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 September 30, 2012

¨	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 October 26, 2012, 491,831,925 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 Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011		3
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011 (Unaudited)		4
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (Unaudited)		5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2012 and 2011 (Unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (Unaudited)		7
	Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		83

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		182

Item 4.	Controls and Procedures		183

PART II—OTHER INFORMATION			184

Item 1.	Legal Proceedings		184

Item 1A.	Risk Factors		184

Item 6.	Exhibits		186

Signatures			187

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	September 30, 2012			December 31, 2011
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	62,214		$	58,295
Equity securities available-for-sale, at fair value		524			361
Commercial mortgage loans		5,861			6,092
Restricted commercial mortgage loans related to securitization entities		359			411
Policy loans		1,626			1,549
Other invested assets		3,916			4,819
Restricted other invested assets related to securitization entities ($393 and $376 at fair value)		393			377

Total investments		74,893			71,904
Cash and cash equivalents		3,741			4,488
Accrued investment income		746			691
Deferred acquisition costs		5,020			5,193
Intangible assets		488			580
Goodwill		1,128			1,253
Reinsurance recoverable		17,195			16,998
Other assets		1,010			958
Separate account assets		10,166			10,122

Total assets	$	114,387		$	112,187

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	33,221		$	32,175
Policyholder account balances		26,449			26,345
Liability for policy and contract claims		7,545			7,620
Unearned premiums		4,291			4,223
Other liabilities ($167 and $210 other liabilities related to securitization entities)		6,073			6,308
Borrowings related to securitization entities ($60 and $48 at fair value)		353			396
Non-recourse funding obligations		2,325			3,256
Long-term borrowings		4,880			4,726
Deferred tax liability		1,437			838
Separate account liabilities		10,166			10,122

Total liabilities		96,740			96,009

Commitments and contingencies

Stockholders’ equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 580 million and 579 million shares issued as of September 30, 2012 and December 31, 2011, respectively; 492 million and 491 million shares outstanding as of September 30, 2012 and December 31, 2011, respectively		1			1
Additional paid-in capital		12,162			12,136

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		2,641			1,617
Net unrealized gains (losses) on other-than-temporarily impaired securities		(88	)		(132	)

Net unrealized investment gains (losses)		2,553			1,485

Derivatives qualifying as hedges		2,011			2,009
Foreign currency translation and other adjustments		659			553

Total accumulated other comprehensive income (loss)		5,223			4,047
Retained earnings		1,741			1,584
Treasury stock, at cost (88 million shares as of September 30, 2012 and December 31, 2011)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		16,427			15,068
Noncontrolling interests		1,220			1,110

Total stockholders’ equity		17,647			16,178

Total liabilities and stockholders’ equity	$	114,387		$	112,187

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenues:
Premiums	$	1,311		$	1,461		$	3,720		$	4,353
Net investment income		825			842			2,503			2,553
Net investment gains (losses)		9			(157	)		10			(225	)
Insurance and investment product fees and other		391			375			1,252			1,063

Total revenues		2,536			2,521			7,485			7,744

Benefits and expenses:
Benefits and other changes in policy reserves		1,363			1,457			3,977			4,549
Interest credited		193			194			582			599
Acquisition and operating expenses, net of deferrals		504			581			1,536			1,725
Amortization of deferred acquisition costs and intangibles		162			152			582			465
Goodwill impairment		89			—			89			—
Interest expense		126			124			352			385

Total benefits and expenses		2,437			2,508			7,118			7,723

Income before income taxes		99			13			367			21
Provision (benefit) for income taxes		29			(7	)		108			8

Net income		70			20			259			13
Less: net income attributable to noncontrolling interests		36			36			102			106

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	34		$	(16	)	$	157		$	(93	)

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.07		$	(0.03	)	$	0.32		$	(0.19	)

Diluted	$	0.07		$	(0.03	)	$	0.32		$	(0.19	)

Weighted-average common shares outstanding:
Basic		491.7			490.8			491.5			490.5

Diluted		493.9			490.8			494.5			490.5

Supplemental disclosures:
Total other-than-temporary impairments	$	(26	)	$	(39	)	$	(84	)	$	(98	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		(3	)		(13	)		(1	)		(16	)

Net other-than-temporary impairments		(29	)		(52	)		(85	)		(114	)
Other investments gains (losses)		38			(105	)		95			(111	)

Total net investment gains (losses)	$	9		$	(157	)	$	10		$	(225	)

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012		2011
Net income	$	70		$	20		$	259	$	13
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired		517			1,256			1,029		1,600
Net unrealized gains (losses) on other-than-temporarily impaired securities		28			(10	)		44		(5	)
Derivatives qualifying as hedges		(76	)		1,017			2		1,036
Foreign currency translation and other adjustments		148			(508	)		145		(259	)

Total other comprehensive income (loss)		617			1,755			1,220		2,372

Total comprehensive income (loss)		687			1,775			1,479		2,385
Less: comprehensive income attributable to noncontrolling interests		83			(25	)		146		86

