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 June 30, 2010March 31, 2011

OR

 

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

For the transition period fromto

Commission file number 001-32195

 

 

LOGOLOGO

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer  xaccelerated filer Accelerated Filer  ¨
Non-accelerated Filer  ¨x  Accelerated filer¨
Non-accelerated filer¨Smaller reporting company¨

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 July 26, 2010, 489,335,077As of April 27, 2011, 490,561,211 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.

Financial Statements

  3

Condensed Consolidated Statements of Income for the three and six months ended June 30,March  31, 2011 and 2010 and  2009 (Unaudited)

  3

Condensed Consolidated Balance Sheets as of June 30, 2010March 31, 2011 (Unaudited) and December  31, 20092010

  4

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the sixthree months ended June  30,March 31, 2011 and 2010 and 2009 (Unaudited)

  5

Condensed Consolidated Statements of Cash Flows for the sixthree months ended June 30,March  31, 2011 and 2010 and  2009 (Unaudited)

  7

Notes to Condensed Consolidated Financial Statements (Unaudited)

  8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  6259

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

  131107

Item 4.

Controls and Procedures

  131108

PART II—OTHER INFORMATION

  132108

Item 1.

Legal Proceedings

  132108

Item 1A.

Risk Factors

  132109

Item 6.

Exhibits

  133110

Signatures

  134111

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

Item 1.Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)

 

  Three months ended
June 30,
 Six months ended
June 30,
   Three months ended
March 31,
 
      2010         2009     2010 2009       2011         2010     

Revenues:

        

Premiums

  $1,470   $1,502   $2,940   $3,004    $1,437   $1,470  

Net investment income

   823    781    1,588    1,492     830    765  

Net investment gains (losses)

   (139  (53  (209  (823   (28  (70

Insurance and investment product fees and other

   256    253    512    544     329    256  
                    

Total revenues

   2,410    2,483    4,831    4,217     2,568    2,421  
                    

Benefits and expenses:

        

Benefits and other changes in policy reserves

   1,340    1,492    2,655    3,000     1,409    1,315  

Interest credited

   211    263    424    538     201    213  

Acquisition and operating expenses, net of deferrals

   499    456    974    897     500    475  

Amortization of deferred acquisition costs and intangibles

   179    212    363    459     185    184  

Interest expense

   109    114    224    210     127    115  
                    

Total benefits and expenses

   2,338    2,537    4,640    5,104     2,422    2,302  
                    

Income (loss) before income taxes

   72    (54  191    (887

Benefit for income taxes

   (5  (4  (98  (368

Income before income taxes

   146    119  

Provision (benefit) for income taxes

   30    (93
                    

Net income (loss)

   77    (50  289    (519

Net income

   116    212  

Less: net income attributable to noncontrolling interests

   35    —      69    —       34    34  
                    

Net income (loss) available to Genworth Financial, Inc.’s common stockholders

  $42   $(50 $220   $(519

Net income available to Genworth Financial, Inc.’s common stockholders

  $82   $178  
                    

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:

     

Net income available to Genworth Financial, Inc.’s common stockholders per common share:

   

Basic

  $0.09   $(0.11 $0.45   $(1.20  $0.17   $0.36  
                    

Diluted

  $0.08   $(0.11 $0.45   $(1.20  $0.17   $0.36  
                    

Weighted-average common shares outstanding:

        

Basic

   489.1    433.2    489.0    433.2     490.1    488.8  
                    

Diluted

   494.2    433.2    493.9    433.2     494.4    493.5  
                    

Supplemental disclosures:

        

Total other-than-temporary impairments

  $(24 $(476 $(101 $(1,073  $(31 $(77

Portion of other-than-temporary impairments included in other comprehensive income (loss)

   (27  324    (30  324  

Portion of other-than-temporary impairments recognized in other comprehensive income (loss)

   (5  (3
                    

Net other-than-temporary impairments

   (51  (152  (131  (749   (36  (80

Other investment gains (losses)

   (88  99    (78  (74

Other investments gains (losses)

   8    10  
                    

Total net investment gains (losses)

  $(139 $(53 $(209 $(823  $(28 $(70
                    

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

  June 30,
2010
 December 31,
2009
   March 31,
2011
 December 31,
2010
 
  (Unaudited)     (Unaudited)   

Assets

      

Investments:

      

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

  $53,386   $49,752    $54,998   $55,183  

Equity securities available-for-sale, at fair value

   199    159     355    332  

Commercial mortgage loans

   7,208    7,499     6,600    6,718  

Restricted commercial mortgage loans related to securitization entities

   535    —       485    507  

Policy loans

   1,467    1,403     1,480    1,471  

Other invested assets

   4,042    4,702     3,752    3,854  

Restricted other invested assets related to securitization entities ($373 at fair value)

   374    —    

Restricted other invested assets related to securitization entities ($374 and $370 at fair value)

   376    372  
              

Total investments

   67,211    63,515     68,046    68,437  

Cash and cash equivalents

   4,586    5,002     3,742    3,132  

Accrued investment income

   696    691     794    733  

Deferred acquisition costs

   7,170    7,341     7,334    7,256  

Intangible assets

   789    934     713    741  

Goodwill

   1,313    1,324     1,331    1,329  

Reinsurance recoverable

   17,279    17,332     17,102    17,191  

Other assets

   1,024    954     883    810  

Deferred tax asset

   —      92     1,188    1,100  

Separate account assets

   10,284    11,002     11,807    11,666  
              

Total assets

  $110,352   $108,187    $112,940   $112,395  
              

Liabilities and stockholders’ equity

      

Liabilities:

      

Future policy benefits

  $29,929   $29,469    $30,872   $30,717  

Policyholder account balances

   28,338    28,470     26,399    26,978  

Liability for policy and contract claims

   6,302    6,567     6,959    6,933  

Unearned premiums

   4,238    4,714     4,529    4,541  

Other liabilities ($183 and $—other liabilities related to securitization entities)

   6,287    6,298  

Borrowings related to securitization entities ($51 at fair value)

   525    —    

Other liabilities ($139 and $150 other liabilities related to securitization entities)

   6,189    6,085  

Borrowings related to securitization entities ($58 and $51 at fair value)

   489    494  

Non-recourse funding obligations

   3,437    3,443     3,431    3,437  

Short-term borrowings

   730    930  

Long-term borrowings

   4,331    3,641     5,347    4,952  

Deferred tax liability

   904    303     1,689    1,621  

Separate account liabilities

   10,284    11,002     11,807    11,666  
              

Total liabilities

   95,305    94,837     97,711    97,424  
              

Commitments and contingencies

      

Stockholders’ equity:

      

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 578 million and 577 million shares issued as of June 30, 2010 and December 31, 2009, respectively; 489 million shares outstanding as of June 30, 2010 and December 31, 2009

   1    1  

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 579 million and 578 million shares issued as of March 31, 2011 and December 31, 2010, respectively; 491 million and 490 million shares outstanding as of March 31, 2011 and December 31, 2010, respectively

   1    1  

Additional paid-in capital

   12,078    12,034     12,101    12,095  
              

Accumulated other comprehensive income (loss):

      

Net unrealized investment gains (losses):

      

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

   208    (1,151   77    21  

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

   (179  (247)   (114  (121
              

Net unrealized investment gains (losses)

   29    (1,398   (37  (100
              

Derivatives qualifying as hedges

   1,162    802     864    924  

Foreign currency translation and other adjustments

   140    432     793    668  
              

Total accumulated other comprehensive income (loss)

   1,331    (164   1,620    1,492  

Retained earnings

   3,221    3,105     3,055    2,973  

Treasury stock, at cost (88 million shares as of June 30, 2010 and December 31, 2009)

   (2,700  (2,700

Treasury stock, at cost (88 million shares as of March 31, 2011 and December 31, 2010)

   (2,700  (2,700
              

Total Genworth Financial, Inc.’s stockholders’ equity

   13,931    12,276     14,077    13,861  

Noncontrolling interests

   1,116    1,074     1,152    1,110  
              

Total stockholders’ equity

   15,047    13,350     15,229    14,971  
              

Total liabilities and stockholders’ equity

  $110,352   $108,187    $112,940   $112,395  
              

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in millions)

(Unaudited)

 

 Common
stock
 Additional
paid-in
capital
 Accumulated
other
comprehensive
income (loss)
 Retained
earnings
 Treasury
stock, at
cost
 Total
Genworth
Financial,
Inc.’s
stockholders’
equity
 Noncontrolling
interests
 Total
stockholders’
equity
  Common
stock
 Additional
paid-in
capital
 Accumulated
other
comprehensive
income (loss)
 Retained
earnings
 Treasury
stock, at
cost
 Total
Genworth
Financial,
Inc.’s
stockholders’
equity
 Noncontrolling
interests
 Total
stockholders’
equity
 

Balances as of December 31, 2009

 $1 $12,034 $(164 $3,105   $(2,700 $12,276   $1,074  $13,350  

Balances as of December 31, 2010

 $1   $12,095   $1,492   $2,973   $(2,700 $13,861   $1,110   $14,971  
                    

Cumulative effect of change in accounting, net of taxes and other adjustments

  —    —    91    (104  —      (13  —      (13

Comprehensive income (loss):

                

Net income (loss)

  —    —    —      220    —      220    69    289  

Net income

  —      —      —      82    —      82    34    116  

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

  —    —    1,268    —      —      1,268    9    1,277    —      —      56    —      —      56    (9  47  

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

  —    —    68    —      —      68    —      68    —      —      7    —      —      7    —      7  

Derivatives qualifying as hedges

  —    —    360    —      —      360    —      360    —      —      (60  —      —      (60  —      (60

Foreign currency translation and other adjustments

  —    —    (292  —      —      (292  (15  (307  —      —      125    —      —      125    29    154  
                    

Total comprehensive income (loss)

         1,687           264  

Dividends to noncontrolling interests

  —    —    —      —      —      —      (21  (21  —      —      —      —      —      —      (12  (12

Stock-based compensation expense and exercises and other

  —    24  —      —      —      24    —      24    —      6    —      —      —      6    —      6  

Other capital transactions

  —    20  —      —      —      20    —      20  
                                              

Balances as of June 30, 2010

 $1 $12,078 $1,331   $3,221   $(2,700 $13,931   $1,116   $15,047  

Balances as of March 31, 2011

 $1   $12,101   $1,620   $3,055   $(2,700 $14,077   $1,152   $15,229  
                                              

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY—

(CONTINUED)

(Amounts in millions)

(Unaudited)

 

 Common
stock
 Additional
paid-in
capital
 Accumulated other
comprehensive
income (loss)
 Retained
earnings
 Treasury
stock, at
cost
 Total
stockholders’
equity
  Common
stock
 Additional
paid-in
capital
 Accumulated
other
comprehensive
income (loss)
 Retained
earnings
 Treasury
stock, at
cost
 Total
Genworth
Financial,
Inc.’s
stockholders’
equity
 Noncontrolling
interests
 Total
stockholders’
equity
 

Balances as of December 31, 2008

 $1 $11,477 $(3,062 $3,210   $(2,700 $8,926  

Balances as of December 31, 2009

 $1   $12,034   $(164 $3,105   $(2,700 $12,276   $1,074   $13,350  
                  

Cumulative effect of change in accounting, net of taxes and other adjustments

  —    —    (349  355    —      6    —      —      91    (104  —      (13  —      (13

Comprehensive income (loss):

              

Net income (loss)

  —    —    —      (519  —      (519

Net income

  —      —      —      178    —      178    34    212  

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

  —    —    1,378    —      —      1,378    —      —      408    —      —      408    (1  407  

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

  —    —    (14  —      —      (14  —      —      39    —      —      39    —      39  

Derivatives qualifying as hedges

  —    —    (213  —      —      (213  —      —      (25  —      —      (25  —      (25

Foreign currency translation and other adjustments

  —    —    391    —      —      391    —      —      (2  —      —      (2  37    35  
                  

Total comprehensive income (loss)

       1,023           668  

Dividends to noncontrolling interests

  —      —      —      —      —      —      (10  (10

Stock-based compensation expense and exercises and other

  —    15  —      —      —      15    —      10    —      —      —      10    —      10  

Other capital transactions

  —      20    —      —      —      20    —      20  
                                        

Balances as of June 30, 2009

 $1 $11,492 $(1,869 $3,046   $(2,700 $9,970  

Balances as of March 31, 2010

 $1   $12,064   $347   $3,179   $(2,700 $12,891   $1,134   $14,025  
                                        

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

  Six months ended
June 30,
   Three
months ended
March 31,
 
  2010 2009   2011 2010 

Cash flows from operating activities:

      

Net income (loss)

  $289   $(519

Adjustments to reconcile net income (loss) to net cash from operating activities:

   

Net income

  $116   $212  

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

   

Amortization of fixed maturity discounts and premiums

   5    106     (18  24  

Net investment losses (gains)

   209    823     28    70  

Charges assessed to policyholders

   (233  (211   (159  (113

Acquisition costs deferred

   (392  (368   (229  (193

Amortization of deferred acquisition costs and intangibles

   363    459     185    184  

Deferred income taxes

   (173  (591   (37  (101

Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments

   119    116  

Net increase in trading securities, held-for-sale investments and derivative instruments

   35    58  

Stock-based compensation expense

   23    15     7    11  

Change in certain assets and liabilities:

      

Accrued investment income and other assets

   24    30     (117  (43

Insurance reserves

   1,208    1,520     557    576  

Current tax liabilities

   (211  197     25    (163

Other liabilities and other policy-related balances

   (674  (208   (57  (392
              

Net cash from operating activities

   557    1,369     336    130  
              

Cash flows from investing activities:

      

Proceeds from maturities and repayments of investments:

      

Fixed maturity securities

   2,057    1,892     1,627    941  

Commercial mortgage loans

   263    381     148    136  

Restricted commercial mortgage loans related to securitization entities

   27    —       22    12  

Proceeds from sales of investments:

      

Fixed maturity and equity securities

   2,393    1,663     1,009    1,021  

Purchases and originations of investments:

      

Fixed maturity and equity securities

   (6,867  (2,700   (2,200  (3,623

Commercial mortgage loans

   (23  —       (38  —    

Other invested assets, net

   1,491    (348   (59  344  

Policy loans, net

   (64  (253   (9  (5

Payments for businesses purchased, net of cash acquired

   (4  —    
              

Net cash from investing activities

   (723  635     496    (1,174
              

Cash flows from financing activities:

      

Deposits to universal life and investment contracts

   1,174    1,271     560    490  

Withdrawals from universal life and investment contracts

   (1,734  (4,231   (1,115  (913

Short-term borrowings and other, net

   (285  (330   (33  (37

Repayment and repurchase of long-term borrowings

   —      (739

Proceeds from the issuance of long-term borrowings

   660    —    

Redemption of non-recourse funding obligations

   (6  (12   (6  (6

Proceeds from the issuance of long-term debt

   397    —    

Repayment of borrowings related to securitization entities

   (31  —       (12  (11

Dividends paid to noncontrolling interests

   (21  —       (12  (10
              

Net cash from financing activities

   (243  (4,041   (221  (487

Effect of exchange rate changes on cash and cash equivalents

   (7  83     (1  (5
              

Net change in cash and cash equivalents

   (416  (1,954   610    (1,536

Cash and cash equivalents at beginning of period

   5,002    7,328     3,132    5,002  
              

Cash and cash equivalents at end of period

  $4,586   $5,374    $3,742   $3,466  
              

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware on October 23, 2003. 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 interest or where we are the primary beneficiary of a variable interest entity, 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 andand/or manage a variety of protection, wealth management and retirement income products. Our primary protectioninsurance products include:include life and long-term care and Medicare supplement insurance. Additionally, we offer other senior supplementalMedicare supplement insurance products, as well as care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs and advisor services, financial planning services, fixed and variable deferred and immediate individual annuitiesannuities. We previously offered variable deferred and group variable annuities offered through retirement plans.

 

  

International.We offer mortgage and lifestyle protection insurance products and related services in multiple markets. We are a leading provider of mortgage insurance products in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk. We are a leading provider of payment protection coverages primarily associated with certain financial obligations (referred to as lifestyle protection) in multiple European countries, Canada and Mexico. Ourcountries. These lifestyle protection insurance products primarily 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.,United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively 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 efficiently and manage capital and 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 and the results of non-core businesses and non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist ofof: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”).

In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business. We continue to offer fixed annuities.

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 U.S. 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Actual results could differ from those estimates. 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 flows 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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 20092010 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Pronouncements

Recently Adopted

Accounting for Transfers of Financial Assets

On January 1, 2010,2011, we adopted new accounting guidance related to accounting for transfersgoodwill impairment testing when a reporting unit’s carrying value is zero or negative. This guidance did not impact our consolidated financial statements upon adoption, as all of financial assets. Thisour reporting units with goodwill balances have positive carrying values.

On January 1, 2011, we adopted new accounting guidance amends the previous guidance on transfersrelated to how investments held through separate accounts affect an insurer’s consolidation analysis of financial assets by eliminating the qualifying special-purpose entity concept, providing certain conditions that must be met to qualify for sale accounting, changing the amount of gain or loss recognized on certain transfers and requiring additional disclosures.those investments. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements. The elimination of the qualifying special-purpose entity concept requires that these entities be considered for consolidation as a result of the new guidance related to variable interest entities (“VIEs”) as discussed below.

Improvements to Financial Reporting by Enterprises Involved with VIEs

On January 1, 2010,2011, we adopted new accounting guidance for determining which enterprise, if any, has a controlling financial interest in a VIE and requiresrelated to additional disclosures about involvementpurchases, sales, issuances and settlements in VIEs. Under this new accounting guidance, the primary beneficiaryrollforward of a VIE is the enterprise that has the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance and has the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. Upon adoption of this new accounting guidance, we were required to consolidate certain VIEs, including previously qualifying special-purpose entities and investment structures. We recorded a transition adjustment for the impact upon adoption to reflect the difference between the assets and liabilities of the newly consolidated entities and the amounts recorded for our interests in these entities prior to adoption. On January 1, 2010, we recorded a net cumulative effect adjustment of $104 million to retained earnings with a partial offset to accumulated other comprehensive income (loss) of $91 million related to the adoption of this new accounting guidance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The assets and liabilities of the newly consolidated entities were as follows as of January 1, 2010:

(Amounts in millions)

 Carrying value (1) Adjustment for election
of fair value option
(2)
  Amounts
recorded upon
consolidation
 

Assets

   

Restricted commercial mortgage loans

 $564 $—     $564  

Restricted other invested assets

  409  (30  379  

Accrued investment income

  2  —      2  
           

Total assets

  975  (30  945  
           

Liabilities

   

Other liabilities

  138  —      138  

Borrowings related to securitization entities

  644  (80  564  
           

Total liabilities

  782  (80  702  
           

Net assets and liabilities of newly consolidated entities

 $193 $50    243  
        

Less: amortized cost of fixed maturity securities previously recorded(3)

    404  
      

Cumulative effect adjustment to retained earnings upon adoption, pre-tax

    (161

Tax effect

    57  
      

Net cumulative effect adjustment to retained earnings upon adoption

   $(104
      

(1)

Carrying value represents the amounts that would have been recorded in the consolidated financial statements on January 1, 2010 had we recorded the assets and liabilities in our financial statements from the date we first met the conditions for consolidation based on the criteria in the new accounting guidance.

(2)

Amount represents the difference between book value and fair value of the investments and borrowings related to consolidated securitization entities where we have elected fair value option.

(3)

Fixed maturity securities that were previously recorded had net unrealized investment losses of $91 million included in accumulated other comprehensive income (loss) as of December 31, 2009.

For commercial mortgage loans, the carrying amounts represent the unpaid principal balance less any reserve. Restricted other invested assets are comprised of trading securities that are recorded at fair value. Trading securities represent asset-backed securities where we electedLevel 3 fair value option. Borrowings related to securitization entities are recorded at unpaid principal except for the borrowings related to entities where we elected fair value option for all assets and liabilities.

For certain entities consolidated upon adoption of the new accounting guidance on January 1, 2010, we elected fair value option to measure all assets and liabilities at current fair value with future changes in fair value being recording in income (loss). We elected fair value option for certain entities as a method to better present the offsetting changes in assets and liabilities related to third-party interests in those entities and eliminated the potential accounting mismatch between the measurement of the assets and derivatives of the entity compared to the borrowings issued by the entity. The entities where we did not elect fair value option did not have the same accounting mismatch since the assets held by the securitization entity and the borrowings of the entity were recorded at cost. See note 7 for additional information related to consolidation of VIEs.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The new accounting guidance related to consolidation of VIEs has been deferred for a reporting entity’s interest in an entity that has all of the attributes of an investment company as long as there is no implicit or explicit obligation to fund losses of the entity. For entities that meet these criteria, the new accounting guidance related to VIE consolidation would not be applicable until further guidance is issued. Accordingly, we did not have any impact upon adoption related to entities that meet the deferral criteria, such as certain limited partnership and fund investments.

Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements

On January 1, 2010, we adopted new accounting guidance requiring additional disclosures for significant transfers between Level 1 and 2 fair value measurements and clarifications to existing fair value disclosures related to the level of disaggregation, inputs and valuation techniques.measurements. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Not Yet Adopted

In July 2010,April 2011, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued new accounting guidance that will require additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain additional disclosures in thistroubled debt restructurings. This new accounting guidance and related disclosures will be effective for us on December 31, 2010 with certain other additional disclosures that will be effective for us on March 31,July 1, 2011. We do not expect the adoption of this new accounting guidance to have a material impact on our consolidated financial statements.

In AprilOctober 2010, the FASB issued new accounting guidance on how investments held through separate accounts affect an insurer’s consolidation analysis of those investments.related to accounting for costs associated with acquiring or renewing insurance contracts. This new accounting guidance will be effective for us on January 1, 2011.2012. When adopted, we expect to defer fewer costs. The new guidance is effective prospectively with retrospective adoption allowed. We dohave not expectyet determined the adoption ofmethod nor impact this new accounting guidance towill have a material impact on our consolidated financial statements.

In March 2010, the FASB issued new accounting guidance clarifying the scope exception for embedded credit derivatives and when those features would be bifurcated from the host contract. Under the new accounting guidance, only embedded credit derivative features that are in the form of subordination of one financial instrument to another would not be subject to the bifurcation requirements. Accordingly, upon adoption of this new accounting guidance, we are required to bifurcate embedded credit derivatives that no longer qualify under the amended scope exception. In conjunction with our adoption, we elected fair value option for certain fixed maturity securities. This accounting guidance was effective for us on July 1, 2010. The impact upon adoption of this new accounting guidance was approximately $270 million, before taxes and other adjustments, and was recorded as a reduction in retained earnings with a corresponding increase in accumulated other comprehensive income (loss) on July 1, 2010.

In January 2010, the FASB issued new accounting guidance to require additional disclosures about purchases, sales, issuances, and settlements in the rollforward of Level 3 fair value measurements. This new accounting guidance will be effective for us on January 1, 2011. We do not expect the adoption of this new accounting guidance to have a material impact on our consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

(3) Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted shares outstanding for the periods indicated:

 

  Three months ended
June 30,
 Six months ended
June 30,
   Three months ended
March 31,
 

(Amounts in millions, except per share amounts)

  2010  2009 2010  2009   2011   2010 

Net income (loss)

  $77  $(50 $289  $(519

Net income

  $116    $212  

Less: net income attributable to noncontrolling interests

   35   —      69   —       34     34  
                     

Net income (loss) available to Genworth Financial, Inc.’s common stockholders

  $42  $(50 $220  $(519

Net income available to Genworth Financial, Inc.’s common stockholders

  $82    $178  
                     

Basic per common share:

           

Net income (loss)

  $0.16  $(0.11 $0.59  $(1.20

Net income

  $0.24    $0.43  

Less: net income attributable to noncontrolling interests

   0.07   —      0.14   —       0.07     0.07  
                     

Net income (loss) available to Genworth Financial, Inc.’s common stockholders(1)

  $0.09  $(0.11 $0.45  $(1.20

Net income available to Genworth Financial, Inc.’s common stockholders(1)

  $0.17    $0.36  
                     

Diluted per common share:

           

Net income (loss)

  $0.16  $(0.11 $0.59  $(1.20

Net income

  $0.23    $0.43  

Less: net income attributable to noncontrolling interests

   0.07   —      0.14   —       0.07     0.07  
                     

Net income (loss) available to Genworth Financial, Inc.’s common stockholders(1)

  $0.08  $(0.11 $0.45  $(1.20

Net income available to Genworth Financial, Inc.’s common stockholders(1)

  $0.17    $0.36  
                     

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

   489.1   433.2    489.0   433.2  

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

   490.1     488.8  

Potentially dilutive securities:

           

Stock options, restricted stock units and stock appreciation rights

   5.1   —      4.9   —       4.3     4.7  
                     

Weighted-average shares used in diluted earnings (loss) per common share calculations(2)

   494.2   433.2    493.9   433.2  

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

   494.4     493.5  
                     

 

(1)

May not total due to whole number calculation.

(2)

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss for the three and six months ended June 30, 2009, we were required to use basic weighted-average common shares outstanding in the calculation of the 2009 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.2 million and 0.6 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss for the three and six months ended June 30, 2009, dilutive potential common shares would have been 434.4 million and 433.8 million, respectively.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

(4) Investments

(a) Net Investment Income

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

 

  Three months ended
June 30,
  Six months ended
June 30,
 

(Amounts in millions)

     2010          2009      2010  2009 

Fixed maturity securities—taxable

 $646   $604   $1,272   $1,227  

Fixed maturity securities—non-taxable

  16    28    32    58  

Commercial mortgage loans

  99    109    203    223  

Restricted commercial mortgage loans related to securitization
entities
(1)

  10    —      20    —    

Equity securities

  5    3    7    6  

Other invested assets

  39    (7  37    (106

Restricted other invested assets related to securitization entities(1)

  —      —      1    —    

Policy loans

  28    52    55    96  

Cash, cash equivalents and short-term investments

  4    14    9    31  
                

Gross investment income before expenses and fees

  847    803    1,636    1,535  

Expenses and fees

  (24  (22  (48  (43
                

Net investment income

 $823   $781   $1,588   $1,492  
                

(1)

See note 7 for additional information related to consolidated securitization entities.

   Three months ended
March 31,
 

(Amounts in millions)

  2011  2010 

Fixed maturity securities—taxable

  $670   $626  

Fixed maturity securities—non-taxable

   11    16  

Commercial mortgage loans

   92    104  

Restricted commercial mortgage loans related to securitization entities

   10    10  

Equity securities

   3    2  

Other invested assets

   34    (2

Restricted other invested assets related to securitization entities

   —      1  

Policy loans

   29    27  

Cash, cash equivalents and short-term investments

   6    5  
         

Gross investment income before expenses and fees

   855    789  

Expenses and fees

   (25  (24
         

Net investment income

  $830   $765  
         

(b) Net Investment Gains (Losses)

The following table sets forth net investment gains (losses) for the periods indicated:

 

 Three months ended
June 30,
 Six months ended
June 30,
   Three months ended
March 31,
 

(Amounts in millions)

     2010         2009     2010 2009   2011 2010 

Available-for-sale securities:

       

Realized gains on sale

 $53   $21   $76   $50  

Realized losses on sale

  (36  (48  (74  (111

Realized gains

  $29   $23  

Realized losses

   (31  (38
       

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

   (2  (15
       

Impairments:

       

Total other-than-temporary impairments

  (24  (476  (101  (1,073   (31  (77

Portion of other-than-temporary impairments recognized in other comprehensive income (loss)

  (27  324    (30  324     (5  (3
                   

Net other-than-temporary impairments

  (51  (152  (131  (749   (36  (80
                   

Trading securities

  (4  11    2    (1   11    6  

Commercial mortgage loans

  (18  (5  (22  (11   (1  (4

Net gains (losses) related to securitization entities(1)

  (47  —      (36  —    

Derivative instruments(2)

  (38  114    (46  (7

Net gains (losses) related to securitization entities

   10    11  

Derivative instruments(1)

   (10  (8

Other

  2    6    22    6     —      20  
                   

Net investment gains (losses)

 $(139 $(53 $(209 $(823  $(28 $(70
                   

 

(1)

See note 7 for additional information related to consolidated securitization entities.

(2)

See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three monthsperiods ended June 30,March 31, 2011 and 2010 and 2009 was $858$397 million and $367$558 million, respectively, which was approximately 96% and 89%, respectively,94% of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2010 and 2009 was $1,416 million and $737 million, respectively, which was approximately 95% and 87%, respectively, of book value.for both periods.

The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (loss) (“OCI”) as of or for the periods indicated:three months ended March 31:

 

   As of or for the
three months ended
June 30,
 

(Amounts in millions)

      2010          2009     

Cumulative credit loss beginning balance

  $1,025   $—    

Impact upon adoption of new accounting guidance

   —      1,204  

Additions:

   

Other-than-temporary impairments not previously recognized

   11    56  

Increases related to other-than-temporary impairments previously recognized

   32    95  

Reductions:

   

Securities sold, paid down or disposed

   (90  (270

Securities where there is intent to sell

   —      —    
         

Cumulative credit loss ending balance

  $978   $1,085  
         

   As of or for the
six months ended
June 30,
 

(Amounts in millions)

  2010  2009 

Cumulative credit loss beginning balance

  $1,059   $—    

Impact upon adoption of new accounting guidance

   —      1,204  

Additions:

   

Other-than-temporary impairments not previously recognized

   31    56  

Increases related to other-than-temporary impairments previously recognized

   78    95  

Reductions:

   

Securities sold, paid down or disposed

   (190  (270

Securities where there is intent to sell

   —      —    
         

Cumulative credit loss ending balance

  $978   $1,085  
         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(Amounts in millions)

  2011  2010 

Beginning balance

  $784   $1,059 

Additions:

   

Other-than-temporary impairments not previously recognized

   3    20  

Increases related to other-than-temporary impairments previously recognized

   31    46  

Reductions:

   

Securities sold, paid down or disposed

   (63  (100

Securities where there is intent to sell

   —      —    
         

Ending balance

  $755   $1,025  
         

(c) Unrealized Investment Gains and Losses

Net unrealized gains and losses on investment securities classified as available-for-sale and other invested assets are reduced by deferred income taxes and adjustments to present value of future profits, deferred acquisition costs and sales inducements that would have resulted had such gains and losses been realized. Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:

 

(Amounts in millions)

  June 30, 2010 December 31, 2009   March 31, 2011 December 31, 2010 

Net unrealized gains (losses) on investment securities:

      

Fixed maturity securities

  $296   $(2,245  $548   $511  

Equity securities

   7    20     20    9  

Other invested assets

   (27  (29   (20  (22
              

Subtotal

   276    (2,254   548    498  

Adjustments to present value of future profits, deferred acquisition costs and sales inducements

   (162  138  

Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves

   (546  (583

Income taxes, net

   (37  757     2    35  
              

Net unrealized investment gains (losses)

   77    (1,359   4    (50

Less: net unrealized investment gains (losses) attributable to noncontrolling interests

   48    39     41    50  
              

Net unrealized investment gains (losses) attributable to Genworth
Financial, Inc.

  $29   $(1,398  $(37 $(100
              

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The change in net unrealized gains (losses) on available-for-sale securities reported in accumulated other comprehensive income (loss) was as follows as of or for the periods indicated:three months ended March 31:

 

  As of or for the
three months ended
June 30,
 

(Amounts in millions)

  2010 2009   2011 2010 

Beginning balance

  $(860 $(4,095  $(100 $(1,398

Cumulative effect of change in accounting

   —      (349

Impact upon adoption of new accounting guidance

   —      91  

Unrealized gains (losses) arising during the period:

      

Unrealized gains (losses) on investment securities

   1,498    2,261     12    763  

Adjustment to deferred acquisition costs

   (80  (164   (21  (113

Adjustment to present value of future profits

   (51  (79   (1  (31

Adjustment to sales inducements

   (10  1     (4  (15

Adjustment to benefit reserves

   63    —    

Provision for income taxes

   (480  (714   (20  (220
              

Change in unrealized gains (losses) on investment securities

   877    1,305     29    384  

Reclassification adjustments to net investment (gains) losses, net of taxes of $(11) and $(63)

   22    116  

Reclassification adjustments to net investment (gains) losses, net of taxes of $(13) and $(34)

   25    62  
              

Change in net unrealized investment gains (losses)

   899    1,072     54    537  

Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests

   10    —    

Less: change in net unrealized investment (gains) losses attributable to noncontrolling interests

   9    1  
              

Ending balance

  $29   $(3,023  $(37 $(860
              

(d) Fixed Maturity and Equity Securities

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

(Amounts in millions)

  Amortized
cost or
cost
   Gross unrealized gains   Gross unrealized losses  Fair
value
 
    Not other-than-
temporarily
impaired
   Other-than-
temporarily
impaired
   Not other-than-
temporarily
impaired
  Other-than-
temporarily
impaired
  

Fixed maturity securities:

          

U.S. government, agencies and government-sponsored enterprises

  $3,352    $102    $—      $(40 $—     $3,414  

Tax-exempt

   1,029     16     —       (117  —      928  

Government—non-U.S.

   2,267     99     —       (7  —      2,359  

U.S. corporate

   23,069     1,062     12     (390  —      23,753  

Corporate—non-U.S.

   13,655     454     —       (163  (9  13,937  

Residential mortgage-backed

   4,897     134     20     (270  (181  4,600  

Commercial mortgage-backed

   3,841     120     3     (172  (36  3,756  

Other asset-backed

   2,324     19     —       (90  (2  2,251  
                            

Total fixed maturity securities

   54,434     2,006     35     (1,249  (228  54,998  

Equity securities

   334     24     —       (3  —      355  
                            

Total available-for-sale securities

  $54,768    $2,030    $35    $(1,252 $(228 $55,353  
                            

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

   As of or for the
six months ended
June 30,
 

(Amounts in millions)

  2010  2009 

Beginning balance

  $(1,398 $(4,038

Cumulative effect of change in accounting

   91    (349

Unrealized gains (losses) arising during the period:

   

Unrealized gains (losses) on investment securities

   2,261    1,558  

Adjustment to deferred acquisition costs

   (193  (184

Adjustment to present value of future profits

   (81  (70

Adjustment to sales inducements

   (26  —    

Provision for income taxes

   (700  (467
         

Change in unrealized gains (losses) on investment securities

   1,261    837  

Reclassification adjustments to net investment (gains) losses, net of taxes of $(45) and $(284)

   84    527  
         

Change in net unrealized investment gains (losses)

   1,436    1,015  

Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests

   9    —    
         

Ending balance

  $29   $(3,023
         

(d) Fixed Maturity and Equity Securities

As of June 30,December 31, 2010, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

(Amounts in millions)

 Amortized
cost or
cost
 Gross unrealized gains Gross unrealized losses  Fair
value
  Not other-than-
temporarily
impaired
 Other-than-
temporarily
impaired
 Not other-than-
temporarily
impaired
  Other-than-
temporarily
impaired
  

Fixed maturity securities:

      

U.S. government, agencies and government-sponsored enterprises

 $3,422 $262 $—   $—     $—     $3,684

Tax-exempt

  1,407  39  —    (96  —      1,350

Government—non-U.S.

  2,023  126  —    (3  —      2,146

U.S. corporate

  22,529  1,332  7  (489  (1  23,378

Corporate—non-U.S.

  12,572  494  12  (279  —      12,799

Residential mortgage-backed

  4,395  160  8  (347  (261  3,955

Commercial mortgage-backed

  4,117  152  7  (488  (62  3,726

Other asset-backed

  2,640  18  —    (297  (13  2,348
                    

Total fixed maturity securities

  53,105  2,583  34  (1,999  (337  53,386

Equity securities

  192  13  —    (6  —      199
                    

Total available-for-sale securities

 $53,297 $2,596 $34 $(2,005 $(337 $53,585
                    

(Amounts in millions)

  Amortized
cost or
cost
   Gross unrealized gains   Gross unrealized losses  Fair
value
 
    Not other-than-
temporarily
impaired
   Other-than-
temporarily
impaired
   Not other-than-
temporarily
impaired
  Other-than-
temporarily
impaired
  

Fixed maturity securities:

          

U.S. government, agencies and government-sponsored enterprises

  $3,568    $145    $—      $(8 $—     $3,705  

Tax-exempt

   1,124     19     —       (113  —      1,030  

Government—non-U.S.

   2,257     118     —       (6  —      2,369  

U.S. corporate

   23,282     1,123     10     (448  —      23,967  

Corporate—non-U.S.

   13,180     485     —       (167  —      13,498  

Residential mortgage-backed

   4,821     116     18     (304  (196  4,455  

Commercial mortgage-backed

   3,936     132     6     (286  (45  3,743  

Other asset-backed

   2,494     18     —       (94  (2  2,416  
                            

Total fixed maturity securities

   54,662     2,156     34     (1,426  (243  55,183  

Equity securities

   323     13     —       (4  —      332  
                            

Total available-for-sale securities

  $54,985    $2,169    $34    $(1,430 $(243 $55,515  
                            

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

As of December 31, 2009, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

(Amounts in millions)

  Amortized
cost or
cost
  Gross unrealized gains  Gross unrealized losses  Fair
value
    Not other-than-
temporarily
impaired
  Other-than-
temporarily
impaired
  Not other-than-
temporarily
impaired
  Other-than-
temporarily
impaired
  

Fixed maturity securities:

  ��       

U.S. government, agencies and government-sponsored enterprises

  $2,673  $25  $—    $(96 $—     $2,602

Tax-exempt

   1,606   42   —     (104  —      1,544

Government—non-U.S.

   2,310   96   —     (22  —      2,384

U.S. corporate

   21,598   628   3   (814  (3  21,412

Corporate—non-U.S.

   12,530   366   11   (356  —      12,551

Residential mortgage-backed

   3,989   41   7   (484  (326  3,227

Commercial mortgage-backed

   4,404   44   4   (738  (97  3,617

Other asset-backed

   2,887   8   —     (466  (14  2,415
                        

Total fixed maturity securities

   51,997   1,250   25   (3,080  (440  49,752

Equity securities

   139   23   —     (3  —      159
                        

Total available-for-sale securities

  $52,136  $1,273  $25  $(3,083 $(440 $49,911
                        

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table presents the gross unrealized losses and 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 June 30, 2010:March 31, 2011:

 

  Less than 12 months  12 months or more Less than 12 months 12 months or more Total 

(Dollar amounts in millions)

  Fair
value
  Gross
unrealized
losses
 Number of
securities
  Fair
value
  Gross
unrealized
losses
 Number of
securities
 Fair
value
 Gross
unrealized
losses
 Number of
securities
 Fair
value
 Gross
unrealized
losses
(1)
 Number of
securities
 Fair
value
 Gross
unrealized
losses
(2)
 Number of
securities
 

Description of Securities

                   

Fixed maturity securities:

                   

U.S. government, agencies and government-sponsored enterprises

 $1,187   $(40  56   $—     $—      —     $1,187   $(40  56  

Tax-exempt

  $106  $(3 33  $272  $(93 93  229    (13  81    244    (104  91    473    (117  172  

Government—non-U.S.

   69   (1 30   34   (2 6  312    (6  80    39    (1  11    351    (7  91  

U.S. corporate

   1,257   (47 168   3,596   (443 304  3,883    (140  484    2,068    (250  174    5,951    (390  658  

Corporate—non-U.S.

   926   (32 163   1,774   (247 161  2,633    (82  362    992    (90  92    3,625    (172  454  

Residential mortgage-backed

   291   (5 76   1,097   (603 461  454    (23  80    964    (428  389    1,418    (451  469  

Commercial mortgage-backed

   79   (4 11   1,282   (546 277  254    (10  37    1,105    (198  199    1,359    (208  236  

Other asset-backed

   413   (1 28   969   (309 147  173    (1  30    424    (91  46    597    (92  76  
                                             

Subtotal, fixed maturity securities

   3,141   (93 509   9,024   (2,243 1,449  9,125    (315  1,210    5,836    (1,162  1,002    14,961    (1,477  2,212  

Equity securities

   51   (5 41   7   (1 8  71    (2  46    6    (1  11    77    (3  57  
                                             

Total for securities in an unrealized loss position

  $3,192  $(98 550  $9,031  $(2,244 1,457 $9,196   $(317  1,256   $5,842   $(1,163  1,013   $15,038   $(1,480  2,269  
                                             

% Below cost—fixed maturity securities:

          

<20% Below cost

  $3,089  $(71 469  $6,602  $(515 763

20-50% Below cost

   51   (20 22   2,069   (1,006 406

>50% Below cost

   1   (2 18   353   (722 280
                  

Total fixed maturity securities

   3,141   (93 509   9,024   (2,243 1,449
                  

% Below cost—equity securities:

          

<20% Below cost

   46   (2 40   7   (1 8

20-50% Below cost

   5   (3 1   —     —     —  
                  

Total equity securities

   51   (5 41   7   (1 8
                  

Total for securities in an unrealized loss position

  $3,192  $(98 550  $9,031  $(2,244 1,457
                  

Investment grade

  $2,564  $(81 422  $7,203  $(1,386 959

Below investment grade

   628   (17 128   1,828   (858 498
                  

Total for securities in an unrealized loss position

  $3,192  $(98 550  $9,031  $(2,244 1,457
                  

(1)

Amounts included $218 million of unrealized losses on other-than-temporarily impaired securities.

(2)

Amounts included $228 million of unrealized losses on other-than-temporarily impaired securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Aging of Gross Unrealized Losses and Other-Than-Temporary Losses

The following table presents the gross unrealized losses and number of investment securities, aggregated by investment type and length of time that individual investment securities have been in ana continuous unrealized loss position, as of June 30, 2010 consisted of 2,007 securities and accounted for unrealized losses of $2,342 million. Of these unrealized losses of $2,342 million, 63% were investment grade (rated “AAA” through “BBB-”) and 25% were less than 20% below cost. March 31, 2011:

  Less than 20%  20% to 50%  Greater than 50% 

(Dollar amounts in
millions)

 Gross
unrealized
losses
  % of total
gross
unrealized
losses
  Number
of
securities
  Gross
unrealized
losses
  % of total
gross
unrealized
losses
  Number
of
securities
  Gross
unrealized
losses
  % of total
gross
unrealized
losses
  Number
of
securities
 

Fixed maturity securities:

         

Less than 12 months:

         

Investment grade

 $(278  19  1,143   $(24  2  8   $—      —    —    

Below investment grade

  (11  1    50    (1  —      3    (1  —      6  
                                    

Total

  (289  20    1,193    (25  2    11    (1  —      6  
                                    

12 months or more:

         

Investment grade

  (279  19    437    (246  16    128    (63  4    24  

Below investment grade (1)

  (86  6    149    (293  20    155    (195  13    109  
                                    

Total

  (365  25    586    (539  36    283    (258  17    133  
                                    

Equity securities:

         

Less than 12 months:

         

Investment grade

  (1  —      24    —      —      —      —      —      —    

Below investment grade

  (1  —      22    —      —      —      —      —      —    
                                    

Total

  (2  —      46    —      —      —      —      —      —    
                                    

12 months or more:

         

Investment grade

  (1  —      11    —      —      —      —      —      —    

Below investment grade

  —      —      —      —      —      —      —      —      —    
                                    

Total

  (1  —      11    —      —      —      —      —      —    
                                    

Total

 $(657  45  1,836   $(564  38  294   $(259  17  139  
                                    

(1)

Amounts included $202 million of unrealized losses on other-than-temporarily impaired securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The securities less than 20% below cost were primarily attributable to credit spreads that have widened since acquisition for certain mortgage-backed and asset-backed securities and corporate securities in the finance and insurance sector. Included in these unrealized losses as

Concentration of June 30, 2010 was $337 million of unrealized losses on other-than-

GENWORTH FINANCIAL, INC.Gross Unrealized Losses and Other-Than-Temporary Losses by Sector

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

temporarily impaired securities. OfThe following table presents the total unrealized losses on other-than-temporarily impaired securities, $332 million have been in an unrealized loss position for more than 12 months.

Of the unrealized lossesconcentration of $2,342 million, $1,468 million were related to structured securities and $552 million were related to corporate securities in the finance and insurance sector. Of the remaining gross unrealized losses of $322 million, $99 million were related to tax-exempt and government—non-U.S. securities and $223 million were primarily related to other corporate securities that were spread evenly across all other sectors with no individualby sector exceeding $40 million.

Of the $1,468 million unrealized losses in structured securities, 41% were in residential mortgage-backed securities and 37% were in commercial mortgage-backed securities with the remainder in other asset-backed securities. Approximately 54% of the total unrealized losses in structured securities were on securities that have retained investment grade ratings. Most of these securities have been in an unrealized loss position for 12 months or more. Given ongoing concern about the housing market and unemployment, the fair value of these securities has declined due to credit spreads that have widened since acquisition. We examined the performance of the underlying collateral and developed our estimate of cash flows expected to be collected. In doing so, we identified certain securities where the non-credit portion of other-than-temporary impairments was recorded in OCI. Based on this evaluation, we determined that the unrealized losses on our mortgage-backed and asset-backed securities represented temporary impairments as of June 30, 2010.March 31, 2011:

Of the $552 million unrealized losses in the finance and insurance sector, most have been in an unrealized loss position for 12 months or more. Most of these securities have retained a credit rating of investment grade. A portion of the unrealized losses included securities where an other-than-temporary impairment was recorded in OCI. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these securities represented temporary impairments as of June 30, 2010. A subset of the securities issued by banks and other financial institutions represent investments in financial hybrid securities on which a debt impairment model was employed. Most of these securities retain a credit rating of investment grade. The majority of these securities were issued by foreign financial institutions. The fair value of these securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred. The remaining unrealized losses in our U.S. and non-U.S. corporate securities were evenly distributed across all other major industry types that comprise our corporate bond holdings.

Of the investment securities in an unrealized loss position for 12 months or more as of June 30, 2010, 686 securities were 20% or more below cost, of which 357 securities were also below investment grade (rated “BB+” and below) and accounted for unrealized losses of $747 million. These securities were primarily structured securities or securities issued by corporations in the finance and insurance sector. Included in this amount are other-than-temporarily impaired securities where the non-credit loss of $260 million was recorded in OCI.

   Investment grade  Below investment grade 

(Amounts in millions)

  Gross
unrealized
losses
  % of gross
unrealized
losses
  Gross
unrealized
losses
  % of gross
unrealized
losses
 

Fixed maturity securities:

     

U.S. government, agencies and government-sponsored enterprises

  $(40  3 $—      —  

Tax-exempt

   (115  8    (2  —    

Government—non-U.S.

   (7  1    —      —    

U.S. corporate

   (360  24    (30  2  

Corporate—non-U.S.

   (158  11    (14  1  

Residential mortgage-backed

   (95  6    (356  24  

Commercial mortgage-backed

   (93  6    (115  8  

Other asset-backed

   (22  1    (70  5  
                 

Subtotal, fixed maturity securities

   (890  60    (587  40  

Equity securities

   (2  —      (1  —    
                 

Total

  $(892  60 $(588  40
                 

While certain securities included in the preceding tabletables were considered other-than-temporarily impaired, we expect to recover the new amortized cost based on our estimate of cash flows to be collected. We do not intend to sell and it is not more likely than not that we will be required to sell these securities prior to recovering our amortized cost.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Despite the considerable analysis and rigor employed on our structured securities, it is at least reasonably possible that the underlying collateral of these investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of asset-backed and mortgage-backed securities and potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. We expect our investments in corporate securities will continue to perform in accordance with our conclusions about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Structured Securities

The following table presents the concentration of gross unrealized losses related to structured securities as of March 31, 2011:

   Investment grade  Below investment grade 

(Amounts in millions)

  Gross
unrealized
losses
  % of gross
unrealized
losses
  Gross
unrealized
losses
  % of gross
unrealized
losses
 

Structured securities:

     

Residential mortgage-backed

  $(95  13 $(356  48

Commercial mortgage-backed

   (93  12    (115  15  

Other asset-backed

   (22  3    (70  9  
                 

Total structured securities

  $(210  28 $(541  72
                 

Most of the structured securities have been in an unrealized loss position for 12 months or more. Given ongoing concern about the housing market and unemployment, the fair value of these securities has declined due to credit spreads that have widened since acquisition. We examined the performance of the underlying collateral and developed our estimate of cash flows expected to be collected. In doing so, we identified certain securities where the non-credit portion of other-than-temporary impairments was recorded in OCI. Based on this evaluation, we determined that the unrealized losses on our mortgage-backed and asset-backed securities represented temporary impairments as of March 31, 2011.

