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 March 31,September 30, 2007

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerAccelerated Filer  x                     Accelerated filerFiler  ¨                    Non-accelerated filerNon-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 April 27,October 22, 2007, 434,873,498438,642,744 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

 



TABLE OF CONTENTS

 

    Page

PART I—FINANCIAL INFORMATION

  3

Item 1. Condensed Consolidated Financial Statements

  3

Condensed Consolidated Statements of Income for the three and nine months ended March 31,September 30, 2007 and 2006 (Unaudited)

  3

Condensed Consolidated Balance Sheets as of March 31,September 30, 2007 (Unaudited) and December 31, 2006

  4

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the threenine months ended March 31,September 30, 2007 and 2006 (Unaudited)

  5

Condensed Consolidated Statements of Cash Flows for the threenine months ended March 31,September 30, 2007 and 2006 (Unaudited)

  6

Notes to Condensed Consolidated Financial Statements (Unaudited)

  7

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

  1419

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  4577

Item 4. Controls and Procedures

  4577

PART II—OTHER INFORMATION

  46

Item 1. Legal Proceedings

  4678

Item 1A. Risk Factors

  4679

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

  4780

Item 6. Exhibits

  4780

Signatures

  4881

2


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)

 

  For the three months ended
March 31,
   

Three months

ended September 30,

 

Nine months

ended September 30,

 
      2007         2006           2007         2006         2007         2006     

Revenues:

        

Premiums

  $1,511  $1,371   $1,600  $1,505  $4,660  $4,356 

Net investment income

   984   912    1,074   932   3,082   2,784 

Net investment gains (losses)

   (19)  (22)   (48)  (6)  (118)  (77)

Policy fees and other income

   234   181 

Insurance and investment product fees and other

   249   184   726   565 
                    

Total revenues

   2,710   2,442    2,875   2,615   8,350   7,628 
                    

Benefits and expenses:

        

Benefits and other changes in policy reserves

   1,067   915    1,168   1,061   3,325   2,954 

Interest credited

   385   372    391   382   1,167   1,132 

Acquisition and operating expenses, net of deferrals

   489   436    540   493   1,524   1,412 

Amortization of deferred acquisition costs and intangibles

   213   164    202   160   622   521 

Interest expense

   107   82    124   87   355   257 
                    

Total benefits and expenses

   2,261   1,969    2,425   2,183   6,993   6,276 
                    

Income from continuing operations before income taxes

   449   473    450   432   1,357   1,352 

Provision for income taxes

   135   151    111   138   383   430 
                    

Income from continuing operations

   314   322    339   294   974   922 

Income from discontinued operations, net of taxes

   10   8    —     10   15   29 

Gain on sale of discontinued operations, net of taxes

   —     —     53   —   
                    

Income before cumulative effect of accounting change

   324   330    339   304   1,042   951 

Cumulative effect of accounting change, net of taxes

   —     4    —     —     —     4 
                    

Net income

  $324  $334   $339  $304  $1,042  $955 
                    

Earnings from continuing operations per common share:

        

Basic

  $0.71  $0.69   $0.77  $0.64  $2.21  $2.01 
                    

Diluted

  $0.69  $0.67   $0.76  $0.63  $2.16  $1.95 
                    

Earnings per common share:

        

Basic

  $0.74  $0.72   $0.77  $0.67  $2.36 ��$2.08 
                    

Diluted

  $0.71  $0.70   $0.76  $0.65  $2.32  $2.02 
                    

Weighted-average common shares outstanding:

        

Basic

   441.0   467.0    441.1   453.8   440.5   458.8 
                    

Diluted

   455.0   479.5    445.6   467.2   449.8   471.7 
                    

See Notes to Condensed Consolidated Financial Statements

3


GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

  

March 31,

2007

 December 31,
2006
   

September 30,

2007

 

December 31,

2006

 
  (Unaudited)     (Unaudited)   

Assets

      

Investments:

      

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

  $55,113  $54,684   $55,775  $54,684 

Equity securities available-for-sale, at fair value

   200   197    247   197 

Commercial mortgage loans

   8,508   8,357    8,839   8,357 

Policy loans

   1,494   1,489    1,650   1,489 

Other invested assets

   3,762   3,846    3,803   3,846 
              

Total investments

   69,077   68,573    70,314   68,573 

Cash and cash equivalents

   2,250   2,436    3,146   2,436 

Accrued investment income

   810   742    803   742 

Deferred acquisition costs

   6,320   6,183    6,842   6,183 

Intangible assets

   802   831    845   831 

Goodwill

   1,604   1,602    1,605   1,602 

Reinsurance recoverable

   16,746   16,783    16,573   16,783 

Other assets

   808   864    1,015   864 

Separate account assets

   11,216   10,875    12,615   10,875 

Assets associated with discontinued operations

   1,925   1,982    —     1,982 
      ��        

Total assets

  $111,558  $110,871   $113,758  $110,871 
              

Liabilities and stockholders’ equity

      

Liabilities:

      

Future annuity and contract benefits

  $63,477  $63,299   $63,717  $63,299 

Liability for policy and contract claims

   3,216   3,114    3,473   3,114 

Unearned premiums

   4,422   4,229    5,511   4,229 

Other policyholder liabilities

   375   385    335   385 

Other liabilities

   5,702   5,709    6,024   5,709 

Non-recourse funding obligations

   2,765   2,765    3,455   2,765 

Short-term borrowings

   250   199    326   199 

Long-term borrowings

   3,332   3,321    3,789   3,921 

Senior notes underlying equity units

   600   600 

Mandatorily redeemable preferred stock

   100   100    100   100 

Deferred tax liability

   1,384   1,522    1,096   1,522 

Separate account liabilities

   11,216   10,875    12,615   10,875 

Liabilities associated with discontinued operations

   1,411   1,423    —     1,423 
              

Total liabilities

   98,250   97,541    100,441   97,541 
              

Commitments and contingencies

      

Stockholders’ equity:

      

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 494 million and 493 million shares issued as of March 31, 2007 and December 31, 2006, respectively; 437 million and 443 million shares outstanding as of March 31, 2007 and December 31, 2006, respectively

   —     —   

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 521 million and 493 million shares issued as of September 30, 2007 and December 31, 2006, respectively; 439 million and 443 million shares outstanding as of September 30, 2007 and December 31, 2006, respectively

   1   —   

Additional paid-in capital

   10,785   10,759    11,440   10,759 
              

Accumulated other comprehensive income:

   

Net unrealized investment gains

   418   435 

Accumulated other comprehensive income (loss):

   

Net unrealized investment gains (losses)

   (353)  435 

Derivatives qualifying as hedges

   309   375    285   375 

Foreign currency translation and other adjustments

   384   347    765   347 
              

Total accumulated other comprehensive income

   1,111   1,157 

Total accumulated other comprehensive income (loss)

   697   1,157 

Retained earnings

   3,145   2,914    3,779   2,914 

Treasury stock, at cost (57 million and 50 million shares as of March 31, 2007 and December 31, 2006, respectively)

   (1,733)  (1,500)

Treasury stock, at cost (82 million and 50 million shares as of September 30, 2007 and December 31, 2006, respectively)

   (2,600)  (1,500)
              

Total stockholders’ equity

   13,308   13,330    13,317   13,330 
              

Total liabilities and stockholders’ equity

  $111,558  $110,871   $113,758  $110,871 
              

See Notes to Condensed Consolidated Financial Statements

4


GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in millions)

(Unaudited)

 

  Additional
paid-in
capital
  Accumulated other
comprehensive
income
 Retained
earnings
 Treasury
stock, at
cost
 Total
stockholders’
equity
   Additional
paid-in
capital
  Accumulated other
comprehensive
income (loss)
 Retained
earnings
 Treasury
stock, at
cost
 Total
stockholders’
equity
 

Balances as of December 31, 2005

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

Comprehensive income (loss):

              

Net income

   —     —     334   —     334    —     —     955   —     955 

Net unrealized gains (losses) on investment securities

   —     (537)  —     —     (537)   —     (323)  —     —     (323)

Derivatives qualifying as hedges

   —     (109)  —     —     (109)   —     (12)  —     —     (12)

Foreign currency translation and other adjustments

   —     (18)  —     —     (18)   —     97   —     —     97 
                  

Total comprehensive income (loss)

        (330)        717 

Acquisition of treasury stock

   —     —     —     (479)  (479)   —     —     —     (675)  (675)

Dividends to stockholders

   —     —     (34)  —     (34)   —     —     (109)  —     (109)

Stock-based compensation expense and exercises

   7   —     —     —     7    61   —     —     —     61 

Capital contributions from GE

   4   —     —     —     4 

Other capital transactions

   5   —     —     —     5 
                                

Balances as of March 31, 2006

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

Balances as of September 30, 2006

  $10,737  $1,166  $2,581  $(1,175) $13,309 
                                
  Additional
paid-in
capital
  Accumulated other
comprehensive
income
 Retained
earnings
 Treasury
stock, at
cost
 Total
stockholders’
equity
 

Balances as of December 31, 2006

  $10,759  $1,157  $2,914  $(1,500) $13,330 
         

Cumulative effect of accounting change

   —     —     (54)  —     (54)

Comprehensive income (loss):

       

Net income

   —     —     324   —     324 

Net unrealized gains (losses) on investment securities

   —     (17)  —     —     (17)

Derivatives qualifying as hedges

   —     (66)  —     —     (66)

Foreign currency translation and other adjustments

   —     37   —     —     37 
         

Total comprehensive income (loss)

        278 

Acquisition of treasury stock

   —     —     —     (233)  (233)

Dividends to stockholders

   —     —     (39)  —     (39)

Stock-based compensation expense and exercises

   26   —     —     —     26 
                

Balances as of March 31, 2007

  $10,785  $1,111  $3,145  $(1,733) $13,308 
                

   Common
stock
  Additional
paid-in
capital
  Accumulated other
comprehensive
income (loss)
  Retained
earnings
  Treasury
stock, at
cost
  Total
stockholders’
equity
 

Balances as of December 31, 2006

  $ —    $10,759  $1,157  $2,914  $(1,500) $13,330 
            

Cumulative effect of accounting change

   —     —     —     (54)  —     (54)

Comprehensive income (loss):

         

Net income

   —     —     —     1,042   —     1,042 

Net unrealized gains (losses) on investment securities

   —     —     (788)  —     —     (788)

Derivatives qualifying as hedges

   —     —     (90)  —     —     (90)

Foreign currency translation and other adjustments

   —     —     418   —     —     418 
            

Total comprehensive income (loss)

          582 

Issuance of common stock

   1   600   —     —     —     601 

Acquisition of treasury stock

   —     —     —     —     (1,100)  (1,100)

Dividends to stockholders

   —     —     —     (123)  —     (123)

Stock-based compensation expense and exercises

   —     78   —     —     —     78 

Other capital transactions

   —     3   —     —     —     3 
                         

Balances as of September 30, 2007

  $1  $11,440  $697  $3,779  $(2,600) $13,317 
                         

See Notes to Condensed Consolidated Financial Statements

5


GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

  Three months ended
March 31,
   Nine months
ended
September 30,
 
  2007 2006   2007 2006 

Cash flows from operating activities:

      

Net income

  $324  $334   $1,042  $955 

Less net income from discontinued operations

   (10)  (8)

Less income from discontinued operations, net of taxes

   (15)  (29)

Less gain on sale from discontinued operations, net of taxes

   (53)  —   

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

      

Amortization of fixed maturity discounts and premiums

   3   5    (32)  16 

Net investment losses (gains)

   19   22    118   77 

Charges assessed to policyholders

   (97)  (86)   (291)  (255)

Acquisition costs deferred

   (309)  (279)   (1,054)  (874)

Amortization of deferred acquisition costs and intangibles

   213   164    622   521 

Deferred income taxes

   73   120    217   215 

Cumulative effect of accounting change

   —     (4)   —     (4)

Purchases of trading securities, net of proceeds from sales

   (3)  —   

Purchases of trading securities and held-for-sale investments, net of proceeds from sales

   (145)  —   

Change in certain assets and liabilities:

      

Accrued investment income and other assets

   (34)  15    (202)  (48)

Insurance reserves

   775   739    2,389   2,424 

Current tax liabilities

   84   141    163   105 

Other liabilities and other policy-related balances

   (1)  (409)   984   214 

Cash from operating activities—discontinued operations

   27   17    25   33 
              

Net cash from operating activities

   1,064   771    3,768   3,350 
              

Cash flows from investing activities:

      

Proceeds from maturities and repayments of investments:

      

Fixed maturities

   1,320   1,325    4,505   4,121 

Commercial mortgage loans

   261   249    910   825 

Proceeds from sales of investments:

      

Fixed maturities and equity securities

   1,749   1,332    5,038   3,679 

Purchases and originations of investments:

      

Fixed maturities and equity securities

   (3,393)  (2,979)   (10,370)  (8,143)

Commercial mortgage loans

   (419)  (543)   (1,343)  (1,517)

Other invested assets, net

   (159)  (5)   (998)  (39)

Policy loans, net

   (5)  (12)   (161)  (148)

Payments for businesses purchased, net of cash acquired

   —     (291)

Cash received from sale of discontinued operations, net of cash sold

   514   —   

Cash from investing activities—discontinued operations

   (41)  (16)   103   (41)
              

Net cash from investing activities

   (687)  (649)   (1,802)  (1,554)
              

Cash flows from financing activities:

      

Proceeds from issuance of investment contracts

   1,877   2,056    5,844   5,585 

Redemption and benefit payments on investment contracts

   (2,262)  (2,597)   (7,111)  (7,396)

Short-term borrowings and other, net

   69   234    78   158 

Redemption of non-recourse funding obligations

   (100)  —   

Proceeds from issuance of non-recourse funding obligations

   —     750    790   1,050 

Repayment of long-term debt

   (500)  —   

Proceeds from the issuance of long-term debt

   349   —   

Dividends paid to stockholders

   (40)  (35)   (119)  (103)

Stock-based compensation awards exercised

   14   —      29   32 

Acquisition of treasury stock

   (233)  (479)   (1,100)  (675)

Proceeds from issuance of common stock

   600   —   

Cash from financing activities—discontinued operations

   (10)  (5)   (21)  (2)
              

Net cash from financing activities

   (585)  (76)   (1,261)  (1,351)

Effect of exchange rate changes on cash and cash equivalents

   (4)  (12)   (28)  (18)
              

Net change in cash and cash equivalents

   (212)  34    677   427 

Cash and cash equivalents at beginning of period

   2,469   1,875    2,469   1,875 
              

Cash and cash equivalents at end of period

   2,257   1,909    3,146   2,302 

Less cash and cash equivalents of discontinued operations at end of period

   7   18    —     6 
              

Cash and cash equivalents of continuing operations at end of period

  $2,250  $1,891   $3,146  $2,296 
              

See Notes to Condensed Consolidated Financial Statements

6


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 on October 23, 2003 in preparation for the corporate formation of certain insurance and related subsidiaries of the General Electric Company (“GE”) and an initial public offering of Genworth common stock, which was completed on May 28, 2004 (“IPO”). 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 iswas an indirect subsidiary of GE.

The accompanying condensed 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 we refer to as the “Company,” “we,” “us,” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.

We have the following three operating segments:

 

  

Retirement and Protection. We offer a variety of protection, wealth accumulation, retirement income and institutional investment products. Retail protectionProtection products include: life insurance, long-term care insurance and a linked benefitlinked-benefits product that combines long-term care insurance with universal life insurance. Additionally, as part of our senior market products and services, we offer Medicare supplement insurance along with wellness and care coordination services for our long-term care policyholders. Our wealth accumulation and retirement income products principally include: individualfixed and variable annuities, fixed deferred and immediate individual annuities, group variable annuities offered through retirement plans, and a variety of managed account programs, financial planning advisory services and mutual funds. Institutional products include: funding agreements, funding agreements backing notes (“FABNs”), and guaranteed investment contracts (“GICs”).

 

  

International. In Canada, Australia, New Zealand, Mexico, Japan and multiple European countries, we are a leading provider of mortgage insurance products on loans made predominately to prime-based borrowers.products. We are the largest private mortgage insurer in most of our international markets. We also provide mortgage insurance on a structured, or bulk basis, which aids in the sale of mortgages to the capital markets and helps lenders manage capital and risks. Additionally, we offer services, analytical tools and technology that enable lenders to operate more efficiently and more effectively manage risk. We also offer payment protection coverages in multiple European countries, Canada and Mexico. Our payment protection insurance products help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death.

 

  

U.S. Mortgage Insurance. In the U.S., we offer mortgage insurance products predominately insuring prime-based, individually underwritten residential mortgage loans, also known as “flow” mortgage insurance. We also have begun to increasingly provide mortgage insurance on a structured, or bulk basis, with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate more efficiently and more effectively manage risk.

We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions, the results of a small, non-core business that is managed outside our operating segments and our group life and health insurance business.

7


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

business which was sold on May 31, 2007.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of operations and cash flowflows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2006 Annual Report on Form 10-K and our Current Report on Form 8-K filed on April 16, 2007 (reflecting our reorganized segment reporting structure and the effects of classifying our group life and health insurance business as discontinued operations).

(2) Accounting Pronouncements

Recently adopted

On January 1, 2007,December 31, 2006, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.Upon adoption, we recorded a $31 million reduction in comprehensive income in our consolidated statement of changes in stockholders’ equity as of December 31, 2006. However, the cumulative effect of change in accounting, net of tax, should have been recorded as a separate component of accumulated other comprehensive income. As of December 31, 2006, we reported total comprehensive income of $1,081 million. With this revised presentation, total comprehensive income would have been $1,112 million as of December 31, 2006. This revised presentation will be reflected in our Annual Report on Form 10-K as of December 31, 2007.

On January 1, 2007, we adopted FASB Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes. This guidance clarifies the criteria that must be satisfied to recognize the financial statement benefit of a position taken in our tax returns. The criteria for recognition in the consolidated financial statements set forth in FIN No. 48 require an affirmative determination that it is more likely than not, based on a tax position’s technical merits, that we are entitled to the benefit of that position.

Upon adoption of FIN No. 48 on January 1, 2007, the total amount of unrecognized tax benefits was $358$362 million, of which, $184$190 million, if recognized, would affect the effective tax rate on continuing operations. As of January 1, 2007, we had accrued interest and penalties of $30 million in our condensed consolidated balance sheet. These amounts of interest and penalties relate to unrecognized tax benefits and arewere recognized as components of income tax expense.

We file U.S. federal income tax returns and various state and local and foreign income tax returns. With few exceptions, we are no longer subject to U.S. federal or foreign income tax examinations for years prior to 2000. Potential state and local examinations for those years are generally restricted to results that are based on closed U.S. federal examinations. TheA U.S. federal field examination regarding the 2003 and 2004 tax years was concluded in September 2007, and a Revenue Agent Report was issued. Certain issues are currently under review by the Joint Committee of Taxation for 2000 through 2002 tax years and in the Internal Revenue Service is currently reviewing our U.S. income tax returnsadministrative appeals process for the 2000 through2003 and 2004 tax years andyears. HM Revenue and Customs is currently reviewing our U.K. income tax returns for the 2000 through 2004 tax years. It is reasonably possible that the review of certain of our U.S. income tax returns will be completed in 2007 and the statute of limitations will close with respect to such returns. It is also reasonably possible that the field examination for certain other U.S. federal income tax returns will be completed in 2007 with the issuance of a Revenue Agent Report.

We believe that it is reasonably possible that in 2007, up to approximately $52$57 million of unrecognized tax benefits, related to individually immaterial items in the U.S. and foreign jurisdictions, will be recognized.

On January 1, 2007, we adopted the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Connection With Modifications or Exchanges of Insurance Contracts. This statement provides guidance on accounting for deferred acquisition costs and other 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

8


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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. The adoption of SOP 05-1 resulted in the shortening of the period over which our group life and health insurance business deferred acquisition costs are amortized. Transition to the shorter amortization period resulted in a January 1, 2007 cumulative effect adjustment to retained earnings of $54 million, net of tax. The cumulative effect of adoption of SOP 05-1 relates to our discontinued operations.operations which we sold on May 31, 2007.

Not yet adopted

In September 2006, FASB issued Statement of Financial Accounting Standards (“SFAS”)SFAS No. 157,Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for us on January 1, 2008. We do not expect SFAS No. 157 to have a material impact on our consolidated financial statements.

In February 2007, FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. This statement provides an option to report selected financial assets and liabilities, including insurance contracts, at fair value. SFAS No. 159 will be effective for us on January 1, 2008. We have not decided whether we will elect the fair value option for any financial assets or liabilities; and therefore, we do not know the impact, if any, SFAS No. 159 will have on our consolidated financial statements.

In June 2007, the AICPA issued SOP 07-1,Clarification of the Scope of the Audit and Accounting GuideInvestment Companiesand Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. This statement provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting GuideInvestment Companies (the “Guide”). For those entities that are investment companies under SOP 07-1, it also addresses when specialized industry accounting principles of the Guide should be retained by a parent company in consolidation or by an investor that has the ability to exercise significant influence over the investment company and applies the equity method of accounting to its investment in the entity. In addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method investors in investment companies that retain Investment Company accounting in the parent company’s consolidated financial statements or the financial statements of an equity method investor. The effective date of SOP 07-1 is uncertain as the FASB decided to issue a proposed FASB Staff Position that would indefinitely defer the effective date. Management is reviewing SOP 07-1 to determine the impact on our consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(3) Earnings per Common Share

Basic and diluted earnings per common share are calculated by dividing net income by the weighted average basic common shares outstanding and by the weighted average diluted common shares outstandingoutstanding:

   Three months
ended September 30,
  

Nine months

ended September 30,

(Amounts in millions, except per share data)

      2007          2006          2007          2006    

Basic earnings per common share:

        

Income from continuing operations

  $0.77  $0.64  $2.21  $2.01

Income from discontinued operations, net of taxes

   —     0.02   0.03   0.06

Gain from discontinued operations, net of taxes

   —     —     0.12   —  

Cumulative effect of accounting change, net of taxes

   —     —     —     0.01
                

Basic earnings per common share(1)

  $0.77  $0.67  $2.36  $2.08
                

Diluted earnings per common share:

        

Income from continuing operations

  $0.76  $0.63  $2.16  $1.95

Income from discontinued operations, net of taxes

   —     0.02   0.03   0.06

Gain from discontinued operations, net of taxes

   —     —     0.12   —  

Cumulative effect of accounting change, net of taxes

   —     —     —     0.01
                

Diluted earnings per common share(1)

  $0.76  $0.65  $2.32  $2.02
                

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

   441.1   453.8   440.5   458.8

Potentially dilutive securities:

        

Stock purchase contracts underlying Equity Units

   —     8.1   4.2   7.7

Stock options, restricted stock units and stock appreciation rights

   4.5   5.3   5.1   5.2
                

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

   445.6   467.2   449.8   471.7
                

(1)

May not total due to whole number calculation.

Revision to Previously Reported 2006 Quarterly Earnings Per Share Amounts

Certain 2006 quarterly earnings per share amounts previously presented in our 2006 consolidated financial statements in the Current Report on Form 8-K filed on April 16, 2007 (reflecting our reorganized segment reporting structure and the effects of classifying our group life and health insurance business as discontinued operations) have been revised to correct immaterial rounding errors. The immaterial rounding errors had no impact on the earnings per share amounts for the threetwelve months ended March 31:

(Amounts in millions except per share data)

  2007  2006

Basic earnings per common share:

    

Income from continuing operations

  $0.71  $0.69

Income from discontinued operations, net of taxes

   0.02   0.02

Cumulative effect of accounting change, net of taxes

   —     0.01
        

Basic earnings per common share

  $0.74  $0.72
        

Diluted earnings per common share:

    

Income from continuing operations

  $0.69  $0.67

Income from discontinued operations, net of taxes

   0.02   0.02

Cumulative effect of accounting change, net of taxes

   —     0.01
        

Diluted earnings per common share

  $0.71  $0.70
        

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

   441.0   467.0

Potentially dilutive securities:

    

Stock purchase contracts underlying equity units

   8.4   7.5

Stock options and stock appreciation rights

   4.7   4.7

Restricted stock units

   0.9   0.3
        

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

   455.0   479.5
        

9December 31, 2006. In addition, this revision had no impact on our 2006 earnings per share amounts presented in our Quarterly Reports on Form 10-Q filed in the first and second quarters of 2007. This revision also had no impact on our quarterly earnings per share amounts as originally reported in our 2006 Quarterly Reports on Form 10-Q.


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table summarizes the revised earnings per share amounts for the periods indicated:

   For the three months ended,
   March 31,
2006
  June 30,
2006
  September 30,
2006
  December 31,
2006

Revised earnings per share amounts:

        

Basic earnings per common share:

        

Income from continuing operations

  $  0.69  $  0.67  $  0.64  $  0.81

Income from discontinued operations, net of taxes

   0.02   0.02   0.02   0.03

Cumulative effect of accounting change, net of taxes

   0.01   —     —     —  
                

Basic earnings per common share(1)

  $0.72  $0.70  $0.67  $0.83
                

Diluted earnings per common share:

        

Income from continuing operations

  $0.67  $0.66  $0.63  $0.78

Income from discontinued operations, net of taxes

   0.02   0.02   0.02   0.03

Cumulative effect of accounting change, net of taxes

   0.01   —     —     —  
                

Diluted earnings per common share(1)

  $0.70  $0.68  $0.65  $0.81
                

(1)

May not total due to whole number calculation.

(4) Discontinued Operations

Sale of Group Life and Health Insurance Business

On January 10,May 31, 2007, we entered into an agreement to sellcompleted the sale of our group life and health insurance business for cash consideration of approximately $650 million in cash.$660 million. Accordingly, thisthe business has been accounted for as discontinued operations and its results of operations, financial position and cash flows are separately reported for all periods presented. We expect to recognizeThe sale resulted in a gain on the sale estimated between $55of discontinued operations of $53 million, and $65 million upon closing, which we expect to occur in the second quarternet of 2007.taxes.

