Edgar Filing: GENWORTH FINANCIAL INC

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, 2014

¨	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 (Address of Principal Executive Offices)		23230 (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):


Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

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

As of July 24, 2014, 496,616,897 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 June 30, 2014 (Unaudited) and December 31, 2013		3
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013 (Unaudited)		4
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013 (Unaudited)		5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2014 and 2013 (Unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (Unaudited)		7
	Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		75

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		160

Item 4.	Controls and Procedures		161

PART II—OTHER INFORMATION			161

Item 1.	Legal Proceedings		161

Item 1A.	Risk Factors		163

Item 6.	Exhibits		166

Signatures			167

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	June 30, 2014			December 31, 2013
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	62,360		$	58,629
Equity securities available-for-sale, at fair value		320			341
Commercial mortgage loans		5,986			5,899
Restricted commercial mortgage loans related to securitization entities		217			233
Policy loans		1,514			1,434
Other invested assets		1,963			1,686
Restricted other invested assets related to securitization entities, at fair value		404			391

Total investments		72,764			68,613
Cash and cash equivalents		4,138			4,214
Accrued investment income		642			678
Deferred acquisition costs		5,085			5,278
Intangible assets		266			399
Goodwill		867			867
Reinsurance recoverable		17,276			17,219
Other assets		695			639
Separate account assets		9,911			10,138

Total assets	$	111,644		$	108,045

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	34,497		$	33,705
Policyholder account balances		25,834			25,528
Liability for policy and contract claims		7,223			7,204
Unearned premiums		4,191			4,107
Other liabilities ($40 and $50 other liabilities related to securitization entities)		3,702			4,096
Borrowings related to securitization entities ($83 and $75 at fair value)		233			242
Non-recourse funding obligations		2,024			2,038
Long-term borrowings		4,691			5,161
Deferred tax liability		1,074			206
Separate account liabilities		9,911			10,138

Total liabilities		93,380			92,425

Commitments and contingencies
Stockholders’ equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 585 million and 583 million shares issued as of June 30, 2014 and December 31, 2013, respectively; 497 million and 495 million shares outstanding as of June 30, 2014 and December 31, 2013, respectively		1			1
Additional paid-in capital		11,986			12,127

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		2,109			914
Net unrealized gains (losses) on other-than-temporarily impaired securities		19			12

Net unrealized investment gains (losses)		2,128			926

Derivatives qualifying as hedges		1,652			1,319
Foreign currency translation and other adjustments		381			297

Total accumulated other comprehensive income (loss)		4,161			2,542
Retained earnings		2,783			2,423
Treasury stock, at cost (88 million shares as of June 30, 2014 and December 31, 2013)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		16,231			14,393
Noncontrolling interests		2,033			1,227

Total stockholders’ equity		18,264			15,620

Total liabilities and stockholders’ equity	$	111,644		$	108,045

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,
	2014			2013			2014			2013
Revenues:
Premiums	$	1,343		$	1,286		$	2,650		$	2,547
Net investment income		813			821			1,618			1,635
Net investment gains (losses)		34			21			17			(40	)
Insurance and investment product fees and other		225			243			452			532

Total revenues		2,415			2,371			4,737			4,674

Benefits and expenses:
Benefits and other changes in policy reserves		1,256			1,269			2,450			2,470
Interest credited		184			184			367			368
Acquisition and operating expenses, net of deferrals		404			413			782			846
Amortization of deferred acquisition costs and intangibles		138			137			272			259
Interest expense		120			121			247			247

Total benefits and expenses		2,102			2,124			4,118			4,190

Income from continuing operations before income taxes		313			247			619			484
Provision for income taxes		85			73			172			149

Income from continuing operations		228			174			447			335
Income (loss) from discontinued operations, net of taxes		—			6			—			(14	)

Net income		228			180			447			321
Less: net income attributable to noncontrolling interests		52			39			87			77

Net income available to Genworth Financial, Inc.’s common stockholders	$	176		$	141		$	360		$	244

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.35		$	0.27		$	0.73		$	0.52

Diluted	$	0.35		$	0.27		$	0.72		$	0.52

Net income available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.35		$	0.29		$	0.73		$	0.49

Diluted	$	0.35		$	0.28		$	0.72		$	0.49

Weighted-average common shares outstanding:
Basic		496.6			493.4			496.2			492.9

Diluted		503.6			497.5			503.2			497.2


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

Net other-than-temporary impairments		(2	)		(5	)		(3	)		(17	)
Other investments gains (losses)		36			26			20			(23	)

Total net investment gains (losses)	$	34		$	21		$	17		$	(40	)

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,
	2014		2013			2014		2013
Net income	$	228	$	180		$	447	$	321
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired		533		(1,216	)		1,239		(1,433	)
Net unrealized gains (losses) on other-than-temporarily impaired securities		1		26			7		52
Derivatives qualifying as hedges		114		(218	)		333		(328	)
Foreign currency translation and other adjustments		148		(353	)		127		(457	)

Total other comprehensive income (loss)		796		(1,761	)		1,706		(2,166	)

Total comprehensive income (loss)		1,024		(1,581	)		2,153		(1,845	)
Less: comprehensive income (loss) attributable to noncontrolling interests		113		(40	)		117		(29	)

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	911	$	(1,541	)	$	2,036	$	(1,816	)

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, 2013	$	1	$	12,127		$	2,542		$	2,423	$	(2,700	)	$	14,393		$	1,227		$	15,620
Initial sale of subsidiary shares to noncontrolling interests		—		(145	)		(57	)		—		—			(202	)		713			511
Comprehensive income (loss):
Net income		—		—			—			360		—			360			87			447
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—		—			1,217			—		—			1,217			22			1,239
Net unrealized gains (losses) on other-than-temporarily impaired securities		—		—			7			—		—			7			—			7
Derivatives qualifying as hedges		—		—			333			—		—			333			—			333
Foreign currency translation and other adjustments		—		—			119			—		—			119			8			127

Total comprehensive income (loss)															2,036			117			2,153
Dividends to noncontrolling interests		—		—			—			—		—			—			(27	)		(27	)
Stock-based compensation expense and exercises and other		—		4			—			—		—			4			3			7

Balances as of June 30, 2014	$	1	$	11,986		$	4,161		$	2,783	$	(2,700	)	$	16,231		$	2,033		$	18,264