Corporate Securities

The following table presents the concentration of gross unrealized losses related to corporate debt and equity securities by industry as of March 31, 2011:

   Investment grade  Below investment grade 

(Amounts in millions)

  Less than
12 months
  12 months
or more
  Less than
12 months
  12 months
or more
 

Industry:

     

Finance and insurance

  $(45 $(216 $(9 $(15

Utilities and energy

   (64  (9  —      —    

Consumer—non-cyclical

   (23  (7  —      (3

Consumer—cyclical

   (4  (6  (1  (2

Capital goods

   (6  (7  —      (7

Industrial

   (15  (13  —      (2

Technology and communications

   (19  (6  —      (2

Transportation

   (3  (27  —      —    

Other

   (33  (17  (2  (2
                 

Total

  $(212 $(308 $(12 $(33
                 

A portion of the unrealized losses in the finance and insurance sector included debt securities where an other-than-temporary impairment was recorded in OCI. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of March 31, 2011. A subset of the securities issued by banks and other financial institutions represent investments in financial hybrid securities on which a debt impairment model was employed. The majority of hybrid securities retain a credit rating of investment grade and were issued by foreign financial institutions. The fair value of the hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred.

The following table presents the gross unrealized losses and 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 December 31, 2009:2010:

 

  Less than 12 months  12 months or more Less than 12 months 12 months or more Total 

(Dollar amounts in millions)

  Fair
value
  Gross
unrealized
losses
 Number of
securities
  Fair
value
  Gross
unrealized
losses
 Number of
securities
 Fair
value
 Gross
unrealized
losses
 Number  of
securities
 Fair
value
 Gross
unrealized
losses(1)
 Number  of
securities
 Fair
value
 Gross
unrealized
losses(2)
 Number  of
securities
 

Description of Securities

                   

Fixed maturity securities:

                   

U.S. government, agencies and government-sponsored enterprises

  $1,759  $(95 81  $6  $(1 2 $545   $(8  36   $—     $—      —     $545   $(8  36  

Tax-exempt

   152   (6 48   346   (98 113  285    (12  101    244    (101  90    529    (113  191  

Government—non-U.S.

   341   (3 60   105   (19 35  431    (5  69    21    (1  7    452    (6  76  

U.S. corporate

   2,823   (81 317   5,660   (736 510  3,615    (125  443    2,338    (323  191    5,953    (448  634  

Corporate—non-U.S.

   1,721   (55 221   2,245   (301 258  2,466    (53  296    1,141    (114  102    3,607    (167  398  

Residential mortgage-backed

   941   (252 256   1,012   (558 348  461    (23  92    1,031    (477  416    1,492    (500  508  

Commercial mortgage-backed

   714   (64 81   1,720   (771 345  177    (8  26    1,167    (323  225    1,344    (331  251  

Other asset-backed

   329   (6 43   1,727   (474 183  401    (2  37    512    (94  53    913    (96  90  
                                             

Subtotal, fixed maturity securities

   8,780   (562 1,107   12,821   (2,958 1,794  8,381    (236  1,100    6,454    (1,433  1,084    14,835    (1,669  2,184  

Equity securities

   2   (1 3   12   (2 9  77    (3  48    5    (1  4    82    (4  52  
                                             

Total for securities in an unrealized loss position

  $8,782  $(563 1,110  $12,833  $(2,960 1,803 $8,458   $(239  1,148   $6,459   $(1,434  1,088   $14,917   $(1,673  2,236  
                                             

% Below cost—fixed maturity securities:

          

<20% Below cost

  $8,437  $(245 920  $9,699  $(762 1,055

20-50% Below cost

   267   (137 91   2,637   (1,246 455

>50% Below cost

   76   (180 96   485   (950 284
                  

Total fixed maturity securities

   8,780   (562 1,107   12,821   (2,958 1,794
                  

% Below cost—equity securities:

          

<20% Below cost

   2   (1 3   11   (1 5

>50% Below cost

   —     —     —     1   (1 4
                  

Total equity securities

   2   (1 3   12   (2 9
                  

Total for securities in an unrealized loss position

  $8,782  $(563 1,110  $12,833  $(2,960 1,803
                  

Investment grade

  $8,391  $(320 891  $10,897  $(2,122 1,390

Below investment grade

   391   (243 219   1,936   (838 413
                  

Total for securities in an unrealized loss position

  $8,782  $(563 1,110  $12,833  $(2,960 1,803
                  

(1)

Amounts included $240 million of unrealized losses on other-than-temporarily impaired securities.

(2)

Amounts included $243 million of unrealized losses on other-than-temporarily impaired securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and number of investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2010:

  Less than 20%  20% to 50%  Greater than 50% 

(Dollar amounts in millions)

 Gross
unrealized
losses
  % of total
gross
unrealized
losses
  Number
of
securities
  Gross
unrealized
losses
  % of total
gross
unrealized
losses
  Number
of
securities
  Gross
unrealized
losses
  % of total
gross
unrealized
losses
  Number
of
securities
 

Fixed maturity securities:

         

Less than 12 months:

         

Investment grade

 $(222  13  1,031   $(7  1  8   $—      —    —    

Below investment grade

  (4  —      45    (1  —      10    (2  —      6  
                                    

Total

  (226  13    1,076    (8  1    18    (2  —      6  
                                    

12 months or more:

         

Investment grade

  (330  20    473    (328  20    166    (105  6    40  

Below investment grade (1)

  (88  5    115    (324  19    162    (258  16    128  
                                    

Total

  (418  25    588    (652  39    328    (363  22    168  
                                    

Equity securities:

         

Less than 12 months:

         

Investment grade

  (1  —      20    (1  —      1    —      —      —    

Below investment grade

  (1  —      27    —      —      —      —      —      —    
                                    

Total

  (2  —      47    (1  —      1    —      —      —    
                                    

12 months or more:

         

Investment grade

  (1  —      4    —      —      —      —      —      —    

Below investment grade

  —      —      —      —      —      —      —      —      —    
                                    

Total

  (1  —      4    —      —      —      —      —      —    
                                    

Total

 $(647  38  1,715   $(661  40  347   $(365  22  174  
                                    

(1)

Amounts included $213 million of unrealized losses on other-than-temporarily impaired securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The scheduled maturity distribution of fixed maturity securities as of June 30, 2010March 31, 2011 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Amounts in millions)

  Amortized
cost or
cost
  Fair
value
  Amortized
cost or
cost
   Fair
value
 

Due one year or less

  $2,776  $2,801  $2,360    $2,379  

Due after one year through five years

   11,367   11,696   11,966     12,248  

Due after five years through ten years

   8,494   8,877   9,324     9,678  

Due after ten years

   19,316   19,983   19,722     20,086  
              

Subtotal

   41,953   43,357   43,372     44,391  

Residential mortgage-backed

   4,395   3,955   4,897     4,600  

Commercial mortgage-backed

   4,117   3,726   3,841     3,756  

Other asset-backed

   2,640   2,348   2,324     2,251  
              

Total

  $53,105  $53,386  $54,434    $54,998  
              

As of June 30, 2010, $5,015March 31, 2011, $4,504 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of June 30, 2010,March 31, 2011, securities issued by finance and insurance, utilities and energy, and consumer—non-cyclical industry groups represented approximately 24%23%, 22% and 12%11% of our domestic and foreign corporate fixed maturity securities portfolio, respectively. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the U.S.United States and internationally, and is not dependent on the economic stability of one particular region.

As of June 30, 2010,March 31, 2011, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of prepayments, amortization and allowance for loan losses.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the periodsdates indicated:

 

  June 30, 2010 December 31, 2009   March 31, 2011 December 31, 2010 

(Amounts in millions)

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

Property Type

     

Property type:

     

Retail

  $2,047   28 $2,115   28  $1,976    30 $1,974    29

Office

   1,971   27    2,025   27     1,822    27    1,850    27  

Industrial

   1,903   26    1,979   26     1,745    26    1,788    26  

Apartments

   812   11    832   11     700    11    725    11  

Mixed use/other

   540   8    590   8     411    6    435    7  
                          

Total principal balance

   7,273   100  7,541   100   6,654    100  6,772    100
                  

Unamortized balance of loan origination fees and costs

   5     6      4     5   

Allowance for losses(1)

   (70   (48 

Allowance for losses

   (58   (59 
                  

Total(2)

  $7,208    $7,499   

Total

  $6,600    $6,718   
                  
  March 31, 2011 December 31, 2010 

(Amounts in millions)

  Carrying
value
 % of
total
 Carrying
value
 % of
total
 

Geographic region:

     

Pacific

  $1,746    26 $1,769    26

South Atlantic

   1,577    24    1,583    23  

Middle Atlantic

   880    13    937    14  

East North Central

   603    9    612    9  

Mountain

   527    8    540    8  

New England

   480    7    482    7  

West North Central

   355    5    369    6  

West South Central

   305    5    297    4  

East South Central

   181    3    183    3  
             

Total principal balance

   6,654    100  6,772    100
         

Unamortized balance of loan origination fees and costs

   4     5   

Allowance for losses

   (58   (59 
         

Total

  $6,600    $6,718   
         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)

Included $13 million related to held-for-sale commercial mortgage loans as of June 30, 2010.

The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:

(2)

Included held-for-sale mortgage loans of $37 million and $17 million as of June 30, 2010 and December 31, 2009, respectively. The held-for-sale mortgage loans as of December 31, 2009 represented interests in reverse mortgage loans. In the first quarter of 2010, we began reporting held-for-sale reverse mortgages in other invested assets.

 

   June 30, 2010  December 31, 2009 

(Amounts in millions)

  Carrying
value
  % of
total
  Carrying
value
  % of
total
 

Geographic Region

     

Pacific

  $1,937   27 $2,005   27

South Atlantic

   1,660   23    1,711   23  

Middle Atlantic

   974   13    1,005   13  

East North Central

   701   10    728   10  

Mountain

   624   8    650   9  

New England

   491   7    492   6  

West North Central

   378   5    389   5  

West South Central

   314   4    331   4  

East South Central

   194   3    230   3  
               

Total principal balance

   7,273   100  7,541   100
         

Unamortized balance of loan origination fees and costs

   5     6   

Allowance for losses(1)

   (70   (48 
           

Total(2)

  $7,208    $7,499   
           
   March 31, 2011 

(Amounts in millions)

  31 – 60  days
past due
  61 – 90  days
past due
  Greater than
90 days past
due
  Total
past due
  Current  Total 

Property type:

       

Retail

  $3   $3   $—     $6   $1,970   $1,976  

Office

   —      —      10    10    1,812    1,822  

Industrial

   —      4    12    16    1,729    1,745  

Apartments

   —      —      —      —      700    700  

Mixed use/other

   —      —      —      —      411    411  
                         

Total principal balance

  $3   $7   $22   $32   $6,622   $6,654  
                         

% of total commercial mortgage loans

   —    —    —    —    100  100
                         

 

(1)

Included $13 million related to held-for-sale commercial mortgage loans as of June 30, 2010.

(2)

Included held-for-sale mortgage loans of $37 million and $17 million as of June 30, 2010 and December 31, 2009, respectively. The held-for-sale mortgage loans as of December 31, 2009 represented interests in reverse mortgage loans. In the first quarter of 2010, we began reporting held-for-sale reverse mortgages in other invested assets.

   December 31, 2010 

(Amounts in millions)

  31 – 60  days
past due
  61 – 90  days
past due
  Greater than
90 days past
due
  Total
past due
  Current  Total 

Property type:

       

Retail

  $—     $—     $—     $—     $1,974   $1,974  

Office

   —      —      12    12    1,838    1,850  

Industrial

   —      6    27    33    1,755    1,788  

Apartments

   —      —      —      —      725    725  

Mixed use/other

   —      —      —      —      435    435  
                         

Total principal balance

  $—     $6   $39   $45   $6,727   $6,772  
                         

% of total commercial mortgage loans

   —    —    1  1  99  100
                         

As of March 31, 2011 and December 31, 2010, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

“Impaired”The following table sets forth the commercial mortgage loans are definedon nonaccrual status by U.S. GAAPproperty type as of the dates indicated:

(Amounts in millions)

  March 31,
2011
   December 31,
2010
 

Property type:

    

Retail

  $—      $—    

Office

   10     12  

Industrial

   12     27  

Apartments

   —       —    

Mixed use/other

   —       —    
          

Total principal balance

  $22    $39  
          

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement.period ended March 31:

Under these principles, we may have two types of “impaired” loans: loans requiring specific allowances for losses ($5 million for the six months ended June 30, 2010 and $21 million for the year ended December 31, 2009) and loans expected to be fully recoverable because the carrying amount has been reduced previously through charge-offs or deferral of income recognition (none for the six months ended June 30, 2010 and for the year ended December 31, 2009).

Average investment in specifically impaired loans was $3 million and $10 million as of June 30, 2010 and December 31, 2009, respectively, and there was no interest income recognized on these loans while they were considered impaired.

(Amounts in millions)

  2011 

Allowance for credit losses:

  

Beginning balance

  $59  

Charge-offs

   (1

Recoveries

   —    

Provision

   —    
     

Ending balance

  $58  
     

Ending allowance for individually impaired loans

  $—    
     

Ending allowance for loans not individually impaired that were evaluated collectively for impairment

  $58  
     

Principal balance:

  

Ending balance

  $6,654  
     

Ending balance of individually impaired loans

  $14  
     

Ending balance of loans not individually impaired that were evaluated collectively for impairment

  $6,640  
     

The following table presents the activity in the allowance for losses duringfor the periodsperiod ended March 31:

(Amounts in millions)

  2010 

Beginning balance

  $48  

Provision

   4  

Release

   —    
     

Ending balance

  $52  
     

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables set forth our individually impaired commercial mortgage loans by property type as of the dates indicated:

 

(Amounts in millions)

  Three months ended
June 30, 2010
  Six months ended
June  30, 2010

Beginning balance

  $52  $48

Provision(1)

   18   22

Release

   —     —  
        

Ending balance

  $70  $70
        
   March 31, 2011 

(Amounts in millions)

  Recorded
investment
   Unpaid
principal
balance
   Charge-
offs
   Related
allowance
   Average
recorded
investment
   Interest
income
recognized
 

Property type:

            

Retail

  $1    $2    $1    $—      $1    $—    

Office

   9     10     1     —      $3     —    

Industrial

   4     6     2     —      $4     —    

Apartments

   —       —       —       —      $—       —    

Mixed use/other

   —       —       —       —      $—       —    
                           

Total

  $14    $18    $4    $—      $3    $—    
                           

 

(1)

Included $13 million related to held-for-sale commercial mortgage loans.
   December 31, 2010 

(Amounts in millions)

  Recorded
investment
   Unpaid
principal
balance
   Charge-
offs
   Related
allowance
   Average
recorded
investment
   Interest
income
recognized
 

Property type:

            

Retail

  $5    $8    $3    $—      $2    $—    

Office

   6     8     2     —      $2     —    

Industrial

   19     24     5     —      $3     —    

Apartments

   —       —       —       —      $—       —    

Mixed use/other

   —       —       —       —      $—       —    
                           

Total

  $30    $40    $10    $—      $3    $—    
                           

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgages loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables set forth the average loan-to-value of commercial mortgage loans by property type as of the dates indicated:

   March 31, 2011 

(Amounts in millions)

  0% – 50%  51% – 60%  61% – 75%  76% – 100%  Greater
than 100%
  Total 

Property type:

       

Retail

  $477   $268   $845   $347   $39   $1,976  

Office

   318    308    702    364    130    1,822  

Industrial

   418    372    624    260    71    1,745  

Apartments

   125    188    265    107    15    700  

Mixed use/other

   99    19    143    141    9    411  
                         

Total

  $1,437   $1,155   $2,579   $1,219   $264   $6,654  
                         

% of total

   22  17  39  18  4  100
                         

Weighted-average debt service coverage ratio

   2.24    1.98    2.42    1.83    1.02    2.14  
                         

   December 31, 2010 

(Amounts in millions)

  0% – 50%  51% – 60%  61% – 75%  76% – 100%  Greater
than 100%
  Total 

Property type:

       

Retail

  $477   $287   $805   $363   $42   $1,974  

Office

   320    327    612    446    145    1,850  

Industrial

   431    361    625    284    87    1,788  

Apartments

   99    172    321    133    —      725  

Mixed use/other

   123    10    63    221    18    435  
                         

Total

  $1,450   $1,157   $2,426   $1,447   $292   $6,772  
                         

% of total

   22  17  36  21  4  100
                         

Weighted-average debt service coverage ratio

   2.24    1.99    1.79    2.42    0.75    2.01  
                         

The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:

   March 31, 2011 

(Amounts in millions)

  Less than 1.00  1.00 – 1.25  1.26 – 1.50  1.51 – 2.00  Greater
than 2.00
  Total 

Property type:

       

Retail

  $119   $309   $499   $522   $412   $1,861  

Office

   196    182    241    486    538    1,643  

Industrial

   245    163    278    708    333    1,727  

Apartments

   7    61    123    296    146    633  

Mixed use/other

   47    18    11    77    69    222  
                         

Total

  $614   $733   $1,152   $2,089   $1,498   $6,086  
                         

% of total

   10  12  19  34  25  100
                         

Weighted-average loan-to-value

   86  71  68  60  51  63
                         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   December 31, 2010 

(Amounts in millions)

  Less than 1.00  1.00 – 1.25  1.26 – 1.50  1.51 – 2.00  Greater
than 2.00
  Total 

Property type:

       

Retail

  $125   $317   $490   $512   $415   $1,859  

Office

   176    186    238    524    547    1,671  

Industrial

   260    166    292    698    346    1,762  

Apartments

   7    62    160    290    135    654  

Mixed use/other

   49    12    17    78    94    250  
                         

Total

  $617   $743   $1,197   $2,102   $1,537   $6,196  
                         

% of total

   10  12  19  34  25  100
                         

Weighted-average loan-to-value

   90  71  68  62  50  64
                         

The following tables set forth the debt service coverage ratio for floating rate commercial mortgage loans by property type as of the dates indicated:

   March 31, 2011 

(Amounts in millions)

  Less than 1.00  1.00 – 1.25  1.26 – 1.50  1.51 – 2.00  Greater than
2.00
  Total 

Property type:

       

Retail

  $—     $—     $—     $2   $113   $115  

Office

   —      —      —      9    170    179  

Industrial

   1    5    —      1    11    18  

Apartments

   —      —      —      29    38    67  

Mixed use/other

   —      4    —      —      185    189  
                         

Total

  $1   $9   $—     $41   $517   $568  
                         

% of total

   —    2  —    7  91  100
                         

Weighted-average loan-to-value

   28  58  —    69  77  76
                         
   December 31, 2010 

(Amounts in millions)

  Less than 1.00  1.00 – 1.25  1.26 – 1.50  1.51 – 2.00  Greater than
2.00
  Total 

Property type:

       

Retail

  $—     $—     $—     $2   $113   $115  

Office

   —      —      —      57    122    179  

Industrial

   1    5    —      1    19    26  

Apartments

   —      4    —      21    46    71  

Mixed use/other

   —      —      —      —      185    185  
                         

Total

  $1   $9   $—     $81   $485   $576  
                         

% of total

   —    2  —    14  84  100
                         

Weighted-average loan-to-value

   30  62  —    83  77  78
                         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the datedates indicated:

 

  June 30, 2010   March 31, 2011 December 31, 2010 

(Amounts in millions)

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

Property Type

   

Property type:

     

Retail

  $195   37  $177    36 $182    36

Industrial

   131   24     120    25    124    24  

Office

   122   23     105    22    117    23  

Apartments

   66   12     63    13    64    13  

Mixed use/other

   23   4     22    4    22    4  
                    

Total principal balance

   537   100   487    100  509    100
              

Allowance for losses

   (2    (2   (2 
              

Total

  $535     $485    $507   
              
  March 31, 2011 December 31, 2010 

(Amounts in millions)

  Carrying
value
 % of
total
 Carrying
value
 % of
total
 

Geographic region:

     

South Atlantic

  $176    36 $189    37

Pacific

   88    18    90    18  

Middle Atlantic

   68    14    70    14  

East North Central

   50    10    51    10  

Mountain

   31    7    32    6  

East South Central

   31    7    32    6  

West North Central

   30    6    31    6  

West South Central

   12    2    13    3  

New England

   1    —      1    —    
             

Total principal balance

   487    100  509    100
         

Allowance for losses

   (2   (2 
         

Total

  $485    $507   
         

As of March 31, 2011 and December 31, 2010, all restricted commercial mortgage loans were current and there were no restricted commercial mortgage loans on nonaccrual status.

Of the total carrying value of restricted commercial mortgage loans as of March 31, 2011 and December 31, 2010, $485 million and $507 million, respectively, related to loans not individually impaired that were evaluated collectively for impairment. There was no provision for credit losses recorded during the three months ended March 31, 2011 related to restricted commercial mortgage loans. A provision for credit losses of $2 million was recorded during the three months ended March 31, 2010 related to restricted commercial mortgage loans, which reflected our ending allowance for credit losses balance and was required upon consolidation of securitization entities as of January 1, 2010.

In evaluating the credit quality of restricted commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. The risks associated with restricted commercial

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

   June 30, 2010 

(Amounts in millions)

  Carrying
value
  % of
total
 

Geographic Region

   

South Atlantic

  $197   37

Pacific

   95   18  

Middle Atlantic

   72   13  

East North Central

   57   11  

Mountain

   36   7  

East South Central

   33   6  

West North Central

   33   6  

West South Central

   13   2  

New England

   1   —    
        

Total principal balance

   537   100
     

Allowance for losses

   (2 
      

Total

  $535   
      

See note 7mortgage loans can typically be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for additional information relatedan amount that would enable us to consolidated securitization entities.recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

The following tables set forth the average loan-to-value of restricted commercial mortgage loans by property type as of the dates indicated:

   March 31, 2011 

(Amounts in millions)

  0% – 50%  51% – 60%  61% – 75%  76% – 100%  Greater
than 100%
  Total 

Property type:

       

Retail

  $146   $26   $—     $2   $3   $177  

Industrial

   105    8    4    2    1    120  

Office

   88    7    5    3    2    105  

Apartments

   35    9    —      19    —      63  

Mixed use/other

   16    6    —      —      —      22  
                         

Total

  $390   $56   $9   $26   $6   $487  
                         

% of total

   80  12  2  5  1  100
                         

Weighted-average debt service coverage ratio

   1.78    1.32    1.02    1.16    0.39    1.66  
                         

   December 31, 2010 

(Amounts in millions)

  0% – 50%  51% – 60%  61% – 75%  76% – 100%  Greater
than 100%
  Total 

Property type:

       

Retail

  $141   $34   $1   $3   $3   $182  

Industrial

   108    8    4    2    2    124  

Office

   90    19    5    3    —      117  

Apartments

   35    9    —      20    —      64  

Mixed use/other

   17    5    —      —      —      22  
                         

Total

  $391   $75   $10   $28   $5   $509  
                         

% of total

   77  15  2  5  1  100
                         

Weighted-average debt service coverage ratio

   1.82    1.35    1.05    1.18    0.52    1.69  
                         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables set forth the debt service coverage ratio for fixed rate restricted commercial mortgage loans by property type as of the dates indicated:

   March 31, 2011 

(Amounts in millions)

  Less than 1.00  1.01 – 1.25  1.26 – 1.50  1.51 – 2.00  Greater
than 2.00
  Total 

Property type:

       

Retail

  $14   $9   $43   $78   $33   $177  

Industrial

   16    5    22    44    33    120  

Office

   11    17    24    37    16    105  

Apartments

   —      24    12    18    9    63  

Mixed use/other

   —      —      7    10    5    22  
                         

Total

  $41   $55   $108   $187   $96   $487  
                         

% of total

   9  11  22  38  20  100
                         

Weighted-average loan-to-value

   63  55  41  39  31  42
                         

   December 31, 2010 

(Amounts in millions)

  Less than 1.00  1.01 – 1.25  1.26 – 1.50  1.51 – 2.00  Greater
than 2.00
  Total 

Property type:

       

Retail

  $14   $6   $52   $77   $33   $182  

Industrial

   11    9    25    50    29    124  

Office

   14    14    23    45    21    117  

Apartments

   —      21    10    26    7    64  

Mixed use/other

   —      —      7    11    4    22  
                         

Total

  $39   $50   $117   $209   $94   $509  
                         

% of total

   8  10  23  41  18  100
                         

Weighted-average loan-to-value

   65  55  42  41  31  43
                         

There were no floating rate restricted commercial mortgage loans as of March 31, 2011 or December 31, 2010.

(g) Restricted Other Invested Assets Related To Securitization Entities

We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities whereby the changes in fair value are recorded in current period income (loss).income. The trading securities are comprised of asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables. See note 7 for additional information related to consolidated securitization entities.

(5) Derivative Instruments

Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges”hedges�� in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table sets forth our positions in derivative instruments as of the dates indicated:

 

  Derivative assets Derivative liabilities 

Derivative assets

 

Derivative liabilities

 
  Balance
sheet
classification
 Fair value Balance
sheet
classification
 Fair value

(Amounts in millions)

 

Balance

sheet classification

 Fair value 

Balance

sheet classification

 Fair value 
  Balance
sheet
classification
 June 30,
2010
 December 31,
2009
 Balance
sheet
classification
 June 30,
2010
 December 31,
2009
 March 31,
2011
 December 31,
2010
 March 31,
2011
 December 31,
2010
 

Derivatives designated as hedges

            

Cash flow hedges:

             

Interest rate swaps

  Other invested
assets
 $540 $72   Other
liabilities
 $9 $114 Other invested assets $168   $222   Other liabilities $106   $56  

Inflation indexed swaps

  Other invested
assets
  1  —     Other
liabilities
  22  21 Other invested assets  —      —     Other liabilities  35    33  

Foreign currency swaps

  Other invested
assets
  140  101   Other
liabilities
  —    —   Other invested assets  192    205   Other liabilities  —      —    
                          

Total cash flow hedges

    681  173     31  135   360    427     141    89  
                          

Fair value hedges:

             

Interest rate swaps

  Other invested
assets
  124  132   Other
liabilities
  11  15 Other invested assets  77    95   Other liabilities  6    8  

Foreign currency swaps

  Other invested
assets
  20  24   Other
liabilities
  —    —   Other invested assets  36    35   Other liabilities  —      —    
                          

Total fair value hedges

    144  156     11  15   113    130     6    8  
                          

Total derivatives designated as hedges

    825  329     42  150   473    557     147    97  
                          

Derivatives not designated as hedges

             

Interest rate swaps

  Other invested
assets
  509  505   Other
liabilities
  41  59 Other invested assets  385    446   Other liabilities  20    74  

Interest rate swaps related to
securitization entities(1)

  Restricted
other invested
assets
  —    —     Other
liabilities
  23  —  

Equity return swaps

 Other invested assets  —      —     Other liabilities  1    3  

Interest rate swaps related to securitization entities

 Restricted other invested assets  —      —     Other liabilities  16    19  

Interest rate swaptions

  Other invested
assets
  4  54   Other
liabilities
  —    67 Other invested assets  —      —     Other liabilities  —      —    

Credit default swaps

  Other invested
assets
  2  11   Other
liabilities
  27  3 Other invested assets  11    11   Other liabilities  7    7  

Credit default swaps related to
securitization entities(1)

  Restricted
other invested
assets
  —    —     Other
liabilities
  159  —  

Credit default swaps related to securitization entities

 Restricted other invested assets  —      —     Other liabilities  120    129  

Equity index options

  Other invested
assets
  97  39   Other
liabilities
  —    2 Other invested assets  32    33   Other liabilities  —      3  

Financial futures

  Other invested
assets
  —    —     Other
liabilities
  —    —   Other invested assets  —      —     Other liabilities  —      —    

Other foreign currency contracts

  Other invested
assets
  6  8   Other
liabilities
  —    —   Other invested assets  —      —     Other liabilities  8    —    

Reinsurance embedded derivatives(2)

  Other assets  2  —     Other
liabilities
  —    —  

Reinsurance embedded
derivatives
(1)

 Other assets  —      1   Other liabilities  —      —    

GMWB embedded derivatives

  Reinsurance
recoverable (3)
  9  (5 Policyholder
account
balances(4)
  447  175 Reinsurance recoverable (2)  (7  (5 Policyholder account balances (3)  69    121  
                          

Total derivatives not designated as hedges

    629  612     697  306   421    486     241    356  
                          

Total derivatives

   $1,454 $941    $739 $456  $894   $1,043    $388   $453  
                          

 

(1)

See note 7 for additional information related to consolidated securitization entities.

(2)

Represents embedded derivatives associated with certain reinsurance agreements.

(3)(2)

Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.

(4)(3)

Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements. The amounts recognized for derivative counterparty collateral retained by us was recorded in other invested assets with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us.

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:

 

(Notional in millions)

  Measurement  December 31, 2009  Additions  Maturities/
terminations
 June 30, 2010  Measurement   December 31,
2010
   Additions   Maturities/
terminations
 March 31, 2011 

Derivatives designated as hedges

                  

Cash flow hedges:

                  

Interest rate swaps

  Notional  $9,479  $1,382  $(206 $10,655   Notional    $12,355    $995    $(3 $13,347  

Inflation indexed swaps

  Notional   376   157   (6  527   Notional     525     9     —      534  

Foreign currency swaps

  Notional   491   —     —      491   Notional     491     —       —      491  
                               

Total cash flow hedges

     10,346   1,539   (212  11,673     13,371     1,004     (3  14,372  
                               

Fair value hedges:

                  

Interest rate swaps

  Notional   2,366   —     (139  2,227   Notional     1,764     —       (326  1,438  

Foreign currency swaps

  Notional   85   —     —      85   Notional     85     —       —      85  
                               

Total fair value hedges

     2,451   —     (139  2,312     1,849     —       (326  1,523  
                               

Total derivatives designated as hedges

     12,797   1,539   (351  13,985     15,220     1,004     (329  15,895  
                               

Derivatives not designated as hedges

                  

Interest rate swaps

  Notional   6,474   2,345   (577  8,242   Notional     7,681     35     (1,275  6,441  

Equity return swaps

   Notional     208     7     —      215  

Interest rate swaps related to securitization entities

  Notional   —     138   (3  135   Notional     129     —       (3  126  

Interest rate swaptions

  Notional   5,100   200   (5,100  200   Notional     200     —       (200  —    

Credit default swaps

  Notional   1,090   50   —      1,140   Notional     1,195     115     (100  1,210  

Credit default swaps related to securitization entities

  Notional   —     322   (5  317   Notional     317     —       —      317  

Equity index options

  Notional   912   397   (614  695   Notional     744     288     (451  581  

Financial futures

  Notional   5,822   3,696   (5,019  4,499   Notional     3,937     1,372     (1,806  3,503  

Other foreign currency contracts

  Notional   521   73   —      594   Notional     521     185     —      706  

Reinsurance embedded derivatives

  Notional   —     47   —      47   Notional     72     12     —      84  
                               

Total derivatives not designated as hedges

     19,919   7,268   (11,318  15,869     15,004     2,014     (3,835  13,183  
                               

Total derivatives

    $32,716  $8,807  $(11,669 $29,854    $30,224    $3,018    $(4,164 $29,078  
                               

(Number of policies)

  Measurement   December 31,
2010
   Additions   Terminations March 31, 2011 

Derivatives not designated as hedges

         

GMWB embedded derivatives

   Policies     49,566     675     (654  49,587  

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(Number of policies)

  Measurement  December 31, 2009  Additions  Terminations  June 30, 2010

Derivatives not designated as hedges

         

GMWB embedded derivatives

  Policies  47,543  2,244  (1,445 48,342

Approximately $1.1 billion of notional value above is related to derivatives with counterparties that can be terminated at the option of the derivative counterparty and represented a net fair value asset of $148$195 million as of June 30, 2010.

GENWORTH FINANCIAL, INC.March 31, 2011.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Cash Flow Hedges

Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) pay U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure on liabilities denominated in foreign currencies; (v) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed-rate bond purchases and/or interest income; and (vi) other instruments to hedge the cash flows of various forecasted transactions.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended June 30, 2010:March 31, 2011:

 

(Amounts in millions)

 Gain (loss)
recognized in OCI
 Gain (loss)
reclassified into
net income (loss)
from OCI 
 Classification of gain
(loss) reclassified into
net income (loss)
 Gain (loss)
recognized in
net income (loss) 
(1)
 Classification of gain
(loss) recognized in
net income (loss)
  Gain (loss)
recognized in OCI
 Gain (loss)
reclassified into
net income
from OCI
 

Classification of gain
(loss) reclassified into
net income

  Gain (loss)
recognized in
net income (1)
 

Classification of gain
(loss) recognized in
net income

Interest rate swaps hedging assets

 $599   $4   Net investment
income
 $15 Net investment
gains (losses)
  $(101 $(5 Net investment income  $(2 Net investment gains (losses)

Interest rate swaps hedging liabilities

  (3  1   Interest expense  —   Net investment
gains (losses)

Foreign currency
swaps

  6    (2 Interest expense  —   Net investment
gains (losses)
   3    (1 Interest expense   —     Net investment gains (losses)
                       

Total

 $602   $3    $15   $(98 $(6   $(2 
                       

 

(1)

Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended June 30, 2009:

(Amounts in millions)

 Gain (loss)
recognized in OCI
  Gain (loss)
reclassified into
net income (loss)

from OCI 
  Classification of gain
(loss) reclassified into
net income (loss)
 Gain (loss)
recognized in
net income (loss) 
(1)
  Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

 $(177 $3   Net investment

income

 $(4 Net investment

gains (losses)

Interest rate swaps hedging assets

  —      2   Net investment

gains (losses)

  —     Net investment

gains (losses)

Foreign currency
swaps

  (1  (5 Interest expense  —     Net investment

gains (losses)

              

Total

 $(178 $—      $(4 
              

(1)

Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the six months ended June 30, 2010:

(Amounts in millions)

 Gain (loss)
recognized in OCI
  Gain (loss)
reclassified into
net income (loss)
from OCI 
  Classification of gain
(loss) reclassified into
net income (loss)
 Gain (loss)
recognized in
net income (loss) 
(1)
 Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

 $563   $8   Net investment
income
 $12 Net investment
gains (losses)

Interest rate swaps hedging assets

  —      1   Net investment
gains (losses)
  —   Net investment
gains (losses)

Interest rate swaps hedging liabilities

  (3  1   Interest expense  —   Net investment
gains (losses)

Foreign currency
swaps

  7    (4 Interest expense  —   Net investment
gains (losses)
             

Total

 $567   $6    $12 
             

(1)

Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the sixthree months ended June 30, 2009:March 31, 2010:

 

(Amounts in millions)

 Gain (loss)
recognized in OCI
 Gain (loss)
reclassified into
net income (loss)

from OCI 
 Classification of gain
(loss) reclassified into
net income (loss)
 Gain (loss)
recognized in
net income (loss) 
(1)
 Classification of gain
(loss) recognized in
net income (loss)
  Gain (loss)
recognized in OCI
 Gain (loss)
reclassified into
net income
from OCI
 

Classification of gain
(loss) reclassified into
net income

  Gain (loss)
recognized in
net income(1)
 

Classification of gain
(loss) recognized in
net income

Interest rate swaps hedging assets

 $(322 $8   Net investment
income
 $(10 Net investment

gains (losses)

  $(36 $4   Net investment income  $(3 Net investment gains (losses)

Interest rate swaps hedging assets

  —      5   Net investment

gains (losses)

  —     Net investment

gains (losses)

   —      1   Net investment gains (losses)   —     Net investment gains (losses)

Foreign currency
swaps

  (13  (8 Interest expense  —     Net investment

gains (losses)

   1    (2 Interest expense   —     Net investment gains (losses)
                        

Total

 $(335 $5    $(10   $(35 $3     $(3 
                        

 

(1)

Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The total of derivatives designated as cash flow hedges of $1.2 billion,$864 million, net of taxes, recorded in stockholders’ equity as of June 30, 2010March 31, 2011 is expected to be reclassified to future net income (loss), concurrently with and primarily offsetting changes in interest expense and interest income on floating-rate instruments and interest income on future fixed-rate bond purchases. Of this amount, $8$18 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2045. No amounts were reclassified to net income (loss) during the sixthree months ended June 30, 2010March 31, 2011 in connection with forecasted transactions that were no longer considered probable of occurring.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Fair Value Hedges

Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income (loss). In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income (loss). We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate investments to floating rate investments; (ii) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (iii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iv) other instruments to hedge various fair value exposures of investments.

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended June 30, 2010:March 31, 2011:

 

 Derivative instrument Hedged item Derivative instrument Hedged item

(Amounts in millions)

 Gain (loss)
recognized in
net income
(loss)
 Classification
of gain (loss)
recognized in

net income (loss)
 Other impacts
to net
income (loss)
 Classification
of other

impacts to
net income (loss)
 Gain (loss)
recognized in
net income
(loss)
 Classification
of gain (loss)
recognized in net
income (loss)
 Gain (loss)
recognized in
net income
 

Classification
of gain (loss)
recognized in

net income

 Other impacts
to  net

income
 Classification
of other

impacts to
net income
 Gain (loss)
recognized in
net income
 

Classification
of gain (loss)
recognized in net
income

Interest rate swaps hedging assets

 $1   Net investment
gains (losses)
 $(3 Net investment
income
 $(1 Net investment
gains (losses)
 $1   Net investment gains (losses) $(3  
 
Net investment
income
  
  
 $(1 Net investment gains (losses)

Interest rate swaps hedging liabilities

  (6 Net investment
gains (losses)
  25   Interest credited  6   Net investment
gains (losses)
  (22 Net investment gains (losses)  20    Interest credited    22   Net investment gains (losses)

Foreign currency
swaps

  (2 Net investment
gains (losses)
  1   Interest credited  2   Net investment
gains (losses)
  —     Net investment gains (losses)  1    Interest credited    (1 Net investment gains (losses)
                        

Total

 $(7  $23    $7    $(21  $18    $20   
                        

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended June 30, 2009:

  Derivative instrument Hedged item

(Amounts in millions)

 Gain (loss)
recognized in
net income
(loss)
  Classification
of gain (loss)
recognized in

net income (loss)
 Other impacts
to net
income (loss)
  Classification
of other

impacts to
net income (loss)
 Gain (loss)
recognized in
net income
(loss)
  Classification
of gain (loss)
recognized in net
income (loss)

Interest rate swaps hedging assets

 $4   Net investment

gains (losses)

 $(4 Net investment
income
 $(6 Net investment
gains (losses)

Interest rate swaps hedging liabilities

  (50 Net investment

gains (losses)

  23   Interest credited  51   Net investment
gains (losses)

Foreign currency
swaps

  (2 Net investment
gains (losses)
  —     Interest credited  1   Net investment
gains (losses)
               

Total

 $(48  $19    $46   
               

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the six months ended June 30,March 31, 2010:

 

  Derivative instrument Hedged item

(Amounts in millions)

 Gain (loss)
recognized in
net income
(loss)
  Classification
of gain (loss)
recognized in

net income (loss)
 Other impacts
to net
income (loss)
  Classification
of other

impacts to
net income (loss)
 Gain (loss)
recognized in
net income
(loss)
  Classification
of gain (loss)
recognized in net
income (loss)

Interest rate swaps hedging assets

 $2   Net investment
gains (losses)
 $(6 Net investment
income
 $(2 Net investment
gains (losses)

Interest rate swaps hedging liabilities

  (7) Net investment
gains (losses)
  50   Interest credited  7   Net investment
gains (losses)

Foreign currency
swaps

  (4 Net investment
gains (losses)
  2  Interest credited  4   Net investment
gains (losses)
               

Total

 $(9  $46    $9   
               

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the six months ended June 30, 2009:

 Derivative instrument Hedged item  Derivative instrument  Hedged item

(Amounts in millions)

 Gain (loss)
recognized in
net income
(loss)
 Classification
of gain (loss)
recognized in
net income (loss)
 Other impacts
to net
income (loss)
 Classification
of other
impacts to
net income (loss)
 Gain (loss)
recognized in
net income
(loss)
 Classification
of gain (loss)
recognized in net
income (loss)
  Gain (loss)
recognized in
net income
 

Classification
of gain (loss)
recognized in

net income

  Other impacts
to  net

income
 

Classification
of other

impacts to

net income

  Gain (loss)
recognized in
net income
 

Classification
of gain (loss)
recognized in net
income

Interest rate swaps hedging assets

 $6   Net investment
gains (losses)
 $(8 Net investment
income
 $(10 Net investment
gains (losses)
  $1   Net investment gains (losses)  $(3 Net investment income  $(1 Net investment gains (losses)

Interest rate swaps hedging liabilities

  (59 Net investment
gains (losses)
  42   Interest credited  62   Net investment
gains (losses)
   (1 Net investment gains (losses)   25   Interest credited   1   Net investment gains (losses)

Foreign currency
swaps

  (13 Net investment
gains (losses)
  1   Interest credited  11   Net investment
gains (losses)
   (2 Net investment gains (losses)   1   Interest credited   2   Net investment gains (losses)
                           

Total

 $(66  $35    $63     $(2   $23     $2   
                           

The difference between the gain (loss) recognized for the derivative instrumentsinstrument and the hedged itemsitem presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the net income (loss) effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged items.item. There were no amounts excluded from the measurement of effectiveness.

Derivatives Not Designated As Hedges

We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps, swaptions and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; and (vi) foreign currency forward contracts to mitigate currency risk associated with future dividends from certain currency risk.foreign subsidiaries to our holding company. Additionally, we provide GMWBs on certain

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

products that are required to be bifurcated as embedded derivatives and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap. See note 7 for additional information related to consolidated securitization entities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:

 

   Three months ended June 30,  Classification of gain (loss) recognized
in net income (loss)

(Amounts in millions)

  2010  2009  

Interest rate swaps

  $63   $164   Net investment gains (losses)

Interest rate swaps related to securitization entities(1)

   (9  —     Net investment gains (losses)

Interest rate swaptions

   35    (338 Net investment gains (losses)

Credit default swaps

   (32  35   Net investment gains (losses)

Credit default swaps related to securitization entities(1)

   (46  —     Net investment gains (losses)

Equity index options

   50    (71 Net investment gains (losses)

Financial futures

   105    (163 Net investment gains (losses)

Inflation indexed swaps

   —      4   Net investment gains (losses)

Other foreign currency contracts

   2    8   Net investment gains (losses)

Reinsurance embedded derivatives

   2    —     Net investment gains (losses)

GMWB embedded derivatives

   (278  479   Net investment gains (losses)
          

Total derivatives not designated as hedges

  $(108 $118   
          

(1)

See note 7 for additional information related to consolidated securitization entities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:

   Six months ended June 30,  Classification of gain (loss) recognized
in net income (loss)

(Amounts in millions)

  2010  2009  

Interest rate swaps

  $57   $246   Net investment gains (losses)

Interest rate swaps related to securitization entities(1)

   (12  —     Net investment gains (losses)

Interest rate swaptions

   57    (579 Net investment gains (losses)

Credit default swaps

   (27  21   Net investment gains (losses)

Credit default swaps related to securitization entities(1)

   (41  —     Net investment gains (losses)

Equity index options

   23    (55 Net investment gains (losses)

Financial futures

   72    (84 Net investment gains (losses)

Inflation indexed swaps

   —      (4 Net investment gains (losses)

Foreign currency swaps

   —      6   Net investment gains (losses)

Other foreign currency contracts

   (1  10   Net investment gains (losses)

Reinsurance embedded derivatives

   2    —     Net investment gains (losses)

GMWB embedded derivatives

   (242  440   Net investment gains (losses)
          

Total derivatives not designated as hedges

  $(112 $1   
          

(1)

See note 7 for additional information related to consolidated securitization entities.

   Three months ended March 31,  

Classification of gain (loss) recognized
in net income

(Amounts in millions)

  2011  2010  

Interest rate swaps

  $2   $(6 Net investment gains (losses)

Equity return swaps

   (4  —     Net investment gains (losses)

Interest rate swaps related to securitization entities

   1    (3 Net investment gains (losses)

Interest rate swaptions

   —      22   Net investment gains (losses)

Credit default swaps

   3    5   Net investment gains (losses)

Credit default swaps related to securitization entities

   9    5   Net investment gains (losses)

Equity index options

   (19  (27 Net investment gains (losses)

Financial futures

   (39  (33 Net investment gains (losses)

Other foreign currency contracts

   (9  (3 Net investment gains (losses)

GMWB embedded derivatives

   59    36   Net investment gains (losses)
          

Total derivatives not designated as hedges

  $3   $(4 
          

Derivative Counterparty Credit Risk

As of June 30, 2010March 31, 2011 and December 31, 2009,2010, net fair value assets by counterparty totaled $1.3 billion$773 million and $739$888 million, respectively. As of June 30, 2010March 31, 2011 and December 31, 2009,2010, net fair value liabilities by counterparty totaled $192$191 million and $74$172 million, respectively. As of June 30, 2010March 31, 2011 and December 31, 2009,2010, we retained collateral of $1.1 billion$745 million and $647$794 million, respectively, related to these agreements, including over collateralization of $6$53 million and $10$29 million, respectively, from certain counterparties. As of June 30, 2010March 31, 2011 and December 31, 2009,2010, we posted $12$67 million and $121$30 million, respectively, of collateral to derivative counterparties, including over collateralization of $3$16 million and $46$11 million, respectively. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.

Except for derivatives related to securitization entities, all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If the downgrade provisions had been triggered as of June 30, 2010March 31, 2011 and December 31, 2009,2010, we could have been allowed to claim up to $292$81 million and $102$123 million, respectively, from counterparties and required to disburse up to $1$4 million in both periods.and $5 million, respectively. This represented the net fair value of gains and losses by counterparty, less available collateral held, and did not include any fair value gains or losses for derivatives related to securitization entities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

Credit Derivatives—Sell ProtectionDerivatives

We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit default swaps and the par value of debt instruments with embedded credit derivatives.swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction. For debt instruments with embedded credit derivatives, the security’s principal is typically reduced by the net amount of default for any referenced entity defaults.

In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we were required to consolidateconsolidated in 2010. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity. See note 9 for information on the third-party borrowings related to consolidated securitization entities.

