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, 2013

¨	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		80-0873306
(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 24, 2013, 493,730,387 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

NOTE REGARDING THIS QUARTERLY REPORT

As previously announced, on April 1, 2013, we completed a holding company reorganization in connection with a comprehensive capital plan for our U.S. mortgage insurance business, which is discussed in further detail in note 1 of the financial statements in “Item 1—Financial Statements” of this Quarterly Report on Form 10-Q. Pursuant to the reorganization, the public holding company historically known as “Genworth Financial, Inc.” (now renamed Genworth Holdings, Inc. (“Genworth Holdings”)) became a direct, wholly-owned subsidiary of a new public holding company that it had formed and that now has been renamed Genworth Financial, Inc. (“New Genworth”). In connection with the reorganization, all the stockholders of Genworth Holdings immediately prior to the completion of the reorganization automatically became stockholders of New Genworth, owning the same number of shares of stock in New Genworth that they owned in Genworth Holdings immediately prior to the reorganization. New Genworth, as the successor issuer to Genworth Holdings (pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), began making filings under the Securities Act of 1933, as amended, and the Exchange Act, from April 1, 2013.

On April 1, 2013, in connection with the reorganization, Genworth Holdings distributed to New Genworth (as its sole stockholder), through a dividend (the “Distribution”), the 84.6% membership interest in one of its subsidiaries (Genworth Mortgage Holdings, LLC (“GMHL”)) that it held directly, and 100% of the shares of another of its subsidiaries (Genworth Mortgage Holdings, Inc. (“GMHI”)), that held the remaining 15.4% of outstanding membership interests of GMHL. At the time of the Distribution, GMHL and GMHI together owned (directly or indirectly) 100% of the shares or other equity interests of all of the subsidiaries that conducted Genworth Holdings’ U.S. mortgage insurance business (these subsidiaries also owned the subsidiaries that conducted Genworth Holdings’ European mortgage insurance business). As part of the comprehensive U.S. mortgage insurance capital plan, on April 1, 2013, immediately prior to the Distribution, Genworth Holdings contributed $100 million to the U.S. mortgage insurance subsidiaries.

On April 1, 2013, in connection with the reorganization (a) New Genworth provided a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior notes and the holders of the senior notes, on an unsecured unsubordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior notes indenture in respect of such senior notes and (b) New Genworth provided a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding subordinated notes and the holders of the subordinated notes, on an unsecured subordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, the outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the subordinated notes indenture in respect of the subordinated notes.

References to “Genworth,” the “Company,” “we” or “our” in this Quarterly Report on Form 10-Q (including in the condensed consolidated financial statements and notes thereto in this report) have the following meanings, unless the context otherwise requires:

•

For periods prior to April 1, 2013: Genworth Holdings and its subsidiaries

•

For periods from and after April 1, 2013: New Genworth and its subsidiaries

TABLE OF CONTENTS


	Page
PART I—FINANCIAL INFORMATION		4
Item 1. Financial Statements		4
Condensed Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012		4
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012 (Unaudited)		5
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012 (Unaudited)		6
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2013 and 2012 (Unaudited)		7
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (Unaudited)		8
Notes to Condensed Consolidated Financial Statements (Unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		85
Item 3. Quantitative and Qualitative Disclosures About Market Risk		167
Item 4. Controls and Procedures		167

PART II—OTHER INFORMATION		168
Item 1. Legal Proceedings		168
Item 1A. Risk Factors		169
Item 6. Exhibits		170
Signatures		172

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	June 30, 2013			December 31, 2012
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	58,008		$	62,161
Equity securities available-for-sale, at fair value		411			518
Commercial mortgage loans		5,831			5,872
Restricted commercial mortgage loans related to securitization entities		309			341
Policy loans		1,671			1,601
Other invested assets		1,976			3,493
Restricted other invested assets related to securitization entities, at fair value		392			393

Total investments		68,598			74,379
Cash and cash equivalents		3,613			3,632
Accrued investment income		639			715
Deferred acquisition costs		5,237			5,036
Intangible assets		433			366
Goodwill		867			868
Reinsurance recoverable		17,236			17,230
Other assets		704			710
Separate account assets		9,806			9,937
Assets associated with discontinued operations		443			439

Total assets	$	107,576		$	113,312

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	33,437		$	33,505
Policyholder account balances		24,935			26,262
Liability for policy and contract claims		7,302			7,509
Unearned premiums		4,022			4,333
Other liabilities ($100 and $133 other liabilities related to securitization entities)		4,629			5,239
Borrowings related to securitization entities ($74 and $62 at fair value)		317			336
Non-recourse funding obligations		2,054			2,066
Long-term borrowings		4,720			4,776
Deferred tax liability		369			1,507
Separate account liabilities		9,806			9,937
Liabilities associated with discontinued operations		83			61

