Edgar Filing: GENWORTH FINANCIAL INC

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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, 2011

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

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

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

As of July 25, 2011, 490,716,493 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION			3

Item 1.	Financial Statements		3
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010 (Unaudited)		3
	Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010		4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2011 and 2010 (Unaudited)		5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (Unaudited)		6
	Notes to Condensed Consolidated Financial Statements (Unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		66

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		137

Item 4.	Controls and Procedures		137

PART II—OTHER INFORMATION			138

Item 1.	Legal Proceedings		138

Item 1A.	Risk Factors		139

Item 5.	Other Information		139

Item 6.	Exhibits		140

Signatures			141

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Revenues:
Premiums	$	1,455		$	1,470		$	2,892		$	2,940
Net investment income		881			823			1,711			1,588
Net investment gains (losses)		(40	)		(139	)		(68	)		(209	)
Insurance and investment product fees and other		359			256			688			512

Total revenues		2,655			2,410			5,223			4,831

Benefits and expenses:
Benefits and other changes in policy reserves		1,672			1,340			3,081			2,655
Interest credited		204			211			405			424
Acquisition and operating expenses, net of deferrals		514			499			1,014			974
Amortization of deferred acquisition costs and intangibles		197			179			382			363
Interest expense		134			109			261			224

Total benefits and expenses		2,721			2,338			5,143			4,640

Income (loss) before income taxes		(66	)		72			80			191
Provision (benefit) for income taxes		(6	)		(5	)		24			(98	)

Net income (loss)		(60	)		77			56			289
Less: net income attributable to noncontrolling interests		36			35			70			69

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(96	)	$	42		$	(14	)	$	220

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	(0.20	)	$	0.09		$	(0.03	)	$	0.45

Diluted	$	(0.20	)	$	0.08		$	(0.03	)	$	0.45

Weighted-average common shares outstanding:
Basic		490.6			489.1			490.4			489.0

Diluted		490.6			494.2			490.4			493.9

Supplemental disclosures:
Total other-than-temporary impairments	$	(28	)	$	(24	)	$	(59	)	$	(101	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		2			(27	)		(3	)		(30	)

Net other-than-temporary impairments		(26	)		(51	)		(62	)		(131	)
Other investment gains (losses)		(14	)		(88	)		(6	)		(78	)

Total net investment gains (losses)	$	(40	)	$	(139	)	$	(68	)	$	(209	)

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	June 30, 2011			December 31, 2010
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	56,221		$	55,183
Equity securities available-for-sale, at fair value		374			332
Commercial mortgage loans		6,432			6,718
Restricted commercial mortgage loans related to securitization entities		457			507
Policy loans		1,542			1,471
Other invested assets		3,301			3,854
Restricted other invested assets related to securitization entities ($378 and $370 at fair value)		379			372

Total investments		68,706			68,437
Cash and cash equivalents		2,831			3,132
Accrued investment income		693			733
Deferred acquisition costs		7,362			7,256
Intangible assets		692			741
Goodwill		1,333			1,329
Reinsurance recoverable		16,999			17,191
Other assets		988			810
Deferred tax asset		1,291			1,100
Separate account assets		11,452			11,666

Total assets	$	112,347		$	112,395

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	31,177		$	30,717
Policyholder account balances		26,115			26,978
Liability for policy and contract claims		7,327			6,933
Unearned premiums		4,563			4,541
Other liabilities ($145 and $150 other liabilities related to securitization entities)		5,637			6,085
Borrowings related to securitization entities ($58 and $51 at fair value)		452			494
Non-recourse funding obligations		3,374			3,437
Long-term borrowings		4,755			4,952
Deferred tax liability		1,937			1,621
Separate account liabilities		11,452			11,666

Total liabilities		96,789			97,424

Commitments and contingencies

Stockholders’ equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 579 million and 578 million shares issued as of June 30, 2011 and December 31, 2010, respectively; 491 million and 490 million shares outstanding as of June 30, 2011 and December 31, 2010, respectively		1			1
Additional paid-in capital		12,110			12,095

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		352			21
Net unrealized gains (losses) on other-than-temporarily impaired securities		(116	)		(121	)

Net unrealized investment gains (losses)		236			(100	)

Derivatives qualifying as hedges		943			924
Foreign currency translation and other adjustments		883			668

Total accumulated other comprehensive income (loss)		2,062			1,492
Retained earnings		2,959			2,973
Treasury stock, at cost (88 million shares as of June 30, 2011 and December 31, 2010)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		14,432			13,861
Noncontrolling interests		1,126			1,110

