Edgar Filing: GENWORTH FINANCIAL INC

Genworth Financial, Inc. Form 10-Q

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, 2006

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

For the transition period from to

Commission file number 001-32195

LOGO

Genworth Financial, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware		33-1073076
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

6620 West Broad Street Richmond, Virginia		23230
(Address of Principal Executive Offices)		(Zip Code)

(804) 281-6000

(Registrant’s Telephone Number, Including Area Code)

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

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

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


Large accelerated filer x		Accelerated filer ¨		Non-accelerated filer ¨

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

At July 27, 2006, 455,002,495 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements		3

Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2006 and 2005 (Unaudited)		3

Condensed Consolidated Statements of Financial Position as of June 30, 2006 (Unaudited) and December 31, 2005		4

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2006 and 2005 (Unaudited)		5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (Unaudited)		6

Notes to Condensed Consolidated Financial Statements (Unaudited)		7

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk		64

Item 4. Controls and Procedures		64

PART II—OTHER INFORMATION

Item 1. Legal Proceedings		65

Item 1A. Risk Factors		67

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		67

Item 4. Submission of Matters to a Vote of Security Holders		67

Item 6. Exhibits		68

Signatures		69

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in millions, except per share amounts)

(Unaudited)


	Three months ended June 30,					Six months ended June 30,
	2006			2005		2006			2005
Revenues:
Premiums	$	1,648		$	1,614	$	3,187		$	3,219
Net investment income		953			842		1,877			1,693
Net investment gains (losses)		(49	)		—		(71	)		(6	)
Policy fees and other income		202			154		386			315

Total revenues		2,754			2,610		5,379			5,221

Benefits and expenses:
Benefits and other changes in policy reserves		1,096			1,051		2,131			2,126
Interest credited		378			347		751			687
Acquisition and operating expenses, net of deferrals		521			523		996			970
Amortization of deferred acquisition costs and intangibles		207			208		381			401
Interest expense		88			69		170			141

Total benefits and expenses		2,290			2,198		4,429			4,325

Net earnings before income taxes and accounting change		464			412		950			896
Provision for income taxes		147			127		303			289

Net earnings before accounting change		317			285		647			607
Cumulative effect of accounting change, net of taxes		—			—		4			—

Net earnings	$	317		$	285	$	651		$	607

Earnings per common share:
Basic	$	0.70		$	0.61	$	1.41		$	1.27

Diluted	$	0.68		$	0.60	$	1.37		$	1.25

Weighted-average common shares outstanding:
Basic		455.8			470.4		461.3			479.6

Diluted		468.3			477.4		473.9			485.9

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Amounts in millions)


	June 30, 2006			December 31, 2005
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	52,316		$	53,937
Equity securities available-for-sale, at fair value		187			206
Commercial mortgage loans		8,203			7,558
Policy loans		1,485			1,350
Restricted investments held by securitization entities		—			685
Other invested assets		1,840			3,174

Total investments		64,031			66,910
Cash and cash equivalents		2,351			1,875
Accrued investment income		663			733
Deferred acquisition costs		6,042			5,586
Intangible assets		942			782
Goodwill		1,486			1,450
Reinsurance recoverable		17,789			18,245
Other assets		717			967
Separate account assets		9,625			9,106

Total assets	$	103,646		$	105,654

Liabilities and stockholders’ equity
Liabilities:
Future annuity and contract benefits	$	63,614		$	63,749
Liability for policy and contract claims		3,297			3,364
Unearned premiums		3,956			3,647
Other policyholder liabilities		484			507
Other liabilities		3,652			4,937
Non-recourse funding obligations		2,150			1,400
Short-term borrowings		295			152
Long-term borrowings		2,741			2,736
Senior notes underlying equity units		600			600
Mandatorily redeemable preferred stock		100			100
Deferred tax liability		922			1,386
Borrowings related to securitization entities		—			660
Separate account liabilities		9,625			9,106

Total liabilities		91,436			92,344

Commitments and contingencies
Stockholders’ equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 491 million and 404 million shares issued as of June 30, 2006 and December 31, 2005, respectively; 455 million and 385 million shares outstanding as of June 30, 2006 and December 31, 2005, respectively		—			—
Class B common stock, $0.001 par value; 700 million shares authorized; zero and 86 million shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively		—			—
Additional paid-in capital		10,713			10,671

Accumulated other comprehensive income:
Net unrealized investment gains (losses)		(312	)		760
Derivatives qualifying as hedges		212			389
Foreign currency translation and other adjustments		333			255

Total accumulated other comprehensive income		233			1,404
Retained earnings		2,317			1,735
Treasury stock, at cost (37 million and 19 million shares as of June 30, 2006 and December 31, 2005, respectively)		(1,053	)		(500	)

Total stockholders’ equity		12,210			13,310

Total liabilities and stockholders’ equity	$	103,646		$	105,654

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in millions)

(Unaudited)


	Additional paid-in capital		Accumulated other comprehensive income			Retained earnings			Treasury stock, at cost			Total stockholders’ equity
Balances as of December 31, 2004	$	10,612	$	1,608		$	646		$	—		$	12,866
Comprehensive income (loss):
Net earnings							607						607
Net unrealized gains (losses) on investment securities				519									519
Derivatives qualifying as hedges				138									138
Foreign currency translation and other adjustments				(102	)								(102	)

Total comprehensive income (loss)													1,162
Acquisition of treasury stock										(500	)		(500	)
Dividends to stockholders							(61	)					(61	)
Stock-based compensation expense and exercises		25											25
Capital contributions from GE		14											14

Balances as of June 30, 2005	$	10,651	$	2,163		$	1,192		$	(500	)	$	13,506


	Additional paid-in capital		Accumulated other comprehensive income			Retained earnings			Treasury stock, at cost			Total stockholders’ equity
Balances as of December 31, 2005	$	10,671	$	1,404		$	1,735		$	(500	)	$	13,310
Comprehensive income (loss):
Net earnings							651						651
Net unrealized gains (losses) on investment securities				(1,072	)								(1,072	)
Derivatives qualifying as hedges				(177	)								(177	)
Foreign currency translation and other adjustments				78									78

Total comprehensive income (loss)													(520	)
Acquisition of treasury stock										(553	)		(553	)
Dividends to stockholders							(69	)					(69	)
Stock-based compensation expense and exercises		38											38
Capital contributions from GE		4											4

Balances as of June 30, 2006	$	10,713	$	233		$	2,317		$	(1,053	)	$	12,210

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)


	Six months ended June 30,
	2006			2005
Cash flows from operating activities:
Net earnings	$	651		$	607
Adjustments to reconcile net earnings to net cash from operating activities:
Amortization of fixed maturity discounts and premiums		12			33
Net investment (gains) losses		71			6
Charges assessed to policyholders		(177	)		(152	)
Cumulative effect of accounting policy change		(4	)		—
Acquisition costs deferred		(607	)		(531	)
Amortization of deferred acquisition costs and intangibles		381			401
Deferred income taxes		182			218
Change in certain assets and liabilities:
Accrued investment income and other assets, net		144			117
Insurance reserves		1,476			1,183
Current tax liabilities		44			(53	)
Other liabilities and other policy-related balances		(176	)		(466	)

Net cash from operating activities		1,997			1,363

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturities		2,802			2,086
Mortgage loans		554			432
Proceeds from sales of investments:
Fixed maturities and equity securities		2,918			2,332
Purchases and originations of investments:
Fixed maturities and equity securities		(5,564	)		(4,844	)
Mortgage loans		(1,183	)		(1,249	)
Other invested assets, net		(10	)		213
Policy loans, net		(135	)		(9	)
Payments for business purchased, net of cash acquired		(134	)		—

Net cash from investing activities		(752	)		(1,039	)

Cash flows from financing activities:
Proceeds from issuance of investment contracts		3,774			3,815
Redemption and benefit payments on investment contracts		(4,827	)		(4,147	)
Short-term borrowing activity, net		143			(30	)
Proceeds from issuance of non-recourse funding obligations		750			200
Dividends paid to stockholders		(69	)		(61	)
Stock-based compensation awards exercised		20			2
Acquisition of treasury stock		(553	)		(500	)
Capital contribution received from GE		2			13

Net cash from financing activities		(760	)		(708	)
Effect of exchange rate changes on cash and cash equivalents		(9	)		(61	)

Net change in cash and cash equivalents		476			(445	)
Cash and cash equivalents at beginning of period		1,875			1,963

Cash and cash equivalents at end of period	$	2,351		$	1,518

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

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

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

We are a leading insurance company in the U.S., with an expanding international presence, serving the life and lifestyle protection, retirement income, investment and mortgage insurance needs of more than 15 million customers. We have leadership positions in key products that we expect will benefit from a number of significant demographic, governmental and market trends. We distribute our products and services through an extensive and diversified distribution network that includes financial intermediaries, independent producers and dedicated sales specialists. We conduct operations in 24 countries and have approximately 7,000 employees. We have the following four segments:

•

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

•

Our Retirement Income and Investments segment includes fixed annuities, individual and group variable annuities, single premium immediate annuities, variable life insurance, asset management and specialized products, including guaranteed investment contracts (“GICs”), funding agreements, funding agreements backing notes (“FABNs”) and structured settlements.

•

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

•

Our Corporate and Other segment includes debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, and the results of a small, non-core business that is managed outside our operating segments.

On March 8, 2006, GEFAHI completed an offering (“Secondary Offering”) of 71.2 million shares of our Class B Common Stock. The 71.2 million shares were automatically converted to Class A Common Stock upon the sale of these shares to the public. We did not receive any proceeds in the Secondary Offering. Concurrently with the Secondary Offering, we repurchased 15.0 million shares of Class B Common Stock from our majority stockholder at a price of $31.93125 per share (the net proceeds per share received by the selling stockholder from the

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

underwriters), which is recorded at cost as treasury stock in the unaudited condensed consolidated statement of financial position. As a result of these transactions, GEFAHI no longer owns any of our outstanding common stock.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and rules and regulations of the United States Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. These condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary by management to present a fair statement of the financial position, results of operations, and cash flow for the periods presented. The results reported in these 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 financial statements and related notes contained in our 2005 Annual Report on Form 10-K.

(2) Accounting Pronouncements

Recently adopted

On January 1, 2006, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment, an amendment of SFAS No. 123, Accounting for Stock-Based Compensation. We adopted SFAS No. 123R under the modified prospective transition method. The statement requires companies to recognize the grant-date fair value of options and other equity-based awards within the income statement over the respective vesting period of the awards. We adopted SFAS No. 123 effective January 1, 2002 and, as permitted, we determined a grant date fair value using a Black-Scholes model (“Black-Scholes Model”) and recognized the related compensation expense through the income statement for all equity awards issued subsequent to January 1, 2002. As a result of the adoption of SFAS No. 123R, we will continue to recognize the remaining portion of the requisite service under previously granted unvested awards including those awards granted prior to January 1, 2002. Prior to the adoption of SFAS No. 123R, we adjusted compensation cost related to forfeiture of awards when the actual forfeiture occurred. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and requires companies which previously accounted for forfeitures on an occurrence basis to include in income of the period of adoption a cumulative effect of a change in accounting principle for the adjustment to reflect estimated forfeitures for prior periods. On January 1, 2006, we recognized an increase to net earnings of $4 million related to the cumulative effect of a change in accounting principle for the adoption of SFAS No. 123R. See Note 6 for additional information.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

pertains to a beneficial interest other than another derivative financial interest. Adoption of SFAS No. 155 did not have a material impact on our condensed consolidated financial statements.

Not yet adopted

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

In July 2006, FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes was issued. This guidance clarifies what criteria must be met prior to recognition of the financial statement benefit of a position taken in a tax return. Additionally, it applies to the recognition and measurement of income tax uncertainties resulting from a purchase business combination. This guidance is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact FIN No. 48 will have on our consolidated results of operations and financial position.

