Genworth Life & Annuity Insurance 10Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2008

¨	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: 001-32709

LOGO

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

(Exact Name of Registrant as Specified in its Charter)


Virginia		54-0283385
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

6610 West Broad Street Richmond, Virginia		23230
(Address of Principal Executive Offices)		(Zip Code)

(804) 281-6000

(Registrant’s Telephone Number, Including Area Code)

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

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


Large Accelerated Filer ¨		Accelerated Filer ¨
Non-accelerated Filer x		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 August 4, 2008, 25,651 shares of common stock with a par value of $1,000.00 were outstanding. The common stock of Genworth Life and Annuity Insurance Company is not publicly traded.

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) and (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements		3

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007 (Unaudited)		3

Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007		4

Condensed Consolidated Statements of Changes in Stockholder’s Equity for the six months ended June 30, 2008 and 2007 (Unaudited)		5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (Unaudited)		6

Notes to Condensed Consolidated Financial Statements (Unaudited)		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3. Quantitative and Qualitative Disclosures About Market Risk		45

Item 4. Controls and Procedures		45

PART II—OTHER INFORMATION

Item 1. Legal Proceedings		46

Item 1A. Risk Factors		46

Item 5. Other Information		46

Item 6. Exhibits		47

Signatures		48

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions)

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Revenues:
Premiums	$	265.1		$	258.6		$	533.7		$	514.5
Net investment income		239.8			287.2			511.0			572.5
Net investment gains (losses)		(227.3	)		(16.5	)		(292.5	)		(18.1	)
Policy fees and other income		125.0			118.4			260.3			236.3

Total revenues		402.6			647.7			1,012.5			1,305.2

Benefits and expenses:
Benefits and other changes in policy reserves		260.5			261.9			525.9			526.9
Interest credited		109.7			134.8			235.0			264.6
Acquisition and operating expenses, net of deferrals		62.1			51.8			122.9			101.5
Amortization of deferred acquisition costs and intangibles		51.5			41.6			83.1			82.3
Interest expense		37.2			49.1			83.3			91.1

Total benefits and expenses		521.0			539.2			1,050.2			1,066.4

Income (loss) before income taxes and equity in net income (loss) of unconsolidated subsidiary		(118.4	)		108.5			(37.7	)		238.8
Provision (benefit) for income taxes		(31.4	)		36.6			(6.1	)		78.3

Net income (loss) before equity in net income (loss) of unconsolidated subsidiary		(87.0	)		71.9			(31.6	)		160.5
Equity in net income (loss) of unconsolidated subsidiary		(3.7	)		4.6			(5.6	)		9.5

Net income (loss)	$	(90.7	)	$	76.5		$	(37.2	)	$	170.0

See Notes to Condensed Consolidated Financial Statements

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share and per share amounts)


	June 30, 2008			December 31, 2007
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	13,530.3		$	15,237.3
Equity securities available-for-sale, at fair value		80.0			64.0
Commercial mortgage loans		2,797.8			2,968.1
Policy loans		474.5			466.8
Other invested assets ($383.2 and $399.8 restricted)		1,662.3			1,437.5

Total investments		18,544.9			20,173.7
Cash and cash equivalents		1,563.3			616.4
Accrued investment income		164.5			167.4
Deferred acquisition costs		3,155.1			2,962.2
Goodwill		450.9			450.9
Intangible assets		535.5			502.3
Reinsurance recoverable		8,607.1			8,670.6
Other assets		430.5			427.8
Separate account assets		11,484.4			12,005.8

Total assets	$	44,936.2		$	45,977.1

Liabilities and stockholder’s equity
Liabilities:
Future policy benefits	$	9,868.7		$	9,809.4
Policyholder account balances		13,866.8			13,962.3
Liability for policy and contract claims		265.7			263.1
Unearned premiums		20.8			21.4
Deferred income tax liability		866.8			1,077.9
Non-recourse funding obligations		3,555.0			3,555.0
Other liabilities ($400.8 and $415.1 restricted)		1,152.6			995.8
Separate account liabilities		11,484.4			12,005.8

Total liabilities		41,080.8			41,690.7

Commitments and contingencies

Stockholder’s equity:
Common stock ($1,000 par value, 50,000 shares authorized, 25,651 shares issued and outstanding)		25.6			25.6
Additional paid-in capital		4,075.2			4,071.6

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses)		(737.2	)		(338.2	)
Derivatives qualifying as hedges		6.5			4.9

Total accumulated other comprehensive income (loss)		(730.7	)		(333.3	)
Retained earnings		485.3			522.5

Total stockholder’s equity		3,855.4			4,286.4

Total liabilities and stockholder’s equity	$	44,936.2		$	45,977.1

See Notes to Condensed Consolidated Financial Statements

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

(Amounts in millions)

(Unaudited)


	Preferred stock			Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)			Retained earnings			Total stockholder’s equity
Balances as of December 31, 2006	$	110.0		$	25.6	$	4,025.3	$	22.0		$	260.8		$	4,443.7

Comprehensive income (loss):
Net income		—			—		—		—			170.0			170.0
Net unrealized gains (losses) on investment securities		—			—		—		(116.5	)		—			(116.5	)
Derivatives qualifying as hedges		—			—		—		(0.8	)		—			(0.8	)

Total comprehensive income (loss)															52.7
Redemption of preferred stock		(110.0	)		—		—		—			—			(110.0	)
Dividends and other transactions with stockholder		—			—		50.9		—			(2.2	)		48.7

Balances as of June 30, 2007	$	—		$	25.6	$	4,076.2	$	(95.3	)	$	428.6		$	4,435.1


	Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)			Retained earnings			Total stockholder’s equity
Balances as of December 31, 2007	$	25.6	$	4,071.6	$	(333.3	)	$	522.5		$	4,286.4

Comprehensive income (loss):
Net loss		—		—		—			(37.2	)		(37.2	)
Net unrealized gains (losses) on investment securities		—		—		(399.0	)		—			(399.0	)
Derivatives qualifying as hedges		—		—		1.6			—			1.6

Total comprehensive income (loss)												(434.6	)
Dividends and other transactions with stockholder		—		3.6		—			—			3.6

Balances as of June 30, 2008	$	25.6	$	4,075.2	$	(730.7	)	$	485.3		$	3,855.4

See Notes to Condensed Consolidated Financial Statements

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)


	Six months ended June 30,
	2008			2007
Cash flows from operating activities:
Net income (loss)	$	(37.2	)	$	170.0
Adjustments to reconcile net income (loss) to net cash from operating activities:
Net investments (gains) losses		292.5			18.1
Equity in net (income) loss of unconsolidated subsidiary		5.6			(9.5	)
Charges assessed to policyholders		(176.5	)		(171.5	)
Purchases of trading securities		(18.7	)		(5.1	)
Amortization of fixed maturity discounts and premiums		1.5			(1.3	)
Acquisition costs deferred		(229.3	)		(243.2	)
Amortization of deferred acquisition costs and intangibles		83.1			82.3
Deferred income taxes		(8.8	)		84.9
Change in certain assets and liabilities:
Accrued investment income and other assets		(165.7	)		(17.3	)
Insurance reserves		255.9			287.9
Other liabilities and other policy-related balances		30.9			12.1

Net cash from operating activities		33.3			207.4

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		1,014.5			1,237.4
Commercial mortgage loans		198.3			362.1
Proceeds from sales of investments:
Fixed maturity and equity securities		223.8			877.2
Purchases and originations of investments:
Fixed maturity and equity securities		(429.0	)		(2,759.7	)
Commercial mortgage loans		(27.3	)		(504.3	)
Other invested assets, net		(78.4	)		(86.0	)
Cash related to transfer of subsidiary to an affiliate		—			(27.0	)
Policy loans, net		(7.7	)		(2.0	)

Net cash from investing activities		894.2			(902.3	)

Cash flows from financing activities:
Proceeds from issuance of investment contracts		2,074.7			2,322.2
Redemption and benefit payments on investment contracts		(2,061.6	)		(2,032.7	)
Proceeds from short-term borrowings and other, net		6.3			185.3
Payments on short-term borrowings		—			(246.0	)
Proceeds from issuance of non-recourse funding obligations		—			790.0
Redemption of preferred stock		—			(110.0	)
Dividends paid to stockholder		—			(2.5	)

Net cash from financing activities		19.4			906.3

Net change in cash and cash equivalents		946.9			211.4
Cash and cash equivalents at beginning of period		616.4			423.8

Cash and cash equivalents at end of period	$	1,563.3		$	635.2

See Notes to Condensed Consolidated Financial Statements

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Formation and Nature of Business

Genworth Life and Annuity Insurance Company (the “Company,” “GLAIC,” “we,” “us” or “our” unless the context otherwise requires) is a stock life insurance company operating under a charter granted by the Commonwealth of Virginia on March 21, 1871 as The Life Insurance Company of Virginia. An affiliate of our former ultimate parent company acquired us on April 1, 1996 and ultimately contributed the majority of the outstanding common stock to Genworth Life Insurance Company (“GLIC”).

On May 31, 2004, we became a direct, wholly-owned subsidiary of GLIC while remaining an indirect, wholly-owned subsidiary of Genworth Financial, Inc. (“Genworth”). Until March 12, 2007, our preferred shares were owned by an affiliate, Brookfield Life Assurance Company Limited. On March 12, 2007, we redeemed the remaining outstanding preferred shares for par value of $110.0 million and paid $2.5 million in dividends on the redeemed preferred shares. On April 30, 2007, the issued shares of preferred stock were retired.

The accompanying condensed consolidated financial statements include the historical operations and accounts of the Company and its subsidiaries which include Assigned Settlement, Inc., GNWLAAC Real Estate Holding, LLC, Jamestown Life Insurance Company, River Lake Insurance Company (“River Lake I”), River Lake Insurance Company II (“River Lake II”), River Lake Insurance Company III (“River Lake III”), River Lake Insurance Company IV Limited (“River Lake IV”), River Lake Insurance Company V (“River Lake V”) and Rivermont Life Insurance Company I (“Rivermont I”). All significant intercompany accounts and transactions have been eliminated in consolidation.

We offer term and universal life insurance and Medicare supplement insurance. We also offer fixed and variable deferred and immediate individual annuities, group variable annuities offered through retirement plans, and institutional products which include funding agreements backing notes (“FABNs”), funding agreements and guaranteed investment contracts (“GICs”). On March 25, 2008, we announced our intention to discontinue the sales of variable life insurance policies beginning May 1, 2008. We do business in Bermuda, the District of Columbia and all states, except New York.

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 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 2007 Annual Report on Form 10-K filed on February 28, 2008.

2. Accounting Pronouncements

Recently adopted

Fair Value Measurements

As of January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value and

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

expands disclosures about fair value measurements. The adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements. Additionally, on January 1, 2008, we elected the partial adoption of SFAS No. 157 under the provisions of Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 157-2, which amends SFAS No. 157 to allow an entity to delay the application of this statement until January 1, 2009 for certain non-financial assets and liabilities. Under the provisions of the FSP, we will delay the application of SFAS No. 157 for fair value measurements used in the impairment testing of goodwill and indefinite-lived intangible assets and eligible non-financial assets and liabilities included within a business combination. In January 2008, FASB also issued proposed FSP FAS 157-c that would amend SFAS No. 157 to clarify the principles on fair value measurement of liabilities. Management is monitoring the status of this proposed FSP for any impact on our consolidated financial statements. See note 4 for additional disclosures about fair value measurement.

Fair Value Option for Financial Assets and Financial Liabilities

As of January 1, 2008, we adopted SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. This statement provides an option, on specified election dates, to report selected financial assets and liabilities, including insurance contracts, at fair value. Subsequent changes in fair value for designated items are reported in income in the current period. The adoption of SFAS No. 159 did not impact our consolidated financial statements as no items were elected for measurement at fair value upon initial adoption. We will continue to evaluate eligible financial assets and liabilities on their election dates. Any future elections will be disclosed in accordance with the provisions outlined in the statement.