Total stockholders’ equity		15,558			14,971

Total liabilities and stockholders’ equity	$	112,347		$	112,395

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in millions)

(Unaudited)


	Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)			Retained earnings			Treasury stock, at cost			Total Genworth Financial, Inc.’s stockholders’ equity			Noncontrolling interests			Total stockholders’ equity
Balances as of December 31, 2010	$	1	$	12,095	$	1,492		$	2,973		$	(2,700	)	$	13,861		$	1,110		$	14,971

Repurchase of subsidiary shares		—		—		—			—			—			—			(71	)		(71	)
Comprehensive income (loss):
Net income (loss)		—		—		—			(14	)		—			(14	)		70			56
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—		—		331			—			—			331			5			336
Net unrealized gains (losses) on other-than-temporarily impaired securities		—		—		5			—			—			5			—			5
Derivatives qualifying as hedges		—		—		19			—			—			19			—			19
Foreign currency translation and other adjustments		—		—		215			—			—			215			36			251

Total comprehensive income (loss)																					667
Dividends to noncontrolling interests		—		—		—			—			—			—			(24	)		(24	)
Stock-based compensation expense and exercises and other		—		15		—			—			—			15			—			15

Balances as of June 30, 2011	$	1	$	12,110	$	2,062		$	2,959		$	(2,700	)	$	14,432		$	1,126		$	15,558

Balances as of December 31, 2009	$	1	$	12,034	$	(164	)	$	3,105		$	(2,700	)	$	12,276		$	1,074		$	13,350

Cumulative effect of change in accounting, net of taxes and other adjustments		—		—		91			(104	)		—			(13	)		—			(13	)
Comprehensive income (loss):
Net income		—		—		—			220			—			220			69			289
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—		—		1,268			—			—			1,268			9			1,277
Net unrealized gains (losses) on other-than-temporarily impaired securities		—		—		68			—			—			68			—			68
Derivatives qualifying as hedges		—		—		360			—			—			360			—			360
Foreign currency translation and other adjustments		—		—		(292	)		—			—			(292	)		(15	)		(307	)

Total comprehensive income (loss)																					1,687
Dividends to noncontrolling interests		—		—		—			—			—			—			(21	)		(21	)
Stock-based compensation expense and exercises and other		—		24		—			—			—			24			—			24
Other capital transactions		—		20		—			—			—			20			—			20

Balances as of June 30, 2010	$	1	$	12,078	$	1,331		$	3,221		$	(2,700	)	$	13,931		$	1,116		$	15,047

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,
	2011			2010
Cash flows from operating activities:
Net income	$	56		$	289
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity discounts and premiums and limited partnerships		(53	)		5
Net investment losses (gains)		68			209
Charges assessed to policyholders		(327	)		(233	)
Acquisition costs deferred		(449	)		(392	)
Amortization of deferred acquisition costs and intangibles		382			363
Deferred income taxes		(85	)		(173	)
Net increase in trading securities, held-for-sale investments and derivative instruments		79			119
Stock-based compensation expense		16			23
Change in certain assets and liabilities:
Accrued investment income and other assets		(83	)		24
Insurance reserves		1,281			1,208
Current tax liabilities		5			(211	)
Other liabilities and other policy-related balances		(48	)		(674	)

Net cash from operating activities		842			557

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		3,069			2,057
Commercial mortgage loans		411			263
Restricted commercial mortgage loans related to securitization entities		49			27
Proceeds from sales of investments:
Fixed maturity and equity securities		1,893			2,393
Purchases and originations of investments:
Fixed maturity and equity securities		(5,183	)		(6,867	)
Commercial mortgage loans		(142	)		(23	)
Other invested assets, net		(28	)		1,491
Policy loans, net		(71	)		(64	)
Payments for businesses purchased, net of cash acquired		(4	)		—

Net cash from investing activities		(6	)		(723	)

Cash flows from financing activities:
Deposits to universal life and investment contracts		1,221			1,174
Withdrawals from universal life and investment contracts		(2,123	)		(1,734	)
Short-term borrowings and other, net		137			(285	)
Redemption and repurchase of non-recourse funding obligations		(45	)		(6	)
Proceeds from the issuance of long-term debt		545			660
Repayment and repurchase of long-term debt		(760	)		—
Repayment of borrowings related to securitization entities		(49	)		(31	)
Repurchase of subsidiary shares		(71	)		—
Dividends paid to noncontrolling interests		(24	)		(21	)

Net cash from financing activities		(1,169	)		(243	)
Effect of exchange rate changes on cash and cash equivalents		32			(7	)

Net change in cash and cash equivalents		(301	)		(416	)
Cash and cash equivalents at beginning of period		3,132			5,002

Cash and cash equivalents at end of period	$	2,831		$	4,586

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware on October 23, 2003. The accompanying condensed financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or where we are the primary beneficiary of a variable interest entity, which we refer to as the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.