(3) Earnings per Common Share

Basic and diluted earnings per common share are calculated by dividing net earnings by the weighted average basic common shares outstanding and by the weighted average diluted common shares outstanding for the periods presented:


	Three months ended June 30,				Six months ended June 30,
(Amounts in millions except for per share data)	2006		2005		2006		2005
Basic earnings per common share:
Net earnings before accounting change	$	0.70	$	0.61	$	1.40	$	1.27
Cumulative effect of accounting change, net of taxes		—		—		0.01		—

Basic earnings per common share	$	0.70	$	0.61	$	1.41	$	1.27

Diluted earnings per common share:
Net earnings before accounting change	$	0.68	$	0.60	$	1.37	$	1.25
Cumulative effect of accounting change, net of taxes		—		—		0.01		—

Diluted earnings per common share	$	0.68	$	0.60	$	1.37	$	1.25

Weighted-average shares used in basic earnings per common share calculations		455.8		470.4		461.3		479.6
Dilutive securities:
Stock purchase contracts underlying equity units		7.5		4.4		7.5		4.0
Stock options and stock appreciation rights		4.5		2.2		4.6		1.9
Restricted stock units		0.5		0.4		0.5		0.4

Weighted-average shares used in diluted earnings per common share calculations		468.3		477.4		473.9		485.9

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(4) Investments and Derivative Instruments

The following table sets forth information about our net investment income for the components of our investment portfolio for the periods presented:


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2006			2005			2006			2005
Fixed maturities—taxable	$	731		$	665		$	1,450		$	1,334
Fixed maturities—non-taxable		31			32			62			65
Commercial mortgage loans		138			98			259			196
Equity securities		7			6			14			12
Other investments		12			10			23			24
Policy loans		32			27			62			53
Restricted investments held by securitization entities		—			13			7			27
Cash, cash equivalents and short-term investments		20			7			37			15

Gross investment income before expenses and fees		971			858			1,914			1,726
Expenses and fees		(18	)		(16	)		(37	)		(33	)

Net investment income	$	953		$	842		$	1,877		$	1,693

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


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2006			2005			2006			2005
Available-for-sale securities
Realized gains on sale	$	8		$	12		$	30		$	51
Realized losses on sale		(50	)		(9	)		(76	)		(20	)
Loss on derecognition of securitization entities		—			—			(17	)		—
Impairments		(4	)		(3	)		(5	)		(37	)
Net unrealized gains (losses) on trading securities		(1	)		—			(1	)		—
Derivative instruments		(2	)		—			(2	)		—

Net investment gains (losses)	$	(49	)	$	—		$	(71	)	$	(6	)

Derivative instruments primarily consist of changes in fair value on the 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. Effective April 1, 2006, we began classifying changes in fair value of these derivative items as net investment gains (losses). These items were previously included as a component of net investment income, interest credited and benefits and other changes in policy reserves. The amount of these derivative items in prior periods that were included in the aforementioned categories was not material.

For the three months ended June 30, 2006 and 2005, we recognized impairments of $4 million and $3 million, respectively, and for the six months ended June 30, 2006 and 2005, we recognized impairments of $5 million and $37 million, respectively. The aggregate fair value of securities sold at a loss during the three months

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

ended June 30, 2006 and 2005, was $1,227 million and $481 million, respectively, which was approximately 96% and 98% of book value, respectively. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2006 and 2005, was $2,068 million and $1,158 million, respectively, which was approximately 96% and 99% of book value, respectively. The loss on sales of securities in the three and six months ended June 30, 2006 was primarily driven by the higher interest rate environment.

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


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Fixed maturities:
U.S. government, agencies and government sponsored entities	$	695	$	10	$	(17	)	$	688
Tax exempt		2,763		56		(16	)		2,803
Government—non U.S.		1,833		33		(24	)		1,842
U.S. corporate		24,816		357		(775	)		24,398
Corporate—non U.S.		9,716		115		(270	)		9,561
Mortgage and asset-backed		13,200		96		(272	)		13,024

Total fixed maturities		53,023		667		(1,374	)		52,316
Equity securities		161		29		(3	)		187

Total available-for-sale securities	$	53,184	$	696	$	(1,377	)	$	52,503

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


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains		Gross unrealized losses			Estimated fair value
Fixed maturities:
U.S. government, agencies and government sponsored entities	$	777	$	32	$	(4	)	$	805
Tax exempt		2,797		97		(4	)		2,890
Government—non U.S.		1,736		74		(4	)		1,806
U.S. corporate		25,378		975		(231	)		26,122
Corporate—non U.S.		9,168		306		(84	)		9,390
Mortgage and asset-backed		12,926		140		(142	)		12,924

Total fixed maturities		52,782		1,624		(469	)		53,937
Equity securities		173		36		(3	)		206

Total available-for-sale securities	$	52,955	$	1,660	$	(472	)	$	54,143

Included in other invested assets are certain securities that are designated as trading and, accordingly, are held at fair value with changes in fair value included in net investment gains (losses) in the condensed consolidated statement of earnings. As of June 30, 2006 and December 31, 2005, the fair value of the trading portfolio was $31 million and $15 million, respectively.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table presents the gross unrealized losses and estimated fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of June 30, 2006:


	Less Than 12 Months						12 Months or more
(Dollar amounts in millions)	Estimated fair value		Gross unrealized losses			# of securities	Estimated fair value		Gross unrealized losses			# of securities
Description of Securities
Fixed maturities:
U.S. government, agencies and government sponsored entities	$	325	$	(14	)	82	$	86	$	(3	)	17
Tax exempt		868		(12	)	204		146		(4	)	49
Government—non U.S.		1,017		(23	)	186		29		(1	)	8
U.S. corporate		12,575		(618	)	1,184		2,670		(157	)	323
Corporate—non U.S.		5,584		(203	)	678		1,101		(67	)	115
Mortgage and asset backed		6,129		(193	)	680		1,848		(79	)	296

Subtotal, fixed maturities		26,498		(1,063	)	3,014		5,880		(311	)	808
Equity securities		—		—		—		27		(3	)	13

Total temporarily impaired securities	$	26,498	$	(1,063	)	3,014	$	5,907	$	(314	)	821


% Below cost—fixed maturities:
<20% Below cost	$	26,466	$	(1,050	)	3,008	$	5,820	$	(290	)	794
20-50% Below cost		31		(11	)	3		59		(20	)	13
>50% Below cost		1		(2	)	3		1		(1	)	1

Total fixed maturities		26,498		(1,063	)	3,014		5,880		(311	)	808


% Below cost—equity securities:
<20% Below cost		—		—		—		27		(3	)	13
20-50% Below cost		—		—		—		—		—		—
>50% Below cost		—		—		—		—		—		—

Total equity securities		—		—		—		27		(3	)	13

Total temporarily impaired securities	$	26,498	$	(1,063	)	3,014	$	5,907	$	(314	)	821


Investment grade	$	25,148	$	(1,006	)	2,716	$	5,414	$	(274	)	721
Below investment grade		1,321		(56	)	295		482		(38	)	90
Not Rated—Fixed maturities		29		(1	)	3		—		—		—
Not Rated—Equities		—		—		—		11		(2	)	10

Total temporarily impaired securities	$	26,498	$	(1,063	)	3,014	$	5,907	$	(314	)	821

The investment securities in an unrealized loss position as of June 30, 2006 consisted of 3,835 securities accounting for unrealized losses of $1.4 billion. Of these unrealized losses 93% were investment grade (rated AAA through BBB-) and 98% were less than 20% below cost. The amount of the unrealized loss on these securities was primarily attributable to increases in interest rates.

Of the investment securities in an unrealized loss position for twelve months or more as of June 30, 2006, 14 securities were 20% or more below cost, including 8 securities which were also below investment grade

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(rated BB+ and below). These 8 securities accounted for unrealized losses of $8 million. These securities consisted of four issuers primarily in the automotive and airline industries and were current on all terms. All airline securities were collateralized by commercial jet aircraft associated with one domestic airline. We believe these airline security holdings were in a temporary loss position as a result of ongoing negative market reaction to difficulties in the commercial airline industry. The unrealized loss on the automotive investments was primarily caused by deteriorating market share and legacy issues. The automotive issuer continues to maintain significant liquidity relative to its maturity and we currently expect to collect full principal and interest.

As of June 30, 2006, we expected these investments to continue to perform in accordance with their original contractual terms and we generally have the ability and intent to hold these investment securities until the recovery of the fair value up to the cost of the investment, which may be maturity. Accordingly, we do not consider these investments to be other-than-temporarily impaired at June 30, 2006. However, from time to time, we may sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield enhancement, asset-liability management and liquidity requirements.

The following table sets forth our positions in derivative instruments and the estimated fair values as of the dates indicated. The fair value of derivative instruments, including financial futures, interest rate and foreign currency swaps, foreign currency forward contracts and equity index options, are based upon quotations obtained from dealers or other reliable sources.


	June 30, 2006				December 31, 2005
(Amounts in millions)	Notional value		Estimated fair value		Notional value		Estimated fair value
Interest rate swaps	$	11,795	$	222	$	7,894	$	508
Foreign currency swaps		533		15		533		4
Equity index options		223		20		265		21
Financial futures		9		—		27		—

Total	$	12,560	$	257	$	8,719	$	533

As of June 30, 2006 and December 31, 2005, the fair value of derivatives in a gain position and recorded in other invested assets was $286 million and $559 million, respectively, and the fair value of derivatives in a loss position and recorded in other liabilities was $29 million and $26 million, respectively.

(5) Acquisitions

On May 1, 2006, we completed the acquisition of Continental Life Insurance Company of Brentwood, Tennessee (“Continental Life”), for $145 million, plus contingent consideration of $5 million per year for two years based on attaining certain sales production thresholds. Continental Life’s business provides primarily Medicare supplement insurance and is a part of our Protection segment. This acquisition was accounted for as a purchase business combination. The excess purchase price over the estimated fair value of the net assets acquired of $29 million has been recorded as goodwill. In addition, $93 million of present value of future profits was recorded in connection with this transaction. The results of operations of Continental Life have been included in our consolidated results beginning May 1, 2006. We have reflected our initial allocation of the purchase price based on estimated fair value according to preliminary valuations. Such estimated values may change as additional information is obtained and the valuation is finalized.

On June 29, 2006, we agreed to acquire AssetMark Investment Services Inc. (“AssetMark”) of Pleasant Hill, California, for approximately $230 million. AssetMark is an investment management and adviser company with

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

more than $8 billion in third-party assets under management. Under terms of the agreement, we may pay additional performance-based payments of up to $100 million over three to five years. This transaction is expected to close in the third or fourth quarter of 2006.

On July 3, 2006, we completed the acquisition of Vero Lenders Mortgage Insurance Limited (“Vero LMI”), a subsidiary of Vero Insurance Limited, which is wholly owned by Promina Group Limited of Sydney, Australia, for approximately $80 million, net of a post-closing dividend. Vero LMI consists solely of a run-off mortgage insurance block. This transaction will be recorded in the third quarter of 2006.

(6) Stock-Based Compensation

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

We have recorded stock-based compensation expense related to the estimated value of the RSUs, DSUs, SARs and stock options for the periods presented:


	Three months ended June 30,				Six months ended June 30,
(Amounts in millions)	2006		2005		2006		2005
Stock-based compensation	$	12	$	12	$	24	$	22

For awards issued prior to January 1, 2006, stock-based compensation expense is recognized on a graded vesting attribution method over the awards’ respective vesting schedule. For awards issued after January 1, 2006, stock-based compensation expense is recognized evenly on a straight-line attribution method over the awards’ respective vesting period.

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

The following table contains the stock option weighted-average grant-date fair value information for June 30, 2006 and 2005. Fair value is estimated using the Black-Scholes Model.