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

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,
	2014			2013
Cash flows from operating activities:
Net income	$	447		$	321
Less loss from discontinued operations, net of taxes		—			14
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity securities discounts and premiums and limited partnerships		(69	)		(40	)
Net investment losses (gains)		(17	)		40
Charges assessed to policyholders		(376	)		(404	)
Acquisition costs deferred		(239	)		(212	)
Amortization of deferred acquisition costs and intangibles		272			259
Deferred income taxes		28			(213	)
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments		79			35
Stock-based compensation expense		15			17
Change in certain assets and liabilities:
Accrued investment income and other assets		(92	)		21
Insurance reserves		1,102			1,183
Current tax liabilities		(164	)		260
Other liabilities and other policy-related balances		(408	)		(638	)
Cash from operating activities—discontinued operations		—			3

Net cash from operating activities		578			646

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		2,568			2,820
Commercial mortgage loans		262			474
Restricted commercial mortgage loans related to securitization entities		17			31
Proceeds from sales of investments:
Fixed maturity and equity securities		1,256			2,245
Purchases and originations of investments:
Fixed maturity and equity securities		(4,873	)		(4,558	)
Commercial mortgage loans		(347	)		(431	)
Other invested assets, net		175			113
Policy loans, net		4			(1	)
Proceeds from sale of a subsidiary, net of cash transferred		—			25
Cash from investing activities—discontinued operations		—			—

Net cash from investing activities		(938	)		718

Cash flows from financing activities:
Deposits to universal life and investment contracts		1,548			920
Withdrawals from universal life and investment contracts		(1,270	)		(2,059	)
Redemption of non-recourse funding obligations		(14	)		(12	)
Proceeds from issuance of long-term debt		144			—
Repayment and repurchase of long-term debt		(621	)		(15	)
Repayment of borrowings related to securitization entities		(17	)		(32	)
Proceeds from sale of subsidiary shares to noncontrolling interests		519			—
Repurchase of subsidiary shares		—			(21	)
Dividends paid to noncontrolling interests		(27	)		(26	)
Other, net		(32	)		(17	)
Cash from financing activities—discontinued operations		—			—

Net cash from financing activities		230			(1,262	)

Effect of exchange rate changes on cash and cash equivalents		54			(118	)

Net change in cash and cash equivalents		(76	)		(16	)
Cash and cash equivalents at beginning of period		4,214			3,653

Cash and cash equivalents at end of period		4,138			3,637
Less cash and cash equivalents of discontinued operations at end of period		—			24

Cash and cash equivalents of continuing operations at end of period	$	4,138		$	3,613

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 in 2003 in preparation for an initial public offering of Genworth common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that 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. (“Genworth Financial”) upon the completion of the reorganization.

References to “Genworth,” the “Company,” “we” or “our” in the accompanying unaudited 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: Genworth Financial and its subsidiaries

The accompanying unaudited 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 (“VIE”). 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 in the United States. Our primary 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”)

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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, including 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 unaudited 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 unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2013 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncement Recently Adopted

On January 1, 2014, we adopted new accounting guidance on the scope, measurement and disclosure requirements for investment companies. The new guidance clarified the characteristics of an investment company, provided comprehensive guidance for assessing whether an entity is an investment company, required investment companies to measure noncontrolling ownership interest in other investment companies at fair value rather than using the equity method of accounting and required additional disclosures. The adoption of this accounting guidance did not have any impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In June 2014, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance related to the accounting for repurchase-to-maturity transactions and repurchase financings, and added disclosure requirements for all repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. The new guidance changes the accounting for repurchase-to-maturity transactions and repurchase financing such that they will be consistent with secured borrowing accounting. In addition, the guidance requires new disclosures for all repurchase agreements and securities lending transactions. We do not have repurchase-to-maturity transactions but have repurchase agreements and securities lending transactions that will be subject to additional disclosures. These new requirements will be effective for us on January 1, 2015 and early adoption is not permitted. This new guidance will only impact our disclosures.

In May 2014, the FASB issued new accounting guidance related to revenue from contracts with customers. The key principle of the new guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. The guidance also includes disclosure requirements that provide information about the nature, amount, timing and uncertainty of revenue and cash flows arising from

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

contracts with customers. The guidance is effective for us on January 1, 2017 and early adoption is not permitted. Although insurance contracts are specifically scoped out of this new guidance, we have minor services that may be subject to the new revenue recognition guidance and are still in the process of evaluating the impact, if any, the guidance may have on our consolidated financial statements.

(3) Earnings Per Share

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


	Three months ended June 30,				Six months ended June 30,
(Amounts in millions, except per share amounts)	2014		2013		2014		2013
Weighted-average shares used in basic earnings per common share calculations		496.6		493.4		496.2		492.9
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		7.0		4.1		7.0		4.3

Weighted-average shares used in diluted earnings per common share calculations		503.6		497.5		503.2		497.2

Income from continuing operations:
Income from continuing operations	$	228	$	174	$	447	$	335
Less: income from continuing operations attributable to noncontrolling interests		52		39		87		77

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	176	$	135	$	360	$	258

Basic per common share	$	0.35	$	0.27	$	0.73	$	0.52

Diluted per common share	$	0.35	$	0.27	$	0.72	$	0.52

Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of taxes	$	—	$	6	$	—	$	(14	)
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	$	—	$	(14	)

Basic per common share	$	—	$	0.01	$	—	$	(0.03	)

Diluted per common share	$	—	$	0.01	$	—	$	(0.03	)

Net income:
Income from continuing operations	$	228	$	174	$	447	$	335
Income (loss) from discontinued operations, net of taxes		—		6		—		(14	)

Net income		228		180		447		321
Less: net income attributable to noncontrolling interests		52		39		87		77

Net income available to Genworth Financial, Inc.’s common stockholders	$	176	$	141	$	360	$	244

Basic per common share	$	0.35	$	0.29	$	0.73	$	0.49

Diluted per common share	$	0.35	$	0.28	$	0.72	$	0.49

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)	2014			2013			2014			2013
Fixed maturity securities—taxable	$	666		$	672		$	1,314		$	1,328
Fixed maturity securities—non-taxable		3			2			6			4
Commercial mortgage loans		81			81			164			163
Restricted commercial mortgage loans related to securitization entities		4			7			8			14
Equity securities		4			6			8			10
Other invested assets		39			39			89			87
Restricted other invested assets related to securitization entities		1			—			2			—
Policy loans		32			32			63			64
Cash, cash equivalents and short-term investments		7			5			12			12

Gross investment income before expenses and fees		837			844			1,666			1,682
Expenses and fees		(24	)		(23	)		(48	)		(47	)

