insurance Pty Ltd., GE Mortgage Insurance

GENWORTH FINANCIAL, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(Guernsey) Ltd., Genworth Financial Mortgage Insurance Company Canada, GE Capital Mortgage Insurance Corp. (Australia) Pty Ltd., The Terra Financial Companies, Ltd., GE Capital Insurance Agency, Inc., CFI Pension Trustees Ltd., Financial Insurance Guernsey PCC Ltd., GE Financial Assurance Compania De Seguros y Reaseguros de Vida S.A., GE Residential Connections Corp., Assocred SA, Ennington Properties Limited and the consumer protection insurance business of Vie Plus S.A. All of the companies were indirect subsidiaries of GE. For these periods, we refer to the combined predecessor companies and businesses as the “company”, “we”, “us”, or “our” unless the context otherwise requires.

For the periods subsequent to our reorganization, the accompanying financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting or economic interest, which for these periods we refer to as the “company,” “we”, “us”,“we,” “us,” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.

We are a leading insurance company in the U.S., with an expanding international presence, serving the life and lifestyle protection, retirement income, investment and mortgage insurance needs of more than 15 million customers. We have leadership positions in key products that we expect will benefit from a number of significant demographic, governmental and market trends. We distribute our products and services through an extensive and diversified distribution network that includes financial intermediaries, independent producers and dedicated sales specialists. We conduct operations in 24 countries and have approximately 6,900 employees. We have the following four segments:

Our Protection segment includes life, long-term care and Medicare supplement insurance and, primarily for companies with fewer than 1,000 employees, group life and health insurance. Protection also includes consumer payment protection insurance, which helps consumers meet their payment obligations in the event of illness, involuntary unemployment, disability or death.

Our Retirement Income and Investments segment offers spread-based retail products that include fixed deferred and single premium immediate annuities along with structured settlements. We also offer fee-based products that include variable deferred annuities, variable life insurance, and asset management products. Our spread-based institutional products include guaranteed investment contracts (“GICs”), funding agreements and funding agreements backing notes.

Our Mortgage Insurance segment includes mortgage insurance products offered in the U.S., Canada, Australia, Europe, New Zealand, Mexico and Japan that facilitate homeownership by enabling borrowers to buy homes with low-down-payment mortgages.

Our Corporate and Other segment includes debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses (including amounts accrued in settlement of some class action lawsuits), and the results of small, non-core businesses that are managed outside our operating segments.

On March 8, 2006, GEFAHI completed an offering (“Secondary Offering”) of 71.2 million shares of our Class B Common Stock. The 71.2 million shares were automatically converted to Class A Common Stock upon the sale of these shares to the public. We did not receive any proceeds in the Secondary Offering. Concurrently

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

We labelwith the Secondary Offering, we repurchased 15.0 million shares of Class B Common Stock from our quarterly information usingmajority stockholder at a calendar convention, thatprice of $31.93125 per share (the net proceeds per share received by the selling stockholder from the underwriters), which is first quarter is consistently labeledrecorded at cost as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It istreasury stock in the unaudited condensed consolidated statement of financial position. As a result of these transactions, GEFAHI no longer owns any of our practice to establish actual interim closing dates using a “fiscal” calendar, which requires our businesses to close their books on a Saturday. The effects of this practice are modest and only exist within a reporting year.

outstanding common stock.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with theU.S. generally accepted accounting principles and rules and regulations of the United States Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. These financial statements include all adjustments (consisting of normal recurring accruals) 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 quarterly financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The financial statements included herein should be read in conjunction with the audited financial statements and related notes for the fiscal year ended December 31, 2004,2005, contained in our 2005 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform with the current year presentation.

(2) Recent Accounting Pronouncements

Recently adopted

On January 1, 2006, we adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 123R,Share-Based Payment, an amendment of SFAS No. 123,Accounting for Stock-Based Compensation. We adopted SFAS No. 123R under the modified prospective transition method. The statement requires companies to recognize the grant-date fair value of options and other equity-based awards within the income statement over the respective vesting period of the awards. We adopted SFAS No. 123 effective January 1, 2002 and, as permitted, we determined a grant date fair value using a Black-Scholes model (“Black-Scholes Model”) and recognized the related compensation expense through the income statement for all equity awards issued subsequent to January 1, 2002. As a result of the adoption of SFAS No. 123R, we will continue to recognize the remaining portion of the requisite service under previously granted unvested awards including those awards granted prior to January 1, 2002. Prior to the adoption of SFAS No. 123R, we adjusted compensation cost related to forfeiture of awards when the actual forfeiture occurred. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and requires companies which previously accounted for forfeitures on an occurrence basis to include in income of the period of adoption a cumulative effect of a change in accounting principle for the adjustment to reflect estimated forfeitures for prior periods. We recognized an increase to net earnings of $4 million related to the cumulative effect of a change in accounting principle for the adoption of SFAS No. 123R. See Note 5 for additional information.

As of January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 155,Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 amends SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. In addition, among other changes, SFAS No. 155 (i) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; (ii) establishes a requirement to evaluate interests in securitized financial assets

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (iii) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (iv) eliminates the prohibition on a qualifying special-purpose entity (“QSPE”) from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial interest. Adoption of SFAS No. 155 did not have a material impact on our consolidated financial statements.

Accounting pronouncements not yet adopted

In September 2005, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts.This statement provides guidance on accounting for deferred acquisition costs and other deferred balances on an internal replacement, defined broadly as a modification in product benefits, features, rights, or coverages that occurs by the exchange of an existing contract for a new contract, or by amendment, endorsement, or rider to an existing contract, or by the election of a benefit, feature, right, or coverage within an existing contract. WeDepending on the type of modification, the period over which these deferred balances will adoptbe recognized could be accelerated. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning January 1, 2007. Given its recent issuance, management is still assessingafter December 15, 2006. We are currently evaluating the impact that SOP 05-1 will have on our results of operations orand financial position.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R Share-Based Payments—an amendment of FASB Statements No. 123 and 95, which we will adopt on January 1, 2006. This statement provides additional guidance on accounting for share based payments and will require all such awards to be measured at fair value with the related compensation cost recognized in income on a prospective basis. We currently recognize compensation cost using the fair value method for all stock based awards issued after January 1, 2002 and do not expect the adoption of SFAS 123R to have a material impact on our results of operations or financial position.

GENWORTH FINANCIAL, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(3) Earnings per Common Share

Basic and diluted earnings per common share are calculated by dividing net earnings for the three and nine months ended September 30,March 31, 2006 and 2005 by the weighted average basic common shares outstanding and by the weighted average diluted common shares outstanding, for the corresponding period. The following is a summary of earnings per common share and weighted average shares outstanding:respectively.

 

    Three months ended
September 30,


    Nine months ended
September 30,


  Three months ended
March 31,
    2005

    2004

    2005

    2004

(Amounts in millions except for per share data)

      2006          2005    

Basic earnings per common share:

                        

Net earnings from continuing operations before accounting change

    $0.65    $0.55    $1.92    $1.63

Gain on sale of discontinued operations, net of taxes

     —       —       —       0.01

Net earnings before accounting change

  $0.71  $0.66

Cumulative effect of accounting change, net of taxes

     —       —       —       0.01   0.01   —  
    

    

    

    

      

Basic earnings per common share

    $0.65    $0.55    $1.92    $1.66  $0.72  $0.66
    

    

    

    

      

Diluted earnings per common share:

                        

Net earnings from continuing operations before accounting change

    $0.64    $0.55    $1.88    $1.63

Gain on sale of discontinued operations, net of taxes

     —       —       —       0.01

Net earnings before accounting change

  $0.69  $0.65

Cumulative effect of accounting change, net of taxes

     —       —       —       0.01   0.01   —  
    

    

    

    

      

Diluted earnings per common share

    $0.64    $0.55    $1.88    $1.65  $0.70  $0.65
      
    

    

    

    

Weighted-average shares used in basic earnings per common share calculations

     470.7     489.6     476.7     489.5   467.0   488.8

Dilutive securities:

                        

Stock purchase contracts underlying equity units

     6.4     —       4.9     —     7.5   3.6

Stock options and stock appreciation rights

     3.6     0.4     2.7     0.5   4.7   1.4

Restricted stock units

     0.4     0.4     0.4     0.4   0.3   0.5
    

    

    

    

      

Weighted-average shares used in diluted earnings per common share calculations

     481.1     490.4     484.7     490.4   479.5   494.3
    

    

    

    

      

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

4)(4) Investments

In August 2005, certainThe following table sets forth information about our net investment income for the components of our life insurance subsidiaries transferred approximately $1.7 billioninvestment portfolio for the periods indicated:

   For the three months ended March 31, 
               2006                          2005             

(Dollar amounts in millions)

       

Fixed maturities—taxable

  $719  $669 

Fixed maturities—non-taxable

   31   33 

Commercial mortgage loans

   121   98 

Equity securities

   7   6 

Other investments

   11   14 

Policy loans

   30   26 

Restricted investments held by securitization entities

   7   14 

Cash, cash equivalents and short-term investments

   17   8 
         

Gross investment income before expenses and fees

   943   868 

Expenses and fees

   (19)  (17)
         

Net investment income

  $924  $851 
         

The following table sets forth gross realized investment gains and losses resulting from the sales and impairments of investment securities classified as available-for-sale for the three months ended March 31:

(Dollar amounts in millions)

  2006  2005 

Gross realized investment

   

Gains on sale

  $22  $39 

Losses on sale

   (26)  (11)

Loss on derecognition of securitization entities

   (17)  —   

Impairment losses

   (1)  (34)
         

Net realized investment gains (losses)

  $(22) $(6)
         

For the three months ended March 31, 2006 and 2005, we recognized impairments of $1 million and $34 million, respectively. We generally intend to an affiliated special purpose entity (“SPE”), whose sole purpose ishold securities in unrealized loss positions until they recover. However, from time to securitize these investmenttime, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield enhancement and issue secured notes (the “Secured Notes”) to various affiliated companies.liquidity requirements. The securitized investments are owned in their entirety by the SPE and are not available to satisfy the claimsaggregate fair value of Genworth’s creditors. However, our life insurance subsidiaries are entitled to all principal and interest payments made on the Secured Notes as well as dividends and all proceeds upon liquidationsecurities sold at a loss during three months ended March 31, 2006, was $841 million, which was approximately 96.9% of the SPE. Under U.S. GAAP, the SPE is not a qualified SPE and therefore is consolidated into Genworth for financial reporting purposes. Accordingly, the investment securities are included within Genworth’s financial statements. The sale and contribution of the investment securities to the SPE as well as the Secured Notes issued by the SPE are eliminated in consolidation.book value.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

As of September 30,March 31, 2006, the amortized cost or cost, gross unrealized investment gains (losses), and estimated fair value of our fixed maturities and equity securities classified as available-for-sale were as follows:

(Dollar amounts in millions)

 Amortized
cost or
cost
 Gross
unrealized
gains
 Gross
unrealized
losses
  Estimated
fair value

Fixed maturities:

    

U.S. government, agencies and government sponsored entities

 $652 $16 $(11) $657

Tax exempt

  2,806  99  (5)  2,900

Government—non U.S.

  1,761  68  (4)  1,825

U.S. corporate

  25,208  581  (475)  25,314

Corporate—non U.S.

  9,242  203  (154)  9,291

Mortgage and asset-backed

  13,691  113  (232)  13,572
             

Total fixed maturities

  53,360  1,080  (881)  53,559

Equity securities

  165  34  (6)  193
             

Total available-for-sale securities

 $53,525 $1,114 $(887) $53,752
             

As of December 31, 2005, the amortized cost or cost, gross unrealized investment gains and losses, and estimated fair value of our fixed maturities and equity securities classified as available-for-sale were as follows:

 

(Dollar amounts in millions)


    Amortized
cost or
cost


    Gross
unrealized
gains


    Gross
unrealized
losses


   Estimated
fair value


 Amortized
cost or
cost
 Gross
unrealized
gains
 Gross
unrealized
losses
 Estimated
fair value

Fixed maturities:

                      

U.S. government, agencies and government sponsored entities

    $681    $36    $(2)  $715 $777 $32 $(4) $805

Tax exempt

     2,793     122     (2)   2,913  2,797  97  (4)  2,890

Government—non U.S.

     1,709     86     (2)   1,793  1,736  74  (4)  1,806

U.S. corporate

     25,628     1,158     (169)   26,617  25,378  975  (231)  26,122

Corporate—non U.S.

     8,820     369     (45)   9,144  9,168  306  (84)  9,390

Mortgage and asset-backed

     12,343     129     (85)   12,387  12,926  140  (142)  12,924
    

    

    


  

         

Total fixed maturities

     51,974     1,900     (305)   53,569  52,782  1,624  (469)  53,937

Equity securities

     278     90     (2)   366  173  36  (3)  206
    

    

    


  

         

Total available-for-sale securities

    $52,252    $1,990    $(307)  $53,935 $52,955 $1,660 $(472) $54,143
    

    

    


  

         

Included in other invested assets are certain securities that are designated as trading and, accordingly, are held at fair value with changes in fair value included in net realized investment gains (losses) in the condensed consolidated statement of earnings. As of March 31, 2006 and December 31, 2004,2005, the amortized cost or cost, gross unrealized gains and losses, and estimated fair value of the trading portfolio was $21 million and $15 million, respectively. There was no material unrealized investment gains (losses) on our fixed maturities and equity securities classifieddesignated as available-for-sale weretrading as follows:cost approximates fair value.

(Dollar amounts in millions)


    Amortized
cost or
cost


    Gross
unrealized
gains


    Gross
unrealized
losses


   Estimated
fair value


Fixed maturities:

                       

U.S. government, agencies and government sponsored entities

    $552    $21    $(1)  $572

Tax exempt

     2,908     123     (1)   3,030

Government—non U.S.

     1,681     66     (3)   1,744

U.S. corporate

     25,931     1,311     (141)   27,101

Corporate—non U.S.

     7,801     321     (22)   8,100

Mortgage and asset-backed

     11,749     175     (47)   11,877
     

    

    


  

Total fixed maturities

     50,622     2,017     (215)   52,424

Equity securities

     304     72     (2)   374
     

    

    


  

Total available-for-sale securities

    $50,926    $2,089    $(217)  $52,798
     

    

    


  

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

EffectiveThe following table presents the gross unrealized losses and estimated fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of March 2005, we began a repurchase program31, 2006:

   Less Than 12 Months  12 Months or more

2006

 

(Dollar amounts in millions)

  Estimated
fair value
  Gross
unrealized
losses
  # of
securities
  Estimated
fair value
  Gross
unrealized
losses
  # of
securities

Description of Securities

          

Fixed maturities:

          

U.S. government, agencies and government sponsored entities

  $317  $(9) 32  $68  $(2) 11

Tax exempt

   428   (4) 124   60   (1) 24

Government—non U.S.

   441   (3) 102   86   (1) 12

U.S. corporate

   10,920   (370) 935   1,921   (105) 254

Corporate—non U.S.

   3,718   (108) 442   916   (46) 101

Mortgage and asset backed

   7,633   (199) 751   1,077   (33) 214
                      

Subtotal, fixed maturities

   23,457   (693) 2,386   4,128   (188) 616

Equity securities

   10   (2) 10   31   (4) 21
                      

Total temporarily impaired securities

  $23,467  $(695) 2,396  $4,159  $(192) 637
                      

% Below cost—fixed maturities:

          

<20% Below cost

  $23,450  $(689) 2,381  $4,069  $(164) 602

20-50% Below cost

   6   (2) 2   58   (23) 13

>50% Below cost

   1   (2) 3   1   (1) 1
                      

Total fixed maturities

   23,457   (693) 2,386   4,128   (188) 616
                      

% Below cost—equity securities:

          

<20% Below cost

   8   (1) 8   26   (2) 13

20-50% Below cost

   2   (1) 2   5   (2) 8

>50% Below cost

   —     —    —     —     —    —  
                      

Total equity securities

   10   (2) 10   31   (4) 21
                      

Total temporarily impaired securities

  $23,467  $(695) 2,396  $4,159  $(192) 637
                      

Investment grade

  $22,607  $(677) 2,200  $3,731  $(151) 537

Below investment grade

   850   (17) 185   412   (37) 81

Not Rated—Fixed maturities

   —     —    —     —     —    —  

Not Rated—Equities

   10   (1) 11   16   (4) 19
                      

Total temporarily impaired securities

  $23,467  $(695) 2,396  $4,159  $(192) 637
                      

The investment securities in which we sell a security at a specified pricean unrealized loss position as of March 31, 2006 consist of 3,033 securities accounting for unrealized losses of $887 million. Of these unrealized losses 93.3% are investment grade (rated AAA through BBB-) and agree to repurchase that security at another specified price at a later date. Repurchase agreements96.5% are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired, including accrued interest, as specified in the respective agreement.less than 20% below cost. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturities. At September 30, 2005, the fair valueamount of the unrealized loss on these securities pledged under the repurchase program totaled $205 millionis primarily attributable to increases in interest rates and the offsetting repurchase obligation of $200 million is included in other liabilities on the Statement of Financial Position.

(5) Stockholders’ Interest

The following presents a summary of activity in stockholders’ interest for the nine months ended September 30, 2005:

(Dollar amounts in millions)


  

Additional

paid-in

capital


  

Accumulated

non-owner

changes in

stockholders’
interest


  Retained
earnings


  

Treasury
stock, at

cost


  Total
stockholders’
interest


 

Balances as of December 31, 2004

  $10,612  $1,609  $645  $—    $12,866 
                   


Changes other than transactions with stockholders:

                     

Net earnings

   —     —     914   —     914 

Net unrealized gains on investment securities

   —     21   —     —     21 

Derivatives qualifying as hedges

   —     131   —     —     131 

Foreign currency translation adjustments

   —     (47)  —     —     (47)
                   


Total changes other than transactions with stockholders

   —     —     —     —     1,019 
                   


Dividends and other transactions with stockholders

   —     —     (96)  —     (96)

Acquisition of treasury stock

   —     —     —     (500)  (500)

Capital contribution received from our then majority stockholder

   4   —     —     —     4 

Stock-based compensation

   35   —     —     —     35 
   

  


 


 


 


Balances as of September 30, 2005

  $10,651  $1,714  $1,463  $(500) $13,328 
   

  


 


 


 


A summary of changes in stockholders’ interest that did not result directly from transactions with our stockholders iscredit spreads.

Of the investment securities in an unrealized loss position as follows:of March 31, 2006, 22 securities are 20% or more below cost of which 10 securities are below investment grade (rated BB+ and below) for twelve months or

(Dollar amounts in millions)


    

Three months ended

September 30,


    2005

   2004

Net earnings

    $307   $271

Net unrealized gains (losses) on investment securities

     (498)   757

Derivatives qualifying as hedges

     (7)   84

Foreign currency translation adjustments

     55    19
     


  

Total

    $(143)  $1,131
     


  

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

(Dollar amounts in millions)


    

Nine months ended

September 30,


 
    2005

   2004

 

Net earnings

    $914   $811 

Net unrealized gains (losses) on investment securities

     21    (595)

Derivatives qualifying as hedges

     131    173 

Foreign currency translation adjustments

     (47)   (4)
     


  


Total

    $1,019   $385 
     


  


more and account for unrealized losses of $16 million. Three companies residing in the mining, automotive and airline industries issued these securities. Two of the issuers are current on all terms and the third is in default. The potential losses associated with the issuer in default in the mining industry are primarily due to liquidity problems, which resulted in the issuer commencing insolvency proceedings, however at this time we ultimately expect to collect full principal and interest.

As of March 31, 2006, we expect these investments to continue to perform in accordance with their original contractual terms and we have the ability and intent to hold these investment securities until the recovery of the fair value up to the cost of the investment, which may be maturity. Accordingly, we do not consider these investments to be other-than-temporarily impaired at March 31, 2006.

(5) Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123R under the modified prospective transition method. The statement requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors, including stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and deferred stock units (“DSUs”) under the 2004 Genworth Financial, Inc. Omnibus Incentive Plan (“Omnibus Incentive Plan”). We previously accounted for these awards under the fair value expense provisions of SFAS No. 123. Accordingly, on January 1, 2006, we recognized a $4 million after-tax increase to earnings related to our cumulative effect of adopting SFAS No. 123R.

We have recorded stock-based compensation expense in the amount of $13 million and $10 million and a deferred tax benefit in the amount of $5 million and $4 million for the three month periods ending March 31, 2006 and 2005, respectively, related to the estimated value of the RSUs, SARs and stock options. For awards issued prior to January 1, 2006, stock-based compensation expense is recognized on a graded vesting attribution method over the awards’ respective vesting schedule. For awards issued after January 1, 2006, stock-based compensation expense will be recognized evenly on a straight-line attribution method over the awards longest vesting period.

For purposes of determining the estimated fair value of stock-based payment awards on the date of grant we use the Black-Scholes Model. The Black-Scholes Model requires the input of certain assumptions that involve judgment. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies.

The following table contains the stock option weighted-average grant-date fair value information for March 31, 2005. There were no stock options granted for the quarter ended March 31, 2006. Fair value is estimated using the Black-Scholes Model.

 

   March 31, 2005 

Estimated fair value per option

  $9.68 

Valuation Assumptions:

  

Expected term (years)

   6 

Expected volatility

   34.2%

Expected dividend yield

   1.10%

Risk-free interest rate

   4.0%

Under the Omnibus Incentive Plan, we are authorized to grant 38 million equity awards.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For the periods ending March 31, 2006 and 2005, we granted 0 and 85,000 stock options with exercise prices ranging from $26.68 to $28.00, which equaled the closing market prices on the date of grant and have an exercise term of 10 years. The stock options will vest in 20% annual increments commencing on the first anniversary of the date of grant. Additionally, during the periods ending March 31, 2006 and 2005 we issued 0 and 306,842 RSUs with restriction periods ranging from 3 to 8 years and a fair value of $27.01, which is measured at the market price of a share of our nonrestricted stock on the grant date. There were no SARs granted during these periods. There were 15,590,541 and 15,007,743 stock options, 1,870,289 and 1,748,868 RSUs and 6,883,713 and 6,255,213 SARs outstanding as of March 31, 2006 and 2005, respectively.

A summary of stock option activity as of March 31, 2006, and changes during the three months then ended is presented below:

   Shares subject to
option
  Weighted average
exercise price

Balance as of January 1, 2006

  15,770,646  $21.93

Granted

  —    

Exercised

  (47,052) $22.88

Forfeited

  (133,053) $20.81

Expired

  —    
     

Balance as of March 31, 2006

  15,590,541  $21.94
     

Exercisable as of March 31, 2006

  3,586,515  $24.06
     

A summary of the status of our other equity-based awards as of March 31, 2006 and the changes during the three months then ended is presented below:

  Restricted stock units
(RSUs)
 Deferred stock units
(DSUs)
 Stock appreciation rights
(SARs)
  Number of
awards
  Weighted
average grant
date fair value
 Number of
awards
 Weighted
average grant
date fair value
 Number of
awards
 Weighted
average grant
date fair value

Balance as of January 1, 2006

 1,879,761  $24.74 16,868 $32.12 6,883,713 $7.02

Granted

 —     3,463 $32.12 —   

Exercised

 (67) $32.10 —    —   

Terminated

 (9,405) $32.41 —    —   
          

Balance as of March 31, 2006

 1,870,289  $24.71 20,331 $31.87 6,883,713 $7.02
          

As of March 31, 2006, there was $82 million of total unrecognized stock-based compensation cost related to non-vested awards not yet recognized. That cost is expected to be recognized over a weighted average period of 2 years.

Cash received from stock options exercised for the three months ending March 31, 2006, was $1 million. New shares were issued to settle all exercised awards. The actual tax benefit realized for the tax deductions from stock option exercises was $0 million for the three-month period ending March 31, 2006.

In our Condensed Consolidated Statement of Cash Flows, the amount included in the cash flows from operating activities and cash flows from investing activities related to stock option activities was not material to our consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes information about stock options outstanding as of March 31, 2006:

   Outstanding  Exercisable

Exercise price range

  Number of
shares
  Average
life(1)
  Average
exercise
price
  Number of
shares
  Average
exercise
price

$14.11 – $18.51

  1,872,174  5.74  $17.04  1,106,668  $16.88

$19.45 – $22.67

  9,970,015  7.93  $19.76  535,383  $21.77

$23.20 – $27.95

  1,681,616  4.83  $27.00  1,576,816  $27.08

$28.00 – $36.62

  2,065,775  8.46  $32.73  366,687  $35.99

$37.89 – $39.60

  961  5.32  $38.77  961  $38.77
                 
  15,590,541  7.41  $21.94  3,586,515  $24.06
            

(1)Average contractual life remaining in years

(6) Operating Segment Information

We conduct our operations in four business segments: (1) Protection, which includes our life insurance, long-term care insurance, Medicare supplement insurance, group life and health insurance and payment protection insurance; (2) Retirement Income and Investments, which includes our fixed, variable and incomesingle premium immediate annuities, variable life insurance, asset management and specialized products, including guaranteed investment contracts (“GICs”),GICs, funding agreements, funding agreements backing notes and structured settlements; (3) Mortgage Insurance, which includes our mortgage insurance products that facilitate homeownership by enabling borrowers to buy homes with low-down-payment mortgages; and (4) Corporate and Other, which includes net realized investment gains (losses), interest and other debt financing expenses and unallocatedother corporate income and expenses not allocated to the segments, as well as the results of several small, non-core businesses that are managed outside our operating segments.

In 2006, we began to allocate net realized investment gains (losses) from our Corporate and Other segment to our Protection (except payment protection insurance) and Retirement Income and Investments segments using an approach based principally upon the investment portfolio established to support each of those segments’ products and targeted capital levels. We do not allocate net realized investment gains (losses) from our Corporate and Other segment to our Mortgage Insurance segment or to our payment protection insurance business within the Protection segment, because they have their own separate investment portfolios, and net realized investment gains (losses) from those portfolios are reflected in the Mortgage Insurance and Protection segment results, respectively.

Prior to our corporate reorganization, we also conducted operations2006, all net realized investment gains (losses) were recorded in the AffinityCorporate and Other segment and were not reflected in the results of any of our other segments.

Effective January 1, 2006, GE Seguros (“Seguros”), a small Mexican-domiciled insurer, previously included in our Corporate and Other segment, is being managed within our Protection segment and whose results are now included as part of the payment protection insurance business. Segment information related to the Seguros move is reflected in all periods presented.

We use the same accounting policies and procedures to measure segment net operating earnings and assets as our consolidated net earnings and assets. Segment net operating earnings represent the basis on which includes life and health insurancethe performance of our business is assessed by management. Segment net operating earnings exclude after-tax net

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

realized investment gains (losses) (which can fluctuate significantly from period to period), and other financial productsadjustments, changes in accounting principles and services offered directly to consumers through affinity marketing arrangements with a variety of organizations, an institutional asset management business and several other small businesses thatinfrequent or unusual non-operating items. There were not part of our core ongoing business.

no non-recurring, infrequent or unusual items excluded from net operating earnings for the periods presented.