Amendment of FASB Interpretation No. 39

As of January 1, 2008, we adopted FSP FASB Interpretation (“FIN”) No. 39-1,Amendment of FASB Interpretation No. 39.This FSP amends FIN No. 39, Offsetting of Amounts Related to Certain Contracts, to allow fair value amounts recognized for collateral to be offset against fair value amounts recognized for derivative instruments that are executed with the same counterparty under certain circumstances. The FSP also requires an entity to disclose the accounting policy decision to offset, or not to offset, fair value amounts in accordance with FIN No. 39, as amended. We do not, and have not previously, offset the fair value amounts recognized for derivatives with the amounts recognized as collateral. See note 3 for additional disclosures about the collateral positions related to derivative instruments.

Not yet adopted

In March 2008, FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This statement requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS No. 161 will be effective for us on January 1, 2009. We do not expect SFAS No. 161 to have a material impact on our consolidated financial statements.

In December 2007, FASB issued SFAS No. 141R,Business Combinations. This statement establishes principles and requirements for how an acquirer recognizes and measures certain items in a business combination, as well as disclosures about the nature and financial effects of a business combination. SFAS No. 141R will be effective for us on January 1, 2009 and will be applied to business combinations for which the acquisition date is on or after the effective date. We do not expect SFAS No. 141R to have a material impact on our consolidated financial statements.

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In December 2007, FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This statement establishes accounting and reporting standards for noncontrolling interests in a subsidiary and for deconsolidation of a subsidiary. SFAS No. 160 will be effective for us on January 1, 2009 and will be applied prospectively as of the effective date. We do not expect SFAS No. 160 to have a material impact on our consolidated financial statements.

3. Investments and Derivative Instruments

Net Investment Gains (Losses)

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


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2008			2007			2008			2007
Available-for-sale securities:
Realized gains on sale	$	10.2		$	2.2		$	13.4		$	4.6
Realized losses on sale		(6.1	)		(12.0	)		(8.9	)		(19.2	)
Impairments		(232.4	)		(0.1	)		(276.6	)		(0.1	)
Derivatives and other		1.1			(5.6	)		(22.9	)		(3.4	)
Net unrealized gains (losses) on trading securities		(0.2	)		(0.5	)		2.3			1.1
Commercial mortgage loans		0.1			(0.5	)		0.2			(1.1	)

Net investments gains (losses)	$	(227.3	)	$	(16.5	)	$	(292.5	)	$	(18.1	)

Fixed Maturity and Equity Securities

As of June 30, 2008, 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
Fixed maturity securities:
U.S. government, agencies and government sponsored entities	$	122.6	$	4.2	$	(1.1	)	$	125.7
Government—non U.S.		288.9		18.2		(8.2	)		298.9
U.S. corporate		6,849.4		53.8		(387.4	)		6,515.8
Corporate—non U.S.		1,863.4		4.1		(148.1	)		1,719.4
Mortgage and asset-backed		5,538.9		17.9		(686.3	)		4,870.5

Total fixed maturity securities		14,663.2		98.2		(1,231.1	)		13,530.3
Equity securities		82.1		0.4		(2.5	)		80.0

Total available-for-sale securities	$	14,745.3	$	98.6	$	(1,233.6	)	$	13,610.3

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

As of December 31, 2007, 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
Fixed maturity securities:
U.S. government, agencies and government sponsored entities	$	189.3	$	18.0	$	(0.1	)	$	207.2
Government—non U.S.		293.0		28.1		(1.4	)		319.7
U.S. corporate		6,983.1		99.6		(207.3	)		6,875.4
Corporate—non U.S.		1,881.6		9.5		(79.7	)		1,811.4
Mortgage and asset-backed		6,398.4		25.7		(400.5	)		6,023.6

Total fixed maturity securities		15,745.4		180.9		(689.0	)		15,237.3
Equity securities		60.5		3.6		(0.1	)		64.0

Total available-for-sale securities	$	15,805.9	$	184.5	$	(689.1	)	$	15,301.3

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of June 30, 2008:


	Less Than 12 Months						12 Months or More
(Dollar amounts in millions)	Fair value		Gross unrealized losses			# of securities	Fair value		Gross unrealized losses			# of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government sponsored entities	$	42.8	$	(1.1	)	7	$	—	$	—		—
Government—non U.S.		97.1		(6.6	)	36		7.0		(1.6	)	7
U.S. corporate		2,872.7		(183.6	)	449		1,656.2		(203.8	)	292
Corporate—non U.S.		865.8		(67.8	)	139		606.0		(80.3	)	86
Asset-backed		1,301.4		(71.8	)	139		1,262.1		(288.2	)	193
Mortgage-backed		849.8		(130.3	)	183		1,023.1		(196.0	)	262

Subtotal, fixed maturity securities		6,029.6		(461.2	)	953		4,554.4		(769.9	)	840
Equity securities		33.9		(1.9	)	6		1.5		(0.6	)	3

Total temporarily impaired securities	$	6,063.5	$	(463.1	)	959	$	4,555.9	$	(770.5	)	843

% Below cost—fixed maturity securities:
<20% Below cost	$	5,733.4	$	(306.4	)	855	$	3,869.4	$	(401.4	)	628
20-50% Below cost		272.7		(106.0	)	77		618.9		(249.0	)	171
>50% Below cost		23.5		(48.8	)	21		66.1		(119.5	)	41

Total fixed maturity securities		6,029.6		(461.2	)	953		4,554.4		(769.9	)	840

% Below cost—equity securities:
<20% Below cost		33.4		(1.7	)	3		0.8		(0.5	)	2
20-50% Below cost		0.5		(0.2	)	3		0.7		(0.1	)	1

Total equity securities		33.9		(1.9	)	6		1.5		(0.6	)	3

Total temporarily impaired securities	$	6,063.5	$	(463.1	)	959	$	4,555.9	$	(770.5	)	843


Investment grade	$	5,703.8	$	(427.5	)	823	$	4,301.1	$	(705.6	)	743
Below investment grade		356.6		(35.0	)	126		253.4		(64.4	)	95
Not rated—fixed maturity securities		0.6		(0.1	)	6		0.5		(0.1	)	3
Not rated—equities		2.5		(0.5	)	4		0.9		(0.4	)	2

Total temporarily impaired securities	$	6,063.5	$	(463.1	)	959	$	4,555.9	$	(770.5	)	843

The investment securities in an unrealized loss position as of June 30, 2008 consisted of 1,802 securities and accounted for unrealized losses of $1,233.6 million. Of these unrealized losses of $1,233.6 million, 91.9% were investment grade (rated AAA through BBB-) and 57.6% were less than 20% below cost. The securities less than 20% below cost were primarily corporate securities and mortgage-backed and asset-backed securities. The amount of the unrealized loss on these securities was primarily attributed to widening credit spreads during 2008.

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

securities and these securities remain primarily investment grade. We are comfortable with the performance of the underlying collateral and expect that our investments in mortgage-backed and asset-backed securities will continue to perform in accordance with their contractual terms with no adverse changes in cash flows.

Of the investment securities in an unrealized loss position for twelve months or more as of June 30, 2008, 26 securities were 20% or more below cost and below investment grade (rate BB+ and below) for twelve months or more. These securities accounted for unrealized losses of $43.1 million.

As of June 30, 2008, we expect these investments to continue to perform in accordance with their original contractual terms and we have the ability and intent to hold these investment securities until the recovery of the fair value up to the cost of the investment, which may be at maturity. Accordingly, we do not consider these investments to be other-than-temporarily impaired as of June 30, 2008. 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.

Expectations that our investments in residential mortgage-backed securities will continue to perform in accordance with their contractual terms are based on assumptions a market participant would use in determining the current fair value. 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 residential mortgage-backed securities and potential future write-downs within our portfolio of residential mortgage-backed securities.

Derivative Instruments

The fair value of derivative instruments is based upon either prices obtained from market sources or pricing valuation models utilizing market inputs obtained from market sources. The following table sets forth our positions in derivative instruments and the fair values as of the dates indicated:


	June 30, 2008						December 31, 2007
(Amounts in millions)	Notional value		Assets		Liabilities		Notional value		Assets		Liabilities
Interest rate swaps	$	3,685.9	$	74.9	$	41.7	$	2,513.7	$	73.8	$	24.4
Equity index options		1,210.8		197.8		—		877.6		115.6		—
Limited guarantee		250.0		23.2		—		250.0		23.9		—
Financial futures		273.1		—		—		12.5		—		—
Credit default swaps		56.1		0.1		0.4		—		—		—

Total derivatives	$	5,475.9	$	296.0	$	42.1	$	3,653.8	$	213.3	$	24.4

The fair value of derivative assets was recorded in other invested assets and the fair value of derivative liabilities was recorded in other liabilities. As of June 30, 2008 and December 31, 2007, the fair value included $235.9 million and $150.9 million, respectively, of derivative assets and $25.2 million and $14.5 million, respectively, of derivative liabilities that do not qualify for hedge accounting.

Swaps and purchased options with contractual maturities longer than one year are conducted within our credit policy constraints. Our policy permits us to enter into derivative transactions with counterparties rated “A2” by Moody’s and “A” by S&P if the agreements governing such transactions require both us and the counterparties to provide collateral in certain circumstances. In the second quarter of 2008, we modified our derivative counterparty agreements. As of June 30, 2008, we retained collateral of $61.4 million related to these

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

agreements including over collateralization from certain counterparties. As of June 30, 2008, we provided no collateral. Prior to the second quarter of 2008, there were no provisions requiring collateral for our derivative transactions. 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 the obligation to return collateral retained by us and the right to reclaim collateral from counterparties was recorded in other liabilities and other assets, respectively.

4. Fair Value Measurement

As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold fixed maturity and equity securities, trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value.

Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. SFAS No. 157 requires all assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

•

Level 1—Quoted prices for identical instruments in active markets.

•

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

•

Level 3—Instruments whose significant value drivers are unobservable.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded derivatives and actively traded mutual fund investments.

Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. These models are primarily industry-standard models that consider various inputs, such as interest rate, credit spread and foreign exchange rates for the underlying financial instruments. All significant inputs are observable, or derived from observable, information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed maturity and equity securities; government or agency securities; certain mortgage-backed and asset-backed securities; securities held as collateral; and certain non-exchange-traded derivatives such as interest rate swaps.

Level 3 is comprised of financial instruments whose fair value is estimated based on industry-standard pricing methodologies and internally developed models utilizing significant inputs not based on, nor corroborated by, readily available market information. This category primarily consists of certain less liquid fixed maturity, equity and trading securities and certain derivative instruments where we cannot corroborate the significant valuation inputs with market observable data.

As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability, such as the relative impact on the fair value as a result of including a particular input.

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The vast majority of our fixed maturity and equity securities use Level 2 inputs for the determination of fair value. These fair values are obtained primarily from industry-standard pricing methodologies based on market observable information. Certain structured securities valued using industry-standard pricing methodologies utilize significant unobservable inputs to estimate fair value, resulting in the fair value measurements being classified as Level 3. We also utilize internally developed pricing models to produce estimates of fair value primarily utilizing Level 2 inputs along with certain Level 3 inputs. The internally developed models include matrix pricing where we discount expected cash flows utilizing market interest rates obtained from market sources based on the credit quality and duration of the instrument to determine fair value. For securities that may not be reliably priced using internally developed pricing models, we estimate fair value using indicative market prices. These prices are indicative of an exit price, but the assumptions used to establish the fair value may not be observable, or able to be corroborated by market observable information, and represent Level 3 inputs.

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

As discussed above, the classification of fair value measurements for derivative instruments, including embedded derivatives requiring bifurcation, is determined based on consideration of several inputs including: closing exchange or over-the-counter market price quotations; time value and volatility factors underlying options; market interest rates; and non-performance risk. For product-related embedded derivatives, we also include certain policyholder assumptions in the determination of fair value.

The following table sets forth our assets that were measured at fair value on a recurring basis as of the date indicated:


	June 30, 2008
(Amounts in millions)	Total		Level 1		Level 2		Level 3
Investments:
Fixed maturity securities, available-for-sale	$	13,530.3	$	—	$	11,308.8	$	2,221.5
Equity securities, available-for-sale		80.0		8.0		68.1		3.9
Other invested assets^(a)		980.3		—		711.0		269.3
Separate account assets		11,484.4		11,484.4		—		—

Total assets	$	26,075.0	$	11,492.4	$	12,087.9	$	2,494.7

^(a)	Includes derivatives, trading securities, restricted other invested assets and securities held as collateral.