	June 30, 2006			June 30, 2005
Estimated fair value per option	$	11.50		$	9.63
Valuation Assumptions:
Expected term (years)		6			6
Expected volatility		28.0	%		33.3	%
Expected dividend yield		0.9	%		1.1	%
Risk-free interest rate		5.0	%		4.0	%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

For the three months ended June 30, 2006 and 2005, we granted 24,000 and 25,839 stock options with exercise prices ranging from $32.45 to $33.46, and $27.78 to $29.90, respectively, which equaled the closing market prices on the date of grant and have an exercise term of 10 years. The stock options will vest in 20% annual increments commencing on the first anniversary of the date of grant. Additionally, during the three months ended June 30, 2006 and 2005 we issued 6,000 and 20,122 RSUs with restriction periods ranging from 3 to 5 years and a fair value of $32.45, and $27.96, respectively, which is measured at the market price of a share of our nonrestricted stock on the grant date. There were no SARs granted during these periods.

For the six months ended June 30, 2006 and 2005, we granted 24,000 and 111,663 stock options with exercise prices ranging from $32.45 to $33.46 and $26.68 to $29.90, respectively, which equaled the closing market prices on the date of grant and have an exercise term of 10 years. The stock options will vest in 20% annual increments commencing on the first anniversary of the date of grant. Additionally, during the six months ended June 30, 2006 and 2005 we issued 6,000 and 326,964 RSUs with restriction periods ranging from 3 to 5 years and a fair value of $32.45 and $27.07, respectively, which is measured at the market price of a share of our nonrestricted stock on the grant date. There were no SARs granted during these periods. There were 14,308,206 and 14,547,263 stock options, 1,829,149 and 1,397,239 RSUs and 6,393,713 and 6,255,213 SARs outstanding as of June 30, 2006 and 2005, respectively.

A summary of stock option activity as of June 30, 2006, and changes during the six months then ended is presented below:


	Shares subject to option		Weighted average exercise price
Balance as of January 1, 2006	15,770,646		$	21.93
Granted	24,000		$	32.79
Exercised	(1,127,876	)	$	19.47
Forfeited	(358,564	)	$	21.34
Expired	—

Balance as of June 30, 2006	14,308,206		$	22.16

Exercisable as of June 30, 2006	4,688,323		$	23.03

A summary of the status of our other equity-based awards as of June 30, 2006 and the changes during the six months then ended is presented below:


	Restricted stock units (RSUs)				Deferred stock units (DSUs)			Stock appreciation rights (SARs)
	Number of awards		Weighted average grant date fair value		Number of awards	Weighted average fair value		Number of awards		Weighted average grant date fair value
Balance as of January 1, 2006	1,879,761		$	24.74	16,868	$	32.12	6,883,713		$	7.02
Granted	6,000		$	32.45	8,148	$	31.90	—
Exercised	(67	)	$	32.10	—			(240,000	)	$	6.65
Terminated	(56,545	)	$	27.10	—			(250,000	)	$	6.65

Balance as of June 30, 2006	1,829,149		$	24.70	25,016	$	31.88	6,393,713		$	7.01

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

As of June 30, 2006, there was $71 million of total unrecognized stock-based compensation expense related to non-vested awards not yet recognized. This expense is expected to be recognized over a weighted average period of two years.

Cash received from stock options exercised for the six months ending June 30, 2006, was $20 million. New shares were issued to settle all exercised awards. The actual tax benefit realized for the tax deductions from stock option exercises was $6 million both for the three and six months ended June 30, 2006, respectively.

The following table summarizes information about stock options outstanding as of June 30, 2006:


	Outstanding				Exercisable
Exercise price range	Shares in thousands	Average life⁽¹⁾	Average exercise price		Shares in thousands	Average exercise price
$14.11 – $18.51	1,489,570	6.20	$	17.28	734,395	$	17.28
$19.45 – $22.67	9,210,584	7.67		19.77	2,131,347		20.01
$23.20 – $27.95	1,558,010	4.60		26.99	1,456,277		27.08
$28.00 – $36.62	2,049,081	8.21		32.75	365,343		36.00
$37.89 – $39.60	961	5.07		38.77	961		38.77

	14,308,206	7.26	$	22.16	4,688,323	$	23.03

⁽¹⁾	Average contractual life remaining in years

(7) Commitments and Contingencies

(a) Litigation

We face a significant risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts, including punitive and treble damages, which may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations.

(b) Commitments

As of June 30, 2006, we were committed to fund $318 million in U.S. commercial mortgage loans and $168 million in limited partnerships.

During the second quarter of 2006, we agreed to acquire Vero LMI and AssetMark, as further described in note 5 of these condensed consolidated financial statements.

(8) Borrowings

Commercial Paper Facility

In March 2006, we issued $229 million of commercial paper and we used the proceeds from this issuance to finance a stock repurchase from GEFAHI concurrently with its secondary offering. The notes under the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

commercial paper program are offered pursuant to an exemption from registration under the Securities Act of 1933 and may have a maturity of up to 364 days from the date of issue. During the second quarter, we reduced the outstanding balance of our commercial paper by $85 million. As of June 30, 2006 and December 31, 2005, the weighted average interest rate on commercial paper outstanding was 5.17% and 3.29%, respectively, and the weighted average maturity was 30 and 53 days, respectively.

Revolving Credit Facilities

On May 25, 2006 we entered into a $1.0 billion five-year revolving credit facility, which matures in May 2011, replacing our $1.0 billion five-year revolving credit facility, which was scheduled to mature in May 2009. We also have a $1.0 billion revolving credit facility that matures in April 2010. These facilities bear variable interest rates based on a one-month LIBOR plus a margin. As of June 30, 2006, we utilized $170 million of the commitment under these facilities for the issuance of a letter of credit for the benefit of one of our Mortgage Insurance subsidiaries.

Non-recourse Funding Obligations

On January 20, 2006, River Lake Insurance Company III (“River Lake III”), a special purpose financial captive insurance company wholly owned by First Colony Life Insurance Company (“First Colony”), itself an indirect wholly owned subsidiary of Genworth, issued $750 million in aggregate principal amount of floating rate surplus notes due 2036 (the “Notes”). River Lake III has received regulatory approval to issue additional series of its floating rate surplus notes up to an aggregate amount of $1.2 billion (including the Notes), but is under no obligation to do so.

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

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

As of June 30, 2006 and December 31, 2005, the weighted average interest rate on our non-recourse funding obligations was 5.34% and 4.50%, respectively. The non-recourse funding obligations bear variable interest rates, carrying value approximates fair value as of June 30, 2006.

(9) Securitization Entities

GE Capital, our former indirect majority stockholder, provides credit and liquidity support to a funding conduit it sponsored, which exposes it to a majority of the risks and rewards of the conduit’s activities and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

therefore makes GE Capital the primary beneficiary of the funding conduit. Upon adoption of FIN No. 46, Consolidation of Variable Interest Entities, GE Capital was required to consolidate the funding conduit because of this financial support. As a result, assets and liabilities of certain previously off-balance sheet securitization entities, for which we were the transferor, were required to be included in our condensed consolidated financial statements because the funding conduit no longer qualified as a third-party. Because these securitization entities lost their qualifying status, we were required to recognize $1.2 billion of securitized assets and $1.1 billion of associated liabilities in our condensed consolidated statement of financial position in July 2003. The assets and liabilities associated with these securitization entities have been reported in the corresponding financial statement captions in our condensed consolidated statement of financial position, and the assets are noted as restricted due to the lack of legal control we have over them. We apply the same accounting policies to these restricted assets and liabilities as we do to our unrestricted assets and liabilities.

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

(10) Operating Segment Information

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

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

Prior to 2006, all net investment gains (losses) were recorded in the Corporate and Other segment and were not reflected in the results of any of our other segments.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

We use the same accounting policies and procedures to measure segment net operating earnings and assets as our consolidated net earnings and assets. Segment net operating earnings represent the basis on which the performance of our business is assessed by management. Segment net operating earnings exclude after-tax net investment gains (losses) (which can fluctuate significantly from period to period), and other adjustments, changes in accounting principles and infrequent or unusual non-operating items. There were no non-recurring, infrequent or unusual items excluded from net operating earnings for the periods presented.

The following is a summary of revenues, segment net operating earnings and reconciliation to total company net earnings for the periods presented:


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2006			2005			2006			2005
Revenues
Protection	$	1,639		$	1,531		$	3,191		$	3,073
Retirement Income and Investments		726			735			1,439			1,470
Mortgage Insurance		364			300			699			594
Corporate and Other		25			44			50			84

Total revenues	$	2,754		$	2,610		$	5,379		$	5,221

Segment net operating earnings (losses)
Protection	$	151		$	133		$	300		$	272
Retirement Income and Investments		57			60			118			120
Mortgage Insurance		162			121			311			262
Corporate and Other		(31	)		(29	)		(45	)		(43	)

Total segment net operating earnings		339			285			684			611
Net investment gains (losses), net of taxes and other adjustments		(22	)		—			(37	)		(4	)

Net earnings before accounting change		317			285			647			607
Cumulative effect of accounting change, net of taxes		—			—			4			—

Net earnings	$	317		$	285		$	651		$	607

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


(Amounts in millions)	June 30, 2006		December 31, 2005
Assets
Protection	$	35,598	$	33,945
Retirement Income and Investments		57,749		58,281
Mortgage Insurance		7,580		7,118
Corporate and Other		2,719		6,310

Total assets	$	103,646	$	105,654

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

•

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

•

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

•

Risks relating to our separation from GE, including the loss of benefits associated with GE’s brand and reputation, our need to establish the new Genworth brand identity quickly and effectively, the possibility that we will not be able to replace services previously provided by GE on terms that are at least as favorable, the possibility that in certain circumstances we will be obligated to make payments to GE

under our tax matters agreement even if our corresponding tax savings either are delayed or never materialize, the possibility that in the event of a change in control of our company we would have insufficient funds to meet accelerated obligations under the tax matters agreement, the possibility that certain service agreements with GE are not extended on favorable terms, and the significance of our distribution relationship with GE in our payment protection insurance business.

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

Overview

Our business

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

•

Protection. We offer U.S. customers life, long-term care and Medicare supplement insurance and, primarily for companies with fewer than 1,000 employees, group life and health insurance. Through our European operations, we offer payment protection insurance, which helps consumers meet their payment obligations in the event of illness, involuntary unemployment, disability or death. Effective January 1, 2006, GE Seguros (“Seguros”), a small Mexican-domiciled multi-line insurer, previously included in our Corporate and Other segment, is being managed within our Protection segment and whose results are now included as part of the payment protection insurance business. For the three months ended June 30, 2006 and 2005, our Protection segment had segment net operating earnings of $151 million and $133 million, respectively. For the six months ended June 30, 2006 and 2005, our Protection segment had segment net operating earnings of $300 million and $272 million, respectively.

•

Retirement Income and Investments. We offer U.S. customers fixed annuities, individual and group variable annuities, single premium immediate annuities, variable life insurance, asset management and specialized products, including guaranteed investment contracts (“GICs”), funding agreements, funding agreements backing notes (“FABNs”) and structured settlements. For the three months ended June 30, 2006 and 2005, our Retirement Income and Investments segment had segment net operating earnings of $57 million and $60 million, respectively. For the six months ended June 30, 2006 and 2005, our Retirement Income and Investments segment had segment net operating earnings of $118 million and $120 million, respectively.

•

Mortgage Insurance. In the U.S., Canada, Australia, Europe, New Zealand, Mexico and Japan, we offer mortgage insurance products that facilitate homeownership by enabling borrowers to buy homes with low-down-payment mortgages. For the three months ended June 30, 2006 and 2005, our Mortgage Insurance segment had segment net operating earnings of $162 million and $121 million, respectively. For the six months ended June 30, 2006 and 2005, our Mortgage Insurance segment had segment net operating earnings of $311 million and $262 million, respectively.