Net investment income	$	813		$	821		$	1,618		$	1,635

(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)	2014			2013			2014			2013
Available-for-sale securities:
Realized gains	$	38		$	78		$	45		$	118
Realized losses		(14	)		(47	)		(37	)		(113	)

Net realized gains (losses) on available-for-sale securities		24			31			8			5

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

Net other-than-temporary impairments		(2	)		(5	)		(3	)		(17	)

Trading securities		8			(19	)		20			(9	)
Commercial mortgage loans		3			2			6			4
Net gains (losses) related to securitization entities		9			15			15			22
Derivative instruments ⁽¹⁾		(7	)		(2	)		(28	)		(44	)
Contingent consideration adjustment		—			(1	)		—			—
Other		(1	)		—			(1	)		(1	)

Net investment gains (losses)	$	34		$	21		$	17		$	(40	)

⁽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, 2014 and 2013 was $243 million and $308 million, respectively, which was approximately 95% and 87%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2014 and 2013 was $507 million and $885 million, respectively, which was approximately 93% and 89%, 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)	2014			2013			2014			2013
Beginning balance	$	99		$	251		$	101		$	387
Additions:
Other-than-temporary impairments not previously recognized		1			—			1			2
Increases related to other-than-temporary impairments previously recognized		—			3						7
Reductions:
Securities sold, paid down or disposed		(5	)		(75	)		(7	)		(217	)

Ending balance	$	95		$	179		$	95		$	179

(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, 2014			December 31, 2013
Net unrealized gains (losses) on investment securities:
Fixed maturity securities	$	4,951		$	2,346
Equity securities		36			23
Other invested assets		(3	)		(4	)

Subtotal		4,984			2,365
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(1,571	)		(869	)
Income taxes, net		(1,188	)		(517	)

Net unrealized investment gains (losses)		2,225			979
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		97			53

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	2,128		$	926

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)	2014			2013
Beginning balance	$	1,624		$	2,443
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		1,193			(2,510	)
Adjustment to deferred acquisition costs		(96	)		202
Adjustment to present value of future profits		(39	)		70
Adjustment to sales inducements		(15	)		41
Adjustment to benefit reserves		(200	)		396
Provision for income taxes		(295	)		628

Change in unrealized gains (losses) on investment securities		548			(1,173	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $8 and $9		(14	)		(17	)

Change in net unrealized investment gains (losses)		534			(1,190	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		30			(41	)

Ending balance	$	2,128		$	1,294


	As of or for the six months ended June 30,
(Amounts in millions)	2014			2013
Beginning balance	$	926		$	2,638
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		2,624			(2,937	)
Adjustment to deferred acquisition costs		(195	)		218
Adjustment to present value of future profits		(91	)		71
Adjustment to sales inducements		(28	)		38
Adjustment to benefit reserves		(388	)		487
Provision for income taxes		(673	)		734

Change in unrealized gains (losses) on investment securities		1,249			(1,389	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $2 and $(4)		(3	)		8

Change in net unrealized investment gains (losses)		1,246			(1,381	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		44			(37	)

Ending balance	$	2,128		$	1,294

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity and Equity Securities

As of June 30, 2014, 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	$	4,894	$	677	$	—	$	(88	)	$	—		$	5,483
Tax-exempt		353		21		—		(21	)		—			353
Government—non-U.S.		1,989		146		—		(3	)		—			2,132
U.S. corporate		24,113		2,809		19		(94	)		—			26,847
Corporate—non-U.S.		14,695		1,087		—		(33	)		—			15,749
Residential mortgage-backed		4,923		309		14		(33	)		(1	)		5,212
Commercial mortgage-backed		2,721		138		4		(17	)		(1	)		2,845
Other asset-backed		3,744		39		—		(44	)		—			3,739

Total fixed maturity securities		57,432		5,226		37		(333	)		(2	)		62,360
Equity securities		284		40		—		(4	)		—			320

Total available-for-sale securities	$	57,716	$	5,266	$	37	$	(337	)	$	(2	)	$	62,680

As of December 31, 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	$	4,710	$	331	$	—	$	(231	)	$	—		$	4,810
Tax-exempt		324		7		—		(36	)		—			295
Government—non-U.S.		2,057		104		—		(15	)		—			2,146
U.S. corporate		23,614		1,761		19		(359	)		—			25,035
Corporate—non-U.S.		14,489		738		—		(156	)		—			15,071
Residential mortgage-backed		5,058		232		9		(70	)		(4	)		5,225
Commercial mortgage-backed		2,886		75		2		(62	)		(3	)		2,898
Other asset-backed		3,171		35		—		(57	)		—			3,149

Total fixed maturity securities		56,309		3,283		30		(986	)		(7	)		58,629
Equity securities		318		36		—		(13	)		—			341

Total available-for-sale securities	$	56,627	$	3,319	$	30	$	(999	)	$	(7	)	$	58,970

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, 2014:


	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 ⁽¹⁾			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	—	$	—			—	$	857	$	(88	)		29	$	857	$	(88	)		29
Tax-exempt		—		—			—		110		(21	)		13		110		(21	)		13
Government—non-U.S.		46		(1	)		12		117		(2	)		11		163		(3	)		23
U.S. corporate		638		(6	)		80		2,008		(88	)		307		2,646		(94	)		387
Corporate—non-U.S.		437		(3	)		91		821		(30	)		99		1,258		(33	)		190
Residential mortgage-backed		291		(5	)		42		341		(29	)		111		632		(34	)		153
Commercial mortgage-backed		—		—			—		570		(18	)		76		570		(18	)		76
Other asset-backed		519		(2	)		85		468		(42	)		46		987		(44	)		131

Subtotal, fixed maturity securities		1,931		(17	)		310		5,292		(318	)		692		7,223		(335	)		1,002
Equity securities		—		—			—		51		(4	)		6		51		(4	)		6

Total for securities in an unrealized loss position	$	1,931	$	(17	)		310	$	5,343	$	(322	)		698	$	7,274	$	(339	)		1,008

% Below cost—fixed maturity securities:
<20% Below cost	$	1,931	$	(17	)		310	$	5,171	$	(263	)		658	$	7,102	$	(280	)		968
20%-50% Below cost		—		—			—		118		(51	)		23		118		(51	)		23
>50% Below cost		—		—			—		3		(4	)		11		3		(4	)		11

Total fixed maturity securities		1,931		(17	)		310		5,292		(318	)		692		7,223		(335	)		1,002

% Below cost—equity securities:
<20% Below cost		—		—			—		51		(4	)		6		51		(4	)		6

Total equity securities		—		—			—		51		(4	)		6		51		(4	)		6

Total for securities in an unrealized loss position	$	1,931	$	(17	)		310	$	5,343	$	(322	)		698	$	7,274	$	(339	)		1,008

Investment grade	$	1,861	$	(16	)		300	$	5,038	$	(294	)		615	$	6,899	$	(310	)		915
Below investment grade ⁽²⁾		70		(1	)		10		305		(28	)		83		375		(29	)		93

Total for securities in an unrealized loss position	$	1,931	$	(17	)		310	$	5,343	$	(322	)		698	$	7,274	$	(339	)		1,008

⁽¹⁾	Amounts included $2 million of unrealized losses on other-than-temporarily impaired securities.