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	604		$	1,800		$	1,333	$	2,299

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, 2011	$	1	$	12,136	$	4,047		$	1,584		$	(2,700	)	$	15,068		$	1,110		$	16,178

Comprehensive income (loss):
Net income		—		—		—			157			—			157			102			259
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—		—		1,024			—			—			1,024			5			1,029
Net unrealized gains (losses) on other-than-temporarily impaired securities		—		—		44			—			—			44			—			44
Derivatives qualifying as hedges		—		—		2			—			—			2			—			2
Foreign currency translation and other adjustments		—		—		106			—			—			106			39			145

Total comprehensive income (loss)															1,333			146			1,479
Dividends to noncontrolling interests		—		—		—			—			—			—			(36	)		(36	)
Stock-based compensation expense and exercises and other		—		26		—			—			—			26			—			26

Balances as of September 30, 2012	$	1	$	12,162	$	5,223		$	1,741		$	(2,700	)	$	16,427		$	1,220		$	17,647

Balances as of December 31, 2010	$	1	$	12,107	$	1,506		$	1,535		$	(2,700	)	$	12,449		$	1,096		$	13,545

Repurchase of subsidiary shares		—		—		—			—			—			—			(71	)		(71	)
Comprehensive income (loss):
Net income (loss)		—		—		—			(93	)		—			(93	)		106			13
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—		—		1,566			—			—			1,566			34			1,600
Net unrealized gains (losses) on other-than-temporarily impaired securities		—		—		(5	)		—			—			(5	)		—			(5	)
Derivatives qualifying as hedges		—		—		1,036			—			—			1,036			—			1,036
Foreign currency translation and other adjustments		—		—		(205	)		—			—			(205	)		(54	)		(259	)

Total comprehensive income (loss)															2,299			86			2,385
Dividends to noncontrolling interests		—		—		—			—			—			—			(35	)		(35	)
Stock-based compensation expense and exercises and other		—		22		—			—			—			22			—			22

Balances as of September 30, 2011	$	1	$	12,129	$	3,898		$	1,442		$	(2,700	)	$	14,770		$	1,076		$	15,846

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)


	Nine months ended September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	259		$	13
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity discounts and premiums and limited partnerships		(59	)		(71	)
Net investment losses (gains)		(10	)		225
Charges assessed to policyholders		(590	)		(507	)
Acquisition costs deferred		(456	)		(485	)
Amortization of deferred acquisition costs and intangibles		582			465
Goodwill impairment		89			—
Deferred income taxes		14			(155	)
Gain on sale of subsidiary		(15	)		—
Net increase in trading securities, held-for-sale investments and derivative instruments		66			795
Stock-based compensation expense		20			23
Change in certain assets and liabilities:
Accrued investment income and other assets		(160	)		(152	)
Insurance reserves		1,672			1,953
Current tax liabilities		(190	)		8
Other liabilities and other policy-related balances		(795	)		(80	)

Net cash from operating activities		427			2,032

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		3,619			4,075
Commercial mortgage loans		559			633
Restricted commercial mortgage loans related to securitization entities		48			77
Proceeds from sales of investments:
Fixed maturity and equity securities		3,956			3,446
Purchases and originations of investments:
Fixed maturity and equity securities		(8,942	)		(7,798	)
Commercial mortgage loans		(339	)		(202	)
Other invested assets, net		531			(56	)
Policy loans, net		(8	)		(85	)
Proceeds from sale of a subsidiary, net of cash transferred		64			—
Payments for businesses purchased, net of cash acquired		(18	)		(4	)

Net cash from investing activities		(530	)		86

Cash flows from financing activities:
Deposits to universal life and investment contracts		2,248			2,016
Withdrawals from universal life and investment contracts		(2,057	)		(3,034	)
Redemption and repurchase of non-recourse funding obligations		(801	)		(112	)
Proceeds from the issuance of long-term debt		361			545
Repayment and repurchase of long-term debt		(222	)		(760	)
Repayment of borrowings related to securitization entities		(53	)		(77	)
Repurchase of subsidiary shares		—			(71	)
Dividends paid to noncontrolling interests		(36	)		(35	)
Other, net		(103	)		21

Net cash from financing activities		(663	)		(1,507	)
Effect of exchange rate changes on cash and cash equivalents		19			(95	)

Net change in cash and cash equivalents		(747	)		516
Cash and cash equivalents at beginning of period		4,488			3,132

Cash and cash equivalents at end of period	$	3,741		$	3,648

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 operating segments:

•

U.S. Life Insurance. We offer and manage a variety of insurance and fixed annuity products. Our primary insurance products include life and long-term care insurance.

•

International Protection. We are a leading provider of payment protection coverages (referred to as lifestyle protection) in multiple European countries. Our 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.

•

Wealth Management. We offer and manage a variety of wealth management services, including investments, advisor support and practice management services.