The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:

 

   June 30, 2010  December 31, 2009

(Amounts in millions)

  Notional
value
  Assets  Liabilities  Notional
value
  Assets  Liabilities

Reference entity credit rating and maturity:

            

AAA

            

Matures after one year through five years

  $5  $—    $—    $6  $—    $—  

AA

            

Matures after one year through five years

   11   —     —     5   —     —  

A

            

Matures after one year through five years

   32   —     —     32   1   —  

Matures after five years through ten years

   10   —     —     10   —     —  

BBB

            

Matures after one year through five years

   68   1   —     73   1   —  

Matures after five years through ten years

   29   —     1   29   —     —  
                        

Total credit default swaps on single name reference entities

  $155  $1  $1  $155  $2  $—  
                        

   March 31, 2011   December 31, 2010 

(Amounts in millions)

  Notional
value
   Assets   Liabilities   Notional
value
   Assets   Liabilities 

Reference entity credit rating and maturity:

            

AAA

            

Matures after one year through five years

  $5    $—      $—      $5    $—      $—    

AA

            

Matures after one year through five years

   6     —       —       6     —       —    

Matures after five years through ten years

   5     —       —       5     —       —    

A

            

Matures after one year through five years

   37     1     —       37     1     —    

Matures after five years through ten years

   10     —       —       5     —       —    

BBB

            

Matures after one year through five years

   68     2     —       68     2 ��   —    

Matures after five years through ten years

   24     —       —       29     —       —    
                              

Total credit default swaps on single name reference entities

  $155    $3    $—      $155    $3    $—    
                              

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:

 

  June 30, 2010 December 31, 2009

(Amounts in millions)

 Notional
value
 Assets Liabilities Notional
value
 Assets Liabilities

Index tranche attachment/detachment point and maturity:

      

9% – 12% matures after one year through five years (1)

 $300 $—   $13 $50 $—   $—  

9% – 12% matures after five years through ten years (2)

  —    —    —    250  1  1

10% – 15% matures after five years through ten years (3)

  250  —    6  250  —    2

12% – 22% matures after five years through ten years (4)

  248  —    6  248  4  —  

15% – 30% matures after five years through ten years (5)

  127  —    1  127  2  —  
                  

Total credit default swap index tranches

  925  —    26  925  7  3
                  

Customized credit default swap index tranches related to securitization entities:

      

Portion backing third-party borrowings maturing 2017 (6)

  17  —    9  —    —    —  

Portion backing our interest maturing 2017(7)

  300  —    150  —    —    —  
                  

Total customized credit default swap index tranches related to securitization entities

  317  —    159  —    —    —  
                  

Total credit default swaps on index tranches

 $1,242 $—   $185 $925 $7 $3
                  
   March 31, 2011   December 31, 2010 

(Amounts in millions)

  Notional
value
   Assets   Liabilities   Notional
value
   Assets   Liabilities 

Original index tranche attachment/detachment point and maturity:

            

9% – 12% matures after one year through five years (1)

  $300    $1    $3    $300    $—      $3  

10% – 15% matures after one year through five years(2)

   250     4     —       250     4     —    

12% – 22% matures after five years through ten years (3)

   248     —       4     248     —       4  

15% – 30% matures after five years through ten years(4)

   127     1     —       127     2     —    
                              

Total credit default swap index tranches

   925     6     7     925     6     7  
                              

Customized credit default swap index tranches related to securitization entities:

            

Portion backing third-party borrowings maturing 2017 (5)

   17     —       7     17     —       8  

Portion backing our interest maturing 2017(6)

   300     —       113     300     —       121  
                              

Total customized credit default swap index tranches related to securitization entities

   317     —       120     317     —       129  
                              

Total credit default swaps on index tranches

  $1,242    $6    $127    $1,242    $6    $136  
                              

 

(1)

The current attachment/detachment as of June 30, 2010March 31, 2011 and December 31, 20092010 was 9% – 12%.

(2)

The current attachment/detachment as of June 30, 2010March 31, 2011 and December 31, 2009 was 9% – 12%.

(3)

The current attachment/detachment as of June 30, 2010 and December 31, 2009 was 10% – 15%.

(4)(3)

The current attachment/detachment as of June 30, 2010March 31, 2011 and December 31, 20092010 was 12% – 22%.

(5)(4)

The current attachment/detachment as of June 30, 2010March 31, 2011 and December 31, 20092010 was 14.8% – 30.3%.

(6)(5)

Original notional value was $39 million.

(7)(6)

Original notional value was $300 million.

The following table sets forth our holding of available-for-sale fixed maturity securities that include embedded credit derivatives and the fair values as of the dates indicated:

   June 30, 2010  December 31, 2009

(Amounts in millions)

  Par
value
  Amortized
cost or
cost
  Fair
value
  Par
value
  Amortized
cost or
cost
  Fair
value

Credit rating:

            

AA

            

Matures after five years through ten years

  $100  $100  $96  $100  $100  $96

BBB

            

Matures after five years through ten years(1)

   —     —     —     100   100   76

BB

            

Matures after five years through ten years(1)

   —     —     —     200   228   148
                        

Total available-for-sale fixed maturity securities that include embedded credit derivatives

  $100  $100  $96  $400  $428  $320
                        

(1)

The amounts in 2009 related to certain VIEs that were consolidated on January 1, 2010. See note 7 for additional information related to consolidated securitization entities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(6) Fair Value of Financial Instruments

Assets and liabilities that are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and cash equivalents, investment securities, separate accounts, securities held as collateral and derivative instruments. Other financial assets and liabilities—those not carried at fair value—are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The basis on which we estimate fair value is as follows:

Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates.

Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates.

Other invested assets.Based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the related instrument. Primarily represents short-term investments, limited partnerships accounted for under the cost method and bank loans.

Short-term borrowings.Based on carrying value which approximates fair value since the borrowings are based on variable interest rates that are reset monthly.method.

Long-term borrowings.Based on market quotes or comparable market transactions.

Non-recourse funding obligations. Based on the then current coupon, revalued based on the London Interbank Offered Rate (“LIBOR”) set and current spread assumption based on commercially available data. The model is a floating rate coupon model using the spread assumption to derive the valuation.

Borrowings related to securitization entities.Based on market quotes or comparable market transactions.

Investment contracts.Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following represents the fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:

 

(Amounts in millions)

  June 30, 2010  December 31, 2009  March 31, 2011   December 31, 2010 
Notional
amount
 Carrying
amount
  Fair
value
  Notional
amount
 Carrying
amount
  Fair
value
Notional
amount
 Carrying
amount
   Fair
value
   Notional
amount
 Carrying
amount
   Fair
value
 

Assets:

                    

Commercial mortgage loans

  $            (1)  $7,208  $7,211  $ (1)  $7,499  $7,213  $ (1)  $6,600    $6,827    $ (1)  $6,718    $6,896  

Restricted commercial mortgage loans(2)

               (1)   535   554       (1)   —     —      (1)   485     529      (1)   507     554  

Other invested assets

               (1)   328   332       (1)   1,766   1,769    (1)   328     340      (1)   267     272  

Liabilities:

                    

Short-term borrowings(3)

               (1)   730   730       (1)   930   930

Long-term borrowings(3)

               (1)   4,331   4,127       (1)   3,641   3,291

Non-recourse funding obligations(3)

               (1)   3,437   1,468       (1)   3,443   1,674

Borrowings related to securitization
entities
(2), (3)

               (1)   474   497       (1)   —     —  

Long-term borrowings(2)

    (1)   5,347     5,320      (1)   4,952     4,928  

Non-recourse funding obligations(2)

    (1)   3,431     2,175      (1)   3,437     2,170  

Borrowings related to securitization entities

    (1)   431     452      (1)   443     467  

Investment contracts

               (1)   21,287   22,048       (1)   21,515   21,743    (1)   19,106     19,671      (1)   19,772     20,471  

Performance guarantees, principally letters of credit

   77    —     —     117    —     —  

Other firm commitments:

                    

Commitments to fund limited partnerships

   143    —     —     194    —     —     106    —       —       110    —       —    

Ordinary course of business lending commitments

   5    —     —     —      —     —     39    —       —       28    —       —    

 

(1)

These financial instruments do not have notional amounts.

(2)

See note 7 for additional information related to consolidated securitization entities.

(3)

See note 98 for additional information related to borrowings.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recurring Fair Value Measurements

We have fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.

Fixed maturity, equity and trading securities

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

We utilize certain third-party data providers when determining fair value. We consider information obtained from third-party pricing services as well as third-party broker provided prices, or broker quotes, in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by third-party pricing services and broker quotes, management determines the fair value of our investment securities after considering all relevant and available information. We also obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received and determine the appropriate fair value.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

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

For private fixed maturity securities, we utilize an internal model to determine fair value and utilize public bond spreads by sector, rating and maturity to develop the market rate that would be utilized for a similar public bond. We then add an additional premium to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We assign each security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds to determine whether the spreads utilized would be considered observable inputs for the private placement being valued. To determine the significance of unobservable inputs, we calculate the impact on the valuation from the unobservable input and will classify a security as Level 3 when the impact on the valuation exceeds 10%.

For broker quotes, we discuss the valuation methodology utilized by the third party but cannot typically obtain sufficient evidence to determine the valuation does not include significant unobservable inputs. Accordingly, we typically classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizestables summarize the primary sources considered when determining fair value of each class of fixed maturity securities as of June 30, 2010.the dates indicated:

 

(Amounts in millions)

  Total  Level 1  Level 2  Level 3

U.S. government, agencies and government-sponsored enterprises:

        

Pricing services

  $3,667  $—    $3,667  $—  

Internal models

   17   —     8   9
                

Total U.S. government, agencies and government-sponsored enterprises

   3,684   —     3,675   9
                

Tax-exempt:

        

Pricing services

   1,350   —     1,350   —  
                

Total tax-exempt

   1,350   —     1,350   —  
                

Government—non-U.S.:

        

Pricing services

   2,116   —     2,116   —  

Internal models

   30   —     12   18
                

Total government—non-U.S.

   2,146   —     2,128   18
                

U.S. corporate:

        

Pricing services

   19,988   —     19,988   —  

Broker quotes

   300   —     —     300

Internal models

   3,090   —     1,870   1,220
                

Total U.S. corporate

   23,378   —     21,858   1,520
                

Corporate—non-U.S.:

        

Pricing services

   10,793   —     10,696   97

Broker quotes

   136   —     —     136

Internal models

   1,870   —     1,383   487
                

Total corporate—non-U.S.

   12,799   —     12,079   720
                

Residential mortgage-backed:

        

Pricing services

   3,893   —     3,893   —  

Broker quotes

   35   —     —     35

Internal models

   27   —     —     27
                

Total residential mortgage-backed

   3,955   —     3,893   62
                

Commercial mortgage-backed:

        

Pricing services

   3,662   —     3,662   —  

Broker quotes

   20   —     —     20

Internal models

   44   —     5   39
                

Total commercial mortgage-backed

   3,726   —     3,667   59
                

Other asset-backed:

        

Pricing services

   1,978   —     1,978   —  

Broker quotes

   156   —     —     156

Internal models

   214   —     9   205
                

Total other asset-backed

   2,348   —     1,987   361
                

Total fixed maturity securities

  $53,386  $—    $50,637  $2,749
                

  March 31, 2011 

(Amounts in millions)

 Total  Level 1  Level 2  Level 3 

U.S. government, agencies and government-sponsored enterprises:

    

Pricing services

 $3,401   $—     $3,401   $—    

Internal models

  13    —      12    1  
                

Total U.S. government, agencies and government-sponsored enterprises

  3,414    —      3,413    1  
                

Tax-exempt:

    

Pricing services

  928    —      928    —    
                

Total tax-exempt

  928    —      928    —    
                

Government—non-U.S.:

    

Pricing services

  2,348    —      2,348    —    

Internal models

  11    —      10    1  
                

Total government—non-U.S.

  2,359    —      2,358    1  
                

U.S. corporate:

    

Pricing services

  20,506    —      20,506    —    

Broker quotes

  232    —      —      232  

Internal models

  3,015    —      2,532    483  
                

Total U.S. corporate

  23,753    —      23,038    715  
                

Corporate—non-U.S.:

    

Pricing services

  12,081    —      12,081    —    

Broker quotes

  87    —      —      87  

Internal models

  1,769    —      1,654    115  
                

Total corporate—non-U.S.

  13,937    —      13,735    202  
                

Residential mortgage-backed:

    

Pricing services

  4,465    —      4,465    —    

Broker quotes

  64    —      —      64  

Internal models

  71    —      —      71  
                

Total residential mortgage-backed

  4,600    —      4,465    135  
                

Commercial mortgage-backed:

    

Pricing services

  3,714    —      3,714    —    

Broker quotes

  16    —      —      16  

Internal models

  26    —      —      26  
                

Total commercial mortgage-backed

  3,756    —      3,714    42  
                

Other asset-backed:

    

Pricing services

  2,083    —      1,985    98  

Broker quotes

  165    —      —      165  

Internal models

  3    —      3    —    
                

Total other asset-backed

  2,251    —      1,988    263  
                

Total fixed maturity securities

 $54,998   $—     $53,639   $1,359  
                

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

   December 31, 2010 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3 

U.S. government, agencies and government-sponsored enterprises:

        

Pricing services

  $3,688    $—      $3,688    $—    

Internal models

   17     —       6     11  
                    

Total U.S. government, agencies and government-sponsored enterprises

   3,705     —       3,694     11  
                    

Tax-exempt:

        

Pricing services

   1,030     —       1,030     —    
                    

Total tax-exempt

   1,030     —       1,030     —    
                    

Government—non-U.S.:

        

Pricing services

   2,357     —       2,357     —    

Internal models

   12     —       11     1  
                    

Total government—non-U.S.

   2,369     —       2,368     1  
                    

U.S. corporate:

        

Pricing services

   20,563     —       20,563     —    

Broker quotes

   235     —       —       235  

Internal models

   3,169     —       2,304     865  
                    

Total U.S. corporate

   23,967     —       22,867     1,100  
                    

Corporate—non-U.S.:

        

Pricing services

   11,584     —       11,584     —    

Broker quotes

   113     —       —       113  

Internal models

   1,801     —       1,546     255  
                    

Total corporate—non-U.S.

   13,498     —       13,130     368  
                    

Residential mortgage-backed:

        

Pricing services

   4,312     —       4,312     —    

Broker quotes

   72     —       —       72  

Internal models

   71     —       —       71  
                    

Total residential mortgage-backed

   4,455     —       4,312     143  
                    

Commercial mortgage-backed:

        

Pricing services

   3,693     —       3,693     —    

Broker quotes

   16     —       —       16  

Internal models

   34     —       —       34  
                    

Total commercial mortgage-backed

   3,743     —       3,693     50  
                    

Other asset-backed:

        

Pricing services

   2,241     —       2,143     98  

Broker quotes

   169     —       —       169  

Internal models

   6     —       5     1  
                    

Total other asset-backed

   2,416     —       2,148     268  
                    

Total fixed maturity securities

  $55,183    $—      $53,242    $1,941  
                    

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizestables summarize the primary sources considered when determining fair value of equity securities as of June 30, 2010.the dates indicated:

 

  March 31, 2011 

(Amounts in millions)

  Total  Level 1  Level 2  Level 3  Total   Level 1   Level 2   Level 3 

Pricing services

  $190  $20  $170  $—    $268    $262    $6    $—    

Broker quotes

   6   —     —     6   6     —       —       6  

Internal models

   3   —     —     3   81     —       —       81  
                            

Total equity securities

  $199  $20  $170  $9  $355    $262    $6    $87  
                            

   December 31, 2010 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3 

Pricing services

  $245    $240    $5    $—    

Broker quotes

   6     —       —       6  

Internal models

   81     —       —       81  
                    

Total equity securities

  $332    $240    $5    $87  
                    

The following table summarizestables summarize the primary sources considered when determining fair value of trading securities as of June 30, 2010.the dates indicated:

 

  March 31, 2011 

(Amounts in millions)

  Total  Level 1  Level 2  Level 3  Total   Level 1   Level 2   Level 3 

Pricing services

  $85  $—    $85  $—    $329    $—      $329    $—    

Internal models

   238     —       —       238  

Broker quotes

   136   —     —     136   100     —       —       100  
                            

Total trading securities

  $221  $—    $85  $136  $667    $—      $329    $338  
                            

   December 31, 2010 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3 

Pricing services

  $348    $—      $348    $—    

Broker quotes

   230     —       —       230  

Internal models

   99     —       —       99  
                    

Total trading securities

  $677    $—      $348    $329  
                    

Restricted other invested assets related to securitization entities

We have trading securities related to securitization entities that are classified as restricted other invested assets and are carried at fair value. The trading securities represent asset-backed securities. The valuation for trading securities is determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there is observable market information for transactions of the same or similar instruments and is provided to us by a third-party pricing service and is classified as Level 2. For certain securities that are not actively traded, we determine fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classify these valuations as Level 3.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Securities lending and derivative counterparty collateral

The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.

Separate account assets

The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.

Derivatives

In determining the fair value of derivatives, we consider the counterparty collateral arrangements and rights of set-off when determining whether any incremental adjustment should be made for both the counterparty’s and our non-performance risk. As a result of these counterparty arrangements, we determined no adjustment for our non-performance risk was required to our derivative liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Interest rate swaps.The valuation of interest rate swaps is determined using an income approach. The primary inputsinput into the valuation representrepresents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2. For certain other swaps, there are features that provide an option to the counterparty to terminate the swap at specified dates and would be considered a significant unobservable input and results in the fair value measurement of the derivative being classified as Level 3.

Interest rate swaps related to securitization entities.The valuation of interest rate swaps related to securitization entities is determined using an income approach. The primary input into the valuation representrepresents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2.

Inflation indexed swaps. The valuation of inflation indexed swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and consumer price index, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Interest rate swaptions. The valuation of interest rate swaptions is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, which is generally considered an observable input, forward interest rate volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate volatility input, the derivative is classified as Level 3.

Foreign currency swaps. The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency exchange rates, both of which are considered an observable input, and results in the derivative being classified as Level 2.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credit default swaps. We have both single name credit default swaps and index tranche credit default swaps. For single name credit default swaps, we utilize an income approach to determine fair value based on using current market information for the credit spreads of the reference entity, which is considered observable inputs based on the reference entities of our derivatives and results in these derivatives being classified as Level 2. For index tranche credit default swaps, we utilize an income approach that utilizes current market information related to credit spreads and expected defaults and losses associated with the reference entities that comprise the respective index associated with each derivative. There are significant unobservable inputs associated with the timing and amount of losses from the reference entities as well as the timing or amount of losses, if any, that will be absorbed by our tranche. Accordingly, the index tranche credit default swaps are classified as Level 3.

Credit default swaps related to securitization entities.Credit default swaps related to securitization entities represent customized index tranche credit default swaps and are valued using a similar methodology as described above for index tranche credit default swaps. We determine fair value of these credit default swaps after considering both the valuation methodology described above as well as the valuation provided by the derivative counterparty. In addition to the valuation methodology and inputs described for index tranche credit default swaps, these customized credit default swaps contain a feature that permits the securitization entity to provide the par value of underlying assets in the securitization entity to settle any losses under the credit default swap. The valuation of this settlement feature is dependent upon the valuation of the underlying assets and the timing and amount of any expected loss on the credit default swap, which is considered a significant unobservable input. Accordingly, these customized index tranche credit default swaps related to securitization entities are classified as Level 3.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Equity index options. We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rate volatility and time value component associated with the optionality in the derivative, which are considered significant unobservable inputs in most instances. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3.3

Financial futures. The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.

Equity return swaps.The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Other foreign currency contracts. We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate and foreign currency exchange rate volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate and foreign currency exchange rate volatility input, the derivative is classified as Level 3. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Reinsurance embedded derivatives

We have certain reinsurance agreements that result in a reinsurance counterparty holding assets for our benefit where this feature is considered an embedded derivative requiring bifurcation. As a result, we measure the embedded derivatives at fair value with changes in fair value being recorded in income. Fair value is determined by comparing the fair value and cost basis of the underlying assets. The underlying assets are primarily comprised of highly rated investments and result in the fair value of the embedded derivatives being classified as Level 2.

GMWB embedded derivatives

We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. In addition to these inputs, we also consider risk and expense margins when determining the projected cash flows that would be determined by another market participant. While the risk and expense margins are considered in determining fair value, these inputs do not have a significant impact on the valuation.

For GMWB liabilities, non-performance risk is integrated into the discount rate. ThePrior to the third quarter of 2010, the discount rate utilized in our valuation was based on the swap curve, which included the credit risk of an instrument rated “AA” and incorporated the non-performance risk of our GMWB liabilities. In recent periods,Beginning in 2009, the swap curve has been lower thandropped below the U.S. Treasury curve forat certain points on the curve. Forlonger end of the curve, and in 2010, the points where the swap curve is lower thanbelow the U.S. Treasury curve expanded to several points beyond 10 years. For these points on the curve, we utilizeutilized the U.S. Treasury curve as our discount rate.rate through the second quarter of 2010. Beginning in the third quarter of 2010, we revised our discount rate to reflect market credit spreads that represent an adjustment for the non-performance risk of the GMWB liabilities. The credit spreads included in our discount rate range from 60 to 80 basis points over the most relevant points on the U.S. Treasury curve. As of June 30, 2010March 31, 2011 and December 31, 2009,2010, the impact of non-performance risk onresulted in a lower fair value of our GMWB valuation was not material.liabilities of $39 million and $44 million, respectively.

To determine whether the use of the swap curve was the appropriate discount rate to reflect the non-performance risk of the GMWB liabilities, we evaluate the non-performance risk in our liabilities based on a hypothetical exit market transaction as there is no exit market for these types of liabilities. A hypothetical exit

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

market can be viewed as a hypothetical transfer of the liability to another similarly rated insurance company which would closely resemble a reinsurance transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. After considering all relevant factors in assessing whether any additional adjustment to the discount rate for non-performance risk was necessary, including assumptions we expect market participants would utilize in a hypothetical exit market transaction, we determined that no incremental adjustment to the discount rate was necessary for our GMWB liabilities that are recorded at fair value. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities and would not incorporate changes in non-performance risk in the discount rate other than the implied credit spread incorporated in the swap curve.liabilities.

For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected near-term equity market volatility with more significance being placed on projected and recent historical data.

Equity index and fund correlations are determined based on historical price observations for the fund and equity index.

For policyholder assumptions, we use our expected lapse, mortality and utilization assumptions and update these assumptions for our actual experience, as necessary. For our lapse assumption, we adjust our base lapse assumption by policy based on a combination of the policyholder’s current account value and GMWB benefit.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We classify the GMWB valuation as Level 3 based on having significant unobservable inputs. We evaluate the inputs and methodologies used to determine fair value based on how we expect a market participant would determine exit value. As stated above, there is no exit market or market participants for the GMWB embedded derivatives. Accordingly, we evaluate our inputs and resulting fair value based on a hypothetical exit market and hypothetical market participants. A hypothetical exit market could be viewed as a transaction that would closely resemble reinsurance. While reinsurance transactions for this type of product are not an observable input, we consider this type of hypothetical exit market, as appropriate, when evaluating our inputs and determining that our inputs are consistent with that of a hypothetical market participant.

Borrowings related to securitization entities

We record certain borrowings related to securitization entities at fair value. The fair value of these borrowings is determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determine fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may impact the valuation. After considering all relevant inputs, we determine fair value of the borrowings using the net valuation of the underlying assets and derivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 3.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

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

 

  June 30, 2010 March 31, 2011 

(Amounts in millions)

  Total  Level 1  Level 2  Level 3 Total Level 1 Level 2 Level 3 

Assets

            

Investments:

            

Fixed maturity securities:

            

U.S. government, agencies and government-sponsored enterprises

  $3,684  $—    $3,675  $9 $3,414   $—     $3,413   $1  

Tax-exempt

   1,350   —     1,350   —    928    —      928    —    

Government—non-U.S.

   2,146   —     2,128   18  2,359    —      2,358    1  

U.S. corporate

   23,378   —     21,858   1,520  23,753    —      23,038    715  

Corporate—non-U.S.

   12,799   —     12,079   720  13,937    —      13,735    202  

Residential mortgage-backed

   3,955   —     3,893   62  4,600    —      4,465    135  

Commercial mortgage-backed

   3,726   —     3,667   59  3,756    —      3,714    42  

Other asset-backed

   2,348   —     1,987   361  2,251    —      1,988    263  
                        

Total fixed maturity securities

   53,386   —     50,637   2,749  54,998    —      53,639    1,359  
                        

Equity securities

   199   20   170   9  355    262    6    87  
                        

Other invested assets:

            

Trading securities

   221   —     85   136  667    —      329    338  

Derivative assets:

            

Interest rate swaps

   1,173   —     1,164   9  630    —      627    3  

Inflation indexed swaps

   1   —     1   —  

Foreign currency swaps

   160   —     160   —    228    —      228    —    

Interest rate swaptions

   4   —     —     4

Credit default swaps

   2   —     2   —    11    —      5    6  

Equity index options

   97   —     —     97  32    —      —      32  

Other foreign currency contracts

   6   —     5   1
                        

Total derivative assets

   1,443   —     1,332   111  901    —      860    41  
                        

Securities lending collateral

   680   —     680   —    811    —      811    —    

Derivatives counterparty collateral

   100   —     100   —    605    —      605    —    

Restricted other invested assets related to securitization entities

   373   —     199   174
                        

Total other invested assets

   2,817   —     2,396   421  2,984    —      2,605    379  
                        

Other assets(1)

   2   —     2   —  

Reinsurance recoverable(2)

   9   —     —     9

Restricted other invested assets related to securitization entities

  374    —      199    175  

Reinsurance recoverable(1)

  (7  —      —      (7

Separate account assets

   10,284   10,284   —     —    11,807    11,807    —      —    
                        

Total assets

  $66,697  $10,304  $53,205  $3,188 $70,511   $12,069   $56,449   $1,993  
                        

Liabilities

            

Policyholder account balances(3)

  $447  $—    $—    $447

Policyholder account balances(2)

 $69   $—     $—     $69  

Derivative liabilities:

            

Interest rate swaps

   61   —     61   —    132    —      132    —    

Interest rate swaps related to securitization entities

   23   —     23   —    16    —      16    —    

Inflation indexed swaps

   22   —     22   —    35    —      35    —    

Credit default swaps

   27   —     1   26  7    —      —      7  

Credit default swaps related to securitization entities

   159   —     —     159  120    —      —      120  

Equity return swaps

  1    —      1    —    

Other foreign currency contracts

  8    —      8    —    
                        

Total derivative liabilities

   292   —     107   185  319    —      192    127  

Borrowings related to securitization entities

   51   —     —     51  58    —      —      58  
                        

Total liabilities

  $790  $—    $107  $683 $446   $—     $192   $254  
                        

 

(1)

Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

(2)

Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  December 31, 2010 

(Amounts in millions)

 Total  Level 1  Level 2  Level 3 

Assets

    

Investments:

    

Fixed maturity securities:

    

U.S. government, agencies and government-sponsored enterprises

 $3,705   $—     $3,694   $11  

Tax-exempt

  1,030    —      1,030    —    

Government—non-U.S.

  2,369    —      2,368    1  

U.S. corporate

  23,967    —      22,867    1,100  

Corporate—non-U.S.

  13,498    —      13,130    368  

Residential mortgage-backed

  4,455    —      4,312    143  

Commercial mortgage-backed

  3,743    —      3,693    50  

Other asset-backed

  2,416    —      2,148    268  
                

Total fixed maturity securities

  55,183    —      53,242    1,941  
                

Equity securities

  332    240    5    87  
                

Other invested assets:

    

Trading securities

  677    —      348    329  

Derivative assets:

    

Interest rate swaps

  763    —      758    5  

Foreign currency swaps

  240    —      240    —    

Credit default swaps

  11    —      5    6  

Equity index options

  33    —      —      33  
                

Total derivative assets

  1,047    —      1,003    44  
                

Securities lending collateral

  772    —      772    —    

Derivatives counterparty collateral

  630    —      630    —    
                

Total other invested assets

  3,126    —      2,753    373  
                

Restricted other invested assets related to securitization entities

  370    —      199    171  

Other assets(1)

  1    —      1    —    

Reinsurance recoverable(2)

  (5  —      —      (5

Separate account assets

  11,666    11,666    —      —    
                

Total assets

 $70,673   $11,906   $56,200   $2,567  
                

Liabilities

    

Policyholder account balances(3)

 $121   $—     $—     $121  

Derivative liabilities:

    

Interest rate swaps

  138    —      138    —    

Interest rate swaps related to securitization entities

  19    —      19    —    

Inflation indexed swaps

  33    —      33    —    

Credit default swaps

  7    —      —      7  

Credit default swaps related to securitization entities

  129    —      —      129  

Equity index options

  3    —      —      3  

Equity return swaps

  3    —      3    —    
                

Total derivative liabilities

  332    —      193    139  

Borrowings related to securitization entities

  51    —      —      51  
                

Total liabilities

 $504   $—     $193   $311  
                

(1)

Represents embedded derivatives associated with certain reinsurance agreements.

(2)

Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

(3)

Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

   December 31, 2009 

(Amounts in millions)

  Total  Level 1  Level 2  Level 3 

Assets

       

Investments:

       

Fixed maturity securities:

       

U.S. government, agencies and government-sponsored enterprises

  $2,602   $—    $2,586  $16  

Tax-exempt

   1,544    —     1,542   2  

Government—non-U.S.

   2,384    —     2,377   7  

U.S. corporate

   21,412    —     20,339   1,073  

Corporate—non-U.S.

   12,551    —     12,047   504  

Residential mortgage-backed

   3,227    —     1,746   1,481  

Commercial mortgage-backed

   3,617    —     59   3,558  

Other asset-backed

   2,415    —     996   1,419  
                 

Total fixed maturity securities

   49,752    —     41,692   8,060  
                 

Equity securities

   159    42   108   9  
                 

Other invested assets:

       

Trading securities

   174    —     29   145  

Derivative assets:

       

Interest rate swaps

   709    —     706   3  

Foreign currency swaps

   125    —     125   —    

Interest rate swaptions

   54    —     —     54  

Credit default swaps

   11    —     5   6  

Equity index options

   39    —     —     39  

Other foreign currency contracts

   8    —     —     8  
                 

Total derivative assets

   946    —     836   110  
                 

Securities lending collateral

   853    —     853   —    

Derivatives counterparty collateral

   148    —     148   —    
                 

Total other invested assets

   2,121    —     1,866   255  
                 

Reinsurance recoverable(1)

   (5  —     —     (5

Separate account assets

   11,002    11,002   —     —    
                 

Total assets

  $63,029   $11,044  $43,666  $8,319  
                 

Liabilities

       

Policyholder account balances(2)

  $175   $—    $—    $175  

Derivative liabilities:

       

Interest rate swaps

   188    —     186   2  

Inflation indexed swaps

   21    —     21   —    

Interest rate swaptions

   67    —     —     67  

Credit default swap

   3    —     3   —    

Equity index options

   2    —     —     2  
                 

Total derivative liabilities

   281    —     210   71  
                 

Total liabilities

  $456   $—    $210  $246  
                 

(1)

Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

(2)

Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following tables present additional information about assets measured atWe review the fair value onhierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a recurring basisreclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and for which we have utilized significant unobservable (Level 3) inputs to determineout of Level 3, or between other levels, at the beginning fair value as of or for the dates indicated:

  Beginning
balance
as of
April 1,
2010
  Total realized and
unrealized gains
(losses)
 Purchases,
sales,
issuances
and
settlements,
net
  Transfer
in Level  3 
(1)
 Transfer
out of
Level 3
  Ending
balance
as of
June 30,
2010
 Total gains
(losses)
included in
net income
(loss)
attributable
to assets
still held
 

(Amounts in millions)

  Included in
net income
(loss)
  Included
in OCI
     

Fixed maturity securities:

        

U.S. government, agencies and government- sponsored enterprises

 $8   $—     $—   $(1 $6 $(4 $9 $—    

Tax-exempt

  2    —      —    —      —    (2)  —    —    

Government—non-U.S.

  1    —      1  —      16  —      18  —    

U.S. corporate

  906    11   19  (29  653  (40  1,520  4  

Corporate—non-U.S.

  508    —      7  2    294  (91  720  —    

Residential mortgage- backed

  171    —      —    (26  1  (84  62  —    

Commercial mortgage- backed

  47    —      10  (1  11  (8  59  —    

Other asset-backed

  409    (8  2  (14  —    (28  361  (8
                             

Total fixed maturity securities

  2,052    3    39  (69  981  (257  2,749  (4
                             

Equity securities

  67    —      1  1    —    (60)  9  —    
                             

Other invested assets:

        

Trading securities

  142    (7  —    1    —    —      136  (7

Derivative assets:

        

Interest rate swaps

  4    5    —    —      —    —      9  5  

Interest rate swaptions

  14    24    —    (34  —    —      4  24  

Credit default swaps

  7    (7  —    —      —    —      —    (7

Equity index options

  34    46    —    17    —    —      97  46  

Other foreign currency contracts

  4    (3  —    —      —    —      1  (3
                             

Total derivative assets

  63    65    —    (17  —    —      111  65  
                             

Total other invested assets

  205    58    —    (16  —    —      247  58  
                             

Restricted other invested assets related to securitization entities (2)

  174    (2  2  —      —    —      174  (2

Reinsurance recoverable(3)

  (6  15    —    —      —    —      9  15  
                             

Total Level 3 assets

 $2,492   $74   $42 $(84 $981 $(317 $3,188 $67  
                             

(1)

The transfer into Level 3 was primarily related to private fixed U.S. corporate and corporate—non U.S. securities and resulted from a changereporting period in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations.

(2)

Relates to the consolidation of certain securitization entities as of January 1, 2010. See note 7 for additional information related to consolidated securitization entities.

(3)

Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

  Beginning
balance
as of
April 1,
2009
 Total realized and
unrealized gains
(losses)
  Purchases,
sales,
issuances

and
settlements,

net
  Transfer
in Level 3
 Transfer
out of
Level 3
  Ending
balance
as of
June 30,
2009
 Total gains
(losses)
included in
net income
(loss)
attributable
to assets
still held
 

(Amounts in millions)

  Included in
net income
(loss)
  Included
in OCI
      

Fixed maturity securities:

        

U.S. government, agencies and government-sponsored entities

 $19 $—     $(37 $4   $389 $(18 $357 $—    

Tax exempt

  5  —      —      —      2  (5  2  —    

Government—non-U.S.

  35  —      2    3    —    (18  22  —    

U.S. corporate

  1,658  (14  140    (70  240  (546  1,408  6  

Corporate—non-U.S.

  1,136  (10  25    (23  204  (565  767  1  

Residential mortgage-backed

  2,602  (106  66    (44  4  (899  1,623  (88

Commercial mortgage-backed

  3,647  (10  7    (27  27  (516  3,128  (11

Other asset-backed

  1,901  (8  137    (98  8  (877  1,063  (4
                             

Total fixed maturity securities

  11,003  (148  340    (255  874  (3,444  8,370  (96
                             

Equity securities

  61  —      —      —      —    —      61  —    
                             

Other invested assets:

        

Trading securities

  156  15    —      (5  —    (33  133  13  

Derivative assets

  706  (256  —      (164  —    —      286  (237
                             

Total other invested assets

  862  (241  —      (169  —    (33  419  (224
                             

Reinsurance recoverable

  18  (16  —      —      —    —      2  (16
                             

Total Level 3 assets

 $11,944 $(405 $340   $(424 $874 $(3,477 $8,852 $(336
                             

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

  Beginning
balance

as of
January 1,
2010
  Total realized and
unrealized gains
(losses)
 Purchases,
sales,
issuances
and
settlements,
net
  Transfer
in Level 3 
(1)
 Transfer
out of
Level 3
  Ending
balance
as of
June 30,
2010
 Total gains
(losses)
included in
net income
(loss)
attributable
to assets
still held
 

(Amounts in millions)

  Included in
net income
(loss)
  Included
in OCI
     

Fixed maturity securities:

        

U.S. government, agencies and government-sponsored enterprises

 $16   $—     $—   $(2 $9 $(14 $9 $—    

Tax-exempt

  2    —      —    —      —    (2  —    —    

Government—non-U.S.

  7    —      1  —      16  (6  18  —    

U.S. corporate

  1,073    11   34  31    678  (307  1,520  8  

Corporate—non-U.S.

  504    1    8  11    353  (157  720  1  

Residential mortgage- backed

  1,481    —      3  80    1  (1,503  62  —    

Commercial mortgage- backed

  3,558    1    14  (63  11  (3,462  59  —    

Other asset-backed

  1,419    (24  23  (18  10  (1,049  361  (24
                             

Total fixed maturity securities

  8,060    (11  83  39    1,078  (6,500  2,749  (15
                             

Equity securities

  9    —      —    8    52  (60)  9  —    
                             

Other invested assets:

        

Trading securities

  145    1    —    (10  —    —      136  1  

Derivative assets:

        

Interest rate swaps

  3    6    —    —      —    —      9  6  

Interest rate swaptions

  54    15    —    (65  —    —      4  15  

Credit default swaps

  6    (6  —    —      —    —      —    (6

Equity index options

  39    22    —    36    —    —      97  22  

Other foreign currency contracts

  8    (7  —    —      —    —      1  (7
                             

Total derivative assets

  110    30    —    (29  —    —      111  30  
                             

Total other invested assets

  255    31    —    (39  —    —      247  31  
                             

Restricted other invested assets related to securitization
entities 
(2)

  —      (2  2  —      174  —      174  (2

Reinsurance recoverable(3)

  (5  14    —    —      —    —      9  14  
                             

Total Level 3 assets

 $8,319   $32   $85 $8   $1,304 $(6,560 $3,188 $28  
                             

(1)

The transfer out of Level 3 was primarily related to residential and commercial mortgage-backed and other asset-backed securities and resulted from a change in the observability of inputs used to determine fair value.

(2)

Relates to the consolidation of certain securitization entities as of January 1, 2010. See note 7 for additional information related to consolidated securitization entities.

(3)

Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

changes occur. Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations of the mortgage-backed and asset-based securities markets obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from third-party pricing sources to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.

While we observed some increased trading activity for certain mortgage-backed and asset-backed securities during 2009, primarily as a result of government programs, we did not observe a broad-based improvement in market conditions to result in the classification of several mortgage-backed and asset-backed securities as Level 2. During the six months ended June 30, 2010, primary market issuance and secondary market activity for commercial and non-agency residential mortgage-backed and other asset-backed securities increased the market observable inputs used to establish fair values for similar securities. These factors, along with more consistent pricing from third-party sources, resulted in our conclusion that there is sufficient trading activity in similar instruments to support classifying certain mortgage-backed and asset-backed securities as Level 2 as of June 30, 2010. Accordingly, our assessment resulted in a transfer out of Level 3 of $1,503 million, $3,462 million and $1,049 million, respectively, during the six months ended June 30, 2010 related to residential mortgage-backed, commercial mortgage-backed and other asset-backed securities.

  Beginning
balance

as of
January 1,
2009
 Total realized and
unrealized gains
(losses)
  Purchases, sales,
issuances and
settlements, net
  Transfer
in Level 3
 Transfer
out of
Level 3
  Ending
balance
as of
June 30,
2009
 Total gains
(losses)
included in
net income
(loss)
attributable
to assets
still held
 

(Amounts in millions)

  Included in
net income
(loss)
  Included
in OCI
      

Fixed maturity securities:

        

U.S. government, agencies and government- sponsored entities

 $25 $—     $(38 $13   $389 $(32 $357 $—    

Tax exempt

  —    —      —      5    2  (5  2  —    

Government—non-U.S.

  31  —      —      9    —    (18  22  —    

U.S. corporate

  2,734  (16  111    (111  377  (1,687  1,408  5  

Corporate—non-U.S.

  1,560  (33  142    11    404  (1,317  767  (27

Residential mortgage-backed

  1,957  (331  164    (154  885  (898  1,623  (313

Commercial mortgage-backed

  3,219  (39  43    (106  532  (521  3,128  (39

Other asset-backed

  1,034  (22  180    (232  981  (878  1,063  (18
                             

Total fixed maturity securities

  10,560  (441  602    (565  3,570  (5,356  8,370  (392
                             

Equity securities

  60  —      —      1    —    —      61  —    
                             

Other invested assets:

        

Trading securities

  125  1    —      (15  54  (32  133  —    

Derivative assets

  933  (494  —      (175  22  —      286  (474
                             

Total other invested assets

  1,058  (493  —      (190  76  (32  419  (474
                             

Reinsurance recoverable

  18  (17  —      1    —    —      2  (17
                             

Total Level 3 assets

 $11,696 $(951 $602   $(753 $3,646 $(5,388 $8,852 $(883
                             

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur.

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

 

  Beginning
balance
as of
April 1,
2010
 Total realized and
unrealized (gains)
losses
 Purchases,
sales,
issuances
and
settlements,
net
  Transfer
in Level 3
 Transfer
out of
Level 3
 Ending
balance
as of
June 30,
2010
 Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

  Included in
net (income)
loss
  Included
in OCI
     

Policyholder account
balances
  (1)

 $145 $294   $—   $8   $—   $—   $447 $294  

Derivative liabilities:

        

Interest rate swaptions

  18  (10  —    (8  —    —    —    (10

Credit default swaps

  1  25    —    —      —    —    26  25  

Credit default swaps related to securitization
entities
(2)

  118  46    —    (5  —    —    159  46  

Equity index options

  4  (3  —    (1  —    —    —    (3
                           

Total derivative liabilities

  141  58    —    (14  —    —    185  58  

Borrowings related to securitization entities(2)

  58  (7  —    —      —    —    51  (6
                           

Total Level 3 liabilities

 $344 $345   $—   $(6 $—   $—   $683 $346  
                           
  Beginning
balance
as of
January 1,
2011
�� Total realized and
unrealized gains
(losses)
  Purchases  Sales  Issuances  Settlements  Transfer
in  Level 3
  Transfer
out of
Level 3
  Ending
balance
as of
March 31,
2011
  Total gains
(losses)
included in
net income
attributable
to assets
still held
 

(Amounts in millions)

  Included in
net
income
  Included
in OCI
         

Fixed maturity securities:

           

U.S. government, agencies and government-sponsored enterprises

 $11   $—     $—     $—     $—     $—     $—     $—     $(10 $1   $—    

Government—non-U.S.

  1    —      —      —      —      —      —      —      —      1    —    

U.S. corporate(1)

  1,100    4    (3  3    —      —      (45  16    (360  715    4  

Corporate—non-U.S. (1)

  368    (12  (3  25    (25  —      (5  40    (186  202    (11

Residential mortgage-backed

  143    (1  2    —      —      —      (8  —      (1  135    (1

Commercial mortgage-backed

  50    —      —      —      —      —      (8  —      —      42    —    

Other asset-backed

  268    (1  2    8    (8  —      (21  15    —      263    (1
                                            

Total fixed maturity securities

  1,941    (10  (2  36    (33  —      (87  71    (557  1,359    (9
                                            

Equity securities

  87    1    1    —      —      —      (2  —      —      87    —    
                                            

Other invested assets:

           

Trading securities

  329    9    —      5    —      —      (5  —      —      338    9  

Derivative assets:

           

Interest rate swaps

  5    (2  —      —      —      —      —      —      —      3    (2

Credit default swaps

  6    —      —      —      —      —      —      —      —      6    —    

Equity index options

  33    (19  —      24    —      —      (6)  —      —      32    (19
                                            

Total derivative assets

  44    (21  —      24    —      —      (6)  —      —      41    (21
                                            

Total other invested assets

  373    (12  —      29    —      —      (11  —      —      379    (12
                                            

Restricted other invested assets related to securitization entities

  171    4    —      —      —      —      —      —      —      175    4  

Reinsurance recoverable (2)

  (5  (3  —      —      —      1    —      —      —      (7  (3
                                            

Total Level 3 assets

 $2,567   $(20 $(1 $65   $(33 $1   $(100 $71   $(557 $1,993   $(20
                                            

 

((1)1)

Represents embedded derivatives associated withThe transfers in and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our GMWB liabilities, excluding theprivate placements and resulted in unobservable inputs having a significant impact of reinsurance.on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out.

(2)

Relates toRepresents embedded derivatives associated with the consolidationreinsured portion of certain securitization entities as of January 1, 2010. See note 7 for additional information related to consolidated securitization entities.our GMWB liabilities.

  Beginning
balance
as of
April 1,
2009
 Total realized and
unrealized (gains)
losses
 Purchases,
sales,
issuances
and
settlements,
net
  Transfer
in Level 3
 Transfer
out of
Level 3
 Ending
balance
as of
June 30,
2009
 Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

  Included in
net (income)
loss
  Included
in OCI
     

Policyholder account balances

 $923 $(495 $—   $7   $—   $—   $435 $(490

Other liabilities(1)

  73  137    —    (49  —    —    161  105  
                           

Total Level 3 liabilities

 $996 $(358 $—   $(42 $—   $—   $596 $(385
                           

(1)

Represents derivative liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

   Beginning
balance
as of
January 1,
2010
  Total realized and
unrealized gains
(losses)
  Purchases,
sales,
issuances
and
settlements,
net
  Transfer
in Level  3
   Transfer
out of
Level 3
  Ending
balance
as of
March 31,
2010
  Total gains
(losses)
included in
net income
attributable
to assets
still held
 

(Amounts in millions)

   Included in
net  income
  Included
in OCI
       

Fixed maturity securities:

          

U.S. government, agencies and government-sponsored enterprises

  $16   $—     $—     $(1 $3    $(10 $8   $—    

Tax-exempt

   2    —      —      —      —       —      2    —    

Government—non-U.S.

   7    —      —      —      —       (6  1    —    

U.S. corporate

   1,073    —      15    60    25     (267  906    4  

Corporate—non-U.S.

   504    1    1    9    59     (66  508    1  

Residential mortgage-backed (1)

   1,481    —      3    106    —       (1,419  171    —    

Commercial mortgage-backed (1)

   3,558    1    4    (62  —       (3,454  47    —    

Other asset-backed(1)

   1,419    (16  21    (4  10     (1,021  409    (16
                                  

Total fixed maturity securities

   8,060    (14  44    108    97     (6,243  2,052    (11
                                  

Equity securities

   9    —      (1  7    52     —      67    —    
                                  

Other invested assets:

          

Trading securities

   145    8    —      (11  —       —      142    8  

Derivative assets:

          

Interest rate swaps

   3    1    —      —      —       —      4    2  

Interest rate swaptions

   54    (10  —      (30  —       —      14    (5

Credit default swaps

   6    1    —      —      —       —      7    1  

Equity index options

   39    (25  —      20    —       —      34    (24

Other foreign currency contracts

   8    (4  —      —      —       —      4    (4
                                  

Total derivative assets

   110    (37  —      (10  —       —      63    (30
                                  

Total other invested assets

   255    (29  —      (21  —       —      205    (22
                                  

Restricted other invested assets related to securitization entities

   —      —      —      —      174     —      174    —    

Reinsurance recoverable(2)

   (5  (1  —      —      —       —      (6  (1
                                  

Total Level 3 assets

  $8,319   $(44 $43   $94   $323    $(6,243 $2,492   $(34
                                  

(1)

During 2010, primary market issuance and secondary market activity for commercial and non-agency residential mortgage-backed and other asset-backed securities increased the market observable inputs used to establish fair values for similar securities. These factors, along with more consistent pricing from third-party sources, resulted in our conclusion that there is sufficient trading activity in similar instruments to support classifying certain mortgage-backed and asset-backed securities as Level 2.