The following table sets forth our liabilities that were measured at fair value on a recurring basis as of the date indicated:


	June 30, 2008
(Amounts in millions)	Total		Level 1		Level 2		Level 3
Policyholder account balances^(a)	$	70.4	$	—	$	—	$	70.4
Other liabilities^(b)		42.1		—		42.1		—

Total liabilities	$	112.5	$	—	$	42.1	$	70.4

^(a)	Represents the fair value of certain product-related embedded derivatives that were recorded at fair value.

^(b)	Represents derivative instruments.

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

For assets carried at fair value, the non-performance of the counterparties is considered in the determination of fair value measurement for those assets. Similarly, the fair value measurement of a liability must reflect the entity’s own non-performance risk. Therefore, the impact of non-performance risk, as well as any potential credit enhancements (e.g., collateral), has been considered in the fair value measurement of both assets and liabilities.

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 and for the dates indicated:


	Three months ended June 30, 2008
(Amounts in millions)	Fixed maturity securities, available-for- sale			Equity securities, available-for- sale			Other invested assets^(a)			Total
Beginning balance as of April 1, 2008	$	2,074.4		$	4.6		$	319.3		$	2,398.3
Total realized and unrealized gains (losses):
Included in net income (loss)		(178.4	)		—			(19.5	)		(197.9	)
Included in other comprehensive income (loss)		106.3			(0.7	)		—			105.6
Purchases, sales, issuances and settlements, net		(161.0	)		—			27.0			(134.0	)
Transfers in (out) of Level 3		380.2			—			(57.5	)		322.7

Ending balance as of June 30, 2008	$	2,221.5		$	3.9		$	269.3		$	2,494.7

Amount of total gains (losses) for the period included in net income (loss) attributable to the change in unrealized gains (losses) relating to assets still held as of the reporting date	$	(178.5	)	$	—		$	(19.2	)	$	(197.7	)

^(a)	Includes certain trading securities, restricted other invested assets and derivatives.


	Six months ended June 30, 2008
(Amounts in millions)	Fixed maturity securities, available-for- sale			Equity securities, available-for- sale			Other invested assets^(a)			Total
Beginning balance as of January 1, 2008	$	2,044.2		$	5.1		$	227.2		$	2,276.5
Total realized and unrealized gains (losses):
Included in net income (loss)		(194.4	)		0.8			26.7			(166.9	)
Included in other comprehensive income (loss)		(55.5	)		(0.7	)		(0.4	)		(56.6	)
Purchases, sales, issuances and settlements, net		(146.9	)		(1.3	)		80.0			(68.2	)
Transfers in (out) of Level 3		574.1			—			(64.2	)		509.9

Ending balance as of June 30, 2008	$	2,221.5		$	3.9		$	269.3		$	2,494.7

Amount of total gains (losses) for the period included in net income (loss) attributable to the change in unrealized gains (losses) relating to assets still held as of the reporting date	$	(194.5	)	$	—		$	27.1		$	(167.4	)

^(a)	Includes certain trading securities, restricted other invested assets and derivatives.

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

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 and for the dates indicated:


	Three months ended June 30, 2008
(Amounts in millions)	Policyholder account balances^(a)
Beginning balance as of April 1, 2008	$	102.7
Total realized and unrealized (gains) losses:
Included in net (income) loss		(36.0	)
Included in other comprehensive (income) loss		—
Purchases, sales, issuances and settlements, net		3.7
Transfers in (out) of Level 3		—

Ending balance as of June 30, 2008	$	70.4

Amount of total (gains) losses for the period included in net (income) loss attributable to the change in unrealized (gains) losses relating to liabilities still held as of the reporting date	$	(35.2	)

^(a)	Includes product-related embedded derivatives.


	Six months ended June 30, 2008
(Amounts in millions)	Policyholder account balances^(a)
Beginning balance as of January 1, 2008	$	30.3
Total realized and unrealized (gains) losses:
Included in net (income) loss		33.6
Included in other comprehensive (income) loss		—
Purchases, sales, issuances and settlements, net		6.5
Transfers in (out) of Level 3		—

Ending balance as of June 30, 2008	$	70.4

Amount of total (gains) losses for the period included in net (income) loss attributable to the change in unrealized (gains) losses relating to liabilities still held as of the reporting date	$	34.4

^(a)	Includes product-related embedded derivatives.

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 other comprehensive income (loss) within stockholder’s equity based on the appropriate accounting treatment for the instrument.

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 and sales of fixed maturity, equity and trading securities and purchases and settlements of derivative instruments.

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Purchases, sales, issuances and settlements, net, presented for policyholder account balances represent the issuances and settlements of product-related embedded derivatives 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. However, due to the characteristics of these embedded derivatives, the total change in fair value was reflected in income (loss) for the period.

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 at the beginning fair value for the reporting period in which the changes occur.

The amount presented for unrealized gains (losses) for assets and liabilities still held as of the reporting date primarily represents impairments for available-for-sale securities, changes in fair value of trading securities and certain derivatives, and changes in fair value of certain product-related embedded derivatives that exist as of the reporting date, which were recorded in net investment gains (losses).

As of June 30, 2008, we held investments in bank loans that were recorded at the lower of cost or fair value and were recorded in other invested assets. As of June 30, 2008, all bank loans were recorded at cost, which was lower than the respective fair value. Accordingly, no fair value adjustment was made for the three and six months ended June 30, 2008. Fair value for bank loans is determined using inputs based on market observable information and is classified as Level 2.

5. 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. Plaintiffs in class action and other lawsuits against us may seek indeterminate amounts which may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer 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 all pending investigations and legal proceedings, nor to provide reasonable ranges of potential losses.

(b) Commitments

As of June 30, 2008, we were committed to fund $149.1 million in limited partnership investments.

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(c) Guarantees

We guaranteed the payment of certain structured settlement benefits sold by Assigned Settlement, Inc., our wholly-owned subsidiary, from March 2004 through December 2005 that were funded by products of our parent and one of our affiliates. The structured settlement reserves related to this guarantee were $275.3 million as of June 30, 2008.

6. Non-recourse Funding Obligations

As of June 30, 2008, we had $3.6 billion of fixed and floating rate non-recourse funding obligations outstanding backing additional statutory reserves, of which $1.7 billion were guaranteed by third-party financial guaranty insurance companies. The interest rates on these obligations are subject to rate resets triggered by negative rating agency action on the third-party financial guaranty insurance companies that guarantee these obligations. In June 2008, the maximum rate on $1.2 billion of the $1.7 billion of non-recourse funding obligations was contractually reset to the highest margin to the related underlying index rate due to the third-party financial guaranty insurance company that guarantees these obligations being downgraded and placed on negative outlook. In February 2008, the rate was reset from the December 2007 rate on the remaining $0.5 billion to the highest contractual margin to the related underlying index rate due to further downgrades on the third-party financial guaranty insurance company that guarantees these obligations.

As of June 30, 2008 and December 31, 2007, the weighted average interest rates on our non-recourse funding obligations were 3.6% and 5.8%, respectively.

7. Income Taxes

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


	Three months ended June 30,				Six months ended June 30,
	2008		2007		2008		2007
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%	35.0	%
Increase (reduction) in rate resulting from:
State income tax, net of federal income tax effect	0.1		0.5		0.3		0.5
Effect of tax favored investments	(8.2	)	(1.3	)	(18.3	)	(2.7	)
Tax contingencies	—		(0.3	)	(0.9	)	—
Other, net	(0.4	)	(0.2	)	0.1		—

Effective rate	26.5	%	33.7	%	16.2	%	32.8	%

8. Segment Information

We conduct our operations in two operating business segments: (1) Protection, which includes term and universal life insurance and Medicare supplement insurance and (2) Retirement Income and Institutional, which principally includes fixed and variable deferred and immediate individual annuities, group variable annuities offered through retirement plans, variable life insurance and institutional products. Institutional products include FABNs, funding agreements and GICs. We also have Corporate and Other activities which include income and expenses not allocated to the segments.

We use the same accounting policies and procedures to measure segment net income (loss) and assets as we use to measure our consolidated net income (loss) and assets. Segment net income (loss) represents the basis on which the performance of our business is assessed by management.

GENWORTH LIFE AND ANNUITY INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2008			2007			2008			2007
Revenues:
Protection	$	366.8		$	437.6		$	802.8		$	880.6
Retirement Income and Institutional		57.3			212.0			224.2			420.0
Corporate and Other		(21.5	)		(1.9	)		(14.5	)		4.6

Total revenues	$	402.6		$	647.7		$	1,012.5		$	1,305.2


Net income (loss):
Protection	$	16.7		$	59.2		$	76.6		$	128.6
Retirement Income and Institutional		(86.4	)		16.5			(92.5	)		35.7
Corporate and Other		(21.0	)		0.8			(21.3	)		5.7

Net income (loss)	$	(90.7	)	$	76.5		$	(37.2	)	$	170.0

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


(Amounts in millions)	June 30, 2008		December 31, 2007
Assets:
Protection	$	15,323.7	$	14,880.0
Retirement Income and Institutional		28,473.8		29,456.7
Corporate and Other		1,138.7		1,640.4

Total assets	$	44,936.2	$	45,977.1

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included herein.

Cautionary note regarding forward-looking statements

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

•

Risks relating to our businesses, including interest rate fluctuations, downturns and volatility in equity and credit markets, downgrades in our financial strength or credit ratings, insufficiency of reserves, competition, availability and adequacy of reinsurance, defaults by counterparties, regulatory restrictions on our operations and changes in applicable laws and regulations, legal or regulatory investigations or actions, the failure or any compromise of the security of our computer systems, the occurrence of natural or man-made disasters or disease pandemic, unexpected changes in mortality, accelerated amortization of deferred acquisition costs and present value of future profits, goodwill impairments, medical advances such as genetic mapping research, unexpected changes in persistency rates and increases in statutory reserve requirements.

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

Overview

Our business

We are one of a number of subsidiaries of Genworth Financial, Inc. (“Genworth”), a leading financial security company in the U.S. that specializes in targeted market segments with an expanding international presence. We have two operating segments: (1) Protection and (2) Retirement Income and Institutional.

•

Protection. We offer customers term and universal life insurance and Medicare supplement insurance.

•

Retirement Income and Institutional. We offer customers a variety of wealth accumulation, income distribution and institutional products. Wealth accumulation and income distribution products principally include fixed and variable deferred and immediate individual annuities and group variable annuities offered through retirement plans. Institutional products include funding agreements backing notes (“FABNs”), funding agreements and guaranteed investment contracts (“GICs”).

We also have Corporate and Other activities which include income and expenses not allocated to the segments.

Business trends and conditions

In recent years, our business has been, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions. The discussion of business trends and conditions should be read together with the trends contained in our 2007 Annual Report on Form 10-K, which described additional business trends and conditions.

General conditions and trends affecting our businesses

Financial and economic environment. The stability of both the financial markets and the economy impacts our sales and revenue growth and trends in profitability of our businesses. Economic and financial market conditions have continued to deteriorate to varying degrees in the first half of 2008. These conditions have resulted in declining asset prices and lower interest rates.

Overall, we believe that the changing market conditions combined with the slowing economy have influenced, and will continue to influence, investment and spending decisions as both consumers and businesses adjust their risk profiles in response. Depending upon consumer reaction, we may see an adverse impact on sales, revenues and profitability trends of certain insurance and investment products.

In response to these current market conditions, we have adjusted our asset-liability management strategy in an attempt to reduce risk during the current economic and financial market conditions.

Volatility in credit markets.Credit markets continue to experience reduced liquidity, higher volatility and widening credit spreads across asset classes associated with the re-pricing risk. While these trends began mainly as a result of marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans, these trends have spread to other asset classes and financial sectors.

In connection with this uncertainty, we believe investors and lenders have retreated from many investments in asset-backed securities including those associated with sub-prime and Alt-A residential mortgage loans, as well as types of debt investments with weak lender protections or those with limited transparency and/or complex features which hindered investor understanding. At the same time, investors shifted emphasis towards less risky investments, increasing the demand for investments such as U.S. Treasury instruments.