•

International Mortgage Insurance. We are a leading provider of mortgage insurance products and related services in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk.

•

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 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 risk.

•

Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and Medicare supplement 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. Effective October 1, 2011, we completed the sale of our Medicare supplement insurance business.

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 other non-core businesses that are managed outside of our operating segments.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Actual results could differ from those estimates. These condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire 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 Current Report on Form 8-K filed on June 11, 2012 which reflected retrospective changes in accounting for costs associated with acquiring or renewing insurance contracts and changes in the treatment of future policy benefits for level premium term life insurance products. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

On January 1, 2012, we adopted 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. We chose to present two separate but consecutive statements and adopted this new guidance retrospectively. The Financial Accounting Standards Board (“FASB”) issued an amendment relating to this new guidance for presentation of the reclassification of items out of accumulated other comprehensive income into net income that removed this requirement until further guidance is issued. The adoption of this new accounting guidance did not have any impact on our consolidated financial results.

On January 1, 2012, we adopted new accounting guidance related to fair value measurements. This new accounting guidance clarified existing fair value measurement requirements and changed certain fair value measurement principles and disclosure requirements. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2012, we adopted new accounting guidance related to repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removed the requirement to consider a transferor’s ability to fulfill its contractual rights from the criteria used to determine effective control and was effective for us prospectively for any transactions occurring on or after January 1, 2012. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2012, we adopted new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. Acquisition costs include costs that are related directly to the successful acquisition of our insurance policies and investment contracts, which are deferred and amortized over the estimated life of the related insurance policies. These costs include commissions in excess of ultimate renewal commissions and for contracts and policies issued some support costs, such as underwriting, medical inspection and issuance expenses. Deferred acquisition costs (“DAC”) are subsequently amortized to expense over the lives of the underlying contracts, in relation to the anticipated recognition of premiums or gross profits. We adopted this new guidance retrospectively, which reduced retained earnings and stockholders’ equity by $1.3 billion as of January 1, 2011, and reduced net income (loss) by $63 million, $86 million and $12 million for the years ended December 31, 2011, 2010 and 2009, respectively. This new guidance results in lower amortization and fewer deferred costs, specifically related to underwriting, inspection and processing for contracts that are not issued, as well as marketing and customer solicitation.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Effective January 1, 2012, we changed our treatment of the liability for future policy benefits for our level premium term life insurance products when the liability for a policy falls below zero. Previously, the total liability for future policy benefits included negative reserves calculated at an individual policy level. Through 2010, we issued level premium term life insurance policies whose premiums are contractually determined to be level through a period of time and then increase thereafter. Our previous accounting policy followed the accounting for traditional, long-duration insurance contracts where the reserves are calculated as the present value of expected benefit payments minus the present value of net premiums based on assumptions determined on the policy issuance date including mortality, interest, and lapse rates. This accounting has the effect of causing profits to emerge as a level percentage of premiums, subject to differences in assumed versus actual experience which flow through income as they occur, and for products with an increasing premium stream, such as the level premium term life insurance product, may result in negative reserves for a given policy.

More recent insurance-specific accounting guidance reflects a different accounting philosophy, emphasizing the balance sheet over the income statement, or matching, focus which was the philosophy in place when the traditional, long-duration insurance contract guidance was issued (the accounting model for traditional, long-duration insurance contracts draws upon the principles of matching and conservatism originating in the 1970’s, and does not specifically address negative reserves). More recent accounting models for long-duration contracts specifically prohibit negative reserves, e.g., non-traditional contracts with annuitization benefits and certain participating contracts. These recent accounting models do not impact the reserving for our level premium term life insurance products.

We believe that industry accounting practices for level premium term life insurance product reserving is mixed with some companies “flooring” reserves at zero and others applying our previous accounting policy described above. In 2010, we stopped issuing new level premium term life insurance policies. Thus, as the level premium term policies reach the end of their level premium term periods, the portion of policies with negative reserves in relation to the reserve for all level premium term life insurance products will continue to increase. Our new method of accounting floors the liability for future policy benefits on each level premium term life insurance policy at zero. We believe that flooring reserves at zero is preferable in our circumstances as this alternative accounting policy will not allow negative reserves to accumulate on the balance sheet for this closed block of insurance policies. In implementing this change in accounting, no changes were made to the assumptions that were locked-in at policy inception. We implemented this accounting change retrospectively, which reduced retained earnings and stockholders’ equity by $110 million as of January 1, 2011, and reduced net income (loss) by $10 million, $4 million and $32 million for the years ended December 31, 2011, 2010 and 2009, respectively.