The following is a summary of revenues, segment activity:net operating earnings and reconciliation to total company net earnings for the three months ended March 31, 2006 and 2005:

 

     

Three months ended

September 30,


 

(Dollar amounts in millions)


    2005

   2004

 

Revenues

            

Protection

    $1,549   $1,474 

Retirement Income and Investments

     705    664 

Mortgage Insurance

     303    272 

Corporate and Other

     71    60 
     


  


Total revenues

    $2,628   $2,470 
     


  


Net earnings (loss) from continuing operations before accounting change

            

Protection

    $145   $135 

Retirement Income and Investments

     59    40 

Mortgage Insurance

     126    102 

Corporate and Other

     (23)   (6)
     


  


Total net earnings (loss) from continuing operations before accounting change

    $307   $271 
     


  


GENWORTH FINANCIAL, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

(Unaudited)

     

Nine months ended

September 30,


 

(Dollar amounts in millions)


    2005

   2004

 

Revenues

            

Protection

    $4,596   $4,557 

Retirement Income and Investments

     2,175    2,609 

Mortgage Insurance

     897    801 

Affinity

     —      218 

Corporate and Other

     181    230 
     


  


Total revenues

    $7,849   $8,415 
     


  


Net earnings (loss) from continuing operations before accounting change

            

Protection

    $416   $388 

Retirement Income and Investments

     179    118 

Mortgage Insurance

     388    319 

Affinity

     —      (14)

Corporate and Other

     (69)   (12)
     


  


Total net earnings (loss) from continuing operations before accounting change

    $914   $799 
     


  


   Three months ended
March 31,
 

(Dollar amounts in millions)

      2006          2005     

Revenues

   

Protection

  $1,552  $1,542 

Retirement Income and Investments

   713   735 

Mortgage Insurance

   335   294 

Corporate and Other

   25   40 
         

Total revenues

  $2,625  $2,611 
         

Segment net operating earnings (losses)

   

Protection

  $149  $139 

Retirement Income and Investments

   61   60 

Mortgage Insurance

   149   141 

Corporate and Other

   (14)  (14)
         

Total segment net operating earnings

   345   326 

Net realized investment gains (losses), net of taxes and other adjustments

   (15)  (4)
         

Net earnings before accounting change

   330   322 

Cumulative effect of accounting change, net of taxes

   4   —   
         

Net earnings

  $334  $322 
         

The following is a summary of total assets by operating segment:segment as of:

 

(Dollar amounts in millions)


    September 30,
2005


    

December 31,

2004


Assets

            

Protection

    $32,916    $31,806

Retirement Income and Investments

     58,271     56,610

Mortgage Insurance

     7,035     6,428

Corporate and Other

     7,467     9,034
     

    

Total assets

    $105,689    $103,878
     

    

(Dollar amounts in millions)

  March 31,
2006
  December 31,
2005

Assets

    

Protection

  $34,947  $33,945

Retirement Income and Investments

   58,195   58,281

Mortgage Insurance

   7,297   7,118

Corporate and Other

   4,468   6,310
        

Total assets

  $104,907  $105,654
        

(7) Commitments and Contingencies

(a) Litigation

We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

including punitive and treble damages, which may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our 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. At this time, it

(b) Commitments

As at March 31, 2006, we were committed to fund $241 million in U.S. commercial mortgage loans and $120 million to fund limited partnerships.

In January 2006, we agreed to acquire Continental Life Insurance Company, of Brentwood, Tennessee, for approximately $145 million. This transaction is not feasibleexpected to predict or determineclose in the ultimate outcomessecond quarter of all pending investigations and legal proceedings or to provide reasonable ranges of potential losses.

Recently, the insurance industry has become the focus of increased scrutiny by regulatory and law enforcement authorities concerning certain practices within the insurance industry. In this regard, in May 2005, we received a subpoena from the Northeast Regional Office of the Securities and Exchange Commission,

GENWORTH FINANCIAL, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

(Unaudited)

requiring the production of documents related to “certain loss mitigation insurance products,” such as finite risk reinsurance. We are cooperating fully with the SEC with respect to its subpoena. Additionally, in May and June 2005, certain of our subsidiaries received information requests from the State of Delaware Department of Insurance and the State of Connecticut Insurance Department on the same general subject. In June 2005, GE received a subpoena from the United States Attorney’s office for the Southern District of New York, also on the same general subject. In the subpoena, GE is defined as including, among other things, its subsidiaries and affiliates. We are cooperating with GE in connection with GE’s response to the subpoena. In the United Kingdom, the Financial Services Authority has initiated an industry-wide review of payment protection insurance products, as well as an industry-wide review of non-traditional financial arrangements. Also, in May 2005, each of our U.S. mortgage insurance subsidiaries received an information request from the State of New York Insurance Department with respect to captive reinsurance transactions with lender-affiliated reinsurers and other types of arrangements in which lending institutions receive from our subsidiary any form of payment, compensation or other consideration in connection with issuance of a policy covering a mortgagor of the lending institution. We are also cooperating with respect to these industry-wide regulatory inquiries.

2006.

(8) Borrowings

Long-term Senior notesCommercial Paper Facility

In September 2005,March 2006, we issued senior$229 million of commercial paper and we used the proceeds from this issuance to finance a stock repurchase from GEFAHI concurrently with its secondary offering. The notes havingunder the commercial paper program are offered pursuant to an aggregate principal amountexemption from registration under the Securities Act of $350 million, with an1933 and may have a maturity of up to 364 days from the date of issue. As of March 31, 2006 the weighted average interest rate equal to 4.95% per year payable semi-annually, and maturing in October 2015 (“2015 Notes”). The 2015 Notes are our direct, unsecured obligations and will rank equally with all of our existing and future unsecured and unsubordinated obligations. The 2015 Notes are not guaranteed by any subsidiary of Genworth Financial, Inc. We have the option to redeem all or a portion of the 2015 Notes, at any time with proper notice to the noteholders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread.

The net proceeds of $348 million from the issuance of the 2015 Notes were used to reduce our outstandingon commercial paper borrowings.

Revolving Credit Facilities

In April 2005, we entered into a $1.0 billion revolving credit facility (“2010 Facility”) which matures in April 2010. The 2010 Facility replaced our 364-day credit facility, whichoutstanding was scheduled to mature in May, 2005. We also have a $1.0 billion five-year revolving credit facility that matures in May 2009. As of September 30, 2005 we have utilized $170 million of4.68% and the commitment under these facilities with the issuance of a letter of credit for the benefit of one of our mortgage insurance subsidiaries. Each of these facilities bears a floating interest rate based on certain indices plus an applicable margin.

weighted average maturity was 22 days.

Non-recourse funding obligationsFunding Obligations

We have issued non-recourse funding obligations in connection with our capital management strategy related to our term life insurance business.

In September 2005,On January 20, 2006, River Lake Insurance Company II issued $300 million of non-recourse funding obligations (the “Fourth RL Issuance”). In June 2005 III (“River Lake Insurance Company issued $200 million of non-recourse funding obligations (the “Third RL Issuance”III”). The Third and Fourth RL Issuance are in addition to

GENWORTH FINANCIAL, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

(Unaudited)

$900 million of non-recourse funding obligations previously issued by River Lake Insurance Company and River Lake Insurance Company II. River Lake Insurance Company and River Lake Insurance Company II are both, a special purpose financial captive insurance company wholly owned subsidiaries ofby First Colony Life Insurance Company which is(“First Colony”), itself an indirect wholly owned subsidiary of Genworth.

AsGenworth, issued $750 million in aggregate principal amount of September 30, 2005 and December 31, 2004, we had $1,400 million and $900 million of non-recourse funding obligations outstanding, respectively. Of the $1,400 million non-recourse funding obligations, $800 million mature in 2033 and $600 million mature in 2035. The floating rate surplus notes due 2036 (the “Notes”). River Lake III has received regulatory approval to issue additional series of its floating rate surplus notes up to an aggregate amount of $1,200 million (including the Notes), but is under no obligation to do so. The Notes are direct financial obligations of River Lake III and are not guaranteed by First Colony or Genworth.

The Notes were issued by River Lake III to fund statutory reserves required by the Valuation of Life Insurance Policies Regulation. River Lake III has reinsured on a coinsurance basis from First Colony certain term life insurance policies having guaranteed level premiums. The Notes have been depositedsold to Lehman Brothers Inc. for deposit into a series ofcertain Delaware trusts that have issuedwill issue money market or term securities. BothThe principal and interest payments due on the money market and term securities are guaranteedwill be insured by a third party insurance company. The holders of the money market or term securitiesNotes cannot require repayment from usGenworth or any of ourits subsidiaries, other than River Lake Insurance Company or River Lake Insurance Company II, as applicable,III, the direct issuersissuer of the notes.Notes. First Colony Life Insurance Company has agreed to indemnify the issuersRiver Lake III and the third party insurer for certain limited costs related to the issuance of these obligations.costs.

InterestRiver Lake III will pay interest on the principal amount of the notes issued by River Lake Insurance Company and River Lake Insurance Company II accrues atNotes on a floating rate of interest based on one-month LIBOR plus an applicable margin or market rate.monthly basis, subject to regulatory approval. Any payment of principal, including by redemption, or interest on the notesNotes may only be made with the prior approval of the Director of Insurance of the State of South Carolina in accordance with the terms of its licensing ordersorder and in accordance with applicable law. The holders of the notesNotes have no rights to accelerate payment of principal of the notesNotes under any circumstances, including without limitation, for

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

nonpayment or breach of any covenant. Each issuerRiver Lake III reserves the right to repay the notes that it has issuedNotes at any time, subject to the terms of the Notes and prior regulatory approval.

TheAs of March 31, 2006, the weighted average interest rate on theour non-recourse funding obligations as of September 30, 2005 and December 31, 2004 is 3.8% and 2.4%, respectively.was 4.85%. Because the non-recourse funding obligations bear variable interest rates, carrying value approximates fair value as of September 30, 2005.March 31, 2006.

(9) Securitization Entities

General Electric Capital Corporation (“GE Capital”), our former indirect majority stockholder, provides credit and liquidity support to a funding conduit it sponsored, which exposes it to a majority of the risks and rewards of the conduit’s activities and therefore makes GE Capital the primary beneficiary of the funding conduit. Upon adoption of FIN 46, GE Capital was required to consolidate the funding conduit because of this financial support. As a result, assets and liabilities of certain previously off-balance sheet securitization entities, for which we were the transferor, were required to be included in our condensed consolidated financial statements because the funding conduit no longer qualified as a third-party. Because these securitization entities lost their qualifying status, we were required to recognize $1.2 billion of securitized assets and $1.1 billion of associated liabilities in our condensed consolidated statement of financial position in July 2003. The assets and liabilities associated with these securitization entities have been reported in the corresponding financial statement captions in our condensed consolidated statement of financial position, and the assets are noted as restricted due to the lack of legal control we have over them. We apply the same accounting policies to these restricted assets and liabilities as we do to our unrestricted assets and liabilities.

As a result of GE Capital no longer having an ownership interest in us as of March 2006, the respective funding conduit re-qualified as a third party and these securitization entities regained their qualifying status under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. As a result, the assets were effectively re-securitized and the related assets and liabilities were derecognized from our consolidated financial statements. This resulted in a reduction from December 31, 2005 balances of $685 million, $44 million, $660 million and $15 million of restricted investments held by securitization entities, other assets, borrowings related to securitization entities and other liabilities, respectively. We continue to hold a retained interest in the form of interest-only strips classified as fixed maturity securities available-for-sale on our condensed consolidated statements of financial position. We recognized a realized investment loss on sale of $11 million, net of tax, from this re-securitization transaction.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited historical financial statements and related notes as well as the pro forma financial information and related notes included herein.

Cautionary note regarding forward-looking statements

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will,” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to global political, economic, business, competitive, market, regulatory and other factors and risks, including the following:

 

Risks relating to our businesses, including interest rate fluctuations, downturns and volatility in equity markets, defaults in portfolio securities, downgrades in our financial strength and credit ratings, insufficiency of reserves, legal constraints on dividend distributions by subsidiaries, illiquidity of investments, competition, inability to attract or retain independent sales intermediaries and dedicated sales specialists, defaults by counterparties, foreign exchange rate fluctuations, regulatory restrictions on our operations and changes in applicable laws and regulations, legal or regulatory actions or investigations, political or economic instability, the failure or any compromise of the security of our computer systems and the occurrence of natural or man-made disasters;
Risks relating to our businesses, including interest rate fluctuations, downturns and volatility in equity markets, defaults in portfolio securities, downgrades in our financial strength and credit ratings, insufficiency of reserves, legal constraints on dividend distributions by subsidiaries, illiquidity of investments, competition, inability to attract or retain independent sales intermediaries and dedicated sales specialists, availability and adequacy of reinsurance, defaults by counterparties, foreign exchange rate fluctuations, regulatory restrictions on our operations and changes in applicable laws and regulations, legal or regulatory investigations or actions, political or economic instability, the failure or any compromise of the security of our computer systems and the occurrence of natural or man-made disasters or a pandemic disease;

 

Risks relating to our Protection and Retirement Income and Investments segments, including unexpected changes in mortality, morbidity and unemployment rates, accelerated amortization of deferred acquisition costs and present value of future profits, goodwill impairments, medical advances such as genetic mapping research, unexpected changes in persistency rates, increases in statutory reserve requirements, the failure of demand for long-term care insurance to increase as we expect and changes in tax and securities laws;
Risks relating to our Protection and Retirement Income and Investments segments, including unexpected changes in morbidity, mortality and unemployment rates, accelerated amortization of deferred acquisition costs and present value of future profits, goodwill impairments, reputational risks if we were to raise premiums on in-force long-term care insurance products, medical advances such as genetic mapping research, unexpected changes in persistency rates, increases in statutory reserve requirements, the failure of demand for long-term care insurance to increase as we expect and changes in tax and securities laws;

 

Risks relating to our Mortgage Insurance segment, including the influence of Fannie Mae, Freddie Mac and a small number of large mortgage lenders and investors, increased regulatory scrutiny of Fannie Mae and Freddie Mac resulting in possible regulatory changes, decreases in the volume of high loan-to-value mortgage originations, increases in mortgage insurance cancellations, increases in the use of simultaneous second mortgages and other alternatives to private mortgage insurance and reductions by lenders in the level of coverage they select, unexpected increases in mortgage insurance default rates or severity of defaults, deterioration in economic conditions, insufficiency of premium rates to compensate us for risks associated with mortgage loans bearing high loan-to-value ratios, increases in the use of captive reinsurance in the mortgage insurance market, changes in the demand for mortgage insurance that could arise as a result of efforts of large mortgage investors, legal or regulatory actions or investigations under applicable laws and regulations, including the Real Estate Settlement Practices Act and the Federal Fair Credit Reporting Act, potential liabilities in connection with contract underwriting services and growth in the European mortgage insurance market that is lower than we expect; and
Risks relating to our Mortgage Insurance segment, including the influence of Fannie Mae, Freddie Mac and a small number of large mortgage lenders and investors, increased regulatory scrutiny of Fannie Mae and Freddie Mac resulting in possible regulatory changes, decreases in the volume of high loan-to-value mortgage originations or increases in mortgage insurance cancellations, increases in the use of simultaneous second mortgages and other alternatives to private mortgage insurance and reductions by lenders in the level of coverage they select, unexpected increases in mortgage insurance default rates or severity of defaults, deterioration in economic conditions, insufficiency of premium rates to compensate us for risks associated with mortgage loans bearing high loan-to-value ratios, increases in the use of captive reinsurance in the mortgage insurance market, changes in the demand for mortgage insurance that could arise as a result of efforts of large mortgage investors, legal or regulatory actions or investigations under applicable laws and regulations, including the Real Estate Settlement Practices Act and the Federal Fair Credit Reporting Act, competition with government-owned and government-sponsored entities, potential liabilities in connection with contract underwriting services and growth in the European mortgage insurance market that is lower than we expect; and

 

Risks relating to our separation from GE, including the loss of benefits associated with GE’s brand and reputation, our need to establish our new Genworth brand identity quickly and effectively, the lack of comparability between our financial information for periods before the IPO and for periods after the IPO, the possibility that we will not be able to replace services previously provided by GE on terms that are at least as favorable, the possibility that in certain circumstances we will be obligated to make payments to GE under our tax matters agreement even if our corresponding tax savings either are delayed or never materialize, the possibility that in the event of a change in control of our company we would have insufficient funds to meet accelerated obligations under the tax matters agreement, GE’s control over certain tax matters that could have an impact on us, potential conflicts of interest with GE and GE’s engaging in the same type of business as we do in the future.

Risks relating to our separation from GE, including the loss of benefits associated with GE’s brand and reputation, our need to establish the new Genworth brand identity quickly and effectively, the possibility that we will not be able to replace services previously provided by GE on terms that are at least as favorable, the possibility that in certain circumstances the we will be obligated to make payments to GE under our tax matters agreement even if our corresponding tax savings either are delayed or never materialize, the possibility that in the event of a change in control of our company we would have

insufficient funds to meet accelerated obligations under the tax matters agreement, the possibility that certain service agreements with GE are not extended on favorable terms, and the significance of our distribution relationship with GE in our payment protection insurance business.

We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Overview

Our business

We are a leading insurance company in the U.S., with an expanding international presence. We have three primary operating segments: Protection, Retirement Income and Investments, and Mortgage Insurance.

 

  ProtectionProtection.. We offer U.S. customers life, insurance, long-term care and Medicare supplement insurance and, group life and health insurance primarily for companies with fewer than 1,000 employees.employees, group life and health insurance. In Europe, we offer payment protection insurance, (PPI), which helps consumers meet their payment obligations in the event of illness, involuntary unemployment, disability or death. Beginning January 1, 2006, GE Seguros, a small Mexican-domiciled multi-line insurer that was previously included in our Corporate and Other segment, is being managed within our Protection segment and whose results are now included as part of the payment protection insurance business. For the three months ended September 30,March 31, 2006 and 2005, and 2004 our Protection segment had segment net operating earnings of $145$149 million and $135 million, respectively. For the nine months ended September 30, 2005 and 2004 our Protection segment had segment net earnings of $416 million and pro forma segment net earnings of $387$139 million, respectively.

 

  Retirement Income and InvestmentsInvestments.. We offer U.S. customers fixed and variable deferred annuities, incomesingle premium immediate annuities, variable life insurance, asset management and specialized products, including GIC’s,guaranteed investment contracts, funding agreements, funding agreements backing notes and structured settlements. For the three months ended September 30,March 31, 2006 and 2005, and 2004 our Retirement Income and Investments segment had segment net operating earnings of $59$61 million and $40 million, respectively. For the nine months ended September 30, 2005 and 2004 our Retirement Income and Investments segment had segment net earnings of $179 million and pro forma segment net earnings of $113$60 million, respectively.

 

  Mortgage InsuranceInsurance.. We offer mortgage insurance products in In the U.S., Canada, Australia, Europe, New Zealand, Mexico and EuropeJapan, we offer mortgage insurance products that facilitate homeownership by enabling borrowers to buy homes with low-down-payment mortgages. For the three months ended September 30,March 31, 2006 and 2005, and 2004, our Mortgage Insurance segment had segment net operating earnings of $126$149 million and $102 million, respectively. For the nine months ended September 30, 2005 and 2004 our Mortgage Insurance segment had segment net earnings of $388 million and $319$141 million, respectively.

We also have a Corporate and Other segment, which consists primarily of unallocated corporate income and expenses (including amounts accrued in settlement of some class action lawsuits), the results of a few small, non-core businesses that are managed outside of our operating segments, and most of our interest and other financing expenses and net realized investment (losses) gains.expenses. For the three months ended September 30,March 31, 2006 and 2005, and 2004 our Corporate and Other segment had a segment net lossoperating losses of $23$14 million and $6$14 million, respectively. For the nine months ended September 30, 2005 and 2004, the Corporate and Other segment had a segment net loss of $69 million and pro forma segment net loss of $35 million, respectively.

Our corporate reorganization

We were incorporated in Delaware on October 23, 2003 in preparation for our corporate reorganization and the IPO. In connection with the IPO, we acquired substantially all of the assets and liabilities of GEFAHI. GEFAHI is an indirect subsidiary of GE and prior to the completion of the IPO, was a holding company for a group of companies that provide life insurance, long-term care insurance, group life and health insurance, annuities and other investment products and U.S. mortgage insurance. We also acquired certain other insurance businesses that were owned by other GE subsidiaries but managed by members of the Genworth management team. These businesses included international mortgage insurance, payment protection insurance, a Bermuda reinsurer and mortgage contract underwriting. In consideration for the assets that we acquired and the liabilities that we assumed in connection with our corporate reorganization, we issued to GEFAHI 489.5 million shares of our Class B Common Stock, $600 million of our Equity Units, $100 million of our Series A Preferred Stock, a $2.4 billion note and a $550 million Contingent Note. We refinanced the $2.4 billion note with $1.9 billion of senior notes and $500 million of commercial paper shortly after the IPO and we repaid the Contingent Note in December 2004.

Basis of financial information

The financial information presented herein has been derived from our condensed consolidated financial statements, which have been prepared as if Genworth had been in existence throughout all relevant periods. Our financial information and statements include all businesses that were owned by GEFAHI, including those that were not transferred to us in connection with our corporate reorganization, as well as the other insurance businesses that we acquired from other GE subsidiaries in connection with our corporate reorganization. In addition to our three operating segments and our Corporate and Other segment, our historical financial statements also include the results of (1) the Partnership Marketing Group business, which offers life and health insurance, auto club memberships and other financial products and services directly to consumers through affinity marketing arrangements with a variety of organizations, (2) an institutional asset management business owned by GEFAHI, and (3) several other small businesses owned by GEFAHI that are not part of our core ongoing business.

We did not acquire the Partnership Marketing Group business, the institutional asset management business or these other small businesses from GEFAHI, and their results are presented as a separate operating segment under the caption Affinity.

The unaudited pro forma information presented herein reflects our financial information for the nine months ended September 30, 2004, as adjusted to give effect to the reinsurance transactions, the transactions included in our corporate reorganization, and the other transactions described in the notes to the pro forma financial information under “Notes to Pro Forma Financial Information,” as if each had occurred as of January 1, 2004. There were no pro forma adjustments for the three months ended September 30, 2004 or for the three or nine months ended September 30, 2005.

statements.

Revenues and expenses

Our revenues consist primarily of the following:

 

  Protection. The revenues in our Protection segment consist primarily of:

 

net premiums earned on individual life, individual long-term care, group life and health, and payment protection insurance policies;

net investment income and net realized investment gains (losses) on the separate investment portfolio held by our payment protection insurance business, orand net investment income and net realized investment gains (losses) allocated to this segment’s other lines of business; and

 

policy fees and other income, including fees for mortality and surrender charges primarily from universal life insurance policies, and other administrative charges.

 

  Retirement Income and Investments. The revenues in our Retirement Income and Investments segment consist primarily of:

 

net premiums earned on incomesingle premium immediate annuities and structured settlements with life contingencies;

 

net investment income and net realized investment gains (losses) allocated to this segment; and

 

policy fees and other income, including surrender charges, mortality and expense charges, investment management fees and commissions.

 

  Mortgage Insurance. The revenues in our Mortgage Insurance segment consist primarily of:

 

net premiums earned on mortgage insurance policies;

 

net investment income and net realized investment gains (losses) on the segment’s separate investment portfolio; and

 

policy fees and other income, including fees from contract underwriting services.

 

  Corporate and Other. The revenues in our Corporate and Other segment consist primarily of:

 

net premiums, policy fees and other income from the insurance businesses in this segment; and

unallocated net investment income;income and

net realized investment gains (losses).

WeIn 2006, we began to allocate net realized investment incomegains (losses) from our Corporate and Other segment to our Protection (except payment protection insurance) and Retirement Income and Investments segments using an approach based principally upon the investment portfolioportfolios established to support each of those segments’ products and targeted capital levels. We do not allocate net realized investment incomegains (losses) from our Corporate and Other segment to our Mortgage Insurance segment or to our payment protection insurance productbusiness within the Protection segment, because they have their own separate investment portfolios, and the net realized investment incomegains (losses) from those portfolios is reflected in the Mortgage Insurance and Protection segment results. In our financial statements, we allocated net investment income

Prior to our Affinity segment in the same manner that we allocated these items to our Protection and Retirement Income and Investments segments.

All2006, all net realized investment gains (losses) are reflectedwere recorded in the Corporate and Other segment and arewere not reflected in the results of any of our other segments.

Our expenses consist primarily of the following:

 

benefits provided to policyholders and contractholders and changes in reserves;

 

interest credited on general account balances;

 

underwriting, acquisition and insuranceoperating expenses, including commissions, marketing expenses, policy and contract servicing costs, overhead and other general expenses that are not capitalized (shown net of deferrals);

 

amortization of deferred policy acquisition costs and other intangible assets;

 

interest and other financing expenses; and

 

income taxes.

We allocate corporate expenses to each of our operating segments based on the amount of capital allocated to that segment.

Critical accounting policies

ThereThe accounting policies discussed in this section are several accounting policiesthose that we consider to be particularly critical to an understanding of our financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. These policies relate to reserves,valuation of investment securities and impairment of investment securities, deferred acquisition costs (DAC), present value of future profits (PVFP), goodwill impairment, valuation of investment securitiesgoodwill, reserves, unearned premiums, derivatives, and impairment of investment securities.contingent liabilities. For a discussion of each of these policies, please see the discussion entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Critical Accounting Policies” contained in our Annual Report on Form 10-K for the year ended December 31, 2004.2005. For all of these critical accounting policies, we caution that future events rarely develop exactly as forecasted,forecast, and our management’s best estimates may require adjustment.

For single premium mortgage insurance contracts, we recognize premiums over the policy life in accordance with the expiration of risk. We recognize a portion of the revenue in premiums earned in the current period, while the remaining portion is deferred as unearned premiums and earned over time in accordance with the expected expiration of risk, an average of ten years. If single premium policies related to insured loans are cancelled and the premium is non-refundable, then the remaining unearned premium related to each cancelled policy is recognized to earned premiums upon notification of the cancellation. Estimation of risk expiration on which we base premium recognition is inherently judgmental and is based on actuarial analysis of historical experience. We periodically review our premium earnings recognition models with any adjustments to the estimates reflected in current period earnings.

Pro Forma Financial Information

The following unaudited pro forma financial information table reflects our historical statements of earnings for the nine month period ended September 30, 2004, as adjusted to give effect to the transactions described in the notes hereto as if each had occurred as of January 1, 2004. There were no pro forma adjustments for the three month period ended September 30, 2004.

The unaudited pro forma financial information is based upon available information and assumptions that we believe are reasonable, is for illustrative and informational purposes only and is not intended to represent or be indicative of what our results of operations would have been had the transactions described above occurred on the dates indicated. The unaudited pro forma financial information also should not be considered representative of our future results of operations.