We also have a Corporate and Other segment, which consists primarily of unallocated corporate income and expenses, the results of a small, non-core business that is managed outside our operating segments, and most of our interest and other financing expenses. For the three months ended June 30, 2006 and 2005, our Corporate and Other segment had segment net operating losses of $31 million and $29 million, respectively. For the six months ended June 30, 2006 and 2005, our Corporate and Other segment had segment net operating losses of $45 million and $43 million, respectively.

Our financial information

The financial information presented herein has been derived from our condensed consolidated financial statements.

Revenues and expenses

Our revenues consist primarily of the following:

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

net premiums earned on mortgage insurance policies;

•

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

•

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

•

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

•

net premiums, policy fees and other income from a small non-core insurance business in this segment; and

•

unallocated net investment income and net investment gains (losses).

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

Prior to 2006, all net investment gains (losses) were recorded in the Corporate and Other segment and were not reflected in the results of any of our other segments.

Our expenses consist primarily of the following:

•

benefits provided to policyholders and contractholders and changes in reserves;

•

interest credited on general account balances;

•

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

•

amortization of deferred policy acquisition costs and other intangible assets;

•

interest and other financing expenses; and

•

income taxes.

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

Critical accounting policies

The accounting policies discussed in this section are those that we consider to be particularly critical to an understanding of our condensed consolidated financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. These policies relate to valuation of investment securities and impairment of investment securities, deferred acquisition costs (“DAC”), present value of future profits (“PVFP”), valuation of goodwill, reserves, unearned premiums, derivatives, and contingent liabilities. For a discussion of each of these policies, please see the discussion entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Critical Accounting Policies” contained in our 2005 Annual Report on Form 10-K. For all of these policies, we caution that future events rarely develop exactly as forecast, and our management’s best estimates may require adjustment.

Recent business trends and conditions

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

Life insurance. Results in our life insurance business are impacted by sales, mortality, persistency, investment yields, and the effective use of capital. Additionally, sales of new products are dependent on competitive product features and pricing, distribution expansion and penetration, and consistent customer service. Regulation XXX requires insurers to establish additional statutory reserves for term and universal life insurance policies with long-term premium guarantees, which increases the capital required to write these products. For term life insurance, we have implemented capital management actions that improve our new business returns and have enabled us to decrease our premium rates. Recently, several competitors have executed similar capital management actions and lowered their term prices, which could make the market more competitive and affect sales levels over time. In addition, an October 2005 revision to actuarial guidelines for Regulation XXX, effective for universal life policies issued since July 1, 2005, may increase the reserves of certain companies on a statutory basis. Reserves for our universal life policies already meet the requirements of this guideline, so we expect that it will not have an impact on our capital requirements. However, we continue to work towards the execution of a capital management strategy for our universal life business which could result in the issuance of additional non-recourse funding obligations.

Long-term care insurance. Results of our long-term care insurance business are influenced by morbidity, persistency, investment yields, new product sales, expenses and reinsurance. Industry-wide first-year annualized premiums of individual long-term care insurance decreased approximately 10% for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 according to the most recently published data by LIMRA International. Our sales growth in a challenging market reflects the breadth of our distribution and progress across multiple growth initiatives with an emphasis on broadening our product offerings. However, slower than anticipated sales growth, the continued low interest rate environment and the impact of lower termination rates on older issued policies, some with expiring reinsurance coverage, could result in lower net operating earnings. In response to these trends, we will continue to pursue multiple growth initiatives, continue investing in claims process improvements, execute investment strategies and, if appropriate, consider rate increases to improve loss ratios. In addition, we recently completed the acquisition of Continental Life Insurance Company of Brentwood, Tennessee, a provider of Medicare supplement insurance, for approximately

$145 million. This acquisition enhances our presence in the senior supplemental insurance market by more than doubling our existing annualized premiums for this product and giving us access to approximately 4,200 independent agents.

Payment protection insurance. Growth of our payment protection insurance business is dependent on economic conditions including consumer lending levels, client account penetration and the number of countries and markets we enter. Additionally, the types and mix of our products will vary based on regulatory and consumer acceptance of our products. Our payment protection insurance business continues to show strong growth from increased penetration of existing relationships, and the addition of new distribution relationships in existing new countries and across our markets.

Retirement products. Retirement Income and Investments segment results are affected by investment performance, net interest spreads, equity market fluctuations and the impact of new product sales and lapses. In addition, our competitive position within many of our distribution channels, as well as our ability to retain business, depends significantly upon product features, including current and minimum crediting rates on spread-based products relative to our competitors, surrender charge periods in fixed annuities as well as guaranteed features we offer in variable products. We continually evaluate our competitive position based upon each of those features, and we make adjustments as appropriate to meet our target return thresholds. The attractiveness of certain fixed annuities has declined as a result of continued low long-term interest rates, a relatively flat yield curve and short term investment alternatives, such as certificates of deposit. These trends are having an adverse impact on both sales and retention of fixed annuities. In recent quarters, we have experienced improved spreads in fixed annuities primarily due to run-off of and crediting rate resets of historically higher crediting rate business. We expect this trend to continue.

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

We offer asset management products to individual investors and back office support for independent broker dealers. The industry is witnessing rapid increases of independent broker dealers as registered representatives are leaving large national firms to form their own small firms. These new small firms need back office support and access to technology. Further, individuals are increasingly transferring their money to managed products from mutual funds. We expect these trends to continue and possibly accelerate in the future. As a result of these trends, we are expanding our presence in this market and have announced the acquisition of AssetMark Investment Services, Inc., a leading provider of open architecture asset management solutions to independent financial advisors, with more than $8 billion in assets under management. Our products consist of separately managed accounts and managed mutual fund accounts. We receive a management fee based upon the amount of assets under management. The results of our asset management business are a function of net flows and investment performance of assets under management, which are influenced by the relative performance of our product’s underlying investments and the overall equity market environment.

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

In the U.S., the demand for flow private mortgage insurance declined in the first quarter of 2006 as compared to the same period in 2005, according to data published by Inside Mortgage Finance. We believe this was driven principally by the significant use of simultaneous second mortgages as an alternative to private mortgage insurance, the origination of mortgages that did not meet the eligibility requirements of Fannie Mae and Freddie Mac and mortgages that were securitized in mortgage-backed securities that did not use private mortgage insurance.

In the U.S., the bulk mortgage insurance market is increasing as a percentage of the overall primary mortgage insurance market, which we believe is driven in part, by an increase in non-prime mortgage-backed security issuances. We have increased our participation in the bulk market and continue to evaluate additional opportunities this market presents.

The recent rise in interest rates and lower home price appreciation in the U.S. have contributed to rising persistency rates. Our U.S. flow persistency was 72% and 65% for the six months ended June 30, 2006 and June 30, 2005, respectively. We believe that sustained higher interest rates and increased persistency will lead to stable to growing levels of insurance in-force. Primary insurance in-force increased from $100 billion as of March 31, 2006 to $102 billion as of June 30, 2006. This increase in primary insurance-in-force reflected a sequential increase in flow insurance in-force for the first time in nearly five years.

Our international mortgage insurance business has continued to expand with favorable operating results. We expect that the growth of our established international mortgage insurance business and our entry into new international markets will continue to contribute an increasing portion of this segment’s total revenues and profits.

The Canadian government expanded its authority to guarantee mortgage insurance to cover any approved mortgage insurer in addition to us. The overall cap on guaranteed policies was also increased to CDN $200 billion and the government was given latitude to change the cap without further legislation. These changes facilitate our ongoing ability to offer mortgage insurance products under the guarantee but may also enable potential new competitors to do the same.

As a result of the significant U.S. refinancing activity since 2002 and the expansion of our international business in recent years, as of June 30, 2006, approximately 66% of our U.S. risk in-force and 67% of our international risk in-force have not yet reached its anticipated highest claim frequency years, which are generally between the third and seventh year of the loan. We expect our loss experience on these loans will increase as these books of business continue to mature.

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

Results of Operations

“Net operating earnings” is a non-GAAP financial measure that we define as net earnings, excluding after-tax net investment gains (losses) (which can fluctuate significantly from period to period), and other adjustments, changes in accounting principles and infrequent or unusual non-operating items. There were no non-recurring, infrequent or unusual items excluded from net operating earnings in the three and six months ended June 30, 2006 and 2005.

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

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

The following table provides a reconciliation of net earnings to “net operating earnings” (as defined above) for the three months ended June 30, 2006 and 2005:


	Three months ended June 30,					Increase (decrease) and percentage change
(Amounts in millions, except per share amounts)	2006			2005		2006 vs. 2005
Revenues:
Premiums	$	1,648		$	1,614	$	34		2	%
Net investment income		953			842		111		13	%
Net investment gains (losses)		(49	)		—		(49	)	NM	⁽¹⁾
Policy fees and other income		202			154		48		31	%

Total revenues		2,754			2,610		144		6	%

Benefits and expenses:
Benefits and other changes in policy reserves		1,096			1,051		45		4	%
Interest credited		378			347		31		9	%
Acquisition and operating expenses, net of deferrals		521			523		(2	)	—	%
Amortization of deferred acquisition costs and intangibles		207			208		(1	)	—	%
Interest expense		88			69		19		28	%

Total benefits and expenses		2,290			2,198		92		4	%

Net earnings before income taxes and accounting change		464			412		52		13	%
Provision for income taxes		147			127		20		16	%

Net earnings before accounting change		317			285		32		11	%
Cumulative effect of accounting change, net of taxes		—			—		—		—	%

Net earnings		317			285		32		11	%
Adjustments to net earnings:
Net investment losses (gains), net of taxes and other adjustments		22			—		22		NM	⁽¹⁾
Cumulative effect of accounting change, net of taxes		—			—		—		—	%

Net operating earnings	$	339		$	285	$	54		19	%

Net earnings per common share:
Basic	$	0.70		$	0.61

Diluted	$	0.68		$	0.60

Net earnings before accounting change per common share:
Basic	$	0.70		$	0.61

Diluted	$	0.68		$	0.60

Net operating earnings per common share:
Basic	$	0.74		$	0.61

Diluted	$	0.72		$	0.60

Weighted-average common shares outstanding:
Basic		455.8			470.4

Diluted		468.3			477.4

⁽¹⁾	Not meaningful

Premiums. Premiums consist primarily of premiums earned on insurance products for individual life, long-term care, Medicare supplement, group life and health, payment protection, single premium immediate annuities and structured settlements with life contingencies and mortgage insurance policies. Premiums increased $47 million in our Mortgage Insurance segment reflecting growth and aging of our international mortgage insurance in-force block. Additionally, our Protection segment increased $33 million primarily due to growth of our term life insurance in-force block and $27 million in our long-term care business from the Continental Life acquisition. Partially offsetting these increases in the Protection segment was a $30 million decrease from our payment protection business as a result of a decrease in the U.K. market and changes in foreign exchange rates. Our Retirement Income and Investments segment decreased $41 million attributable to a reduction in sales of our life-contingent structured settlement annuities.

Net investment income. Net investment income increased primarily as a result of an increase in average invested assets attributable to assets purchased using proceeds from our issuance of non-recourse funding obligations supporting certain term life insurance policies, growth of our long-term care in-force block and new production in institutional products. The increase in net investment income was also due to an increase in weighted average investment yields to 5.8% for the three months ended June 30, 2006 from 5.4% for the three months ended June 30, 2005. The increase in weighted average investment yields was primarily attributable to increased yields on floating rate investments. Net investment income for the three months ended June 30, 2006 included $35 million of investment income from a reduction in commercial mortgage loan loss reserves, bond calls, mortgage loan prepayments and limited partnership investments as compared to $9 million in investment income from bond calls, mortgage loan prepayments and limited partnership investments in the prior year.