We have the following three operating segments:

•

Retirement and Protection. We offer and/or manage a variety of protection, wealth management and retirement income products. Our primary insurance products include life and long-term care insurance. Additionally, we offer other Medicare supplement insurance products, as well as care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs and advisor services, financial planning services and fixed deferred and immediate individual annuities. We previously offered variable deferred annuities and group variable annuities offered through retirement plans.

•

International. We offer mortgage and lifestyle protection insurance products and related services in multiple markets. We are a leading provider of mortgage insurance products in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. We are a leading provider of protection coverages primarily associated with certain financial obligations (referred to as lifestyle protection) in multiple European countries. These lifestyle protection insurance products primarily help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death.

•

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

We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”).

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

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these condensed consolidated

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2010 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Pronouncements

Recently Adopted

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

On January 1, 2011, we adopted new accounting guidance related to how investments held through separate accounts affect an insurer’s consolidation analysis of those investments. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2011, we adopted new accounting guidance related to additional disclosures about purchases, sales, issuances and settlements in the rollforward of Level 3 fair value measurements. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Not Yet Adopted

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

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

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

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

In October 2010, the FASB issued new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This new accounting guidance will be effective for us on January 1, 2012. When adopted, we expect to defer fewer costs. The new guidance is effective prospectively with

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

retrospective adoption allowed. We intend to adopt this new guidance retrospectively. We have not yet determined the impact this accounting guidance will have on our consolidated financial statements.

(3) Earnings (Loss) Per Share

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


	Three months ended June 30,					Six months ended June 30,
(Amounts in millions, except per share amounts)	2011			2010		2011			2010
Net income (loss)	$	(60	)	$	77	$	56		$	289
Less: net income attributable to noncontrolling interests		36			35		70			69

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(96	)	$	42	$	(14	)	$	220

Basic per common share:
Net income (loss)	$	(0.12	)	$	0.16	$	0.11		$	0.59
Less: net income attributable to noncontrolling interests		0.07			0.07		0.14			0.14

Net income (loss) available to Genworth Financial, Inc.’s common stockholders ⁽¹⁾	$	(0.20	)	$	0.09	$	(0.03	)	$	0.45

Diluted per common share:
Net income (loss)	$	(0.12	)	$	0.16	$	0.11		$	0.59
Less: net income attributable to noncontrolling interests		0.07			0.07		0.14			0.14

Net income (loss) available to Genworth Financial, Inc.’s common stockholders ⁽¹⁾	$	(0.20	)	$	0.08	$	(0.03	)	$	0.45

Weighted-average shares used in basic earnings per common share calculations		490.6			489.1		490.4			489.0
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		—			5.1		—			4.9

Weighted-average shares used in diluted earnings per common share calculations ⁽²⁾		490.6			494.2		490.4			493.9

⁽¹⁾	May not total due to whole number calculation.

⁽²⁾

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss available to Genworth Financial, Inc.’s common stockholders for the three and six months ended June 30, 2011, we were required to use basic weighted-average common shares outstanding in the calculation for the three and six months ended June 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 3.7 million and 4.0 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.’s common stockholders for the three and six months ended June 30, 2011, dilutive potential common shares would have been 494.3 million and 494.4 million, respectively.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) Investments

(a) Net Investment Income

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


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2011			2010			2011			2010
Fixed maturity securities—taxable	$	693		$	646		$	1,363		$	1,272
Fixed maturity securities—non-taxable		10			16			21			32
Commercial mortgage loans		92			99			184			203
Restricted commercial mortgage loans related to securitization entities		9			10			19			20
Equity securities		10			5			13			7
Other invested assets		55			39			89			37
Restricted other invested assets related to securitization entities		—			—			—			1
Policy loans		30			28			59			55
Cash, cash equivalents and short-term investments		6			4			12			9

Gross investment income before expenses and fees		905			847			1,760			1,636
Expenses and fees		(24	)		(24	)		(49	)		(48	)

Net investment income	$	881		$	823		$	1,711		$	1,588

(b) Net Investment Gains (Losses)