PRO FORMA FINANCIAL INFORMATION

(Amounts in millions, except per share data)

(Unaudited)

     Nine months ended September 30, 2004

     Historical

    

Pro forma

adjustments—

excluded

assets and

liabilities(a)


   

Pro forma

adjustments—

reinsurance

transactions(b)


   

Pro forma

adjustments—

capital

structure(c)


   

Pro

forma


Revenues:

                           

Premiums

    $4,953    $(80)  $(91)  $—     $4,782

Net investment income

     2,823     (28)   (460)   —      2,335

Net realized investment gains

     27     (3)   —      —      24

Policy fees and other income

     612     (103)   (57)   —      452
     

    


  


  


  

Total revenues

     8,415     (214)   (608)   —      7,593
     

    


  


  


  

Benefits and expenses:

                           

Benefits and other changes in policy reserves

     3,675     (71)   (393)   —      3,211

Interest credited

     1,088     —      (113)   —      975

Underwriting, acquisition, and insurance expenses, net of deferrals

     1,445     (117)   (38)   —      1,290

Amortization of deferred acquisition costs and intangibles

     830     (46)   (56)   —      728

Interest expense

     154     —      —      26    180
     

    


  


  


  

Total benefits and expenses

     7,192     (234)   (600)   26    6,384
     

    


  


  


  

Earnings from continuing operations before income taxes and accounting change

     1,223     20    (8)   (26)   1,209

Provision for income taxes

     424     13    (4)   (8)   425
     

    


  


  


  

Net earnings from continuing operations

    $799    $7   $(4)  $(18)  $784
     

    


  


  


  

Net earnings from continuing operations per common share:

                           

Basic

    $1.63                   $1.60
     

                   

Diluted

    $1.63                   $1.60
     

                   

Weighted-average common shares outstanding:

                           

Basic

     489.5                    489.5
     

                   

Diluted

     490.4                    490.4
     

                   

See Notes to Pro Forma Financial Information.

Notes to Pro Forma Financial Information

(a)Reflects adjustments to exclude amounts included in our historical earnings relating to (1) certain businesses (formerly reported in the company’s Affinity segment) and certain investment partnerships, which in each case were not transferred to the company, and (2) net realized investment (gains) losses and related tax benefit arising from sales of Affinity segment assets that were reflected in our Corporate and Other segment.

(b)Reflects adjustments to record the effects of the reinsurance transactions we entered into with, and the related contribution we made to Union Fidelity Life Insurance Co. (“UFLIC”), an indirect subsidiary of GE. As part of these transactions, we ceded to UFLIC all of our in-force structured settlement contracts, substantially all of our in-force variable annuity contracts, and a block of long-term care insurance policies that we reinsured from Travelers in 2000, and we assumed from UFLIC a block of Medicare supplement insurance, all effective as of January 1, 2004.

The unaudited pro forma earnings information for 2004 gives effect to the reinsurance transactions as if each had occurred as of January 1, 2004 and excludes the effects of all ceded reinsured contracts that were issued before January 1, 2004. We have continued to sell variable annuities and structured settlements after completion of the reinsurance transactions and are retaining that business for our own account, subject to third party reinsurance in the ordinary course of business. Our pro forma statement of earnings for the nine months ended September 30, 2004 excludes the impact of the entire block of long-term care insurance policies that we ceded to UFLIC as we did not issue any new policies for this block in 2004, and we will not issue any in the future.

Under the reinsurance transactions, we receive an expense allowance to reimburse us for costs we incur to service the reinsured blocks. Actual costs and expense allowance amounts will be determined by expense studies to be conducted periodically. The pro forma adjustments have been prepared assuming that actual costs incurred during the pro forma periods, as determined under our historical cost structure and allocation methods, were reimbursed by an expense allowance.

Concurrently with the reinsurance transactions, we contributed $1.836 billion of capital to UFLIC, which primarily represented the excess statutory capital in our insurance subsidiaries after giving effect to the reinsurance transactions. As a significant portion of the assets transferred and contributed were not owned for the entire period, the pro forma adjustments to reduce net investment income and net realized investment gains were based upon a proportional allocation of investment income from the investment assets historically identified as (1) supporting the blocks of business reinsured for the reinsurance, and (2) representing surplus of subsidiaries providing assets that were contributed to UFLIC.

(c)Reflects adjustments for changes in our capitalization to exclude the impact of commercial paper, short-term borrowings from GE Capital and derivatives that were not transferred to us in connection with the corporate reorganization and to include the impact of the issuance of $600 million of the company’s 6.00% Equity Units and $100 million of the company’s 5.25% mandatory redeemable Series A Cumulative Preferred Stock, both of which were completed on May 28, 2004, the issuance of 3, 5, 10 and 30 year notes totaling $1.9 billion which was completed June 15, 2004, and the issuance of $500 million of commercial paper which was completed June 14, 2004, as well as interest expense related to the accretion of the company’s obligation to GE under the Tax Matters Agreement and the tax impacts resulting from these changes in the company’s capitalization.

Net operating earnings

The following table presents our “net operating earnings” for the three and nine months ended September 30, 2005 and 2004. “Net operating earnings” is a non-GAAP financial measure that we define as net earnings from continuing operations, excluding after-tax net realized investment gains and losses (which can fluctuate significantly from period to period), changes in accounting principles and infrequent or unusual non-operating items. There were no infrequent or unusual non-operating items excluded from net operating earnings in the three and nine months ended September 30, 2005 and 2004 other than a $22 million IPO-related tax charge in the second quarter of 2004.

Management believes that analysis of net operating earnings enhances understanding and comparability of performance by highlighting underlying business activity and profitability drivers. However, net operating earnings should not be viewed as a substitute for net earnings in accordance with GAAP. In addition, our definition of net operating earnings may differ from the definitions used by other companies. The table below provides a reconciliation of net earnings to net operating earnings (as defined above) for the three and nine months ended September 30, 2005 and 2004 and to pro forma net earnings from continuing operations for the three and nine months ended September 30, 2004.

RECONCILIATION TO NET OPERATING EARNINGS

(Amounts in millions, except per share data)

(Unaudited)

     Three months ended
September 30,


   Nine months ended
September 30,


 
     2005

    2004

   2005

    2004

 

Net earnings

    $307    $271   $914    $811 

Gain on sale of discontinued operations, net of taxes

     —       —      —       (7)

Cumulative effect of accounting change, net of taxes

     —       —      —       (5)
     

    


  

    


Net earnings from continuing operations before accounting change

     307     271    914     799 

Net realized investment losses (gains), net of taxes

     4     (2)   8     (17)

Net tax expense related to initial public offering

     —       —      —       22 
     

    


  

    


Net operating earnings

    $311    $269   $922    $804 
     

    


  

    


Net earnings from continuing operations before accounting change

                     $799 

Excluded assets and liabilities(a)

                      7 

Reinsurance transactions(b)

                      (4)

Capital structure and other(c)

                      (18)
                      


Pro forma net earnings from continuing operations

                      784 

Net realized investment gains, net of taxes

                      (16)

Net tax expense related to initial public offering

                      22 
                      


Pro forma net operating earnings

                     $790 
                      


Net earnings per common share:

                        

Basic

    $0.65    $0.55   $1.92    $1.66 
     

    


  

    


Diluted

    $0.64    $0.55   $1.88    $1.65 
     

    


�� 

    


Net earnings from continuing operations before accounting change per common share:

                        

Basic

    $0.65    $0.55   $1.92    $1.63 
     

    


  

    


Diluted

    $0.64    $0.55   $1.88    $1.63 
     

    


  

    


Net operating earnings per common share:

                        

Basic

    $0.66    $0.55   $1.93    $1.64 
     

    


  

    


Diluted

    $0.65    $0.55   $1.90    $1.64 
     

    


  

    


Pro forma net earnings from continuing operations per common share:

                        

Basic

                     $1.60 
                      


Diluted

                     $1.60 
                      


Pro forma net operating earnings per common share:

                        

Basic

                     $1.61 
                      


Diluted

                     $1.61 
                      


Weighted-average common shares outstanding:

                        

Basic

     470.7     489.6    476.7     489.5 
     

    


  

    


Diluted

     481.1     490.4    484.7     490.4 
     

    


  

    


See Notes to Pro Forma Financial Information.

Recent business trends and conditions

The following business trends and conditions have had a significant impact on our products during the periods covered by this report:

Life insurance. Results in our life insurance business are impacted by sales, mortality, persistency, investment yields, and the effective use of capital. Additionally, sales of new products are dependent on competitive product features and pricing, distribution expansion and penetration, and consistent customer service. Regulation XXX requires insurers to establish additional statutory reserves for term and universal life insurance policies with long-term premium guarantees, which increases the capital required to write these products. For term life insurance, we have implemented capital management actions that improve our new business returns and enablehave enabled us to decrease our premium rates. Our competitive pricing, as well as our new product offerings, distribution expansion and ongoing service initiatives, have led to higher term and universal life insurance sales. Our annualized first-year premiums and deposits for life insurance products increased by 58% from $36 million for the three months ended September 30, 2004 to $57 million for the three months ended September 30, 2005 and by 40% from $105 million for the nine months ended September 30, 2004 to $147 million for the nine months ended September 30, 2005. Recently, several competitors have executed similar capital management actions and lowered their term prices, which could have an impact on our future sales.make the market more competitive and affect sales levels over time. In addition, an October 2005 revision to actuarial guidelines for Regulation XXX, effective for universal life policies issued since July 1, 2005, may increase the reserves of certain companies on a statutory basis. Reserves for our universal life policies already meet the requirements of this guideline, so we expect that it will not have an impact on our capital requirements.

Long-term care insurance.Results of our long-term care insurance business are influenced by morbidity, persistency, investment yields, new product sales and expenses. Industry-wide first-year annualized premiums of individual long-term care insurance decreased approximately 8%5% and industry-wide US employer based group long-term care first-year annualized premiums increased by 12% for the sixtwelve months ended June 30,December 31, 2005 over the sixtwelve months ended June 30,December 31, 2004, according to the most recently published data by LIMRA International. Our annualized first-year premiums have increased by 5% from $39 million for the three months ended September 30, 2004 to $41 million for the three months ended September 30, 2005 and by 2% from $121 million for the nine months ended September 30, 2004 to $124 million for the nine months ended September 30, 2005. Our annualized first-year premiumsales stability in a challenging market reflects the breadth of our distribution and progress across multiple growth initiatives.initiatives with an emphasis on broadening our product offerings. However, slower than anticipated sales growth, the continued low interest rate environment, and relatively lower mortality related termination rates on our older issued policies, along with reduced net investment income due to lower required capital, will likelycould result in relatively flatlower segment net operating earningsearnings. In response to these trends, we will continue to pursue multiple growth initiatives, continue investing in claims process improvements, execute investment strategies and, if appropriate, consider rate increases to improve loss ratios. In addition, in January 2006, we agreed to acquire Continental Life Insurance Company of Brentwood, Tennessee, a provider of Medicare supplement insurance, for approximately $145 million. We expect to close this acquisition during the next several quarters.second quarter of 2006. The acquisition will enhance our presence in the senior supplemental market by more than doubling our existing annualized premiums for this product and giving us access to approximately 4,200 independent agents.

Payment protection insurance.insurance. Growth of our payment protection insurance business is dependent on economic conditions including consumer lending levels and client account penetration and the number of

countries and markets we enter. Additionally, the types and mix of our products will vary based on regulatory and consumer acceptance of our products. Our payment protection insurance business continuedcontinues to show strong performance associated with expanded distribution, products and markets. In the aggregate, written premiums, gross of reinsurance and cancellations, in the payment protection insurance business increased by 14% from $397 million for the three months ended September 30, 2004 to $454 million for the three months ended September 30, 2005 and by 22% from $1,150 million for the nine months ended September 30, 2004 to $1,408 million for the nine months ended September 30, 2005. This increase reflects strong growth from increased penetration of existing, distribution relationships and the addition of new, distribution relationships.

relationships in existing and new countries and markets. During the first quarter of 2006, we began writing business in Poland and Greece, two countries we entered in the prior year.

Annuities.Retirement products.Retirement Income and Investments segment results are affected by investment performance, net interest spreads, equity market fluctuations and new product sales. In addition, our competitive position within many of our distribution channels depends significantly upon product features, including current and minimum crediting rates on spread-based products relative to our competitors, surrender charge periods in fixed annuities as well as guaranteed features we offer in variable products. We continually evaluate our competitive position based upon each of those features, and we make adjustments as appropriate to meet our target return thresholds. Our deposits in fixed annuities decreased by 42% from $653 million for the three months ended September 30,

2004 to $378 million for the three months ended September 30, 2005 and from $1,436 million for the nine months ended September 30, 2004 to $1,428 million for the nine months ended September 30, 2005. The attractiveness of certain fixed annuities has declined as a result of continued low long-term low interest rates and a flatteningrelatively flat yield curve, resulting in short-term investment alternatives, such as certificates of deposit, being more competitive. These events,The continued low interest rate environment, along with our pricing discipline of selling business that meets our profitability hurdles,objectives, have adversely affected sales of our fixed annuities. We believe however, that a gradualcontinued increase in market interest rates on the long duration end of the yield curve will have a net favorable impact on consumer demand for these products.the fixed annuities. In recent quarters, we have experienced improved spreads in these products. Structured settlement contract sales declined 44% from $89 million for the three months ended September 30, 2004fixed annuities due primarily to $50 million for the three months ended September 30, 2005maturities of historically high crediting rate business and by 31% from $431 million for the nine months ended September 30, 2004resetting to $296 million for the nine months ended September 30, 2005. This decline is primarily a result of our continued pricing discipline in a low interestmarket rates on some historically higher credit rate environment. Total new deposits in variable annuities, excluding our Income Distribution Series, decreased by 21% from $180 million for the three months ended September 30, 2004 to $142 million for the three months ended September 30, 2005 and by 26% from $644 million for the nine months ended September 30, 2004 to $479 million for the nine months ended September 30, 2005. This decline is primarily due to a decrease in additional deposits on a block of reinsured business as well as a market shift to variable annuity products with certain guaranteed benefit features that we chose not to offer because ofcoming off their risk profile.

guarantee period.

We have continued to focus on our Income Distribution Series of variable annuity products and ridersriders. We have witnessed a decline in response to customers who desire guaranteed minimum income streamsdefined benefit retirement plans in favor of defined contribution plans with equity market upside at the endmore of the contribution and accumulation period.responsibility for retirement income planning falling on the individual. Additionally, U.S. savings rates are at historical lows. We believe these factors support demand for products that provide various forms of guarantee benefits with the opportunity to realize market performance upside. Our Income Distribution Series of variable annuity products and riders providesprovide the contractholder with a guaranteed minimum income stream that they cannot outlive, along with an opportunity to participate in market appreciation, butappreciation. However, through various techniques, these products are designed to reduce some of theour risks to insurers that generally accompany traditional products with guaranteed minimum incomeliving benefits. We are targeting peopleindividuals who are focused on building a personal portable retirement plan or are moving from the accumulation to the distribution phase of their retirement planning. Sales of our Income Distribution Series increased by 41% from $70 million for the three months ended September 30, 2004 to $99 million for the three months ended September 30, 2005 and by 60% from $175 million for the nine months ended September 30, 2004 to $280 million for the nine months ended September 30, 2005.

Third party managed assets. We offer asset management products to affluent individual investors.investors and back office support for independent broker dealers. The industry is witnessing rapid increases of independent broker dealers as registered representatives are leaving large national firms to form their own small firms. These new small firms need back office support and access to technology. Further, individuals are increasingly transferring their money towards managed products from mutual funds. We expect these trends to continue and possibly accelerate in the future. Our products consist of separately managed accounts, managed mutual funds accounts and managed variable annuity services. We receive a management fee based upon the amount of assets under management. The results of our asset management business are a function of net flows and investment performance of assets under management, which are influenced by the relative investment performance of our productsproduct’s underlying investments and of the overall equity market environment. Third party managed assets grew by 20% from $4.0 billion at December 31, 2004 to $4.8 billion at September 30, 2005. This increase is primarily due to the net sales over the period and the impact of the equity market appreciation.

Mortgage insurance.The results of our Mortgage Insurance segment are affected by employment and other economic and housing markets trends, including mortgage origination volume, interest rate trends, home price appreciation and levels of mortgage delinquencies (including seasonal effects). In addition, our international mortgage insurance results are affected by movements in foreign currency exchange rates.rates affect our international mortgage insurance results.

In the U.S., the demand for flow private mortgage insurance declined during the first six months of 2005, as compared to the same period in 2004, according to data published byInside Mortgage FinanceFinance.. We believe this iswas driven principally by increases in the use of simultaneous second mortgages or “80-10-10” loans, as an alternative to private mortgage insurance, and an increase in the origination of mortgages that do

did not meet the eligibility requirements of Fannie Mae and Freddie Mac and mortgages that arewere securitized in mortgage-backed securities that dodid not use private mortgage insurance. Our U.S. flow new insurance written increased by 22% from $5.8 billion for the three months ended September 30, 2004 to $7.1 billion for the three months ended September 30, 2005 and increased by 3% from $18.1 billion for the nine months ended September 30, 2004 to $18.6 billion for the nine months ended

September 30, 2005. These increases were attributable to increased account penetration as a result of executing a more disciplined strategy to penetrate additional distribution channels.

Ongoing lowWe believe higher short-term interest rates and a flattening yield curve have caused the use of simultaneous second mortgages to stabilize.

The recent rise in interest rates and lower home price appreciation in the U.S. have contributed to rising persistency rates remaining low.rates. Our U.S. persistency rates have declined 5 points from 64%increased to 72% for the three months ended September 30, 2004March 31, 2006. We believe that sustained higher interest rates and increased persistency will lead to 59% for the three months ended September 30, 2005 and have declined 1 point from 65% for the nine months ended September 30, 2004stable to 64% for the nine months ended September 30, 2005. These ongoing low rates have adversely affected ourgrowing levels of insurance in-force levels. Continued low persistency could have an adverse impact on future earnings.

in-force.

Our international mortgage insurance business has continued to expand with favorable operating results. International flow new insurance written increased by 49% from $12.4 billion for the three months ended September 30, 2004 to $18.5 billion for the three months ended September 30, 2005 and increased by 29% from $35.3 billion for the nine months ended September 30, 2004 to $45.4 billion for the nine months ended September 30, 2005. This growth reflected continued flow business growth in our established international markets, particularly in Australia and Europe. International bulk new insurance written increased from $0.8 billion for the three months ended September 30, 2004 to $2.5 billion for the three months ended September 30, 2005 and increased from $1.3 billion for the nine months ended September 30, 2004 to $11.3 billion for the nine months ended September 30, 2005, primarily attributable to our selective expansion into prime bulk offerings in Australia and Europe. We expect that the growth of our established international mortgage insurance business and our entry into new international markets will continue to contribute an increasing portion of this segment’s total revenues and profits.

As a result of the significant U.S. refinancing activity insince 2002 and 2003 and the significant expansion of our international business in recent years, as of September 30, 2005,March 31, 2006, approximately 78%71% of our U.S. risk in forcein-force and 69%67% of our international risk in forcein-force have not yet reached its anticipated highest claim frequency years, which are generally between the third and seventh year of the loan. We expect our loss experience on these loans will increase as policiesthese books of business continue to mature.

See “—Results of Operations by Segment” and selected operating performance measures contained herein for additional discussion of business trends and conditions.

Results of Operations

The following table sets forth our results of operations. The pro forma“Net operating earnings” is a non-GAAP financial information reflects our results of operations as adjusted to reflect the various adjustments described in the Notes to Pro Forma Financial Information set forth above. The pro forma financial information principally reflects the exclusion, from our results of operations, of the results of the structured settlement, variable annuity and long-term care insurance in-force blocksmeasure that we cededdefine as net earnings, excluding after-tax net realized investment gains (losses) (which can fluctuate significantly from period to UFLIC in connection with the reinsurance transactions; the exclusion from our results of operations of certain businesses, including the Affinity segment,period), and other assetsadjustments, changes in accounting principles and liabilities of GEFAHI that were not transferred to us in connection with our corporate reorganization; the inclusion in our results of operations of incremental interest expense associated with the consideration that we issued to GEFAHI in connection with our corporate reorganization, including $600 million of our Equity Units, $100 million of our Series A Preferred Stock and the issuance of $500 million of commercial paper; and the issuance of an aggregate of $1.9 billion of our 3-, 5-, 10-, and 30-year senior notes.

The revenues and benefits and expenses for the nine months ended September 30, 2004, include the results of operations of the Affinity segment and the blocks of business that we reinsured with UFLIC through May 24, 2004, the date of our corporate reorganization. The results of operations of the Affinity segment and the blocks of business that we reinsured with UFLIC are not included in our results for the three and nine months ended September 30, 2005.infrequent or unusual non-operating items. There were no pro forma adjustmentsnon-recurring, infrequent or unusual items excluded from net operating earnings in the three months ended March 31, 2006 and 2005.

Management believes that analysis of “net operating earnings” enhances understanding and comparability of performance by highlighting underlying business activity and profitability drivers. However, “net operating earnings” should not be viewed as a substitute for net earnings in accordance with GAAP. In addition, our definition of “net operating earnings” may differ from the definitions used by other companies. The table below provides a reconciliation of net earnings to “net operating earnings” (as defined above) for the three months ended September 30, 2004.March 31, 2006 and 2005.

 

    Three months ended
September 30,


    Nine months ended September 30,

  Three months ended
March 31,
 Increase (decrease) and
percentage change
 

(Dollar amounts in millions)


    2005

   2004

    2005

   2004

    Pro forma
2004


(Dollar amounts in millions, except per share amounts)

      2006         2005               2006 vs. 2005           

Revenues:

                          

Premiums

    $1,547   $1,523    $4,766   $4,953    $4,782  $1,539  $1,605  $(66) (4)%

Net investment income

     902    785     2,595    2,823     2,335   924   851   73  9%

Net realized investment gains (losses)

     (7)   3     (13)   27     24

Net realized investment losses

   (22)  (6)  (16) NM 

Policy fees and other income

     186    159     501    612     452   184   161   23  14%
    


  

    


  

    

           

Total revenues

     2,628    2,470     7,849    8,415     7,593   2,625   2,611   14  1%
    


  

    


  

    

           

Benefits and expenses:

                          

Benefits and other changes in policy reserves

     1,026    1,034     3,152    3,675     3,211   1,035   1,075   (40) (4)%

Interest credited

     364    328     1,051    1,088     975   373   340   33  10%

Underwriting, acquisition and insurance expenses, net of deferrals

     506    411     1,476    1,445     1,290

Acquisition and operating expenses, net of deferrals

   475   447   28  6%

Amortization of deferred acquisition costs and intangibles

     217    230     618    830     728   174   193   (19) (10)%

Interest expense

     72    60     213    154     180   82   72   10  14%
    


  

    


  

    

           

Total benefits and expenses

     2,185    2,063     6,510    7,192     6,384   2,139   2,127   12  1%
    


  

    


  

    

           

Earnings from continuing operations before income taxes

     443    407     1,339    1,223     1,209

Net earnings before income taxes and accounting change

   486   484   2  —  %

Provision for income taxes

     136    136     425    424     425   156   162   (6) (4)%
    


  

    


  

    

           

Net earningsfrom continuing operations

    $307   $271    $914   $799    $784

Net earnings before accounting change

   330   322   8  2%

Cumulative effect of accounting change, net of taxes

   4   —     4  NM 
    


  

    


  

    

           

Net earnings

   334   322   12  4%

Adjustments to net earnings:

     

Net realized investment losses (gains) net of taxes and other adjustments

   15   4   11  NM 

Cumulative effect of accounting change

   (4)  —     (4) NM 
           

Net operating earnings

  $345  $326  $19  6%
           

Net earnings per common share:

     

Basic

  $0.72  $0.66   
         

Diluted

  $0.70  $0.65   
         

Net earnings before accounting change per common share:

     

Basic

  $0.71  $0.66   
         

Diluted

  $0.69  $0.65   
         

Net operating earnings per common share:

     

Basic

  $0.74  $0.67   
         

Diluted

  $0.72  $0.66   
         

Weighted-average common shares outstanding:

     

Basic

   467.0   488.8   
         

Diluted

   479.5   494.3   
         

Three months ended September 30,Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005 compared to three months ended September 30, 2004

PremiumsPremiums.. Our premiums consist primarily of premiums earned on individual life, long-term care, Medicare supplement, group life and health, payment protection, insurance policies, incomesingle premium immediate annuities and structured settlements with life contingencies and mortgage insurance policies. Premiums increased $24 million, or 2%,decreased primarily due to $1,547 million for the three months ended September 30, 2005 from $1,523 million for the three months ended September 30, 2004. This increase was the result of a $35 million increase in our Protection segment and a $21 million increase in our Mortgage Insurance segment, partially offset by a $30$64 million decrease in our Retirement Income and Investments segment and a $2 million decrease in our Corporate and Other segment. The increase in our Protection segment was primarily attributable to an increase in premiums related to new business growth of the term life in-force block along with growth of the long-term care and group business in-force blocks, partially offset by a decrease in premiums in our PPI business attributable to the continued run-off of low return blocks of business. The increase in our Mortgage Insurance segment was primarily attributable to continued growth in our international mortgage insurance business. The decrease in our Retirement Income and Investments segment was primarily attributable to a decrease in premiums related to our continued pricing discipline inon our life-contingent structured settlements and incomesingle premium immediate annuities in a low interest rate environment. TheAlso contributing to the decrease was a $33 million decrease in our CorporateProtection segment due to a decrease in the U.K. market and Otherchanges in foreign exchange rates, amounting to $23 million, in our payment protection business. Partially offsetting these decreases was a $32 million increase in our Mortgage Insurance segment was primarily attributable to decreased premiums fromdriven by the continued growth and aging of our Bermuda reinsurer related to the run-off of certain creditinternational mortgage insurance blocks.business.

Net investment incomeincome.. Net investment income represents the income earned on our investments. Net investment income increased $117 million, or 15%, to $902 million for the three months ended September 30, 2005 from $785 million for the three months ended September 30, 2004. The increase in net investment income was primarily due toas a result of an increase in weighted average investment yields to 5.68% for the three months ended September 30, 2005 from 5.31% for the three months ended September 30, 2004. The increase in weighted average investment yields was primarilyinvested assets attributable to higher yields on floating rate investmentsgrowth in assets resulting from new production in spread-based retail and institutional products, growth of our long-term care in-force block and an increase related to spread-based institutional floating rate products and a $27 million increase in investment income related to bond calls, mortgage loan prepayments and limited partnerships. Thisassets purchased using proceeds from our issuance of non-recourse funding obligations supporting certain term life insurance policies. The increase in net investment income was also the result of an increase in weighted average invested assets.investment yields to 5.6% for the three months ended March 31, 2006 from 5.5% for the three months ended March 31, 2005. The increase in weighted average invested assets is driveninvestment yields was primarily by growth in assets as a result of an increase in insurance in force.attributable to increased yields on floating rate investments.

Net realized investment gains (losses).. Net realized investment gains (losses) represents gains and (losses) recognized on the sale or impairment of investments. We had net realized investment losses of $(7) million for the three months ended September 30, 2005 compared to gains of $3 million for the three months ended September 30, 2004. For the three months ended September 30, 2005,March 31, 2006, gross realized gains were $22 million and gross realized (losses) were $35$(44) million, and $(42)including $1 million respectively. The realizedof impairments. Realized gains for the three months ended September 30, 2005March 31, 2006 were primarily attributable to sales of fixed maturities and a preferred equity holding. Realized losses for the three months ended September 30, 2005 consisted primarily of $32 million of impairments attributable primarily to fixed maturity investments and $10 million from the sale of fixed maturities.

For the three months ended September 30, 2004, gross realized gains and (losses) were $18 million and $(15) million, respectively. The realizedin gains for the three months ended September 30, 2004 included $17 million related to the sale or callon recoveries of fixed maturities and equitypreviously impaired securities, and $1the recovery of $4 million from termination of derivative hedges, primarily related to callable bonds. Realized losses for the three months ended September 30, 2004 included $11 million fromon the sale of fixed maturities and equity investments. Realized losses includes $26 million related to disposition of securities, $17 million on the derecognition of assets and $4liabilities related to certain securitization entities and a $1 million impairment charge related to a limited partnership investment. The $26 million of realized losses on the disposition of selected lower yielding securities related to portfolio yield enhancement activities undertaken during the quarter. For the three months ended March 31, 2005, gross realized gains were $39 million and gross realized losses were $(45) million, including $34 million of impairments. These impairments were attributable to fixed maturities, securities.

limited partnership investments and equity investments ($28 million, $5 million and $1 million, respectively). The fixed maturities impairments related primarily to securities issued by companies in the automotive, transportation and consumer products industries ($14 million, $12 million and $2 million, respectively). There was no material unrealized investment gains (losses) on our securities designated as trading as cost of the trading portfolio approximates fair value.