Summary operating results of discontinued operations were as follows for the periods ended March 31 are as follows:indicated:

 

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

(Amounts in millions)

      2007            2006          2007          2006          2007          2006    

Revenues

  $189    $183  $  —    $190  $318  $556
                    

Income before income taxes

  $16    $13  $—    $15  $24  $45

Provision for income taxes

   6     5   —     5   9   16
                    

Income from discontinued operations

  $10    $8  $—    $10  $15  $29
                    

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The assets and liabilities associated with discontinued operations prior to the sale have been segregated in the condensed consolidated balance sheets. The major asset and liability categories were as follows:

(Amounts in millions)

  

December 31,

2006

Assets:

  

Investments

  $903

Cash and cash equivalents

   33

Deferred acquisition costs

   142

Intangible assets and goodwill

   145

Reinsurance recoverable and other assets

   759
    

Assets associated with discontinued operations

  $1,982
    

Liabilities:

  

Future annuity and contract benefits

  $837

Liability for policy and contract claims

   428

Unearned premiums, other liabilities and deferred tax liability

   158
    

Liabilities associated with discontinued operations

  $1,423
    

(5) Investments and Derivative Instruments

As of September 30, 2007, the amortized cost or cost, gross unrealized gains (losses) and estimated fair value of our fixed maturities and equity securities classified as available-for-sale were as follows:

(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

  $622  $25  $(2) $645

Tax exempt

   2,088   78   (11)  2,155

Government—non U.S.

   2,238   74   (18)  2,294

U.S. corporate

   23,768   394   (622)  23,540

Corporate—non U.S.

   12,628   125   (288)  12,465

Mortgage and asset-backed

   15,100   110   (534)  14,676
                

Total fixed maturities

   56,444   806   (1,475)  55,775

Equity securities

   218   35   (6)  247
                

Total available-for-sale securities

  $56,662  $841  $(1,481) $56,022
                

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

(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

  $850  $21  $(7) $864

Tax exempt

   2,126   106   (1)  2,231

Government—non U.S.

   1,688   83   (6)  1,765

U.S. corporate

   24,350   639   (333)  24,656

Corporate—non U.S.

   10,567   204   (139)  10,632

Mortgage and asset-backed

   14,490   141   (95)  14,536
                

Total fixed maturities

   54,071   1,194   (581)  54,684

Equity securities

   171   28   (2)  197
                

Total available-for-sale securities

  $54,242  $1,222  $(583) $54,881
                

The fair value of derivative instruments, including interest rate and foreign currency swaps, forward commitments, equity index options and financial futures, is based upon either independent market quotations or pricing valuation models which utilize independent third-party data as inputs. The following table sets forth our positions in derivative instruments and the estimated fair values as of March 31,the dates indicated:

   September 30, 2007  December 31, 2006 

(Amounts in millions)

  Notional
value
  Estimated
fair value
  Notional
value
  Estimated
fair value
 

Interest rate swaps

  $22,819  $343  $17,832  $496 

Foreign currency swaps

   768   3   567   (8)

Forward commitments

   56   2   —     —   

Equity index options

   771   72   323   22 

Financial futures

   78   —     19   —   
                 

Total

  $24,492  $420  $18,741  $510 
                 

As of September 30, 2007 and December 31, 2006, are as follows:the fair value of derivatives in a gain position and recorded in other invested assets was $496 million and $543 million, respectively, and the fair value of derivatives in a loss position and recorded in other liabilities was $76 million and $33 million, respectively.

(Amounts in millions)

  March 31,
        2007        
  December 31,
        2006        

Assets:

    

Investments

  $945  $903

Cash and cash equivalents

   7   33

Deferred acquisition costs

   56   142

Intangible assets and goodwill

   143   145

Reinsurance recoverable and other assets

   774   759
        

Assets associated with discontinued operations

  $1,925  $1,982
        

Liabilities:

    

Future annuity and contract benefits

  $855  $837

Liability for policy and contract claims

   428   428

Unearned premiums, other liabilities and deferred tax liability

   128   158
        

Liabilities associated with discontinued operations

  $1,411  $1,423
        

(5)(6) Commitments and Contingencies

(a) Litigation

We face a significantthe 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 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.

10


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

an adverse effect on our business, financial condition or results of operations. At this time, it is not feasible to predict, nor to determine the ultimate outcomes of all pending investigations and legal proceedings, nor to provide reasonable ranges of potential losses.

(b) Commitments

As of March 31,September 30, 2007, we were committed to fund $275$303 million in U.S. commercial mortgage loan investments and $356$515 million in limited partnership investments.

(6)(c) Accelerated Stock Repurchase

In May 2007, we repurchased 16.5 million shares of our Class A Common Stock under an accelerated share repurchase transaction with a broker-dealer counterparty for an initial aggregate purchase price of $600 million. We funded the purchase price with proceeds from the issuance and sale of Class A Common Stock pursuant to the settlement of purchase contracts that were components of our Equity Units. The repurchased shares will be held in treasury, until such time as they may be reissued or retired.

As part of this transaction, we simultaneously entered into a forward contract indexed to the price of our Class A Common Stock, which subjects the transaction to a future price adjustment. Upon settlement of the contract, the price adjustment was calculated based on the arithmetic mean of the volume weighted average price of our Class A Common Stock during the term of the agreement, less a discount. In October 2007, this forward contract was settled resulting in the broker-dealer counterparty’s commitment to deliver $72 million in shares of Class A Common Stock to us in the fourth quarter of 2007.

(d) Pending Acquisition

On July 18, 2007, we entered into an agreement to acquire Liberty Reverse Mortgage, Inc., an independent reverse mortgage lender, for $50 million plus additional contingent consideration. The transaction is subject to regulatory approvals and expected to close in the fourth quarter of 2007.

(7) Borrowings and Other Financings

Commercial Paper Facility

We have a $1.0 billion commercial paper program. The notes under the commercial paper program are offered pursuant to an exemption from registration under the Securities Act of 1933 and may have a maturity of up to 364 days from the date of issue. During the first quarter of 2007, we issued $50 million of commercial paper, which was repaid during the second quarter of 2007. During the third quarter of 2007, we issued $127 million of commercial paper. As of March 31,September 30, 2007 and December 31, 2006, the weighted average interest rate on commercial paper outstanding was 5.2% and the weighted average maturity was 1529 days and 37 days, respectively.

Revolving Credit FacilitiesLong-term Senior Notes

In June 2007, we issued senior notes having an aggregate principal amount of $350 million, with an interest rate equal to 5.65% per year payable semi-annually, and maturing in June 2012 (“2012 Notes”). The 2012 Notes are our direct, unsecured obligations and will rank equally with all of our existing and future unsecured and unsubordinated obligations. We have the option to redeem all or a $1.0 billion five-year revolving credit facility that matures in May 2011 and a $1.0 billion revolving credit facility that matures in April 2010. These facilities bear variable interest rates based on one-month LIBOR plus a margin. As of March 31, 2007, we had no borrowings under these facilities; however, we utilized $172 millionportion of the commitment under these facilities for2012 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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 $349 million from the issuance of a letter of credit primarily for the benefit of one2012 Notes were used to partially repay $500 million of our U.S. Mortgage Insurance subsidiaries.senior notes which matured in June 2007, with the remainder repaid with cash on hand.

Equity Units

In May 2007, Equity Unit holders purchased 25.5 million of newly issued shares of our Class A Common Stock equal to the settlement rate specified in the stock purchase contract component of the Equity Units for $600 million. In May 2007, we also remarketed the senior notes underlying our Equity Units pursuant to their terms. The interest rate on the senior notes was reset to 5.231%.

Non-recourse Funding Obligations

As of March 31, 2007 and December 31, 2006, the weighted average interest rate on our non-recourse funding obligations was 5.4%. The non-recourse funding obligations bear variable interest rates and their carrying value approximates fair value as of March 31, 2007.

OnIn April 25, 2007, River Lake Insurance Company IV Limited (“River Lake IV”), a Bermuda long-term insurance company wholly-owned by Genworth Life and Annuity Insurance Company (“GLAIC”), itself an indirect wholly-owned subsidiary of Genworth, issued $500 million in aggregate principal amount of floating rate guaranteed notes due 2028 (the “Guaranteed Notes”) and $40 million in aggregate principal amount of floating rate subordinated notes due 2028 (the “Subordinated Notes” and, together with the Guaranteed Notes, the “Notes”). The Notes were issued pursuant to an indenture, which by its terms requires River Lake IV to pledge substantially all of its available assets to the indenture trustee as collateral for the Notes.

River Lake IV may issue additional series of its floating rate guaranteed notes up to an aggregate principal amount of $925 million (including the Guaranteed Notes). The Notes are direct financial obligations of River Lake IV and are not guaranteed by GLAIC or Genworth. A third-party financial guaranty insurance company (the “Insurer”) will insure the timely payment of scheduled interest payments and the repayment of principal on May 25, 2028 on all series of the floating rate guaranteed notes, including the Guaranteed Notes.

The Notes were issued by River Lake IV to primarily fund statutory reserves for policies subject to Valuation of Life Insurance Policies Regulation (more commonly known as “Regulation XXX”) and its predecessor regulations. River Lake IV has reinsured from GLAIC, on a coinsurance basis, certain term life insurance policies written or reinsured by GLAIC.

11


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The holders of the Notes cannot require payment of principal or interest on the Notes from the Company or any of its subsidiaries, other than River Lake IV, the direct issuer of the Notes. River Lake IV will pay interest on the principal amount of the Notes on a monthly basis. The holders of the Notes will have the right to accelerate payment of principal of the Notes, subject to applicable notice and cure provisions, in the event of River Lake IV’s or the Insurer’s nonpayment of amounts due with respect to the Guaranteed Notes, River Lake IV’s bankruptcy or insolvency, the failure of the security interest in the collateral granted by River Lake IV to the indenture trustee to be perfected, the nonpayment by River Lake IV of amounts due to the Insurer, the breach in any material respect of River Lake IV’s representations or warranties, or the breach by River Lake IV of any material covenant. River Lake IV reserves the right to redeem the Notes at any time, subject to the terms of the Notes.

In June 2007, River Lake Insurance Company II (“River Lake II”), a special purpose financial captive insurance company wholly-owned by GLAIC, issued $250 million in aggregate principal amount of floating rate surplus notes due 2035. This transaction represented the third and final issuance of surplus notes by River Lake II, bringing the total aggregate principal amount of surplus notes issued by River Lake II to $850 million.

In August 2007, approximately $1.7 billion of our non-recourse funding obligations reset to the current maximum contractual rate. During the third quarter of 2007, we acquired $100 million of notes secured by our

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

non-recourse funding obligations. We have accounted for this transaction as a redemption of our non-recourse funding obligations. As of September 30, 2007 and December 31, 2006, the weighted average interest rate on our non-recourse funding obligations was 6.3% and 5.4%, respectively.

Revolving Credit Facilities

We have a $1.0 billion five-year revolving credit facility that matures in May 2012 (as extended during the second quarter of 2007 pursuant to the terms of the facility). In August 2007, we entered into a $1.0 billion five-year revolving credit facility that matures in August 2012. This facility replaces our $1.0 billion five-year credit facility that was scheduled to mature in April 2010. These facilities bear variable interest rates based on one-month LIBOR plus a margin. As of September 30, 2007, we had no borrowings under these facilities; however, we utilized $172 million of the commitment under these facilities for the issuance of a letter of credit primarily for the benefit of one of our U.S. Mortgage Insurance subsidiaries.

Commercial Mortgage Loan Repurchase Facility

OnIn March 22, 2007, Genworth Financial Commercial Mortgage Warehouse LLC, an indirect subsidiary of Genworth, entered into a $300 million repurchase facility maturing March 22, 2010. The facility may be permanently increased to $500 million upon 30-days’ advance written notice. The sole purpose of this facility is to fundfinance the purchase of commercial mortgage loans with the intent to securitize such loans in the future. As of March 31,September 30, 2007, there were no amountswas $43 million outstanding under this facility.facility that was included in other liabilities in the condensed consolidated balance sheet. This facility bears a variable interest rate based on one-month LIBOR plus a margin. During the three months ended September 30, 2007, we purchased $53 million of held-for-sale commercial mortgage loans. These loans were classified as held-for-sale and carried at the lower of cost or market. These loans were included in commercial mortgage loans in the condensed consolidated balance sheet.

(7)(8) Income Taxes

The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows:

   Three months
ended September 30,
  Nine months
ended September 30,
 
       2007          2006          2007          2006     

Statutory U.S. federal income tax rate

  35.0% 35.0% 35.0% 35.0%

Increase (reduction) in rate resulting from:

     

State income tax, net of federal income tax effect

  (0.4) 0.3  0.1  0.4 

Effect of foreign operations

  (1.4) (1.6) (2.9) (1.9)

Benefit of tax favored investments

  (8.1) (3.1) (4.4) (2.8)

Other, net

  (0.4) 1.3  0.4  1.1 
             

Effective rate

  24.7% 31.9% 28.2% 31.8%
             

(9) Segment Information

On January 9, 2007, we announced a significant organizational repositioning to more directly align high growth retirement and protection, international and mortgage insurance business opportunities. Additionally, our group life and health insurance business, previously included in our former Protection segment, is nowwas included in Corporate and Other activities. The following discussion reflects our reorganized operating segments for all periods presented.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

We conduct our operations in three operating business segments: (1) Retirement and Protection, which includes our managed money products and services, retirement income products, institutional products, life insurance and long-term care insurance; (2) International, which includes international mortgage insurance and payment protection insurance; and (3) U.S. Mortgage Insurance, which includes mortgage-related products and services that facilitate homeownership by enabling borrowers to buy homes with low-down-payment mortgages. We also have Corporate and Other activities which include interest and other debt financing expenses, other corporate income and expenses not allocated to the segments, eliminations of inter-segment transactions and the results of a small, non-core business that is managed outside of our operating segments. Our group life and health insurance business, which we agreed to sell in January 2007, was accounted for as discontinued operations and included in Corporate and Other activities. This business was sold on May 31, 2007.

We allocate invested assets, net investment income and net investment gains (losses) from Corporate and Other activities to our Retirement and Protection segment using an approach based principally upon the investment portfolios established to support the segment’s products and targeted capital levels. We do not allocate invested assets, net investment income and net investment gains (losses) from Corporate and Other activities to our International or U.S. Mortgage Insurance segments because they have their own separate investment portfolios.

We use the same accounting policies and procedures to measure segment income and assets as our consolidated net income and assets. Segment net income is generally measured as income from continuing operations before cumulative effect of accounting change. Segment netOur chief operating income representsdecision maker evaluates segment performance and allocates resources on the basis on which the performance of our business is assessed by management.“net operating income.” We define segment net operating income (loss) as segment net income (loss) from continuing operations excluding after-tax net investment gains (losses) and other adjustments changes in accounting principles and infrequent or unusual non-operating items. ThereWe exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A significant component of our net investment gains (losses) are the result of credit-related impairments and credit-related gains and losses, the timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are often subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income in accordance with U.S. GAAP, we believe that net operating income, and measures that are derived from or incorporate net operating income, are appropriate measures that are useful to investors because they identify the income attributable to the ongoing operations of the business. However, net operating income (loss) is not a substitute for net income determined in accordance with U.S. GAAP. In addition, our definition of net operating income may differ from the definitions used by other companies.

12


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

There were no infrequent or unusual non-operating items excluded from net operating income during the periods presented other than a $14 million after-tax expense recorded in the first quarter of 2007 related to our segment reorganization costs, including $9 million for the impairment of internal-use software and $5 million of severance and other employee termination related expenses. We believe that the presentation of segment net operating income (loss) enhances our understanding and assessment of the results of operations of our operating segments by highlighting net income (loss) attributable to the normal, recurring operations of our business. However, segment net operating income (loss) is not a substitute for net income determined in accordance with U.S. GAAP. Policy premiums and fees, other income, policy benefits and acquisition and operating expenses and policy related amortizations are attributed directly to each operating segment.costs.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following is a summary of segmentrevenues for our segments and Corporate and Other activities for the three months ended March 31:periods indicated:

 

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

(Amounts in millions)

      2007           2006             2007              2006              2007              2006      

Revenues

    

Revenues:

        

Retirement and Protection

  $1,918   $1,763   $1,949  $1,886  $5,796  $5,481

International

   587    499    711   538   1,922   1,593

U.S. Mortgage Insurance

   181    156    206   160   581   478

Corporate and Other

   24    24    9   31   51   76
                    

Total revenues

  $2,710   $2,442   $2,875  $2,615  $8,350  $7,628
                    

Segment net operating income (losses)

    

Retirement and Protection

  $185   $178 

International

   123    102 

U.S. Mortgage Insurance

   65    72 

Corporate and Other

   (33)   (15)
        

Total segment net operating income

   340    337 

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

   (12)   (15)

Expenses related to reorganization, net of taxes

   (14)   —   
        

Income from continuing operations

  $314   $322 
        

The following table reflects net operating income (loss) of our segments and Corporate and Other activities determined in accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information, and a reconciliation of net operating income (loss) of our segments and Corporate and Other activities to net income for the periods indicated:

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

(Amounts in millions)

       2007              2006              2007            2006       

Retirement and Protection

 $223  $170  $588  $519 

International

  140   107   405   328 

U.S. Mortgage Insurance

  39   53   170   197 

Corporate and Other

  (34)  (33)  (104)  (82)
                

Net operating income

  368   297   1,059   962 

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

  (29)  (3)  (71)  (40)

Expenses related to reorganization, net of taxes

  —     —     (14)  —   
                

Income from continuing operations

  339   294   974   922 

Income from discontinued operations, net of taxes

  —     10   15   29 

Gain on sale from discontinued operations, net of taxes

  —     —     53   —   
                

Income before cumulative effect of accounting change

  339   304   1,042   951 

Cumulative effect of accounting change, net of taxes

  —     —     —     4 
                

Net income

 $339  $304  $1,042  $955 
                

The following is a summary of total assets for our segments and Corporate and Other activities as of:of the periods indicated:

 

(Amounts in millions)

  March 31,
        2007        
  December 31,
            2006            
  

September 30,

2007

  

December 31,

2006

Assets

    

Assets:

    

Retirement and Protection

  $93,405  $92,820  $95,323  $92,820

International

   9,090   8,518   11,377   8,518

U.S. Mortgage Insurance

   3,327   3,237   3,157   3,237

Corporate and Other

   3,811   4,314   3,901   4,314
            

Segment assets from continuing operations

   109,633   108,889   113,758   108,889

Assets associated with discontinued operations

   1,925   1,982   —     1,982
            

Total assets

  $111,558  $110,871  $113,758  $110,871
            

13


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 condensed consolidated financial statements 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 and credit markets, defaults in portfolio securities, downgrades in our financial strength and credit ratings, insufficiency of reserves, legal constraints on dividend distributions by subsidiaries, competition, availability and adequacy of reinsurance, defaults by counterparties, 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 Retirement and Protection segment, including unexpected changes in morbidity and mortality, accelerated amortization of deferred acquisition costs and present value of future profits, goodwill impairments, reputational risks if we wereas a result of our plans to raisefile for an increase in the premiums on certain in-force long-term care insurance products, medical advances such as genetic mapping research, unexpected changes in persistency rates, increases in statutory reserve requirements, and the failure of demand for long-term care insurance to increase as we expect;

 

  

Risks relating to our International segment, including political and economic instability, foreign exchange rate fluctuations, unexpected changes in unemployment rates, deterioration in economic conditions or decline in home price appreciation, unexpected increases in mortgage insurance default rates or severity of defaults, decreases in the volume of high loan-to-value international mortgage originations, increased competition with government-owned and government-sponsored entities offering mortgage insurance, changes in regulations, and growth in the global mortgage insurance market that is lower than we expect;

 

  

Risks relating to our U.S. Mortgage Insurance segment, including the influence of Fannie Mae, Freddie Mac and a small number of large mortgage lenders and investors, 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 or a decline in home price appreciation, increases in the use of reinsurance with reinsurance companies affiliated with our mortgage lending customers, increased competition with government-owned and government-sponsored entities offering mortgage insurance, changes in regulations, legal actions under Real Estate Settlement Practices Act, and potential liabilities in connection with our U.S. contract underwriting services; and

 

  

Other risks, including 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 are never realized and payments could be accelerated in the event of certain changes in control, and provisions of our certificate of incorporation and by-laws and our tax matters agreement with GE may discourage takeover attempts and business combinations that stockholders might consider in their best interests.

14


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 financial security company in the U.S. with an expanding international presence. We have three operating segments: Retirement and Protection, International and U.S. Mortgage Insurance.

On January 9, 2007, we announced a significant organizational repositioning to more directly align high growth retirement and protection, international and mortgage insurance business opportunities. Additionally, our group life and health insurance business, previously included in our Protection segment, is nowwas included in Corporate and Other activities. This business was sold on May 31, 2007. The following discussion reflects our reorganized operating segments.

 

  

Retirement and Protection. We offer a variety of protection, wealth accumulation, retirement income and institutional investment products. Retail protectionProtection products include: life insurance, long-term care insurance and a linked benefitlinked-benefits product that combines long-term care insurance with universal life insurance. Additionally, as part of our senior market products and services, we offer Medicare supplement insurance along with wellness and care coordination services for our long-term care policyholders. Our wealth accumulation and retirement income products principally include: individualfixed and variable annuities, fixed deferred and immediate individual annuities, group variable annuities offered through retirement plans, and a variety of managed account programs, financial planning advisory services and mutual funds. Institutional products include: funding agreements, funding agreements backing notes (“FABNs”), and guaranteed investment contracts (“GICs”). For the three months ended March 31,September 30, 2007, our Retirement and Protection segmentsegment’s net income was $173 million and segment net operating income was $185 million.were $200 million and $223 million, respectively. For the nine months ended September 30, 2007, our Retirement and Protection segment’s net income and net operating income were $526 million and $588 million, respectively.

 

  

International. In Canada, Australia, New Zealand, Mexico, Japan and multiple European countries, we are a leading provider of mortgage insurance products on loans made predominately to prime-based borrowers.products. We are the largest private mortgage insurer in most of our international markets. We also provide mortgage insurance on a structured, or bulk basis, which aids in the sale of mortgages to the capital markets and helps lenders manage capital and risks. Additionally, we offer services, analytical tools and technology that enable lenders to operate more efficiently and more effectively manage risk. We also offer payment protection coverages in multiple European countries, Canada and Mexico. Our payment protection insurance products help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death. For the three months ended March 31,September 30, 2007, our International segmentsegment’s net income and segment net operating income were each $123 million.$139 million and $140 million, respectively. For the nine months ended September 30, 2007, our International segment’s net income and net operating income were $401 million and $405 million, respectively.

 

  

U.S. Mortgage Insurance. In the U.S,U.S., we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as “flow” mortgage insurance. We also have begun to increasingly provide mortgage insurance on a structured, or bulk basis, with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate more efficiently and more effectively manage risk. For the three months ended March 31,September 30, 2007, our U.S. Mortgage Insurance segmentsegment’s net income and segment net operating income were each $65 million.$40 million and $39 million, respectively. For the nine months ended September 30, 2007, our U.S. Mortgage Insurance segment’s net income and net operating income were $171 million and $170 million, respectively.

We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions, the results of a small, non-core business that is managed outside our operating segments and our group life and health insurance business.business, which we agreed to sell in January 2007 and was accounted for as discontinued operations. This business was sold on May 31, 2007. For the three months ended March 31,September 30, 2007, Corporate and Other activities had a net loss from continuing operations of $47 million and a net operating loss of $33 million.$40 million and $34 million, respectively. For the nine months ended September 30, 2007, Corporate and Other activities had a loss from continuing operations and a net operating loss of $124 million and $104 million, respectively.

Business trends and conditions

15

In recent years, our business has been, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions. The discussion of business trends and conditions should be read together with the trends contained in our 2006 Annual Report on Form 10-K and in our Current Report on Form 8-K filed on April 16, 2007 (reflecting our reorganized segment reporting structure and the effects of classifying our group life and health insurance business as discontinued operations), which describe additional business trends and conditions.


General trends and conditions affecting our businesses

Volatility in credit markets

During the third quarter of 2007, credit markets experienced reduced liquidity, higher volatility and widening credit spreads across asset classes mainly as a result of marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans. In connection with this uncertainty, we believe investors and lenders have retreated from many investments in asset-backed securities including those associated with sub-prime and Alt-A residential mortgage loans, as well as types of debt investments with weak lender protections or those with limited transparency and/or complex features which hindered investor understanding. At the same time, investors shifted emphasis towards safety pushing up the demand for U.S. Treasury instruments. We believe these credit market conditions in the third quarter of 2007 contributed to an increase in unrealized valuation losses of $171 million, net of tax and other offsets, in our $55.8 billion investment portfolio of fixed maturity securities reflecting widening spreads in our mortgage and asset-backed securities, partially offset by a lower risk-free interest rate environment. We also believe these credit market conditions have contributed to a higher level of credit-related impairments during the three and nine months ended September 30, 2007. We expect to experience continued volatility in the valuation of our investments in fixed maturity securities, as well as generally higher level of credit-related investment losses if current credit market conditions continue. We believe, however, that the current credit environment also provides us with opportunities to invest in select asset classes and sectors that may enhance our investment yields over time. See “—Investments and Derivative Instruments” section of management discussion and analysis for additional information on our investment portfolio.

The third quarter credit market conditions resulted in an unfavorable liquidity environment for issuers of financial instruments including commercial paper, long-term debt and asset-backed securities. Credit spreads widened for many corporate issuers of commercial paper and long-term debt resulting in less favorable financing terms. This unfavorable liquidity environment did not have a material effect on our commercial paper or long-term debt financing activities.

See additional trends related to volatile credit markets in the “—Trends and conditions affecting our segments” which follows.