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


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2011			2010			2011			2010
Available-for-sale securities:
Realized gains	$	25		$	53		$	54		$	76
Realized losses		(34	)		(36	)		(65	)		(74	)

Net realized gains (losses) on available-for-sale securities		(9	)		17			(11	)		2

Impairments:
Total other-than-temporary impairments		(28	)		(24	)		(59	)		(101	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		2			(27	)		(3	)		(30	)

Net other-than-temporary impairments		(26	)		(51	)		(62	)		(131	)

Trading securities		14			(4	)		25			2
Commercial mortgage loans		2			(18	)		1			(22	)
Net gains (losses) related to securitization entities		(5	)		(47	)		5			(36	)
Derivative instruments ⁽¹⁾		(15	)		(38	)		(25	)		(46	)
Other		(1	)		2			(1	)		22

Net investment gains (losses)	$	(40	)	$	(139	)	$	(68	)	$	(209	)

⁽¹⁾	See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended June 30, 2011 and 2010 was $294 million and $858 million, respectively, which was approximately 91% and 96%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2011 and 2010 was $691 million and $1,416 million, respectively, which was approximately 93% and 95%, respectively, of book value.

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


	As of or for the three months ended June 30,						As of or for the six months ended June 30,
(Amounts in millions)	2011			2010			2011			2010
Beginning balance	$	755		$	1,025		$	784		$	1,059
Additions:
Other-than-temporary impairments not previously recognized		1			11			4			31
Increases related to other-than-temporary impairments previously recognized		17			32			48			78
Reductions:
Securities sold, paid down or disposed		(47	)		(90	)		(110	)		(190	)

Ending balance	$	726		$	978		$	726		$	978

(c) Unrealized Investment Gains and Losses

Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:


(Amounts in millions)	June 30, 2011			December 31, 2010
Net unrealized gains (losses) on investment securities:
Fixed maturity securities	$	1,141		$	511
Equity securities		21			9
Other invested assets		(24	)		(22	)

Subtotal		1,138			498
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(694	)		(583	)
Income taxes, net		(153	)		35

Net unrealized investment gains (losses)		291			(50	)
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		55			50

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	236		$	(100	)

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	As of or for the three months ended June 30,
(Amounts in millions)	2011			2010
Beginning balance	$	(37	)	$	(860	)
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		555			1,498
Adjustment to deferred acquisition costs		(36	)		(80	)
Adjustment to present value of future profits		(15	)		(51	)
Adjustment to sales inducements		(3	)		(10	)
Adjustment to benefit reserves		(94	)		—
Provision for income taxes		(142	)		(480	)

Change in unrealized gains (losses) on investment securities		265			877
Reclassification adjustments to net investment (gains) losses, net of taxes of $(13) and $(11)		22			22

Change in net unrealized investment gains (losses)		287			899
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		14			10

Ending balance	$	236		$	29


	As of or for the six months ended June 30,
(Amounts in millions)	2011			2010
Beginning balance	$	(100	)	$	(1,398	)
Cumulative effect of change in accounting		—			91
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		567			2,261
Adjustment to deferred acquisition costs		(57	)		(193	)
Adjustment to present value of future profits		(16	)		(81	)
Adjustment to sales inducements		(7	)		(26	)
Adjustment to benefit reserves		(31	)		—
Provision for income taxes		(162	)		(700	)

Change in unrealized gains (losses) on investment securities		294			1,261
Reclassification adjustments to net investment (gains) losses, net of taxes of $(26) and $(45)		47			84

Change in net unrealized investment gains (losses)		341			1,436
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		5			9

Ending balance	$	236		$	29

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity and Equity Securities

As of June 30, 2011, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains				Gross unrealized losses						Fair value
(Amounts in millions)	Amortized cost or cost		Not other-than- temporarily impaired		Other-than- temporarily impaired		Not other-than- temporarily impaired			Other-than- temporarily impaired			Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	3,548	$	153	$	—	$	(19	)	$	—		$	3,682
Tax-exempt		940		19		—		(94	)		—			865
Government—non-U.S.		2,265		128		—		(4	)		—			2,389
U.S. corporate		23,081		1,260		13		(307	)		—			24,047
Corporate—non-U.S.		14,038		530		—		(139	)		(1	)		14,428
Residential mortgage-backed		5,252		174		15		(268	)		(190	)		4,983
Commercial mortgage-backed		3,767		135		6		(153	)		(34	)		3,721
Other asset-backed		2,172		22		—		(86	)		(2	)		2,106