Policy fees and other incomeincome.. Policy fees and other income consist primarily of cost of insurance and surrender charges assessed on universal life insurance policies, fees assessed on policyholdersagainst policyholder and contractholder account values, and commission income. PolicyThe increase in policy fees and other income increased $27 million, or 17%, to $186 million for the three months ended September 30, 2005 from $159 million for the three months ended September 30, 2004. This increase was primarily the result of a $17 million increasedue to higher sales and growth in our Protection segment and a $9 million increaseassets under management in ourthe Retirement Income and Investments segment. The increase in our Protection segment was attributable to an adjustment to unearned revenueInvestments’ fee-based products of $16 million as a result of distribution expansion, favorable equity markets, and persistency of the in-force block in our universal life business. The increase in our Retirement Income and Investments segment was primarily attributable to increased assets under management.continued product enhancements.

Benefits and other changes in policy reservesreserves.. Benefits and other changes in policy reserves consist primarily of reserve activity related to current claims and future policy benefits on life, long-term care, Medicare supplement, group life and health, and payment protection, insurance policies, structured settlements, and incomesingle premium immediate annuities with life contingencies and claim costs incurred related to mortgage insurance products. BenefitsThe decrease in benefits and other changes in policy reserves decreased $8 million, or 1%, to $1,026 million for the three months ended September 30, 2005 from $1,034 million for the three months ended September 30, 2004. This decrease was attributable toprimarily driven by a $34$65 million decrease in our Retirement Income and Investments segment as a result of the reduction in the life-contingent structured settlement and single premium immediate annuities sales. Partially offsetting this decrease was a $10 million decrease in our Mortgage Insurance segment partially offset by a $34$21 million increase in our Protection segment. The decreasesinternational mortgage insurance business driven by higher losses in our Retirement IncomeAustralia, which were favorable in the prior year and Investments segment was primarily attributable to a decrease in life-contingent structured settlement and income annuity reserves attributable to lower salesalso reflect the seasoning of these products. The decrease in our Mortgage Insurance segment was primarily attributable to a decline in U.S. paid claims and an adjustment to U.S. prime bulk reserves.more recent in-force blocks of business.

Interest creditedcredited.. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances. Interest credited increased $36 million, or 11%, to $364 million for the three months

ended September 30, 2005 from $328 million for the three months ended September 30, 2004. ThisThe increase was attributable toprimarily driven by a $37$33 million increase in our Retirement Income and Investments segment primarily the result of an increase in interest credited onInvestments’ spread-based institutional products primarily attributable to higher average interest crediting ratesresulting from increased yields on floating rate funding agreements.

products and higher assets under management.

Underwriting, acquisitionAcquisition and insuranceoperating expenses, net of deferralsdeferrals.. Underwriting, acquisition Acquisition and insuranceoperating expenses, net of deferrals, represent costs and expenses related to the acquisition and ongoing maintenance of insurance and investment contracts, including commissions, policy issueissuance expenses and other underwriting and general operating costs. This also includes corporate expenses such as legal, compliance, finance, governance, insurance, branding and other overhead related costs. These costs and expenses are net of amounts that are capitalized and deferred, which are primarily costs and expenses which vary with and are primarily related to the sale and issuance of our insurance policies and investment contracts. These costs increased $95 million, or 23%, to $506 million for the three months ended September 30, 2005 from $411 million for the three months ended September 30, 2004. This increase was primarily attributable to a $49 million increasecontracts, such as first-year commissions in our Protection segment, a $22 million increase in our Corporate and Other segment and a $17 million increase in our Mortgage Insurance segment. The increase in our Protection segment was primarily attributable to an increase inexcess of ultimate renewal commissions and other policy issuance expenses. Acquisition and operating expenses, in our PPI run-off block and an increase in our long-term care businessnet of deferrals, increased primarily attributable to an increase in renewal commissions. The increase in our Corporate and Other segment was primarily attributable to an increase in stand-alone public company costs and certain employee benefits. The increase in our Mortgage Insurance segment was primarily attributable to volume driven underwriting expenses and indemnity reserves related to our U.S. contract services offerings and an increase in costs related to our existing platforms and investments in potential new international mortgage insurance platforms.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles consists primarily of the amortization of acquisition costs that are capitalized and the present value of future profits. Amortization of deferred acquisition costs and intangibles decreased $13 million, or 6%, to $217 million for the three months ended September 30, 2005 from $230 million for the three months ended September 30, 2004. This decrease was attributabledue to a $25 million decrease in our Protection segment partially offset by an $8$16 million increase in our Retirement Income and Investments segment, and a $6 million increase in our Mortgage Insurance segment. The decrease in our Protection segment was primarily attributable to a decrease in amortization in our PPI run-off block. The increase in our Retirement Income and Investments segment was primarily attributable to growth in assets under management in our spread-based retail business. The increase in our Mortgage Insurance segment was attributable to accelerated amortization of deferred acquisition costs in our U.S. mortgage business as a result of continued low persistency during the year.

Interest expense. Interest expense increased $12 million, or 20%, to $72 million for the three months ended September 30, 2005 from $60 million for the three months ended September 30, 2004. This increase was primarily the result of an increase in interest paid on non-recourse funding obligations related to our term life insurance capital management strategy.

Provision for income taxes. Provision for income taxes remained unchanged at $136 million for the three months ended September 30, 2005 and September 30, 2004. The effective tax rate decreased to 30.7% for the three months ended September 30, 2005 from 33.4% for the three months ended September 30, 2004. The decrease in the effective tax rate was primarily attributable to reductions in excess foreign tax credits and favorable examination developments in the three months ended September 30, 2005.

Net earnings from continuing operations. Net earnings from continuing operations increased by $36 million, or 13%, to $307 million for the three months ended September 30, 2005 from $271 million for the three months ended September 30, 2004. This increase was the result of a $24 million increase in our Mortgage Insurance segment, a $19 million increase in our Retirement Income and Investments segment and a $10 million increase in our Protection segment, partially offset by a $17 million decrease in our Corporate and Other segment.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

Premiums. Premiums decreased $187 million, or 4%, to $4,766 million for the nine months ended September 30, 2005 from $4,953 million for the nine months ended September 30, 2004. This decrease was the result of a $143 million decrease in our Retirement Income and Investments segment, an $88 million decrease in our Affinity segment, a $12 million decrease in our Corporate and Other segment and a $10 million decrease in our Protection segment, partially offset by a $66 million increase in our Mortgage Insurance segment. The decrease in our Retirement Income and Investments segment was primarily attributable to our continued pricing discipline in our life-contingent structured settlements and income annuities in a low interest rate environment. The decrease in our Affinity segment was attributable to our corporate reorganization in which we did not acquire the operations of this segment. The decrease in our Corporate and Other segment was primarily attributable to decreased premiums from our Bermuda reinsurer related to the run-off of certain credit insurance blocks. The decrease in our Protection segment was primarily attributable to decreases in premiums in our PPI business attributable to the continued run-off of low return blocks of business and in our long-term care business related to the reinsurance transactions with UFLIC, partially offset by an increase in premiums in our life and group businesses related to new business growth of the term life block and growth of the non-medical in-force block. The increase in our Mortgage Insurance segment was primarily attributable to continued growth in our international mortgage insurance business.

Net investment income. Net investment income decreased $228 million, or 8%, to $2,595 million for the nine months ended September 30, 2005 from $2,823 million for the nine months ended September 30, 2004. This decrease in net investment income was primarily the result of a $4 billion, or 6%, decrease in average invested assets. This decrease in average invested assets was attributable primarily to transfers of assets relating to the reinsurance transactions with UFLIC and our corporate reorganization, partially offset by growth in assets as a result of an increase in insurance in force. The decrease was also due to a decrease in weighted average investment yields, primarily attributable to investments in the U.S., to 5.51% for the nine months ended September 30, 2005 from 5.63% for the nine months ended September 30, 2004. The decrease in weighted average investment yields was attributable to higher yields on the assets transferred to UFLIC as well as purchases of new assets in an interest rate environment where current market yields are lower than existing portfolio yields. The decrease was partially offset by a $12 million increase in investment income related to bond calls, mortgage loan prepayments and limited partnerships.

Net realized investment gains (losses). We had net realized investment losses of $(13) million for the nine months ended September 30, 2005 compared to gains of $27 million for the nine months ended September 30, 2004. For the nine months ended September 30, 2005, gross realized gains and (losses) were $86 million and $(99) million, respectively. The realized gains for the nine months ended September 30, 2005 were primarily attributable to sales of fixed maturities and a preferred equity holding. Realized losses for the nine months ended September 30, 2005 were primarily attributable to the sale of fixed maturities and included $68 million of impairments primarily attributable to fixed maturity investments.

For the nine months ended September 30, 2004, gross realized gains and (losses) were $76 million and $(49) million, respectively. The realized gains for the nine months ended September 30, 2004 included $65 million related to the sale or call of fixed maturities and equity securities, and $10 million from termination of derivative hedges, primarily related to callable bonds. Realized losses for the nine months ended September 30, 2004 included $32 million from the sale of fixed maturities and equity securities, $3 million from termination of hedges on fixed maturities, which were sold during the period, and $13 million of impairments. These impairments were attributable to fixed maturities, equity securities and partnership investments ($3, $5 and $5 million, respectively).

Policy fees and other income. Policy fees and other income decreased $111 million, or 18%, to $501 million for the nine months ended September 30, 2005 from $612 million for the nine months ended September 30, 2004.

This decrease was primarily the result of a $104 million decrease in our Affinity segment and a $32 million decrease in our Retirement Income and Investments segment. The decrease in our Affinity segment was attributable to the impact of our corporate reorganization. The decrease in our Retirement Income and Investments segment was primarily attributable to the reinsurance transactions with UFLIC partially offset by an increase in assets under management.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves decreased $523 million, or 14%, to $3,152 million for the nine months ended September 30, 2005 from $3,675 million for the nine months ended September 30, 2004. This decrease was attributable to a $414 million decrease in our Retirement Income and Investments segment, an $80 million decrease in our Affinity segment, a $13 million decrease in our Protection segment and a $16 million decrease in our Mortgage Insurance segment. The decrease in our Retirement Income and Investments segment was primarily attributable to the reinsurance transactions with UFLIC. The decrease in our Affinity segment was attributable to our corporate reorganization. The decrease in our Protection segment was primarily attributable to the reinsurance transactions with UFLIC and a correction of reserves related to a long-term care policy rider, which had been incorrectly coded in our policy valuation system partially offset by the strengthening of certain claim reserves. The decrease in our Mortgage Insurance segment was primarily attributable to more favorable delinquency experience in our U.S. mortgage insurance business, partially offset by the seasoning of the in-force block.

Interest credited. Interest credited decreased $37 million, or 3%, to $1,051 million for the nine months ended September 30, 2005 from $1,088 million for the nine months ended September 30, 2004. This decrease was attributable to a $37 million decrease in our Retirement Income and Investments segment primarily attributable to the reinsurance transactions with UFLIC partially offset by an increase in interest credited on floating rate funding agreements in our spread-based institutional products.

Underwriting, acquisition and insurance expenses, net of deferrals. Underwriting, acquisition and insurance expenses, net of deferrals increased $31 million, or 2%, to $1,476 million for the nine months ended September 30, 2005 from $1,445 million for the nine months ended September 30, 2004. This increase was attributable to a $127 million increase in our Protection segment, a $22$9 million increase in our Mortgage Insurance segment and a $16$6 million increase in our Corporate and Other segment, partially offset by a $123 million decrease in our Affinity segment and an $11 million decreasesegment. The increase in our Retirement Income and Investments segment. The increase in our ProtectionInvestment segment was primarily attributable to an increaseexpenses associated with higher sales and growth in commissions and other expensesassets under management in our PPI run-off block and higher renewable commission costs in our life and LTC businesses partially offset by a decrease in our long-term care business primarily attributable to the reinsurance transactions with UFLIC.fee-based products. The increase in our Mortgage Insurance segment was primarily attributable to an increase in costs in our existing international platforms and continued investmentsinvestment in potential new international mortgage insurance platforms. The increase in our Corporate and Other Segment is attributable to an increase in stand-alone and branding costs. The decrease in our Affinity segment was attributable to our corporate reorganization. The decreasean accrual adjustment related to certain employee benefits in our Retirement IncomeMarch 2005, which did not recur in 2006 and Investments segment was attributableexpenses related to a decrease in expenses associated withinsurance and the reinsurance transactions with UFLIC partially offset by increased expenses associated with increased assets under management in our fee-based retail products.issuance of stock options and stock appreciation rights.

Amortization of deferred acquisition costs and intangiblesintangibles.. Amortization of deferred acquisition costs and intangibles consists primarily of the amortization of acquisition costs that are capitalized and PVFP. These amortization costs decreased $212 million, or 26%, to $618 million for the nine months ended September 30, 2005 from $830 million for the nine months ended September 30, 2004. This decrease was attributableprimarily due to a $129$30 million decrease in our Protection segment a $47 million decrease in our Affinity segment and a $44 million decrease in our Retirement Income and Investments segment. The decrease in our Protection segment was largelyprimarily attributable to a decrease in our PPIpayment protection insurance business run-off blocks, partially offset by the impact ofblock and changes in foreign exchange rates. The decrease in our Affinity segment was attributable to our corporate reorganization. The decrease in our Retirement Income and Investments segment was primarily attributable to the reinsurance transactions with UFLIC.

Interest expenseexpense.. Interest expense increased $59 million, or 38%, to $213 million for the nine months ended September 30, 2005 from $154 million for the nine months ended September 30, 2004. This increase was primarily theas a result of a changethe issuance of additional non-recourse funding obligations in our capital structure in connection with our corporate reorganization,the first quarter of 2006 and the second and third quarters of 2005, and an increase in interestaverage variable rate yields paid on non-recourse funding obligations related tosupporting our term life insurance capital management strategy. This was partially offset by a decrease in interest expenses associated with the derecognition of borrowings related to securitization entities.

Provision for income taxes.taxes Provision for income taxes increased $1 million to $425 million for the nine months ended September 30, 2005 from $424 million for the nine months ended September 30, 2004.. The effective tax rate decreased to 31.7%32.1% for the ninethree months ended September 30, 2005March 31, 2006 from 34.7%33.5% for the ninethree months ended September 30, 2004.March 31, 2005. The decrease in the effective tax rate was primarily attributable to IPO-related transaction taxesthe increase in the nine months ended September 30, 2004, and reductionslower taxed foreign earnings, offset in excess foreign tax credits andpart by nonrecurring favorable examination developments in the nine months ended September 30, 2005.

Net earnings from continuing operationsoperating earnings.. Net earnings from continuing operations increased by $115 million, or 14%, to $914 million for the nine months ended September 30, 2005 from $799 million for the nine months ended September 30, 2004. This increase was the result of a $69 million The increase in net operating earnings reflects increases in segment net operating earnings in each of our Mortgage Insurance segment, a $61 million increase in our Retirement Income and Investments segment and a $28 million increase in our Protection segment, partially offset by a $57 million decrease insegments, except for our Corporate and Other segment.segment, which remained unchanged.

Results of Operations by Segment

Set forth below is financial information forManagement regularly reviews the performance of each of our operating segments (Protection, Retirement Income and Investments and Mortgage Insurance) based on after-tax segment net operating earnings (loss), together withwhich excludes: (1) cumulative effect of accounting changes, and (2) infrequent or unusual non-operating items. Certain other items, including most of our interest and other financing expenses and advertising, marketing and other corporate expenses, are included in our Corporate and Other segment. Although these excluded items are significant to our consolidated financial performance, we believe that the presentation of segment net operating earnings (loss) enhances our understanding and assessment of the Affinity segment. Set forth below also is pro forma financial information forresults of operations of our operating segments by highlighting net earnings (loss) attributable to the nine months ended September 30, 2004 fornormal, recurring operations of our Protection, Retirement Income and Investments, Mortgage Insurance and Corporate and Other segments. Pro forma financial informationbusiness. However, segment net operating earnings (loss) is not provideda substitute for the Affinity segment because we did not retain that segment after our corporate reorganization. All pro forma segment information is prepared on the same basis as the segment information presentednet income determined in our unaudited financial statements.accordance with U.S. GAAP.

Protection segment

We offer U.S. customers life, long-term care, Medicare supplement insurance and, primarily for companies with fewer than 1,000 employees, group life and health insurance. In Europe, we offer payment protection insurance, which helps consumers meet their payment obligations in the event of illness, involuntary unemployment, disability or death. Beginning January 1, 2006, Seguros, a small Mexican-domiciled multi-line insurer that was previously included in our Corporate segment, is now being managed within our Protection segment and whose results are now included as part of the payment protection insurance business.

The following table sets forth the results of operations relating to our Protection segment. Prior to our corporate reorganization, we entered into several significant reinsurance transactions with UFLIC in which we ceded to UFLIC a block of long-term care insurance policies that we reinsured from Travelers in 2000, and we assumed from UFLIC in-force blocks of Medicare supplement insurance policies.

   Three months ended
March 31,
  Increase (decrease) and
percentage change
 

(Dollar amounts in millions)

      2006          2005                2006 vs. 2005           

Revenues:

      

Premiums

  $1,105  $1,138  $(33) (3)%

Net investment income

   346   315   31  10%

Net realized investment gains (losses)

   4   —     4  NM 

Policy fees and other income

   97   89   8  9%
              

Total revenues

   1,552   1,542   10  1%
              

Benefits and expenses:

      

Benefits and other changes in policy reserves

   747   745   2  —  %

Interest credited

   95   90   5  6%

Acquisition and operating expenses, net of deferrals

   330   330   —    —  %

Amortization of deferred acquisition costs and intangibles

   122   152   (30) (20)%

Interest expense

   25   9   16  178%
              

Total benefits and expenses

   1,319   1,326   (7) (1)%
              

Earnings before income taxes

   233   216   17  8%

Provision for income taxes

   81   77   4  5%
              

Segment net earnings

   152   139   13  9%

Adjustments to segment net earnings:

      

Net realized investment losses (gains) net of taxes and other adjustments

   (3)  —     (3) NM 
              

Segment net operating earnings

  $149  $139  $10  7%
              

The Travelers long-term care block was ceded to UFLIC in connection with our corporate reorganization on May 24, 2004, and its results are not included after that date. Similarly, the Medicare supplement blocks were assumed from UFLIC in connection with our corporate reorganization on May 24, 2004, and its results are included after that date. As a result of the foregoing, our results of operationsfollowing table sets forth net earnings for the nine months ended September 30, 2005 are not comparable to this segment’s results of operations for the nine months ended September 30, 2004. The pro forma results of operations for the nine months ended September 30, 2004 below reflect adjustments to record the effects of the reinsurance transactions as if they had been effective as of January 1, 2004. There were no pro forma adjustmentsproducts included in the three months ended September 30, 2004. There were no pro forma adjustments to policy fees or other income, interest credited or interest expense because the long-term care insurance policies we ceded to UFLIC and the Medicare supplement insurance policies UFLIC ceded to us in connection with the reinsurance transactions do not generate such fees, interest credited or interest expense.our Protection segment:

     Three months ended
September 30,


    Nine months ended September 30,

(Dollar amounts in millions)


    2005

    2004

    2005

    2004

    Pro forma
2004


Revenues:

                              

Premiums

    $1,120    $1,085    $3,377    $3,387    $3,304

Net investment income

     321     298     946     913     867

Policy fees and other income

     108     91     273     257     257
     

    

    

    

    

Total revenues

     1,549     1,474     4,596     4,557     4,428
     

    

    

    

    

Benefits and expenses:

                              

Benefits and other changes in policy reserves

     732     698     2,172     2,185     2,083

Interest credited

     90     91     271     271     271

Underwriting, acquisition and insurance expenses, net of deferrals

     328     279     1,004     877     860

Amortization of deferred acquisition costs and intangibles

     161     186     470     599     591

Interest expense

     13     4     33     9     9
     

    

    

    

    

Total benefits and expenses

     1,324     1,258     3,950     3,941     3,814
     

    

    

    

    

Earnings before income taxes

     225     216     646     616     614

Provision for income taxes

     80     81     230     228     227
     

    

    

    

    

Segment net earnings

    $145    $135    $416    $388    $387
     

    

    

    

    

 

   For the three months ended
March 31,
  

Increase (decrease) and

percentage change

 

(Dollar amounts in millions)

          2006                  2005                      2006 vs. 2005             

Segment net operating earnings:

        

Life insurance

  $74  $68  $6  9%

Long-term care insurance

   43   42   1  2%

Payment protection insurance

   25   22   3  14%

Group life and health insurance

   7   7   —    —  %
              

Total segment net operating earnings

  $149  $139  $10  7%
              

Three months ended September 30,Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005 compared to three months ended September 30, 2004

Segment net operating earnings

Premiums. Premiums increased $35 million, or 3%, to $1,120 million for the three months ended September 30, 2005 from $1,085 million for the three months ended September 30, 2004. This increase was due to a $22 million increase in our life business, a $10 million increase in our group business and a $9 million increase in our long-term care business, partially offset by a $6 million decrease in our PPI business. The increase in our life premiumsinsurance was driven by new businessprimarily related to growth of the term life insurance in-force block.blocks and favorable in-force performance. The increase in our long-term carepayment protection insurance business was due to growth of our in-force blocks,in

Continental Europe and $3 million attributable to a lower effective tax rate, partially offset by an$2 million attributable to unfavorable changes in foreign exchange rates. Our long-term care business benefited from growth in the in-force block and lower loss ratios, which offset pressure from investment yields and higher renewal commissions resulting in relatively flat net operating earnings. The lower loss ratios was the result of higher terminations, a $5 million, net of tax, reserve release and stable paid claims. The prior year quarter included $3 million, net of tax, of favorable experience refundon reinsured blocks.

Revenues

Premiums decreased primarily as a result of a $76 million decrease in 2004 on a block in which we had a reinsured interest, which did not recur in 2005. The increase in our group premiumsthe payment protection business. This decrease was primarily attributabledue to growtha decrease of the in-force blocks. The decrease in PPI premiums, consisted of decreases of $43$68 million in the U.K. market and a decrease of $3$23 million attributable to changes in foreign exchange rates, partially offset by a $40 millionan increase in Continental Europe. The decrease in the U.K. market was attributable to the continued run-off of lowerlow return blocks of business and the exit from the travel insurance business. The increase in Continental Europe was attributable to the growth of our in-force blocks, due to new distribution relationships and the growth of consumer lending in those markets.

Net investment income. Net investment income increased $23 million, or 8%, to $321 million for the three months ended September 30, 2005 from $298 million for the three months ended September 30, 2004. This increase was primarily the result of an increase in average invested assets, offset in part by a decrease in weighted average investment yields. The increase in average invested assets was primarily the result of new assets backing growth of the long-term care in-force block, and an increase related to assets purchased using proceeds from our issuance of non-recourse funding obligations supporting our term life insurance capital management strategy. The decrease in weighted average investment yields was attributable to purchases of new assets in an interest rate environment where current market yields are lower than existing portfolio rates as well as investments in floating-rate securities from proceeds of our issuance of non-recourse funding obligations related to our term life insurance capital management strategy.

Policy fees and other income. Policy fees and other income increased $17 million, or 19%, to $108 million for the three months ended September 30, 2005 from $91 million for the three months ended September 30, 2004. This increase was primarily attributable to a $15 million increase in our life business related to a $9 million adjustment to unearned revenue on a closed block of non-standard universal life insurance business and $3 million attributable to persistency of the universal life insurance in-force block.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves increased $34 million, or 5%, to $732 million for the three months ended September 30, 2005 from $698 million for the three months ended September 30, 2004. The increase was the result of a $20 million increase in our long-term care business, a $14 million increase in our group business and a $7 million increase in our life insurance business partially offset by a $7 million decrease in our PPI business. The increase of $20 million in our long-term care business was primarily attributable to lower mortality related policy terminations and an increase in incurred claims associated with the aging of the in-force block partially offset by a $6 million reserve adjustment on a closed block of business. The increase in our group business was primarily due to less favorable loss experience in the current year as compared to the prior year. The increase in our life insurance business was primarily due to growth of the term life insurance in-force block. The decrease in our PPI business was due to a decrease in claims in our run-off block and a $1 million decrease attributable to changes in foreign exchange rates.

Interest credited. Interest credited decreased $1 million to $90 million for the three months ended September 30, 2005 from $91 million for the three months ended September 30, 2004.

Underwriting, acquisition, insurance and other expenses, net of deferrals.Underwriting, acquisition, insurance and other expenses, net of deferrals increased $49 million, or 18%, to $328 million for the three months ended September 30, 2005 from $279 million for the three months ended September 30, 2004. The increase was primarily due to a $27 million increase in our PPI business and a $21 million increase in our long-term care business. The increase in our PPI business was related to an increase in commissions and other expenses in the run-off block and additional expenses related to investment in new growth platforms, partially offset by $2 million attributable to changes in foreign exchange rates. The increase in our long-term care business consisted primarily of an increase attributable to higher renewal commissions.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles decreased $25 million, or 13%, to $161 million for the three months ended September 30, 2005 from $186 million for the three months ended September 30, 2004. The decrease was primarily related to a decrease of $28 million in our PPI business and a $10 million decrease in our long-term care business partially offset by a $10 million increase in our life business. The decrease in our PPI business was attributable to our run-off block. The decrease in our long-term care business related primarily to lower termination experience. The increase in our life business was due to an adjustment in universal life amortization.

Interest expense. Interest expense increased by $9 million to $13 million for the three months ended September 30, 2005 from $4 million for the three months ended September 30, 2004. This increase was primarily the result of an increase in average yields paid on non-recourse funding obligations related to our term life capital management strategy and the issuance of additional non-recourse funding obligations in the fourth quarter of 2004 and the second and third quarters of 2005.

Provision for income taxes. Provision for income taxes decreased $1 million, or 1%, to $80 million for the three months ended September 30, 2005 from $81 million for the three months ended September 30, 2004. The effective tax rate decreased to 35.6% for the three months ended September 30, 2005 from 37.5% for the three months ended September 30, 2004. The decrease in the effective tax rate was primarily attributable to a reduction in excess foreign tax credits and favorable current year examination developments benefiting the three months ended September 30, 2005.