⁽²⁾	Amounts that have been in a continuous loss position for 12 months or more included $2 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 and an increase in U.S. Treasury yields since these securities were purchased. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 1% as of June 30, 2014.

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

Of the $263 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 “AA-” and approximately 94% of the unrealized losses were related to investment grade securities as of June 30, 2014. These unrealized losses were attributable to the lower credit ratings for these securities since acquisition, primarily associated with corporate securities in the finance and insurance and utilities and energy sectors and structured securities, in addition to U.S. government, agencies and government-sponsored enterprises securities resulting from an increase in U.S. Treasury yields since these securities were purchased. The average fair value percentage below cost for these securities was approximately 5% as of June 30, 2014. 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2014:


	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	$	19	$	(7	)		2	%		2	$	—	$	—			—	%		—
Corporate—non-U.S.		1		(1	)		—			2		—		—			—			—
Structured securities:
Residential mortgage-backed		6		(3	)		1			3		3		(3	)		1			4
Other asset-backed		71		(28	)		8			4		—		—			—			—

Total structured securities		77		(31	)		9			7		3		(3	)		1			4

Total	$	97	$	(39	)		11	%		11	$	3	$	(3	)		1	%		4


	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:
Structured securities:
Residential mortgage-backed	$	3	$	(2	)		1	%		6	$	—	$	(1	)		—	%		7
Commercial mortgage-backed		10		(4	)		1			5		—		—			—			—
Other asset-backed		8		(6	)		2			1		—		—			—			—

Total structured securities		21		(12	)		4			12		—		(1	)		—			7

Total	$	21	$	(12	)		4	%		12	$	—	$	(1	)		—	%		7

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 nor do we expect that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.

Structured Securities

Of the $47 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, $1 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 credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been 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. economy.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

We used our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected 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, 2014.

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 ⁽¹⁾			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	796	$	(109	)		32	$	335	$	(122	)		13	$	1,131	$	(231	)		45
Tax-exempt		82		(3	)		26		97		(33	)		9		179		(36	)		35
Government—non-U.S.		479		(15	)		60		—		—			—		479		(15	)		60
U.S. corporate		4,774		(260	)		707		663		(99	)		82		5,437		(359	)		789
Corporate—non-U.S.		3,005		(127	)		379		287		(29	)		34		3,292		(156	)		413
Residential mortgage-backed		1,052		(55	)		139		157		(19	)		92		1,209		(74	)		231
Commercial mortgage-backed		967		(42	)		107		370		(23	)		62		1,337		(65	)		169
Other asset-backed		1,089		(17	)		133		145		(40	)		17		1,234		(57	)		150

Subtotal, fixed maturity securities		12,244		(628	)		1,583		2,054		(365	)		309		14,298		(993	)		1,892
Equity securities		95		(13	)		41		—		—			—		95		(13	)		41

Total for securities in an unrealized loss position	$	12,339	$	(641	)		1,624	$	2,054	$	(365	)		309	$	14,393	$	(1,006	)		1,933

% Below cost—fixed maturity securities:
<20% Below cost	$	12,009	$	(547	)		1,571	$	1,575	$	(163	)		238	$	13,584	$	(710	)		1,809
20%-50% Below cost		235		(81	)		12		466		(187	)		51		701		(268	)		63
>50% Below cost		—		—			—		13		(15	)		20		13		(15	)		20

Total fixed maturity securities		12,244		(628	)		1,583		2,054		(365	)		309		14,298		(993	)		1,892

% Below cost—equity securities:
<20% Below cost		87		(11	)		40		—		—			—		87		(11	)		40
20%-50% Below cost		8		(2	)		1		—		—			—		8		(2	)		1

Total equity securities		95		(13	)		41		—		—			—		95		(13	)		41

Total for securities in an unrealized loss position	$	12,339	$	(641	)		1,624	$	2,054	$	(365	)		309	$	14,393	$	(1,006	)		1,933

Investment grade	$	11,896	$	(616	)		1,515	$	1,631	$	(315	)		208	$	13,527	$	(931	)		1,723
Below investment grade ⁽²⁾		443		(25	)		109		423		(50	)		101		866		(75	)		210

Total for securities in an unrealized loss position	$	12,339	$	(641	)		1,624	$	2,054	$	(365	)		309	$	14,393	$	(1,006	)		1,933

⁽¹⁾	Amounts included $7 million of unrealized losses on other-than-temporarily impaired securities.

⁽²⁾	Amounts that have been in a continuous loss position for 12 months or more included $7 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, 2014 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	$	2,757	$	2,784
Due after one year through five years		10,097		10,701
Due after five years through ten years		12,605		13,401
Due after ten years		20,585		23,678

Subtotal		46,044		50,564
Residential mortgage-backed		4,923		5,212
Commercial mortgage-backed		2,721		2,845
Other asset-backed		3,744		3,739

Total	$	57,432	$	62,360

As of June 30, 2014, $6,503 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of June 30, 2014, 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, 2014, 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, 2014						December 31, 2013
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	2,162			36	%	$	2,073			35	%
Industrial		1,585			26			1,581			27
Office		1,533			26			1,558			26
Apartments		480			8			491			8
Mixed use/other		253			4			229			4

Subtotal		6,013			100	%		5,932			100	%

Allowance for losses		(27	)					(33	)

Total	$	5,986					$	5,899


	June 30, 2014						December 31, 2013
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
Pacific	$	1,607			27	%	$	1,590			27	%
South Atlantic		1,565			26			1,535			26
Middle Atlantic		812			13			828			14
Mountain		514			9			478			8
East North Central		409			7			404			7
West North Central		366			6			377			6
New England		350			6			337			6
West South Central		254			4			241			4
East South Central		136			2			142			2