Total fixed maturity securities		55,063		2,421		34		(1,070	)		(227	)		56,221
Equity securities		352		25		—		(3	)		—			374

Total available-for-sale securities	$	55,415	$	2,446	$	34	$	(1,073	)	$	(227	)	$	56,595

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


(Amounts in millions)	Amortized cost or cost		Gross unrealized gains				Gross unrealized losses						Fair value
(Amounts in millions)	Amortized cost or cost		Not other-than- temporarily impaired		Other-than- temporarily impaired		Not other-than- temporarily impaired			Other-than- temporarily impaired			Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	3,568	$	145	$	—	$	(8	)	$	—		$	3,705
Tax-exempt		1,124		19		—		(113	)		—			1,030
Government—non-U.S.		2,257		118		—		(6	)		—			2,369
U.S. corporate		23,282		1,123		10		(448	)		—			23,967
Corporate—non-U.S.		13,180		485		—		(167	)		—			13,498
Residential mortgage-backed		4,821		116		18		(304	)		(196	)		4,455
Commercial mortgage-backed		3,936		132		6		(286	)		(45	)		3,743
Other asset-backed		2,494		18		—		(94	)		(2	)		2,416

Total fixed maturity securities		54,662		2,156		34		(1,426	)		(243	)		55,183
Equity securities		323		13		—		(4	)		—			332

Total available-for-sale securities	$	54,985	$	2,169	$	34	$	(1,430	)	$	(243	)	$	55,515

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of June 30, 2011:


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses ⁽¹⁾			Number of securities		Fair value		Gross unrealized losses ⁽²⁾			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	1,002	$	(19	)		43	$	—	$	—			—	$	1,002	$	(19	)		43
Tax-exempt		114		(3	)		31		253		(91	)		88		367		(94	)		119
Government—non-U.S.		189		(3	)		58		11		(1	)		5		200		(4	)		63
U.S. corporate		2,933		(94	)		337		1,712		(213	)		150		4,645		(307	)		487
Corporate—non-U.S.		1,896		(65	)		276		854		(75	)		78		2,750		(140	)		354
Residential mortgage-backed		450		(19	)		92		884		(439	)		373		1,334		(458	)		465
Commercial mortgage-backed		361		(17	)		51		1,034		(170	)		180		1,395		(187	)		231
Other asset-backed		113		(5	)		20		343		(83	)		39		456		(88	)		59

Subtotal, fixed maturity securities		7,058		(225	)		908		5,091		(1,072	)		913		12,149		(1,297	)		1,821
Equity securities		83		(2	)		54		10		(1	)		10		93		(3	)		64

Total for securities in an unrealized loss position	$	7,141	$	(227	)		962	$	5,101	$	(1,073	)		923	$	12,242	$	(1,300	)		1,885

% Below cost—fixed maturity securities:
<20% Below cost	$	6,969	$	(190	)		883	$	3,966	$	(354	)		544	$	10,935	$	(544	)		1,427
20%-50% Below cost		89		(34	)		20		986		(432	)		249		1,075		(466	)		269
>50% Below cost		—		(1	)		5		139		(286	)		120		139		(287	)		125

Total fixed maturity securities		7,058		(225	)		908		5,091		(1,072	)		913		12,149		(1,297	)		1,821

% Below cost—equity securities:
<20% Below cost		78		(1	)		53		10		(1	)		10		88		(2	)		63
20%-50% Below cost		5		(1	)		1		—		—			—		5		(1	)		1
>50% Below cost		—		—			—		—		—			—		—		—			—

Total equity securities		83		(2	)		54		10		(1	)		10		93		(3	)		64

Total for securities in an unrealized loss position	$	7,141	$	(227	)		962	$	5,101	$	(1,073	)		923	$	12,242	$	(1,300	)		1,885

Investment grade	$	6,837	$	(217	)		863	$	3,616	$	(505	)		527	$	10,453	$	(722	)		1,390
Below investment grade ⁽³⁾		304		(10	)		99		1,485		(568	)		396		1,789		(578	)		495

Total for securities in an unrealized loss position	$	7,141	$	(227	)		962	$	5,101	$	(1,073	)		923	$	12,242	$	(1,300	)		1,885

⁽¹⁾	Amounts included $222 million of unrealized losses on other-than-temporarily impaired securities.

⁽²⁾	Amounts included $227 million of unrealized losses on other-than-temporarily impaired securities.