Total liabilities		91,674			95,531

Commitments and contingencies

Stockholders’ equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 582 million and 580 million shares issued as of June 30, 2013 and December 31, 2012, respectively; 494 million and 492 million shares outstanding as of June 30, 2013 and December 31, 2012, respectively		1			1
Additional paid-in capital		12,139			12,127

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		1,296			2,692
Net unrealized gains (losses) on other-than-temporarily impaired securities		(2	)		(54	)

Net unrealized investment gains (losses)		1,294			2,638

Derivatives qualifying as hedges		1,581			1,909
Foreign currency translation and other adjustments		267			655

Total accumulated other comprehensive income (loss)		3,142			5,202
Retained earnings		2,107			1,863
Treasury stock, at cost (88 million shares as of June 30, 2013 and December 31, 2012)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		14,689			16,493
Noncontrolling interests		1,213			1,288

Total stockholders’ equity		15,902			17,781

Total liabilities and stockholders’ equity	$	107,576		$	113,312

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 June 30,						Six months ended June 30,
	2013			2012			2013			2012
Revenues:
Premiums	$	1,286		$	1,302		$	2,547		$	2,408
Net investment income		821			846			1,635			1,678
Net investment gains (losses)		21			(33	)		(40	)		4
Insurance and investment product fees and other		243			287			532			627

Total revenues		2,371			2,402			4,674			4,717

Benefits and expenses:
Benefits and other changes in policy reserves		1,269			1,382			2,470			2,614
Interest credited		184			194			368			389
Acquisition and operating expenses, net of deferrals		413			439			846			879
Amortization of deferred acquisition costs and intangibles		137			147			259			418
Interest expense		121			131			247			226

Total benefits and expenses		2,124			2,293			4,190			4,526

Income from continuing operations before income taxes		247			109			484			191
Provision for income taxes		73			27			149			42

Income from continuing operations		174			82			335			149
Income (loss) from discontinued operations, net of taxes		6			27			(14	)		39

Net income		180			109			321			188
Less: net income attributable to noncontrolling interests		39			33			77			66

Net income available to Genworth Financial, Inc.’s common stockholders	$	141		$	76		$	244		$	122

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.27		$	0.10		$	0.52		$	0.17

Diluted	$	0.27		$	0.10		$	0.52		$	0.17

Net income available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.29		$	0.16		$	0.49		$	0.25

Diluted	$	0.28		$	0.16		$	0.49		$	0.25

Weighted-average common shares outstanding:
Basic		493.4			491.5			492.9			491.4

Diluted		497.5			493.9			497.2			494.8

Supplemental disclosures:
Total other-than-temporary impairments	$	(2	)	$	(42	)	$	(14	)	$	(58	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		(3	)		3			(3	)		2

Net other-than-temporary impairments		(5	)		(39	)		(17	)		(56	)
Other investments gains (losses)		26			6			(23	)		60

Total net investment gains (losses)	$	21		$	(33	)	$	(40	)	$	4

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net income	$	180		$	109		$	321		$	188
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired		(1,216	)		697			(1,433	)		512
Net unrealized gains (losses) on other-than-temporarily impaired securities		26			(5	)		52			16
Derivatives qualifying as hedges		(218	)		407			(328	)		78
Foreign currency translation and other adjustments		(353	)		(119	)		(457	)		(3	)

Total other comprehensive income (loss)		(1,761	)		980			(2,166	)		603

Total comprehensive income (loss)		(1,581	)		1,089			(1,845	)		791
Less: comprehensive income attributable to noncontrolling interests		(40	)		16			(29	)		63

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(1,541	)	$	1,073		$	(1,816	)	$	728

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, 2012	$	1	$	12,127	$	5,202		$	1,863	$	(2,700	)	$	16,493		$	1,288		$	17,781

Repurchase of subsidiary shares		—		—		—			—		—			—			(21	)		(21	)
Comprehensive income (loss):
Net income		—		—		—			244		—			244			77			321
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—		—		(1,396	)		—		—			(1,396	)		(37	)		(1,433	)
Net unrealized gains (losses) on other-than-temporarily impaired securities		—		—		52			—		—			52			—			52
Derivatives qualifying as hedges		—		—		(328	)		—		—			(328	)		—			(328	)
Foreign currency translation and other adjustments		—		—		(388	)		—		—			(388	)		(69	)		(457	)

Total comprehensive income (loss)														(1,816	)		(29	)		(1,845	)
Dividends to noncontrolling interests		—		—		—			—		—			—			(26	)		(26	)
Stock-based compensation expense and exercises and other		—		12		—			—		—			12			1			13

Balances as of June 30, 2013	$	1	$	12,139	$	3,142		$	2,107	$	(2,700	)	$	14,689		$	1,213		$	15,902

Balances as of December 31, 2011	$	1	$	12,136	$	4,047		$	1,538	$	(2,700	)	$	15,022		$	1,110		$	16,132