Net investment gains (losses). For the three months ended June 30, 2006, gross investment gains were $8 million and gross investment (losses) were $57 million, including $4 million of impairments. Gross investment gains for the three months ended June 30, 2006 were attributable to $8 million in gains on the sale of available-for-sale fixed maturities and equity securities. Gross investment losses include $50 million of interest rate related losses as a result of the disposition of available-for-sale securities primarily from portfolio repositioning activities, a $4 million impairment charge related to an equity security and $2 million in connection with terminations and losses in fair value of non-qualified derivatives. Net investment losses on trading securities were $1 million for the three months ended June 30, 2006. For the three months ended June 30, 2005, gross investment gains on available-for-sale securities were $12 million and gross investment losses on available-for-sale securities were $12 million, including $3 million of impairments. The available-for-sale securities impairments related primarily to fixed maturity securities issued by companies in the consumer products and transportation industries ($1 million, and $1 million, respectively).

Policy fees and other income. Policy fees and other income consist primarily of cost of insurance and surrender charges assessed on universal life insurance policies, fees assessed against policyholder and contractholder account values, and commission income. The increase in policy fees and other income was primarily due to higher sales and growth in assets under management in Retirement Income and Investments’ fee-based products of $20 million as a result of distribution expansion, favorable equity markets, and continued product enhancements. In addition, our life insurance business increased $21 million primarily as a result of the growth of our universal life insurance in-force block.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of reserve activity related to current claims and future policy benefits on insurance and investment products for life, long-term care, Medicare supplement, group life and health, payment protection, structured settlements and single premium immediate annuities with life contingencies and claim costs incurred related to mortgage insurance products. The increase in benefits and other changes in policy reserves was primarily driven by a $64 million increase in our long-term care business as a result of claims associated with the aging of the in-force block, higher than expected loss experience in the current quarter, as well as the Continental Life acquisition. Adding to this increase was an $11 million increase in our Mortgage Insurance segment

primarily driven by higher losses in Australia from portfolio seasoning and increased delinquencies from a limited number of distribution relationships. This was partially offset by a decrease in our Retirement Income and Investments segment of $34 million attributable to the decline in life-contingent structured settlement annuity sales.

Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances. The increase in interest credited was primarily due to a $37 million increase related to spread-based institutional products as a result of increased crediting rates on floating rate products and higher assets under management. This increase was partially offset by an $11 million decrease in interest credited on fixed annuities primarily due to crediting rates being reset to current, lower rates as the fixed annuities reach the end of their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals. 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. An increase in our fee-based products in our Retirement Income and Investments segment of $16 million associated with higher growth in assets under management in fee-based products was offset by a $15 million decrease in our Corporate and Other segment that was attributable to lower unallocated overhead expenses in 2006 compared to 2005.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles consists primarily of the amortization of acquisition costs that are capitalized and PVFP. The decrease in our Protection segment of $8 million was offset by an $8 million increase in our Retirement Income and Investments segment primarily from our spread-based retail products. This increase to our Retirement Income and Investments segment was partially offset by an $11 million reduction in amortization expense attributable to investment losses on our investment contracts.

Interest expense. Interest expense increased primarily as a result of the issuance of additional non-recourse funding obligations in the first quarter of 2006 and the second and third quarters of 2005, and an increase in average variable rates paid on non-recourse funding obligations supporting our term life insurance capital management strategy. This was partially offset by a decrease in interest expense associated with the first quarter 2006 derecognition of borrowings related to securitization entities.

Provision for income taxes. The effective tax rate increased to 31.7% for the three months ended June 30, 2006 from 30.8% for the three months ended June 30, 2005. The increase in effective tax rate was primarily attributable to nonrecurring favorable examination developments in 2005, offset in part by the increase in lower taxed foreign earnings in 2006.

Net operating earnings. The increase in net operating earnings reflects increases in segment net operating earnings in our Protection and Mortgage Insurance segments, offset by our Retirement Income and Investments and Corporate and Other segments, which experienced small decreases, as discussed in the “—Results of Operations by Segment.”

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

The following table provides a reconciliation of net earnings to “net operating earnings” (as defined above) for the six months ended June 30, 2006 and 2005.


	Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions, except per share amounts)	2006			2005			2006 vs. 2005
Revenues:
Premiums	$	3,187		$	3,219		$	(32	)	(1	)%
Net investment income		1,877			1,693			184		11	%
Net investment gains (losses)		(71	)		(6	)		(65	)	NM	⁽¹⁾
Policy fees and other income		386			315			71		23	%

Total revenues		5,379			5,221			158		3	%

Benefits and expenses:
Benefits and other changes in policy reserves		2,131			2,126			5		—	%
Interest credited		751			687			64		9	%
Acquisition and operating expenses, net of deferrals		996			970			26		3	%
Amortization of deferred acquisition costs and intangibles		381			401			(20	)	(5	)%
Interest expense		170			141			29		21	%

Total benefits and expenses		4,429			4,325			104		2	%

Net earnings before income taxes and accounting change		950			896			54		6	%
Provision for income taxes		303			289			14		5	%

Net earnings before accounting change		647			607			40		7	%
Cumulative effect of accounting change, net of taxes		4			—			4		NM	⁽¹⁾

Net earnings		651			607			44		7	%

Adjustments to net earnings:
Net investment losses (gains), net of taxes and other adjustments		37			4			33		NM	⁽¹⁾
Cumulative effect of accounting change, net of taxes		(4	)		—			(4	)	NM	⁽¹⁾

Net operating earnings	$	684		$	611		$	73		12	%


Net earnings per common share:
Basic	$	1.41		$	1.27

Diluted	$	1.37		$	1.25

Net earnings before accounting change per common share:
Basic	$	1.40		$	1.27

Diluted	$	1.37		$	1.25

Net operating earnings per common share:
Basic	$	1.48		$	1.27

Diluted	$	1.44		$	1.26

Weighted-average common shares outstanding:
Basic		461.3			479.6

Diluted		473.9			485.9

⁽¹⁾	Not meaningful

Premiums. The decrease in premiums is primarily driven by a $105 million decrease in our Retirement Income and Investments segment from a reduction in sales of our life-contingent structured settlement annuities. Partially offsetting this is a $79 million increase in our Mortgage Insurance segment reflecting growth and aging of our international mortgage insurance in-force block. Premiums for the Protection segment were unchanged compared to the prior year. Our payment protection business decreased by $106 million as a result of a decrease in the U.K. market and changes in foreign exchange rates. Offsetting the decrease in the payment protection business was increases in our life, long-term care and group life and health businesses. The life business increased $53 million primarily due to growth of our term life insurance in-force block. The long-term care business increased $44 million associated with growth in the in-force block and $27 million in our long-term care business from the Continental Life acquisition.

Net investment income. Net investment income increased primarily as a result of an increase in average invested assets attributable to assets purchased using proceeds from our issuance of non-recourse funding obligations supporting certain term life insurance policies and growth of our long-term care in-force block. The increase in net investment income was also due to an increase in weighted average investment yields to 5.7% for the six months ended June 30, 2006 from 5.4% for the six months ended June 30, 2005. The increase in weighted average investment yields was primarily attributable to increased yields on floating rate investments. Net investment income for the six months ended June 30, 2006 included $54 million of investment income related to a reduction in commercial mortgage loan loss reserves, bond calls, mortgage loan prepayments and limited partnership investments as compared to $29 million in investment income from bond calls, mortgage loan prepayments and limited partnership investments in the prior year.

Net investment gains (losses). For the six months ended June 30, 2006, gross investment gains were $30 million and gross investment losses were $101 million, including $5 million of impairments. These impairments were attributable to available-for-sale equity securities and limited partnership investments ($4 million and $1 million, respectively). Gross investment gains for the six months ended June 30, 2006 were associated with $30 million in gains on the sale of available-for-sale fixed maturities and equity securities. Gross investment losses include $76 million of interest rate related losses as a result of the disposition of available-for-sale securities primarily from portfolio repositioning activities, $17 million on the derecognition of assets and liabilities associated with certain securitization entities, $5 million of impairment charges, and $2 million in connection with terminations and losses in fair value of non-qualified derivatives. Net investment losses on trading securities were $1 million for the six months ended June 30, 2006. For the six months ended June 30, 2005, gross investment gains were $51 million and gross investment losses were $57 million, including $37 million of impairments. These impairments were attributable to available-for-sale fixed maturities, limited partnership investments and equity investments ($31 million, $5 million and $1 million, respectively). The fixed maturities impairments related primarily to securities issued by companies in the automotive, transportation and consumer products industries ($14 million, $12 million and $3 million, respectively).

Policy fees and other income. The increase in policy fees and other income was primarily due to higher sales and growth in assets under management in Retirement Income and Investments’ fee-based products of $36 million as a result of distribution expansion, favorable equity markets, and continued product enhancements. In addition, our life insurance business increased $26 million primarily as a result of the growth of our universal life insurance in-force block.

Benefits and other changes in policy reserves. The increase in benefits and other changes in policy reserves was primarily driven by a $70 million increase in our Protection segment resulting from claims associated with the aging of the long-term care insurance in-force block and the Continental Life acquisition. Adding to this increase was a $36 million increase in our Mortgage Insurance segment largely driven by higher losses in Australia from portfolio seasoning and increased delinquencies from a limited number of distribution relationships. This increase was nearly offset by a decrease in our Retirement Income and Investments segment of $101 million attributable to the decline in life-contingent structured settlement annuity sales.

Interest credited. The increase in interest credited was primarily due to a $69 million increase related to spread-based institutional products as a result of increased crediting rates on floating rate products and higher

assets under management and a $10 million increase in our Protection segment. This increase was partially offset by a $17 million decrease in interest credited on fixed annuities primarily due to crediting rates being reset to current, lower rates as the fixed annuities reach their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals. Acquisition and operating expenses, net of deferrals, increased primarily due a $27 million increase in our Retirement Income and Investments segment associated with higher growth in assets under management in fee-based products and a $10 million increase in our Mortgage Insurance segment primarily as a result of an increase in costs in our existing international platforms and continued investment in potential new international mortgage insurance platforms. This was partially offset by a $9 million decrease in our Corporate and Other segment that was principally from lower unallocated overhead expenses in 2006 compared to 2005.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition cost and intangibles decreased primarily due to a $38 million decrease in our Protection segment from payment protection insurance business run-off block and changes in foreign exchange rates, as well as a decrease in our long-term care business related to a correction related to a long-term care policy rider in the prior year. This was partially offset by an increase in our Retirement Income and Investments of $17 million associated with higher lapses and growth in spreads on spread-based retail products. Partially offsetting this increase in our Retirement Income and Investments segment was an $11 million reduction in amortization expense attributable to investment losses.

Provision for income taxes. The effective tax rate decreased to 31.9% for the six months ended June 30, 2006 from 32.3% for the six months ended June 30, 2005. The decrease in effective tax rate was primarily attributable to the increase in lower taxed foreign earnings in 2006, offset in part by nonrecurring favorable examination developments in 2005.

Net operating earnings. The increase in net operating earnings reflects increases in segment net operating earnings in our Protection and Mortgage Insurance segments, offset by decreases in our Retirement Income and Investments and Corporate and Other segments, as discussed in the “—Results of Operations by Segment.”

Results of Operations by Segment

Management regularly reviews the performance of each of our operating segments (Protection, Retirement Income and Investments and Mortgage Insurance) based on after-tax segment net operating earnings (loss), which excludes: (1) cumulative effect of accounting changes, and (2) infrequent or unusual non-operating items. Certain other items, including most of our interest and other financing expenses and advertising, marketing and other corporate expenses, are included in our Corporate and Other segment. Although these excluded items are significant to our consolidated financial performance, we believe that the presentation of segment net operating earnings (loss) enhances our understanding and assessment of the results of operations of our operating segments by highlighting net earnings (loss) attributable to the normal, recurring operations of our business. However, segment net operating earnings (loss) is not a substitute for net income determined in accordance with GAAP.

