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 SeptemberJune 30, 20102011

OR

 

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

For the transition period from              to             

Commission file number 001-32195

 

 

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 x  Accelerated Filer  ¨
Non-accelerated Filer  ¨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 OctoberAs of July 25, 2010, 489,595,6292011, 490,716,493 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.

Item 1.Financial Statements

   3  

Condensed Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20102011 and  20092010 (Unaudited)

   3  

Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20102011 (Unaudited) and December 31, 20092010

   4  

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the ninesix months ended SeptemberJune 30, 20102011 and 20092010 (Unaudited)

   5  

Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20102011 and  20092010 (Unaudited)

   6  

Notes to Condensed Consolidated Financial Statements (Unaudited)

   7  

Item 2.

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

   6366  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

   131137  

Item 4.

Controls and Procedures

   131137  

PART II—OTHER INFORMATION

  138
Item 1.

Item 1.Legal Proceedings

   132138
Item 1A.

Risk Factors

139
Item 5.

Other Information

139
Item 6.

Exhibits

140  

Item 1A.Risk FactorsSignatures

   133

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

135

Item 6.Exhibits

135
Signatures136141  

PART I—FINANCIAL INFORMATION

 

Item 1.Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)

 

 Three months
ended September 30,
 Nine months
ended September 30,
   Three months ended
June 30,
 Six months ended
June 30,
 
 2010 2009 2010 2009   2011 2010 2011 2010 

Revenues:

         

Premiums

 $1,447   $1,492   $4,387   $4,496    $1,455   $1,470   $2,892   $2,940  

Net investment income

  815    759    2,403    2,251     881    823    1,711    1,588  

Net investment gains (losses)

  105    (122  (104  (945   (40  (139  (68  (209

Insurance and investment product fees and other

  300    262    812    806     359    256    688    512  
                         

Total revenues

  2,667    2,391    7,498    6,608     2,655    2,410    5,223    4,831  
                         

Benefits and expenses:

         

Benefits and other changes in policy reserves

  1,502    1,450    4,157    4,450     1,672    1,340    3,081    2,655  

Interest credited

  212    225    636    763     204    211    405    424  

Acquisition and operating expenses, net of deferrals

  472    484    1,446    1,381     514    499    1,014    974  

Amortization of deferred acquisition costs and intangibles

  227    143    590    602     197    179    382    363  

Interest expense

  114    96    338    306     134    109    261    224  
                         

Total benefits and expenses

  2,527    2,398    7,167    7,502     2,721    2,338    5,143    4,640  
                         

Income (loss) before income taxes

  140    (7  331    (894   (66  72    80    191  

Provision (benefit) for income taxes

  18    (52  (80  (420   (6  (5  24    (98
                         

Net income (loss)

  122    45    411    (474   (60  77    56    289  

Less: net income attributable to noncontrolling interests

  39    26    108    26     36    35    70    69  
                         

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

 $83   $19   $303   $(500  $(96 $42   $(14 $220  
                         

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

         

Basic

 $0.17   $0.04   $0.62   $(1.14  $(0.20 $0.09   $(0.03 $0.45  
                         

Diluted

 $0.17   $0.04   $0.61   $(1.14  $(0.20 $0.08   $(0.03 $0.45  
                         

Weighted-average common shares outstanding:

         

Basic

  489.5    448.9    489.1    438.5     490.6    489.1    490.4    489.0  
                         

Diluted

  493.9    451.6    493.9    438.5     490.6    494.2    490.4    493.9  
                         

Supplemental disclosures:

         

Total other-than-temporary impairments

 $(7 $(285 $(108 $(1,358  $(28 $(24 $(59 $(101

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

  (30  89    (60  413     2    (27  (3  (30
                         

Net other-than-temporary impairments

  (37  (196  (168  (945   (26  (51  (62  (131

Other investment gains (losses)

  142    74    64    —       (14  (88  (6  (78
                         

Total net investment gains (losses)

 $105   $(122 $(104 $(945  $(40 $(139 $(68 $(209
                         

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

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

Assets

    

Investments:

    

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

 $56,356   $49,752   $56,221   $55,183  

Equity securities available-for-sale, at fair value

  223    159    374    332  

Commercial mortgage loans

  6,929    7,499    6,432    6,718  

Restricted commercial mortgage loans related to securitization entities

  522    —      457    507  

Policy loans

  1,480    1,403    1,542    1,471  

Other invested assets

  5,320    4,702    3,301    3,854  

Restricted other invested assets related to securitization entities ($376 at fair value)

  378    —    

Restricted other invested assets related to securitization entities ($378 and $370 at fair value)

  379    372  
            

Total investments

  71,208    63,515    68,706    68,437  

Cash and cash equivalents

  3,598    5,002    2,831    3,132  

Accrued investment income

  760    691    693    733  

Deferred acquisition costs

  7,055    7,341    7,362    7,256  

Intangible assets

  647    934    692    741  

Goodwill

  1,321    1,324    1,333    1,329  

Reinsurance recoverable

  17,223    17,332    16,999    17,191  

Other assets

  958    954    988    810  

Deferred tax asset

  867    92    1,291    1,100  

Separate account assets

  11,063    11,002    11,452    11,666  
            

Total assets

 $114,700   $108,187   $112,347   $112,395  
            

Liabilities and stockholders’ equity

    

Liabilities:

    

Future policy benefits

 $30,758   $29,469   $31,177   $30,717  

Policyholder account balances

  27,714    28,470    26,115    26,978  

Liability for policy and contract claims

  6,448    6,567    7,327    6,933  

Unearned premiums

  4,492    4,714    4,563    4,541  

Other liabilities ($166 and $— other liabilities related to securitization entities)

  6,949    6,298  

Borrowings related to securitization entities ($44 at fair value)

  502    —    

Other liabilities ($145 and $150 other liabilities related to securitization entities)

  5,637    6,085  

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

  452    494  

Non-recourse funding obligations

  3,437    3,443    3,374    3,437  

Short-term borrowings

  730    930  

Long-term borrowings

  4,373    3,641    4,755    4,952  

Deferred tax liability

  2,163    303    1,937    1,621  

Separate account liabilities

  11,063    11,002    11,452    11,666  
            

Total liabilities

  98,629    94,837    96,789    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 September 30, 2010 and December 31, 2009, respectively; 490 million and 489 million shares outstanding as of September 30, 2010 and December 31, 2009, respectively

  1    1  

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 579 million and 578 million shares issued as of June 30, 2011 and December 31, 2010, respectively; 491 million and 490 million shares outstanding as of June 30, 2011 and December 31, 2010, respectively

  1    1  

Additional paid-in capital

  12,084    12,034    12,110    12,095  
            

Accumulated other comprehensive income (loss):

    

Net unrealized investment gains (losses):

    

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

  730    (1,151  352    21  

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

  (143  (247)  (116  (121
            

Net unrealized investment gains (losses)

  587    (1,398  236    (100
            

Derivatives qualifying as hedges

  1,354    802    943    924  

Foreign currency translation and other adjustments

  543    432    883    668  
            

Total accumulated other comprehensive income (loss)

  2,484    (164  2,062    1,492  

Retained earnings

  3,133    3,105    2,959    2,973  

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

  (2,700  (2,700

Treasury stock, at cost (88 million shares as of June 30, 2011 and December 31, 2010)

  (2,700  (2,700
            

Total Genworth Financial, Inc.’s stockholders’ equity

  15,002    12,276    14,432    13,861  

Noncontrolling interests

  1,069    1,074    1,126    1,110  
            

Total stockholders’ equity

  16,071    13,350    15,558    14,971  
            

Total liabilities and stockholders’ equity

 $114,700   $108,187   $112,347   $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

  —      —      260    (275  —      (15  —      (15

Repurchase of subsidiary shares

  —      —      —      —      —      —      (131  (131  —      —      —      —      —      —      (71  (71

Comprehensive income (loss):

                

Net income (loss)

  —      —      —      303    —      303    108    411    —      —      —      (14  —      (14  70    56  

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

  —      —      1,621    —      —      1,621    28    1,649    —      —      331    ��      —      331    5    336  

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

  —      —      104    —      —      104    —      104    —      —      5    —      —      5    —      5  

Derivatives qualifying as hedges

  —      —      552    —      —      552    —      552    —      —      19    —      —      19    —      19  

Foreign currency translation and other adjustments

  —      —      111    —      —      111    22    133    —      —      215    —      —      215    36    251  
                    

Total comprehensive income (loss)

         2,849           667  

Dividends to noncontrolling interests

  —      —      —      —      —      —      (32  (32  —      —      —      —      —      —      (24  (24

Stock-based compensation expense and exercises and other

  —      30    —      —      —      30    —      30    —      15    —      —      —      15    —      15  

Other capital transactions

  —      20    —      —      —      20    —      20  
                                                

Balances as of September 30, 2010

 $1   $12,084   $2,484   $3,133   $(2,700 $15,002   $1,069   $16,071  

Balances as of June 30, 2011

 $1   $12,110   $2,062   $2,959   $(2,700 $14,432   $1,126   $15,558  
                                                

Balances as of December 31, 2008

 $1   $11,477   $(3,062 $3,210   $(2,700 $8,926   $—     $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    —      6    —      —      91    (104  —      (13  —      (13

Initial sale of subsidiary shares to noncontrolling interests

  —      (85  (60  —      —      (145  828    683  

Additional sale of subsidiary shares to noncontrolling interests

  —      (3  (12  —      —      (15  99    84  

Issuance of common stock

  —      622    —      —      —      622    —      622  

Comprehensive income (loss):

                

Net income (loss)

  —      —      —      (500  —      (500  26    (474

Net income

  —      —      —      220    —      220    69    289  

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

  —      —      3,027    —      —      3,027    19    3,046    —      —      1,268    —      —      1,268    9    1,277  

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

  —      —      (19  —      —      (19  —      (19  —      —      68    —      —      68    —      68  

Derivatives qualifying as hedges

  —      —      (148  —      —      (148  —      (148  —      —      360    —      —      360    —      360  

Foreign currency translation and other adjustments

  —      —      646    —      —      646    56    702    —      —      (292  —      —      (292  (15  (307
                    

Total comprehensive income (loss)

         3,107           1,687  

Dividends to noncontrolling interests

  —      —      —      —      —      —      (21  (21

Stock-based compensation expense and exercises and other

  —      17    —      —      —      17    —      17    —      24    —      —      —      24    —      24  

Other capital transactions

  —      20    —      —      —      20    —      20  
                                                

Balances as of September 30, 2009

 $1   $12,028   $23   $3,065   $(2,700 $12,417   $1,028   $13,445  

Balances as of June 30, 2010

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

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

  Nine months ended
September 30,
   Six months ended
June 30,
 
  2010 2009   2011 2010 

Cash flows from operating activities:

      

Net income (loss)

  $411   $(474

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

   

Amortization of fixed maturity discounts and premiums

   (11  103  

Net income

  $56   $289  

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

   

Amortization of fixed maturity discounts and premiums and limited partnerships

   (53  5  

Net investment losses (gains)

   104    945     68    209  

Charges assessed to policyholders

   (367  (332   (327  (233

Acquisition costs deferred

   (610  (540   (449  (392

Amortization of deferred acquisition costs and intangibles

   590    602     382    363  

Deferred income taxes

   (111  (634   (85  (173

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

   113    (4

Gain on sale of subsidiary

   —      (4

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

   79    119  

Stock-based compensation expense

   31    17     16    23  

Change in certain assets and liabilities:

      

Accrued investment income and other assets

   (31  (135   (83  24  

Insurance reserves

   1,767    2,153     1,281    1,208  

Current tax liabilities

   (313  55     5    (211

Other liabilities and other policy-related balances

   (597  102     (48  (674
              

Net cash from operating activities

   976    1,854     842    557  
              

Cash flows from investing activities:

      

Proceeds from maturities and repayments of investments:

      

Fixed maturity securities

   3,302    3,157     3,069    2,057  

Commercial mortgage loans

   493    519     411    263  

Restricted commercial mortgage loans related to securitization entities

   40    —       49    27  

Proceeds from sales of investments:

      

Fixed maturity and equity securities

   3,329    3,343     1,893    2,393  

Purchases and originations of investments:

      

Fixed maturity and equity securities

   (10,223  (5,091   (5,183  (6,867

Commercial mortgage loans

   (35  —       (142  (23

Other invested assets, net

   1,483    122     (28  1,491  

Policy loans, net

   (77  426     (71  (64

Net cash transferred related to the sale of a subsidiary

   —      (90

Payments for businesses purchased, net of cash acquired

   (4  —    
              

Net cash from investing activities

   (1,688  2,386     (6  (723
              

Cash flows from financing activities:

      

Deposits to universal life and investment contracts

   1,832    1,801     1,221    1,174  

Withdrawals from universal life and investment contracts

   (2,950  (6,669   (2,123  (1,734

Short-term borrowings and other, net

   (86  (363   137    (285

Repayment and repurchase of long-term borrowings

   (6  (809

Proceeds from the issuance of long-term borrowings

   660    —    

Redemption of non-recourse funding obligations

   (6  (12

Redemption and repurchase of non-recourse funding obligations

   (45  (6

Proceeds from the issuance of long-term debt

   545    660  

Repayment and repurchase of long-term debt

   (760  —    

Repayment of borrowings related to securitization entities

   (46  —       (49  (31

Proceeds from issuance of common stock

   —      622  

Proceeds from the sale of subsidiary shares to noncontrolling interests

   —      771  

Repurchase of subsidiary shares

   (131  —       (71  —    

Dividends paid to noncontrolling interests

   (32  —       (24  (21
              

Net cash from financing activities

   (765  (4,659   (1,169  (243

Effect of exchange rate changes on cash and cash equivalents

   73    235     32    (7
              

Net change in cash and cash equivalents

   (1,404  (184   (301  (416

Cash and cash equivalents at beginning of period

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

Cash and cash equivalents at end of period

  $3,598   $7,144    $2,831   $4,586  
              

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 life and long-term care insurance. Additionally, we offer other Medicare 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 variablefixed deferred and immediate individual annuities. We previously offered variable deferred annuities 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. 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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 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

Scope Exception for Embedded Credit Derivatives

On JulyJanuary 1, 2010,2011, we adopted new accounting guidance related to embedded credit derivatives.goodwill impairment testing when a reporting unit’s carrying value is zero or negative. This accounting guidance clarified 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 onedid not impact our consolidated financial instrument to another would not be subject to the bifurcation requirements. Accordingly,statements upon adoption, we were required to bifurcate embedded credit derivatives that no longer qualified under the amended scope exception. In conjunction with our adoption, we elected fair value option for certain fixed maturity securities. On July 1, 2010, we recorded a net cumulative effect adjustment of $171 million to retained earnings with an offset to accumulated other comprehensive income (loss) of $169 million. The following summarizes the components for the cumulative effect adjustment:

(Amounts in millions)

  Accumulated other
comprehensive
income (loss)
  Retained
earnings
  Total stockholders’
equity
 

Investment securities

  $267   $(267 $—    

Adjustment to deferred acquisition costs

   (4  1    (3

Adjustment to sales inducements

   (1  1    —    

Provision for income taxes

   (93  94    1  
             

Net cumulative effect adjustment

  $169   $(171 $(2
             

For certain securities where the embedded credit derivative would require bifurcation, we elected the fair value option to carry the entire instrument at fair value to reduce the cost of calculating and recording the fair value of the embedded derivative feature separate from the debt security. Additionally, we elected the fair value option for a portionas all of our other asset-backed securities for operational ease and to record and present the securities at fair value in future periods. Upon electing fair value option on July 1, 2010, these securities were reclassified into the trading category included in other invested assets and had a fair value of $407 million. Prior to electing fair value option, these securities were classified as available-for-sale fixed maturity securities.

Accounting for Transfers of Financial Assetsreporting units with goodwill balances have positive carrying values.

On January 1, 2010,2011, we adopted new accounting guidance related to accounting for transfershow investments held through separate accounts affect an insurer’s consolidation analysis of financial assets. This accounting guidance amended the previous guidance on transfers 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 required that these entities be considered for consolidation as a result of the new guidance related to variable interest entities (“VIEs”) as discussed below.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 requiredrelated 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.

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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 recorded 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.

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 October 2010,June 2011, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance requiring presentation of the components of net income (loss), the components of other comprehensive income (loss) (“FASB”OCI”) and total comprehensive income either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. This new accounting guidance is effective for us on January 1, 2012. We do not expect the adoption of this accounting guidance to have a material impact on our consolidated financial results.

In May 2011, the FASB issued new accounting guidance for fair value measurements. This new accounting guidance clarifies existing fair value measurement requirements and changes certain fair value measurement principles and disclosure requirements that will be effective for us on January 1, 2012. We have not yet determined the impact this accounting guidance will have on our consolidated financial statements.

In April 2011, the FASB issued new accounting guidance for troubled debt restructurings. This new accounting guidance and related disclosures will be effective for us on July 1, 2011. The adoption of this accounting guidance will not have a material impact on our consolidated financial statements.

In April 2011, the FASB issued new accounting guidance for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removes the requirement to consider a transferor’s ability to fulfill its contractual rights from the criteria when determining effective control and is effective, for us, prospectively to any transactions occurring on or after January 1, 2012. We do not expect the adoption of this accounting guidance to have a material impact on our consolidated financial statements.

In October 2010, the FASB issued new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This new accounting guidance will be effective for us on January 1, 2012. When adopted, we expect to defer fewer costs. The new guidance is effective prospectively with retrospective adoption allowed. We have not yet determined the method nor impact this accounting guidance will have on our consolidated financial statements.

In July 2010, 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 this new accounting guidance will be effective for us on December 31, 2010 with certain other additional disclosures that will be effective for us on March 31, 2011. We do not expect the adoption of this new accounting guidance to have a material impact on our consolidated financial statements.

In April 2010, the FASB issued new accounting guidance on how investments held through separate accounts affect an insurer’s consolidation analysis of those investments. 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)

 

In January 2010,retrospective adoption allowed. We intend to adopt this new guidance retrospectively. We have not yet determined 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 newimpact this 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.

(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
September 30,
   Nine months ended
September 30,
   Three months ended
June 30,
   Six months ended
June 30,
 

(Amounts in millions, except per share amounts)

      2010           2009           2010           2009           2011         2010       2011 2010 

Net income (loss)

  $122    $45    $411    $(474  $(60 $77    $56   $289  

Less: net income attributable to noncontrolling interests

   39     26     108     26    36    35     70    69  
                  

 

  

 

   

 

  

 

 

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

  $83    $19    $303    $(500  $(96 $42    $(14 $220  
                  

 

  

 

   

 

  

 

 

Basic per common share:

              

Net income (loss)

  $0.25    $0.10    $0.84    $(1.08  $(0.12 $0.16    $0.11   $0.59  

Less: net income attributable to noncontrolling interests

   0.08     0.06     0.22     0.06     0.07    0.07     0.14    0.14  
                  

 

  

 

   

 

  

 

 

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

  $0.17    $0.04    $0.62    $(1.14  $(0.20 $0.09    $(0.03 $0.45  
                  

 

  

 

   

 

  

 

 

Diluted per common share:

              

Net income (loss)

  $0.25    $0.10    $0.83    $(1.08  $(0.12 $0.16    $0.11   $0.59  

Less: net income attributable to noncontrolling interests

   0.08     0.06     0.22     0.06     0.07    0.07     0.14    0.14  
                  

 

  

 

   

 

  

 

 

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

  $0.17    $0.04    $0.61    $(1.14  $(0.20 $0.08    $(0.03 $0.45  
                  

 

  

 

   

 

  

 

 

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

   489.5     448.9     489.1     438.5  

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

   490.6    489.1     490.4    489.0  

Potentially dilutive securities:

              

Stock options, restricted stock units and stock appreciation rights

   4.4     2.7    4.8     —       —      5.1     —      4.9  
                  

 

  

 

   

 

  

 

 

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

   493.9     451.6     493.9     438.5  

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

   490.6    494.2     490.4    493.9  
                  

 

  

 

   

 

  

 

 

 

(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 available to Genworth Financial, Inc.’s common stockholders for the ninethree and six months ended SeptemberJune 30, 2009,2011, we were required to use basic weighted-average common shares outstanding in the calculation offor the three and six months ended June 30, 2011 diluted loss per share, for the nine months ended September 30, 2009, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.33.7 million and 4.0 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.’s common stockholders for the ninethree and six months ended SeptemberJune 30, 2009,2011, dilutive potential common shares would have been 439.8 million.494.3 million and 494.4 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
September 30,
  Nine months ended
September 30,
 

(Amounts in millions)

     2010          2009          2010          2009     

Fixed maturity securities—taxable

 $658   $610   $1,930   $1,837  

Fixed maturity securities—non-taxable

  14    27    46    85  

Commercial mortgage loans

  95    106    298    329  

Restricted commercial mortgage loans related to securitization entities (1)

  10    —      30    —    

Equity securities

  4    6    11    12  

Other invested assets

  24    4    61    (102

Restricted other invested assets related to securitization entities(1)

  1    —      2    —    

Policy loans

  28    19    83    115  

Cash, cash equivalents and short-term investments

  6    9    15    40  
                

Gross investment income before expenses and fees

  840    781    2,476    2,316  

Expenses and fees

  (25  (22  (73  (65
                

Net investment income

 $815   $759   $2,403   $2,251  
                

(1)

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

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

(Amounts in millions)

      2011          2010      2011  2010 

Fixed maturity securities—taxable

  $693   $646   $1,363   $1,272  

Fixed maturity securities—non-taxable

   10    16    21    32  

Commercial mortgage loans

   92    99    184    203  

Restricted commercial mortgage loans related to securitization entities

   9    10    19    20  

Equity securities

   10    5    13    7  

Other invested assets

   55    39    89    37  

Restricted other invested assets related to securitization entities

   —      —      —      1  

Policy loans

   30    28    59    55  

Cash, cash equivalents and short-term investments

   6    4    12    9  
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross investment income before expenses and fees

   905    847    1,760    1,636  

Expenses and fees

   (24  (24  (49  (48
  

 

 

  

 

 

  

 

 

  

 

 

 

Net investment income

  $881   $823   $1,711   $1,588  
  

 

 

  

 

 

  

 

 

  

 

 

 

(b) Net Investment Gains (Losses)

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

 

 Three months ended
September 30,
 Nine months ended
September 30,
   Three months ended
June 30,
 Six months ended
June 30,
 

(Amounts in millions)

     2010         2009         2010         2009            2011          2010       2011     2010   

Available-for-sale securities:

         

Realized gains on sale

 $38   $122   $114   $172  

Realized losses on sale

  (35  (81  (109  (192

Realized gains

  $25   $53   $54   $76  

Realized losses

   (34  (36  (65  (74
              

 

  

 

  

 

  

 

 

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

  3    41    5    (20

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

   (9  17    (11  2  
              

 

  

 

  

 

  

 

 

Impairments:

         

Total other-than-temporary impairments

  (7  (285  (108  (1,358   (28  (24  (59  (101

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

  (30  89    (60  413  

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

   2    (27  (3  (30
              

 

  

 

  

 

  

 

 

Net other-than-temporary impairments

  (37  (196  (168  (945   (26  (51  (62  (131
              

 

  

 

  

 

  

 

 

Trading securities

  23    16    25    15     14    (4  25    2  

Commercial mortgage loans

  (9  (8  (31  (19   2    (18  1    (22

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

  30    —      (6  —       (5  (47  5    (36

Derivative instruments(2)(1)

  94    19    48    12     (15  (38  (25  (46

Other

  1    6    23    12     (1  2    (1  22  
              

 

  

 

  

 

  

 

 

Net investment gains (losses)

 $105   $(122 $(104 $(945  $(40 $(139 $(68 $(209
              

 

  

 

  

 

  

 

 

 

(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 months ended SeptemberJune 30, 2011 and 2010 and 2009 was $275$294 million and $354$858 million, respectively, which was approximately 89%91% and 84%96%, respectively, of book value. The aggregate fair value of securities sold at a loss during the ninesix months ended SeptemberJune 30, 2011 and 2010 and 2009 was $1,691$691 million and $1,091$1,416 million, respectively, which was approximately 94%93% and 86%95%, respectively, of book value.

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”)OCI as of or for the periods indicated:

 

   As of or for the
three months ended
September 30,
 

(Amounts in millions)

      2010          2009     

Cumulative credit loss beginning balance

  $978   $1,085  

Additions:

   

Other-than-temporary impairments not previously recognized

   13    25  

Increases related to other-than-temporary impairments previously recognized

   22    74  

Reductions:

   

Securities sold, paid down or disposed

   (126  (103

Securities where there is intent to sell

   —      (5
         

Cumulative credit loss ending balance

  $887   $1,076  
         

   As of or for the
nine months ended
September 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

   44    81  

Increases related to other-than-temporary impairments previously recognized

   100    169  

Reductions:

   

Securities sold, paid down or disposed

   (316  (373

Securities where there is intent to sell

   —      (5
         

Cumulative credit loss ending balance

  $887   $1,076  
         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

   As of or for the
three months ended
June 30,
  As of or for the
six months ended
June 30,
 

(Amounts in millions)

      2011          2010      2011  2010 

Beginning balance

  $755   $1,025   $784   $1,059  

Additions:

     

Other-than-temporary impairments not previously recognized

   1    11    4    31  

Increases related to other-than-temporary impairments previously recognized

   17    32    48    78  

Reductions:

     

Securities sold, paid down or disposed

   (47  (90  (110  (190
                 

Ending balance

  $726   $978   $726   $978  
                 

(c) Unrealized Investment Gains and Losses

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)

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

Net unrealized gains (losses) on investment securities:

      

Fixed maturity securities

  $2,075   $(2,245  $1,141   $511  

Equity securities

   15    20     21    9  

Other invested assets

   (27  (29   (24  (22
              

Subtotal

   2,063    (2,254   1,138    498  

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

   (1,057  138  

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

   (694  (583

Income taxes, net

   (352  757     (153  35  
              

Net unrealized investment gains (losses)

   654    (1,359   291    (50

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

   67    39     55    50  
              

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

  $587   $(1,398  $236   $(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:

 

  As of or for the
three months ended
September 30,
   As of or for the
three months ended
June 30,
 

(Amounts in millions)

  2010 2009       2011         2010     

Beginning balance

  $29   $(3,023  $(37 $(860

Cumulative effect of change in accounting

   169    —    

Unrealized gains (losses) arising during the period:

      

Unrealized gains (losses) on investment securities

   1,486    2,796     555    1,498  

Adjustment to deferred acquisition costs

   (187  (264   (36  (80

Adjustment to present value of future profits

   (101  (93   (15  (51

Adjustment to sales inducements

   (21  (13   (3  (10

Adjustment to benefit reserves

   (581  —       (94  —    

Provision for income taxes

   (210  (863   (142  (480
              

Change in unrealized gains (losses) on investment securities

   386    1,563     265    877  

Reclassification adjustments to net investment (gains) losses, net of taxes of $(12) and $(51)

   22    100  

Reclassification adjustments to net investment (gains) losses, net of taxes of $(13) and $(11)

   22    22  
              

Change in net unrealized investment gains (losses)

   577    1,663     287    899  

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

   (19  (41   14    10  
              

Ending balance

  $587   $(1,401  $236   $29  
              

   As of or for the
six months ended
June 30,
 

(Amounts in millions)

  2011  2010 

Beginning balance

  $(100 $(1,398

Cumulative effect of change in accounting

   —      91  

Unrealized gains (losses) arising during the period:

   

Unrealized gains (losses) on investment securities

   567    2,261  

Adjustment to deferred acquisition costs

   (57  (193

Adjustment to present value of future profits

   (16  (81

Adjustment to sales inducements

   (7  (26

Adjustment to benefit reserves

   (31  —    

Provision for income taxes

   (162  (700
         

Change in unrealized gains (losses) on investment securities

   294    1,261  

Reclassification adjustments to net investment (gains) losses, net of taxes of $(26) and $(45)

   47    84  
         

Change in net unrealized investment gains (losses)

   341    1,436  

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

   5    9  
         

Ending balance

  $236   $29  
         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

   As of or for the
nine months ended
September 30,
 

(Amounts in millions)

  2010  2009 

Beginning balance

  $(1,398 $(4,038

Cumulative effect of change in accounting

   260    (349

Unrealized gains (losses) arising during the period:

   

Unrealized gains (losses) on investment securities

   3,747    4,352  

Adjustment to deferred acquisition costs

   (381  (448

Adjustment to present value of future profits

   (182  (164

Adjustment to sales inducements

   (46  (12

Adjustment to benefit reserves

   (581  —    

Provision for income taxes

   (910  (1,328
         

Change in unrealized gains (losses) on investment securities

   1,647    2,400  

Reclassification adjustments to net investment (gains) losses, net of taxes of $(57) and $(337)

   106    627  
         

Change in net unrealized investment gains (losses)

   2,013    2,678  

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

   (28  (41
         

Ending balance

  $587   $(1,401
         

(d) Fixed Maturity and Equity Securities

As of SeptemberJune 30, 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

 $3,548   $153   $—     $(19 $—     $3,682  

Tax-exempt

  940    19    —      (94  —      865  

Government—non-U.S.

  2,265    128    —      (4  —      2,389  

U.S. corporate

  23,081    1,260    13    (307  —      24,047  

Corporate—non-U.S.

  14,038    530    —      (139  (1  14,428  

Residential mortgage-backed

  5,252    174    15    (268  (190  4,983  

Commercial mortgage-backed

  3,767    135    6    (153  (34  3,721  

Other asset-backed

  2,172    22    —      (86  (2  2,106  
                        

Total fixed maturity securities

  55,063    2,421    34    (1,070  (227  56,221  

Equity securities

  352    25    —      (3  —      374  
                        

Total available-for-sale securities

 $55,415   $2,446   $34   $(1,073 $(227 $56,595  
                        

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:

 

(Amounts in millions)

 Amortized
cost or
cost
  Gross unrealized gains Gross unrealized losses Fair
value
  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
   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

 $3,508   $414   $—     $—     $—     $3,922   $3,568   $145   $—     $(8 $—     $3,705  

Tax-exempt

  1,288    55    —      (72  —      1,271    1,124    19    —      (113  —      1,030  

Government—non-U.S.

  2,188    169    —      (5  —      2,352    2,257    118    —      (6  —      2,369  

U.S. corporate

  22,979    1,858    10    (322  —      24,525    23,282    1,123    10    (448  —      23,967  

Corporate—non-U.S.

  13,282    730    15    (209  (3  13,815    13,180    485    —      (167  —      13,498  

Residential mortgage-backed

  4,629    228    14    (312  (225  4,334    4,821    116    18    (304  (196  4,455  

Commercial mortgage-backed

  4,011    188    5    (389  (58  3,757    3,936    132    6    (286  (45  3,743  

Other asset-backed

  2,391    25    —      (34  (2  2,380    2,494    18    —      (94  (2  2,416  
                                    

Total fixed maturity securities

  54,276    3,667    44    (1,343  (288  56,356    54,662    2,156    34    (1,426  (243  55,183  

Equity securities

  208    18    —      (3  —      223    323    13    —      (4  —      332  
                                    

Total available-for-sale securities

 $54,484   $3,685   $44   $(1,346 $(288 $56,579   $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 SeptemberJune 30, 2010:2011:

 

 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

 $1,002   $(19  43   $—     $—      —     $1,002   $(19  43  

Tax-exempt

 $—     $—      —     $277   $(72  92    114    (3  31    253    (91  88    367    (94  119  

Government—non-U.S.

  141    (4  32    21    (1  2    189    (3  58    11    (1  5    200    (4  63  

U.S. corporate

  631    (17  89    2,572    (305  199    2,933    (94  337    1,712    (213  150    4,645    (307  487  

Corporate—non-U.S.

  836    (20  130    1,443    (192  109    1,896    (65  276    854    (75  78    2,750    (140  354  

Residential mortgage-backed

  170    (2  46    1,051    (535  432    450    (19  92    884    (439  373    1,334    (458  465  

Commercial mortgage-backed

  78    (1  16    1,135    (446  239    361    (17  51    1,034    (170  180    1,395    (187  231  

Other asset-backed

  287    (1  19    470    (35  53    113    (5  20    343    (83  39    456    (88  59  
                                             

Subtotal, fixed maturity securities

  2,143    (45  332    6,969    (1,586  1,126    7,058    (225  908    5,091    (1,072  913    12,149    (1,297  1,821  

Equity securities

  34    (3  18    —      —      —      83    (2  54    10    (1  10    93    (3  64  
                                             

Total for securities in an unrealized loss position

 $2,177   $(48  350   $6,969   $(1,586  1,126   $7,141   $(227  962   $5,101   $(1,073  923   $12,242   $(1,300  1,885  
                                             

% Below cost—fixed maturity securities:

               

<20% Below cost

 $2,139   $(42  311   $5,128   $(375  603   $6,969   $(190  883   $3,966   $(354  544   $10,935   $(544  1,427  

20-50% Below cost

  3    (1  8    1,593    (714  310  

20%-50% Below cost

  89    (34  20    986    (432  249    1,075    (466  269  

>50% Below cost

  1    (2  13    248    (497  213    —      (1  5    139    (286  120    139    (287  125  
                                             

Total fixed maturity securities

  2,143    (45  332    6,969    (1,586  1,126    7,058    (225  908    5,091    (1,072  913    12,149    (1,297  1,821  
                                             

% Below cost—equity securities:

               

<20% Below cost

  28    (1  17    —      —      —      78    (1  53    10    (1  10    88    (2  63  

20-50% Below cost

  6    (2  1    —      —      —    

20%-50% Below cost

  5    (1  1    —      —      —      5    (1  1  

>50% Below cost

  —      —      —      —      —      —      —      —      —    
                                             

Total equity securities

  34    (3  18    —      —      —      83    (2  54    10    (1  10    93    (3  64  
                                             

Total for securities in an unrealized loss position

 $2,177   $(48  350   $6,969   $(1,586  1,126   $7,141   $(227  962   $5,101   $(1,073  923   $12,242   $(1,300  1,885  
                                             

Investment grade

 $2,070   $(43  294   $5,224   $(796  689   $6,837   $(217  863   $3,616   $(505  527   $10,453   $(722  1,390  

Below investment grade

  107    (5  56    1,745    (790  437  

Not rated—fixed maturity securities

  —      —      —      —      —      —    

Not rated—equity securities

  —      —      —      —      —      —    

Below investment grade(3)

  304    (10  99    1,485    (568  396    1,789    (578  495  
                                             

Total for securities in an unrealized loss position

 $2,177   $(48  350   $6,969   $(1,586  1,126   $7,141   $(227  962   $5,101   $(1,073  923   $12,242   $(1,300  1,885  
                                             

The investment

(1)

Amounts included $222 million of unrealized losses on other-than-temporarily impaired securities.

(2)

Amounts included $227 million of unrealized losses on other-than-temporarily impaired securities.

(3)

Amounts that have been in a continuous loss position for 12 months or more included $208 million of unrealized losses on other-than-temporarily impaired securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As indicated in the table above, the majority of the securities in ana continuous unrealized loss position as of September 30, 2010 consisted of 1,476 securities and accounted for unrealized losses of $1,634 million. Of these unrealized losses of $1,634 million, 51%less than 12 months were investment grade (rated “AAA” through “BBB-”) and 26% were less than 20% below cost. The securities less than 20% below costThese unrealized losses were primarily attributable to credit spreads that have widened since acquisition for certain mortgage-backedcorporate securities across various industry sectors, including finance and asset-backedinsurance as well as transportation. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 3% as of June 30, 2011.

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

Of the $354 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB” and approximately 75% of the unrealized losses were related to investment grade securities as of June 30, 2011. These unrealized losses were attributable to the widening of credit spreads for these securities since acquisition, primarily associated with corporate securities in the finance and insurance sector. Included insector as well as mortgaged-back and asset-backed securities. The average fair value percentage below cost for these unrealized lossessecurities was approximately 8% as of SeptemberJune 30, 2010 was $288 million of unrealized losses on other-than-temporarily impaired securities. Of the total unrealized losses on other-than-temporarily impaired2011. See below for additional discussion related to fixed maturity securities $286 millionthat have been in a continuous loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by asset class as of June 30, 2011:

  Investment Grade 
  20% to 50%  Greater than 50% 

(Dollar amounts in millions)

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

Fixed maturity securities:

        

Tax-exempt

 $184   $(78  6  55   $—     $—      —    —    

Government—non-U.S.

  2    (1  —      1    —      —      —      —    

U.S. corporate

  77    (30  2    4    14    (26  2    1  

Corporate—non-U.S.

  66    (20  2    4    —      —      —      —    

Structured securities:

        

Residential mortgage-backed

  56    (23  2    21    12    (27  2    14  

Commercial mortgage-backed

  80    (30  2    9    2    (3  —      5  

Other asset-backed

  4    (1  —      1   1    (1  —      1  
                                

Total structured securities

  140    (54  4    31    15    (31  2    20  
                                

Total

 $469   $(183  14  95   $29   $(57  4  21  
                                

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  Below Investment Grade 
  20% to 50%  Greater than 50% 

(Dollar amounts in millions)

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

Fixed maturity securities:

        

Tax-exempt

 $—     $—      —    —     $—     $—      —    —    

U.S. corporate

  14    (6  —      2    —      —      —      —    

Structured securities:

        

Residential mortgage-backed

  342    (168  13   124    82    (184  14    81  

Commercial mortgage-backed

  61    (22  2    23    17    (33  3    16  

Other asset-backed

  100    (53  4    5    11    (12  1    2  
                                

Total structured securities

  503    (243  19    152    110    (229  18    99  
                                

Total

 $517   $(249  19  154   $110   $(229  18  99  
                                

For all securities in an unrealized loss position, we expect to recover the 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. See below for further discussion of gross unrealized losses by asset class.

Tax-Exempt Securities

As indicated in the table above, $78 million of gross unrealized losses were related to tax-exempt securities that have been in a continuous unrealized loss position for more than 12 months.months and were more than 20% below cost. The unrealized losses for tax-exempt securities represent municipal bonds that were diversified by state as well as municipality or political subdivision within those states. Of these tax-exempt securities, the average unrealized loss was approximately $1 million which represented an average of 30% below cost. The unrealized losses primarily related to widening of credit spreads on these securities since acquisition as a result of higher risk premiums being attributed to these securities from uncertainty in many political subdivisions related to special revenues supporting these obligations as well as certain securities having longer duration that may be viewed as less desirable in the current market place. Additionally, the fair value of certain of these securities has been negatively impacted as a result of having certain bond insurers associated with the security. In our analysis of impairment for these securities, we expect to recover our amortized cost from the cash flows of the underlying securities before any guarantee support. However, the existence of these guarantees may negatively impact the value of the debt security in certain instances. We performed an analysis of these securities and the underlying activities that are expected to support the cash flows and determined we expect to recover our amortized cost.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

Corporate Debt Securities

OfThe following tables present the concentration of gross unrealized losses of $1,634 million, $1,020 million were related to structured securities and $395 million werefair values related to corporate securities in the finance and insurance sector. Of the remaining gross unrealized losses of $219 million, $77 million were related to tax-exempt and government—non-U.S. securities and $142 million were primarily related to other corporatedebt fixed maturity securities that were spread evenly across all other sectors with no individual sector exceeding $28 million.

Of the $1,020 million unrealized lossesmore than 20% below cost and in structured securities, 53% were in residential mortgage-backed securities and 44% were in commercial mortgage-backed securities with the remainder in other asset-backed securities. Approximately 39% 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 unrealizeda continuous loss position for 12 months or more. Given ongoing concern aboutmore by industry as of June 30, 2011:

  Investment Grade 
  20% to 50%  Greater than 50% 

(Dollar amounts in millions)

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

Industry:

        

Finance and insurance

 $139   $(49  4  7   $—     $—      —    —    

Transportation

  —      —      —      —      14    (26  2    1  

Other

  4    (1  —      1    —      —      —      —    
                                

Total

 $143   $(50  4  8   $14   $(26  2  1  
                                

  Below Investment Grade 
  20% to 50%  Greater than 50% 

(Dollar amounts in millions)

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

Industry:

        

Finance and insurance

 $14   $(6  —    2   $—     $—      —    —    

Consumer – cyclical

  —      —      —      —      —      —      —      —    

Transportation

  —      —      —      —      —      —      —      —    
                                

Total

 $14   $(6  —    2   $—     $—      —    —    
                                

Of the housing market and unemployment,total unrealized losses of $82 million for corporate fixed maturity securities presented in the fair valuepreceding tables, $55 million, or 67%, 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 September 30, 2010.

Of the $395 million unrealized lossesrelated to issuers 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.that were 26% below cost on average. 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 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 SeptemberJune 30, 2010. A subset2011. Of the $55 million of unrealized losses related to the securities issued by banksfinance and other financial institutions represent investments ininsurance industry, $28 million related to financial hybrid securities on which a debt impairment model was employed. Most of theseour hybrid securities retainretained a credit rating of investment grade. The majority of these securities were issued by foreign financial institutions. The fair value of these 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. We continue to receive our contractual payments and expect to fully recover our amortized cost.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As presented in the table above, we also had one security related to the transportation industry that had a total unrealized loss of $26 million that was 65% below cost as of June 30, 2011. The remaining unrealized lossesissuer of this security has diverse holdings in long-term franchises on toll roads, bridges and tunnels in economically important regions. Our security holding represented a senior interest that benefits from structural enhancements that protect our rights to the issuer’s cash flows. In our evaluation of the issuer, we believed there were sufficient assets and cash flows for the issuer to continue to make their contractual payments and that resulted in our U.S. and non-U.S.conclusion that we will recover the amortized cost despite the fair value of this security being greater than 50% below cost.

We expect that our investments in corporate securities were evenly distributed across all other major industry typeswill continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is at least reasonably possible that compriseissuers of our investments in corporate bond holdings.securities will perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of corporate securities in the future.

Structured Securities

Of the investment$557 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more as of September 30, 2010, 523 securitiesand were more than 20% or more below cost, of which 323$192 million related to other-than-temporarily-impaired securities were also below investment grade (rated “BB+” and below) and accounted forwhere the unrealized losses represented the non-credit portion of $701 million. These securities were primarilythe impairment. The extent and duration of the unrealized loss position on our structured securities oris due to the ongoing concern and uncertainty about the residential and commercial real estate market and unemployment, resulting in credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been significantly impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the housing market.

While we considered the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of the underlying collateral. Our examination of the historical performance of the securitization trust included consideration of the following factors for each class of securities issued by corporations in the financetrust: i) the payment history, including failure to make scheduled payments; ii) current payment status; iii) current and insurance sector. Includedhistorical outstanding balances; iv) current levels of subordination and losses incurred to-date; and v) characteristics of the underlying collateral. Our examination of the historical performance of the underlying collateral included: i) historical default rates, delinquency rates, voluntary and involuntary prepayments and severity of losses, including recent trends in this amount are other-than-temporarily impaired securities whereinformation; ii) current payment status; iii) loan to collateral value ratios, as applicable; iv) vintage; and v) other underlying characteristics such as current financial condition.