Subtotal		6,013			100	%		5,932			100	%

Allowance for losses		(27	)					(33	)

Total	$	5,986					$	5,899

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, 2014
(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	$	—		$	—		$	12		$	12		$	2,150		$	2,162
Industrial		—			—			18			18			1,567			1,585
Office		—			—			6			6			1,527			1,533
Apartments		—			—			—			—			480			480
Mixed use/other		—			—			—			—			253			253

Total recorded investment	$	—		$	—		$	36		$	36		$	5,977		$	6,013

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


	December 31, 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	$	—		$	—		$	10		$	10		$	2,063		$	2,073
Industrial		2			2			16			20			1,561			1,581
Office		—			—			6			6			1,552			1,558
Apartments		—			—			—			—			491			491
Mixed use/other		1			—			—			1			228			229

Total recorded investment	$	3		$	2		$	32		$	37		$	5,895		$	5,932

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

As of June 30, 2014 and December 31, 2013, 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, 2014 and December 31, 2013.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of June 30, 2014, our commercial mortgage loans greater than 90 days past due included loans with appraised values in excess of the recorded investment and the current recorded investment of these loans was expected to be recoverable.

During the six months ended June 30, 2014 and the year ended December 31, 2013, we modified or extended 15 and 33 commercial mortgage loans, respectively, with a total carrying value of $182 million and $165 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)	2014			2013			2014			2013
Allowance for credit losses:
Beginning balance	$	30		$	40		$	33		$	42
Charge-offs		—			(2	)		(1	)		(2	)
Recoveries		—			—			—			—
Provision		(3	)		—			(5	)		(2	)

Ending balance	$	27		$	38		$	27		$	38

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

Ending allowance for loans not individually impaired that were evaluated collectively for impairment	$	27		$	38		$	27		$	38

Recorded investment:
Ending balance	$	6,013		$	5,868		$	6,013		$	5,868

Ending balance of individually impaired loans	$	17		$	1		$	17		$	1

Ending balance of loans not individually impaired that were evaluated collectively for impairment	$	5,996		$	5,867		$	5,996		$	5,867

As of June 30, 2014, we had individually impaired commercial mortgage loans included within the industrial property type with a recorded investment of $15 million, an unpaid principal balance of $16 million, charge-offs of $1 million and an average recorded investment of $15 million. As of June 30, 2014 and December 31, 2013, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $2 million, an unpaid principal balance of $3 million, charge-offs of $1 million, which were recorded in the second quarter of 2013, and an average recorded investment of $2 million.

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, 2014
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100% ⁽¹⁾			Total
Property type:
Retail	$	615		$	436		$	1,010		$	79		$	22		$	2,162
Industrial		438			248			787			78			34			1,585
Office		399			169			773			129			63			1,533
Apartments		201			101			162			16			—			480
Mixed use/other		68			46			128			11			—			253

Total recorded investment	$	1,721		$	1,000		$	2,860		$	313		$	119		$	6,013

% of total		29	%		17	%		47	%		5	%		2	%		100	%

Weighted-average debt service coverage ratio		2.11			2.03			1.57			1.03			0.51			1.75

⁽¹⁾	Included $17 million of impaired loans, $6 million of loans past due and not individually impaired and $96 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 120%.


	December 31, 2013
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100% ⁽¹⁾			Total
Property type:
Retail	$	596		$	336		$	1,024		$	95		$	22		$	2,073
Industrial		430			237			748			146			20			1,581
Office		397			191			716			191			63			1,558
Apartments		201			86			176			27			1			491
Mixed use/other		71			36			110			12			—			229

Total recorded investment	$	1,695		$	886		$	2,774		$	471		$	106		$	5,932

% of total		28	%		15	%		47	%		8	%		2	%		100	%

Weighted-average debt service coverage ratio		2.14			1.79			1.66			1.03			0.63			1.75

⁽¹⁾	Included $2 million of impaired loans, $5 million of delinquent loans and $99 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 119%.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:


	June 30, 2014
(Amounts in millions)	Less than 1.00			1.00 - 1.25			1.26 - 1.50			1.51 - 2.00			Greater than 2.00			Total
Property type:
Retail	$	101		$	316		$	477		$	789		$	379		$	2,062
Industrial		183			105			287			727			283			1,585
Office		157			180			215			646			328			1,526
Apartments		2			37			115			181			145			480
Mixed use/other		20			8			34			127			64			253

Total recorded investment	$	463		$	646		$	1,128		$	2,470		$	1,199		$	5,906

% of total		8	%		11	%		19	%		42	%		20	%		100	%

Weighted-average loan-to-value		78	%		67	%		63	%		60	%		43	%		59	%


	December 31, 2013
(Amounts in millions)	Less than 1.00			1.00 - 1.25			1.26 - 1.50			1.51 - 2.00			Greater than 2.00			Total
Property type:
Retail	$	106		$	314		$	374		$	779		$	399		$	1,972
Industrial		195			100			270			721			295			1,581
Office		131			181			225			637			376			1,550
Apartments		3			31			107			187			163			491
Mixed use/other		16			9			32			106			66			229

Total recorded investment	$	451		$	635		$	1,008		$	2,430		$	1,299		$	5,823

% of total		8	%		11	%		17	%		42	%		22	%		100	%

Weighted-average loan-to-value		80	%		68	%		63	%		60	%		43	%		59	%

As of June 30, 2014 and December 31, 2013, we had floating rate commercial mortgage loans of $107 million and $109 million, respectively.

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to securitization entities.

(g) Restricted Other Invested Assets Related To Securitization Entities

We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities whereby the changes in fair value are recorded in current period income (loss). The trading securities comprise asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(5) Derivative Instruments

Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.