(2)

Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 Beginning
balance

as of
January 1,
2010
 Total realized and
unrealized (gains)
losses
 Purchases,
sales,
issuances
and
settlements,
net
  Transfer
in Level 3
 Transfer
out of
Level 3
 Ending
balance
as of
June 30,
2010
 Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
  Beginning
balance
as of
January 1,
2011
  Total realized and
unrealized (gains)
losses
       Settlements  Transfer
in  Level 3
  Transfer
out of
Level 3
  Ending
balance
as of
March 31,
2011
  Total  (gains)
losses
included in
net (income)
attributable
to liabilities
still held
 

(Amounts in millions)

 Included in
net (income)
loss
 Included
in OCI
  Included in
net  (income)
 Included
in OCI
 Purchases Sales Issuances 

Policyholder account
balances
(1)

 $175 $255   $—   $17  $—   $—   $447 $255  

Policyholder account balances (1)

 $121   $(62 $—     $—     $—     $10  $—     $—     $—     $69   $(61

Derivative liabilities:

                   

Interest rate swaps

  2  (2  —    —      —    —    —    (2

Interest rate swaptions

  67  (42  —    (25  —    —    —    (42

Credit default swaps

  —    26    —    —      —    —    26  26    7    (2  —      3    —      —      (1)  —      —      7    (2

Credit default swaps related to securitization
entities
(2)

  —    41    —    (3)  121  —    159  41  

Credit default swaps related to securitization entities

  129    (9  —      —      —      —      —      —      —      120    (9

Equity index options

  2  (1  —    (1  —    —    —    (1  3    —      —      —      —      —      (3  —      —      —      —    
                                                    

Total derivative liabilities

  71  22    —    (29  121  —    185  22    139    (11  —      3    —      —      (4)  —      —      127    (11

Borrowings related to securitization entities(2)

  —    (8  —    —      59  —    51  (8

Borrowings related to securitization entities

  51    7    —      —      —      —      —      —      —      58    7  
                                                    

Total Level 3 liabilities

 $246 $269   $—   $(12 $180 $—   $683 $269   $311   $(66 $—     $3   $—     $10   $(4) $—     $—     $254   $(65
                                                    

 

((1)1)

Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

(2)

Relates to the consolidation of certain securitization entities as of January 1, 2010. See note 7 for additional information related to consolidated securitization entities.

 

  Beginning
balance

as of
January 1,
2009
  Total realized and
unrealized (gains)

losses
  Purchases,
sales,
issuances
and
settlements,
net
  Transfer
in Level 3
  Transfer
out of
Level 3
  Ending
balance
as of
June 30,
2009
  Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
  Beginning
balance
as of
January 1,
2010
  Total realized and
unrealized (gains)
losses
 Purchases,
sales,
issuances
and
settlements,
net
  Transfer
in  Level 3
  Transfer
out of
Level 3
  Ending
balance
as of
March 31,
2010
  Total  (gains)
losses
included in
net (income)
attributable
to liabilities
still held
 

(Amounts in millions)

  Included in
net (income)
loss
 Included
in OCI
      Included in
net  (income)
 Included
in OCI
 

Policyholder account balances

  $878  $(456 $—    $13   $—    $—    $435  $(445

Other liabilities(1)

   68   142    —     (49  —     —     161   110  

Policyholder account
balances
(1)

 $175   $(39 $9   $—     $—     $—     $145   $(37

Derivative liabilities:

        

Interest rate swaps

  2    (2  —      —      —      —      —      (2

Interest rate swaptions

  67    (32  —      (17  —      —      18    (15

Credit default swaps

  —      1    —      —      —      —      1    1  

Credit default swaps related to securitization entities

  —      (5  —      2    121    —      118    (5

Equity index options

  2    3    —      (1  —      —      4    3  
                        

Total derivative liabilities

  71    (35  —      (16  121    —      141    (18

Borrowings related to securitization entities

  —      (2  —      —      60    —      58    (2
                                                 

Total Level 3 liabilities

  $946  $(314 $—    $(36 $—    $—    $596  $(335 $246   $(76 $9   $(16 $181   $—     $344   $(57
                                                 

 

(1(1))

Represents derivative liabilities.embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

Purchases, sales, issuancesIssuances and settlements net, presented for policyholder account balances represent the issuances and settlements of embedded derivatives associated with our GMWB liabilities where: issuances are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance and settlements are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income) loss” in the tables presented above.

The amount presented for unrealized gains (losses) for assets and liabilities still held as of the reporting date primarily represents impairments related tofor available-for-sale securities, accretion on certain fixed maturity securities, changes in fair value of trading securities and certain derivatives and changes in fair value of embedded derivatives associated with our GMWB liabilities that existed as of the reporting date, which were recorded in net investment gains (losses).

Non-Recurring Fair Value Measurements

We hold investments in bank loans that are recorded at the lower of cost or fair value, and are recorded in other invested assets. As of June 30, 2010, $3 million of bank loans were recorded at fair value, basedaccretion on market observable information and classified as Level 2, which was lower than their respective cost; therefore, we recorded $1 million of fair value loss adjustments for the three and six months ended June 30, 2010. In addition, we held an investment in one commercial mortgage loan that was recorded at the lower of cost or fair value. As of June 30, 2010, $37 million of commercial mortgage loans were recorded at fair value, based on the expected transaction price and classified as Level 2. Therefore, we recorded $13 million of fair value adjustments for the three and six months ended June 30, 2010.

(7) Variable Interest and Securitization Entities

VIEs are generally entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. We evaluate VIEs to determine whether we are the primary beneficiary and are required to consolidate the assets and liabilities of the entity. The determination of the primary beneficiary for a VIE can be complex and requires management judgment regarding the expected results of the entity and who directs the activities of the entity that most significantly impact the economic results of the VIE. Our primary involvement related to VIEs includes:

asset securitization transactions,

certain investments and

certain mortgage insurance policies.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(a) Asset Securitizations

We have used former affiliates and third-party entities to facilitate asset securitizations. Disclosure requirements related to off-balance sheet arrangements encompass a broader array of arrangements than those at risk for consolidation. These arrangements include transactions with term securitization entities, as well as transactions with conduits that are sponsored by third parties.

The following table summarizes the total securitized assets as of the dates indicated:

(Amounts in millions)

  June 30,
2010
  December 31,
2009

Receivables secured by:

    

Commercial mortgage loans

  $—    $574

Fixed maturity securities

   80   123

Other assets

   168   236
        

Total securitized assets not required to be consolidated

   248   933
        

Total securitized assets required to be consolidated

   612   —  
        

Total securitized assets

  $860  $933
        

Financial support for certain securitization entities was provided under credit support agreements, in which we provided limited recourse for a maximum of $117 million of credit losses as of June 30, 2010. These agreements will remain in place throughout the life of the related entities. Included in this amount was $40 million for the limited recourse related to one of our commercial mortgage loan entities that was required to be consolidated with assets of $125 million as of June 30, 2010. There were no amounts recorded for these limited recourse liabilities as of June 30, 2010 and December 31, 2009.

(b) Securitization and Variable Interest Entities Not Required To Be Consolidated

We are involved in certain securitization and VIEs where we are not required to consolidate the securitization entity.

Asset securitizations.We transferred assets to securitization entities that would be considered VIEs but we were not required to consolidate the securitization entities. These securitization entities were designed to have significant limitations on the types of assets owned and the types and extent of permitted activities and decision making rights. We evaluated our involvement in the entities’ design and our decision making ability regarding the assets held by the securitization entity and determined we would generally not be the party with power to direct the activities that significantly impact the economic performance of the entity.

In certain instances, we determined we were the party with power but did not have a variable interest in the entity. Our interest in the entities included servicer fees and excess interest, where our benefit from our excess interest holding is subordinated to third-party holdings. Based on the composition of the assets in the securitization entity, there were no reasonable scenarios that would result in our interest receiving any significant benefit for the entity. As a result, our interest would not be considered a variable interest in the entity as a result of meeting certain requirements in the accounting guidance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Amounts recognized in our consolidated financial statements related to our involvement with entities used to facilitate asset securitization transactions where the securitization entity was not required to be consolidated as of the dates indicated:

   June 30, 2010  December 31, 2009

(Amounts in millions)

  Cost  Fair
value
  Cost  Fair
value

Retained interests—assets

  $1  $2  $79  $44
                

Total

  $1  $2  $79  $44
                

The decrease in the amounts presented above were primarily a result of having to consolidate certain securitization entities as discussed above.

In certain securitization transactions, we retained an interest in transferred assets. Those interests take various forms and may be subject to credit, prepayment and interest rate risks. When we securitized receivables, we determined the fair value based on discounted cash flow models that incorporate, among other things, assumptions including credit losses, prepayment speeds and discount rates. These assumptions were based on our experience, market trends and anticipated performance related to the particular assets securitized. Our retained interests are reflected as fixed maturity securities available-for-sale.

Following a securitization transaction, we retained the responsibility for servicing the receivables, and as such, were entitled to receive an ongoing fee based on the outstanding principal balances of the receivables. There were no servicing assets nor liabilities recorded as the benefits of servicing the assets were adequate to compensate an independent servicer for its servicing responsibilities.

There has been no new asset securitization activity in 2010 or 2009.

Investments.We hold investments in certain structures that are considered VIEs. Our investments represent beneficial interests that are primarily in the form of structured securities. Our involvement in these structures typically represent a passive investment in the returns generated by the VIE and typically do not result in having significant influence over the economic performance of the VIE. See note 4 for additional information related to our investments, which includes information related to structured securities, such as asset-backed and mortgage-backed securities. Our maximum exposure to loss represents our cost basis in the investments.

Mortgage insurance.We also provide mortgage insurance on certain residential mortgage loans originated and securitized by third parties using VIEs to issue mortgage-backed securities. While we provide mortgage insurance on the underlying loans, we do not typically have any ongoing involvement with the VIE other than our mortgage insurance coverage and do not act in a servicing or decision making capacity for the underlying loans held by the VIE.

(c) Securitization and Variable Interest Entities Required To Be Consolidated

As a result of adopting new accounting guidance for VIE consolidation on January 1, 2010, we were required to consolidate certain VIEs. Our involvement with VIEs that were required to be consolidated related to asset securitization transactions and certain investments, both of which are described in more detail below. Prior to being required to consolidate these entities, our interest in these entities was recorded in our consolidated financial statements as fixed maturity securities available-for-sale.

GENWORTH FINANCIAL, INC.net investment income.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Asset securitizations.For VIEs related to asset securitization transactions, we were required to consolidate three securitization entities as a result of our involvement in the entities’ design or having certain decision making ability regarding the assets held by the securitization entity. These securitization entities were designed to have significant limitations on the types of assets owned and the types and extent of permitted activities and decision making rights. The three securitization entities that were required to be consolidated are comprised of two securitization entities backed by commercial mortgage loans and one backed by residual interests in certain policy loan securitization entities.

For one of our commercial mortgage loan securitization entities with assets of $125 million as of June 30, 2010, our economic interest represents the excess interest received on the loans compared to the interest paid on the entity’s obligation. We also act as the servicer for the underlying mortgage loans and have the ability to direct certain activities in accordance with the agreements related to the securitization entity.

For the other commercial mortgage loan securitization entity with assets of $417 million as of June 30, 2010, our economic interest represents the excess interest of the commercial mortgage loans and the subordinated notes of the securitization entity. The commercial mortgage loans are serviced by a third-party servicer and special servicer. However, we have the right to replace the special servicer without cause at any time. This right is recognized under accounting guidance as resulting in our effective control of the activities directed by the special servicer.

Our economic interest in the policy loan securitization entity represents the excess interest received from the residual interest in certain policy loan securitization entities and the floating rate obligation issued by the securitization entity. The securitization entity also contains an interest rate swap to mitigate the difference between the effective fixed receipt on the assets and the floating rate obligation issued by the securitization entity. Since there are no significant ongoing activities in the securitization entity, we evaluated the design of the entity upon inception when we transferred the residual interests in the securitization entity. Prior to 2010, we fully impaired our investment in this securitization entity as a result of not expecting any future economic benefits from our investment under any reasonable scenario. However, there are certain remote interest rate and mortality scenarios that would result in our residual interest receiving significant economic benefits in relation to benefits received by the securitization entity. In accordance with the relevant accounting guidance, the use of probability is not permitted when determining whether we would have the ability to receive significant benefits from the securitization entity.

Investments.For VIEs related to certain investments, we were required to consolidate three securitization entities as a result of having certain decision making rights related to instruments held by the entities. These securitization entities were designed as synthetic collateralized debt obligations whereby the entities purchased highly rated asset-backed securities and entered into credit default swaps to generate income that would be passed to the noteholders of the entities. The entities also have the ability to settle any losses incurred on the credit default swap by providing the derivative counterparty asset-backed securities with a par amount equal to the loss incurred on the credit default swap. We hold the majority of the notes issued by the securitization entity and also have certain decision making rights related to the instruments held by the entity. Previously, we were not required to consolidate the securitization entity as a result of other noteholders absorbing the majority of expected losses from the entity.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table shows the activity presented in our consolidated statement of income related to the consolidated securitization entities for the periods indicated:

(Amounts in millions)

  Three months ended
June 30, 2010
  Six months ended
June 30, 2010
 

Revenues:

   

Net investment income:

   

Restricted commercial mortgage loans

  $9   $19  

Restricted other invested assets

   —      1  
         

Total net investment income

   9    20  
         

Net investment gains (losses):

   

Trading securities

   2    9  

Derivatives

   (55  (53

Commercial mortgage loans

   (1  (1

Borrowings related to securitization entities recorded at fair value

   7    9  
         

Total net investment gains (losses)

   (47  (36
         

Total revenues

   (38  (16
         

Expenses:

   

Interest expense

   7    15  
         

Total expenses

   7    15  
         

Loss before income taxes

   (45  (31

Benefit for income taxes

   (16  (11
         

Net loss

  $(29 $(20
         

The following table shows the assets and liabilities that were recorded for the consolidated securitization entities as of the date indicated:

(Amounts in millions)

  June 30, 2010

Assets

  

Investments:

  

Restricted commercial mortgage loans

  $535

Restricted other invested assets:

  

Trading securities

   373

Other

   1
    

Total restricted other invested assets

   374
    

Total investments

   909

Cash and cash equivalents

   2

Accrued investment income

   1
    

Total assets

  $912
    

Liabilities

  

Other liabilities:

  

Derivative liabilities

  $182

Other liabilities

   1
    

Total other liabilities

   183

Borrowings related to securitization entities

   525
    

Total liabilities

  $708
    

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The assets and other instruments held by the securitization entities are restricted and can only be used to fulfill the obligations of the securitization entity. Additionally, the obligations of the securitization entities do not have any recourse to the general credit of any other consolidated subsidiaries, except $40 million of limited recourse related to a consolidated commercial mortgage loan securitization entity.

(8)(7) Commitments and Contingencies

(a) Litigation

We face the 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. 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, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, bidding practices in connection with our management and administration of a third party’sthird-party’s municipal guaranteed investment contract business, claims payments and procedures, cancellation or rescission of coverage, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 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 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. WeIn addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations. At this time, it is not feasible to predict, nor to determine the ultimate outcomes of allany pending investigations and legal proceedings, nor to provide reasonable ranges of potentialpossible losses.

As previously disclosed, in December 2009, one of our non-insurance subsidiaries, one of the subsidiary’s officers and Genworth Financial, Inc. were named in a putative class action lawsuit captionedMichael J. Goodman and Linda Brown v. Genworth Financial Wealth Management, Inc., et al, in the United States District Court for the Eastern District of New York. In response to our motion to dismiss the complaint in its entirety, the Court granted on March 30, 2011 the motion to dismiss the state law fiduciary duty claim and denied the motion to dismiss the remaining federal claims. We continue to vigorously defend this action.

As previously disclosed, we and one of our mortgage insurance subsidiaries were named in a putative class action lawsuit filed in November 2010 captionedArchie Moses and Violet M. Moses v. SunTrust Banks, Inc., et al,in the United States District Court for the District of Columbia. On March 10, 2011, plaintiffs voluntarily dismissed the action without prejudice as to Genworth Financial, Inc. and our mortgage insurance subsidiary.

(b) Commitments

As of June 30, 2010,March 31, 2011, we were committed to fund $143$106 million in limited partnership investments and $5$39 million in U.S. commercial mortgage loan investments.

(9)(8) Borrowings and Other Financings

Revolving Credit Facilities

We have two five-year revolving credit facilities that mature in May 2012 and August 2012. These facilities bear variable interest rates based on one-month LIBOR plus a margin. Each of these facilities originally had $1.0 billion available for borrowings. Lehman Commercial Paper Inc. (“LCP”) had committed $70 million under the August 2012 credit facilitymargin and Lehman Brothers Bank, FSB (“Lehman FSB”) had committed $70 million under the May 2012 credit facility. On October 5, 2008, LCP filed for protection under Chapter 11 of the Federal

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. LCP was unable to fulfill its commitments under the August 2012 credit facility and Lehman FSB declined to fulfill its commitment under the May 2012 credit facility. On April 1, 2010, a consent and waiver agreement was entered into which releases the Lehman Brothers-related entities from their commitments under the facilities and reduces the remaining commitments by those respective amounts. Therefore, as of June 30, 2010, we hadhave access to $1.9 billion under these facilities.

In June 2010, As of March 31, 2011, we repaid $100 million of outstandinghad no borrowings under each of our five-year revolving credit facilities using the net proceeds from our senior notes offering that was completed in June 2010.

As of June 30, 2010,these facilities; however, we had borrowings of $730utilized $280 million under these facilities andprimarily for the issuance of letters of credit for the benefit of one of our life insurance subsidiaries. As of December 31, 2010, we had no borrowings under these facilities; however, we utilized $54$56 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our lifestyle protection insurance subsidiaries. As of December 31, 2009, we had borrowings of $930 million under these facilities, and we utilized $407 million under these facilities for the issuance of letters of credit for the benefit of one of our life insurance subsidiaries.

Long-Term Senior Notes

In June 2010,March 2011, we issued senior notes having an aggregate principal amount of $400 million, with an interest rate equal to 7.700%7.625% per year payable semi-annually, and maturing in June 2020September 2021 (“20202021 Notes”). The 20202021 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 portion of the 20202021 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 $397 million from the issuance of the 20202021 Notes were used to repay $100 million of outstanding borrowings under each of our five-year revolving credit facilities and the remainder of the proceeds were used for general corporate purposes.

In June 2010, our majority-owned subsidiary, Genworth MI Canada Inc. (“Genworth Canada”), issued CDN$275 million of 5.68% senior notes due 2020. The net proceeds of the offering will be used to fund transactions among Genworth Canada and its Canadian wholly-owned subsidiaries. Genworth Canada is expected to use any proceeds it receives from such transactions for general corporate and investment purposes, and/or to fund a distribution to, or a repurchase of common shares from, Genworth Canada’s shareholders.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Non-Recourse Funding Obligations

As of June 30, 2010,March 31, 2011, we had $3.4 billion of fixed and floating rate non-recourse funding obligations outstanding backing additional statutory reserves. As of June 30, 2010March 31, 2011 and December 31, 2009,2010, the weighted-average interest rates on our non-recourse funding obligations were 1.51%1.41% and 1.49%1.44%, respectively.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Borrowings Related To Securitization Entities

Borrowings related to securitization entities were as follows as of June 30, 2010:

(Amounts in millions)

  Principal
amount
  Carrying
value

GFCM LLC, due 2035, 5.2541%

  $236   $236

GFCM LLC, due 2035, 5.7426%

   113    113

Genworth Special Purpose Two, LLC, due 2023, 6.0175%

   125    125

Marvel Finance 2007-1 LLC, due 2017(1)

   5    1

Marvel Finance 2007-4 LLC, due 2017(1)

   12    5

Genworth Special Purpose Five, LLC, due 2040(1)

   NA  (2)   45
        

Total

  $491   $525
        

(1)

Accrual of interest based on three-month LIBOR that resets every three months plus a fixed margin.

(2)

Principal amount not applicable. Notional balance is $117 million.

These borrowings are required to be paid down as principal is collected on the restricted investments held by the securitization entities and accordingly the repayment of these borrowings follows the maturity or prepayment, as permitted, of the restricted investments. See note 7 for additional information on consolidated securitization entities.

(10)(9) Income Taxes

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

 

 Three months ended
June 30,
 Six months ended
June 30,
   Three months ended March 31, 
     2010         2009         2010         2009       2011 2010 

Statutory U.S. federal income tax rate

 35.0 35.0 35.0 35.0   35.0  35.0

Increase (reduction) in rate resulting from:

       

State income tax, net of federal income tax effect

 —     (5.1 (2.1 0.2     1.2    (3.4

Benefit on tax favored investments

 (8.0 (3.1 (7.1 3.8     (2.7  (6.6

Effect of foreign operations

 (33.7 (18.6 (21.3 3.3     (14.4  (13.7

Non-deductible expenses

 2.2   0.7   0.5   (0.5   0.6    (0.5

Interest on uncertain tax positions

 (2.4 (2.7 (2.3 (0.3   —      (2.2

Tax benefits related to separation from our former parent

 —     —     (55.8 —       —      (89.5

Other, net

 —     1.2   1.8   —       0.8    2.7  
                   

Effective rate

 (6.9)%  7.4 (51.3)%  41.5   20.5  (78.2)% 
                   

The effective tax rate decreasedincreased significantly from the prior year due to uncertain tax benefits related to separation from our former parent favorable impact of newly enacted Australian tax legislation, lower taxed foreign income and tax favored investments.

in the prior year that did not recur. In connection with our 2004 separation from our former parent, General Electric (“GE”), we made certain joint tax elections and realized certain tax benefits. During the first quarter of 2010, the Internal Revenue Service (“IRS”) completed an examination of GE’s 2004 tax return, including these tax impacts. Therefore, $106 million

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

of previously uncertain tax benefits related to separation became certain and we recognized those in the first quarter of 2010. Additionally, we recorded $20 million as additional paid-in capital related to our 2004 separation.

(11)(10) Segment Information

We conduct our operations in three operating business segments: (1) Retirement and Protection, which includes our life insurance, long-term care insurance, wealth management products and services and retirement income products; (2) International, which includes international mortgage and lifestyle 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.Insurance.

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, the results of non-core businesses and non-strategic products that are managed outside of our operating segments, and eliminations of inter-segment transactions.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income (loss) and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “net operating income (loss) available to Genworth Financial, Inc.’s common stockholders.” We define net operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding net income attributable to noncontrolling interests, after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. We 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) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are oftencan be 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) available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that net operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate net operating income (loss) available to Genworth Financial, Inc.’s common stockholders, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. However, net operating income (loss) available to Genworth Financial, Inc.’s common stockholders is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.

There were no infrequent or unusual non-operating items excluded from net operating income (loss) available to Genworth Financial, Inc.’s common stockholders during the periods presented other than a $106 million tax benefit related to separation from our former parent recorded in the first quarter of 2010.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

 

  Three months ended
June 30,
  Six months ended
June 30,
  Three months ended
March  31,
 

(Amounts in millions)

      2010         2009      2010 2009  2011   2010 

Revenues:

          

Retirement and Protection

  $1,643   $1,607  $3,236   $2,594  $1,738    $1,593  

International

   622    639   1,273    1,229   632     651  

U.S. Mortgage Insurance

   181    196   362    384   177     181  

Corporate and Other

   (36  41   (40  10   21     (4
                    

Total revenues

  $2,410   $2,483  $4,831   $4,217  $2,568    $2,421  
                    

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities and a reconciliation of net operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities to net income (loss) for the periods indicated:

 

   Three months ended
June 30,
  Six months ended
June 30,
 

(Amounts in millions)

      2010          2009        2010      2009   

Retirement and Protection

  $114   $123   $236   $161  

International

   105    87    196    188  

U.S. Mortgage Insurance

   (40  (134  (76  (269

Corporate and Other

   (61  (67  (124  (57
                 

Net operating income available to Genworth Financial, Inc.’s common stockholders

   118    9    232    23  

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

   (76  (59  (118  (542

Net tax benefit related to separation from our former parent

   —      —      106    —    
                 

Net income (loss) available to Genworth Financial, Inc.’s common stockholders

   42    (50  220    (519

Add: net income attributable to noncontrolling interests

   35    —      69    —    
                 

Net income (loss)

  $77   $(50 $289   $(519
                 
   Three months ended
March  31,
 

(Amounts in millions)

  2011  2010 

Retirement and Protection’s net operating income

  $127   $122  

International’s net operating income

   124    91  

U.S. Mortgage Insurance’s net operating loss

   (81  (36

Corporate and Other’s net operating loss

   (72  (63
         

Net operating income

   98    114  

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

   (16  (42

Net tax benefit related to separation from our former parent

   —      106  
         

Net income available to Genworth Financial, Inc.’s common stockholders

   82    178  

Add: net income attributable to noncontrolling interests

   34    34  
         

Net income

  $116   $212  
         

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

 

(Amounts in millions)

  June 30,
2010
  December 31,
2009

Assets:

    

Retirement and Protection

  $85,087  $81,497

International

   11,444   12,143

U.S. Mortgage Insurance

   3,564   4,247

Corporate and Other

   10,257   10,300
        

Total assets

  $110,352  $108,187
        

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(12) Noncontrolling Interests

In July 2009, Genworth Canada, our indirect subsidiary, completed the initial public offering (the “Offering”) of its common shares. Of the 49.7 million common shares of Genworth Canada that were sold in the Offering, 5.1 million common shares were sold by Genworth Canada and 44.6 million common shares were sold by Brookfield Life Assurance Company Limited, our indirect wholly-owned subsidiary. Following completion of the Offering, we beneficially own 57.5% of the common shares of Genworth Canada.

In the six months ended June 30, 2010, dividends of $21 million were paid to the noncontrolling interests.

(Amounts in millions)

  March 31,
2011
   December 31,
2010
 

Assets:

    

Retirement and Protection

  $86,622    $86,352  

International

   12,838     12,422  

U.S. Mortgage Insurance

   3,989     3,875  

Corporate and Other

   9,491     9,746  
          

Total assets

  $112,940    $112,395  
          

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.herein and with our 2010 Annual Report on Form 10-K.

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 downturns and volatility in global economies and equity and credit markets, downgrades in our financial strength or credit ratings, interest rate fluctuations and levels, adverse capital and credit market conditions, the valuation of fixed maturity, equity and trading securities, defaults, downgrade or other events impacting the value of our fixed maturity securities portfolio, defaults on our commercial mortgage loans or the mortgage loans underlying our investments in commercial mortgage-backed securities and volatility in performance, goodwill impairments, the soundness of other financial institutions, inabilitydefault by counterparties to access our credit facilities,reinsurance arrangements or derivative instruments, an adverse change in risk-based capital and other regulatory requirements, insufficiency of reserves, legal constraints on dividend distributions by our subsidiaries, competition, availability, affordability and adequacy of reinsurance, default by counterparties, loss of key distribution partners, regulatory restrictions on our operations and changes in applicable laws and regulations, legal or regulatory investigations or actions, the failure or any compromise of the security of our computer systems, and the occurrence of natural or man-made disasters or a pandemic;pandemic, the effect of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, changes in the accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies and impairments of or valuation allowances against our deferred tax assets;

 

  

Risks relating to our Retirement and Protection segment, including changes in morbidity and mortality, accelerated amortization of deferred acquisition costs and present value of future profits, reputational risks as a result of rate increases on certain in-force long-term care insurance products, medical advances, such as genetic research and diagnostic imaging, and related legislation, unexpected changes in persistency rates, ability to continue to implement actions to mitigate the impact of statutory reserve requirements and the failure of demand for long-term care insurance to increase;

 

  

Risks relating to our International segment, including political and economic instability or changes in government policies, foreign exchange rate fluctuations, unexpected changes in unemployment rates, unexpected increases in mortgage insurance default rates or severity of defaults, the significant portion of high loan-to-value insured international mortgage loans which generally result in more and larger claims than lower loan-to-value loans,ratios, competition with government-owned and government-sponsored enterprises (“GSEs”) offering mortgage insurance and changes in regulations;

 

  

Risks relating to our U.S. Mortgage Insurance segment, including increases in mortgage insurance default rates, failure to meet, or severity of defaults,have waived to the extent needed, the minimum statutory capital requirements and hazardous financial condition standards, uncertain results of continued investigations of insured U.S. mortgage loans, possible rescissions of coverage and the results of objections to our rescissions, the extent to which loan modifications and other similar programs may provide benefits to us, unexpected changes in unemployment and underemployment rates, further deterioration in economic conditions or a further decline in home prices, problems associated with foreclosure process defects that may defer claim payments, changes to the role or structure of Federal National Mortgage

Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), competition with government-owned and government-sponsored enterprises offering mortgage insurance, (including the Federal Housing Administration (“FHA”)), changes in regulations that affect ourthe U.S. mortgage insurance business, 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 alternatives to private mortgage insurance and reductions by

lenders in the level of coverage they select, the impact of the use of reinsurance with reinsurance companies affiliated with mortgage lending customers, legal actions under the Real Estate Settlement Procedures Act of 1974 (“RESPA”) and potential liabilities in connection with our U.S. contract underwriting services;

 

  

Other risks, including the possibility that in certain circumstances we will be obligated to make payments to General Electric Company (“GE”) under the tax matters agreement with GE 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 theour certificate of incorporation and bylaws and the tax matters agreement with GE may discourage takeover attempts and business combinations that stockholders might consider in their best interests; and

 

  

Risks relating to our common stock, including the suspension of dividends and stock price fluctuation.fluctuations.

For additional information regarding the risks identified above, see “Item 1A. Risk Factors” in our 2009 Annual Report on Form 10-K. 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 dedicated to providing insurance, wealth management, investment and financial solutions to more than 15 million customers, with a presence in more than 25 countries. We have three operating segments: Retirement and Protection, International and U.S. Mortgage Insurance.

 

  

Retirement and Protection. We offer andand/or manage a variety of protection, wealth management and retirement income products. Our primary protectioninsurance products include:include life and long-term care and Medicare supplement insurance. Additionally, we offer other senior supplementalMedicare supplement insurance products, as well as care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs and advisor services, financial planning services, fixed and variable deferred and immediate individual annuitiesannuities. We previously offered variable deferred and group variable annuities offered through retirement plans. For the three months ended June 30, 2010,March 31, 2011, our Retirement and Protection segment’s net income available to Genworth Financial, Inc.’s common stockholders and net operating income available to Genworth Financial, Inc.’s common stockholders were $81$112 million and $114 million, respectively. For the six months ended June 30, 2010, our Retirement and Protection segment’s net income available to Genworth Financial, Inc.’s common stockholders and net operating income available to Genworth Financial, Inc.’s common stockholders were $165 million and $236$127 million, respectively.

 

  

International. We offer mortgage and lifestyle protection insurance products and related services in multiple markets. We are a leading provider of mortgage insurance products in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk. We are a leading provider of payment protection coverages primarily associated with certain financial obligations (referred to as lifestyle protection) in multiple European countries, Canada and Mexico. Ourcountries. These lifestyle 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 June 30, 2010,March 31, 2011, our International segment’s net income available to Genworth Financial, Inc.’s common stockholders and net operating income available to Genworth Financial, Inc.’s common stockholders were $107$127 million and $105 million, respectively. For the six months ended June 30, 2010, our International segment’s net income available to Genworth Financial, Inc.’s common stockholders and net operating income available to Genworth Financial, Inc.’s common stockholders were $202 million and $196$124 million, respectively.

  

U.S. Mortgage Insurance. In the U.S.,United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage

insurance. We selectively 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 efficiently and manage capital and risk. For the three months ended June 30, 2010, our U.S. Mortgage Insurance segment’s net loss available to Genworth Financial, Inc.’s common stockholders and net operating loss available to Genworth Financial, Inc.’s common stockholders were $43 million and $40 million, respectively. For the six months ended June 30, 2010,March 31, 2011, our U.S. Mortgage Insurance segment’s net loss available to Genworth Financial, Inc.’s common stockholders and net operating loss available to Genworth Financial, Inc.’s common stockholders were both $76$81 million.

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 and the results of non-core businesses and non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist ofof: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). For the three months ended June 30, 2010, ourMarch 31, 2011, Corporate and Other activities’activities had a net loss available to Genworth Financial, Inc.’s common stockholders and a net operating loss available to Genworth Financial, Inc.’s common stockholders were $103of $76 million and $61 million, respectively. For the six months ended June 30, 2010, our Corporate and Other activities’ net loss available to Genworth Financial, Inc.’s common stockholders and net operating loss available to Genworth Financial, Inc.’s common stockholders were $71 million and $124$72 million, respectively.

Business trends and conditions

Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions. The following discussion of business trends and conditions should be read together with the trends discussed in our 20092010 Annual Report on Form 10-K, which described additional business trends and conditions.

General conditions and trends affecting our businesses

Financial and economic environment. As a financial security company, theThe stability of both the financial markets and global economies in which we operate impacts ourthe sales, revenue growth and profitability trends of our businesses. GlobalImprovements in equity markets, credit markets, interest rate spreads and global financial markets improvedseen during 2010 continued in the first quarter of 2010 from2011. In Canada, the volatility experiencedhousing market continued to improve while unemployment levels remained relatively in 2009,line with solid performance, lower volatility in equity markets, narrowing spreadsthe fourth quarter of 2010. In Australia, the housing market has remained stable and better credit performance in many sectors ofunemployment levels remained consistent with the debt markets. However, in the secondfourth quarter of 2010 we saw a decline in equity markets and widening spreads primarily as a result ofdespite recent natural disasters though these disasters could impact regional economies over the perceived contagion risk related to the European sovereign debt crisis. In 2010, Canadian and Australian economies and housing markets improved. Despite continued stress in themedium-term. The U.S. housing market reflected continuing stress, growing levels of foreclosures and variations in performance by sub-market, there wereincluding continued signs of stabilization.stabilization within certain regions. Europe remained a slow growth environment.

Slow economic growth, coupledenvironment with uncertain financial market conditions, influenced, and may continue to influence, investment and spending decisions by both consumers and businesses as they adjust their consumption, debt and risk profiles in response to these conditions. As a result, our sales, revenues and profitability trends of certain insurance and investment products were adversely impacted during the first half of 2009. Since then, these trends have improved as investor confidence in the markets and the outlook for some consumers and businesses strengthened. Other factors such as government spending, monetary policies, regulatory initiatives, the volatility and strength of the capital markets, anticipated tax policy changes and the impact of U.S. healthcare and financial regulation reform can continue to affect economic and business outlooks andlower consumer behaviors moving forward.

In response to market conditions, we adjusted our investment and asset-liability management strategies to reduce risk during strained economic and financial market conditions. In addition, we refined our product and

distribution management strategies to best fit with our strengths, profitability targets and risk tolerance. These and other company actions were made to enhance our competitive position as well as our capital flexibility and liquidity.lending activity. See “—Trends and conditions affecting our segments” below for a discussion regarding the impacts the financial markets and global economies have on our businesses.

Since late 2008,Slow or varied levels of economic growth, coupled with uncertain financial markets and economic outlooks, changes in government policy, regulatory reforms and other changes in market conditions, influenced, and we believe will continue to influence, investment and spending decisions by consumers and businesses as they adjust their consumption, debt, capital and risk profiles in response to these conditions. Although these trends have generally improved as investor confidence in the markets and the outlook for some consumers and businesses strengthened, our sales, revenues and profitability trends of certain insurance and investment products have been and could be further adversely impacted going forward. In particular, factors such as government spending, monetary policies, the volatility and strength of the capital markets, anticipated tax policy changes and the impact of U.S. healthcare and financial regulation reform will continue to affect economic and business outlooks and consumer behaviors moving forward.

The U.S. government, Federal Reserve and other legislative and regulatory bodies have takencontinue to take a variety of other actions to support the economy and capital markets, influence interest rates, stabilize the capitalhousing markets and provide needed liquidity to promote economic growth. These include various mortgage restructuring programs

implemented or under consideration by the government-sponsored enterprises (“GSEs”),GSEs, lenders, servicers and the U.S. government. Outside of the U.S.,United States, various governments took actions to stimulate economies, stabilize financial systems and improve market liquidity. In general, these actions have positively affected these countries and their markets; however, there can be no assurance as to the future level of impact of any of these actions on the economic and financial markets, including levels of volatility. A delayed economic recovery period or a U.S. or global recessionary or debt crisis setback could materially and adversely affect our business, financial condition and results of operations.

We evaluate our product offerings, investment and asset-liability management strategies to moderate risk especially during periods of strained economic and financial market conditions. In addition, we continue to review our product and distribution management strategies to align with our strengths, profitability targets and risk tolerance. These and other company actions should enhance our competitive position as well as our capital flexibility and liquidity.

Volatility in credit and investment markets. Market conditions showed continued signs of improvement inDuring the first quarter of 2010 resulting in greater investor confidence and positive, though inconsistent, equity and credit market performance. Continued strong demand for fixed-income products resulted in credit spread compression. However, during the first quarter of 2010, there was higher2011, markets were characterized by rising volatility in selectthe U.S. Treasury market due to external events in Europe, North Africa and the Middle East and due to the earthquake in Japan. Credit spreads were generally less volatile and ended the quarter tighter. Macroeconomic conditions, improving company fundamentals, declining corporate default rates, reduced net supply of spread product and continued strong investor demand drove the tightening in both credit and securitized products. Fears regarding systemic risk were largely contained this quarter, despite European sovereign bondsconcerns and related securities as concerns grew overpolitical instability in North Africa and the refinancing needs of Greece and certain other European countries. In the second quarter of 2010,Middle East. For securitized products, the market moved away from riskier assets. This was generallycontinued to see shrinking supply, though issuance did improve in commercial mortgage-backed securities. Asset valuations in securitized sectors continued to improve given a response to increased concerns regarding macro-economic risks in Europestrong supply and a slowing in the pace of recovery of the U.S. economy. During the second quarter of 2010, Treasury yields declined substantially as equity volatility increased and high yield bond spreads widened as the market demand grew for higher-quality assets. Nonetheless, investor liquidity was strong during the quarter and most investment grade bond issues were met with good demand. Investor appetite for asset-backed securities remained strong given limited supply,imbalance, stable credit performance and the structural protections embedded in the larger transactions brought to market. Although financial sector performance improved during the first half of 2010, high levels of unemployment and continued global economic uncertainty still weigh on certain markets.

WhileCertain segments of the marketplace isare still experiencing declines in the performance of collateral underlying certain structured securities, corporatebut impairments continued their downward trend and were atin our investment portfolio remained consistent with the moderate levels duringrecorded in the first halfthird and fourth quarters of 2010. We recorded net other-than-temporary impairments of $51$36 million and $131 million, respectively, duringin the three and six months ended June 30, 2010first quarter of 2011 which were lower than prior year levels and we expect losses to moderate further. Additionally, in the first half of 2010, losses related to limited partnerships decreased $116 million as compared to the first half of 2009 with limited partnership gains in the second quarter of 2010. Although economic conditions may continue to negatively impact certain investment valuations, the underlying collateral associated with assetssecurities that have not been impaired continues to perform.

Looking ahead, we believe that the current credit environment provides us with opportunities to invest across a variety of asset classes to meet our yield requirements, as well as to continue ourexecution of various risk management disciplines involving further diversification and efforts to minimize risk within the investment portfolio. See “—Investments and Derivative Instruments” for additional information on our investment portfolio.

Trends and conditions affecting our segments

Retirement and Protection

Life insurance. Results of our life insurance business are impacted by sales, mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements. Additionally, sales of our products and persistency of our insurance in-force are dependent on competitive product features and pricing, effective distribution and customer service.

The increase in lifeLife insurance sales we experienced during the second half of 2009 continued intoincreased in the first half of 2010 in large part the result ofdue to strong adoption of our new term universal life insurance product. As anticipated,product and remained stable through the second half of 2010 and into the first quarter of 2011 with sales of our term universal life insurance product up 29% in the first quarter of 2011 versus the traditional term and term universal life insurance sales in the prior year. We believe our term universal life insurance product offers a better value proposition to the consumer when compared to our traditional term life insurance product have declined given the introduction late in 2009 ofproducts which we no longer sell. Based on recent sales trends, we believe our new term universal life insurance product that was designed to replace our traditional term life insurance product. Our new term universal life insurance product is more capital efficient and we believe offers a similar or better value proposition to the consumer as our traditional term life insurance product, and is competitively priced for the main streetmiddle and emerging affluent markets. We have experienced strong initial adoption of the product; however, the growth rate will ultimately depend upon the intensityThroughout 2010 and level of future distributor (existing brokerage general agents (“BGAs”) and other distributors) and consumer adoption. In our universal life insurance products, sales for the first half of 2010 were relatively stable given product changes made in 2009 to our new universal life insurance product that resulted in a more capital efficient product that is priced to achieve targeted returns. New premium sales may decline, remain flat or increase depending upon the ongoing distributor and consumer adoption and usage, as well as overall market conditions.

Throughout 2009,into 2011, we experienced favorable mortality results in our term life insurance products as compared to priced mortality. In 2010,

mortality remained favorable althoughassumptions. Additionally, while less sosevere in the first quarter of 2011 than in 2009. Additionally,prior quarters, we have experienced lower persistency as compared to pricing assumptions for 10-year term life insurance policies written in 1999 and 2000 as they reachgo through their post-level rate period. Given the relatively high volume ofWe expect this trend in persistency to continue as these 10-year term life insurance policies written in 2000, we expect this trend to continuego through their post-level rate period and then moderate as these policies have now reached their post-level rate period.thereafter.

Regulations XXX and AXXX require insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and certain universal life insurance policies with secondary guarantees, which increaseguarantees. This increases the capital required to write these products beyond economic requirements. The solutionsalternatives available to reduce the impact for the increased reserve requirements on some of our in-force books of business have over time become more limited and expensive; however, we havemore expensive. Despite this, committed funding sources are in place for approximately 95% of our anticipated peak level reserves required under Regulations XXX and AXXX, soand therefore we believe unfunded reserve exposure is minimal. Additionally, we have made product modifications and introduced new products designed to reduce capital requirements and limit financing costs associated with existing products and thereby improve the profitability of new business. The new term universal life insurance product, discussed above, offers death benefit guarantee premiums that are competitive with traditional term insurance premiums for comparable durations and provides greater consumer flexibility typically associated with universal life coverage. We have also introduced product modifications to our universal life insurance products which provide shorter guarantee periods thereby reducing capital requirements.

Long-term care insurance. Results of our long-term care insurance business are influenced by morbidity, mortality, persistency, investment yields, new product sales, expenses and reinsurance.reinsurance as well as the relative competitiveness of our offerings.

In recent years, industry-wide first-year annualized premiums of long-term care insurance declined during the recession and rebounded as the economy stabilized. This positive trend continued during the first quarter of 2011. Sales of our individual long-term care insuranceproduct have either declined or grown moderately. While our overall sales in 2009 were adversely impacted primarily by the general economic conditions and lower sales through our independent distribution and career force channels,increased 48% in the second halffirst quarter of 2009 and continuing into2011 versus the first half of 2010, we experienced improvements in our long-term care insurance sales. Recent improvements areprior year due in part to growth in the breadthmarket and competitor actions combined with the impacts of our distribution, and we havethe progress made progress on multiple growth initiatives with an emphasis onrelating to distribution effectiveness and broadening of our offerings, including additionalindividual and group offerings. We have experienced, and may continue to experience, higher claims than priced for in older issued policies which negatively impact our results of operations.

In the fourth quarter of 2010, one of our competitors announced its intent to exit the long-term care insurance market effective January 1, 2011. In addition, several competitors have announced their intent to seek rate actions on their individual and certain group long-term care insurance participationproducts. These announcements by competitors could disrupt the market and linked-benefits products.

In the first half of 2009, termination rates increased on the new and old blocks of business resulting in lower benefits and other changes in policy reserves that contributed positively to results of operations. However, during the second half of 2009 and continuing into the first half of 2010, termination rates have decreased to levels experienced historically resulting in higher benefits and other changes in policy reserves that contributed to lower results of operations. We have also experienced higher claims in older issued policies in recent periods which have negatively impactedimpact our results of operations.sales going forward.

We continue pursuing multiple growth initiatives including: new product issuance and service offerings; investing in case management,care coordination capabilities; maintaining tight expense management,management; actively exploring alternative reinsurance strategies,strategies; executing effective investment strategiesstrategies; and considering other actions to improve business profitability and the performance of the overall block,block. These efforts include evaluating the need for future in-force rate increases, where warranted. In this connection, we began filing for a rate increase of 18% on two blocks of older long-term care insurance policies in November 2010. The state approval process of an in-force rate increase varies, and in particular our older blockscertain states can take up to two years to obtain approval. Upon approval, premium increases may only occur on an insured’s policy anniversary date. Therefore, the benefits of business, including potential futureany rate increases. increase may not be fully realized until the implementation is complete over the next several years.

In addition, changes in regulations or government programs, including certain aspects of healthcare reform, such as the Community Living Assistance Services and Supports (“CLASS”) Act, could impact our long-term care insurance business positively or negatively. As such, we continue to actively monitor regulatory developments.

Wealth management.Results of our wealth management business are impacted by the demand for asset management products and related support services, investment performance and equity market conditions.

The decline and volatility in the equity markets that began in 2008 negatively impacted the asset management industry overall, as well as our assets under management, net flows, the performance of certain mutual funds we offer and associated fee income. The recovery of equity and fixed income markets began inmarket improvements since the second quarter of 2009, and continued throughout 2009 and into the first quarter of 2010, although we saw a reversal of this trend late in the second quarter of 2010.

The market improvement over the second half of 2009 and first quarter of 2010, in addition to our introduction of new investment strategies, the expansion of products and services we offer to our advisors and an increase in the

number of advisors that do business with us collectively contributed to our higher sales, net flows and assets under management in the last three quarters of 2009 and the first half of 2010. Market declines and volatility in the second quarter of 2010 reduced sales and net flows over prior periods although net flows remained positive. Despite the market volatility, the business generated positive net flows since April 2009.management. Depending upon the direction of equity and fixed income markets in the future, we could see a correlated impact on sales, net flows and assets under management.

On December 31, 2010, we purchased the operating assets of Altegris Capital, LLC (“Altegris”). This acquisition provided a platform of alternative investments including hedge funds and managed futures products and had approximately $2.2 billion in client assets as of December 31, 2010.

Retirement income.Results of our retirement income business are affected by investment performance, interest rate levels, slope of the interest rate yield curve, net interest spreads, equity market conditions, mortality, policyholder lapses, new product sales and relative competitiveness of our offerings. Our competitive position within many of our distribution channels and our ability to grow this business depends on many factors, including product featuresofferings and company ratings. Product featuresOur product offerings include current and minimum crediting rates on our spread-based products and surrender charges and guaranteedcharges. Guaranteed benefit features inof our in-force variable annuity products which provide guaranteed death or living benefits to the consumer.

RecentRefinements of product changesofferings and sales of annuity productsrelated pricing and investment strategies reflect a more targeted growth strategy in orderplans to achieve appropriate risk adjusted returns. We have scaled back certain product featuresIn January 2011, we discontinued sales of our individual and targeted certain market segments to reduce risk in our annuity products. In this connection,group variable annuities; however, we have targeted distributors and producers and chosen sales personnel that align with this more focused strategy. Beginning in the second half of 2009, we expanded our distribution relationships with new financial institutions, independent financial planners and BGAs and we expect towill continue to expand these distribution relationshipsservice our existing block of business and introduce new product offerings.accept additional deposits on existing contracts.

In fixed annuities, sales may fluctuate as interest rates change and as we offer these products using a disciplined approach to meet targeted returns. We have introduced new market value adjustment deferred annuity products in the BGAbrokerage general agency (“BGA”) channel and we have re-priced immediate annuities to maintain spreads and targeted returns. In 2009, spreads on fixed annuity products declinedEarly in connection with lower short-term rates and from holding higher cash balances to manage through challenging market conditions. Through the first half of 2010, we have reinvested a significant portion of the excess cash and are achievingachieved improvements in spread-related income as a result of higher yields. Looking ahead, we will continue to actively evaluate marketing and investment strategies in the event that interest rates increase. We have targeted distributors and producers and maintained sales capabilities that align with our focused strategy. We have expanded distribution relationships with new financial institutions, independent financial planners and BGAs and we expect to continue to further expand these distribution relationships while selectively adding additional product offerings.