We used our assessment of the non-credit losshistorical performance of $228 million was recorded in OCI.

While certain securities included inboth the preceding table were considered other-than-temporarily impaired, we expectsecuritization trust and the underlying collateral for each security, along with third-party sources, when available, to recover the new amortized cost based ondevelop our best estimate of cash flows expected to be collected. We do not intendThese estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to selldetermine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and it is not more likelydirectly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.

Based on this evaluation, the present value of expected cash flows was greater than notor equal to the amortized cost for each security. Accordingly, we determined that we will be required to sell thesethe unrealized losses on each of our structured securities prior to recovering our amortized cost.represented temporary impairments as of June 30, 2011.

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-backedstructured securities and mortgage-backedfuture write-downs within our portfolio of structured securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

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.

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   $8,359   $(226  1,076   $4,852   $(418  588   $13,211   $(644  1,664  

20-50% Below cost

   267     (137  91     2,637     (1,246  455  

20%-50% Below cost

  22    (8  18    1,428    (652  328    1,450    (660  346  

>50% Below cost

   76     (180  96     485     (950  284    —      (2  6    174    (363  168    174    (365  174  
                                                 

Total 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  
                                                 

% Below cost—equity securities:

                   

<20% Below cost

   2     (1  3     11     (1  5    72    (2  47    5    (1  4    77    (3  51  

>50% Below cost

   —       —      —       1     (1  4  

20%-50% Below cost

  5   (1)  1    —      —      —      5   (1)  1 
                                                 

Total 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  
                                                 

Investment grade

  $8,391    $(320  891    $10,897    $(2,122  1,390   $8,249   $(231  1,060   $4,850   $(764  683   $13,099   $(995  1,743  

Below investment grade

   391     (243  219     1,936     (838  413  

Below investment grade(3)

  209    (8  88    1,609    (670  405    1,818    (678  493  
                                                 

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  
                                                 

(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.

(3)

Amounts that have been in a continuous loss position for 12 months or more included $213 million of unrealized losses on other-than-temporarily impaired securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

The scheduled maturity distribution of fixed maturity securities as of SeptemberJune 30, 20102011 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

  $2,591    $2,613    $2,831    $2,857  

Due after one year through five years

   12,156     12,562     11,766     12,103  

Due after five years through ten years

   8,818     9,454     9,570     10,031  

Due after ten years

   19,680     21,256     19,705     20,420  
                

Subtotal

   43,245     45,885     43,872     45,411  

Residential mortgage-backed

   4,629     4,334     5,252     4,983  

Commercial mortgage-backed

   4,011     3,757     3,767     3,721  

Other asset-backed

   2,391     2,380     2,172     2,106  
                

Total

  $54,276    $56,356    $55,063    $56,221  
                

As of SeptemberJune 30, 2010, $4,9852011, $4,505 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of SeptemberJune 30, 2010,2011, securities issued by finance and insurance, utilities and energy, and consumer—non-cyclical industry groups represented approximately 24%22%, 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 SeptemberJune 30, 2010,2011, 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)

(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:

 

   September 30, 2010  December 31, 2009 

(Amounts in millions)

  Carrying
value
  % of
total
  Carrying
value
  % of
total
 

Property Type

     

Retail

  $2,015    29 $2,115    28

Office

   1,897    27    2,025    27  

Industrial

   1,861    27    1,979    26  

Apartments

   776    11    832    11  

Mixed use/other

   437    6    590    8  
                 

Total principal balance

   6,986    100  7,541    100
           

Unamortized balance of loan origination fees and costs

   5     6   

Allowance for losses

   (62   (48 
           

Total(1)

  $6,929    $7,499   
           

(1)

Included held-for-sale mortgage loans of $17 million as of December 31, 2009. 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 mortgage loans in other invested assets.

   September 30, 2010  December 31, 2009 

(Amounts in millions)

  Carrying
value
  % of
total
  Carrying
value
  % of
total
 

Geographic Region

     

Pacific

  $1,857    27 $2,005    27

South Atlantic

   1,593    23    1,711    23  

Middle Atlantic

   935    13    1,005    13  

East North Central

   657    9    728    10  

Mountain

   591    9    650    9  

New England

   484    7    492    6  

West North Central

   374    5    389    5  

West South Central

   306    4    331    4  

East South Central

   189    3    230    3  
                 

Total principal balance

   6,986    100  7,541    100
                 

Unamortized balance of loan origination fees and costs

   5     6   

Allowance for losses

   (62   (48 
           

Total(1)

  $6,929    $7,499   
           

(1)

Included held-for-sale mortgage loans of $17 million as of December 31, 2009. 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 mortgage loans in other invested assets.

“Impaired” loans are defined by U.S. GAAP as 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.

   June 30, 2011  December 31, 2010 

(Amounts in millions)

  Carrying
value
  % of
total
  Carrying
value
  % of
total
 

Property type:

     

Retail

  $1,912    30 $1,974    29

Office

   1,757    27    1,850    27  

Industrial

   1,753    27    1,788    26  

Apartments

   718    11    725    11  

Mixed use/other

   345    5    435    7  
                 

Subtotal

   6,485    100  6,772    100
           

Unamortized balance of loan origination fees and costs

   4     5   

Allowance for losses

   (57   (59 
           

Total

  $6,432    $6,718   
           

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

   June 30, 2011  December 31, 2010 

(Amounts in millions)

  Carrying
value
  % of
total
  Carrying
value
  % of
total
 

Geographic region:

     

South Atlantic

  $1,624    25 $1,583    23

Pacific

   1,615    25    1,769    26  

Middle Atlantic

   865    13    937    14  

East North Central

   577    9    612    9  

Mountain

   516    8    540    8  

New England

   422    7    482    7  

West North Central

   349    5    369    6  

West South Central

   348    5    297    4  

East South Central

   169    3    183    3  
                 

Subtotal

   6,485    100  6,772    100
           

Unamortized balance of loan origination fees and costs

   4     5   

Allowance for losses

   (57   (59 
           

Total

  $6,432    $6,718   
           

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

   June 30, 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

  $9   $—     $5  $14   $1,898   $1,912  

Office

   4    —      18    22    1,735    1,757  

Industrial

   2    —      10    12    1,741    1,753  

Apartments

   —      —      —      —      718    718  

Mixed use/other

   —      —      —      —      345    345  
                         

Total recorded investment

  $15   $—     $33   $48   $6,437   $6,485  
                         

% of total commercial mortgage loans

   —    —    1  1  99  100
                         

   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 recorded investment

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

% of total commercial mortgage loans

   —    —    1  1  99  100
                         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Under these principles, we may have two typesAs of “impaired” loans: loans requiring specific allowances for losses ($14 million for the nine months ended SeptemberJune 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 nine months ended September 30, 2010 and for the year ended December 31, 2009).

Average investment in specifically impaired loans was $5 million and $10 million as of September 30, 20102011 and December 31, 2009,2010, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest.

During 2011 and 2010, we modified or extended 11 and 13, respectively, commercial mortgage loans with a total carrying value of $36 million and there was no$98 million, respectively. All of these modifications or extensions were based on current market interest income recognizedrates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.

The following table sets forth the commercial mortgage loans on thesenonaccrual status by property type as of the dates indicated:

(Amounts in millions)

  June 30,
2011
   December 31,
2010
 

Property type:

    

Retail

  $5    $—    

Office

   18     12  

Industrial

   10     27  

Apartments

   —       —    

Mixed use/other

   —       —    
  

 

 

   

 

 

 

Total recorded investment

  $33    $39  
  

 

 

   

 

 

 

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans while they were considered impaired.for the periods indicated:

(Amounts in millions)

  Three months ended
June 30, 2011
  Six months ended
June 30, 2011
 

Allowance for credit losses:

   

Beginning balance

  $58   $59  

Charge-offs

   (4  (5

Recoveries

   —      —    

Provision

   3    3  
  

 

 

  

 

 

 

Ending balance

  $57   $57  
  

 

 

  

 

 

 

Ending allowance for individually impaired loans

  $—     $—    
  

 

 

  

 

 

 

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

  $57   $57  
  

 

 

  

 

 

 

Recorded investment:

   

Ending balance

  $6,485   $6,485  
  

 

 

  

 

 

 

Ending balance of individually impaired loans

  $13   $13  
  

 

 

  

 

 

 

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

  $6,472   $6,472  
  

 

 

  

 

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the activity in the allowance for losses duringfor the periods indicated:

 

(Amounts in millions)

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

Beginning balance

  $70   $48   $52    $48  

Provision(1)

   5    27    18     22  

Release(1)

   (13  (13  —       —    
        

 

   

 

 

Ending balance

  $62   $62   $70    $70  
        

 

   

 

 

 

(1)

Included $13 million related to held-for-sale commercial mortgage loans that were sold in the third quarter of 2010.loans.

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

   June 30, 2011 

(Amounts in millions)

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

Property type:

            

Retail

  $3    $4    $1    $—      $2    $—    

Office

   10     13     3     —      $10     —    

Industrial

   —       —       —       —      $—       —    

Apartments

   —       —       —       —      $—       —    

Mixed use/other

   —       —       —       —      $—       —    
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total

  $13    $17    $4    $—      $6    $—    
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

   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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 loan-to-value of commercial mortgage loans by property type as of the dates indicated:

   June 30, 2011 

(Amounts in millions)

  0% – 50%  51% – 60%  61% – 75%  76% – 100%  Greater
than 100% 
(1)
  Total 

Property type:

       

Retail

  $458   $247   $847   $322   $38   $1,912  

Office

   321    294    605    365    172    1,757  

Industrial

   498    329    613    283    30    1,753  

Apartments

   147    191    304    61    15    718  

Mixed use/other

   83    40    72    140    10    345  
                         

Total recorded investment

  $1,507   $1,101   $2,441   $1,171   $265   $6,485  
                         

% of total

   23  17  38  18  4  100
                         

Weighted-average debt service coverage ratio

   2.28    1.86    2.16    1.80    1.56    2.05  
                         

(1)

Included $13 million of impaired loans and $252 million of loans in good standing, with a total weighted-average loan-to-value of 119%, where borrowers continued to make timely payments and have no history of delinquencies or distress.

   December 31, 2010 

(Amounts in millions)

  0% – 50%  51% – 60%  61% – 75%  76% – 100%  Greater
than 100% 
(1)
  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 recorded investment

  $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  
                         

(1)

Included $25 million of impaired loans and $267 million of loans in good standing, with a total weighted-average loan-to-value of 117%, where borrowers continued to make timely payments and have no history of delinquencies or distress.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

   June 30, 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

  $92   $357   $412   $587   $352   $1,800  

Office

   194    135    268    432    553    1,582  

Industrial

   242    226    316    596    355    1,735  

Apartments

   12    91    79    301    168    651  

Mixed use/other

   56    17    11    71    91    246  
                         

Total recorded investment

  $596   $826   $1,086   $1,987   $1,519   $6,014  
                         

% of total

   10  14  18  33  25  100
                         

Weighted-average loan-to-value

   84  72  66  60  51  63
                         

   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 recorded investment

   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:

   June 30, 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

  $—     $—     $1  $—     $111   $112  

Office

   —      —      8   —      167    175  

Industrial

   1    —      —      6    11    18  

Apartments

   —      —      —      29    38    67  

Mixed use/other

   —      4    —      —      95    99  
                         

Total recorded investment

  $1   $4   $9  $35   $422   $471  
                         

% of total

   —    1  2  7  90  100
                         

Weighted-average loan-to-value

   47  77  26  77  79  77
                         

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

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

Office

   —      —      —      57    122    179  

Industrial

   1    5    —      1    19    26  

Apartments

   —      4    —      21    46    71  

Mixed use/other

   —      —      —      —      185    185  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recorded investment

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

% of total

   —    2  —    14  84  100
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted-average loan-to-value

   30  62  —    83  77  78
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

( f )(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:

 

  September 30, 2010   June 30, 2011 December 31, 2010 

(Amounts in millions)

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

Property Type

   

Property type:

     

Retail

  $190    36  $175    38 $182    36

Industrial

   128    25     113    24    124    24  

Office

   120    23     101    22    117    23  

Apartments

   64    12     62    14    64    13  

Mixed use/other

   22    4     8    2    22    4  
         

 

  

 

  

 

  

 

 

Total principal balance

   524    100

Subtotal

   459    100  509    100
        

 

   

 

 

Allowance for losses

   (2    (2   (2 
       

 

   

 

  

Total

  $522     $457    $507   
       

 

   

 

  
  June 30, 2011 December 31, 2010 

(Amounts in millions)

  Carrying
value
 % of
total
 Carrying
value
 % of
total
 

Geographic region:

     

South Atlantic

  $160    35 $189    37

Pacific

   77    17    90    18  

Middle Atlantic

   71    15    70    14  

East North Central

   48    10    51    10  

Mountain

   31    7    32    6  

East South Central

   30    7    32    6  

West North Central

   29    6    31    6  

West South Central

   12    3    13    3  

New England

   1    —      1    —    
  

 

  

 

  

 

  

 

 

Subtotal

   459    100  509    100
   

 

   

 

 

Allowance for losses

   (2   (2 
  

 

   

 

  

Total

  $457    $507   
  

 

   

 

  

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

   September 30, 2010 

(Amounts in millions)

  Carrying
value
  % of
total
 

Geographic Region

   

South Atlantic

  $193    37

Pacific

   92    18  

Middle Atlantic

   71    14  

East North Central

   54    10  

Mountain

   36    7  

East South Central

   32    6  

West North Central

   32    6  

West South Central

   13    2  

New England

   1    —    
         

Total principal balance

   524    100
      

Allowance for losses

   (2 
      

Total

  $522   
      

See note 7Of our restricted commercial mortgage loans as of June 30, 2011, $457 million were current, $1 million were 61 to 90 days past due and $1 million were past due for additional informationmore than 90 days and still accruing interest. As of December 31, 2010, all restricted commercial mortgage loans were current and there were no restricted commercial mortgage loans on nonaccrual status.

As of June 30, 2011 and December 31, 2010, loans not individually impaired that were evaluated collectively for impairment were $458 million and $509 million, respectively, of the total recorded investment of restricted commercial mortgage loans of $459 million and $509 million, respectively. There was no provision for credit losses recorded during the three months ended June 30, 2011 or 2010 related to consolidatedrestricted commercial mortgage loans. There was no provision for credit losses recorded during the six months ended June 30, 2011 related to restricted commercial mortgage loans. A provision for credit losses of $2 million was recorded during the six months ended June 30, 2010 related to restricted commercial mortgage loans, which reflected our ending allowance for credit losses balance and was required upon consolidation of securitization entities.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 mortgage 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 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.

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

   June 30, 2011 

(Amounts in millions)

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

Property type:

       

Retail

  $147   $25   $—     $—     $3   $175  

Industrial

   97    8    6    —      2    113  

Office

   87    7    5    1    1    101  

Apartments

   34    9    —      19    —      62  

Mixed use/other

   8    —      —      —      —      8  
                         

Total recorded investment

  $373   $49   $11   $20   $6   $459  
                         

% of total

   82  11  2  4  1  100
                         

Weighted-average debt service coverage ratio

   1.74    1.46    1.26    0.93    0.47    1.65  
                         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   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 recorded investment

  $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  
                         

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:

   June 30, 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

  $7   $48   $66   $21   $33   $175  

Industrial

   20    24    27    11    31    113  

Office

   12    12    39    25    13    101  

Apartments

   12    10    20    15    5    62  

Mixed use/other

   —      —      3    —      5    8  
                         

Total recorded investment

  $51   $94   $155   $72   $87   $459  
                         

% of total

   11  21  34  15  19  100
                         

Weighted-average loan-to-value

   63  39  37  43  31  40
                         

   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

  $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 recorded investment

  $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
                         

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

There were no floating rate restricted commercial mortgage loans as of June 30, 2011 or December 31, 2010.

(g) Restricted Other Invested Assets Related To Securitization Entities

OurWe 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). 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 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” 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)STATEMENTS

(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
  September 30,
2010
 December 31,
2009
 Balance
sheet
classification
  September 30,
2010
 December 31,
2009
   June 30,
2011
 December 31,
2010
 June 30,
2011
 December 31,
2010
 

Derivatives designated as hedges

          

Cash flow hedges:

            

Interest rate swaps

  
 
Other invested
assets
  
  
 $821   $72    
 
Other
liabilities
 
  
 $5   $114   Other invested assets $264   $222   Other liabilities $62   $56  

Inflation indexed swaps

  
 
Other invested
assets
  
  
  7    —      
 
Other
liabilities
 
  
  5    21   Other invested assets  —      —     Other liabilities  61    33  

Foreign currency swaps

  

 

Other invested

assets

  

  

  180    101    
 
Other
liabilities
 
  
  —      —     Other invested assets  —      205   Other liabilities  —      —    
                            

Total cash flow hedges

   1,008    173     10    135     264    427     123    89  
                            

Fair value hedges:

            

Interest rate swaps

  
 
Other invested
assets
 
  
  117    132    
 
Other
liabilities
 
  
  10    15   Other invested assets  69    95   Other liabilities  4    8  

Foreign currency swaps

  
 
Other invested
assets
 
  
  31    24    
 
Other
liabilities
 
  
  —      —     Other invested assets  46    35   Other liabilities  —      —    
                            

Total fair value hedges

   148    156     10    15     115    130     4    8  
                            

Total derivatives designated as hedges

   1,156    329     20    150     379    557     127    97  
                            

Derivatives not designated as hedges

            

Interest rate swaps

  
 
Other invested
assets
 
  
  454    505    
 
Other
liabilities
 
  
  57    59   Other invested assets  386    446   Other liabilities  21    74  

Equity return swaps

  
 
Other invested
assets
 
  
  —      —      
 
Other
liabilities
 
  
  6    —     Other invested assets  6    —     Other liabilities  1    3  

Interest rate swaps related to securitization entities (1)

  
 
 
 
Restricted
other
invested
assets
 
  
 
  
  —      —      
 
Other
liabilities
 
  
  34    —     Restricted other invested assets  —      —     Other liabilities  18    19  

Interest rate swaptions

  
 
Other invested
assets
 
  
  8    54    
 
Other
liabilities
 
  
  —      67   Other invested assets  —      —     Other liabilities  —      —    

Credit default swaps

  
 
Other invested
assets
 
  
  4    11    
 
Other
liabilities
 
  
  9    3   Other invested assets  9    11   Other liabilities  9    7  

Credit default swaps related to securitization entities (1)

  
 
 
 
Restricted
other
invested
assets
 
  
 
  
  —      —      
 
Other
liabilities
 
  
  130    —     Restricted other invested assets  —      —     Other liabilities  126    129  

Equity index options

  
 
Other invested
assets
 
  
  61    39    
 
Other
liabilities
 
  
  —      2   Other invested assets  40    33   Other liabilities  —      3  

Financial futures

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

Other foreign currency contracts

  
 
Other invested
assets
 
  
  —      8    
 
Other
liabilities
 
  
  3   —     Other invested assets  —      —     Other liabilities  12    —    

Reinsurance embedded derivatives(2)(1)

  Other assets    4    —      
 
Other
liabilities
 
  
  —      —     Other assets  —      1   Other liabilities  1    —    

GMWB embedded derivatives

  

 

Reinsurance

recoverable (3)

  

  

  4    (5  

 

 

Policyholder

account

balances (4)

  

  

  

  316    175   Reinsurance recoverable (2)  (5  (5 Policyholder account balances (3)  113    121  
                            

Total derivatives not designated as hedges

   535    612     555    306     436    486     301    356  
                            

Total derivatives

  $1,691   $941    $575   $456    $815   $1,043    $428   $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
 September 30, 2010  

Measurement

  December 31,
2010
   Additions   Maturities/
terminations
 June 30, 2011 

Derivatives designated as hedges

             

Cash flow hedges:

             

Interest rate swaps

  Notional   $9,479   $1,382   $(209 $10,652   Notional  $12,355    $995    $(157 $13,193  

Inflation indexed swaps

  Notional    376    157    (10  523   Notional   525     16     —      541  

Foreign currency swaps

  Notional    491    —      —      491   Notional   491     —       (491)  —    
                             

Total cash flow hedges

   10,346    1,539    (219  11,666      13,371     1,011     (648  13,734  
                             

Fair value hedges:

             

Interest rate swaps

  Notional    2,366    —      (281  2,085   Notional   1,764     —       (405  1,359  

Foreign currency swaps

  Notional    85    —      —      85   Notional   85     —       —      85  
                             

Total fair value hedges

   2,451    —      (281  2,170      1,849     —       (405  1,444  
                             

Total derivatives designated as hedges

   12,797    1,539    (500  13,836      15,220     1,011     (1,053  15,178  
                             

Derivatives not designated as hedges

             

Interest rate swaps

  Notional    6,474    4,057    (2,569  7,962   Notional   7,681     314     (1,550  6,445  

Equity return swaps

  Notional    —      200    —      200   Notional   208     139     —      347  

Interest rate swaps related to securitization entities

  Notional    —      138    (6  132   Notional   129     —       (6  123  

Interest rate swaptions

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

Credit default swaps

  Notional    1,090    100    —      1,190   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    564    (614  862   Notional   744     521     (480  785  

Financial futures

  Notional    5,822    5,579    (6,817  4,584   Notional   3,937     2,687     (3,463  3,161  

Other foreign currency contracts

  Notional    521    132   (73  580   Notional   521     185     (535  171  

Reinsurance embedded derivatives

  Notional    —      52    —      52   Notional   72     89     —      161  
                             

Total derivatives not designated as hedges

   19,919    11,344    (15,184  16,079      15,004     4,050     (6,334  12,720  
                             

Total derivatives

  $32,716   $12,883   $(15,684 $29,915     $30,224    $5,061    $(7,387 $27,898  
                             

(Number of policies)

 

Measurement

  December 31,
2010
   Additions   Terminations June 30, 2011 

Derivatives not designated as hedges

        

GMWB embedded derivatives

 Policies   49,566     690     (1,326  48,930  

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(Number of policies)

 Measurement  December 31, 2009  Additions  Terminations  September 30, 2010 

Derivatives not designated as hedges

     

GMWB embedded derivatives

  Policies    47,543    3,089    (1,882  48,750  

Approximately $1.1 billion$125 million 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 $186$1 million as of SeptemberJune 30, 2010.

GENWORTH FINANCIAL, INC.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 SeptemberJune 30, 2010:2011:

 

(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 (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

 $299   $4   Net investment income $8   Net investment gains (losses)

Interest rate swaps hedging assets

  —      1   Net investment gains (losses)  —     Net investment gains (losses) $113   $(6 Net investment income $2   Net investment gains (losses)

Interest rate swaps hedging liabilities

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

Foreign currency swaps

  2    (1 Interest expense  —     Net investment gains (losses)  1    (4 Interest expense  —     Net investment gains (losses)
    ��                  

Total

 $301   $4    $8    $114   $(9  $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 SeptemberJune 30, 2009:2010:

 

(Amounts in millions)

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

from OCI (1)
 

Classification of gain
(loss) reclassified into
net income (loss)

 Gain (loss)
recognized in
net income (loss) 
(2)
 

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

 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

 $99   $2   

Net investment

income

 $(2 

Net investment

gains (losses)

 $599   $4   Net investment income $15   Net investment gains (losses)

Interest rate swaps hedging assets

  —      —     

Net investment

gains (losses)

  —     

Net investment

gains (losses)

Foreign currency swaps

  —      (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

  3    —     Interest expense  1   

Net investment

gains (losses)

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

Total

 $102   $1   $(1  $602   $3    $15   
                      

 

(1)

Amounts include $(1) million of gains reclassified into net income (loss) for cash flow hedges that were terminated or de-designated where the effective portion is reclassified into net income (loss) when the underlying hedge item affects net income (loss).

(2)

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)STATEMENTS

(Unaudited)

 

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

 

(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 (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

 $862   $12   Net investment income $20   Net investment gains (losses)

Interest rate swaps hedging assets

  —      2   Net investment gains (losses)  —     Net investment gains (losses) $12   $(11 Net investment income $—     Net investment gains (losses)

Interest rate swaps hedging liabilities

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

Foreign currency swaps

  9    (5 Interest expense  —     Net investment gains (losses)  4    (5 Interest expense  —     Net investment gains (losses)
                      

Total

 $868   $10    $20    $16   $(15  $—     
                      

 

(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 ninesix months ended SeptemberJune 30, 2009:2010:

 

(Amounts in millions)

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

Classification of gain
(loss) reclassified into
net income (loss)

 Gain (loss)
recognized in
net income (loss) 
(2)
 

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

 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

 $(223 $10   Net investment income $(12 

Net investment

gains (losses)

 $563   $8   Net investment income $12   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

  —      (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

  (10  (8 Interest expense  1   

Net investment

gains (losses)

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

Total

 $(233 $6    $(11  $567   $6    $12   
                      

 

(1)

Amounts include $4 million of gains reclassified into net income (loss) for cash flow hedges that were terminated or de-designated where the effective portion is reclassified into net income (loss) when the underlying hedge item affects net income (loss).

(2)

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 total of derivatives designated as cash flow hedges of $1.4 billion,$943 million, net of taxes, recorded in stockholders’ equity as of SeptemberJune 30, 20102011 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, $6$23 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 ninesix months ended SeptemberJune 30, 20102011 in connection with forecasted transactions that were no longer considered probable of occurring.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 SeptemberJune 30, 2010:2011:

 

 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 (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

 $—     Net investment gains (losses) $(4 Net investment income $(1 Net investment gains (losses) $1   Net investment gains (losses) $(2 Net investment income $(1 Net investment gains (losses)

Interest rate swaps hedging liabilities

  (4 Net investment gains (losses)  25   Interest credited  4   Net investment gains (losses)  (7 Net investment gains (losses)  17   Interest credited  7   Net investment gains (losses)

Foreign currency swaps

  11   Net investment gains (losses)  —     Interest credited  (10 Net investment gains (losses)  11   Net investment gains (losses)  —     Interest credited  (11 Net investment gains (losses)
                        

Total

 $7    $21    $(7  $5    $15    $(5 
                        

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 SeptemberJune 30, 2009:2010:

 

 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 (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

 $1   

Net investment

gains (losses)

 $(4 Net investment income $—     Net investment gains (losses) $1   Net investment gains (losses) $(3 Net investment income $(1 Net investment gains (losses)

Interest rate swaps hedging liabilities

  14   

Net investment

gains (losses)

  26   Interest credited  (14 Net investment gains (losses)  (6 Net investment gains (losses)  25   Interest credited  6   Net investment gains (losses)

Foreign currency swaps

  3   Net investment gains (losses)  —     Interest credited  (4 Net investment gains (losses)  (2 Net investment gains (losses)  1   Interest credited  2   Net investment gains (losses)
                        

Total

 $18    $22    $(18  $(7  $23    $7   
                        

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

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

 

 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 (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) $(10 Net investment income $(3 Net investment gains (losses) $2   Net investment gains (losses) $(5 Net investment income $(2 Net investment gains (losses)

Interest rate swaps hedging liabilities

  (11 Net investment gains (losses)  75   Interest credited  11   Net investment gains (losses)  (29 Net investment gains (losses)  37   Interest credited  29   Net investment gains (losses)

Foreign currency swaps

  7   Net investment gains (losses)  2   Interest credited  (6 Net investment gains (losses)  11   Net investment gains (losses)  1   Interest credited  (12 Net investment gains (losses)
                        

Total

 $(2  $67    $2    $(16  $33    $15   
                        

The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the ninesix months ended SeptemberJune 30, 2009:2010:

 

 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 (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

 $7   Net investment gains (losses) $(12 Net investment income $(10 Net investment gains (losses) $2   Net investment gains (losses) $(6 Net investment income $(2 Net investment gains (losses)

Interest rate swaps hedging liabilities

  (45 Net investment gains (losses)  68   Interest credited  48   Net investment gains (losses)  (7 Net investment gains (losses)  50   Interest credited  7   Net investment gains (losses)

Foreign currency swaps

  (10 Net investment gains (losses)  1   Interest credited  7   Net investment gains (losses)  (4 Net investment gains (losses)  2   Interest credited  4   Net investment gains (losses)
                        

Total

 $(48  $57    $45    $(9  $46    $9   
                        

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; and (vii) equity index options and credit default swaps

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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.

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 September 30,  

Classification of gain (loss) recognized

in net income (loss)

(Amounts in millions)

      2010          2009      

Interest rate swaps

  $36   $(52 Net investment gains (losses)

Interest rate swaps related to securitization entities(1)

   (12  —     Net investment gains (losses)

Interest rate swaptions

   4    85   Net investment gains (losses)

Credit default swaps

   22    15   Net investment gains (losses)

Credit default swaps related to securitization entities (1)

   30    —     Net investment gains (losses)

Equity index options

   (55  (49 Net investment gains (losses)

Equity return swaps

   (6  —     Net investment gains (losses)

Financial futures

   (43  (106 Net investment gains (losses)

Inflation indexed swaps

   —      —     Net investment gains (losses)

Other foreign currency contracts

   (8  (5 Net investment gains (losses)

Reinsurance embedded derivatives

   2    —     Net investment gains (losses)

GMWB embedded derivatives

   133    133   Net investment gains (losses)
          

Total derivatives not designated as hedges

  $103   $21   
          

(1)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

  Three months ended June 30,  

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

(Amounts in millions)

        2011                2010         

Interest rate swaps

 $2   $63   Net investment gains (losses)

Equity return swaps

  (6  —     Net investment gains (losses)

Interest rate swaps related to securitization entities

  (4  (9 Net investment gains (losses)

Interest rate swaptions

  —      35   Net investment gains (losses)

Credit default swaps

  —      (32 Net investment gains (losses)

Credit default swaps related to securitization entities

  (4  (46 Net investment gains (losses)

Equity index options

  (9  50   Net investment gains (losses)

Financial futures

  34    105   Net investment gains (losses)

Other foreign currency contracts

  (4  2   Net investment gains (losses)

Reinsurance embedded derivatives

  (1  2   Net investment gains (losses)

GMWB embedded derivatives

  (33  (278 Net investment gains (losses)
         

Total derivatives not designated as hedges

 $(25 $(108 
         

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:

 

  Nine months ended September 30, 

Classification of gain (loss) recognized

in net income (loss)

 Six months ended June 30, 

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

(Amounts in millions)

      2010         2009          2011         2010     

Interest rate swaps

  $93   $194   Net investment gains (losses) $4   $57   Net investment gains (losses)

Interest rate swaps related to securitization entities(1)

   (24  —     Net investment gains (losses)

Equity return swaps

  (10  —     Net investment gains (losses)

Interest rate swaps related to securitization entities

  (3  (12 Net investment gains (losses)

Interest rate swaptions

   61    (494 Net investment gains (losses)  —      57   Net investment gains (losses)

Credit default swaps

   (5  36   Net investment gains (losses)  3    (27 Net investment gains (losses)

Credit default swaps related to securitization entities(1)

   (11  —     Net investment gains (losses)

Credit default swaps related to securitization entities

  5    (41 Net investment gains (losses)

Equity index options

   (32  (104 Net investment gains (losses)  (28  23   Net investment gains (losses)

Equity return swaps

   (6  —     Net investment gains (losses)

Financial futures

   29    (190 Net investment gains (losses)  (5  72   Net investment gains (losses)

Inflation indexed swaps

   —      (4 Net investment gains (losses)

Foreign currency swaps

   —      6   Net investment gains (losses)

Other foreign currency contracts

   (9  5   Net investment gains (losses)  (13  (1 Net investment gains (losses)

Reinsurance embedded derivatives

   4    —     Net investment gains (losses)  (1  2   Net investment gains (losses)

GMWB embedded derivatives

   (109  573   Net investment gains (losses)  26    (242 Net investment gains (losses)
               

Total derivatives not designated as hedges

  $(9 $22    $(22 $(112 
               

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)

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

Derivative Counterparty Credit Risk

As of SeptemberJune 30, 20102011 and December 31, 2009,2010, net fair value assets by counterparty totaled $1.6 billion$691 million and $739$888 million, respectively. As of SeptemberJune 30, 20102011 and December 31, 2009,2010, net fair value liabilities by counterparty totaled $169$186 million and $74$172 million, respectively. As of SeptemberJune 30, 20102011 and December 31, 2009,2010, we retained collateral of $1.6 billion$704 million and $647$794 million, respectively, related to these agreements, including over collateralization of $100$86 million and $10$29 million, respectively, from certain counterparties. As of SeptemberJune 30, 20102011 and December 31, 2009,2010, we posted $4$23 million and $121$30 million, respectively, of collateral to derivative counterparties, including zero over collateralization for September 30, 2010 and over collateralization of $46$1 million for December 31, 2009.and $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 SeptemberJune 30, 20102011 and December 31, 2009,2010, we could have been allowed to claim up to $106$73 million and $102$123 million, respectively, from counterparties and required to disburse up to $2$20 million and $1$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)

(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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:

 

  September 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

  6    —      —      5    —      —    

Matures after five years through ten years

  5    —      —      —      —      —    

A

      

Matures after one year through five years

  37    1    —      32    1    —    

Matures after five years through ten years

  5    —      —      10    —      —    

BBB

      

Matures after one year through five years

  68    1    —      73    1    —    

Matures after five years through ten years

  29    —      —      29    —      —    
                        

Total credit default swaps on single name reference entities

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

   June 30, 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     1     —       68     2     —    

Matures after five years through ten years

   24     —       —       29     —       —    
                              

Total credit default swaps on single name reference entities

  $155    $2    $—      $155    $3    $—    
                              

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:

 

  September 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   $—     $5  $50   $—     $—    

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

  —      —      —      250    1    1  

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

  250    —      1   —      —      —    

10% – 15% matures after five years through ten years(4)

  —      —      —      250    —      2  

12% – 22% matures after five years through ten years (5)

  248    —      3   248    4    —    

15% – 30% matures after five years through ten years(6)

  127    1    —      127    2    —    
                        

Total credit default swap index tranches

  925    1    9   925    7    3  
                        

Customized credit default swap index tranches related to securitization entities:

      

Portion backing third-party borrowings maturing 2017 (7)

  17    —      8    —      —      —    

Portion backing our interest maturing 2017(8)

  300    —      122    —      —      —    
                        

Total customized credit default swap index tranches related to securitization entities

  317    —      130    —      —      —    
                        

Total credit default swaps on index tranches

 $1,242   $1   $139   $925   $7   $3  
                        
   June 30, 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    $4    $300    $—      $3  

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

   250     3     —       250     4     —    

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

   248     —       5     248     —       4  

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

   127     —       —       127     2     —    
                              

Total credit default swap index tranches

   925     4     9     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     —       119     300     —       121  
                              

Total customized credit default swap index tranches related to securitization entities

   317     —       126     317     —       129  
                              

Total credit default swaps on index tranches

  $1,242    $4    $135    $1,242    $6    $136  
                              

 

(1)

The current attachment/detachment as of SeptemberJune 30, 20102011 and December 31, 20092010 was 9% – 12%.

(2)

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

(3)

The current attachment/detachment as of September 30, 2010 was 10% – 15%.

(4)

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

(5)(3)

The current attachment/detachment as of SeptemberJune 30, 20102011 and December 31, 20092010 was 12% – 22%.

(6)(4)

The current attachment/detachment as of SeptemberJune 30, 20102011 and December 31, 20092010 was 14.8% – 30.3%.

(7)(5)

Original notional value was $39 million.

(8)(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:

   September 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(1)

  $—      $—      $—      $100    $100    $96  

BBB

            

Matures after five years through ten years(2)

   —       —       —       100     100     76  

BB

            

Matures after five years through ten years(2)

   —       —       —       200     228     148  
                              

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

  $—      $—      $—      $400    $428    $320  
                              

(1)

The amounts in 2009 related to securities that were reclassified to the trading category on July 1, 2010 as a result of adopting new accounting guidance related to embedded credit derivatives.

(2)

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)STATEMENTS

(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.

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

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

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

Other invested assetsassets.. 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, and limited partnerships accounted for under the cost method.

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

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

Non-recourse funding obligationsobligations.. 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 entitiesentities.. Based on market quotes or comparable market transactions.

Investment contractscontracts.. 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)STATEMENTS

(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)

  September 30, 2010   December 31, 2009   June 30, 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)  $6,929    $7,136    $ (1)  $7,499    $7,213    $ (1)  $6,432    $6,742    $ (1)  $6,718    $6,896  

Restricted commercial mortgage loans (2)

    (1)   522     574      (1)   —       —        (1)   457     506      (1)   507     554  

Other invested assets

    (1)   329     332      (1)   1,766     1,769      (1)   282     293      (1)   267     272  

Liabilities:

                    

Short-term borrowings(3)

    (1)   730     730      (1)   930     930  

Long-term borrowings(3)

    (1)   4,373     4,363      (1)   3,641     3,291  

Non-recourse funding obligations(3)

    (1)   3,437     2,199      (1)   3,443     1,674  

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

    (1)   458     491      (1)   —       —    

Long-term borrowings(2)

    (1)   4,755     4,766      (1)   4,952     4,928  

Non-recourse funding obligations(2)

    (1)   3,374     2,339      (1)   3,437     2,170  

Borrowings related to securitization entities

    (1)   394     417      (1)   443     467  

Investment contracts

    (1)   20,596     21,621      (1)   21,515     21,743      (1)   18,728     19,365      (1)   19,772     20,471  

Performance guarantees, principally letters of credit

   74    —       —       117    —       —    

Other firm commitments:

                    

Commitments to fund limited partnerships

   121    —       —       194    —       —       90    —       —       110    —       —    

Ordinary course of business lending commitments

   44    —       —       —      —       —       49    —       —       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.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 discussconsider 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.

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)STATEMENTS

(Unaudited)

 

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

 

  June 30, 2011 

(Amounts in millions)

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

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

                

Pricing services

  $3,905    $—      $3,905    $—      $3,669    $—      $3,669    $—    

Internal models

   17     —       3     14     13     —       —       13  
                                

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

   3,922     —       3,908     14     3,682     —       3,669     13  
                                

Tax-exempt:

                

Pricing services

   1,271     —       1,271     —       865     —       865     —    
                                

Total tax-exempt

   1,271     —       1,271     —       865     —       865     —    
                                

Government—non-U.S.:

                

Pricing services

   2,322     —       2,322     —       2,378     —       2,378     —    

Internal models

   30     —       11     19     11     —       10     1  
                                

Total government—non-U.S.

   2,352     —       2,333     19     2,389     —       2,388     1  
                                

U.S. corporate:

                

Pricing services

   21,038     —       21,038     —       20,787     —       20,787     —    

Broker quotes

   286     —       —       286     277     —       —       277  

Internal models

   3,201     —       2,158     1,043     2,983     —       2,311     672  
                                

Total U.S. corporate

   24,525     —       23,196     1,329     24,047     —       23,098     949  
                                

Corporate—non-U.S.:

                

Pricing services

   11,831     —       11,734     97     12,568     —       12,568     —    

Broker quotes

   148     —       —       148     86     —       —       86  

Internal models

   1,836     —       1,478     358     1,774     —       1,489     285  
                                

Total corporate—non-U.S.

   13,815     —       13,212     603     14,428     —       14,057     371  
                                

Residential mortgage-backed:

                

Pricing services

   4,202     —       4,202     —       4,859     —       4,859     —    

Broker quotes

   59     —       —       59     63     —       —       63  

Internal models

   73     —       —       73     61     —       —       61  
                                

Total residential mortgage-backed

   4,334     —       4,202     132     4,983     —       4,859     124  
                                

Commercial mortgage-backed:

                

Pricing services

   3,706     —       3,706     —       3,678     —       3,678     —    

Broker quotes

   23     —       —       23     16     —       —       16  

Internal models

   28     —       4     24     27     —       —       27  
                                

Total commercial mortgage-backed

   3,757     —       3,710     47     3,721     —       3,678     43  
                                

Other asset-backed:

                

Pricing services

   2,207     —       2,207     —       1,840     —       1,840     —    

Broker quotes

   142     —       —       142     265     —       —       265  

Internal models

   31     —       7     24     1     —       1     —    
                                

Total other asset-backed

   2,380     —       2,214     166     2,106     —       1,841     265  
                                

Total fixed maturity securities

  $56,356    $—      $54,046    $2,310    $56,221    $—      $54,455    $1,766  
                                

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 September 30, 2010:the dates indicated:

 

  June 30, 2011 

(Amounts in millions)

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

Pricing services

  $206    $22    $184    $—      $268    $260    $8    $—    

Broker quotes

   7     —       —       7     6     —       —       6  

Internal models

   10     —       —       10     100     —       —       100  
                                

Total equity securities

  $223    $22    $184    $17    $374    $260    $8    $106  
                                
  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 September 30, 2010:the dates indicated:

 

  June 30, 2011 

(Amounts in millions)

  Total   Level 1   Level 2   Level 3 

Pricing services

  $316    $—      $316    $—    

Broker quotes

   291     —       —       291  
                

Total trading securities

  $607    $—      $316    $291  
                
  December 31, 2010 

(Amounts in millions)

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

Pricing services

  $336    $—      $336    $—      $348    $—      $348    $—    

Broker quotes

   157     —       —       157     230     —       —       230  

Internal models

   208     —       —       208     99     —       —       99  
                                

Total trading securities

  $701    $—      $336    $365    $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 equity indexforward 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.

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, foreign equity index 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,and foreign equity index volatility inputs, 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.income (loss). 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. Prior to the third quarter of 2010, the discount rate was based on the swap curve, which incorporated the non-performance risk of our GMWB liabilities. Beginning in 2009, the swap curve dropped below the U.S. Treasury curve at certain points on the longer end of the curve, and in 2010, the points below the U.S. Treasury curve expanded to several points beyond 10 years. For these points on the curve, we utilized the U.S. Treasury curve as our discount 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 SeptemberJune 30, 2011 and December 31, 2010, the impact of non-performance risk resulted in a lower fair value of our GMWB liabilities of $70$44 million. As of December 31, 2009, the impact of non-performance risk on our GMWB valuation was not material.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

To determine 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 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. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the 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:

 

  September 30, 2010   June 30, 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

  $3,922    $—      $3,908    $14    $3,682   $—      $3,669   $13  

Tax-exempt

   1,271     —       1,271     —       865    —       865    —    

Government—non-U.S.

   2,352     —       2,333     19     2,389    —       2,388    1  

U.S. corporate

   24,525     —       23,196     1,329     24,047    —       23,098    949  

Corporate—non-U.S.