Trends and conditions affecting our segments

Retirement and Protection

Managed money. We offer asset management products to individual investors and support services for independent broker-dealers and registered investment advisors. The asset management industry is witnessing

rapid increasesgrowth in the number of independent broker-dealer representativesbroker-dealers and registered investment advisors, as registered representatives are leavingleave large national firms to join independent firms or form their own small firms. These new smallsmaller firms need client and back office support services and access to technology. Further,technology solutions. Furthermore, individuals are increasingly transferring their assets to separately managed products from mutual funds.products. We expect these trends to continue and possiblymost likely accelerate in the future. As a result of these trends, we have expanded our presence in this market with the October 2006 acquisition of AssetMark Investment Services, Inc. (“AssetMark”), a leading provider of open architecture asset management solutions to independent financial advisors. Our asset management products consist of separately managed accounts and managed mutual fund accounts. Weaccounts upon which 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, both of which are influenced by the relative performance of our products’ underlying investments and the overall equity market environment.

Retirement income. Results for our retirement income businessesbusiness are affected by investment performance, interest rate levels, slope of the interest rate yield curve, net interest spreads, equity market fluctuations, mortality, policyholder lapses and the impact of new product sales and lapses. In addition, oursales. Our competitive position within many of our distribution channels as well asand our ability to retain business 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.

The current invertedinterest rate environment coupled with the relatively flat shape of the yield curve environment has reduced the attractiveness of certainsome fixed annuities relative to investment alternatives, such as certificates of deposit. This interest rate and yield curve environment has had an adverse impact on both sales and retention of fixed annuities with the latter resulting in an acceleration of the amortization of related deferred acquisition costs. In recent quarters, we have experienced improved spreads in fixed annuities associated with the runoff and crediting rate resets of lower return business. We expect these trends to continue.

We continue to focus on our Income Distribution Series of variable annuity products and riders.products. We have witnessed a decline in defined benefit retirement plans in favor of defined contribution plans with more of the 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 individual and group retirement income products that provide various forms of guaranteed benefits with the opportunity to realize upside market performance. Our Income Distribution Series provides the contractholder with the ability to receive a guaranteed minimum income stream that they cannot outlive, along with an opportunity to participate in market appreciation. However, through various techniques, these products are designed to reduce some of our risks that generally accompany traditional products with guaranteed living benefits. We are targeting individuals who are focused on building a personal portable retirement plan or are moving from the accumulation to the distribution phase of their retirement planning.

Institutional.Our Retirement and Protection segment previously issued a combined $9.4 billion of FABNs and funding agreements, of which $2.8 billion offer contractholders the option to make periodic elections to extend the maturity date of the contract. The credit market conditions during the third quarter of 2007 made these types of institutional products less attractive compared to alternative products offering higher yields with more liquidity. Additionally, during this same time period, certain contractholders did not extend the maturity on approximately $1.3 billion of outstanding notes, of which $1.0 billion will mature over the next 12 months. We do not believe that this trend will have a material effect on our financial position or liquidity.

Life insurance. Results in our life insurance business are impacted by sales, mortality, persistency, investment yields and statutory reserve requirements. Additionally, sales of our products are dependent on competitive product features and pricing, distribution penetration and customer service. Valuation of Life Insurance Policies Regulation (more commonly known as “Regulation XXX” and “AXXX”) requires insurers to

establish additional statutory reserves for both term and universal life insurance policies with long-term premium guarantees, which increases the capital required to write these products. For both term and universal life insurance, we have implemented capital management actions that improve our new business returns and have, in part, enabled us to decrease our premium rates.

As of September 30, 2007, we have $3.5 billion of floating rate non-recourse funding obligations outstanding which back excess statutory reserves. In the current quarter, the interest rate we paid on $1.7 billion of those non-recourse funding obligations was contractually reset to the current maximum rate due to lower investor demand for these types of securities. We believe that demand will return over time, and that higher reinvestment rates on portfolio assets will further offset this cost over time. To maintain and optimize product returns, we may, at our discretion, seek alternative financing terms in the future depending upon market conditions.

16


Several competitors have taken similar capital management actions.actions similar to ours. Additionally, we have seen some competitors lower their term life insurance prices, which has made the market more competitive. We have also experienced a shift in focus by our distributors from term life insurance to universal life insurance products. In response to this shift in focus by our distributors, we are building our universal life insurance capabilities and maintaining a disciplined approach to term life insurance pricing. Our sales levels and returns on new term life insurance businessproducts have been and may continue to be impacted by the increased competition and shift in distribution focus.

Long-term care insurance. Results of our long-term care insurance business are influenced by morbidity, persistency, investment yields, new product sales, expenses and reinsurance. Industry-wide annualized first-year annualized premiums of individual long-term care insurance decreasedincreased approximately 8%2% for the yearsix months ended December 31, 2006June 30, 2007 compared to the yearsix months ended December 31, 2005,June 30, 2006, according to data published by LIMRA International. Our sales growth over the past year in a challenging market reflects the breadth of our distribution and progress across multiple growth initiatives with an emphasis on broadening our product offerings. For example, for the nine months ended September 30, 2007, we have experienced sales growth in our recently introduced linked-benefits product. In addition, in July 2007, AARP selected us as its provider to offer new long-term care insurance products to its approximately 39 million members. However, the continued low interest rate environment and the impact of lower termination rates on older issued policies, some with expiring reinsurance coverage, are causing higher benefits and other changes in policy reserves, resulting in lower net operating income. In response to these trends, we will continue to pursue multiple growth initiatives, continue investing in claims processcase management improvements, maintain tight expense management, actively explore reinsurance and capital market solutions, execute investment strategies and, if appropriate, consider rate increasesother actions to improve profitability of the block. On July 26, 2007, we announced our plans to file for a premium rate increase of between 8% and 12% on most of our block of older issued long-term care insurance policies. This block represents approximately $700 million, or 40%, of our total annual long-term care insurance premium in-force. The premium rate increase has been filed for regulatory approval in more than 40 states with approvals received from six states.

International

International mortgage insurance. The results of our international mortgage insurance business are affected by changes in regulatory environments, employment and other economic and housing market trends, including interest rate trends, home price appreciation, mortgage origination volume, levels of mortgage delinquencies and movements in foreign currency exchange rates. Our international mortgage insurance business has continued to expand with favorable operating results. 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 expansion of our international business in recent years, as of March 31,September 30, 2007, approximately 59%61% of our international risk in-force has 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 these books of business continue to mature.

Payment protection insurance. Growth of our payment protection insurance business is dependent on economic conditions including consumer lending levels, 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 continues to show growth from increased penetration of existing relationships and the addition of new distribution relationships in existing and new countries.

U.S. Mortgage Insurance

The results of our U.S. mortgage insurance business are affected by employment and other economic and housing markets trends, including interest rate trends, home price appreciation, mortgage origination volume and product mix and the levels and aging of mortgage delinquencies including seasonal trends.

We believe theThe demand for flow private mortgage insurance increased significantly during the threenine months ended March 31,September 30, 2007 as compared to the same period in 2006. This increase was driven by a number of market conditions, which included: increased regulatory and market focus on credit risk, tightenedongoing tightening of underwriting standards, an increase in the volume of mortgages purchased by the government-sponsored entities’entities (“GSE”) penetration of, the mortgage-backed securities

17


market, thereturn to traditional fixed rate mortgages resulting in a decline in simultaneous second mortgages and mortgage insurance tax deductibility. TheWe believe in the third quarter of 2007 the bulk mortgage insurance market is increasingdecreased as a percentage of the overall primary mortgage insurance market, which we believe is driven in part,primarily by an increase in GSE Alt-A penetration, portfolio transactions which have increased recently driven by regulatory pressure on lenders tolower market liquidity and a dramatic decrease the risk in their mortgage loan portfolios, as well as an increase in non-prime mortgage-backed security issuances. We have increased our participationparticipate in selected segments of the bulk market where we believe we will be able to meet our targeted risk-adjusted returns and continue to evaluate additional opportunities this market presents.

The recent rise in interest rates and lower or negative home price appreciation in the U.S. have contributed to rising persistency rates. The flow persistency rate for the three months ended March 31,September 30, 2007 was 78%82%, which represents the highest persistency rate we have experienced in 6more than six years.

Primary insurance in-force increased from $113.4to $144.8 billion as of December 31,September 30, 2007, which represents a 39% increase as compared to the prior year. In addition, net earned premiums have grown from $350 million for the nine months ended September 30, 2006 to $120.5 billion as of March 31,$444 million for the nine months ended September 30, 2007. This increaseThese increases in primary insurance in-force reflectsand net earned premiums reflect an increase in both our flow and bulk product writings and our fifth sequential quarter increase in primaryas a result of increased demand for private mortgage insurance in-force.as well as higher persistency. We believe that the increased demand for private mortgage insurance, sustained higher interest rates, increased persistency and our ongoing growth strategy will lead to stable to growing levels of insurance in-force.in-force and related net earned premiums.

We believe that the U.S. economy overall remains relatively strong based on continued gross domestic product growth and low levels of unemployment. However, we also believe that the U.S. housing market has slowed materially and the rate of home price appreciation has declined or turned negative in selectthe majority of markets. In addition, there has been a significant increase in the default and foreclosure levels especially in the adjustable rate sub-prime market, according to the Mortgage Bankers Association, which we believe will resulthas resulted in an increase in housing supply levels and has further pressurepressured home price appreciation resulting in defaults not being supported by adequate levels of embedded home price appreciation. Over 90%We believe this overall pressure on the housing market has begun to affect the performance of our U.S. risk in-force is considered prime, based on FICO credit scoresother mortgage products, including A minus, Alt-A and adjustable rate mortgages.

We have increased loss reserves as a result of the underlying mortgage loans. Continued low or negative home price appreciation may cause further increasesa material increase in delinquencies and foreclosures, especially in Florida, California, Arizona and Nevada, as well as in our U.S. paid lossesA minus and Alt-A products. In addition, throughout the related loss ratio.

U.S., we have experienced an increase in the average loan balance of mortgage loan delinquencies. The Great Lakes region has experienced an economic slowdown and has seen a more pronounced weakness in their housing markets as well as a decline in home prices. While our portfolio concentration in the Great Lakes region is less than 10% of our total risk in-force, this region’s weakness has contributed disproportionately to the increase in our U.S. paid losses. In addition, we

The foregoing factors have recently experiencedcontributed to an increase in our incurred losses. While over 90% of our primary risk in force in the average loan balanceU.S. is considered prime, based on FICO credit scores of the underlying mortgage loan delinquencies and an increase in aged delinquencies, resulting in higher overall loss reserves per delinquency. In particular, we sawloans, continued low or negative home price appreciation may cause further increases in delinquencies in someour incurred losses and related loss ratio. As of the higher loan balance states including Florida, California, Arizona and several Northeastern states.

As a result of the significant U.S. refinancing activity since 2002, as of March 31,September 30, 2007, approximately 63%69% of our U.S. risk in-force had 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 these books of business continue to mature.

Consolidated Results of Operations

Net operating incomeThe following is a non-GAAP financial measure that we define as income from continuing operations, excluding after-tax net investment gains (losses) (which can fluctuate significantly from period to period),discussion of our consolidated results of operations. For a discussion of our segment results, see “—Results of Operations and other adjustmentsSelected Financial and infrequent or unusual non-operating items. There were no non-recurring, infrequent or unusual items excluded from net operating income during the three months ended March 31, 2007 or 2006 other than a $14 million after-tax expense recorded in the first quarter of 2007 related to reorganization costs, including $9 million for the impairment of internal-use software and $5 million of severance and other employee termination related expenses.

Management believes that analysis of net operating income enhances understanding and comparability of performanceOperating Performance Measures by highlighting underlying business activity and profitability drivers. However, net operating income should not be viewed as a substitute for net income in accordance with U.S. GAAP. In addition, our definition of net operating income may differ from the definitions used by other companies.Segment.

18


Three Months Ended March 31,September 30, 2007 Compared to Three Months Ended March 31,September 30, 2006

The following table providesis a reconciliationsummary of income from continuing operations to net operating income (as defined above) for the periods indicated:

 

  For the three months
ended March 31,
 Increase (decrease) and
percentage change
   Three months
ended September 30,
 Increase (decrease) and
percentage change
 

(Amounts in millions, except per share amounts)

        2007             2006                   2007 vs. 2006             

(Amounts in millions)

        2007             2006                   2007 vs. 2006             

Revenues:

          

Premiums

  $1,511  $1,371  $140  10%  $1,600  $1,505  $95  6%

Net investment income

   984   912   72  8%   1,074   932   142  15%

Net investment gains (losses)

   (19)  (22)  3  14%   (48)  (6)  (42) NM(1)

Policy fees and other income

   234   181   53  29%

Insurance and investment product fees and other

   249   184   65  35%
                      

Total revenues

   2,710   2,442   268  11%   2,875   2,615   260  10%
                      

Benefits and expenses:

          

Benefits and other changes in policy reserves

   1,067   915   152  17%   1,168   1,061   107  10%

Interest credited

   385   372   13  3%   391   382   9  2%

Acquisition and operating expenses, net of deferrals

   489   436   53  12%   540   493   47  10%

Amortization of deferred acquisition costs and intangibles

   213   164   49  30%   202   160   42  26%

Interest expense

   107   82   25  30%   124   87   37  43%
                      

Total benefits and expenses

   2,261   1,969   292  15%   2,425   2,183   242  11%
                      

Income from continuing operations before income taxes

   449   473   (24) (5)%   450   432   18  4%

Provision for income taxes

   135   151   (16) (11)%   111   138   (27) (20)%
                      

Income from continuing operations

   314   322   (8) (2)%   339   294   45  15%

Adjustments to income from continuing operations:

     

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

   12   15   (3) (20)%

Expenses related to reorganization, net of taxes

   14   —     14  NM(1)

Income from discontinued operations, net of taxes

   —     10   (10) (100)%
                      

Net operating income

  $340  $337  $3  1%

Net income

  $339  $304  $35  12%
                      

Earnings from continuing operations per common share:

     

Basic

  $0.71  $0.69   
         

Diluted

  $0.69  $0.67   
         

Net operating earnings per common share:

     

Basic

  $0.77  $0.72   
         

Diluted

  $0.75  $0.70   
         

Weighted-average common shares outstanding:

     

Basic

   441.0   467.0   
         

Diluted

   455.0   479.5   
         

(1)

Not meaningful.We define “NM” as not meaningful for increases or decreases greater than 200%.

19


Premiums. Premiums consist primarily of premiums earned on insurance products for individual life, long-term care, Medicare supplement, single premium immediate annuities and structured settlements with life contingencies, payment protection and mortgage insurance policies. Premiums

Our International segment increased $48$118 million as a result of a $64 million increase in our international mortgage insurance business and an increase of $54 million from our payment protection insurance business. The three months ended September 30, 2007 included an increase of $42 million attributable to changes in foreign exchange rates.

Our U.S. Mortgage Insurance segment increased $41 million.

Our Retirement and Protection segment decreased $62 million primarily due to a $60$92 million decrease in our retirement income business, offset by a $22 million increase in our long-term care insurance business mainly from the second quarter of 2006 acquisition of Continental Life Insurance Company of Brentwood, Tennessee (“Continental Life”) and growthan $8 million increase in the in-force block. Ourour life insurance business increased $14 million mostly from growth in our in-force term life insurance business. Partially offsetting these increases in our Retirement and Protection segment is a $26 million decrease in our retirement income business due to lower sales of our life contingent spread-based retail products reflecting higher pricing of our products as a result of our continued pricing discipline in the current interest rate environment. Premiums in our International segment increased $71 million, $29 million of which was attributable to changes in foreign exchange rates, as a result of a $42 million increase reflecting growth and seasoning of our international mortgage insurance in-force block and a $29 million increase from our payment protection business. In our U.S. Mortgage segment, premiums increased $21 million principally attributable to an increase in bulk and flow insurance written premiums.

Net investment income. Net investment income represents the income earned on our investments. Net investment income increased principally as a result of an increase in average invested assets in our Retirement and Protection and International segments. The increase in our

Our Retirement and Protection segment was theincreased driven largely by higher invested assets as a result of an increase in assets under management in our institutional business, the investment of net insurance cash flows attributable to growth of our long-term care and life insurance in-force blocks and an increase related to securities purchased using proceeds from the issuance of non-recourse funding obligations supporting certain term and universal life insurance reserves. The increase in our

Our International segment was due toincreased as a result of higher invested assets from the investment of net insurance cash flows primarily related to the growth in the international mortgage insurance in-force. in-force and additional cash from capital contributions. The three months ended September 30, 2007 included an increase of $11 million attributable to changes in foreign exchange rates.

Additionally, higher net investment income was due to an increase in weighted average investment yields to 5.8%6.1% for the three months ended March 31,September 30, 2007 from 5.7% for the three months ended March 31,September 30, 2006. The increase in weighted average investment yields was largely relatedprimarily attributable to increased investment income from limited partnership investments, bond calls and commercial mortgage loan prepayments and increased yields on floating rate investments supporting floating rate policyholder and non-recourse funding liabilities.

Net investment income for the three months ended March 31,September 30, 2007 included $21$40 million of favorable net investment income from bond calls and prepayments, commercial mortgage loan prepayments and limited partnership investmentsitems as compared to $19$13 million in investment income from bond calls, commercial mortgage loan prepayments and limited partnership investments in the prior year.

Net investment gains (losses).Net investment gains (losses) consist of realized gains and (losses) from the sale or impairment of our investments, unrealized and realized gains and (losses) from our trading securities, fair value hedging relationships, non-qualifying derivatives and embedded derivatives. ForWe incurred approximately $25 million of credit related impairments during the three months ended March 31,September 30, 2007, gross investment gains were $8 million and gross investment (losses) were $(27) million. There were no impairments for the three months ended March 31, 2007. Gross investment gains were primarily attributable to $6 million on the sale of available-for-sale fixed maturities and equity securities and $2 million from increases in the fair value of trading securities. Gross investment losses included $23 million of interest rate related losses as a result of the disposition of available-for-sale securities primarily for portfolio repositioning activities, $2 million on derivatives and $2which $17 million related to an increasesecurities backed by sub-prime and Alt-A residential mortgage-backed and asset-backed securities. For a discussion of the change in the commercial mortgage loan allowance for losses. For the three months ended March 31, 2006, grossnet investment gains were $22 million(losses), see the comparison for this line item under “—Investments and gross investment (losses) were $(44) million. Gross investment losses included $26 million related to the disposition of securities, $17 million on the derecognition of assets and liabilities related to certain securitization entities and a $1 million impairment charge related to a limited partnership investment.Derivative Instruments.”

PolicyInsurance and investment product fees and other income.other. PolicyInsurance and investment product fees and other income consist primarily of fees assessed against policyholder and contractholder account values, cost of insurance and surrender charges assessed on universal life insurance policies, advisory and administration service fees assessed on investment contractholder account values, broker-dealer commission income. Policy feesrevenues and other income in ourfees.

Our Retirement and Protection segment increased $54$67 million largely driven by a $34$40 million increase in our managed money business, from the acquisition of AssetMarka $14 million increase in the fourth quarter of 2006 and growth in assets under management from positive net flows and market appreciation. Ourour life insurance business increased $10and a $14 million primarily as a result of increased account values of universal life insurance. Retirementincrease from our retirement income increased $8 million mainly due to anbusiness.

 

20


increase in variable annuity assets under management, partially offset by lower municipal GIC advisory fees. Our International segment decreased $3$2 million from the elimination of Canadian application fees inrelated to our international mortgage insurance business in the third quarter of 2006.business.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of benefits paid and reserve activity related to current claims and future policy benefits on insurance and investment products for life, long-term care and Medicare supplement insurance, structured settlements and single premium immediate annuities with life contingencies, payment protection insurance and claim costs incurred related to mortgage insurance products.

Our Retirement and Protection segment increased $88decreased $16 million largely asattributable to an $86 million decrease in our retirement income business, offset by a result of an $84$49 million increase in our long-term care insurance business asand a result of aging and growth of the in-force block, higher incurred loss ratio on older issued policies and the Continental Life acquisition. Our$21 million increase in our life insurance business increased $13 million from the growth of our term life insurance in-force block, partially offset by less favorable mortality. Our retirement income business decreased $9 million as a result of lower sales of life contingent spread-based retail products as a result of our continued pricing discipline in the current interest rate environment. business.

Our U.S. Mortgage Insurance segment increased $33$79 million.

Our International segment increased $45 million attributable to higher losses fromas a result of an increase in our average reserve per delinquency associated with higher loan balances in more recent books of business and aging of delinquent loans as a result of further weakening in home price appreciation. Also, our International segment increased $32 million primarily attributable to the seasoning of our international mortgage insurance in-force blocksbusiness of business$34 million and increased losses from a limited numberan increase of Australian distribution relationships.$11 million in our payment protection insurance business. The three months ended September 30, 2007 included an increase of $9 million attributable to changes in foreign exchange rates.

Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances. The increase in interestInterest credited of $13 million fromrelated to our Retirement and Protection segment wasincreased $9 million primarily due to a $27$29 million increase related to our institutional business, from higher assets under management and an increase in short-term interest rates resulting in higher crediting rates on floating rate policyholder liabilities. This increase was partially offset by a $19$24 million decrease in interest credited related toour retirement income as a result of a decline of fixed annuity liabilities as surrenders have outpaced sales and crediting rates have been reset to lower rates as the fixed annuities reach the end of their initial crediting rate guarantee period.business.

Acquisition and operating expenses, net of deferrals. Acquisition and operating expenses, net of deferrals, represent costs and expenses related to the acquisition and ongoing maintenance of insurance and investment contracts, including commissions, policy issuance expenses and other underwriting and general operating costs. These costs and expenses are net of amounts that are capitalized and deferred, which are primarily costs and expenses that vary with and are primarily related to the sale and issuance of our insurance policies and investment contracts, such as first-year commissions in excess of ultimate renewal commissions and other policy issuance expenses. Acquisition and operating expenses, net of deferrals, increased $53 million primarily from a $23 million increase in our

Our Retirement and Protection segment increased $17 million primarily attributable to an increase of $31 million from our managed money business, aspartially offset by a resultdecrease of the AssetMark acquisition$7 million in our life insurance business, a decrease in our long-term care insurance business of $4 million and growth ofa $4 million decrease in our assets under management. retirement income business.

Our International segment increased $16$53 million largely duerelated to a $22 million increase in our international mortgage insurance business and a $31 million increase in our payment protection insurance business. The three months ended September 30, 2007 included an increase of $19 million attributable to changes in foreign exchange rates and our continued investment in our existing international platforms and potential new international platforms. rates.

Corporate and Other increased $15 million as a result of severance and other employee termination expenses incurred of $8 million and higher unallocated expenses.activities decreased $16 million.

Our U.S. Mortgage Insurance segment decreased $7 million.

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, present value of future profits and capitalized software. Amortization of deferred acquisition costs and intangibles

Our International segment increased as a result of a $21 million increase in our Retirement and Protection segment primarily attributablerelated to an $11 million increase from our life insurance business mainly due to favorable adjustments in the first quarter of 2006 that did not recur and growth in the in-force block partially offset by favorable persistency. The $9 million increase in our retirement income business was a result of higher fixed annuity lapses in our spread-based products and growth from our Income Distribution Series of variable annuity products and riders. The increase in our International

21


segment of $15 million related primarily to an increase in our payment protection insurance business of $12 million attributable to changes in foreign exchange rates and the effects of the reinsurance accounting change and an increase in our international mortgage insurance business of $3 million mainlyand an increase in our payment protection insurance business of $18 million. The three months ended September 30, 2007 included an increase of $8 million attributable to changes in foreign exchange rates.

Our Retirement and Protection segment increased $20 million due to the growth and seasoning ofan increase in our life insurance in-force. Corporate and Other increased $13 million as a result of an impairment of internal-use software.business.

Interest expense.expense Interest expense

Our Retirement and Protection segment increased primarily as a result of$23 million in our life insurance business from the issuances of additional non-recourse funding obligations and an increase in average floating rates paid on those obligations. This was partially offset by a decrease in interest expense associated with the derecognition of borrowings related to securitization entities in the first quarter of 2006.

Our International segment increased $6 million primarily from our payment protection insurance business.

Corporate and Other activities increased $8 million.

Provision for income taxes. The effective tax rate decreased to 30.1%24.7% for the three months ended March 31,September 30, 2007 from 31.9% for the three months ended March 31,September 30, 2006. This decrease in the effective tax rate was primarily attributable to favorable examination developments and a change in estimate related to the prior year tax provision in our Retirement and Protection segment. The three months ended September 30, 2007 included an increase of $5 million attributable to changes in foreign exchange rates.

Net income. The increase in net income reflects increases in our Retirement and Protection and International segments’ net income, partially offset by a decrease in our U.S. Mortgage Insurance segment and an increase in the net operating loss of our Corporate and Other activities, as discussed under “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.” Included in net income was an increase of $12 million, net of tax, attributable to changes in foreign exchange rates.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

The following is a summary of net income for the periods indicated:

   Nine months
ended September 30,
  Increase (decrease) and
percentage change
 

(Amounts in millions)

        2007              2006                    2007 vs. 2006             

Revenues:

     

Premiums

  $4,660  $4,356  $304  7%

Net investment income

   3,082   2,784   298  11%

Net investment gains (losses)

   (118)  (77)  (41) (53)%

Insurance and investment product fees and other

   726   565   161  28%
              

Total revenues

   8,350   7,628   722  9%
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   3,325   2,954   371  13%

Interest credited

   1,167   1,132   35  3%

Acquisition and operating expenses, net of deferrals

   1,524   1,412   112  8%

Amortization of deferred acquisition costs and intangibles

   622   521   101  19%

Interest expense

   355   257   98  38%
              

Total benefits and expenses

   6,993   6,276   717  11%
              

Income from continuing operations before income taxes

   1,357   1,352   5  —  %

Provision for income taxes

   383   430   (47) (11)%
              

Income from continuing operations

   974   922   52  6%

Income from discontinued operations, net of taxes

   15   29   (14) (48)%

Gain on sale of discontinued operations, net of taxes

   53   —     53  NM(1)
              

Income before cumulative effect of accounting change

   1,042   951   91  10%

Cumulative effect of accounting change, net of taxes

   —     4   (4) (100)%
              

Net income

  $1,042  $955  $87  9%
              

(1)

We define “NM” as not meaningful for increases or decreases greater than 200%.

Premiums

Our International segment increased $225 million as a result of a $150 million increase in our international mortgage insurance business and an increase of $75 million from our payment protection insurance business. The nine months ended September 30, 2007 included an increase of $107 million attributable to changes in foreign exchange rates.