In variable annuities, the improvement in the equity markets during the second half of 2009 and the first quarter of 2010 favorably impacted our results. However, the decline and volatility in the equity markets during the second quarter of 2010 adversely impacted our results. In the future, equity market performance and volatility could result in additional gains or losses in our variable annuity products andalthough associated hedging program which

would impact our results. In addition,activities are expected to mitigate these impacts. As this is a closed block of business, we continue to offer variable annuity products with living benefit featureswill see limited new deposits as described above. However, in response to the risk in equity markets, certain product features have been scaled back to reduce adverse selection risk and volatility while costs to the consumer have been increased. These product changes are similar to actions taken by many, but not all, of our competitors. We believe the benefits offered by these products remain attractive to consumers within our targeted markets.we will only accept additional deposits on existing contracts.

International

International mortgage insurance.Results of our international mortgage insurance business are affected by changes in regulatory environments, employment levels 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.

Throughout 2009, we observed increased stability in international housing markets, particularly in Canada and Australia, as lower mortgage rates, improved housing affordability, certain government programs and improved consumer confidence resulted in increased home sales activity. As a result, home prices increased in these markets during 2009. In the first half of 2010, home price growth slowed in Canada and Australia. Additionally, while unemployment increased during the first half of 2009, we observed a modest decline in unemployment rates in these two markets during the second half of 2009 and we have seen this trend continue or strengthen in the first half of 2010. In certain of our European mortgage insurance markets, we have observed early signs of stabilization as unemployment growth and declines in home prices have moderated.

Canada and Australia comprise approximately 97% of our international mortgage insurance risk in-force with an estimated average effective loan-to-value ratio of 61%62% as of June 30, 2010.March 31, 2011. We expect that these established markets will continue to be key drivers of revenues and earnings in our international mortgage insurance business. Our entry and growth in developing international markets will remain disciplinedselective and selective.disciplined.

During 2010, we continued to observe increased stability in international housing markets, particularly in Canada and Australia, as the economic recovery which began in 2009 gained momentum. As a result of improving economic and employment outlooks, relatively low mortgage rates, improved housing affordability

and consumer confidence, home sales activity remained strong and home prices increased at the start of 2010 in these two markets. During the second half of 2010, home price appreciation moderated after a sustained period of growth. During the first quarter of 2011, home prices increased modestly in Canada and remained relatively flat in Australia. During the remainder of 2011, we expect home prices to remain consistent with current levels in both Canada and Australia. Additionally, we observed a decline in unemployment rates in these two markets during 2010 with rates remaining fairly stable during the first quarter of 2011. However, in Australia, with the combined impact of higher mortgage interest rates, increases in the cost of living and January flooding, the Queensland economy is pressured which could adversely impact our results of operations.

In Canada,many of our European mortgage insurance markets, we have observed early signs of stabilization as unemployment rates appear to be peaking and declines in home prices have moderated. The overall economic environment in Europe, however, continues to be dominated by concerns about the fiscal health of the region, which has created uncertainty about the timing and speed of economic recovery.

Since the beginning of 2010, the Bank of Canada increased the overnight rate by 2575 basis points into 1.0% and we expect the second quarterBank of 2010, and has implemented another 25 basis points increase in July 2010.Canada to maintain the overnight rate at current levels at least through the first half of 2011. In Australia, as a sign of the relative health and stability of that economy, the Reserve Bank of Australia increased the cash rate by 150175 basis points to 4.75% between September 30, 2009 and June 30, 2010. It is anticipated that both the Bank of Canada andMarch 31, 2011. We also expect the Reserve Bank of Australia may increase rates modestly into maintain the secondcash rate at current levels through the first half of 2010.2011.

In Canada, we experienced higher than anticipated levels of flow new insurance written in the first half of 2010 driven by a larger mortgage market.during 2010. A low mortgage interest rate environment in the first half of 2010 with rates forecasted to increase in the second half of the year and improved consumer confidence contributed to this increase. Additionally, implementation of the harmonized sales tax in July 2010 in British Columbia and Ontario, which had the potential to increase the cost of purchasing a home for certain buyers, contributed tothese higher levels of mortgage originations in 2010. We believe these factors accelerated purchase decisions intolevels. During the first halfquarter of 2011, favorable economic conditions persisted with housing affordability benefiting from low interest rates and historically low unemployment levels. As of March 31, 2011, our 2010 book of business represents 12% of our insurance in-force while our 2007 and 2008 book years, the year and may result in lower levels of mortgage originations and an associated decreasetwo largest in our portfolio, together represent 33% of our insurance in-force. As a result of our large 2007 and 2008 book years and subsequent smaller books seasoning during 2011, earned premiums in Canada are expected to decline moderately relative to 2010 levels. In January 2011, the Canadian government announced new mortgage rules that became effective in March and April of 2011. These changes may reduce the amount of net premiums written in 2011. This decline may be offset by modest growth in flow new insurance written in the second half of 2010.2011 if economic conditions in Canada continue to be favorable and we are able to continue to gradually increase our market share.

In Australia, total mortgage market activity slowed during 2010 as a resultthe incremental government stimulus and incentives for first-time homebuyers implemented during the economic downturn were eliminated. Additionally, high loan-to-value mortgage originations, particularly above 90% loan-to-value, declined significantly in 2010 as banks allocated less capital to high loan-to-value lending and consumers became cautious of low interest ratesrising personal debt levels. This trend continued during the first nine monthsquarter of 2009 and specific government programs, there was an increase in mortgage originations by first-time home buyers and an associated increase in our flow new insurance written. The Australian government extended its enhanced first-time home buyer program benefits through the end of 2009, although at reduced levels, and eliminated these enhanced benefits altogether effective January 1, 2010. As a result of lower levels of government support to first-time home buyers and2011. These factors, combined with increased interest rates beginning in the fourth quarter of 2009, there has beenled to a decrease in mortgage originations and an associated decrease in our flow new insurance written in the first half of 2010. As some liquidity returnedduring 2010 compared to the securitization market in Australia, we insured additional bulk transactions in the first half of 2010. We expect to continue to write modest levels of bulk2009 levels. Our flow new insurance written throughout 2010.

further decreased during the first quarter of 2011 compared to the fourth quarter of 2010 reflecting smaller mortgage originations market as well as the economic impact of recent natural disasters. For the remainder of 2011, we expect flow new insurance written to remain flat compared to 2010 levels.

During 2009,Over the past two years, we significantly expanded our focus on, and the resources devoted to, loss mitigation initiatives, including programs that actively partner with our lenders to find solutions that cure delinquencies through actions such as loan modifications andthat keep borrowers in their homes. Thesehomes, asset management strategies such as arranged and facilitated sales and pursuing recoveries. Loan modification programs benefit all parties as borrowers are able to remain in their homes, lenders maintain their relationship with the borrower and an earning asset, and we mitigate claim payments under the terms of our mortgage insurance policies. Additionally, in cases where no solution is found to cure the delinquency and keep the borrower in their home, we are actively partnering with our lenders to optimize the transition process, including taking early possession of properties, and mitigate claim payments. As a result of our expanded focus, there was an increase in the

number of loans subject to our loss mitigation initiatives, which we believe had a favorable impact on our results of operations. We have also seen improvements in our total losses as economies continue to improve, home prices continueprice appreciation transitions to increasea stable rate of growth and unemployment levels decline. With ongoing improvement in the Canadian and Australian economies and stable housing markets, as well as the success we experiencedare experiencing with our loss mitigation initiatives outlined above, we expect our overall loss levels to continue to improve from themodestly over time compared with levels experienced during 2009.in 2010. These loss levels will vary quarterly based on seasonal or event-driven fluctuations.

Lifestyle protection insurance. Growth and performance of our lifestyle protection insurance business is dependent in part on economic conditions, including consumer lending levels, unemployment trends, client account penetration and mortality and morbidity trends. Additionally, the types and mix of our products will vary based on regulatory and consumer acceptance of our products.

ForThe profitability of our lifestyle protection insurance business improved during 2010 and in the six months ended June 30,first quarter of 2011 and has been driven by lower new claim registrations from stabilizing European unemployment levels and the impact of our policy re-pricing and distribution contract restructuring initiatives. Sales during 2010 sales decreased primarily as a result of stagnating economies across Europe, which resulted in a decline in consumer lending where most of our insurance coverages attach as banks tightened lending criteria and consumer demand declined. Additionally, our ongoing focus on risk management led us to exit certain relationships or concentrationSales in the first quarter of coverages.2011 remained consistent with the fourth quarter of 2010 levels. We are actively pursuing various growth initiatives to offset these market conditions; however,expand our distribution channels and our product offerings which have begun to help to mitigate lower consumer lending levels. However, depending on the severity and length of these conditions, we could experience additional declines in sales declines.

In contrastor the inability to the first half of 2009, when unemployment rates increased rapidly, we have seen a slowdown in the rate of increase or stabilization in unemployment over the past several quarters broadly across Europe with regional variation. Consequently, we experienced a continued declinegenerate targeted growth in new sales.

New claim registrations on unemployment-related policies particularlydeclined throughout 2010 and the first quarter of 2011 and are at the lowest levels since the third quarter of 2008. This, combined with stabilizing claim durations, has led to a decrease in Irelandour loss ratio. The improvement in our loss ratio has been most notable in the Nordic and Spain since March 2009 and in Denmark since March 2010.Western Europe regions. We expect unemployment rates in Europe to increase slowly and peak indecline over the second half of 2010. Increasing claims duration pressure from longer periods of persistent unemployment and accident and sickness claims is beginning to stabilizenext several quarters with regional variation. Additionally, we expect slow but positive European gross domestic product growth, which could positively impact consumer lending demand as a result of re-pricing actions and loss mitigation efforts.well as reduce claim pressures through new job creation.

During 20092010 and into 2010,2011, significant progress was made in improving profitability through pricing, coverage or distribution contract changes on both new and eligible in-force policies. Collectively,With most of these contract restructuring projects complete, we are focusing on increasing sales through improved product offerings and expanded distribution channels. We expect these strategies willto continue to improve profitability and help to offset the impact of continued high unemployment as well as relatively lowlower levels of consumer lending.

U.S. Mortgage Insurance

Results of our U.S. mortgage insurance business are affected by unemployment, underemployment and other economic and housing market trends, including interest rates, home prices, mortgage origination volume mix and practices, and product mix, as well as the levels and aging of mortgage delinquencies including seasonal variations.variations, the inventory of unsold homes and lender modification efforts. These economic and housing market trends are in turn continuing to be adversely affected by the ongoing weakweakness in the domestic economy and related levels of unemployment. However,This has resulted in numerous outcomes including rising foreclosures, more borrowers seeking loan modifications and elevated housing inventories which place downward pressure on home values. At the same time, home prices are beginningcontinuing to stabilizeshow signs of stabilizing or improveimproving in manyseveral U.S. markets after a significant decline from their peak levels. Overall, we anticipate some additional modest declines in home values in 2010during 2011 and we expect unemployment and underemployment levels may increase modestly by the end of 2010.to stabilize and gradually decline over time though remain elevated for an extended period.

ADuring 2010, a weak housing market, tightened lending standards, the lack of consumer confidence and the lack of liquidity in some mortgage securitization markets, along with volatility in mortgage interest rates,

continued to drive a smaller mortgage origination market. However, in this smaller originationWithin the private mortgage insurance market, we have seen an increase in our market share in recent quarters. Thethe mortgage insurance

penetration rate and overall market size have beenwas driven down by growth in FHAFederal Housing Administration (“FHA”) originations, associated with multiple pricing, underwriting and loan size factors, and the negative impact of GSE market fees and loan level pricing which can makemade private mortgage insurance solutions less competitive with the FHA solution. Given ongoing FHA risk management actions, we have seen the private mortgage insurance penetration rate increase somewhat in the first quarter of 2011 and expect this to continue given the additional FHA pricing changes effective in April 2011. This increase has been mitigated in part by increased GSE loan level fees which can make private mortgage insurance less attractive. Going forward, this trend mayfurther fees could limit the demand for or competitiveness of private mortgage insurance. Alternatively, given potential adjustments in FHA policies and pricing, GSE pricing and housing and financial reform involving the GSEs and government programs,Considering both of these trends, the industry expectscontinues to expect to regain market share over time. Specifically, theThe mortgage insurance industry level of market penetration and eventual market size couldwill continue to be affected by any actions taken by the GSEs, the FHA or the U.S. government impacting housing policy, underwriting standards or related reforms. The Housing and Economic Recovery Act of 2008 providesprovided for changes to, among other things, the regulatory authority and oversight of the GSEs and the authority of the FHA including with respect to premium pricing, maximum loan limits and down payment requirements. The FHA is also seeking legislative authority to increase its annual premium rates. Such an increase is expected to increase the private mortgage insurance industry’s market share compared to that of the FHA. In addition, Fannie Mae and Freddie Mac remain the largest purchasers and guarantors of mortgage loans in the United States.

We controlcontinue to manage the quality of new business through prudent underwriting guidelines, which we modify from time to time when circumstances warrant. For example, we announced in early 2010 the expansion of certain underwriting guidelines. We are also seeingexpect to continue realizing the benefit of previously implemented rate increases along with other pricing-related actions. In addition, we regularly monitor competitor pricing and underwriting changes and their potential market impact.

While we are currently experiencing a decrease in the previously announced rate increaselevel of 20% on average for our flow products and a reduction in captive cession which equates to an effective pricing improvement of approximately 15%. We previously exited certain product lines, such as A minus, Alt-A and 100% loan-to-value products. We also continue to monitor our targeted declining market policy, which among various restrictions, limited coverages to loans with 90% loan-to-value and below and to adjust those markets accordingly as areas of the U.S. housing market begin to stabilize or improve. In the first quarter of 2010, we reduced the number of markets subject to our declining market policy to allow coverage of loans up to 95% loan-to-value in additional markets given improving housing market conditions, which may result in increased new business written.

Overalldelinquencies, overall pressure on the housing market hascontinues to adversely affectedaffect the performance of our portfolio, particularly our 2005, 2006, 2007 and 2007first half of 2008 book years that we believe peaked in their delinquency development during the first quarter of 2010. Delinquencies for these book years continue to drive the level of new delinquencies being reported. While the impact was originally concentrated in certain states and alternative product types, during 2009,the last few years, the impact has shifted to more traditional products reflecting the elevated unemployment and underemployment levels throughout the country. We have also seenBeginning mid-2010, we saw an increase in the number of foreclosure starts and in the rate at which foreclosures progress to claim. As such, we have begun to seeas well as an increase in our paid claims as theselate stage delinquency loans go through foreclosure.

However, as We expect this trend to continue at least through the second quarter of 2011. Suspensions of foreclosure actions in response to problems associated with lender and servicer foreclosure process defects have caused, and could further cause, claim payments to be deferred to later periods and potentially have an adverse impact on a resultrecovery of the residential mortgage market.

The recent stabilization of home prices and unemployment levels andin certain markets, expanded efforts in the mortgage market to modify loans we experiencedand improved performance of our second half of 2008, 2009 and 2010 book years, resulted in a decrease in delinquencies induring the first halfquarter of 2010.2011. This decrease reflected a reduction in new delinquencies combined with a higher number of paid claims and increased cures from government and lender loan modification programs and other loss mitigation activities.activities through the first half of 2010. However, agedaging of delinquencies continued to increase through the remainder of 2010 and through the first quarter of 2011; moreover, foreclosures continued increasing and liquidations remained elevated through the second quarter of 2010, both of which pressure home prices in certain marketssame period, thereby resulting in higher levels of default.claims. If home values continue toexperience further decline, and credit remains tight and interest rates increase, the ability to cure a delinquent loan could be more difficult to achieve. In addition, while we continue to execute on our loan modification strategy, during the first quarter of 2011, we have seen the level of loan modification actions remain consistent with the level we experienced during the fourth quarter of 2010. Further reduction of loan modifications would have an adverse impact on the ability of borrowers to cure a delinquent loan.

Our loss mitigation activities, including those relating to workouts, loan modifications, pre-sales, rescissions and targeted settlements, net of reinstatements, havewhich occurred during the first quarter of 2011 resulted in a reduction of expected losses of approximately $450$122 million during the six months ended June 30, 2010 compared to $333$233 million duringin the six months ended June 30, 2009. first quarter of 2010.

Workouts and loan modifications, which related to loans representing 3%1% of our primary risk in-force as of June 30, 2010,March 31, 2011, and occurred during the period then ended, resulted in a reduction of loss exposureexpected losses of approximately $267$94 million for the six months ended June 30, 2010 compared to $97$113 million forin the six months ended June 30, 2009.first quarter of 2010. Our workout and loan modification programs with various lenderlenders and service customersservicers are designed to help borrowers in default regain current repayment status on their mortgage loans, which ultimately allowed many of these borrowers to remain in their homes. During the six months ended June 30, 2010,first quarter of 2011, we executed loan restructurings and modifications with our lender partners that resulted in reduced monthly mortgage loan repayment amounts either

through reductions of the underlying loans’ interest rates and/or debt forgiveness by lenders, or through a lengthening of the loans’ principal amortization period.period, or through some combination thereof. The loans that are subject to workouts and loan modifications that were completed could be subject to potential re-default by the underlying borrower at some future date. In addition, pre-sales and other non-cure workouts that occurred during the first quarter of 2011 resulted in a reduction of loss exposureexpected losses of approximately $28$17 million for the six months ended June 30, 2010 compared to $21$13 million forthat occurred during the six months ended June 30, 2009. first quarter of 2010.

As a result of investigation activities on certain insured delinquent loans, we found significantcertain levels of misrepresentation and non-compliance with certainspecific terms and conditions of our underlying master insurance policies, as well as fraud. These findings separately resulted in rescission actions that occurred during the first quarter of 2011 which reduced our loss exposureexpected losses at the time of rescission by approximately $155$11 million for the six months ended June 30, 2010 compared to $215$107 million forthat occurred during the six months ended June 30, 2009. Benefitsfirst quarter of 2010.

During 2010, benefits from loss mitigation activities arebegan shifting from rescissions to loan modifications where we expect a majority of our loss mitigation benefits to be achieved going forward. During 2010, we reached agreements with a servicer and a counterparty that further reduced our risk in-force exposure. Our investigations process and rescission actions, along with expandedAlthough loan modification efforts supported by various related lender and government programs, have benefited our results significantly and these benefits are expected to continue. At the same time, we continue to discuss with lenders any concerns with respect to our rescission practices and risk exposures in books of business. Going forward, however, there is no assurance regarding what specific level of benefits may result from modification, rescission or settlement activity. In addition, there are several programs related to the U.S. housing market being implemented by the U.S. government, GSEs, servicers and various lenders that we expect will mitigate losses on loans we insure. We are actively participating in and supporting these various programs. These programs are expected to limit increases in paid claims and we continue to pursue waysa wide range of approaches to support mortgage servicers in their effortsexecute appropriate loan modifications, government-sponsored programs such as Home Affordable Modification Program (“HAMP”) continue to increase thedecline as alternative programs have begun to gain momentum. With lower benefits from government-sponsored programs and the limited impact from alternative programs to date, we have experienced higher levels of paid claims. Depending upon the mix of loss mitigation activities.activity, market trends and employment levels in future periods, we could see additional adverse loss reserve changes going forward.

We also participate in reinsurance programs in which we share portions of our premiums associated with flow insurance written on loans originated or purchased by lenders with captive insurance entities of these lenders in exchange for an agreed upon level of loss coverage above a specified attachment point. For the sixthree months ended June 30, 2010,March 31, 2011, we recorded reinsurance recoveries of $89$21 million where cumulative losses have exceeded the attachment points in captive reinsurance arrangements, primarily related to our 2005, 2006, 2007 and 20072008 book years. We have exhausted certain captive reinsurance tiers for these book years based on loss development trends. Once the captive reinsurance or trust assets are exhausted, we are responsible for additional losses incurred. We have begun to experience constraints on the recognition of captive benefit recovery due to the amount of funds held in certain captive trusts and the exhaustion of captive loss tiers for certain reinsurers. As of January 1, 2009, we no longer participate inenter into excess loss of captive reinsurance transactions and, we willtherefore, only participate in quota share reinsurance arrangements. The majority of our excess of loss captive reinsurance arrangements are in runoff with no new books of business being added going forward; however, we will continue to benefit from captive reinsurance on our 2005, 2006, 2007 and 20072008 book years.

As of March 31, 2011, Genworth Mortgage Insurance Corporation (“GEMICO”) exceeded the maximum risk-to-capital requirement of 25:1. GEMICO is authorized and continues to write new business in North Carolina under a revocable two-year waiver of that state’s maximum 25:1 risk-to-capital requirement limitation, which the North Carolina Department of Insurance (“NCDOI”) approved in a letter dated January 31, 2011. By extension, GEMICO also remains authorized and continues to write business in 34 additional states that do not have a maximum risk-to-capital requirement. Ten additional states have granted GEMICO the authority to continue to write new business by a waiver (or other communication) regarding their relative state’s risk-to-capital requirements, subject to varying terms and conditions. Consequently, GEMICO is authorized to write new business in 45 states as of March 31, 2011. While we continue to seek this regulatory flexibility through additional state waivers, where available, we expect to manage our capital and business operations so as

to maintain capacity to write new profitable business. Currently, we utilize another one of our U.S. mortgage insurance subsidiaries, Genworth Residential Mortgage Insurance Corporation of North Carolina (“GRMIC-NC”), to write business in those five states where GEMICO is restricted under risk-to-capital requirements and where no waiver has been granted to date. We have also taken steps to be able to utilize another one of our U.S. mortgage insurance subsidiaries, Genworth Residential Mortgage Assurance Corporation (“GRMAC”), for similar purposes. In this regard, Fannie Mae has approved both our use of GRMIC-NC and our request that GRMAC be recognized as an eligible insurer. Fannie Mae’s approvals allow either entity to write business in lieu of GEMICO subject to specified conditions, including that we refrain from utilizing either entity, except in states where GEMICO is prohibited from writing business due to a breach of its maximum risk-to-capital requirement and has not obtained the applicable waiver of such breach. We remain in ongoing consultation with our state regulators and the GSEs regarding our ongoing use of these alternative arrangements, as necessary.

Consolidated Results of Operations

The following is a discussion of our consolidated results of operations and should be read in conjunction with “—Business trends and conditions.” For a discussion of our segment results, see “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.”

Three Months Ended June 30, 2010March 31, 2011 Compared to Three Months Ended June 30, 2009March 31, 2010

The following table sets forth the consolidated results of operations for the periods indicated:

 

  Three months ended
June 30,
 Increase
(decrease) and
percentage
change
   Three months ended
March 31,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2010         2009     2010 vs. 2009   2011 2010 2011 vs. 2010 

Revenues:

          

Premiums

  $1,470   $1,502   $(32 (2)%   $1,437   $1,470   $(33  (2)% 

Net investment income

   823    781    42   5   830    765    65    8

Net investment gains (losses)

   (139  (53  (86 (162)%    (28  (70  42    60

Insurance and investment product fees and other

   256    253    3   1   329    256    73    29
                      

Total revenues

   2,410    2,483    (73 (3)%    2,568    2,421    147    6
                      

Benefits and expenses:

          

Benefits and other changes in policy reserves

   1,340    1,492    (152 (10)%    1,409    1,315    94    7

Interest credited

   211    263    (52 (20)%    201    213    (12  (6)% 

Acquisition and operating expenses, net of deferrals

   499    456    43   9   500    475    25    5

Amortization of deferred acquisition costs and intangibles

   179    212    (33 (16)%    185    184    1    1

Interest expense

   109    114    (5 (4)%    127    115    12    10
                      

Total benefits and expenses

   2,338    2,537    (199 (8)%    2,422    2,302    120    5
                      

Income (loss) before income taxes

   72    (54  126   NM(1) 

Benefit for income taxes

   (5  (4  (1 (25)% 

Income before income taxes

   146    119    27    23

Provision (benefit) for income taxes

   30    (93  123    132
                      

Net income (loss)

   77    (50  127   NM(1) 

Net income

   116    212    (96  (45)% 

Less: net income attributable to noncontrolling interests

   35    —      35   NM(1)    34    34    —      —  
                      

Net income (loss) available to Genworth Financial, Inc.’s common stockholders

  $42   $(50 $92   184

Net income available to Genworth Financial, Inc.’s common stockholders

  $82   $178   $(96  (54)% 
                      

(1)

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

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

 

Our Retirement and Protection segment decreased $7$6 million primarily related to a $9$16 million decrease in our retirement income business and a $7 million decrease in our life insurance business, and a $6 million decrease in our retirement income business, partially offset by an $8a $17 million increase in our long-term care insurance business.

 

Our International segment decreased $13$27 million as a result of a decrease of $40$43 million in our lifestyle protection insurance business, partially offset by a $27$16 million increase in our international mortgage insurance business. The three months ended June 30, 2010March 31, 2011 included an increase of $25$10 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment decreased $11 million.was flat.

Net investment income. Net investment income represents the income earned on our investments.

 

Weighted-average investment yields increased to 4.8% for the three months ended June 30, 2010March 31, 2011 from 4.6%4.4% for the three months ended June 30, 2009.March 31, 2010. The increase in weighted-average investment yields was primarily attributable to lower losses onthe improved performance of limited partnerships.partnerships accounted for under the equity method and the reinvestment of cash balances. Net investment income for the three months ended June 30, 2010March 31, 2011 included $10$4 million of gains related to limited partnerships accounted for under the equity method as compared to $33$34 million of losses inrelated to limited partnerships for the three months ended June 30, 2009.March 31, 2010.

Additionally, there was an increase in net investment income related to the consolidation of certain securitization entities as of January 1, 2010. These increases were partially offset by a decrease in investment income related to policy loans from a bankruptcy-related lapse in 2009 and lower yields on floating rate investments.

 

The three months ended June 30, 2010March 31, 2011 included an increase of $11$5 million attributable to changes in foreign exchange rates in our International segment.

Net investment gains (losses).Net investment gains (losses) consist of realized gains and losses from the sale or impairment of our investments and unrealized and realized gains and losses from our trading securities and derivative instruments. For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

 

We recorded $51$36 million of net other-than-temporary impairments for the three months ended June 30, 2010March 31, 2011 as compared to $152$80 million for the three months ended June 30, 2009.March 31, 2010. Of total impairments for the three months ended June 30,March 31, 2011 and 2010, and 2009, $43$21 million and $109$62 million, respectively, related to structured securities, including $23$15 million and $66$36 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. ForImpairments related to corporate securities as a result of bankruptcies, receivership or concerns about the issuer’s ability to continue to make contractual payments or where we have intent to sell were $14 million and $5 million for the three months ended June 30,March 31, 2011 and 2010, werespectively. We also recorded $5impairments of $6 million of impairments related to commercial mortgage loansfinancial hybrid securities and $4$7 million related to limited partnership investments. For the three months ended June 30, 2009, we recorded a $36 million impairment related to a retained interest in securitized assets based on revised assumptions regarding cash flows from the assets underlying this securitization transaction. We concluded the value of our retained interest was zero and recognized the full impairment in the prior year. We also recorded $5 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlandsinvestments during the three months ended June 30, 2009.March 31, 2010.

 

Net investment losses related to derivatives of $38$10 million in the secondfirst quarter of 20102011 were primarily related to $31$8 million of losses associated with derivative instruments used to hedge foreign currency risk, $4 million of losses from the change in the value of our credit default swaps due to widening credit spreads, $21 million of losses from the change in value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”) exceeding the change in value of the embedded derivative liabilities and $9$2 million of losses due to hedge ineffectiveness. These losses were partially offset by $3 million of gains from credit default swaps due to narrowing credit spreads and $1 million of gains related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. These losses were partially offset by $15 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $4 million of gains from other non-qualified interest rate swaps, $2 million of gains related to embedded derivatives associated with certain reinsurance agreements and $2 million of gains from foreign currency options and forward contracts. Net investment gainslosses related to derivatives of $114$8 million in the secondfirst quarter of 20092010 were primarily related to gains$14 million of losses in derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of the embedded derivative instruments used for mitigating this risk.

We also recorded $47 million of net losses related to securitization entities in the second quarter of 2010 primarily associated with derivativesliabilities and $18$3 million of losses related to commercial mortgage loans from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance. foreign

currency options. These losses were partially offset by $5 million of gains from credit default swaps utilized to improve our diversification and portfolio yield and $5 million of gains in non-qualified interest rate swaps.

Net gainslosses related to the sale of available-for-sale securities were $17$2 million in the secondfirst quarter of 20102011 compared to losses of $27$15 million in the secondfirst quarter of 2009.2010. We also recorded $16 million from the recovery of a counterparty receivable in the first quarter of 2010.

Insurance and investment product fees and other. Insurance and investment product fees and other consist primarily of fees assessed against policyholder and contractholder account values, surrender charges, cost of insurance assessed on universal and term universal life insurance policies, advisory and administration service fees assessed on investment contractholder account values, broker/dealer commission revenues and other fees.

 

Our Retirement and Protection segment increased $50$78 million largely driven by an increase of $23$39 million in our life insurance business, an increase of $29 million in our wealth management business an increase of $13 million in our life insurance business and an increase of $11$8 million in our retirement income business.

Corporate and Other activities decreased $44 million.

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

 

Our Retirement and Protection segment increased $66$44 million primarily attributable to a $33 million increase in our life insurance business, a $23$34 million increase in our long-term care insurance business and a $10$30 million increase in our life insurance business, partially offset by a $20 million decrease in our retirement income business.

 

Our International segment decreased $63$33 million as a result of a decrease of $44$36 million in our lifestyle protection insurance business, and a decreasepartially offset by an increase of $19$3 million in our international mortgage insurance business. The three months ended June 30, 2010March 31, 2011 included an increase of $10$6 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment decreased $155increased $83 million.

Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances.

 

Our Retirement and Protection segment decreased $8$6 million principally related to our retirement income business.

 

Corporate and Other activities decreased $44$6 million.

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.

 

Our Retirement and Protection segment increased $41$43 million primarily attributable to a $17$26 million increase in our wealth management business, a $15$14 million increase in our retirement income business and an $11 million increase in our long-term care insurance business, andpartially offset by an $8 million increasedecrease in our life insurance business.

 

Our International segment increased $8decreased $5 million primarily related to an $11 million increase in our international mortgage insurance business, partially offset by a $3$6 million decrease in our lifestyle protection insurance business. The three months ended March 31, 2011 included a decrease of $2 million attributable to changes in foreign exchange rates.

Corporate and Other activities decreased $6$13 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.

 

Our Retirement and Protection segment decreased $34increased $6 million primarily attributable to an $18 million increase in our retirement income business, partially offset by a $44$7 million decrease in our retirement incomelife insurance business and a $5 million decrease in our long-term care insurance business, partially offset by a $15 million increase in our life insurance business.

 

Our International segment was relatively flat asdecreased $5 million primarily related to a $7$10 million decrease in our lifestyle protection insurance business, partially offset by a $5 million increase in our international mortgage insurance business was offset by a $6 million decrease in our lifestyle protection insurance business. The three months ended June 30, 2010March 31, 2011 included an increase of $2$1 million attributable to changes in foreign exchange rates.

Interest expense. Interest expense represents interest related to our borrowings that are incurred at our holding company or subsidiary level and our non-recourse funding obligations and interest expense related to certain reinsurance arrangements being accounted for as deposits.

 

Our Retirement and Protection segment increased $5$4 million primarily related to our life insurance business.

 

Our International segment decreased $14$4 million related to a decrease of $10 million in our lifestyle protection insurance business, partially offset by a $6 million increase in our international mortgage insurance business. The three months ended March 31, 2011 included a decrease of $1 million attributable to changes in foreign exchange rates.

 

Corporate and Otherother activities increased $4$12 million.

BenefitProvision (benefit) for income taxestaxes.. The effective tax rate decreasedincreased to (6.9)20.5% for the three months ended March 31, 2011 from (78.2)% for the three months ended June 30, 2010 from 7.4% for the three months ended June 30, 2009.March 31, 2010. This decreaseincrease in the effective tax rate was primarily attributable to the favorable impact of newly enacted Australian tax legislation,changes in uncertain tax benefits in the prior year related to separation from our former parent, partially offset by lower taxed foreign income and tax favored investments benefits recognized in the current year and from the effects of interim tax accounting standards in the prior year.investments. The three months ended June 30, 2010March 31, 2011 included an increase of $7$3 million attributable to changes in foreign exchange rates.

Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portion of equity in a subsidiary attributable to third parties. The increase related to the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5%. The three months ended June 30, 2010March 31, 2011 included an increase of $4$2 million attributable to changes in foreign exchange rates.

Net income (loss) available to Genworth Financial, Inc.’s common stockholders. We reported lower net income available to Genworth Financial, Inc.’s common stockholders in the current year compared to a net loss available to Genworth Financial, Inc.’s common stockholders in the prior year primarily related to a lower$106 million tax benefit related to separation from our former parent recorded in the first quarter of 2010 and a higher net operating loss in our U.S. mortgage insurance business.Mortgage Insurance segment in the current year. For a discussion of our Retirement and Protection, International and U.S. Mortgage Insurance segments and Corporate and Other activities, see the “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.” Included in net income available to Genworth Financial, Inc.’s common stockholders was an increase of $12 million, net of tax, attributable to changes in foreign exchange rates.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

The following table sets forth the consolidated results of operations for the periods indicated:

   Six months ended
June 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Revenues:

     

Premiums

  $2,940   $3,004   $(64 (2)% 

Net investment income

   1,588    1,492    96   6

Net investment gains (losses)

   (209  (823  614   75

Insurance and investment product fees and other

   512    544    (32 (6)% 
              

Total revenues

   4,831    4,217    614   15
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   2,655    3,000    (345 (12)% 

Interest credited

   424    538    (114 (21)% 

Acquisition and operating expenses, net of deferrals

   974    897    77   9

Amortization of deferred acquisition costs and intangibles

   363    459    (96 (21)% 

Interest expense

   224    210    14   7
              

Total benefits and expenses

   4,640    5,104    (464 (9)% 
              

Income (loss) before income taxes

   191    (887  1,078   122% 

Benefit for income taxes

   (98  (368  270   73% 
              

Net income (loss)

   289    (519  808   156% 

Less: net income attributable to noncontrolling interests

   69    —      69   NM(1) 
              

Net income (loss) available to Genworth Financial, Inc.’s common stockholders

  $220   $(519 $739   142% 
              

(1)

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

Premiums

Our Retirement and Protection segment decreased $18 million primarily related to a $23 million decrease in our life insurance business and a $17 million decrease in our retirement income business, partially offset by a $22 million increase in our long-term care insurance business.

Our International segment decreased $5 million as a result of a decrease of $64 million in our lifestyle protection insurance business, partially offset by a $59 million increase in our international mortgage insurance business. The six months ended June 30, 2010 included an increase of $93 million attributable to changes in foreign exchange rates.

Our U.S. Mortgage Insurance segment decreased $39 million.

Net investment income

Weighted-average investment yields increased to 4.6% for the six months ended June 30, 2010 from 4.3% for the six months ended June 30, 2009. The increase in weighted-average investment yields was primarily attributable to lower losses on limited partnerships. Net investment income for the six months ended June 30, 2010 included $116 million of lower losses related to limited partnerships accounted for under the equity method as compared to the six months ended June 30, 2009. Additionally, there was an increase in net investment income related to the consolidation of certain securitization entities as of

January 1, 2010. These increases were partially offset by a decrease in investment income related to policy loans from a bankruptcy-related lapse in 2009 and lower yields on floating rate investments.

The six months ended June 30, 2010 included an increase of $32 million attributable to changes in foreign exchange rates in our International segment.

Net investment gains (losses).For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

We recorded $131 million of net other-than-temporary impairments for the six months ended June 30, 2010 as compared to $749 million for the six months ended June 30, 2009. Of total impairments, for the six months ended June 30, 2010 and 2009, $105 million and $389 million, respectively, related to structured securities, including $59 million and $268 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Impairments related to corporate securities as a result of bankruptcies, receivership or concerns about the issuer’s ability to continue to make contractual payments or where we have intent to sell were $5 million and $59 million for the six months ended June 30, 2010 and 2009, respectively. We also recorded $6 million and $245 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlands during the six months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010, we recorded $10 million of impairments related to limited partnership investments and $5 million related to commercial mortgage loans. We recorded a $36 million impairment related to a retained interest in securitized assets based on revised assumptions regarding cash flows from the assets underlying this securitization transaction during the six months ended June 30, 2009. We concluded the value of our retained interest was zero and recognized the full impairment in the prior year.

Net investment losses related to derivatives of $46 million for the six months ended June 30, 2010 were primarily related to $35 million of losses from the change in value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs, $27 million of losses from the change in value of our credit default swaps due to widening credit spreads and $6 million of losses related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. These losses were partially offset by $13 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $7 million of gains from other non-qualified interest rate swaps and $2 million of gains related to embedded derivatives associated with certain reinsurance agreements. Net investment losses related to derivatives of $7 million for the six months ended June 30, 2009 were primarily related to losses from a derivative strategy to mitigate the interest rate risk associated with our statutory capital position which were partially offset by gains in embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of derivative instruments used for mitigating this risk.

We also recorded $36 million of net losses related to securitization entities primarily associated with derivatives and $22 million of losses related to commercial mortgage loans from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance during the six months ended June 30, 2010. There was also a net gain of $16 million from the recovery of a counterparty receivable in 2010. Net gains related to the sale of available-for-sale securities were $2 million during the six months ended June 30, 2010 compared to losses of $61 million during the six months ended June 30, 2009.

Insurance and investment product fees and other

Our Retirement and Protection segment increased $85 million largely driven by an increase of $40 million in our wealth management business, an increase of $24 million in our life insurance business and an increase of $19 million in our retirement income business.

Corporate and Other activities decreased $116 million.

Benefits and other changes in policy reserves

Our Retirement and Protection segment increased $98 million primarily attributable to a $69 million increase in our long-term care insurance business and a $39 million increase in our life insurance business, partially offset by a $10 million decrease in our retirement income business.

Our International segment decreased $81 million as a result of a decrease of $59 million in our lifestyle protection insurance business and a decrease of $22 million in our international mortgage insurance business. The six months ended June 30, 2010 included an increase of $35 million attributable to changes in foreign exchange rates.

Our U.S. Mortgage Insurance segment decreased $362 million.

Interest credited

Our Retirement and Protection segment decreased $20 million principally related to our retirement income business.

Corporate and Other activities decreased $94 million.

Acquisition and operating expenses, net of deferrals

Our Retirement and Protection segment increased $68 million primarily attributable to a $31 million increase in our wealth management business, a $21 million increase in our long-term care insurance business, a $12 million increase in our life insurance business and a $4 million increase in our retirement income business.

Our International segment increased $16 million related to an $18 million increase in our international mortgage insurance business, partially offset by a $2 million decrease in our lifestyle protection insurance business. The six months ended June 30, 2010 included an increase of $19 million attributable to changes in foreign exchange rates.

Corporate and Other activities decreased $9 million.

Amortization of deferred acquisition costs and intangibles

Our Retirement and Protection segment decreased $92 million primarily attributable to a $104 million decrease in our retirement income business and a $12 million decrease in our long-term care insurance business, partially offset by a $24 million increase in our life insurance business.

Our International segment was relatively flat as a $14 million decrease in our lifestyle protection insurance business was offset by a $13 million increase in our international mortgage insurance business. The six months ended June 30, 2010 included an increase of $10 million attributable to changes in foreign exchange rates.

Interest expense. Interest expense increased primarily related to a $12 million increase in Corporate and Other activities.

Benefit for income taxes. The effective tax rate decreased to (51.3)% for the six months ended June 30, 2010 from 41.5% for the six months ended June 30, 2009. This decrease in the effective tax rate was attributable to changes in uncertain tax benefits related to our separation from our former parent, favorable impact of newly enacted Australian tax legislation, lower taxed foreign income and tax favored investments. The six months ended June 30, 2010 included an increase of $19 million attributable to changes in foreign exchange rates.

Net income attributable to noncontrolling interests. The increase related to the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5%. The six months ended June 30, 2010 included an increase of $9 million attributable to changes in foreign exchange rates.

Net income (loss) available to Genworth Financial, Inc.’s common stockholders. We reported net income available to Genworth Financial, Inc.’s common stockholders in the current year compared to a net loss available to Genworth Financial, Inc.’s common stockholders in the prior year primarily related to additional tax benefits recognized in the current year, lower net investment losses and a lower loss in our U.S. mortgage insurance business. For a discussion of our Retirement and Protection, International and U.S. Mortgage Insurance segments and Corporate and Other activities, see the “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.” Included in net income available to Genworth Financial, Inc.’s common stockholders was an increase of $32 million, net of tax, attributable to changes in foreign exchange rates.

Reconciliation of net income (loss) to net operating income available to Genworth Financial, Inc.’s common stockholders

Net operating income available to Genworth Financial, Inc.’s common stockholders for the three months ended June 30,March 31, 2011 and 2010 and 2009 was $118$98 million and $9 million, respectively. Net operating income available to Genworth Financial, Inc.’s common stockholders for the six months ended June 30, 2010 and 2009 was $232 million and $23$114 million, respectively. We define net operating income available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding net income attributable to noncontrolling interests, after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. We 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) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are oftencan be 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 available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends. There were no infrequent or unusual non-operating items excluded from net operating income available to Genworth Financial, Inc.’s common stockholders during the periods presented other than a $106 million tax benefit related to separation from our former parent recorded in the first quarter of 2010.

While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP,generally accepted accounting principles (“U.S. GAAP”), we believe that net operating income available to Genworth Financial, Inc.’s common stockholders and measures that are derived from or incorporate net operating income available to Genworth Financial, Inc.’s common stockholders, including net operating income available to Genworth Financial, Inc.’s common stockholders per common share on a basic and diluted basis, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. However, net operating income available to Genworth Financial, Inc.’s common stockholders is not a substitute forand net operating income (loss) available to Genworth Financial, Inc.’s common stockholders per common share on a basic and diluted basis are not substitutes for net income available to Genworth Financial, Inc.’s common stockholders or net income available to Genworth Financial, Inc.’s common stockholders per common share on a basic and diluted basis determined in accordance with U.S. GAAP. In addition, our definition of net operating income available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.

The following table includes a reconciliation of net income (loss) to net operating income available to Genworth Financial, Inc.’s common stockholders for the periods indicated:

 

  Three months ended
June 30,
 Six months ended
June 30,
   Three months ended
March 31,
 

(Amounts in millions)

    2010      2009     2010     2009         2011           2010     

Net income (loss)

  $77  $(50 $289   $(519

Net income

  $116    $212  

Less: net income attributable to noncontrolling interests

   35   —      69    —       34     34  
                     

Net income (loss) available to Genworth Financial, Inc.’s common stockholders

   42   (50  220    (519

Adjustments to net income (loss) available to Genworth Financial, Inc.’s common stockholders:

      

Net income available to Genworth Financial, Inc.’s common stockholders

   82     178  

Adjustments to net income available to Genworth Financial, Inc.’s common stockholders:

    

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

   76   59    118    542     16     42  

Net tax benefit related to separation from our former parent

   —     —      (106  —       —       (106
                     

Net operating income available to Genworth Financial, Inc.’s common stockholders

  $118  $9   $232   $23    $98    $114  
                     

Earnings (loss) per share

The following table provides basic and diluted net income (loss) available to Genworth Financial, Inc.’s common stockholderstockholders and net operating income available to Genworth Financial, Inc.’s common stockholders per common share for the periods indicated:

 

   Three months ended
June 30,
  Six months ended
June 30,
 

(Amounts in millions, except per share amounts)

  2010  2009  2010  2009 

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:

       

Basic

  $0.09  $(0.11 $0.45  $(1.20
                 

Diluted

  $0.08  $(0.11 $0.45  $(1.20
                 

Weighted-average common shares outstanding:

       

Basic

   489.1   433.2    489.0   433.2  
                 

Diluted(1)

   494.2   433.2    493.9   433.2  
                 

(1)

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss for the three and six months ended June 30, 2009, we were required to use basic weighted-average common shares outstanding in the calculation of the 2009 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.2 million and 0.6 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss for the three and six months ended June 30, 2009, dilutive potential common shares would have been 434.4 million and 433.8 million, respectively.

    Three months ended
March 31,
 

(Amounts in millions, except per share amounts)

  2011   2010 

Net income available to Genworth Financial, Inc.’s common stockholders per common share:

    

Basic

  $0.17    $0.36  
          

Diluted

  $0.17    $0.36  
          

Net operating income available to Genworth Financial, Inc.’s common stockholders per common share:

    

Basic

  $0.20    $0.23  
          

Diluted

  $0.20    $0.23  
          

Weighted-average common shares outstanding:

    

Basic

   490.1     488.8  
          

Diluted

   494.4     493.5  
          

Diluted weighted-average shares outstanding for 2010 reflect the effects of potentially dilutive securities including stock options, restricted stock units and other equity-based compensation.

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

Our chief operating decision maker evaluates segment performance and allocates resources on the basis of net operating income available to Genworth Financial, Inc.’s common stockholders. See note 1110 in our “—Notes to Condensed Consolidated Financial Statements” for a reconciliation of net operating income available to Genworth Financial, Inc.’s common stockholders of our segments and Corporate and Other activities to net income (loss) available to Genworth Financial, Inc.’s common stockholders.

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.

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

Management regularly monitors and reports assets under management for our wealth management business, insurance in-force and risk in-force. Assets under management for our wealth management business represent third-party assets under management that are not consolidated in our financial statements. Insurance in-force for our life, international mortgage and U.S. mortgage insurance businesses is a measure of the aggregate face value of outstanding insurance policies as of the respective reporting date. RiskFor our risk in-force forin our international and U.S. mortgage insurance businesses is a measure thatbusiness, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular mortgage loan will be reduced by the net proceeds received upon sale of the underlying property. Effective risk in-force has been calculated by applying to insurance in-force a factor of 35% that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Canada, Australia and New Zealand. Risk in-force for our U.S. mortgage insurance business is our obligation that is limited under contractual terms to the amounts less than 100% of the mortgage loan value. We consider assets under management for our wealth management business, insurance in-force and risk in-force to be measuresa measure of our operating performance because they represent measuresa measure of the size of our business at a specific date which will generate revenues and profits in a future period, rather than measuresa measure of our revenues or profitability during that period.

We also include a metricinformation related to loss mitigation activities for our U.S. mortgage insurance business. We define loss mitigation activities as rescissions, cancellations, borrower loan modifications, repayment plans, lender- and borrower-titled pre-salespresales and other loan workouts and claim mitigation actions. Estimated savings related to rescissions are the reduction in carried loss reserves, net of premium refunds and reinstatement of prior rescissions. Estimated savings related to loan modifications and other cure related loss mitigation actions represent the reduction in carried loss reserves. For non-cure related actions, including pre-sales,presales, the estimated savings represent the difference between the full claim obligation and the actual amount paid. We believe that this metricinformation helps to enhance the understanding of the operating performance of our U.S. mortgage insurance business.business as they specifically impact current and future loss reserves and level of claim payments.

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.

The following discussions of our segment results of operations should be read in conjunction with the “—Business trends and conditions.