   13,815     —       13,212     603     14,428    —       14,057    371  

Residential mortgage-backed

   4,334     —       4,202     132     4,983    —       4,859    124  

Commercial mortgage-backed

   3,757     —       3,710     47     3,721    —       3,678    43  

Other asset-backed

   2,380     —       2,214     166     2,106    —       1,841    265  
                              

Total fixed maturity securities

   56,356     —       54,046     2,310     56,221    —       54,455    1,766  
                              

Equity securities

   223     22     184     17     374    260     8    106  
                              

Other invested assets:

              

Trading securities

   701     —       336     365     607    —       316    291  

Derivative assets:

              

Interest rate swaps

   1,392     —       1,383     9     719    —       715    4  

Inflation indexed swaps

   7     —       7     —    

Foreign currency swaps

   211     —       211     —       46    —       46    —    

Interest rate swaptions

   8     —       —       8  

Credit default swaps

   4     —       3     1     9    —       5    4  

Equity index options

   61     —       —       61     40    —       —      40  

Equity return swaps

   6    —       6    —    
                              

Total derivative assets

   1,683     —       1,604     79     820    —       772    48  
                              

Securities lending collateral

   702     —       702     —       554    —       554    —    

Derivatives counterparty collateral

   156     —       156     —       522    —       522    —    
                              

Total other invested assets

   3,242     —       2,798     444    2,503    —       2,164    339  
                              

Restricted other invested assets related to securitization entities

   376     —       198     178     378    —       203    175  

Other assets(1)

   4     —       4    —       (1  —       (1  —    

Reinsurance recoverable(2)

   4     —       —       4     (5  —       —      (5

Separate account assets

   11,063     11,063     —       —       11,452    11,452     —      —    
                              

Total assets

  $71,268    $11,085    $57,230    $2,953    $70,922   $11,712    $56,829   $2,381  
                              

Liabilities

              

Policyholder account balances(3)

  $316    $—      $—      $316    $113   $—      $—     $113  

Derivative liabilities:

              

Interest rate swaps

   72     —       72     —       87    —       87    —    

Interest rate swaps related to securitization entities

   34     —       34     —       18    —       18    —    

Inflation indexed swaps

   5     —       5     —       61    —       61    —    

Credit default swaps

   9     —       —       9     9    —       —      9  

Credit default swaps related to securitization entities

   130     —       —       130     126    —       —      126  

Equity return swaps

   6     —       6     —       1    —       1    —    

Other foreign currency contracts

   3     —       3     —       12    —       12    —    
                              

Total derivative liabilities

   259     —       120     139     314    —       179    135  

Borrowings related to securitization entities

   44     —       —       44     58    —       —      58  
                              

Total liabilities

  $619    $—      $120    $499    $485   $—      $179   $306  
                              

 

(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)

 

(Amounts in millions)

  December 31, 2009 
  December 31, 2010 

(Amounts in millions)

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

Investments:

              

Fixed maturity securities:

              

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

  $2,602   $—      $2,586    $16    $3,705   $—      $3,694    $11  

Tax-exempt

   1,544    —       1,542     2     1,030    —       1,030     —    

Government—non-U.S.

   2,384    —       2,377     7     2,369    —       2,368     1  

U.S. corporate

   21,412    —       20,339     1,073     23,967    —       22,867     1,100  

Corporate—non-U.S.

   12,551    —       12,047     504     13,498    —       13,130     368  

Residential mortgage-backed

   3,227    —       1,746     1,481     4,455    —       4,312     143  

Commercial mortgage-backed

   3,617    —       59     3,558     3,743    —       3,693     50  

Other asset-backed

   2,415    —       996     1,419     2,416    —       2,148     268  
                              

Total fixed maturity securities

   49,752    —       41,692     8,060     55,183    —       53,242     1,941  
                              

Equity securities

   159    42     108     9     332    240     5     87  
                              

Other invested assets:

              

Trading securities

   174    —       29     145     677    —       348     329  

Derivative assets:

              

Interest rate swaps

   709    —       706     3     763    —       758     5  

Foreign currency swaps

   125    —       125     —       240    —       240     —    

Interest rate swaptions

   54    —       —       54  

Credit default swaps

   11    —       5     6     11    —       5     6  

Equity index options

   39    —       —       39     33    —       —       33  

Other foreign currency contracts

   8    —       —       8  
                              

Total derivative assets

   946    —       836     110     1,047    —       1,003     44  
                              

Securities lending collateral

   853    —       853     —       772    —       772     —    

Derivatives counterparty collateral

   148    —       148     —       630    —       630     —    
                              

Total other invested assets

   2,121    —       1,866     255     3,126    —       2,753     373  
                              

Restricted other invested assets related to securitization entities

   370    —       199     171  

Other assets(1)

   1    —       1     —    

Reinsurance recoverable(1)(2)

   (5  —       —       (5   (5  —       —       (5

Separate account assets

   11,002    11,002     —       —       11,666    11,666     —       —    
                              

Total assets

  $63,029   $11,044    $43,666    $8,319    $70,673   $11,906    $56,200    $2,567  
                              

Liabilities

              

Policyholder account balances(2)(3)

  $175   $—      $—      $175    $121   $—      $—      $121  

Derivative liabilities:

              

Interest rate swaps

   188    —       186     2     138    —       138     —    

Interest rate swaps related to securitization entities

   19    —       19     —    

Inflation indexed swaps

   21    —       21     —       33    —       33     —    

Interest rate swaptions

   67    —       —       67  

Credit default swap

   3    —       3     —    

Credit default swaps

   7    —       —       7  

Credit default swaps related to securitization entities

   129    —       —       129  

Equity index options

   2    —       —       2     3    —       —       3  

Equity return swaps

   3    —       3     —    
                              

Total derivative liabilities

   281    —       210     71     332    —       193     139  

Borrowings related to securitization entities

   51    —       —       51  
                              

Total liabilities

  $456   $—      $210    $246    $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.

(2)(3)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations 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.

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
April 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
June 30,
2011
  Total gains
(losses)
included in
net income
(loss)
attributable
to assets
still held
 

(Amounts in millions)

 Beginning
balance
as of
July 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
September 30,
2010
  Total gains
(losses)
included in
net income
(loss)
attributable
to assets
still held
  Included in
net
income (loss)
 Included
in OCI
 
 Included in
net income
(loss)
 Included
in OCI
 

Fixed maturity securities:

                   

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

 $9   $—     $—     $—     $5   $—     $14   $—    

Tax-exempt

  —      —      —      —      —      —      —      —    

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

 $1   $—     $—     $—     $—     $—     $—     $12   $—     $13   $—    

Government—non-U.S.

  18    —      1   —      —      —      19    —      1    —      —      —      —      —      —      —      —      1    —    

U.S. corporate(1)

  1,520    4   23    2    83    (303  1,329    4    715    4    9    27    (5  —      (18  236    (19  949    4  

Corporate—non-U.S.(1)

  720    (8  —      (8  119    (220  603    (8  202    1    —      15    (10  —      (2  165    —      371    1  

Residential mortgage- backed

  62    —      1    9    65    (5  132    —    

Commercial mortgage- backed

  59    (6  8    (15  1    —      47    —    

Other asset-backed(2)

  361    —      5    15    —      (215  166    —    

Residential mortgage-backed

  135    —      (10  3   —      —      (4  —      —      124    —    

Commercial mortgage-backed

  42    —      2    —      —      —      (1  —      —      43    —    

Other asset-backed

  263    —      7    —      —      —      (5  —      —      265    —    
                                                         

Total fixed maturity securities

  2,749    (10  38    3    273    (743  2,310    (4  1,359    5    8    45    (15  —      (30  413    (19  1,766    5  
                                                         

Equity securities

  9    11    —      (11  8    —      17    —      87    —      —      24    (5)  —      —      —      —      106    —    
                                                         

Other invested assets:

                   

Trading securities(2)

  136   7    —      9    213    —      365    7  

Trading securities

  338    7    —      —      (41)  —      (13  —      —      291    7  

Derivative assets:

                   

Interest rate swaps

  9    —      —      —      —      —      9    —      3    1    —      —      —      —      —      —      —      4    1  

Interest rate swaptions

  4    4    —      —      —      —      8    4  

Credit default swaps

  —      1    —      —      —      —      1    1    6    (2  —      —      —      —      —      —      —      4    (2)

Equity index options

  97    (54  —      18    —      —      61    (54  32    (8  —      15    —      —      1    —      —      40    (8

Other foreign currency contracts

  1    —      —      (1  —      —      —      —    
                                                         

Total derivative assets

  111    (49  —      17    —      —      79    (49  41    (9  —      15    —      —      1    —      —      48    (9
                                                         

Total other invested assets

  247    (42  —      26    213   —      444    (42  379    (2  —      15    (41  —      (12  —      —      339    (2
                                                         

Restricted other invested assets related to securitization entities (3)

  174    4    —      —      —      —      178    3  

Reinsurance recoverable(4)

  9    (7  —      2   —      —      4    (7

Restricted other invested assets related to securitization entities

  175    —      —      —      —      —      —      —      —      175    —    

Reinsurance recoverable (2)

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

Total Level 3 assets

 $3,188   $(44 $38   $20   $494   $(743 $2,953   $(50 $1,993   $4   $8   $84  $(61 $1   $(42 $413   $(19 $2,381   $4  
                                                         

 

(1)

The 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 private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out.

(2)

Transfers in for trading securities were offset by transfers out of other asset-backed securities and were driven primarily by the adoption of new accounting guidance related to embedded credit derivatives.

(3)

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

(4)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

(Amounts in millions)

 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
 
  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 

  174    (2  2    —      —      —      174    (2

Reinsurance recoverable(2)

  (6  15    —      —      —      —      9    15  
                                

Total Level 3 assets

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

 

(Amounts in millions)

 Beginning
balance
as of
July 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
September 30,
2009
  Total gains
(losses)
included in
net income
(loss)
attributable
to assets
still held
 
  Included in
net income
(loss)
  Included
in OCI
      

Fixed maturity securities:

        

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

 $357   $—     $—     $—     $4   $(356 $5   $—    

Tax exempt

  2    —      —      —      —      —      2    —    

Government—non-U.S.

  22    —      (2  (1  15   —      34    —    

U.S. corporate

  1,408    25    60    (52  387    (308  1,520    5  

Corporate—non-U.S.

  767    7    69    74    293    (178  1,032    (2

Residential mortgage-backed

  1,623    (89  200    (51  20    (44  1,659    (77

Commercial mortgage-backed

  3,128    (6  294    (34  476    (229  3,629    (6

Other asset-backed

  1,063    (1  105    (122  1    (31  1,015    (1
                                

Total fixed maturity securities

  8,370    (64  726    (186  1,196    (1,146  8,896    (81
                                

Equity securities

  61    —      1    (1  —      (1  60    —    
                                

Other invested assets:

        

Trading securities

  133    16    —      —      —      —      149    16  

Derivative assets

  286    (15  —      1    —      —      272    (11
                                

Total other invested assets

  419    1    —      1    —      —      421    5  
                                

Reinsurance recoverable

  2    (2  —      —      —      —      —      (2
                                

Total Level 3 assets

 $8,852   $(65 $727   $(186 $1,196   $(1,147 $9,377   $(78
                                
(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 change 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)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

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

(Amounts in millions)

 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
September 30,
2010
  Total gains
(losses)
included in
net income
(loss)
attributable
to assets
still held
  Included in
net
income (loss)
 Included
in OCI
 
 Included in
net income
(loss)
 Included
in OCI
 

Fixed maturity securities:

                   

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

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

Tax-exempt

  2    —      —      —      —      (2  —      —    

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

 $11   $—     $—     $—     $—     $—     $—     $12   $(10 $13   $—    

Government—non-U.S.

  7    —      2    —      16    (6  19    —      1    —      —      —      —      —      —      —      —      1    —    

U.S. corporate(1)

  1,073    15   57    33    761    (610  1,329    12    1,100    8    6    30    (5  —      (63  252    (379  949    8  

Corporate—non-U.S. (1)

  504    (7  8    3    472    (377  603    (7  368    (11  (3  40    (35  —      (7  205    (186  371    (10

Residential mortgage- backed (2)

  1,481    —      4    89    66    (1,508  132    —    

Commercial mortgage- backed(2)

  3,558    (5  22    (78  12    (3,462  47    —    

Other asset-backed (2), (3)

  1,419    (24  28    (3  10    (1,264  166    (24

Residential mortgage-backed

  143    (1  (8  3    —      —      (12  —      (1  124    (1

Commercial mortgage-backed

  50    —      2    —      —      —      (9  —      —      43    —    

Other asset-backed

  268    (1  9    8    (8  —      (26  15    —      265    (1
                                                         

Total fixed maturity securities

  8,060    (21  121    42    1,351    (7,243  2,310    (19  1,941    (5  6    81    (48  —      (117  484    (576  1,766    (4
                                                         

Equity securities

  9    11    —      (3  60    (60)  17    —      87    1    1    24    (5  —      (2  —      —      106    —    
                                                         

Other invested assets:

                   

Trading securities(3)

  145    8    —      (1  213   —      365    8  

Trading securities

  329    16    —      5    (41)  —      (18  —      —      291    16 

Derivative assets:

                   

Interest rate swaps

  3    6    —      —      —      —      9    6    5    (1  —      —      —      —      —      —      —      4    (1

Interest rate swaptions

  54    19    —      (65  —      —      8    19  

Credit default swaps

  6    (5  —      —      —      —      1    (5  6    (2  —      —      —      —      —      —      —      4    (2

Equity index options

  39    (32  —      54    —      —      61    (32  33    (27  —      39    —      —      (5  —      —      40    (27

Other foreign currency contracts

  8    (7  —      (1  —      —      —      (7
                                                         

Total derivative assets

  110    (19  —      (12  —      —      79    (19  44    (30  —      39    —      —      (5  —      —      48    (30
                                                         

Total other invested assets

  255    (11  —      (13  213    —      444    (11  373    (14  —      44    (41  —      (23  —      —      339    (14
                                                         

Restricted other invested assets related to securitization entities (4)

  —      4    —      —      174    —      178    1  

Reinsurance recoverable(5)

  (5  7    —      2    —      —      4    7  

Restricted other invested assets related to securitization entities

  171    4    —      —      —      —      —      —      —      175    4  

Reinsurance recoverable (2)

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

Total Level 3 assets

 $8,319   $(10 $121   $28   $1,798   $(7,303 $2,953   $(22 $2,567   $(16 $7   $149   $(94 $2   $(142) $484   $(576 $2,381   $(16
                                                         

 

(1)

The 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 private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out.

(2)

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.

(3)

Transfers in for trading securities were offset by transfers out of other asset-backed securities and were driven primarily by the adoption of new accounting guidance related to embedded credit derivatives.

(4)

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

(5)

Represents embedded derivatives associated with the reinsured portion of our GMWB 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 
(1)
  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    —      174    —      174    (2

Reinsurance recoverable(2)

  (5  14    —      —      —      —      9    14  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Level 3 assets

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

Our assessment of whether or not there were significant unobservable inputs 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
(1)

During 2010, primary 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 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 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 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 September 30, 2010. Accordingly, our assessment resulted in a transfer out of Level 3 of $1,508 million, $3,462 million and $1,264 million, respectively, during the nine months ended September 30, 2010 related to residential mortgage-backed, commercial mortgage-backed and other asset-backed securities.

(2)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

(Amounts in millions)

 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
September 30,
2009
  Total gains
(losses)
included in
net income
(loss)
attributable
to assets
still held
 
  Included in
net income
(loss)
  Included
in OCI
      

Fixed maturity securities:

        

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

 $25   $—     $(38 $13   $394   $(389 $5   $—    

Tax exempt

  —      —      —      5    2    (5  2    —    

Government—non-U.S.

  31    —      (2)  9    15    (19  34    —    

U.S. corporate

  2,734    9    170    (163  764    (1,994  1,520    10  

Corporate—non-U.S.

  1,560    (26  211    85    696    (1,494  1,032    (29

Residential mortgage-backed

  1,957    (421  364    (205  905    (941  1,659    (391

Commercial mortgage-backed

  3,219    (44  337    (140  1,008    (751  3,629    (45

Other asset-backed

  1,034    (23  285    (355  982    (908  1,015    (18
                                

Total fixed maturity securities

  10,560    (505  1,327    (751  4,766    (6,501  8,896    (473
                                

Equity securities

  60    —      1   1    —      (2  60    —    
                                

Other invested assets:

        

Trading securities

  125    17    —      (15  54    (32  149    16 

Derivative assets

  933    (508  —      (175  22    —      272    (486
                                

Total other invested assets

  1,058    (491  —      (190  76    (32  421    (470
                                

Reinsurance recoverable

  18    (18  —      —      —      —      —      (18
                                

Total Level 3 assets

 $11,696   $(1,014 $1,328   $(940 $4,842   $(6,535 $9,377   $(961
                                

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(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
July 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
September 30,
2010
  Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
  Beginning
balance
as of
April 1,
2011
  Total realized and
unrealized (gains)
losses
       Settlements  Transfer
in Level 3
  Transfer
out of
Level 3
  Ending
balance
as of
June 30,
2011
  Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

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

Policyholder account balances (1)

 $447   $(140 $—     $9   $—     $—     $316   $(138 $69   $34   $—     $—     $—     $10   $—     $—     $—     $113   $34 

Derivative liabilities:

                   

Credit default swaps

  26    (17  —      —      —      —      9    (17  7    2    —      —      —      —      —      —      —      9    2  

Credit default swaps related to securitization entities (2)

  159    (30  —      1    —      —      130    (30  120    6    —      —      —      —      —      —      —      126    6  
                                                         

Total derivative liabilities

  185    (47  —      1    —      —      139    (47  127    8    —      —      —      —      —      —      —      135    8  

Borrowings related to securitization entities (2)

  51    (8  —      —      1   —      44    (8
                                 

Borrowings related to securitization entities

  58    —      —      —      —      —      —      —      —      58    —    
                                                         

Total Level 3 liabilities

 $683   $(195 $—     $10   $1   $—     $499   $(193 $254   $42   $—     $—     $—     $10   $—     $—     $—     $306   $42  
                                                         

 

(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
July 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
September 30,
2009
  Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
 
   Included in
net (income)
loss
  Included
in OCI
      

Policyholder account balances(1)

 $435   $(135 $—     $8   $—     $—     $308   $(133

Other liabilities(2)

  161    (57  —      —      —      —      104    (57
                                

Total Level 3 liabilities

 $596   $(192 $—     $8   $—     $—     $412   $(190
                     ��          
  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

  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

  58    (7  —      —      —      —      51    (6
                                

Total Level 3 liabilities

 $344   $345   $—     $(6 $—     $—     $683   $346  
                                

 

(1)

Represents embedded derivatives associated with our GMWB liabilities.

(2)

Represents derivatives.liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)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:

 

(Amounts in millions)

 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
September 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
June 30,
2011
  Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

Beginning
balance
as of
January 1,
2010
  Included in
net (income)
loss
 Included
in OCI
 Purchases,
sales,
issuances
and
settlements,
net
  Transfer
in Level 3
  Transfer
out of
Level 3
  Ending
balance
as of
September 30,
2010
  Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
  Included in
net (income)
loss
 Included
in OCI
 Purchases Sales Issuances 
 $115   $—      $121   $(28 $—     $—     $—     $20   $—     $—     $—     $113   $(27

Derivative liabilities:

                   

Interest rate swaps

  2    (2  —      —      —      —      —      (2

Interest rate swaptions

  67    (42  —      (25  —      —      —      (42

Credit default swaps

  —      9    —      —      —      —      9    9    7    —      —      3    —      —      (1  —      —      9    —    

Credit default swaps related to securitization entities (2)

  —      11    —      (2)  121    —      130    11  

Credit default swaps related to securitization entities

  129    (3  —      —      —      —      —      —      —      126    (3

Equity index options

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

Total derivative liabilities

  71    (25  —      (28  121    —      139    (25  139    (3  —      3    —      —      (4  —      —      135    (3

Borrowings related to securitization entities (2)

  —      (16  —      —      60    —      44    (16
                                 

Borrowings related to securitization entities

  51    7    —      —      —      —      —      —      —      58    7  
                                                         

Total Level 3 liabilities

 $246   $74   $—     $(2 $181   $—     $499   $76   $311   $(24 $—     $3   $—     $20   $(4 $—     $—     $306   $(23
                                                         

 

(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
September 30,
2009
  Total (gains)
losses
included in
net (income)
loss
attributable
to liabilities
still held
 
   Included in
net (income)
loss
  Included
in OCI
      

Policyholder account balances(1)

 $878   $(592 $—     $22   $—     $—     $308   $(579

Other liabilities(2)

  68    85    —      (49  —      —      104    53  
                                

Total Level 3 liabilities

 $946   $(507 $—     $(27 $—     $—     $412   $(526
                                
  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
 

(Amounts in millions)

  Included in
net (income)
loss
  Included
in OCI
      

Policyholder account balances (1)

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

Derivative liabilities:

        

Interest rate swaps

  2    (2  —      —      —      —      —      (2

Interest rate swaptions

  67    (42  —      (25  —      —      —      (42

Credit default swaps

  —      26    —      —      —      —      26    26  

Credit default swaps related to securitization entities

  —      41    —      (3  121    —      159    41  

Equity index options

  2    (1  —      (1  —      —      —      (1
                                

Total derivative liabilities

  71    22    —      (29  121    —      185    22  
                                

Borrowings related to securitization entities

  —      (8  —      —      59    —      51    (8
                                

Total Level 3 liabilities

 $246   $269   $—     $(12 $180   $—     $683   $269  
                                

 

(1)

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

(2)

Represents derivatives.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(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

(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, all of which were recorded in net investment gains (losses), except forand accretion on debtcertain fixed maturity securities which was recorded in net investment income.

(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.

(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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

(Amounts in millions)

  September 30,
2010
   December 31,
2009
 

Receivables secured by:

    

Commercial mortgage loans

  $—      $574  

Fixed maturity securities

   74     123  

Other assets

   165     236  
          

Total securitized assets not required to be consolidated

   239     933  
          

Total securitized assets required to be consolidated

   598     —    
          

Total securitized assets

  $837    $933  
          

Financial support for certain securitization entities was provided under credit support agreements, in which we provided limited recourse for a maximum of $114 million of credit losses as of September 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 $118 million as of September 30, 2010. There were no amounts recorded for these limited recourse liabilities as of September 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.

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:

   September 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  
                    

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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.

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 $118 million as of September 30, 2010, our economic interest represents the excess interest received on the loans compared to the

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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 $409 million as of September 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
September 30, 2010
   Nine months ended
September 30, 2010
 

Revenues:

    

Net investment income:

    

Restricted commercial mortgage loans

  $10    $30  

Restricted other invested assets

   1     2  
          

Total net investment income

   11     32  
          

Net investment gains (losses):

    

Trading securities

   5     14  

Derivatives

   18     (35

Commercial mortgage loans

   —       (1

Borrowings related to securitization entities recorded at fair value

   7     16  
          

Total net investment gains (losses)

   30     (6
          

Total revenues

   41     26  
          

Expenses:

    

Interest expense

   7     22  

Acquisition and operating expenses

   2     2  
          

Total expenses

   9     24  
          

Income before income taxes

   32     2  

Provision for income taxes

   12     1  
          

Net income

  $20    $1  
          

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

(Amounts in millions)

  September 30, 2010 

Assets

  

Investments:

  

Restricted commercial mortgage loans

  $522  

Restricted other invested assets:

  

Trading securities

   376  

Other

   2  
     

Total restricted other invested assets

   378  
     

Total investments

   900  

Cash and cash equivalents

   —    

Accrued investment income

   1  
     

Total assets

  $901  
     

Liabilities

  

Other liabilities:

  

Derivative liabilities

  $164  

Other liabilities

   2  
     

Total other liabilities

   166  

Borrowings related to securitization entities

   502  
     

Total liabilities

  $668  
     

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) 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 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 identified, the U.K. antitrust authorities conducted a review of the payment protection insurance sector. In January 2009, the antitrust authorities issued their final report that included the remedies to address the antitrust issues identified in their findings. The remedies included prohibitions on the sale of single premium payment protection insurance products, or the sale of payment protection products within seven days of the sale of the underlying credit product unless the consumer contacts the distributor after 24 hours of sale of the credit product, as well as additional informational remedies. Though it was previously anticipated that the remedies would be implemented during 2010, a successful appeal brought against key elements of the findings by a large U.K. retail bank delayed implementation of the full remedies package. Following publication of the antitrust authorities’ response to the appeal, it appears that the remedies package will now be implemented during the second half of 2011 and early 2012.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On July 30, 2010,June 22, 2011, we received a subpoena from the office of the New York Attorney General, relating to an industry-wide investigation of the use of retained asset accounts as a settlement option for life insurance death benefit payments. When a retained asset account is established for a beneficiary, our insurance company

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

subsidiary retains the death benefit proceeds in its general accountunclaimed property and pays interest on those proceeds. Beneficiaries can withdraw all of the funds or a portion of the funds held in the account at any time.escheatment practices and procedures. In addition to the subpoena, we have been contacted byother state insurance regulators regarding retained asset accounts.are conducting reviews and examinations on the same subject. We have responded to the New York Attorney General subpoena and state insurance regulator informationare cooperating with these requests and will cooperate with respectinquiries.

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 any follow-up requests or inquiries.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.

(b) Commitments

As of SeptemberJune 30, 2010,2011, we were committed to fund $121$90 million in limited partnership investments and $44$49 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 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 September 30, 2010, we hadhave access to $1.9 billion under these facilities.

In As of June 2010,30, 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 September 30, 2010,these facilities; however, we had borrowings of $730utilized $279 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 $57$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 2010,2011, our indirect wholly-owned subsidiary, Genworth Financial Mortgage Insurance Pty Limited, issued AUD$140 million of subordinated floating rate notes due 2021 with an interest rate of three-month Bank Bill Swap reference rate plus a margin of 4.75%. Genworth Financial Mortgage Insurance Pty Limited expects to use the proceeds it received from this transaction for general corporate purposes.

During the second quarter of 2011, we repaid ¥57.0 billion of senior notes that matured in June 2011, plus accrued interest. In addition, the arrangements to swap our obligations under these notes to a U.S. dollar obligation matured. These swaps had a notional principal amount of $491 million with interest at a rate of 4.84% per year. Upon maturity of these swaps, we received $212 million from the derivative counterparty resulting in a net repayment of $491 million of principal related to these notes.

In 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS

(Unaudited)

 

Mandatorily Redeemable Preferred Stock

InOn June 2010, our majority-owned subsidiary, Genworth MI Canada Inc. (“Genworth Canada”), issued CAD$275 million of 5.68% senior notes due 2020. The net proceeds1, 2011, we redeemed all the remaining outstanding shares of the offering were usedSeries A Preferred Stock at a price of $50 per share, plus unpaid dividends accrued to fund transactions among Genworth Canada and its Canadian wholly-owned subsidiaries. Genworth Canada used the proceeds it received from such transactionsdate of redemption, for general corporate and investment purposes and to fund a repurchase of common shares from Genworth Canada’s shareholders.$57 million.

Non-Recourse Funding Obligations

As of SeptemberJune 30, 2010,2011, we had $3.4 billion of fixed and floating rate non-recourse funding obligations outstanding backing additional statutory reserves. In the second quarter of 2011, we repurchased principal of $57 million of notes secured by our non-recourse funding obligations, plus accrued interest, for a pre-tax gain of $17 million. As of SeptemberJune 30, 20102011 and December 31, 2009,2010, the weighted-average interest rates on our non-recourse funding obligations were 1.42%1.33% and 1.49%1.44%, respectively.

Borrowings Related To Securitization Entities

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

(Amounts in millions)

  Principal
amount
  Carrying
value
 

GFCM LLC, due 2035, 5.2541%

  $228   $228  

GFCM LLC, due 2035, 5.7426%

   113    113  

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

   117    117  

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

   5    1  

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

   12    6  

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

   NA(2)   37  
         

Total

  $475   $502  
         

(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 was $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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(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 September 30, Nine months ended September 30,   Three months ended
June 30,
 Six months ended
June 30,
 

(Amounts in millions)

  2010 2009 2010 2009 

Pre-tax income (loss)

  $140    $(7  $331    $(894 
                       2011         2010         2011         2010     

Statutory U.S. federal income tax rate

  $49    35.0 $(2  35.0 $116    35.0 $(313  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

   4    2.5    —      1.4    (1  (0.2  (2  0.2     (2.4  —      4.3    (2.1

Benefit on tax favored investments

   (9  (6.6  (15  214.5    (23  (6.9  (49  5.5     (0.4  (8.0  (4.5  (7.1

Effect of foreign operations

   (30  (21.1  (10  141.5    (70  (21.2  (40  4.4     (24.8  (33.7  (5.9  (21.3

Non-deductible expenses

   1.2    2.2    0.2    0.5  

Interest on uncertain tax positions

   (1  (0.4  (10  138.8    (5  (1.5  (7  0.8     (0.4  (2.4  0.4    (2.3

Non-deductible expenses

   2    1.3    (10  141.5    3    0.9    (6  0.7  

Tax benefits related to separation from our former parent

   —      —      —      —      (106  (32.2  —      —       —      —      —      (55.8

Other, net

   3    2.2    (5  70.2    6    1.9    (3  0.4     0.9   —      0.5    1.8  
                           

 

  

 

  

 

  

 

 

Effective rate

  $18    12.9 $(52  742.9 $(80  (24.2)%  $(420  47.0   9.1  (6.9)%   30.0  (51.3)% 
                           

 

  

 

  

 

  

 

 

For the three months ended SeptemberJune 30, 2010,2011, the effective tax rate decreased significantlyincreased compared to the prior year primarily due to higher taxes in the current year as a result of a Canadian legislative change and an Australian tax legislation benefit in the prior year. The Canadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase the effective tax rate on our U.S. GAAP earnings as prior deductions for contributions to the fund lowered the effective tax rate on U.S. GAAP earnings.

For the six months ended June 30, 2011, the effective tax rate increased from the prior year due to small pre-tax results in relation to tax adjustments in the prior year. For the nine months ended September 30, 2010, the effective tax rate decreased significantly from the prior yearprimarily due to changes in uncertain tax benefits related to separation from our former parent, lower taxed foreign income and tax favored investments in the current year.

In connection with our 2004 separation from our former parent, General Electric (“GE”),. At the time of the separation, 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 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. The effective tax rate also increased due to higher taxes in the current year pursuant to the Canadian legislative change as compared to an Australian tax legislative benefit in the prior year.

GENWORTH FINANCIAL, INC.

(11)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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.

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

 

  Three months ended
September 30,
 Nine months ended
September 30,
   Three months ended
June 30,
 Six months ended
June 30,
 

(Amounts in millions)

      2010           2009         2010           2009       2011   2010 2011   2010 

Revenues:

              

Retirement and Protection

  $1,810    $1,521   $5,046    $4,115    $1,784    $1,643   $3,522    $3,236  

International

   594     663    1,867     1,892     658     622    1,290     1,273  

U.S. Mortgage Insurance

   195     235    557     619     170     181    347     362  

Corporate and Other

   68     (28  28     (18   43     (36  64     (40
                 

 

   

 

  

 

   

 

 

Total revenues

  $2,667    $2,391   $7,498    $6,608    $2,655    $2,410   $5,223    $4,831  
                 

 

   

 

  

 

   

 

 

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)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
September 30,
 Nine months ended
September 30,
   Three months ended
June 30,
 Six months ended
June 30,
 

(Amounts in millions)

      2010         2009         2010         2009           2011         2010         2011         2010     

Retirement and Protection

  $111   $134   $347   $295  

International

   121    96    317    284  

U.S. Mortgage Insurance

   (152  (116  (228  (385

Corporate and Other

   (51  (33  (175  (90

Retirement and Protection’s net operating income

  $149   $114   $276   $236  

International’s net operating income

   107    105    231    196  

U.S. Mortgage Insurance’s net operating loss

   (253  (40  (334  (76

Corporate and Other’s net operating loss

   (77  (61  (149  (124
                          

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

   29    81    261    104  

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

   (74  118    24    232  

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

   54    (62  (64  (604   (22  (76  (38  (118

Net tax benefit related to separation from our former parent

   —      —      106    —       —      —      —      106  
                          

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

   83    19    303    (500   (96  42    (14  220  

Add: net income attributable to noncontrolling interests

   39    26    108    26     36    35    70    69  
                          

Net income (loss)

  $122   $45   $411   $(474  $(60 $77   $56   $289  
                          

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

 

(Amounts in millions)

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

Assets:

        

Retirement and Protection

  $87,357    $81,497    $87,119    $86,352  

International

   12,188     12,143     12,834     12,422  

U.S. Mortgage Insurance

   3,883     4,247     4,048     3,875  

Corporate and Other

   11,272     10,300     8,346     9,746  
                

Total assets

  $114,700    $108,187    $112,347    $112,395  
                

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(11) Liability for Policy and Contract Claims

The following table sets forth changes in the liability for policy and contract claims for the dates indicated:

   As of or for the six
months ended
June 30,
 

(Amounts in millions)

  2011(1)  2010(2) 

Beginning balance

  $6,933   $6,567  

Less reinsurance recoverables

   (1,654  (1,769
         

Net beginning balance

   5,279    4,798  
         

Incurred related to insured events of:

   

Current year

   1,720    1,641  

Prior years

   494    120  
         

Total incurred

   2,214    1,761  
         

Paid related to insured events of:

   

Current year

   (475  (452

Prior years

   (1,373  (1,539
         

Total paid

   (1,848  (1,991
         

Interest on liability for policy and contract claims

   67    59  

Foreign currency translation

   37    (63
         

Net ending balance

   5,749    4,564  

Add reinsurance recoverables

   1,578    1,738  
         

Ending balance

  $7,327   $6,302  
         

(1)

Current year reserves related to our U.S. Mortgage Insurance segment for the six months ended June 30, 2011 were reduced by loss mitigation activities of $22 million related to workouts, loan modifications and pre-sales. Loss mitigation actions related to prior year delinquencies resulted in a reduction of expected losses of $230 million to date, including $211 million related to workouts, loan modifications and pre-sales, and $19 million related to rescissions, net of reinstatements of $49 million.

(2)

Current year reserves related to our U.S. Mortgage Insurance segment for the six months ended June 30, 2010 were reduced by loss mitigation activities of $97 million, including $94 million related to workouts, loan modifications and pre-sales, and $3 million related to rescissions, net of reinstatements. Loss mitigation actions related to prior year delinquencies resulted in a reduction of expected losses of $353 million to date, including $201 million related to workouts, loan modifications and pre-sales, and $152 million related to rescissions, net of reinstatements of $107 million.

We establish reserves for the ultimate cost of settling claims on reported and unreported insured events that have occurred on or before the respective reporting period. These liabilities are associated primarily with our mortgage, long-term care and lifestyle protection insurance products and represent our best estimates of the liabilities at the time based on known facts, historical trends of claim payments and other external factors, such as various trends in economic conditions, housing prices, employment rates, mortality, morbidity and medical costs.

While the liability for policy and contract claims represents our current best estimates, there may be additional adjustments to these amounts based on information and trends not presently known. Such adjustments, reflecting any variety of new and adverse or favorable trends, could possibly be significant, exceeding the currently recorded reserves by an amount that could be material to our results of operations, financial condition and liquidity. For

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

example, in our U.S. mortgage insurance business, the amount and rate at which home prices, employment levels and cure rates for delinquent loans change could result in additional changes to reserves in future periods.

As of June 30, 2011, the increase in the ending liability for policy and contract claims was largely related to our U.S. Mortgage Insurance segment due to a reserve strengthening in the second quarter of 2011. In addition, our long-term care insurance business increased as a result of growth of the in-force block and claims experience including the severity and duration of existing claims.

During the six months ended June 30, 2011, we strengthened prior year reserves by $494 million as a result of changes in estimates related to prior year insured events and the development of information and trends not previously known when establishing the reserves in prior periods.

During the six months ended June 30, 2011, we increased prior year reserves in our U.S. Mortgage Insurance segment by $382 million from $2,282 million as of December 31, 2010. During the second quarter of 2011, we strengthened reserves by $299 million as a result of worsening trends in recent experience in the quarter as well as market trends in an environment of continuing weakness in the U.S. residential real estate market. These trends reflected a decline in cure rates in the second quarter of 2011 for delinquent loans and continued aging trends in the delinquent loan inventory. These trends were associated with a range of factors, including slow-moving pipelines of mortgages in some stage of foreclosure and delinquent loans under consideration for loan modifications. Specifically, reduced cure rates were driven by lower borrower self-cures and lower levels of lender loan modifications outside of government-sponsored modification programs. The decline in cure rates was also concentrated in earlier term delinquencies at a level higher than expected or historically experienced. In our U.S. Mortgage Insurance segment, loss mitigation actions that occurred during the six months ended June 30, 2011 resulted in a reduction of expected losses of $252 million.

During the six months ended June 30, 2011, we increased prior year claim reserves related to our long-term care insurance business by $144 million from $3,678 million as of December 31, 2010. In the current stressed economic environment, we have experienced an increase in severity and duration of claims associated with observed loss development which contributed to the reserve increase.

For our other businesses, the remaining favorable development during the six months ended June 30, 2011 related to refinements to our estimates as part of our reserving process on both reported and unreported insured events occurring in the prior year that were not significant.

As of June 30, 2010, the decrease in the ending liability for policy and contract claims was largely related to our U.S. Mortgage Insurance segment due principally to a substantial decrease in flow delinquencies, coupled with a settlement that was reached with a GSE counterparty regarding certain bulk Alt-A business in the first quarter of 2010. In our U.S. Mortgage Insurance segment, loss mitigation actions that occurred during the six months ended June 30, 2010 resulted in a reduction of expected losses of $450 million. Our international mortgage insurance business also decreased from favorable global economic and housing market conditions. These decreases were partially offset by an increase related to our long-term care insurance business as a result of growth of the in-force block and claims experience, including the severity and duration of existing claims.

During the six months ended June 30, 2010, we strengthened prior year reserves by $120 million primarily related to our long-term care insurance business. During the six months ended June 30, 2010, we increased prior year reserves in our long-term care insurance business by $109 million from $3,188 million as of December 31, 2009. We experienced an increase in severity and duration of claims associated with observed loss development which contributed to the reserve increase.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For our other businesses, the remaining unfavorable development during the six months ended June 30, 2010 related to refinements to our estimates as part of our reserving process on both reported and unreported insured events occurring in the prior year that were not significant.

(12) Sale of Medicare Supplement Insurance Business

In June 2011, we reached an agreement to sell our Medicare supplement insurance business for $290 million in cash, subject to customary adjustments based on the amount of capital in the business at closing. We expect to recognize a realized gain on the sale, with the closing of the sale expected to occur in the fourth quarter of 2011. Our Medicare supplement insurance business is included in our long-term care insurance business in our Retirement and Protection segment. The transaction includes the sale of Continental Life Insurance Company of Brentwood, Tennessee and its subsidiary, American Continental Insurance Company, and the reinsurance of the Medicare supplement insurance in-force business written by other Genworth life insurance subsidiaries.

(13) Noncontrolling Interests

In July 2009,June 2011, Genworth MI Canada Inc. (“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 (“Brookfield”), our indirect wholly-owned subsidiary. Following completion of the Offering, we beneficially owned 57.5% of the common shares of Genworth Canada. In August 2010, Genworth Canada repurchased 12.3approximately 6.2 million common shares for CAD$325160 million through a substantial issuer bid. Brookfield Life Assurance Company Limited, our indirect wholly-owned subsidiary, participated in the issuer bid by making a proportionate tender and received CAD$18790 million and continues to hold approximately 57.5% of the outstanding common shares of Genworth Canada.

In the nine months ended September 30, 2010, dividends of $32 million were paid to the noncontrolling interests.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(13) Subsequent Event

On October 18, 2010, we entered into an agreement to purchase the operating assets of Altegris Capital, LLC (“Altegris”), which will be accounted for as a business combination. The acquisition will be part of our wealth management business in our Retirement and Protection segment. Altegris, based in La Jolla, California, provides a platform of alternative investments, including hedge funds and managed futures products, and has approximately $2.0 billion in client assets. The target date for closing the transaction, subject to various approvals and closing conditions, is December 31, 2010. We will pay approximately $35 million at closing, with additional performance-based payments of up to $85 million during the five-year period following closing.

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, downgradedowngrades 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, the occurrence of natural or man-made disasters or a pandemic, and the effect of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act;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 and problems associated with foreclosure process defects that may defer claim payments;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 life and long-term care insurance. Additionally, we offer other Medicare 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 variablefixed deferred and immediate individual annuities. We previously offered variable deferred annuities and group variable annuities offered through retirement plans. For the three months ended SeptemberJune 30, 2010,2011, 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 $135$123 million and $111$149 million, respectively. For the ninesix months ended SeptemberJune 30, 2010,2011, 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 $300$235 million and $347$276 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 primarily 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 SeptemberJune 30,

2010, 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 $124$110 million and $121$107 million, respectively. For the ninesix months ended SeptemberJune 30, 2010,2011, 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 $326$237 million and $317$231 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 SeptemberJune 30, 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 $252 million and $253 million, respectively. For the six 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 $141$333 million and $152 million, respectively. For the nine months ended September 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 $217 million and $228$334 million, respectively.

We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions 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 SeptemberJune 30, 2010, our Corporate and Other activities’2011, the net loss available to Genworth Financial, Inc.’s common stockholders and net operating loss available to Genworth Financial, Inc.’s common stockholders were $35both $77 million and $51 million, respectively. For the nine months ended September 30, 2010, ourfor Corporate and Other activities’activities. For the six months ended June 30, 2011, Corporate and Other 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 $106of $153 million and $175$149 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 on an ongoing basis.conditions. The following discussion of quarterly 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 the sales, revenue growth and profitability trends of our businesses. Global financial markets improved during the first quarter of 2010 from the volatility experienced in 2009, with solid performanceImprovements in equity markets, and narrowing credit markets and interest rate spreads along with better credit performance in many sectors of the debt markets. However,seen during 2010 generally continued in the second quarterfirst half of 2010, we saw a decline in equity2011. Although global financial markets and widening debt spreads primarily as a result of the perceived contagion risk related toexperienced some improvement, the European sovereign debt crisis. Equity markets improvedcrisis and debt spreads tightened as concerns regarding systemic European sovereign risk subsided during the third quarterU.S. debt ceiling impacted the rate of 2010. In 2010, Canadian and Australian economies and housing markets improved although the high loan-to-value mortgage origination market in Australia remained substantially below levels seen in prior years.recovery. The U.S. housing market reflected continuing stress and growing levels of foreclosures andwith variations in performance by sub-market, including continued signs of stabilization within certain regions.regions while others declined. Unemployment and underemployment levels in the United States remained relatively constant with the fourth quarter of 2010 and the first quarter of 2011. We expect unemployment and underemployment levels in the United States to stabilize and gradually decrease over time though remain elevated for an extended period. In Canada, the housing market continued to improve with home prices remaining stable, while unemployment levels improved modestly from the first quarter of 2011. In Australia, the housing market has remained fairly stable with home prices declining modestly from the first quarter of 2011 and unemployment levels remaining consistent with the first quarter of 2011. Consumers in

Australia became more cautious given higher interest rates, higher costs of living, general concerns about the global economy and slow recovery in regions impacted by the recent natural disasters. Europe remained a slow growth environment with lower lending activity and reduced consumer lending activity.