We believe the current credit market conditions contributed to an increase in net unrealized investment losses of $624.8 million, before tax and other offsets, during 2008 in our $13,530.3 million investment portfolio of fixed maturity securities reflecting widening spreads in our mortgage-backed and asset-backed securities, partially offset by the effects of the current risk-free interest rate environment. We also believe these credit market conditions have contributed to a higher level of impairments on our investment portfolio. In some cases, the combined shift in rating and valuations of certain securities have resulted in a change in intent of whether to hold these securities to recovery of value. We expect to experience continued volatility in the valuation of our fixed maturity securities, as well as generally higher levels of credit-related investment losses, including the potential for additional impairments on our investment portfolio or changes regarding retention strategies for certain securities.

We also believe, however, that the current credit environment provides us with opportunities to invest in select asset classes and sectors that may enhance our investment yields over time. See “—Investments and Derivative Instruments” for additional information on our investment portfolio. In addition, further weakening in the economic environment could lead to increased credit defaults.

The current credit market conditions resulted in an unfavorable liquidity environment for issuers of financial instruments including non-recourse funding obligations, commercial paper, long-term debt and asset-backed securities. Credit spreads widened for many corporate issuers of commercial paper and long-term debt resulting in less favorable financing terms. This unfavorable liquidity environment did not have a material effect on our financing activities during the six months ended June 30, 2008.

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

Trends and conditions affecting our products

Life insurance. Results in our life insurance business are impacted by sales, mortality, persistency, investment yields and statutory reserve requirements. Additionally, sales of our products and persistency of our

insurance in-force are dependent on competitive product features and pricing, distribution penetration and customer service. As a result of a competitive pricing environment and our discipline to achieve targeted returns, we experienced lower term life insurance sales. We also experienced lower persistency in term life insurance policies coming out of their post-level rate period (10 and 15 years after policy issue). We expect these trends to continue, in general, as we maintain pricing discipline in the current competitive pricing environment.

We have also experienced a shift in focus by our distributors from term life insurance to universal life insurance products. In response to this shift in focus by our distributors, we continue to expand our universal life insurance capabilities.

Regulations XXX and AXXX require insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and certain universal life insurance policies with secondary guarantees, which increase the capital required to write these products. For term life insurance and certain universal life insurance, we have implemented capital management actions, including the use of securitization transactions, to reduce the capital impact of these regulations. Several competitors have taken capital management actions similar to ours in response to Regulations XXX and AXXX. Recent market conditions impacting securitization transactions create a need to pursue alternative approaches such as reinsurance and private financing transactions and we expect these conditions to continue. Together the ability to and effectiveness of financing these additional reserves may impact future life insurance sales or new business returns.

As of June 30, 2008, we had $3.6 billion of fixed and floating rate non-recourse funding obligations outstanding backing these additional statutory reserves, of which $1.7 billion were guaranteed by third-party financial guaranty insurance companies. The interest rates on these obligations are subject to rate resets triggered by negative rating agency action on the third-party financial guaranty insurance companies that guarantee these obligations. During 2008, the rates on those $1.7 billion of non-recourse funding obligations were contractually reset to the highest margin to the related underlying index rates. We do not believe that these increases will have a material impact on our consolidated financial statements. As noted above, to maintain and optimize product returns, we may seek alternative financing approaches in the future depending upon market conditions which could be more costly than those utilized in the past.

Retirement products. Results for our retirement income products within our Retirement Income and Institutional segment are affected by investment performance, interest rate levels, slope of the interest rate yield curve, net interest spreads, equity market fluctuations, mortality, policyholder lapses and new product sales. Our competitive position within many of our distribution channels and our ability to retain business depends significantly upon product features, including current and minimum crediting rates on spread-based products relative to our competitors, surrender charge periods in our annuities, as well as guaranteed benefit features we offer in variable annuity products. We actively evaluate our competitive position based upon each of those features, and where possible, we make adjustments as appropriate to meet our target return thresholds.

We maintain a focus on our Income Distribution Series of variable annuity products and group retirement income offerings. We have seen a decline in defined benefit retirement plans in favor of defined contribution plans with more of the responsibility for retirement income planning falling on the individual. Additionally, U.S. savings rates are at historical lows. We believe these factors support demand for individual and group retirement income products that provide various forms of guaranteed benefits with the opportunity to realize upside market performance. Our Income Distribution Series products provide the contractholder with the ability to receive a guaranteed minimum income stream that they cannot outlive, along with an opportunity to participate in market appreciation. However, through various techniques, these products are designed to reduce some of the risks that generally accompany traditional products with guaranteed living benefits. We are targeting individuals who are focused on building a personal portable retirement plan or are moving from the accumulation to the distribution phase of their retirement planning.

Institutional. Results in our institutional business are affected by credit markets. During 2007 and the first half of 2008, credit markets experienced reduced liquidity, higher volatility and widening credit spreads across asset classes. Our ability to issue funding agreements, FABNs and GICs to institutional investors is primarily dependent upon the credit markets, market perception of credit and risk-based pricing and our credit default swap levels. We view this business as opportunistic and, therefore, new origination activity may vary considerably from period to period. The current credit market conditions made these types of products for large institutional investors less attractive compared to alternative products offering higher yields or more liquidity. Certain of our FABNs and funding agreements offer contractholders the option to make periodic elections to extend their maturity date. As a result of the current credit market conditions, certain contractholders have elected not to extend their contracts. We do not believe that this trend will have a material effect on our financial position or liquidity.

In December 2007, we began issuing FABNs to retail investors and despite the credit market conditions in the first half of 2008, we continued to issue FABNs to retail investors. We do not believe sales to our retail investors will be materially impacted if these credit market conditions continue.

Critical Accounting Estimates

Valuation of investment securities. We hold fixed maturity and equity securities, 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.

Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets carried at fair value are classified and disclosed in one of the following three categories:

•

Level 1—Quoted prices for identical instruments in active markets.

•

Level 3—Instruments whose significant value drivers are unobservable.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded derivatives and actively traded mutual fund investments.

equity and trading securities and certain derivative instruments where we cannot corroborate the significant valuation inputs with market observable data.

Our portfolio of fixed maturity securities is comprised primarily of investment grade registered securities. Estimates of fair values for these securities are obtained primarily from industry-standard pricing methodologies utilizing market observable inputs consistent with Level 2 inputs. For our less liquid securities, such as our privately placed securities, we utilize independent market data to employ alternative valuation methods commonly used in the financial services industry to estimate fair value. Based on the market observability of the inputs used in estimating the fair value, the pricing level is assigned.

Security pricing is applied using a hierarchy, or “waterfall” approach. The vast majority of our fixed maturity and equity securities use Level 2 inputs for the determination of fair value. These fair values are obtained primarily from industry-standard pricing methodologies utilizing market observable information, when available. Because many fixed income securities do not trade on a daily basis, fair value is determined using industry-standard methodologies by applying available market information through processes such as benchmark curves, benchmarking of like-securities, sector groupings, quotes from market participants and matrix pricing. Observable information is compiled and integrates relevant credit information, perceived market movements and sector news. Additionally, security prices are periodically back-tested to validate and/or refine models as conditions warrant. Market indicators and industry and economic events are also monitored as triggers to obtain additional data. For certain structured securities with limited trading activity, industry-standard pricing methodologies utilize adjusted market information, such as index prices, to estimate fair value, which is not deemed observable for a particular security and results in the measurement being classified as Level 3.

Where specific market information is unavailable for certain securities, such as privately placed securities, internally developed pricing models produce estimates of fair value primarily utilizing Level 2 inputs along with certain Level 3 inputs. The internally developed models include matrix pricing. The pricing matrix begins with current treasury rates and uses credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry or issuer-specific credit characteristics and the security’s time to maturity, if warranted. Remaining un-priced securities are valued using an estimate of fair value based on indicative market prices that include significant unobservable inputs not based on, nor corroborated by, market information.

In addition to this “waterfall” approach, we employ other valuation methods that we deem appropriate for certain externally managed funds.

Evaluation of other-than-temporary impairments on available-for-sale securities.One of the significant estimates related to available-for-sale securities is the evaluation of investments for other-than-temporary impairments. We regularly review our investments for other-than-temporary impairments. If a decline in the fair value of an available-for-sale security is judged to be other-than-temporary, a charge is recorded to income (loss) equal to the difference between the fair value and cost or the amortized cost basis of the security.

The evaluation of impairments is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period income (loss). The assessment of whether such impairment has occurred is based on management’s evaluation of the underlying reasons for the decline in fair value at the individual security level. We deem an individual investment to be other-than-temporarily impaired when management concludes it is probable that we will not receive timely payment of the cash flows contractually stipulated for the investment. We regularly monitor our investment portfolio to ensure

that investments that may be other-than-temporarily impaired are identified in a timely manner and that any impairment is charged against income (loss) in the proper period. As part of our review process, the duration and severity of a decline in individual security values and credit risk characteristics are regularly monitored as potential impairment indicators. For all investments, with particular focus on those with impairment indicators, we assess market conditions, macroeconomic factors and industry developments in addition to investment-specific metrics in performing a credit assessment on the impacted investments.

For certain securitized financial assets with contractual cash flows including mortgage-backed and asset-backed securities, Emerging Issues Task Force (“EITF”) Issue No. 99-20,Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continued to Be Held by a Transferor in Securitized Financial Assets, requires that we use current information to periodically update our best estimate of cash flows that a market participant would use in determining the current fair value of the security. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the estimated cash flows since the last revised estimate that is unrelated to simple changes in interest rates when considering both timing and amount, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Where possible, this data is benchmarked against third-party sources to ensure it is consistent with inputs a market participant would use in establishing the current fair value. In addition, projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral.

Securities not subject to EITF Issue No. 99-20 (“non-EITF Issue No. 99-20 securities”) that are in an unrealized loss position are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors. The primary factors considered in evaluating whether a decline in value for non-EITF Issue No. 99-20 securities is other-than-temporary include: (a) the length of time and the extent to which the fair value has been or is expected to be less than cost or amortized cost, (b) the financial condition, credit rating and near-term prospects of the issuer and (c) whether the debtor is current on contractually obligated interest and principal payments.

We also consider our intent and ability to retain a temporarily depressed security until recovery. We believe that our intent and ability to hold an investment, along with the ability of the investment to generate cash flows that have not changed adversely, are the primary factors in assessing whether an investment in an unrealized loss position is other-than-temporarily impaired.

Each quarter, during this analysis, we assert our intent and ability to retain until recovery those securities judged to be temporarily impaired. Once identified, these securities are systematically restricted from trading unless approved by management. Management will only authorize the sale of these securities based on predefined criteria that relate to events that could not have been foreseen. Examples of the criteria include, but are not limited to, the deterioration in the issuer’s creditworthiness, a change in regulatory requirements or a major business combination or major disposition. We may change our intent to retain certain securities until recovery for risk mitigation reasons based on investment-specific metrics such as deterioration in the issuer’s creditworthiness, recent pricing movements and current credit ratings. When we determine there has been a change of intent to hold a depressed security until recovery, an other-than-temporary impairment is recognized.

Consolidated Results of Operations

In addition to measuring revenues, net income (loss) and assets in terms of operating performance, management also monitors and reports sales and insurance in-force metrics each period.

Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refers to: (1) annualized first-year premiums for term life insurance and Medicare supplement insurance and (2) new and additional premiums/deposits for universal life insurance, fixed

annuities, institutional products and variable products. Sales do not include renewal premiums on policies or contracts written during prior periods. We consider annualized first-year premiums and new premiums/deposits to be measures of our operating performance because they represent measures of new sales of insurance policies or contracts during a specified period, rather than measures of our revenues or profitability during that period.

Management regularly monitors and reports insurance in-force. Insurance in-force for life insurance is a measure of the aggregate face value of outstanding insurance policies as of the respective reporting date. We consider insurance in-force to be a measure of our operating performance because it represents a measure of the size of our business at a specific date, rather than a measure of our revenues or profitability during that period.

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

The following discussions of our results of operations should be read in conjunction with the “—Business trends and conditions.”