Our U.S. Mortgage Insurance segment increased $94 million.

Our Retirement and Protection segment decreased $11 million primarily due to a $167 million decrease in our retirement income business, offset by a $122 million increase in our long-term care insurance business and a $34 million increase in our life insurance business.

Net investment income

Our Retirement and Protection segment increased largely driven by higher invested assets as a result of an increase in assets under management in our institutional business, the investment of net insurance cash flows attributable to growth of our long-term care and life insurance in-force blocks and an increase related to securities purchased using proceeds from the issuance of non-recourse funding obligations supporting certain term and universal life insurance reserves.

Our International segment increased as a result of higher invested assets from the investment of net insurance cash flows primarily related to the growth in the international mortgage insurance in-force and additional cash from capital contributions. The nine months ended September 30, 2007 included an increase of $21 million attributable to changes in foreign exchange rates.

Additionally, higher net investment income was due to an increase in weighted average investment yields to 5.9% for the nine months ended September 30, 2007 from 5.7% for the nine months ended September 30, 2006. The increase in weighted average investment yields was primarily attributable to increased investment income from limited partnership investments, bond calls and commercial mortgage loan prepayments and increased yields on floating rate investments supporting floating rate policyholder and non-recourse funding liabilities. This increase was partially offset by a decline in yield related to commercial mortgage loans primarily as a result of a favorable adjustment to our commercial mortgage loan loss reserves in the prior year.

Net investment income for the nine months ended September 30, 2007 included $80 million of favorable net investment income items as compared to $67 million in the prior year.

Net investment gains (losses).We incurred approximately $39 million of credit related impairments during the nine months ended September 30, 2007, of which $17 million related to securities backed by sub-prime and Alt-A residential mortgage-backed and asset-backed securities. For a discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

Insurance and investment product fees and other

Our Retirement and Protection segment increased $170 million largely driven by a $109 million increase in our managed money business, a $33 million increase in our life insurance business and a $30 million increase from our retirement income business.

Our U.S. Mortgage Insurance segment increased $5 million.

Our International segment decreased $10 million primarily related to our international mortgage insurance business.

Benefits and other changes in policy reserves

Our U.S. Mortgage Insurance segment increased $148 million.

Our Retirement and Protection segment increased $116 million as a result of a $192 million increase in our long-term care insurance business and a $65 million increase in our life insurance business, offset by a $141 million decrease in our retirement income business.

Our International segment increased $109 million driven by an increase in our international mortgage insurance business of $91 million and an increase of $18 million in our payment protection insurance business. The nine months ended September 30, 2007 included an increase of $23 million attributable to changes in foreign exchange rates.

Interest credited. Interest credited related to our Retirement and Protection segment increased $35 million primarily due to an $82 million increase related to our institutional business, partially offset by a $60 million decrease in our retirement income business.

Acquisition and operating expenses, net of deferrals

Our International segment increased $72 million attributable to an increase of $31 million related to our international mortgage insurance business and an increase of $41 million related to our payment protection insurance business. The nine months ended September 30, 2007 included an increase of $50 million attributable to changes in foreign exchange rates.

Our Retirement and Protection segment increased $54 million primarily attributable to an increase of $80 million from our managed money business, partially offset by a decrease of $16 million in our life insurance business and a decrease in our long-term care insurance business of $7 million.

Our U.S. Mortgage Insurance segment decreased $8 million.

Corporate and Other activities decreased $6 million.

Amortization of deferred acquisition costs and intangibles

Our Retirement and Protection segment increased $47 million primarily attributable to a $29 million increase from our life insurance business, a $9 million increase in our retirement income business and an $8 million increase in our long-term care insurance business.

Our International segment increased $39 million related to an increase in our international mortgage insurance business of $11 million and an increase of $28 million in our payment protection insurance business. The nine months ended September 30, 2007 included an increase of $21 million attributable to changes in foreign exchange rates.

Corporate and Other activities increased $13 million.

Interest expense

Our Retirement and Protection segment increased $56 million related to our life insurance business from the issuances of additional non-recourse funding obligations and an increase in average floating rates paid on those obligations.

Corporate and Other activities increased $22 million.

Our International segment increased $20 million primarily from our payment protection insurance business.

Provision for income taxes. The effective tax rate decreased to 28.2% for the nine months ended September 30, 2007 from 31.8% for the nine months ended September 30, 2006. This decrease in the effective tax rate was primarily attributable to the increase in lower taxed foreign income, favorable examination developments and a favorable examination development, partially offset by a decreasechange in tax-exempt investment income.estimate related to the prior year tax provision in our Retirement and Protection segment. The nine months ended September 30, 2007 included an increase of $9 million attributable to changes in foreign exchange rates.

Net operating income. The increase in net operating income reflects increases in our International segment and Retirement and Protection segmentsegments’ net operating income, partially offset by a decrease in our U.S. Mortgage Insurance segment and an increase in the net operating loss of our Corporate and Other activities, net operating loss, as discussed under “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.” Included in net operating income was an increase of $4$25 million, net of tax, attributable to changes in foreign exchange rates. Additionally, we completed the sale of our group life and health insurance business in the second quarter of 2007. The sale resulted in a gain on sale of discontinued operations of $53 million, net of taxes.

Earnings per share.share

The following table provides basic and diluted earnings per common share for the periods indicated:

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

(Amounts in millions, except per share amounts)

        2007              2006              2007              2006      

Earnings from continuing operations per common share:

        

Basic

  $0.77  $0.64  $2.21  $2.01
                

Diluted

  $0.76  $0.63  $2.16  $1.95
                

Earnings per common share:

        

Basic

  $0.77  $0.67  $2.36  $2.08
                

Diluted

  $0.76  $0.65  $2.32  $2.02
                

Weighted-average common shares outstanding:

        

Basic

   441.1   453.8   440.5   458.8
                

Diluted

   445.6   467.2   449.8   471.7
                

Weighted average shares outstanding for the first quarter of 2007 reflectdeclined reflecting repurchases of 22.547.3 million shares since the end of the first quarter of 2006 through March 31,September 30, 2007. In May 2007, we repurchased 16.5 million shares of our Class A Common Stock under an accelerated share repurchase transaction with a broker-dealer counterparty. Diluted weighted average shares outstanding for both the 2007 and 2006 quarters reflect the effects of potentially dilutive securities including stock options, restricted stock units and other equity-based compensation. In May 2007, our Equity Unit holders purchased 25.5 million of newly issued shares of our Class A Common Stock according to the stock purchase contract component of the Equity Units; therefore, the stock purchase contracts underlying equity units, stock options, and restricted stock units.Equity Units were only dilutive through May 2007.

Results of Operations and Selected Financial and Operating Performance Measures by Segment

Management regularly reviewsOur chief operating decision maker evaluates segment performance and allocates resources on the performancebasis of each of our“net operating segments (Retirement and Protection, International, and U.S. Mortgage Insurance) based onincome.” We define net operating income (loss) of the segment. We define segment net operating income (loss) as segment net income (loss) from continuing operations excluding after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. CertainWe exclude net investment gains (losses) and infrequent or unusual non-operating items including mostbecause we do not consider them to be related to the operating performance of our interestsegments and other financing expenses and advertising, marketing and other corporate expenses, are included in Corporate and Other. We believe thatOther activities. A significant component of our net investment gains (losses) are the presentationresult of segmentcredit-related impairments and credit-related gains and losses, the timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are often subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income (loss) enhancesif, in our understanding and assessmentopinion, they are not indicative of the resultsoverall operating trends. While some of operationsthese items may be significant components of our operating segments by highlighting net income (loss)in accordance with U.S. GAAP, we believe that net operating income, and measures that are derived from or incorporate net operating income, are appropriate measures that are useful to investors because they identify the income attributable to the normal, recurringongoing operations of ourthe business. However, segment net operating income (loss) is not a substitute for net income determined in accordance with U.S. GAAP. In addition, our definition of net operating income may differ from the definitions used by other companies. See note 9 in our “—Notes to Condensed Consolidated Financial Statements” for a reconciliation of net operating income (loss) of our segments and Corporate and Other activities to net income.

Related to our payment protection insurance business in our International segment, there were reclassifications of certain reinsured assumed business from reinsurance accounting to the deposit method of accounting (“reinsurance accounting change”) in the fourth quarter of 2006. Prior year amounts have not been

reclassified, as such amounts were not material to our consolidated financial statements. The reclassification impacted premiums, net investment income, benefits and other changes in policy reserves and interest expense; however, it had no impact on net income or net operating income for all periods presented.

Management’s discussion and analysis by segment also contains selected operating performance measures including “sales,” “assets under management” and “insurance in-force” or “risk in-force” which are commonly used in the insurance and investment industries as measures of operating performance.

22Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refers to (1) annualized first-year premiums for term life insurance, long-term care insurance and Medicare supplement insurance; (2) new and additional premiums/deposits for universal life insurance, linked-benefits, spread-based and variable products; (3) gross and net flows, which represent deposits less redemptions, for our managed money business; (4) written premiums and deposits, gross of ceded reinsurance and cancellations, and premium equivalents, where we earn a fee for administrative services only business, for payment protection insurance; (5) new insurance written for mortgage insurance, which in each case reflects the amount of business the company generated during each period presented; and (6) written premiums net of cancellations for our Mexican insurance operations. Sales do not include renewal premiums on policies or contracts written during prior periods. We consider annualized first-year premiums, new premiums/deposits, deposits and net flows, written premiums, premium equivalents and new insurance written to be a measure of our operating performance because they represent a measure of new sales of insurance policies or contracts during a specified period, rather than a measure of our revenues or profitability during that period.

Management regularly monitors and reports assets under management for our managed money business, insurance in-force and risk in-force. Assets under management for our managed money business represent third-party assets under management that are not consolidated in our financial statements. Insurance in-force for our life insurance, international mortgage insurance and U.S. mortgage insurance businesses is a measure of the aggregate face value of outstanding insurance policies as of the respective reporting date. Risk in-force for our international mortgage insurance and U.S. mortgage insurance businesses is a measure that recognizes that the loss on any particular mortgage loan will be reduced by the net proceeds received upon sale of the underlying property. We consider assets under management for our managed money business, insurance in-force and risk in-force to be a measure of our operating performance because they represent a measure of the size of our business at a specific date, rather than a measure of our revenues or profitability during that period.

These operating measures enable us to compare our operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources.


Retirement and Protection segment

Segment results of operations

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

The following table sets forth the results of operations relating to our Retirement and Protection segment:

 

  For the three months
ended March 31,
 Increase (decrease) and
percentage change
   Three months
ended September 30,
 Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007         2006               2007 vs. 2006                   2007             2006                   2007 vs. 2006             

Revenues:

          

Premiums

  $874  $826  $48  6%  $861  $923  $(62) (7)%

Net investment income

   844   777   67  9%   893   803   90  11%

Net investment gains (losses)

   (19)  (5)  (14) NM(1)   (38)  (6)  (32) NM(1)

Policy fees and other income

   219   165   54  33%

Insurance and investment product fees and other

   233   166   67  40%
                      

Total revenues

   1,918   1,763   155  9%   1,949   1,886   63  3%
                      

Benefits and expenses:

          

Benefits and other changes in policy reserves

   908   820   88  11%   919   935   (16) (2)%

Interest credited

   385   372   13  3%   391   382   9  2%

Acquisition and operating expenses, net of deferrals

   212   189   23  12%   220   203   17  8%

Amortization of deferred acquisition costs and intangibles

   104   83   21  25%   96   76   20  26%

Interest expense

   43   26   17  65%   59   36   23  64%
                      

Total benefits and expenses

   1,652   1,490   162  11%   1,685   1,632   53  3%
                      

Income from continuing operations before income taxes

   266   273   (7) (3)%   264   254   10  4%

Provision for income taxes

   93   98   (5) (5)%   64   87   (23) (26)%
                      

Segment net income

   173   175   (2) (1)%

Adjustment to segment net income:

     

Net income

   200   167   33  20%

Adjustment to net income:

     

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

   12   3   9  NM(1)   23   3   20  NM(1)
                      

Segment net operating income

  $185  $178  $7  4%

Net operating income

  $223  $170  $53  31%
                      

(1)

Not meaningful.We define “NM” as not meaningful for increases or decreases greater than 200%.

The following table sets forth net operating income for the productsbusinesses included in our Retirement and Protection segment:

 

   For the three months
ended March 31,
  Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007          2006              2007 vs. 2006         

Segment net operating income:

       

Managed money

  $10  $2  $8  NM(1)

Retirement income

   46   49   (3) (6)%

Institutional

   14   10   4  40%

Life insurance

   78   74   4  5%

Long-term care insurance

   37   43   (6) (14)%
              

Total segment net operating income

  $185  $178  $7  4%
              

(1)

Not meaningful.

   Three months
ended September 30,
  Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007          2006              2007 vs. 2006         

Net operating income:

        

Managed money

  $11  $5  $6  120%

Retirement income

   82   39   43  110%

Institutional

   10   9   1  11%

Life insurance

   81   79   2  3%

Long-term care insurance

   39   38   1  3%
              

Total net operating income

  $223  $170  $53  31%
              

Segment netNet operating income

Segment net operating income in our

Our managed money business increased $6 million primarily due to our fourth quarter of 2006 acquisition of AssetMark, and strong growth in our assets under management in our existing platforms.platforms and favorable equity market performance.

23


Our institutionalretirement income business increased $43 million mainly as a result of a tax benefit during the current quarter from favorable examination developments and a change in estimate related to the prior year tax provision. Additionally, there was an increase was attributable toin income from fee-based products as a result of growth in assets under management and increased spreads, primarily inof our fixed GIC products.variable annuity products, particularly the Income Distribution Series. The increase in our life insurance business is primarily duecurrent year also included favorable investment items of $11 million as compared to growth in the in-force block of term life insuranceprior year. These increases were partially offset by less favorable mortality. These increases were offset by lower segment net operating income in the retirement income and long-term care insurance businesses. The decrease in our retirement income business was mainly the result of lower municipal GICinvestment advisory fees and lower spread-based retail assets under management from withdrawals of older issued blocks outpacingmore than offsetting new deposits as crediting rates are being reset to lower rates. Offsetting these decreases was an increase

Our institutional business increased $1 million attributable to growth in income from fee-based productsassets under management offset by lower spreads in the current year.

Our life insurance business increased $2 million primarily due to favorable investment items and favorable mortality in universal life insurance, partially offset by higher mortality in term life insurance as compared to the prior year.

Our long-term care insurance business increased $1 million principally as a result of strong growth in variable annuity assets under management and a lower effective tax rate. The decrease in our long-term care insurance businessthe favorable performance of newer issued policies that was the result of a favorable reserve adjustment in 2006 that did not recur. In addition, the current quarter reflects lower expenses offset by a higher loss ratio onunfavorable performance of older issued policies. Medicare supplement insurance income improved from a $3Additionally, the current year included net favorable adjustments of $8 million net operating losscompared to $4 million in the prior year to net operating income of $1 million in 2007 as the result of the second quarter of 2006 acquisition of Continental Life. Additionally, Medicare supplement insurance claims are higher in the first quarter due to increased claim activity as policyholders submit claims until they reach Medicare deductible limits.year.

Revenues

RevenuesPremiums

Premiums increased mainly driven by increases in our long-term care insurance business of $60 million and our life insurance business of $14 million, partially offset by a decrease of $26 million in our retirement income business. The increase in our long-term care insurance business was mainly attributable to an increase of $44 million due to the Continental Life acquisition and growth in the long-term care insurance block. The increase in our life insurance business was mainly due to in-force growth from new sales and renewal premiums of term life insurance. The decrease in our

Our retirement income business wasdecreased $92 million attributable to lower life contingent sales in our spread-based retail products primarily due to our continued pricing discipline in the current interest rate environment.

The increaseand yield curve environment and our decision in netthe third quarter of 2006 to discontinue sales of our life-contingent structured settlement annuities.

Our long-term care insurance business increased $22 million mainly attributable to growth in the in-force block from new sales and renewal premiums.

Our life insurance business increased $8 million mainly due to in-force growth from new sales and renewal premiums of term life insurance, partially offset by lapses and continued runoff of our whole life block.

Net investment income was primarily the result of

Our life insurance business increased yields on floating rate investments supporting certain floating rate policyholder and non-recourse funding obligation liabilities. Additionally, the increase in net investment income was related$37 million mainly due to the growth of our long-term care and life insurancethe in-force blocksblock and an increase in securities purchased using proceeds from the issuance of non-recourse funding obligations supporting certain term and universal life insurance reserves. The current year also included $15 million of additional investment income from limited partnerships, bond calls and commercial mortgage loan prepayments as compared to the prior year.

For

Our long-term care insurance increased $28 million primarily as a discussionresult of net investment gains (losses), seean increase in average invested assets due to growth in the comparison for this line itemin-force block.

Our institutional business increased $31 million attributable to increased assets under “—Results of Operations.”management.

Policy fees and other

Our retirement income increasedbusiness decreased $8 million as a result of a $34decline in assets under management in our spread-based retail products. Partially offsetting this decrease was an increase of $17 million increase in ourattributable to additional investment income from limited partnerships, bond calls and commercial mortgage loan prepayments as compared to the prior year.

Insurance and investment product fees and other

Our managed money business a $10increased $40 million increase in our life insurance business and an $8 million increase in our retirement income business. The increase in our managed money business was primarily attributable to an increase of $21$24 million from the acquisition of AssetMark, as well as growth in assets under management in our existing platforms. The increase in ourplatforms and favorable equity market performance.

Our life insurance business was principally theincreased $14 million as a result of increased salesan unfavorable adjustment in unearned revenue of $13 million in our universal life insurance products. The increaseproduct in the prior year that did not recur.

Our retirement income wasbusiness increased $14 million mainly due to increased assets under management from continued sales of our Income Distribution Series of variable annuity products and riders, partially offset by lower municipal GICinvestment advisory fees.

Benefits and expenses

Benefits and other changes in policy reserves increased from

Our retirement income business decreased $86 million principally attributable to an $84$87 million increasedecrease in our spread-based retail products due to lower life-contingent sales primarily as a result of our continued pricing discipline in the current interest rate and yield curve environment and our decision in the third quarter of 2006 to discontinue sales of our life-contingent structured settlement annuities.

Our long-term care insurance business and a $13increased $49 million increase in our life insurance business, partially offset by a $9 million decrease in our retirement income business. The increase in the long-term care insurance business was mainly as a result of the aging and growth of the in-force block, and a $35partially offset by favorable reserve adjustments of $9 million increase from the Continental Life acquisition. The increase in the current year as compared to $5 million in the prior year. In addition, the performance of newer issued policies was offset by unfavorable performance of older issued policies where we continue to experience low termination rates and higher incurred losses.

Our life insurance business wasincreased $21 million largely attributable to growth in the growth of our term life insurance in-force block. The decreaseblocks, higher mortality in our retirement income business was dueterm life insurance as compared to the prior year and a $12 million decrease in our spread-based retail products duereclassification to lower life contingent sales primarily dueacquisition and operating expenses related to our continued pricing discipline in the current interest rate environment.commission deferrals.

Interest credited

 

24


Interest credited increased primarily as a result of a $27 million increase in ourOur institutional business partially offset by a $19increased $29 million decrease in our retirement income business. The increase in our institutional business was mainly attributable to growth in assets under management and an increase in crediting rates. The decrease in themanagement.

Our retirement income business was mainly the result of a decline of interest crediteddecreased $24 million from lower account values on fixed annuities associated with surrenders outpacingmore than offsetting sales and crediting rates being reset to current, lower rates as the fixed annuities reach the end of their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals increased due to a $23 million increase from our

Our managed money business increased $31 million attributable to an increase of $15$19 million from the AssetMark acquisition and growth of our assets under management.management in our existing platforms.

Our life insurance business decreased $7 million primarily from a reclassification from benefits and other changes in reserves related to commission deferrals in the current year.

Our long-term care insurance business decreased $4 million mainly from continued productivity efficiencies more than offsetting higher expenses associated with continued growth of insurance in-force.

Our retirement income business decreased $4 million mainly from our spread-based retail products as a result of lower sales.

Amortization of deferred acquisition costs and intangiblesintangibles. Our life insurance business increased mainly$20 million from continued growth of insurance in-force and an $11increase in amortization resulting from higher post-level term lapses. Partially offsetting these increases was lower amortization of $7 million increasefrom unlocking of estimated gross profit assumptions in our universal life insurance product in the current year. The prior year included favorable adjustments to universal life insurance of $7 million due to an unearned revenue adjustment and $7 million associated with unlocking of estimated gross profit assumptions.

Interest expense. Interest expense in our life insurance business and a $9 million increase in our retirement income business. The increase in our life insurance business was mainly due to growth in the in-force block partially offset by less favorable persistency. The increase in our retirement income business was a result of higher fixed annuity lapses in our spread-based products and growth in our variable annuity block.

Interest expense increased $17$23 million from the issuance of additional non-recourse funding obligations and an increase in average floating rates paid on those obligations.

Provision for income taxestaxes.

The effective tax rate decreased to 35.0%24.2% for the three months ended March 31,September 30, 2007 from 35.9%34.3% for the three months ended March 31,September 30, 2006. This decrease in the effective tax rate was primarily attributable to favorable examination developments and a change in estimate related to the prior year tax provision.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

The following table sets forth the results of operations relating to our Retirement and Protection segment:

  Nine months
ended September 30,
  Increase (decrease) and
percentage change
 

(Amounts in millions)

       2007              2006                2007 vs. 2006         

Revenues:

    

Premiums

 $2,622  $2,633  $(11) —  %

Net investment income

  2,597   2,397   200  8%

Net investment gains (losses)

  (102)  (58)  (44) (76)%

Insurance and investment product fees and other

  679   509   170  33%
             

Total revenues

  5,796   5,481   315  6%
             

Benefits and expenses:

    

Benefits and other changes in policy reserves

  2,744   2,628   116  4%

Interest credited

  1,167   1,132   35  3%

Acquisition and operating expenses, net of deferrals

  654   600   54  9%

Amortization of deferred acquisition costs and intangibles

  312   265   47  18%

Interest expense

  153   97   56  58%
             

Total benefits and expenses

  5,030   4,722   308  7%
             

Income from continuing operations before income taxes

  766   759   7  1%

Provision for income taxes

  240   268   (28) (10)%
             

Net income

  526   491   35  7%

Adjustment to net income:

    

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

  62   28   34  121%
             

Net operating income

 $588  $519  $69  13%
             

The following table sets forth net operating income for the businesses included in our Retirement and Protection segment:

  Nine months
ended September 30,
 Increase (decrease) and
percentage change
 

(Amounts in millions)

         2007                 2006                 2007 vs. 2006         

Net operating income:

    

Managed money

 $32 $13 $19  146%

Retirement income

  171  126  45  36%

Institutional

  34  32  2  6%

Life insurance

  234  230  4  2%

Long-term care insurance

  117  118  (1) (1)%
           

Total net operating income

 $588 $519 $69  13%
           

Net operating income

Our managed money business increased $19 million due to our fourth quarter of 2006 acquisition of AssetMark, growth in our assets under management in our existing platforms and favorable equity market performance.

Our retirement income business increased $45 million from a lower effective tax rate from favorable examination developments and a change in estimate related to the prior year tax provision. Additionally, income increased from our fee-based products as a result of growth in assets under management of our Income Distribution Series of variable annuity products and riders. The current year also included favorable investment items of $8 million as compared to the prior year. These increases were partially offset by lower investment advisory fees and lower spread-based retail assets under management from withdrawals of older issued blocks more than offsetting new deposits as crediting rates are being reset to lower rates.

Our institutional business increased $2 million attributable to growth in assets under management, partially offset by lower spreads, primarily in our fixed GIC products, and less favorable investment income items in the current year.

Our life insurance business increased $4 million primarily due to growth in the in-force block of term life insurance, partially offset by higher mortality in term life insurance as compared to the prior year. The current year also included favorable investment items of $12 million as compared to the prior year.

Our long-term care insurance business decreased $1 million as the favorable performance of newer issued policies was offset by unfavorable performance of older issued policies. The current year included $18 million, net of tax, in favorable adjustments. The prior year included $10 million, net of tax, of favorable adjustments. The revenues and benefits and expenses for Continental Life Insurance Company of Brentwood, Tennessee (“Continental Life”) reflect a five-month period for 2006 compared to a nine-month period for 2007.

Revenues

Premiums

Our retirement income business decreased $167 million attributable to lower life-contingent sales in our spread-based retail products primarily due to our continued pricing discipline in the current interest rate and yield curve environment and our decision in the third quarter of 2006 to discontinue sales of our life-contingent structured settlement annuities.

Our long-term care insurance business increased $122 million mainly attributable to growth in the in-force block from new sales and renewal premiums and a $64 million increase due to the Continental Life acquisition.

Our life insurance business increased $34 million mainly due to in-force growth from new sales and renewal premiums of term life insurance, partially offset by lapses and continued runoff of our whole life block.

Net investment income

Our institutional business increased $87 million attributable to higher asset balances and increased yields on floating rate investments supporting certain floating rate policyholder liabilities.

Our long-term care insurance increased $79 million largely as a result of an increase in average invested assets due to growth in the dividends received deduction, whichin-force block. The current year also included $14 million of additional investment income from limited partnerships, bond calls and commercial mortgage loan prepayments as compared to the prior year.

Our life insurance business increased $74 million mainly due to an increase in securities purchased using proceeds from the issuance of non-recourse funding obligations supporting certain term and universal life insurance reserves and growth of the in-force block. The current year also included $18 million of additional investment income from limited partnerships, bond calls and commercial mortgage loan prepayments as compared to the prior year.

Our retirement income business decreased $43 million as result of a decline in assets under management in our spread-based retail products. Partially offsetting this decrease was an increase of $12 million attributable to additional investment income from limited partnerships, bond calls and commercial mortgage loan prepayments as compared to the prior year.

Insurance and investment product fees and other

Our managed money business increased $109 million primarily attributable to an increase of $68 million from the acquisition of AssetMark, growth in assets under management in our existing platforms and favorable equity market performance.