Slow economic growth, coupled with uncertain financial market, government policyspending, particularly in Greece, Spain, Portugal, Ireland and other market conditions, influenced, and will continue to influence, investment and spending decisions by consumers and businessesItaly, in part 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 will continue to affect economic and business outlooks and 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.European debt crisis. 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, concerns around resolution of the U.S. debt ceiling, the volatility and strength of the capital markets, anticipated tax policy changes and the impact of U.S. healthcare and global 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 taken a variety of othercontinue to take certain actions to stabilizesupport the economy and capital markets, influence interest rates, influence housing markets and mortgage servicing 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 affectedpreviously had a positive effect on these countries and their markets; however, there can be no assurance as to the future level of impact these types of any of these actionsaction may have 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. During the thirdsecond quarter of 2010,2011, markets were characterized by both declining U.S. Treasury yieldshigh levels of uncertainty regarding resolution of issues around peripheral Europe and, tightening credit spreads. Ongoing expectationparticularly toward the latter part of renewed Federal Reserve supportthe quarter, disappointing economic data and concerns around resolution of the U.S. economic recovery,debt ceiling. Spreads on domestic U.S. issuances continued to decline early in additionthe second quarter of 2011, as uncertainty remained contained and demand and issuance was strong. However, as the European Union’s policy failed to continued strong demandprovide conclusive support for fixed income assets, resulted in a significant drop inGreece and other less stable peripheral European countries, and concerns about the U.S. Treasury yields. Strongdebt ceiling rose, issuances declined markedly and credit spreads began to widen. Despite these adverse developments and spread widening during the second quarter of 2011, investor demand also continuedremained strong for investment grade debt and higher quality issues that came to drive credit spreads tighter in all sectors. In particular, continued progress in both the U.S. and Europe in developing and implementing financial regulation resulted in improved pricingmarket were generally oversubscribed. Similarly for both domestic and non-U.S. borrowers. Concerns regarding systemic European sovereign risk subsided, although more focused concerns about particular European borrowers remain. For securitized products, the market was characterizedlatter half of the second quarter of 2011 saw increased volatility, mainly driven by shrinking supplyweaker economic and lowerhousing data. In addition, the liquidation of certain non-agency securities by the Federal Reserve weighed heavily on the markets, and this coupled with heavy issuance across all asset types. Asset valuations in securitized sectors continued to improve given a strong supplyof commercial mortgage-backed securities put pressure on both residential and demand imbalance, stable credit performance, and the structural protections embedded in the transactions brought to market.commercial mortgage-backed securities.

Certain segments of the marketplace are still experiencing declines in the performance of collateral underlying certain structured securities, but corporate impairments continued their downward trend and were atin our investment portfolio declined further in the second quarter of 2011 from the moderate levels duringrecorded in the firstsecond half of 2010 with a minimal increase inand the thirdfirst quarter of 2010. 2011.

We recorded net other-than-temporary impairments of $37$62 million and $168 million, respectively, during the three and ninesix months ended SeptemberJune 30, 20102011 which were lower than prior year levels and we expect losses to moderate further. Additionally, during the nine months ended September 30, 2010, losses related to limited partnerships decreased $137 million as compared to the nine months ended September 30, 2009 with limited partnership gains in the second and third quarters of 2010. Although economic conditions may continue to negatively impact certain investment valuations, the underlying collateral associated with securities 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 duringincreased in the secondfirst half of 2009 continued into2011 compared to the first half of 2010 in large part the result ofdue to strong adoption of our new term universal life insurance product. As anticipated, salesSales of our traditional term life insurance product have declined given the introduction late in 2009 of our new term universal life insurance product that was designed to replace ourwere up 29% in the first half of 2011 versus the traditional term and term universal life insurance product. Our newsales in the prior year and up 16% from the first quarter of 2011. We believe our term universal life insurance product is more capital efficient and we believe offers a similar or better value proposition to the consumer aswhen compared to our traditional term life insurance products which we no longer sell. We believe our term universal life insurance product and ishas been competitively priced for the main streetmiddle and emerging affluent markets.markets as reflected in recent trends. We have experienced strong adoption of the product; however, the growth rate will ultimately depend upon the intensityexpect our sales levels could be impacted by shifts in consumer demand, relative pricing, return on capital decisions and other factors; therefore, we expect to see a reduced level of future distributor (existing brokerage general agents (“BGAs”) and other distributors) and consumer adoption, as well as competitors offering similar products. In our universal life insurance products, sales during 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. Going forward, the levelsecond half of new premium sales will depend on ongoing distributor and consumer adoption and usage, as well as overall market conditions.2011.

Throughout 2009,2010 and into 2011, we experienced favorable mortality results in our term life insurance products as compared to priced mortality assumptions. In 2010, mortality remained favorable to pricing assumptions althoughDuring this same period, while less sosevere in 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 go through their post-level rate period. We expect this trend in persistency to continue as these 10-year term life insurance policies go through their post-level rate period and then moderate thereafter.

Regulations XXX and AXXX require insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and for certain universal life insurance policies with secondary guarantees, which increaseguarantees. This increases the capital required to write these products beyondto be in excess of 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 limited or more limited and expensive; however, we haveexpensive. 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 modificationsIn addition, the statutory reserve requirements of Regulations XXX and introducedAXXX are currently being reviewed by the Life Actuarial Task Force of the National Association of Insurance Commissioners (“NAIC”). While it is too early to assess how this task force will address specific issues, if any, related to the statutory reserve requirements, any new products designedinterpretation of, or future revisions to, reduce capitalthe valuation requirements and limit financing costs compared to existing products and thereby improve the profitability of new business. The new term universalcould impact our 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.business.

Long-term care insurance. Results of our long-term care insurance business are influenced by sales, 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 have either declined or grown moderately. Whileduring the recession and rebounded as the economy stabilized. This positive trend continued during 2011. Sales of our overall salesindividual long-term care insurance product increased 47% in 2009 were adversely impacted primarily by the generalsecond quarter of 2011 versus the prior year

economic conditionsdue in part to growth in the market and lowercompetitor actions. These trends combined with the impacts of the progress made on our multiple growth initiatives relating to distribution effectiveness and broadening of our individual and group offerings have resulted in increased sales. We expect our sales through our independent distributionlevels could be impacted by shifts in consumer demand, relative pricing, pricing of next generation products, return on capital decisions and career force channels,other factors; therefore, we expect to see a reduced level of sales in the second half of 2009 and continuing into the first nine months of 2010, we experienced improvements in our long-term care insurance sales. Recent improvements are due in part to the breadth of our distribution, and we have made progress on multiple growth initiatives with an emphasis on distribution effectiveness and broadening our individual and group offerings.

2011. In the first half of 2009, termination rates increased on our 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 nine months of 2010, termination rates have decreased and returned to levels experienced historically resulting in higher benefits and other changes in policy reserves that contributed to lower results of operations. In recent periods,addition, we have experienced, and may continue to experience, higher claims than priced for in older issued policies which negatively impactedimpact our results of operations.

Since the fourth quarter of 2010, several of our competitors have exited the long-term care insurance market or announced their intent to seek rate actions on their individual and certain group long-term care insurance products. These announcements by competitors have disrupted the market and could impact our sales going forward.

We continue pursuing multiple initiatives including: new product issuance and service offerings; investing in claims case management;care coordination capabilities; maintaining tight expense management; actively exploring alternative reinsurance strategies; executing effective investment strategies; and considering other actions to improve business profitability and the performance of the overall block. These efforts include our older blocks of business andevaluating the potentialneed for future in-force rate increases, where warranted. In this connection, on October 21, 2010,regard, we announced plans to filebegan filing for a premium rate increase of 18% on two blocks of older long-term care insurance policies in November 2010. As of June 30, 2011, we have received approvals in 30 states which represent approximately 25%more than 50% of individual long-term care insurancethe impacted premiums. We planThe state approval process of an in-force rate increase varies, and in certain states can take up to begin filing fortwo years to obtain approval. Upon approval, premium increases may only occur on an insured’s policy anniversary date. Therefore, the benefits of any rate changes in early November and anticipate that this increase willmay not take effectbe fully realized until 2011. Thethe implementation will take placeis complete over the next two to threefew years. In addition, changes

Changes in regulations or government programs, including long-term care insurance rate action legislation and 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.

In June 2011, we reached an agreement to sell our Medicare supplement insurance business for $290 million in cash, subject to customary adjustments based on the amount of capital in the business at closing. We expect to recognize a realized gain on the sale, with the closing of the sale expected to occur in the fourth quarter of 2011.

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 in the second quarter of 2009 and continued throughout 2009 and 2010.

The market improvement, in addition to ourOur 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 have collectively contributed to our highergrowth in assets under management from sales and positive net flows and assets under management.for nine sequential quarters. 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 October 18,December 31, 2010, we entered into an agreement to purchasepurchased the operating assets of Altegris Capital, LLC (“Altegris”). Altegris providesThis acquisition provided a platform of alternative investments including hedge funds and managed futures products and hashad approximately $2.0$2.2 billion in client assets. See note 13 in our “—Notes to Condensed Consolidated Financial Statements” for additional information.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 offerings, relative pricing and company ratings. Our 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, including reduced commission structures, and investment strategies reflect a more targeted growth strategy in orderplans to achieve appropriate risk adjusted returns. In January 2011, we discontinued sales of our individual and group variable annuities; however, we will continue to service our existing block of business and accept additional deposits on existing contracts.

In fixed annuities, sales may fluctuate as a result of consumer demand, changes in interest rates, credit spreads, relative pricing, return on capital decisions and as we offer these products using a disciplined approach to manage risks. We have scaled back certain product featuresintroduced new market value adjustment deferred annuity products in the brokerage general agency (“BGA”) channel and we have re-priced immediate annuities to maintain spreads and targeted certain market segmentsreturns. Looking ahead, we will continue to reduce riskactively evaluate marketing and investment strategies in our annuity products. In this connection, wethe event that interest rates increase. We have targeted distributors and producers and chosenmaintained sales personnelcapabilities that align with this moreour focused strategy. Beginning in the second half of 2009, weWe have expanded our distribution relationships with new financial institutions, independent financial planners and BGAs and we expect to continue to further expand these distribution relationships.

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 BGA channel and we have re-priced immediate annuities to maintain spreads and targeted returns. In 2009, spreads on fixed annuity products declined 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 reinvested a significant portion of the excess cash and are achieving improvements in spread-related income as a result of higher yields. Looking ahead, we will continue to actively evaluate investment strategies in the event that interest rates increase rapidly resulting in liability durations shortening.relationships while selectively adding additional product offerings.

In variable annuities, the improvement in the equity markets favorably 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 features. 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.will see limited new deposits as 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, consumer borrowing behavior, lender mortgage-related strategies and other economic and housing market trends,influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels of mortgage delinquencies and movements in foreign currency exchange rates.

Throughout 2009,Canada and Australia comprise approximately 97% of our international mortgage insurance risk in-force with an estimated average effective loan-to-value ratio of 60% as of June 30, 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 selective and disciplined.

In Canada, during the first half of 2011, favorable economic conditions persisted with housing affordability benefiting from low interest rates and historically low unemployment levels. In 2011, the Bank of Canada maintained the overnight rate at 1.0% which was set in 2010 and we observedexpect the Bank of Canada to slightly increase the overnight rate through the remainder of 2011. During the first half of 2011, home prices increased stability in international housing markets, particularlymodestly 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 notably in these markets during 2009. During 2010, home price appreciation slowed in both Canada and Australia. Looking forward to the remainder of 2010 and into 2011, we expect home prices to stabilize or grow moderatelyremain consistent with the current levels during the remainder of the year. Additionally, the unemployment rate in Australia while remaining relatively flat in Canada. Additionally, while unemployment increasedCanada improved marginally from the first quarter of 2011.

In Canada, flow new insurance written during the first half of 2009,2011 remained consistent with levels in the first half of 2010. As of June 30, 2011, our 2010 book of business represents 12% of our insurance in-force while our 2007 and 2008 book years, the two largest in our portfolio, together represent 31% 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 flow new insurance written in 2011 primarily due to a smaller refinance market. The impact on net premiums written will depend upon the refinance share of new mortgage originations and the effect of the elimination of the 35-year amortization option. We expect this trend to continue if economic conditions in Canada continue to be favorable and we are able to continue to gradually increase our market share.

Losses in Canada have observedremained relatively flat from levels experienced in 2010 as improving overall economic conditions and stable housing markets, as well as the success we experienced with our loss mitigation initiatives, were pressured by delinquency trends in Alberta earlier in the year. While loss levels may vary quarterly based on seasonal or event-driven fluctuations, we expect our overall loss levels in Canada to improve modestly over time compared with levels experienced in 2010.

In June 2011, the Canadian government passed legislation, that when effective, will formalize existing mortgage insurance arrangements with private mortgage insurers to eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase our effective tax rate on a moderate declineU.S. GAAP basis, as prior deductions for contributions to the fund lowered the effective tax rate on Canadian earnings. However, this legislation does not change the current government guarantee of 90% provided on mortgages we insure. While we do not anticipate any significant impacts to our business as a result of this legislation, a full assessment of the impact on our business cannot be completed until the regulations are finalized.

As part of our capital optimization strategies, Genworth MI Canada Inc. (“Genworth Canada”), our indirect subsidiary, repurchased CAD$160 million of its existing common shares through a substantial issuer bid in unemploymentJune 2011. Brookfield Life Assurance Company Limited (“Brookfield”), our indirect wholly-owned subsidiary, participated in the issuer bid by making a proportionate tender and received CAD$90 million and continues to hold approximately 57.5% of the outstanding common shares of Genworth Canada.

In Australia, the economy has slowed, particularly in Queensland, given the economic impact of the flooding in January 2011, pressures from higher interest rates, higher costs of living, higher exchange rates and cautious consumer spending. As a result, increased levels of new delinquencies were reported by financial institutions in these two markets sincethis market, which adversely impacted the results of our operations. The housing market in Australia has remained fairly stable despite home price declines in the second quarter of 2011 and we expect home prices to remain consistent with current levels. Additionally, unemployment levels remained consistent with the first quarter of 2011. In 2011, the Reserve Bank of Australia maintained the cash rate at 4.75% which is consistent with the rate in December 2010 and we expect the Reserve Bank of Australia to maintain the cash rate near current levels through the remainder of the year.

Total mortgage market activity in Australia continued to slow during the first half of 2009. 2011 as consumers became more cautious about higher interest rates, rising personal debt levels and global economic uncertainty. Additionally, some lenders were slow to return to the high loan-to-value market. Our flow new insurance written further decreased during the first quarter of 2011 compared to the fourth quarter of 2010 reflecting a smaller mortgage originations market, as well as the economic impact of recent natural disasters. While flow new insurance written in the second quarter of 2011 improved from the first quarter of 2011, we expect flow new insurance written to remain flat compared to 2010 levels for the remainder of the year.

Losses in Australia improved throughout most of 2010 as a result of continued loss mitigation activities and the benefits of the improving economic environment. In the first quarter of 2011, this trend reversed driven by higher reserves for claims anticipated from the natural disasters during that quarter, particularly the flooding in Queensland. In the second quarter of 2011, there was an increase in delinquencies and reserves as the cumulative impact of the factors noted previously exerted pressure on elements of the portfolio. We expect these pressures to continue through the remainder of 2011 resulting in an elevated loss ratio as was seen in the second quarter of 2011 which may begin to moderate in 2012.

As part of our strategy to reduce dependence on affiliate reinsurance and to aid the capital optimization strategies in Australia, our indirect wholly-owned subsidiary, Genworth Financial Mortgage Insurance Pty Limited, issued AUD$140 million of subordinated floating rate notes in June 2011.

In 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.

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% as of September 30, 2010. 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 selective.

Since the beginning of 2010, the Bank of Canada increased the overnight rate by 75 basis points to 1.0% and is expected to hold it constant for the remainder of 2010. In Australia, as a sign of the relative health and stability of that economy, the Reserve Bank of Australia increased the cash rate by 150 basis points to 4.5% between September 30, 2009 and September 30, 2010.

In Canada, we experienced higher than anticipated levels of flow new insurance written duringOver the first nine months of 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 these higher levels. Additionally, implementation of the harmonized sales tax in British Columbia and Ontario, which had the potential to increase the cost of purchasing a home for certain buyers, also contributed to higher levels of mortgage originations in the first half of 2010. We believe these factors accelerated purchase decisions in 2010 and we expect lower levels of mortgage originations and an associated decrease in our flow new insurance written in the fourth quarter of 2010 as normal seasonal patterns slow originations.

In Australia, as a result of low interest rates during the first nine months 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. 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. As a result of lower levels of government support to first-time home buyers, a decline in high loan-to-value mortgage originations and increased interest rates beginning in the fourth quarter of 2009, there has been a decrease in mortgage originations and an associated decrease in our flow new insurance written during the first nine months of 2010. As some liquidity returned to the securitization market in Australia, we insured some bulk transactions in the first three quarters of 2010 and we expect to continue to write modest levels during the fourth quarter of 2010.

During 2009,past several 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 that keep borrowers in their homes, asset management strategies such as arranged and facilitated sales and pursuing recoveries. TheseLoan modification programs benefit all parties as borrowers are able to remain in their homes, lenders maintain their relationship with the borrower andwhile retaining an interest 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, andincluding taking early possession of properties to 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 continue to increase and unemployment levels decline. With ongoing improvement in the Canadian and Australian economies and stable housing markets, as well as the success we experienced with our loss mitigation initiatives outlined above, we expect our overall loss levels to remain favorable to the levels experienced in 2009.

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.

For the nine months ended September 30, 2010, net operating income inThe profitability of our lifestyle protection insurance business improved significantly as compared toduring 2010 and through the prior year. This improved profitability has beenfirst half of 2011 driven by lower new claim registrations from stabilizing European unemployment levels and the impact of our contractpolicy re-pricing and distribution contract restructuring initiative in late 2009 through early 2010.initiatives. Sales during the nine months ended September 30, 2010 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. However, sales increased modestlySales in the first quarter of 2011 remained consistent with the fourth quarter of 2010 levels but improved in the second quarter of 2011 as a result of signing new clients during the third quarter of 2010.quarter. We are actively pursuing various growth initiatives to 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 or the inability to generate targeted growth in new sales.

New claim registrations on unemployment-related policies have continued to declinedeclined throughout 2010 and arethrough the first half of 2011 and remain at the lowest levels since the third quarter of 2008. This, combined with stabilizing claim durations, has led to a decrease inlower loss ratio since the second quarter of 2010 and our loss ratio.ratio has remained relatively consistent with the third quarter of 2010. The improvement in our loss ratio has been most notable in the Nordic and Western Europe regions. We expect unemployment rates in Europe to slowly declineimprove over the next several quarters with regional variation. Additionally, we seeexpect slow but positive European gross domestic product growth, which could positively impact consumer lending demand as 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. 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 to 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.unemployment and underemployment. This has resulted in numerous outcomes including rising foreclosures, more borrowers seeking loan modifications and elevated foreclosed and delinquent housing inventories which place downward pressure on home values. At the same time, home prices are continuing to show signs of stabilizing or improving in several U.S. markets after a significant decline from their peak levels. Overall, we anticipate some additional declines in home values in the fourth quarter of 2010 and into earlyduring 2011 and we expect unemployment and underemployment levels to stabilize and gradually decrease over time though remain elevated for an extended period.

A

Beginning in 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. Within the private mortgage insurance market, the 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 recentongoing FHA risk management actions, we have seen the private mortgage insurance penetration rate increase slightly inthrough the thirdsecond quarter of 20102011 and expect this to continue given the additional FHA pricing changes effective in October 2010. In contrast, GSEs have maintainedApril 2011. This increase has been mitigated in part by increased GSE loan level pricing up chargesfees which can make private mortgage insurance less attractive compared to FHA solutions.attractive. Going forward, this trend mayfurther GSE fee increases could limit the demand for or competitiveness of private mortgage insurance. Alternatively, given recently enacted adjustments in FHA policies and pricing along with 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 provided 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. 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 seeing the benefit of the previously implemented rate increase of 20% on average for our flow products and a reduction in lender captive cession which equates to an effective pricing improvement of approximately 15%. We also previously exited certain product lines, such as A minus, Alt-A and 100% loan-to-value products. We continue to monitor and selectively reduce our targeted declining market policy, which among various restrictions, limited coverages to loans with 90% loan-to-value and below and to

adjust the restrictions in 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. In addition, we regularly monitor competitor pricing and underwriting changes and their potential market impact.

OverallWhile we continue to experience a decrease in the level of new delinquencies, 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. Albeit at a lower rate, 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. InBeginning mid-2010, bothwe saw an increase in foreclosure starts and the rate at which foreclosures progress to claim increased. As a result, we expect to seeas well as an increase in our paid claims as these late stage delinquency loans go through foreclosure. Recently announced voluntary suspendedThis trend continued through the second quarter of 2011. Suspensions and delays 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 the timing of a recovery of the U.S. residential mortgage market.

As a result of the recent stabilization of home prices and unemployment levels in certain markets and expandedExpanded efforts in the mortgage lending market to modify loans we experienced a decreaseand improved performance of our second half of 2008 and the 2009 and 2010 book years compared with the performance of prior book years, resulted in continued reductions in delinquency levels during the second quarter of 2011. However, aging of delinquencies during 2010. This decrease reflected a reduction in new delinquencies combined with increased cures from government and lender loan modification programs and other loss mitigation activitiescontinued to increase through the first halfremainder of 2010. However, aged delinquencies2010 and through the second quarter of 2011; moreover, foreclosures continued increasing and liquidations remained elevated through the third 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 or 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 half of 2011, we have seen the level of loan modification actions moderating against the levels we experienced during the fourth quarter of 2010. We saw evidence of low levels of modification activity outside of government programs and servicers distracted by various regulatory and legal actions. 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 six months ended June 30, 2011 resulted in a reduction of expected losses of approximately $608$252 million compared to $450 million during the ninesix months ended SeptemberJune 30, 2010 compared to $557 million during the nine months ended September 30, 2009. 2010.

Workouts and loan modifications, which related to loans representing 4%2% of our primary risk in-force as of SeptemberJune 30, 2010,2011, and occurred during the period then ended, resulted in a reduction of loss exposure of approximately $413 million forexpected losses during the ninesix months ended SeptemberJune 30, 20102011 of $195 million compared to $140$267 million forduring the ninesix months ended SeptemberJune 30, 2009.2010. 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 nine months ended September 30, 2010,first quarter of 2011, we executed a loan restructuringsrestructuring and modificationsmodification program with some of 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 six months ended June 30, 2011 resulted in a reduction of loss exposureexpected losses of approximately $43$38 million forcompared to $28 million that occurred during the ninesix months ended SeptemberJune 30, 2010 compared to $33 million for the nine months ended September 30, 2009. 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 six months ended June 30, 2011 which reduced our loss exposureexpected losses at the time of rescission by approximately $152$19 million forcompared to $155 million that occurred during the ninesix months ended SeptemberJune 30, 2010. We expect limited benefit from rescission actions in future periods.

During 2010, compared to $384 million for the nine months ended September 30, 2009. Benefitsbenefits 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. With the exceptionAlthough loan servicers continue to pursue a wide range of Florida, the shift from rescissionsapproaches to modification benefits was proportional across regions, products and vintages. In Florida, we saw reduced opportunities to mitigate losses throughexecute appropriate loan modifications, duegovernment-sponsored programs such as Home Affordable Modification Program (“HAMP”) continue to itsdecline 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 percentagelevels of later stage delinquencies and larger base of investor properties as compared to the broader portfolio. This resulted in an increase in reserves of $85 million in the third quarter of 2010.paid claims. Depending upon the mix of loss mitigation activity, market trends, and unemploymentemployment levels in future periods and other general economic impacts which influence the U.S. residential housing market, we could see additional adverse loss reserve changes.

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 expanded loan modification efforts supported by various related lender and government programs, have benefited our results significantly. While expanded loan modification efforts and resulting benefits are expected to continue, the level of rescission activities has declined and we expect this level to remain stable for the foreseeable future. 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 ways to support mortgage servicers in their efforts to increase the benefits from loss mitigation activities.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 ninesix months ended SeptemberJune 30, 2010,2011, we recorded reinsurance recoveries of $156$66 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 enter into excess loss of captive reinsurance transactions and, therefore, 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.

The insurance laws of various states, including North Carolina, require mortgage insurersWe are executing a non-cash intercompany transaction to maintain a minimum amount ofincrease the statutory capital relative to risk in-force in order forour U.S. mortgage insurance companies by using a mortgage insurer toportion of common shares of Genworth Canada, with an estimated market value of $375 million, currently held by Brookfield, our indirect wholly-owned subsidiary. Once this transaction is complete, we will continue to write new business. Duringhold approximately 57.5% of the third quarteroutstanding common shares of 2010,Genworth Canada on a consolidated basis. In addition, Brookfield will have the right, exercisable at its discretion, to purchase for cash these common shares of Genworth Canada from our U.S. mortgage insurance companies at the then current

market price. Brookfield will also have a right of first refusal with respect to the transfer of these common shares of Genworth Canada by the U.S. mortgage insurance companies. This transaction is undergoing customary regulatory review and is expected to be effective as of June 30, 2011, for statutory financial reporting purposes.

As of June 30, 2011, Genworth Mortgage Insurance Corporation (“GEMICO”) exceeded the maximum risk-to-capital ratio increased. Under certain stress scenarios, risk-to-capital ratios could rise to levels that could pressure our abilityrequirement of 25:1. GEMICO is authorized and continues to write new business if available waivers for operating over specified risk-to-capital ratios are not obtained from regulators. Accordingly, we are pursuing various capital strategies which include exploringin North Carolina under a temporaryrevocable two-year waiver of thethat state’s maximum 25:1 risk-to-capital requirement withlimitation, which the North Carolina Department of Insurance (“NCDOI”) approved in a letter dated January 31, 2011. By extension, GEMICO also remains authorized and maycontinues to write business in 34 additional states that do so with other state regulators wherenot have a maximum risk-to-capital requirement. Eleven additional states have granted GEMICO the authority to grantcontinue to write new business by a waiver exists. At the same time,(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 46 states as of June 30, 2011. While we continue to seek necessary approvalsthis 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 four 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 the licensing, capitalization and activation of a subsidiary for the purpose of writing new business.similar purposes. In this regard, the NCDOI recentlyFannie Mae has approved both our filing to permit implementationuse of this plan.GRMIC-NC and our request that GRMAC be recognized as an eligible insurer. We also continue to workremain in ongoing consultation with our state regulators and the GSEs regarding our ongoing use of these alternative arrangements, as necessary.

Ratings

Following our announcement on July 20, 2011 that we strengthened reserves by approximately $300 million in our U.S. mortgage insurance business, Standard & Poor’s Financial Services LLC (“S&P”) lowered the financial strength ratings on GEMICO and GRMIC-NC to obtain their related approvals.“BB-” from “BB+.” The “BB” range is the fifth-highest of nine financial strength rating ranges assigned by S&P, which range from “AAA” to “R.” A plus (+) or minus (-) shows relative standing in a rating category. Accordingly, the “BB-” rating is the thirteenth-highest of S&P’s 21 ratings categories.

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 SeptemberJune 30, 20102011 Compared to Three Months Ended SeptemberJune 30, 20092010

The following table sets forth the consolidated results of operations for the periods indicated:

 

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

(Amounts in millions)

  2010   2009 2010 vs. 2009       2011         2010     2011 vs. 2010 

Revenues:

           

Premiums

  $1,447    $1,492   $(45  (3)%   $1,455   $1,470   $(15  (1)% 

Net investment income

   815     759    56    7   881    823    58    7

Net investment gains (losses)

   105     (122  227    186   (40  (139  99    71

Insurance and investment product fees and other

   300     262    38    15   359    256    103    40
              

 

  

 

  

 

  

Total revenues

   2,667     2,391    276    12   2,655    2,410    245    10
              

 

  

 

  

 

  

Benefits and expenses:

           

Benefits and other changes in policy reserves

   1,502     1,450    52    4   1,672    1,340    332    25

Interest credited

   212     225    (13  (6)%    204    211    (7  (3)% 

Acquisition and operating expenses, net of deferrals

   472     484    (12  (2)%    514    499    15    3

Amortization of deferred acquisition costs and intangibles

   227     143    84    59   197    179    18    10

Interest expense

   114     96    18    19   134    109    25    23
              

 

  

 

  

 

  

Total benefits and expenses

   2,527     2,398    129    5   2,721    2,338    383    16
              

 

  

 

  

 

  

Income (loss) before income taxes

   140     (7  147    NM(1)    (66  72    (138  (192)% 

Provision (benefit) for income taxes

   18     (52  70    135

Benefit for income taxes

   (6  (5  (1  (20)% 
              

 

  

 

  

 

  

Net income

   122     45    77    171

Net income (loss)

   (60  77    (137  (178)% 

Less: net income attributable to noncontrolling interests

   39     26    13    50   36    35    1    3
              

 

  

 

  

 

  

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

  $83    $19   $64    NM(1) 

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

  $(96 $42   $(138  NM(1) 
              

 

  

 

  

 

  

 

(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 increased $32 million primarily related towas flat as a $35$22 million increase in our long-term care insurance business andwas offset by a $12 million increasedecrease in our retirement income business partially offset byand a $15$10 million decrease in our life insurance business.

 

Our International segment decreased $70$4 million as a result of a $21 million decrease of $69 million in our lifestyle protection insurance business, andpartially offset by a $1$17 million decreaseincrease in our international mortgage insurance business. The three months ended SeptemberJune 30, 20102011 included a decreasean increase of $11$44 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment decreased $7$11 million.

Net investment income. Net investment income represents the income earned on our investments.

 

Weighted-average investment yields increased to 4.7%5.1% for the three months ended SeptemberJune 30, 20102011 from 4.4%4.8% for the three months ended SeptemberJune 30, 2009.2010. The increase in weighted-average investment yields was primarily attributable to the reinvestmentimproved performance of limited partnerships accounted for under the high cash balances we were holding during 2009equity method and lower losses on limited partnerships.$16 million of bond calls and prepayments in the current year. Net investment income for the three months ended SeptemberJune 30, 20102011 included $1$7 million of higher gains related to limited partnerships accounted for under the equity method as compared to $20 million of losses in the three months ended SeptemberJune 30, 2009. Additionally, there was an increase in net investment income related to the consolidation of certain securitization entities as of January 1, 2010.

The three months ended SeptemberJune 30, 20102011 included an increase of $2$13 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 $37$26 million of net other-than-temporary impairments for the three months ended SeptemberJune 30, 20102011 as compared to $196$51 million for the three months ended SeptemberJune 30, 2009.2010. Of total impairments for the three months ended SeptemberJune 30, 2011 and 2010, and 2009, $26$17 million and $99$43 million, respectively, related to structured securities, including $18$9 million and $74$23 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. For the three months ended SeptemberJune 30, 2011 and 2010, we recorded $8$4 million related to corporate securities and $2$5 million, respectively, of impairments related to commercial mortgage loans. Weloans and $2 million and $4 million, respectively, of impairments related to limited partnership investments. For the three months ended June 30, 2011, we also recorded $71$3 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlands during the three months ended September 30, 2009.real estate held-for-investment.

 

Net investment gainslosses related to derivatives of $94$15 million infor the third quarter of 2010three months ended June 30, 2011 were primarily relateddue to $66$16 million of gainslosses 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”) as a resultand $4 million of changes in the non-performance risk incorporated into the discount ratelosses associated with derivatives used to value GMWB embedded derivatives. The increase also included $22 million of gains from the change in value of our credit default swaps due to narrowing credit spreads, $9 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $2 million of gains related to embedded derivatives associated with certain reinsurance agreements and $1foreign currency risk. These losses were partially offset by $3 million of gains related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. Theseposition and $2 million of gains in other non-qualified interest rate swaps. Net investment losses related to derivatives of $38 million for the three months ended June 30, 2010 were partially offset by $6primarily related to $31 million of losses from foreign currency forward contracts. Net investment gains relatedthe change in value of our credit default swaps due to derivativeswidening credit spreads, $21 million of $19 millionlosses from the change in value of the third quarterembedded derivative liabilities exceeding the change in value of 2009 were primarily related to gains inthe 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 derivative instruments used for mitigating this risk.

We also recorded $30 million of net gains related to securitization entities in the third quarter of 2010 primarily associated with derivatives and $9 million of losses related to commercial mortgage loans. 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 gainslosses related to the sale of available-for-sale securities were $9 million during the three months ended June 30, 2011 compared to net gains of $17 million during the three months ended June 30, 2010. We recorded $14 million of net gains related to trading securities during the three months ended June 30, 2011. We recorded $42 million of lower net losses related to securitization entities during the three months ended June 30, 2011 compared to the three months ended June 30, 2010 primarily associated with lower losses related to derivatives. We also $38recorded $2 million lowerof gains related to commercial mortgage loans during the three months ended June 30, 2011 attributable to a decrease in the current year.allowance compared to $18 million of losses during the three months ended June 30, 2010 from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance.

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 $44$88 million largely driven by ana $61 million increase of $17in our life insurance business, a $25 million increase in our wealth management business and a $4 million increase in our retirement income business.

Our International segment increased $10 million primarily as a result of an increase of $11$6 million in our long-term care insurance business, an increase of $9 million in our lifeinternational mortgage insurance business and an increase of $7$4 million in our retirement incomelifestyle protection insurance business. The three months ended June 30, 2011 did not include a change attributable to changes in foreign exchange rates.

 

Corporate and Other activities decreased $5increased $4 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 $88$43 million primarily attributable to a $39$62 million increase in our long-term care insurance business and a $28$7 million increase in our life insurance business, andpartially offset by a $21$26 million increasedecrease in our retirement income business.

 

Our International segment decreased $80$21 million primarily as a result of a decrease of $46$22 million in our lifestyle protection insurance business, and a decreasepartially offset by an increase of $34$1 million in our international mortgage insurance business. The three months ended June 30, 2011 included an increase of $13 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment increased $45$310 million.

Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances.

Our Retirement and Protection segment decreased $12$3 million principally relatedprimarily attributable to a $10 million decrease in our retirement income business, partially offset by an $8 million increase in our life insurance business.

Corporate and Other activities decreased $4 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 $28$22 million primarily attributable to a $15$20 million increase in our wealth management business a $14 million increase in our long-term care insurance business and a $3$2 million increase in our life insurance business, partially offset by a $4 million decrease in our retirement income business.

 

Our International segment decreased $23 million related towas flat as a $30$6 million decrease in our lifestyle protection insurance business partiallywas offset by a $7an increase of $6 million increase in our international mortgage insurance business. The three months ended SeptemberJune 30, 20102011 included a decreasean increase of $11$17 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment decreased $6 million.

Corporate and Other activities decreased $11$9 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 increased $92$14 million primarily attributable to a $48 million increase in our life insurance business, a $37$16 million increase in our retirement income business, andpartially offset by a $7$2 million increasedecrease in our long-term carelife insurance business.

 

Our International segment decreased $6increased $5 million from an $8primarily related to a $3 million decreaseincrease in our lifestyle protection insurance business partially offset byand a $2 million increase in our international mortgage insurance business. The three months ended SeptemberJune 30, 20102011 included a decreasean increase of $3$5 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 decreased $3 million related to our life insurance business.

Our International segment decreased $4increased $12 million largely related todriven by an $8increase of $6 million decrease in each of our international mortgage insurance and our lifestyle protection insurance business, partially offset by a $4 million increase in our international mortgage insurance business.businesses. The three months ended SeptemberJune 30, 20102011 included a decreasean increase of $1$2 million attributable to changes in foreign exchange rates.

 

Corporate and Otherother activities increased $19$16 million.

Provision (benefit)Benefit for income taxestaxes.. The effective tax rate decreasedincreased to 12.9%9.1% for the three months ended SeptemberJune 30, 20102011 from 742.9%(6.9)% for the three months ended SeptemberJune 30, 2009.2010. This decreaseincrease in the effective tax rate was primarily attributable to small pre-tax results in relation to tax adjustmentshigher taxes in the priorcurrent year includingas a result of a Canadian legislative change as compared to an Australian tax favored investments benefits, the effect of lower taxed foreign income, non-deductible expenses and interest on uncertain tax positionslegislative benefit in the prior year. The Canadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase the effective tax rate on our U.S. generally accepted accounting principles (“U.S. GAAP”) earnings as prior deductions for contributions to the fund lowered the effective tax rate on U.S. GAAP earnings. The three months ended SeptemberJune 30, 20102011 included an increase of $2$4 million attributable to changes in foreign exchange rates.

Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portion of equityincome 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%, as well as a result of lower losses from an improving economy. The three months ended SeptemberJune 30, 20102011 included an increase of $3$2 million attributable to changes in foreign exchange rates.

Net income (loss) available to Genworth Financial, Inc.’s common stockholders. The increaseWe reported a net loss available to Genworth Financial, Inc.’s common stockholders in the current year compared to net income available to Genworth Financial, Inc.’s common stockholders in the currentprior year was primarily related to improved investment performance, partially offset by a higher net operating loss in our U.S. mortgage insurance business.business largely related to the reserve strengthening during the three months ended June 30, 2011 and additional tax benefits recognized in the prior year. These decreases were partially offset by higher product fee income and improved investment performance 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 the net loss available to Genworth Financial, Inc.’s common stockholders for the three months ended June 30, 2011 was an increase of $14 million, net of tax, attributable to changes in foreign exchange rates.

NineSix Months Ended SeptemberJune 30, 20102011 Compared to NineSix Months Ended SeptemberJune 30, 20092010

The following table sets forth the consolidated results of operations for the periods indicated:

 

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

(Amounts in millions)

  2010      2009  2010 vs. 2009 

Revenues:

     

Premiums

  $4,387   $4,496   $(109  (2)% 

Net investment income

   2,403    2,251    152    7

Net investment gains (losses)

   (104  (945  841    89

Insurance and investment product fees and other

   812    806    6    1
              

Total revenues

   7,498    6,608    890    13
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   4,157    4,450    (293  (7)% 

Interest credited

   636    763    (127  (17)% 

Acquisition and operating expenses, net of deferrals

   1,446    1,381    65    5

Amortization of deferred acquisition costs and intangibles

   590    602    (12  (2)% 

Interest expense

   338    306    32    10
              

Total benefits and expenses

   7,167    7,502    (335  (4)% 
              

Income (loss) before income taxes

   331    (894  1,225    137% 

Benefit for income taxes

   (80  (420  340    81% 
              

Net income (loss)

   411    (474  885    187% 

Less: net income attributable to noncontrolling interests

   108    26    82    NM(1) 
              

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

  $303   $(500 $803    161% 
              

(1)

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

   Six months ended
June 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2011  2010  2011 vs. 2010 

Revenues:

     

Premiums

  $2,892   $2,940   $(48  (2)% 

Net investment income

   1,711    1,588    123    8

Net investment gains (losses)

   (68  (209  141    67

Insurance and investment product fees and other

   688    512    176    34
              

Total revenues

   5,223    4,831    392    8
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   3,081    2,655    426    16

Interest credited

   405    424    (19  (4)% 

Acquisition and operating expenses, net of deferrals

   1,014    974    40    4

Amortization of deferred acquisition costs and intangibles

   382    363    19    5

Interest expense

   261    224    37    17
              

Total benefits and expenses

   5,143    4,640    503    11
              

Income before income taxes

   80    191    (111  (58)% 

Provision (benefit) for income taxes

   24    (98  122    124
              

Net income

   56    289    (233  (81)% 

Less: net income attributable to noncontrolling interests

   70    69    1    1
              

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

  $(14 $220   $(234  (106)% 
              

Premiums

 

Our Retirement and Protection segment increased $14decreased $6 million primarily related to a $57$28 million increasedecrease in our long-term care insuranceretirement income business partially offset byand a $38$17 million decrease in our life insurance business, and a $5partially offset by an increase of $39 million decrease in our retirement incomelong-term care insurance business.

 

Our International segment decreased $75$31 million as a result of a decrease of $133$64 million in our lifestyle protection insurance business, partially offset by a $58an increase of $33 million increase in our international mortgage insurance business. The ninesix months ended SeptemberJune 30, 20102011 included an increase of $82$54 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment decreased $46$11 million.

Net investment income

 

Weighted-average investment yields increased to 4.7%5.0% for the ninesix months ended SeptemberJune 30, 20102011 from 4.3%4.6% for the ninesix months ended SeptemberJune 30, 2009.2010. The increase in weighted-average investment yields was primarily attributable to improved performance of limited partnerships and $20 million of higher bond calls and prepayments in the reinvestment of the high cash balances we were holding during 2009 and lower losses on limited partnerships.current year. Net investment income for the ninesix months ended SeptemberJune 30, 20102011 included $137$21 million of lower lossesgains related to limited partnerships accounted for under the equity method as compared to $24 million of losses for the prior year. Additionally, there was an increase in net investment income related to the consolidation of certain securitization entities as of January 1,six months ended June 30, 2010. These increases were partially offset by a decrease in investment income related to policy loans from a bankruptcy-related lapse in 2009.

 

The ninesix months ended SeptemberJune 30, 20102011 included an increase of $34$18 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 $168$62 million of net other-than-temporary impairments for the ninesix months ended SeptemberJune 30, 20102011 as compared to $945$131 million for the ninesix months ended SeptemberJune 30, 2009.2010. Of total impairments for the ninesix months ended SeptemberJune 30, 2011 and 2010, and 2009, $131$38 million and $488$105 million, respectively, related to structured securities, including $77$24 million and $342$59 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 $13$14 million and $81$5 million for the ninesix months ended SeptemberJune 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, we recorded $5 million of impairments related to commercial mortgage loans and $2 million and $10 million, respectively, of impairments related to limited partnership investments. For the six months ended June 30, 2011, we also recorded $3 million of impairments related to real estate held-for-investment. For the six months ended June 30, 2010, and 2009, respectively. Wewe also recorded $6 million and $316 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlands during the nine months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010, we recorded $10 million of impairments related to limited partnership investments and $7 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 nine months ended September 30, 2009. We concluded the value of our retained interest was zero and recognized the full impairment in the prior year.securities.