Comprehensive income (loss):
Net income		—		—		—			122		—			122			66			188
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—		—		515			—		—			515			(3	)		512
Net unrealized gains (losses) on other-than-temporarily impaired securities		—		—		16			—		—			16			—			16
Derivatives qualifying as hedges		—		—		78			—		—			78			—			78
Foreign currency translation and other adjustments		—		—		(3	)		—		—			(3	)		—			(3	)

Total comprehensive income (loss)														728			63			791
Dividends to noncontrolling interests		—		—		—			—		—			—			(24	)		(24	)
Stock-based compensation expense and exercises and other		—		20		—			—		—			20			—			20

Balances as of June 30, 2012	$	1	$	12,156	$	4,653		$	1,660	$	(2,700	)	$	15,770		$	1,149		$	16,919

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,
	2013			2012
Cash flows from operating activities:
Net income	$	321		$	188
Less (income) loss from discontinued operations, net of taxes		14			(39	)
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity discounts and premiums and limited partnerships		(40	)		(49	)
Net investment losses (gains)		40			(4	)
Charges assessed to policyholders		(404	)		(388	)
Acquisition costs deferred		(212	)		(309	)
Amortization of deferred acquisition costs and intangibles		259			418
Deferred income taxes		(213	)		47
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments		35			93
Stock-based compensation expense		17			13
Change in certain assets and liabilities:
Accrued investment income and other assets		21			9
Insurance reserves		1,183			1,001
Current tax liabilities		260			(197	)
Other liabilities and other policy-related balances		(638	)		(605	)
Cash from operating activities—discontinued operations		3			42

Net cash from operating activities		646			220

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		2,820			2,366
Commercial mortgage loans		474			391
Restricted commercial mortgage loans related to securitization entities		31			25
Proceeds from sales of investments:
Fixed maturity and equity securities		2,245			2,538
Purchases and originations of investments:
Fixed maturity and equity securities		(4,558	)		(5,586	)
Commercial mortgage loans		(431	)		(184	)
Other invested assets, net		113			378
Policy loans, net		(1	)		(70	)
Proceeds from sale of a subsidiary, net of cash transferred		25			77
Cash from investing activities—discontinued operations		—			(41	)

Net cash from investing activities		718			(106	)

Cash flows from financing activities:
Deposits to universal life and investment contracts		920			1,351
Withdrawals from universal life and investment contracts		(2,059	)		(1,506	)
Redemption and repurchase of non-recourse funding obligations		(12	)		(567	)
Proceeds from the issuance of long-term debt		—			361
Repayment and repurchase of long-term debt		(15	)		(222	)
Repayment of borrowings related to securitization entities		(32	)		(29	)
Repurchase of subsidiary shares		(21	)		—
Dividends paid to noncontrolling interests		(26	)		(24	)
Other, net		(17	)		(63	)
Cash from financing activities—discontinued operations		—			(26	)

Net cash from financing activities		(1,262	)		(725	)

Effect of exchange rate changes on cash and cash equivalents		(118	)		(3	)

Net change in cash and cash equivalents		(16	)		(614	)
Cash and cash equivalents at beginning of period		3,653			4,488

Cash and cash equivalents at end of period		3,637			3,874
Less cash and cash equivalents of discontinued operations at end of period		24			20

Cash and cash equivalents of continuing operations at end of period	$	3,613		$	3,854

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 Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware on October 23, 2003. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, wholly-owned subsidiary of a new public holding company it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, under the name Sub XLVI, Inc., and was renamed Genworth Financial, Inc. upon the completion of the reorganization.

To implement the reorganization, Genworth Holdings formed New Genworth and New Genworth, in turn, formed Sub XLII, Inc. (“Merger Sub”). The holding company structure was implemented pursuant to Section 251(g) of the General Corporation Law of the State of Delaware (“DGCL”) by the merger of Merger Sub with and into Genworth Holdings (the “Merger”). Genworth Holdings survived the Merger as a direct, wholly-owned subsidiary of New Genworth and each share of Genworth Holdings Class A Common Stock, par value $0.001 per share (“Genworth Holdings Class A Common Stock”), issued and outstanding immediately prior to the Merger and each share of Genworth Holdings Class A Common Stock held in the treasury of Genworth Holdings immediately prior to the Merger converted into one issued and outstanding or treasury, as applicable, share of New Genworth Class A Common Stock, par value $0.001 per share, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the Genworth Holdings Class A Common Stock being converted.

Immediately after the consummation of the Merger, New Genworth had the same authorized, outstanding and treasury capital stock as Genworth Holdings immediately prior to the Merger. Each share of New Genworth common stock outstanding immediately prior to the Merger was cancelled.