Our life insurance business increased $33 million principally as a result of increased sales in our universal life insurance products and an unfavorable adjustment in unearned revenue of $13 million in our universal life insurance product in the prior year that did not recur.

Our retirement income business increased $30 million mainly due to increased assets under management from continued sales of our Income Distribution Series of variable annuity products and riders, partially offset by lower investment advisory fees.

Benefits and expenses

Benefits and other changes in policy reserves

Our long-term care insurance business increased $192 million mainly as a result of the aging and growth of the in-force block and a $45 million increase from the Continental Life acquisition. The prior year included a $27 million favorable adjustment related to our group long-term care policies which did not recur in the current year. In addition, the favorable performance of newer issued policies was offset by unfavorable performance of older issued policies where we continue to experience low terminations and higher incurred losses.

Our life insurance business increased $65 million principally attributable to growth of our term life insurance in-force block, higher mortality in term life insurance as compared to the prior year and a reclassification to acquisition and operating expenses related to commission deferrals, partially offset by a favorable reserve adjustment in the current year.

Our retirement income business decreased $141 million largely attributable to a decrease in our spread-based retail products from lower life-contingent sales primarily as a result of our continued pricing discipline in the current interest rate and yield curve environment and our decision in the third quarter of 2006 to discontinue sales of our life-contingent structured settlement annuities.

Interest credited

Our institutional business increased $82 million mainly attributable to growth in assets under management and an increase in crediting rates.

Our retirement income business decreased $60 million from lower account values on fixed annuities associated with surrenders more than offsetting sales and crediting rates being reset to current, lower rates as the fixed annuities reach the end of their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals

Our managed money business increased $80 million from an increase of $49 million from the AssetMark acquisition and growth of our assets under management in our existing platforms.

Our life insurance business decreased $16 million primarily from a reclassification from benefits and other changes in reserves related to commission deferrals in the current year.

Our long-term care insurance business decreased $7 million driven by continued productivity efficiencies. A $7 million increase from the Continental Life acquisition was offset by an $8 million unfavorable reinsurance adjustment in the prior year that did not recur.

Amortization of deferred acquisition costs and intangibles

Our life insurance business increased $29 million mainly due to continued growth of the in-force block, less favorable persistency and an increase in amortization resulting from higher post-level term lapses. Partially offsetting these increases was lower amortization of $7 million from unlocking of estimated gross profit assumptions in our universal life insurance product in the current year. The prior year included favorable adjustments to universal life insurance of $7 million due to an unearned revenue adjustment and $7 million associated with unlocking of estimated gross profit assumptions.

Our retirement income business increased $9 million as a result of higher fixed annuity lapses in our spread-based products and growth in our variable annuity block.

Our long-term care insurance business increased $8 million attributable to a $12 million increase from the Continental Life acquisition, partially offset by lower terminations of our in-force block.

Interest expense.Interest expense in our life insurance business increased $56 million from the issuance of additional non-recourse funding obligations and an increase in average floating rates paid on those obligations.

Provision for income taxes.The effective tax rate decreased to 31.3% for the nine months ended September 30, 2007 from 35.3% for the nine months ended September 30, 2006. This decrease in the effective tax rate was primarily attributable to favorable examination development.developments and a change in estimate related to the prior year tax provision.

Retirement and Protection selected financial and operating performance measures

Managed money

The following table sets forth selected operatingfinancial performance measures regarding our managed money business as of or for the datesperiods indicated:

 

   As of or for the three
months ended March 31,
 

(Amounts in millions)

        2007              2006       

Account value, beginning of period

  $17,293  $5,180 

Deposits

   1,712   582 

Interest credited and investment performance

   232   254 

Surrenders, benefits and product charges

   (431)  (192)
         

Account value, end of period

  $18,806  $5,824 
         
  As of or for the three
months ended September 30,
  As of or for the nine
months ended September 30,
 

(Amounts in millions)

         2007                  2006                  2007                  2006         

Assets under management, beginning of period

 $20,683  $6,143  $17,293  $5,180 

Gross flows

  1,665   602   5,136   1,827 

Redemptions

  (567)  (133)  (1,492)  (490)
                

Net flows

  1,098   469   3,644   1,337 

Market performance and product fees

  (119)  154   725   249 
                

Assets under management, end of period

 $21,662  $6,766  $21,662  $6,766 
                

Managed money includes third-party assets managed by AssetMark, Genworth Financial Asset Management and Genworth Financial Advisers.

The increase in these assets was primarily due to the fourth quarter of 2006 acquisition of AssetMark and core growthhigher net flows in managed money accounts from new and existing clients, as well as favorable equity market performance. Additionally,performance for the growthnine months ended September 30, 2007. The increase in depositsgross and net flows was the result of the AssetMark acquisition, expansion of our distribution network, growth in our sales force and changes in our fee structure. The increase in surrenders, benefitsnet flows associated with AssetMark were $432 million and product charges was largely$1,502 million for the resultthree and nine months ended September 30, 2007, respectively. As of $278 million fromSeptember 30, 2007, the AssetMark acquisition. The account value as of March 31, 2007 for AssetMark was $10.4$11.6 billion.

25


Retirement income

Fee-based retail products

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

 

  As of or for the three
months ended March 31,
  As of or for the three
months ended September 30,
 As of or for the nine
months ended September 30,
 

(Amounts in millions)

          2007                 2006                  2007                 2006                 2007                 2006         

Income Distribution Series(1)

       

Account value, net of reinsurance, beginning of period

  $2,402  $911  $3,361  $1,555  $2,402  $911 

Deposits

   421   281   543   334   1,446   965 

Surrenders, benefits and product charges

  (78)  (28)  (204)  (69)
            

Net flows

  465   306   1,242   896 

Interest credited and investment performance

   50   59   152   68   334   122 

Surrenders, benefits and product charges

   (60)  (16)
                   

Account value, net of reinsurance, end of period

  $2,813  $1,235  $3,978  $1,929  $3,978  $1,929 
                   

Traditional variable annuities

       

Account value, net of reinsurance, beginning of period

  $1,780  $1,182  $2,098  $1,458  $1,780  $1,182 

Deposits

   130   132   133   105   412   384 

Surrenders, benefits and product charges

  (48)  (32)  (145)  (94)
            

Net flows

  85   73   267   290 

Interest credited and investment performance

   36   78   79   54   215   113 

Surrenders, benefits and product charges

   (41)  (32)
                   

Account value, net of reinsurance, end of period

  $1,905  $1,360  $2,262  $1,585  $2,262  $1,585 
                   

Variable life insurance

       

Account value, beginning of period

  $391  $363  $408  $367  $391  $363 

Deposits

   5   9   6   7   18   23 

Surrenders, benefits and product charges

  (15)  (13)  (41)  (38)
            

Net flows

  (9)  (6)  (23)  (15)

Interest credited and investment performance

   12   18   15   10   46   23 

Surrenders, benefits and product charges

   (12)  (13)
                   

Account value, end of period

  $396  $377  $414  $371  $414  $371 
                   

(1)

The Income Distribution Series products are comprised of our retirement income deferred and immediate variable annuity products, including those variable annuity products with rider options that provide similar income features. These products do not include fixed single premium immediate annuities or deferred annuities, which may also serve income distribution needs.

Income Distribution Series.Series

We experienced an increase in assets under management attributable to continued strong sales growth of our guaranteed minimum withdrawal for life benefit rider and favorable equity markets.

Traditional variable annuities.annuities The

In our traditional variable annuities, the increase in assets under management was principally the result of ongoing sales of our traditional variable annuity products and favorable equity markets.

26markets exceeding surrenders and benefits.


Spread-based retail products

The following table sets forth selected operatingfinancial performance measures regarding our spread-based retail products as of or for the datesperiods indicated:

 

  As of or for the three
months ended March 31,
   As of or for the three
months ended September 30,
 As of or for the nine
months ended September 30,
 

(Amounts in millions)

        2007             2006                 2007                 2006                 2007                 2006       

Fixed annuities

        

Account value net of reinsurance, beginning of period

  $13,972  $15,547   $12,886  $14,835  $13,972  $15,547 

Deposits

   207   267    184   424   535   1,017 

Surrenders, benefits and product charges

   (815)  (947)  (2,495)  (2,536)
             

Net flows

   (631)  (523)  (1,960)  (1,519)

Interest credited

   124   145    113   137   356   421 

Surrenders, benefits and product charges

   (781)  (718)
                    

Account value net of reinsurance, end of period

  $13,522  $15,241   $12,368  $14,449  $12,368  $14,449 
                    

Single premium immediate annuities

        

Account value net of reinsurance, beginning of period

  $6,174  $5,680   $6,367  $5,888  $6,174  $5,680 

Net earned premiums and deposits

   237   250 

Premiums and deposits

   247   294   745   834 

Surrenders, benefits and product charges

   (241)  (200)  (715)  (690)
             

Net flows

   6   94   30   144 

Interest credited

   84   80    85   82   254   240 

Surrenders, benefits and product charges

   (234)  (238)
                    

Account value net of reinsurance, end of period

  $6,261  $5,772   $6,458  $6,064  $6,458  $6,064 
                    

Structured settlements

        

Account value net of reinsurance, beginning of period

  $1,011  $871   $1,088  $966  $1,011  $871 

Net earned premiums and deposits

   47   58 

Interest credited

   14   12 

Premiums and deposits

   5   37   82   140 

Surrenders, benefits and product charges

   (14)  (16)   (15)  (14)  (44)  (47)
                    

Net flows

   (10)  23   38   93 

Interest credited

   14   14   43   39 
             

Account value net of reinsurance, end of period

  $1,058  $925   $1,092  $1,003  $1,092  $1,003 
             
       

Total premiums from spread-based retail products

  $154  $180   $118  $210  $423  $590 
                    

Total deposits on spread-based retail products

  $337  $395   $318  $545  $939  $1,401 
                    

Fixed annuities.annuities

Surrenders outpacedexceeded deposits during the first quarter of 2007 and 2006 as the current invertedinterest rate and unfavorable yield curve hasenvironment along with competitive pressures have reduced the attractiveness of certain fixed annuities relative to investment alternatives, such as certificates of deposit. This interest rate and yield curve environment has had an adverse impact on both sales and retention of fixed annuities and we expect this trend to continue if the current interest rate and yield curve environment remains unchanged. In recent quarters, we have experienced improved spreads in fixed annuities principally from runoff and crediting rate resets on lower return business.

Single premium immediate annuities.annuities

The account value, net of reinsurance, increased primarily due to interest credited on the account values as premiums and deposits were offset by surrenders and benefits.

Structured settlements.settlements

Upon completion of a strategic review of our structured settlement annuities, we decided in the third quarter of 2006 to no longer solicit sales of this product as a result of a continued challenging and competitive long-term interest rate environment. However, we continue to service our existing block of business.

27


Institutional

The following table sets forth selected operatingfinancial performance measures regarding our institutional business as of or for the datesperiods indicated:

 

  As of or for the three
months ended March 31,
   As of or for the three
months ended September 30,
 As of or for the nine
months ended September 30,
 

(Amounts in millions)

        2007             2006                 2007                 2006                 2007                 2006         

Account value, beginning of period

  $10,483  $9,777   $11,515  $9,886  $10,483  $9,777 

Deposits(1)

   722   980    323   676   2,152   2,154 

Surrenders and benefits(1)

   (710)  (878)  (1,799)  (2,484)
             

Net flows

   (387)  (202)  353   (330)

Interest credited

   141   114    154   128   442   365 

Surrenders and benefits(1)

   (629)  (1,105)

Foreign currency translation

   7   —      10   —     14   —   
                    

Account value, end of period

  $10,724  $9,766   $11,292  $9,812  $11,292  $9,812 
                    

(1)

“Surrenders and benefits” include contracts that have matured but are redeposited with us and reflected as deposits. For the periodsthree months ended March 31,September 30, 2007 and 2006, surrenders and deposits that were redeposited and are now reflected under “Deposits” amounted to $100 million and $210$105 million, respectively. For the nine months ended September 30, 2007 and 2006, surrenders and deposits included $300 million and $415 million, respectively, that were redeposited and reflected under “Deposits.”

The increase in account values was primarily the result of the increase in our FABNs, which include the FABN registered note program and the global medium term note (“GMTN”) program and increases in interest credited partially offset by scheduled maturities of GICs.programs. The GMTN program was launched in the first quarter of 2007 and resulted in issuances of $600 million. TheIn the second quarter of 2007, we issued $650 million of our FABN registered note program. For the three months ended September 30, 2007, deposits decreased as a result of lower sales given the credit market environment. For the three and nine months ended September 30, 2007, the increase in interest credited was driven by an increase in assets under managementaccount value as well as higher crediting rates on our floating rate products largely due to an increase in short-term interest rates compared to 2006. These increases were partially offset by scheduled maturities of fixed GICs.

See “—Trends and conditions affecting our segments” for further discussion of the prior year.impact of the current credit market condition on FABNs and funding agreements.

Life insurance

The following table setstables set forth selected financial and operating performance measures regarding our life insurance business as of or for the three months ended March 31, 2007 and 2006:periods indicated:

 

  As of or for the three
months ended March 31,
  

Increase (decrease) and

percentage change

  Three months
ended September 30,
 Increase (decrease) and
percentage change
 Nine months
ended September 30,
 

Increase (decrease) and

percentage change

 

(Amounts in millions)

      2007          2006                2007 vs. 2006                2007         2006           2007 vs. 2006           2007         2006             2007 vs. 2006         

Term life insurance

               

Net earned premiums

  $229  $213  $16  8% $231 $224 $7  3% $691 $658 $33  5%

Annualized first-year premiums

   29   34   (5) (15)%  28  36  (8) (22)%  86  107  (21) (20)%

Life insurance in-force, net of reinsurance

   439,380   393,812   45,568  12%

Life insurance in-force before reinsurance

   602,725   554,472   48,253  9%

Universal and whole life insurance

               

Net earned premiums and deposits

  $143  $122  $21  17% $143 $112 $31  28% $420 $352 $68  19%

Universal life annualized first-year deposits

   11   9   2  22%  15  9  6  67%  41  28  13  46%

Universal life excess deposits

   48   19   29  153%  53  24  29  121%  142  65  77  118%

Life insurance in-force, net of reinsurance

   40,912   40,890   22  —  %

Life insurance in-force before reinsurance

   49,834   49,335   499  1%

Total life insurance

               

Net earned premiums and deposits

  $372  $335  $37  11% $374 $336 $38  11% $1,111 $1,010 $101  10%

Annualized first-year premiums

   29   34   (5) (15)%  28  36  (8) (22)%  86  107  (21) (20)%

Annualized first-year deposits

   11   9   2  22%  15  9  6  67%  41  28  13  46%

Excess deposits

   48   19   29  153%  53  24  29  121%  142  65  77  118%

Life insurance in-force, net of reinsurance

   480,292   434,702   45,590  10%

Life insurance in-force before reinsurance

   652,559   603,807   48,752  8%

 

28

   As of September 30,  Percentage
change
 

(Amounts in millions)

  2007  2006  2007 vs. 2006 

Term life insurance

      

Life insurance in-force, net of reinsurance

  $457,001  $422,163  8%

Life insurance in-force before reinsurance

   614,248   583,780  5%

Universal and whole life insurance

      

Life insurance in-force, net of reinsurance

  $41,638  $41,595  —  %

Life insurance in-force before reinsurance

   50,737   49,337  3%

Total life insurance

      

Life insurance in-force, net of reinsurance

  $498,639  $463,758  8%

Life insurance in-force before reinsurance

   664,985   633,117  5%


Term life insurance.insurance

The increase in term life insurance net earned premiums and insurance in-force was mainly due to growth of the in-force block of business.business as annualized first-year premiums exceeded lapses. Annualized first-year premiums decreased as a result of increased price competition and a shift to universal life insurance products by our distributors.

Universal and whole life insurance.insurance Universal life annualized

Annualized first-year and excess deposits in our universal life insurance increased largely from a shift from term life insurance products by our distributors and new product offerings gaining momentum in the market.momentum. The in-force block remained flat mainly as a result of the growth in universal life insurance being offset by the continued runoff of our closed block of whole life insurance.

Long-term care insurance

The following table sets forth selected financial and operating performance measures regarding our long-term care insurance business, which includes individual and group long-term care insurance, Medicare supplement insurance, a linked benefitlinked-benefits product (that combines universal life insurance and long-term care insurance product features), as well as several runoff blocks of accident and health insurance and corporate-owned life insurance for the three months ended March 31, 2007 and 2006:periods indicated:

 

    For the three months
ended March 31,
  Increase (decrease) and
percentage change
   Three months
ended September 30,
  

Increase

(decrease) and
percentage change

 

Nine months

ended September 30,

  

Increase

(decrease) and
percentage change

 

(Amounts in millions)

        2007            2006                  2007 vs. 2006                   2007          2006              2007 vs. 2006             2007          2006              2007 vs. 2006         

Net earned premiums:

                            

Long-term care

    $419    $399  $20    5%  $444  $418  $26  6% $1,293  $1,224  $69  6%

Medicare supplement and other

     66     26   40    154%   63   67   (4) (6)%  197   144   53  37%
                                          

Total

    $485    $425  $60    14%  $507  $485  $22  5% $1,490  $1,368  $122  9%
                                          

Annualized first-year premiums and deposits

    $52    $48  $4    8%  $60  $51  $9  18% $166  $150  $16  11%

The increase inNet earned premiums wasincreased primarily due to growth in the individual long-term care insurance in-force block andfrom new sales. For the three months ended September 30, 2007, Medicare supplement insurance net earned premiums growth of $44 milliondecreased mainly as a result of higher terminations. For the second quarternine months ended September 30, 2007, Medicare supplement insurance net earned premiums increased principally as a result of 2006a $64 million increase due to the Continental Life acquisition.acquisition, partially offset by higher terminations.

The increase in annualizedAnnualized first-year premiums and deposits wasincreased primarily dueattributable to growththe introduction of our linked-benefits product in our linked benefit product and our2006 with sales beginning in the fourth quarter of 2006. Our acquisition of Continental Life whichcontributed an increase of $7 million in the nine months ended September 30, 2007 and was more than offset by a decline in our existing block of Medicare supplement insurance. The decline of salesannualized first-year premiums in our existing block of Medicare supplement insurance was the result of pricing actions and limited plan withdrawals in selected markets in the second quarter of 2006.

29 Annualized first-year premiums and deposits in our long-term care insurance product were flat.


International segment

Segment results of operations

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

The following table sets forth the results of operations relating to our International segment:

 

  For the three months
ended March 31,
  Increase (decrease) and
percentage change
   Three months
ended September 30,
 

Increase

(decrease) and
percentage change

 

(Amounts in millions)

        2007              2006                    2007 vs. 2006                     2007              2006                   2007 vs. 2006             

Revenues:

             

Premiums

  $493  $422  $71  17%  $572  $454  $118  26%

Net investment income

   88   67   21  31%   131   75   56  75%

Net investment gains (losses)

   —     1   (1) (100)%   —     (1)  1  100%

Policy fees and other income

   6   9   (3) (33)%

Insurance and investment product fees and other

   8   10   (2) (20)%
                      

Total revenues

   587   499   88  18%   711   538   173  32%
                      

Benefits and expenses:

             

Benefits and other changes in policy reserves

   107   75   32  43%   126   81   45  56%

Interest credited

   —     —     —    —  %

Acquisition and operating expenses, net of deferrals

   224   208   16  8%   281   228   53  23%

Amortization of deferred acquisition costs and intangibles

   87   72   15  21%   94   73   21  29%

Interest expense

   4   —     4  NM(1)   6   —     6  NM(1)
                      

Total benefits and expenses

   422   355   67  19%   507   382   125  33%
                      

Income from continuing operations before income taxes

   165   144   21  15%   204   156   48  31%

Provision for income taxes

   42   42   —    —  %   65   49   16  33%
                      

Segment net income

   123   102   21  21%

Adjustment to segment net income:

       

Net income

   139   107   32  30%

Adjustment to net income:

      

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

   —     —     —    —  %   1   —     1  NM(1)
                      

Segment net operating income

  $123  $102  $21  21%

Net operating income

  $140  $107  $33  31%
                      

(1)

Not meaningful.We define “NM” as not meaningful for increases or decreases greater than 200%.

The following table sets forth net operating income for the productsbusinesses included in our International segment:

 

  For the three months
ended March 31,
  Increase (decrease) and
percentage change
   Three months
ended September 30,
  

Increase

(decrease) and
percentage change

 

(Amounts in millions)

      2007          2006              2007 vs. 2006                   2007                  2006                  2007 vs. 2006         

Segment net operating income:

        

Net operating income:

        

International mortgage insurance

  $94  $77  $17  22%  $110  $81  $29  36%

Payment protection insurance

   29   25   4  16%   30   26   4  15%
                      

Total segment net operating income

  $123  $102  $21  21%

Total net operating income

  $140  $107  $33  31%
                      

Segment netNet operating income

Our international mortgage insurance business net operating income increased $17

The three months ended September 30, 2007 included increases of $10 million includingand $2 million net of tax, attributable to changes in foreign exchange rates. rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was driven by growth of the business,and seasoning of our insurance in-force in Canada and a decrease in the effective tax rate. These increasesAustralia, which were partially offset by an increase in incurred losses, primarily from a limited number of Australian distribution relationships.increased loss ratio.

The increase in our payment protection insurance business net operating income was primarily associated with growth in production in continental Europe and Ireland a lower effective tax rate, a favorable claims reserve adjustment and included a $2 million increase, net of tax, attributable to changes in foreign exchange rates.continued expansion into new markets.

Revenues

Premiums

 

30


Revenues

Our international mortgage insurance premiumsbusiness increased by $42$64 million $4and our payment protection business increased $54 million.

The three months ended September 30, 2007 included increases of $16 million of which wasand $26 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was primarily as athe result of growth and seasoning of our international in-force block. increased earned premiums from new insurance written in prior years.

The increase in our payment protection insurance premiums of $29 million, including $25 million related to foreign exchange,business was primarily a result of businessattributable to growth in existingcontinental Europe and Ireland and continued expansion into new markets. Partially offsetting this increasethese increases was our runoff block of business and a decrease of $12 million as premiums related to certain reinsurance arrangements are now being accounted for as deposits (“reinsurance accounting change”) in the current year, while prior year amounts have not been reclassified. The accounting change had no impact on net income andor net operating income for all periods presented.

The increase in netNet investment income was the result of an $11 million increase in our

Our international mortgage insurance business whichincreased $39 million and our payment protection insurance business increased $17 million.

The three months ended September 30, 2007 included an increaseincreases of $1$8 million and $3 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was largely fromdue to an increase in invested assets associated with growth of the business, higher levels of capital and increased yields. In addition, we reclassified $16 million of fees associated with a government-mandated reserve for our Canadian mortgage insurance business previously presented as a reduction in net investment income to acquisition and operating expenses in the current year. The effects of this business. Additionally,reclassification were not material to the previous quarters in 2007 and prior year 2006 and were not reclassified.

The increase in our payment protection insurance business was principally attributable to an increase in yields and the reinsurance accounting change.

Insurance and investment product fees and other.The decrease was primarily a result of the elimination of the Canadian application fees in our international mortgage insurance business in the third quarter of 2006.

Benefits and expenses

Benefits and other changes in policy reserves

Our international mortgage insurance business increased $34 million and our payment protection insurance business increased $10$11 million.

The three months ended September 30, 2007 included increases of $6 million includingand $3 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was primarily driven by large blocks of insurance in-force that are seasoning and an ongoing housing slowdown in certain areas of Australia.

The increase in our payment protection insurance business was driven by continued business growth, partially offset by the effects of the reinsurance accounting change.

Acquisition and operating expenses, net of deferrals

Our international mortgage insurance business increased $22 million and our payment protection insurance business increased $31 million.

The three months ended September 30, 2007 included increases of $4 million and $15 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was primarily driven by a $16 million reclassification of fees associated with the government-mandated reserve for our Canadian mortgage insurance business from net investment income in the current year.

The increase in our payment protection insurance business was principally driven by an increase in commissions relating to growth in the business, partially offset by the effects of the reinsurance accounting change.

Amortization of deferred acquisition costs and intangibles

Our international mortgage insurance business increased $3 million and our payment protection insurance business increased $18 million.

The three months ended September 30, 2007 included increases of $1 million and $7 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was mainly due to amortization of deferred acquisition costs from the growth and seasoning of our insurance in-force.

The increase in our payment protection insurance business was primarily from an increase in structured transactions, partially offset by the effects of the reinsurance accounting change.

Interest expense.The increase was primarily due to new deposit method reinsurance arrangements in our payment protection insurance business.

Provision for income taxes.The effective tax rate increased to 31.9% for the three months ended September 30, 2007 from 31.4% for the three months ended September 30, 2006. This increase in the effective tax rate was primarily attributable to unfavorable examination developments offset by lower taxed foreign income. The provision for income taxes also included a $5 million increase attributable to changes in foreign exchange rates.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

The following table sets forth the results of operations relating to our International segment:

   Nine months
ended September 30,
  Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007          2006                  2007 vs. 2006             

Revenues:

      

Premiums

  $1,574  $1,349  $225  17%

Net investment income

   332   213   119  56%

Net investment gains (losses)

   (5)  —     (5) NM(1)

Insurance and investment product fees and other

   21   31   (10) (32)%
              

Total revenues

   1,922   1,593   329  21%
              

Benefits and expenses:

      

Benefits and other changes in policy reserves

   345   236   109  46%

Acquisition and operating expenses, net of deferrals

   734   662   72  11%

Amortization of deferred acquisition costs and intangibles

   267   228   39  17%

Interest expense

   20   —     20  NM(1)
              

Total benefits and expenses

   1,366   1,126   240  21%
              

Income from continuing operations before income taxes

   556   467   89  19%

Provision for income taxes

   155   139   16  12%
              

Net income

   401   328   73  22%

Adjustment to net income:

      

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

   4   —     4  NM(1)
              

Net operating income

  $405  $328  $77  23%
              

(1)

We define “NM” as not meaningful for increases or decreases greater than 200%.