Segment net earnings. Segment net earnings increased by $10 million, or 7%, to $145 million for the three months ended September 30, 2005 from $135 million for the three months ended September 30, 2004. The increase in segment net earnings was primarily attributable to a $12 million increase in our life insurance business and a $2 million increase in our PPI business offset by a decrease of $2 million in both our long-term care and group business. The increase in our life business was attributable to new business growth of the term in-force block. The earnings growth in our PPI business was attributable to an increase resulting from growth in Continental Europe and a lower effective tax rate, partially offset by additional expenses related to investment in new growth platforms. The decrease in net earnings of our long-term care business was attributable to an experience refund on a block in which we have a reinsured interest in 2004 which did not recur in the current period.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

Premiums. Premiums decreased $10 million to $3,377 million for the nine months ended September 30, 2005 from $3,387 million for the nine months ended September 30, 2004. The decrease was due to a $53 million decrease in our PPI business, a $25 million decrease in our long-term care business, partially offset by a $39 million increase in our life business and a $29 million increase in our group business. This decrease in PPI premiums was due to a decrease of $233 million in the U.K. market partially offset by a $143 million increase in Continental Europe and an increase of $37 million attributable to changes in foreign exchange rates. The decrease in the U.K. market was attributable to the continued run-off of low return blocks of business. The increase in Continental Europe was attributable to the growth of our in-force block, which was due to new distribution relationships and the growth of consumer lending in those markets. The decrease in our long-term carethe payment protection business related primarily to the reinsurance transactions with UFLIC,was partially offset by growth in the in-force block premiums, a favorable experience refund on a block in which we have a reinsured interest and an $8$20 million correction of premiums related to an incorrectly coded long-term care policy rider. The increase in our life insurance business wasprimarily related to new business growth of the term life insurance in-force blocks. Theblocks, a $17 million increase in our long-term care business primarily attributable to in-force growth and a $6 million increase in our group business was duerelated to growth ofincreased sales in the non-medical in-force blocks.and individual voluntary products.

Net investment income. NetThe increase in net investment income, increased $33 million, or 4%, to $946 million for the nine months ended September 30, 2005 from $913 million for the nine months ended September 30, 2004. This increase, which included $3a $2 million duedecrease attributable to changes in foreign exchange rates, was primarily the result of an increase in average invested assets offset in part by a decrease in weighted average investment yields. The increase in average invested assets was the result ofattributable to new assets backing growth of our long-term care in-force block and an increase related to assets purchased using proceeds from our issuance of non-recourse funding obligations supporting certain term life insurance policies. This increase was partially offset by transfers

For a discussion of assets relating tonet realized investment gains (losses), see the reinsurance transactions with UFLIC. The decrease in weighted average investment yields was attributable to higher yields on the assets transferred to UFLIC, as well as purchasescomparison for this line item under “—Results of new assets in an interest rate environment where current market yields are lower than existing portfolio rates as well as investments in floating-rate securities from proceeds of our issuance of non-recourse funding obligations and a $6 million decrease in net investment income related to bond calls and prepayments.

Policy fees and other income. Policy fees and other income increased $16 million, or 6%, to $273 million for the nine months ended September 30, 2005 from $257 million for the nine months ended September 30, 2004. This increase was primarily attributable to an increase in policy fees associated with increased persistency of the universal life insurance in-force block, a $9 million adjustment to unearned revenue on a closed block of universal life insurance business and a $3 million attributable to growth of the universal life insurance in-force block. These increases were partially offset by a decrease of $12 million related to a deferred gain adjustment on a reinsured block of term life policies.

Operations.”

Benefits and other changes in policy reserves.expenses

Benefits and other changes in policy reserves decreased $13 million, or 1%,increased due to $2,172 million for the nine months ended September 30, 2005 from $2,185 million for the nine months ended September 30, 2004. The decrease was primarily the result of a $39 million decrease in our long-term care business and a $33 million decrease in our PPI business, partially offset by a $38an $11 million increase in our life insurance business and a $21 million increase in our group business. The decrease in our long-term care

business was attributable to a $102 million decrease related to the reinsurance transactions with UFLIC, and a $40 million correction of reserves related to a long-term care policy rider which had been incorrectly coded in our policy valuation system, partially offset by an increase of $80 million attributable to lower mortality related policy terminations and an increase in incurred claims associated with the aging of the in-force block and a $23 million increase relating to the strengthening of certain claim reserves. The decrease in our PPI business was primarily attributable to a decrease in claims in our run-off business, partially offset by $7 million attributable to changes in foreign exchange rates. The increase in our life insurance business was primarily due to growth of the term life in-force block and lessblocks offset in part by favorable term life mortality. The increase in our group business was due to less favorable loss experience in the current year as compared to the prior year and growth of the in-force blocks.

Interest credited. Interest credited remained unchanged at $271 million for the nine months ended September 30, 2005 and 2004.

Underwriting, acquisition, insurance and other expenses, net of deferrals. Underwriting, acquisition, insurance and other expenses, net of deferrals increased $127 million, or 14%, to $1,004 million for the nine months ended September 30, 2005 from $877 million for the nine months ended September 30, 2004. The increase was primarily due to a $112 million increase in our PPI businessmortality and an $8 million increase in each of our long-term care and lifegroup businesses. The increase in our PPI business was due an increase in commissions and other expenses in our run-off block and an increase of $15 million attributable to changes in foreign exchange rates. This increase in our life business was due to higher non-deferrable acquisition costs. The increase in our long-term care business was due to increased claims associated with the aging of the in-force block partially offset by favorable seasonal termination levels and a claim reserve release. The increase in the group business was due to higher non-deferrable acquisition costsclaims on non-medical business. Offsetting the increase was a decrease of $25 million in our payment protection business, including $3 million attributable to changes in foreign exchange rates, primarily driven by a reduction of claim reserves in our run-off block.

Acquisition and wasoperating expenses, net of deferrals, were flat primarily due to a $16 million increase in our long-term care business due to investment in growth initiatives and growth in our in-force premium levels driving higher renewal commission expense, partially offset by a decrease relatedin our payment protection business, which was primarily due to the reinsurance transactions with UFLIC.a $14 million decrease due to changes in foreign exchange rates.

Amortization of deferred acquisition costs and intangibles.Amortization of deferred acquisition costs and intangibles decreased $129 million, or 22%, to $470 million for the nine months ended September 30, 2005 from $599 million for the nine months ended September 30, 2004. The decrease wasprimarily due to a $143$41 million decrease in our PPIpayment protection business, and a $3including $5 million decreaseattributable to changes in our life business, partially offset by a $9 million increase in our long-term care business and an $8 million increase in our group business. Theforeign exchange rates. This decrease in our PPI business was primarily attributable to our run-off block partially offset by a $14block. Partially offsetting this decrease was an increase of $9 million increase as a result of changes in foreign exchange rates. The decrease in our life business was primarily related to less favorable mortality in universal life that contributed to lower amortization partially offset by a $10 million increase in our life insurance business due to an adjustment in universal life amortization. The increase in our long-term care business wasdue primarily attributable to a $27 million increase to correct amortization related to an incorrectly coded long-term care policy rider, partially offset by lower policy termination experience and an $8 million decrease attributable to the reinsurance transactions with UFLIC. The increasegrowth in our group business was attributable to growth of the in-force block.block and higher terminations.

Interest expense.Interest expense increased $24$16 million to $33 million for the nine months ended September 30, 2005 from $9 million for the nine months ended September 30, 2004. This increase was primarilyas the result of the issuance of additional non-recourse funding obligations in the first quarter of 2006 and the second and third quarters of 2005, and an increase in average variable rate yields paid on non-recourse funding obligations supporting our term life insurance capital management strategy and the issuance of additional non-recourse funding obligations in the fourth quarter of 2004 and the second and third quarters of 2005.strategy.

Provision for income taxes.taxes Provision for income taxes increased $2 million, or 1%, to $230 million for the nine months ended September 30, 2005 from $228 million for the nine months ended September 30, 2004.

The effective tax rate decreased to 34.8% for the three months ended March 31, 2006 from 35.6% for the ninethree months ended September 30, 2005 from 37.0% for the nine months ended September 30, 2004.March 31, 2005. The decrease in the effective tax rate was primarily attributable to the increase in lower taxed foreign earnings and a reduction in excess foreign tax credits, andpartially offset by nonrecurring favorable examination developments in 2005.

Protection selected operating performance measures

Life insurance

The following table sets forth selected operating performance measures regarding our life insurance products as of or for the nine months ended September 30, 2005.dates indicated:

 

   As of or for the three months
ended March 31,
  

Increase (decrease) and

percentage change

 

(Dollar amounts in millions)

          2006                  2005          2006 vs. 2005 

Term life insurance

       

Net earned premiums

  $213  $191  $22  12%

Annualized first-year premiums

   34   29   5  17%

Revenue, net of reinsurance

   268   227   41  18%

Life insurance in-force, net of reinsurance (face amount)

   393,812   337,927   55,885  17%

Life insurance in-force before reinsurance (face amount)

   554,472   494,431   60,041  12%

Universal and whole life insurance

       

Net earned premiums and deposits

  $122  $100  $22  22%

Annualized first-year deposits

   9   7   2  29%

Excess deposits

   19   6   13  NM 

Revenue, net of reinsurance

   174   173   1  1%

Life insurance in-force, net of reinsurance (face amount)

   40,890   42,428   (1,538) (4)%

Life insurance in-force before reinsurance (face amount)

   49,335   50,805   (1,470) (3)%

Total life insurance

       

Net earned premiums and deposits

  $335  $291  $44  15%

Annualized first-year premiums

   34   29   5  17%

Annualized first-year deposits

   9   7   2  29%

Excess deposits

   19   6   13  NM 

Revenue, net of reinsurance

   442   400   42  11%

Life insurance in-force, net of reinsurance (face amount)

   434,702   380,355   54,347  14%

Life insurance in-force before reinsurance (face amount)

   603,807   545,236   58,571  11%

Segment net earnings.Term life insurance. Segment net earningsTerm life annualized first-year premiums increased by $28 million, or 7%, to $416 millionas a result of increased competitiveness of our product offerings. This increase in annualized first-year premiums was the primary driver for the nine months ended September 30, 2005increase in term life insurance net earned premiums, revenues and insurance in-force. Term life insurance revenues also increased due to an increase in invested assets related to assets purchased using the proceeds from $388 millionour issuance of non-recourse funding obligations supporting certain term life insurance policies.

Universal and whole life insurance. Universal life annualized first-year deposits increased primarily due to new product offerings gaining momentum in the market. The decrease in our in-force block was primarily due to the continued run-off on our closed block of whole life insurance.

Long-term care insurance

The following table sets forth selected operating performance measures regarding our long-term care insurance business, which includes long-term care insurance, Medicare supplement insurance, as well as several run-off blocks of accident and health insurance and corporate-owned life insurance for the nine months ended September 30, 2004. periods indicated:

   

For the three months ended

March 31,

  

Increase (decrease) and

percentage change

 

(Dollar amounts in millions)

          2006                  2005                  2006 vs. 2005         

Net earned premiums

  $425  $408  $17  4%

Annualized first-year premiums

   48   41   7  17%

Revenue, net of reinsurance

   608   566   42  7%

The increase in segment net earningsannualized first-year premiums was primarily attributabledue to the broadening of our product offering in Medicare supplement of $4 million and individual long-term care products of $3 million. The additional layer of 2005 annualized first-year premiums was the primary driver for the increase in net earned premium and revenue, net of reinsurance. The increase in revenue was also due to an $18 million increase in our life insurance business, a $9 millionnet investment income primarily due to an increase in our PPI business, and a $3 million increase inaverage invested assets backing growth of our long-term care business. Thein-force block.

Payment protection insurance

The following table sets forth selected operating performance measures regarding our payment protection insurance and other related consumer protection insurance products for the periods indicated:

   

For the three months ended

March 31,

  

Increase (decrease) and

percentage change

 

(Dollar amounts in millions)

          2006                  2005                  2006 vs. 2005         

Payment protection insurance gross written premiums

  $419  $453  $(34) (8)%

Mexico operations gross written premiums

   16   12   4  33%

Net earned premiums

   291   367   (76) (21)%

Revenue, net of reinsurance

   319   399   (80) (20)%

Payment protection insurance gross written premiums, gross of reinsurance and cancellations, increased $2 million, offset by unfavorable changes in foreign exchange rates of $36 million. Net earned premiums and revenues decreased primarily due to continued run-off of low return blocks of business in the U.K. market, the exit from our travel insurance business and unfavorable changes in foreign exchange rates, partially offset by growth in the Continental European market.

Group life and health insurance

The following table sets forth selected operating performance measures regarding our group products for the periods indicated:

   

For the three months ended

March 31,

  

Increase (decrease) and

percentage change

 

(Dollar amounts in millions)

          2006                  2005            2006 vs. 2005   

Net earned premiums

  $168  $162  $6  4%

Annualized first-year premiums

   34   30   4  13%

Revenue, net of reinsurance

   183   177   6  3%

The increase in our life business was attributable to new business growth of the term life in-force block. The earnings growth in our PPI business wasannualized first-year premiums is attributable to an increase resulting from growth in Continental Europe, asales in the non-medical products partially offset by lower effective tax ratesales in the medical and $5 million attributableindividual voluntary products due to changescompetitive pricing in foreign exchange rates.that market. The increase in earnings in our long-term care businessrevenue and net earned premium was attributable to a favorable experience refund on a block in which we have a reinsurance interest and a correction relatedprimarily due to an incorrectly coded long term care policy rider, partially offset by a strengthening of certain claim reserves.increase in annualized first-year premiums.

Retirement Income and Investments segment

We offer U.S. customers fixed and variable deferred annuities, single premium immediate annuities, variable life insurance, asset management, and specialized products, including guaranteed investment contracts, or GICs, funding agreements, funding agreements backing notes and structured settlements.

The following table sets forth the results of operations relating to our Retirement Income and Investments segment. Prior to our corporate reorganization, we entered into several significant reinsurance transactions with UFLIC in which we ceded to UFLIC all of our in-force structured settlements contracts and substantially all of our in-force variable annuity contracts. These blocks of business were ceded to UFLIC in connection with our corporate reorganization on May 24, 2004, and those results are not

   

Three month ended

March 31,

  Increase (decrease) and
percentage change
 

(Dollar amounts in millions)

          2006                  2005                    2006 vs. 2005           

Revenues:

      

Premiums

  $180  $244  $(64) (26)%

Net investment income

   465   433   32  7%

Net realized investment gains (losses)

   (9)  —     (9) NM 

Policy fees and other income

   77   58   19  33%
              

Total revenues

   713   735   (22) (3)%
              

Benefits and expenses:

      

Benefits and other changes in policy reserves

   241   308   (67) (22)%

Interest credited

   278   250   28  11%

Acquisition and operating expenses, net of deferrals

   72   59   13  22%

Amortization of deferred acquisition costs and intangibles

   36   27   9  33%

Interest expense

   1   —     1  NM 
              

Total benefits and expenses

   628   644   (16) (2)%
              

Earnings before income taxes

   85   91   (6) (7)%

Provision for income taxes

   30   31   (1) (3)%
              

Segment net earnings

   55   60   (5) (8)%

Adjustments to segment net earnings:

      

Net realized investment losses (gains), net of taxes and other adjustments

   6   —     6  NM 
              

Segment net operating earnings

  $61  $60  $1  2%
              

The following table sets forth net operating earnings for the products included in our results after that date. AsRetirement Income and Investments segment:

   Three months ended
March 31,
  Increase (decrease) and
percentage change
 

(Dollar amounts in millions)

      2006              2005                    2006 vs. 2005           

Segment net operating earnings:

       

Spread-based retail

  $36  $34  $2  6%

Spread-based institutional

   10   9   1  11%

Fee-based

   15   17   (2) (12)%
              

Total segment net earnings

  $61  $60  $1  2%
              

Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005

Segment net operating earnings

Segment net operating earnings from spread-based retail increased primarily due to growth in assets under management, improved spreads and a reduction in reserves on a closed block of business. Segment net operating earnings on spread-based institutional increased marginally due primarily to growth in assets under management. Segment net operating earnings on fee-based decreased primarily as a result of the foregoing, our results of operations for the nine months ended September 30, 2005 are not comparable to our results of operations for the nine months ended September 30, 2004. The pro forma results of operations for the nine months ended September 30, 2004 below reflect adjustments to record the effects of the reinsurance transactions as if they had been effective as of January 1, 2004. There were no pro forma adjustmentsunusually low expenses in the three months ended September 30, 2004. There were no pro forma adjustments to premiums because the structured settlements we ceded are single premium products and do not have renewal premiums, and the variable annuity products we ceded are deposit contracts and their deposits are not recorded as premiums.

     Three months ended September 30,

    Nine months ended September 30,

(Dollar amounts in millions)


    2005

    2004

    2005

    2004

    Pro forma
2004


Revenues:

                              

Premiums

    $189    $219    $674    $817    $817

Net investment income

     455     393     1,320     1,579     1,165

Policy fees and other income

     61     52     181     213     157
     

    

    

    

    

Total revenues

     705     664     2,175     2,609     2,139
     

    

    

    

    

Benefits and expenses:

                              

Benefits and other changes in policy reserves

     247     281     856     1,270     989

Interest credited

     274     237     780     817     704

Underwriting, acquisition and insurance expenses, net of deferrals

     66     59     191     202     181

Amortization of deferred acquisition costs and intangibles

     33     25     92     136     88

Interest expense

     1     —       2     1     1
     

    

    

    

    

Total benefits and expenses

     621     602     1,921     2,426     1,963
     

    

    

    

    

Earnings before income taxes

     84     62     254     183     176

Provision for income taxes

     25     22     75     65     63
     

    

    

    

    

Segment net earnings

    $59    $40    $179    $118    $113
     

    

    

    

    

Three months ended September 30, 2005 compared to three months ended September 30, 2004

prior year.

PremiumsRevenues. Premiums decreased $30 million, or 14%, to $189 million for the three months ended September 30, 2005 from $219 million for the three months ended September 30, 2004. This

The decrease in premiums was primarily the result of a $30$65 million decreasereduction in premiums attributable to lower sales inof our life-contingent structured settlement and income annuitiessingle premium immediate annuities. This is due to our continued pricing discipline in a continuedthe continuing low long-term interest rate environment.

Net investment income. Net investment income increased $62 million, or 16%, to $455 million for the three months ended September 30, 2005 from $393 million for the three months ended September 30, 2004. The increase in net investment income was primarily due to an increase in weighted average investment yields attributable to higherincreased yields on floating rate assets related toinvestments backing spread-based institutional floating rate products and higher assets under management. This was partially offset by a $12 million increasedecrease in income related to bond calls and mortgage loan prepayments. This increase was alsoprepayment fees.

For a discussion of net realized investment gains (losses), see the resultcomparison for this line item under “—Results of an increase in average invested assets. Operations.”

The increase in average invested assets was driven primarily by growth in assets resulting from new production in spread-based retail and institutional products.

Policypolicy fees and other income. Policy fees and other income increased $9 million, or 17%, to $61 million for the three months ended September 30, 2005 from $52 million for the three months ended September 30, 2004. This increase was primarily attributabledue to a $9$16 million increase in fee income attributable tothe fee-based segment as a result of increased sales and growth in assets under management.

management from distribution expansion, strong equity markets, and continued product enhancements.

Benefits and other changes in policy reservesexpenses.

Benefits and other changes in policy reserves decreased $34 million, or 12%, to $247 million forprimarily as a result of the three months ended September 30, 2005 from $281 million for the three months ended September 30, 2004. This decrease was primarily attributable to a $34$65 million decrease in spread-based retail products related primarily to a decrease inthe life-contingent structured settlement and income annuity reserves attributablesingle premium immediate annuities sales.

The increase in interest credited was primarily due to lowera $33 million increase related to spread-based institutional products as a result of increased crediting rates on floating rate products and higher assets under management.

The increase in acquisition and operating expenses, net of deferrals, was primarily due to $16 million in expenses associated with higher sales and growth in assets under management in fee-based products.

The increase in amortization of these products.

Interest credited. Interest credited increased $37 million, or 16%, to $274 million for the three months ended September 30, 2005 from $237 million for the three months ended September 30, 2004. This increasedeferred acquisition costs and intangibles was primarily the result of a $30 million increase in interest credited on spread-based institutional products primarily attributable to higher average interest crediting rates on floating rate products.

Underwriting, acquisition and insurance expenses, net of deferrals. Underwriting, acquisition and insurance expenses, net of deferrals, increased $7 million, or 12%, to $66 million for the three months ended September 30, 2005 from $59 million for the three months ended September 30, 2004. The increase was primarily the result of an $8 million increase in expenses on fee retail products attributable primarily to increased assets under management.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles increased $8 million, or 32%, to $33 million for the three months ended September 30, 2005 from $25 million for the three months ended September 30, 2004. This increase was primarily the result of a $5 million increase in spread-based retail products due primarily to growth in spreads and assets under management.

Interest expense.Provision for income taxes Interest expense

The effective tax rate increased $1 million to $1 million35.3% for the three months ended September 30, 2005 as compared to the three months ended September 30, 2004.

Provision for income taxes. Provision for income taxes increased $3 million, or 14%, to $25 millionMarch 31, 2006 from 34.1% for the three months ended September 30, 2005 from $22 million for the three months ended September 30, 2004. The effective tax rate decreased to 29.8% for the three months ended September 30, 2005 from 35.5% for the three months ended September 30, 2004. The decreaseMarch 31, 2005. This increase in the effective tax rate was primarily attributable to lower dividends received deductions as a proportion of pretax earnings in 2006 and nonrecurring favorable current yearIRS examination developments benefitingin 2005.

Retirement Income and Investments selected operating performance measures

Spread-based retail products

The following table sets forth selected operating performance measures regarding our spread-based retail products as of or for the three months ended September 30, 2005.dates indicated:

 

   As of or for three months ended
March 31,
 

(Dollar amounts in millions)

            2006                      2005           

Fixed annuities

   

Account value net of reinsurance, beginning of period

  $15,547  $15,113 

Deposits

   267   285 

Interest credited

   145   150 

Surrenders, benefits and product charges

   (718)  (334)
         

Account value net of reinsurance, end of period

  $15,241  $15,214 
         

Single premium immediate annuities

   

Account value net of reinsurance, beginning of period

  $5,680  $5,344 

Net earned premiums and deposits

   250   212 

Interest credited

   80   77 

Surrenders, benefits and product charges

   (238)  (218)
         

Account value net of reinsurance, end of period

  $5,772  $5,415 
         

Structured settlements

   

Account value net of reinsurance, beginning of period

  $871  $533 

Net earned premiums and deposits

   58   124 

Interest credited

   12   11 

Surrenders, benefits and product charges

   (16)  (15)
         

Account value net of reinsurance, end of period

  $925  $653 
         

Total annualized first-year premiums from spread-based retail products

  $180  $244 
         

Total deposits on spread-based retail products

  $395  $377 
         

SegmentFixed annuities. The account value net earningsof reinsurance increased primarily due to increased net flows in the first half of 2005. The flattening of the yield curve during 2005 has resulted in a shift in demand to shorter duration instruments like bank certificates of deposit and money market funds from longer duration products like fixed annuities. Additionally, we lowered crediting rates on several blocks of lower return, high rate, fixed annuity business that reached crediting rate reset periods during 2005 and the first quarter of 2006. As we lowered crediting rates, we experienced a higher level of surrenders. We expect this trend to continue throughout 2006 and 2007. The level of these surrenders has been at or near our expected levels.

Single premium immediate annuities. SegmentThe account value net earningsof reinsurance increased $19 million, or 48%,primarily due to $59 millionpositive net flows along with interest credited on account values in 2005 and 2006.

Structured settlements. We continue to write structured settlements to the extent that we are able to achieve our targeted returns. Our continued pricing discipline in a low long-term interest rate environment was the primary reason for the three months ended September 30, 2005 from $40 millionlower sales of these products in the first quarter of 2006.

Spread-based institutional products

The following table sets forth selected operating performance measures regarding our spread-based institutional products as of or for the three months ended September 30, 2004.dates indicated:

   As of or for the three months ended
March 31,
 

(Dollar amounts in millions)

            2006                      2005           

GICs, funding agreements and funding agreements backing notes

   

Account value, beginning of period

  $9,777  $9,541 

Deposits (1)

   980   841 

Interest credited

   114   82 

Surrenders and benefits (1)

   (1,105)  (1,056)
         

Account value, end of period

  $9,766  $9,408 
         

(1)“Surrenders and benefits” include contracts that have matured but are redeposited with us and reflected as deposits. In the three months ended March 31, 2006 and 2005, surrenders and deposits included $210 million and $483 million, respectively, that was redeposited and reflected under “Deposits.”

Spread-based institutional account values increased primarily due to the launch of our registered notes program in the fourth quarter of 2005. This program resulted in an issuance of $300 million of funding agreements backing notes in the fourth quarter of 2005 and $700 million in the first quarter of 2006. The increase in interest credited was primarilydriven by higher crediting rates on our floating rate products due to an increase in the resultunderlying indices. This was partially offset by expected maturities.

Fee-based products

The following table sets forth selected operating performance measures regarding our fee-based products as of or for the dates indicated:

   As of or for three months ended
March 31,
 

(Dollar amounts in millions)

            2006                      2005           

Income Distribution Series(1)

   

Account value, beginning of period

  $911  $462 

Deposits

   281   85 

Interest credited and investment performance

   59   (4)

Surrenders, benefits and product charges

   (16)  (3)
         

Account value, end of period

  $1,235  $540 
         

Traditional variable annuities

   

Account value, beginning of period

  $1,182  $632 

Deposits

   132   143 

Interest credited and investment performance

   78   (13)

Surrenders, benefits and product charges

   (32)  (15)
         

Account value, end of period

  $1,360  $747 
         

   As of or for three months ended
March 31,
 

(Dollar amounts in millions)

            2006                      2005           

Variable life insurance

   

Account value, beginning of period

  $363  $345 

Deposits

   9   8 

Interest credited and investment performance

   18   (11)

Surrenders, benefits and product charges

   (13)  (7)
         

Account value, end of period

  $377  $335 
         

Third-party assets

   

Account value, beginning of period

  $5,180  $3,973 

Deposits

   582   324 

Interest credited and investment performance

   254   (96)

Surrenders, benefits and product charges

   (192)  (155)
         

Account value, end of period

  $5,824  $4,046 
         


(1)The Income Distribution Series offers variable annuity products and four riders that provide the contractholder with a guaranteed minimum income stream that they cannot outlive, along with an opportunity to participate in market appreciation.

Income Distribution Series. We experienced an increase in assets under management improved investment spreads and a lower effective tax rate.

Nine months ended September 30, 2005 comparedattributable to nine months ended September 30, 2004the successful launch of our guaranteed minimum withdrawal for life benefit rider in the fourth quarter of 2005. Sales of this product remained strong in the first quarter of 2006.

Premiums. Premiums decreased $143 million, or 18%, to $674 million for the nine months ended September 30, 2005 from $817 million for the nine months ended September 30, 2004. This decrease was

primarily the result of a $143 million decrease in premiums attributable to lower sales in our life-contingent structured settlement and income annuities due to our continued pricing discipline in a continued low long-term interest rate environment.

Net investment income. Net investment income decreased $259 million, or 16%, to $1,320 million for the nine months ended September 30, 2005 from $1,579 million for the nine months ended September 30, 2004. This decrease was primarily attributable to a decrease in investment income onTraditional variable annuities and structured settlements related to the reinsurance transactions with UFLIC, which resulted in an overall decrease in invested assets. This decrease was partially offset by anannuities. The increase in investment income related to spread-based institutional products due to increased yields on floating rate investments and an increase in spread-based retail products due primarily to growth in assets under management was attributable to ongoing sales of our core variable annuity products and a $9 million increase related to bond calls and mortgage loan prepayments.positive investment performance.