The following table sets forth our positions in derivative instruments as of the dates indicated:


	Derivative assets						Derivative liabilities
		Fair value						Fair value
(Amounts in millions)	Balance sheet classification	June 30, 2014		December 31, 2013			Balance sheet classification	June 30, 2014		December 31, 2013
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Other invested assets	$	205	$	121		Other liabilities	$	118	$	569
Inflation indexed swaps	Other invested assets		—		—		Other liabilities		90		60
Foreign currency swaps	Other invested assets		3		4		Other liabilities		1		2
Forward bond purchase commitments	Other invested assets		8		—		Other liabilities		—		13

Total cash flow hedges			216		125				209		644

Fair value hedges:
Interest rate swaps	Other invested assets		1		1		Other liabilities		—		—

Total fair value hedges			1		1				—		—

Total derivatives designated as hedges			217		126				209		644

Derivatives not designated as hedges
Interest rate swaps	Other invested assets		387		314		Other liabilities		99		6
Interest rate swaps related to securitization entities	Restricted other invested assets		—		—		Other liabilities		22		16
Credit default swaps	Other invested assets		7		11		Other liabilities		—		—
Credit default swaps related to securitization entities	Restricted other invested assets		—		—		Other liabilities		16		32
Foreign currency swaps	Other invested assets		1		—		Other liabilities		—		—
Equity index options	Other invested assets		4		12		Other liabilities		—		—
Financial futures	Other invested assets		—		—		Other liabilities		—		—
Equity return swaps	Other invested assets		—		—		Other liabilities		5		1
Other foreign currency contracts	Other invested assets		1		8		Other liabilities		7		4
GMWB embedded derivatives	Reinsurance recoverable ⁽¹⁾		3		(1	)	Policyholder account balances ⁽²⁾		146		96
Fixed index annuity embedded derivatives	Other assets		—		—		Policyholder account balances ⁽³⁾		219		143
Indexed universal life embedded derivatives	Reinsurance recoverable		—		—		Policyholder account balances ⁽⁴⁾		2		—

Total derivatives not designated as hedges			403		344				516		298

Total derivatives		$	620	$	470			$	725	$	942

⁽¹⁾	Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.

⁽²⁾	Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

⁽³⁾	Represents the embedded derivatives associated with our fixed index annuity liabilities.

⁽⁴⁾	Represents the embedded derivatives associated with our indexed universal life liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements. The amounts recognized for derivative counterparty collateral retained by us was recorded in other invested assets with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us.

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB, fixed index annuity embedded derivatives and indexed universal life embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:


(Notional in millions)	Measurement		December 31, 2013		Additions		Maturities/ terminations			June 30, 2014
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps		Notional	$	13,926	$	—	$	(400	)	$	13,526
Inflation indexed swaps		Notional		561		10		(2	)		569
Foreign currency swaps		Notional		35		—		—			35
Forward bond purchase commitments		Notional		237		—		(113	)		124

Total cash flow hedges				14,759		10		(515	)		14,254

Fair value hedges:
Interest rate swaps		Notional		6		—		(1	)		5

Total fair value hedges				6		—		(1	)		5

Total derivatives designated as hedges				14,765		10		(516	)		14,259

Derivatives not designated as hedges
Interest rate swaps		Notional		4,822		2		(3	)		4,821
Interest rate swaps related to securitization entities		Notional		91		—		(6	)		85
Credit default swaps		Notional		639		—		—			639
Credit default swaps related to securitization entities		Notional		312		—		—			312
Equity index options		Notional		777		237		(254	)		760
Financial futures		Notional		1,260		2,680		(2,620	)		1,320
Equity return swaps		Notional		110		113		(110	)		113
Foreign currency swaps		Notional		—		84		—			84
Other foreign currency contracts		Notional		487		670		(783	)		374

Total derivatives not designated as hedges				8,498		3,786		(3,776	)		8,508

Total derivatives			$	23,263	$	3,796	$	(4,292	)	$	22,767

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(Number of policies)	Measurement		December 31, 2013		Additions		Maturities/ terminations			June 30, 2014
Derivatives not designated as hedges
GMWB embedded derivatives		Policies		42,045		—		(1,541	)		40,504
Fixed index annuity embedded derivatives		Policies		7,705		3,767		(110	)		11,362
Indexed universal life embedded derivatives		Policies		29		110		—			139

Cash Flow Hedges

Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; (v) forward bond purchase commitments to hedge against the variability in the anticipated cash flows required to purchase future fixed rate bonds; and (vi) other instruments to hedge the cash flows of various forecasted transactions.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended June 30, 2014:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income from OCI			Classification of gain (loss) reclassified into net income	Gain (loss) recognized in net income ⁽¹⁾		Classification of gain (loss) recognized in net income
Interest rate swaps hedging assets	$	215		$	13		Net investment income	$	3	Net investment gains (losses)
Interest rate swaps hedging liabilities		(14	)		1		Interest expense		—	Net investment gains (losses)
Inflation indexed swaps		(27	)		(7	)	Net investment income		—	Net investment gains (losses)
Forward bond purchase commitments		10			—		Net investment income		—	Net investment gains (losses)

Total	$	184		$	7			$	3

⁽¹⁾	Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended June 30, 2013:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income from OCI			Classification of gain (loss) reclassified into net income	Gain (loss) recognized in net income ⁽¹⁾			Classification of gain (loss) recognized in net income
Interest rate swaps hedging assets	$	(350	)	$	10		Net investment income	$	(7	)	Net investment gains (losses)
Interest rate swaps hedging assets		—			1		Net investment gains (losses)		—		Net investment gains (losses)
Interest rate swaps hedging liabilities		22			—		Interest expense		—		Net investment gains (losses)
Inflation indexed swaps		25			(5	)	Net investment income		—		Net investment gains (losses)
Foreign currency swaps		(1	)		—		Interest expense		—		Net investment gains (losses)
Forward bond purchase commitments		(25	)		—		Net investment income		—		Net investment gains (losses)

Total	$	(329	)	$	6			$	(7	)

⁽¹⁾	Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the six months ended June 30, 2014:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income from OCI			Classification of gain (loss) reclassified into net income	Gain (loss) recognized in net income ⁽¹⁾		Classification of gain (loss) recognized in net income
Interest rate swaps hedging assets	$	572		$	28		Net investment income	$	7	Net investment gains (losses)
Interest rate swaps hedging liabilities		(34	)		1		Interest expense		—	Net investment gains (losses)
Inflation indexed swaps		(30	)		(8	)	Net investment income		—	Net investment gains (losses)
Forward bond purchase commitments		28			—		Net investment income		—	Net investment gains (losses)

Total	$	536		$	21			$	7

⁽¹⁾	Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the six months ended June 30, 2013:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income from OCI			Classification of gain (loss) reclassified into net income	Gain (loss) recognized in net income ⁽¹⁾			Classification of gain (loss) recognized in net income
Interest rate swaps hedging assets	$	(503	)	$	19		Net investment income	$	(10	)	Net investment gains (losses)
Interest rate swaps hedging assets		—			1		Net investment gains (losses)		—		Net investment gains (losses)
Interest rate swaps hedging liabilities		22			1		Interest expense		—		Net investment gains (losses)
Inflation indexed swaps		34			(2	)	Net investment income		—		Net investment gains (losses)
Forward bond purchase commitments		(39	)		—		Net investment income		—		Net investment gains (losses)