On October 22, 2012, we announced the launch of a new traditional term life insurance product, along with other changes to our life insurance portfolio designed to update and expand our product offerings and further adjust pricing. We will floor the liability for future policy benefits on these level premium term insurance policies at zero, consistent with our accounting for our existing level premium term insurance business.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balance sheet as of December 31, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:


(Amounts in millions)	As Originally Reported			Effect of DAC Change			Effect of Reserve Change			As Currently Reported
Assets
Total investments	$	71,904		$	—		$	—		$	71,904
Cash and cash equivalents		4,488			—			—			4,488
Accrued investment income		691			—			—			691
Deferred acquisition costs		7,327			(2,134	)		—			5,193
Intangible assets		577			3			—			580
Goodwill		1,253			—			—			1,253
Reinsurance recoverable		16,982			—			16			16,998
Other assets		958			—			—			958
Separate account assets		10,122			—			—			10,122

Total assets	$	114,302		$	(2,131	)	$	16		$	112,187

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	31,971		$	3		$	201		$	32,175
Policyholder account balances		26,345			—			—			26,345
Liability for policy and contract claims		7,620			—			—			7,620
Unearned premiums		4,257			(34	)		—			4,223
Other liabilities		6,308			—			—			6,308
Borrowings related to securitization entities		396			—			—			396
Non-recourse funding obligations		3,256			—			—			3,256
Long-term borrowings		4,726			—			—			4,726
Deferred tax liability		1,636			(733	)		(65	)		838
Separate account liabilities		10,122			—			—			10,122

Total liabilities		96,637			(764	)		136			96,009

Stockholders’ equity:
Class A common stock		1			—			—			1
Additional paid-in capital		12,124			12			—			12,136
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		1,586			31			—			1,617
Net unrealized gains (losses) on other-than-temporarily impaired securities		(132	)		—			—			(132	)

Net unrealized investment gains (losses)		1,454			31			—			1,485

Derivatives qualifying as hedges		2,009			—			—			2,009
Foreign currency translation and other adjustments		558			(5	)		—			553

Total accumulated other comprehensive income (loss)		4,021			26			—			4,047
Retained earnings		3,095			(1,391	)		(120	)		1,584
Treasury stock, at cost		(2,700	)		—			—			(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		16,541			(1,353	)		(120	)		15,068
Noncontrolling interests		1,124			(14	)		—			1,110

Total stockholders’ equity		17,665			(1,367	)		(120	)		16,178

Total liabilities and stockholders’ equity	$	114,302		$	(2,131	)	$	16		$	112,187

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the income statement for the three months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:


(Amounts in millions)	As Originally Reported			Effect of DAC Change			Effect of Reserve Change		As Currently Reported
Revenues:
Premiums	$	1,461		$	—		$	—	$	1,461
Net investment income		842			—			—		842
Net investment gains (losses)		(157	)		—			—		(157	)
Insurance and investment product fees and other		375			—			—		375

Total revenues		2,521			—			—		2,521

Benefits and expenses:
Benefits and other changes in policy reserves		1,457			—			—		1,457
Interest credited		194			—			—		194
Acquisition and operating expenses, net of deferrals		510			71			—		581
Amortization of deferred acquisition costs and intangibles		190			(38	)		—		152
Interest expense		124			—			—		124

Total benefits and expenses		2,475			33			—		2,508

Income before income taxes		46			(33	)		—		13
Benefit for income taxes		(19	)		12			—		(7	)

Net income		65			(45	)		—		20
Less: net income attributable to noncontrolling interests		36			—			—		36

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	29		$	(45	)	$	—	$	(16	)

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:
Basic⁽¹⁾	$	0.06		$	(0.09	)	$	—	$	(0.03	)

Diluted⁽¹⁾	$	0.06		$	(0.09	)	$	—	$	(0.03	)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the income statement for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:


(Amounts in millions)	As Originally Reported			Effect of DAC Change			Effect of Reserve Change			As Currently Reported
Revenues:
Premiums	$	4,353		$	—		$	—		$	4,353
Net investment income		2,553			—			—			2,553
Net investment gains (losses)		(225	)		—			—			(225	)
Insurance and investment product fees and other		1,063			—			—			1,063

Total revenues		7,744			—			—			7,744

Benefits and expenses:
Benefits and other changes in policy reserves		4,538			—			11			4,549
Interest credited		599			—			—			599
Acquisition and operating expenses, net of deferrals		1,524			201			—			1,725
Amortization of deferred acquisition costs and intangibles		572			(107	)		—			465
Interest expense		385			—			—			385

Total benefits and expenses		7,618			94			11			7,723

Income before income taxes		126			(94	)		(11	)		21
Provision for income taxes		5			7			(4	)		8

Net income		121			(101	)		(7	)		13
Less: net income attributable to noncontrolling interests		106			—			—			106

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	15		$	(101	)	$	(7	)	$	(93	)

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:
Basic⁽¹⁾	$	0.03		$	(0.21	)	$	(0.01	)	$	(0.19	)

Diluted⁽¹⁾	$	0.03		$	(0.21	)	$	(0.01	)	$	(0.19	)

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the cash flows from operating activities for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:


(Amounts in millions)	As Originally Reported			Effect of DAC Change			Effect of Reserve Change			As Currently Reported
Cash flows from operating activities:
Net income	$	121		$	(101	)	$	(7	)	$	13
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity discounts and premiums and limited partnerships		(71	)		—			—			(71	)
Net investment losses		225			—			—			225
Charges assessed to policyholders		(507	)		—			—			(507	)
Acquisition costs deferred		(686	)		201			—			(485	)
Amortization of deferred acquisition costs and intangibles		572			(107	)		—			465
Deferred income taxes		(158	)		7			(4	)		(155	)
Net increase in trading securities, held-for-sale investments and derivative instruments		795			—			—			795
Stock-based compensation expense		23			—			—			23
Change in certain assets and liabilities:
Accrued investment income and other assets		(152	)		—			—			(152	)
Insurance reserves		1,942			—			11			1,953
Current tax liabilities		8			—			—			8
Other liabilities and policy-related balances		(80	)		—			—			(80	)

Net cash from operating activities	$	2,032		$	—		$	—		$	2,032

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the balance sheet as of September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:


(Amounts in millions)	As Reported Under New Policy			As Computed Under Previous Policy			Effect of Change
Assets
Total investments	$	74,893		$	74,893		$	—
Cash and cash equivalents		3,741			3,741			—
Accrued investment income		746			746			—
Deferred acquisition costs		5,020			5,020			—
Intangible assets		488			488			—
Goodwill		1,128			1,128			—
Reinsurance recoverable		17,195			17,172			23
Other assets		1,010			1,010			—
Separate account assets		10,166			10,166			—

Total assets	$	114,387		$	114,364		$	23

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	33,221		$	32,997		$	224
Policyholder account balances		26,449			26,449			—
Liability for policy and contract claims		7,545			7,545			—
Unearned premiums		4,291			4,291			—
Other liabilities		6,073			6,073			—
Borrowings related to securitization entities		353			353			—
Non-recourse funding obligations		2,325			2,325			—
Long-term borrowings		4,880			4,880			—
Deferred tax liability		1,437			1,508			(71	)
Separate account liabilities		10,166			10,166			—

Total liabilities		96,740			96,587			153

Stockholders’ equity:
Class A common stock		1			1			—
Additional paid-in capital		12,162			12,162			—
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		2,641			2,641			—
Net unrealized gains (losses) on other-than-temporarily impaired securities		(88	)		(88	)		—

Net unrealized investment gains (losses)		2,553			2,553			—

Derivatives qualifying as hedges		2,011			2,011			—
Foreign currency translation and other adjustments		659			659			—

Total accumulated other comprehensive income (loss)		5,223			5,223			—
Retained earnings		1,741			1,871			(130	)
Treasury stock, at cost		(2,700	)		(2,700	)		—

Total Genworth Financial, Inc.’s stockholders’ equity		16,427			16,557			(130	)
Noncontrolling interests		1,220			1,220			—

Total stockholders’ equity		17,647			17,777			(130	)

Total liabilities and stockholders’ equity	$	114,387		$	114,364		$	23

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the income statement for the three months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:


(Amounts in millions)	As Reported Under New Policy		As Computed Under Previous Policy		Effect of Change
Revenues:
Premiums	$	1,311	$	1,311	$	—
Net investment income		825		825		—
Net investment gains (losses)		9		9		—
Insurance and investment product fees and other		391		391		—

Total revenues		2,536		2,536		—

Benefits and expenses:
Benefits and other changes in policy reserves		1,363		1,356		7
Interest credited		193		193		—
Acquisition and operating expenses, net of deferrals		504		504		—
Amortization of deferred acquisition costs and intangibles		162		162		—
Goodwill impairment		89		89		—
Interest expense		126		126		—

Total benefits and expenses		2,437		2,430		7

Income before income taxes		99		106		(7	)
Provision for income taxes		29		32		(3	)

Net income		70		74		(4	)
Less: net income attributable to noncontrolling interests		36		36		—

Net income available to Genworth Financial, Inc.’s common stockholders	$	34	$	38	$	(4	)

Net income available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.07	$	0.08	$	(0.01	)

Diluted	$	0.07	$	0.08	$	(0.01	)

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the income statement for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:


(Amounts in millions)	As Reported Under New Policy		As Computed Under Previous Policy		Effect of Change
Revenues:
Premiums	$	3,720	$	3,720	$	—
Net investment income		2,503		2,503		—
Net investment gains (losses)		10		10		—
Insurance and investment product fees and other		1,252		1,252		—

Total revenues		7,485		7,485		—

Benefits and expenses:
Benefits and other changes in policy reserves		3,977		3,961		16
Interest credited		582		582		—
Acquisition and operating expenses, net of deferrals		1,536		1,536		—
Amortization of deferred acquisition costs and intangibles		582		582		—
Goodwill impairment		89		89		—
Interest expense		352		352		—

Total benefits and expenses		7,118		7,102		16

Income before income taxes		367		383		(16	)
Provision for income taxes		108		114		(6	)