Retirement and Protection segment

Segment results of operations

Three Months Ended June 30, 2010March 31, 2011 Compared to Three Months Ended June 30, 2009March 31, 2010

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

 

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

(Amounts in millions)

      2010          2009          2010 vs. 2009     

Revenues:

      

Premiums

  $822   $829  $(7 (1)% 

Net investment income

   630    564   66   12

Net investment gains (losses)

   (69  4   (73 NM(1) 

Insurance and investment product fees and other

   260    210   50   24
              

Total revenues

   1,643    1,607   36   2
              

Benefits and expenses:

      

Benefits and other changes in policy reserves

   961    895   66   7

Interest credited

   176    184   (8 (4)% 

Acquisition and operating expenses, net of deferrals

   252    211   41   19

Amortization of deferred acquisition costs and intangibles

   104    138   (34 (25)% 

Interest expense

   29    24   5   21
              

Total benefits and expenses

   1,522    1,452   70   5
              

Income before income taxes

   121    155   (34 (22)% 

Provision for income taxes

   40    56   (16 (29)% 
              

Net income available to Genworth Financial, Inc.’s common stockholders

   81    99   (18 (18)% 

Adjustment to net income (loss) available to Genworth Financial, Inc.’s common stockholders:

      

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

   33    24   9   38
              

Net operating income available to Genworth Financial, Inc.’s common stockholders

  $114   $123  $(9 (7)% 
              

(1)

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

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

(Amounts in millions)

      2011          2010      2011 vs. 2010 

Revenues:

     

Premiums

  $818   $824   $(6  (1)% 

Net investment income

   628    594    34    6

Net investment gains (losses)

   (28  (67  39    58

Insurance and investment product fees and other

   320    242    78    32
              

Total revenues

   1,738    1,593    145    9
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   989    945    44    5

Interest credited

   168    174    (6  (3)% 

Acquisition and operating expenses, net of deferrals

   273    230    43    19

Amortization of deferred acquisition costs and intangibles

   111    105    6    6

Interest expense

   26    22    4    18
              

Total benefits and expenses

   1,567    1,476    91    6
              

Income before income taxes

   171    117    54    46

Provision for income taxes

   59    33    26    79
              

Net income available to Genworth Financial, Inc.’s common stockholders

   112    84    28    33

Adjustment to net income available to Genworth Financial, Inc.’s common stockholders:

     

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

   15    38    (23  (61)% 
              

Net operating income available to Genworth Financial, Inc.’s common stockholders

  $127   $122   $5    4
              

The following table sets forth net operating income available to Genworth Financial, Inc.’s common stockholders for the businesses included in our Retirement and Protection segment for the periods indicated:

 

  Three months ended
June 30,
  Increase
(decrease) and
percentage
change
   Three months ended
March 31,
   Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2010          2009      2010 vs. 2009       2011           2010       2011 vs. 2010 

Net operating income available to Genworth Financial, Inc.’s common stockholders:

              

Life insurance

  $32  $58  $(26 (45)%   $52    $37    $15    41

Long-term care insurance

   47   42   5   12   40     40     —      —  

Wealth management

   10   7   3   43   10     11     (1  (9)% 

Retirement income

   25   16   9  56   25     34     (9  (26)% 
                        

Total net operating income available to Genworth Financial, Inc.’s common stockholders

  $114  $123  $(9 (7)%   $127    $122    $5    4
                        

Net operating income available to Genworth Financial, Inc.’s common stockholders

 

Our life insurance business decreased $26increased $15 million primarily attributable to lower persistency onfrom growth in our universal and term universal life insurance policies entering the post-level rate periodproducts, an $8 million favorable cumulative impact from a recent change in premium taxes in Virginia and increased claims as the result of higherfavorable investment income, partially offset by less favorable mortality in our term life insurance products in the current year compared to the prior year. The prior year included an unfavorable reinsurance adjustment of $5 million and a favorable tax settlement that did not recur.

 

Our long-term care insurance business increased $5 millionwas flat as the favorable performance of newer issued policies and higher investment income were partially offset by lower terminationsspread in the current year.year was offset by higher claims as a result of the aging and growth of the in-force block.

 

Our wealth management business increased $3 million fromwas relatively flat as higher average assets under management from favorable equity market performancegrowth and positive net flows.flows were offset by a $2 million favorable tax adjustment in the prior year that did not recur.

 

Our retirement income business increaseddecreased $9 million. Our fee-based products decreased $6 million mainly attributable to an $8 million favorable adjustment to deferred acquisition costs in the prior year that did not recur and a $7 million charge in the first quarter of 2011 from the discontinuance of our variable annuity offerings announced in 2011, partially offset by favorable market performance. Our spread-based products increased $24decreased $3 million primarily from an increase in net investment income. Our fee-based products decreased $15 million mainly attributablean accrual related to less favorable market performance.guarantee funds in the current year.

Revenues

Premiums

 

Our life insurance business decreased $9$7 million primarily attributable toas a result of the introductionrunoff of our term universal life insurance product that is designed to replace new sales of our existing term life insurance products, with fees associated with depositspartially offset by an unfavorable reinsurance adjustment of $8 million in the new product reflected in insurance and investment product fees and other. The decrease was also from higher lapses on policies entering the post-level rate period.prior year that did not recur.

 

Our long-term care insurance business increased $8$17 million mainly attributable to growth ofin the in-force block from new sales, renewal premiums and in-force rate actions.sales.

 

Our retirement income business decreased $6$16 million primarily driven by lower life-contingentlife contingent sales of our spread-based products in the current market environment.products.

Net investment income

 

Our life insurance business increased $11$24 million mainly related to limited partnerships accounted for under the equity method. Net investmenthigher average invested assets, an increase in income included $3 million of gains related tofrom limited partnerships accounted for under the equity method and reinvestment of cash balances. Net investment income included $2 million of gains related to limited partnerships in the secondfirst quarter of 20102011 as compared to losses related to limited partnerships of $9$5 million in the secondfirst quarter of 2009.2010.

 

Our long-term care insurance business increased $32$19 million largely as a result of an increase in average invested assets due to growth of our long-term care insurance in-force block. Additionally, net investment income in the secondfirst quarter of 20102011 included lower losses of $3 million of gains related to limited partnerships accounted for under the equity method as compared to lossesthe first quarter of $32010. These increases were partially offset by an unfavorable adjustment of $6 million related to the accounting for interest rate swaps in the second quarter of 2009.current year.

 

Our retirement income business increased $23decreased $9 million primarily attributable to a decline in average invested assets, partially offset by an increase in income from limited partnerships accounted for under the equity method. Net investment income in the first quarter of 2011 included $4gains of $1 million of gains related to limited partnerships accounted for under the equity method in the second quarter of 2010 as compared to losses related to limited partnerships of $17$4 million in the secondfirst quarter of 2009. Net investment income for our spread-based products also benefited from the reinvestment of the high cash balances we were holding during 2009. These increases were partially offset by a decline in average invested assets of our fee-based products.2010.

Net investment gains (losses).For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

 

Net investment losses in our life insurance business decreased $35$26 million primarily driven by lower lossesimpairments and higher gains from the sale of investment securities related to portfolio repositioning and lower impairments recorded in the current year.

Our long-term care insurance business had net investment gainslosses of $8 million in the current year mainly from the sale of investment securities related to portfolio repositioning asimpairments compared to net investment lossesgains of $2 million in the prior year primarily from derivative losses related to our derivative strategy to mitigate interest rate risk associated with our statutory capital position.gains, partially offset by impairments.

 

OurNet investment losses in our retirement income business had net investment losses in the current yeardecreased $23 million primarily from lossesrelated to higher gains related to embedded derivatives associated with our variable annuity products with GMWBs, as compared to net investment gains related to those embedded derivatives in the prior year. The current year embedded derivative losses were partially offset by lower impairments.higher losses from the sale of investment securities related to portfolio repositioning.

Insurance and investment product fees and other

 

Our life insurance business increased $13$39 million primarily from growth of our new term universal life insurance product that is designed to replace sales of our traditional termand universal life insurance products.

 

Our wealth management business increased $23$29 million primarily attributable to higher average assets under management from favorable market performance andthe purchase of Altegris in the fourth quarter of 2010, positive net flows as gross flows exceeded redemptions.and market growth.

 

Our retirement income business increased $11$8 million mainly due toas a result of higher average account values ofin our fee-based products from favorable market improvement in the second half of 2009 and the first quarter of 2010.performance.

Benefits and expenses

Benefits and other changes in policy reserves

 

Our life insurance business increased $33$30 million principally related to increased claims associated with highergrowth of our term universal life insurance product and less favorable mortality in our term life insurance products compared to the prior year and aging of the in-force block.

Our long-term care insurance business increased $23 million primarily as a result of the aging and growth of the in-force block and lower terminations in the current year.

Our retirement income business increased $10 million largely attributable to our fee-based products related to our guaranteed minimum benefit liabilities for our variable annuity contracts driven by unfavorable market impacts during the current year as compared to the prior year, partially offset by the runoff of our term life insurance products.

Our long-term care insurance business increased $34 million primarily as a result of the aging and growth of our long-term care insurance in-force block.

Our retirement income business decreased $20 million largely attributable to a decrease of $17 million from our life-contingent spread-based products as a result of a decline in sales in the current year. Our fee-based products decreased $3 million driven by a decline in our guaranteed minimum death benefit claims.

Interest credited. Interest credited decreased $8$6 million primarily related to our retirement income business from lower account values on fixed annuities and lower crediting rates as the fixed annuities reach the end of their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals

 

Our life insurance business increaseddecreased $8 million primarily related to a $13 million favorable cumulative impact from a recent change in premium taxes in Virginia in the current year, partially offset by higher expenses from growth of our term universal life insurance products.product.

 

Our long-term care insurance business increased $15$11 million relatedlargely attributable to growth of our long-term care insurance in-force block.

Our wealth management business increased $17$26 million primarily from increased asset-based expenses as assets under management increased from favorable market impacts and positive net flows.

Our retirement income business remained relatively flat as higher costs associated with salesthe acquisition of our fee-based products were offset by lower sales of our spread-based products.

Amortization of deferred acquisition costs and intangibles

Our life insurance business increased $15 million primarily attributable to higher amortization related to lower persistency in our term life insurance products entering the post-level rate period.

Our long-term care insurance business decreased $5 million from lower terminationsAltegris in the current year, partially offset by growthfourth quarter of our in-force block.

Our retirement income business decreased $44 million primarily related to a decrease of $29 million in our fee-based products largely attributable to a decrease in amortization of deferred acquisition costs from lower net investment gains, partially offset by an increase in amortization from unfavorable market performance in the current year. Our spread-based products decreased $15 million mainly from a $9 million favorable unlocking primarily related to lower lapse trends in the current year and lower amortization of deferred acquisition costs attributable to higher net investment losses.

Interest expense. Interest expense increased $5 million primarily related to our life insurance business from higher costs associated with the issuance of letters of credit related to reinsurance transactions.

Provision for income taxes.The effective tax rate decreased to 33.1% for the three months ended June 30, 2010, from 36.1% for the three months ended June 30, 2009. This decrease in the effective tax rate was primarily attributable to a revision in the state effective tax rate in the prior year and tax favored investments recognized in the current year.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

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

   Six months ended
June 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Revenues:

     

Premiums

  $1,646   $1,664   $(18 (1)% 

Net investment income

   1,224    1,083    141   13

Net investment gains (losses)

   (136  (570  434   76

Insurance and investment product fees and other

   502    417    85   20
              

Total revenues

   3,236    2,594    642   25
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   1,906    1,808    98   5

Interest credited

   350    370    (20 (5)% 

Acquisition and operating expenses, net of deferrals

   482    414    68   16

Amortization of deferred acquisition costs and intangibles

   209    301    (92 (31)% 

Interest expense

   51    50    1   2
              

Total benefits and expenses

   2,998    2,943    55   2
              

Income (loss) before income taxes

   238    (349  587   168

Provision (benefit) for income taxes

   73    (132  205   155
              

Net income (loss) available to Genworth Financial, Inc.’s common stockholders

   165    (217  382   176

Adjustment to net income (loss) available to Genworth Financial, Inc.’s common stockholders:

     

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

   71    378    (307 (81)% 
              

Net operating income available to Genworth Financial, Inc.’s common stockholders

  $236   $161   $75   47
              

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

   Six months ended
June 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2010          2009        2010 vs. 2009   

Net operating income available to Genworth Financial, Inc.’s common stockholders:

      

Life insurance

  $69  $96   $(27 (28)% 

Long-term care insurance

   87   83    4   5

Wealth management

   21   13    8   62

Retirement income

   59   (31  90   NM(1) 
              

Total net operating income available to Genworth Financial, Inc.’s common stockholders

  $236  $161   $75   47
              

(1)

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

Net operating income available to Genworth Financial, Inc.’s common stockholders

Our life insurance business decreased $27 million primarily in our term life insurance products attributable to higher mortality compared to the prior year, lower persistency in the post-level rate period and an unfavorable reinsurance adjustment of $5 million, partially offset by higher net investment income and a favorable tax settlement in the current year.

Our long-term care insurance business increased $4 million as the favorable performance of newer issued policies and higher investment income in the current year were partially offset by higher claims in older issued policies and lower terminations in the current year.

Our wealth management business increased $8 million from higher average assets under management from favorable equity market performance and positive net flows and a $2 million favorable tax adjustment in the current year.market growth.

 

Our retirement income business increased $90 million. Our spread-based products increased $61$14 million primarilylargely driven by a $9 million charge in the first quarter of 2011 from the discontinuance of our variable annuity offerings announced in 2011 and an increase of $4 million from an increase in net investment income. Our fee-based products increased $29 million mainly attributableaccrual related to lower amortization of deferred acquisition costs from increases in the equity market performance.

Revenues

Premiums

Our life insurance business decreased $23 million mainly attributable to the introduction of our term universal life insurance product that is designed to replace new sales of our existing term life insurance products with fees associated with deposits of the new product reflected in insurance and investment product fees and other. The decrease was also a result of an unfavorable reinsurance adjustment of $8 million and higher lapses on policies entering the post-level rate periodguarantee funds in the current year.

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

Our retirement income business decreased $17 million primarily driven by lower life-contingent sales of our spread-based products in the current market environment.

Net investment income

Our life insurance business increased $14 million mainly related to $24 million of lower losses in the current year related to limited partnerships accounted for under the equity method. This increase was partially offset by a decline in average invested assets related to our term life insurance products and lower yields on the assets backing our non-recourse funding obligations supporting certain term and universal life insurance reserves.

Our long-term care insurance business increased $64 million largely as a result of an increase in average invested assets due to growth of our in-force block. Additionally, net investment income in the current year included $17 million of lower losses related to limited partnerships accounted for under the equity method.

Our retirement income business increased $63 million primarily attributable to $78 million of lower losses related to limited partnerships accounted for under the equity method. Net investment income for our spread-based products also benefited from the reinvestment of the high cash balances we were holding during 2009. These increases were partially offset by a decline in average invested assets of our fee-based products.

Net investment gains (losses).For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

Net investment losses in our life insurance business decreased $169 million primarily driven by lower losses from the sale of investment securities related to portfolio repositioning and lower impairments recorded in the current year.

Our long-term care insurance business had net investment gains in the current year from the sale of investment securities related to portfolio repositioning as compared to net investment losses in the prior year from derivative losses related to our derivative strategy to mitigate interest rate risk associated with our statutory capital position.

Net investment losses in our retirement income business decreased $16 million primarily related to lower impairments recorded in the current year which were partially offset by higher losses related to embedded derivatives associated with our variable annuity products with GMWBs.

Insurance and investment product fees and other

Our life insurance business increased $24 million primarily from growth of our new term universal life insurance product that is designed to replace sales of our traditional term life insurance products.

Our wealth management business increased $40 million primarily attributable to higher average assets under management from favorable market impacts and positive net flows as gross flows exceeded redemptions.

Our retirement income business increased $19 million mainly due to higher average account values of our fee-based products from market improvement in the second half of 2009 and the first quarter of 2010.

Benefits and expenses

Benefits and other changes in policy reserves

Our life insurance business increased $39 million principally related to increased claims associated with higher mortality in our term life insurance products compared to the prior year and aging of our life insurance products.

Our long-term care insurance business increased $69 million primarily as a result of the aging and growth of the in-force block, higher claims in older issued policies and lower terminations in the current year.

Our retirement income business decreased $10 million attributable to a decrease of $5 million from our fee-based products related to a decrease in guaranteed minimum death benefit claims, partially offset by an increase related to our guaranteed minimum benefit liabilities driven by unfavorable market performance in the current year. Our life-contingent spread-based products decreased $5 million driven by a decline in sales in the current market environment, partially offset by higher amortization of sales inducements as a result of lower net investment losses in the current year.

Interest credited. Interest credited decreased $20 million primarily related to our retirement income business from lower account values on fixed annuities and lower crediting rates as the fixed annuities reach the end of their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals

Our life insurance business increased $12 million primarily from growth of our life insurance products.

Our long-term care insurance business increased $21 million related to growth of our in-force block.

Our wealth management business increased $31 million primarily from increased asset-based expenses as assets under management increased from favorable market impacts and positive net flows.

Our retirement income business increased $4 million primarily from higher costs associated with sales of our fee-based products, partially offset by lower sales of our spread-based products.

Amortization of deferred acquisition costs and intangibles

 

Our life insurance business increased $24decreased $7 million primarily attributable to lower amortization related to our term life insurance policies coming out of their post-level rate period and a decrease in amortization of present value of future profits driven by higher mortality in our universal life insurance products. These decreases were partially offset by an increase in amortization relateddue to lower persistency ingrowth of our termuniversal life insurance products entering the post-level rate period.products.

 

Our long-term care insurance business decreased $12$5 million primarily from lower terminationsdeferring costs associated with the sale of joint policies that were incorrectly expensed in prior years as a result of a system conversion in late 2008 that was identified and corrected in the current year,fourth quarter of 2010. This decrease was partially offset by growth of our long-term care insurance in-force block.

 

Our retirement income business decreased $104increased $18 million primarily related to a decreasean increase of $107$13 million in our fee-based products largely attributable to lower amortization of deferred acquisition costsprincipally from improved equity market performance. The decrease was also related to a $12 million favorable adjustment recorded in the current year. The prior year included additional amortization of deferred acquisition costs of $54 million from loss recognition testing that did not recur. This decrease was partially offset by an increase of $3 million in ourOur spread-based products increased $5 million mainly from higher amortization of deferred acquisition costs attributableless favorable adjustments related to lower net investment losseslapses in the current year, partially offset by a $9decrease in the account values of these products.

Interest expense. Interest expense increased $4 million favorable unlocking primarily related to lower lapse trendsour life insurance business from higher letter of credit fees in the current year.

Provision (benefit) for income taxes.The effective tax rate decreasedincreased to 30.7%34.5% for the sixthree months ended June 30, 2010March 31, 2011 from 37.8%28.2% for the sixthree months ended June 30, 2009. This decreaseMarch 31, 2010. The increase in the effective tax rate was primarily attributable to the proportion of tax favored investments recognizedinvestment benefits to pre-tax results in the current year compared to the prior year and the relationship ofa change in uncertain tax favored investments recognizedpositions in the prior year to the pre-tax loss.year.

Retirement and Protection selected financial and operating performance measures

Life insurance

The following tables settable sets forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:

 

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

(Amounts in millions)

   2010     2009           2010 vs. 2009            2010     2009           2010 vs. 2009            2011   2010   2011 vs. 2010 

Term life insurance

               

Net earned premiums

 $228 $238 $(10 (4)%  $452 $475 $(23 (5)%   $219    $224    $(5  (2)% 

Annualized first-year premiums

  4  18  (14 (78)%   18  37  (19 (51)%    —       14     (14  (100)% 

Life insurance in-force, net of reinsurance

   452,116     472,696     (20,580  (4)% 

Life insurance in-force before reinsurance

   587,545     620,108     (32,563  (5)% 

Term universal life insurance

               

Net deposits

 $14 $—   $14   NM(1)  $19 $—   $19   NM(1)   $35    $5    $30    NM (1) 

Term universal life annualized first-year deposits

  24  —    24   NM(1)   34  —    34   NM(1) 

Annualized first-year deposits

   31     10     21    NM (1) 

Life insurance in-force, net of reinsurance

   58,371     5,453     52,918    NM (1) 

Life insurance in-force before reinsurance

   58,811     5,456     53,355    NM (1) 

Universal and whole life insurance

               

Net earned premiums and deposits

 $121 $116 $5   4 $239 $240 $(1 —    $162    $118    $44    37

Universal life annualized first-year deposits

  10  8  2   25  17  17  —     —     11     7     4    57

Universal life excess deposits

  28  23  5   22  48  51  (3 (6)%    36     20     16    80

Linked-benefits(2)

   23     —       23    NM (1) 

Life insurance in-force, net of reinsurance

   44,131     43,712     419    1

Life insurance in-force before reinsurance

   50,855     50,655     200    —  

Total life insurance

               

Net earned premiums and deposits

 $363 $354 $9   3 $710 $715 $(5 (1)%   $416    $347    $69    20

Annualized first-year premiums

  4  18  (14 (78)%   18  37  (19 (51)%    —       14     (14  (100)% 

Annualized first-year deposits

  34  8  26   NM(1)   51  17  34   200   42     17     25    147

Excess deposits

  28  23  5   22  48  51  (3 (6)% 

Universal life excess deposits

   36     20     16    80

Linked-benefits(2)

   23     —       23    NM (1) 

Life insurance in-force, net of reinsurance

   554,618     521,861     32,757    6

Life insurance in-force before reinsurance

   697,211     676,219     20,992    3

 

(1)

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

   As of June 30,  Percentage
change
 

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Term life insurance

      

Life insurance in-force, net of reinsurance

  $468,098  $477,759  (2)% 

Life insurance in-force before reinsurance

   612,284   623,139  (2)% 

Term universal life insurance

      

Life insurance in-force, net of reinsurance

  $17,754  $—    NM(1) 

Life insurance in-force before reinsurance

   17,820   —    NM(1) 

Universal and whole life insurance

      

Life insurance in-force, net of reinsurance

  $43,743  $43,800  —  

Life insurance in-force before reinsurance

   50,617   50,994  (1)% 

Total life insurance

      

Life insurance in-force, net of reinsurance

  $529,595  $521,559  2

Life insurance in-force before reinsurance

   680,721   674,133  1

(1)(2)

We define “NM” asIn the first quarter of 2011, we began reporting the results of the linked-benefits product for universal life insurance in our life insurance business. The linked-benefits product for universal life insurance was previously reported in our long-term care insurance business. The amounts associated with this product were not meaningful for increases or decreases greater than 200%.material and the prior period amounts were not re-presented.

Term life insurance

Net earned premiums decreased mainly as a result of lower sales in the current year from the introductionrunoff of our term universal life insurance product that is designed to replace new sales of our existing term life insurance products, and higher lapses on policies entering the post-level rate period. For the six months ended June 30, 2010, the decrease was also attributable topartially offset by an unfavorable reinsurance adjustment of $8 million in the first quarter of 2010. Annualized first-year premiumsprior year that did not recur. The in-force block also decreased as we focused on sales of our new term universal life insurance product.due to runoff.

Term universal life insurance

InNet deposits increased due to growth of this product since its introduction in late 2009, we introduced a new term universal life insurance product that is designed to replace new sales of our existing term life insurance products. This new product provides greater flexibility typically associated with universal life insurance coverage.2009.

Universal and whole life insurance

Annualized first-yearNet earned premiums and deposits remained relatively flat as we maintainedincreased due primarily to the growth of our focus on smaller face amounts.universal life insurance products. The in-force block was relatively flat as the growth ofin our universal life insurance products was offset by the continued runoff of our closed block of the whole life insurance.insurance product.

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, linked-benefits products, as well as several runoff blocks of accident and health insurance for the periods indicated:

 

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

(Amounts in millions)

  Three months ended
March 31,
   Increase
(decrease) and
percentage
change
 
      2010          2009          2010 vs. 2009         2010          2009          2010 vs. 2009          2011           2010       2011 vs. 2010 

Net earned premiums:

                      

Long-term care

  $480  $478  $2  —   $959  $953  $6  1  $492    $479    $13    3

Medicare supplement and other

   78   72   6  8  158   142   16  11   84     80     4    5
                                  

Total

  $558  $550  $8  1 $1,117  $1,095  $22  2  $576    $559    $17    3
                                  

Annualized first-year premiums and deposits

  $60  $44  $16  36 $127  $91  $36  40  $65    $67    $(2  (3)% 
                                  

Net earned premiums increased mainly attributable to growth ofin our in-force block from new sales, renewal premiums and in-force rate actions. sales.

The increasedecrease in annualized first-year premiums and deposits was primarily attributable to growthour linked-benefits products. In the first quarter of 2011, we began reporting the results of the linked-benefits products for universal life insurance and single premium deferred annuity products in our individuallife insurance and groupspread-based retirement income businesses, respectively. The linked-benefits products were previously reported in our long-term care insurance and linked-benefitsbusiness. This decrease was partially offset by growth in our individual long-term care insurance products.

Wealth management

The following table sets forth selected financial performance measures regarding our wealth management business as of or for the dates indicated:

 

   As of or for the three
months ended June 30,
  As of or for the six
months ended June 30,
 

(Amounts in millions)

      2010          2009          2010          2009     

Assets under management, beginning of period

  $20,037   $14,210   $18,865   $15,447  

Gross flows

   1,362    1,113    2,837    1,909  

Redemptions

   (926  (953  (1,897  (2,227
                 

Net flows

   436    160    940    (318

Market performance

   (925  1,539    (257  780  
                 

Assets under management, end of period

  $19,548   $15,909   $19,548   $15,909  
                 

   As of or for the three
months ended March 31,
 

(Amounts in millions)

      2011          2010     

Assets under management, beginning of period

  $24,740   $18,865  

Gross flows

   2,058    1,475  

Redemptions

   (1,703  (971
         

Net flows

   355    504  

Market performance

   456    668  
         

Assets under management, end of period

  $25,551   $20,037  
         

Wealth managementManagement results represent Genworth Financial Wealth Management, Inc., Genworth Financial Investment Services, Inc., Genworth Financial Trust Company, Centurion Financial Advisers, Inc., Quantavis Consulting, Inc. and Quantuvis Consulting, Inc.the Altegris companies.

The increase in assets under management was primarily attributable to favorable equity market performance andthe acquisition of Altegris on December 31, 2010, positive net flows.flows and market growth.

Retirement income

Fee-based products

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

 

  As of or for the three
months ended June 30,
 As of or for the six
months ended June 30,
   As of or for the three
months ended March 31,
 

(Amounts in millions)

      2010         2009         2010         2009           2011         2010     

Income Distribution Series(1)

        

Account value, net of reinsurance, beginning of period

  $6,135   $5,093   $5,943   $5,234  

Account value, beginning of period

  $6,590   $5,943  

Deposits

   141    133    314    258     117    173  

Surrenders, benefits and product charges

   (150  (109  (277  (215   (185  (127
                    

Net flows

   (9  24    37    43     (68  46  

Interest credited and investment performance

   (162  169    (16  9     165    146  
                    

Account value, net of reinsurance, end of period

  $5,964   $5,286   $5,964   $5,286  

Account value, end of period

  $6,687   $6,135  
                    

Traditional variable annuities

        

Account value, net of reinsurance, beginning of period

  $2,048   $1,642   $2,016   $1,756    $2,078   $2,016  

Deposits

   25    16    52    35     17    27  

Surrenders, benefits and product charges

   (70  (60  (135  (123   (88  (65
                    

Net flows

   (45  (44  (83  (88   (71  (38

Interest credited and investment performance

   (124  198    (54  128     89    70  
                    

Account value, net of reinsurance, end of period

  $1,879   $1,796   $1,879   $1,796    $2,096   $2,048  
                    

Variable life insurance

        

Account value, beginning of period

  $303   $248   $298   $266    $313   $298  

Deposits

   3    3    6    7     3    3  

Surrenders, benefits and product charges

   (8  (9  (18  (20   (11  (10
                    

Net flows

   (5  (6  (12  (13   (8  (7

Interest credited and investment performance

   (19  29    (7  18     14    12  
                    

Account value, end of period

  $279   $271   $279   $271    $319   $303  
                    

 

(1)

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

Income Distribution Series

Account value related to our Income Distribution Series products increased from the prior year mainly attributable to positive net flows and favorable market performancegrowth, partially offset by surrenders outpacing sales. Beginning in the second half of 2009 and the first quarter of 2010. Net flows decreased during the second quarter2011, we no longer solicit sales of 2010 dueour variable annuities; however, we continue to unfavorable equity market impacts.service our existing block of business and accept additional deposits on existing contracts.

Traditional variable annuities

In our traditional variable annuities, the increase in account value from the prior year was principally theas a result of improved equity market performance in the second half of 2009,growth, partially offset by surrenders outpacing sales. Beginning in the first quarter of 2011, we no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts.

Variable life insurance

We no longer solicit sales of this product; however, we continue to service our existing block of business.

Spread-based products

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

 

  As of or for the three
months ended June 30,
 As of or for the six
months ended June 30,
   As of or for the three
months ended March 31,
 

(Amounts in millions)

      2010         2009         2010         2009           2011         2010     

Fixed annuities

        

Account value, beginning of period

  $10,819   $11,409  

Deposits

   120    41  

Surrenders, benefits and product charges

   (368  (312
       

Net flows

   (248  (271

Interest credited

   89    96  
       

Account value, end of period

  $10,660   $11,234  
       

Single premium immediate annuities

   

Account value, beginning of period

  $6,528   $6,675  

Premiums and deposits

   85    95  

Surrenders, benefits and product charges

   (256  (265
       

Net flows

   (171  (170

Interest credited

   83    88  

Effect of accumulated net unrealized investment gains (losses)

   (29  —    
       

Account value, end of period

  $6,411   $6,593  
       

Structured settlements

   

Account value, net of reinsurance, beginning of period

  $11,234   $11,833   $11,409   $11,996    $1,113   $1,115  

Deposits

   92    229    133    471  

Surrenders, benefits and product charges

   (304  (394  (616  (902   (15  (14
                    

Net flows

   (212  (165  (483  (431   (15  (14

Interest credited

   95    102    191    205     15    14  
                    

Account value, net of reinsurance, end of period

  $11,117   $11,770   $11,117   $11,770    $1,113   $1,115  
                    

Single premium immediate annuities

     

Account value, net of reinsurance, beginning of period

  $6,593   $6,925   $6,675   $6,957  

Premiums and deposits

   100    101    195    212  

Surrenders, benefits and product charges

   (251  (289  (516  (525

Total premiums from spread-based products

  $20   $36  
                    

Net flows

   (151  (188  (321  (313

Interest credited

   87    90    175    183  

Total deposits on spread-based products

  $185   $100  
                    

Account value, net of reinsurance, end of period

  $6,529   $6,827   $6,529   $6,827  
             

Structured settlements

     

Account value, net of reinsurance, beginning of period

  $1,115   $1,101   $1,115   $1,106  

Premiums and deposits

   —      6    —      10  

Surrenders, benefits and product charges

   (15  (5  (29  (28
             

Net flows

   (15  1    (29  (18

Interest credited

   15    15    29    29  
             

Account value, net of reinsurance, end of period

  $1,115   $1,117   $1,115   $1,117  
             

Total premiums from spread-based retail products

  $32   $38   $68   $85  
             

Total deposits on spread-based retail products

  $160   $298   $260   $608  
             

Fixed annuities

Account value of our fixed annuities decreased as surrenders exceeded deposits. Sales have slowed significantlyincreased over the prior year but remain at lower levels given the low interest rate environment and other market conditions and changes in the product management strategy.conditions.

Single premium immediate annuities

Account value of our single premium immediate annuities decreased as surrenders exceeded depositspremiums and premiums.deposits. Sales have slowed significantly given the low interest rate environment and other market conditions and changes in the product management strategy.conditions.

Structured settlements

We no longer solicit sales of this product; however, we continue to service our existing block of business.

International segment

Segment results of operations

Three Months Ended June 30, 2010March 31, 2011 Compared to Three Months Ended June 30, 2009March 31, 2010

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

 

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

(Amounts in millions)

     2010          2009      2010 vs. 2009 

Revenues:

    

Premiums

 $495   $508   $(13 (3)% 

Net investment income

  127    122    5   4

Net investment gains (losses)

  1    4    (3 (75)% 

Insurance and investment product fees and other

  (1  5    (6 (120)% 
             

Total revenues

  622    639    (17 (3)% 
             

Benefits and expenses:

    

Benefits and other changes in policy reserves

  163    226    (63 (28)% 

Acquisition and operating expenses, net of deferrals

  205    197    8   4

Amortization of deferred acquisition costs and intangibles

  67    66    1   2

Interest expense

  10    24    (14 (58)% 
             

Total benefits and expenses

  445    513    (68 (13)% 
             

Income before income taxes

  177    126    51   40

Provision for income taxes

  35    36    (1 (3)% 
             

Net income

  142    90    52   58

Less: net income attributable to noncontrolling interests

  35    —      35   NM(1) 
             

Net income available to Genworth Financial, Inc.’s common stockholders

  107    90    17   19

Adjustment to net income available to Genworth Financial, Inc.’s common stockholders:

    

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

  (2  (3  1   33
             

Net operating income available to Genworth Financial, Inc.’s common stockholders

 $105   $87   $18   21
             

(1)

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

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

(Amounts in millions)

      2011          2010      2011 vs. 2010 

Revenues:

     

Premiums

  $477   $504   $(27  (5)% 

Net investment income

   143    132    11    8

Net investment gains (losses)

   6    9    (3  (33)% 

Insurance and investment product fees and other

   6    6    —      —  
              

Total revenues

   632    651    (19  (3)% 
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   141    174    (33  (19)% 

Acquisition and operating expenses, net of deferrals

   198    203    (5  (2)% 

Amortization of deferred acquisition costs and intangibles

   67    72    (5  (7)% 

Interest expense

   19    23    (4  (17)% 
              

Total benefits and expenses

   425    472    (47  (10)% 
              

Income before income taxes

   207    179    28    16

Provision for income taxes

   46    50    (4  (8)% 
              

Net income

   161    129    32    25

Less: net income attributable to noncontrolling interests

   34    34    —      —  
              

Net income available to Genworth Financial, Inc.’s common stockholders

   127    95    32    34

Adjustment to net income available to Genworth Financial, Inc.’s common stockholders:

     

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

   (3  (4  1    25
              

Net operating income available to Genworth Financial, Inc.’s common stockholders

  $124   $91   $33    36
              

The following table sets forth net operating income available to Genworth Financial, Inc.’s common stockholders for the businesses included in our International segment for the periods indicated:

 

  Three months ended
June 30,
  Increase
(decrease) and
percentage
change
   Three months ended
March 31,
   Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2010  2009  2010 vs. 2009       2011           2010       2011 vs. 2010 

Net operating income available to Genworth Financial, Inc.’s common stockholders:

                

International mortgage insurance

  $93  $83  $10  12  $99    $79    $20     25

Lifestyle protection insurance

   12   4   8  200   25     12     13     108
                         

Total net operating income available to Genworth Financial, Inc.’s common stockholders:

  $105  $87  $18  21

Total net operating income available to Genworth Financial, Inc.’s common stockholders

  $124    $91    $33     36
                         

Net operating income available to Genworth Financial, Inc.’s common stockholders

 

The three months ended June 30, 2010March 31, 2011 included an increase of $14$7 million and a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

 

Excluding the effect of foreign exchange, the decrease in our international mortgage insurance business was primarily driven by the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5% resulting in lower net operating income of $35 million, which included $4 million attributable to changes in foreign exchange rates, in the second quarter of 2010. Excluding the impact related to noncontrolling interests, netNet operating income for our international mortgage insurance business increased primarily due tofrom overall lower losses in Canada and Australia. There was also a benefit from newly enacted Australian tax legislation in the current year.taxes, partially offset by higher interest expense.

 

Net operating income for our lifestyle protection insurance business increased from a decrease inattributable to lower new claim registrations from stabilization ofimproving economic conditions and a favorable impact from our re-pricing actions that we begantaken in the second half of 2009,2010, partially offset by lower sales from reduced levels of consumer lending.

Revenues

Premiums

 

Our international mortgage insurance business increased $27$16 million and our lifestyle protection insurance business decreased $40$43 million.

 

The three months ended June 30, 2010March 31, 2011 included an increase of $31$17 million and a decrease of $6$7 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

Excluding the effects of foreign exchange, our international mortgage insurance business was relatively flat. In both Canada and Australia, lower premiums were attributable to seasoning of our in-force blocks of business. This decrease was offset by lower ceded affiliated reinsurance in Australia in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year and ongoing loss mitigation activities.

The decrease in our lifestyle protection insurance business was primarily attributable to our runoff block of business and a decrease in premium volume driven by reduced levels of consumer lending. Additionally, there was a favorable premium adjustment related to the timing of receiving client data which was partially offset by an unfavorable reinsurance adjustment in the first quarter of 2010 both of which were offset in expenses. These decreases were partially offset by re-pricing actions taken during 2010.

Net investment income

Our international mortgage insurance business increased $10 million and our lifestyle protection insurance business increased $1 million.

The three months ended March 31, 2011 included an increase of $7 million and a decrease of $2 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

The increase in our international mortgage insurance business was primarily as a result of higher average invested assets in Canada and Australia.

The increase in our lifestyle protection insurance business was principally attributable to reinsurance arrangements accounted for under the deposit method as these arrangements were in a gain position.

Benefits and expenses

Benefits and other changes in policy reserves

Our international mortgage insurance business increased $3 million and our lifestyle protection insurance business decreased $36 million.

The three months ended March 31, 2011 included an increase of $7 million and a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

 

Excluding the effects of foreign exchange, the decrease in our international mortgage insurance business was primarily driven by lower losses in Europe related to Australia as seasoning of our in-force block of business was more than offset by increased ceded reinsurance premiumslender settlements in the second quarter of 2010prior year and lower new business volumes.

The decrease in our lifestyle protection insurance business was primarily attributable to our runoff business. Reduced levels of consumer lending and lower single premium sales related to new business regulations in the U.K. also contributed to the decrease. These decreases were partially offset by a favorable impact from our re-pricing actions that we began in the second half of 2009.

Net investment income

Our international mortgage insurance business increased $14 million and our lifestyle protection insurance business decreased $9 million.

The three months ended June 30, 2010 included an increase of $12 million and a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

Our international mortgage insurance businessongoing loss mitigation activities. Australia was relatively flat as an increase in invested assetsreserves driven by the economic impact of recent flooding was offset by lower yields.

The decreasepaid claims. Losses in our lifestyle protection insurance businessCanada were flat as lower severity from overall economic improvement in the current year was principally attributable to reinsurance arrangements accounted for under the deposit method and a decrease in average invested assets. In 2009, we made a reclassification adjustment to interest expense related to our reinsurance arrangements that were in a loss position that did not recur.

Benefits and expenses

Benefits and other changes in policy reserves

Our international mortgage insurance business decreased $19 million and our lifestyle protection insurance business decreased $44 million.

The three months ended June 30, 2010 included an increase of $11 million and a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

The decrease in our international mortgage insurance business was primarily related to Canada and Australia. In Canada, losses declined drivenoffset by lowerhigher new delinquencies from an improving economy. In Australia, losses decreased asin Alberta which have a result of lower reserveshigher average reserve per delinquency primarily from an improving economy.delinquency.

 

The decrease in our lifestyle protection insurance business was largely attributable to a decrease in claim reserves from declining claim registrations as a result ofdriven by continued stabilization of economic conditions in Europe. These decreases were partially offset by a favorable reserve adjustment in the second quarter of 2009 that did not recur.

Acquisition and operating expenses, net of deferrals.Acquisition and operating expenses, net of deferrals,

Our international mortgage insurance business increased $11 decreased $5 million andlargely attributable to our lifestyle protection insurance business decreased $3 million.

from a decrease in paid commissions related to a decline in new business, partially offset by an increase in profit commissions driven by lower claims. Additionally, there was a favorable commission adjustment in the first quarter of 2010 that was offset in premiums. The three months ended June 30, 2010March 31, 2011 included an increase of $5$2 million and a decrease of $5$4 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

The increase in our international mortgage insurance business was due to higher expenses in Canada and the cancellation of our capital maintenance agreement with our U.S. mortgage insurance business in the second quarter of 2009.

Excluding the effects of foreign exchange, the increase in our lifestyle protection insurance business was largely attributable to an increase in profit commissions driven by lower claims, partially offset by a decrease in commissions related to a decline in new business.

Amortization of deferred acquisition costs and intangibles

 

Our international mortgage insurance business increased $7$5 million and our lifestyle protection insurance business decreased $6$10 million.

 

The three months ended June 30, 2010March 31, 2011 included an increase of $3$2 million and a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

 

The increase in our international mortgage insurance business was as a result ofresulted primarily from an increase inrelated to software and higher amortization of deferred acquisition costs fromdriven by the seasoning of our in-force blocks of business.

 

The decrease in our lifestyle protection insurance business was attributable to a decrease in the U.K. from lower single premium sales related to new business regulations and a decrease from our runoff business.

Interest expense.Interest expense decreased $14 million primarily related to our lifestyle protection insurance business due to reinsurance arrangements accounted for under the deposit method. In 2009, we made a reclassification adjustment from net investment income related to our reinsurance arrangements that were in a loss position that did not recur.

Provision for income taxes.The effective tax rate decreased to 19.8% for the three months ended June 30, 2010 from 28.6% for the three months ended June 30, 2009. This decrease in the effective tax rate was primarily attributable to the favorable impact of newly enacted Australian tax legislation and lower taxed foreign income in the current year. The three months ended June 30, 2010 also included an increase of $7 million attributable to changes in foreign exchange rates for our international mortgage business.

Net income attributable to noncontrolling interests. The increase related to the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5%. The three months ended June 30, 2010 included an increase of $4 million attributable to changes in foreign exchange rates.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

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

   Six months ended
June 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Revenues:

     

Premiums

  $999   $1,004   $(5 —  

Net investment income

   259    226    33   15

Net investment gains (losses)

   10    (11  21   191

Insurance and investment product fees and other

   5    10    (5 (50)% 
              

Total revenues

   1,273    1,229    44   4
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   337    418    (81 (19)% 

Acquisition and operating expenses, net of deferrals

   408    392    16   4

Amortization of deferred acquisition costs and intangibles

   139    140    (1 (1)% 

Interest expense

   33    32    1   3
              

Total benefits and expenses

   917    982    (65 (7)% 
              

Income before income taxes

   356    247    109   44

Provision for income taxes

   85    66    19   29
              

Net income

   271    181    90   50

Less: net income attributable to noncontrolling interests

   69    —      69   NM(1) 
              

Net income available to Genworth Financial, Inc.’s common stockholders

   202    181    21   12

Adjustment to net income available to Genworth Financial, Inc.’s common stockholders:

     

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

   (6  7    (13 (186)% 
              

Net operating income available to Genworth Financial, Inc.’s common stockholders

  $196   $188   $8   4
              

(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 for the periods indicated:

   Six months ended
June  30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2010          2009          2010 vs. 2009     

Net operating income available to Genworth Financial, Inc.’s common stockholders:

       

International mortgage insurance

  $172  $173  $(1 (1)% 

Lifestyle protection insurance

   24   15   9   60
              

Total net operating income available to Genworth Financial, Inc.’s common stockholders

  $196  $188  $8   4
              

Net operating income available to Genworth Financial, Inc.’s common stockholders

The six months ended June 30, 2010 included an increase of $33 million and a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

The decrease in our international mortgage insurance business was primarily driven by the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5% resulting in lower net operating income of $68 million, which included $9 million attributable to changes in foreign exchange rates, for the six months ended June 30, 2010. Excluding the impact related to noncontrolling interests, net operating income for our international mortgage insurance business increased from lower losses partially offset by lower premiums. There was also a benefit from newly enacted Australian tax legislation in the current year.

Net operating income for our lifestyle protection insurance business increased from a decrease in new claim registrations from stabilization of economic conditions and a favorable impact from our re-pricing actions that we began in the second half of 2009, partially offset by lower sales from reduced levels of consumer lending.

Revenues

Premiums

Our international mortgage insurance business increased $59 million and our lifestyle protection insurance business decreased $64 million.

The six months ended June 30, 2010 included increases of $77 million and $16 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

Excluding the effects of foreign exchange, the decrease in our international mortgage insurance business was related to rescissions and other terminations related to loss mitigation activities in Europe, particularly in Spain. In addition, premiums in Australia decreased as seasoning of our in-force block of business was more than offset by increased ceded reinsurance premiums during the six months ended June 30, 2010 and lower new business volumes. In Canada, premiums were relatively flat as seasoning of our in-force block of business was offset by lower policy cancellations.

The decrease in our lifestyle protection insurance business was primarily attributable to our runoff business. Reduced levelsblock of consumer lending and lower single premium sales related to new business regulations in the U.K. also contributed to the decrease. These decreases were partially offset by a favorable impact from our re-pricing actions that we began in the second half of 2009. Additionally, there was a favorable premium adjustment related to the timing of receiving client data which was partially offset by an unfavorable reinsurance adjustment in the first quarter of 2010. These adjustments were offset in expenses.

Net investment income

Our international mortgage insurance business increased $27 million and our lifestyle protection insurance business increased $6 million.

The six months ended June 30, 2010 included increases of $29 million and $3 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

Excluding the effects of foreign exchange, the decrease in our international mortgage insurance business was principally attributable to lower yields, partially offset by an increase in invested assets.

The increase in our lifestyle protection insurance business was largely related to reinsurance arrangements accounted for under the deposit method of accounting as these arrangements were in a gain position, partially offset by lower yields and invested assets.

Benefits and expenses

Benefits and other changes in policy reserves

Our international mortgage insurance business decreased $22 million and our lifestyle protection insurance business decreased $59 million.

The six months ended June 30, 2010 included increases of $30 million and $5 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

The decrease in our international mortgage insurance business was primarily related to Canada and Australia. In Canada, losses declined driven by lower new delinquencies from an improving economy. In Australia, losses decreased as a result of lower reserves per delinquency primarily from an improving economy. Losses in Europe also declined primarily related to ongoing loss mitigation activities.

The decrease in our lifestyle protection insurance business was largely attributable to a decrease in claim reserves from declining claim registrations as a result of stabilization of economic conditions in Europe. These decreases were partially offset by higher paid claims, particularly in Denmark.

Acquisition and operating expenses, net of deferrals

Our international mortgage insurance business increased $18 million and our lifestyle protection insurance business decreased $2 million.

The six months ended June 30, 2010 included increases of $11 million and $8 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

The increase in our international mortgage insurance business was primarily due to higher expenses in Canada and the cancellation of our capital maintenance agreement with our U.S. mortgage insurance business in the second quarter of 2009.

The decrease in our lifestyle protection insurance business was largely attributable to a decrease in commissions related to a decline in new business. This decrease was partially offset by an increase in profit commissions driven by lower claims. Additionally, there was a favorable commission adjustment in the first quarter of 2010 that was offset in premiums and a favorable impact from our re-pricing actions that we began in the second half of 2009.

Amortization of deferred acquisition costs and intangibles

Our international mortgage insurance business increased $13 million and our lifestyle protection insurance business decreased $14 million.

The six months ended June 30, 2010 included increases of $7 million and $3 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

The increase in our international mortgage insurance business was as a result of an increase in amortization of deferred acquisition costs from the seasoning of our in-force blocks of business.

The decrease in our lifestyle protection insurance business was attributable to a decrease in the U.K. from lower single premium sales related to new business regulations and a decrease from our runoff business. Additionally, there was an unfavorable adjustment in the first quarter of 2010 related to the timing of receiving client data that was offset in premiums.

Interest expense

Our international mortgage insurance business increased $6 million and our lifestyle protection insurance business decreased $10 million.