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

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


(Amounts in millions)	Three months ended June 30,						Increase (decrease) and percentage change
	2008			2007			2008 vs. 2007
Revenues:
Premiums	$	265.1		$	258.6		$	6.5		2.5	%
Net investment income		239.8			287.2			(47.4	)	(16.5	)%
Net investment gains (losses)		(227.3	)		(16.5	)		(210.8	)	NM	⁽¹⁾
Policy fees and other income		125.0			118.4			6.6		5.6	%

Total revenues		402.6			647.7			(245.1	)	(37.8	)%

Benefits and expenses:
Benefits and other changes in policy reserves		260.5			261.9			(1.4	)	(0.5	)%
Interest credited		109.7			134.8			(25.1	)	(18.6	)%
Acquisition and operating expenses, net of deferrals		62.1			51.8			10.3		19.9	%
Amortization of deferred acquisition costs and intangibles		51.5			41.6			9.9		23.8	%
Interest expense		37.2			49.1			(11.9	)	(24.2	)%

Total benefits and expenses		521.0			539.2			(18.2	)	(3.4	)%

Income (loss) before income taxes and equity in net income (loss) of unconsolidated subsidiary		(118.4	)		108.5			(226.9	)	NM	⁽¹⁾
Provision (benefit) for income taxes		(31.4	)		36.6			(68.0	)	(185.8	)%

Net income (loss) before equity in net income (loss) of unconsolidated subsidiary		(87.0	)		71.9			(158.9	)	NM	⁽¹⁾
Equity in net income (loss) of unconsolidated subsidiary		(3.7	)		4.6			(8.3	)	(180.4	)%

Net income (loss)	$	(90.7	)	$	76.5		$	(167.2	)	NM	⁽¹⁾

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

Premiums. Premiums consist primarily of premiums earned on individual life insurance, Medicare supplement insurance, single premium immediate annuities and structured settlements with life contingencies.

•

Our Protection segment increased $13.6 million driven largely by in-force growth of our term life insurance from new sales and renewal premiums, partially offset by a decrease in Medicare supplement insurance premiums as lapses exceeded new sales.

•

Our Retirement Income and Institutional segment decreased $7.1 million primarily as a result of a decrease in our structured settlement annuities which are in runoff, partially offset by increased life-contingent single premium immediate annuity sales.

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

•

Our Protection segment decreased $16.0 million mainly due to lower yields on assets backing our non-recourse funding obligations supporting certain term and universal life insurance reserves.

•

Our Retirement Income and Institutional segment decreased $33.2 million mainly attributable to lower yields on floating rate investments supporting certain floating rate policyholder liabilities related to our institutional products, a decrease related to GICs from a decline in average invested assets and a decrease related to deferred annuities from a decline in average invested assets and yields. The decrease was also attributable to valuation marks on limited partnership investments and reduced yields from holding higher cash balances to cover near term obligations and portfolio repositioning activities.

•

Corporate and other activities increased $1.8 million attributable to higher income from surplus assets.

Net investment gains (losses). Net investment gains (losses) consist of realized gains and losses from the sale or impairment of our investments, unrealized and realized gains and losses from our trading securities, non-qualifying derivatives, including embedded derivatives, changes in fair value of certain derivatives and related hedged items in fair value hedge relationships and hedge ineffectiveness on qualifying derivative instruments. We incurred $80.6 million of credit and/or cash flow related impairments and $151.8 million related to a change in intent to hold securities to recovery during the three months ended June 30, 2008. Of total impairments, $224.7 million related to securities backed by sub-prime and Alt-A residential mortgage-backed and asset-backed securities. These losses were partially offset by a reclassification in the second quarter of 2008 of embedded derivative costs related to guaranteed minimum withdrawal products to policy fees and other income. For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

Policy fees and other income. Policy fees and other income consist primarily of fees assessed against policyholder and contractholder account values, cost of insurance and surrender charges assessed on universal life insurance policies and other fees.

•

Our Protection segment decreased $3.9 million largely due to lower cost of insurance charges attributable to higher mortality and surrenders. This was partially offset by higher surrender fee income.

•

Our Retirement Income and Institutional segment increased $10.5 million principally from increased assets under management from continued sales of our variable annuities, primarily our Income Distribution Series products. This increase was partially offset by a reclassification in the second quarter of 2008 of embedded derivative costs related to guaranteed minimum withdrawal products previously reported in net investment gains (losses).

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 insurance, Medicare supplement insurance, structured settlements and single premium immediate annuities with life contingencies.

•

Our Protection segment increased $0.5 million principally driven by higher mortality in our universal life insurance business, partially offset by terminations and favorable claims experience in our Medicare supplement insurance.

•

Our Retirement Income and Institutional segment decreased $1.9 million mainly due to our runoff block of life-contingent structured settlements, partially offset by an increase in our guaranteed minimum

benefit liability for our variable annuity contracts driven by the unfavorable volatility in the equity markets.

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

•

Our Protection segment decreased $0.8 million mainly as a result of a decrease in our supplementary contracts without life contingencies.

•

Our Retirement Income and Institutional segment decreased $24.3 million primarily from our institutional products attributable to the impact of lower short-term rates on interest paid on our floating rate policyholder liabilities. Our spread-based products also decreased as a result of lower account values on fixed annuities associated with surrenders more than offsetting sales. Additionally, crediting rates were reset to current, lower rates as the fixed annuities reach the end of their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals. 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 Protection segment increased $8.5 million primarily due to lower commission allowances related to an affiliated reinsurance agreement and higher operating expenses.

•

Corporate and other activities increased from higher overhead expenses.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles consist primarily of the amortization of acquisition costs that are capitalized, present value of future profits, capitalized software and goodwill impairments.

•

Our Protection segment remained relatively flat with a decrease of $0.5 million as lower amortization related to universal life insurance from an unlocking adjustment in the third quarter of 2007 was offset by growth in term life insurance.

•

Our Retirement Income and Institutional segment increased $10.4 million from higher amortization attributable to growth in our Income Distribution Series products.

Interest expense. Interest expense represents interest related to our non-recourse funding obligations. Interest expense decreased mainly as a result of a decrease in average floating rates paid on the non-recourse funding obligations.

Provision (benefit) for income taxes.The effective tax rate decreased to (26.5)% for the three months ended June 30, 2008 from 33.7% for the three months ended June 30, 2007. The decrease in the effective rate was primarily attributable to lower expected full year pre-tax income and a change in prior year estimates related to tax favored investment benefits.

Net income (loss). The net loss was largely the result of impairments recorded in the second quarter of 2008 and a decrease in net investment income from lower yields on investments during the current quarter. Additionally, there was a decrease of $8.3 million from equity in the net income (loss) of Genworth Life Insurance Company of New York (“GLICNY”).

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

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


(Amounts in millions)	Six months ended June 30,						Increase (decrease) and percentage change
	2008			2007			2008 vs. 2007
Revenues:
Premiums	$	533.7		$	514.5		$	19.2		3.7	%
Net investment income		511.0			572.5			(61.5	)	(10.7	)%
Net investment gains (losses)		(292.5	)		(18.1	)		(274.4	)	NM	⁽¹⁾
Policy fees and other income		260.3			236.3			24.0		10.2	%

Total revenues		1,012.5			1,305.2			(292.7	)	(22.4	)%

Benefits and expenses:
Benefits and other changes in policy reserves		525.9			526.9			(1.0	)	(0.2	)%
Interest credited		235.0			264.6			(29.6	)	(11.2	)%
Acquisition and operating expenses, net of deferrals		122.9			101.5			21.4		21.1	%
Amortization of deferred acquisition costs and intangibles		83.1			82.3			0.8		1.0	%
Interest expense		83.3			91.1			(7.8	)	(8.6	)%

Total benefits and expenses		1,050.2			1,066.4			(16.2	)	(1.5	)%

Income (loss) before income taxes and equity in net income (loss) of unconsolidated subsidiary		(37.7	)		238.8			(276.5	)	(115.8	)%
Provision (benefit) for income taxes		(6.1	)		78.3			(84.4	)	(107.8	)%

Net income (loss) before equity in net income (loss) of unconsolidated subsidiary		(31.6	)		160.5			(192.1	)	(119.7	)%
Equity in net income (loss) of unconsolidated subsidiary		(5.6	)		9.5			(15.1	)	(158.9	)%

Net income (loss)	$	(37.2	)	$	170.0		$	(207.2	)	(121.9	)%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

Premiums

•

Our Protection segment increased $25.8 million driven largely by in-force growth of our term life insurance from new sales and renewal premiums, partially offset by a decrease in Medicare supplement insurance premiums as lapses exceeded new sales.

•

Our Retirement Income and Institutional segment decreased $6.6 million primarily as a result of a decrease in our structured settlement annuities which are in runoff, partially offset by increased life-contingent single premium immediate annuity sales.

Net investment income

•

Our Protection segment decreased $18.6 million mainly due to lower yields on assets backing our non-recourse funding obligations supporting certain term and universal life insurance reserves.

•

Our Retirement Income and Institutional segment decreased $43.7 million mainly attributable to lower yields on floating rate investments supporting certain floating rate policyholder liabilities related to our institutional products, a decrease in GICs related to a decline in average invested assets and a decrease related to deferred annuities from a decline in average invested assets and yields. The decrease was also attributable to valuation marks on limited partnership investments and reduced yields from holding higher cash balances to cover near term obligations and portfolio repositioning strategies.

•

Corporate and other activities increased $0.8 million attributable to higher income from surplus assets.

Net investment gains (losses). We incurred $124.8 million of credit and/or cash flow related impairments and $151.8 million related to a change in intent to hold securities to recovery during the six months ended June 30, 2008. Of total impairments, $260.3 million related to securities backed by sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Net investment losses from derivatives were primarily a result of the change in value of derivative instruments used for risk management of variable annuity guaranteed minimum withdrawal benefits not fully offsetting the corresponding changes in the embedded liability during the six months ended June 30, 2008. These losses were partially offset by a reclassification in the second quarter of 2008 of embedded derivative costs related to guaranteed minimum withdrawal products to policy fees and other income. For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

Policy fees and other income

•

Our Protection segment decreased $0.8 million largely due to lower cost of insurance attributable to higher mortality and surrenders. This was partially offset by higher surrender fee income in our universal life insurance.

•

Our Retirement Income and Institutional segment increased $24.8 million principally from increased assets under management from continued sales of our variable annuities, primarily our Income Distribution Series products. This increase was partially offset by a reclassification in the second quarter of 2008 of embedded derivative costs related to guaranteed minimum withdrawal products previously reported in net investment gains (losses).

Benefits and other changes in policy reserves

•

Our Protection segment decreased $3.4 million principally driven by higher terminations and favorable claims experience in our Medicare supplement insurance, partially offset by higher mortality in our universal life insurance products.

•

Our Retirement Income and Institutional segment increased $2.4 million mainly resulting from increased life-contingent single premium immediate annuity sales and an increase in our guaranteed minimum benefit liability for our variable annuity contracts driven by the unfavorable volatility in the equity markets. These increases were partially offset by a decrease from our runoff block of life-contingent structured settlements.

Interest credited

•

Our Protection segment was relatively flat with an increase of $0.4 million as growth in assets under management in universal life insurance was offset by higher withdrawals and a decrease in our supplementary contracts without life contingencies.

•

Our Retirement Income and Institutional segment decreased $30.0 million primarily from our institutional products attributable to the impact of lower short-term rates on interest paid on our floating rate policyholder liabilities. Our spread-based products also decreased as a result of lower account values on fixed annuities associated with surrenders more than offsetting sales. Additionally, crediting rates were reset to current, lower rates as the fixed annuities reach the end of their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals

•

Our Protection segment increased $20.9 million primarily due to lower commission allowances related to an affiliated reinsurance agreement and higher operating expenses.

•

Our Retirement Income and Institutional segment increased as a result of growth in our Income Distribution Series products.

•

Corporate and other activities increased from higher overhead expenses.

Amortization of deferred acquisition costs and intangibles

•

Our Protection segment decreased $6.2 million primarily from lower amortization related to our universal life insurance product from an unlocking adjustment in the third quarter of 2007.

•

Our Retirement Income and Institutional segment increased $7.0 million from higher amortization attributable to growth in our Income Distribution Series products, partially offset by lower amortization as a result of hedge losses related to our guaranteed minimum withdrawal benefit product.