Protection segment

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

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

The following table sets forth the results of operations relating to our Protection segment for the three months ended June 30, 2006 and 2005:


	Three months ended June 30,					Increase (decrease) and percentage change
(Amounts in millions)	2006			2005		2006 vs. 2005
Revenues:
Premiums	$	1,174		$	1,141	$	33		3	%
Net investment income		364			312		52		17	%
Net investment gains (losses)		(2	)		—		(2	)	NM	⁽¹⁾
Policy fees and other income		103			78		25		32	%

Total revenues		1,639			1,531		108		7	%

Benefits and expenses:
Benefits and other changes in policy reserves		778			710		68		10	%
Interest credited		96			91		5		5	%
Acquisition and operating expenses, net of deferrals		350			352		(2	)	(1	)%
Amortization of deferred acquisition costs and intangibles		153			161		(8	)	(5	)%
Interest expense		34			11		23		NM	⁽¹⁾

Total benefits and expenses		1,411			1,325		86		6	%

Earnings before income taxes		228			206		22		11	%
Provision for income taxes		79			73		6		8	%

Segment net earnings		149			133		16		12	%
Adjustments to segment net earnings:
Net investment losses (gains) net of taxes and other adjustments		2			—		2		NM	⁽¹⁾

Segment net operating earnings	$	151		$	133	$	18		14	%

⁽¹⁾	Not meaningful

The following table sets forth net operating earnings for the products included in our Protection segment for the three months ended June 30, 2006 and 2005:


	Three months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005
Segment net operating earnings:
Life insurance	$	77	$	55	$	22		40	%
Long-term care insurance		37		46		(9	)	(20	)%
Payment protection insurance		29		24		5		21	%
Group life and health insurance		8		8		—		—	%

Total segment net operating earnings	$	151	$	133	$	18		14	%

Segment net operating earnings

investment yields, and lower termination rates on older issued policies, some with expiring reinsurance coverage. The current year benefited from a $15 million favorable reserve adjustment, net of tax, related to group long-term care policies, offset by $9 million of unfavorable reinsurance adjustments, net of tax. The prior year benefited from a $4 million, net of tax, of favorable experience on a reinsured block and $4 million of net reserve adjustments, net of tax.

Revenues

Premiums increased as a result of a $33 million increase in our life insurance business primarily related to growth of the term life insurance in-force blocks, a $27 million increase in our long-term care business due to $27 million from the Continental Life acquisition and an increase attributable to in-force growth. Partially offsetting the long-term care business increase is the absence of a prior year favorable $8 million correction of premiums associated with a long-term care policy rider and a $6 million favorable experience on a reinsured block in the prior year. The increases were partially offset by a decrease of $30 million in our payment protection insurance business which included a decrease of $16 million attributable to changes in foreign exchange rates. This decrease was principally due to a $56 million decrease in the U.K. market, partially offset by an increase in continental Europe and Ireland. The decrease in the U.K. market was attributable to the continued run-off of low return blocks of business and the exit from the travel insurance business. The increase in continental Europe and Ireland relates to growth from new distribution relationships and an increase in consumer lending in those markets.

The increase in net investment income, which includes a decrease of $1 million attributable to changes in foreign exchange rates, was primarily the result of an increase in average invested assets and average variable rate yields, associated with assets purchased using proceeds from our issuance of non-recourse funding obligations supporting certain term life insurance policies and to new assets backing growth of our long-term care business.

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

The increase in policy fees and other income is primarily due to an increase of $21 million in our life insurance business largely due to growth of the universal life insurance in-force block and a $12 million unfavorable adjustment on a reinsured block of term life insurance policies in the prior year.

Benefits and expenses

Benefits and other changes in policy reserves increased due to a $64 million increase in our long-term care business, a $6 million increase in our life insurance business and a $5 million increase in our group business, offset by a $7 million decrease in our payment protection insurance business. The increase in our long-term care business was primarily the result of growth of the in-force block, higher than normal claims in the current period, lower termination rates on older issued policies, some with expiring reinsurance coverage, and a $17 million increase from the Continental Life acquisition. Both years benefited from reserve adjustments of similar amounts. The current year includes a $24 million decrease associated with an adjustment related to group long-term care policies. The prior year included $25 million of favorable reserve adjustments for a correction of a long-term care policy rider and strengthening of certain claim reserves. The increase in our life insurance business is principally due to growth of the term life in-force blocks partially offset by favorable mortality. The increase in our group business was driven by a combination of growth and fluctuations in claims that are within our expectations. The decrease in our payment protection insurance business was largely the result of a reduction of claims in our run-off block of travel insurance and also includes a $2 million decrease attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, decreased primarily due to a $27 million decrease in our payment protection insurance business primarily associated with our run-off block and also includes a decrease of $9 million attributable to changes in foreign exchange rates, partially offset by a $19 million increase in our long-term care business primarily from growth of our in-force business, a $5 million increase from the

Continental Life acquisition, an $8 million unfavorable reinsurance adjustment, and a $7 million increase in our life insurance business due to prior year expense favorability that did not recur in the current year.

Amortization of deferred acquisition costs and intangibles decreased primarily due to a $17 million decrease in our long-term care business attributable to unfavorable prior year amortization of $27 million related to the correction of a long-term care policy rider. This decrease is partially offset by growth of the in-force block and higher terminations in our Medicare supplement product. The decrease in our long-term care business was partially offset by a $12 million increase in our life insurance business due to growth of the term life and universal life in-force blocks.

Interest expense increased $23 million as the result of the issuance of additional non-recourse funding obligations in the first quarter of 2006 and the second and third quarters of 2005, and an increase in average variable rates paid on non-recourse funding obligations supporting our term life insurance capital management strategy.

Provision for income taxes

The effective tax rate decreased to 34.6% for the three months ended June 30, 2006 from 35.4% for the three months ended June 30, 2005. The decrease in effective tax rate was primarily attributable to the increase in lower taxed foreign earnings and a reduction in excess foreign tax credits, partially offset by nonrecurring favorable examination developments in 2005.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

The following table sets forth the results of operations relating to our Protection segment for the six months ended June 30, 2006 and 2005:


	Six months ended June 30,					Increase (decrease) and percentage change
(Amounts in millions)	2006			2005		2006 vs. 2005
Revenues:
Premiums	$	2,279		$	2,279	$	—		—	%
Net investment income		710			627		83		13	%
Net investment gains (losses)		2			—		2		NM	⁽¹⁾
Policy fees and other income		200			167		33		20	%

Total revenues		3,191			3,073		118		4	%

Benefits and expenses:
Benefits and other changes in policy reserves		1,525			1,455		70		5	%
Interest credited		191			181		10		6	%
Acquisition and operating expenses, net of deferrals		680			682		(2	)	—	%
Amortization of deferred acquisition costs and intangibles		275			313		(38	)	(12	)%
Interest expense		59			20		39		195	%

Total benefits and expenses		2,730			2,651		79		3	%

Earnings before income taxes		461			422		39		9	%
Provision for income taxes		160			150		10		7	%

Segment net earnings		301			272		29		11	%
Adjustments to segment net earnings:
Net investment losses (gains) net of taxes and other adjustments		(1	)		—		(1	)	NM	⁽¹⁾

Segment net operating earnings	$	300		$	272	$	28		10	%

⁽¹⁾	Not meaningful

The following table sets forth net operating earnings for the products included in our Protection segment for the six months ended June 30, 2006 and 2005:


	Six months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005
Segment net operating earnings:
Life insurance	$	151	$	123	$	28		23	%
Long-term care insurance		80		88		(8	)	(9	)%
Payment protection insurance		54		46		8		17	%
Group life and health insurance		15		15		—		—	%

Total segment net operating earnings	$	300	$	272	$	28		10	%

Segment net operating earnings

The increase in our life insurance business was primarily related to growth of the term life in-force blocks and favorable mortality. In addition, earnings in the prior year were reduced by unfavorable mortality and $8 million related to an unfavorable adjustment on a reinsured block of term life insurance policies. The increase in our payment protection insurance business was due to growth in continental Europe and Ireland and $6 million attributable to a lower effective tax rate, partially offset by $4 million unfavorable changes in foreign exchange rates, net of tax. The decrease in our long-term care business is largely the result of lower terminations on our older issued policies, some with expiring reinsurance coverage, and a continued low interest rate environment. The current year benefited from a $17 million reserve adjustment, net of tax, related to group long-term care policies, offset by $9 million of reinsurance adjustments, net of tax. Our long-term care business benefited in the prior year from a $7 million, net of tax, favorable experience on a reinsured block partially offset by $1 million of net reserve adjustments, net of tax.

Revenues

Premiums from our life insurance business increased $53 million reflecting growth of the term life insurance in-force blocks. Our long-term care business increased $44 million primarily associated with in-force growth and $27 million from the Continental Life acquisition. The prior year included $19 million of favorable items for the long-term care business that did not recur in the current year. Of this $19 million, $11 million related to favorable experience on a reinsured block and the remaining $8 million was the result of a correction of premiums related to a long-term care policy rider. Additionally, our group business increased $9 million largely as a result of higher sales in our non-medical products. These increases were partially offset by a decrease of $106 million in our payment protection insurance business which included a decrease of $39 million attributable to changes in foreign exchange rates. This decrease was principally due to a decrease of $124 million in the U.K. market, partially offset by an increase in continental Europe and Ireland. The decrease in the U.K. market was attributable to the continued run-off of low return blocks of business and the exit from the travel insurance business. The increase in continental Europe and Ireland was the result of the growth due to new distribution relationships and the growth of consumer lending in those markets.

The increase in net investment income, which included a $3 million decrease attributable to changes in foreign exchange rates, was largely the result of an increase in average invested assets and average variable rate yields, associated with assets purchased using proceeds from our issuance of non-recourse funding obligations supporting certain term life insurance policies and to new assets backing growth of our long-term care business.

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

The increase in policy fees and other income is primarily due to an increase of $26 million in our life insurance business principally from growth of the universal life insurance in-force block and a $12 million unfavorable adjustment on a reinsured block of term life insurance policies in the prior year.

Benefits and expenses

Benefits and other changes in policy reserves increased due to a $72 million increase in our long-term care business, a $17 million increase in our life insurance business and a $13 million increase in our group business offset by a $32 million decrease in our payment protection insurance business. The increase in our long-term care business was primarily the result of growth of the in-force block, lower termination rates on older issued policies, some with expiring reinsurance coverage, and a $17 million increase from the Continental Life acquisition. Both years benefited from reserve adjustments. The current year includes a $27 million decrease due to a favorable adjustment related to group long-term care policies. The prior year included $17 million of favorable reserve adjustments for a correction of a long-term care policy rider and strengthening of certain claim reserves. The increase in our group business is based upon continued growth in our non-medical business which is partially offset by decreases in our medical products which are within expectations. The increase in our life insurance business is associated with growth of the term life in-force blocks and unfavorable prior year mortality offset in part by favorable current year mortality. The decrease in our payment protection insurance business was largely driven by a reduction of claim reserves in our run-off block and also includes a decrease of $5 million attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, decreased primarily due to a $41 million decrease in our payment protection insurance business, primarily associated with our run-off block and also includes a $23 million decrease attributable to changes in foreign exchange rates. Our group business decreased $5 million as a result of favorable expense management and reduced sales related expenses. These increases were partially offset by a $35 million increase in our long-term care business largely from growth of our in-force premium levels driving higher renewal commission expense, a $5 million increase from the Continental Life acquisition and an unfavorable $8 million reinsurance adjustment. Our life business increased $9 million principally due to prior year expense favorability that did not recur in the current year.

Amortization of deferred acquisition costs and intangibles decreased primarily due to a $42 million decrease in our payment protection insurance business and an $8 million decrease in our long-term care business, partially offset by a $13 million increase in our life insurance business. The decrease in our payment protection insurance business was largely attributable to our run-off block and also includes a $9 million decrease attributable to changes in foreign exchange rates. The decrease in our long-term care business is from an unfavorable $27 million correction related to a long-term care policy rider in the prior year. This decrease is partially offset by growth of the in-force block and higher terminations in our Medicare supplement product. The increase in our life insurance business is principally due to growth of the term life and universal life in-force blocks.