 

Net investment gainslosses related to derivatives of $48$25 million for the ninesix months ended SeptemberJune 30, 20102011 were primarily relateddue to $31$20 million of gainslosses from the change in value of derivative instruments used for mitigating the risk of embedded derivative liabilities exceeding the changegains in value of the embedded derivative liabilities associated with our variable annuity products with GMWBs which included a reduction in the GMWB valuation as a resultand $13 million of changes in the non-performance risk incorporated into the discount ratelosses associated with derivatives used to value GMWB embedded derivatives. The increase also included $22 million of ineffectiveness gains from our cash flow hedge programs related to our long- term care insurance business and $4foreign currency risk. These losses were partially offset by $5 million of gains related to embedded derivativesa derivative strategy to mitigate the interest rate risk associated with certain reinsurance agreements. Theseour statutory capital position and $3 million of gains in other non-qualified interest rate swaps. Net investment losses related to derivatives of $46 million for the six months ended June 30, 2010 were partially offset by $5primarily 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 $4$6 million of losses related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. Net investment gains related to derivatives of $12 million for the nine months ended September 30, 2009 were primarily related toThese losses from a derivative strategy to mitigate the interest rate risk associated with our statutory capital position which were partially offset by $13 million of ineffectiveness gains infrom 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 derivative liabilitiesderivatives associated with our variable annuity products with GMWBs exceeding the change in value of derivative instruments used for mitigating this risk.certain reinsurance agreements.

 

Net losses related to the sale of available-for-sale securities were $11 million during the six months ended June 30, 2011 compared to net gains of $2 million during the six months ended June 30, 2010. We recorded $31$23 million of higher gains related to trading securities during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. We recorded $5 million of net gains related to securitization entities during the six months ended June 30, 2011 primarily related to gains on trading securities compared to $36 million of net losses during the six months ended June 30, 2010 primarily associated with derivatives. We also recorded $1 million of gains related to commercial mortgage loans during the six months ended June 30, 2011 attributable to a decrease in the allowance compared to $22 million of losses during the six months ended June 30, 2010 from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance and $6 million of net losses related to securitization entities primarily associated with derivatives during the nine months ended September 30, 2010.allowance. 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 $5 million during the nine months ended September 30, 2010 compared to net losses of $20 million during the nine months ended September 30, 2009.

Insurance and investment product fees and other

 

Our Retirement and Protection segment increased $129$166 million largely driven by an increase of $57 million in our wealth management business, an increase of $33$100 million in our life insurance business, an increase of $26$54 million in our wealth management business and an increase of $12 million in our retirement income business and an increase of $13 million in our long-term care insurance business.

Our U.S. Mortgage Insurance segment decreased $3 million.

 

Corporate and Other activities decreased $121increased $3 million.

Benefits and other changes in policy reserves

 

Our Retirement and Protection segment increased $186$87 million primarily attributable to a $108$96 million increase in our long-term care insurance business and a $67$37 million increase in our life insurance business, and an $11partially offset by a $46 million increasedecrease in our retirement income business.

 

Our International segment decreased $161$54 million as a result of a decrease of $105$58 million in our lifestyle protection insurance business, and a decreasepartially offset by an increase of $56$4 million in our international mortgage insurance business. The ninesix months ended SeptemberJune 30, 20102011 included an increase of $35$19 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment decreased $317increased $393 million.

Interest credited

 

Our Retirement and Protection segment decreased $32$9 million principally relatedprimarily attributable to an $18 million decrease in our retirement income business, partially offset by an $11 million increase in our life insurance business.

 

Corporate and Other activities decreased $95$10 million.

Acquisition and operating expenses, net of deferrals

 

Our Retirement and Protection segment increased $96$65 million primarily attributable to a $46 million increase in our wealth management business, a $35$13 million increase in our retirement income business and a $12 million increase in our long-term care insurance business, andpartially offset by a $15$6 million increasedecrease in our life insurance business.

 

Our International segment decreased $7$5 million related to a $32$12 million decrease in our lifestyle protection insurance business, partially offset by a $25$7 million increase in our international mortgage insurance business. The ninesix months ended SeptemberJune 30, 20102011 included an increase of $8$15 million attributable to changes in foreign exchange rates.

 

Our U.S. Mortgage Insurance segment decreased $4 million.

Corporate and Other activities decreased $20$22 million.

Amortization of deferred acquisition costs and intangibles

 

Our Retirement and Protection segment was flat as anincreased $20 million primarily attributable to a $34 million increase of $72in our retirement income business, partially offset by a $9 million decrease in our life insurance business was offset by a $67 million decrease in our retirement income business and a $5 million decrease in our long-term care insurance business.

 

Our International segment decreased $7 million primarilywas flat as a result of a $22$7 million decrease in our lifestyle protection insurance business was partially offset by a $15$7 million increase in our international mortgage insurance business. The ninesix months ended SeptemberJune 30, 20102011 included an increase of $7$6 million attributable to changes in foreign exchange rates.

Interest expense.expense Interest expense

Our International segment increased primarily$8 million related to a $31$12 million increase in our international mortgage insurance business, partially offset by a decrease of $4 million in our lifestyle protection insurance business. The three months ended June 30, 2011 included an increase of $1 million attributable to changes in foreign exchange rates.

Corporate and Other activities.other activities increased $28 million.

BenefitProvision (benefit) for income taxes. The effective tax rate decreasedincreased to (24.2)30.0% for the six months ended June 30, 2011 from (51.3)% for the ninesix months ended SeptemberJune 30, 2010 from 47.0% for the nine months ended September 30, 2009.2010. This decreaseincrease in the effective tax rate was attributable to changes in uncertain tax benefits in the prior year related to our separation from our former parent lower taxed foreign income and higher taxes in the current year as a result of a Canadian legislative change as compared to an Australian tax favored investments.legislative benefit in the prior year. The nineCanadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase the effective tax rate on our U.S. GAAP earnings as prior deductions for contributions to the fund lowered the effective tax rate on U.S. GAAP earnings. The six months ended SeptemberJune 30, 20102011 included an increase of $21$7 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 ninesix months ended SeptemberJune 30, 20102011 included an increase of $12$4 million attributable to changes in foreign exchange rates.

Net income (loss) available to Genworth Financial, Inc.’s common stockholders. We reported a net incomeloss available to Genworth Financial, Inc.’s common stockholders in the current year compared to a net lossincome available

to Genworth Financial, Inc.’s common stockholders in the prior year primarily related to a higher loss in our U.S. mortgage insurance business largely related to the reserve strengthening in the current year and additional tax benefits recognized in the prior year. These decreases were partially offset by higher product fee income and improved investment performance in the current year, lower net investment losses and a lower loss in our U.S. mortgage insurance business.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 the net incomeloss available to Genworth Financial, Inc.’s common stockholders for the six months ended June 30, 2011 was an increase of $32$20 million, net of tax, attributable to changes in foreign exchange rates.

Reconciliation of net income (loss) to net operating income (loss) available to Genworth Financial, Inc.’s common stockholders

The net operating loss available to Genworth Financial, Inc.’s common stockholders for the three months ended June 30, 2011 was $74 million compared to net operating income available to Genworth Financial, Inc.’s common stockholders of $118 million for the three months ended June 30, 2010. Net operating income available to Genworth Financial, Inc.’s common stockholders for the threesix months ended SeptemberJune 30, 2011 and 2010 and 2009 was $29$24 million and $81 million, respectively. Net operating income available to Genworth Financial, Inc.’s common stockholders for the nine months ended September 30, 2010 and 2009 was $261 million and $104$232 million, respectively. 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. 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.

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. generally accepted accounting principles (“U.S. GAAP”),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, including net operating income (loss) 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 (loss) available to

Genworth Financial, Inc.’s common stockholders and net operating income (loss) available to Genworth Financial, Inc.’s common stockholders isper common share on a basic and diluted basis are not a substitutesubstitutes for net income (loss) available to Genworth Financial, Inc.’s common stockholders or net income (loss) 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 (loss) 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 (loss) available to Genworth Financial, Inc.’s common stockholders for the periods indicated:

 

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

(Amounts in millions)

      2010          2009           2010          2009     

Net income (loss)

  $122   $45    $411   $(474

Less: net income attributable to noncontrolling interests

   39    26    108    26 
                  

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

   83    19     303    (500

Adjustments to net income (loss) available to Genworth Financial, Inc.’s common stockholders:

      

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

   (54  62     64    604  

Net tax benefit related to separation from our former parent

   —      —       (106  —    
                  

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

  $29   $81    $261   $104  
                  

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

(Amounts in millions)

      2011          2010           2011          2010     

Net income (loss)

  $(60 $77    $56   $289  

Less: net income attributable to noncontrolling interests

   36    35     70    69  
  

 

 

  

 

 

   

 

 

  

 

 

 

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

   (96  42     (14  220  

Adjustments to net income (loss) available to Genworth Financial, Inc.’s common stockholders:

      

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

   22    76     38    118  

Net tax benefit related to separation from our former parent

   —      —       —      (106
  

 

 

  

 

 

   

 

 

  

 

 

 

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

  $(74 $118    $24   $232  
  

 

 

  

 

 

   

 

 

  

 

 

 

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 (loss) available to Genworth Financial, Inc.’s common stockholders per common share for the periods indicated:

 

  Three months ended
September 30,
   Nine months ended
September 30,
   Three months ended
June 30,
   Six months ended
June 30,
 

(Amounts in millions, except per share amounts)

      2010           2009            2010           2009            2011         2010           2011         2010     

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

              

Basic

  $0.17    $0.04    $0.62    $(1.14  $(0.20 $0.09    $(0.03 $0.45  
                  

 

  

 

   

 

  

 

 

Diluted(1)

  $0.17    $0.04    $0.61    $(1.14

Diluted

  $(0.20 $0.08    $(0.03 $0.45  
  

 

  

 

   

 

  

 

 

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

      

Basic

  $(0.15 $0.24    $0.05   $0.47  
  

 

  

 

   

 

  

 

 

Diluted

  $(0.15 $0.24    $0.05   $0.47  
                  

 

  

 

   

 

  

 

 

Weighted-average common shares outstanding:

              

Basic

   489.5     448.9     489.1     438.5     490.6    489.1     490.4    489.0  
                  

 

  

 

   

 

  

 

 

Diluted(1)

   493.9     451.6     493.9     438.5     490.6    494.2     490.4    493.9  
                  

 

  

 

   

 

  

 

 

 

(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 available to Genworth Financial, Inc.’s common stockholders for the ninethree and six months ended SeptemberJune 30, 2009,2011, we were required to use basic weighted-average common shares outstanding in the calculation offor the 2009three and six months ended June 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.33.7 million and 4.0 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.’s common stockholders for the ninethree and six months ended SeptemberJune 30, 2009,2011, dilutive potential common shares would have been 439.8 million.494.3 million and 494.4 million, respectively.

Diluted weighted-average shares outstanding forin 2010 and for the three months ended September 30, 2009 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 (loss) 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 (loss) 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-sales, claims curtailment 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, the estimated savings represent the difference between the full claim obligation and the actual amount paid. We believe that this metric

information 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 SeptemberJune 30, 20102011 Compared to Three Months Ended SeptemberJune 30, 20092010

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

 

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

(Amounts in millions)

      2010         2009         2010 vs. 2009       2011 2010 2011 vs. 2010 

Revenues:

          

Premiums

  $845   $813   $32    4  $822   $822   $—      —  

Net investment income

   630    576    54    9   660    630    30    5

Net investment gains (losses)

   57    (102  159    156%    (46  (69  23    33

Insurance and investment product fees and other

   278    234    44    19   348    260    88    34
                      

Total revenues

   1,810    1,521    289    19   1,784    1,643    141    9
                      

Benefits and expenses:

          

Benefits and other changes in policy reserves

   990    902    88    10   1,004    961    43    4

Interest credited

   174    186    (12  (6)%    173    176    (3  (2)% 

Acquisition and operating expenses, net of deferrals

   254    226    28    12   274    252    22    9

Amortization of deferred acquisition costs and intangibles

   159    67    92    137   118    104    14    13

Interest expense

   26    23    3    13   26    29    (3  (10)% 
                      

Total benefits and expenses

   1,603    1,404    199    14   1,595    1,522    73    5
                      

Income before income taxes

   207    117    90    77   189    121    68    56

Provision for income taxes

   72    32    40    125   66    40    26    65
                      

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

   135    85    50    59   123    81    42    52

Adjustment to net income available to Genworth Financial, Inc.’s common stockholders:

          

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

   (24  49    (73  (149)%    26    33    (7  (21)% 
                      

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

  $111   $134   $(23  (17)%   $149   $114   $35    31
                      

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

  $33    $78    $(45  (58)%   $72    $32    $40    125

Long-term care insurance

   44     39     5    13   31     47     (16  (34)% 

Wealth management

   8     8     —      —     13     10     3    30

Retirement income

   26     9     17    189   33     25     8    32
               

 

   

 

   

 

  

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

  $111    $134    $(23  (17)%   $149    $114    $35    31
               

 

   

 

   

 

  

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

 

Our life insurance business decreased $45increased $40 million primarily drivenprincipally from an $11 million gain on the repurchase of notes secured by our non-recourse funding obligations, favorable mortality, higher lapses oninvestment income, improved persistency and growth of our term life insurance policies issued in 1999 and 2000 as they go through their post-level rate period, increased claims as the result of higher mortality in our term life insurance products compared to the prior year and a favorable unlocking related to estimated gross profit assumptions in our universal life insurance products in the prior year that did not recur in the current year. These decreases were partially offset by an increase in net investment income.product.

 

Our long-term care insurance business increased $5decreased $16 million as a result ofmainly attributable to higher investment income as well as growth and continuedclaims in older issued policies, partially offset by the favorable performance of newer issued policies.

 

Our wealth management business was flat asincreased $3 million primarily from higher average assets under management from market growth and positive net flows were offset by a tax adjustment in the current year.flows.

 

Our retirement income business increased $17$8 million primarily attributablelargely related to an increase of $18$9 million in our fee-based products from favorable market performance in the current year. This increase was partially offset by a $1 million decrease in our spread-based products from higher amortization due to less favorable adjustments related to an increaselapses, partially offset by more favorable mortality in net investment income.our single premium immediate annuity product.

Revenues

Premiums

 

Our life insurance business decreased $15$10 million primarily 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 depositsas a result of the new product reflected in insurance and investment product fees and other. The decrease was also from higher lapses onrunoff of our term life insurance policies as they go through their post-level rate period.products.

 

Our long-term care insurance business increased $35$22 million mainly attributable to growth of the in-force block from new sales and in-force rate actions.sales.

 

Our retirement income business increaseddecreased $12 million primarily driven by higherlower life-contingent sales of our spread-based products.

Net investment income

 

Our life insurance business increased $11$22 million mainly related to limited partnerships accounted for under the equity method.higher average invested assets and reinvestment of cash balances. Net investment income in the second quarter of 2011 also included $1higher gains of $4 million of gains related tofrom limited partnerships accounted for under the equity method in the current year as compared to losses of $6and $4 million in the prior year.from bond calls and prepayments.

Our long-term care insurance business increased $27$18 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 included $1 million of gains related to limited partnerships accounted for under the equity method in the current year as compared to losses of $5 million in the prior year.

 

Our retirement income business increased $16decreased $10 million primarily attributable to the benefit from the reinvestment of high cash balances held during 2009 and $8 million of lower losses from limited partnerships accounted for under the equity method. These increases were partially offset by a decline in average invested assets. Net investment income also included $10 million of additional investment income from bond calls and prepayments in the current year.

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 $30increased $8 million primarily driven by lower impairments recorded in the current year and lower gainshigher losses from the sale of investment securities related to portfolio repositioning.

 

Our long-term care insurance business had net investment losses of $8 million in the current year of $5 million compared to $5 million of netmainly from impairments. Net investment gains of $4 million in the prior year were primarily relatedattributable to salesgains from the sale of investment securities related to portfolio repositioning.repositioning, partially offset by impairments.

 

OurNet investment losses in our retirement income business had netdecreased $43 million largely attributable to a $37 million decrease in losses related to our spread-based products primarily related to higher derivative gains and higher gains from the sale of investment gainssecurities related to portfolio repositioning in the current year of $75 million compared to $63prior year. Our fee-based products had $6 million of net investmentlower losses in the prior year primarily from gainson embedded derivatives associated with our variable annuity products with GMWBs as a result of changes in non-performance risk incorporated into the discount rate used to value GMWB embedded derivatives and lower impairments in the current year.year, partially offset by lower derivative gains.

Insurance and investment product fees and other

 

Our life insurance business increased $9$61 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. Partially offsetting this increase was a decrease primarily from a favorable adjustment in ourand universal life insurance products related to estimated gross profit assumptionsand also included a gain of $17 million from the repurchase of notes secured by our non-recourse funding obligations in the prior year that did not recur.

Our long-term care insurance business increased $11 million primarily driven by our equity access business as a result of higher margins on loans.current year.

 

Our wealth management business increased $17$25 million primarily attributable to higher average assets under management from the purchase of Altegris in the fourth quarter of 2010, market growth and positive net flows.

 

Our retirement income business increased $7$4 million mainly due toas a result of higher average account values ofin our fee-based products from favorable market growth.performance.

Benefits and expenses

Benefits and other changes in policy reserves

 

Our life insurance business increased $28$7 million principally related to increased claims associated with higher mortalitygrowth of our term universal life insurance product. This increase was partially offset by improved persistency in our term life insurance products aging of our in-force block and an increase in reserves due to growth in our new term universal life insurance product. Thethe current year also includedas a $5 million increase in reserves from a policy valuation system input correction related toresult of smaller blocks entering the post-level rate period and overall lower lapse rates and favorable mortality on our universal and term life insurance products.products in the current year as compared to the prior year.

 

Our long-term care insurance business increased $39$62 million primarily as a result of higher claims and increased reserves from the aging and growth of our long-term care insurance in-force block and lower terminations in the current year.higher claims on older issued policies.

 

Our retirement income business increased $21decreased $26 million largely attributable to a decrease of $22 million from our life-contingent spread-based products related to higher life-contingentas a result of a decline in sales in the current year and higher amortization of sales inducements as a result of net investment lossesmore favorable mortality in the current year compared to prior year. Our fee-based products decreased $4 million driven by a decline in our guaranteed minimum death benefit claims.

Interest credited

Our life insurance business increased $8 million from the timing of reinsurance activity in the current year.

Interest credited. Interest credited decreased $12 million primarily related to ourOur retirement income business decreased $10 million 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.period in a low interest rate environment.

Acquisition and operating expenses, net of deferrals

 

Our life insurance business increased $3$2 million primarily related to higher expenses from growth of our term universal life insurance products.

Our long-term care insurance business increased $14 million largely driven by our equity access business as a result of increased broker commissions on loans and from growth of our long-term care insurance in-force block.product.

 

Our wealth management business increased $15$20 million primarily from increased asset-based expenses as assets under management increased from the acquisition of Altegris in the fourth quarter of 2010, market growth and positive net flows.

Our retirement income business decreased $4 million as the prior year included non-recoverable acquisition expenses.

Amortization of deferred acquisition costs and intangibles

 

Our life insurance business increased $48 million. The prior year included an adjustmentdecreased $2 million primarily attributable to estimated gross profits of $20 million and lower amortization of $20 million from adeferred acquisition costs related to our term life insurance products in the post-level rate period, partially offset by an increase in amortization of deferred acquisition costs driven by favorable unlockingmortality in our universal life insurance products that did not recur in the current year. The current year also increased primarily attributable to increased amortization on our universal life insurance products primarily from favorable mortality in the current year compared to the prior year. In addition, amortization increased due to higher lapses in our term life insurance policies as they go through their post-level rate period and from growth in our term universal life insurance product.products.

 

Our long-term care insurance business increased $7 million fromwas flat as growth of our long-term care insurance in-force block partiallywas offset by lower terminationsa decrease in amortization due to deferring 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.

 

Our retirement income business increased $37$16 million primarily related to an increase of $25$20 million in our fee-basedspread-based products largelyprincipally from less favorable adjustments related to lapses and higher amortization of deferred acquisition costs attributable to increased amortization as a result of higher gains in the current year related to embedded derivatives associated with our variable annuity products with GMWBs and an unfavorable refinement of assumptions of $9 million in the current year. Our spread-based products increased $12 million mainly from increased amortization attributable to net investment gains in the current year compared tolower net investment losses in the priorcurrent year. TheThis increase was partially offset by a decrease in the account values of these products. Our fee-based products decreased $4 million mainly from favorable equity market performance in the current year, partially offset by an increase in amortization of deferred acquisition costs from lower derivative losses.

Interest expense. Interest expense decreased $3 million related to our life insurance business from the write-off of capitalized costs associated with our non-recourse funding obligations in the prior year, also included an unfavorable unlocking primarily related to spread assumptions that did not recur.partially offset by higher letter of credit fees in the current year.

Provision for income taxes.The effective tax rate increased to 34.8%34.9% for the three months ended SeptemberJune 30, 20102011 from 27.4%33.1% for the three months ended SeptemberJune 30, 2009.2010. The increase in the effective tax rate was primarily attributable to a changetax favored investment benefits in uncertain tax positionsrelation to higher pre-tax earnings in the current year compared to the prior year.

NineSix Months Ended SeptemberJune 30, 20102011 Compared to NineSix Months Ended SeptemberJune 30, 20092010

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

 

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

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Revenues:

     

Premiums

  $2,491   $2,477   $14    1

Net investment income

   1,854    1,659    195    12

Net investment gains (losses)

   (79  (672  593    88

Insurance and investment product fees and other

   780    651    129    20
              

Total revenues

   5,046    4,115    931    23
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   2,896    2,710    186    7

Interest credited

   524    556    (32  (6)% 

Acquisition and operating expenses, net of deferrals

   736    640    96    15

Amortization of deferred acquisition costs and intangibles

   368    368    —      —  

Interest expense

   77    73    4    5
              

Total benefits and expenses

   4,601    4,347    254    6
              

Income (loss) before income taxes

   445    (232  677    NM(1) 

Provision (benefit) for income taxes

   145    (100  245    NM(1) 
              

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

   300    (132  432    NM(1) 

Adjustment to net income (loss) available to Genworth Financial, Inc.’s common stockholders:

     

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

   47    427    (380  (89)% 
              

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

  $347   $295   $52    18
              

(1)

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

   Six months ended
June 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2011  2010  2011 vs. 2010 

Revenues:

     

Premiums

  $1,640   $1,646   $(6  —  

Net investment income

   1,288    1,224    64    5

Net investment gains (losses)

   (74  (136  62    46

Insurance and investment product fees and other

   668    502    166    33
  

 

 

  

 

 

  

 

 

  

Total revenues

   3,522    3,236    286    9
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   1,993    1,906    87    5

Interest credited

   341    350    (9  (3)% 

Acquisition and operating expenses, net of deferrals

   547    482    65    13

Amortization of deferred acquisition costs and intangibles

   229    209    20    10

Interest expense

   52    51    1    2
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   3,162    2,998    164    5
  

 

 

  

 

 

  

 

 

  

Income before income taxes

   360    238    122    51

Provision for income taxes

   125    73    52    71
  

 

 

  

 

 

  

 

 

  

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

   235    165    70    42

Adjustment to net income available to Genworth Financial, Inc.’s common stockholders:

     

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

   41    71    (30  (42)% 
  

 

 

  

 

 

  

 

 

  

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

  $276   $236   $40    17
  

 

 

  

 

 

  

 

 

  

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

 

   Nine months ended
September 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

  $102    $174   $(72  (41)% 

Long-term care insurance

   131     122    9    7

Wealth management

   29     21    8    38

Retirement income

   85     (22  107    NM(1) 
               

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

  $347    $295   $52    18
               

(1)

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

   Six months ended
June 30,
   Increase
(decrease) and
percentage
change
 

(Amounts in millions)

      2011           2010       2011 vs. 2010 

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

       

Life insurance

  $124    $69    $55    80

Long-term care insurance

   71     87     (16  (18)% 

Wealth management

   23     21     2    10

Retirement income

   58     59     (1  (2)% 
  

 

 

   

 

 

   

 

 

  

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

  $276    $236    $40    17
  

 

 

   

 

 

   

 

 

  

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

 

Our life insurance business decreased $72increased $55 million primarilyfrom growth of our term universal life insurance product, an $11 million gain on the repurchase of notes secured by our non-recourse funding obligations, an $8 million favorable cumulative impact from a recent change in premium taxes in Virginia and higher investment income. These increases were partially offset by the runoff of our term life insurance products attributable to an increase in claims as a result of higher mortality compared to theproducts. The prior year higher lapses on our term life insurance policies issued in 1999 and 2000 as they go through their post-level rate periodalso included an unfavorable reinsurance adjustment of $5 million and a favorable unlocking related to estimated gross profit assumptions in our universal life insurance products in the prior yeartax settlement that did not recur. These decreases were partially offset by higher net investment income in the current year.

 

Our long-term care insurance business increased $9decreased $16 million from growth and continuedas higher claims in older issued policies were partially offset by the favorable performance of newer issued policies and higher investment income in the current year, partially offset by lower terminations.policies.

 

Our wealth management business increased $8$2 million fromas a result of higher average assets under management from market growth and positive net flows.flows which were partially offset by a $2 million favorable tax adjustment in the prior year that did not recur.

 

Our retirement income business was relatively flat. Our fee-based products increased $107 million.$3 million mainly attributable to favorable market performance, partially offset by 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. Our spread-based products increased $79decreased $4 million primarily from an increase in amortization due to less favorable adjustments related to lapses and a decrease in net investment income. Our fee-based products increased $28 million mainly attributable to market growth.income, partially offset by more favorable mortality in our single premium immediate annuity product.

Revenues

Premiums

 

Our life insurance business decreased $38$17 million mainly attributable toprimarily as 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 deposits of the new product reflected in insurance and investment product fees and other. The decrease was also a result of higher lapses on our term life insurance policies as they go through their post-level rate period andpartially offset by an unfavorable reinsurance adjustment of $8 million in the current year.prior year that did not recur.

 

Our long-term care insurance business increased $57$39 million mainly attributable to growth ofin the in-force block from new sales and in-force rate actions.sales.

 

Our retirement income business decreased $5$28 million primarily driven by lower life-contingent sales of our spread-based products.

Net investment income

 

Our life insurance business increased $25$46 million mainly related to $31higher average invested assets and reinvestment of cash balances. Net investment income for the six months ended June 30, 2011 also included gains of $9 million of lower losses in the current year related tofrom limited partnerships accounted for under the equity method. This increase was partially offset by a declinemethod compared to losses of $2 million in average invested assets related to our term life insurance products.the prior year and $6 million of additional investment income from bond calls and prepayments in the current year.

 

Our long-term care insurance business increased $91$37 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 incomeThese increases were partially offset by an unfavorable adjustment of $6 million related to the accounting for interest rate swaps in the current yearyear.

Our retirement income business decreased $19 million primarily attributable to a decline in average invested assets. Net investment income for the six months ended June 30, 2011 also included $23$14 million of lower losses related toadditional income from bond calls and prepayments and higher gains of $5 million from limited partnerships accounted for under the equity method.method compared to prior year.

Our retirement income business increased $79 million primarily attributable to $86 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 held during 2009. These increases were partially offset by lower average invested assets.

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 $199$18 million primarily driven by lower impairments recorded in the current year and lower losses from the sale of investment securities related to portfolio repositioning.year.

 

Our long-term care insurance business had net investment gainslosses of $1$16 million in the current year mainly from impairments compared to net investment gains of $6 million in the prior year primarily from derivative gains and gains from the sale of investment securities related to portfolio repositioning, compared to $238 million of net investment losses in the prior year primarily attributable to impairments and derivative losses related to our strategy to mitigate interest rate risk associated with our statutory capital position.partially offset by impairments.

 

Net investment losses in our retirement income business decreased $154$66 million largely attributable to a $52 million decrease in our spread-based products primarily related to lower impairments recordedderivative gains in the current year compared to losses in the prior year and higher gains from the sale of investment securities related to portfolio repositioning in the current year. Our fee-based products had $14 million in lower losses primarily related to gains on embedded derivatives associated with our variable annuity products with GMWBs as a result of changes in non-performance risk incorporated into the discount rate usedcurrent year compared to value GMWB embedded derivatives.losses in the prior year.

Insurance and investment product fees and other

 

Our life insurance business increased $33$100 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. The prior year also included a favorable adjustment related to estimated gross profit assumptions in ourand universal life insurance products that did not recur.

Our long-term care business increased $13and also included a gain of $17 million primarily drivenfrom the repurchase of notes secured by our equity access business as a result of higher margins on loans.non-recourse funding obligations in the current year.

 

Our wealth management business increased $57$54 million primarily attributable to higher average assets under management from the purchase of Altegris in the fourth quarter of 2010, market growth and positive net flows.

 

Our retirement income business increased $26$12 million mainly due toas a result of higher average account values ofin our fee-based products from favorable market growth.performance.

Benefits and expenses

Benefits and other changes in policy reserves

 

Our life insurance business increased $67$37 million principally related to increased claims associated with higher mortality in our term life insurance products compared to the prior year, aginggrowth of our in-force block and an increase in reserves due to growth in our term universal life insurance product. The current year also included a $5 million increase in reserves from a policy valuation system input correction related toproduct, partially offset by the runoff of our term life insurance products.

 

Our long-term care insurance business increased $108$96 million primarily as a result of the aging and growth of theour long-term care insurance in-force block and lower terminationshigher claims on older issued policies.

Our retirement income business decreased $46 million largely attributable to a decrease of $39 million from our life-contingent spread-based products as a result of a decline in sales in the current year and more favorable mortality in the current year compared to prior year. Our fee-based products decreased $7 million driven by a decline in our guaranteed minimum death benefit claims.

Interest credited

Our life insurance business increased $11 million from the timing of reinsurance activity in the current year.

 

Our retirement income business increased $11decreased $18 million primarily attributable to our spread-based products related to higher amortization of sales inducements as a result of lower net investment losses in the current year, partially offset by lower life-contingent sales in the current year. Our fee-based products increased related to our guaranteed minimum benefit liabilities driven by less favorable market performance in the current year, partially offset by a decrease in guaranteed minimum death benefit claims.

Interest credited. Interest credited decreased $32 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.period in a low interest rate environment.

Acquisition and operating expenses, net of deferrals

 

Our life insurance business increased $15decreased $6 million primarily related to a $13 million favorable cumulative impact from a recent change in premium taxes in Virginia in the first quarter of 2011, partially offset by higher expenses from growth of our term universal life insurance products.product.

 

Our long-term care insurance business increased $35$12 million largely driven by our equity access business as a result of increases in broker commissions on loans and fromattributable to growth of our long-term care insurance in-force block.

 

Our wealth management business increased $46 million primarily from increased asset-based expenses as assets under management increased from favorablethe acquisition of Altegris in the fourth quarter of 2010, market impactsgrowth and positive net flows.

 

Our retirement income business was flat as higher costs associated withincreased $13 million largely driven by a $9 million charge in the salefirst quarter of 2011 from the discontinuance of our fee-based products were offset by lower salesvariable annuity offerings announced in 2011 and an increase of our spread-based products and higher non-recoverable acquisition expenses$4 million from an accrual related to guarantee funds in the priorcurrent year.

Amortization of deferred acquisition costs and intangibles

 

Our life insurance business increased $72decreased $9 million primarily attributable to a prior year adjustment to estimated gross profits of $33 million and lower amortization of $20 million fromdeferred acquisition costs related to our term life insurance policies in the post-level rate period and a favorable unlockingdecrease in amortization of present value of future profits driven by higher mortality in our universal life insurance products that did not recurproducts. These decreases were partially offset by an increase in the current year. Also contributingamortization of deferred acquisition costs due to the increase was higher amortization from growth related toof our universal life insurance and term universal life insurance products and higher lapses in our term life insurance policies as they go through their post-level rate period.products.

 

Our long-term care insurance business decreased $5 million primarily from lower terminationsa decrease in amortization due to deferring 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 that was partially offset by growth of our long-term care insurance in-force block.

 

Our retirement income business decreased $67increased $34 million primarily related to a decreasean increase of $82$25 million in our spread-based products mainly from less favorable adjustments related to our fee-based products. The prior year included additional amortization of deferred acquisition costs of $54 million from loss recognition testing that did not recur. Additionally, amortization decreased as a result of lower gains in the current year related to embedded derivatives associated with our variable annuity products with GMWBs. This decrease was partially offset by an unfavorable refinement of assumptions of $9 million in the current year. Our spread-based products also increased $15 million mainly fromlapses and higher amortization of deferred acquisition costs attributable to lower net investment losses in the current year. This increase was partially offset by a decrease in the account values of these products. Our fee-based products increased $9 million principally from a $12 million favorable adjustment recorded in the prior year that did not recur and an increase in amortization of deferred acquisition costs from lower derivative losses in the current year, partially offset by a $9 million of favorable unlocking primarily related to lower lapse trendsequity market performance in the current year as compared to an unfavorable unlocking primarily related to spread assumptions in the prior year.

Provision (benefit) for income taxestaxes.. The effective tax rate decreasedincreased to 32.6%34.7% for the ninesix months ended SeptemberJune 30, 20102011 from 43.1%30.7% for the ninesix months ended SeptemberJune 30, 2009.2010. The decreaseincrease in the effective tax rate was primarily attributable to the proportion of tax favored investment benefits in relation to higher pre-tax resultsearnings in the current year compared to the prior year and a change in uncertain tax positions in the prior year.

Retirement and Protection selected financial and operating performance measures

Life insurance

The following tables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:

 

 Three months ended
September 30,
 Increase (decrease)
and percentage change
 Nine months ended
September 30,
 Increase (decrease)
and percentage change
   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             2011     2010            2011 vs. 2010           2011     2010             2011 vs. 2010           

Term life insurance

                     

Net earned premiums

 $221   $236   $(15  (6)%  $673   $711   $(38  (5)%   $218    $228    $(10  (4)%  $437    $452    $(15  (3)% 

Annualized first-year premiums

  1    19    (18  (95)%   19    56    (37  (66)%    —       4     (4  (100)%   —       18     (18  (100)% 

Term universal life insurance

                     

Net deposits

 $21   $—     $21    NM(1)  $40   $—     $40    NM(1)   $45    $14    $31    NM(1)  $80    $19    $61    NM(1) 

Term universal life annualized first-year deposits

  31    —      31    NM(1)   65    —      65    NM(1) 

Annualized first-year deposits

   36     24     12    50  67     34     33    97

Universal and whole life insurance

                     

Net earned premiums and deposits

 $120   $111   $9    8 $359   $351   $8    2  $156    $121    $35    29 $318    $239    $79    33

Universal life annualized first-year deposits

  10    8    2    25  27    25    2    8   9     10     (1  (10)%   20     17     3   18

Universal life excess deposits

  26    23    3    13  73    74    (1  (1)%    35     28     7    25  71     48     23    48

Linked-benefits(2)

   25     —       25    NM(1)   48     —       48    NM(1) 

Total life insurance

                     

Net earned premiums and deposits

 $362   $347   $15    4 $1,072   $1,062   $10    1  $419    $363    $56    15 $835    $710    $125    18

Annualized first-year premiums

  1    19    (18  (95)%   19    56    (37  (66)%    —       4     (4  (100)%   —       18     (18  (100)% 

Annualized first-year deposits

  41    8    33    NM(1)   92    25    67    NM(1)    45     34     11    32  87     51     36    71

Excess deposits

  26    23    3    13  73    74    (1  (1)% 

Universal life excess deposits

   35     28     7    25  71     48     23    48

Linked-benefits(2)

   25     —       25    NM(1)   48     —       48    NM(1) 

 

(1)

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

(2)

In 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 material and the prior period amounts were not re-presented.

 

  As of September 30,   Percentage
change
   As of June 30,   Percentage
change
 

(Amounts in millions)

  2010   2009   2010 vs. 2009   2011   2010   2011 vs. 2010 

Term life insurance

            

Life insurance in-force, net of reinsurance

  $465,275    $474,721     (2)%   $447,336    $468,098     (4)% 

Life insurance in-force before reinsurance

   603,606     621,808     (3)%    580,113     612,284     (5)% 

Term universal life insurance

            

Life insurance in-force, net of reinsurance

  $31,761    $—       NM(1)   $73,569    $17,754     NM(1) 

Life insurance in-force before reinsurance

   31,935     —       NM(1)    74,107     17,820     NM(1) 

Universal and whole life insurance

            

Life insurance in-force, net of reinsurance

  $43,797    $43,875     —    $44,207    $43,743     1

Life insurance in-force before reinsurance

   50,632     50,952     (1)%    50,884     50,617     1

Total life insurance

            

Life insurance in-force, net of reinsurance

  $540,833    $518,596     4  $565,112    $529,595     7

Life insurance in-force before reinsurance

   686,173     672,760     2   705,104     680,721     4

 

(1)

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

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 productproducts. For the six months ended June 30 2011, the decrease was partially offset by an unfavorable reinsurance adjustment of $8 million in the prior year that is designeddid not recur. The in-force block also decreased due to replace new sales of our existing term life insurance products, lower renewals and higher lapses on policies as they go through their post-level rate period.runoff.

Term universal life insurance

In late 2009, we introduced a new term universal life insurance product that is designedNet deposits increased due to replace new sales of our existing term life insurance products. The increase is primarily related to the continued growth of ourthis product since its introduction in late 2009. The in-force block.block has increased primarily driven by strong production and product adoption.

Universal and whole life insurance

Net earned premiums and deposits increased due primarily to the growth of our 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 whole life insurance.

Long-term care insurance

The following table sets forth selected financial and operating performance measures regarding our long-term care insurance business, which includes individual and group long-term care insurance, Medicare supplement insurance, linked-benefits products, as well as several runoff blocks of accident and health insurance for the periods indicated:

 

  Three months ended
September 30,
   Increase
(decrease) and
percentage
change
 Nine months ended
September 30,
   Increase
(decrease) and
percentage
change
   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       2011           2010           2011 vs. 2010     2011   2010   2011 vs. 2010 

Net earned premiums:

                              

Long-term care

  $494    $469    $25     5 $1,453    $1,422    $31     2  $495    $480    $15     3 $987    $959    $28     3

Medicare supplement and other

   83     73     10     14  241     215     26     12   85     78     7     9  169     158     11     7
                             

 

   

 

   

 

    

 

   

 

   

 

   

Total

  $577    $542    $35     6 $1,694    $1,637    $57     3  $580    $558    $22     4 $1,156    $1,117    $39     3
                             

 

   

 

   

 

    

 

   

 

   

 

   

Annualized first-year premiums and deposits

  $69    $53    $16     30 $196    $144    $52     36  $69    $60    $9     15 $134    $127    $7     6
                             

 

   

 

   

 

    

 

   

 

   

 

   

Net earned premiums increased mainly attributable to growth ofin our in-force block from new sales and in-force rate actions. sales.

The increase in annualized first-year premiums and deposits was primarily attributable to growth ofin our individual and group long-term care insurance andproducts, partially offset by a change in reporting related to our 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 life insurance and spread-based retirement income businesses, respectively. The linked-benefits products were previously reported in our long-term care insurance business.

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 September 30,
  As of or for the nine
months ended September 30,
 

(Amounts in millions)

      2010          2009          2010          2009     

Assets under management, beginning of period

  $19,548   $15,909   $18,865   $15,447  

Gross flows

   1,354    1,372    4,191    3,281  

Redemptions

   (893  (904  (2,790  (3,131
                 

Net flows

   461    468    1,401    150  

Market performance

   1,151    1,615    894    2,395  
                 

Assets under management, end of period

  $21,160   $17,992   $21,160   $17,992  
                 

   As of or for the three
months ended June 30,
  As of or for the six
months ended June 30,
 

(Amounts in millions)

      2011          2010          2011          2010     

Assets under management, beginning of period

  $25,551   $20,037   $24,740   $18,865  

Gross flows

   1,807    1,362    3,865    2,837  

Redemptions

   (1,143  (926  (2,846  (1,897
  

 

 

  

 

 

  

 

 

  

 

 

 

Net flows

   664    436    1,019    940  

Market performance

   (285  (925  171    (257
  

 

 

  

 

 

  

 

 

  

 

 

 

Assets under management, end of period

  $25,930   $19,548   $25,930   $19,548  
  

 

 

  

 

 

  

 

 

  

 

 

 

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 market growth, and positive net flows.flows and the acquisition of Altegris on December 31, 2010.