The three months ended March 31, 2011 included a decrease of $1 million attributable to changes in foreign exchange rates in our lifestyle protection insurance business.

The increase in our international mortgage insurance business was related to Canada from the issuance of debt by our majority-owned subsidiary in June and December 2010.

The decrease in our lifestyle protection insurance business was due to reinsurance arrangements accounted for under the deposit method of accounting as these arrangements were in a lower loss position in the current year.

Provision for income taxes.The effective tax rate decreased to 23.9%22.2% for the sixthree months ended June 30, 2010March 31, 2011 from 26.7%27.9% for the sixthree months ended June 30, 2009.March 31, 2010. This decrease in the effective tax rate was primarily attributable to the favorable impact of newly enacted Australian tax legislation andchanges in lower taxed foreign income in the current year.income. The sixthree months ended June 30, 2010 alsoMarch 31, 2011 included increasesan increase of $17$4 million and $2a decrease of $1 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

Net income attributable to noncontrolling interests. The increase related to the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5%. The six months ended June 30, 2010 included an increase of $9 million attributable to changes in foreign exchange rates.

International selected operating performance measures

International mortgage insurance

The following table sets forth selected operating performance measures regarding our international mortgage insurance business as of or for the dates indicated:

 

   As of June 30,  Increase
(decrease)  and
percentage

change
 

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Primary insurance in-force

  $484,100  $452,800  $31,300  7

Risk in-force

   163,000   148,000   15,000  10

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

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

(Amounts in millions)

  2010  2009  2010 vs. 2009 2010  2009  2010 vs. 2009   2011   2010   2011 vs. 2010 

Primary insurance in-force

  $577,500    $515,500    $62,000    12

Risk in-force

   194,700     172,900     21,800    13

New insurance written

  $14,900  $13,000  $1,900  15 $28,800  $23,300  $5,500  24   12,700     13,900     (1,200  (9)% 

Net premiums written

   218   181   37  20  381   319   62  19   172     163     9    6

Net earned premiums

   251   224   27  12  497   438   59  13   262     246     16    7

Primary insurance in-force and risk in-force

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 six months ended June 30,March 31, 2011 and 2010, and 2009, this factor was 35%.

Primary insurance in-force and risk in-force increased primarily as a result of new insurance written in Canada and Australia, partially offset by cancellations in Australia and loss mitigation activities in Europe.Europe during 2010. Primary insurance in-force and risk in-force included increases of $25.1$45.8 billion and $9.5$15.7 billion, respectively, attributable to changes in foreign exchange rates as of June 30, 2010.March 31, 2011.

New insurance written

For the three and six months ended June 30, 2010,New insurance written was lower primarily driven by decreases in flow new insurance written increased primarily asin Australia due to a result ofsmaller mortgage originations market and lower bulk transactions volume in Canada. These decreases were partially offset by higher flow new insurance written in Canada driven by growthfrom an estimated increase in the mortgage origination markets as consumer confidence improved. Also contributing to the increase was growth inour market share and bulk new insurance written in Australia

and Canada as some liquidity returned to the securitization markettransactions in Australia and as select lenders look for capital reliefEurope in Canada. Partially offsetting these increases was a decrease in flow new insurance written in Australia reflecting higher interest rates and lower mortgage originations primarily from first-time homebuyers and in Europe where we have taken actions to selectively reduce new business including exiting selected distribution relationships.the current year. The three and six months ended June 30, 2010March 31, 2011 included increasesan increase of $1.9$1.0 billion and $4.8 billion, respectively, attributable to changes in foreign exchange rates.

Net premiums written and net earned premiums

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 June 30, 2010,March 31, 2011, our unearned premium reserves decreased to $2.8were $3.1 billion, including an increase of $0.2 billion attributable to changes in foreign exchange rates, from $2.9compared to $3.1 billion as of June 30, 2009.March 31, 2010. Excluding the effects of foreign exchange, our unearned premium reserves decreased primarily related to seasoning of our in-force block of business.

For

Excluding the three and six months ended June 30, 2010,effects of foreign exchange, net premiums written increaseddecreased primarily driven by an increasefrom lower flow new insurance written in Australia and bulk new insurance written in Canada. Partially offsetting this decrease was higher flow new insurance written in Canada partially offset by a decreaseand lower ceded affiliated reinsurance premiums in new insurance written in Australia, a decrease in average price driven by a decline in new business volume with loan-to-value ratios of more than 90% and increased ceded reinsurance premiums.Australia. The three and six months ended June 30, 2010March 31, 2011 included increasesan increase of $28$11 million and $59 million, respectively, attributable to changes in foreign exchange rates.

For the three months ended June 30, 2010, excludingExcluding the effects of foreign exchange, net earned premiums decreased primarily relatedwere relatively flat. In both Canada and Australia, lower premiums were attributable to Australia as seasoning of our in-force block of business was more than offset by increased ceded reinsurance premiums in the second quarter of 2010 and lower new business volumes.

For the six months ended June 30, 2010, excluding the effects of foreign exchange, net earned premiums decreased related to rescissions and other terminations related to loss mitigation activities in Europe, particularly in Spain. In addition, premiums in Australia decreased as seasoning of our in-force block of business was more than offset by increased ceded reinsurance premiums during the six months ended June 30, 2010 and lower new business volumes. In Canada, premiums were relatively flat as seasoning of our in-force block of businessbusiness. This decrease was offset by lower policy cancellations.ceded affiliated reinsurance in Australia in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year and ongoing loss mitigation activities. The three and six months ended June 30, 2010March 31, 2011 included increasesan increase of $31$17 million and $77 million, respectively, attributable to changes in foreign exchange rates.

Loss and expense ratios

The following table sets forth the loss and expense ratios for our international mortgage insurance business for the dates indicated:

��

  Three months ended
June 30,
 Increase (decrease) Six months ended
June 30,
 Increase (decrease)   Three months ended March 31, Increase (decrease) 
      2010         2009     2010 vs. 2009   2010     2009   2010 vs. 2009   2011 2010 2011 vs. 2010 

Loss ratio

  42 56 (14)%  43 53 (10)%    42  43  (1)% 

Expense ratio

  33 30 3 38 35 3   45  44  1

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. 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.

The decrease in the loss ratio for the three months ended June 30, 2010 was primarily attributable to lower losses in Canada from a decreaseEurope related to lender settlements in delinquenciesthe prior year and inongoing loss mitigation activities. In Australia, as a result of lower reserves per delinquency.

The decrease in the loss ratio forincreased primarily from an increase in reserves driven by the six months ended June 30, 2010 was primarily attributable to lower losses in Canada from a decrease in delinquencies and in Australia as a resulteconomic impact of lower reserves per delinquency. There were also decreased losses in Europe related to ongoing loss mitigation activities in Spain. Partially offsetting the decrease in the loss ratio was a decline in net earned premiums.recent flooding.

The increase in the expense ratio for the three and six months ended June 30, 2010 was primarily attributable to higher expenses in Canada and a decrease inAustralia from lower net premiums written in Australia.written.

Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our international mortgage insurance portfolio as of the dates indicated:

 

  June 30, 2010 December 31, 2009 June 30, 2009   March 31, 2011 December 31, 2010 March 31, 2010 

Primary insurance

    

Primary insurance:

    

Insured loans in-force

  2,938,624   2,911,605   2,918,570     2,983,530    2,986,059    2,937,992  

Delinquent loans(1)

  22,093   22,821   24,569     21,615    21,082    24,015  

Percentage of delinquent loans (delinquency rate)(1)

  0.75 0.78 0.84   0.72  0.71  0.82

Flow loans in-force

  2,447,543   2,418,144   2,392,425     2,477,736    2,468,354    2,442,408  

Flow delinquent loans(1)

  19,219   19,652   21,389     18,218    17,684    20,931  

Percentage of flow delinquent loans (delinquency rate)(1)

  0.79 0.81 0.89   0.74  0.72  0.86

Bulk loans in-force

  491,081   493,461   526,145     505,794    517,705    495,584  

Bulk delinquent loans (2)(1)

  2,874   3,169   3,180     3,397    3,398    3,084  

Percentage of bulk delinquent loans (delinquency rate)

  0.59 0.64 0.60   0.67  0.66  0.62

 

(1)

The amounts previously presented in our second quarter of 2009 Quarterly Report on Form 10-Q have been revised for June 30, 2009 to include delinquencies associated with a lender captive reinsured by us in Australia that had previously been excluded. There was no impact on reserves or losses as these items had previously been included in reported amounts.

(2)

Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 2,8583,374 as of June 30, 2010, 3,154March 31, 2011, 3,376 as of December 31, 20092010 and 2,5473,072 as of June 30, 2009.March 31, 2010.

Flow loans in-force increased primarily due to growthfrom flow new insurance written in Canada that wasduring the current year while bulk loans in-force decreased from higher cancellations in Australia. Delinquent loans increased from higher delinquencies in Australia and Europe as a result of the seasoning of our insurance in-force, partially offset by loss mitigation efforts in Europe. Bulk loans in-force decreased due to limited market opportunities. Delinquent loans decreased from lower new delinquencies in Canada from improving economic conditions and in Europe from ongoing loss mitigation activities, partially offset by a moderate increase in delinquencies in Australia.Mexico.

Lifestyle protection insurance

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

 

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

(Amounts in millions)

      2010          2009      2010 vs. 2009      2010          2009      2010 vs. 2009 

Lifestyle protection insurance gross written premiums, premium equivalents and deposits

  $424  $456  $(32 (7)%  $861  $863  $(2 —  

Mexico operations gross written premiums

   —     16   (16 (100)%   —     32   (32 (100)% 

Net earned premiums

   244   284   (40 (14)%   502   566   (64 (11)% 

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

(Amounts in millions)

      2011           2010       2011 vs. 2010 

Lifestyle protection insurance gross written premiums, premium equivalents and deposits

  $423    $437    $(14  (3)% 

Net earned premiums

   215     258     (43  (17)% 

Gross written premiums, premium equivalents and deposits

The three and six months ended June 30, 2010 included a decrease of $8 million and an increase of $30 million, respectively, attributable to changes in foreign exchange rates. Gross written premiums, premium equivalents and deposits, gross of ceded reinsurance and cancellations, decreased mainly attributable towere relatively flat as our re-pricing initiatives were offset by reduced levels of consumer lending. In the third quarterThe three months ended March 31, 2011 included a decrease of 2009, we sold our Mexico operations; therefore, there were no sales$13 million attributable to changes in 2010.foreign exchange rates.

Net earned premiums

For the three months ended June 30, 2010,March 31, 2011, the decrease in our lifestyle protection insurance business was primarily attributable to our runoff business. Reducedblock of business and a decrease in premium volume driven by reduced levels of consumer lending and lower single premium sales related to new business regulations in the U.K. also contributed to the decrease. These decreases were partially offset by a favorable impact from our re-pricing actions taken in the second half of 2009. The three months ended June 30, 2010 included a decrease of $6 million attributable to changes in foreign exchange rates.

For the six months ended June 30, 2010, the decrease in our lifestyle protection insurance business was primarily attributable to our runoff business. Reduced levels of consumer lending and lower single premium sales related to new business regulations in the U.K. also contributed to the decrease. These decreases were partially offset by a favorable impact from our re-pricing actions taken in the second half of 2009.lending. Additionally, there was a favorable premium adjustment related to the timing of receiving client data which was partially offset by an unfavorable reinsurance adjustment in the first quarter of 2010. These adjustments were offset in expenses. The sixthree months ended June 30, 2010March 31, 2011 included an increasea decrease of $16$7 million attributable to changes in foreign exchange rates.

U.S. Mortgage Insurance segment

Segment results of operations

Three Months Ended June 30, 2010March 31, 2011 Compared to Three Months Ended June 30, 2009March 31, 2010

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

 

  Three months ended
June 30,
 Increase
(decrease) and
percentage
change
   Three months ended
March 31,
 Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2010         2009     2010 vs. 2009       2011         2010     2011 vs. 2010 

Revenues:

          

Premiums

  $153   $164   $(11 (7)%   $142   $142   $—      —  

Net investment income

   31    35    (4 (11)%    33    30    3    10

Net investment gains (losses)

   (3  —      (3 NM(1)    1    4    (3  (75)% 

Insurance and investment product fees and other

   —      (3  3   100   1    5    (4  (80)% 
                      

Total revenues

   181    196    (15 (8)%    177    181    (4  (2)% 
                      

Benefits and expenses:

          

Benefits and other changes in policy reserves

   216    371    (155 (42)%    279    196    83    42

Acquisition and operating expenses, net of deferrals

   33    33    —     —     34    34    —      —  

Amortization of deferred acquisition costs and intangibles

   4    5    (1 (20)%    4    3    1    33
                      

Total benefits and expenses

   253    409    (156 (38)%    317    233    84    36
                      

Loss before income taxes

   (72  (213  141   66   (140  (52  (88  (169)% 

Benefit for income taxes

   (29  (79  50   63   (59  (19  (40  NM (1) 
                      

Net loss available to Genworth Financial, Inc.’s common stockholders

   (43  (134  91   68   (81  (33  (48  (145)% 

Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders:

          

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

   3   —      3  NM(1)    —      (3  3    100
                      

Net operating loss available to Genworth Financial, Inc.’s common stockholders

  $(40 $(134 $94   70  $(81 $(36 $(45  (125)% 
                      

 

(1)

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

Net operating loss available to Genworth Financial, Inc.’s common stockholders

The decreaseincrease in the net operating loss available to Genworth Financial, Inc.’s common stockholders was as a result of moderating losseslower benefits from a decrease in delinquencies and increasing loss mitigation activities including settlements,and an increase in 2010.the aging of existing delinquencies, partially offset by lower new delinquencies.

Revenues

Premiums decreasedremained flat as lower premium refunds related to rescission activity were offset by both lower average primary insurance in-force and lower premiums assumed from an affiliate under an intercompany reinsurance agreement.

Net investment income increased primarily related to a preferred stock dividend in the current year, partially offset by lower invested assets.

The decrease in net investment gains was primarily driven by lower new insurance written as a result of a smaller mortgage insurance market and policy coverage rescission activity, partially offset by the favorable impact of rate increases and an increase in flow persistency from 81% for the three months ended June 30, 2009 to 88% for the three months ended June 30, 2010.

Net investment income decreased primarily from lower average invested assets. Net investment income in 2010 included $2 million of lower losses related to limited partnerships accounted for under the equity method.

Net investment losses in 2010 were as a result of a decrease in gains on salesthe sale of investments from portfolio repositioning activities for the three months ended June 30, 2010 compared to the three months ended June 30, 2009.activities.

Insurance and investment product fees and other income increased primarilydecreased from the cancellationcommutation of a capital maintenance agreement with our European international mortgage insurance businesscaptive trust in the second quarter of 2009.prior year that did not recur.

Benefits and expenses

Benefits and other changes in policy reserves decreasedincreased due to an increase in change in reserves of $258 million and a decrease in net paid claims of $175 million. This included a settlement with a counterparty related to our GSE Alt-A business of $5 million, consisting of net paid claims of $180 million and a decrease in change in reserves of $202$185 million in the first quarter of 2010. Excluding the settlement in the prior year, the increase in incurred losses in the current year was driven by lower benefits from loss mitigation activities and an increase in net paid claimsthe aging of $46 million. The decrease in change in reserves was primarily drivenexisting delinquencies, partially offset by a decrease in delinquencies from the fourth quarter of 2009 related to increased loss mitigation efforts.lower new delinquencies. The increase in paid claims was attributable to an increasehigher claim counts offset by a decrease in average claim payments reflecting higherlower loan balances in more recent book years and higher claim counts. Benefits and other changes in reserves included a reinsurance credit principally related to our captive reinsurance arrangements of $55 million and $76 million for the three months ended June 30, 2010 and 2009, respectively.balances.

Benefit for income taxes.The effective tax rate increased to 40.3%42.1% for the three months ended June 30, 2010March 31, 2011 from 37.1%36.5% for the three months ended June 30, 2009.March 31, 2010. This increase in the effective tax rate was primarily attributable to proportion ofchanges in tax favored investment income and to the effects of interima state income tax accounting standardsadjustment in the prior year.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

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

   Six months ended
June 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2010          2009      2010 vs. 2009 

Revenues:

     

Premiums

  $295   $334   $(39 (12)% 

Net investment income

   61    68    (7 (10)% 

Net investment gains (losses)

   1    (19  20   105

Insurance and investment product fees and other

   5    1    4   NM(1) 
              

Total revenues

   362    384    (22 (6)% 
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   412    774    (362 (47)% 

Acquisition and operating expenses, net of deferrals

   67    65    2   3

Amortization of deferred acquisition costs and intangibles

   7    10    (3 (30)% 
              

Total benefits and expenses

   486    849    (363 (43)% 
              

Loss before income taxes

   (124  (465  341   73

Benefit for income taxes

   (48  (183  135   74
              

Net loss available to Genworth Financial, Inc.’s common stockholders

   (76  (282  206   73

Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders:

     

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

   —      13    (13 (100)% 
              

Net operating loss available to Genworth Financial, Inc.’s common stockholders

  $(76 $(269 $193   72
              

(1)

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

Net operating loss available to Genworth Financial, Inc.’s common stockholders

The decrease in the net operating loss available to Genworth Financial, Inc.’s common stockholders was as a result of moderating losses from a decrease in delinquencies and increasing loss mitigation activities, including settlements, in 2010.

Revenues

Premiums decreased primarily driven by lower new insurance written as a result of a smaller mortgage insurance market and policy coverage rescission activity, partially offset by the favorable impact of rate increases and an increase in flow persistency from 82% for the six months ended June 30, 2009 to 87% for the six months ended June 30, 2010.

Net investment income decreased primarily from lower average invested assets. Net investment income in 2010 included $6 million of lower losses related to limited partnerships accounted for under the equity method.

The change in net investment gains (losses) was primarily driven by impairments recorded in the first quarter of 2009year that did not recur. Also contributing to the change was an increase in gains on sales of investments from portfolio repositioning activities for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.

Insurance and investment product fees and other income increased primarily from the cancellation of a capital maintenance agreement with our European international mortgage insurance business in the second quarter of 2009.

Benefits and expenses

Benefits and other changes in policy reserves decreased due to a decrease in change in reserves of $639 million and an increase in net paid claims of $276 million. The decrease in change in reserves was primarily driven by a decrease in delinquencies from the fourth quarter of 2009 related to increased loss mitigation efforts. The increase in paid claims was attributable to an increase in average claim payments reflecting higher loan balances in more recent book years and higher claim counts. Benefits and other changes in reserves included a reinsurance credit principally related to our captive reinsurance arrangements of $89 million and $195 million for the six months ended June 30, 2010 and 2009, respectively.

Benefit for income taxes.The effective tax rate decreased to 38.7% for the six months ended June 30, 2010 from 39.4% for the six months ended June 30, 2009. This decrease in the effective tax rate was primarily attributable to tax favored investments.

U.S. Mortgage Insurance selected operating performance measures

The following table sets forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:

 

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

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Primary insurance in-force

  $131,900  $155,200  $(23,300 (15)% 

Risk in-force

   30,700   33,900   (3,200 (9)% 

  Three months ended
June  30,
  Increase
(decrease)  and
percentage

change
 Six months ended
June 30,
  Increase
(decrease)  and
percentage

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

(Amounts in millions)

      2010          2009      2010 vs. 2009 2010  2009  2010 vs. 2009   2011   2010   2011 vs. 2010 

Primary insurance in-force

  $123,300    $134,800    $(11,500  (9)% 

Risk in-force

   28,800     31,100     (2,300  (7)% 

New insurance written

  $2,200  $3,400  $(1,200 (35)%  $3,900  $7,100  $(3,200 (45)%    2,400     1,700     700    41

Net premiums written

   152   160   (8 (5)%   294   331   (37 (11)%    142     142     —      —  

Primary insurance in-force and risk in-force

Primary insurance in-force and risk in-force decreased primarily as a result of an increase in rescissionsrescission and other loss mitigation actions, including agreements with a counterparty that reduced our bulk risk in-force exposure.actions. This decrease was partially offset by an increase in flow new insurance written from an increase in ourthe overall mortgage insurance market share, partially offsetmarket. In addition, risk in-force decreased due to tighter mortgage insurance guidelines and limited by tight domestic credit markets and lending guidelines,mortgage lender underwriting standards as well as a weak housing market and limitedreduced mortgage credit liquidity. Our flowFlow persistency was 87% and 82%86% for the sixthree months ended June 30, 2010March 31, 2011 and 2009, respectively.2010.

New insurance written

New insurance written decreasedincreased during the three months ended June 30, 2010March 31, 2011 primarily driven by constraints in the bulk market. This decrease was partially offset by an increase in flow newthe overall mortgage insurance written from an increasemarket, partially offset by a decline in our mortgage insurance market share partially offset bydue to tighter mortgage insurance guidelines and mortgage lender underwriting standards. New insurance written decreased during the six months ended June 30, 2010 primarily driven by constraints in the bulk market as well as a decrease in flow new insurance written from a decline in overall mortgage originations as a result of a weak housing market and reduced mortgage credit liquidity.

Net premiums written

Net premiums written decreased principally fromremained flat as lower reinsurance premiums were offset by higher new insurance written during 2010 as a result of a loweran increase in the overall mortgage insurance origination market.

Loss and expense ratios

The following table sets forth the loss and expense ratios for our U.S. Mortgage Insurance segment for the periodsdates indicated:

 

  Three months ended
June  30,
 Increase (decrease) Six months ended
June  30,
 Increase (decrease)   Three months ended March 31, Increase (decrease) 
  2010 2009 2010 vs. 2009 2010 2009 2010 vs. 2009   2011 2010 2011 vs. 2010 

Loss ratio

  141 225 (84)%  140 231 (91)%    197  138  59

Expense ratio

  25 24 1 25 23 2   27  26  1

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. 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.

ForThe three months ended March 31, 2010 included a settlement with a counterparty related to our GSE Alt-A business of $5 million, consisting of net paid claims of $180 million and a decrease in change in reserves of $185 million. Excluding the settlement in the first quarter of 2010, the loss ratio for the three months ended June 30,March 31, 2010 the decreasewould have been 141%. The increase in the loss ratio was primarily attributable to a decreasean increase in change in reserves which waslargely driven by lower benefits from loss mitigation activities and an increase in the aging of existing delinquencies, partially offset by an increase in paid claims. The decrease in change in reserves was primarily driven by lower new delinquencies anddelinquencies. In addition, the loss ratio increased as net paid claims increased from higher claim counts, partially offset by a decrease in delinquencies from the fourth quarter of 2009 related to increased loss mitigation efforts. The increase in paid claims was attributable to an increase in average claim payments reflecting higherlower loan balances in more recent book years and higher claim counts. Partially offsetting the decrease in the loss ratio was a decline in net earned premiums.

For the six months ended June 30, 2010, the decrease in the loss ratio was primarily attributable to a decrease in change in reserves which was partially offset by an increase in paid claims. The remaining decrease in change in reserves was primarily driven by lower new delinquencies and a decrease in delinquencies from the fourth quarter of 2009 related to increased loss mitigation efforts. The increase in paid claims was attributable to an increase in average claim payments reflecting higher loan balances in more recent book years and higher claim counts. Partially offsetting the decrease in the loss ratio was a decline in net earned premiums.

The expense ratio increased as a result of a decrease in net premiums written for the three and six months ended June 30, 2010.balances.

Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our U.S. mortgage insurance portfolio as of the dates indicated:

 

  June 30,
2010
 December 31,
2009
 June 30,
2009
   March 31,
2011
 December 31,
2010
 March 31,
2010
 

Primary insurance:

        

Insured loans in-force

  821,617   890,730   947,777     763,439    781,024    840,618  

Delinquent loans

  101,759   122,279   102,800     89,018    95,395    107,104  

Percentage of delinquent loans (delinquency rate)

  12.39 13.73 10.85   11.66  12.21  12.74

Flow loans in-force

  723,301   753,370   796,633     673,276    687,964    735,564  

Flow delinquent loans

  98,771   107,495   87,590     85,758    92,225    102,389  

Percentage of flow delinquent loans (delinquency rate)

  13.66 14.27 11.00   12.74  13.41  13.92

Bulk loans in-force

  98,316   137,360   151,144     90,163    93,060    105,054  

Bulk delinquent loans (1)

  2,988   14,784   15,210     3,260    3,170    4,715  

Percentage of bulk delinquent loans (delinquency rate)

  3.04 10.76 10.06   3.62  3.41  4.49

A minus and sub-prime loans in-force

  83,859   89,678   97,271     75,421    77,822    86,185  

A minus and sub-prime delinquent loans

  24,867   29,238   25,271     20,656    22,827    26,387  

Percentage of A minus and sub-prime delinquent loans (delinquency rate)

  29.65 32.60 25.98   27.39  29.33  30.62

Pool insurance:

        

Insured loans in-force

  19,473   20,370   21,166     17,421    17,880    19,907  

Delinquent loans

  831   781   632     913    989    783  

Percentage of delinquent loans (delinquency rate)

  4.27 3.83 2.99   5.24  5.53  3.93

 

(1)

Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 1,4781,814 as of June 30, 2010, 11,319March 31, 2011, 1,713 as of December 31, 20092010 and 10,2942,155 as of June 30, 2009.March 31, 2010.

Delinquency and foreclosure levels that developed principally in our 2006, 2007 and 2008 book years have increased significantly since the second quarter of 2009remained high as the U.S.United States continues to experience an economic recession and weakness in its housing markets. There has also been a continued increase in delinquencies and foreclosures in our 2005, 2006 and 2007 book years. These trends continue to be especially evident in Florida, California, Arizona and Nevada, as well as in our A minus, Alt-A, ARMsadjustable rate mortgages (“ARMs”) and certain 100% loan-to-value products. However, we have seen delinquencies decrease in our primary insurance in-force since the fourth quarter of 2009 as a result of settlements reached with counterparties in 2010, as well as a decline in new flow delinquencies and increased cures from loan modification programs.delinquencies.

Primary insurance delinquency rates differ from region to region in the U.S.United States at any one time depending upon economic conditions and cyclical growth patterns. The tables below set forth our primary delinquency rates for the various regions of the U.S.United States and the ten largest states by our risk in-force and total reserves as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.

 

  Percent of primary
risk in-force as of
June 30, 2010
  Percent of total
reserves as of
June 30, 2010
 (1)
  Delinquency rate           Delinquency rate 
 June 30,
2010
 December 31,
2009
 June 30,
2009
   Percent of primary
risk in-force as of
March 31, 2011
   Percent of total
reserves as of
March 31, 2011 
(1)
   March 31,
2011
 December 31,
2010
 March 31,
2010
 

By Region:

              

Southeast(2)

  23 31 17.06 18.36 14.98   22%     34%     16.26  16.79  17.28

South Central(3)

  16   15   11.41 12.42 9.27   16     13     10.01  11.00  11.81

Northeast(4)

  14   10   10.85 11.60 8.78   14     11     11.44  11.66  11.13

North Central(5)

  11   12   11.50 12.20 9.08   12     12     11.06  11.51  11.66

Pacific(6)

  11   15   15.83 19.43 16.14   11     14     13.64  14.39  16.66

Great Lakes(7)

  9   7   9.08 10.20 8.58   9     7     8.44  8.92  9.47

Plains(8)

  6   3   7.59 8.29 6.16   6     3     7.73  8.14  7.72

Mid-Atlantic(9)

  5   4   11.23 13.08 9.63

New England(10)

  5   3   11.11 12.48 9.38

New England(9)

   5     3     10.43  10.71  11.67

Mid-Atlantic(10)

   5     3     10.09  10.67  11.85
                      

Total

  100 100 12.39 13.73 10.85   100%     100%     11.66  12.21  12.74
                      

 

(1)

Total reserves were $1,952$2,220 million as of June 30, 2010.March 31, 2011.

(2)

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

(3)

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

(4)

New Jersey, New York and Pennsylvania.

(5)

Illinois, Minnesota, Missouri and Wisconsin.

(6)

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

(7)

Indiana, Kentucky, Michigan and Ohio.

(8)

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

(9)

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

(10)

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

(10)

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

 

  Percent of primary
risk in-force as of
June 30, 2010
  Percent of total
reserves as of
June 30, 2010
 (1)
  Delinquency rate           Delinquency rate 
 June 30,
2010
 December 31,
2009
 June 30,
2009
   Percent of primary
risk in-force as of
March 31, 2011
   Percent of total
reserves as of
March 31, 2011 
(1)
   March 31,
2011
 December 31,
2010
 March 31,
2010
 

By State:

              

Florida

  8 20 28.86 30.77 26.81   7%     23%     28.09  28.31  29.07

Texas

  7 3 8.80 9.49 6.76   7%     3%     7.63  8.71  9.10

New York

  6 4 8.88 9.42 7.03   7%     4%     9.59  9.76  9.12

California

  5 8 16.40 21.87 19.08   5%     7%     12.89  13.99  17.72

Illinois

  5 7 15.79 16.40 12.11   5%     8%     15.44  15.79  16.09

Georgia

  4 4 17.13 17.62 13.06   4%     4%     15.12  16.16  17.40

North Carolina

  4 2 11.12 11.73 8.44   4%     2%     10.73  11.23  11.50

New Jersey

   4%     4%     17.53  17.30  16.68

Pennsylvania

  4 2 10.34 11.13 8.41   4%     2%     10.32  10.94  10.66

New Jersey

  4 4 16.36 17.35 13.31

Ohio

  3 2 7.85 8.47 6.94   3%     2%     7.97  8.19  8.11

 

(1)

Total reserves were $1,952$2,220 million as of June 30, 2010.March 31, 2011.

The following table sets forth the dispersion of our total reserves and primary insurance in-force and risk in-force by year of policy origination and average annual mortgage interest rate as of June 30, 2010:March 31, 2011:

 

(Amounts in millions)

  Average
rate
 Percent of total
reserves
(1)
 Primary
insurance
in-force
  Percent
of total
 Primary
risk in-force
  Percent
of total
   Average
rate
 Percent of total
reserves
(1)
 Primary
insurance
in-force
   Percent
of total
 Primary
risk
in-force
   Percent
of total
 

Policy Year

                    

1999 and prior

  7.80 1 $2,004  1.5 $520  1.7

2000

  8.26 —      353  0.3    89  0.3  

2000 and prior

   7.86  0.8 $1,995     1.6 $512     1.8

2001

  7.49 1    1,292  1.0    325  1.1     7.56  0.5    1,037     0.8    261     0.9  

2002

  6.62 1    3,098  2.3    753  2.5     6.64  1.0   2,559     2.1    629     2.2  

2003

  5.65 2    12,480  9.5    2,105  6.9     5.65  2.3    10,225     8.3    1,762     6.2  

2004

  5.88 2    7,317  5.5    1,640  5.4     5.88  2.6    6,245     5.1    1,416     5.0  

2005

  5.98 13    11,559  8.8    2,931  9.7     5.98  13.5    10,088     8.2    2,589     9.1  

2006

  6.52 23    15,453  11.7    3,737  12.3     6.49  22.4    13,590     11.0    3,316     11.6  

2007

  6.61 50    33,467  25.4    8,229  27.1     6.57  48.8    29,931     24.3    7,377     25.8  

2008

  6.19 7    30,998  23.5    7,633  25.2     6.16  7.9    27,807     22.5    6,894     24.1  

2009

  5.08 —      10,061  7.6    1,563  5.1     5.08  0.1    8,254     6.7    1,421     5.0  

2010

  4.97 —      3,854  2.9    820  2.7     4.66  0.1    9,248     7.5    1,901     6.7  

2011

   4.50  —      2,343     1.9    465     1.6  
                                    

Total portfolio

  6.22 100 $131,936  100.0 $30,345  100.0   6.10  100.0 $123,322     100.0 $28,543     100.0
                                    

 

(1)

Total reserves were $1,952$2,220 million as of June 30, 2010.March 31, 2011.

Corporate and Other

Results of Operations

Three Months Ended June 30, 2010March 31, 2011 Compared to Three Months Ended June 30, 2009March 31, 2010

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

 

  Three months ended
June 30,
 Increase
(decrease) and
percentage
change
   Three months ended
March 31,
 Increase (decrease)  and
percentage change
 

(Amounts in millions)

      2010         2009         2010 vs. 2009           2011         2010                 2011 vs. 2010              

Revenues:

          

Premiums

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

Net investment income

   35    60    (25 (42)%    26    9    17    189

Net investment gains (losses)

   (68  (61  (7 (11)%    (7  (16  9    56

Insurance and investment product fees and other

   (3  41    (44 (107)%    2    3    (1  (33)% 
                      

Total revenues

   (36  41    (77 (188)%    21    (4  25    NM (1) 
                      

Benefits and expenses:

          

Interest credited

   35   79    (44 (56)%    33    39    (6  (15)% 

Acquisition and operating expenses, net of deferrals

   9    15    (6 (40)%    (5  8    (13  (163)% 

Amortization of deferred acquisition costs and intangibles

   4    3    1   33   3    4    (1  (25)% 

Interest expense

   70    66    4   6   82    70    12    17
                      

Total benefits and expenses

   118    163    (45 (28)%    113    121    (8  (7)% 
                      

Loss before income taxes

   (154  (122  (32 (26)%    (92  (125  33    26

Benefit for income taxes

   (51  (17  (34 (200)%    (16  (157  141    90
                      

Net loss available to Genworth Financial, Inc.’s common stockholders

   (103  (105  2   2

Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders:

     

Net income (loss) available to Genworth Financial, Inc.’s common stockholders

   (76  32    (108  NM (1) 

Adjustments to net income (loss) available to Genworth Financial, Inc.’s common stockholders:

     

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

   42    38    4   11   4    11    (7  (64)% 

Net tax benefit related to separation from our former parent

   —      (106  106    100
                      

Net operating loss available to Genworth Financial, Inc.’s common stockholders

  $(61 $(67 $6   9  $(72 $(63 $(9  (14)% 
                      

(1)

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

Net operating loss available to Genworth Financial, Inc.’s common stockholders

The decrease in theWe reported a higher net operating loss available to Genworth Financial, Inc.’s common stockholders in the current year wascompared to the prior year primarily as a result of lower tax benefits and higher tax benefits.

Revenues

Net investment income decreased primarily driven by lower investment income related to policy loans from a bankruptcy-related lapse in 2009. This decrease wasinterest expense, partially offset by an increase in net investment income largelyand higher allocated expenses.

Revenues

Higher investment income was primarily driven by the improved performance of limited partnership investments accounted for under the equity method. Net investment income included $1 million of gains related to limited partnerships in the consolidationfirst quarter of certain securitization entities as2011 compared to $21 million of January 1,losses related to limited partnerships in the first quarter of 2010.

Insurance and investment product fees and other decreased primarily as The increase was partially offset by a result of income from the early retirement of institutional contracts at a discount to contract valuesdecline in 2009 that did not recur.average invested assets.

Benefits and expenses

The decrease in interest credited was mainly attributable to lower interest rates on interest paid on our floating rate policyholder liabilities and a decrease in average outstanding liabilities. There was also a decrease as a result of a bankruptcy-related lapse in 2009 of a large group corporate-owned life insurance policy.

Operating expenses decreased as a result of higher allocated expenses in the current year.

Interest expense increased primarily related to the consolidation of certain securitization entities as of January 1, 2010.

The increase in the income tax benefit was primarily related to allocated tax expense in the prior year.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

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

   Six months ended
June 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2010          2009      2010 vs. 2009 

Revenues:

     

Premiums

  $—     $2   $(2 (100)% 

Net investment income

   44    115    (71 (62)% 

Net investment gains (losses)

   (84  (223  139   62

Insurance and investment product fees and other

   —      116    (116 (100)% 
              

Total revenues

   (40  10    (50 NM(1) 
              

Benefits and expenses:

     

Interest credited

   74    168    (94 (56)% 

Acquisition and operating expenses, net of deferrals

   17    26    (9 (35)% 

Amortization of deferred acquisition costs and intangibles

   8    8    —     —  

Interest expense

   140    128    12   9
              

Total benefits and expenses

   239    330    (91 (28)% 
              

Loss before income taxes

   (279  (320  41   13

Benefit for income taxes

   (208  (119  (89 (75)% 
              

Net loss available to Genworth Financial, Inc.’s common stockholders

   (71  (201  130   65

Adjustments to net loss available to Genworth Financial, Inc.’s common stockholders:

     

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

   53    144    (91 (63)% 

Net tax benefit related to separation from our former parent

   (106  —      (106 NM(1) 
              

Net operating loss available to Genworth Financial, Inc.’s common stockholders

  $(124 $(57 $(67 (118)% 
              

(1)

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

Net operating loss available to Genworth Financial, Inc.’s common stockholders

The increase in the net operating loss available to Genworth Financial, Inc.’s common stockholders in the current year was primarily attributable to income from the early retirement of institutional contracts at a discount to contract values in the prior year that did not recur.

Revenues

Net investment income decreased primarily driven by lower investment income related to policy loans from a bankruptcy-related lapse in 2009, lower yields on floating rate investments and a decline in average invested

assets. Net investment income also included $9 million of higher losses related to limited partnership investments accounted for under the equity method in 2010. These decreases were partially offset by an increase in net investment income largely related to the consolidation of certain securitization entities as of January 1, 2010.

Insurance and investment product fees and other decreased primarily as a result of income from the early retirement of institutional contracts at a discount to contract values in 2009 that did not recur.

Benefits and expenses

The decrease in interest credited was mainly attributable to lower interest rates on interest paid on our floating rate policyholder liabilities and a decrease in average outstanding liabilities. There was also a decrease as a result of a bankruptcy-related lapse in 2009 of a large group corporate-owned life insurance policy.

Operating expenses decreased as a result of higher allocated expenses to the operating segments in the current year.

Interest expense increased largely related to the consolidationdebt issuances in the second half of certain securitization entities as of January 1, 2010.

The increasedecrease in the income tax benefit was primarily related to changes in uncertain tax benefits in the prior year related to separation from our former parent.

Investments and Derivative Instruments

Investment results

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

 

   Three months ended
June 30,
  Increase (decrease) 
   2010  2009  2010 vs. 2009 

(Amounts in millions)

  Yield  Amount  Yield  Amount  Yield  Amount 

Fixed maturity securities—taxable

  5.0 $646   5.2 $604   (0.2)%  $42  

Fixed maturity securities—non-taxable

  4.3  16   4.6  28   (0.3)%   (12

Commercial mortgage loans

  5.5  99   5.5  109   —    (10

Restricted commercial mortgage loans related to securitization entities (1)

  7.3  10   —    —     7.3  10  

Equity securities

  11.8  5   3.6  3   8.2  2  

Other invested assets

  14.9  39   (1.3)%   (7 16.2  46  

Policy loans

  7.7  28   10.5  52   (2.8)%   (24

Cash, cash equivalents and short-term investments

  0.3  4   0.7  14   (0.4)%   (10
                

Gross investment income before expenses and fees

  4.9  847   4.7  803   0.2  44  

Expenses and fees

  (0.1)%   (24 (0.1)%   (22 —    (2
                

Net investment income

  4.8 $823   4.6 $781   0.2 $42  
                

(1)

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.

   Six months ended
June 30,
  Increase (decrease) 
   2010  2009  2010 vs. 2009 

(Amounts in millions)

  Yield  Amount  Yield  Amount  Yield  Amount 

Fixed maturity securities—taxable

  5.0 $1,272   5.3 $1,227   (0.3)%  $45  

Fixed maturity securities—non-taxable

  4.3  32   4.6  58   (0.3)%   (26

Commercial mortgage loans

  5.7  203   5.5  223   0.2  (20

Restricted commercial mortgage loans related to securitization entities (1)

  7.4  20   —    —     7.4  20  

Equity securities

  9.4  7   4.1  6   5.3  1  

Other invested assets

  6.8  37   (9.3)%   (106 16.1  143  

Restricted other invested assets related to securitization entities (1)

  0.6  1   —    —     0.6  1  

Policy loans

  7.6  55   10.0  96   (2.4)%   (41

Cash, cash equivalents and short-term investments

  0.3  9   0.8  31   (0.5)%   (22
                

Gross investment income before expenses and fees

  4.8  1,636   4.4  1,535   0.4  101  

Expenses and fees

  (0.2)%   (48 (0.1)%   (43 (0.1)%   (5
                

Net investment income

  4.6 $1,588   4.3 $1,492   0.3 $96  
                

(1)

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.

   Three months ended
March 31,
  Increase (decrease) 
   2011  2010  2011 vs. 2010 

(Amounts in millions)

  Yield  Amount  Yield  Amount  Yield  Amount 

Fixed maturity securities—taxable

   5.0 $670    4.9 $626    0.1 $44  

Fixed maturity securities—non-taxable

   4.2  11    4.3  16    (0.1)%   (5

Commercial mortgage loans

   5.5  92    5.8  104    (0.3)%   (12

Restricted commercial mortgage loans related to securitization entities

   7.6  10    7.3  10    0.3  —    

Equity securities

   3.2  3    6.6  2    (3.4)%   1  

Other invested assets

   10.1  34    (0.7)%   (2  10.8  36  

Restricted other invested assets related to securitization entities

   0.3  —      1.0  1    (0.7)%   (1

Policy loans

   8.0  29    7.7  27    0.3  2  

Cash, cash equivalents and short-term investments

   0.7  6    0.4  5    0.3  1  
                

Gross investment income before expenses and fees

   5.0  855    4.6  789    0.4  66  

Expenses and fees

   (0.2)%   (25  (0.2)%   (24  —    (1
                

Net investment income

   4.8 $830    4.4 $765    0.4 $65  
                

Yields for fixed maturity and equity securities are based on weighted-average amortized cost or cost, respectively. Yields for other invested assets, which include securities lending activity, are calculated net of the corresponding securities lending liability. All other yields are based on average carrying values.

For the three and six months ended June 30, 2010,March 31, 2011, the increase in overall weighted-average investment yields was primarily attributable to lower losses onthe improved performance of limited partnerships.partnerships accounted for under the equity method

and the reinvestment of cash balances. Net investment income for the three months ended June 30, 2010March 31, 2011 included $10$4 million of gains related to limited partnerships accounted for under the equity method as compared to losses of $33 million in the three months ended June 30, 2009. Net investment income for the six months ended June 30, 2010 included $116$34 million of lower losses related to limited partnerships accounted for under the equity method as compared to the sixthree months ended June 30, 2009. Additionally, there was an increase in net investment income related to the consolidation of certain securitization entities as of January 1,March 31, 2010. These increases were partially offset by a decrease in investment income related to policy loans from a bankruptcy-related lapse in 2009 and lower yields on floating rate investments.

The following table sets forth net investment gains (losses) for the periods indicated:

 

   Three months ended
June 30,
  Six months ended
June 30,
 

(Amounts in millions)

      2010          2009          2010          2009     

Available-for-sale securities:

     

Realized gains on sale

  $53   $21   $76   $50  

Realized losses on sale

   (36  (48  (74  (111

Impairments:

     

Total other-than-temporary impairments

   (24  (476  (101  (1,073

Portion of other-than-temporary impairments recognized in other comprehensive income (loss)

   (27  324    (30  324  
                 

Net other-than-temporary impairments

   (51  (152  (131  (749
                 

Trading securities

   (4  11    2    (1

Commercial mortgage loans

   (18  (5  (22  (11

Net gains (losses) related to securitization entities(1)

   (47  —      (36  —    

Derivative instruments

   (38  114    (46  (7

Other

   2    6    22    6  
                 

Net investment gains (losses)

  $(139 $(53 $(209 $(823
                 

(1)

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.

   Three months ended
March 31,
 

(Amounts in millions)

      2011          2010     

Available-for-sale securities:

   

Realized gains

  $29   $23  

Realized losses

   (31  (38
         

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

   (2  (15
         

Impairments:

   

Total other-than-temporary impairments

   (31  (77

Portion of other-than-temporary impairments recognized in other comprehensive income (loss)

   (5  (3
         

Net other-than-temporary impairments

   (36  (80
         

Trading securities

   11    6  

Commercial mortgage loans

   (1  (4

Net gains (losses) related to securitization entities

   10    11  

Derivative instruments

   (10  (8

Other

   —      20  
         

Net investment gains (losses)

  $(28 $(70
         

Three Months Ended June 30, 2010March 31, 2011 Compared to Three Months Ended June 30, 2009March 31, 2010

 

We recorded $51$36 million of net other-than-temporary impairments for the three months ended June 30, 2010March 31, 2011 as compared to $152$80 million for the three months ended June 30, 2009.March 31, 2010. Of total impairments for the three months ended June 30,March 31, 2011 and 2010, and 2009, $43$21 million and $109$62 million, respectively, related to structured securities, including $23$15 million and $66$36 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. ForImpairments related to corporate securities as a result of bankruptcies, receivership or concerns about the issuer’s ability to continue to make contractual payments or where we have intent to sell were $14 million and $5 million for the three months ended June 30,March 31, 2011 and 2010, werespectively. We also recorded $5impairments of $6 million of impairments related to commercial mortgage loansfinancial hybrid securities and $4$7 million related to limited partnership investments. For the three months ended June 30, 2009, we recorded a $36 million impairment related to a retained interest in securitized assets based on revised assumptions regarding cash flows from the assets underlying this securitization transaction. We concluded the value of our retained interest was zero and recognized the full impairment in the prior year. We also recorded $5 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlandsinvestments during the three months ended June 30, 2009.March 31, 2010.

 

Net investment losses related to derivatives of $38$10 million in the secondfirst quarter of 20102011 were primarily related to $31$8 million of losses associated with derivative instruments used to hedge foreign currency risk, $4 million of losses from the change in the value of our credit default swaps due to widening credit spreads, $21 million of losses from the change in value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of the embedded derivative liabilities and $9$2 million of losses due to hedge ineffectiveness. These losses were partially offset by $3 million of gains from credit default swaps due to narrowing credit spreads and $1 million of gains related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. These losses were partially offset by $15 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $4 million of gains from other non-qualified interest rate swaps, $2 million of gains related to embedded derivatives associated with certain reinsurance agreements and $2 million of gains from foreign currency options and forward contracts. Net investment gainslosses related to derivatives of $114$8 million in the secondfirst quarter of 20092010 were primarily related to gains$14 million of losses in derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of the embedded derivative instruments used for mitigating this risk.liabilities and $3 million of losses from foreign currency options. These losses were partially offset by $5 million of gains from credit default swaps utilized to improve our diversification and portfolio yield and $5 million of gains in non-qualified interest rate swaps.

We also recorded $47 million of netNet losses related to securitization entities in the second quarter of 2010 primarily associated with derivatives and $18 million of losses related to commercial mortgage loans from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance. Net gains related to the sale of available-for-sale securities were $17$2 million in the secondfirst quarter of 20102011 compared to losses of $27$15 million in the secondfirst quarter of 2009.2010. We also recorded $16 million from the recovery of a counterparty receivable in the first quarter of 2010.