Pursuant to Section 251(g) of the DGCL, the Merger did not require a vote of the stockholders of Genworth Holdings. Effective upon the consummation of the Merger, New Genworth adopted an amended and restated certificate of incorporation and amended and restated bylaws that were identical to those of Genworth Holdings immediately prior to the consummation of the Merger (other than provisions regarding certain technical matters, as permitted by Section 251(g) of the DGCL). New Genworth’s directors and executive officers immediately after the consummation of the Merger were the same as the directors and executive officers of Genworth Holdings immediately prior to the consummation of the Merger. Immediately after the consummation of the Merger, New Genworth had, on a consolidated basis, the same assets, businesses and operations as Genworth Holdings had immediately prior to the consummation of the Merger.

On April 1, 2013, in connection with the reorganization, immediately following the consummation of the Merger, Genworth Holdings distributed to New Genworth (as its sole stockholder), through a dividend (the “Distribution”), the 84.6% membership interest in one of its subsidiaries (Genworth Mortgage Holdings, LLC (“GMHL”)) that it held directly, and 100% of the shares of another of its subsidiaries (Genworth Mortgage Holdings, Inc. (“GMHI”)), that held the remaining 15.4% of outstanding membership interests of GMHL. At the time of the Distribution, GMHL and GMHI together owned (directly or indirectly) 100% of the shares or other equity interests of all of the subsidiaries that conducted Genworth Holdings’ U.S. mortgage insurance business (these subsidiaries also owned the subsidiaries that conducted Genworth Holdings’ European mortgage insurance business). As part of the comprehensive U.S. mortgage insurance capital plan, on April 1, 2013, immediately prior to the Distribution, Genworth Holdings contributed $100 million to the U.S. mortgage insurance subsidiaries.

The accompanying condensed financial statements include on a consolidated basis the accounts of: (a) for the periods prior to April 1, 2013, Genworth Holdings and the affiliated companies in which it held a majority

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

equity interest or where it was the primary beneficiary of a variable interest entity and (b) for the periods from and after April 1, 2013, New Genworth and the affiliated companies in which it held a majority voting interest or where it was the primary beneficiary of a variable interest entity. All intercompany accounts and transactions have been eliminated in consolidation.

References to “Genworth,” the “Company,” “we” or “our” in the accompanying condensed consolidated financial statements and these notes thereto have the following meanings, unless the context otherwise requires:

•

For periods prior to April 1, 2013: Genworth Holdings and its subsidiaries

•

For periods from and after April 1, 2013: New Genworth and its subsidiaries

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 insurance, long-term care insurance and fixed annuities.

•

International Mortgage Insurance. We are a leading provider of mortgage insurance products and related services in Canada and Australia and also participate in select European and other countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We also selectively 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.

•

International Protection. We are a leading provider of payment protection coverages (referred to as lifestyle protection) in multiple European countries and have operations in select other 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.

•

Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health 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 also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments.

On March 27, 2013, we announced that we had agreed to sell our wealth management business to AqGen Liberty Acquisition, Inc., a subsidiary of AqGen Liberty Holdings LLC, a partnership of Aquiline Capital Partners and Genstar Capital, for approximately $412 million. Historically, this business has been reported as a

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

separate segment. As a result of the sale agreement, the financial statements and other disclosures herein have been revised to reclassify this business as discontinued operations and report its financial position, results of operations and cash flows separately for all periods presented. The sale is expected to close in the third quarter of 2013, subject to customary closing conditions, including requisite regulatory approvals. Also included in discontinued operations was our tax and advisor unit, Genworth Financial Investment Services, which was part of our wealth management business until the closing of its sale on April 2, 2012. See note 10 for additional information related to discontinued operations.

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 (including normal recurring 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 May 30, 2013, which reflected the reclassification of our wealth management business as discontinued operations, adjustments to correct an error related to premium refund accrual in our U.S. mortgage insurance business, the addition of a footnote in the notes to the consolidated financial statements that provides required supplemental guarantor financial information related to certain guarantees we gave in connection with the reorganization in which we became the parent company to Genworth Holdings and the addition of certain disclosures about offsetting assets and liabilities required by newly adopted accounting guidance. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On January 1, 2013, we adopted new accounting guidance for disclosures about offsetting assets and liabilities. This 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. The adoption of this accounting guidance impacted our disclosures only and did not impact our consolidated results.

On January 1, 2013, we adopted new accounting guidance related to the presentation of the reclassification of items out of accumulated other comprehensive income into net income. The adoption of this accounting guidance impacted our disclosures only and did not impact our consolidated results.

Accounting Pronouncements Not Yet Adopted

In July 2013, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance to provide additional flexibility in the benchmark interest rates used when applying hedge accounting. The new guidance permits the use of the Federal Funds Effective Swap Rate as a benchmark interest rate for hedge accounting purposes and removes certain restrictions on being able to apply hedge accounting for similar hedges using different benchmark interest rates. These new requirements are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The new guidance will not have a material impact on our consolidated financial statements upon adoption but may impact our selection of benchmark interest rates for hedging relationships in the future.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In June 2013, the FASB issued new accounting guidance on the scope, measurement and disclosure requirements for investment companies. The new guidance clarifies the characteristics of an investment company, provides comprehensive guidance for assessing whether an entity is an investment company, requires investment companies to measure noncontrolling ownership interest in other investment companies at fair value rather than using the equity method of accounting and requires additional disclosures. These new requirements will be effective for us on January 1, 2014 and are not expected to have a material impact on our consolidated financial statements.