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 September 30,
 As of or for the nine
months ended September 30,
   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       2011         2010         2011         2010     

Income Distribution Series (1)

          

Account value, net of reinsurance, beginning of period

  $5,964   $5,286   $5,943   $5,234  

Account value, beginning of period

  $6,687   $6,135   $6,590   $5,943  

Deposits

   131    190    445    448     33    141    150    314  

Surrenders, benefits and product charges

   (131  (109  (408  (324   (171  (150  (356  (277
               

 

  

 

  

 

  

 

 

Net flows

   —      81    37    124     (138  (9  (206  37  

Interest credited and investment performance

   370    435    354    444     57    (162  222    (16
               

 

  

 

  

 

  

 

 

Account value, net of reinsurance, end of period

  $6,334   $5,802   $6,334   $5,802  

Account value, end of period

  $6,606   $5,964   $6,606   $5,964  
               

 

  

 

  

 

  

 

 

Traditional variable annuities

          

Account value, net of reinsurance, beginning of period

  $1,879   $1,796   $2,016   $1,756    $2,096   $2,048   $2,078   $2,016  

Deposits

   20    25    72    60     3    25    20    52  

Surrenders, benefits and product charges

   (68  (48  (203  (171   (100  (70  (188  (135
               

 

  

 

  

 

  

 

 

Net flows

   (48  (23  (131  (111   (97  (45�� (168  (83

Interest credited and investment performance

   162    200    108    328     13    (124  102    (54
               

 

  

 

  

 

  

 

 

Account value, net of reinsurance, end of period

  $1,993   $1,973   $1,993   $1,973    $2,012   $1,879   $2,012   $1,879  
               

 

  

 

  

 

  

 

 

Variable life insurance

          

Account value, beginning of period

  $279   $271   $298   $266    $319   $303   $313   $298  

Deposits

   3    3    9    10     3    3    6    6  

Surrenders, benefits and product charges

   (10  (12  (28  (32   (11  (8  (22  (18
               

 

  

 

  

 

  

 

 

Net flows

   (7  (9  (19  (22   (8  (5  (16  (12

Interest credited and investment performance

   25    30    18    48     3    (19  17    (7
               

 

  

 

  

 

  

 

 

Account value, end of period

  $297   $292   $297   $292    $314   $279   $314   $279  
               

 

  

 

  

 

  

 

 

 

(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 flowsmarket 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 market growth.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 as a result of market 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
September 30,
 As of or for  the
nine months ended
September 30,
   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       2011 2010 2011 2010 

Fixed annuities

         

Account value, beginning of period

  $10,660   $11,234   $10,819   $11,409  

Deposits

   275    92    395    133  

Surrenders, benefits and product charges

   (441  (304  (809  (616
  

 

  

 

  

 

  

 

 

Net flows

   (166  (212  (414  (483

Interest credited

   88    95    177    191  
  

 

  

 

  

 

  

 

 

Account value, end of period

  $10,582   $11,117   $10,582   $11,117  
  

 

  

 

  

 

  

 

 

Single premium immediate annuities

     

Account value, beginning of period

  $6,411   $6,593   $6,528   $6,675  

Premiums and deposits

   85    100    170    195  

Surrenders, benefits and product charges

   (253  (251  (509  (516
  

 

  

 

  

 

  

 

 

Net flows

   (168  (151  (339  (321

Interest credited

   82    87    165    175  

Effect of accumulated net unrealized investment gains (losses)

   59    —      30    —    
  

 

  

 

  

 

  

 

 

Account value, end of period

  $6,384   $6,529   $6,384   $6,529  
  

 

  

 

  

 

  

 

 

Structured settlements

     

Account value, net of reinsurance, beginning of period

 $11,117   $11,770   $11,409   $11,996    $1,113   $1,115   $1,113   $1,115  

Deposits

  136    69    269    540  

Surrenders, benefits and product charges

  (376  (353  (992  (1,255   (14  (15  (29  (29
              

 

  

 

  

 

  

 

 

Net flows

  (240  (284  (723  (715   (14  (15  (29  (29

Interest credited

  95    102    286    307     14    15    29    29  
              

 

  

 

  

 

  

 

 

Account value, net of reinsurance, end of period

 $10,972   $11,588   $10,972   $11,588    $1,113   $1,115   $1,113   $1,115  
              

 

  

 

  

 

  

 

 

Single premium immediate annuities

    

Account value, net of reinsurance, beginning of period

 $6,529   $6,827   $6,675   $6,957  

Premiums and deposits

  116    91    311    303  

Surrenders, benefits and product charges

  (251  (255  (767  (780

Total premiums from spread-based products

  $20   $32   $40   $68  
              

 

  

 

  

 

  

 

 

Net flows

  (135  (164  (456  (477

Interest credited

  85    90    260    273  

Effect of accumulated net unrealized investment gains (losses)

  304    —      304   —    

Total deposits on spread-based products

  $340   $160   $525   $260  
              

 

  

 

  

 

  

 

 

Account value, net of reinsurance, end of period

 $6,783   $6,753   $6,783   $6,753  
            

Structured settlements

    

Account value, net of reinsurance, beginning of period

 $1,115   $1,117   $1,115   $1,106  

Premiums and deposits

  —      —      —      10  

Surrenders, benefits and product charges

  (16  (15  (45  (43
            

Net flows

  (16  (15  (45  (33

Interest credited

  15    14    44    43  
            

Account value, net of reinsurance, end of period

 $1,114   $1,116   $1,114   $1,116  
            

Total premiums from spread-based retail products

 $42   $30   $110   $115  
            

Total deposits on spread-based retail products

 $210   $130   $470   $738  
            

Fixed annuities

Account value of our fixed annuities decreased as surrenders exceeded deposits. Sales have slowed significantly given market conditions and changesincreased in the product management strategy.current year driven by reduced commission offerings but remain at lower levels given the low interest rate environment and other market conditions.

Single premium immediate annuities

Account value of our single premium immediate annuities decreased as surrenderspayouts 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.

Valuation systems and processes

Over the next 12 to 24 months, our Retirement and Protection segment will migrate to a new valuation and projection platform. This migration is part of our ongoing efforts to improve the infrastructure and capabilities of our information systems and our routine assessment and refinement of financial, actuarial, investment and risk

management capabilities enterprise wide. This migration will also provide our Retirement and Protection segment with a platform to support emerging accounting guidance and ongoing changes in capital regulations. Concurrently, valuation processes and methodologies will be reviewed. Any material changes in balances or income trends that may result from these activities will be disclosed accordingly.

International segment

Segment results of operations

Three Months Ended SeptemberJune 30, 20102011 Compared to Three Months Ended SeptemberJune 30, 20092010

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

 

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

(Amounts in millions)

      2010         2009         2010 vs. 2009           2011         2010     2011 vs. 2010 

Revenues:

          

Premiums

  $453   $523   $(70  (13)%   $491   $495   $(4  (1)% 

Net investment income

   121    124    (3  (2)%    152    127    25    20

Net investment gains (losses)

   8    4    4    100   6    1    5    NM(1) 

Insurance and investment product fees and other

   12    12    —      —     9    (1  10    NM(1) 
             

 

  

 

  

 

  

Total revenues

   594    663    (69  (10)%    658    622    36    6
             

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   120    200    (80  (40)%    142    163    (21  (13)% 

Acquisition and operating expenses, net of deferrals

   192    215    (23  (11)%    205    205    —      —  

Amortization of deferred acquisition costs and intangibles

   59    65    (6  (9)%    72    67    5    7

Interest expense

   11    15    (4  (27)%    22    10    12    120
             

 

  

 

  

 

  

Total benefits and expenses

   382    495    (113  (23)%    441    445    (4  (1)% 
             

 

  

 

  

 

  

Income before income taxes

   212    168    44    26   217    177    40    23

Provision for income taxes

   49    45    4    9   71    35    36    103
             

 

  

 

  

 

  

Net income

   163    123    40    33   146    142    4    3

Less: net income attributable to noncontrolling interests

   39    26   13    50   36    35    1    3
             

 

  

 

  

 

  

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

   124    97    27    28   110    107    3    3

Adjustment to net income available to Genworth Financial, Inc.’s common stockholders:

          

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

   (3  (1  (2  (200)%    (3  (2  (1  (50)% 
             

 

  

 

  

 

  

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

  $121   $96   $25    26  $107   $105   $2    2
             

 

  

 

  

 

  

(1)

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

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
September 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

  $93    $78    $15     19

Lifestyle protection insurance

   28     18     10     56
                 

Total net operating income available to Genworth Financial, Inc.’s common stockholders:

  $121    $96    $25     26
                 

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

(Amounts in millions)

      2011           2010       2011 vs. 2010 

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

       

International mortgage insurance

  $82    $93    $(11  (12)% 

Lifestyle protection insurance

   25     12     13    108
  

 

 

   

 

 

   

 

 

  

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

  $107    $105    $2    2
  

 

 

   

 

 

   

 

 

  

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

 

The three months ended SeptemberJune 30, 20102011 included an increaseincreases of $5$11 million and a decrease of $4$3 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

 

Net operating income for ourOur international mortgage insurance business increased primarily related todecreased from higher taxes and interest expense, partially offset by lower overall losses in Canada, Australia and Europe.higher investment income.

 

Net operating income for ourOur lifestyle protection insurance business increased primarily attributable to a tax benefit in the current year and a decrease inlower new claim registrations resulting from stabilizationimproving economic conditions and a favorable impact from our re-pricing actions taken in 2010, partially offset by reduced levels of economic conditions.consumer lending.

Revenues

Premiums

 

Our international mortgage insurance business decreased $1increased $17 million and our lifestyle protection insurance business decreased $69$21 million.

 

The three months ended SeptemberJune 30, 20102011 included an increaseincreases of $11$24 million and a decrease of $22$20 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

 

TheExcluding the effects of foreign exchange, the decrease in our international mortgage insurance business was primarily related to lower premiums in Canada and Australia attributable to seasoning of our in-force blocks of business. In addition, in Australia, lower ceded affiliated reinsurance was largely offset by a decrease in premiums from an increasea lower rate of policy cancellations in ceded reinsurancethe current year. In Europe, premiums anddecreased as a result of lender settlements in Europe from rescissions and other terminations related to loss mitigation activities particularly in Spain.the prior year.

 

The decrease in our lifestyle protection insurance business was primarily attributable to our runoff block of business and a decrease in overall premium volumesvolume driven by slower lending in Europe and our runoff business.reduced levels of consumer lending. These decreases were partially offset by re-pricing actions taken during 2010.

Net investment income

 

Our international mortgage insurance business increased $7$10 million and our lifestyle protection insurance business increased $15 million.

The three months ended June 30, 2011 included increases of $9 million and $4 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 as higher average invested assets were offset by lower investment yields.

The increase in our lifestyle protection insurance business was principally attributable to reinsurance arrangements accounted for under the deposit method as certain of these arrangements were in a higher gain position in the current year.

Insurance and investment product fees and other

Our international mortgage insurance business increased $6 million and our lifestyle protection insurance business increased $4 million.

The increase in our international mortgage insurance business was mainly attributable to currency transactions related to a foreign branch in the current year.

The increase in our lifestyle protection insurance business was mainly attributable to non-functional currency transactions attributable to changes in foreign exchange rates.

Benefits and expenses

Benefits and other changes in policy reserves

Our international mortgage insurance business increased $1 million and our lifestyle protection insurance business decreased $10$22 million.

 

The three months ended SeptemberJune 30, 20102011 included an increaseincreases of $5$10 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 primarily driven by lower losses in Europe related to lender settlements in the prior year and ongoing loss mitigation activities. In Australia, losses increased primarily as a result of higher new delinquencies from the seasoning of our in-force block of business and a higher average reserve per delinquency reflecting the economic impact of recent flooding, partially offset by lower paid claims. Losses in Canada were relatively flat as lower severity from overall economic improvement in the current year was offset by new delinquencies in Alberta which have a higher average reserve per delinquency.

The decrease in our lifestyle protection insurance business was largely attributable to a decrease in claim reserves from declining claim registrations.

Acquisition and operating expenses, net of $3deferrals

Our international mortgage insurance business increased $6 million and our lifestyle protection insurance business decreased $6 million.

The three months ended June 30, 2011 included increases of $4 million and $13 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 reinvestment of cash balances in Canada and Australia.driven by lower net deferred acquisition costs which were partially offset by lower overall expenses.

 

The decrease in our lifestyle protection insurance business was principally attributable to reinsurance arrangements accounted for under the deposit method anddriven by a decrease in average invested assets.

Benefits and expenses

Benefits and other changes in policy reserves

Our international mortgage insurance business decreased $34 million and our lifestyle protection insurance business decreased $46 million.

The three months ended September 30, 2010 included an increase of $5 million and a decrease of $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 a decrease in Europe from ongoing loss mitigation efforts. In Australia, losses decreased as a result of lower claims paid. Additionally, in both Canada and Australia, losses declined driven by lower reserves per delinquency from an improving economy.

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.

Acquisition and operating expenses, net of deferrals

Our international mortgage insurance business increased $7 million and our lifestyle protection insurance business decreased $30 million.

The three months ended September 30, 2010 included a decrease of $11 million attributable to changes in foreign exchange rates for our lifestyle protection insurance business.

The increase in our international mortgage insurance business was due to higher expenses in Australia and Europe primarily from a decrease in deferrable expenses from lower new business volume.

The decrease in our lifestyle protection insurance business was largely attributable to a decrease inpaid commissions related to a decline in new business.business, partially offset by an increase in profit commissions driven by lower claims.

Amortization of deferred acquisition costs and intangibles

 

Our international mortgage insurance business increased $2 million and our lifestyle protection insurance business decreased $8increased $3 million.

 

The three months ended SeptemberJune 30, 20102011 included an increaseincreases of $1$2 million and a decrease of $4$3 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

 

OurExcluding the effects of foreign exchange, our international mortgage insurance business was relatively flat as higher amortization of deferred acquisition costs from the seasoning of our in-force blocks of business in Australia and Canada was offset by lower new business volume.amortization in Europe as a result of lender settlements in the prior year.

 

The decrease inExcluding the effects of foreign exchange, our lifestyle protection insurance business was attributableflat as our runoff block of business was offset by higher amortization of deferred acquisition costs in the current year due to a decreasefavorable client adjustment in the U.K. from lower single premium sales related to new business regulations and a decrease from our runoff business.prior year that did not recur.

Interest expense

 

Our international mortgage insurance business increased $4 million and our lifestyle protection insurance business decreased $8businesses each increased $6 million.

 

The three months ended SeptemberJune 30, 20102011 included a decreaseincreases of $1 million attributable to changes in foreign exchange rates forin both our international mortgage insurance and lifestyle protection insurance business.businesses.

 

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 decreaseincrease in our lifestyle protection insurance business was relateddue to reinsurance arrangements accounted for under the deposit method.method of accounting as certain of these arrangements were in a higher loss position in the current year.

Provision for income taxes.The effective tax rate decreasedincreased to 23.1%32.7% for the three months ended SeptemberJune 30, 20102011 from 26.8%19.8% for the three months ended SeptemberJune 30, 2009.2010. This decreaseincrease in the effective tax rate was primarily attributable to higher taxes in the current year as a result of a Canadian legislative change as compared to an Australian tax legislative benefit in uncertainthe prior year. The Canadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase the effective tax positions.rate on our U.S. GAAP earnings as prior deductions for contributions to the fund lowered the effective tax rate on U.S. GAAP earnings. The three months ended SeptemberJune 30, 2010 also2011 included an increaseincreases of $2$3 million and $1 million attributable to changes in foreign exchange rates for our international mortgage business.and lifestyle protection insurance businesses, respectively.

Net income attributable to noncontrolling interests. The increase related mainly to the timing of the initial public offering of our Canadian mortgage insurance business in July 2009 which reduced our ownership percentage to 57.5%, as well as the result of lower losses from an improving economy. The three months ended September 30, 2010 included an increase of $3 million attributable to changes in foreign exchange rates.

NineSix Months Ended SeptemberJune 30, 20102011 Compared to NineSix Months Ended SeptemberJune 30, 20092010

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

 

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

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Revenues:

     

Premiums

  $1,452   $1,527   $(75  (5)% 

Net investment income

   380    350    30    9

Net investment gains (losses)

   18    (7  25    NM(1) 

Insurance and investment product fees and other

   17    22    (5  (23)% 
              

Total revenues

   1,867    1,892    (25  (1)% 
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   457    618    (161  (26)% 

Acquisition and operating expenses, net of deferrals

   600    607    (7  (1)% 

Amortization of deferred acquisition costs and intangibles

   198    205    (7  (3)% 

Interest expense

   44    47    (3  (6)% 
              

Total benefits and expenses

   1,299    1,477    (178  (12)% 
              

Income before income taxes

   568    415    153    37

Provision for income taxes

   134    111    23    21
              

Net income

   434    304    130    43

Less: net income attributable to noncontrolling interests

   108    26   82    NM(1) 
              

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

   326    278    48    17

Adjustment to net income available to Genworth Financial, Inc.’s common stockholders:

     

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

   (9  6    (15  NM(1) 
              

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

  $317   $284   $33    12
              

(1)

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

   Six months ended
June 30,
  Increase
(decrease) and
percentage
change
 

(Amounts in millions)

  2011  2010  2011 vs. 2010 

Revenues:

     

Premiums

  $968   $999   $(31  (3)% 

Net investment income

   295    259    36    14

Net investment gains (losses)

   12    10    2    20

Insurance and investment product fees and other

   15    5    10    200
  

 

 

  

 

 

  

 

 

  

Total revenues

   1,290    1,273    17    1
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   283    337    (54  (16)% 

Acquisition and operating expenses, net of deferrals

   403    408    (5  (1)% 

Amortization of deferred acquisition costs and intangibles

   139    139    —      —  

Interest expense

   41    33    8    24
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   866    917    (51  (6)% 
  

 

 

  

 

 

  

 

 

  

Income before income taxes

   424    356    68    19

Provision for income taxes

   117    85    32    38
  

 

 

  

 

 

  

 

 

  

Net income

   307    271    36    13

Less: net income attributable to noncontrolling interests

   70    69    1    1
  

 

 

  

 

 

  

 

 

  

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

   237    202    35    17

Adjustment to net income available to Genworth Financial, Inc.’s common stockholders:

     

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

   (6  (6  —      —  
  

 

 

  

 

 

  

 

 

  

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

  $231   $196   $35    18
  

 

 

  

 

 

  

 

 

  

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:

 

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

  $265    $251    $14     6  $181    $172    $9     5

Lifestyle protection insurance

   52     33     19     58   50     24     26     108
                

 

   

 

   

 

   

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

  $317    $284    $33     12  $231    $196    $35     18
                

 

   

 

   

 

   

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

 

The ninesix months ended SeptemberJune 30, 20102011 included an increaseincreases of $38$18 million and a decrease of $5$2 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.

 

Excluding the impacteffects of foreign exchange, and 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 $81 million, net operating income for our international mortgage insurance business increaseddecreased from lower losses,higher taxes and interest expense, partially offset by lower premiums. There was also a benefit from newly enacted Australian tax legislation in the current year.overall losses and higher investment income.

 

Net operating income for ourOur lifestyle protection insurance business increased primarily dueattributable to a decrease inlower new claim registrations resulting from stabilization ofimproving economic conditions. This wasconditions and a favorable impact from our re-pricing actions taken in 2010, partially offset by lower sales from reduced levels of consumer lending.

Revenues

Premiums

 

Our international mortgage insurance business increased $58$33 million and our lifestyle protection insurance business decreased $133$64 million.

 

The ninesix months ended SeptemberJune 30, 20102011 included an increaseincreases of $88$41 million and a decrease of $6$13 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 relatedlower overall premiums attributable to loss mitigation activities in Europe, particularly in Spain. In addition, premiums in Australia decreased asthe seasoning of our in-force blockblocks of businessbusiness. In addition, in Australia, lower ceded affiliated reinsurance was more than offset by increased ceded reinsurancea decrease in premiums from a lower rate of policy cancellations and lower flow new business volumes during 2010.volume in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year.

 

The decrease in our lifestyle protection insurance business was primarily attributable to our runoff block of business and a decrease in overall premium volumesvolume driven by slower lendingreduced 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 Europe and our runoff business.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 $34$20 million and our lifestyle protection insurance business decreased $4increased $16 million.

 

The ninesix months ended SeptemberJune 30, 20102011 included an increaseincreases of $34 million attributable to changes in foreign exchange rates for our international mortgage business.

Excluding the effects of foreign exchange, our international mortgage insurance business was flat as lower yields were offset by an increase in invested assets and reinvestment of cash balances.

The decrease in our lifestyle protection insurance business was largely due to lower yields and lower invested assets which were partially offset by reinsurance arrangements accounted for under the deposit method of accounting as these arrangements were in a gain position.

Benefits and expenses

Benefits and other changes in policy reserves

Our international mortgage insurance business decreased $56$16 million and our lifestyle protection insurance business decreased $105 million.

The nine months ended September 30, 2010 included an increase of $35 million attributable to changes in foreign exchange rates for our international mortgage insurance business.

The decrease in our international mortgage insurance business was primarily related to Canada as 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 $25 million and our lifestyle protection insurance business decreased $32 million.

The nine months ended September 30, 2010 included an increase of $11 million and a decrease of $3$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 dueas a result of higher average invested assets in Australia and Canada, partially offset by lower investment yields in Canada.

The increase in our lifestyle protection insurance business was principally attributable to reinsurance arrangements accounted for under the deposit method as certain of these arrangements were in a higher gain position in the current year.

Insurance and investment product fees and other

Our international mortgage and lifestyle protection insurance businesses each increased $5 million.

The increase in our international mortgage insurance business was mainly attributable to currency transactions related to a foreign branch in the current year.

The increase in our lifestyle protection insurance business was mainly attributable to non-functional currency transactions as the result of changes in foreign exchange rates.

Benefits and expenses

Benefits and other changes in policy reserves

Our international mortgage insurance business increased $4 million and our lifestyle protection insurance business decreased $58 million.

The six months ended June 30, 2011 included increases of $17 million and $2 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 decrease was primarily driven by lower losses in Europe related to lender settlements in the prior year and ongoing loss mitigation activities. In Australia, losses increased primarily as a result of higher new delinquencies from seasoning of our in-force block of business and a higher average reserve per delinquency reflecting the economic impact of the recent flooding. Partially offsetting this increase was lower paid claims in Australia as a result of lender settlements in the prior year. Losses in Canada were relatively flat as well aslower severity from overall economic improvement in the current year was offset by new delinquencies in Alberta which have a higher expenses in Australia from a decrease in deferrable expenses from lower new business volume.average reserve per delinquency.

 

The decrease in our lifestyle protection insurance business was largely attributable to a decrease in claim reserves from declining claim registrations.

Acquisition and operating expenses, net of deferrals

Our international mortgage insurance business increased $7 million and our lifestyle protection insurance business decreased $12 million.

The six months ended June 30, 2011 included increases of $6 million and $9 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 as lower net deferred acquisition costs were offset by lower overall expenses.

The decrease in our lifestyle protection insurance business was driven by a decrease in paid commissions related to a decline in new business. This decrease wasbusiness, 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.

Amortization of deferred acquisition costs and intangibles

 

Our international mortgage insurance business increased $15$7 million and our lifestyle protection insurance business decreased $22$7 million.

 

The ninesix months ended SeptemberJune 30, 20102011 included an increaseincreases of $8$4 million and a decrease of $1$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 as a result ofresulted primarily from an increase inrelated to software and higher amortization of deferred acquisition costs from the seasoning of our in-force blocks of business in Australia and Canada. This increase was partially offset by lower amortization in Europe as the result of lender settlements in the prior year.

The decrease in our lifestyle protection insurance business was primarily attributable to our runoff block of 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 $12 million and our lifestyle protection insurance business decreased $4 million.

The six months ended June 30, 2011 included an increase of $1 million attributable to changes in foreign exchange rates in our international mortgage 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 attributabledue to reinsurance arrangements accounted for under the deposit method of accounting as certain of these arrangements were in a decreaselower loss position in the U.K. from lower single premium sales related to new business regulations and a decrease from our runoff business.current year.

Provision for income taxes.The effective tax rate decreasedincreased to 23.6%27.6% for the ninesix months ended SeptemberJune 30, 20102011 from 26.8%23.9% for the ninesix months ended SeptemberJune 30, 2009.2010. This decreaseincrease in the effective tax rate was primarily attributable to a change in uncertain tax positions, the favorable impact of newly enacted Australian tax legislation and lower taxed foreign incomehigher taxes in the current year as a result of a Canadian legislative change as compared to an Australian tax legislative benefit in the prior year. The nineCanadian legislation change passed in June 2011 will eliminate the Canadian government guarantee fund. The elimination of the guarantee fund is expected to increase the effective tax rate on our U.S. GAAP earnings as prior deductions for contributions to the fund lowered the effective tax rate on U.S. GAAP earnings. The six months ended SeptemberJune 30, 2010 also2011 included increasesan increase of $19 million and $2$7 million attributable to changes in foreign exchange rates for our international mortgage and lifestyle protection insurance businesses, respectively.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 nine months ended September 30, 2010 included an increase of $12 million attributable to changes in foreign exchange rates.

International selected operating performance measures

International mortgage insurance

The following tables set forth selected operating performance measures regarding our international mortgage insurance business as of or for the dates indicated:

 

  As of September 30,   Increase
(decrease)  and

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

(Amounts in millions)

  2010   2009   2010 vs. 2009   2011   2010   2011 vs. 2010 

Primary insurance in-force

  $535,400    $495,100    $40,300     8  $597,900    $484,100    $113,800     24

Risk in-force

   180,200     162,600     17,600     11   201,600     163,000     38,600     24

 

  Three months ended
September 30,
   Increase
(decrease)  and
percentage
change
 Nine months ended
September 30,
   Increase
(decrease)  and
percentage
change
   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   2011   2010   2011 vs. 2010 2011   2010   2011 vs. 2010 

New insurance written

  $15,000    $14,400    $600    4 $43,800    $37,700    $6,100     16  $17,800    $14,900    $2,900     19 $30,500    $28,800    $1,700     6

Net premiums written

   233     204     29    14  614     523     91     17   257     218     39     18  429     381     48     13

Net earned premiums

   235     236     (1  —    732     674     58     9   268     251     17     7  530     497     33     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”

“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 ninesix months ended SeptemberJune 30, 20102011 and 2009,2010, 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 $32.3$92.7 billion and $11.7$31.3 billion, respectively, attributable to changes in foreign exchange rates as of SeptemberJune 30, 2010.2011.

New insurance written

For the three months ended SeptemberJune 30, 2010,2011, new insurance written increased includingprimarily as a result of increases in bulk transactions in Canada, Australia and Europe in the current year. These increases were partially offset by decreases in flow new insurance written in Australia and Canada as a result of smaller mortgage originations markets. In addition, flow new insurance written declined in Europe due to lower volume from existing lenders. The three months ended June 30, 2011 included an increase of $0.8$1.8 billion attributable to changes in foreign exchange rates. Excluding

For the impactsix months ended June 30, 2011, excluding the effects of foreign exchange, new insurance written decreased modestly. Flow new insurance written decreasedprimarily as a result of decreases in Australia reflecting higher interest rates and lower mortgage originations primarily driven by a reduction in first-time homebuyer benefits and in Europe where we have taken actions to selectively reduce new business including exiting selected distribution relationships. These decreases were partially offset by higher flow new insurance written in Canada driven by growth in the mortgage origination markets and growth in bulk new insurance written in Australia and Canada as some liquidity returned to the securitization market in Australia and as select lenders sought capital relief in Canada.

For the nine months ended September 30, 2010,a result of smaller mortgage originations markets. In addition, flow new insurance written increased includingdeclined in Europe due to lower volume from existing lenders. These decreases were partially offset by increases in bulk transactions in Australia, Europe and Canada in the current year. The six months ended June 30, 2011 included an increase of $5.6$2.8 billion attributable to changes in foreign exchange rates. In Canada, flow new insurance written increased driven by growth in the mortgage origination markets. Also contributing to the increase was growth in bulk new insurance written in Australia and Canada as some liquidity returned to the securitization market in Australia and as select lenders sought capital relief 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 driven by a reduction in first-time homebuyer benefits and in Europe where we have taken actions to selectively reduce new business including exiting selected distribution relationships.

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 SeptemberJune 30, 2010,2011, our unearned premium reserves decreased to $3.0were $3.1 billion, including an increase of $0.2$0.4 billion attributable to changes in foreign exchange rates, from $3.1compared to $2.8 billion as of SeptemberJune 30, 2009.2010. Excluding the effects of foreign exchange, our unearned premium reserves decreased primarily related to seasoning of our in-force block of business.

For the three and ninesix months ended SeptemberJune 30, 2010,2011, net premiums written increased primarily driven by an increase in new insurance written in Canada, partially offset by a decrease infrom higher average price, bulk new insurance written in Australia, a decreaseCanada and Europe and lower ceded affiliated reinsurance premiums in average price drivenAustralia in the current year. These increases were partially offset by a declinelower flow net premiums written in newCanada as an increase in market share was more than offset by lower business volume with loan-to-value ratios of more than 90% and increased ceded reinsurance premiums.. The three and ninesix months ended SeptemberJune 30, 20102011 included increases of $12$22 million and $71$33 million, respectively, attributable to changes in foreign exchange rates.

For the three months ended SeptemberJune 30, 2010,2011, excluding the effects of foreign exchange, net earned premiums decreased primarily related to lower premiums in Canada and Australia attributable to the seasoning of our in-force blocks of business. In addition, in Australia, lower ceded affiliated reinsurance was largely offset by a decrease in premiums from a lower rate of policy cancellations in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year. The three months ended June 30, 2011 included an increase of $24 million attributable to changes in ceded reinsurance premiums and in Europe from rescissions and other terminations related to loss mitigation activities particularly in Spain.foreign exchange rates.

For the ninesix months ended SeptemberJune 30, 2010,2011, excluding the effects of foreign exchange, net earned premiums decreased related to rescissions and other terminations relatedlower overall premiums attributable to loss mitigation activities in Europe, particularly in Spain. In addition, premiums in Australia decreased asthe seasoning of our in-force blockblocks of businessbusiness. In addition, in Australia, lower ceded affiliated reinsurance was more than offset by increased ceded reinsurancea decrease in premiums from a lower rate of policy cancellations and lower flow new business volumes during 2010.volume in the current year. In Europe, premiums decreased as a result of lender settlements in the prior year. The three and ninesix months ended SeptemberJune 30, 20102011 included increasesan increase of $11$41 million and $88 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
September 30,
 Increase (decrease) Nine months  ended
September 30,
 Increase (decrease)   Three months ended
June 30,
 Increase (decrease) Six months ended
June 30,
 Increase (decrease) 
  2010 2009 2010 vs. 2009 2010 2009 2010 vs. 2009   2011 2010 2011 vs. 2010 2011 2010 2011 vs. 2010 

Loss ratio

   35  50  (15)%   40  52  (12)%    40  42  (2)%   41  43  (2)% 

Expense ratio

   31  31  —   %   35  34  1   31  33  (2)%   37  38  (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 and six months ended SeptemberJune 30, 20102011 was primarily attributable to lower losses in Europe related to lender settlements in the prior year and ongoing loss mitigation activities and inactivities. In Australia, as a result of lower paid claims. Additionally, in both Canada and Australia, losses declined as a result of lower reserves per delinquency primarily from an improving economy. Partially offsetting the decrease in the loss ratio was a decline in net earned premiums.increased primarily from higher reserves driven by higher new delinquencies from the seasoning of our in-force block of business and the economic impact of the recent flooding.

The decrease in the loss ratio for the nine months ended September 30, 2010 was primarily attributable to lower losses in Canada from a decrease in delinquencies and in Australia as a result 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.

The expense ratio was relatively flat for the three and ninesix months ended SeptemberJune 30, 2010 as higher expenses were offset by2011 was primarily attributable to an increase in net premiums written.

written, partially offset by higher general expenses.

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:

 

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

Primary insurance

    

Primary insurance:

   

Insured loans in-force

   2,948,710    2,911,605    2,939,957    3,004,011    2,986,059    2,938,624  

Delinquent loans(1)

   22,078    22,821    24,518    22,495    21,082    22,093  

Percentage of delinquent loans (delinquency rate)(1)

   0.75  0.78  0.83  0.75  0.71  0.75

Flow loans in-force

   2,454,401    2,418,144    2,420,701    2,486,842    2,468,354    2,447,543  

Flow delinquent loans(1)

   19,384    19,652    21,459    19,070    17,684    19,219  

Percentage of flow delinquent loans (delinquency rate)(1)

   0.79  0.81  0.89  0.77  0.72  0.79

Bulk loans in-force

   494,309    493,461    519,256    517,169    517,705    491,081  

Bulk delinquent loans(2)(1)

   2,694    3,169    3,059    3,425    3,398    2,874  

Percentage of bulk delinquent loans (delinquency rate)

   0.55  0.64  0.59  0.66  0.66  0.59

 

(1)

The amounts previously presented in our third quarter of 2009 Quarterly Report on Form 10-Q have been revised for September 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 2,6743,403 as of SeptemberJune 30, 2010, 3,1542011, 3,376 as of December 31, 20092010 and 2,4182,858 as of SeptemberJune 30, 2009.2010.

Since December 31, 2009, flowFlow loans in-force increased primarily due tofrom growth in Canada that wasduring the current year while bulk loans in-force decreased primarily due to cancellations in Australia. Delinquent loans increased from higher delinquencies in Australia and Europe as a result of the seasoning of our in-force blocks of business, partially offset by loss mitigation efforts in Europe and lower volumes in Australia. Bulk loans in-force increased marginally driven by growth in Canada. Delinquent loans decreased from ongoing loss mitigation activities in Europe and lower delinquencies in Canada from improving economic conditions, partially offset by a moderate increase in delinquencies in Australia.and 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
September 30,
 Increase
(decrease)  and
percentage
change
 Nine months  ended
September 30,
 Increase
(decrease)  and
percentage
change
   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     2011       2010     2011 vs. 2010   2011       2010     2011 vs. 2010 

Lifestyle protection insurance gross written premiums, premium equivalents and deposits

 $438   $474   $(36  (8)%  $1,299   $1,337   $(38  (3)%   $469    $424    $45    11 $892    $861    $31    4

Mexico operations gross written premiums

  —      18    (18  (100)%   —      50    (50  (100)% 

Net earned premiums

  218    287    (69  (24)%   720    853    (133  (16)%    223     244     (21  (9)%   438     502     (64  (13)% 

Gross written premiums, premium equivalents and deposits

The three and nine months ended September 30, 2010 included a decrease of $41 million and of $11 million, respectively, attributable to changes in foreign exchange rates. Excluding foreign exchange, gross

Gross written premiums, premium equivalents and deposits, gross of ceded reinsurance and cancellations, increased modestly during thefrom sales growth. The three and six months ended SeptemberJune 30, 2010. Gross written premiums, premium equivalents2011 included increases of $40 million and deposits, gross of ceded reinsurance and cancellations, decreased during the nine months ended September 30, 2010 mainly$27 million, respectively, attributable to reduced levels of consumer lending. In the third quarter of 2009, we sold our Mexico operations; therefore, there were no saleschanges in 2010.foreign exchange rates.

Net earned premiums

For the three months ended SeptemberJune 30, 2010,2011, the decrease in our lifestyle protection insurance business was primarily attributable to lower singleour runoff block of business and a decrease in premium sales volume in Europe,driven by reduced levels of consumer lending and lower single premium sales related to new business regulations in the U.K and our runoff business.lending. The three months ended SeptemberJune 30, 20102011 included a decreasean increase of $22$20 million attributable to changes in foreign exchange rates.

For the ninesix months ended SeptemberJune 30, 2010,2011, the decrease in our lifestyle protection insurance business was primarily attributable to lower sales volume in Europe and our runoff business. Reducedbusiness and a decrease in premium volume driven by reduced levels of consumer lending and lower singlelending. Additionally, there was a favorable premium salesadjustment related to new business regulationsthe timing of receiving client data which was partially offset by an unfavorable reinsurance adjustment in the U.K. also contributed to the decrease.first quarter of 2010, both of which were offset in expenses. The ninesix months ended SeptemberJune 30, 20102011 included a decreasean increase of $6$13 million attributable to changes in foreign exchange rates.

U.S. Mortgage Insurance segment

Segment results of operations

Three Months Ended SeptemberJune 30, 20102011 Compared to Three Months Ended SeptemberJune 30, 20092010

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

 

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

change
 

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Revenues:

     

Premiums

  $149   $156   $(7  (4)% 

Net investment income

   28    34    (6  (18)% 

Net investment gains (losses)

   15    41    (26  (63)% 

Insurance and investment product fees and other

   3   4    (1  (25)% 
              

Total revenues

   195    235    (40  (17)% 
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   391    346    45    13

Acquisition and operating expenses, net of deferrals

   28    34    (6)  (18)% 

Amortization of deferred acquisition costs and intangibles

   6    6    —      —  
              

Total benefits and expenses

   425    386    39    10
              

Loss before income taxes

   (230  (151  (79  (52)% 

Benefit for income taxes

   (89  (62  (27  (44)% 
              

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

   (141  (89  (52  (58)% 

Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders:

     

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

   (11  (27  16    59
              

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

  $(152 $(116 $(36  (31)% 
              

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

(Amounts in millions)

      2011          2010      2011 vs. 2010 

Revenues:

     

Premiums

  $142   $153   $(11  (7)% 

Net investment income

   26    31    (5  (16)% 

Net investment gains (losses)

   1    (3  4    133

Insurance and investment product fees and other

   1    —      1    —  
  

 

 

  

 

 

  

 

 

  

Total revenues

   170    181    (11  (6)% 
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   526    216    310    144

Acquisition and operating expenses, net of deferrals

   35    33    2   6

Amortization of deferred acquisition costs and intangibles

   4    4    —      —  
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   565    253    312    123
  

 

 

  

 

 

  

 

 

  

Loss before income taxes

   (395  (72  (323  NM(1) 

Benefit for income taxes

   (143  (29  (114  NM(1) 
  

 

 

  

 

 

  

 

 

  

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

   (252  (43  (209  NM(1) 

Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders:

     

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

   (1  3    (4  (133)% 
  

 

 

  

 

 

  

 

 

  

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

  $(253 $(40 $(213  NM(1) 
  

 

 

  

 

 

  

 

 

  

 

(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 was as a result of an increasemainly related to the reserve strengthening in the second quarter of 2011 from a decline in the cure rates and continued aging of existing delinquent loans due to higher foreclosure starts and higher levels of claim payments.loans.

Revenues

Premiums decreased primarily driven by lower new insurance written as a result of a smaller mortgage insurance origination market and lower premiums assumed from an affiliate under an intercompany reinsurance agreement, partially offset by less policy coverage rescission activity. The flow persistency remained flat at 84% for both the three months ended September 30, 2010 and 2009.

Net investment income decreased primarily fromdue to lower average invested assets.assets and lower yield from holding higher cash balances.

NetThe increase in net investment gains decreased as a result of lowerwas primarily driven by higher gains on salesthe sale of investments from portfolio repositioning activitiesactivities.

Benefits and expenses

Benefits and other changes in policy reserves increased due to an increase in change in reserves of $343 million, partially offset by a decrease in net paid claims of $33 million. In the second quarter of 2011, we strengthened reserves by $299 million primarily related to a decline in cure rates during the second quarter of 2011 for delinquent loans and continued aging of existing delinquencies. Of the reserve strengthening, approximately $102 million was associated with worsening trends in recent experience. These trends were associated with a range of factors, including reduced opportunities to mitigate losses through loan modification actions due to a higher percentage of early stage delinquencies shifting to a more aged delinquency status. Specifically, reduced cure rates were driven by lower levels of borrower self-cures and lender loan modifications outside of government-sponsored modification programs. In addition, our expectations going forward include further deterioration in cure rates from a continuation of current market trends and an ongoing weakness in the U.S. residential real estate market. Accordingly, these expectations going forward resulted in an additional reserve strengthening of approximately $197 million in the second quarter of 2011. These increases were partially offset by lower new delinquencies. The decrease in net paid claims was attributable to lower claim counts and lower average claim payments reflecting lower loan balances.

Benefit for income taxes.The effective tax rate decreased to 36.2% for the three months ended SeptemberJune 30, 2010 compared to2011 from 40.3% for the three months ended SeptemberJune 30, 2009.2010. This decrease in the effective tax rate was primarily attributable to tax favored investment benefits in relation to pre-tax results in the current year compared to the prior year.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

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)

  2011  2010  2011 vs. 2010 

Revenues:

     

Premiums

  $284   $295   $(11  (4)% 

Net investment income

   59    61    (2  (3)% 

Net investment gains (losses)

   2    1    1    100

Insurance and investment product fees and other

   2    5    (3  (60)% 
  

 

 

  

 

 

  

 

 

  

Total revenues

   347    362    (15  (4)% 
  

 

 

  

 

 

  

 

 

  

Benefits and expenses:

     

Benefits and other changes in policy reserves

   805    412    393    95

Acquisition and operating expenses, net of deferrals

   69    67    2    3

Amortization of deferred acquisition costs and intangibles

   8    7    1    14
  

 

 

  

 

 

  

 

 

  

Total benefits and expenses

   882    486    396    81
  

 

 

  

 

 

  

 

 

  

Loss before income taxes

   (535  (124  (411  NM(1) 

Benefit for income taxes

   (202  (48  (154  NM(1) 
  

 

 

  

 

 

  

 

 

  

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

   (333  (76  (257  NM(1) 

Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders:

     

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

   (1  —      (1  —  
  

 

 

  

 

 

  

 

 

  

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

  $(334 $(76 $(258  NM(1) 
  

 

 

  

 

 

  

 

 

  

(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 was mainly related to the reserve strengthening in the second quarter of 2011 from a decline in the cure rates and continued aging of existing delinquent loans.

Revenues

Premiums decreased driven by lower new insurance written as a result of a smaller mortgage insurance origination market and lower premiums assumed from an affiliate under an intercompany reinsurance agreement, partially offset by less policy coverage rescission activity.

Net investment income decreased primarily related to lower average invested assets, partially offset by a preferred stock dividend in the current year.

The increase in net investment gains was primarily driven by gains on the sale of investments from portfolio repositioning activities.

Insurance and investment product fees and other income decreased primarily from the commutation of a captive trust in the prior year that did not recur.

Benefits and expenses

Benefits and other changes in policy reserves increased due to an increase in change in reserves of $184$601 million, andpartially offset by a decrease in net paid claims of $139$208 million. In the thirdsecond quarter of 2009,2011, we reached a settlement of arbitration proceedings with a lender regarding bulk transactions of $95strengthened reserves by $299 million consisting of $203 million of paid claims and a decrease in reserves of $108 million. The increase in change in reserves was primarily related to an increasea decline in cure rates in the second quarter of 2011 for delinquent loans and continued aging of delinquent loans as compared toexisting delinquencies. Of the prior year driven by foreclosure starts andreserve strengthening, approximately $102 million was associated with worsening trends in recent experience. These trends were associated with a reduction in rescission activity, partially offset by an increase in loan modifications. With the exceptionrange of Florida, the shift from rescissions to modification benefits was proportional across regions, products and vintages. In Florida, we sawfactors, including reduced opportunities to mitigate losses through loan modificationsmodification actions due to itsa higher percentage of laterearly stage delinquencies shifting to a more aged delinquency status. Specifically, reduced cure rates were driven by lower levels of borrower self-cures and larger baselender loan modifications outside of investor properties as compared to the broader portfolio. Excluding the settlementgovernment-sponsored modification programs. In addition, our expectations going forward include further deterioration in cure rates from a continuation of current market trends and an ongoing weakness in the prior year,U.S. residential real estate market. Accordingly, these expectations going forward resulted in an additional reserve strengthening of approximately $197 million in the second quarter of 2011. These increases were partially offset by lower new delinquencies. The decrease in net paid claims increased largelywas attributable to an increase inlower claim counts and lower average claim payments reflecting higherlower loan balances within the 2005, 2006 and 2007 book years, as well as higher claim counts within those same book years. Benefits and other changes in policy reservesbalances. The prior year also included a reinsurance credit principallysettlement with a counterparty related to our captive reinsurance arrangementsGSE Alt-A business of $67$5 million, and $41consisting of net paid claims of $180 million for the three months ended September 30, 2010 and 2009, respectively.

Acquisition and operating expenses decreased primarily attributable to lower operating expenses from a decrease in net premiums written.change in reserves of $185 million that did not recur.

Benefit for income taxes.The effective tax rate decreased to 37.8% for the six months ended June 30, 2011 from 38.7% for the threesix months ended SeptemberJune 30, 2010 from 41.1% for the three months ended September 30, 2009.2010. This decrease in the effective tax rate was primarily attributable to tax favored investment income.