Net income		259		269		(10	)
Less: net income attributable to noncontrolling interests		102		102		—

Net income available to Genworth Financial, Inc.’s common stockholders	$	157	$	167	$	(10	)

Net income available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.32	$	0.34	$	(0.02	)

Diluted	$	0.32	$	0.34	$	(0.02	)

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the net cash flows from operating activities for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:


(Amounts in millions)	As Reported Under New Policy			As Computed Under Previous Policy			Effect of Change
Cash flows from operating activities:
Net income	$	259		$	269		$	(10	)
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity discounts and premiums and limited partnerships		(59	)		(59	)		—
Net investment gains		(10	)		(10	)		—
Charges assessed to policyholders		(590	)		(590	)		—
Acquisition costs deferred		(456	)		(456	)		—
Amortization of deferred acquisition costs and intangibles		582			582			—
Goodwill impairment		89			89			—
Deferred income taxes		14			20			(6	)
Gain on sale of subsidiary		(15	)		(15	)		—
Net increase in trading securities, held-for-sale investments and derivative instruments		66			66			—
Stock-based compensation expense		20			20			—
Change in certain assets and liabilities:
Accrued investment income and other assets		(160	)		(160	)		—
Insurance reserves		1,672			1,656			16
Current tax liabilities		(190	)		(190	)		—
Other liabilities and policy-related balances		(795	)		(795	)		—

Net cash from operating activities	$	427		$	427		$	—

Accounting Pronouncements Not Yet Adopted

In July 2012, the FASB issued new accounting guidance on testing indefinite-lived intangible assets for impairment. The new guidance permits the use of a qualitative assessment prior to, and potentially instead of, the quantitative impairment test for indefinite-lived intangible assets. This new accounting guidance has an effective date of January 1, 2013, with early adoption permitted in certain circumstances. We do not expect the adoption of this accounting guidance to have an impact on our consolidated financial statements.

In December 2011, the FASB issued new accounting guidance for disclosures about offsetting assets and liabilities. The new guidance requires an entity to disclose information about offsetting and related arrangements to enable users to understand the effect of those arrangements on its financial position. These new disclosure requirements will be effective for us on January 1, 2013 and are not expected to have a material impact on our consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Earnings (Loss) Per Share

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


	Three months ended September 30,					Nine months ended September 30,
(Amounts in millions, except per share amounts)	2012		2011			2012		2011
Net income	$	70	$	20		$	259	$	13
Less: net income attributable to noncontrolling interests		36		36			102		106

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	34	$	(16	)	$	157	$	(93	)

Basic per common share:
Net income	$	0.14	$	0.04		$	0.53	$	0.03
Less: net income attributable to noncontrolling interests		0.07		0.07			0.21		0.22

Net income (loss) available to Genworth Financial, Inc.’s common stockholders⁽¹⁾	$	0.07	$	(0.03	)	$	0.32	$	(0.19	)

Diluted per common share:
Net income	$	0.14	$	0.04		$	0.52	$	0.03
Less: net income attributable to noncontrolling interests		0.07		0.07			0.21		0.22

Net income (loss) available to Genworth Financial, Inc.’s common stockholders⁽¹⁾	$	0.07	$	(0.03	)	$	0.32	$	(0.19	)

Weighted-average shares used in basic earnings per common share calculations		491.7		490.8			491.5		490.5
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		2.2		—			3.0		—

Weighted-average shares used in diluted earnings per common share calculations⁽²⁾		493.9		490.8			494.5		490.5

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

⁽²⁾

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our net loss available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2011, we were required to use basic weighted-average common shares outstanding in the calculation for the three and nine months ended September 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.7 million and 3.2 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 nine months ended September 30, 2011, dilutive potential common shares would have been 492.5 million and 493.7 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 September 30,						Nine months ended September 30,
(Amounts in millions)	2012			2011			2012			2011
Fixed maturity securities—taxable	$	659		$	669		$	1,988		$	2,032
Fixed maturity securities—non-taxable		2			8			9			29
Commercial mortgage loans		87			89			256			273
Restricted commercial mortgage loans related to securitization entities		8			11			24			30
Equity securities		4			3			14			16
Other invested assets		48			42			157			131
Policy loans		31			30			93			89
Cash, cash equivalents and short-term investments		8			12			28			24

Gross investment income before expenses and fees		847			864			2,569			2,624
Expenses and fees		(22	)		(22	)		(66	)		(71	)

Net investment income	$	825		$	842		$	2,503		$	2,553

(b) Net Investment Gains (Losses)

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


	Three months ended September 30,						Nine months ended September 30,
(Amounts in millions)	2012			2011			2012			2011
Available-for-sale securities:
Realized gains	$	28		$	59		$	112		$	113
Realized losses		(14	)		(23	)		(79	)		(88	)