(3) Earnings Per Share

Basic and diluted earnings per share are calculated by dividing each income 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)	2013		2012		2013			2012
Weighted-average shares used in basic earnings per common share calculations		493.4		491.5		492.9			491.4
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		4.1		2.4		4.3			3.4

Weighted-average shares used in diluted earnings per common share calculations		497.5		493.9		497.2			494.8

Income from continuing operations:
Income from continuing operations	$	174	$	82	$	335		$	149
Less: income from continuing operations attributable to noncontrolling interests		39		33		77			66

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	135	$	49	$	258		$	83

Basic per common share	$	0.27	$	0.10	$	0.52		$	0.17

Diluted per common share	$	0.27	$	0.10	$	0.52		$	0.17

Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of taxes	$	6	$	27	$	(14	)	$	39
Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests		—		—		—			—

Income (loss) from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders	$	6	$	27	$	(14	)	$	39

Basic per common share	$	0.01	$	0.05	$	(0.03	)	$	0.08

Diluted per common share	$	0.01	$	0.05	$	(0.03	)	$	0.08

Net income:
Income from continuing operations	$	174	$	82	$	335		$	149
Income (loss) from discontinued operations, net of taxes		6		27		(14	)		39

Net income		180		109		321			188
Less: net income attributable to noncontrolling interests		39		33		77			66

Net income available to Genworth Financial, Inc.’s common stockholders	$	141	$	76	$	244		$	122

Basic per common share	$	0.29	$	0.16	$	0.49		$	0.25

Diluted per common share	$	0.28	$	0.16	$	0.49		$	0.25

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)	2013			2012			2013			2012
Fixed maturity securities—taxable	$	672		$	669		$	1,328		$	1,329
Fixed maturity securities—non-taxable		2			3			4			7
Commercial mortgage loans		81			85			163			169
Restricted commercial mortgage loans related to securitization entities		7			7			14			16
Equity securities		6			6			10			10
Other invested assets		39			56			87			109
Policy loans		32			31			64			62
Cash, cash equivalents and short-term investments		5			10			12			20

Gross investment income before expenses and fees		844			867			1,682			1,722
Expenses and fees		(23	)		(21	)		(47	)		(44	)

Net investment income	$	821		$	846		$	1,635		$	1,678

(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)	2013			2012			2013			2012
Available-for-sale securities:
Realized gains	$	78		$	21		$	118		$	84
Realized losses		(47	)		(19	)		(113	)		(65	)

Net realized gains (losses) on available-for-sale securities		31			2			5			19

Impairments:
Total other-than-temporary impairments		(2	)		(42	)		(14	)		(58	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		(3	)		3			(3	)		2

Net other-than-temporary impairments		(5	)		(39	)		(17	)		(56	)

Trading securities		(19	)		32			(9	)		7
Commercial mortgage loans		2			3			4			5
Net gains (losses) related to securitization entities		15			(4	)		22			30
Derivative instruments ⁽¹⁾		(2	)		(28	)		(44	)		(2	)
Contingent consideration adjustment		(1	)		1			—			1
Other		—			—			(1	)		—

Net investment gains (losses)	$	21		$	(33	)	$	(40	)	$	4

⁽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, 2013 and 2012 was $308 million and $326 million, respectively, which was approximately 87% and 95%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2013 and 2012 was $885 million and $683 million, respectively, which was approximately 89% and 93%, respectively, of book value.

The following represents the activity for credit losses recognized in net income on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (loss) (“OCI”) as of and 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)	2013			2012			2013			2012
Beginning balance	$	251		$	610		$	387		$	646
Additions:
Other-than-temporary impairments not previously recognized		—			6			2			8
Increases related to other-than-temporary impairments previously recognized		3			19			7			32
Reductions:
Securities sold, paid down or disposed		(75	)		(47	)		(217	)		(98	)

Ending balance	$	179		$	588		$	179		$	588

(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, 2013			December 31, 2012
Net unrealized gains (losses) on investment securities:
Fixed maturity securities	$	3,173		$	6,086
Equity securities		19			34
Other invested assets		(5	)		(8	)

Subtotal		3,187			6,112
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(1,111	)		(1,925	)
Income taxes, net		(727	)		(1,457	)

Net unrealized investment gains (losses)		1,349			2,730
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		55			92