Nine Months Ended September 30, 2010 Comparedbenefits in relation to Nine Months Ended September 30, 2009

The following table sets forth thepre-tax results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:

   Nine months ended
September 30,
  Increase
(decrease)  and

percentage
change
 

(Amounts in millions)

  2010  2009  2010 vs. 2009 

Revenues:

     

Premiums

  $444   $490   $(46  (9)% 

Net investment income

   89    102    (13  (13)% 

Net investment gains (losses)

   16    22    (6  (27)% 

Insurance and investment product fees and other

   8    5    3    60% 
              

Total revenues

   557    619    (62  (10)% 
              

Benefits and expenses:

     

Benefits and other changes in policy reserves

   803    1,120    (317  (28)% 

Acquisition and operating expenses, net of deferrals

   95    99    (4  (4)% 

Amortization of deferred acquisition costs and intangibles

   13    16    (3  (19)% 
              

Total benefits and expenses

   911    1,235    (324  (26)% 
              

Loss before income taxes

   (354  (616  262    43

Benefit for income taxes

   (137  (245  108    44
              

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

   (217  (371  154    42

Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders:

     

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

   (11)  (14  3    21
              

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

  $(228 $(385 $157    41
              

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, partially offset by less policy coverage rescission activity. The flow persistency increased from 83% for the nine months ended September 30, 2009 to 86% for the nine months ended September 30, 2010.

Net investment income decreased primarily from lower average invested assets. Net investment income in 2010 included $5 million of lower losses related to limited partnerships accounted for under the equity method.

The decrease in net investment gains was primarily driven by lower gains on sales of investments from portfolio repositioning activities in the current year partially offset by impairments recorded in 2009 that did not recur.

Insurance and investment product fees and other income increased primarily relatedcompared to 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 $454 million and an increase in net paid claims of $137 million. In the third quarter of 2009, we reached a settlement of arbitration proceedings with a lender regarding bulk transactions of $95 million, consisting of $203 million of paid claims and a decrease in reserves of $108 million that did not recur. The decrease in change in reserves in the current year was driven by lower new delinquencies and a decrease in delinquencies since the fourth quarter of 2009 related to increased loss mitigation efforts. The increase in paid claims was principally attributable to an increase in average claim payments reflecting higher loan balances within the 2005, 2006 and 2007 book years as well as higher claim counts within those same book years. Benefits and other changes in policy reserves also included a reinsurance credit principally related to our captive reinsurance arrangements of $156 million and $236 million for the nine months ended September 30, 2010 and 2009, respectively.

Acquisition and operating expenses decreased primarily attributable to lower operating expenses from a decrease in net premiums written.

Benefit for income taxes.The effective tax rate decreased to 38.7% for the nine months ended September 30, 2010 from 39.8% for the nine months ended September 30, 2009. This decrease in the effective tax rate was primarily attributable to tax favored investments.prior year.

U.S. Mortgage Insurance selected operating performance measures

The following tables set forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:

 

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

(Amounts in millions)

  2010   2009   2010 vs. 2009   2011   2010   2011 vs. 2010 

Primary insurance in-force

  $129,100    $149,500    $(20,400  (14)%   $120,900    $131,900    $(11,000  (8)% 

Risk in-force

   30,000     33,000     (3,000  (9)%    28,300     30,700     (2,400  (8)% 

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

percentage
change
   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       2011           2010       2011 vs. 2010 2011   2010       2011 vs. 2010     

New insurance written

  $2,700    $2,000    $700     35 $6,600    $9,100    $(2,500  (27)%   $1,900    $2,200    $(300  (14)%  $4,300    $3,900    $400    10

Net premiums written

   148     150     (2   (1)%   442     481     (39  (8)%    145     152     (7  (5)%   287     294     (7  (2)% 

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 withas well as a counterparty that reduced our bulk risk in-force exposure. This decrease was partially offset by an increase in flow new insurance written from an increase in oursmaller mortgage insurance market share, partially offsetin the current year. 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 86% and 83%87% for the ninesix months ended SeptemberJune 30, 20102011 and 2009,2010, respectively.

New insurance written

New insurance written increased duringFor the three months ended SeptemberJune 30, 20102011, new insurance written decreased primarily driven by a slight decline in our mortgage insurance market share, coupled with a decline in mortgage originations. For the six months ended June 30, 2011, new insurance written increased primarily driven by an increase in flowthe overall mortgage insurance market following FHA pricing changes.

Net premiums written

For the three months ended June 30, 2011, net premiums written decreased due to lower new insurance written from an increaseas a result of a decline in our mortgage insurance market share and lower premiums assumed from an affiliate under an intercompany reinsurance agreement. For the six months ended June 30, 2011, net premiums written decreased due to lower reinsurance premiums, partially offset by tighter mortgage insurance guidelines and mortgage lender underwriting standards.

New insurance written decreased during the nine months ended September 30, 2010 primarily driven by constraints in the bulk market. This decrease was partially offset by an increase in flowhigher new insurance written from an increase in our mortgage insurance market share, partially offset by tighter mortgage insurance guidelines and mortgage lender underwriting standards.

Net premiums written

Net premiums written decreased during the nine months ended September 30, 2010 principally from lower new insurance written during 2010 as a result of a loweran overall increase in the 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
September 30,
 Increase (decrease) Nine months  ended
September 30,
 Increase (decrease)   Three months ended
June 30,
 Increase (decrease) Six months ended
June 30,
 Increase (decrease) 
  2010 2009 2010 vs. 2009 2010 2009 2010 vs. 2009   2011 2010 2011 vs. 2010 2011 2010 2011 vs. 2010 

Loss ratio

   263  223  40 %   181  228  (47)%    369  141  228  283  140  143

Expense ratio

   23  26  (3)%   24  24  —   %    27  25  2  27  25  2

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.

In the third quarter of 2009, we reached a $95 million settlement with a lender regarding certain bulk transactions. Excluding the effect of this settlement, theThe loss ratio for the three and ninesix months ended SeptemberJune 30, 2009 would have been 162% and 209%, respectively.

For the three months ended September 30, 2010, the increase in the loss ratio was2011 increased primarily attributable to an increase in change in reserves anda reserve strengthening of $299 million primarily related to a decline in net earned premiums, partially offset by a decrease in net paid claims as a result ofcure rates during the settlement in the thirdsecond quarter of 2009. The increase in change in reserves was primarily related to an increase in the2011 for delinquent loans and continued aging of delinquent loans compared toexisting delinquencies. Of the prior year driven by foreclosure starts andreserve strengthening, approximately $102 million was associated with worsening trends in recent experience. These trends were associated with a reduction in rescission activity, partially offset by an increase in loan modifications. With the exceptionrange of Florida, the shift from rescissions to modification benefits was proportional across regions, products and vintages. In Florida, we sawfactors, including reduced opportunities to mitigate losses through loan modificationsmodification actions due to itsa higher percentage of laterearly stage delinquencies shifting to a more aged delinquency status. Specifically, reduced

cure rates were driven by lower levels of borrower self-cures and larger baselender loan modifications outside of investor properties as compared to the broader portfolio. Excluding the settlementgovernment-sponsored modification programs. In addition, our expectations going forward include further deterioration in cure rates from a continuation of current market trends and an ongoing weakness in the prior year, net paid claims increased largely attributable toU.S. residential real estate market. Accordingly, these expectations going forward resulted in an increase in average claim payments reflecting higher loan balances within the 2005, 2006 and 2007 book years as well as higher claim counts within those same book years.

For the nine months ended September 30, 2010, the decreaseadditional reserve strengthening of approximately $197 million in the loss ratio was primarily attributable to a decrease in change in reserves,second quarter of 2011. These increases were partially offset by an increase in net paid claims. The decrease in change in reserves was driven by lower new delinquencies and a decrease in delinquencies since the fourth quarter of 2009 related to increased loss mitigation efforts. The increase in paid claims was principally attributable to an increase inlower claim counts and lower average claim payments reflecting higherlower loan balances within the 2005, 2006balances. The six months ended June 30, 2010 also 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 2007 book years as well as higher claim counts within those same book years. Partially offsetting thea decrease in the loss ratio was a declinechange in net earned premiums.reserves of $185 million.

The expense ratio decreasedincreased as a result of lower expenses, partially offset by a decrease in net premiums written for the three and six months ended SeptemberJune 30, 2010. The expense ratio was flat as lower expenses were offset by a decrease in net premiums written for the nine months ended September 30, 2010.

2011.

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:

 

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

Primary insurance:

        

Insured loans in-force

   802,090    890,730    914,770     746,740    781,024    821,617  

Delinquent loans

   98,613    122,279    115,430     87,464    95,395    101,759  

Percentage of delinquent loans (delinquency rate)

   12.29  13.73  12.62   11.71  12.21  12.39

Flow loans in-force

   705,754    753,370    774,000     658,251    687,964    723,301  

Flow delinquent loans

   95,567    107,495    100,208     84,442    92,225    98,771  

Percentage of flow delinquent loans (delinquency rate)

   13.54  14.27  12.95   12.83  13.41  13.66

Bulk loans in-force

   96,336    137,360    140,770     88,489    93,060    98,316  

Bulk delinquent loans(1)

   3,046    14,784    15,222     3,022    3,170    2,988  

Percentage of bulk delinquent loans (delinquency rate)

   3.16  10.76  10.81   3.42  3.41  3.04

A minus and sub-prime loans in-force

   80,774    89,678    93,344     73,211    77,822    83,859  

A minus and sub-prime delinquent loans

   23,882    29,238    28,151     20,284    22,827    24,867  

Percentage of A minus and sub-prime delinquent loans (delinquency rate)

   29.57  32.60  30.16   27.71  29.33  29.65

Pool insurance:

        

Insured loans in-force

   18,759    20,370    20,859     16,943    17,880    19,473  

Delinquent loans

   939    781    741     931    989    831  

Percentage of delinquent loans (delinquency rate)

   5.01  3.83  3.55   5.49  5.53  4.27

 

(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 1,4391,569 as of SeptemberJune 30, 2010, 11,3192011, 1,713 as of December 31, 20092010 and 11,0021,478 as of SeptemberJune 30, 2009.2010.

Delinquency and foreclosure levels that developed principally in our 2005, 2006, 2007 and 20072008 book years have remained high as the U.S.United States continues to experience an economic recession and weakness in its housing markets.residential real estate market. These trends continue to be especially evident in Florida, California, Arizona and Nevada, as well as in our A minus, Alt-A, adjustable 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.

The following tables set forth flow delinquencies, direct case reserves and risk in-force by aged missed payment status in our U.S. mortgage insurance portfolio as of the dates indicated:

   June 30, 2011 

(Dollar amounts in millions)

  Delinquencies   Direct case
reserves 
(1)
   Risk
in-force
   Reserves as %
of risk in-force
 

Payments in default:

        

3 payments or less

   20,255    $193    $810     24

4 – 11 payments

   26,099     714     1,186     60

12 payments or more

   38,088     1,349     1,901     71
  

 

 

   

 

 

   

 

 

   

Total

   84,442    $2,256    $3,897     58
  

 

 

   

 

 

   

 

 

   

(1)

Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.

   December 31, 2010 

(Dollar amounts in millions)

  Delinquencies   Direct case
reserves 
(1)
   Risk
in-force
   Reserves as %
of risk in-force
 

Payments in default:

        

3 payments or less

   24,104    $152    $959     16

4 – 11 payments

   33,635     754     1,546     49

12 payments or more

   34,486     1,142     1,757     65
  

 

 

   

 

 

   

 

 

   

Total

   92,225    $2,048    $4,262     48
  

 

 

   

 

 

   

 

 

   

(1)

Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.

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
September 30, 2010
  Percent of  total
reserves as of
September 30, 2010 (1)
  Delinquency rate   Percent of primary
risk in-force as of
June 30, 2011
  Percent of total
reserves as of
June 30, 2011 
(1)
  Delinquency rate 
 September 30,
2010
 December 31,
2009
 September 30,
2009
   June 30,
2011
 December 31,
2010
 June 30,
2010
 

By Region:

            

Southeast(2)

   23  34  16.94  18.36  17.06   22  35  16.37  16.79  17.06

South Central(3)

   16    14    11.19  12.42  11.01   16    12    9.90  11.00  11.41

Northeast(4)

   14    9    11.15  11.60  10.48   14    12    11.71  11.66  10.85

North Central(5)

   11    11    11.52  12.20  11.00   12    11    11.36  11.51  11.50

Pacific(6)

   11    15    15.13  19.43  18.19   11    13    13.29  14.39  15.83

Great Lakes(7)

   9    7    8.99  10.20  9.72   9    7    8.49  8.92  9.08

Plains(8)

   6    3    7.96  8.29  7.50   6    3    7.75  8.14  7.59

Mid-Atlantic(9)

   5    4    10.80  13.08  11.76

New England(10)

   5    3    11.04  12.48  11.40

New England(9)

   5    3    10.36  10.71  11.11

Mid-Atlantic(10)

   5    4    10.12  10.67  11.23
            

 

  

 

    

Total

   100  100  12.29  13.73  12.62   100  100  11.71  12.21  12.39
            

 

  

 

    

 

(1)

Total reserves were $1,973$2,506 million as of SeptemberJune 30, 2010.2011.

(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
September 30, 2010
  Percent of  total
reserves as of
September 30, 2010 (1)
  Delinquency rate   Percent of primary
risk in-force as of
June 30, 2011
  Percent of total
reserves as of
June 30, 2011 
(1)
  Delinquency rate 
 September 30,
2010
 December 31,
2009
 September 30,
2009
   June 30,
2011
 December 31,
2010
 June 30,
2010
 

By State:

            

Florida

   8  24  28.59  30.77  29.56   7  24  28.35  28.31  28.86

Texas

   7  3  8.83  9.49  8.22   7  3  7.61  8.71  8.80

New York

   7  4  9.34  9.42  8.44   7  5  9.71  9.76  8.88

California

   5  7  15.16  21.87  21.04   5  7  12.24  13.99  16.40

Illinois

   5  7  15.66  16.40  14.65   5  7  15.90  15.79  15.79

Georgia

   4  4  16.88  17.62  15.59   4  4  14.70  16.16  17.13

North Carolina

   4  2  11.25  11.73  10.08   4  3  10.93  11.23  11.12

New Jersey

   4  5  17.73  17.30  16.36

Pennsylvania

   4  2  10.48  11.13  10.02   4  2  10.81  10.94  10.34

New Jersey

   4  4  16.54  17.35  15.81

Ohio

   3  2  7.83  8.47  8.08   3  2  8.00  8.19  7.85

 

(1)

Total reserves were $1,973$2,506 million as of SeptemberJune 30, 2010.2011.

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 SeptemberJune 30, 2010:2011:

 

(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

   7.79  1 $1,886     1.5 $489     1.6

2000

   8.27  —      337     0.3    85     0.3  

2000 and prior

   7.84  1.3 $1,876     1.6 $481     1.7

2001

   7.50  —      1,217     0.9    306     1.0     7.58  0.7    954     0.8    240     0.9  

2002

   6.63  1    2,919     2.3    711     2.4     6.64  1.5    2,358     2.0    581     2.1  

2003

   5.65  2    11,801     9.1    1,988     6.7     5.65  3.7    9,603     7.9    1,622     5.8  

2004

   5.88  3    6,948     5.4    1,562     5.3     5.88  4.2    5,963     4.9    1,354     4.8  

2005

   5.98  14    11,050     8.6    2,810     9.4     5.98  12.6    9,710     8.0    2,501     8.9  

2006

   6.51  23    14,805     11.4    3,589     12.1     6.49  19.7    13,144     10.9    3,216     11.5  

2007

   6.60  49    32,246     25.0    7,932     26.7     6.56  40.0    29,077     24.0    7,171     25.6  

2008

   6.19  7    29,815     23.1    7,358     24.8     6.15  15.8    26,922     22.3    6,685     23.8  

2009

   5.08  —      9,617     7.4    1,519     5.1     5.08  0.3    7,982     6.6    1,386     4.9  

2010

   4.84  —      6,475     5.0    1,369     4.6     4.66  0.2    9,085     7.5    1,872     6.7  

2011

   4.63  —      4,264     3.5    920     3.3  
                      

 

  

 

   

 

  

 

   

 

 

Total portfolio

   6.18  100 $129,116     100.0 $29,718     100.0   6.08  100.0 $120,938     100.0 $28,029     100.0
                      

 

  

 

   

 

  

 

   

 

 

 

(1)

Total reserves were $1,973$2,506 million as of SeptemberJune 30, 2010.2011.

Corporate and Other

Results of Operations

Three Months Ended SeptemberJune 30, 20102011 Compared to Three Months Ended SeptemberJune 30, 20092010

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

 

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

(Amounts in millions)

      2010         2009     2010 vs. 2009     2011     2010   2011 vs. 2010 

Revenues:

          

Premiums

  $—     $—     $—      —  

Net investment income

   36    25    11    44  $43   $35   $8    23

Net investment gains (losses)

   25    (65  90    138   (1  (68  67    99

Insurance and investment product fees and other

   7    12    (5  (42)%    1    (3  4    133
             

 

  

 

  

 

  

Total revenues

   68    (28  96    NM(1)    43    (36  79    NM(1) 
             

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   1    2    (1  (50)% 

Interest credited

   38    39   (1  (3)%    31    35    (4  (11)% 

Acquisition and operating expenses, net of deferrals

   (2  9    (11  (122)%    —      9    (9  (100)% 

Amortization of deferred acquisition costs and intangibles

   3    5    (2  (40)%    3    4    (1  (25)% 

Interest expense

   77    58    19    33   86    70    16    23
             

 

  

 

  

 

  

Total benefits and expenses

   117    113    4    4   120    118    2    2
             

 

  

 

  

 

  

Loss before income taxes

   (49  (141  92    65   (77  (154  77    50

Benefit for income taxes

   (14  (67  53    79   —      (51  51    100
             

 

  

 

  

 

  

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

   (35  (74  39    53   (77  (103  26    25

Adjustment to net loss available to Genworth Financial, Inc.’s common stockholders:

          

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

   (16  41    (57  (139)%    —      42    (42  (100)% 
             

 

  

 

  

 

  

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

  $(51 $(33 $(18  (55)%   $(77 $(61 $(16  (26)% 
             

 

  

 

  

 

  

 

(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 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 an increase inhigher interest expense, partially offset by higher net investment income.

Revenues

Net investment income increased primarily driven by an increase in net investment income largelyand lower operating expenses.

Revenues

Higher investment income was primarily driven by higher dividend income from equity investments and $3 million of higher gains related to limited partnerships accounted for under the consolidation ofequity method in the current year.

Net investment losses decreased primarily related to derivative activity associated with certain consolidated securitization entities as of January 1, 2010.and lower impairments.

Insurance and investment product fees and other decreased primarily as a result of gains from our long-term debt repurchasesincreased mainly attributable to non-functional currency transactions attributable to changes in 2009 that did not recur.foreign exchange rates in the current year.

Benefits and expenses

The decrease in interest credited was attributable to lower interest rates on interest paid on our floating rate policyholder liabilities and a decrease in average outstanding liabilities.

Operating expenses decreased as a result of higher allocated expenses to the operating segments in the current year.

Interest expense increased primarily related to the consolidation of certain securitization entities as of January 1,debt issuances in June and November 2010 and debt that was issued in the second quarter of 2010.March 2011.

The decrease in the income tax benefit was primarily related to tax expense allocated to Corporate and Other activities in the current year and a change in uncertain tax positions in the prior year.

NineSix Months Ended SeptemberJune 30, 20102011 Compared to NineSix Months Ended SeptemberJune 30, 20092010

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

 

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

(Amounts in millions)

      2010         2009     2010 vs. 2009   2011 2010 2011 vs. 2010 

Revenues:

          

Premiums

  $—     $2   $(2  (100)% 

Net investment income

   80    140    (60  (43)%   $69   $44   $25    57

Net investment gains (losses)

   (59  (288  229    80   (8  (84  76    90

Insurance and investment product fees and other

   7   128    (121  (95)%    3   —      3    NM(1) 
             

 

  

 

  

 

  

Total revenues

   28    (18  46    NM(1)    64    (40  104    NM(1) 
             

 

  

 

  

 

  

Benefits and expenses:

          

Benefits and other changes in policy reserves

   1    2    (1  (50)% 

Interest credited

   112    207    (95  (46)%    64    74    (10  (14)% 

Acquisition and operating expenses, net of deferrals

   15    35    (20  (57)%    (5  17    (22  (129)% 

Amortization of deferred acquisition costs and intangibles

   11    13    (2)  (15)%    6    8    (2  (25)% 

Interest expense

   217    186    31    17   168    140    28    20
             

 

  

 

  

 

  

Total benefits and expenses

   356    443    (87  (20)%    233    239    (6  (3)% 
             

 

  

 

  

 

  

Loss before income taxes

   (328  (461  133    29   (169  (279  110    39

Benefit for income taxes

   (222  (186  (36  (19)%    (16  (208  192    92
             

 

  

 

  

 

  

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

   (106  (275  169    61   (153  (71  (82  (115)% 

Adjustments to net loss available to Genworth Financial, Inc.’s common stockholders:

          

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

   37    185    (148  (80)%    4    53    (49  (92)% 

Net tax benefit related to separation from our former parent

   (106  —      (106  NM(1)    —      (106  106    100
             

 

  

 

  

 

  

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

  $(175 $(90 $(85  (94)%   $(149 $(124 $(25  (20)% 
             

 

  

 

  

 

  

 

(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 theWe reported a higher net operating loss available to Genworth Financial, Inc.’s common stockholders in the current year was primarily attributablecompared 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 byas a result of lower investment income related to policy loans from a bankruptcy-related lapse in 2009, lower yields on floating rate investmentstax benefits and a decline in average invested assets. Net investment income also included $8 million of higher losses related to limited partnership investments accounted for under the equity method in 2010. These decreases wereinterest expense, partially offset by an increase in net investment income largelyand lower operating 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 $4 million of gains related to limited partnerships during the consolidationsix months ended June 30, 2011 compared to losses of $21 million during the six months ended June 30, 2010.

Net investment losses decreased primarily related to derivative activity associated with certain consolidated securitization entities as of January 1, 2010.and lower impairments.

Insurance and investment product fees and other decreased primarily as a result of income fromincreased mainly attributable to non-functional currency transactions attributable to changes in foreign exchange rates in the early retirement of institutional contracts at a discount to contract values in 2009 that did not recur.current year.

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 consolidation of certain securitization entities as of January 1,debt issuances in June and November 2010 and debt issued in the second quarter of 2010.March 2011.

The increasedecrease in the income tax benefit was primarily related to a changechanges in uncertain tax positionsbenefits in the prior year related to separation from our former parent company.parent.

Investments and Derivative Instruments

Investment results

The following tables set 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
September 30,
  Increase (decrease) 
   2010  2009  2010 vs. 2009 

(Amounts in millions)

  Yield  Amount  Yield  Amount  Yield  Amount 

Fixed maturity securities—taxable

   5.0 $658    5.2 $610    (0.2)%  $48  

Fixed maturity securities—non-taxable

   4.3  14    4.6  27    (0.3)%   (13

Commercial mortgage loans

   5.4  95    5.5  106    (0.1)%   (11

Restricted commercial mortgage loans related to securitization entities(1)

   7.6  10    —    —      7.6  10  

Equity securities

   6.8  4    12.8  6    (6.0)%   (2

Other invested assets

   9.1  24    0.7  4    8.4  20  

Restricted other invested assets related to securitization entities (1)

   0.3  1    —    —      0.3  1  

Policy loans

   7.6  28    4.4  19    3.2  9  

Cash, cash equivalents and short-term investments

   0.5  6    0.5  9    —    (3
                

Gross investment income before expenses and fees

   4.8  840    4.5  781    0.3  59  

Expenses and fees

   (0.1)%   (25  (0.1)%   (22  —    (3
                

Net investment income

   4.7 $815    4.4 $759    0.3 $56  
                

(1)

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.

   Three months ended
June 30,
  Increase (decrease) 
   2011  2010  2011 vs. 2010 

(Amounts in millions)

  Yield  Amount  Yield  Amount  Yield  Amount 

Fixed maturity securities—taxable

   5.2 $693    5.0 $646    0.2 $47  

Fixed maturity securities—non-taxable

   4.1  10    4.3  16    (0.2)%   (6

Commercial mortgage loans

   5.6  92    5.5  99    0.1  (7

Restricted commercial mortgage loans related to securitization entities

   7.8  9    7.3  10    0.5  (1

Equity securities

   11.7  10    11.8  5    (0.1)%   5  

Other invested assets

   16.9  55    14.9  39    2.0  16  

Restricted other invested assets related to securitization entities

   0.2  —      —    —      0.2  —    

Policy loans

   7.9  30    7.7  28    0.2  2  

Cash, cash equivalents and short-term investments

   0.7  6    0.3  4    0.4  2  
                

Gross investment income before expenses and fees

   5.3  905    4.9  847    0.4  58  

Expenses and fees

   (0.2)%   (24  (0.1)%   (24  (0.1)%   —    
                

Net investment income

   5.1 $881    4.8 $823    0.3 $58  
                

  Nine months ended
September 30,
  Increase (decrease) 
  2010  2009  2010 vs. 2009 

(Amounts in millions)

 Yield  Amount  Yield  Amount  Yield  Amount 

Fixed maturity securities—taxable

  5.0 $1,930    5.2 $1,837    (0.2)%  $93  

Fixed maturity securities—non-taxable

  4.3  46    4.7  85    (0.4)%   (39

Commercial mortgage loans

  5.6  298    5.5  329    0.1  (31

Restricted commercial mortgage loans related to securitization entities (1)

  7.4  30    —    —      7.4  30  

Equity securities

  8.4  11    6.6  12    1.8  (1

Other invested assets

  7.0  61    (6.4)%   (102  13.4  163  

Restricted other invested assets related to securitization entities (1)

  0.5  2    —    —      0.5  2  

Policy loans

  7.6  83    8.5  115    (0.9)%   (32

Cash, cash equivalents and short-term investments

  0.4  15    0.7  40    (0.3)%   (25
               

Gross investment income before expenses and fees

  4.8  2,476    4.4  2,316    0.4  160  

Expenses and fees

  (0.1)%   (73  (0.1)%   (65  —    (8
               

Net investment income

  4.7 $2,403    4.3 $2,251    0.4 $152  
               

(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) 
   2011  2010  2011 vs. 2010 

(Amounts in millions)

  Yield  Amount  Yield  Amount  Yield  Amount 

Fixed maturity securities—taxable

   5.1 $1,363    5.0 $1,272    0.1 $91  

Fixed maturity securities—non-taxable

   4.1  21    4.3  32    (0.2)%   (11

Commercial mortgage loans

   5.6  184    5.7  203    (0.1)%   (19

Restricted commercial mortgage loans related to securitization entities

   7.7  19    7.4  20    0.3  (1

Equity securities

   7.6  13    9.4  7    (1.8)%   6  

Other invested assets

   13.5  89    6.8  37    6.7  52  

Restricted other invested assets related to securitization entities

   0.2  —      0.6  1    (0.4)%   (1

Policy loans

   7.9  59    7.6  55    0.3  4  

Cash, cash equivalents and short-term investments

   0.7  12    0.3  9    0.4  3  
                

Gross investment income before expenses and fees

   5.1  1,760    4.8  1,636    0.3  124  

Expenses and fees

   (0.1)%   (49  (0.2)%   (48  0.1  (1
                

Net investment income

   5.0 $1,711    4.6 $1,588    0.4 $123  
                

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 nine months ended SeptemberJune 30, 2010,2011, the increase in overall weighted-average investment yields was primarily attributable to the reinvestmentimproved performance of limited partnerships accounted for under the high cash balances we were holding during 2009equity method and lower losses on limited partnerships.$16 million of bond calls and prepayments in the current year. Net investment income for the three months ended SeptemberJune 30, 20102011 included $1$7 million of higher gains related to limited partnerships as compared the three months ended June 30, 2010.

For the six months ended June 30, 2011, the increase in overall weighted-average investment yields was primarily attributable to the improved performance of limited partnerships accounted for under the equity method as compared to losses ofand $20 million of higher bond calls and prepayments in the three months ended September 30, 2009.current year. Net investment income for the ninesix months ended SeptemberJune 30, 20102011 included $137$21 million of lower lossesgains related to limited partnerships accounted for under the equity method as compared to $24 million of losses for the ninesix months ended SeptemberJune 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.

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

 

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

(Amounts in millions)

  2010  2009  2010  2009 

Available-for-sale securities:

     

Realized gains on sale

  $38   $122   $114   $172  

Realized losses on sale

   (35  (81  (109  (192
                 

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

   3    41    5    (20
                 

Impairments:

     

Total other-than-temporary impairments

   (7  (285  (108  (1,358

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

   (30  89    (60  413  
                 

Net other-than-temporary impairments

   (37  (196  (168  (945
                 

Trading securities

   23    16    25    15  

Commercial mortgage loans

   (9  (8  (31  (19

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

   30    —      (6  —    

Derivative instruments

   94    19    48    12  

Other

   1    6    23    12  
                 

Net investment gains (losses)

  $105   $(122 $(104 $(945
                 

(1)

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.

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

(Amounts in millions)

    2011      2010      2011      2010   

Available-for-sale securities:

     

Realized gains

  $25   $53   $54   $76  

Realized losses

   (34  (36  (65  (74
  

 

 

  

 

 

  

 

 

  

 

 

 

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

   (9  17    (11  2  
  

 

 

  

 

 

  

 

 

  

 

 

 

Impairments:

     

Total other-than-temporary impairments

   (28  (24  (59  (101

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

   2    (27  (3  (30
  

 

 

  

 

 

  

 

 

  

 

 

 

Net other-than-temporary impairments

   (26  (51  (62  (131
  

 

 

  

 

 

  

 

 

  

 

 

 

Trading securities

   14    (4  25    2  

Commercial mortgage loans

   2    (18  1    (22

Net gains (losses) related to securitization entities

   (5  (47  5    (36

Derivative instruments

   (15  (38  (25  (46

Other

   (1  2    (1  22  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net investment gains (losses)

  $(40 $(139 $(68 $(209
  

 

 

  

 

 

  

 

 

  

 

 

 

Three Months Ended SeptemberJune 30, 20102011 Compared to Three Months Ended SeptemberJune 30, 20092010

 

We recorded $37$26 million of net other-than-temporary impairments for the three months ended SeptemberJune 30, 20102011 as compared to $196$51 million for the three months ended SeptemberJune 30, 2009.2010. Of total impairments for the three months ended SeptemberJune 30, 2011 and 2010, and 2009, $26$17 million and $99$43 million, respectively, related to structured securities, including $18$9 million and $74$23 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. For the three months ended SeptemberJune 30, 2011 and 2010, we recorded $8$4 million related to corporate securities and $2$5 million, respectively, of impairments related to commercial mortgage loans. Weloans and $2 million and $4 million, respectively, of impairments related to limited partnership investments. For the three months ended June 30, 2011, we also recorded $71$3 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlands during the three months ended September 30, 2009.real estate held-for-investment.

 

Net investment gainslosses related to derivatives of $94$15 million infor the third quarter of 2010three months ended June 30, 2011 were primarily relateddue to $66$16 million of gainslosses 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 as a resultand $4 million of changes in the non-performance risk incorporated into the discount ratelosses associated with derivatives used to value GMWB embedded derivatives. The increase also included $22 million of gains from the change in value of our credit default swaps due to narrowing credit spreads, $9 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business, $2 million of gains related to embedded derivatives associated with certain reinsurance agreements and $1foreign currency risk. These losses were partially offset by $3 million of gains related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. Theseposition and $2 million of gains in other non-qualified interest rate swaps. Net investment losses related to derivatives of $38 million for the three months ended June 30, 2010 were partially offset by $6primarily related to $31 million of losses from foreign currency forward contracts. Net investment gains relatedthe change in value of our credit default swaps due to derivativeswidening credit spreads, $21 million of $19 millionlosses from the change in value of the third quarterembedded derivative liabilities exceeding the change in value of 2009 were primarily related to gains inthe 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 derivative instruments used for mitigating this risk.

We also recorded $30 million of net gains related to securitization entities in the third quarter of 2010 primarily associated with derivatives and $9 million of losses related to commercial mortgage loans. 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 gainslosses related to the sale of available-for-sale securities were $9 million during the three months ended June 30, 2011 compared to net gains of $17 million during the three months ended June 30, 2010. We recorded $14 million of net gains related to trading securities during the three months ended June 30, 2011. We recorded $42 million of lower net losses related to securitization entities during the three months ended June 30, 2011 compared to the three months ended June 30, 2010 primarily associated with lower losses related to derivatives. We also $38recorded $2 million lowerof gains related to commercial mortgage loans during the three months ended June 30, 2011 attributable to a decrease in the current year.allowance compared to $18 million of losses during the three months ended June 30, 2010 from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance.

 

The aggregate fair value of securities sold at a loss during the three months ended SeptemberJune 30, 2011 and 2010 and 2009 was $275 million from the sale of 100 securities and $354$294 million from the sale of 78 securities and $858 million from the sale of 159 securities, respectively, which was approximately 89%91% and 84%, respectively,96% of book value.value for the three months ended June 30, 2011 and 2010, respectively. The loss on sales of securities in the three months ended September 30, 2010June, 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 September 30, 2010, the average period of time those securities had been continuously in an unrealized loss position was approximately 19 months. The securities sold at a loss duringin the three months ended September 30, 2010second quarter of 2011 included one U.Sforeign corporate security that was sold for a total loss of $6$11 million related to portfolio repositioning activities. The securities sold at a loss in the second quarter of 2010 included one municipal bond that was sold for a total loss of $6 million and one collateralized mortgage obligationmortgage-backed security that was sold for a total loss of $5 million. Of the securities that were sold at a loss during the three months ended September 30, 2009, the average period of time those securities had been continuously in an unrealized loss position was approximately 13 months. Of the securities that were sold at a loss, there were no individual transactions that produced losses considered material$4 million related to the consolidated financial statements.portfolio repositioning activities.

NineSix Months Ended SeptemberJune 30, 20102011 Compared to NineSix Months Ended SeptemberJune 30, 20092010

 

We recorded $168$62 million of net other-than-temporary impairments for the ninesix months ended SeptemberJune 30, 20102011 as compared to $945$131 million for the ninesix months ended SeptemberJune 30, 2009.2010. Of total impairments for the ninesix months ended SeptemberJune 30, 2011 and 2010, and 2009, $131$38 million and $488$105 million, respectively, related to structured securities, including $77$24 million and $342$59 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 $13$14 million and $81$5 million for the ninesix months ended SeptemberJune 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, we recorded $5 million of impairments related to commercial mortgage loans and $2 million and $10 million, respectively, of impairments related to limited partnership investments. For the six months ended June 30, 2011, we also recorded $3 million of impairments related to real estate held-for-investment. For the six months ended June 30, 2010, and 2009, respectively. Wewe also recorded $6 million and $316 million of impairments related to financial hybrid securities primarily from banks in the U.K., Ireland and the Netherlands during the nine months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010, we recorded $10 million of impairments related to limited partnership investments and $7 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 nine months ended September 30, 2009. We concluded the value of our retained interest was zero and recognized the full impairment in the prior year.securities.

 

Net investment gainslosses related to derivatives of $48$25 million for the ninesix months ended SeptemberJune 30, 20102011 were primarily relateddue to $31$20 million of gainslosses from the change in value of derivative instruments used for mitigating the risk of embedded derivative liabilities exceeding the changegains in value of the embedded derivative liabilities associated with our variable annuity products with GMWBs which included a reduction in the GMWB valuation as a resultand $13 million of changes in the non-performance risk incorporated into the discount ratelosses associated with derivatives used to value GMWB embedded derivatives. The increase also included $22 million of ineffectiveness gains from our cash flow hedge programs related to our long-term care insurance business and $4foreign currency risk. These losses were partially offset by $5 million of gains related to embedded derivativesa derivative strategy to mitigate the interest rate risk associated with certain reinsurance agreements. Theseour statutory capital position and $3 million of gains in other non-qualified interest rate swaps. Net investment losses related to derivatives of $46 million for the six months ended June 30, 2010 were partially offset by $5primarily 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 $4 million of losses

related to a derivative strategy to mitigate the interest rate risk associated with our statutory capital position. Net investment gains related to derivatives of $12 million for the nine months ended September 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 $31$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 losses related to the sale of available-for-sale securities were $11 million during the six months ended June 30, 2011 compared to net gains of $2 million during the six months ended June 30, 2010. We recorded $23 million of higher gains related to trading securities during the six months ended June 30, 2011 compared to the six months ended June 30, 2010. We recorded $5 million of net gains related to securitization entities during the six months ended June 30, 2011 primarily related to gains on trading securities compared to $36 million of net losses during the six months ended June 30, 2010 primarily associated with derivatives. We also recorded $1 million of gains related to commercial mortgage loans during the six months ended June 30, 2011 attributable to a decrease in the allowance compared to $22 million of losses during the six months ended June 30, 2010 from a lower of cost or market adjustment on loans held-for-sale and an increase in the allowance and $6 million of net losses related to securitization entities primarily associated with derivatives during the nine months ended September 30, 2010.allowance. 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 $5 million during the nine months ended September 30, 2010 compared to net losses of $20 million during the nine months ended September 30, 2009.

 

The aggregate fair value of securities sold at a loss during the ninesix months ended SeptemberJune 30, 2011 and 2010 and 2009 was $1,691$691 million from the sale of 285145 securities and $1,091$1,416 million from the sale of 277239 securities, respectively, which was approximately 94%93% and 86%95%, respectively, of book value. The loss on sales of securities in the ninesix months ended SeptemberJune 30, 20102011 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 nine months ended September 30, 2010, the average period of time those securities had been continuously in an unrealized loss position was approximately 18 months. The securities sold at a loss during the ninesix months ended SeptemberJune 30, 2011 included two U.S. corporate securities that were sold for a total loss of $11 million in the first quarter of 2011 and one foreign corporate security that was sold for a total loss of $11 million in the second quarter of 2011 related to portfolio repositioning activities. The securities sold at a loss during the six months ended June 30, 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, and one U.S. corporate security, one municipal bond and one collateralized mortgage obligation security that were sold for total losses of $6 million, $6 million and $5 million, respectively, in the third quarter of 2010. Of the securities that were sold at a loss during the nine months ended September 30, 2009, the average period of time those securities had been continuously in an unrealized loss position was approximately 11 months. The securities sold at a loss during the nine months ended September 30, 2009 included one in the financial services sector totaling $47 million due to portfolio repositioning.activities.

Investment portfolio

We analyze our investment portfolio on a security by security basis as part of our ongoing evaluation of our holdings. A component of this ongoing evaluation is an internal credit monitoring process that includes a fundamental evaluation of the credit risk for each security. In this evaluation, we consider published ratings, when available. However, our analysis is not intended to validate nor make any judgments with respect to the validity of any third-party credit ratings but, rather, is intended to serve as the basis for making decisions with respect to our ongoing management of our investment portfolio. Additionally, in any financial reporting disclosure where ratings are presented or stratified, such as investment grade and below investment grade, we utilize the Nationally Recognized Statistical Rating Organization (“NRSRO”) rating, when available, and do not make any adjustments to third-party ratings in such disclosures.

In our evaluation of our securities, we consider current market spreads and ratings published by a NRSRO in our analysis. For corporate securities, we consider factors such as the financial results and ratios of a company, capital structure, industry, covenants and other available information including updates from rating agencies. For structured securities, we also consider underlying asset performance including default, delinquency, loan-to-value of the collateral, third-party enhancement and current levels of subordination. Although we consider NRSRO ratings, they are not considered a significant component of our analysis of fair value or other-than-temporary impairments.

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

 

   September 30, 2010  December 31, 2009 

(Amounts in millions)

  Carrying value   % of total  Carrying value   % of total 

Fixed maturity securities, available-for-sale:

       

Public

  $43,530     58 $37,158     54

Private

   12,826     17    12,594     19  

Commercial mortgage loans

   6,929     9    7,499     11  

Other invested assets

   5,320     7    4,702     7  

Policy loans

   1,480     2    1,403     2  

Restricted commercial mortgage loans related to securitization entities (1)

   522     1    —       —    

Restricted other invested assets related to securitization entities (1)

   378     1    —       —    

Equity securities, available-for-sale

   223     —      159     —    

Cash and cash equivalents

   3,598     5    5,002     7  
                   

Total cash, cash equivalents and invested assets

  $74,806     100 $68,517     100
                   

(1)

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.

   June 30, 2011  December 31, 2010 

(Amounts in millions)

  Carrying value   % of total  Carrying value   % of total 

Fixed maturity securities, available-for-sale:

       

Public

  $43,525     61 $42,526     59

Private

   12,696     18    12,657     18  

Commercial mortgage loans

   6,432     9    6,718     9  

Other invested assets

   3,301     5    3,854     5  

Policy loans

   1,542     2    1,471     2  

Restricted commercial mortgage loans related to securitization entities

   457     1    507     1  

Restricted other invested assets related to securitization entities

   379     —      372     1  

Equity securities, available-for-sale

   374     —      332     1  

Cash and cash equivalents

   2,831     4    3,132     4  
                   

Total cash, cash equivalents and invested assets

  $71,537     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 SeptemberJune 30, 2010,2011, approximately 5%4% 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 SeptemberJune 30, 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

 $3,548   $153   $—     $(19 $—     $3,682  

Tax-exempt(1)

  940    19    —      (94  —      865  

Government—non-U.S.

  2,265    128    —      (4  —      2,389  

U.S. corporate(2)

  23,081    1,260    13    (307  —      24,047  

Corporate—non-U.S.

  14,038    530    —      (139  (1  14,428  

Residential mortgage-backed(3)

  5,252    174    15    (268  (190  4,983  

Commercial mortgage-backed

  3,767    135    6    (153  (34  3,721  

Other asset-backed(3)

  2,172    22    —      (86  (2  2,106  
                        

Total fixed maturity securities

  55,063    2,421    34    (1,070  (227  56,221  

Equity securities

  352    25    —      (3  —      374  
                        

Total available-for-sale securities

 $55,415   $2,446   $34   $(1,073 $(227 $56,595  
                        

(1)

Fair value included municipal bonds of $545 million related to special revenue bonds, $282 million related to general obligation bonds and $38 million related to other municipal bonds.

(2)

Fair value included municipal bonds of $522 million related to special revenue bonds and $356 million related to general obligation bonds.

(3)

Fair value included $414 million collateralized by sub-prime residential mortgage loans and $331 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

 $3,508   $414   $—     $—     $—     $3,922   $3,568   $145   $—     $(8 $—     $3,705  

Tax-exempt(1)

  1,288    55    —      (72  —      1,271    1,124    19    —      (113  —      1,030  

Government—non-U.S.

  2,188    169    —      (5  —      2,352    2,257    118    —      (6  —      2,369  

U.S. corporate(2)

  22,979    1,858    10    (322  —      24,525    23,282    1,123    10    (448  —      23,967  

Corporate—non-U.S.