Interest expense. Interest expense decreased mainly as a result of a decrease in average floating rates paid on the non-recourse funding obligations.

Provision (benefit) for income taxes.The effective tax rate decreased to (16.2)% for the six months ended June 30, 2008 from 32.8% for the six months ended June 30, 2007. The decrease in the effective rate was primarily attributable to lower expected full year pre-tax income and a change in prior year estimates related to tax favored investment benefits.

Net income (loss). The net loss was largely the result of impairments and hedging activity recorded in the six months ended June 30, 2008 and a decrease in net investment income from lower yields on our investments. Additionally, there was a decrease of $15.1 million from equity in the net income (loss) of GLICNY.

Investments and Derivative Instruments

Investment results

The following tables set forth information about our net investment income for each component of our investment portfolio for the periods indicated:


	Three months ended June 30,										Increase (decrease)
	2008					2007					2008 vs. 2007
(Amounts in millions)	Yield		Amount			Yield		Amount			Yield		Amount
Fixed maturity securities—taxable	5.1	%	$	193.4		5.9	%	$	225.6		(0.8	)%	$	(32.2	)
Commercial mortgage loans	6.2	%		44.0		6.6	%		46.6		(0.4	)%		(2.6	)
Equity securities	4.3	%		0.8		2.1	%		0.1		2.2	%		0.7
Other invested assets	0.1	%		0.6		3.8	%		16.3		(3.7	)%		(15.7	)
Policy loans	6.5	%		7.7		6.0	%		6.9		0.5	%		0.8

Gross investment income before expenses and fees	4.6	%		246.5		5.8	%		295.5		(1.2	)%		(49.0	)
Expenses and fees	(0.1	)%		(6.7	)	(0.2	)%		(8.3	)	0.1	%		1.6

Net investment income	4.5	%	$	239.8		5.6	%	$	287.2		(1.1	)%	$	(47.4	)


	Six months ended June 30,										Increase (decrease)
	2008					2007					2008 vs. 2007
(Amounts in millions)	Yield		Amount			Yield		Amount			Yield		Amount
Fixed maturity securities—taxable	5.3	%	$	407.4		6.0	%	$	456.7		(0.7	)%	$	(49.3	)
Commercial mortgage loans	6.3	%		90.5		6.3	%		90.0		—	%		0.5
Equity securities	6.2	%		2.1		2.0	%		0.3		4.2	%		1.8
Other invested assets	1.0	%		10.4		2.9	%		24.5		(1.9	)%		(14.1	)
Policy loans	6.2	%		14.6		5.9	%		13.7		0.3	%		0.9

Gross investment income before expenses and fees	5.0	%		525.0		5.7	%		585.2		(0.7	)%		(60.2	)
Expenses and fees	(0.2	)%		(14.0	)	(0.1	)%		(12.7	)	(0.1	)%		(1.3	)

Net investment income	4.8	%	$	511.0		5.6	%	$	572.5		(0.8	)%	$	(61.5	)

Yields for fixed maturity and equity securities are based on weighted average amortized cost or cost, respectively. Yields for other invested assets, which included securities lending activity, are calculated net of the corresponding securities lending liability. All other yields are based on average carrying values.

For the three and six months ended June 30, 2008, the decrease in overall investment yields was primarily attributable to decreased yields on floating rate investments supporting floating rate policyholder liabilities and non-recourse funding obligations. Additionally, we are holding higher cash balances to cover near term obligations and portfolio repositioning strategies which have resulted in reduced yields on our investment portfolio.

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


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2008			2007			2008			2007
Available-for-sale securities:
Realized gains on sale	$	10.2		$	2.2		$	13.4		$	4.6
Realized losses on sale		(6.1	)		(12.0	)		(8.9	)		(19.2	)
Impairments		(232.4	)		(0.1	)		(276.6	)		(0.1	)
Derivatives and other		1.1			(5.6	)		(22.9	)		(3.4	)
Net unrealized gains (losses) on trading securities		(0.2	)		(0.5	)		2.3			1.1
Commercial mortgage loans		0.1			(0.5	)		0.2			(1.1	)

Net investments gains (losses)	$	(227.3	)	$	(16.5	)	$	(292.5	)	$	(18.1	)

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

•

For the three months ended June 30, 2008, net investment losses increased principally as a result of an increase in impairments. We incurred $80.6 million of credit and/or cash flow related impairments and $151.8 million related to a change in intent to hold securities to recovery. Total impairments included $224.7 million related to securities backed by sub-prime and Alt-A residential mortgage-backed and asset-backed securities. These impairment losses were partially offset by gains on the disposition of available-for-sale securities for portfolio repositioning activities.

•

The aggregate fair value of securities sold at a loss during the three months ended June 30, 2008 and 2007 was $26.5 million and $378.2 million, respectively, which was 81.0% and 96.9% of book value, respectively.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

•

For the six months ended June 30, 2008, net investment losses increased principally as a result of an increase in impairments. We incurred $124.8 million of credit and/or cash flow related impairments and $151.8 million related to a change in intent to hold securities to recovery. Total impairments included $260.3 million related to securities backed by sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Net investment losses from derivatives were primarily a result of the change in value of derivative instruments used for risk management of variable annuity guaranteed minimum withdrawal benefits not fully offsetting the corresponding changes in the embedded liability during the first half of 2008. These losses were partially offset by gains on the disposition of available-for-sale securities for portfolio repositioning activities.

•

The aggregate fair value of securities sold at a loss during the six months ended June 30, 2008 and 2007 was $97.0 million and $782.2 million, respectively, which was 91.6% and 97.6% of book value, respectively.

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

Investment portfolio

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


	June 30, 2008				December 31, 2007
(Amounts in millions)	Carrying value		% of total		Carrying value		% of total
Fixed maturity securities, available-for-sale⁽¹⁾:
Public	$	8,117.6	40.4	%	$	9,217.6	44.3	%
Private		5,412.7	26.9			6,019.7	29.0
Commercial mortgage loans		2,797.8	13.9			2,968.1	14.3
Other invested assets		1,662.3	8.3			1,437.5	6.9
Policy loans		474.5	2.3			466.8	2.2
Equity securities, available-for-sale		80.0	0.4			64.0	0.3
Cash and cash equivalents		1,563.3	7.8			616.4	3.0

Total cash, cash equivalents and invested assets	$	20,108.2	100.0	%	$	20,790.1	100.0	%

⁽¹⁾

As of June 30, 2008 and December 31, 2007, we had $1,488.1 million and $2,050.1 million, respectively, of residential mortgage-backed and asset-backed securities included in fixed maturity securities, of which $579.2 million and $888.4 million, respectively, were securities collateralized by sub-prime residential mortgage loans and $347.1 million and $526.9 million, respectively, were securities collateralized by Alt-A residential mortgage loans.

For a discussion of the change in cash, cash equivalents and invested assets, see the comparison for this line item under “—Consolidated Balance Sheets.”

We hold fixed maturity and equity securities, 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. See note 4 in our “—Notes to Condensed Consolidated Financial Statements” for additional information regarding fair value measurement and classification of fair value measurements into level categories. As of June 30, 2008, approximately 17.1% of our investment holdings recorded at fair value were based on significant inputs that were not market observable and were classified as Level 3 measurements.

The following table sets forth our investments that were measured at fair value on a recurring basis as of the date indicated:


	June 30, 2008
(Amounts in millions)	Total		Level 1		Level 2		Level 3
Investments:
Fixed maturity securities, available-for-sale	$	13,530.3	$	—	$	11,308.8	$	2,221.5
Equity securities, available-for-sale		80.0		8.0		68.1		3.9
Other invested assets^(a)		980.3		—		711.0		269.3

Total investments	$	14,590.6	$	8.0	$	12,087.9	$	2,494.7

^(a)	Includes derivatives, trading securities, restricted other invested assets and securities held as collateral.

Other invested assets presented above only include collateral that is held in the form of securities with any remaining collateral balance representing cash.


	Three months ended June 30, 2008
(Amounts in millions)	Fixed maturity securities, available-for- sale			Equity securities, available-for- sale			Other invested assets^(a)			Total
Beginning balance as of April 1, 2008	$	2,074.4		$	4.6		$	319.3		$	2,398.3
Total realized and unrealized gains (losses):
Included in net income (loss)		(178.4	)		—			(19.5	)		(197.9	)
Included in other comprehensive income (loss)		106.3			(0.7	)		—			105.6
Purchases, sales, issuances and settlements, net		(161.0	)		—			27.0			(134.0	)
Transfers in (out) of Level 3		380.2			—			(57.5	)		322.7

Ending balance as of June 30, 2008	$	2,221.5		$	3.9		$	269.3		$	2,494.7

Amount of total gains (losses) for the period included in net income (loss) attributable to the change in unrealized gains (losses) relating to assets still held as of the reporting date	$	(178.5	)	$	—		$	(19.2	)	$	(197.7	)

^(a)	Includes certain trading securities, restricted other invested assets and derivatives.


	Six months ended June 30, 2008
(Amounts in millions)	Fixed maturity securities, available-for- sale			Equity securities, available-for- sale			Other invested assets^(a)			Total
Beginning balance as of January 1, 2008	$	2,044.2		$	5.1		$	227.2		$	2,276.5
Total realized and unrealized gains (losses):
Included in net income (loss)		(194.4	)		0.8			26.7			(166.9	)
Included in other comprehensive income (loss)		(55.5	)		(0.7	)		(0.4	)		(56.6	)
Purchases, sales, issuances and settlements, net		(146.9	)		(1.3	)		80.0			(68.2	)
Transfers in (out) of Level 3		574.1			—			(64.2	)		509.9

Ending balance as of June 30, 2008	$	2,221.5		$	3.9		$	269.3		$	2,494.7

Amount of total gains (losses) for the period included in net income (loss) attributable to the change in unrealized gains (losses) relating to assets still held as of the reporting date	$	(194.5	)	$	—		$	27.1		$	(167.4	)

^(a)	Includes certain trading securities, restricted other invested assets and derivatives.

As included in the Level 3 tables above for the three and six months ended June 30, 2008, the fair value of fixed maturity securities classified as Level 3 measurements decreased by $72.1 million and $249.9 million, respectively, primarily as a result of a decrease in fair value of mortgage-backed and asset-backed securities. The sale of securities classified as Level 3 also contributed to the decrease in fixed maturity securities classified as Level 3. Offsetting these decreases was an increase, or net transfer in, of securities where the fair value measurement was classified as Level 3 as of June 30, 2008 but was not previously classified as Level 3. The change in classification primarily resulted from a change in the observability of inputs for certain mortgage-backed and asset-backed securities based on the lack of market observable inputs for these securities.

During the current period, market inputs changed for certain structured securities valued using industry-standard pricing methodologies. The current market conditions for these securities have resulted in little, or no, trading activity or other market observable data and requires the use of significant unobservable inputs to estimate fair value. Accordingly, these resulting fair value measurements have been classified as Level 3.

Fixed maturity and equity securities

As of June 30, 2008, 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
Fixed maturity securities:
U.S. government, agencies and government sponsored entities	$	122.6	$	4.2	$	(1.1	)	$	125.7
Government—non U.S.		288.9		18.2		(8.2	)		298.9
U.S. corporate		6,849.4		53.8		(387.4	)		6,515.8
Corporate—non U.S.		1,863.4		4.1		(148.1	)		1,719.4
Mortgage and asset-backed		5,538.9		17.9		(686.3	)		4,870.5

Total fixed maturity securities		14,663.2		98.2		(1,231.1	)		13,530.3
Equity securities		82.1		0.4		(2.5	)		80.0

Total available-for-sale securities	$	14,745.3	$	98.6	$	(1,233.6	)	$	13,610.3

As of December 31, 2007, 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
Fixed maturity securities:
U.S. government, agencies and government sponsored entities	$	189.3	$	18.0	$	(0.1	)	$	207.2
Government—non U.S.		293.0		28.1		(1.4	)		319.7
U.S. corporate		6,983.1		99.6		(207.3	)		6,875.4
Corporate—non U.S.		1,881.6		9.5		(79.7	)		1,811.4
Mortgage and asset-backed		6,398.4		25.7		(400.5	)		6,023.6

Total fixed maturity securities		15,745.4		180.9		(689.0	)		15,237.3
Equity securities		60.5		3.6		(0.1	)		64.0

Total available-for-sale securities	$	15,805.9	$	184.5	$	(689.1	)	$	15,301.3

Changes in gross unrealized gains (losses) in our fixed maturity securities portfolio from December 31, 2007 through June 30, 2008 were primarily a result of continued widening spreads in 2008, particularly in mortgage-backed and asset-backed securities attributable to marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans.