Policy feesThird-party assets. Third-party assets include assets managed by our Private Asset Management and other income. Policy fees and other income decreased $32 million, or 15%, to $181 million for the nine months ended September 30, 2005 from $213 million for the nine months ended September 30, 2004.Genworth Financial Advisor groups. The decrease in fee income of $56 million was primarily related to the reinsurance transactions with UFLIC. This decrease was partially offset by a $24 million increase in fee income attributable to increased assets under management.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves decreased $414 million, or 33%, to $856 million for the nine months ended September 30, 2005 from $1,270 million for the nine months ended September 30, 2004. This decrease was primarily attributable to a $281 million decrease attributable to the reinsurance transactions with UFLIC and a $116 million decrease in structured settlement and income annuity reserves attributable primarily to lower sales of these products.

Interest credited. Interest credited decreased $37 million, or 5%, to $780 million for the nine months ended September 30, 2005 from $817 million for the nine months ended September 30, 2004. This decrease was primarily related to a $113 million decrease in interest credited related to the reinsurance transactions with UFLIC. This decrease was partially offset by a $65 million increase in interest credited on spread-based institutional products due primarily to higher average interest crediting rates on floating rate products.

Underwriting, acquisition and insurance expenses, net of deferrals. Underwriting, acquisition and insurance expenses, net of deferrals decreased $11 million, or 5%, to $191 million for the nine months ended September 30, 2005 from $202 million for the nine months ended September 30, 2004. The decrease was primarily attributable to a $21 million decrease in expenses related to the reinsurance transactions with UFLIC partially offset by a $10 million increase in expenses on fee retail products attributable primarily to increased assets under management.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles decreased $44 million, or 32%, to $92 million for the nine months ended September 30, 2005 from $136 million for the nine months ended September 30, 2004. This decrease was primarily related to a $47 million decrease relating to the reinsurance transactions with UFLIC.

Interest expense. Interest expense increased $1 million to $2 million for the nine months ended September 30, 2005 from $1 million for the nine months ended September 30, 2004.

Provision for income taxes. Provision for income taxes increased $10 million, or 15%, to $75 million for the nine months ended September 30, 2005 from $65 million for the nine months ended September 30, 2004. The effective tax rate decreased to 29.5% for the nine months ended September 30, 2005 from 35.5% for the nine months ended September 30, 2004. The decrease in the effective tax rate was primarily attributable to favorable examination developments in the nine months ended September 30, 2005.

Segment net earnings. Segment net earnings increased by $61 million, or 52%, to $179 million for the nine months ended September 30, 2005 from $118 million for the nine months ended September 30, 2004. This increase was primarily due to growth in deposits from new and existing clients, as well as positive investment performance during the resultlast three quarters of an increase2005 and the first quarter of 2006. Significant contributors to the growth in average assets under management, improved investment spreadsdeposits was the expansion of our distribution network, growth in our sales force, and a lower effective tax ratechanges in the nine months ended September 30, 2005.our fee structure.

Mortgage Insurance segment

In the U.S., Canada, Australia, Europe, New Zealand, Mexico and Japan, we offer mortgage insurance products that facilitate homeownership by enabling borrowers to buy homes with low-down-payment mortgages. These products generally also aid financial institutions in managing their capital efficiently by reducing the capital required for low-down-payment mortgages.

Segment results of operations

The following table presentssets forth the historical results of operations relating to our Mortgage Insurance segment. There are no pro forma adjustments to

   Three months ended
March 31,
  Increase (decrease) and
percentage change
 

(Dollar amounts in millions)

      2006          2005                2006 vs. 2005           

Revenues:

       

Premiums

  $247  $215  $32  15%

Net investment income

   80   69   11  16%

Net realized investment gains (losses)

   1   —     1  NM 

Policy fees and other income

   7   10   (3) (30)%
              

Total revenues

   335   294   41  14%
              

Benefits and expenses:

       

Benefits and other changes in policy reserves

   46   21   25  119%

Acquisition and operating expenses, net of deferrals

   68   59   9  15%

Amortization of deferred acquisition costs and intangibles

   15   11   4  36%
              

Total benefits and expenses

   129   91   38  42%
              

Earnings before income taxes

   206   203   3  1%

Provision for income taxes

   57   62   (5) (8)%
              

Segment net earnings

   149   141   8  6%

Adjustments to segment net earnings:

       

Net realized investment losses (gains), net of taxes and other adjustments

   —     —     —    —   
              

Segment net operating earnings

  $149  $141  $8  6%
              

The following table sets forth net earnings for the products included in our Mortgage Insurance segment’s results of operations.segment:

 

     

Three months

ended

September 30,


    

Nine months

ended

September 30,


(Dollar amounts in millions)


    2005

    2004

    2005

    2004

Revenues:

                        

Premiums

    $218    $197    $653    $587

Net investment income

     73     65     210     186

Policy fees and other income

     12     10     34     28
     

    

    

    

Total revenues

     303     272     897     801
     

    

    

    

Benefits and expenses:

                        

Benefits and other changes in policy reserves

     36     46     96     112

Underwriting, acquisition and insurance expenses, net of deferrals

     81     64     215     193

Amortization of deferred acquisition costs and intangibles

     18     12     42     35
     

    

    

    

Total benefits and expenses

     135     122     353     340
     

    

    

    

Earnings before income taxes

     168     150     544     461

Provision for income taxes

     42     48     156     142
     

    

    

    

Segment net earnings

    $126    $102    $388    $319
     

    

    

    

   Three months ended
March 31,
  Increase (decrease) and
percentage change
 

(Dollar amounts in millions)

      2006          2005                2006 vs. 2005           

Segment net earnings:

        

U.S. mortgage insurance

  $72  $72  $—    —  %

International mortgage insurance

   77   69   8  12%
              

Total segment net operating earnings

  $149  $141  $8  6%
              

Three months ended September 30,Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005 compared to three months ended September 30, 2004

Segment net operating earnings

Premiums. Premiums increased $21 million, or 11%, to $218 million for the three months ended September 30, 2005 from $197 million for the three months ended September 30, 2004. This increase was primarily the result of a $23 millionOur U.S. mortgage insurance business net earnings remained unchanged. The increase in premiumslosses was offset by earnings related to intra-segment reinsurance agreement with our international mortgage insurance business. The increase in our international mortgage insurance business $7earnings of $8 million, including $1 million in foreign exchange rates changes, was driven primarily by the growth of whichthe business, seasoning of our insurance in-force, a decrease in effective tax rate due to an increase in lower taxed foreign earnings and a reduction in excess foreign tax credits. This was attributablepartially offset by an increase in losses and continued investments in our global expansion.

Revenues

In our international mortgage insurance business, premiums increased by $27 million, including $1 million due to changes in foreign exchange rates. The increase wasrates, driven by the growth and aging of our international in-force block,

which resulted in increased earned premiums from prior year new insurance written. This year-over-year increase was impacted by higher premiums ceded to our U.S. mortgage insurance business in the current period, as well as the release of unearned premium reserves on our single premium product of $10 million in the first quarter of 2005 due to the completion of a European cancellation study. The increase in our U.S. mortgage insurance business of $5 million was primarily a result of increased reinsurance premiums assumed from our international mortgage insurance business.

The increase in net investment income, which included $1 million due to changes in foreign exchange rates, was primarily the result of an increase in invested assets associated with the growth of our international business.

Policy fees and other income remained relatively flat in our U.S. and international mortgage insurance businesses.

Benefits and Expenses

In our international mortgage insurance business, benefits and other changes in policy reserves increased $21 million primarily due to higher losses in Australia, which were favorable in the prior year and also reflect the seasoning of more recent in-force blocks of business. The increase in our U.S. business of $4 million was primarily due to average reserve per delinquency favorability in the first quarter of 2005, which was not repeated in the current year, which was partially offset by a decline in claims paid and a $3 million decrease in reserves for severely impacted areas associated with Hurricanes Katrina and Rita.

The increase in acquisition and operating expenses, net of deferrals, was primarily attributable to an increase in costs in our existing international platforms and continued investment in potential new international mortgage insurance platforms.

Amortization of deferred acquisition cost and intangibles increased by $4 million primarily due to the growth and seasoning in our international mortgage insurance business.

Provision for income taxes

Provision for income taxes decreased $5 million, which includes an $1 million increase due to changes in foreign exchange rates. The effective tax rate decreased to 27.7% for the three months ended March 31, 2006 from 30.5% for the three months ended March 31, 2005. This decrease in effective tax rate was primarily attributable to the increase in lower taxed foreign earnings and a reduction in excess foreign tax credits. Our Mortgage Insurance segment’s effective tax rate is below the statutory rate primarily as a result of tax-exempt investment income and lower taxed foreign earnings.

Mortgage Insurance selected operating performance measures

The following tables set forth selected operating performance measures regarding our U.S. and international mortgage businesses as of or for the dates indicated:

   As of or for the three months ended
March 31,
  Increase (decrease) and
percentage change
 

(Dollar amounts in millions)

          2006                  2005                        2006 vs. 2005               

Primary insurance in-force:

       

U.S. mortgage insurance

  $100,500  $106,000  $(5,500) (5)%

International mortgage insurance

   256,800   209,900   46,900  22%
              

Total primary insurance in-force

  $357,300  $315,900  $41,400  13%
              

Risk in force:

       

U.S. mortgage insurance

  $22,300  $23,100  $(800) (3)%

International mortgage insurance

   82,800   68,000   14,800  22%
              

Total risk in-force

  $105,100  $91,100  $14,000  15%
              

Net premiums written:

       

U.S. mortgage insurance

  $115  $109  $6  6%

International mortgage insurance

   204   137   67  49%
              

Total net premiums written

  $319  $246  $73  30%
              

Net premiums earned:

       

U.S. mortgage insurance

  $116  $111  $5  5%

International mortgage insurance

   131   104   27  26%
              

Total net premium earned

  $247  $215  $32  15%
              

New insurance written:

       

U.S. mortgage insurance

  $6,800  $5,700  $1,100  19%

International mortgage insurance

   20,400   14,200   6,200  44%
              

Total new insurance written

  $27,200  $19,900  $7,300  37%
              

Primary insurance in-force and risk in-force

The increases in primary insurance in-force and risk in-force were driven primarily by new insurance written in prior years. our international business, as we continue to execute our global expansion strategy. Offsetting strong increases in international insurance in-force and risk in-force was a decline in our U.S. business. This decline was driven by continued low persistency rates, which have caused policy cancellations to exceed new insurance written.

Our businesses in Australia, New Zealand and Canada currently provide 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our risk in-force, we have computed an “effective risk in-force” amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Australia, New Zealand and Canada. For the three months ending March 31, 2006 and 2005, this factor was 35%.

Net premiums written

The increase in net premiums written was driven primarily by increases in new insurance written in our international business. The increase in our international business of $67 million, which includes a $2 million

decrease due to changes in foreign exchange rates, was primarily driven by increased new insurance written in our Australian and European businesses. Included in the international increase was the impact of incremental new insurance written as a result of the timing of customer reporting in Australia.

Most of our international mortgage insurance policies provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premium in incomepremiums earned over time in accordance with the expectedestimated expiration of risk. As of September 30, 2005,March 31, 2006, our international unearned premium reserves were $1.7 billion.

Net investment income. Net investment income increased $8 million, or 12%, to $73 million for the three months ended September 30, 2005 from $65 million for the three months ended September 30, 2004. The increase was primarily the result of a $9 million increase in investment income in our international business related to growth in invested assets, $3 million of which was attributable to changes in foreign exchange rates.

Policy fees and other income. Policy fees and other income increased $2 million, or 20%, to $12 million for the three months ended September 30, 2005 from $10 million for the three months ended September 30, 2004. This increase was primarily the result of increased fees for contract underwriting services in our U.S. mortgage insurance business due to increased volume.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves decreased $10 million, or 22%, to $36 million for the three months ended September 30, 2005 from $46 million for the three months ended September 30, 2004. This decrease was primarily attributable to a decline in our U.S. claims paid of $4 million and a $5 million adjustment to reserves on our prime bulk business. In the international mortgage insurance business, our losses, which included $1 million attributable to changes in foreign exchange rates, were equal to the prior year. A $5 million adjustment to paid losses and a $4 million favorable loss reserve development were offset by increased losses attributable to increased claims and delinquencies related to the seasoning of the international portfolio.

Underwriting, acquisition, insurance and other expenses, net of deferrals. Underwriting, acquisition, insurance and other expenses, net of deferrals, increased $17 million, or 27%, to $81 million for the three months ended September 30, 2005 from $64 million for the three months ended September 30, 2004. The increase was attributable to increased underwriting expenses and indemnity reserves related to our U.S. contract services offerings, which were principally driven by increased underwriting volume. The increase in our international mortgage insurance business was primarily attributable to an $8 millionwere $1.9 billion.

New insurance written

The increase in costs innew insurance written was driven primarily by our existing international platforms and continued investment in potentialbusiness. International new international mortgage insurance platforms and an increase of $1written increased $6,200 million, from changeswhich included a $600 million decrease in foreign exchange rates.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles increased $6 million, or 50%, to $18 million for the three months ended September 30, 2005 from $12 million for the three months ended September 30, 2004. This increase was primarily attributable to accelerated amortization of deferred acquisition costs in our U.S. mortgage insurance businessmovements, as a result of ongoing expansion of our customer base in Europe, continued low persistency rates during the year.

Provision for income taxes. Provision for income taxes decreased $6 million, or 13%, $3 million of which was attributable to changesaccount penetration in foreign exchange rates, to $42 million for the three months ended September 30, 2005 from $48 million for the three months ended September 30, 2004. The effective tax rate decreased to 25.0% for the three months ended September 30, 2005 from 32.0% for the three months ended September 30, 2004. The decrease in effective tax rate was primarily attributable to favorable examination developments in 2005Canada and a reductioncatch-up of sales reported to us caused a delay in excess foreign tax credits, offset by an increasetiming of customer reporting in foreign income, which is taxed at a higher worldwide rate thanAustralia. U.S. income. Our Mortgage Insurance segment’s effective tax rate is significantly below the statutory rate primarilynew insurance written also increased $1,100 million as a result of tax-exempt investment income.

Segment net earnings. Segment net earnings increased $24 million, or 24%, to $126 million for the three months ended September 30, 2005 from $102 million for the three months ended September 30, 2004. Thean 11% increase in segment net earnings was primarily attributable to an $18 million increase in our international mortgageflow new insurance business, $5 million of which was attributable to changes in foreign exchange rates, resulting from higher levels of insurance in force and invested assets, an adjustment to paid losses and a favorable loss reserve development, partially offsetwritten driven by seasoning of the portfoliostrong customer penetration and an increase in international expensesour prime bulk product writings.

Loss and expense ratios

   As of or for the three months ended
March 31,
  Increase (decrease) 
           2006                      2005              2006 vs. 2005     

Loss ratio:

    

U.S. mortgage insurance

  16% 14% 2%

International mortgage insurance

  21% 6% 15%

Total loss ratio

  19% 10% 9%

Expense ratio:

    

U.S. mortgage insurance

  35% 37% (2)%

International mortgage insurance

  21% 22% (1)%

Total expense ratio

  26% 28% (2)%

The loss ratio (expressed as a percentage) is the ratio of incurred losses and loss adjustment expense to support growth innet premiums earned. In our international platforms.business, our loss ratio increased due to higher losses primarily in Australia, which were favorable in the prior year and also reflect the seasoning of more recent in-force blocks of business. The increase in segment net earnings was also the result of a $6 million increase in our U.S. mortgage insurance net earningsbusiness loss ratio is primarily attributabledue to average reserve per delinquency favorability in the first quarter of 2005, which was not repeated in the current year, offset partially by a decline in claims paid an adjustmentand a $3 million decrease in reserves for severely impacted areas associated with Hurricanes Katrina and Rita.

The expense ratio (expressed as a percentage) is the ratio of general expenses to reserves onnet premiums written. In our prime bulk business, general expenses consist of acquisition and favorable tax examination developments, partially offset by increased contract underwritingoperating expenses, net of deferrals, and indemnity reserves and accelerated amortization of deferred acquisition costs.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

Premiums. Premiums increased $66 million, or 11%, to $653 million for the nine months ended September 30, 2005 from $587 million for the nine months ended September 30, 2004. This increase was primarily the result of a $79 million increase in premiums in our international mortgage insurance business, $19 million of which was attributable to changes in foreign exchange rates. The increase was driven by the

growthcost and aging of our international in-force block, which resulted in increased earned premiums from new insurance written in prior years. In addition, our international premiums increased approximately $10 million as a result of the release of unearned premium reserves on our single premium product relating to the completion of a European cancellation study in the first quarter of 2005. The increase in international premiums was offset, in part, by a $13 million decrease in U.S. mortgage insurance premiums as a result of the continued decline in our in-force block due to an excess of policy cancellations over new insurance written.

Net investment income. Net investment income increased $24 million, or 13%, to $210 million for the nine months ended September 30, 2005 from $186 million for the nine months ended September 30, 2004. The increase was primarily the result of a $25 million increase in investment income in our international business related to growth in invested assets, $7 million of which was attributable to changes in foreign exchange rates.

Policy fees and other income. Policy fees and other income increased $6 million, or 21%, to $34 million for the nine months ended September 30, 2005 from $28 million for the nine months ended September 30, 2004. This increase was primarily the result of increased fees for contract underwriting services in our U.S. mortgage insurance business.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves decreased $16 million, or 14%, to $96 million for the nine months ended September 30, 2005 from $112 million for the nine months ended September 30, 2004. This decrease was primarily attributable to a $24 million decrease in U.S. loss reserves primarily attributable to more favorable delinquency experience in our U.S. mortgage insurance business compared to the prior-year period and an adjustment to reserves on our prime bulk business partially offset by a $3 million increase in paid claims. The U.S. decrease was partially offset by a $14 million increase in international losses due to in-force seasoning, $2 million of which was related to changes in foreign exchange rates, offset by a $5 million adjustment to paid losses and a $4 million favorable loss reserve development.

Underwriting, acquisition, insurance and other expenses, net of deferrals. Underwriting, acquisition, insurance and other expenses, net of deferrals, increased $22 million, or 11%, to $215 million for the nine months ended September 30, 2005 from $193 million for the nine months ended September 30, 2004. This increase was primarily attributable to an increase in costs in our existing international platforms, continued investment in potential new international mortgage insurance platforms and $4 million from changes in foreign exchange rates.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles increased $7 million, or 20%, to $42 million for the nine months ended September 30, 2005 from $35 million for the nine months ended September 30, 2004. This increase was primarily attributable to accelerated amortization of deferred acquisition costs in our U.S. mortgage insurance business principally related to continued low persistency rates during the year.

Provision for income taxes. Provision for income taxes increased $14 million, or 10%, $7 million of which was attributable to changes in foreign exchange rates, to $156 million for the nine months ended September 30, 2005 from $142 million for the nine months ended September 30, 2004. The effective tax rate decreased to 28.7% for the nine months ended September 30, 2005 from 30.8% for the nine months ended September 30, 2004. The decrease in the effective tax rateexpense ratio was primarily attributable to favorable examination developments in 2005 and a reduction in excess foreign tax credits, offsetdriven by an increase in foreign income, which is taxed at a higher worldwide rate than U.S. income. Our Mortgage Insurance segment’s effective tax rate is significantly below the statutory rate primarily as a result of tax-exempt investment income.

Segment net earnings. Segment net earnings increased $69 million, or 22%, to $388 million for the nine months ended September 30, 2005 from $319 million for the nine months ended September 30, 2004. The

increase in segment net earnings was primarily attributable to a $52 million increase, $13 million of which was due to changes in foreign exchange rates,our continued focus on expense management in our international mortgage insuranceU.S. business resulting from higher levels of insurance in force and invested assets, the release of unearnedstrong net premium reserves relating to updated cancellation data, an adjustment to paid losses and a favorable loss reserve development, partially offset by seasoning of the portfolio and an increase in international expenses to supportwritten growth in our international platforms. The increase in segment net earnings was also the result of a $17 million increase in our U.S. mortgage insurance net earnings, primarily attributable to a decrease in loss reserves, increased fees for contract underwriting services and favorable tax examination developments. These increases were offset in part by a decline in our in-force block due to an excess of policy cancellations over new insurance written and accelerated amortization of deferred acquisition costs in our U.S. mortgage insurance business.

Affinity segment

The following table sets forth the historical results of operations relating to the Affinity segment. Pro forma financial information is not presented for the Affinity segment because we did not acquire any of the Affinity segment businesses from GEFAHI. Accordingly, the results of the Affinity segment are included in our results of operations through May 24, 2004, but excluded thereafter.

     

Three months

ended

September 30,


    

Nine months

ended

September 30,


 

(Dollar amounts in millions)


   ��2005

    2004

    2005

    2004

 

Revenues:

                         

Premiums

    $—      $—      $—      $88 

Net investment income

     —       —       —       26 

Policy fees and other income

     —       —       —       104 
     

    

    

    


Total revenues

     —       —       —       218 
     

    

    

    


Benefits and expenses:

                         

Benefits and other changes in policy reserves

     —       —       —       80 

Underwriting, acquisition and insurance expenses, net of deferrals

     —       —       —       123 

Amortization of deferred acquisition costs and intangibles

     —       —       —       47 
     

    

    

    


Total benefits and expenses

     —       —       —       250 
     

    

    

    


Earnings before income taxes

     —       —       —       (32)

Provision for income taxes

     —       —       —       (18)
     

    

    

    


Segment net earnings

    $—      $—      $—      $(14)
     

    

    

    


Corporate and Other segment

The Corporate and Other segment consists primarily of unallocated corporate income and expenses (including amounts accrued in settlement of some class action lawsuits), the results of small, non-core businesses that are managed outside our operating segments, most of our interest expense and other financing costs.

The following table sets forth the results of operations relating to our Corporate and Other segment. There were no pro forma

   Three months ended
March 31,
  Increase (decrease) and
percentage change
 

(Dollar amounts in millions)

      2006          2005                  2006 vs. 2005             

Revenues:

     

Premiums

  $7  $8  $(1) (13)%

Net investment income

   33   34   (1) (3)%

Net realized investment gains (losses)

   (18)  (6)  (12) 200%

Policy fees and other income

   3   4   (1) (25)%
              

Total revenues

   25   40   (15) (38)%
              

Expenses:

     

Benefits and other changes in policy reserves

   1   1   —    —  %

Acquisition and operating expenses, net of deferrals

   5   (1)  6  NM 

Amortization of deferred acquisition costs and intangibles

   1   3   (2) (67)%

Interest expense

   56   63   (7) (11)%
              

Total benefits and expenses

   63   66   (3) (5)%
              

Loss before income taxes

   (38)  (26)  (12) 46%

Benefit for income taxes

   (12)  (8)  (4) 50%

Cumulative effect of accounting change, net of taxes

   4   —     4  NM 
              

Segment net loss

   (22)  (18)  (4) 22%

Adjustments to segment net loss:

     

Net realized investment losses (gains), net of taxes and other adjustments

   12   4   8  200%

Cumulative effect of accounting change

   (4)  —     (4) —  %
              

Segment net operating loss

  $(14) $(14) $0  —  %
              

Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005

Segment net operating loss

Segment net operating loss remained unchanged. The increase in operating expenses was attributable to certain employee benefits accrual adjustments to premiums or policy fees and other income because there are no premiums or policy fees and other income in the Corporate and Other segment2005 that were ceded to UFLICdid not recur in connection with the reinsurance transactions. Pro forma2006. This was offset by higher net investment income is different from our historical net investment incomelimited partnership distributions.

Revenues

Premiums decreased primarily as a result of net investment income earned on excess surplus assets that were transferred from the Protection and Retirement Income and Investments segments to the Corporate and Other segment in 2004, offset in part by a decrease attributable to reduced net investment income related to the $1.836 billion capital contribution that we made to UFLIC in connection with our corporate reorganization. Pro forma revenues are different from our historical revenues primarily as a result of the adjustments to net investment income due to the transfer of assets from the Protection and Retirement Income and Investments segments as discussed above, partially offset by the exclusion from our results of operations of net realized investment gains (losses) related to the long-term care insurance, structured settlement and variable annuity blocks we ceded to UFLIC in connection

with the reinsurance transactions and net realized investment gains (losses) related to the Affinity segment. Pro forma benefits and expenses are different from our historical benefits and expenses primarily as a result of the interest expense attributable to our revised debt structure following the completion of the IPO, including the offerings of senior notes and commercial paper. There were no pro forma adjustments in the three months ended September 30, 2004.

     

Three months

ended

September 30,


   Nine months ended September 30,

 

(Dollar amounts in millions)


    2005

   2004

   2005

   2004

   

Pro forma

2004


 

Revenues:

                           

Premiums

    $20   $22   $62   $74   $74 

Net investment income

     53    29    119    119    117 

Net realized investment gains (losses)

     (7)   3    (13)   27    24 

Policy fees and other income

     5    6    13    10    10 
     


  


  


  


  


Total revenues

     71    60    181    230    225 
     


  


  


  


  


Benefits and expenses:

                           

Benefits and other changes in policy reserves

     11    9    28    28    27 

Underwriting, acquisition and insurance expenses, net of deferrals

     31    9    66    50    56 

Amortization of deferred acquisition costs and intangibles

     5    7    14    13    14 

Interest expense

     58    56    178    144    170 
     


  


  


  


  


Total benefits and expenses

     105    81    286    235    267 
     


  


  


  


  


Earnings (loss) before income taxes

     (34)   (21)   (105)   (5)   (42)

(Benefit) provision for income taxes

     (11)   (15)   (36)   7    (7)
     


  


  


  


  


Segment net loss

    $(23)  $(6)  $(69)  $(12)  $(35)
     


  


  


  


  


Three months ended september 30, 2005 compared to three months ended September 30, 2004

Premiums. Premiums decreased $2 million, or 9%, to $20 million for the three months ended September 30, 2005 from $22 million for the three months ended September 30, 2004. The decrease was primarily attributable to decreased premiums from our Bermuda reinsurer relatedattributable to the run-off of certain credit life insurance blocks.

Net investment income. NetThe decrease in net investment income increased $24 million, or 83%, to $53 million forwas primarily the three months ended September 30, 2005result of lower income from $29 million for the three months ended September 30, 2004. Theconsolidated securitization entities partially offset by an increase in net investment income was attributable primarily to an increaseassociated with non-qualifying derivatives and higher yields on our Corporate and Other investment portfolio.

For a discussion of $15 million in investment income related to bond calls, mortgage prepayments and limited partnerships, lower income in the prior year due to the timing of segment investment income allocations, partially offset by lower income from consolidated securitization entities.

Netnet realized investment gains (losses) gains. See, see the comparison offor this line item under “Results“—Results of Operations”.

Policy fees and other income. Policy fees and other income decreased $1 million to $5 million for the three months ended September 30, 2005 from $6 million for the three months ended September 30, 2004.

Operations.”

Benefits and other changes in policy reservesexpenses. Benefits

Acquisition and other changes in policy reserves increased $2 million, or 22% to $11 million for the three months ended September 30, 2005 from $9 million for the three months ended September 30, 2004. This increase was primarily attributable to unfavorable loss experience with our Bermuda reinsurer.