Total	$	(486	)	$	19			$	(10	)

⁽¹⁾	Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following tables provide a reconciliation of current period changes, net of applicable income taxes, for these designated derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the periods indicated:


	Three months ended June 30,
(Amounts in millions)	2014			2013
Derivatives qualifying as effective accounting hedges as of April 1	$	1,538		$	1,799
Current period increases (decreases) in fair value, net of deferred taxes of $(65) and $116		119			(213	)
Reclassification to net (income), net of deferred taxes of $2 and $1		(5	)		(5	)

Derivatives qualifying as effective accounting hedges as of June 30	$	1,652		$	1,581


	Six months ended June 30,
(Amounts in millions)	2014			2013
Derivatives qualifying as effective accounting hedges as of January 1	$	1,319		$	1,909
Current period increases (decreases) in fair value, net of deferred taxes of $(189) and $171		347			(315	)
Reclassification to net (income), net of deferred taxes of $7 and $6		(14	)		(13	)

Derivatives qualifying as effective accounting hedges as of June 30	$	1,652		$	1,581

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The total of derivatives designated as cash flow hedges of $1,652 million, net of taxes, recorded in stockholders’ equity as of June 30, 2014 is expected to be reclassified to net income in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $46 million, net of taxes, is expected to be reclassified to net income in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2047. No amounts were reclassified to net income during the three months ended June 30, 2014 in connection with forecasted transactions that were no longer considered probable of occurring.

Fair Value Hedges

Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income. In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income. We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (ii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iii) other instruments to hedge various fair value exposures of investments.

There were no pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended June 30, 2014. The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended June 30, 2013:


	Derivative instrument							Hedged item
(Amounts in millions)	Gain (loss) recognized in net income			Classification of gain (losses) recognized in net income	Other impacts to net income		Classification of other impacts to net income	Gain (loss) recognized in net income		Classification of gain (losses) recognized in net income
Interest rate swaps hedging liabilities	$	(3	)	Net investment gains (losses)	$	4	Interest credited	$	3	Net investment gains (losses)

Total	$	(3	)		$	4		$	3

There were no pre-tax income (loss) effects of fair value hedges and related hedged items for the six months ended June 30, 2014. The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the six months ended June 30, 2013:


	Derivative instrument							Hedged item
(Amounts in millions)	Gain (loss) recognized in net income			Classification of gain (losses) recognized in net income	Other impacts to net income		Classification of other impacts to net income	Gain (loss) recognized in net income		Classification of gain (losses) recognized in net income
Interest rate swaps hedging liabilities	$	(11	)	Net investment gains (losses)	$	12	Interest credited	$	11	Net investment gains (losses)
Foreign currency swaps		(31	)	Net investment gains (losses)		—	Interest credited		31	Net investment gains (losses)

Total	$	(42	)		$	12		$	42

The difference between the gain (loss) recognized for the derivative instrument and the hedged item presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the net income effects of the derivative instruments that are presented in the same

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

location as the income (loss) activity from the hedged item. There were no amounts excluded from the measurement of effectiveness.

Derivatives Not Designated As Hedges

We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; (vi) foreign currency swaps, options and forward contracts to mitigate currency risk associated with non-functional currency investments held by certain foreign subsidiaries and future dividends or other cash flows from certain foreign subsidiaries to our holding company; and (vii) equity index options to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity and indexed universal life products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap.

The following table provides the pre-tax gain (loss) recognized in net income for the effects of derivatives not designated as hedges for the periods indicated:


	Three months ended June 30,						Classification of gain (loss) recognized in net income
(Amounts in millions)	2014			2013
Interest rate swaps	$	(2	)	$	(6	)	Net investment gains (losses)
Interest rate swaps related to securitization entities		(3	)		7		Net investment gains (losses)
Credit default swaps		—			2		Net investment gains (losses)
Credit default swaps related to securitization entities		11			17		Net investment gains (losses)
Equity index options		(11	)		(2	)	Net investment gains (losses)
Financial futures		17			(56	)	Net investment gains (losses)
Equity return swaps		(4	)		1		Net investment gains (losses)
Other foreign currency contracts		(2	)		3		Net investment gains (losses)
Foreign currency swaps		1			—		Net investment gains (losses)
GMWB embedded derivatives		2			63		Net investment gains (losses)
Fixed index annuity embedded derivatives		(11	)		(1	)	Net investment gains (losses)

Total derivatives not designated as hedges	$	(2	)	$	28

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides the pre-tax gain (loss) recognized in net income for the effects of derivatives not designated as hedges for the periods indicated:


	Six months ended June 30,						Classification of gain (loss) recognized in net income
(Amounts in millions)	2014			2013
Interest rate swaps	$	(5	)	$	(5	)	Net investment gains (losses)
Interest rate swaps related to securitization entities		(6	)		9		Net investment gains (losses)
Credit default swaps		—			6		Net investment gains (losses)
Credit default swaps related to securitization entities		18			25		Net investment gains (losses)
Equity index options		(18	)		(18	)	Net investment gains (losses)
Financial futures		44			(153	)	Net investment gains (losses)
Equity return swaps		(5	)		(9	)	Net investment gains (losses)
Other foreign currency contracts		(11	)		3		Net investment gains (losses)
Foreign currency swaps		1			—		Net investment gains (losses)
GMWB embedded derivatives		(29	)		145		Net investment gains (losses)
Fixed index annuity embedded derivatives		(12	)		(4	)	Net investment gains (losses)

Total derivatives not designated as hedges	$	(23	)	$	(1	)

Derivative Counterparty Credit Risk

Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. For derivatives related to securitization entities, there are no arrangements that require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.

The following tables present additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:


	June 30, 2014
							Gross amounts not offset in the balance sheet
(Amounts in millions)	Gross amounts recognized		Gross amounts offset in the balance sheet		Net amounts presented in the balance sheet		Financial instruments ⁽³⁾			Collateral pledged/ received			Over collateralization			Net amount
Derivative assets ⁽¹⁾	$	640	$	—	$	640	$	(202	)	$	(416	)	$	2		$	24
Derivative liabilities ⁽²⁾		325		—		325		(202	)		(137	)		17			3

Net derivatives	$	315	$	—	$	315	$	—		$	(279	)	$	(15	)	$	21

⁽¹⁾	Included $25 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives.

⁽²⁾	Included $7 million of accruals on derivatives classified as other liabilities and does not include amounts related to embedded derivatives and derivatives related to securitization entities.