⁽³⁾	Amounts that have been in a continuous loss position for 12 months or more included $208 million of unrealized losses on other-than-temporarily impaired securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As indicated in the table above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to credit spreads that have widened since acquisition for corporate securities across various industry sectors, including finance and insurance as well as transportation. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 3% as of June 30, 2011.

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

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

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


	Investment Grade
	20% to 50%										Greater than 50%
(Dollar amounts in millions)	Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities
Fixed maturity securities:
Tax-exempt	$	184	$	(78	)		6	%		55	$	—	$	—			—	%		—
Government—non-U.S.		2		(1	)		—			1		—		—			—			—
U.S. corporate		77		(30	)		2			4		14		(26	)		2			1
Corporate—non-U.S.		66		(20	)		2			4		—		—			—			—
Structured securities:
Residential mortgage-backed		56		(23	)		2			21		12		(27	)		2			14
Commercial mortgage-backed		80		(30	)		2			9		2		(3	)		—			5
Other asset-backed		4		(1	)		—			1		1		(1	)		—			1

Total structured securities		140		(54	)		4			31		15		(31	)		2			20

Total	$	469	$	(183	)		14	%		95	$	29	$	(57	)		4	%		21

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Below Investment Grade
	20% to 50%										Greater than 50%
(Dollar amounts in millions)	Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities
Fixed maturity securities:
Tax-exempt	$	—	$	—			—	%		—	$	—	$	—			—	%		—
U.S. corporate		14		(6	)		—			2		—		—			—			—
Structured securities:
Residential mortgage-backed		342		(168	)		13			124		82		(184	)		14			81
Commercial mortgage-backed		61		(22	)		2			23		17		(33	)		3			16
Other asset-backed		100		(53	)		4			5		11		(12	)		1			2

Total structured securities		503		(243	)		19			152		110		(229	)		18			99

Total	$	517	$	(249	)		19	%		154	$	110	$	(229	)		18	%		99

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of cash flows to be collected. We do not intend to sell and it is not more likely than not that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.

Tax-Exempt Securities

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Corporate Debt Securities

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


	Investment Grade
	20% to 50%										Greater than 50%
(Dollar amounts in millions)	Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities
Industry:
Finance and insurance	$	139	$	(49	)		4	%		7	$	—	$	—			—	%		—
Transportation		—		—			—			—		14		(26	)		2			1
Other		4		(1	)		—			1		—		—			—			—

Total	$	143	$	(50	)		4	%		8	$	14	$	(26	)		2	%		1


	Below Investment Grade
	20% to 50%										Greater than 50%
(Dollar amounts in millions)	Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities		Fair value		Gross unrealized losses		% of total gross unrealized losses			Number of securities
Industry:
Finance and insurance	$	14	$	(6	)		—	%		2	$	—	$	—		—	%		—
Consumer – cyclical		—		—			—			—		—		—		—			—
Transportation		—		—			—			—		—		—		—			—

Total	$	14	$	(6	)		—	%		2	$	—	$	—		—	%		—

Of the total unrealized losses of $82 million for corporate fixed maturity securities presented in the preceding tables, $55 million, or 67%, of the unrealized losses related to issuers in the finance and insurance sector that were 26% below cost on average. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of June 30, 2011. Of the $55 million of unrealized losses related to the finance and insurance industry, $28 million related to financial hybrid securities on which a debt impairment model was employed. Most of our hybrid securities retained a credit rating of investment grade. The fair value of these hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions and continued but diminishing risk that income payments may be deferred. We continue to receive our contractual payments and expect to fully recover our amortized cost.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Structured Securities

Of the $557 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, $192 million related to other-than-temporarily-impaired securities where the unrealized losses represented the non-credit portion of the impairment. The extent and duration of the unrealized loss position on our structured securities is due to the ongoing concern and uncertainty about the residential and commercial real estate market and unemployment, resulting in credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been significantly impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the housing market.