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	1,294		$	2,638

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 June 30,
(Amounts in millions)	2013			2012
Beginning balance	$	2,443		$	1,327
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		(2,510	)		1,329
Adjustment to deferred acquisition costs		202			(52	)
Adjustment to present value of future profits		70			(33	)
Adjustment to sales inducements		41			(4	)
Adjustment to benefit reserves		396			(214	)
Provision for income taxes		628			(358	)

Change in unrealized gains (losses) on investment securities		(1,173	)		668
Reclassification adjustments to net investment (gains) losses, net of taxes of $9 and $(13)		(17	)		24

Change in net unrealized investment gains (losses)		(1,190	)		692
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		(41	)		3

Ending balance	$	1,294		$	2,016


	As of or for the six months ended June 30,
(Amounts in millions)	2013			2012
Beginning balance	$	2,638		$	1,485
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		(2,937	)		1,117
Adjustment to deferred acquisition costs		218			(99	)
Adjustment to present value of future profits		71			(22	)
Adjustment to sales inducements		38			(14	)
Adjustment to benefit reserves		487			(213	)
Provision for income taxes		734			(265	)

Change in unrealized gains (losses) on investment securities		(1,389	)		504
Reclassification adjustments to net investment (gains) losses, net of taxes of $(4) and $(13)		8			24

Change in net unrealized investment gains (losses)		(1,381	)		528
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		(37	)		(3	)

Ending balance	$	1,294		$	2,016

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity and Equity Securities

As of June 30, 2013, 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	$	4,605	$	578	$	—	$	(135	)	$	—		$	5,048
Tax-exempt		278		8		—		(24	)		—			262
Government—non-U.S.		2,130		129		—		(12	)		—			2,247
U.S. corporate		23,032		2,004		20		(314	)		—			24,742
Corporate—non-U.S.		14,004		772		—		(158	)		—			14,618
Residential mortgage-backed		5,312		366		11		(73	)		(26	)		5,590
Commercial mortgage-backed		2,792		94		2		(67	)		(7	)		2,814
Other asset-backed		2,706		38		—		(55	)		(2	)		2,687

Total fixed maturity securities		54,859		3,989		33		(838	)		(35	)		58,008
Equity securities		392		29		—		(10	)		—			411

Total available-for-sale securities	$	55,251	$	4,018	$	33	$	(848	)	$	(35	)	$	58,419

As of December 31, 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	$	4,484	$	1,025	$	—	$	(18	)	$	—		$	5,491
Tax-exempt		308		16		—		(30	)		—			294
Government—non-U.S.		2,173		250		—		(1	)		—			2,422
U.S. corporate		22,873		3,317		19		(104	)		—			26,105
Corporate—non-U.S.		14,577		1,262		—		(47	)		—			15,792
Residential mortgage-backed		5,744		549		13		(124	)		(101	)		6,081
Commercial mortgage-backed		3,253		178		5		(82	)		(21	)		3,333
Other asset-backed		2,660		50		—		(65	)		(2	)		2,643

Total fixed maturity securities		56,072		6,647		37		(471	)		(124	)		62,161
Equity securities		483		41		—		(6	)		—			518

Total available-for-sale securities	$	56,555	$	6,688	$	37	$	(477	)	$	(124	)	$	62,679

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, 2013:


	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	$	848	$	(135	)		44	$	—	$	—			—	$	848	$	(135	)		44
Tax-exempt		23		(1	)		12		110		(23	)		10		133		(24	)		22
Government—non-U.S.		560		(12	)		56		—		—			—		560		(12	)		56
U.S. corporate		4,466		(253	)		642		408		(61	)		38		4,874		(314	)		680
Corporate—non-U.S.		2,868		(133	)		375		196		(25	)		19		3,064		(158	)		394
Residential mortgage-backed		609		(28	)		103		252		(71	)		158		861		(99	)		261
Commercial mortgage-backed		641		(40	)		80		404		(34	)		72		1,045		(74	)		152
Other asset-backed		604		(11	)		95		123		(46	)		14		727		(57	)		109

Subtotal, fixed maturity securities		10,619		(613	)		1,407		1,493		(260	)		311		12,112		(873	)		1,718
Equity securities		133		(10	)		69		—		—			—		133		(10	)		69

Total for securities in an unrealized loss position	$	10,752	$	(623	)		1,476	$	1,493	$	(260	)		311	$	12,245	$	(883	)		1,787

% Below cost—fixed maturity securities:
<20% Below cost	$	10,526	$	(581	)		1,396	$	1,277	$	(127	)		210	$	11,803	$	(708	)		1,606
20%-50% Below cost		93		(32	)		11		192		(88	)		58		285		(120	)		69
>50% Below cost		—		—			—		24		(45	)		43		24		(45	)		43

Total fixed maturity securities		10,619		(613	)		1,407		1,493		(260	)		311		12,112		(873	)		1,718

% Below cost—equity securities:
<20% Below cost		131		(9	)		65		—		—			—		131		(9	)		65
20%-50% Below cost		2		(1	)		4		—		—			—		2		(1	)		4