⁽³⁾	Amounts represent derivative assets and/or liabilities that are presented gross within the balance sheet but are held with the same counterparty where we have a master netting arrangement. This adjustment results in presenting the net asset and net liability position for each counterparty.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2013
									Gross amounts not offset in the balance sheet
(Amounts in millions)	Gross amounts recognized			Gross amounts offset in the balance sheet		Net amounts presented in the balance sheet			Financial instruments ⁽³⁾			Collateral pledged/ received			Over collateralization			Net amount
Derivative assets ⁽¹⁾	$	496		$	—	$	496		$	(286	)	$	(199	)	$	16		$	27
Derivative liabilities ⁽²⁾		662			—		662			(286	)		(394	)		23			5

Net derivatives	$	(166	)	$	—	$	(166	)	$	—		$	195		$	(7	)	$	22

⁽¹⁾	Included $25 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives.

⁽²⁾	Included $7 million of accruals on derivatives classified as other liabilities and does not include amounts related to embedded derivatives and derivatives related to securitization entities.

⁽³⁾	Amounts represent derivative assets and/or liabilities that are presented gross within the balance sheet but are held with the same counterparty where we have a master netting arrangement. This adjustment results in presenting the net asset and net liability position for each counterparty.

Except for derivatives related to securitization entities, almost all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. If the downgrade provisions had been triggered as of June 30, 2014 and December 31, 2013, we could have been allowed to claim or required to disburse up to the net amounts shown in the last column of the charts above. The charts above exclude embedded derivatives and derivatives related to securitization entities as those derivatives are not subject to master netting arrangements.

Credit Derivatives

We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction.

In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we consolidate. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:


	June 30, 2014						December 31, 2013
(Amounts in millions)	Notional value		Assets		Liabilities		Notional value		Assets		Liabilities
Investment grade
Matures in less than one year	$	—	$	—	$	—	$	—	$	—	$	—
Matures after one year through five years		39		1		—		39		1		—

Total credit default swaps on single name reference entities	$	39	$	1	$	—	$	39	$	1	$	—

The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:


	June 30, 2014						December 31, 2013
(Amounts in millions)	Notional value		Assets		Liabilities		Notional value		Assets		Liabilities
Original index tranche attachment/detachment point and maturity:
7% - 15% matures after one year through five years⁽¹⁾	$	100	$	2	$	—	$	100	$	3	$	—
9% - 12% matures after one year through five years⁽²⁾		250		3		—		250		5		—
10% - 15% matures in less than one year⁽³⁾		250		1		—		250		2		—

Total credit default swap index tranches		600		6		—		600		10		—

Customized credit default swap index tranches related to securitization entities:
Portion backing third-party borrowings maturing 2017⁽⁴⁾		12		—		—		12		—		1
Portion backing our interest maturing 2017⁽⁵⁾		300		—		16		300		—		31

Total customized credit default swap index tranches related to securitization entities		312		—		16		312		—		32

Total credit default swaps on index tranches	$	912	$	6	$	16	$	912	$	10	$	32

⁽¹⁾	The current attachment/detachment as of June 30, 2014 and December 31, 2013 was 7% – 15%.

⁽²⁾	The current attachment/detachment as of June 30, 2014 and December 31, 2013 was 9% – 12%.

⁽³⁾	The current attachment/detachment as of June 30, 2014 and December 31, 2013 was 10% – 15%.

⁽⁴⁾	Original notional value was $39 million.

⁽⁵⁾	Original notional value was $300 million.

(6) Fair Value of Financial Instruments

Assets and liabilities that are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and cash equivalents, investment securities, separate accounts, securities held as collateral and derivative instruments. Other financial assets and liabilities—those not carried at fair value—are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.

The basis on which we estimate fair value is as follows:

Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.

Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.

Other invested assets. Primarily represents short-term investments and limited partnerships accounted for under the cost method. The fair value of short-term investments typically does not include significant unobservable inputs and approximate our amortized cost basis. As a result, short-term investments are classified as Level 2. Limited partnerships are valued based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the underlying instrument. Cost method limited partnerships typically include significant unobservable inputs as a result of being relatively illiquid with limited market activity for similar instruments and are classified as Level 3.

Long-term borrowings. We utilize available market data when determining fair value of long-term borrowings issued in the United States and Canada, which includes data on recent trades for the same or similar financial instruments. Accordingly, these instruments are classified as Level 2 measurements. In cases where market data is not available such as our long-term borrowings in Australia, we use broker quotes for which we consider the valuation methodology utilized by the third party, but the valuation typically includes significant unobservable inputs. Accordingly, we classify these borrowings where fair value is based on our consideration of broker quotes as Level 3 measurements.

Non-recourse funding obligations. We use an internal model to determine fair value using the current floating rate coupon and expected life/final maturity of the instrument discounted using the floating rate index and current market spread assumption, which is estimated based on recent transactions for these instruments or similar instruments as well as other market information or broker provided data. Given these instruments are private and very little market activity exists, our current market spread assumption is considered to have significant unobservable inputs in calculating fair value and, therefore, results in the fair value of these instruments being classified as Level 3.

Borrowings related to securitization entities. Based on market quotes or comparable market transactions. Some of these borrowings are publicly traded debt securities and are classified as Level 2. Certain borrowings are not publicly traded and are classified as Level 3.

Investment contracts. Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products. Given the significant unobservable inputs associated with policyholder behavior and current market rate assumptions used to discount the expected future cash flows, we classify these instruments as Level 3 except for certain funding agreement-backed notes that are traded in the marketplace as a security and are classified as Level 2.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following represents our estimated fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:


	June 30, 2014
	Notional amount		Carrying amount			Fair value
(Amounts in millions)	Notional amount		Carrying amount			Total		Level 1		Level 2		Level 3
Assets:
Commercial mortgage loans	$	⁽¹⁾	$	5,986		$	6,364	$	—	$	—	$	6,364
Restricted commercial mortgage loans		⁽¹⁾		217			243		—		—		243
Other invested assets		⁽¹⁾		160			167		—		82		85
Liabilities:
Long-term borrowings		⁽¹⁾		4,691			5,340		—		5,202		138
Non-recourse funding obligations		⁽¹⁾		2,024			1,453		—		—		1,453
Borrowings related to securitization entities		⁽¹⁾		150			166		—		166		—
Investment contracts		⁽¹⁾		17,458			18,112		—		19		18,093
Other firm commitments:
Commitments to fund limited partnerships		62		—			—		—		—		—
Ordinary course of business lending commitments		153		—	&nbs

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