The following table sets forth net operating income for the businesses included in our International segment:

   Nine months
ended September 30,
  Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007          2006            2007 vs. 2006       

Net operating income:

        

International mortgage insurance

  $311  $248  $63  25%

Payment protection insurance

   94   80   14  18%
              

Total net operating income

  $405  $328  $77  23%
              

Net operating income

The nine months ended September 30, 2007 included increases of $18 million and $7 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was driven by growth and seasoning of our insurance in-force in Canada and Australia, as well as a decrease in the effective tax rate. These increases were partially offset by large blocks of insurance in-force that are seasoning and an ongoing housing slowdown in certain areas of Australia.

The increase in our payment protection insurance business was primarily associated with growth in production in continental Europe, Ireland and new markets, an increase in structured transactions and a decrease in the effective tax rate.

Revenues

Premiums

Our international mortgage insurance business increased $150 million and our payment protection insurance business increased $75 million.

The nine months ended September 30, 2007 included increases of $33 million and $74 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was primarily a result of growth and seasoning of our international in-force block, which resulted in increased earned premiums from prior years new insurance written.

The increase in our payment protection insurance business was primarily attributable to imputedan increase in structured transactions, growth in continental Europe and Ireland and continued expansion into new markets. These increases were offset by our runoff block of business and the reinsurance accounting change.

Net investment income

Our international mortgage insurance business increased $71 million and our payment protection insurance business increased $48 million.

The nine months ended September 30, 2007 included increases of $13 million and $8 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was largely due to an increase in invested assets associated with the business, higher levels of capital, increased yields and a $16 million reclassification of fees associated with a government-mandated reserve for our Canadian mortgage insurance business previously presented as a reduction in net investment income to acquisition and operating expenses in the current year.

The increase in our payment protection insurance business was principally attributable to income related to a reinsurance programgrowth in business accounted for under the deposit method, entered into after the first quarter of 2006increased yields and the effects of the reinsurance accounting change.

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

product fees and other.The decrease in policy fees and other incomewas primarily relatesdue to the elimination of Canadian application fees in our international mortgage insurance business in the third quarter of 2006.

Benefits and expenses

Our international mortgage insurance benefitsBenefits and other changes in policy reserves

Our international mortgage insurance business increased $22$91 million including a $2 million increase attributable to changes in foreign exchange rates. The increase was primarily the result of the seasoning ofand our international in-force blocks of business and increased losses from a limited number of Australian distribution relationships. Our payment protection insurance business benefitsincreased $18 million.

The nine months ended September 30, 2007 included increases of $13 million and other changes in policy reserves increased $10 million including a $4 million increase attributable to changes in foreign exchange rates principally from a reduction of claim reservesfor our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our runoff blockinternational mortgage insurance business was primarily a result of large blocks of insurance in-force that are seasoning and an ongoing housing slowdown in 2006 that did not recur, partially offsetcertain areas of Australia.

The increase in our payment protection insurance business was driven by a favorable current year claims reserve adjustment. These increases werecontinued business growth, partially offset by the effects of the reinsurance accounting change and a decrease in paid claims.change.

Our payment protection insurance business acquisition

Acquisition and operating expenses, net of deferrals

Our international mortgage insurance business increased $9$31 million largely dueand our payment protection insurance business increased $41 million.

The nine months ended September 30, 2007 included increases of $7 million and $43 million attributable to a $14 million increasechanges in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business was principally driven by our continued investment in our existing international platforms and potential new international platforms and a reclassification of fees associated with the government-mandated reserve for our Canadian mortgage insurance business from net investment income in the current year. These increases were partially offset by the elimination of Canadian application fees in the third quarter of 2006.

The increase in our payment protection insurance business was largely attributable to an increase in paid commissions relating to growth in the business, partially offset by a decrease in commissions on the runoff block of business. Our international mortgage insurance increased by $7 million, including a $1 million increase attributable to changes in foreign exchange rates. This increase was principally driven by our continued investment in our existing international platformbusiness and potential new international platforms.from the effects of the reinsurance accounting change.

Our payment protection insurance business amortizationAmortization of deferred acquisition costs and intangibles

Our international mortgage insurance business increased $12$11 million primarily from a $7and our payment protection insurance business increased $28 million.

The nine months ended September 30, 2007 included increases of $2 million increaseand $19 million attributable to changes in foreign exchange rates for our international mortgage insurance and the effects of the reinsurance accounting change. payment protection insurance businesses, respectively.

The increase in our international mortgage insurance business of $3 million was mainly due to the growth and seasoning of our insurance in-force.

The increase in our payment protection insurance business was primarily from an increase in structured transactions, partially offset by the effects of the reinsurance accounting change.

Interest expense.The increase was primarily due to new deposit method reinsurance arrangements in our payment protection insurance business.

Provision for income taxestaxes.

Provision for income taxes remained flat and included a $1 million increase attributable to changes in foreign exchange rates. The effective tax rate decreased to 25.5%27.9% for the threenine months ended March 31,September 30, 2007 from 29.2%29.8% for the threenine months ended March 31,September 30, 2006. This decrease in the effective tax rate was primarily attributable to the increase in lower taxed foreign earnings.income. The provision for income taxes also included a $9 million increase attributable to changes in foreign exchange rates.

31


International selected financial and operating performance measures

International mortgage insurance

The following table setstables set forth selected financial and operating performance measures regarding our international mortgage business as of or for the dates indicated:

 

  As of or for the three
months ended March 31,
  

Increase (decrease) and    

percentage change    

   As of September 30,  Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007          2006              2007 vs. 2006                   2007          2006                          2007 vs. 2006                      

Primary insurance in-force

  $360,900  $256,800  $104,100  41%  $461,900  $319,600  $142,300  45%

Risk in-force

   113,600   82,800   30,800  37%   146,800   102,700   44,100  43%

New insurance written

   28,200   20,400   7,800  38%

Net premiums written

   322   204   118  58%

Net premiums earned

   173   131   42  32%

   Three months ended
September 30,
      Increase (decrease) and
percentage change
  Nine months ended
September 30,
      Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007          2006              2007 vs. 2006              2007          2006              2007 vs. 2006         

New insurance written

  $36,200  $28,700  $7,500  26% $108,900  $70,800  $38,100  54%

Net premiums written

   452   311   141  45%  1,202   759   443  58%

Net premiums earned

   208   144   64  44%  576   426   150  35%

Primary insurance in-force and risk in-force

The increases in primary insurance in-force and risk in-force were primarily the result of new insurance written as we continue to execute our global expansion strategy. Our international mortgage insurance primary insurance in-force increased $104.1 billion, of which $21.2 billion was attributable to changes in foreign exchange rates, as we continue to expand our market share.

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 and nine months ended March 31,September 30, 2007 and 2006, this factor was 35%.

NewPrimary insurance written

Internationalin-force and risk in-force increased primarily as a result of an increase in new insurance written increased $7.8as we continue to execute our global expansion strategy and expand our market share and size. Our international mortgage insurance primary insurance in-force and risk in-force included increases of $59.0 billion which included an increase of $1.0and $19.3 billion attributable to changes in foreign exchange rates relatedfor the nine months ended September 30, 2007, respectively.

New insurance written

New insurance written increased attributable to growth in international flow and bulk new insurance written resulting fromprimarily as a result of continued account penetration in Canada, the ongoing expansion of our customer base in Europe, and higher bulk new insurance written in Australia Europe and Japan. Flowgrowth in new insurance writtenmarkets. The three and nine months ended September 30, 2007 included increases of $3.1 billion and $7.0 billion attributable to changes in Australia for 2006 included a catch-up of sales reported to us caused by a delay in timing of customer reporting.foreign exchange rates, respectively.

Net premiums written and net premiums earned

The increase in netNet premiums written wasincreased primarily due to increases in new insurance written in our international mortgage insurance business. The increase, whichthree and nine months ended September 30, 2007 included an increaseincreases of $7$34 million and $65 million attributable to changes in foreign exchange rates, was primarily from our Canadian, European and other international platforms.respectively.

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 premiums earned over time in accordance with the expected pattern of risk emergence. As of March 31,September 30, 2007, our unearned premium reserves in our international mortgage insurance business increased to $2.5$3.3 billion, from $1.9including $0.4 billion as of March 31, 2006.

The increase in net premiums earned, $4 million of which was attributable to changes in foreign exchange rates, wasfrom $2.3 billion as of September 30, 2006.

Net premiums earned increased primarily as a result of growth and seasoning of our internationalinsurance in-force block. The three and nine months ended September 30, 2007 included increases of $16 million and $33 million attributable to changes in foreign exchange rates, respectively.

32


Loss and expense ratios

 

  For the three months
ended March 31,
     Increase (decrease)       Three months
ended September 30,
 Increase (decrease) Nine months
ended September 30,
 Increase (decrease) 
      2007         2006     2007 vs. 2006       2007         2006             2007 vs. 2006             2007         2006             2007 vs. 2006         

Loss ratio

  29% 21% 8%  32% 22% 10% 31% 20% 11%

Expense ratio

  16% 21% (5)%  16% 16% —  % 15% 19% (4)%

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net premiums earned. The expense ratio is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition cost and intangibles.

TheFor the three and nine months ended September 30, 2007, the increase in the loss ratio increased 8 percentage points principally fromwas attributable to higher incurred losses primarily as a result of large blocks of insurance in-force that are seasoning and an ongoing housing slowdown in Australia primarily from a limited numbercertain areas of Australian distribution relationships.Australia.

For the threenine months ended March 31,September 30, 2007, the decrease in the expense ratio was primarily attributable tothe result of higher net premiums written growthprimarily in our international mortgage insurance business and higher deferrals of acquisition costs in Canada, for 2007, partially offset by an increase in costs in our existing international platforms and continued investment in potential new platforms.

Loans in default and claims

The following table sets forth the number of loans insured, the number of loans in default and the default rate for our international mortgage insurance platforms.portfolio:

   As of September 30, 2007  As of December 31, 2006 

Primary insurance

   

Insured loans in-force

  2,777,471  2,437,746 

Loans in default

  13,038  10,126 

Percentage of loans in default (default rate)

  0.47% 0.42%

Flow loans in-force

  2,285,980  2,156,641 

Flow loans in default

  12,165  9,671 

Percentage of flow loans in default (default rate)

  0.53% 0.45%

Bulk loans in-force

  491,491  281,105 

Bulk loans in default(1)

  873  455 

Percentage of bulk loans in default (default rate)

  0.18% 0.16%

(1)

Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk loans in default were 685 and 324 as of September 30, 2007 and December 31, 2006, respectively.

Primary flow and bulk loans in-force increased largely as a result of our continued growth in seasoned and new markets. In addition, loans in default increased primarily as a result of the growth and seasoning of our insurance in-force.

Payment protection insurance

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

 

  For the three months
ended March 31,
  Increase (decrease) and
percentage change
  Three months
ended September 30,
 Increase (decrease) and
percentage change
 

Nine months

ended
September 30,

 Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007          2006                2007 vs. 2006                    2007                 2006                 2007 vs. 2006             2007         2006         2007 vs. 2006     

Payment protection insurance gross written premiums, premium equivalents and deposits

  $586  $419  $167  40% $654 $552 $102 18% $2,108 $1,471 $637 43%

Mexico operations gross written premiums

   19   16   3  19%  19  18  1 6%  56  49  7 14%

Net earned premiums

   320   291   29  10%  364  310  54 17%  998  923  75 8%

Gross written premiums, premium equivalents and deposits

The increase in gross written premiums, premium equivalents and deposits, gross of ceded reinsurance and cancellations, for the firstthird quarter of 2007 was largely attributablerelated to increased sales growth in continental Europe and Ireland and strongcontinued market penetration in Poland. In addition, thePoland, Greece and Mexico. The 2007 production reflects several reinsurance assumed arrangements accounted for under the deposit method entered into in the second half of 2006 and the first half of 2007, which cover Canadian and U.K. risks. Additionally, we entered into a significant structured transaction with a lender in the U.K. in the second quarter of 2007 resulting in written premiums of $199 million. The three and nine months ended March 31,September 30, 2007 included an increaseincreases of $47$49 million and $161 million, respectively, attributable to changes in foreign exchange rates.

Net earned premiums

For the three months ended September 30, 2007, net earned premiums for our payment protection insurance business increased $29principally attributable to business growth in continental Europe and Ireland and continued market penetration in Poland, Greece and Mexico. Partially offsetting these increases was the reinsurance accounting change and our runoff block of business.

For the nine months ended September 30, 2007, our payment protection insurance business increased $75 million including $25 million related to foreign exchange, primarily as a result of business growth in existing continental European markets and new markets. Partially offsetting this increase was a decrease of $12 million in premiums related to the effects ofmarkets, partially offset by the reinsurance accounting change.change and our runoff block of business.

33


U.S. Mortgage Insurance segment

Segment results of operations

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment:

 

  For the three months
ended March 31,
  Increase (decrease) and
percentage change
  Three months
ended September 30,
     Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007          2006                  2007 vs. 2006                    2007             2006                 2007 vs. 2006           

Revenues:

           

Premiums

  $137  $116  $21  18% $159  $118 $41  35%

Net investment income

   37   35   2  6%  38   34  4  12%

Net investment gains (losses)

   —     —     —    —  %  1   1  —    —  %

Policy fees and other income

   7   5   2  40%

Insurance and investment product fees and other

  8   7  1  14%
                    

Total revenues

   181   156   25  16%  206   160  46  29%
                    

Benefits and expenses:

           

Benefits and other changes in policy reserves

   52   19   33  174%  123   44  79  180%

Acquisition and operating expenses, net of deferrals

   32   33   (1) (3)%  30   37  (7) (19)%

Amortization of deferred acquisition costs and intangibles

   8   8   —    —  %  10   9  1  11%
                    

Total benefits and expenses

   92   60   32  53%  163   90  73  81%
                    

Income from continuing operations before income taxes

   89   96   (7) (7)%  43   70  (27) (39)%

Provision for income taxes

   24   24   —    —  %  3   17  (14) (82)%
                    

Segment net income

   65   72   (7) (10)%

Adjustments to segment net income:

       

Net income

  40   53  (13) (25)%

Adjustment to net income:

    

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

   —     —     —    —  %  (1)  —    (1) NM(1)
                    

Segment net operating income

  $65  $72  $(7) (10)%

Net operating income

 $39  $53 $(14) (26)%
                    

(1)

We define “NM” as not meaningful for increases or decreases greater than 200%.

Segment netNet operating income

Segment netNet operating income decreased primarily from increasedas a result of an increase in losses and a higher effective tax rate,incurred, partially offset by an increase in premiums from the growth of our primary insurance in-force block.block, premiums assumed through our inter-segment reinsurance arrangement and a lower effective tax rate.

Revenues

The increase in premiums was primarily fromPremiums increased as a result of an increase in demand for flow private mortgage insurance and our bulk product writingsexpansion of market share. The demand for flow private mortgage insurance increased as a result of several market conditions including: increased regulatory and market focus on credit risk, ongoing tightening of underwriting standards, an increase in the volume of mortgages purchased by GSEs, the return to traditional fixed-rate mortgages resulting in a decline in simultaneous second mortgages and mortgage insurance tax deductibility. In addition, our flow insurance in-force of $17persistency rose to 82% for the three months ended September 30, 2007 from 74% for the same period last year due to higher mortgage interest rates and negative home price appreciation. Premiums also increased $4 million and $3 million related tofrom higher premiums assumed from our international mortgage insurance business through our inter-segment reinsurance arrangement.

The increase in net investment income was the result of favorable pre-tax yields related to portfolio repositioning from tax-exempt securities to predominantly domestic taxable securities as part of our continued after-tax yield enhancement strategy.

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

Benefits and expenses

The increase in benefitsBenefits and other changes in policy reserves was primarily attributableincreased due to anhigher incurred losses as the result of a $13 million increase in ourpaid claims compared to the third quarter of 2006 and a $75 million net change in reserves during the third quarter of 2007. The increase in paid losses was the result of higher claim counts and increased average reserve per delinquency associated withclaim payments as higher loan balances go to claim. The increase in more recent books of businessreserves was driven primarily by higher delinquencies and aging of delinquent loansforeclosures, especially in Florida, California, Arizona and Nevada, as awell as in our A minus and Alt-A products.

Acquisition and operating expenses decreased due to lower indemnity liabilities for contract underwriting claims as the result of further weakeningupdating of the assumptions used to calculate indemnity liabilities and a decrease in home price appreciation.employee related expenses.

34


Provision for income taxestaxes.

The effective tax rate increaseddecreased to 27.0%7.0% for the three months ended March 31,September 30, 2007 from 25.0%24.3% for the three months ended March 31,September 30, 2006. This increasedecrease in the effective tax rate was primarily attributable to the proportion of tax-exempt investment income compared to lower expected pre-tax income.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment:

   

Nine months

ended September 30,

  

    Increase

(decrease) and
percentage change    

 

(Amounts in millions)

      2007          2006                  2007 vs. 2006             

Revenues:

     

Premiums

  $444  $350  $94  27%

Net investment income

   111   106   5  5%

Net investment gains (losses)

   1   2   (1) (50)%

Insurance and investment product fees and other

   25   20   5  25%
              

Total revenues

   581   478   103  22%
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   235   87   148  170%

Acquisition and operating expenses, net of deferrals

   96   104   (8) (8)%

Amortization of deferred acquisition costs and intangibles

   26   24   2  8%
              

Total benefits and expenses

   357   215   142  66%
              

Income from continuing operations before income taxes

   224   263   (39) (15)%

Provision for income taxes

   53   65   (12) (18)%
              

Net income

   171   198   (27) (14)%

Adjustment to net income:

     

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

   (1)  (1)  —    —  %
              

Net operating income

  $170  $197  $(27) (14)%
              

Net operating income

Net operating income decreased as a result of an increase in losses, partially offset by an increase in premiums primarily from the growth of our primary insurance in-force block and premiums assumed through our inter-segment reinsurance arrangement and a lower effective tax rate.

Revenues

Premiums increased primarily as a result of an increase in demand for flow private mortgage insurance, our expansion of market share and higher persistency of our in-force block. Flow persistency rose to 78% for the nine months ended September 30, 2007 from 72% for the same period last year. Premiums also increased $10 million from higher premiums assumed from our international mortgage insurance business through our inter-segment reinsurance arrangement.

The increase in net investment income was the result of favorable pre-tax yields related to portfolio repositioning from tax-exempt securities to predominantly domestic taxable securities as part of our continued after-tax yield enhancement strategy.

Insurance and investment product fees and other increased primarily due to a $3 million increase in income from our capital maintenance agreement with our European international mortgage insurance business.

Benefits and expenses

Benefits and other changes in policy reserves increased due to higher incurred losses as the result of a $28 million increase in paid claims compared to the prior year and a $108 million net change in reserves during the nine months ended September 30, 2007. The increase in paid losses was the result of higher claim counts and increased average claim payments as higher loan balances go to claim. The increase in reserves was driven primarily by higher delinquencies and foreclosures, especially in Florida, California, Arizona and Nevada, as well as in our A minus and Alt-A products.

Acquisition and operating expenses decreased due to a reduction in contract underwriting liabilities as a result of an assumption update and a decrease in employee related expenses.

Provision for income taxes.The effective tax rate decreased to 23.7% for the nine months ended September 30, 2007 from 24.7% for the nine months ended September 30, 2006. This decrease in the effective tax rate was primarily attributable to the proportion of tax-exempt investment income in 2007.compared to lower pre-tax income.

U.S. Mortgage Insurance selected financial and operating performance measures

The following table setstables set forth selected financial and operating performance measures regarding our U.S. mortgage insurance business as of or for the dates indicated:

 

  As of or for the three
months ended March 31,
  Increase (decrease) and
percentage change
   As of September 30,  

            Increase            

(decrease) and
percentage change

 

(Amounts in millions)

        2007              2006                    2007 vs. 2006                 2007      2006            2007 vs. 2006           

Primary insurance in-force

  $120,500  $100,500  $20,000  20%  $144,800  $104,000  $40,800  39%

Risk in-force

   24,400   22,300   2,100  9%   28,500   23,000   5,500  24%

New insurance written

   13,100   6,800   6,300  93%

Net premiums written

   140   115   25  22%

  Three months
ended September 30,
 

            Increase            

(decrease) and

percentage change

  

Nine months

ended September 30,

 

            Increase            

(decrease) and
percentage change

 

(Amounts in millions)

       2007         2006           2007 vs. 2006            2007     2006           2007 vs. 2006             

New insurance written

 $16,100 $8,200 $7,900 96% $51,300 $23,200 $28,100 121%

Net premiums written

  167  121  46 38%  459  355  104 29%

Primary insurance in-force and risk in-force

The increases in primaryPrimary insurance in-force and risk in-force wereincreased primarily as a result of new insurance written and higher policy persistency combined with new insurance written.persistency. Our flow persistency was 78% and 72% for the threenine months ended March 31,September 30, 2007 and 2006, respectively. We believe that the increased demand for private mortgage insurance, sustained higher interest rates, increased persistency and our ongoing growth strategy will lead to growing levels of insurance in-force. Primary insurance in-force increased $20.0 billion to $120.5 billion as of March 31, 2007. ThisThe increase in primary insurance in-force reflects an increase in our flow and bulk product writings.writings largely attributable to increased market penetration.

New insurance written

New insurance written increased due toas a result of an increase in demand for flow private mortgage insurance, our targeted bulk writings as well as anexpansion of market share and the selective increase in our flow new insurance written.bulk writings.

Net premiums written

The increase in netNet premiums written wasincreased principally from growth in primary insurance in-force and higher sales of our single premium product and an increase in reinsurance premiums assumed from our international mortgage insurance business.policy persistency.

Loss and expense ratios

 

  For the three months
ended March 31,
 Increase (decrease)  Three months
ended September 30,
 Increase (decrease) Nine months
ended September 30,
 Increase (decrease) 
      2007         2006             2007 vs. 2006                2007             2006             2007 vs. 2006             2007             2006             2007 vs. 2006       

Loss ratio

  38% 16% 22% 78% 37% 41% 53% 25% 28%

Expense ratio

  29% 36% (7)% 24% 37% (13)% 27% 36% (9)%

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net premiums earned. The expense ratio is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition costs and intangibles.

For the three and nine months ended March 31,September 30, 2007, the increase in the loss ratio increased 22 percentage points over the three month period ended March 31, 2006was primarily attributable to an increase in our average reserve per delinquency associated with higher loan balances in more recent booksthe number of business and aging of delinquent loansdelinquencies as a result of growing levels of insurance in-force, a further weakening in home price appreciation.appreciation and loss development in certain high loan balance states.

35


For the three and nine months ended March 31,September 30, 2007, the expense ratio decreased 7 percentage points over the three month period ended March 31, 2006 resulting fromas a result of maintaining flat expense levels from improved productivity while net premiums written increased primarily from growth in primary insurance in-force, growth.favorable policy persistency and increased market penetration.

Loans in default and claims

The following table sets forth the number of loans insured, the number of loans in default and the default rate for our U.S. mortgage insurance portfolio:

   As of September 30,
2007
  As of December 31,
2006
  As of September 30,
2006
 

Primary insurance

    

Insured loans in-force

  905,412  778,311  744,867 

Loans in default

  30,756  24,296  23,083 

Percentage of loans in default (default rate)

  3.40% 3.12% 3.10%

Flow loans in-force

  715,970  638,833  631,181 

Flow loans in default

  27,609  22,966  22,001 

Percentage of flow loans in default (default rate)

  3.86% 3.59% 3.49%

Bulk loans in-force

  189,442  139,478  113,686 

Bulk loans in default(1)

  3,147  1,330  1,082 

Percentage of bulk loans in default (default rate)

  1.66% 0.95% 0.95%

A minus and sub-prime loans in-force

  100,512  75,234  72,678 

A minus and sub-prime loans in default

  9,632  7,258  6,773 

Percentage of A minus and sub-prime loans in default (default rate)

  9.58% 9.65% 9.32%

Pool insurance

    

Insured loans in-force

  21,118  21,597  17,926 

Loans in default

  442  402  446 

Percentage of loans in default (default rate)

  2.09% 1.86% 2.49%

(1)

Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk loans in default were 1,338 as of September 30, 2007, 386 as of December 31, 2006 and 367 as of September 30, 2006.

Primary flow and bulk loans in-force increased as a result of strong market growth, increased flow and bulk new insurance written and higher persistency levels. In addition, loans in default increased due to an increase in delinquencies and foreclosures from certain high loan balance states, as well as an increase in our A minus and Alt-A products.

Primary insurance default rates differ from region to region in the U.S. at any one time depending upon economic conditions and cyclical growth patterns. The two tables below set forth our primary default rates for the various regions of the U.S. and the ten largest states by our risk in-force as of the dates indicated.

   Percent of primary
risk in-force as of
September 30, 2007
  Default rate 
    September 30,
2007
  December 31,
2006
  September 30,
2006
 

U.S. Regions

     

Southeast(1)

  25% 4.05% 3.36% 3.28%

South Central(2)

  17  2.97% 3.18% 3.31%

Northeast(3)

  13  3.49% 3.34% 3.29%

North Central(4)

  12  3.14% 2.80% 2.69%

Pacific(5)

  10  2.19% 1.44% 1.51%

Great Lakes(6)

  9  4.86% 4.75% 4.63%

Plains(7)

  6  2.57% 2.52% 2.34%

New England(8)

  4  2.95% 2.66% 2.67%

Mid-Atlantic(9)

  4  2.65% 2.21% 2.21%
       

Total

  100% 3.40% 3.12% 3.10%
       

(1)

Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee.

(2)

Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah.

(3)

New Jersey, New York and Pennsylvania.

(4)

Illinois, Minnesota, Missouri and Wisconsin.

(5)

Alaska, California, Hawaii, Nevada, Oregon and Washington.

(6)

Indiana, Kentucky, Michigan and Ohio.

(7)

Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming.

(8)

Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

(9)

Delaware, Maryland, Virginia, Washington, D.C. and West Virginia.