As of June 30, 2008, the amortized cost or cost, gross unrealized gains (losses) and fair value of our mortgage-backed and asset-backed securities collateralized by sub-prime residential mortgage loans were as follows:


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses			Fair value
Rating:
AAA	$	342.4	$	0.4	$	(45.1	)	$	297.7
AA		226.4		—		(86.7	)		139.7

Subtotal		568.8		0.4		(131.8	)		437.4
A		86.2		—		(41.1	)		45.1
BBB		23.7		—		(7.8	)		15.9
BB		93.1		—		(38.8	)		54.3
B		17.5		—		(2.1	)		15.4
Caa and lower		11.0		—		—			11.0
In or near default		0.1		—		—			0.1

Total sub-prime securities	$	800.4	$	0.4	$	(221.6	)	$	579.2

As of December 31, 2007, the amortized cost or cost, gross unrealized gains (losses) and fair value of our mortgage-backed and asset-backed securities collateralized by sub-prime residential mortgage loans were as follows:


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses			Fair value
Rating:
AAA	$	659.3	$	1.8	$	(44.3	)	$	616.8
AA		260.5		—		(89.2	)		171.3

Subtotal		919.8		1.8		(133.5	)		788.1
A		159.1		—		(61.0	)		98.1
BBB		2.2		—		—			2.2

Total sub-prime securities	$	1,081.1	$	1.8	$	(194.5	)	$	888.4

Our sub-prime securities were principally backed by first lien mortgages. We did not have any exposure to mezzanine collateralized debt obligations (“CDO”), interest margin deals, highly leveraged transactions or CDO-squared investments.

As of June 30, 2008, the fair value of our mortgage-backed and asset-backed securities collateralized by sub-prime residential mortgage loans by vintage and fair value level were as follows:


(Amounts in millions)	Total		Level 1		Level 2		Level 3
Vintage:
2004 and prior	$	76.7	$	—	$	—	$	76.7
2005		132.3		—		—		132.3
2006		294.7		—		—		294.7
2007		75.5		—		—		75.5

Total sub-prime securities	$	579.2	$	—	$	—	$	579.2

As of June 30, 2008, the amortized cost or cost, gross unrealized gains (losses) and fair value of our mortgage-backed and asset-backed securities collateralized by Alt-A residential mortgage loans were as follows:


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses			Fair value
Rating:
AAA	$	318.0	$	—	$	(73.5	)	$	244.5
AA		48.9		—		(17.6	)		31.3

Subtotal		366.9		—		(91.1	)		275.8
A		53.0		0.5		(16.0	)		37.5
BBB		35.5		—		(15.8	)		19.7
BB		15.2		—		(8.1	)		7.1
B		4.5		—		(1.4	)		3.1
Caa and lower		2.0		0.7		—			2.7
In or near default		1.1		0.1		—			1.2

Total Alt-A securities	$	478.2	$	1.3	$	(132.4	)	$	347.1

As of December 31, 2007, the amortized cost or cost, gross unrealized gains (losses) and fair value of our mortgage-backed and asset-backed securities collateralized by Alt-A residential mortgage loans were as follows:


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses			Fair value
Rating:
AAA	$	377.4	$	0.2	$	(16.5	)	$	361.1
AA		127.9		0.8		(15.4	)		113.3

Subtotal		505.3		1.0		(31.9	)		474.4
A		60.4		—		(14.6	)		45.8
BBB		9.2		—		(2.6	)		6.6
B		0.1		—		—			0.1

Total Alt-A securities	$	575.0	$	1.0	$	(49.1	)	$	526.9

Gross unrealized losses in our sub-prime and Alt-A residential mortgage-backed and asset-backed securities as of June 30, 2008 were primarily a result of continued widening spreads during 2008 as a result of marketplace uncertainty arising from higher defaults in sub-prime and Alt-A residential mortgage loans. As of June 30, 2008, we expect these investments to continue to perform in accordance with their original contractual terms and we have the ability and intent to hold these securities until the recovery of the fair value up to our cost basis, which may be at maturity.

As of June 30, 2008, the fair value of our mortgage-backed and asset-backed securities collateralized by Alt-A residential mortgage loans by vintage and fair value level were as follows:


(Amounts in millions)	Total		Level 1		Level 2		Level 3
Vintage:
2004 and prior	$	50.9	$	—	$	47.4	$	3.5
2005		122.6		—		117.8		4.8
2006		106.3		—		79.5		26.8
2007		67.3		—		55.3		12.0

Total Alt-A securities	$	347.1	$	—	$	300.0	$	47.1

As of June 30, 2008, the amortized cost or cost, gross unrealized gains (losses) and fair value of our commercial mortgage-backed securities were as follows:


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses			Fair value
Rating:
AAA	$	848.3	$	0.9	$	(62.0	)	$	787.2
AA		216.9		0.1		(35.6	)		181.4

Subtotal		1,065.2		1.0		(97.6	)		968.6
A		236.8		0.2		(46.5	)		190.5
BBB		140.9		4.4		(33.6	)		111.7
BB		17.6		0.4		(4.5	)		13.5
B		2.7		0.2		(0.2	)		2.7
Caa and lower		25.8		—		(2.3	)		23.5
In or near default		0.1		0.3		—			0.4

Total commercial mortgage-backed securities	$	1,489.1	$	6.5	$	(184.7	)	$	1,310.9

As of December 31, 2007, the amortized cost or cost, gross unrealized gains (losses) and fair value of our commercial mortgage-backed securities were as follows:


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses			Fair value
Rating:
AAA	$	906.4	$	4.3	$	(27.3	)	$	883.4
AA		227.8		0.2		(17.1	)		210.9

Subtotal		1,134.2		4.5		(44.4	)		1,094.3
A		231.2		0.2		(24.1	)		207.3
BBB		144.5		4.6		(14.4	)		134.7
BB		13.6		0.7		(1.5	)		12.8
B		3.6		0.8		(0.1	)		4.3
Caa and lower		25.2		0.1		(0.7	)		24.6
In or near default		—		0.2		—			0.2

Total commercial mortgage-backed securities	$	1,552.3	$	11.1	$	(85.2	)	$	1,478.2

As of June 30, 2008, the fair value of our commercial mortgage-backed securities by vintage and fair value level were as follows:


(Amounts in millions)	Total		Level 1		Level 2		Level 3
Vintage:
2004 and prior	$	277.0	$	—	$	243.9	$	33.1
2005		137.7		—		115.2		22.5
2006		519.2		—		359.1		160.1
2007		377.0		—		265.5		111.5

Total commercial mortgage-backed securities	$	1,310.9	$	—	$	983.7	$	327.2

As of June 30, 2008, the fair value of all mortgage-backed and asset-backed securities not collateralized by sub-prime residential mortgage loans, Alt-A residential mortgage loans or commercial mortgage loans by vintage and fair value level were as follows:


(Amounts in millions)	Total		Level 1		Level 2		Level 3
Vintage:
2004 and prior	$	461.1	$	—	$	447.2	$	13.9
2005		665.8		—		319.2		346.6
2006		710.3		—		637.8		72.5
2007		756.0		—		628.3		127.7
2008		40.1		—		40.1		—

Total other mortgage-backed and asset-backed securities	$	2,633.3	$	—	$	2,072.6	$	560.7


	Less Than 12 Months						12 Months or More
(Dollar amounts in millions)	Fair value		Gross unrealized losses			# of securities	Fair value		Gross unrealized losses			# of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government sponsored entities	$	42.8	$	(1.1	)	7	$	—	$	—		—
Government—non U.S.		97.1		(6.6	)	36		7.0		(1.6	)	7
U.S. corporate		2,872.7		(183.6	)	449		1,656.2		(203.8	)	292
Corporate—non U.S.		865.8		(67.8	)	139		606.0		(80.3	)	86
Asset-backed		1,301.4		(71.8	)	139		1,262.1		(288.2	)	193
Mortgage-backed		849.8		(130.3	)	183		1,023.1		(196.0	)	262

Subtotal, fixed maturity securities		6,029.6		(461.2	)	953		4,554.4		(769.9	)	840
Equity securities		33.9		(1.9	)	6		1.5		(0.6	)	3

Total temporarily impaired securities	$	6,063.5	$	(463.1	)	959	$	4,555.9	$	(770.5	)	843

% Below cost—fixed maturity securities:
<20% Below cost	$	5,733.4	$	(306.4	)	855	$	3,869.4	$	(401.4	)	628
20-50% Below cost		272.7		(106.0	)	77		618.9		(249.0	)	171
>50% Below cost		23.5		(48.8	)	21		66.1		(119.5	)	41

Total fixed maturity securities		6,029.6		(461.2	)	953		4,554.4		(769.9	)	840

% Below cost—equity securities:
<20% Below cost		33.4		(1.7	)	3		0.8		(0.5	)	2
20-50% Below cost		0.5		(0.2	)	3		0.7		(0.1	)	1

Total equity securities		33.9		(1.9	)	6		1.5		(0.6	)	3

Total temporarily impaired securities	$	6,063.5	$	(463.1	)	959	$	4,555.9	$	(770.5	)	843


Investment grade	$	5,703.8	$	(427.5	)	823	$	4,301.1	$	(705.6	)	743
Below investment grade		356.6		(35.0	)	126		253.4		(64.4	)	95
Not rated—fixed maturity securities		0.6		(0.1	)	6		0.5		(0.1	)	3
Not rated—equities		2.5		(0.5	)	4		0.9		(0.4	)	2

Total temporarily impaired securities	$	6,063.5	$	(463.1	)	959	$	4,555.9	$	(770.5	)	843

Of the 42.4% of investment securities that were more than 20% below cost, a majority were mortgage-backed and asset-backed securities that have been in an unrealized loss position for twelve months or more. With current events in the credit markets, rating agencies have actively reviewed their credit quality ratings on these securities and these securities remain primarily investment grade. We are comfortable with the performance of the underlying collateral and expect that our investments in mortgage-backed and asset-backed securities will continue to perform in accordance with their contractual terms with no adverse changes in cash flows.

Other invested assets

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


	June 30, 2008				December 31, 2007
(Amounts in millions)	Carrying value		% of total		Carrying value		% of total
Restricted other invested assets	$	383.2	23.0	%	$	399.8	27.8	%
Investment in unconsolidated subsidiary		310.5	18.7			346.5	24.1
Derivatives		296.0	17.8			213.3	14.9
Limited partnerships		292.6	17.6			262.3	18.2
Securities lending collateral		200.5	12.1			152.4	10.6
Trading securities		82.2	4.9			62.3	4.3
Derivatives counterparty collateral		61.4	3.7			—	—
Other investments		35.9	2.2			0.9	0.1

Total other invested assets	$	1,662.3	100.0	%	$	1,437.5	100.0	%

Derivatives increased due to hedges in our FABNs and the acquisition of options to hedge risk embedded in certain products within our Retirement Income and Institutional segment. Limited partnerships increased primarily due to capital calls. The increase in securities lending was driven by the expansion of our program in 2008. In the second quarter of 2008, we modified our derivative counterparty agreements to require both us and the counterparties to provide collateral in certain circumstances. As of June 30, 2008, we retained collateral of $61.4 million related to these agreements including over collateralization from certain counterparties. Prior to the second quarter of 2008, there were no provisions requiring collateral for our derivative transactions. The increase in other investments was driven by increased activity in short-term investments and bank loans.