Net realized gains (losses) on available-for-sale securities		14			36			33			25

Impairments:
Total other-than-temporary impairments		(26	)		(39	)		(84	)		(98	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		(3	)		(13	)		(1	)		(16	)

Net other-than-temporary impairments		(29	)		(52	)		(85	)		(114	)

Trading securities		14			11			21			36
Commercial mortgage loans		2			3			7			4
Net gains (losses) related to securitization entities		18			(57	)		48			(52	)
Derivative instruments⁽¹⁾		(2	)		(76	)		(4	)		(101	)
Contingent consideration adjustment		(8	)		(22	)		(10	)		(23	)

Net investment gains (losses)	$	9		$	(157	)	$	10		$	(225	)

⁽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 September 30, 2012 and 2011 was $228 million and $263 million, respectively, which was approximately 96% and 93%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2012 and 2011 was $911 million and $954 million, respectively, which was approximately 93% of book value for both periods.

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


	As of or for the three months ended September 30,						As of or for the nine months ended September 30,
(Amounts in millions)	2012			2011			2012			2011
Beginning balance	$	588		$	726		$	646		$	784
Additions:
Other-than-temporary impairments not previously recognized		5			27			13			31
Increases related to other-than-temporary impairments previously recognized		10			24			42			72
Reductions:
Securities sold, paid down or disposed		(66	)		(58	)		(164	)		(168	)

Ending balance	$	537		$	719		$	537		$	719

(c) Unrealized Investment Gains and Losses

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


(Amounts in millions)	September 30, 2012			December 31, 2011
Net unrealized gains (losses) on investment securities:
Fixed maturity securities	$	5,925		$	3,742
Equity securities		24			5
Other invested assets		(23	)		(30	)

Subtotal		5,926			3,717
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(1,867	)		(1,303	)
Income taxes, net		(1,412	)		(840	)

Net unrealized investment gains (losses)		2,647			1,574
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		94			89

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	2,553		$	1,485

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	As of or for the three months ended September 30,
(Amounts in millions)	2012			2011
Beginning balance	$	2,016		$	264
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		1,040			2,365
Adjustment to deferred acquisition costs		(39	)		(41	)
Adjustment to present value of future profits		11			(61	)
Adjustment to sales inducements		(17	)		6
Adjustment to benefit reserves		(171	)		(369	)
Provision for income taxes		(288	)		(665	)

Change in unrealized gains (losses) on investment securities		536			1,235
Reclassification adjustments to net investment (gains) losses, net of taxes of $(6) and $(5)		9			11

Change in net unrealized investment gains (losses)		545			1,246
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		8			29

Ending balance	$	2,553		$	1,481


	As of or for the nine months ended September 30,
(Amounts in millions)	2012			2011
Beginning balance	$	1,485		$	(80	)
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		2,157			2,932
Adjustment to deferred acquisition costs		(138	)		(89	)
Adjustment to present value of future profits		(11	)		(77	)
Adjustment to sales inducements		(31	)		(1	)
Adjustment to benefit reserves		(384	)		(400	)
Provision for income taxes		(553	)		(828	)

Change in unrealized gains (losses) on investment securities		1,040			1,537
Reclassification adjustments to net investment (gains) losses, net of taxes of $(19) and $(31)		33			58

Change in net unrealized investment gains (losses)		1,073			1,595
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		5			34

Ending balance	$	2,553		$	1,481

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity and Equity Securities

As of September 30, 2012, 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:


			Gross unrealized gains				Gross unrealized losses
(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	$	4,448	$	1,060	$	—	$	(5	)	$	—		$	5,503
Tax-exempt		328		17		—		(43	)		—			302
Government—non-U.S.		2,315		260		—		(1	)		—			2,574
U.S. corporate		23,062		3,368		20		(144	)		—			26,306
Corporate—non-U.S.		14,256		1,190		—		(78	)		—			15,368
Residential mortgage-backed		5,837		562		12		(150	)		(142	)		6,119
Commercial mortgage-backed		3,240		185		4		(112	)		(31	)		3,286
Other asset-backed		2,799		44		—		(86	)		(1	)		2,756

Total fixed maturity securities		56,285		6,686		36		(619	)		(174	)		62,214
Equity securities		499		32		—		(7	)		—			524

Total available-for-sale securities	$	56,784	$	6,718	$	36	$	(626	)	$	(174	)	$	62,738

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


			Gross unrealized gains				Gross unrealized losses
(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	$	3,946	$	918	$	—	$	(1	)	$	—		$	4,863
Tax-exempt		564		15		—		(76	)		—			503
Government—non-U.S.		2,017		196		—		(2	)		—			2,211
U.S. corporate		23,024		2,542		18		(325	)		(1	)		25,258
Corporate—non-U.S.		13,156		819		—		(218	)		—			13,757
Residential mortgage-backed		5,695		446		9		(252	)		(203	)		5,695
Commercial mortgage-backed		3,470		157		4		(179	)		(52	)		3,400
Other asset-backed		2,686		18		—		(95	)		(1	)		2,608