   Percent of primary
risk in-force as of
September 30, 2007
  Default Rate 
    September 30,
2007
  December 31,
2006
  

September 30,

2006

 

Florida

  9% 4.38% 2.17% 1.95%

Texas

  7% 3.41% 3.89% 4.04%

New York

  6% 2.79% 2.59% 2.51%

Illinois

  5% 3.42% 3.08% 2.84%

California

  4% 2.35% 0.99% 0.96%

Georgia

  4% 4.65% 4.22% 4.16%

North Carolina

  4% 3.65% 4.04% 3.96%

Pennsylvania

  4% 4.23% 4.47% 4.44%

Ohio

  3% 4.91% 4.96% 4.84%

New Jersey

  3% 3.79% 3.14% 3.05%

Corporate and Other

Our Corporate and Other activities consist primarilyResults of unallocated corporate income and expenses (including amounts incurred in settlement of class action lawsuits), elimination of inter-segment transactions, the results of a small, non-core business that is managed outside our operating segments, most of our interest and other financing expenses and unallocated net investment gains (losses).Operations

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

The following table sets forth the results of operations relating to Corporate and Other:Other activities:

 

  For the three months
ended March 31,
 Increase (decrease) and
percentage change
   Three months
ended September 30,
 Increase (decrease) and
percentage change
 

(Amounts in millions)

        2007             2006                     2007 vs. 2006                     2007             2006                   2007 vs. 2006             

Revenues:

          

Premiums

  $7  $7  $—    —  %  $8  $10  $(2) (20)%

Net investment income

   15   33   (18) (55)%   12   20   (8) (40)%

Net investment gains (losses)

   —     (18)  18  100%   (11)  —     (11) NM(1)

Policy fees and other income

   2   2   —    —  %

Insurance and investment product fees and other

   —     1   (1) (100)%
                      

Total revenues

   24   24   —    —  %   9   31   (22) (71)%
                      

Expenses:

          

Benefits and other changes in policy reserves

   —     1   (1) (100)%   —     1   (1) (100)%

Acquisition and operating expenses, net of deferrals

   21   6   15  NM(1)   9   25   (16) (64)%

Amortization of deferred acquisition costs and intangibles

   14   1   13  NM(1)   2   2   —    —  %

Interest expense

   60   56   4  7%   59   51   8  16%
                      

Total benefits and expenses

   95   64   31  48%   70   79   (9) (11)%
                      

Loss from continuing operations before income taxes

   (71)  (40)  (31) (78)%   (61)  (48)  (13) (27)%

Benefit for income taxes

   (24)  (13)  (11) (85)%   (21)  (15)  (6) (40)%
                      

Loss from continuing operations

   (47)  (27)  (20) (74)%   (40)  (33)  (7) (21)%

Adjustments to loss from continuing operations:

     

Adjustment to loss from continuing operations:

     

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

   —     12   (12) (100)%   6   —     6  NM(1)

Expenses related to reorganization, net of taxes

   14   —     14  NM(1)
                      

Net operating loss

  $(33) $(15) $(18) (120)%  $(34) $(33) $(1) (3)%
                      

(1)

Not meaningful.We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating loss

The increase in the net operating loss was primarily attributable to lower net investment income, higherlower unallocated expenses and higher interest expense.

expense due to an additional debt issuance in the fourth quarter of 2006. Lower net investment income was attributable to lower unallocated limited partnership distributions. This increase was partially offset by an increase in income tax benefit driven by an increase in pre-tax loss and favorable examination developments, which included state income taxes.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

The following table sets forth the results of operations relating to Corporate and Other activities:

   Nine months
ended September 30,
  Increase (decrease) and
percentage change
 

(Amounts in millions)

        2007              2006                    2007 vs. 2006             

Revenues:

     

Premiums

  $20  $24  $(4) (17)%

Net investment income

   42   68   (26) (38)%

Net investment gains (losses)

   (12)  (21)  9  43%

Insurance and investment product fees and other

   1   5   (4) (80)%
              

Total revenues

   51   76   (25) (33)%
              

Expenses:

     

Benefits and other changes in policy reserves

   1   3   (2) (67)%

Acquisition and operating expenses, net of deferrals

   40   46   (6) (13)%

Amortization of deferred acquisition costs and intangibles

   17   4   13  NM(1)

Interest expense

   182   160   22  14%
              

Total benefits and expenses

   240   213   27  13%
              

Loss from continuing operations before income taxes

   (189)  (137)  (52) (38)%

Benefit for income taxes

   (65)  (42)  (23) (55)%
              

Loss from continuing operations

   (124)  (95)  (29) (31)%

Adjustments to loss from continuing operations:

     

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

   6   13   (7) (54)%

Expenses related to reorganization, net of taxes

   14   —     14  NM(1)
              

Net operating loss

  $(104) $(82) $(22) (27)%
              

(1)

We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating loss

The increase in the net operating loss was primarily attributable to lower net investment income, lower unallocated expenses and higher interest expense. Lower net investment income was attributable to lower unallocated limited partnership distributions and lower unallocated investments, partially offset by an increase in yields.

investments. The increase in interest expense was due to an additional debt issuance in the fourth quarter of 2006, partially offset by the derecognition of borrowings related to securitization entities in the first quarter of 2006. This increase was partially offset by an increase in income tax benefit driven by an increase in pre-tax loss and favorable examination developments, which included state income taxes.

The non-operating expenses related to reorganization consisted of a $13 million impairment of internal-use software and $8 million of severance and other employee termination related expenses.

The increaseexpenses in income tax benefit was driven by an increase in pre-tax loss.

36the first quarter of 2007.


Investments and Derivative Instruments

Investment results

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

 

  For the three months
ended March 31,
 Increase (decrease)   Three months
ended September 30,
 Increase (decrease) 
  2007 2006 2007 vs. 2006   2007 2006 2007 vs. 2006 

(Amounts in millions)

      Yield         Amount         Yield         Amount         Yield         Amount           Yield         Amount         Yield         Amount         Yield         Amount     

Fixed maturities—taxable

  5.9% $774  5.7% $708  0.2% $66   6.1% $821  5.8% $724  0.3% $97 

Fixed maturities—non-taxable

  4.8%  25  4.4%  31  0.4%  (6)  4.8%  26  4.7%  32  0.1%  (6)

Commercial mortgage loans

  6.2%  130  6.3%  119  (0.1)%  11   6.4%  142  6.2%  125  0.2%  17 

Equity securities

  15.2%  7  12.3%  7  2.9%  —     13.4%  6  15.9%  6  (2.5)%  —   

Other investments

  5.4%  10  10.5%  11  (5.1)%  (1)

Other invested assets

  15.7%  37  6.7%  9  9.0%  28 

Policy loans

  9.0%  34  8.8%  30  0.2%  4   9.0%  36  8.5%  32  0.5%  4 

Restricted investments held by securitization entities

  —  %  —    8.2%  7  (8.2)%  (7)

Cash, cash equivalents and short-term investments

  4.6%  27  3.6%  17  1.0%  10   3.6%  28  4.0%  23  (0.4)%  5 
                          

Gross investment income before expenses and fees

  5.9%  1,007  5.8%  930  0.1%  77   6.2%  1,096  5.8%  951  0.4%  145 

Expenses and fees

  (0.1)%  (23) (0.1)%  (18) —  %  (5)  (0.1)%  (22) (0.1)%  (19) —  %  (3)
                          

Net investment income

  5.8% $984  5.7% $912  0.1% $72   6.1% $1,074  5.7% $932  0.4% $142 
                          

   Nine months
ended September 30,
  Increase (decrease) 
   2007  2006  2007 vs. 2006 

(Amounts in millions)

      Yield          Amount          Yield          Amount          Yield          Amount     

Fixed maturities—taxable

  6.0% $2,387  5.8% $2,152  0.2% $235 

Fixed maturities—non-taxable

  4.8%  77  4.6%  94  0.2%  (17)

Commercial mortgage loans

  6.3%  406  6.4%  380  (0.1)%  26 

Equity securities

  14.5%  20  13.7%  20  0.8%  —   

Other invested assets

  10.8%  69  9.0%  32  1.8%  37 

Policy loans

  9.1%  106  8.8%  94  0.3%  12 

Restricted investments held by securitization entities

  —  %  —    5.4%  7  (5.4)%  (7)

Cash, cash equivalents and short-term investments

  4.3%  87  3.8%  60  0.5%  27 
                

Gross investment income before expenses and fees

  6.0%  3,152  5.8%  2,839  0.2%  313 

Expenses and fees

  (0.1)%  (70) (0.1)%  (55) —  %  (15)
                

Net investment income

  5.9% $3,082  5.7% $2,784  0.2% $298 
                

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,invested assets, are calculated net of the corresponding securities lending liability. All other yields are based on average carrying values.

TheFor the three months ended September 30, 2007, the increase in overall investment yields was primarily attributable to increased investment income from limited partnership investments, bond calls and commercial mortgage loan prepayments and increased yields on floating rate investments supporting floating rate policyholder and non-recourse funding liabilities. During the third quarter of 2007, we reclassified fees associated with a government-mandated reserve for our Canadian mortgage insurance business previously presented as a reduction in net investment income to acquisition and operating expenses.

For the nine months ended September 30, 2007, the increase in overall investment yields was primarily attributable to increased income from limited partnership investments, bond calls and commercial mortgage loan prepayments and increased yields on floating rate investments supporting floating rate policyholder and non-recourse funding liabilities. During the third quarter of 2007, we reclassified fees associated with a government-mandated reserve for our Canadian mortgage insurance business previously presented as a reduction in net investment income to acquisition and operating expenses. This increase was partially offset by a decline in yield related to commercial mortgage loans primarily as a result of a favorable adjustment to our commercial mortgage loan loss reserves in the prior year.

The following table sets forth net investment gains (losses) for the three months ended March 31:periods indicated:

 

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

(Amounts in millions)

      2007         2006           2007         2006         2007         2006     

Available-for-sale securities:

        

Realized gains on sale

  $6  $22   $3  $11  $11  $41 

Realized losses on sale

   (23)  (26)   (19)  (19)  (78)  (95)

Impairments

   —     (1)   (25)  (1)  (39)  (6)

Loss on derecognition of securitization entities

   —     (17)   —     —     —     (17)

Net unrealized gains (losses) on trading securities

   2   —      (4)  —     (3)  (1)

Derivatives

   (2)  —      —     2   (4)  —   

Commercial mortgage loan loss reserve

   (2)  —      (3)  —     (5)  —   

Other

   —     1   —     1 
                    

Net investment gains (losses)

  $(19) $(22)  $(48) $(6) $(118) $(77)
                    

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

For the three months ended March 31,September 30, 2007, we did not recognize any impairments. Fornet investment losses increased principally as a result of an increase in impairments from credit related events, as well as a decrease in interest rate related gains on the three months ended March 31, 2006, we recognizeddisposition of available-for-sale securities from opportunistic portfolio repositioning activities as compared to prior year and an impairment of $1 million. increase in unrealized losses in our trading portfolio. Impairments included $17 million related securities backed by sub-prime and Alt-A residential mortgage-backed and asset-backed securities.

The aggregate fair value of securities sold at a loss during the three months ended March 31,September 30, 2007 and 2006 was $1,069$1,114 million and $841$918 million, respectively, which was approximately 97% and 98% of book value, respectively. The loss on sales of securities in the three months ended September 30, 2007 was primarily driven by the higher interest rate environment.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

For the nine months ended September 30, 2007, net investment losses increased primarily due to an increase in impairments from credit related events and a decrease in interest rate related gains on the disposition of available-for-sale securities from opportunistic portfolio repositioning activities as compared to prior year. Impairments included $17 million related securities backed by sub-prime and Alt-A residential mortgage-backed and asset-backed securities. The prior year net investment losses also included a $17 million loss on the derecognition of assets and liabilities associated with certain securitization entities.

The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2007 and 2006 was $3,608 million and $2,979 million, respectively, which were both approximately 97% of book value, respectively.value. The loss on sales of securities in the nine months ended September 30, 2007 was primarily driven by the higher interest rate environment.

37


Derivative instruments primarily consist of changes in the fair value of non-qualifying derivatives, including embedded derivatives, changes in fair value of certain derivatives and related hedged items in fair value hedge relationships and hedge ineffectiveness on qualifying derivative instruments.

For a discussion of the change in net 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, 2007 December 31, 2006   September 30, 2007 December 31, 2006 

(Amounts in millions)

  Carrying value  % of total Carrying value  % of total   Carrying value  % of total Carrying value  % of total 

Fixed maturities, available-for-sale:

              

Public

  $39,768  56% $39,553  56%  $40,204  55% $39,553  56%

Private

   15,345  22   15,131  21    15,571  21   15,131  21 

Commercial mortgage loans

   8,508  12   8,357  12    8,839  12   8,357  12 

Other invested assets

   3,762  5   3,846  6    3,803  6   3,846  6 

Policy loans

   1,494  2   1,489  2    1,650  2   1,489  2 

Equity securities, available-for-sale

   200  —     197  —      247  —     197  —   

Cash and cash equivalents

   2,250  3   2,436  3    3,146  4   2,436  3 
                          

Total cash, cash equivalents and invested assets

  $71,327  100% $71,009  100%  $73,460  100% $71,009  100%
                          

The total investment portfolio increased $318 million. The increase was primarily due to the purchase of securities, including those underlying the issuanceFor a discussion of the GMTNs, partially offset by GIC maturitieschange in cash, cash equivalents and lower net unrealized gains as a result of a higher interest rate environment.

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 investment gains (losses) insee the condensed consolidated statements of income. As of March 31, 2007 and December 31, 2006, the fair value of the trading portfolio was $111 million and $107 million, respectively.comparison for this line item under “—Consolidated Balance Sheets.”

Fixed maturities

We diversify our fixed maturities by security sector. The following table sets forth the estimated fair value of our fixed maturities by sector as well as the percentage of the total fixed maturities holdings that each security sector comprised as of the dates indicated:

 

      March 31, 2007         December 31, 2006           September 30, 2007         December 31, 2006     

(Amounts in millions)

  

Estimated

fair value

  

% of

total

 

Estimated

fair value

  

% of

total

   Estimated
fair value
  % of
total
 Estimated
fair value
  % of
total
 

U.S. government, agencies and government sponsored entities

  $516  1% $864  2%  $645  1% $864  2%

Tax exempt

   2,220  4   2,231  4    2,155  4   2,231  4 

Government—non-U.S.

   1,736  3   1,765  3 

Government—non U.S.

   2,294  4   1,765  3 

U.S. corporate

   25,013  45   24,656  45    23,540  42   24,656  45 

Corporate—non-U.S.

   10,993  20   10,632  19 

Corporate—non U.S.

   12,465  22   10,632  19 

Mortgage-backed(1)

   9,639  18   9,212  17    9,321  17   9,212  17 

Asset-backed(1)

   4,996  9   5,324  10    5,355  10   5,324  10 
                          

Total fixed maturities

  $55,113  100% $54,684  100%  $55,775  100% $54,684  100%
                          

(1)

We had $6,064$5,668 million of residential mortgage-backed securities included in mortgage-backed and asset-backed securities, of which $2,045$1,770 million arewere primarily investment grade securities which are collateralized by sub-prime residential mortgage loans and $1,646 million were investment grade securities collateralized by Alt-A residential mortgage loans as of March 31,September 30, 2007.

38Our portfolio of fixed maturity securities is comprised primarily of investment grade registered securities that are actively traded in the financial markets where estimates of fair values are readily obtained from leading independent pricing services. For our less liquid securities, such as our privately placed securities, we utilize third-party asset managers to employ alternative valuation methods commonly used in the financial services industry to estimate fair value.


Security pricing is applied using a hierarchy, or “waterfall” approach, whereby valuations are first sought from industry-leading independent pricing services. Because many fixed income securities do not trade on a daily basis, the independent pricing services apply available information through processes such as benchmark curves, benchmarking of like-securities, sector groupings, broker quotes and matrix pricing to prepare evaluations. The independent pricing services’ teams of evaluators gather information from market sources and integrate relevant credit information, perceived market movements and sector news into the evaluated pricing models. Additionally, the independent pricing services perform extensive back-testing procedures to validate and/or refine models as conditions warrant. The independent pricing services also monitor market indicators, industry and economic events as triggers to obtain additional data.

Remaining un-priced securities are submitted by our third-party asset managers to brokers for valuations. For securities that are not priced by the independent pricing services or broker quotes, our third-party asset managers estimate values using their internally developed pricing matrix models. The pricing matrix begins with current treasury rates and uses credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry or issuer-specific credit characteristics and the security’s time to maturity, if warranted.

In addition to this “waterfall” approach, we employ other valuation methods, mostly third-party asset manager estimates for certain externally managed funds.

The following table sets forth the fair value of our fixed maturities portfolio by pricing source as of the date indicated:

       September 30, 2007     

(Amounts in millions)

  Estimated
fair value
  % of
total
 

Priced via independent pricing services

  $45,362  81%

Priced via broker expectations

   3,255  6 

Priced via internally developed matrices.

   6,973  13 

Priced via other methods

   185  —   
        

Total fixed maturities

  $55,775  100%
        

Our fixed maturity portfolio includes residential mortgage-backed and asset-backed securities collateralized by sub-prime and Alt-A residential mortgage loans. The following table sets forth the fair value of these sub-prime and Alt-A residential mortgage-backed securities by pricing source as of the date indicated:

       September 30, 2007     

(Amounts in millions)

  Estimated
fair value
  % of
total
 

Priced via independent pricing services

  $3,016  89%

Priced via broker expectations

   387  11 

Priced via internally developed matrices

   8  —   

Priced via other methods

   5  —   
        

Total sub-prime and Alt-A residential mortgage-backed securities

  $3,416  100%
        

As of March 31,September 30, 2007, the amortized cost or cost, gross unrealized gains (losses), and estimated fair value of our fixed maturities and equity securities classified as available-for-sale were as follows:

 

(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

  $496  $23  $(3) $516  $622  $25  $(2) $645

Tax exempt

   2,122   99   (1)  2,220   2,088   78   (11)  2,155

Government—non U.S.

   1,662   82   (8)  1,736   2,238   74   (18)  2,294

U.S. corporate

   24,714   614   (315)  25,013   23,768   394   (622)  23,540

Corporate—non U.S.

   10,924   196   (127)  10,993   12,628   125   (288)  12,465

Mortgage and asset-backed

   14,592   144   (101)  14,635   15,100   110   (534)  14,676
                        

Total fixed maturities

   54,510   1,158   (555)  55,113   56,444   806   (1,475)  55,775

Equity securities

   172   29   (1)  200   218   35   (6)  247
                        

Total available-for-sale securities

  $54,682  $1,187  $(556) $55,313  $56,662  $841  $(1,481) $56,022
                        

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

 

(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

  $850  $21  $(7) $864

Tax exempt

   2,126   106   (1)  2,231

Government—non U.S.

   1,688   83   (6)  1,765

U.S. corporate

   24,350   639   (333)  24,656

Corporate—non U.S.

   10,567   204   (139)  10,632

Mortgage and asset-backed

   14,490   141   (95)  14,536
                

Total fixed maturities

   54,071   1,194   (581)  54,684

Equity securities

   171   28   (2)  197
                

Total available-for-sale securities

  $54,242  $1,222  $(583) $54,881
                

39Changes in gross unrealized gains (losses) in our fixed maturity securities portfolio from December 31, 2006 through September 30, 2007 were primarily a result of widening spreads during the third quarter of 2007, particularly in mortgage-backed and asset-backed securities attributable to marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans.


As of September 30, 2007, the amortized cost or cost, gross unrealized gains (losses), and estimated fair value of our mortgage-backed and asset-backed securities collateralized by sub-prime residential mortgage loans were as follows:

(Amounts in millions)

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

Rating:

       

AAA

  $838  $  —    $(20) $818

AA

   490   —     (66)  424
                

Subtotal

   1,328   —     (86)  1,242

A

   587   —     (149)  438

BBB

   108   —     (21)  87

BB

   1   —     —     1

B

   4   —     (2)  2
                

Total sub-prime residential mortgage-backed securities

  $2,028  $—    $(258) $1,770
                

Our sub-prime securities were principally backed by first lien mortgages. We do not have a significant exposure to second liens or option adjustable rate mortgages. We do have $4 million of mezzanine collateralized debt obligations. We do not have any exposure to interest margin deals, highly leveraged transactions or collateralized debt obligation-squared investments.

As of September 30, 2007, the amortized cost or cost, gross unrealized gains (losses), and estimated fair value of our mortgage-backed and asset-backed securities collateralized by Alt-A residential mortgage loans were as follows:

(Amounts in millions)

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

Rating:

       

AAA

  $887  $1  $(15) $873

AA

   472   2   (18)  456
                

Subtotal

   1,359   3   (33)  1,329

A

   304   —     (23)  281

BBB

   45   —     (9)  36
                

Total Alt-A residential mortgage-backed securities

  $1,708  $3  $(65) $1,646
                

Gross unrealized losses in our sub-prime and Alt-A residential mortgage-backed and asset-backed securities as of September 30, 2007 were primarily a result of widening spreads during the third quarter of 2007 as a result of marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans. As of September 30, 2007, 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 securities until the recovery of the fair value up to our cost basis, which may be at maturity.

The 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 31,September 30, 2007:

 

  Less Than 12 Months  12 Months or More Less Than 12 Months 12 Months or More

(Dollar amounts in millions)

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

  $—    $—    —    $109  $(3) 23 $26 $(1) 7 $99 $(1) 19

Tax exempt

   —     —    —     47   (1) 23  320  (11) 59  —    —    —  

Government—non U.S.

   362   (5) 80   184   (3) 43  775  (13) 126  189  (5) 54

U.S. corporate

   4,742   (77) 410   6,767   (238) 698  8,140  (321) 688  5,298  (301) 596

Corporate—non U.S.

   2,209   (24) 298   3,771   (103) 371  4,769  (124) 534  3,764  (164) 414

Mortgage and asset backed

   4,138   (32) 486   3,296   (69) 406

Mortgage and asset-backed

  9,016  (410) 1,013  2,695  (124) 372
                                

Subtotal, fixed maturities

   11,451   (138) 1,274   14,174   (417) 1,564  23,046  (880) 2,427  12,045  (595) 1,455

Equity securities

   —     —    —     23   (1) 13  13  (2) 5  22  (4) 8
                                

Total temporarily impaired securities

  $11,451  $(138) 1,274  $14,197  $(418) 1,577 $23,059 $(882) 2,432 $12,067 $(599) 1,463
                                

% Below cost—fixed maturities:

                

<20% Below cost

  $11,441  $(135) 1,271  $14,126  $(403) 1,556 $22,607 $(691) 2,324 $11,888 $(527) 1,418

20-50% Below cost

   10   (3) 3   48   (14) 8  417  (157) 90  150  (51) 33

>50% Below cost

   —     —    —     —     —    —    22  (32) 13  7  (17) 4
                                

Total fixed maturities

   11,451   (138) 1,274   14,174   (417) 1,564  23,046  (880) 2,427  12,045  (595) 1,455
                                

% Below cost—equity securities:

                

<20% Below cost

   —     —    —     23   (1) 13  12  (1) 4  22  (4) 8

20-50% Below cost

   —     —    —     —     —    —    1  (1) 1  —    —    —  

>50% Below cost

   —     —    —     —     —    —    —    —    —    —    —    —  
                                

Total equity securities

   —     —    —     23   (1) 13  13  (2) 5  22  (4) 8
                                

Total temporarily impaired securities

  $11,451  $(138) 1,274  $14,197  $(418) 1,577 $23,059 $(882) 2,432 $12,067 $(599) 1,463
                                

Investment grade

  $11,147  $(134) 1,187  $13,466  $(379) 1,456 $22,172 $(845) 2,234 $11,501 $(552) 1,374

Below investment grade

   274   (3) 85   681   (37) 104  815  (36) 192  536  (45) 84

Not Rated—Fixed maturities

   30   (1) 2   38   (1) 4  72  (1) 6  30  (2) 5

Not Rated—Equities

   —     —    —     12   (1) 13  —    —    —    —    —    —  
                                

Total temporarily impaired securities

  $11,451  $(138) 1,274  $14,197  $(418) 1,577 $23,059 $(882) 2,432 $12,067 $(599) 1,463
                                

The investment securities in an unrealized loss position as of March 31,September 30, 2007 consisted of 2,8513,895 securities accounting for unrealized losses of $556$1,481 million. Of these unrealized losses, 92%94% were investment grade (rated AAA through BBB-) and 97%83% were less than 20% below cost. The amount of the unrealized loss on these securities was primarily attributableattributed to increaseswidening credit spreads during the third quarter of 2007, particularly in interest rates.

our sub-prime and Alt-A residential mortgage and asset-backed securities. Of the investment securities in an unrealized loss position for twelve months or more as of March 31,September 30, 2007, eight37 securities were 20% or more below cost, including twoof which twelve securities which were also below investment grade (rated BB+ and below). These securities and accounted for unrealized losses of $8$16 million. These securities, which were issued primarily by a corporationcorporations in the communication industry,and consumer cyclical industries and residential mortgage-backed securities, were current on all terms, and we expect to collect full principal and interest.

40interest and we are not aware of any adverse changes in cash flows.


As of March 31,September 30, 2007, 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 at maturity. Accordingly, we do not consider these investments to be other-than-temporarily impaired as of March 31,September 30, 2007. However, from time to time, we may sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield enhancement, asset-liability management and liquidity requirements.

Other invested assets

The following table sets forth the carrying values of our other invested assets as of the dates indicated:

   September 30, 2007  December 31, 2006 

(Amounts in millions)

  Carrying value  % of total  Carrying value  % of total 

Securities lending

  $2,279  60% $2,277  59%

Derivatives

   496  13   543  14 

Derivatives counterparty collateral

   219  6   399  11 

Limited partnerships

   554  14   207  5 

Trading securities

   254  7   107  3 

Other investments

   1  —     313  8 
               

Total other invested assets

  $3,803  100% $3,846  100%
               

Our investments in limited partnerships increased as a result of new partnership investments and calls on outstanding commitments. The increase in trading securities was primarily due to the purchase of a single credit during the third quarter of 2007. We reclassified a guarantee fund investment associated with the government-mandated reserve for our Canadian mortgage insurance business from other invested assets to fixed maturities in the third quarter of 2007. As of December 31, 2006, this investment was $292 million.