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

We used our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Despite the considerable analysis and rigor employed on our structured securities, it is at least reasonably possible that the underlying collateral of these investments will perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses ⁽¹⁾			Number of securities		Fair value		Gross unrealized losses ⁽²⁾			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	545	$	(8	)		36	$	—	$	—			—	$	545	$	(8	)		36
Tax-exempt		285		(12	)		101		244		(101	)		90		529		(113	)		191
Government—non-U.S.		431		(5	)		69		21		(1	)		7		452		(6	)		76
U.S. corporate		3,615		(125	)		443		2,338		(323	)		191		5,953		(448	)		634
Corporate—non-U.S.		2,466		(53	)		296		1,141		(114	)		102		3,607		(167	)		398
Residential mortgage-backed		461		(23	)		92		1,031		(477	)		416		1,492		(500	)		508
Commercial mortgage-backed		177		(8	)		26		1,167		(323	)		225		1,344		(331	)		251
Other asset-backed		401		(2	)		37		512		(94	)		53		913		(96	)		90

Subtotal, fixed maturity securities		8,381		(236	)		1,100		6,454		(1,433	)		1,084		14,835		(1,669	)		2,184
Equity securities		77		(3	)		48		5		(1	)		4		82		(4	)		52

Total for securities in an unrealized loss position	$	8,458	$	(239	)		1,148	$	6,459	$	(1,434	)		1,088	$	14,917	$	(1,673	)		2,236

% Below cost—fixed maturity securities:
<20% Below cost	$	8,359	$	(226	)		1,076	$	4,852	$	(418	)		588	$	13,211	$	(644	)		1,664
20%-50% Below cost		22		(8	)		18		1,428		(652	)		328		1,450		(660	)		346
>50% Below cost		—		(2	)		6		174		(363	)		168		174		(365	)		174

Total fixed maturity securities		8,381		(236	)		1,100		6,454		(1,433	)		1,084		14,835		(1,669	)		2,184

% Below cost—equity securities:
<20% Below cost		72		(2	)		47		5		(1	)		4		77		(3	)		51
20%-50% Below cost		5		(1	)		1		—		—			—		5		(1	)		1

Total equity securities		77		(3	)		48		5		(1	)		4		82		(4	)		52

Total for securities in an unrealized loss position	$	8,458	$	(239	)		1,148	$	6,459	$	(1,434	)		1,088	$	14,917	$	(1,673	)		2,236

Investment grade	$	8,249	$	(231	)		1,060	$	4,850	$	(764	)		683	$	13,099	$	(995	)		1,743
Below investment grade ⁽³⁾		209		(8	)		88		1,609		(670	)		405		1,818		(678	)		493

Total for securities in an unrealized loss position	$	8,458	$	(239	)		1,148	$	6,459	$	(1,434	)		1,088	$	14,917	$	(1,673	)		2,236

⁽¹⁾	Amounts included $240 million of unrealized losses on other-than-temporarily impaired securities.

⁽²⁾	Amounts included $243 million of unrealized losses on other-than-temporarily impaired securities.

⁽³⁾	Amounts that have been in a continuous loss position for 12 months or more included $213 million of unrealized losses on other-than-temporarily impaired securities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


(Amounts in millions)	Amortized cost or cost		Fair value
Due one year or less	$	2,831	$	2,857
Due after one year through five years		11,766		12,103
Due after five years through ten years		9,570		10,031
Due after ten years		19,705		20,420

Subtotal		43,872		45,411
Residential mortgage-backed		5,252		4,983
Commercial mortgage-backed		3,767		3,721
Other asset-backed		2,172		2,106

Total	$	55,063	$	56,221

As of June 30, 2011, $4,505 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

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

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

(e) Commercial Mortgage Loans

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

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


	June 30, 2011						December 31, 2010
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	1,912			30	%	$	1,974			29	%
Office		1,757			27			1,850			27
Industrial		1,753			27			1,788			26
Apartments		718			11			725			11
Mixed use/other		345			5			435			7

Subtotal		6,485			100	%		6,772			100	%

Unamortized balance of loan origination fees and costs		4						5
Allowance for losses		(57	)					(59	)

Total	$	6,432					$	6,718

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	June 30, 2011						December 31, 2010
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
South Atlantic	$	1,624			25	%	$	1,583			23	%
Pacific		1,615			25			1,769			26
Middle Atlantic		865			13			937			14
East North Central		577			9			612			9
Mountain		516			8			540			8
New England		422			7			482			7
West North Central		349			5			369			6
West South Central		348			5			297			4
East South Central		169			3			183			3

Subtotal		6,485			100	%		6,772			100	%

Unamortized balance of loan origination fees and costs		4						5
Allowance for losses		(57	)					(59	)

Total	$	6,432					$	6,718

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


	June 30, 2011
(Amounts in millions)	31 – 60 days past due			61 – 90 days past due			Greater than 90 days past due			Total past due			Current			Total
Property type:
Retail	$	9		$	—		$	5		$	14		$	1,898		$	1,912
Office		4			—			18			22			1,735			1,757
Industrial		2			—			10			12			1,741			1,753
Apartments		—			—			—			—			718			718
Mixed use/other		—			—			—			—			345			345