  13,282    730    15    (209  (3  13,815    13,180    485    —      (167  —      13,498  

Residential mortgage-backed(1)(3)

  4,629    228    14    (312  (225  4,334    4,821    116    18    (304  (196  4,455  

Commercial mortgage-backed

  4,011    188    5    (389  (58  3,757    3,936    132    6    (286  (45  3,743  

Other asset-backed(1)(3)

  2,391    25    —      (34  (2  2,380    2,494    18    —      (94  (2  2,416  
                                    

Total fixed maturity securities

  54,276    3,667    44    (1,343  (288  56,356    54,662    2,156    34    (1,426  (243  55,183  

Equity securities

  208    18    —      (3  —      223    323    13    —      (4  —      332  
                                    

Total available-for-sale securities

 $54,484   $3,685   $44   $(1,346 $(288 $56,579   $54,985   $2,169   $34   $(1,430 $(243 $55,515  
                                    

 

(1)

Fair value included $445municipal bonds of $666 million related to special revenue bonds, $309 million related to general obligation bonds and $55 million related to other municipal bonds.

(2)

Fair value included municipal bonds of $682 million related to special revenue bonds and $394 million related to general obligation bonds.

(3)

Fair value included $457 million collateralized by sub-prime residential mortgage loans and $358 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$376 million collateralized by Alt-A residential mortgage loans.

Fixed maturity securities increased $6.6$1.0 billion primarily attributabledue to improved market performance as our fixed maturity securities werethe decline in a net unrealized gain position asinterest rates and the decline in the value of September 30, 2010 as compared to a net unrealized loss position as of December 31, 2009. The increase is also attributable to purchases of fixed maturity securities during 2010 as we continued to reinvest the high cash balances we were holding during 2009.U.S. dollar.

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 $73$98 million and $134$128 million as of SeptemberJune 30, 20102011 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 September 30, 2010:

(Amounts in millions)

  2004
and prior
   2005   2006   2007   Total 

Ratings(1):

          

AAA

  $44    $7    $—      $—      $51  

AA

   23     16     —       18     57  

A

   11     18     3     —       32  

BBB

   16     14     —       —       30  

BB

   11     26     —       —       37  

B

   4     28     22     —       54  

CCC and lower

   25     47     97     15     184  
                         

Total sub-prime securities

  $134    $156    $122    $33    $445  
                         

(1)

Based on ratings as of September 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 September 30, 2010:

(Amounts in millions)

  2004
and prior
   2005   2006   2007   2008   2009   2010   Total 

Ratings(1):

                

AAA

  $42    $16    $—      $—      $—      $—      $13    $71  

AA

   8     —       1     —       —       —       —       9  

A

   16     2     1     6     —       —       —       25  

BBB

   25     —       3     —       —       —       —       28  

BB

   1     4     —       4     —       —       —       9  

B

   3     40     28     5     —       —       —       76  

CCC and lower

   4     80     27     29     —       —       —       140  
                                        

Total Alt-A securities

  $99    $142    $60    $44    $—      $—      $13    $358  
                                        

(1)

Based on ratings of September 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 September 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 September 30, 2010:

(Amounts in millions)

  2004
and prior
   2005   2006   2007   2008   2009   2010   Total 

Ratings(1):

                

AAA

  $1,937    $341    $325    $121    $—      $30    $11    $2,765  

AA

   52     48     102     32     —       —       3     237  

A

   52     29     83     55     —       —       —       219  

BBB

   52     24     48     34     —       —       —       158  

BB

   17     3     49     133     —       —       —       202  

B

   12     —       32     23     —       —       —       67  

CCC and lower

   28     9     35     37     —       —       —       109  
                                        

Total commercial mortgage-backed securities

  $2,150    $454    $674    $435    $—      $30    $14    $3,757  
                                        

(1)

Based on ratings as of September 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:

 

  September 30, 2010   June 30, 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 recorded
investment
   Number of
loans
   Loan-
to-value 
(1)
 Delinquent
principal balance
   Number of
delinquent
loans
 

Loan Year

                   

2004 and prior

  $2,336    $26     955     8     51  $1,988     846     49 $30     5  

2005

   1,540     10     317     2     65   1,415     309     64  3     1  

2006

   1,437     14     286     2     73   1,293     278     73  4     1  

2007

   1,353     6     194     1     79   1,275     188     77  —       —    

2008

   286     13     59     3     77   272     57     73  2     1  

2009

   —       —       —       —       —     —       —       —    —       —    

2010

   34     —       6     —       49   103     17     63  —       —    

2011

   139     27     65  —       —    
                    

 

   

 

    

 

   

 

 

Total

  $6,986    $69     1,817     16     65  $6,485     1,722     64 $39     8  
                    

 

   

 

    

 

   

 

 

 

(1)

Represents weighted-average loan-to-value as of SeptemberJune 30, 2010.2011.

 

  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 recorded
investment
(1)
   Number of
loans
   Loan-
to-value 
(2)
 Delinquent
principal balance
   Number of
delinquent
loans
 

Loan Year

                   

2004 and prior

  $2,644    $5     1,039     2     49  $2,167     908     51 $21     6  

2005

   1,607     —       320     —       63   1,457     312     65  —       —    

2006

   1,521     15     290     4     70   1,417     283     73  9     1  

2007

   1,458     76     203     3     80   1,347     193     79  9     2  

2008

   295     —       61     —       77   280     58     77  11     2  

2009(2)

   16     —       518     —       —     —       —       —    —       —    

2010

   104     17     58  —       —    
                    

 

   

 

    

 

   

 

 

Total

  $7,541    $96     2,431     9     63  $6,772     1,771     65 $50     11  
                    

 

   

 

    

 

   

 

 

 

(1)

Represents loan-to-value asRe-presented to include $4 million of December 31, 2009.net premium/discount on our commercial mortgage loans.

(2)

Loan balance represents reverse mortgage originations not soldRepresents weighted-average loan-to-value 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 periods indicated:

(Amounts in millions)

  Three months ended
June 30, 2011
  Six months ended
June 30, 2011
 

Allowance for credit losses:

   

Beginning balance

  $58   $59  

Charge-offs

   (4  (5

Recoveries

   —      —    

Provision

   3    3  
  

 

 

  

 

 

 

Ending balance

  $57   $57  
  

 

 

  

 

 

 

Ending allowance for individually impaired loans

  $—     $—    
  

 

 

  

 

 

 

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

  $57   $57  
  

 

 

  

 

 

 

Recorded investment:

   

Ending balance

  $6,485   $6,485  
  

 

 

  

 

 

 

Ending balance of individually impaired loans

  $13   $13  
  

 

 

  

 

 

 

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

  $6,472   $6,472  
  

 

 

  

 

 

 

The charge-offs during 2011 were related to individually impaired commercial mortgage loans.

The following table presents the activity in the allowance for losses during the periods indicated:

 

(Amounts in millions)

  As of or for the
three months ended
September 30,  2010
 As of or for the
nine months ended
September 30,  2010
   As of or for the
three months ended
June 30,  2010
   As of or for the
six months ended
June 30,  2010
 

Beginning balance

  $70   $48    $52    $48  

Provision(1)

   5    27     18     22  

Release(1)

   (13  (13   —       —    
         

 

   

 

 

Ending balance

  $62   $62    $70    $70  
         

 

   

 

 

 

(1)

IncludedIncludes $13 million related to held-for-sale commercial mortgage loans that were sold in the third quarter of 2010.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:

 

  September 30, 2010   June 30, 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 recorded
investment
   Number of
loans
   Loan-
to-value 
(1)
 Delinquent
principal balance
   Number of
delinquent
loans
 

Loan Year

                   

2004 and prior

  $524    $—       206     —       44  $459     192     40 $3     2  
                    

 

   

 

    

 

   

 

 

Total

  $524    $—       206     —       44  $459     192     40 $3     2  
                    

 

   

 

    

 

   

 

 

 

(1)

Represents weighted-average loan-to-value as of SeptemberJune 30, 2010.2011.

See note 7 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to consolidated securitization entities.
   December 31, 2010 

(Dollar amounts in millions)

  Total recorded
investment
   Number of
loans
   Loan-
to-value 
(1)
  Delinquent
principal balance
   Number of
delinquent
loans
 

Loan Year

         

2004 and prior

  $509     202     43 $—       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

  $509     202     43 $—       —    
  

 

 

   

 

 

    

 

 

   

 

 

 

(1)

Represents weighted-average loan-to-value as of December 31, 2010.

Other invested assets

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

 

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

(Amounts in millions)

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

Derivatives

  $1,683     31 $946     20  $820     25 $1,047     27

Derivatives counterparty collateral

   1,586     30    647     14     705     21    794     21  

Trading securities

   607     18    677     18  

Securities lending collateral

   702     13    853     18     554     17    772     20  

Trading securities

   701     13    174     4  

Limited partnerships

   365     7    430     9     346     11    340     9  

Short-term investments

   202     4    1,590     34     155     5    139     3  

Other investments

   81     2    62     1     114     3    85     2  
                 

 

   

 

  

 

   

 

 

Total other invested assets

  $5,320     100 $4,702     100  $3,301     100 $3,854     100
                 

 

   

 

  

 

   

 

 

Our investments in derivatives and derivative counterparty collateral increaseddecreased primarily as a result the maturity of a decreasethe swap arrangements associated with the maturity of ¥57.0 billion of senior notes in long-term interest rates.June 2011. Securities lending collateral decreased primarily from our decisiondue to decreaseno longer recording the non-cash collateral asset related to the securities lending program size. Limited partnership investments decreased primarily from sales and unrealized depreciation and returned capital, partially offset by calls on outstanding commitments.in Canada during the second quarter of 2011 as a result of not having any rights to sell or re-pledge the collateral assets. The increasedecrease in trading securities was primarily related to the recently adopted accounting guidance for embedded credit derivatives. The decrease in short-term investments was attributable to portfolio repositioning activities in 2010.sales and maturities exceeding purchases.

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)

  September 30,
2010
  December 31,
2009
   September 30,
2010
  December 31,
2009
 

Derivatives designated as hedges

      

Cash flow hedges:

      

Interest rate swaps

  
 
Other invested
assets
 
  
 $821   $72    
 
Other
liabilities
 
  
 $5   $114  

Inflation indexed swaps

  

 

Other invested

assets

  

  

  7    —      
 
Other
liabilities
 
  
  5    21  

Foreign currency swaps

  
 
Other invested
assets
 
  
  180    101    
 
Other
liabilities
 
  
  —      —    
                  

Total cash flow hedges

   1,008    173     10    135  
                  

Fair value hedges:

      

Interest rate swaps

  
 
Other invested
assets
 
  
  117    132    
 
Other
liabilities
 
  
  10    15  

Foreign currency swaps

  
 
Other invested
assets
 
  
  31    24    
 
Other
liabilities
 
  
  —      —    
                  

Total fair value hedges

   148    156     10    15  
                  

Total derivatives designated as hedges

   1,156    329     20    150  
                  

Derivatives not designated as hedges

      

Interest rate swaps

  
 
Other invested
assets
 
  
  454    505    
 
Other
liabilities
 
  
  57    59  

Equity return swaps

  
 
Other invested
assets
 
  
  —      —      
 
Other
liabilities
 
  
  6    —    

Interest rate swaps related to securitization entities(1)

  
 
 
Restricted
other invested
assets
 
 
  
  —      —      
 
Other
liabilities
 
  
  34    —    

Interest rate swaptions

  
 
Other invested
assets
 
  
  8    54    
 
Other
liabilities
 
  
  —      67  

Credit default swaps

  
 
Other invested
assets
 
  
  4    11    
 
Other
liabilities
 
  
  9    3  

Credit default swaps related to securitization entities(1)

  
 
 
Restricted
other invested
assets
 
 
  
  —      —      
 
Other
liabilities
 
  
  130    —    

Equity index options

  
 
Other invested
assets
 
  
  61    39    
 
Other
liabilities
 
  
  —      2  

Financial futures

  
 
Other invested
assets
 
  
  —      —      
 
Other
liabilities
 
  
  —      —    

Other foreign currency contracts

  
 
Other invested
assets
 
  
  —      8    
 
Other
liabilities
 
  
  3    —    

Reinsurance embedded derivatives (2)

  Other assets    4    —      
 
Other
liabilities
 
  
  —      —    

GMWB embedded derivatives

  
 
Reinsurance
recoverable
(3)
 
  
  4    (5  
 
 
Policyholder
account
balances
(4)
 
 
  
  316    175  
                  

Total derivatives not designated as hedges

   535    612     555    306  
                  

Total derivatives

  $1,691   $941    $575   $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
  September 30, 2010 

Derivatives designated as hedges

     

Cash flow hedges:

     

Interest rate swaps

  Notional   $9,479   $1,382   $(209 $10,652  

Inflation indexed swaps

  Notional    376    157    (10  523  

Foreign currency swaps

  Notional    491    —      —      491  
                 

Total cash flow hedges

   10,346    1,539    (219  11,666  
                 

Fair value hedges:

     

Interest rate swaps

  Notional    2,366    —      (281  2,085  

Foreign currency swaps

  Notional    85    —      —      85  
                 

Total fair value hedges

   2,451    —      (281  2,170  
                 

Total derivatives designated as hedges

   12,797    1,539    (500  13,836  
                 

Derivatives not designated as hedges

     

Interest rate swaps

  Notional    6,474    4,057    (2,569  7,962  

Equity return swaps

  Notional    —      200    —      200  

Interest rate swaps related to securitization entities

  Notional    —      138    (6  132  

Interest rate swaptions

  Notional    5,100    200    (5,100  200  

Credit default swaps

  Notional    1,090    100    —      1,190  

Credit default swaps related to securitization entities

  Notional    —      322    (5  317  

Equity index options

  Notional    912    564    (614  862  

Financial futures

  Notional    5,822    5,579    (6,817  4,584  

Other foreign currency contracts

  Notional    521    132    (73  580  

Reinsurance embedded derivatives

  Notional    —      52    —      52  
                 

Total derivatives not designated as hedges

   19,919    11,344    (15,184  16,079  
                 

Total derivatives

  $32,716   $12,883   $(15,684 $29,915  
                 

(Notional in millions)

 

Measurement

  December 31,
2010
   Additions   Maturities/
terminations
 June 30, 2011 

Derivatives designated as hedges

        

Cash flow hedges:

        

Interest rate swaps

 Notional  $12,355    $995    $(157 $13,193  

Inflation indexed swaps

 Notional   525     16     —      541  

Foreign currency swaps

 Notional   491     —       (491)  —    
   

 

   

 

   

 

  

 

 

Total cash flow hedges

    13,371     1,011     (648  13,734  
   

 

   

 

   

 

  

 

 

Fair value hedges:

        

Interest rate swaps

 Notional   1,764     —       (405  1,359  

Foreign currency swaps

 Notional   85     —       —      85  
   

 

   

 

   

 

  

 

 

Total fair value hedges

    1,849     —       (405  1,444  
   

 

   

 

   

 

  

 

 

Total derivatives designated as hedges

    15,220     1,011     (1,053  15,178  
   

 

   

 

   

 

  

 

 

Derivatives not designated as hedges

        

Interest rate swaps

 Notional   7,681     314     (1,550  6,445  

Equity return swaps

 Notional   208     139     —      347  

Interest rate swaps related to securitization entities

 Notional   129     —       (6  123  

Interest rate swaptions

 Notional   200     —       (200  —    

Credit default swaps

 Notional   1,195     115     (100  1,210  

Credit default swaps related to securitization entities

 Notional   317     —       —      317  

Equity index options

 Notional   744     521     (480  785  

Financial futures

 Notional   3,937     2,687     (3,463  3,161  

Other foreign currency contracts

 Notional   521     185     (535  171  

Reinsurance embedded derivatives

 Notional   72     89     —      161  
   

 

   

 

   

 

  

 

 

Total derivatives not designated as hedges

    15,004     4,050     (6,334  12,720  
   

 

   

 

   

 

  

 

 

Total derivatives

   $30,224    $5,061    $(7,387 $27,898  
   

 

   

 

   

 

  

 

 

(Number of policies)

 Measurement December 31, 2009 Additions Terminations September 30, 2010  

Measurement

  December 31,
2010
   Additions   Terminations June 30, 2011 

Derivatives not designated as hedges

             

GMWB embedded derivatives

  Policies    47,543    3,089    (1,882  48,750   Policies   49,566     690     (1,326  48,930  

The decrease in the notional value of derivatives was primarily attributable to a $2.7$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$1.0 billion notional decrease in non-qualifyinginterest rate swaps and financial futures used for duration management related to our long-term care insurance and single premium deferred annuity products and a $0.9 billion notional decrease in non-qualifying futures and interest rate swapshedge liabilities related to our institutional products. Theproducts and a $1.0 billion notional decrease from maturing cross currency swaps and options related to the maturity of ¥57.0 billion of senior notes in June 2011. These decreases were partially offset by a $1.5$0.8 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 $0.1 billion notional increase in inflation indexed swaps.products.

Consolidated Balance Sheets

Total assets. Total assets increased $6.5decreased $0.1 billion from $108.2$112.4 billion as of December 31, 20092010 to $114.7$112.3 billion as of SeptemberJune 30, 2010.2011.

 

Cash, cash equivalents and invested assets increased $6.3 billiondecreased $32 million primarily from an increase of $6.6 billion in our fixed maturity securities portfolio resulting primarily from improved market performance and an increase in purchases of fixed maturity securities. Also contributing to the increase was an increase of $0.9 billion in restricted commercial mortgage loans and other invested assets from the consolidation of certain securitization entities as of January 1, 2010. Partially offsetting these increases was a decrease of $1.4 billion$301 million in cash and cash equivalents, aspartially offset by an increase of $269 million in invested assets. The decrease in cash was primarily attributable to the net proceedsrepayment of debt in June 2011. Our fixed maturity securities portfolio increased $1,038 million resulting primarily from the decline in interest rates and the decline in the value of the U.S. and Canadian senior note issuancesdollar. Commercial mortgage loans decreased $286 million as collections exceeded originations during 2011. Other invested assets decreased $553 million primarily driven by no longer recording the non-cash collateral asset related to the securities lending program in Canada during the second quarter of 2010 were more than offset by purchases2011 as a result of fixed maturitynot having any rights to sell or re-pledge the collateral assets and a decrease in derivatives, derivatives counterparty collateral and trading securities.

Separate account assets decreased $214 million primarily as a result of the discontinuance of new sales of variable annuities.

Total liabilities. Total liabilities increased $3.8decreased $0.6 billion from $94.8$97.4 billion as of December 31, 20092010 to $98.6$96.8 billion as of SeptemberJune 30, 2010.2011.

 

Our policyholder-related liabilities increased $0.2 billion largely attributable to an increase in reserves related to our$13 million. Our long-term care insurance business increased from growth of ourthe in-force block. This increaseblock and higher claims. Our U.S. mortgage insurance business increased from a reserve strengthening in the current year which was partially offset by higher paid claims. These increases were partially offset by a decrease in reserves associated withour spread-based products from benefit payments and scheduled maturities of our spread-based and institutional productsproducts.

Other liabilities decreased $448 million primarily as a result of no longer recording the offsetting liability to the non-cash collateral asset related to the securities lending program in Canada during the second quarter of 2011 as a result of not having any rights to sell or re-pledge the collateral assets and a decrease in our U.S. mortgage insurance business primarily from settlements and a decline in delinquencies in 2010. Unearned premiums decreased primarily in our lifestyle protection insurance business from a decline in sales.

Other liabilities increased $0.7 billion as a result of an increase in derivatives counterparty collateral driven by an increase in asset positions from the long-term interest rate environment and an increase in the timing of broker payments. These increases were partially offset by a decrease in our securities lending and repurchase programs.

Borrowings related to securitization entities increased $0.5 billion from the consolidation of certain securitization entities as of January 1, 2010.program.

 

Long-term borrowings increased $0.7 billiondecreased $197 million principally from the issuancematurity of $0.4our ¥57.0 billion of senior notes in June 2011 and the second quarterredemption of 2010 and fromthe remaining outstanding shares of the Series A Preferred Stock for $57 million in June 2011. These decreases were partially offset by the issuance of CAD$0.3 billion$400 million of senior notes in March 2011 and the issuance of AUD$140 million of subordinated floating rate notes by our majority-ownedindirect wholly-owned subsidiary, Genworth MI Canada Inc. (“Genworth Canada”),Financial Mortgage Insurance Pty Limited, in the second quarter of 2010.June 2011.

 

Deferred tax liability increased $1.9 billion due to higher taxes from an increase in unrealized investment gains in 2010.Separate account liabilities decreased $214 million primarily as a result of the discontinuance of new sales of variable annuities.

Total stockholders’ equity. Total stockholders’ equity increased $2.7$0.5 billion from $13.4$15.0 billion as of December 31, 20092010 to $16.1$15.5 billion as of SeptemberJune 30, 2010.2011.

 

We reported a net incomeloss available to Genworth Financial, Inc.’s common stockholders of $0.3 billion$14 million for the ninesix months ended SeptemberJune 30, 2010.2011.

 

We recorded cumulative effect adjustments that reduced retained earnings by $0.3 billion with a partial offset to accumulatedAccumulated other comprehensive income (loss) of $0.3 billion relatedincreased $570 million predominately attributable to the adoption of new accounting guidance in 2010. See note 2 in our “—Notes to Condensed Consolidated Financial Statements” for additional information.

We had accumulated other comprehensive income of $2.5 billion as of September 30, 2010 compared to accumulated other comprehensive loss of $0.2 billion as of December 31, 2009. This change was mainly driven by improved market performance during 2010 resulting in nethigher unrealized investment gains and the weakening of $0.6 billion as of September 30, 2010 compared to net unrealized investment losses of $1.4 billion as of December 31, 2009.the U.S. dollar against other currencies resulting in higher foreign currency translation adjustments.

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 ninesix months ended SeptemberJune 30:

 

(Amounts in millions)

  2010 2009   2011 2010 

Net cash from operating activities

  $976   $1,854    $842   $557  

Net cash from investing activities

   (1,688  2,386     (6  (723

Net cash from financing activities

   (765  (4,659   (1,169  (243
         

 

  

 

 

Net decrease in cash before foreign exchange effect

  $(1,477 $(419  $(333 $(409
         

 

  

 

 

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 forin the nine months ended September 30, 2010first half of 2011 compared to the nine months ended September 30, 2009first half of 2010 was primarily as a result of higher paid claims in our U.S. mortgage insurance business, including settlements that were paid in 2010, higherlower tax settlements in the first half of 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 lower net cash outflows from investing activities forin the nine months ended September 30, 2010 as purchasesfirst half of investments exceeded proceeds2011 primarily from higher maturities and sales of fixed maturity securities. In early 2009, we were holding excess cash balances. Insecurities, partially offset by purchases exceeding sales in the second half of 2009 and into 2010, we reinvested this excess cash.current year.

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 repurchaseacquisition of debt and equity securities; the issuance and repayment or repurchase of borrowings and non-recourse funding obligations; and dividends to our preferred stockholders and other capital transactions. NetWe had higher net cash outflows from financing activities decreased duringin the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009first half of 2011 primarily related to lowerdebt repayments and redemptions of our investment contracts primarily from scheduled maturities and the early retirement of institutional contracts in 2009. This decrease also related to net proceedssurrenders which exceeded deposits received from the issuance of senior notes in the U.S. and Canada in the second quarter of 2010. Additionally, during the nine months ended September 30, 2010, Genworth Canada repurchased common shares resulting in a net cash outflow of $131 million and paid dividends to noncontrolling interests of $32 million.on these contracts.

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. and 105% in Canada of the fair value of the applicable securities loaned.portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary.

Under the securities lending program in the United States, the borrower is required to provide collateral, consisting of cash and government securities, on a daily basis in amounts equal to or exceeding 102% of the applicable securities loaned. 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 NAIC, U.S. and foreign government securities, U.S. government agency securities, asset-backed securities and corporate debt securities. As of June 30, 2011 and December 31, 2010, the fair value of securities allloaned under our securities lending program in the United States was $0.5 billion. As of which have scheduled maturitiesJune 30, 2011 and December 31, 2010, the fair value of less than three years.collateral held under our securities lending program in the United States was $0.5 billion and the offsetting obligation to return collateral of $0.5 billion was included in other liabilities in the consolidated balance sheets. We had no non-cash collateral in our securities lending program in the United States as of June 30, 2011 and December 31, 2010.

Under our securities lending program in Canada, the borrower is required to provide collateral consisting of government securities on a daily basis in amounts equal to or exceeding 105% of the fair value of the applicable securities loaned. Securities received from counterparties as collateral are not recorded on our consolidated balance sheet given that the risk and rewards of ownership is not transferred from the counterparties to us in the course of such transactions. Additionally, there was no cash collateral as cash collateral is not permitted as an acceptable form of collateral under the program. 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.S&P. As of SeptemberJune 30, 20102011 and December 31, 2009,2010, the fair value of securities loaned under theour securities lending program in Canada was $0.7 billion and $0.9 billion, respectively, consisting$0.3 billion. Prior to the second quarter of $0.5 billion and $0.6 billion, respectively,2011, we recorded non-cash collateral in the U.S. and $0.2 billion and $0.3 billion, respectively,other invested assets with a corresponding liability in Canada. As of September 30, 2010 and December 31, 2009, the fair value of collateral held under the securities lending program was $0.7 billion and $0.9 billion, respectively, and the offsettingother liabilities representing our obligation to return the non-cash collateral. Since we do not have rights to sell or pledge the non-cash collateral, we determined the gross presentation of $0.7 billionthese amounts were not required and $0.9 billion, respectively, was included in other liabilitieschanged our presentation of these amounts in the consolidated balance sheets. We had non-cash collateralsecond quarter of $0.2 billion and $0.3 billion as of September 30, 2010 and December 31, 2009, respectively.2011.

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 SeptemberJune 30, 20102011 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$1.5 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, debt securities and, potentially, acquisitions.

Our holding company had $1,142$657 million and $1,298$813 million of cash and cash equivalents as of SeptemberJune 30, 20102011 and December 31, 2009,2010, respectively. During the nine months ended September 30, 2010, we contributed $200Our holding company also had $10 million to one of our life insurance subsidiaries to fund growth and invested $200 million in highly liquid U.S. government bonds. bonds as of June 30, 2011 and December 31, 2010, respectively.

During the ninesix months ended SeptemberJune 30, 2010,2011, we received dividends from our subsidiaries of $204$39 million, primarilyof which $24 million came from our non-U.S. subsidiaries. Dividends included $182In July 2011, we received $65 million primarilyof dividends from one of our non-U.S. subsidiaries in connection with proceeds from the Canadian share repurchase in the thirdsecond quarter of 2010.2011.

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 SeptemberJune 30, 2010,2011, our total cash, cash equivalents and invested assets were $74.8$71.5 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 30%31% of the carrying value of our total cash, cash equivalents and invested assets as of SeptemberJune 30, 2010.2011.

As of SeptemberJune 30, 2010,2011, we had approximately $623$291 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 securitiesWe are executing a non-cash intercompany transaction to an affiliated special-purpose entity (“SPE”) that was consolidatedincrease the statutory capital in our financial statements and whose sole purpose wasU.S. mortgage insurance companies by using a portion of common shares of Genworth Canada, with an estimated market value of $375 million, currently held by Brookfield, our indirect wholly-owned subsidiary. Once this transaction is complete, we will continue to securitizehold approximately 57.5% of the outstanding common shares of Genworth Canada on a consolidated basis. In addition, Brookfield will have the right, exercisable at its discretion, to purchase for cash these investment securities and issue secured notescommon shares of Genworth Canada from our U.S. mortgage insurance companies at the then current market price. Brookfield will also have a right of first refusal with respect to various affiliatedthe transfer of these common shares of Genworth Canada by the U.S. mortgage insurance companies. The securitized investments were owned in their entirety by the SPEThis transaction is undergoing customary regulatory review and were not availableis expected to satisfy the claimsbe effective as of our creditors. These securitized investments provided collateral to the notes issued by the SPE to the insurance companies. 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.June 30, 2011, for statutory financial reporting purposes.

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 September 30, 2010, we hadhave access to $1.9 billion under these facilities. InAs of June 2010,30, 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 September 30, 2010, we had borrowings of $730 million under these facilities, and

facilities; however, we utilized $57$279 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 September 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 2010,2011, our indirect wholly-owned subsidiary, Genworth Financial Mortgage Insurance Pty Limited, issued AUD$140 million of subordinated floating rate notes due 2021 with an interest rate of three-month Bank Bill Swap reference rate plus a margin of 4.75%. Genworth Financial Mortgage Insurance Pty Limited expects to use the proceeds it received from this transaction for general corporate purposes.

During the second quarter of 2011, we repaid ¥57.0 billion of senior notes that matured in June 2011, plus accrued interest. In addition, the arrangements to swap our obligations under these notes to a U.S. dollar obligation matured. These swaps had a notional principal amount of $491 million with interest at a rate of 4.84% per year. Upon maturity of these swaps, we received $212 million from the derivative counterparty resulting in a net repayment of $491 million of principal related to these notes.

On June 1, 2011, we redeemed all the remaining outstanding shares of the Series A Preferred Stock at a price of $50 per share, plus unpaid dividends accrued to the date of redemption, for $57 million.

In 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 the second quarter of 2011, we repurchased principal of $57 million of notes secured by our non-recourse funding obligations, plus accrued interest, for a pre-tax gain of $17 million.

In June 2010, our majority-owned subsidiary,2011, Genworth Canada, issued CAD$275 million of 5.68% senior notes due 2020. The net proceeds of the offering were used to fund transactions among Genworth Canada and its Canadian wholly-owned subsidiaries. Genworth Canada used the proceeds it received from such transactions for general corporate and investment purposes and to fund a repurchase of common shares from Genworth Canada’s shareholders.

In August 2010, Genworth Canadaour indirect subsidiary, repurchased 12.3approximately 6.2 million common shares for CAD$325160 million through a substantial issuer bid. Brookfield, Life Assurance Company Limited, our indirect wholly-owned subsidiary, and majority shareholder of Genworth Canada, participated in the issuer bid by making a proportionate tender and received CAD$18790 million and continues to hold approximately 57.5% of the outstanding common shares of Genworth Canada.

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.

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.”

Securitization Entities

There were no off-balance sheet securitization transactions induring the ninesix months ended SeptemberJune 30, 20102011 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

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 continued to show signs of improvement across most asset classes during 2010.in the first half of 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 thirdsecond quarter of 2010,2011, the currencies in Canada, Australia and AustraliaEurope strengthened against the U.S. dollar, while in Europe, the currencies weakened against the U.S. dollar as compared to the prior year.second quarter of 2010 and the first quarter of 2011. 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

Evaluation of Disclosure Controls and Procedures

As of SeptemberJune 30, 2010,2011, 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 June 30, 2011.

Changes in Internal Control Over Financial Reporting During the Quarter Ended SeptemberJune 30, 20102011

There were no changes in our internal control over financial reporting that occurred during the quartersix months ended SeptemberJune 30, 20102011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1.Legal Proceedings

We face a 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.

Except as describeddisclosed below, there were no material developments during the ninesix months ended SeptemberJune 30, 20102011 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 ReportsReport on Form 10-Q for the quarterly periodsperiod ended March 31, 2010 and June 30, 2010.2011. In addition, except as described below, there were no new material legal proceedings during the quarter ended SeptemberJune 30, 2010.

As previously identified, the U.K. antitrust authorities conducted a review of the payment protection insurance sector. In January 2009, the antitrust authorities issued their final report that included the remedies to address the antitrust issues identified in their findings. The remedies included prohibitions on the sale of single premium payment protection insurance products, or the sale of payment protection products within seven days of the sale of the underlying credit product unless the consumer contacts the distributor after 24 hours of sale of the credit product, as well as additional informational remedies. Though it was previously anticipated that the remedies would be implemented during 2010, a successful appeal brought against key elements of the findings by a large U.K. retail bank delayed implementation of the full remedies package. Following publication of the antitrust authorities’ response to the appeal, it appears that the remedies package will now be implemented during the second half of 2011 and early 2012.2011.

On July 30, 2010,June 22, 2011, we received a subpoena from the office of the New York Attorney General, relating to an industry-wide investigation of the use of retained asset accounts as a settlement option for life insurance death benefit payments. When a retained asset account is established for a beneficiary, our insurance company

subsidiary retains the death benefit proceeds in its general accountunclaimed property and pays interest on those proceeds. Beneficiaries can withdraw all of the funds or a portion of the funds held in the account at any time.escheatment practices and procedures. In addition to the subpoena, we have been contacted byother state insurance regulators regarding retained asset accounts.are conducting reviews and examinations on the same subject. We have responded to the New York Attorney General subpoena and state insurance regulator informationare cooperating with these requests and will cooperate with respect to any follow-up requests or inquiries.

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. Other than as set forth below,As of June 30, 2011, there have been no material changes to the risk factors set forth in the above-referenced filing as of September 30, 2010.filing.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act will subject us to substantial additional federal regulation, and we cannot predict the effect of such regulation on our business, results of operations, cash flows or financial condition.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was enacted and signed into law. The Dodd-Frank Act made extensive changes to the laws regulating financial services firms and requires various federal agencies to adopt a broad range of new implementing rules and regulations.

Among other provisions, the Dodd-Frank Act provides for a new framework of regulation of over-the-counter (“OTC”) derivatives markets. This will require us to clear certain types of transactions currently traded in the OTC derivative markets and may limit our ability to customize derivative transactions for our needs. In addition, we will likely experience additional collateral requirements and costs associated with derivative transactions. The Dodd-Frank Act also authorizes the SEC to adopt regulations that could impose heightened standards of care on sellers of our variable or other registered products, which could adversely affect our sales of and reduce our margins on these products.

In the case of our U.S. mortgage insurance business, the Dodd-Frank Act requires securitizers to retain some of the risk associated with mortgage loans they sell or securitize, unless the mortgage loans are “qualified residential mortgages” or are insured by an applicable federal agency. The Dodd-Frank Act provides that the definition of “qualified residential mortgages” will be determined by regulators, with consideration to be given, among other things, to the presence of mortgage insurance. The legislation also prohibits a creditor from making a residential mortgage loan unless the creditor makes a reasonable and good faith determination that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan. These provisions will be clarified in federal rules and regulations to be adopted. Depending on whether and to what extent loans with mortgage insurance are considered “qualified residential mortgages” for purposes of the Dodd-Frank Act’s securitization provisions or “qualified mortgages” for purposes of the ability to repay provisions, this legislation could have a material adverse affect on the amount of new mortgage insurance that we write. The Dodd-Frank Act may in any case reduce the volume of new mortgage loans issued, which could reduce the amount of new mortgage insurance we write. In addition, the Dodd-Frank Act creates a Bureau of Consumer Financial

Protection, which regulates certain aspects of the offering and provision of consumer financial products or services but not the business of insurance. This Bureau may issue rules or regulations that indirectly affect our mortgage insurance business or result in additional compliance burdens and costs.

The Dodd-Frank Act also establishes a Financial Stability Oversight Council, which is authorized to subject nonbank financial companies deemed systemically significant to stricter prudential standards and other requirements and to subject such a company to a special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation (although insurance company subsidiaries would remain subject to liquidation and rehabilitation proceedings under state law). In addition, the Dodd-Frank Act establishes a Federal Insurance Office within the Department of the Treasury. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office will perform various functions with respect to insurance, including serving as a non-voting member of the Financial Stability Oversight Council and making recommendations to the Council regarding insurers to be designated for more stringent regulation. The director is also required to conduct a study on how to modernize and improve the system of insurance regulation in the United States, including by increased national uniformity through either a federal charter or effective action by the states.

Federal agencies have been given significant discretion in drafting the rules and regulations that will implement the Dodd-Frank Act. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for some time. In addition, this legislation mandated multiple studies and reports for Congress, which could result in additional legislative or regulatory action.

We cannot predict the requirements of the regulations ultimately adopted under the Dodd-Frank Act, the affect such regulations will have on financial markets generally, or on our businesses specifically, the additional costs associated with compliance with such regulations, or any changes to our operations that may be necessary to comply with the Dodd-Frank Act, any of which could have a material adverse affect on our business, results of operations, cash flows or financial condition.

Problems associated with foreclosure process defects may cause claim payments to be deferred to later periods.

In the U.S., some large mortgage lenders and servicers have voluntarily suspended foreclosure actions in response to reports that certain mortgage servicers and other parties may have acted improperly in foreclosure proceedings. Where this has occurred, we will evaluate our options under the applicable master policies to curtail interest and expense payments that could have been avoided absent a delay in the foreclosure action. While delays in foreclosure completion may temporarily delay the receipt of claims and increase the length of time a loan remains in our delinquent inventory, our estimated claim rates and claim amounts represent our best estimate of what we actually expect to pay on the loans in default as of the reserve date.

 

Item 2.5.Unregistered Sales of Equity Securities and Use of ProceedsOther Information

Issuer PurchasesGenworth Financial, Inc. (the “Company”) maintains the Amended and Restated 2005 Change of Equity Securities

DuringControl Plan (the “2005 Plan”), under which severance benefits are offered to certain of the third quarter of 2010, we repurchased shares of our Series A Preferred Stock as set forthCompany’s key executives, including executive officers, in the table below.event that their employment is terminated in connection with a change of control of the Company. The Management Development and Compensation Committee (the “Committee”) of the Board of Directors of the Company reviews the 2005 Plan annually. Following the Committee’s 2011 review, the Committee decided that there will be no new participants under the 2005 Plan and that a new plan should be created to offer comparable severance benefits to newly designated key executives. On August 1, 2011, the Committee adopted the Genworth Financial, Inc. 2011 Change of Control Plan (the “2011 Plan”).

The 2011 Plan is identical to the 2005 Plan, except that the 2011 Plan does not provide participants with any tax gross-up benefits. Consistent with the 2005 Plan, the 2011 Plan includes two tiers of benefits that apply to executives who are designated by the Committee. Upon adoption of the 2011 Plan, Tier I benefits initially apply to Martin P. Klein, who was previously appointed Senior Vice President—Chief Financial Officer of the Company effective May 11, 2011, and Tier II benefits initially apply to selected other executives approved by the Committee. The following summary of the 2011 Plan is qualified in its entirety by reference to the text of the 2011 Plan, a copy of which is filed as an exhibit to this report.

(Dollar amounts in millions,

except per share amounts)

 Total number of
shares purchased
  Average price
paid per  share
  Aggregate
liquidation

preference of
repurchased shares (1)
  Total number of
shares purchased
as part of publicly
announced plans
or programs
  Approximate
dollar value of

shares that may yet be
purchased under
the plans or
programs
 

July 1, 2010 through July 31, 2010

  —     $—     $—      —     $—    

August 1, 2010 through August 31, 2010

  120,000   $50.23    6    —      —    

September 1, 2010 through September 30, 2010

  —     $—      —      —      —    
                 

Total

  120,000   $50.23   $6    —     $—    
                 

Summary of 2011 Plan

Benefits under the 2011 Plan are paid only upon the occurrence of two clearly defined events. First, a change of control of the Company (as defined in the 2011 Plan) must have occurred. Second, in order to be eligible for benefits under the 2011 Plan, the designated executive’s employment must either be terminated without cause (and not as a result of death or permanent disability), or by the designated executive for “good reason,” in each case within 24 months from the date of a change of control. Such employment terminations are referred to as a “Qualified Termination.”

Upon the occurrence of a Qualified Termination, a participating executive will receive the following severance benefits:

 

(1)

FollowingCash payment. A Tier I executive will receive 200% of the repurchases during 2010, we had an aggregate liquidation preferencesum of $57 million outstanding ashis or her base salary and a targeted annual incentive payment; a Tier II executive will receive 150% of September 30, 2010.the sum of his or her base salary and a targeted annual incentive payment.

Short-term incentive award. The participating executive will receive a pro-rated bonus earned for the portion of the year worked in which termination occurs, based on the executive’s targeted annual incentive payment and the number of days in the year prior to the Qualified Termination.

Equity-based incentive awards. All performance-based equity awards will become fully vested based on a target level of performance, and will payout pro rata based on the portion of the performance period elapsed prior to the Qualified Termination. Stock options, restricted stock units and other time-vesting equity awards will become immediately vested, and all restrictions on shares subject to awards will lapse, except for the portion of any award of restricted stock units that vest upon retirement.

Retirement provisions. The participating executive will be fully and immediately vested in any funded or unfunded or nonqualified pension or deferred compensation plans in which he or she participates, with payment being made in accordance with the terms of such plans.

Health and welfare benefits. The participating executive will receive health and welfare benefit coverage for 18 months.

In addition, upon a Qualified Termination, if a participating executive elects to enter into a non-competition agreement for 18 months, then he or she will be entitled to receive the following enhanced benefits, in addition to the benefits described above:

Cash payment. Upon the expiration and successful completion of the non-competition agreement, a Tier I executive will receive an additional payment equal to 100% of the sum of his or her base salary and a targeted annual incentive payment. A Tier II executive will receive an additional payment equal to 50% of the sum of his or her base salary and a targeted annual incentive payment.

Equity-based incentive awards. The restrictions on an award of restricted stock units that vest upon retirement shall immediately lapse.

Section 4999 of the Internal Revenue Code imposes a 20% excise tax on individuals who receive compensation in connection with a change of control that exceeds certain specified limits (generally three times his or her average taxable compensation over the last five or fewer years). Because of the way the excise tax is applied, a participant could be better off on an after-tax basis in some instances by taking a lower severance benefit in order to avoid the excise tax. The 2011 Plan provides for such a cut back of benefits, but only if the participant would be benefited by the cut back.

To receive any severance benefits under the 2011 Plan, a participant must execute a general release of claims against the Company and agree to certain restrictive covenants, including restrictions on the use of confidential information and restrictions on the solicitation of customers and employees for 18 months following a Qualified Termination.

The 2011 Plan became effective August 1, 2011. It is attached as Exhibit 10 to this report and is incorporated herein by reference.

 

Item 6.Exhibits

 

    3.1

Amended and Restated Certificate of Incorporation of Genworth Financial, Inc.

    3.2

Certificate of Retirement of 5.25% Series A Cumulative Preferred Stock of Genworth Financial, Inc.

  10

Genworth Financial, Inc. 2011 Change of Control Plan

12

  Statement of Ratio of Income to Fixed Charges

31.1

  Certification of Michael D. Fraizer

31.2

  Certification of Patrick B. KelleherMartin P. Klein

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. KelleherMartin P. Klein
101

101.INS

  The following consolidated financial statements from Genworth Financial, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed on October 29, 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.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL 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: August 2, 2011
Date: October 29, 2010  

By:

 /s/    AMY R. CORBIN      
   

Amy R. Corbin

Vice President and Controller

(Duly Authorized Officer and

Principal Accounting Officer)

 

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