Underwriting, acquisition and insurance expenses, net of deferrals. Underwriting, acquisition and insurance expenses, net of deferrals, primarily consists of expenses of our Bermuda reinsurer, Mexico auto insurer and corporate expenses that are not allocated for segment reporting purposes. These corporate expenses include items such as class-action litigation settlements, advertising and marketing costs and other corporate-level expenses. Underwriting, acquisition and insuranceoperating expenses, net of deferrals, increased $22primarily as a result of a $3 million accrual release related to $31certain employee benefits in 2005 that did not recur in 2006 and a $3 million for the three months ended September 30, 2005 from $9 million for the three months ended September 30, 2004. This increase was primarily attributable to increased stand-alone costs associated with our separation from GE and an increase in certain employee benefits.expenses related to insurance and the issuance of stock options and stock appreciation rights.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles decreased $2 million to $5 million for the three months ended September 30, 2005 from $7 million for the three months ended September 30, 2004.

Interest expense. Interest expense consists of interest and other financingfinancial charges related to our debt that is not allocated for segment reporting purposes. Interest expenseThe decrease was primarily associated with the derecognition of borrowings related to securitization entities which was partially offset by a higher interest environment on corporate debt.

Provision for income taxes

The increased $2 million, or 4%benefit for income taxes was primarily attributable to higher pretax losses in 2006.

Investments

Investment results

The following table sets forth information about our investment income, excluding realized investment gains (losses), for each component of our investment portfolio for the periods indicated:

  For the three months ended
March 31,
  Increase (decrease) 
  2006  2005  2006 vs. 2005 

(Dollar amounts in millions)

 Yield  Amount  Yield  Amount    Yield      Amount   

Fixed maturities—taxable

 5.7% $719  5.6% $669  0.1% $50 

Fixed maturities—non-taxable

 4.4%  31  4.5%  33  (0.1)%  (2)

Commercial mortgage loans

 6.3%  121  6.4%  98  (0.1)%  23 

Equity securities

 12.3%  7  8.8%  6  3.5%  1 

Other investments

 5.2%  11  6.9%  14  (1.7)%  (3)

Policy loans

 8.8%  30  8.3%  26  0.5%  4 

Restricted investments held by securitization entities(1)

 8.2%  7  6.9%  14  1.3%  (7)

Cash, cash equivalents and short-term investments

 3.6%  17  1.7%  8  1.9%  9 
               

Gross investment income before expenses and fees

 5.7%  943  5.6%  868  0.1%  75 

Expenses and fees

   (19)   (17)   (2)
               

Net investment income

 5.6% $924  5.5% $851  0.1% $73 
               

(1)Amount reflects 2 months of activity prior to the re-securitization of these assets as described in note 9 of the condensed consolidated financial statements contained herein.

Yields for fixed maturities and equity securities are based on amortized cost and cost, respectively. Yields for securities lending activity, which is included in other investments, are calculated net of the corresponding securities lending liability. All other yields are based on average carrying values.

The increase in overall investment yields was primarily attributable to $58 millionincreased crediting rates on our floating rate spread-based institutional products due to an increase in the short-term rates.

The following table sets forth gross realized investment gains and losses resulting from the sales and impairments of investment securities classified as available-for-sale for the three months ended September 30, 2005March 31:

(Dollar amounts in millions)

  2006  2005 

Gross realized investment

   

Gains on sale

  $22  $39 

Losses on sale

   (26)  (11)

Loss on derecognition of securitization entities

   (17)  —   

Impairment losses

   (1)  (34)
         

Net realized investment gains (losses)

  $(22) $(6)
         

For a discussion of the change in net realized investment gains (losses), see the comparison for this line item under “—Results of Operations.”

Investment portfolio

The following table sets forth our cash, cash equivalents and invested assets as of the dates indicated:

   March 31, 2006  December 31, 2005 

(Dollar amounts in millions)

  Carrying value  % of total  Carrying value  % of total 

Fixed-maturities, available-for-sale

       

Public

  $39,928  59% $40,539  59%

Private

   13,631  20   13,398  19 

Commercial mortgage loans

   7,854  12   7,558  11 

Other investments

   2,738  4   3,174  5 

Policy loans

   1,362  2   1,350  2 

Restricted investments held by securitization entities

   —    —     685  1 

Equity securities, available for sale

   193  —     206  —   

Cash and cash equivalents

   1,909  3   1,875  3 
               

Total cash, cash equivalents and invested assets

  $67,615  100% $68,785  100%
               

The total investment portfolio decreased $1.2 billion. The decrease was primarily due to the derecognition of restricted investments held by securitization entities from $56 millionour consolidated statement of financial position and a reduction in fair value, as a result of higher interest rate environment, partially offset by cash generated from operating activities which was invested in fixed maturities and commercial mortgage loans.

Impairments of investment securities

See note 4 of the condensed consolidated financial statements contained herein.

Liquidity and Capital Resources

Liquidity and capital resources represent our overall financial strength and our ability to generate strong cash flows from our businesses, borrow funds at competitive rates and raise new capital to meet our operating and growth needs.

Genworth Financial and Subsidiaries

The following table sets forth our condensed consolidated cash flows for the three months ended September 30, 2004. ThisMarch 31:

(Dollar amounts in millions)

  2006  2005 

Net cash from operating activities

  $771  $733 

Net cash from investing activities

   (649)  (456)

Net cash from financing activities

   (76)  (775)

Cash flows from operating activities are affected by the timing of premiums received, fees received, investment income and expenses paid. Principal sources of cash include sales of our products and services. The increase in cash flows from operating activities for the three months ended March 31, 2006 was primarily the result of cash flows from our long-term care insurance in-force and tax payments made in 2005 that did not recur in 2006, offset by timing of cash settlements for other assets and other liabilities.

As an insurance business, we typically generate positive cash flows from operating activities, as premiums and deposits collected from our insurance and investment products exceed benefits paid and redemptions, and we

invest the excess. Accordingly, in analyzing our cash flow we focus on the change in the amount of cash available and used in investing activities.

The decrease in net cash from investing activities for the three months ended March 31, 2006, compared to March 31, 2005, was primarily the result of an increase in interest expense associated with our outstandingincreased level of purchases caused primarily by cash from the issuances of non-recourse funding obligations and commercial paper borrowings. The cash provided by these issuances was partially offset by investment proceeds used to provide for the net redemptions of our investment contracts.

Changes in cash from financing activities primarily relate to the issuance and repayment of borrowings, dividends to our stockholders and other capital transactions, as a resultwell as the issuance of, higher short-term interest rates.

Provision (Benefit) from income taxes. Benefit from income taxes decreased $4 million to ($11) million forand redemptions and benefit payments on, investment contracts. During the three months ended September 30, 2005March 31, 2006, cash from ($15)financing activities included net redemptions on investment contracts of $541 million and cash used for the three months ended September 30, 2004. The decreased benefit is primarily attributableacquisition of treasury stock of $(479) million, partially offset by an issuance of $750 million in non-recourse funding obligations, and $229 million of commercial paper borrowings.

Total assets were $104.9 billion as of March 31, 2006, compared to state income tax benefits recognized in the three months ending September 30, 2004.

Segment net loss. Segment net loss increased $17 million to $23 million for the three months ended September 30, 2005 from $6 million for the three months ended September 30, 2004.$105.7 billion as of December 31, 2005. The increase in net losstotal assets was driven primarily by increased balances in commercial mortgage loans and cash and cash equivalents driven primarily by normal business growth. Offsetting these increases in total assets was a decrease in other invested assets due to a reduction in the participation in our securities lending program.

Total liabilities were $92.4 billion as of March 31, 2006, compared to $92.3 billion as of December 31, 2005. The increase in total liabilities was primarily attributable to increased stand-alone costs associated with our separation from GE,driven by an increase in certain employee benefitsour non-recourse funding obligations and short-term borrowings offset partially by a decrease in future annuity and contract benefits due to net realizedredemptions of our investment gains, partiallycontracts, offset by an increase in net investment income related primarily to increased partnership distributions, bond callsour long-term care insurance from normal aging of the in-force block, as well as liability for policy and mortgage loan prepayments.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

contract claims.

PremiumsGenworth Financial, Inc.—holding company. Premiums decreased $12 million, or 16%, to $62 million for the nine months ended September 30, 2005 from $74 million for the nine months ended September 30, 2004. The decrease was primarily attributable to decreased premiums from our Bermuda reinsurer related to the run-off of certain credit insurance blocks.

Net investment income. Net investment was unchanged at $119 million for the nine months ended September 30, 2005 and 2004. An increase of $9 million in net investment income related to bond calls, mortgage prepayments and limited partnerships was offset by a decline in net investment income primarily attributable to lower income from consolidated securitization entities.

Net realized investment (losses) gains. See the comparison of this line under “Results of Operations”.

Policy fees and other income. Policy fees and other income increased $3 million to $13 million for the nine months ended September 30, 2005 from $10 million for the nine months ended September 30, 2004.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves were unchanged at $28 million for the nine months ended September 30, 2005 and 2004.

Underwriting, acquisition and insurance expenses, net of deferrals. Underwriting, acquisition and insurance expenses, net of deferrals increased $16 million to $66 million for the nine months ended September 30, 2005

from $50 million for the nine months ended September 30, 2004. This increase was primarily attributable to an increase in stand-alone branding and insurance costs associated with our separation from GE and certain employee benefits, partially offset by a decrease in overhead charges from our former majority stockholder.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles increased $1 million to $14 million for the nine months ended September 30, 2005 from $13 million for the nine months ended September 30, 2004.

Interest expense. Interest expense consists of interest and other financing charges related to our debt that is not allocated for segment reporting purposes. Interest expense increased $34 million, or 24%, to $178 million for the nine months ended September 30, 2005 from $144 million for the nine months ended September 30, 2004. This increase was primarily the result of an increase in interest expense associated with the change in our debt structure as a result of our corporate reorganization and increased rates on our outstanding commercial paper.

Provision (Benefit) from income taxes. Benefit from income taxes increased $43 million to $36 million for the nine months ended September 30, 2005 from $7 million for the nine months ended September 30, 2004. The increased benefit was primarily attributable to IPO-related transaction taxes in the nine months ended September 30, 2004, and a decrease in pre-tax income in the nine months ended September 30, 2005.

Segment net loss. Segment net loss increased $57 million to $69 million for the nine months ended September 30, 2005 from $12 million for the nine months ended September 30, 2004. The decrease in net earnings was primarily attributable a decrease in net realized investment gains in the nine months ended September 30, 2005, an increase in investment impairment charges, an increase in interest expense and stand-alone costs relating to our corporate reorganization and separation from GE, partially offset by a decrease in overhead charges from our former majority stockholder.

Liquidity and Capital Resources

We conduct all our operations through our operating subsidiaries. Dividends from our subsidiaries and permitted payments to us under our tax sharing arrangements with our subsidiaries are our principal sources of cash to pay stockholder dividends and to meet our holding company obligations, including payments of principal and interest on our outstanding indebtedness.

Our primary uses of funds at our holding company level include payment of general operating expenses, payment of principal, interest and other expenses related to holding company debt, payment of dividends on our common and preferred stock, amounts we owe to GE under the Tax Matters Agreement, contract adjustment payments on our Equity Units, contributions to subsidiaries, and, potentially, acquisitions. We currently pay quarterly

Our holding company had $207 million and $332 million of cash and cash equivalents as of March 31, 2006 and December 31, 2005, respectively.

In the fourth quarter of 2005, we declared common stock dividends of $35 million which were paid in the first quarter of 2006. During the first quarter of 2006, we declared dividends on our common stock atof $34 million to be paid during the ratesecond quarter of $0.075 per share. However, the2006. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors including our receipt of dividends from our insurance and other operating subsidiaries, financial condition, earnings, capital requirements of our subsidiaries, legal requirements, regulatory constraints and other factors as the board of directors deems relevant. In addition, our Series A Preferred Stock bears dividends at an annual rate of 5.25% of the liquidation value of $50 per share. We also pay quarterly contract adjustment payments with respect to our Equity Units at an annual rate of 2.16% of the stated amount of $25 per Equity Unit.

In the third quarterBased on statutory results as of December 31, 2005, we declared a quarterly dividend of $0.075 per outstanding share ofestimate our Class A and Class B Common Stock or $35 million, payable in the fourth quarter of 2005. During the first six months of 2005, we declaredsubsidiaries could pay dividends of $61 million which were paid in the second and third quarters of 2005. The third quarter dividend represents an increase of 15% per share from our previous quarterly dividend of $0.065 per share.

The payment of dividends and other distributionsapproximately $1.3 billion to us by our insurance subsidiaries is regulated by insurance laws and regulations. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance2006 without obtaining regulatory approval. The ability of our insurance

subsidiaries to pay dividends to us, and our ability to pay dividends to our stockholders, also are subject to various conditions imposed by the rating agencies for us to maintain our ratings. Based on statutory results as of DecemberDuring the three months ended March 31, 2004, our subsidiaries could pay dividends of $1,450 million to us in 2005 without obtaining regulatory approval. As of September 30, 2005, our holding company2006, we received $710 million in dividends from our insurance subsidiaries.

subsidiaries of $254 million.

In connection with our secondary offering completed in March 2005, we repurchased 19.4 million shares of our Class B Common Stock directlyaddition to dividends from our former majority stockholder which were automatically converted to Class A Common Stock upon the transfer of these shares to us, for an aggregate price of $500 million.

Effective in March 2005, we began a repurchase program in which we sell a security at a specified price and agree to repurchase that security at another specified price at a later date. Repurchase agreements are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired, including accrued interest, as specified in the respective agreement. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturities. At September 30, 2005, the fair value of the securities pledged under the repurchase program totaled $205 million and the offsetting repurchase obligation of $200 million is included in other liabilities on the Statement of Financial Position.

As of September 30, 2005, we had approximately $2.7 billion of floating rate funding agreements, which are deposit-type products that generally credit interest on deposits at a floating rate tied to an external market index. Purchasers of funding agreements include money market funds, bank common trust funds and other short-term investors. Some of our funding agreements contain “put” provisions, through which the contractholder has an option to terminate the funding agreement for any reason after giving notice within the contract’s specified notice period, which is generally 90 days. Of the $2.7 billion aggregate amount outstanding as of September 30, 2005, $1.4 billion had put option features, including $0.9 billion with put options features of 90 days and $0.5 billion with put options of 180 days.

During the third quarter of 2005, certain of our insurance subsidiaries, transferred approximately $1.7 billion investment securitiesour other sources of funds include service fees we receive from GE, payments from our subsidiaries pursuant to an affiliated special purpose entity (“SPE”), whose sole purpose istax sharing arrangements, borrowings pursuant to securitize these investment securitiesour credit facilities, and issue secured notes to various affiliated companies. The securitized investments are owned in their entirety by the SPE and are not available to satisfy the claims of our creditors.

In September 2005, we issued senior notes having an aggregate principal amount of $350 million, with an interest rate equal to 4.95% per year payable semi-annually, and maturing in October 2015 (“2015 Notes”). The 2015 Notes are our direct, unsecured obligations and will rank equally with all of our existing and future unsecured and unsubordinated obligations. The 2015 Notes are not guaranteed by any of our subsidiaries. We have the option to redeem all or a portion of the 2015 Notes, at any time with proper notice to the note holders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread.

The net proceeds from the issuance of $348 million from the 2015 Notes were used to reduce our outstanding commercial paper borrowings. As of September 30, 2005 and December 31, 2004 the aggregate amount of our outstanding commercial paper borrowings was $152 million and $499 million, respectively.

In April 2005, we entered into a five-year revolving credit facility, which matures in April 2010, replacing our 364-day credit facility, which was scheduled to mature in May 2005. We also have a $1.0 billion five-year revolving credit facility that matures in May 2009. As of September 30, 2005, we had utilized $170 million of the commitment under these facilities with the issuance of a letter of credit for the benefit of one of our mortgage insurance subsidiaries.

We believe our revolving credit facilities, further issuances under our commercial paper program and anticipated cash flows from operations will provide us with sufficient liquidity to meet our operating requirements for the foreseeable future.

In September 2005, River Lake Insurance Company II issued $300 million of non-recourse funding obligations. This issuance is in addition to the $1,100 million of non-recourse funding obligations previously issued by River Lake Insurance Company and River Lake Insurance Company II. As of September 31, 2005 and December 31, 2004 there were $1,400 million and $900 million of non-recourse funding obligations outstanding, respectively. We intend to consider furtherany additional issuances of non-recourse funding obligations to contribute to the satisfaction of our statutory reserve requirements.commercial paper.

Net cash provided by operating activities was $2,204 million and $4,431 million for the nine months ended September 30, 2005 and 2004, respectively. Cash flows from operating activities are affected by the timing of premiums received, fees received and investment income. Principal sources of cash include sales of our products and services. The decrease in cash from operating activities for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004 of $2,227 million was primarily the result of the timing of cash settlement for other assets and liabilities.

As anRegulated insurance business, we typically generate positive cash flows from operating and financing activities, as premiums and deposits collected from our insurance and investment products exceed benefits paid and redemptions, and we invest the excess. Accordingly, in analyzing our cash flow we focus on the change in the amount of cash available and used in investing activities. Net cash from investing activities was $(2,635) million and $(4,262) million for the nine months ended September 30, 2005 and 2004, respectively. The increase in net cash from investing activities for the nine months ended September 30, 2005 compared to September 30, 2004, of $1,627 million was primarily the result of a $761 million decrease in net investment purchases and a decrease of $867 million in short-term investment activity.

Net cash from financing activities was $339 million and $(777) million for the nine months ended September 30, 2005 and 2004, respectively. Changes in cash from financing activities primarily relate to the issuance and repayment of borrowings, dividends to our stockholders and other capital transactions, as well as the issuance of, and redemptions and benefit payments on, investment contracts. The $1,116 million increase in net cash from financing activities for the nine months ended September 30, 2005, compared to the nine months ended September 30, 2004, was primarily the result of a $525 million decrease in net cash transferred to our former majority shareholder as a result of our corporate reorganization and a $500 million increase in cash received from the issuance of non-recourse funding obligations partially offset by $500 million in cash paid for our share repurchase in March 2005, a $707 million increase in net cash from investment contracts and $93 million in common stock dividends paid to stockholders in the first nine months of 2005.

subsidiaries

The liquidity requirements of our regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to us, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements under applicable put option provisions.

Historically, our insurance subsidiaries have used cash flow from operations and sales of investment securities to fund their liquidity requirements. Our insurance subsidiaries’ principal cash inflows from operating activities derive from premiums, annuity deposits and policy and contract fees and other income, including commissions, cost of insurance, charges, mortality, charges, expense and surrender charges, contract underwriting fees, investment management fees, and dividends and distributions from their subsidiaries. The principal cash inflows from investment activities result from repayments of principal, sales of invested assets and investment income.

As of March 31, 2006, we had approximately $2.6 billion of renewable floating rate funding agreements, which are deposit-type products that generally credit interest on deposits at a floating rate tied to an external market index. Purchasers of renewable funding agreements include money market funds, bank common trust funds and other short-term investors. Some of our funding agreements contain “put” provisions, through which the contractholder has an option to terminate the funding agreement for any reason after giving notice within the contract’s specified notice period, which is generally 90 days or 180 days. Of the $2.6 billion aggregate amount outstanding as of March 31, 2006, $875 million had put option features including $425 million with put options features of 90 days and $450 million with put options of 180 days.

Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar estimated lives such as long-term fixed maturities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high-quality short-term investment securities cash equivalents and other liquid investment-grade fixed maturities to fund anticipated operating expenses, surrenders, and withdrawals. As of September 30, 2005,March 31, 2006, our total cash and invested assets was $68.4$67.8 billion.

Our investments in privately placed fixed maturities, commercial mortgage loans, policy loans and limited partnership interests and restricted investments held by securitization entities are relatively illiquid. These asset classes represented approximately 33%34% of the carrying value of our total cash and invested assets as of September 30, 2005.March 31, 2006.

In 2005, we transferred investment securities to an affiliated special purpose entity (“SPE”), whose sole purpose is to securitize these investment securities and issue secured notes to various affiliated companies. The estimated fairsecuritized investments are owned in their entirety by the SPE and are not available to satisfy the claims of our creditors. The value of infrequently traded fixed maturitythose securities as of September 30,March 31, 2006, was $316.9 million and included in other invested assets and are shown as restricted.

Capital resources and financing activities

On January 20, 2006, River Lake Insurance Company III (“River Lake III”), a special purpose financial captive insurance company wholly owned by First Colony Life Insurance Company (“First Colony”), itself an

indirect wholly owned subsidiary of Genworth issued $750 million in aggregate principal amount of floating rate surplus notes due 2036 (the “Notes”). River Lake III has received regulatory approval to issue additional series of its floating rate surplus notes up to an aggregate amount of $1,200 million (including the Notes), but is under no obligation to do so. The Notes are direct financial obligations of River Lake III and are not guaranteed by First Colony or Genworth.

The Notes were issued by River Lake III to fund statutory reserves required by the Valuation of Life Insurance Policies Regulation. River Lake III has reinsured on a coinsurance basis from First Colony certain term life insurance policies having guaranteed level premiums. The Notes have been sold to Lehman Brothers Inc. for deposit into certain Delaware trusts that will issue money market or term securities. The principal and interest payments due on the money market and term securities will be insured by a third party insurance company. The holders of the Notes cannot require repayment from Genworth or any of its subsidiaries, other than River Lake III, the direct issuer of the Notes. First Colony has agreed to indemnify River Lake III and the third party insurer for certain limited costs.

River Lake III will pay interest on the principal amount of the Notes on a monthly basis, subject to regulatory approval. Any payment of principal of, including by redemption, or interest on the Notes may only be made with the prior approval of the Director of Insurance of the State of South Carolina in accordance with the terms of its licensing order and in accordance with applicable law. The holders of the Notes have no rights to accelerate payment of principal of the Notes under any circumstances, including without limitation, for nonpayment or breach of any covenant. River Lake III reserves the right to repay the Notes at any time, subject to the terms of the Notes and prior regulatory approval.

On December 21, 2005, was approximately $13 billion.our Board of Directors approved a stock repurchase program, authorizing Genworth to repurchase up to $750 million of our common stock over the succeeding 18 months. We expect the purchases to be made from time to time in the open market or in privately negotiated transactions, and will be funded from cash and/or the proceeds from issuance of debt securities.

Concurrently with GE’s secondary offering of our Class A Common Stock completed in March 2006, we repurchased 15 million shares of our Class B Common Stock directly from GE, which were automatically converted to Class A Common Stock upon the transfer of these shares to us, for an aggregate price of $479 million. We financed the stock repurchase with $250 million cash available at the holding company and the proceeds of the issuance of $229 million in commercial paper under our existing commercial paper program.

We believe our revolving credit facilities, further issuances under our commercial paper program and anticipated cash flows from operations, will provide us with sufficient liquidity to meet our operating requirements for the foreseeable future.

Contractual Obligationsobligations and Commercial Commitmentscommercial commitments

We enter into obligations to third partiesthird-parties in the ordinary course of our operations. However, we do not believe that our cash flow requirements can be assessed based upon an analysis of these obligations. The most significant factor affecting our future cash flows is our ability to earn and collect cash from our customers. 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.” These include expenditures for income taxes and payroll.

During the first quarter of 2006, we issued $750 million in non-recourse funding obligations, and $229 million of commercial paper borrowings as of December 31, 2004 are further described in “—Capital Resources and Financing Activities”

included in “Managements Discussionherein. There have been no other material additions or changes to our contractual obligations and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resourced—Contractual Obligations” containedcommercial commitments as set forth in our Annual Report on Form 10K10-K for the fiscal year ended December 31, 2004. As of September 30, 2005 there were no material changes in contractual obligations from what was reported in our Annual Report on form 10K for the year ended December 31, 2004 other than a $300 million and $200 million issuance of non-recourse funding obligations by River Lake Insurance Company II and River Lake Insurance Company in September and June 2005, respectively, and an issuance of $350 million senior notes in September 2005. The net proceeds from the senior notes offering of $348 million were used to reduce our outstanding commercial paper borrowings. The non-recourse funding obligations issued in September 2005 mature in 2035. The funding obligations issued in June 2005 mature in 2033. The senior notes mature in 2015.

Impairments of Investment Securities

We regularly review investment securities for impairment in accordance with our impairment policy, which includes both quantitative and qualitative criteria. Quantitative measures include length of time and amount that each security position is in an unrealized loss position, and for fixed maturities, whether the issuer is in compliance with terms and covenants of the security. Our qualitative criteria include the financial strength and specific prospects for the issuer as well as our intent to hold the security until recovery. Our impairment reviews involve our portfolio management, finance and risk teams.

For fixed maturities, we recognize an impairment charge to earnings in the period in which we determine that we do not expect either to collect principal and interest in accordance with the contractual terms of the instruments or to recover principal based upon underlying collateral values, considering events such as a payment default, bankruptcy or disclosure of fraud. For equity securities, we recognize an impairment charge in the period in which we determine that the security will not recover to book value within a reasonable period. We determine what constitutes a reasonable period on a security-by-security basis based upon consideration of all the evidence available to us, including the magnitude of an unrealized loss and its duration. In any event, this period does not exceed 18 months for common equity securities. We measure impairment charges based upon the difference between the book value of a security and its estimated fair value. Estimated fair value is based upon quoted market price, except for certain infrequently traded securities where we estimate values using internally developed pricing models. These models are based upon common valuation techniques and require us to make assumptions regarding credit quality, liquidity and other factors that affect estimated values.

For the three months ended September 30, 2005 and 2004, we recognized impairment losses of $32 million and $4 million, respectively. For the nine months ended September 30, 2005 and 2004, we recognized impairments of $68 million and $13 million, respectively. We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, we sell securities in the ordinary course of managing our portfolio for reasons such as credit quality, yield and liquidity requirements and portfolio diversification. For the three and nine months ended September 30, 2005, the pre-tax realized investment loss incurred on the sale of fixed maturities and equity securities was $8 million and $23 million, respectively. The aggregate fair value of securities sold at a loss during the three and nine months ended September 30, 2005 was $251 million and $1,409 million, which was approximately 96.7% and 98.4% of book value, respectively.

The following tables present the gross unrealized losses and estimated fair values of our investment securities, on an historical basis, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of September 30, 2005:

   Less Than 12 Months

(Dollar amounts in millions)


  

Amortized

cost or cost


  

Estimated

fair value


  

Gross

unrealized

losses


  % below cost

  # of securities

Fixed maturities:

                  

U.S. government, agencies and government sponsored entities

  $188  $186  $(2) 1.1% 23

Tax exempt

   182   181   (1) 0.5% 54

Government—non U.S.

   105   104   (1) 1.0% 32

U.S. corporate

   6,165   6,041   (124) 2.0% 615

Corporate—non U.S.

   1,944   1,910   (34) 1.7% 214

Mortgage and asset backed

   5,493   5,428   (65) 1.2% 524
   

  

  


    

Total fixed maturities

   14,077   13,850   (227) 1.6% 1,462

Equity securities

   2   2   —    —    8
   

  

  


    

Total temporarily impaired securities

  $14,079  $13,852  $(227) 1.6% 1,470
   

  

  


    

% Below cost—fixed maturities:

                  

<20% Below cost

  $14,045  $13,826  $(219) 1.6% 1,458

20-50% Below cost

   32   24   (8) 25.0% 3

>50% Below cost

   —     —     —        %  1
   

  

  


    

Total fixed maturities

   14,077   13,850   (277) 1.6% 1,462
   

  

  


    

% Below cost—equity securities:

                  

<20% Below cost

   2   2   —    —  % 6

20-50% Below cost

   —     —     —    —  % 2

>50% Below cost

   —     —     —    —  % —  
   

  

  


    

Total equity securities

   2   2   —    —  % 8
   

  

  


    

Total temporarily impaired securities

  $14,079  $13,852  $(227) 1.6% 1,470
   

  

  


    

Investment grade

  $9,726  $9,574  $(152) 1.6% 1,064

Below investment grade

   644   619   (25) 3.9% 103

Not Rated—Fixed maturities

   3,707   3,657   (50) 1.3% 295

Not Rated—Equity securities

   2   2   —    —  % 8
   

  

  


    

Total temporarily impaired securities

  $14,079  $13,852  $(227) 1.6% 1,470
   

  

  


    

   12 Months or More

(Dollar amounts in millions)


  

Amortized

cost or cost


  

Estimated

fair value


  

Gross

unrealized

losses


  % below cost

  # of securities

Fixed maturities:

                  

U.S. government, agencies and government sponsored entities

  $16  $16  $—    —  % 5

Tax exempt

   28   27   (1) 3.6% 13

Government—non U.S.