Total recorded investment	$	15		$	—		$	33		$	48		$	6,437		$	6,485

% of total commercial mortgage loans		—	%		—	%		1	%		1	%		99	%		100	%


	December 31, 2010
(Amounts in millions)	31 – 60 days past due			61 – 90 days past due			Greater than 90 days past due			Total past due			Current			Total
Property type:
Retail	$	—		$	—		$	—		$	—		$	1,974		$	1,974
Office		—			—			12			12			1,838			1,850
Industrial		—			6			27			33			1,755			1,788
Apartments		—			—			—			—			725			725
Mixed use/other		—			—			—			—			435			435

Total recorded investment	$	—		$	6		$	39		$	45		$	6,727		$	6,772

% of total commercial mortgage loans		—	%		—	%		1	%		1	%		99	%		100	%

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of June 30, 2011 and December 31, 2010, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest.

During 2011 and 2010, we modified or extended 11 and 13, respectively, commercial mortgage loans with a total carrying value of $36 million and $98 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.

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


(Amounts in millions)	June 30, 2011		December 31, 2010
Property type:
Retail	$	5	$	—
Office		18		12
Industrial		10		27
Apartments		—		—
Mixed use/other		—		—

Total recorded investment	$	33	$	39

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans for the periods indicated:


(Amounts in millions)	Three months ended June 30, 2011			Six months ended June 30, 2011
Allowance for credit losses:
Beginning balance	$	58		$	59
Charge-offs		(4	)		(5	)
Recoveries		—			—
Provision		3			3

Ending balance	$	57		$	57

Ending allowance for individually impaired loans	$	—		$	—

Ending allowance for loans not individually impaired that were evaluated collectively for impairment	$	57		$	57

Recorded investment:
Ending balance	$	6,485		$	6,485

Ending balance of individually impaired loans	$	13		$	13

Ending balance of loans not individually impaired that were evaluated collectively for impairment	$	6,472		$	6,472

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


(Amounts in millions)	Three months ended June 30, 2010		Six months ended June 30, 2010
Beginning balance	$	52	$	48
Provision ⁽¹⁾		18		22
Release		—		—

Ending balance	$	70	$	70

⁽¹⁾	Included $13 million related to held-for-sale commercial mortgage loans.

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


	June 30, 2011
(Amounts in millions)	Recorded investment		Unpaid principal balance		Charge- offs		Related allowance		Average recorded investment		Interest income recognized
Property type:
Retail	$	3	$	4	$	1	$	—	$	2	$	—
Office		10		13		3		—	$	10		—
Industrial		—		—		—		—	$	—		—
Apartments		—		—		—		—	$	—		—
Mixed use/other		—		—		—		—	$	—		—

Total	$	13	$	17	$	4	$	—	$	6	$	—


	December 31, 2010
(Amounts in millions)	Recorded investment		Unpaid principal balance		Charge- offs		Related allowance		Average recorded investment		Interest income recognized
Property type:
Retail	$	5	$	8	$	3	$	—	$	2	$	—
Office		6		8		2		—	$	2		—
Industrial		19		24		5		—	$	3		—
Apartments		—		—		—		—	$	—		—
Mixed use/other		—		—		—		—	$	—		—

Total	$	30	$	40	$	10	$	—	$	3	$	—

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgages loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

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


	June 30, 2011
(Amounts in millions)	0% – 50%			51% – 60%			61% – 75%			76% – 100%			Greater than 100% ⁽¹⁾			Total
Property type:
Retail	$	458		$	247		$	847		$	322		$	38		$	1,912
Office		321			294			605			365			172			1,757
Industrial		498			329			613			283			30			1,753
Apartments		147			191			304			61			15			718
Mixed use/other		83			40			72			140			10			345

Total recorded investment	$	1,507		$	1,101		$	2,441		$	1,171		$	265		$	6,485

% of total		23	%		17	%		38	%		18	%		4	%		100	%

Weighted-average debt service coverage ratio		2.28			1.86			2.16			1.80			1.56			2.05

⁽¹⁾	Included $13 million of impaired loans and $252 million of loans in good standing, with a total weighted-average loan-to-value of 119%, where borrowers continued to make timely payments and have no history of delinquencies or distress.

December 31, 2010

(Amounts in millions)

0% – 50%

51% – 60%

61% – 75%

76% – 100%

Greater
than 100% ⁽¹⁾

Total

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company