Derivative instruments

The fair value of derivative instruments is based upon either prices obtained from market sources or pricing valuation models utilizing market inputs from market sources. The following table sets forth our positions in derivative instruments and the fair values as of the dates indicated:


	June 30, 2008						December 31, 2007
(Amounts in millions)	Notional value		Assets		Liabilities		Notional value		Assets		Liabilities
Interest rate swaps	$	3,685.9	$	74.9	$	41.7	$	2,513.7	$	73.8	$	24.4
Equity index options		1,210.8		197.8		—		877.6		115.6		—
Limited guarantee		250.0		23.2		—		250.0		23.9		—
Financial futures		273.1		—		—		12.5		—		—
Credit default swaps		56.1		0.1		0.4		—		—		—

Total derivatives	$	5,475.9	$	296.0	$	42.1	$	3,653.8	$	213.3	$	24.4

The increase in the notional value of derivatives was primarily a result of entering into interest rate swaps with a notional value of $477.2 million to convert fixed rate assets or liabilities into floating rate assets or liabilities consistent with the overall asset-liability management for our FABN products. In addition, we had increases in notional value of $695.0 million and $333.2 million for interest rate swaps and equity index options, respectively, to improve asset-liability management for our variable annuity products. We also had increases in notional value of $260.6 million for financial futures and $56.1 million for credit default swaps.

Genworth provides a limited parental guarantee to Rivermont I, which is accounted for as a derivative under Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities, and carried at fair value.

Consolidated Balance Sheets

Total assets. Total assets decreased $1,040.9 million to $44,936.2 million as of June 30, 2008 from $45,977.1 million as of December 31, 2007.

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Cash, cash equivalents and invested assets decreased $681.9 million primarily due to an increase in net unrealized investment losses from the current interest rate environment in our fixed maturity securities portfolio. This decrease was partially offset by an increase in cash and cash equivalents of $946.9 million as we are holding cash to meet scheduled maturities in the third and fourth quarters of 2008. We also had increases from derivatives activity, the securities lending program and our trading portfolio.

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Deferred acquisition costs increased $192.9 million associated with the growth of our insurance in-force in term life insurance and variable annuities, primarily our Income Distribution Series products.

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Separate account assets decreased $521.4 million as a result of unfavorable market performance of the underlying securities and an increase in death, surrender and other benefits.

Total liabilities. Total liabilities decreased $609.9 million to $41,080.8 million as of June 30, 2008 from $41,690.7 million as of December 31, 2007.

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Deferred tax liability decreased $211.1 million from lower deferred taxes as a result of increased net unrealized investment losses.

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Other liabilities increased $156.8 million mainly from an increase in our securities lending program and derivative activity.

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Separate account liabilities decreased $521.4 million as a result of unfavorable market performance of the underlying securities and an increase in death, surrender and other benefits.

Stockholder’s equity. Stockholder’s equity decreased $431.0 million to $3,855.4 million as of June 30, 2008 from $4,286.4 million as of December 31, 2007.

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Current year net loss was $37.2 million.

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Accumulated other comprehensive loss increased $397.4 million primarily driven by an increase in net unrealized investment losses from the current interest rate environment.

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There was an increase of $3.6 million in additional paid-in capital primarily attributable to a capital contribution related to taxes.

Liquidity and Capital Resources

The principal liquidity requirements for our insurance operations are our contractual obligations to contractholders and annuitants. Contractual obligations include payments of claims under outstanding insurance policies and annuities, contract withdrawals and surrender benefits. The primary sources for meeting these contractual obligations are investment activities and cash generated from operating activities.

We maintain a master promissory note and committed line with an indirect parent, GNA Corporation (“GNA”), of $500.0 million in total. The master promissory note and committed line provide liquidity to meet normal variation in cash requirements. In addition, the master promissory note is structured to provide us the ability to lend to GNA at a comparable short-term investment return. As of June 30, 2008 and December 31, 2007, GNA owed us $0.5 million which was included in other assets in the consolidated balance sheets.

The following table sets forth our condensed consolidated cash flows for the six months ended June 30:


(Amounts in millions)	2008		2007
Net cash from operating activities	$	33.3	$	207.4
Net cash from investing activities		894.2		(902.3	)
Net cash from financing activities		19.4		906.3

Net increase in cash and cash equivalents	$	946.9	$	211.4

Cash flows from operating activities are affected by the timing of premiums, fees and investment income received and expenses paid. Principal sources of cash include sales of our products and services. As an insurance business, we typically generate positive cash flows from operating activities, as premiums collected from our insurance products exceed policy acquisition costs, benefits paid and redemptions. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. The decrease in cash flows from operating activities for the six months ended June 30, 2008 was primarily the result of the timing of cash settlements of other assets and liabilities.

Accordingly, in analyzing our cash flows, we focus on the change in the amount of cash available and used in investing activities. The increase in cash from investing activities for the six months ended June 30, 2008 was primarily the result of a decrease in purchases of investments as we have issued fewer FABNs and no non-recourse funding obligations during the first half of 2008.

Changes in cash from financing activities primarily related to the issuance of, and redemptions and benefit payments on, investment contracts, issuance and repayment of non-recourse funding obligations and dividends to

our stockholders. For the six months ended June 30, 2008, there were net proceeds from investment contracts of $13.1 million driven by a decrease in FABN issuances. In the first quarter of 2007, we redeemed $110.0 million of our preferred stock and repaid our note payable to GNA.

Insurance companies are restricted by states as to the aggregate amount of dividends they may pay to their parent in any consecutive twelve-month period without regulatory approval. Dividends in excess of the prescribed limits or the earned surplus are deemed “extraordinary” and require formal state insurance department approval. We are able to pay $440.9 million in dividends in 2008 without obtaining regulatory approval.

In July 2008, the State Corporation Commission, Bureau of Insurance of the Commonwealth of Virginia directed us to amend our 2007 statutory annual statement filing to reflect a revision to our statutory survivorship universal life insurance reserves. This amendment will impact statutory net loss for the year ended December 31, 2007 and statutory capital and surplus and dividend capacity as of December 31, 2007. As amended, combined statutory net loss will be approximately $88.3 million, capital and surplus will be approximately $1,414.2 million and our dividend capacity will be approximately $440.9 million.

As of December 31, 2007, GLAIC and its subsidiaries continued to exceed the minimum required risk-based capital levels.

During 2005, we transferred investment securities to an affiliated special purpose entity (“SPE”), whose sole purpose is to securitize these investment securities and issue secured notes to various affiliated companies. The securitized investments are owned in their entirety by the SPE and are not available to satisfy the claims of our creditors. The value of those securities was $383.2 million and $399.8 million as of June 30, 2008 and December 31, 2007, respectively.

In June 2008, we became a member of the Federal Home Loan Bank of Atlanta (“FHLB-Atlanta”) allowing us to take advantage of the various services provided by the FHLB-Atlanta, including liquidity management through the issuance of funding agreements.

Capital resources and financing activities

As of June 30, 2008, we had $50.0 million of renewable floating rate funding agreements, which are deposit-type products that generally credit interest on deposits at a floating rate tied to an external market index. Purchasers of renewable funding agreements include money market funds, bank common trust funds and other short-term investors. Some of our funding agreements contained “put” provisions, through which the contractholder has an option to terminate the funding agreement for any reason after giving notice within the contract’s specified notice period. Of the $50.0 million aggregate amount outstanding as of June 30, 2008, none had put option features.

As of June 30, 2008, our institutional business in our Retirement Income and Institutional segment had outstanding $3,851.4 million of FABNs and funding agreements, of which $550.0 million offer contractholders the option to make periodic elections to extend the maturity date of the contract. The current credit market conditions have made these types of institutional products less attractive compared to alternative products offering higher yields or more liquidity. During 2007 and the first quarter of 2008, certain contractholders did

not extend the maturity on approximately $550.0 million of outstanding notes, all of which will mature over the next twelve months. During the second quarter of 2008, no contractholders elected not to extend their contracts.

As of June 30, 2008, we had approximately $645.1 million of GICs outstanding. Substantially all of these contracts allow for the payment of benefits at contract value to ERISA plans prior to contract maturity in the event of death, disability, retirement or change in investment election. 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. Contracts 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 believe our cash flows from investment activities and our master promissory note and committed line with GNA will provide us with sufficient liquidity to meet our operating requirements for the foreseeable future.

Contractual obligations and commercial commitments

We enter into obligations to third parties in the ordinary course of our operations. However, we do not believe that our cash flow requirements can be assessed based upon an analysis of these obligations. The most significant factor affecting our future cash flows is our ability to earn and collect cash from our customers. Future cash outflows, whether they are contractual obligations or not, also will vary based upon our future needs. Although some outflows are fixed, others depend on future events. Examples of fixed obligations include our obligations to pay principal and interest on fixed-rate borrowings. Examples of obligations that will vary include obligations to pay interest on variable-rate borrowings and insurance liabilities that depend on future interest rates and market performance. Many of our obligations are linked to cash-generating contracts. These obligations include payments to contractholders that assume those contractholders will continue to make deposits in accordance with the terms of their contracts. In addition, our operations involve significant expenditures that are not based upon “commitments.” These include expenditures for income taxes and payroll.

The current credit market conditions have made institutional products less attractive compared to alternative products offering higher yields or more liquidity. As of June 30, 2008, we had $550.0 million of outstanding notes that certain contractholders elected not to extend the maturity date of the contract, all of which will mature over the next twelve months.

Except as discussed above, there have been no material additions or changes to our contractual obligations and commercial commitments as set forth in our 2007 Annual Report on Form 10-K filed on February 28, 2008.

Off-Balance Sheet Transactions

We have used off-balance sheet securitization transactions to mitigate and diversify our asset risk position and to adjust the asset class mix in our investment portfolio by reinvesting securitization proceeds in accordance with our approved investment guidelines.

The transactions we have used involved securitizations of some of our receivables and investments that were secured by commercial mortgage loans, fixed maturity securities or other receivables, consisting primarily of policy loans. As of June 30, 2008 and December 31, 2007, total securitized assets remaining were $254.1 million and $279.4 million, respectively.

There were no off-balance sheet securitization transactions in the six months ended June 30, 2008 or 2007.

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

Financial support is provided under credit support agreements in which Genworth provides limited recourse for a maximum of $119.0 million of credit losses in such entities. We do not provide any such recourse. Assets with credit support are funded by demand notes that are further enhanced with support provided by a third party.

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.

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

There were no other material changes in these risks since December 31, 2007.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2008, an evaluation was carried out 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 these disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting During the Quarter Ended June 30, 2008

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, payment of contingent or other sales commissions, claims payments and procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers and breaching fiduciary or other duties to customers. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts, including punitive and treble damages, which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships. We are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state and federal regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition and results of operations.

There were no material developments during the quarter in any of the legal proceedings identified in Part I, Item 3 of our 2007 Annual Report on Form 10-K, as updated in Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008.

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 further investigations and have lawsuits filed against us. In addition, increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal precedents and industry-wide regulations or practices that could adversely affect our business, financial condition and results of 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 2007 Annual Report on Form 10-K which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. As of June 30, 2008, there have been no material changes to the risk factors set forth in the above-referenced filing.

Item 5. Other Information

On June 19, 2008, Genworth announced that Mark W. Griffin, Senior Vice President—Chief Investment Officer for the Company resigned his position effective June 30, 2008 to pursue other career interests.

On July 14, 2008, Dennis R. Vigneau, Senior Vice President—Chief Financial Officer for the Company resigned his position effective the close of business August 4, 2008 to pursue other career interests. Kelly L. Groh has been named Senior Vice President—Chief Financial Officer for the Company effective August 4, 2008. Ms. Groh has been with Genworth since March 1996, where she has served in various positions within the

Finance Department. Prior to joining Genworth, Ms. Groh was employed with PriceWaterhouseCoopers LLP. Ms. Groh is a Certified Public Accountant and a member of the American Institute of CPAs.

Item 6. Exhibits


12		Statement of Ratio of Income to Fixed Charges

31.1		Certification of Pamela S. Schutz

31.2		Certification of Dennis R. Vigneau

32.1		Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Pamela S. Schutz

32.2		Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Dennis R. Vigneau

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 LIFE AND ANNUITY INSURANCE COMPANY (Registrant)
Dated: August 4, 2008

	By:	/s/ DENNIS R. VIGNEAU
		Dennis R. Vigneau Senior Vice President—Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

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Genworth Life & Annuity Insurance Inactive 10-Q2008 Q2 Quarterly report

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