Total fixed maturity securities		54,558		5,111		31		(1,148	)		(257	)		58,295
Equity securities		356		19		—		(14	)		—			361

Total available-for-sale securities	$	54,914	$	5,130	$	31	$	(1,162	)	$	(257	)	$	58,656

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 September 30, 2012:


	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	$	303	$	(5	)		7	$	—	$	—			—	$	303	$	(5	)		7
Tax-exempt		—		—			—		129		(43	)		15		129		(43	)		15
Government—non-U.S.		—		—			—		57		(1	)		10		57		(1	)		10
U.S. corporate		382		(11	)		72		938		(133	)		91		1,320		(144	)		163
Corporate—non-U.S.		468		(13	)		90		625		(65	)		61		1,093		(78	)		151
Residential mortgage- backed		120		(2	)		22		577		(290	)		304		697		(292	)		326
Commercial mortgage-backed		—		—			—		830		(143	)		150		830		(143	)		150
Other asset-backed		141		(1	)		31		185		(86	)		20		326		(87	)		51

Subtotal, fixed maturity securities		1,414		(32	)		222		3,341		(761	)		651		4,755		(793	)		873
Equity securities		91		(5	)		40		31		(2	)		20		122		(7	)		60

Total for securities in an unrealized loss position	$	1,505	$	(37	)		262	$	3,372	$	(763	)		671	$	4,877	$	(800	)		933

% Below cost—fixed maturity securities:
<20% Below cost	$	1,405	$	(30	)		216	$	2,434	$	(198	)		371	$	3,839	$	(228	)		587
20%-50% Below cost		9		(2	)		6		842		(385	)		188		851		(387	)		194
>50% Below cost		—		—			—		65		(178	)		92		65		(178	)		92

Total fixed maturity securities		1,414		(32	)		222		3,341		(761	)		651		4,755		(793	)		873

% Below cost—equity securities:
<20% Below cost		87		(4	)		39		28		(1	)		19		115		(5	)		58
20%-50% Below cost		4		(1	)		1		3		(1	)		1		7		(2	)		2

Total equity securities		91		(5	)		40		31		(2	)		20		122		(7	)		60

Total for securities in an unrealized loss position	$	1,505	$	(37	)		262	$	3,372	$	(763	)		671	$	4,877	$	(800	)		933

Investment grade	$	1,283	$	(22	)		203	$	2,173	$	(293	)		308	$	3,456	$	(315	)		511
Below investment grade⁽³⁾		222		(15	)		59		1,199		(470	)		363		1,421		(485	)		422

Total for securities in an unrealized loss position	$	1,505	$	(37	)		262	$	3,372	$	(763	)		671	$	4,877	$	(800	)		933

⁽¹⁾	Amounts included $174 million of unrealized losses on other-than-temporarily impaired securities.

⁽²⁾	Amounts included $174 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 $171 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 lower credit ratings since acquisition for corporate securities across various industry sectors. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 2% as of September 30, 2012.

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

Of the $198 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 62% of the unrealized losses were related to investment grade securities as of September 30, 2012. These unrealized losses were attributable to lower credit ratings for these securities since acquisition, primarily associated with corporate securities in the finance and insurance sector as well as mortgage-backed and asset-backed securities. The average fair value percentage below cost for these securities was approximately 7% as of September 30, 2012. 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 September 30, 2012:


	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	$	114	$	(40	)		5	%		10	$	—	$	—			—	%		—
U.S. corporate		138		(44	)		6			7		—		—			—			—
Corporate—non-U.S.		29		(17	)		2			8		2		(2	)		—			1
Structured securities:
Residential mortgage-backed		38		(22	)		3			17		6		(12	)		2			10
Commercial mortgage-backed		18		(7	)		1			6		—		(1	)		—			1
Other asset-backed		38		(26	)		3			4		—		—			—			—

Total structured securities		94		(55	)		7			27		6		(13	)		2			11

Total	$	375	$	(156	)		20	%		52	$	8	$	(15	)		2	%		12

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:
U.S. corporate	$	80	$	(32	)		4	%		7	$	—	$	—			—	%		—
Structured securities:
Residential mortgage-backed		221		(112	)		14			95		40		(124	)		16			67
Commercial mortgage-backed		117		(49	)		6			31		7		(23	)		3			10
Other asset-backed		49		(36	)		5			3		10		(16	)		2			3

Total structured securities		387		(197	)		25			129		57		(163	)		21			80

Total	$	467	$	(229	)		29	%		136	$	57	$	(163	)		21	%		80

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 the following for further discussion of gross unrealized losses by asset class.

Tax-Exempt Securities

As indicated in the table above, $40 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 $4 million which represented an average of 26% below cost. The unrealized losses continue to persist due to a combination of below market spreads, very low coupons, along with economic uncertainty 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, certain of these securities have been negatively impacted as a result of ratings downgrades of 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 September 30, 2012:

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company