Total equity securities		133		(10	)		69		—		—			—		133		(10	)		69

Total for securities in an unrealized loss position	$	10,752	$	(623	)		1,476	$	1,493	$	(260	)		311	$	12,245	$	(883	)		1,787


Investment grade	$	10,173	$	(587	)		1,315	$	925	$	(149	)		148	$	11,098	$	(736	)		1,463
Below investment grade ⁽³⁾		579		(36	)		161		568		(111	)		163		1,147		(147	)		324

Total for securities in an unrealized loss position	$	10,752	$	(623	)		1,476	$	1,493	$	(260	)		311	$	12,245	$	(883	)		1,787

⁽¹⁾	Amounts included $32 million of unrealized losses on other-than-temporarily impaired securities.

⁽²⁾	Amounts included $35 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 $32 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 5% as of June 30, 2013.

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

Of the $127 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 63% of the unrealized losses were related to investment grade securities as of June 30, 2013. These unrealized losses were attributable to the lower credit ratings for these securities since acquisition, primarily associated with corporate and structured securities in the finance and insurance sector. The average fair value percentage below cost for these securities was approximately 9% as of June 30, 2013. 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, 2013:


	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	$	32	$	(9	)		1	%		3	$	—	$	—			—	%		—
U.S. corporate		8		(2	)		—			1		—		—			—			—
Corporate—non-U.S.		31		(12	)		1			7		—		—			—			—
Structured securities:
Residential mortgage-backed		7		(4	)		—			5		7		(8	)		1			8
Commercial mortgage-backed		3		(1	)		—			2		—		(1	)		—			1
Other asset-backed		58		(32	)		4			4		—		—			—			—

Total structured securities		68		(37	)		4			11		7		(9	)		1			9

Total	$	139	$	(60	)		6	%		22	$	7	$	(9	)		1	%		9

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	$	2	$	(1	)		—	%		3	$	—	$	—			—	%		—
Structured securities:
Residential mortgage-backed		35		(18	)		2			25		8		(25	)		3			30
Commercial mortgage-backed		16		(9	)		1			8		2		(2	)		—			2
Other asset-backed		—		—			—			—		7		(9	)		1			2

Total structured securities		51		(27	)		3			33		17		(36	)		4			34

Total	$	53	$	(28	)		3	%		36	$	17	$	(36	)		4	%		34

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.

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, 2013:


	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	$	39	$	(14	)		1	%		8	$	—	$	—		—	%		—

Total	$	39	$	(14	)		1	%		8	$	—	$	—		—	%		—


	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:
Consumer-cyclical	$	2	$	(1	)		—	%		3	$	—	$	—		—	%		—

Total	$	2	$	(1	)		—	%		3	$	—	$	—		—	%		—

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Of the total unrealized losses of $15 million for corporate fixed maturity securities presented in the preceding tables, $14 million, or 93%, 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, 2013. The $14 million of unrealized losses related to the finance and insurance industry 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.

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 $109 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, $24 million related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily 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 U.S. 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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, 2013.

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	$	655	$	(18	)		19	$	—	$	—			—	$	655	$	(18	)		19
Tax-exempt		—		—			—		137		(30	)		13		137		(30	)		13
Government—non-U.S.		103		(1	)		21		—		—			—		103		(1	)		21
U.S. corporate		859		(19	)		154		646		(85	)		65		1,505		(104	)		219
Corporate—non-U.S.		665		(9	)		105		436		(38	)		41		1,101		(47	)		146
Residential mortgage-backed		152		(1	)		32		494		(224	)		278		646		(225	)		310
Commercial mortgage-backed		183		(1	)		20		749		(102	)		130		932		(103	)		150
Other asset-backed		282		(1	)		42		185		(66	)		18		467		(67	)		60

Subtotal, fixed maturity securities		2,899		(50	)		393		2,647		(545	)		545		5,546		(595	)		938
Equity securities		52		(4	)		32		14		(2	)		13		66		(6	)		45

Total for securities in an unrealized loss position	$	2,951	$	(54	)		425	$	2,661	$	(547	)		558	$	5,612	$	(601	)		983

% Below cost—fixed maturity securities:
<20% Below cost	$	2,899	$	(50	)		393	$	2,151	$	(194	)		337	$	5,050	$	(244	)		730
20%-50% Below cost		—		—			—		445		(218	)		128		445		(218	)		128
>50% Below cost		—		—			—		51		(133	)		80		51		(133	)		80

Total fixed maturity securities		2,899		(50	)		393		2,647		(545	)		545		5,546		(595	)		938

% Below cost—equity securities:
<20% Below cost		47		(2	)		29		12		(1	)		11		59		(3	)		40
20%-50% Below cost		5		(2	)		3		2		(1	)		2		7		(3	)		5

Total equity securities		52		(4	)		32		14		(2	)		13		66		(6	)		45

Total for securities in an unrealized loss position	$	2,951	$	(54	)		425	$	2,661	$	(547	)		558	$	5,612	$	(601	)		983


Investment grade	$	2,761	$	(43	)		356	$	1,616	$	(209	)		235	$	4,377	$	(252	)		591
Below investment grade ⁽³⁾		190		(11	)		69		1,045		(338	)		323		1,235		(349	)		392

Total for securities in an unrealized loss position	$	2,951	$	(54	)		425	$	2,661	$	(547	)		558	$	5,612	$	(601	)		983

⁽¹⁾	Amounts included $123 million of unrealized losses on other-than-temporarily impaired securities.