   81   80   (1) 1.2% 9

U.S. corporate

   737   692   (45) 6.1% 113

Corporate—non U.S.

   453   442   (11) 2.4% 64

Mortgage and asset backed

   732   712   (20) 2.7% 131
   

  

  


    

Total fixed maturities

   2,047   1,969   (78) 3.8% 335

Equity securities

   21   19   (2) 9.5% 19
   

  

  


    

Total temporarily impaired securities

  $2,068  $1,988  $(80) 3.9% 354
   

  

  


    

% Below cost—fixed maturities:

                  

<20% Below cost

  $1,992  $1,933  $(59) 3.0% 318

20-50% Below cost

   48   33   (15) 31.3% 15

>50% Below cost

   7   3   (4) 57.1% 2
   

  

  


    

Total fixed maturities

   2,047   1,969   (78) 3.8% 335
   

  

  


    

% Below cost—equity securities:

                  

<20% Below cost

   20   18   (2) 10.0% 11

20-50% Below cost

   1   1   —    —  % 7

>50% Below cost

   —     —     —    —  % 1
   

  

  


    

Total equity securities

   21   19   (2) 9.5 % 19
   

  

  


    

Total temporarily impaired securities

  $2,068  $1,988  $(80) 3.9% 354
   

  

  


    

Investment grade

  $1,478  $1,433  $(45) 3.0% 250

Below investment grade

   195   175   (20) 10.3% 34

Not Rated—Fixed maturities

   375   362   (13) 3.5% 52

Not Rated—Equity securities

   20   18   (2) 10.0 % 18
   

  

  


    

Total temporarily impaired securities

  $2,068  $1,988  $(80) 3.9% 354
   

  

  


    

The investment securities in an unrealized loss position for less than twelve months account for $227 million, or 74%, of our total unrealized losses. Of the securities in this category, there were five issuers with an unrealized loss in excess of $5 million. These five issuers had aggregate unrealized losses of $40 million. The amount of the unrealized loss on these issuers is driven primarily by the relative size of the holdings, the aggregate par values of which range from $30 million to $454 million, and by their maturities.

The investment securities in an unrealized loss position for twelve months or more account for $80 million, or 26%, of our total unrealized losses. Of the securities in this category there were two single issuers with an unrealized loss in excess of $5 million. There are 135 fixed maturities in six industry groups that account for $51 million, or 63%, of the unrealized losses in this category.

Sixty-six of these 135 securities are in the finance and insurance sector and account for unrealized losses of $18 million. Within this sector, no single issuer has unrealized losses greater than $4 million. The unrealized losses of these securities are due to an increase in interest rates for the quarter ended September 30, 2005.

Eighteen of these 135 securities are in the transportation sector and are related to the airline industry. This sector accounts for $12 million of unrealized losses, of which there is one issuer with an unrealized loss in excess of $5 million. This issuer comprises 9 of the 18 securities and accounts for $10 million of the unrealized losses. Most of our airline securities are collateralized by commercial jet aircraft associated with several domestic airlines. We believe these security holdings are in a temporary loss position as a result of ongoing negative market reaction to difficulties in the commercial airline industry. For those airline securities, which we have previously impaired, we expect to recover our carrying amount based upon underlying aircraft collateral values or the present value of expected cash flows associated with revised lease terms. In accordance with our impairment policy described above, we recognized $4 million and $14 million of impairments for the three and nine months ended September 30, 2005, respectively and less than $1 million for the three and nine months ended September 30, 2004, respectively. These holdings were written down to the estimated fair value based upon the present value of expected cash flows associated with revised lease terms or the value of the underlying aircraft.

Twenty-five of these 135 securities are in the consumer non-cyclical sector and account for $9 million of unrealized losses. Within this sector, there are 8 issuers, comprising 10 of the 25 securities, which represent $7 million of the unrealized losses in this sector. These ten issuers are current on all terms. Each of the securities in this sector have unrealized losses of less than $2 million.

Fourteen of these 135 securities are in the technology and communication sectors and account for $8 million of unrealized losses. There was one issuer with unrealized losses of $5 million. This issuer is performing as expected. The aggregate par value of the securities from this issuer is $62 million. No other single issuer of fixed-maturities in this sector has an unrealized loss of greater than $1 million.

The remaining twelve of these 135 securities are in other industry sectors and account for $4 million of unrealized losses, of which one issuer had unrealized losses of $3 million. The amount of unrealized losses from the issuer is driven primarily by deterioration in credit quality for this issuer. The issuer is performing as expected. No other single issuer of fixed-maturities in these sectors has an unrealized loss of greater than $1 million.

The equity securities in an unrealized loss position for twelve months or more are primarily preferred stocks with fixed maturity-like characteristics. No single issuer had an unrealized loss of greater than $2 million as of September 30, 2005.

Off-Balance Sheet Entities

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 maturities or other receivables, consisting primarily of policy loans. Total securitized assets remaining as of September 30, 2005 and December 31, 2004 were $1.5 billion and $1.6 billion, respectively.

Securitization transactions typically result in gains or losses that are included in net realized investment gains (losses) in our financial statements. There were no off-balance sheet securitization transactions executed in the three and nine months ended September 30, 2005 and 2004.

We have arranged for the assets that we have transferred in securitization transactions to be serviced by us directly, or pursuant to arrangements with a third party service provider. Servicing activities include ongoing review, credit monitoring, reporting and collection activities.

We have entered into credit support arrangements in connection with our securitization transactions. Pursuant to these arrangements, as of September 30, 2005, we provided limited recourse for a maximum of $119 million of credit losses. To date we have not been required to make any payments under any of the credit support agreements. These agreements will remain in place throughout the life of the related entities.

Securitization Entities

GE Capital, our former majority stockholder, provides creditDuring the first quarter of 2006, we derecognized December 31, 2005 securitization entity balances of $685 million, $44 million, $660 million and liquidity support$15 million of restricted investments held by securitization entities, other assets, borrowings related to securitization entities and other liabilities, respectively. We continue to hold a funding conduit it sponsored, which exposes it toretained interest in the form of interest-only strips. We recognized a majorityloss on sale of $11 million, net of tax from this re-securitization transaction. See note 9 of the risks and rewards of the conduit’s activities and therefore makes GE Capital the primary beneficiary of the funding conduit. Upon adoption of FIN 46, GE Capital was required to consolidate the funding conduit because of this financial support. As a result, assets and liabilities of certain previously off-balance sheet securitization entities, for which we were the transferor, were required to be included in ourcondensed consolidated financial statements because the funding conduit no longer qualified as a third party. The assets and liabilities associated with these securitization entities have been reported in the corresponding financial statement captions in our Statement of Financial Position, and the assets are noted as restricted due to the lack of legal control we have over them. These balances will decrease as the assets mature because we will not sell any additional assets to these consolidated entities.

Our inclusion of these assets and liabilities does not change the economic or legal characteristics of the asset sales. Liabilities of these consolidated entities will be repaid with cash flows generated by the related assets. Credit recourse to us remains limited to the credit support described above. We included $39 million of revenue, $2 million of general expenses and $30 million of interest expense associated with these newly consolidated entities in our financial statements for the nine months ended September 30, 2005. For the nine months ended September 30, 2004, we included $49 million of revenue, $3 million of general expenses and $36 million of interest expense associated with these entities in our historical financial statements. Our consolidation of these securitization entities had no effect on our previously reported earnings.

The following table summarizes the assets and liabilities associated with the securitization entities we included in our Statement of Financial Position, which are part of our Corporate and Other segment as of September 30, 2005 and December 31, 2004:

(Dollar amounts in millions)


  September 30,
2005


  December 31,
2004


Assets:

        

Restricted investments held by securitization entities

  $753  $860

Other assets

   28   24
   

  

Total(1)

  $781  $884
   

  

Liabilities:

        

Borrowings related to securitization entities

  $710  $849

Other liabilities

   1   3
   

  

Total

  $711  $852
   

  


(1)Includes $26 million and $31 million of retained interests in securitized assets as of September 30, 2005 and December 31, 2004, respectively, that are consolidated.

contained herein.

New Accounting Standards

Recently adopted

On January 1, 2006, we adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 123R,Share-Based Payment, an amendment of SFAS No. 123,Accounting for Stock-Based Compensation. We adopted SFAS No. 123R under the modified prospective transition method. The statement requires companies to recognize the grant-date fair value of options and other equity-based awards within the income statement over the respective vesting period of the awards. We adopted SFAS No. 123 effective January 1, 2002 and, as permitted, we determined a grant date fair value using a Black-Scholes model and recognized the related compensation expense through the income statement for all equity awards issued subsequent to January 1, 2002. As a result of the adoption of SFAS No. 123R, we will continue to recognize the remaining portion of the requisite service under previously granted unvested awards including those awards granted prior to January 1, 2002. Prior to the adoption of SFAS No. 123R, we adjusted compensation cost related to forfeiture of awards when the actual forfeiture occurred. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and requires companies which previously accounted for forfeitures on an occurrence basis to include in income of the period of adoption a cumulative effect of a change in accounting principle for the adjustment to reflect estimated forfeitures for prior periods. We recognized an increase to net income of $4 million related to the cumulative effect of a change in accounting principle for the adoption of SFAS No. 123R. See note 5 for additional information.

As of January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 155,Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 amends SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to bifurcate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. In addition, among other changes, SFAS No. 155 (i) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; (ii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (iii) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (iv) eliminates the prohibition on a qualifying special-purpose entity (“QSPE”) from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial interest. Adoption of SFAS No. 155 did not have a material impact on our consolidated financial statements.

Accounting pronouncements not yet adopted

In September 2005, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With

Modifications or Exchanges of Insurance Contracts.This statement provides guidance on accounting for deferred acquisition costs and other deferred balances on an internal replacement, defined broadly as a modification in product benefits,

features, rights, or coverages that occurs by the exchange of an existing contract for a new contract, or by amendment, endorsement, or rider to an existing contract, or by the election of a benefit, feature, right, or coverage within an existing contract. WeDepending on the type of modification, the period over which these deferred balances will adoptbe recognized could be accelerated. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning January 1, 2007. Given its recent issuance, management is still assessingafter December 15, 2006. We are currently evaluating the impact that SOP 05-1 will have on our results of operations or financial position.

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R Share-Based Payments—an amendment of FASB Statements No. 123 and 95, which we will adopt on January 1, 2006. This statement provides additional guidance on accounting for share based payments and will require all such awards to be measured at fair value with the related compensation cost recognized in income on a prospective basis. We currently recognize compensation cost using the fair value method for all stock based awards issued after January 1, 2002 and do not expect the adoption of SFAS 123R to have a material impact on our results of operations or financial position.

Item 3. 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 September 30, 2005, and December 31, 2004, was $67 billion and $65 billion, respectively, of which 81% and 80%, 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.

The primary market risk for our long-term borrowings and Equity Units is interest rate risk at the time of maturity or early redemption, when we may be required to refinance these obligations. We continue to monitor the interest rate environment and to evaluate refinancing opportunities as maturity dates approach.

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 also have exposure to foreign currency exchange risk. Our international operations generate revenues denominated in local currencies, and we invest cash generated outside the U.S. in non-U.S. denominated securities. Although investing in securities denominated in local currencies limits the effect of currency exchange rate fluctuations on local operating results, we remain exposed to the impact of fluctuations in exchange rates as we translate the operating results of our foreign operations into our historical financial statements. We currently do not hedge this exposure. For the three months ended September 30, 2005 and 2004, 32% and 29%, respectively, of our net earnings from continuing operationsThere were generated by our international operations.

We use derivative financial instruments, such as interest rate and currency swaps, currency forwards and option-based financial instruments, as part of our risk management strategy. We use these derivatives to mitigate interest rate and currency risk by:

Reducing the risk between the timing of the receipt of cash and its investment in the market;

Matching the currency of invested assets with the liabilities they support;

Converting the asset duration to match the duration of the liabilities;

Reducing our exposure to fluctuations in equity market indices that underlie some of our products; 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 hypotheticalno material changes in interest rates, foreign exchange 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, foreign currency exchange rates and equity market prices is based on so-called “shock-tests,” which model the effects of interest rate, foreign exchange 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, foreign currency exchange 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, currency exchange 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 decrease the market value of our fixed income securities portfolio by approximately $2.9 billion, based on our securities positions as of September 30, 2005.

One means of assessing exposure to changes in foreign currency exchange rates on market sensitive instruments is to model effects on reported earnings using a sensitivity analysis. We analyzed our currency exposure as of September 30, 2005, including financial instruments designated and effective as hedges to identify assets and liabilities denominated in currencies other than their relevant functional currencies. Net unhedged exposures in each currency were then remeasured, generally assuming a 10% decrease in currency exchange rates compared to the U.S. dollar. Under this model, with all other factors constant, we estimated as of September 30, 2005, that such a decrease would have an insignificant impact our net earnings from continuing operations for the year endedrisks since December 31, 2005.

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 decrease the market value of our equity investments by approximately $6 million, based on our equity positions as of September 30, 2005. In addition, fluctuations in equity market prices affect our revenues and returns from our separate account and private asset management products, which depend upon fees that are related primarily to the value of assets under management.

Counterparty credit risk

We manage 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. All swaps are executed under master swap agreements containing mutual credit downgrade provisions that provide the ability to require assignment or replacement in the event either parties unsecured debt rating is downgraded to or below Moody’s “Baa” or S&P’s “BBB.”

Swaps, purchased options and forwards 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. Our policy requires foreign exchange forwards with contractual maturities shorter than one year to be executed with counterparties having a credit rating by Moody’s of “A-1” and by S&P of “P-1”.

The following table sets forth counterparty credit limits by credit rating:

      S&P rating      


 

Moody’s rating


 

Long term
(exposures over
one year) net of
collateral


 

Aggregate limits
(including those
under one year)
net of collateral


 

Aggregate Limit
(gross of collateral)


AAA

 Aaa $50 $125 $300

AA-

 Aa3 25 100 250

A

 A2 15 90 200

The following table sets forth an analysis of our counterparty credit risk exposures percentages net of collateral held as of the dates indicated:

Moody’s Rating


  September 30,
2005


  December 31,
2004


 

Aaa

  66% 88%

Aa

  33% 10%

A

  1% 2%
   

 

   100% 100%
   

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2005,March 31, 2006, an evaluation was carried out under the supervision and with the participation of Genworth’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting During the Quarter Ended September 30, 2005March 31, 2006

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2005March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, payment of contingent or other sales commissions, claims payments and 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, that our pricing structures and breaches ofbusiness practices in our mortgage insurance business, such as captive reinsurance arrangements with lenders and contract underwriting services, violate RESPA or related state anti-inducement laws, and breaching fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts, including punitive and treble damages, 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. We are also subject to various regulatory inquiries, such as information requests, subpoenas and books and record examinations, from state, federal and federalinternational 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 and results of operations.

Recently,Except as described below, there were no material developments during the insurance industry has become the focus of increased scrutiny by regulatory and law enforcement authorities concerning certain practices within the insurance industry. In this regard,quarter in May 2005, we received a subpoena from the Northeast Regional Officeany of the Securities and Exchange Commission, requiring the production of documents related to “certain loss mitigation insurance products,” such as finite risk reinsurance. We are cooperating fully with the SEC with respect to its subpoena. Additionally,legal proceedings identified in May and June 2005, certainPart 1, Item 3 of our subsidiaries received information requests from the State of Delaware Department of Insurance and the State of Connecticut Insurance DepartmentAnnual Report on the same general subject. In June 2005, General Electric Company (GE) received a subpoena from the United States Attorney’s OfficeForm 10-K for the Southern District of New York, also onyear ended December 31, 2005. In addition, there were no new material legal proceedings during the same general subject. In the subpoena, GE is defined as including, among other things, its subsidiaries and affiliates. We are cooperating with GE in connection with GE’s response to the subpoena. In the United Kingdom, the Financial Services Authority has initiated an industry-wide review of payment protection insurance products, as well as an industry-wide review of non-traditional financial arrangements. Also,quarter.

As previously identified, in May 2005, each of our U.S. mortgage insurance subsidiaries received an information request from the State of New York Insurance Department with respect to captive reinsurance transactions with lender-affiliated reinsurers and other types of arrangements in which lending institutions receive from our subsidiary any form of payment, compensation or other consideration in connection with issuance of a policy covering a mortgagor of the lending institution. We are also cooperating with respect to theseIn February 2006, we received a follow-up industry-wide regulatory inquiries.

This industry scrutiny also includes the commencement of investigations and other proceedings by theinquiry from New York State Attorney Generalrequesting supplemental information. In March 2006, we responded to that follow-up industry-wide inquiry.

As previously identified, antitrust authorities in the U.K. conducted an investigation of the store card sector of the retail financial services market in the U.K. to ascertain whether there are any characteristics that restrict or distort competition in this market. As part of the investigation, the authorities also examined various insurance products sold to store cardholders. These products include payment protection insurance, purchase protection and other governmentalprice protection. Our U.K. payment protection insurance business currently underwrites these products that are sold by one of the largest providers of store cards in the U.K. As part of that investigation, we responded to an information request. The provisional findings of the U.K. antitrust authorities were published in September 2005. In March 2006, the U.K. antitrust authorities published their final report confirming its provisional findings that there are features in the store card sector that have had an adverse effect on competition in this sector. The report contains remedies (aimed at mitigating these adverse effects on competition) relating to allegationsthe various insurance products sold to store cardholders, including a requirement that the store card sector of improper conductthe retail financial services market in connection with the U.K. offer payment protection insurance separately from other elements of andstore card insurance. The remedies have to be implemented by March 2007. We cannot predict the failure to disclose, contingent commissions by insurance companies to insurance brokerseffect that this final report, including the remedies, may have on either the store card sector in the U.K. and agents, the solicitation and provision of fictitious or inflated quotes, the use of inducements to brokers or companies in the sale of insurance products andlinked to store cards or the use of captive reinsurance arrangements. We have not received a subpoenawider payment protection insurance sector in the U.K or inquiry fromour payment protection business in the State of New York with respect to these matters. However, as part of industry-wide inquiries in this regard, we have received inquiries and informational requests with respect to some of these matters from other federal and state regulatory authorities. We have responded to these inquiries and informational requests and will continue to cooperate with these regulatory authorities.

Recent industry-wide inquiries also include those regarding market timing and late trading in variable annuity contracts, variable annuity sales practices/exchanges and electronic communication document retention practices. In this regard, we responded in late 2003 to a New York State Attorney General subpoena regarding market timing and late trading in variable products and mutual funds. We have not received any further inquiriesU.K.

from the New York State Attorney General regarding these matters, although we received inquiries and informational requests regarding these matters from other federal and state regulatory authorities. We have responded to these inquiries, follow-up inquiries and informational requests and will continue to cooperate with these regulatory authorities.

We cannot assure you that the current investigations and proceedings will not have a material adverse effect on our business, financial condition or results of operations. ItIn addition, it is also possible that related investigations and proceedings may be commenced in the future, and we could become subject to further investigations and have lawsuits filed against us. In addition, increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal precedents and industry-wide regulations or practices that could adversely affect our business, financial condition and results of operation.

InAs previously identified, one of our investment-related operations,mortgage insurance subsidiaries is named as a defendant in two lawsuits filed in the U.S. District Court for the Northern District of Illinois, William Portis et al. v. GE Mortgage Insurance Corp. and Karwo v. Citimortgage, Inc. and General Electric Mortgage Insurance Corporation. The Portis complaint was filed on January 15, 2004, and the Karwo complaint was filed on March 15, 2004. Each action seeks certification of a nationwide class of consumers who allegedly were required to pay for our private mortgage insurance at a rate higher than our “best available rate,” based upon credit information we obtained. Each action alleges that the Fair Credit Reporting Act (“FCRA”) requires notice to such borrowers and that we violated the FCRA by failing to give such notice. The plaintiffs in Portis allege in the complaint that they are subjectentitled to “actual damages” and may become subject“damages within the Court’s discretion of not more than $1,000 for each separate violation” of the FCRA. The plaintiffs in Karwo allege that they are entitled to “appropriate actual, punitive and statutory damages” and “such other or further relief as the Court deems proper.” Similar cases were filed against six other mortgage insurers. We have vigorously denied liability with respect to plaintiffs’ allegations. Nevertheless, to avoid the risks and costs associated with protracted litigation involving commercial disputesand to resolve our differences with counterparties or others andconsumers, our mortgage insurance subsidiary reached an agreement to settle the cases on a nationwide class action basis. The settlement documents have been finalized and other litigation alleging, among other things, that we made improper or inadequate disclosuressubmitted to the court for approval. On April 25, 2006, the court held a preliminary fairness hearing on the terms of the settlement and set September 25, 2006 as the date for a hearing to determine whether to give final approval to the settlement. In the fourth quarter of 2005, upon reaching an initial agreement in connectionprinciple with respect to the salesettlement, an accrual was established representing our best estimate of assetsthe cost of the settlement. The precise amount of payments in this matter cannot be estimated because they are dependent upon court approval of the class and annuityrelated settlement, the number of individuals who ultimately will seek relief in the claim form process of any approved class settlement, the identity of such claimants and investment products or charged excessive or impermissible fees on these products, recommended unsuitable productswhether they are entitled to customers or breached fiduciary or other duties to customers. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships.

relief under the settlement terms.

As previously disclosedidentified, one of our mortgage insurance subsidiaries is involved in an arbitration regarding our delegated underwriting practices. A mortgage lender that underwrote loan applications for mortgage insurance under our delegated underwriting program commenced the arbitration against us in 2003 after we rescinded policy coverage for a number of mortgage loans underwritten by that lender. We rescinded coverage because we believe those loans were not underwritten in compliance with applicable program standards and underwriting guidelines. However, the lender claims that we improperly rescinded coverage. In addition to seeking reinstatement of coverage, attorney’s fees and punitive damages are sought. The first phase of the arbitration covering 30 loans was held in January 2005 and the panel ordered that 28 of the loans be reinstated. The second phase covering 33 loans was held in July 2005 and the arbitration panel ordered reinstatement of coverage on 5 of the 33 loans. We agreed to a recess of the third phase of arbitration to determine if any settlement can be effected. In March 2006, an agreement in principle to settle this matter was reached and we are in the process of documenting a proposed settlement agreement. Previously established reserves are adequate to cover the expected settlement costs.

Item 1A. Risk Factors

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. As of March 31, 2006, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2004, antitrust authorities in the U.K. currently are investigating the store card sector2005.

Item 2. Unregistered Sales of the retail financial services market in the U.K. to ascertain whether there are any characteristics that restrict or distort competition in this market. As partEquity Securities and Use of the investigation, the authorities also are examining various insurance products sold to store cardholders. These products include payment protection insurance, purchase protection and price protection. Our U.K. payment protection insurance business currently underwrites eachProceeds

Issuer Purchases of these products that are sold by one of the largest providers of store cards in the U.K. As part of that investigation, we responded to an information request.Equity Securities

 

The provisional findings of the U.K. antitrust authorities were published in September 2005 and concluded that there are features in the store card sector that have an adverse effect on competition in this sector. The provisional findings contained proposed remedies (aimed at mitigating these adverse effects on competition) relating to the various insurance products sold to store card holders. We cannot predict the effect this investigation may have on the store card sector in the U.K., the sale of insurance products linked to store cards or our payment protection insurance business in the U.K.

Except as described below, there were no material developments during the quarter in any of the legal proceedings identified in Part 1, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2004 and in Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. In addition, there were no new material legal proceedings during the quarter.

As noted in the legal proceedings identified in Part 1, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2004, one of our subsidiaries is involved in an arbitration regarding our rescission of mortgage insurance on certain loans involving a lender under our delegated underwriting program. We believe our maximum exposure for reinstatement based upon the risk in force on the rescinded coverage for all loans with this lender, whether or not subject to an arbitration demand, would not exceed $10 million. In addition, attorneys fees and punitive damages are sought. The arbitration panel released findings on June 16, 2005 on the first phase of the arbitration, ordering reinstatement of coverage on 28 of 30 loans. The exposure for reinstatement on these loans is less than $1 million. Attorney’s fees and punitive damages were not awarded. The second phase was held in July 2005 and the arbitration panel released its finding on August 5, 2005 ordering reinstatement of coverage on 5 out of 33 loans subject to the second phase. We recently agreed to a recess of the third phase of arbitration originally scheduled for October 2005 to determine if a settlement can be effected. If a settlement cannot be reached, we intend to contest vigorously all claims in this arbitration although we cannot provide assurance that we will prevail.

Period

 Total Number of
Shares (or
units) Purchased(1)
 Average Price
Paid Per Share
(or Unit)
 Total Number of
Shares (or Units)
Purchased
as Part of Publicly
Announced Plans
or Programs
 Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
That May Yet Be
Purchased Under
the Plans or
Programs(2)

January 1, 2006 through January 31, 2006

 —   $—   —   $750,000,000

February 1, 2006 through February 28, 2006

 —   $—   —    750,000,000

March 1, 2006 through March 31, 2006

 15,000,000 $31.93125 15,000,000  271,000,000
        

Total

 15,000,000  15,000,000 $271,000,000
        

(1)On February 27, 2006, we entered into a stock purchase agreement with GE, pursuant to which we agreed to purchase from GE $479 million of our Class B Common Stock at a price per share equal to the net proceeds per share that GE received from the underwriters in a secondary offering of our common stock by GE. The secondary offering was consummated on March 8, 2006, and on that date, pursuant to the stock purchase agreement, we repurchased 15,000,000 shares of Class B Common Stock at a price of $31.93125 per share. The stock repurchase was financed with $250 million of cash available at the holding company and $229 million from the proceeds of an issuance of commercial paper.
(2)On December 21, 2005, our Board of Directors approved a stock repurchase program, authorizing Genworth to repurchase up to $750 million of our common stock over the succeeding 18 months.

Item 6. Exhibits

 

1010.52.6  Sub-Plan under the 2004 Genworth Financial, Inc. Deferred CompensationOmnibus Incentive Plan: Genworth Financial Canada Stock Savings Plan (originally adopted on July 20, 2005; technical and administrative amendments adopted on October 19, 2005)
12  Statement of Ratio of Earnings to Fixed Charges
31.1  Certification of Michael D. Fraizer
31.2  Certification of Richard P. McKenney
32.1  Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Michael D. Fraizer
32.2  Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Richard P. McKenney

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  

GENWORTH FINANCIAL, INC.

  

(Registrant)

Date: October 27, 2005April 28, 2006

   
  

By:

 

/S/s/    RICHARD P. MCKENNEY        


   

Richard P. McKenney

Senior Vice President—Chief Financial Officer

Duly Authorized Officer and

Principal Financial Officer

 

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