Interest expense increased $39 million as the result of the issuance of additional non-recourse funding obligations in the first quarter of 2006 and the second and third quarters of 2005, and an increase in average variable rates paid on non-recourse funding obligations supporting our term life insurance capital management strategy.

Provision for income taxes

The effective tax rate decreased to 34.7% for the six months ended June 30, 2006 from 35.5% for the six months ended June 30, 2005. The decrease in effective tax rate was primarily attributable to the increase in lower taxed foreign earnings and a reduction in excess foreign tax credits, partially offset by nonrecurring favorable examination developments in 2005.

Protection selected operating performance measures

Life insurance

The following tables set forth selected operating performance measures regarding our life insurance products as of or for the three and six months ended June 30, 2006 and 2005:


	For the three months ended June 30,				Percentage change		For the six months ended June 30,				Percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005		2006		2005		2006 vs. 2005
Term life insurance
Net earned premiums	$	221	$	186	19	%	$	434	$	377	15	%
Annualized first-year premiums		37		34	9	%		71		63	13	%
Revenue, net of reinsurance		277		206	34	%		545		433	26	%

Universal and whole life insurance
Net earned premiums and deposits	$	118	$	100	18	%	$	240	$	200	20	%
Annualized first-year deposits		10		6	67	%		19		13	46	%
Excess deposits		22		8	175	%		41		14	193	%
Revenue, net of reinsurance		180		168	7	%		354		341	4	%

Total life insurance
Net earned premiums and deposits	$	339	$	286	19	%	$	674	$	577	17	%
Annualized first-year premiums		37		34	9	%		71		63	13	%
Annualized first-year deposits		10		6	67	%		19		13	46	%
Excess deposits		22		8	175	%		41		14	193	%
Revenue, net of reinsurance		457		374	22	%		899		774	16	%


	As of the six months ended June 30,				Percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005
Term life insurance
Life insurance in-force, net of reinsurance	$	409,103	$	350,224	17	%
Life insurance in-force before reinsurance		571,014		508,330	12	%

Universal and whole life insurance
Life insurance in-force, net of reinsurance	$	40,850	$	42,110	(3	)%
Life insurance in-force before reinsurance		49,207		49,846	(1	)%

Total life insurance
Life insurance in-force, net of reinsurance	$	449,953	$	392,334	15	%
Life insurance in-force before reinsurance		620,221		558,176	11	%

Term life insurance. Term life annualized first-year premiums and insurance in-force, which represents the face amount for life insurance, increased primarily as a result of distribution expansion and the competitiveness of our product offerings. This increase in annualized first-year premiums was the primary driver for the increase in term life insurance net earned premiums, revenues and insurance in-force. Term life insurance revenues also increased due to an increase in invested assets related to securities purchased using the proceeds from our issuance of non-recourse funding obligations supporting certain term life insurance policies.

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

Long-term care insurance

The following tables set forth selected operating performance measures regarding our long-term care insurance business, which includes long-term care insurance, Medicare supplement insurance, as well as several run-off blocks of accident and health insurance and corporate-owned life insurance for the three and six months ended June 30, 2006 and 2005:


	Three months ended June 30,				Percentage change		Six months ended June 30,				Percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005		2006		2005		2006 vs. 2005
Net earned premiums	$	458	$	431	6	%	$	883	$	839	5	%
Annualized first-year premiums		51		42	21	%		99		83	19	%
Revenue, net of reinsurance		649		593	9	%		1,257		1,159	8	%

The increase in annualized first-year premiums was primarily due to an increase in individual long-term care products and the broadening of our product offering in Medicare supplement, including $4 million from the Continental Life acquisition. The additional layer of 2005 annualized first-year premiums was the primary driver for the increase in net earned premium and revenue, net of reinsurance. The increase in revenue was also due to an increase in net investment income principally due to an increase in average invested assets backing growth of our long-term care business.

Payment protection insurance

The following table sets forth selected operating performance measures regarding our payment protection insurance and other related consumer protection insurance products for the three and six months ended June 30, 2006 and 2005:


	Three months ended June 30,				Percentage change		Six months ended June 30,				Percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005		2006		2005		2006 vs. 2005
Payment protection insurance gross written premiums and deposits	$	500	$	501	—	%	$	919	$	954	(4	)%
Mexico operations gross written premiums		15		12	25	%		31		24	29	%
Net earned premiums		322		352	(9	)%		613		719	(15	)%
Revenue, net of reinsurance		352		385	(9	)%		671		784	(14	)%

Gross written premiums and deposits, gross of reinsurance and cancellations for the three and six months ended June 30, 2006 includes $32 million of gross deposits on a reciprocal reinsurance transaction and growth from continental Europe and Ireland. Both periods include a decrease attributable to changes in foreign exchange rates of $23 million and $59 million, respectively. The remainder of the decrease compared to the respective prior year periods is largely driven by a decline of gross written premiums in the U.K. partially offset by growth in the continental Europe and Ireland market.

Net earned premiums and revenues for the three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005 decreased primarily due to continued run-off of low return blocks of business in the U.K. market, the exit from our travel insurance business and a decrease attributable to changes in foreign exchange rates, partially offset by growth in the continental Europe and Ireland markets.

Group life and health insurance

The following table sets forth selected operating performance measures regarding our group products for the three and six months ended June 30, 2006 and 2005:


	Three months ended June 30,				Percentage change		Six months ended June 30,				Percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005		2006		2005		2006 vs. 2005
Net earned premiums	$	168	$	165	2	%	$	336	$	327	3	%
Annualized first-year premiums		44		38	16	%		78		68	15	%
Revenue, net of reinsurance		181		179	1	%		364		356	2	%

The increase in annualized first-year premiums is attributable to growth in sales in non-medical products partially offset by lower sales of medical products due to competitive pricing in that market. This growth is also driving the increases in revenue and net earned premiums.

Retirement Income and Investments segment

We offer U.S. customers fixed annuities, individual and group variable annuities, single premium immediate annuities, variable life insurance, asset management and specialized products, including GICs, funding agreements, FABNs and structured settlements.

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

The following table sets forth the results of operations relating to our Retirement Income and Investments segment for the three months ended June 30, 2006 and 2005:


	Three month ended June 30,					Increase (decrease) and percentage change
(Amounts in millions)	2006			2005		2006 vs. 2005
Revenues:
Premiums	$	200		$	241	$	(41	)	(17	)%
Net investment income		487			432		55		13	%
Net investment gains (losses)		(45	)		—		(45	)	NM	⁽¹⁾
Policy fees and other income		84			62		22		35	%

Total revenues		726			735		(9	)	(1	)%

Benefits and expenses:
Benefits and other changes in policy reserves		267			301		(34	)	(11	)%
Interest credited		282			256		26		10	%
Acquisition and operating expenses, net of deferrals		80			66		14		21	%
Amortization of deferred acquisition costs and intangibles		40			32		8		25	%
Interest expense		1			1		—		—	%

Total benefits and expenses		670			656		14		2	%

Earnings before income taxes		56			79		(23	)	(29	)%
Provision for income taxes		19			19		—		—	%

Segment net earnings		37			60		(23	)	(38	)%
Adjustments to segment net earnings:
Net investment losses (gains), net of taxes and other adjustments		20			—		20		NM	⁽¹⁾

Segment net operating earnings	$	57		$	60	$	(3	)	(5	)%

⁽¹⁾	Not meaningful

The following tables set forth net operating earnings for the products included in our Retirement Income and Investments segment for the three months ended June 30, 2006 and 2005:


	Three months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005
Segment net operating earnings:
Spread-based retail	$	29	$	35	$	(6	)	(17	)%
Spread-based institutional		13		11		2		18	%
Fee-based		15		14		1		7	%

Total segment net operating earnings	$	57	$	60	$	(3	)	(5	)%

Segment net operating earnings

Segment net operating earnings from spread-based retail decreased primarily due to a lower effective tax rate in the prior year related to favorable tax examination developments. Segment net operating earnings from spread-based institutional increased largely from higher spreads and growth in assets under management related to our FABNs. Segment net operating earnings on fee-based increased principally as a result of growth in assets under management.

Revenues

The $41 million decrease in premiums was primarily the result of a $61 million reduction in sales of our life-contingent structured settlement annuities. This is due to our continued pricing discipline in the continuing low long-term interest rate environment. This decrease was partially offset by a $20 million increase in sales of our life-contingent single premium immediate annuities.

The increase in net investment income was principally due to increased yields on floating rate investments backing spread-based institutional products and higher assets under management.

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

The increase in policy fees and other income was primarily attributable to a $20 million increase in the fee-based segment as a result of increased sales and growth in assets under management from distribution expansion and continued product introduction and enhancements.

Benefits and expenses

Benefits and other changes in policy reserves decreased primarily as a result of the decrease in the life-contingent structured settlement annuity sales, which were partially offset by an increase in sales of life-contingent single premium immediate annuities.

The increase in interest credited was principally due to a $37 million increase related to spread-based institutional products as a result of increased crediting rates on floating rate products and higher assets under management. This increase was partially offset by an $11 million decrease in interest credited on fixed annuities associated with crediting rates being reset to lower rates as the fixed annuities reach their initial crediting rate guarantee period.

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

The increase in amortization of deferred acquisition costs and intangibles was largely the result of a $15 million increase in spread-based retail products primarily due to higher lapses and profit margins. Partially offsetting this increase was an $11 million reduction in amortization expense attributable to investment losses.

Provision for income taxes

The effective tax rate increased to 33.9% for the three months ended June 30, 2006 from 24.1% for the three months ended June 30, 2005. This increase in the effective tax rate was primarily attributable to nonrecurring favorable tax examination developments in 2005.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

The following table sets forth the results of operations relating to our Retirement Income and Investments segment for the six months ended June 30, 2006 and 2005:


	Six month ended June 30,					Increase (decrease) and percentage change
(Amounts in millions)	2006			2005		2006 vs. 2005
Revenues:
Premiums	$	380		$	485	$	(105	)	(22	)%
Net investment income		952			865		87		10	%
Net investment gains (losses)		(54	)		—		(54	)	NM	⁽¹⁾
Policy fees and other income		161			120		41		34	%

Total revenues		1,439			1,470		(31	)	(2	)%

Benefits and expenses:
Benefits and other changes in policy reserves		508			609		(101	)	(17	)%
Interest credited		560			506		54		11	%
Acquisition and operating expenses, net of deferrals		152			125		27		22	%
Amortization of deferred acquisition costs and intangibles		76			59		17		29	%
Interest expense		2			1		1		100	%

Total benefits and expenses		1,298			1,300		(2	)	—	%

Earnings before income taxes		141			170		(29	)	(17	)%
Provision for income taxes		49			50		(1	)	(2	)%

Segment net earnings		92			120		(28	)	(23	)%
Adjustments to segment net earnings:
Net investment losses (gains), net of taxes and other adjustments		26			—		26		NM	⁽¹⁾

Segment net operating earnings	$	118		$	120	$	(2	)	(2	)%

⁽¹⁾	Not meaningful

The following table sets forth net operating earnings for the products included in our Retirement Income and Investments segment for the six months ended June 30, 2006 and 2005:


	Six months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005
Segment net operating earnings:
Spread-based retail	$	65	$	69	$	(4	)	(6	)%
Spread-based institutional		23		20		3		15	%
Fee-based		30		31		(1	)	(3	)%

Total segment net operating earnings	$	118	$	120	$	(2	)	(2	)%

Segment net operating earnings

Segment net operating earnings from spread-based retail decreased primarily due to a lower effective tax rate in the prior year related to favorable tax examination developments. Segment net operating earnings on fee-based decreased from lower expenses in the prior year. Segment net operating earnings on spread-based institutional increased in connection with higher spreads and growth in assets under management related to our FABNs.

Revenues

The decrease in premiums was primarily the result of a $112 million reduction in sales of our life-contingent structured settlement annuities. This is due to our continued pricing discipline in the continuing low long-term interest rate environment. This decrease was partially offset by a $7 million increase in sales of our life-contingent single premium immediate annuities.