Derivatives

The fair value of derivative instruments, including interest rate and foreign currency swaps, forward commitments, equity index options and financial futures, is based upon either independent market quotations or pricing valuation models which utilize independent third-party data as inputs. The following table sets forth our positions in derivative instruments and the estimated fair values as of the dates indicated:

 

  March 31, 2007  December 31, 2006   September 30, 2007  December 31, 2006 

(Amounts in millions)

  Notional
value
  Estimated
fair value
  Notional
value
  Estimated
fair value
   Notional
value
  Estimated
fair value
  Notional
value
  Estimated
fair value
 

Interest rate swaps

  $18,661  $390  $17,832  $496   $22,819  $343  $17,832  $496 

Foreign currency swaps

   768   1   567   (8)   768   3   567   (8)

Forward commitments

   56   2   —     —   

Equity index options

   401   26   323   22    771   72   323   22 

Financial futures

   15   —     19   —      78   —     19   —   
                          

Total

  $19,845  $417  $18,741  $510 

Total derivatives

  $24,492  $420  $18,741  $510 
                          

As of March 31,September 30, 2007 and December 31, 2006, the fair value of derivatives in a gain position and recorded in other invested assets was $453$496 million and $543 million, respectively, and the fair value of derivatives in a loss position and recorded in other liabilities was $36$76 million and $33 million, respectively.

The increase in the notional value of derivatives was primarily due to a forward starting interest rate swap with a notional value of $600 million to hedge interest rate risk related to our equity unit note remarketing expected to occur on May 9, 2007. We entered into additional forward starting interest rate swaps with a notional value totaling $272 millionof $4.8 billion to hedge the cash flows of forecasted transactions related to our long-term care insurance business, andbusiness. Additionally, we entered into $1.1 billion of interest rate swaps to swap fixed rate assets or liabilities into floating rate assets or liabilities. We entered into cross currency swaps with a notional value of approximately $200 million to convert foreign currency denominated fixed rate liabilities into U.S. dollar floating rate liabilities consistent with the overall asset-liability management for our GMTN program.program, $462 million of equity index options and $60 million in futures to hedge risk embedded in certain retirement income products, and $56 million of qualifying forward commitment derivatives on unfunded commercial mortgage loan rate lock commitments. These increases were offset by the maturity of a $500 million interest rate swap that was used to hedge our LIBOR floating rate senior notes and $438 million in terminations.

Consolidated Balance Sheets

Total assets. Total assets increased $2.9 billion from $110.9 billion as of December 31, 2006 to $113.8 billion as of September 30, 2007.

Cash, cash equivalents and invested assets increased $2.5 billion primarily due to cash generated from operating activities and non-recourse funding obligations that was invested in fixed maturities and commercial mortgage loans, partially offset by an increase in unrealized investment losses of $1.3 billion primarily due to widening spreads, particularly relating to mortgage-backed and asset-backed securities.

Deferred acquisition costs increased $0.7 billion associated with the growth of our insurance in-force.

Separate account assets increased $1.7 billion related to net flows and favorable market performance of the underlying securities.

Assets associated with discontinued operations decreased $2.0 billion as the sale of our group life and health insurance business was completed in May 2007.

Total liabilities. Total liabilities increased $2.9 billion from $97.5 billion as of December 31, 2006 to $100.4 billion as of September 30, 2007.

Our policyholder-related liabilities increased $0.7 billion associated with the growth of our term life and long-term care insurance in-force, partially offset by fixed annuities.

Unearned premiums increased $1.3 billion, including $0.4 billion attributable to changes in foreign exchange rates, primarily as a result of growth in our International segment. Our international mortgage insurance business increased $1.0 billion and our payment protection insurance business increased $0.2 billion.

Non-recourse funding obligations increased $0.7 billion from issuances during 2007 of $0.8 billion, partially offset by the acquisition of $0.1 billion during the third quarter of 2007.

The deferred tax liability decreased $0.4 billion primarily due to lower deferred taxes as a result of lower other comprehensive income. The decrease was also from a $0.2 billion reclassification with current tax liabilities associated with our adoption of Financial Accounting Standards Board Interpretation No. 48,Accounting for Uncertainty in Income Taxes. These decreases were partially offset by increased deferred taxes from the current year provision.

Separate account liabilities increased $1.7 billion related to net flows and favorable market performance of the underlying securities.

Liabilities associated with discontinued operations decreased $1.4 billion as the sale of our group life and health insurance business was completed in May 2007.

Total stockholders’ equity. Total stockholders’ equity decreased $13 million from $13,330 million as of December 31, 2006 to $13,317 million as of September 30, 2007.

We repurchased shares of our Class A Common Stock for an aggregate cost of $1,100 million during the nine months ended September 30, 2007. In August 2007, we completed the stock repurchase program previously approved by the Board of Directors.

Accumulated other comprehensive income decreased $460 million from $1,157 million as of December 31, 2006 to $697 million as of September 30, 2007. Net unrealized investment gains (losses), net of tax, decreased $788 million to $(353) million primarily due to widening spreads, particularly relating to mortgage-backed and asset-backed securities. Derivatives qualifying as hedges, net of tax, decreased $90 million to $285 million primarily attributable to higher interest rates that impact the fair value of our forward-starting interest rate swaps. Offsetting these decreases was an increase in foreign currency translation and other adjustments, net of tax, of $418 million to $765 million due to increases in foreign exchange rates in countries we operate in, particularly Canada and Australia.

Additional paid-in capital increased $681 million primarily from the issuance of our Class A Common Stock for $600 million and stock-based compensation expense and exercises of $78 million.

Retained earnings increased $865 million from net income of $1,042 million for the nine months ended September 30, 2007, offset by $123 million of declared dividends and a $54 million cumulative effect of accounting change from the adoption of the American Institute of Certified Public Accountants Statement of Position 05-1,Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.

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 threenine months ended March 31:September 30:

 

(Amounts in millions)

  2007  2006 

Net cash from operating activities

  $1,064  $771 

Net cash from investing activities

   (687)  (649)

Net cash from financing activities

   (585)  (76)
         

Net increase (decrease) in cash less foreign exchange effect

  $(208) $46 
         

41


(Amounts in millions)

  2007  2006 

Net cash from operating activities

  $3,768  $3,350 

Net cash from investing activities

   (1,802)  (1,554)

Net cash from financing activities

   (1,261)  (1,351)
         

Net increase in cash before foreign exchange effect

  $705  $445 
         

Cash flows from operating activities are affected by the timing of premiums, received, fees received,and investment income received and expenses paid. Principal sources of cash include sales of our products and services. The increase in cash flows from operating activities for the threenine months ended March 31,September 30, 2007 overas compared to the threenine months ended March 31,September 30, 2006 was primarily the result of an increase in other liabilities and policy relatedpolicy-related balances associated with timing of settlements, offset by a decrease in current and deferred taxes.settlements.

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 policy acquisition costs, benefits paid and redemptions. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. 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 threenine months ended March 31,September 30, 2007 compared to March 31,September 30, 2006, was primarily the result of an increased levelincrease in purchases caused by cash from operating activities, the issuances of other invested asset netour FABN registered note and GMTN programs and the issuances of our non-recourse funding obligations. These purchases of limited partnerships,were partially offset by a decreasecash used to repurchase our common stock and from cash proceeds received from the sale of our discontinued operations in commercial mortgage loan originations.May 2007.

Changes in cash from financing activities primarily related 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. During the threenine months ended March 31,September 30, 2007, cash from financing activities included net redemptions on investment contracts of $385$7,111 million. In May 2007, Equity Unit holders purchased 25.5 million of newly issued shares of our Class A Common Stock. In May 2007, we repurchased 16.5 million shares of our Class A Common Stock in a private transaction for an initial aggregate purchase price of $600 million. We funded the purchase price with proceeds from the issuance and sale of common stock pursuant to the settlement of purchase contracts that were components of our Equity Units. Total cash used for the acquisition of treasury stock was $1,100 million during the nine months ended September 30, 2007. In June 2007, we issued senior notes having an aggregate principal amount of $233$350 million.

Total assets The net proceeds from the issuance of those senior notes were $111.6 billion asused to partially repay $500 million of March 31,our senior notes which matured in June 2007, comparedwith the remainder repaid with cash on hand. See notes 6 and 7 in our “—Notes to $110.9 billion as of December 31, 2006. The increase in total assets was primarily driven by normal business growth primarily related to fixed maturities, securities lending activity and separate account assets. Total liabilities were $98.3 billion as of March 31, 2007 compared to $97.5 billion as of December 31, 2006. The increase in total liabilities was primarily driven by an increase in policyholder liabilities, securities lending activity and separate account liabilities.Condensed Consolidated Financial Statements” for additional information.

We have a repurchase program in which we sell aan investment 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. In the third quarter of 2006, we pledged additional securities under our repurchase program. As of March 31,September 30, 2007, the fair value of securities pledged under the repurchase program was $709$658 million and the offsetting repurchase obligation of $685$600 million was included in other liabilities on the condensed consolidated balance sheet.

Genworth Financial, Inc.—holding company

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.

Our holding company had $127$482 million and $84 million of cash and cash equivalents as of March 31,September 30, 2007 and December 31, 2006, respectively.

42


In the first quarterand second quarters of 2007, we declared common stock dividends of $39 million and $40 million, respectively, which were paid in the second and third quarters of 2007, respectively. During the third quarter of 2007, we declared common stock dividends of $0.10 per share, representing an increase of 11% over the previous quarterly rate of $0.09 per share. This $44 million dividend will be paid in the secondfourth quarter of 2007. 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, net income, 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

In May 2007, we issued 25.5 million shares of our Class A Common Stock pursuant to our Equity Units at an annual rate of 2.16% of the stated amount of $25 per Equity Unit, which payments will terminate after the settlement of the purchase contracts that were originally issued as components of our Equity UnitsUnits. See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information. In May 2007, we repurchased 16.5 million shares of our Class A Common Stock in a private transaction for an initial aggregate purchase price of $600 million. We funded the purchase price with proceeds from the issuance and sale of common stock pursuant to the settlement of purchase contracts that were components of our Equity Units. As part of this transaction, we simultaneously entered into a forward contract indexed to the price of our Class A Common Stock, which subjects the transaction to a future price adjustment. In October 2007, this forward contract was settled resulting in the broker-dealer counterparty’s commitment to deliver $72 million in shares of Class A Common Stock to us in the fourth quarter of 2007. See note 6 in our “—Notes to Condensed Consolidated Financial Statements” for additional information.

On December 8, 2006, our Board of Directors approved a stock repurchase program, authorizing the repurchase of up to $500 million of our common stock over the 12-month period commencing January 1, 2007. Additionally on March 20, 2007, our Board of Directors increased the size of the stock repurchase program by $600 million to $1,100 million for 2007. During the first quarter of 2007, we repurchased 6.6 million shares at a weighted average price of $35.16. On March 20,During the second quarter of 2007, our Boardwe repurchased 21.2 million shares at a weighted average price of Directors increased$36.08. During the sizethird quarter of 2007, we repurchased 3.6 million shares at a weighted average price of $28.72. As of September 30, 2007, we have no remaining repurchase capacity under the stock repurchase program to $1.1 billion, an increase of $600 million. As of March 31, 2007, our remaining repurchase capacity was $867 million.program.

Insurance companies domiciled in the United States are restricted by various state insurance laws as to the amount of dividends that may be paid within any twelve consecutive month period without regulatory consent. During the threenine months ended March 31,September 30, 2007, we received dividends from our life insurance subsidiaries of $235 million.$685 million, of which $350 million was received from our principal U.S. Mortgage insurance subsidiary during the third quarter of 2007. The remaining dividend capacity that our subsidiaries could pay to us in 2007 without regulatory approval is $1,165$715 million.

In addition to dividends from our insurance subsidiaries, our other sources of funds include service fees we receive from GE, payments from our subsidiaries pursuant to tax sharing arrangements, proceeds from any additional issuances of commercial paper and borrowings pursuant to our revolving credit facilities.

DuringFor the first quarter ofnine months ended September 30, 2007, we contributed capital of $264$344 million to our subsidiaries.

During the third quarter of 2007, we entered into a capital support agreement of up to $200 million with one of our subsidiaries to fund claims under an intercompany reinsurance agreement to support our international mortgage insurance business.

Regulated insurance 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 flows 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 policyinsurance and contractinvestment product fees and other income, including commissions, cost of insurance, mortality, 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,September 30, 2007, we had approximately $2.7$2.9 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 containcontained “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 $2.7$2.9 billion aggregate amount outstanding as of March 31,September 30, 2007, $875$770 million had put option features, including $425$270 million with put options features of 90 days and $450$500 million with put options of 180 days.

Our Retirement and Protection segment previously issued a combined $9.4 billion of FABNs and funding agreements, of which $2.8 billion offer contractholders the option to make periodic elections to extend the maturity date of the contract. The credit market conditions during the third quarter of 2007 made these types of institutional products less attractive compared to alternative products offering higher yields with more liquidity. Additionally, during this same time period, certain contractholders did not extend the maturity on approximately $1.3 billion of outstanding notes, of which $1.0 billion will mature over the next 12 months.

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

43


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 and other liquid investment-grade fixed maturities to fund anticipated operating expenses, surrenders, and withdrawals. As of March 31,September 30, 2007, our total cash and invested assets was $71.3$73.5 billion. Our investments in privately placed fixed maturities, commercial mortgage loans, policy loans and limited partnership interests are relatively illiquid. These asset classes represented approximately 36% of the carrying value of our total cash and invested assets as of March 31,September 30, 2007.

During 2005, certain of our domestic life insurance subsidiaries transferred primarily foreign-issued investment securities to an affiliated special purpose entity (“SPE”) which is a subsidiary in our U.S. Mortgage Insurance segment and consolidated in our financial statements and whose sole purpose is to securitize these investment securities and issue secured notes to various affiliated insurance companies. The securitized investments are owned in their entirety by the SPE and are not available to satisfy the claims of our creditors. These securitized investments provide collateral to the notes issued by the SPE to the insurance companies. The value of those securities as of March 31,September 30, 2007 was $1.4$1.3 billion.

Capital resources and financing activities

We have a $1.0 billion five-year revolving credit facility that matures in May 2011 and2012 (as extended during the second quarter of 2007 pursuant to the terms of the facility). In August 2007, we entered into a $1.0 billion five-year revolving credit facility that matures in August 2012. This agreement replaces our $1.0 billion five-year credit facility that was scheduled to mature in April 2010. These facilities bear variable interest rates based on a one-month LIBOR plus margin. As of March 31,September 30, 2007, we utilized $172 million of the commitment under these facilities for the issuance of a letter of credit primarily for the benefit of one of our U.S. Mortgage Insurance subsidiaries.

On March 22,

In June 2007, Genworth Financial Commercial Warehouse LLC,we issued senior notes having an indirect subsidiaryaggregate principal amount of Genworth, entered into$350 million, with an interest rate equal to 5.65% per year payable semi-annually, and maturing in June 2012 (“2012 Notes”). The 2012 Notes are our direct, unsecured obligations and will rank equally with all of our existing and future unsecured and unsubordinated obligations. We have the option to redeem all or a $300portion of the 2012 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 of $349 million credit facility maturing March 22, 2010. The facility may be permanently increasedfrom the issuance of the 2012 Notes were used to $500 million upon 30-days’ advance written notice. The sole purpose of this facility is to fund the purchase of commercial mortgage loans. As of March 31, 2007, there were no amounts outstanding under this facility.

On December 8, 2006, our Board of Directors approved a stock repurchase program, authorizing the repurchase of up topartially repay $500 million of our common stock over the 12-month period commencing January 1, 2007. Additionally on March 20, 2007, our Board of Directors increased the size of the stock repurchase program by $600 million to $1.1 billion for 2007. We repurchased 6.6 million of our Class A Common Stock shares during the first quarter of 2007, for an aggregate cost of $233 million. We expect to make additional stock repurchases from time to time in the open market or in privately negotiated transactions, which will be funded from cash and/or the proceeds from issuance of debt securities and the sale of our group life and health insurance business.

On May 9, 2007, we expect to remarket the senior notes includedwhich matured in our Equity Units pursuant to their terms. Proceeds fromJune 2007, with the remarketing will be used to satisfy the obligations of the holders of the Equity Units to purchase our Class A Common Stock under the related purchase contracts. We expect to repurchase some of the stock issued pursuant to such purchase contracts shortly after the issuance thereof in open market purchases or in privately negotiated transactions.remainder repaid with cash on hand.

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

OnIn April 25, 2007, River Lake Insurance Company IV Limited, a Bermuda long-term insurance company wholly ownedwholly-owned by Genworth Life and Annuity Insurance Company (“GLAIC”), itself an indirect wholly-owned subsidiary of Genworth, issued $500 million in aggregate principal amount of floating rate guaranteed notes due 2028 and $40 million in aggregate principal amount of floating rate subordinated notes due 2028. In June 2007, River Lake Insurance Company II, a special purpose financial captive insurance company wholly-owned by GLAIC, issued $250 million in aggregate principal amount of floating rate surplus notes due 2035. See note 67 in our “—Notes to Condensed Consolidated Financial Statements” for additional information. In August 2007, approximately $1.7 billion of our non-recourse funding obligations reset to the current maximum contractual rate.

In March 2007, Genworth Financial Commercial Warehouse LLC, an indirect subsidiary of Genworth, entered into a $300 million credit facility maturing March 22, 2010. The facility may be permanently increased to $500 million upon 30-days advance written notice. The sole purpose of this facility is to fund the purchase of commercial mortgage loans. As of September 30, 2007, there was $43 million outstanding under this facility.

On May 11, 2007, we remarketed the senior notes included in our Equity Units pursuant to their terms. Proceeds from the remarketing were used to satisfy the obligations of the holders of the Equity Units to purchase our Class A Common Stock under the related purchase contracts. We repurchased some of the stock issued pursuant to such purchase contracts shortly after the issuance thereof in open market purchases or in privately negotiated transactions. See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information.

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

44


Contractual obligations and commercial commitments

We enter into obligations to third 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.

ThereDuring 2007, we issued $790 million in non-recourse funding obligations as further described in note 7 in our “—Notes to Condensed Consolidated Financial Statements.” During the third quarter of 2007, we invested in approximately $100 million of notes secured by our non-recourse funding obligations. We have accounted for this purchase as a redemption of our non-recourse funding obligations.

The credit market conditions during the third quarter of 2007 made these types of institutional products less attractive compared to alternative products offering higher yields with more liquidity. Additionally, during this same time period, certain contractholders did not extend the maturity on approximately $1.3 billion of outstanding notes, of which $1.0 billion will mature over the next 12 months.

In May 2007, we repurchased 16.5 million shares of our Class A Common Stock under an accelerated share repurchase transaction with a broker-dealer counterparty for an initial aggregate purchase price of $600 million. The repurchased shares will be held in treasury, until such time as they may be reissued or retired. See note 6 in our “—Notes to Condensed Consolidated Financial Statements” for additional information.

In June 2007, we issued senior notes having an aggregate principal amount of $350 million. The net proceeds from the issuance of the senior notes were used to partially repay $500 million of our senior notes which matured in June 2007, with the remainder repaid with cash on hand. See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information.

Other than these transactions, there have been no material additions or changes to our contractual obligations and commercial commitments as set forth in our 2006 Annual Report on Form 10-K and our Current Report on Form 8-K filed on April 16, 2007 (reflecting our reorganized segment reporting structure and the effects of classifying our group life and health insurance business as discontinued operations).

Securitization Entities

During the first quarter of 2006, we derecognized securitization entity 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. We recognized a loss on sale of $11 million, net of tax, from this re-securitization transaction in the three months ended March 31, 2006.

New Accounting Standards

For a discussion of recently adopted and not yet adopted accounting standards, see note 2 in our “—Notes to Condensed Consolidated Financial Statements.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of 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.

During the third quarter of 2007, credit markets experienced reduced liquidity, higher volatility and widening credit spreads across asset classes, mainly the result of marketplace uncertainty arising from higher defaults in sub-prime and Alt-A mortgage loan collateral underlying residential mortgage-backed securities. See “—Business trends and conditions”and“—Investments and Derivative Instruments” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1A. Risk Factors” for further discussion of the current market conditions.

During the three and nine months ended September 30, 2007, the currency in our principal international locations (Canada, Australia and Europe) has strengthened significantly against the U.S. dollar. This has resulted in higher levels of reported revenues, net income, assets, liabilities and accumulated other comprehensive income in our U.S. dollar consolidated balance sheet. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussions on the impact changes in foreign currency rates have had during the year.

There were no other material changes in these risks since December 31, 2006.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31,September 30, 2007, 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 March 31,September 30, 2007

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31,September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

45


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, bidding practices in connection with our management and administration of a third-party’s municipal guaranteed investment contract business, 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, our pricing structures and business practices in our mortgage insurance business, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of 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 and market conduct and financial examinations, from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition and results of operations.

There were no material developments during the quarter in any of the legal proceedings identified in Part 1, Item 3 of our 2006 Annual Report on Form 10-K, as updated in Part II, Item 1 of our Quarterly Report on Form 10-Q for the yearquarterly periods ended DecemberMarch 31, 2006.2007 and June 30, 2007. In addition, there were no new material legal proceedings during the quarter.

In October 2007, one of our subsidiaries, Genworth Life Insurance Company of New York, received an industry-wide subpoena from the New York Attorney General’s Office seeking documents and information relating to our long-term care insurance business in New York. We intend to cooperate with the New York Attorney General’s Office in responding to the subpoena.

We cannot ensure that the previously identified investigations and proceedings will not have a material adverse effect on our business, financial condition or results of operations. In addition, it is 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.

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 2006 Annual Report on Form 10-K and in our Current Report on Form 8-K filed on April 16, 2007 (reflecting our reorganized segment reporting structure and the effects of classifying our group life and health insurance business as discontinued operations), 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, 2007,Other than the risk factor below, there have been no material changes to the risk factors set forth in the above-referenced filings.filings as of September 30, 2007.

Downturns and volatility in credit markets could adversely affect our business and profitability.

46Significant downturns and volatility in the credit markets could have an adverse effect on our financial condition and results of operations by reducing our profitability in three principal ways. First, issuers of the fixed-income securities and commercial mortgage loans that we own may default on principal and interest payments. As of September 30, 2007 and December 31, 2006, we had fixed maturities in or near default (where the issuer has missed payment of principal or interest or entered bankruptcy) with a fair value of $10 million and $16 million, respectively.

Second, downturns and volatility in credit markets can have an adverse effect on our ability to efficiently access the capital markets for purposes of issuing commercial paper and long-term debt for financing purposes, and efficiently access the capital markets for capital management purposes including the issuance of fixed and floating rate non-recourse funding obligations for purposes of supporting our term and universal life insurance products. Downturns and volatility in the credit markets can result in lower profitability due to higher financing costs related to both our financing and capital management activities.

Third, downturns and volatility in credit markets may encourage investors in certain of our institutional products, such as FABNs and funding agreements, not to exercise their option to extend underlying maturity dates in favor of investment alternatives offering higher returns or different liquidity features. Because we earn a spread between interest earned and interest credited on these institutional products under management, the failure of investors in these products to extend the underlying maturity dates could reduce our revenues and profitability by reducing institutional product liabilities we manage. In addition, the earlier-than-anticipated maturity of these institutional funds on deposit may cause us to liquidate underlying investments earlier than anticipated, which could result in investment losses, depending on market conditions at the time.


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

Issuer Purchases of Equity Securities

 

(Dollar amounts in millions, except per share
amounts)

 

Periods

  Total number of
shares (or
units) purchased
  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(1)

January 1, 2007 through January 31, 2007

  1,504,500  $34.24  1,504,500  $448

February 1, 2007 through February 28, 2007

  2,455,600  $35.89  2,455,600   360

March 1, 2007 through March 31, 2007

  2,657,400  $35.01  2,657,400   867
            

Total

  6,617,500  $35.16  6,617,500  $867
            

(Dollar amounts in millions, except per share

amounts)

 

Periods

  Total number of
shares (or
units) purchased
  

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(1)

July 1, 2007 through July 30, 2007

  —    $—    —    $  102

August 1, 2007 through August 31, 2007(2)

  3,559,052  $28.72  3,559,052   —  

September 1, 2007 through September 30, 2007

  —    $—    —     —  
          

Total

  3,559,052  $28.72  3,559,052  $—  
          

(1)

On December 8, 2006, our Board of Directors approved a stock repurchase program, authorizing the repurchase of up to $500 million of our common stock over the 12-month period commencing January 1, 2007. Additionally, on March 20, 2007, our Board of Directors increased the size of the stock repurchase program by $600 million to $1,100 million.

(2)

In August 2007, we completed the stock repurchase program. However, additional shares will be delivered to us in the fourth quarter of 2007 as part of the settlement of the accelerated stock repurchase program. See note 6 our “—Notes to Condensed Consolidated Financial Statements” for additional information.

Item 6. Exhibits

 

10.1First Amendment to the Genworth Financial, Inc. 2004 Omnibus Incentive Plan
10.2 Form of PerformanceRestricted Stock Unit Award Agreement under the 2004 Genworth Financial, Inc. Omnibus Incentive Plan
10.2Amendment to the Genworth Financial, Inc. Executive Life Program – Grants made on or after July 31, 2007
10.3 Amendment toForm of Stock Appreciation Rights Award Agreement under the 2004 Genworth Financial, Inc. 2005 Change in ControlOmnibus Incentive Plan – Grants made on or after July 31, 2007
10.4Form of Stock Option Award Agreement under the 2004 Genworth Financial, Inc. Omnibus Incentive Plan – Grants made on or after July 31, 2007
12 ComputationStatement of Ratio of Income to Fixed Charges
31.1 Certification of Michael D. Fraizer
31.2 Certification of Patrick B. Kelleher
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—Patrick B. Kelleher

47


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: May 1,October 26, 2007

   
  By: 

/s/    SCOTT R. LINDQUIST        

   

Scott R. Lindquist

Vice President and Controller

(Duly Authorized Officer and

Principal Accounting Officer)

 

4881