 

The aggregate fair value of securities sold at a loss during the three months ended June 30,March 31, 2011 and 2010 and 2009 was $858$397 million from the sale of 15974 securities and $367$558 million from the sale of 106128 securities, respectively, which was approximately 96% and 89%, respectively,94% of book value.value for both 2011 and 2010. The loss on sales of securities in the three months ended June 30, 2010March 31, 2011 was primarily driven by widening credit spreads. Generally, securities that are sold at a loss represent either small dollar amounts or percentage losses upon disposition. However, in certain circumstances, events may occur that change our intent to hold specific securities and thus result in our disposition of the security at a loss. Examples of these events include unforeseen issuer-specific events or conditions and shifts in risk or uncertainty of certain securities. Of the securities that were sold at a loss during the three months ended June 30, 2010,March 31, 2011, the average period of time those securities had been continuously in an unrealized loss position was approximately 1913 months. The securities sold at a loss duringin the three months ended June 30, 2010first quarter of 2011 included one mortgage-backed securitytwo U.S. corporate securities that waswere sold for a total loss of $4$11 million related to portfolio repositioning activities. Of the securities that were sold at a loss during the three months ended June 30, 2009, the average period of time those securities had been continuously in an unrealized loss position was approximately nine months. Of the securities that were sold at a loss, there were no individual transactions that produced losses considered material to the consolidated financial statements.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

We recorded $131 million of net other-than-temporary impairments for the six months ended June 30, 2010 as compared to $749 million for the six months ended June 30, 2009. Of total impairments, for the six months ended June 30, 2010 and 2009, $105 million and $389 million, respectively, related to structured securities, including $59 million and $268 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Impairments related to corporate securities as a result of bankruptcies, receivership or concerns about the issuer’s ability to continue to make contractual payments or where we have intent to sell were $5 million and $59 million for the six months ended June 30, 2010 and 2009, respectively. We also recorded $6 million and $245 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlands during the six months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010, we recorded $10 million of impairments related to limited partnership investments and $5 million related to commercial mortgage loans. We recorded a $36 million impairment related to a retained interest in securitized assets based on revised assumptions regarding cash flows from the assets underlying this securitization transaction during the six months ended June 30, 2009. We concluded the value of our retained interest was zero and recognized the full impairment in the prior year.

Net investment losses related to derivatives of $46 million for the six months ended June 30, 2010 were primarily related to $35 million of losses from the change in value of the embedded derivative liabilities exceeding the change in value of the derivative instruments used for mitigating the risk of embedded derivative liabilities associated with our variable annuity products with GMWBs, $27 million of losses from the change in value of our credit default swaps due to widening credit spreads and $6 million of losses related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. These losses were partially offset by $13 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $7 million of gains from other non-qualified interest rate swaps and $2 million of gains related to embedded derivatives associated with certain reinsurance agreements. Net investment losses related to derivatives

of $7 million for the six months ended June 30, 2009 were primarily related to losses from a derivative strategy to mitigate the interest rate risk associated with our statutory capital position which were partially offset by gains in embedded derivative liabilities associated with our variable annuity products with GMWBs exceeding the change in value of derivative instruments used for mitigating this risk.

We also recorded $36 million of net losses related to securitization entities primarily associated with derivatives and $22 million of losses related to commercial mortgage loans from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance during the six months ended June 30, 2010. There was also a net gain of $16 million from the recovery of a counterparty receivable in 2010. Net gains related to the sale of available-for-sale securities were $2 million during the six months ended June 30, 2010 compared to losses of $61 million during the six months ended June 30, 2009.

The aggregate fair value of securities sold at a loss during the six months ended June 30, 2010 and 2009 was $1,416 million from the sale of 239 securities and $737 million from the sale of 199 securities, respectively, which was approximately 95% and 87%, respectively, of book value. The loss on sales of securities in the six months ended June 30, 2010 was primarily driven by widening credit spreads. Generally, securities that are sold at a loss represent either small dollar amounts or percentage losses upon disposition. However, in certain circumstances, events may occur that change our intent to hold specific securities and thus result in our disposition of the security at a loss. Examples of these events include unforeseen issuer-specific events or conditions and shifts in risk or uncertainty of certain securities. Of the securities that were sold at a loss during the six months ended June 30,March 31, 2010, the average period of time those securities had been continuously in an unrealized loss position was approximately 1816 months. The securities sold at a loss duringin the six months ended June 30,first quarter of 2010 included one non-U.S. government security that was sold for a total loss of $7 million in the first quarter of 2010 and one mortgage-backed security that was sold for a total loss of $4 million in the second quarter of 2010 related to portfolio repositioning activities. Of the securities that were sold at a loss during the six months ended June 30, 2009, the average period of time those securities had been continuously in an unrealized loss position was approximately nine months. The securities sold at a loss during the six months ended June 30, 2009 included one in the financial services sector totaling $10 million due to portfolio repositioning.

Investment portfolio

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

 

   June 30, 2010  December 31, 2009 

(Amounts in millions)

  Carrying value  % of total  Carrying value  % of total 

Fixed maturity securities, available-for-sale:

       

Public

  $40,677  56 $37,158  54

Private

   12,709  18    12,594  19  

Commercial mortgage loans

   7,208  10    7,499  11  

Other invested assets

   4,042  6    4,702  7  

Policy loans

   1,467  2    1,403  2  

Restricted commercial mortgage loans related to securitization entities(1)

   535  1    —    —    

Restricted other invested assets related to securitization entities(1)

   374  1    —    —    

Equity securities, available-for-sale

   199  —      159  —    

Cash and cash equivalents

   4,586  6    5,002  7  
               

Total cash, cash equivalents and invested assets

  $71,797  100 $68,517  100
               

(1)

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.

   March 31, 2011  December 31, 2010 

(Amounts in millions)

  Carrying value   % of total  Carrying value   % of total 

Fixed maturity securities, available-for-sale:

       

Public

  $42,385     59 $42,526     59

Private

   12,613     18    12,657     18  

Commercial mortgage loans

   6,600     9    6,718     9  

Other invested assets

   3,752     5    3,854     5  

Policy loans

   1,480     2    1,471     2  

Restricted commercial mortgage loans related to securitization entities

   485     1    507     1  

Restricted other invested assets related to securitization entities

   376     1    372     1  

Equity securities, available-for-sale

   355     —      332     1  

Cash and cash equivalents

   3,742     5    3,132     4  
                   

Total cash, cash equivalents and invested assets

  $71,788     100 $71,569     100
                   

For a discussion of the change in cash, cash equivalents and invested assets, see the comparison for this line item under “—Consolidated Balance Sheets.” See note 4 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to our investment portfolio.

We hold fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral and certain other financial instruments, which are carried at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. As of June 30, 2010,March 31, 2011, approximately 6%3% of our investment holdings recorded at fair value was based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 6 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to fair value.

Fixed maturity and equity securities

As of June 30,March 31, 2011, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

(Amounts in millions)

  Amortized
cost or
cost
   Gross unrealized gains   Gross unrealized losses  Fair
value
 
    Not other-than-
temporarily
impaired
   Other-than-
temporarily
impaired
   Not other-than-
temporarily
impaired
  Other-than-
temporarily
impaired
  

Fixed maturity securities:

          

U.S. government, agencies and government-sponsored enterprises

  $3,352    $102    $—      $(40 $—     $3,414  

Tax-exempt

   1,029     16     —       (117  —      928  

Government—non-U.S.

   2,267     99     —       (7  —      2,359  

U.S. corporate

   23,069     1,062     12     (390  —      23,753  

Corporate—non-U.S.

   13,655     454     —       (163  (9  13,937  

Residential mortgage-backed(1)

   4,897     134     20     (270  (181  4,600  

Commercial mortgage-backed

   3,841     120     3     (172  (36  3,756  

Other asset-backed (1)

   2,324     19     —       (90  (2  2,251  
                            

Total fixed maturity securities

   54,434     2,006     35     (1,249  (228  54,998  

Equity securities

   334     24     —       (3  —      355  
                            

Total available-for-sale securities

  $54,768    $2,030    $35    $(1,252 $(228 $55,353  
                            

(1)

Fair value included $457 million collateralized by sub-prime residential mortgage loans and $344 million collateralized by Alt-A residential mortgage loans.

As of December 31, 2010, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

 Amortized
cost or
cost
 Gross unrealized gains Gross unrealized losses Fair
value

(Amounts in millions)

  Amortized
cost or
cost
   Gross unrealized gains   Gross unrealized losses Fair
value
 
 Amortized
cost or
cost
 Not other-than-
temporarily
impaired
 Other-than-
temporarily
impaired
 Not other-than-
temporarily
impaired
 Other-than-
temporarily
impaired
 Fair
value
  Not other-than-
temporarily
impaired
   Other-than-
temporarily
impaired
   Not other-than-
temporarily
impaired
 Other-than-
temporarily
impaired
 

Fixed maturity securities:

               

U.S. government, agencies and government-sponsored enterprises

 $3,422 $262 $—   $—     $—     $3,684  $3,568    $145    $—      $(8 $—     $3,705  

Tax-exempt

  1,407  39  —    (96  —      1,350   1,124     19     —       (113  —      1,030  

Government—non-U.S.

  2,023  126  —    (3  —      2,146   2,257     118     —       (6  —      2,369  

U.S. corporate

  22,529  1,332  7  (489  (1  23,378   23,282     1,123     10     (448  —      23,967  

Corporate—non-U.S.

  12,572  494  12  (279  —      12,799   13,180     485     —       (167  —      13,498  

Residential mortgage-backed(1)

  4,395  160  8  (347  (261  3,955   4,821     116     18     (304  (196  4,455  

Commercial mortgage-backed

  4,117  152  7  (488  (62  3,726   3,936     132     6     (286  (45  3,743  

Other asset-backed(1)

  2,640  18  —    (297  (13  2,348   2,494     18     —       (94  (2  2,416  
                                    

Total fixed maturity securities

  53,105  2,583  34  (1,999  (337  53,386   54,662     2,156     34     (1,426  (243  55,183  

Equity securities

  192  13  —    (6  —      199   323     13     —       (4  —      332  
                                    

Total available-for-sale securities

 $53,297 $2,596 $34 $(2,005 $(337 $53,585  $54,985    $2,169    $34    $(1,430 $(243 $55,515  
                                    

 

(1)

Fair value included $434$457 million collateralized by sub-prime residential mortgage loans and $358$376 million collateralized by Alt-A residential mortgage loans.

As of December 31, 2009, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

  Amortized
cost or
cost
 Gross unrealized gains Gross unrealized losses  Fair
value

(Amounts in millions)

  Not other-than-
temporarily
impaired
 Other-than-
temporarily
impaired
 Not other-than-
temporarily
impaired
  Other-than-
temporarily
impaired
  

Fixed maturity securities:

      

U.S. government, agencies and government-sponsored enterprises

 $2,673 $25 $—   $(96 $—     $2,602

Tax-exempt

  1,606  42  —    (104  —      1,544

Government—non-U.S.

  2,310  96  —    (22  —      2,384

U.S. corporate

  21,598  628  3  (814  (3  21,412

Corporate—non-U.S.

  12,530  366  11  (356  —      12,551

Residential mortgage-backed(1)

  3,989  41  7  (484  (326  3,227

Commercial mortgage-backed

  4,404  44  4  (738  (97  3,617

Other asset-backed(1)

  2,887  8  —    (466  (14  2,415
                    

Total fixed maturity securities

  51,997  1,250  25  (3,080  (440  49,752

Equity securities

  139  23  —    (3  —      159
                    

Total available-for-sale securities

 $52,136 $1,273 $25 $(3,083 $(440 $49,911
                    

(1)

Fair value included $422 million collateralized by sub-prime residential mortgage loans and $369 million collateralized by Alt-A residential mortgage loans.

Fixed maturity securities increased $3.6 billion primarily attributable to improved market performancedecreased $185 million as our fixed maturity securities were in a net unrealized gain position as of June 30, 2010 as compared to a net unrealized loss position as of December 31, 2009. The increase is also attributable tomaturities exceeded purchases of fixed maturity securities during 2010 as we continue to reinvest cash.the period.

We allocate net unrealized investment gains (losses) from Corporate and Other activities to our Retirement and Protection segment using an approach based principally upon the investment portfolio established to support the segment’s products and targeted capital levels. We do not allocate net unrealized investment gains (losses) from Corporate and Other activities to our International and U.S. Mortgage Insurance segments because they have their own separate investment portfolios, and net unrealized investment gains (losses) from those portfolios are reflected in the International and U.S. Mortgage Insurance segment balance sheets, respectively. The majority of our unrealized losses were related to securities held within our Retirement and Protection segment. Our U.S. Mortgage Insurance segment had gross unrealized losses of $102$131 million and $134$128 million as of June 30, 2010March 31, 2011 and December 31, 2009,2010, respectively.

Our sub-prime securities were principally backed by first lien mortgages. We did not have any exposure to interest margin deals, highly leveraged transactions or collateralized debt obligation-squared investments. The fair value of our mortgage-backed and asset-backed securities collateralized by sub-prime residential mortgage loans by rating and vintage was as follows as of June 30, 2010:

(Amounts in millions)

  2004
and prior
  2005  2006  2007  Total

Ratings(1):

          

AAA

  $44  $7  $—    $—    $51

AA

   21   17   —     20   58

A

   11   19   3   —     33

BBB

   17   15   —     —     32

BB

   12   25   —     —     37

B

   4   28   28   —     60

CCC and lower

   24   38   87   14   163
                    

Total sub-prime securities

  $133  $149  $118  $34  $434
                    

(1)

Based on ratings as of June 30, 2010.

The fair value of our mortgage-backed and asset-backed securities collateralized by sub-prime residential mortgage loans by rating and vintage was as follows as of December 31, 2009:

(Amounts in millions)

  2004
and prior
  2005  2006  2007  Total

Ratings(1):

          

AAA

  $42  $12  $—    $—    $54

AA

   23   20   1   19   63

A

   17   47   4   —     68

BBB

   11   6   1   —     18

BB

   8   13   27   —     48

B

   6   24   25   —     55

CCC and lower

   24   16   62   14   116
                    

Total sub-prime securities

  $131  $138  $120  $33  $422
                    

(1)

Based on ratings as of December 31, 2009.

The fair value of our mortgage-backed and asset-backed securities collateralized by Alt-A residential mortgage loans by rating and vintage was as follows as of June 30, 2010:

(Amounts in millions)

  2004
and prior
  2005  2006  2007  2008  2009  2010  Total

Ratings(1):

                

AAA

  $43  $18  $—    $—    $—    $—    $7  $68

AA

   8   7   1   —     —     —     —     16

A

   17   2   1   6   —     —     —     26

BBB

   25   —     3   —     —     —     —     28

BB

   1   4   —     4   —     —     —     9

B

   3   40   29   4   —     —     —     76

CCC and lower

   4   71   31   29   —     —     —     135
                                

Total Alt-A securities

  $101  $142  $65  $43  $—    $—    $7  $358
                                

(1)

Based on ratings of June 30, 2010.

The fair value of our mortgage-backed and asset-backed securities collateralized by Alt-A residential mortgage loans by rating and vintage was as follows as of December 31, 2009:

(Amounts in millions)

  2004
and prior
  2005  2006  2007  Total

Ratings(1):

          

AAA

  $43  $—    $1  $—    $44

AA

   9   26   1   —     36

A

   17   23   1   8   49

BBB

   26   1   3   —     30

BB

   2   25   —     4   31

B

   2   19   32   6   59

CCC and lower

   5   55   36   24   120
                    

Total Alt-A securities

  $104  $149  $74  $42  $369
                    

(1)

Based on ratings of December 31, 2009.

Gross unrealized losses in our sub-prime and Alt-A residential mortgage-backed and asset-backed securities as of June 30, 2010 were primarily a result of credit spreads that have widened since acquisition as a result of marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans, partially offset by lower asset balances. Our investments in sub-prime residential mortgage-backed and asset-backed securities increased primarily attributable to tightening credit spreads, partially offset by principal payment activity. Our investments in Alt-A residential mortgage-backed and asset-backed securities decreased primarily as a result of principal payment activity, partially offset by tightening credit spreads.

The fair value of our commercial mortgage-backed securities by rating and vintage was as follows as of June 30, 2010:

(Amounts in millions)

  2004
and prior
  2005  2006  2007  2008  2009  Total

Ratings(1):

              

AAA

  $1,942  $332  $331  $118  $—    $29  $2,752

AA

   45   46   109   61   —     —     261

A

   49   26   78   107   —     —     260

BBB

   52   17   39   47   —     —     155

BB

   33   7   47   75   —     —     162

B

   17   —     12   21   —     —     50

CCC and lower

   15   6   60   5   —     —     86
                            

Total commercial mortgage-backed securities

  $2,153  $434  $676  $434  $—    $29  $3,726
                            

(1)

Based on ratings as of June 30, 2010.

The fair value of our commercial mortgage-backed securities by rating and vintage was as follows as of December 31, 2009:

(Amounts in millions)

  2004
and prior
  2005  2006  2007  2008  2009  Total

Ratings(1):

              

AAA

  $1,943  $338  $336  $120  $—    $20  $2,757

AA

   52   63   85   127   —     —     327

A

   69   36   54   54   —     —     213

BBB

   50   12   41   33   —     —     136

BB

   30   6   33   52   —     —     121

B

   17   —     10   11   —     —     38

CCC and lower

   10   4   11   —     —     —     25
                            

Total commercial mortgage-backed securities

  $2,171  $459  $570  $397  $—    $20  $3,617
                            

(1)

Based on ratings as of December 31, 2009.

Commercial mortgage loans

The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:

 

  June 30, 2010   March 31, 2011 

(Loan amounts in millions)

  Total loan
balance 
(1)
  Delinquent
loan balance
  Number of
loans
  Number of
delinquent
loans
  Average loan-
to-value
(2)
 

(Dollar amounts in millions)

  Total loan
balance 
(1)
   Delinquent
loan balance
   Number of
loans
   Number of
delinquent
loans
   Average loan-
to-value
(2)
 

Loan Year

                                   

2004 and prior

  $2,470  $18  989  8  49  $2,103    $35     886     8     50

2005

   1,564   —    319  —    64   1,440     3     310     1     64

2006

   1,497   11  288  2  72   1,397     —       281     —       72

2007

   1,435   14  199  4  81   1,293     —       191     —       77

2008

   288   9  59  2  80   281     11     58     2     77

2009

   —     —    —    —    —     —       —       —       —       —  

2010

   23   —    4  —    52   103     —       17     —       64

2011

   38     —       9     —       70
                                

Total

  $7,277  $52  1,858  16  65  $6,655    $49     1,752     11     65
                                

 

(1)

Does not include $4Excludes $1 million of premium.net premium discount on commercial mortgage loans acquired from third parties.

(2)

Represents loan-to-value as of June 30, 2010.March 31, 2011.

 

  December 31, 2009   December 31, 2010 

(Loan amounts in millions)

  Total loan
balance
  Delinquent
loan balance
  Number of
loans
  Number of
delinquent
loans
  Average loan-
to-value
(1)
 

(Dollar amounts in millions)

  Total loan
balance 
(1)
   Delinquent
loan balance
   Number of
loans
   Number of
delinquent
loans
   Average loan-
to-value
(2)
 

Loan Year

                                   

2004 and prior

  $2,644  $5  1,039  2  49  $2,169    $21     908     6     51

2005

   1,607   —    320  —    63   1,458     —       312     —       65

2006

   1,521   15  290  4  70   1,418     9     283     1     73

2007

   1,458   76  203  3  80   1,345     9     193     2     79

2008

   295   —    61  —    77   282     11     58     2     77

2009(2)

   16   —    518  —    —     —       —       —       —       —  

2010

   104     —       17     —       58
                                

Total

  $7,541  $96  2,431  9  63  $6,776    $50     1,771     11     65
                                

 

(1)

Excludes $4 million of net premium discount on commercial mortgage loans acquired from third parties.

(2)

Represents loan-to-value as of December 31, 2009.

(2)

Loan balance represents reverse mortgage originations not sold as of December 31, 2009 and number of loans represents total reverse mortgage loan originations for 2009. In the first quarter of 2010, we began reporting reverse mortgages in other invested assets.2010.

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans for the period ended March 31:

(Amounts in millions)

  2011 

Allowance for credit losses:

  

Beginning balance

  $59  

Charge-offs

   (1

Recoveries

   —    

Provision

   —    
     

Ending balance

  $58  
     

Ending allowance for individually impaired loans

  $—    
     

Ending allowance for loans not individually impaired that were evaluated collectively for impairment

  $58  
     

Principal balance:

  

Ending balance

  $6,654  
     

Ending balance of individually impaired loans

  $14  
     

Ending balance of loans not individually impaired that were evaluated collectively for impairment

  $6,640  
     

The following table presents the activity in the allowance for losses duringfor the periods indicated:period ended March 31:

 

(Amounts in millions)

  As of or for the
three months  ended

June 30, 2010
  As of or for the
six months  ended

June 30, 2010
  2010 

Beginning balance

  $52  $48  $48  

Provision(1)

   18   22   4  

Release

   —     —     —    
          

Ending balance

  $70  $70  $52  
          

(1)

Included $13 million related to held-for-saleThe charge-offs during 2011 were related to individually impaired commercial mortgage loans.

The increase in the provision during 2010 was related to a change in reserving assumptions to reflect the current market environment.

Restricted commercial mortgage loans related to securitization entities

The following table setstables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the datedates indicated:

 

  June 30, 2010   March 31, 2011 

(Loan amounts in millions)

  Total loan
balance
  Delinquent
loan balance
  Number of
loans
  Number of
delinquent
loans
  Average loan-
to-value
(1)
 

(Dollar amounts in millions)

  Total loan
balance
   Delinquent
loan balance
   Number of
loans
   Number of
delinquent
loans
   Average loan-
to-value
(1)
 

Loan Year

                                   

2004 and prior

  $537  $—    209  —    44  $487    $—       198     —       42
                                

Total

  $537  $—    209  —    44  $487    $—       198     —       42
                                

 

(1)

Represents loan-to-value as of June 30,March 31, 2011.

   December 31, 2010 

(Dollar amounts in millions)

  Total loan
balance
   Delinquent
loan balance
   Number of
loans
   Number of
delinquent
loans
   Average loan-
to-value
(1)
 

Loan Year

                    

2004 and prior

  $509    $—       202     —       43
                      

Total

  $509    $—       202     —       43
                      

(1)

Represents loan-to-value as of December 31, 2010.

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.

Other invested assets

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

 

  June 30, 2010 December 31, 2009   March 31, 2011 December 31, 2010 

(Amounts in millions)

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

Derivatives

  $1,443  36 $946  20  $901     24 $1,047     27

Securities lending collateral

   811     22    772     20  

Derivatives counterparty collateral

   1,058  26    647  14     745     20    794     21  

Securities lending collateral

   680  17    853  18  

Trading securities

   667    ��18    677     18  

Limited partnerships

   363  9    430  9     339     9    340     9  

Trading securities

   221  5    174  4  

Short-term investments

   190  5    1,590  34     198     5    139     3  

Other investments

   87  2    62  1     91     2    85     2  
                            

Total other invested assets

  $4,042  100 $4,702  100  $3,752     100 $3,854     100
                            

Our investments in derivatives and derivative counterparty collateral increaseddecreased primarily as a result of a decreasean increase in long-term interest rates. Securities lending collateral decreasedincreased primarily from our decision to decrease theincreased program size. Limited partnership investments decreased primarily from sales and unrealized depreciation and returned capital, partially offset by calls on outstanding commitments.demand. The decreaseincrease in short-term investments was attributable to portfolio repositioning activities inpurchases during the first halfquarter of 2010.2011.

Derivatives

The following table sets forth our positions in derivative instruments as of the dates indicated:

  Derivative assets  Derivative liabilities
  Balance
sheet
classification
 Fair value  Balance
sheet
classification
 Fair value

(Amounts in millions)

  June 30,
2010
 December 31,
2009
   June 30,
2010
 December 31,
2009

Derivatives designated as hedges

      

Cash flow hedges:

      

Interest rate swaps

 Other invested
assets
 $540 $72   Other
liabilities
 $9 $114

Inflation indexed swaps

 Other invested

assets

  1  —     Other
liabilities
  22  21

Foreign currency swaps

 Other invested
assets
  140  101   Other
liabilities
  —    —  
               

Total cash flow hedges

   681  173     31  135
               

Fair value hedges:

      

Interest rate swaps

 Other invested
assets
  124  132   Other
liabilities
  11  15

Foreign currency swaps

 Other invested
assets
  20  24   Other
liabilities
  —    —  
               

Total fair value hedges

   144  156     11  15
               

Total derivatives designated as hedges

   825  329     42  150
               

Derivatives not designated as hedges

      

Interest rate swaps

 Other invested
assets
  509  505   Other
liabilities
  41  59

Interest rate swaps related to securitization entities(1)

 Restricted
other invested
assets
  —    —     Other
liabilities
  23  —  

Interest rate swaptions

 Other invested
assets
  4  54   Other
liabilities
  —    67

Credit default swaps

 Other invested
assets
  2  11   Other
liabilities
  27  3

Credit default swaps related to securitization entities(1)

 Restricted
other invested
assets
  —    —     Other
liabilities
  159  —  

Equity index options

 Other invested
assets
  97  39   Other
liabilities
  —    2

Financial futures

 Other invested
assets
  —    —     Other
liabilities
  —    —  

Other foreign currency contracts

 Other invested
assets
  6  8   Other
liabilities
  —    —  

Reinsurance embedded derivatives(2)

 Other assets  2  —     Other
liabilities
  —    —  

GMWB embedded derivatives

 Reinsurance
recoverable 
(3)
  9  (5 Policyholder
account
balances
(4)
  447  175
               

Total derivatives not designated as hedges

   629  612     697  306
               

Total derivatives

  $1,454 $941    $739 $456
               

(1)

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.

(2)

Represents embedded derivatives associated with certain reinsurance agreements.

(3)

Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

(4)

Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:

 

(Notional in millions)

 Measurement December 31, 2009 Additions Maturities/
terminations
 June 30, 2010  Measurement   December 31,
2010
   Additions   Maturities/
terminations
 March 31,
2011
 

Derivatives designated as hedges

              

Cash flow hedges:

              

Interest rate swaps

 Notional $9,479 $1,382 $(206 $10,655   Notional    $12,355    $995    $(3 $13,347  

Inflation indexed swaps

 Notional  376  157  (6  527   Notional     525     9     —      534  

Foreign currency swaps

 Notional  491  —    —      491   Notional     491     —       —      491  
                           

Total cash flow hedges

   10,346  1,539  (212  11,673     13,371     1,004     (3  14,372  
                           

Fair value hedges:

              

Interest rate swaps

 Notional  2,366  —    (139  2,227   Notional     1,764     —       (326  1,438  

Foreign currency swaps

 Notional  85  —    —      85   Notional     85     —       —      85  
                           

Total fair value hedges

   2,451  —    (139  2,312     1,849     —       (326  1,523  
                           

Total derivatives designated as hedges

   12,797  1,539  (351  13,985     15,220     1,004     (329  15,895  
                           

Derivatives not designated as hedges

              

Interest rate swaps

 Notional  6,474  2,345  (577  8,242   Notional     7,681     35     (1,275  6,441  

Equity return swaps

   Notional     208     7     —      215  

Interest rate swaps related to securitization entities

 Notional  —    138  (3  135   Notional     129     —       (3  126  

Interest rate swaptions

 Notional  5,100  200  (5,100  200   Notional     200     —       (200  —    

Credit default swaps

 Notional  1,090  50  —      1,140   Notional     1,195     115     (100  1,210  

Credit default swaps related to securitization entities

 Notional  —    322  (5  317   Notional     317     —       —      317  

Equity index options

 Notional  912  397  (614  695   Notional     744     288     (451  581  

Financial futures

 Notional  5,822  3,696  (5,019  4,499   Notional     3,937     1,372     (1,806  3,503  

Other foreign currency contracts

 Notional  521  73  —      594   Notional     521     185     —      706  

Reinsurance embedded derivatives

 Notional  —    47  —      47   Notional     72     12     —      84  
                           

Total derivatives not designated as hedges

   19,919  7,268  (11,318  15,869     15,004     2,014     (3,835  13,183  
                           

Total derivatives

  $32,716 $8,807 $(11,669 $29,854    $30,224    $3,018    $(4,164 $29,078  
                           

 

(Number of policies)

 Measurement December 31, 2009 Additions Terminations June 30, 2010  Measurement   December 31,
2010
   Additions   Terminations March 31,
2011
 

Derivatives not designated as hedges

              

GMWB embedded derivatives

 Policies 47,543 2,244 (1,445 48,342   Policies     49,566     675     (654  49,587  

The decrease in the notional value of derivatives was primarily attributable to a $3.1$1.1 billion notional decrease in interest rate swaps and swaptions related to a derivative strategy to mitigate interest rate risk associated with our statutory capital position, a $1.4 billion notional decrease in non-qualifying futures used for duration management related to our long-term care insurance and deferred annuity products and a $0.6 billion notional decrease in non-qualifying futures and interest rate swaps and financial futures used to hedge liabilities related to our institutional products. Theproducts and a $0.5 billion notional decrease in derivatives used to hedge our variable annuity products with GMWBs. These decreases were partially offset by a $1.6$1.0 billion notional increase in qualifying and non-qualifying cash flow hedges related to our interest rate hedging strategy associated with our long-term care insurance products, a $0.5 billion notional increase in credit default swaps and interest rate swaps related to securitization entities and a $0.2 billion notional increase in inflation indexed swaps.products.

Consolidated Balance Sheets

Total assets. Total assets increased $2.2$0.5 billion from $108.2$112.4 billion as of December 31, 20092010 to $110.4$112.9 billion as of June 30, 2010.March 31, 2011.

 

Cash, cash equivalents and invested assets increased $3.3$0.2 billion primarily from an increase of $3.6$0.6 billion in cash and cash equivalents, partially offset by a decrease of $0.4 billion in invested assets. The increase in cash was primarily attributable to our debt issuance in March 2011. Our fixed maturity securities portfolio decreased $0.2 billion resulting primarily from improved market performance and an increase inmaturities exceeding purchases during the first quarter of fixed maturity securities. Also contributing to the increase was an increase of $0.9 billion in restricted commercial2011. Commercial mortgage loans and otherdecreased $0.1 billion as collections exceeded originations during the first quarter of 2011. Other invested assets from the consolidation of certain securitization entities as of January 1, 2010. Partially offsetting these increases was a decrease in other invested assets of $0.7decreased $0.1 billion primarily driven by a decrease in short-term investmentsderivatives and securities lending,derivatives counterparty collateral, partially offset by an increase in derivativesour securities lending program and derivatives counterparty collateral. Also contributing to the decrease was a decrease of $0.4 billion in cash and cash equivalents as the net proceeds from the U.S. and Canadian senior note issuances in the second quarter of 2010 were more than offset by purchases of fixed maturity securities.short-term investments.

 

Separate account assets decreased $0.7increased $0.1 billion primarily as a result of unfavorablefavorable market performance of the underlying securities.

Total liabilities. Total liabilities increased $0.5$0.3 billion from $94.8$97.4 billion as of December 31, 20092010 to $95.3$97.7 billion as of June 30, 2010.March 31, 2011.

 

Our policyholder-related liabilities decreased $0.4 billion largely attributable to a decrease in reserves associated with our retirement income businessspread-based products from benefit payments and scheduled maturities of our spread-based products and a decrease in our U.S. mortgage insurance business primarily from settlements and a decline in delinquencies in 2010. Unearned premiums decreased in our international mortgage insurance business primarily attributable to seasoning and in our lifestyle protection insurance business from a decline in sales.institutional products. These decreases were partially offset by an increase in reserves related to our long-term care insurance business from growth of our in-force blockblock.

Other liabilities increased $0.1 billion primarily as a result of the timing of payments and an increase in our retirement income business from an increasesecurities lending program, partially offset by a decrease in fee-based product sales.

Borrowings related to securitization entities increased $0.5 billion from the consolidation of certain securitization entities as of January 1, 2010.our repurchase program.

 

Long-term borrowings increased $0.7$0.4 billion principally from the issuance of $400 million of senior notes in the second quarter of 2010 and from the issuance of CDN$275 million of senior notes by our majority-owned subsidiary, Genworth MI Canada Inc. (“Genworth Canada”), in the second quarter of 2010.March 2011.

 

Separate account liabilities decreased $0.7increased $0.1 billion primarily as a result of unfavorablefavorable market performance of the underlying securities.

Total stockholders’ equity. Total stockholders’ equity increased $1.6$0.2 billion from $13.4$15.0 billion as of December 31, 20092010 to $15.0$15.2 billion as of June 30, 2010.March 31, 2011.

 

We reported net income available to Genworth Financial, Inc.’s common stockholders of $0.2$0.1 billion for the sixthree months ended June 30, 2010.March 31, 2011.

 

We recorded a cumulative effect adjustment that reduced retained earnings by $104 million with a partial offset to accumulatedAccumulated other comprehensive income (loss) of $91 million relatedincreased $0.1 billion predominately attributable to the consolidationweakening of certain securitization entities as of January 1, 2010.the U.S. dollar against other currencies resulting in higher foreign currency translation adjustments.

We had accumulated other comprehensive income of $1.3 billion as of June 30, 2010 compared to accumulated other comprehensive loss of $0.2 billion as of December 31, 2009. The change in accumulated other comprehensive income was primarily attributable to a decrease of $1.4 billion in net unrealized investment losses from improved market performance during the first half of 2010.

Liquidity and Capital Resources

Liquidity and capital resources represent our overall financial strength and our ability to generate 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 sixthree months ended June 30:March 31:

 

(Amounts in millions)

  2010 2009   2011 2010 

Net cash from operating activities

  $557   $1,369    $336   $130  

Net cash from investing activities

   (723  635     496    (1,174

Net cash from financing activities

   (243  (4,041   (221  (487
              

Net decrease in cash before foreign exchange effect

  $(409 $(2,037

Net increase (decrease) in cash before foreign exchange effect

  $611   $(1,531
              

Our principal sources of cash include sales of our products and services, income from our investment portfolio and proceeds from sales of investments. As an insurance business, we typically generate positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed policy acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. The decreaseincrease in cash inflows from operating activities in the first halfquarter of 20102011 compared to the first halfquarter of 20092010 was primarily as a result of higherlower tax settlements higher paid claims in our U.S. mortgage insurance business, including settlements that were paid in the first halfquarter of 2010,2011 and a decreasean increase from other liabilities and policy-related balances associated with the timing of payments.

In analyzing our cash flow, we focus on the change in the amount of cash available and used in investing activities. We had net cash outflowsinflows from investing activities in the first halfquarter of 20102011 as purchases of investments exceeded proceeds from maturities and sales of fixed maturity securities. In early 2009, we were holding excess cash balances. In the second halfsecurities exceeded purchases of 2009 and into 2010, we began reinvesting this excess cash.investments.

Changes in cash from financing activities primarily relate to the issuance of, and redemptions and benefit payments on, universal life insurance and investment contracts; the issuance and acquisition of debt and equity securities; the issuance and repayment of borrowings and non-recourse funding obligations; and dividends to our preferred stockholders and other capital transactions. We had net cash outflows from financing activities in the first halfquarter of 20102011 related to redemptions of our investment contracts primarily from scheduled maturities and surrenders which exceeded deposits received on these contracts. In 2009, redemptions were significantly higher dueNet cash from financing activities increased related to scheduled maturities and the early retirement of institutional contracts. This was partially offset by net proceeds received from the issuance of senior notes induring the U.S. and Canada.first quarter of 2011.

In the U.S.United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio, which require the borrower to provide collateral, consisting of cash and government securities, on a daily basis in amounts equal to or exceeding 102% in the U.S.United States and 105% in Canada of the fair value of the applicable securities loaned. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. Cash and non-cash collateral, such as a security, received by us on securities lending transactions is reflected in other invested assets with an offsetting liability recognized in other liabilities for the obligation to return the collateral. Any cash collateral received is reinvested by our custodian based upon the investment guidelines provided within our agreement. In the U.S.,United States, the reinvested cash collateral is primarily invested in a money market fund approved by the National Association of Insurance Commissioners (“NAIC”), U.S. and foreign government securities, U.S. government agency securities, asset-backed securities and corporate debt

securities, all of which have scheduled maturities of less than three years. securities. In Canada, the lending institution must be included on the approved Securities Lending Borrowers List with the Canadian regulator and the intermediary must be rated at least “AA-” by Standard & Poor’s Financial Services LLC. We are currently fully indemnified against counterparty credit risk by the intermediary. As of June 30, 2010March 31, 2011 and December 31, 2009,2010, the fair value of securities loaned under the securities lending program was $0.7$0.8 billion, and $0.9 billion, respectively, consisting of $0.5 billion and $0.6 billion, respectively, in the U.S. and $0.2 billionUnited States and $0.3 billion respectively, in Canada. As of June 30, 2010March 31, 2011 and December 31, 2009,2010, the fair value of collateral held under the securities

lending program was $0.7$0.8 billion and $0.9 billion, respectively, and the offsetting obligation to return collateral of $0.7$0.8 billion and $0.9 billion, respectively, was included in other liabilities in the consolidated balance sheets. We had non-cash collateral of $221 million and $326 million$0.3 billion as of June 30, 2010March 31, 2011 and December 31, 2009, respectively.2010.

We also have a repurchase program in which we sell an investment security at a specified price and agree to repurchase that security at another specified price at a later date. 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 maturity securities. As of June 30, 2010March 31, 2011 and December 31, 2009,2010, the fair value of securities pledged under the repurchase program was $2.2$1.6 billion and $2.1$1.7 billion, respectively, and the repurchase obligation of $1.9$1.6 billion and $2.1$1.7 billion, respectively, was included in other liabilities in the consolidated balance sheets.

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. Other principal sources of cash include proceeds from the issuance of debt and equity securities, including borrowings pursuant to our credit facilities, and sales of assets.

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 stockholder dividends on our common and preferred stock, amounts we owe to GE under the Tax Matters Agreement, contributions to subsidiaries, repurchase of stock, and, potentially, acquisitions.

Our holding company had $916$1,140 million and $1,298$813 million of cash and cash equivalents as of June 30, 2010March 31, 2011 and December 31, 2009,2010, respectively. During the six months ended June 30, 2010, we contributed $200 million to one of our life insurance subsidiaries to fund growth and investedOur holding company also had $200 million in highly liquid U.S. government bonds.bonds as of March 31, 2011 and December 31, 2010.

In November 2008, our Board of Directors decided to suspend the payment of dividends on our common stock indefinitely. 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 be dependent on many factors including the receipt of dividends from our operating subsidiaries, our financial condition and operating results, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, our credit and financial strength ratings and such other factors as the Board of Directors deems relevant.

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.

Our insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. Our insurance subsidiaries’ principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment 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, investment income and, as necessary, sales of invested assets.

Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar estimated lives such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturity securities 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 maturity securities to fund anticipated operating expenses, surrenders and withdrawals. As of June 30, 2010,March 31, 2011, our total cash, cash equivalents and invested assets were $71.8 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership interests and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 33%31% of the carrying value of our total cash, cash equivalents and invested assets as of June 30, 2010.March 31, 2011.

As of June 30, 2010,March 31, 2011, we had approximately $860$444 million of GICs outstanding. Substantially all of these contracts allow for the payment of benefits at contract value to Employee Retirement Income Security Act of 1974 (“ERISA”) plans prior to contract maturity in the event of death, disability, retirement or change in investment election. ContractsThese contracts also provide for early termination by the contractholder but are subject to an adjustment to the contract value for changes in the level of interest rates from the time the GIC was issued plus an early withdrawal penalty. We carefully underwrite these risks before issuing a GIC to a plan and historically have been able to effectively manage our exposure to these benefit payments. Our GICs typically credit interest at a fixed interest rate and have a fixed maturity generally ranging from two to six years.

During 2005, certain of our domestic life insurance subsidiaries transferred primarily foreign-issued investment securities to an affiliated special-purpose entity (“SPE”) that is 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 June 30, 2010 was $802 million. In July 2010, the affiliated SPE redeemed the structured notes that were held by our domestic life insurance subsidiaries with investment securities. There was no gain or loss recorded on the transaction.

Capital resources and financing activities

We have two five-year revolving credit facilities that mature in May 2012 and August 2012. These facilities bear variable interest rates based on a one-month London Interbank Offered Rate (“LIBOR”) plus a margin. Each of these facilities originally had $1.0 billion available for borrowings. Lehman Commercial Paper Inc. (“LCP”) had committed $70 million under the August 2012 credit facilitymargin and Lehman Brothers Bank, FSB (“Lehman FSB”) had committed $70 million under the May 2012 credit facility. On October 5, 2008, LCP filed for protection under Chapter 11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. LCP was unable to fulfill its commitments under the August 2012 credit facility and

Lehman FSB declined to fulfill its commitment under the May 2012 credit facility. On April 1, 2010, a consent and waiver agreement was entered into which releases the Lehman Brothers-related commitments under the facilities and reduces the remaining commitments by those respective amounts. Therefore, as of June 30, 2010, we hadhave access to $1.9 billion under these facilities. In June 2010,As of March 31, 2011, we repaid $100 million of outstandinghad no borrowings under each of our five-year revolving credit facilities using the net proceeds from our senior notes offering that was completed in June 2010. As of June 30, 2010, we had borrowings of $730 million under these facilities, andfacilities; however, we utilized $54$280 million of the commitment under these facilities primarily for the issuance of a letterletters of credit for the benefit of one of our life insurance subsidiaries. As of December 31, 2010, we had no borrowings under these facilities; however, we utilized $56 million under these facilities primarily for the issuance of letters of credit for the benefit of one of our lifestyle protection insurance subsidiaries. As of June 30, 2010, we have an unused credit capacity under our revolving credit facilities of $1.1 billion. These two facilities contain minimum consolidated net worth requirements. Consolidated net worth, as defined in these agreements, means all amounts that would be included on a consolidated balance sheet of the borrower and its subsidiaries under stockholders’ equity, excluding accumulated other comprehensive income (loss).

In June 2010,March 2011, we issued senior notes having an aggregate principal amount of $400 million, with an interest rate equal to 7.700%7.625% per year payable semi-annually, and maturing in June 2020September 2021 (“20202021 Notes”). The 20202021 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 portion of the 20202021 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 $397 million from the issuance of the 20202021 Notes were used to repay $100 million of outstanding borrowings under each of our five-year revolving credit facilities and the remainder of the proceeds were used for general corporate purposes.

In June 2010, our majority-owned subsidiary, Genworth Canada, issued CDN$275 million of 5.68% senior notes due 2020. The net proceeds of the offering will be used to fund transactions among Genworth Canada and its Canadian wholly-owned subsidiaries. Genworth Canada is expected to use any proceeds it receives from such transactions for general corporate and investment purposes, and/or to fund a distribution to, or a repurchase of common shares from, Genworth Canada’s shareholders. In July 2010, Genworth Canada announced a substantial issuer bid, pursuant to which it will offer to purchase for cancellation up to CDN$325 million of its common shares. Brookfield Life Assurance Company Limited, our wholly-owned subsidiary and majority shareholder of Genworth Canada, intends to ultimately sell a sufficient number of shares to maintain its ownership at the current 57.5% level.

We believe our revolving credit facilities and anticipated cash flows from operations will provide us with sufficient capital flexibility and liquidity to meet our future operating requirements, as well as optimize our capital structure. In addition, we actively monitor our liquidity position, liquidity generation options and the credit markets given changing market conditions. However, we cannot predict with any certainty the impact to us from any further disruptions in the credit markets or further downgrades by one or more of the rating agencies of the financial strength ratings of our insurance company subsidiaries and/or the credit ratings of our holding company. The availability of additional funding will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, the overall availability of credit to the financial services industry, the level of activity and availability of reinsurers, our credit ratings and credit capacity and the performance of and outlook for our business.

Genworth MI Canada Inc., our majority-owned subsidiary, plans to repurchase approximately CAD$160 million of its existing common shares, with the amount and timing subject to market conditions and customary approvals. We expect to receive approximately CAD$82 million after-tax in net proceeds, with no percentage change in ownership.

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 analysis of these obligations as the funding of these future cash obligations will be from future cash flows from premiums, deposits, fees and investment income that are not reflected herein. 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.”

There have been no material additions or changes to our contractual obligations and commercial commitments as set forth in our 20092010 Annual Report on Form 10-K filed on February 26, 2010,25, 2011, except as discussed above under “Capital“—Capital resources and financing activities.” However, we announced in March 2011 that we intend to redeem all outstanding shares of our Series A Preferred Stock on June 1, 2011, in accordance with their terms.

Securitization Entities

There were no off-balance sheet securitization transactions in the sixthree months ended June 30, 2010March 31, 2011 or 2009. See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.2010.

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. The following is a discussion of our market risk exposures and our risk management practices.

Credit markets have continued to show signs of improvement across most asset classes in the first quarter of 2010.2011. 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” for further discussion of recent market conditions.

In the secondfirst quarter of 2010,2011, the currencies in Canada and Australia strengthened against the U.S. dollar, while in Europe, the currencies weakened against the U.S. dollar, as compared to the prior year.first quarter of 2010 and remained relatively flat from the fourth quarter of 2010. This has generally resulted in higher levels of reported revenues and net income, (loss), assets, liabilities and accumulated other comprehensive income (loss) in our U.S. dollar consolidated financial statements. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact changes in foreign currency exchange rates have had during the year.rates.

There were no other material changes in these risks since December 31, 2009.2010.

Item 4.    Controls and Procedures

Item  4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2010,March 31, 2011, an evaluation was conducted under the supervision and with the participation of our 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 on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of theseour disclosure controls and procedures were effective.effective as of March 31, 2011.

Changes in Internal Control Over Financial Reporting During the Quarter Ended June 30, 2010March 31, 2011

There were no changes in our internal control over financial reporting that occurred during the six monthsquarter ended June 30, 2010March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

Item  1.Legal Proceedings

We face a significantthe 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, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, bidding practices in connection with our management and administration of a third party’sthird-party’s municipal guaranteed investment contract business, claims payments and procedures, cancellation or rescission of coverage, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of 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. WeIn addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition andor results of operations.

ThereExcept as disclosed below, there were no material developments during the sixthree months ended June 30, 2010March 31, 2011 in any of the legal proceedings identified in Part I, Item 3 of our 20092010 Annual Report on Form 10-K, as updated in Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010.10-K. In addition, there were no new material legal proceedings during the sixthree months ended JuneMarch 31, 2011.

As previously disclosed, in December 2009, one of our non-insurance subsidiaries, one of the subsidiary’s officers and Genworth Financial, Inc. were named in a putative class action lawsuit captionedMichael J. Goodman and Linda Brown v. Genworth Financial Wealth Management, Inc., et al, in the United States District Court for the Eastern District of New York. In response to our motion to dismiss the complaint in its entirety, the Court granted on March 30, 2010.2011 the motion to dismiss the state law fiduciary duty claim and denied the motion to dismiss the remaining federal claims. We continue to vigorously defend this action.

As previously disclosed, we and one of our mortgage insurance subsidiaries were named in a putative class action lawsuit filed in November 2010 captionedArchie Moses and Violet M. Moses v. SunTrust Banks, Inc., et al,in the United States District Court for the District of Columbia. On March 10, 2011, plaintiffs voluntarily dismissed the action without prejudice as to Genworth Financial, Inc. and our mortgage insurance subsidiary.

We cannot ensure that the current 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 furtheradditional unrelated investigations and have lawsuits filed against us.lawsuits. 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 operations.

 

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 20092010 Annual Report on Form 10-K 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 June 30, 2010,March 31, 2011, there have been no material changes to the risk factors set forth in the above-referenced filing.

Item  6.    ExhibitsExhibits

 

  10Form of Stock Appreciation Rights with a Maximum Share Value Award Agreement under the 2004 Genworth Financial, Inc. Omnibus Incentive Plan
12  Statement 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
101101.INS  The following consolidated financial statements from Genworth Financial, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed on July 30, 2010, formatted in XBRL: (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Stockholders’ Equity and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.XBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document

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: July 30, 2010May 4, 2011  

By:

 

/s/S/    AMY R. CORBIN        

  

Amy R. Corbin

Vice President and Controller

(Duly Authorized Officer and

Principal Accounting Officer)

 

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