The increase in net investment income was mostly due to increased yields on floating rate investments backing spread-based institutional products and higher assets under management.

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

The increase in policy fees and other income was largely attributable to a $36 million increase in the fee-based segment as a result of increased sales and growth in assets under management from distribution expansion and continued product introduction and enhancements.

Benefits and expenses

Benefits and other changes in policy reserves decreased $101 million primarily as a result of the decrease in the life-contingent structured settlement annuity sales, which were partially offset by an increase in sales of life-contingent single premium immediate annuities.

The increase in interest credited was principally due to a $69 million increase related to spread-based institutional products as a result of increased crediting rates on floating rate products and higher assets under management. This increase was partially offset by a $17 million decrease in interest credited on fixed annuities associated with crediting rates being reset to current, lower rates as the fixed annuities reach their initial crediting rate guarantee period.

The increase in acquisition and operating expenses, net of deferrals, was primarily from expenses associated with higher sales and growth in assets under management in fee-based products. Additionally, the prior year included expense favorability that did not recur in the current year.

Provision for income taxes

The effective tax rate increased to 34.8% for the six months ended June 30, 2006 from 29.4% for the six months ended June 30, 2005. This increase in the effective tax rate was primarily attributable to nonrecurring favorable tax examination developments in 2005.

Retirement Income and Investments selected operating performance measures

Spread-based retail products

The following table sets forth selected operating performance measures regarding our spread-based retail products as of or for the three and six months ended June 30, 2006 and 2005:


	For the three months ended June 30,						Percentage change		For the six months ended June 30,						Percentage change
(Amounts in millions)	2006			2005			2006 vs. 2005		2006			2005			2006 vs. 2005
Fixed annuities
Account value, net of reinsurance, beginning of period	$	15,241		$	15,214		—	%	$	15,547		$	15,113		3	%
Deposits		326			699		(53	)%		593			984		(40	)%
Interest credited		139			150		(7	)%		284			300		(5	)%
Surrenders, benefits and product charges		(871	)		(523	)	67	%		(1,589	)		(857	)	85	%

Account value, net of reinsurance, end of period	$	14,835		$	15,540		(5	)%	$	14,835		$	15,540		(5	)%


Single premium immediate annuities
Account value, net of reinsurance, beginning of period	$	5,772		$	5,415		7	%	$	5,680		$	5,344		6	%
Net earned premiums and deposits		290			215		35	%		540			427		26	%
Interest credited		78			80		(3	)%		158			157		1	%
Surrenders, benefits and product charges		(225	)		(222	)	1	%		(463	)		(440	)	5	%

Account value, net of reinsurance, end of period	$	5,915		$	5,488		8	%	$	5,915		$	5,488		8	%


Structured settlements
Account value, net of reinsurance, beginning of period	$	925		$	653		42	%	$	871		$	533		63	%
Net earned premiums and deposits		45			116		(61	)%		103			240		(57	)%
Interest credited		13			11		18	%		25			22		14	%
Surrenders, benefits and product charges		(15	)		(15	)	—	%		(31	)		(30	)	3	%

Account value, net of reinsurance, end of period	$	968		$	765		27	%	$	968		$	765		27	%

Total premiums from spread-based retail products	$	200		$	241		(17	)%	$	380		$	485		(22	)%

Total deposits on spread-based retail products	$	461		$	789		(42	)%	$	856		$	1,166		(27	)%

Fixed annuities. The account value, net of reinsurance, decreased primarily due to lapses being greater than deposits in the first half of 2006. The attractiveness of certain fixed annuities has declined as a result of continued low long-term interest rates, a relatively flat yield curve and short term investment alternatives, such as certificates of deposit. These trends are having an adverse impact on both sales and retention of fixed annuities. In recent quarters, we have experienced improved spreads in fixed annuities primarily due to run-off of and crediting rate resets of historically higher crediting rate business. The continued low interest rate environment, along with our pricing discipline of selling business that meets our profitability objectives, have adversely affected sales and retention of our fixed annuities. We expect this trend to continue.

Single premium immediate annuities. The account value net of reinsurance increased primarily due to the positive net impact of new product sales and lapses along with interest credited on account values in 2005 and 2006.

Structured settlements. We continue to write structured settlements to the extent that we are able to achieve our targeted returns. Our continued pricing discipline in a challenging and competitive long-term interest rate environment was the primary reason for the lower sales of these products in the first six months of 2006.

Spread-based institutional products

The following table sets forth selected operating performance measures regarding our spread-based institutional products as of the three and six months ended June 30, 2006 and 2005:


	Three months ended June 30,						Percentage change		Six months ended June 30,						Percentage change
(Amounts in millions)	2006			2005			2006 vs. 2005		2006			2005			2006 vs. 2005
GICs, funding agreements and FABNs
Account value, net of reinsurance, beginning of period	$	9,766		$	9,408		4	%	$	9,777		$	9,541		2	%
Deposits⁽¹⁾		498			871		(43	)%		1,478			1,712		(14	)%
Interest credited		123			86		43	%		237			168		41	%
Surrenders and benefits⁽¹⁾		(501	)		(1,203	)	(58	)%		(1,606	)		(2,259	)	(29	)%

Account value, net of reinsurance, end of period	$	9,886		$	9,162		8	%	$	9,886		$	9,162		8	%

⁽¹⁾

“Surrenders and benefits” include contracts that have matured but are redeposited with us and are reflected as deposits. In the three months ended June 30, 2006 and 2005, surrenders and deposits included $100 million and $725 million, respectively, and in the six months ended June 30, 2006 and 2005, surrenders and deposits included $310 million and $1,008 million, respectively, that was redeposited and reflected under “Deposits.”

Spread-based institutional account values increased mostly due to the launch of our registered notes program in the fourth quarter of 2005. This program resulted in an issuance of $300 million of FABNs in the fourth quarter of 2005 and $1,000 million in the first half of 2006. The increase in interest credited was driven by higher crediting rates on our floating rate products due to an increase in the underlying indices. This was partially offset by expected maturities.

Fee-based products

The following table sets forth selected operating performance measures regarding our fee-based products as of the six months ended June 30, 2006 and 2005:


	For the three months ended June 30,						Percentage change		For the six months ended June 30,						Percentage change
(Amounts in millions)	2006			2005			2006 vs. 2005		2006			2005			2006 vs. 2005
Income Distribution Series⁽²⁾
Account value, net of reinsurance, beginning of period	$	1,235		$	540		129	%	$	911		$	462		97	%
Deposits		350			92		NM	⁽¹⁾		631			177		NM	⁽¹⁾
Interest credited and investment performance		(5	)		8		(163	)%		54			4		NM	⁽¹⁾
Surrenders, benefits and product charges		(25	)		(6	)	NM	⁽¹⁾		(41	)		(9	)	NM	⁽¹⁾

Account value, net of reinsurance, end of period	$	1,555		$	634		145	%	$	1,555		$	634		145	%


Traditional variable annuities
Account value, net of reinsurance, beginning of period	$	1,360		$	747		82	%	$	1,182		$	632		87	%
Deposits		147			145		1	%		279			288		(3	)%
Interest credited and investment performance		(17	)		29		(159	)%		61			16		NM	⁽¹⁾
Surrenders, benefits and product charges		(30	)		(19	)	58	%		(62	)		(34	)	82	%

Account value, net of reinsurance, end of period	$	1,460		$	902		62	%	$	1,460		$	902		62	%


Variable life insurance
Account value, beginning of period	$	377		$	335		13	%	$	363		$	345		5	%
Deposits		7			11		(36	)%		16			19		(16	)%
Interest credited and investment performance		(5	)		11		(145	)%		13			—		NM	⁽¹⁾
Surrenders, benefits and product charges		(12	)		(10	)	20	%		(25	)		(17	)	47	%

Account value, end of period	$	367		$	347		6	%	$	367		$	347		6	%


Third-party assets
Account value, beginning of period	$	5,824		$	4,046		44	%	$	5,180		$	3,973		30	%
Deposits		643			359		79	%		1,225			683		79	%
Interest credited and investment performance		(159	)		58		NM	⁽¹⁾		95			(38	)	NM	⁽¹⁾
Surrenders, benefits and product charges		(165	)		(128	)	29	%		(357	)		(283	)	26	%

Account value, end of period	$	6,143		$	4,335		42	%	$	6,143		$	4,335		42	%

⁽¹⁾	Not meaningful

⁽²⁾	The Income Distribution Series offers variable annuity products and four riders that provide the contractholder with a guaranteed minimum income stream that they cannot outlive, along with an opportunity to participate in market appreciation.

Income Distribution Series. We experienced an increase in assets under management attributable to the launch of our guaranteed minimum withdrawal for life benefit rider in the fourth quarter of 2005. Sales of this product remained strong in the first half of 2006, achieving the highest production to date in the second quarter of 2006.

Traditional variable annuities. The increase in assets under management was attributable to ongoing sales of our core income series variable annuity products and positive investment performance for the first six months of 2006.

Third-party assets. Third-party assets include assets managed by our Genworth Financial Asset Management and Genworth Financial Advisor groups. The increase was primarily due to growth in managed money accounts from new and existing clients, as well as positive investment performance during the last three quarters of 2005 and the first quarter of 2006. Significant contributors to the growth in deposits was the result of expansion of our distribution network, growth in our sales force, and changes in our fee structure.

Mortgage Insurance segment

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

Segment results of operations

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

The following table sets forth the results of operations relating to our Mortgage Insurance segment for the three months ended June 30, 2006 and 2005:


	Three months ended June 30,					Increase (decrease) and percentage change
(Amounts in millions)	2006			2005		2006 vs. 2005
Revenues:
Premiums	$	267		$	220	$	47		21	%
Net investment income		85			68		17		25	%
Net investment gains (losses)		1			—		1		NM	⁽¹⁾
Policy fees and other income		11			12		(1	)	(8	)%

Total revenues		364			300		64		21	%

Benefits and expenses:
Benefits and other changes in policy reserves		50			39		11		28	%
Acquisition and operating expenses, net of deferrals		76			75		1		1	%
Amortization of deferred acquisition costs and intangibles		13			13		—		—	%

Total benefits and expenses		139			127		12		9	%

Earnings before income taxes		225			173		52		30	%
Provision for income taxes		62			52		10		19	%

Segment net earnings		163			121		42		35	%
Adjustments to segment net earnings:
Net investment losses (gains), net of taxes and other adjustments		(1	)		—		(1	)	NM	⁽¹⁾

Segment net operating earnings	$	162		$	121	$	41		34	%

⁽¹⁾	Not meaningful

The following table sets forth net operating earnings for the products included in our Mortgage Insurance segment for the three months ended June 30, 2006 and 2005:


	Three months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2006		2005		2006 vs. 2005
Segment net operating earnings:
U.S. mortgage insurance	$	72	$	61	$	11	18	%
International mortgage insurance		90		60		30	50	%

Total segment net operating earnings	$	162	$	121	$	41	34	%

Segment net operating earnings

Our U.S. mortgage insurance business net operating earnings increased by $11 million primarily due to lower administrative costs from productivity gains, higher net investment income and an increase in earnings from our intra-segment reinsurance and capital maintenance agreements with our international mortgage insurance business. The increase in our international mortgage insurance business net operating earnings of $30 million, which included $3 million, net of tax, of favorability due to changes in foreign exchange rates, was driven largely by the growth of the business, seasoning of our insurance in-force and a decrease in effective tax rate. These increases were partially offset by an increase in losses from portfolio seasoning and higher delinquencies from a limited number of Australian distribution relationships and continued investments in our global expansion.

Revenues

Our international mortgage insurance premiums increased by $44 million, which included an increase of $2 million associated with changes in foreign exchange rates, driven by the growth and aging of our international in-force block, which resulted in increased earned premiums from prior years new insurance written. This incre