⁽²⁾	Amounts included $124 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 $119 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, 2013 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	$	2,643	$	2,670
Due after one year through five years		9,815		10,313
Due after five years through ten years		11,369		11,880
Due after ten years		20,222		22,054

Subtotal		44,049		46,917
Residential mortgage-backed		5,312		5,590
Commercial mortgage-backed		2,792		2,814
Other asset-backed		2,706		2,687

Total	$	54,859	$	58,008

As of June 30, 2013, $5,237 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of June 30, 2013, securities issued by utilities and energy, finance and insurance, and consumer—non-cyclical industry groups represented approximately 24%, 19% and 12%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. 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, 2013, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2013						December 31, 2012
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	2,000			34	%	$	1,895			32	%
Office		1,585			27			1,580			27
Industrial		1,565			27			1,603			27
Apartments		490			8			552			9
Mixed use/other		228			4			282			5

Subtotal		5,868			100	%		5,912			100	%

Unamortized balance of loan origination fees and costs		1						2
Allowance for losses		(38	)					(42	)

Total	$	5,831					$	5,872


	June 30, 2013						December 31, 2012
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
Pacific	$	1,621			28	%	$	1,553			26	%
South Atlantic		1,515			26			1,587			27
Middle Atlantic		780			13			739			13
Mountain		466			8			463			8
East North Central		389			7			468			8
West North Central		368			6			353			6
New England		340			6			343			6
West South Central		247			4			265			4
East South Central		142			2			141			2

Subtotal		5,868			100	%		5,912			100	%

Unamortized balance of loan origination fees and costs		1						2
Allowance for losses		(38	)					(42	)

Total	$	5,831					$	5,872

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2013
(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	$	5		$	—		$	10		$	15		$	1,985		$	2,000
Office		—			3			7			10			1,575			1,585
Industrial		—			—			2			2			1,563			1,565
Apartments		7			—			—			7			483			490
Mixed use/other		—			—			—			—			228			228

Total recorded investment	$	12		$	3		$	19		$	34		$	5,834		$	5,868

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


	December 31, 2012
(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	$	—		$	3		$	—		$	3		$	1,892		$	1,895
Office		2			—			—			2			1,578			1,580
Industrial		—			—			—			—			1,603			1,603
Apartments		—			—			4			4			548			552
Mixed use/other		66			—			—			66			216			282

Total recorded investment	$	68		$	3		$	4		$	75		$	5,837		$	5,912

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

As of June 30, 2013 and December 31, 2012, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of June 30, 2013 and December 31, 2012.

As of and for the six months ended June 30, 2013 and the year ended December 31, 2012, we modified or extended 19 and 38 commercial mortgage loans, respectively, with a total carrying value of $106 million and $279 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2013			2012			2013			2012
Allowance for credit losses:
Beginning balance	$	40		$	49		$	42		$	51
Charge-offs		(2	)		—			(2	)		(1	)
Recoveries		—			—			—			—
Provision		—			(3	)		(2	)		(4	)

Ending balance	$	38		$	46		$	38		$	46

Ending allowance for individually impaired loans	$	—		$	—		$	—		$	—

Ending allowance for loans not individually impaired that were evaluated collectively for impairment	$	38		$	46		$	38		$	46

Recorded investment:
Ending balance	$	5,868		$	5,918		$	5,868		$	5,918

Ending balance of individually impaired loans	$	1		$	—		$	1		$	—

Ending balance of loans not individually impaired that were evaluated collectively for impairment	$	5,867		$	5,918		$	5,867		$	5,918

As of June 30, 2013, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $1 million, an unpaid principal balance of $3 million, charge-offs of $2 million and an average recorded investment of $1 million. As of December 31, 2012, we had no individually impaired commercial mortgage loans.

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 mortgage 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 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2013
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100% ⁽¹⁾			Total
Property type:
Retail	$	565		$	361		$	938		$	110		$	26		$	2,000
Office		374			217			733			197			64			1,585
Industrial		451			215			723			154			22			1,565
Apartments		199			93			169			28			1			490
Mixed use/other		79			49			88			—			12			228

Total recorded investment	$	1,668		$	935		$	2,651		$	489		$	125		$	5,868

% of total		29	%		16	%		45	%		8	%		2	%		100	%

Weighted-average de

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company