Edgar Filing: GENWORTH FINANCIAL INC

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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, 2016

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

For the transition period from to

Commission file number 001-32195

LOGO

GENWORTH FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		80-0873306
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

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

(804) 281-6000

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

As of July 27, 2016, 498,336,235 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, 2016 (Unaudited) and December 31, 2015			3
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015 (Unaudited)			4
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015 (Unaudited)			5
Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2016 and 2015 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		94

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		177

Item 4.	Controls and Procedures		179

PART II—OTHER INFORMATION			179

Item 1.	Legal Proceedings		179

Item 1A.	Risk Factors		179

Item 6.	Exhibits		180

Signatures			181

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	June 30, 2016			December 31, 2015
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	62,828		$	58,197
Equity securities available-for-sale, at fair value		481			310
Commercial mortgage loans		6,121			6,170
Restricted commercial mortgage loans related to securitization entities		141			161
Policy loans		1,754			1,568
Other invested assets		2,510			2,309
Restricted other invested assets related to securitization entities, at fair value		312			413

Total investments		74,147			69,128
Cash and cash equivalents		3,457			5,965
Accrued investment income		601			653
Deferred acquisition costs		4,046			4,398
Intangible assets and goodwill		267			357
Reinsurance recoverable		17,564			17,245
Other assets		640			520
Deferred tax asset		—			155
Separate account assets		7,484			7,883
Assets held for sale		—			127

Total assets	$	108,206		$	106,431

Liabilities and equity
Liabilities:
Future policy benefits	$	37,154		$	36,475
Policyholder account balances		26,182			26,209
Liability for policy and contract claims		8,289			8,095
Unearned premiums		3,412			3,308
Other liabilities ($4 and $46 of other liabilities are related to securitization entities)		3,197			3,004
Borrowings related to securitization entities ($11 and $81 are at fair value)		85			179
Non-recourse funding obligations		310			1,920
Long-term borrowings		4,191			4,570
Deferred tax liability		893			24
Separate account liabilities		7,484			7,883
Liabilities held for sale		—			127

Total liabilities		91,197			91,794

Commitments and contingencies

Equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 587 million and 586 million shares issued as of June 30, 2016 and December 31, 2015, respectively; 498 million shares outstanding as of June 30, 2016 and December 31, 2015		1			1
Additional paid-in capital		11,955			11,949

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		2,770			1,236
Net unrealized gains (losses) on other-than-temporarily impaired securities		19			18

Net unrealized investment gains (losses)		2,789			1,254

Derivatives qualifying as hedges		2,439			2,045
Foreign currency translation and other adjustments		(140	)		(289	)

Total accumulated other comprehensive income (loss)		5,088			3,010
Retained earnings		789			564
Treasury stock, at cost (88 million shares as of June 30, 2016 and December 31, 2015)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		15,133			12,824
Noncontrolling interests		1,876			1,813

Total equity		17,009			14,637

Total liabilities and equity	$	108,206		$	106,431

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,
	2016			2015			2016			2015
Revenues:
Premiums	$	1,127		$	1,134		$	1,921		$	2,277
Net investment income		779			793			1,568			1,574
Net investment gains (losses)		30			8			11			(8	)
Policy fees and other income		300			222			521			449

Total revenues		2,236			2,157			4,021			4,292

Benefits and expenses:
Benefits and other changes in policy reserves		1,193			1,232			2,053			2,424
Interest credited		173			181			350			361
Acquisition and operating expenses, net of deferrals		327			295			721			562
Amortization of deferred acquisition costs and intangibles		112			101			211			196
Interest expense		80			103			185			210

Total benefits and expenses		1,885			1,912			3,520			3,753

Income from continuing operations before income taxes		351			245			501			539
Provision for income taxes		110			70			133			161

Income from continuing operations		241			175			368			378
Loss from discontinued operations, net of taxes		(21	)		(314	)		(40	)		(313	)

Net income (loss)		220			(139	)		328			65
Less: net income attributable to noncontrolling interests		48			54			103			104

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	172		$	(193	)	$	225		$	(39	)

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.39		$	0.24		$	0.53		$	0.55

Diluted	$	0.39		$	0.24		$	0.53		$	0.55

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.35		$	(0.39	)	$	0.45		$	(0.08	)

Diluted	$	0.34		$	(0.39	)	$	0.45		$	(0.08	)

Weighted-average common shares outstanding:
Basic		498.5			497.4			498.3			497.2

Diluted		500.4			499.3			499.9			499.1

Supplemental disclosures:
Total other-than-temporary impairments	$	(22	)	$	—		$	(33	)	$	(3	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		—			—			—			—

Net other-than-temporary impairments		(22	)		—			(33	)		(3	)
Other investments gains (losses)		52			8			44			(5	)

Total net investment gains (losses)	$	30		$	8		$	11		$	(8	)

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,
	2016		2015			2016		2015
Net income (loss)	$	220	$	(139	)	$	328	$	65

Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired		745		(1,138	)		1,552		(815	)
Net unrealized gains (losses) on other-than-temporarily impaired securities		5		(2	)		1		—
Derivatives qualifying as hedges		137		(334	)		394		(157	)
Foreign currency translation and other adjustments		8		53			224		(317	)

Total other comprehensive income (loss)		895		(1,421	)		2,171		(1,289	)

Total comprehensive income (loss)		1,115		(1,560	)		2,499		(1,224	)
Less: comprehensive income (loss) attributable to noncontrolling interests		40		40			196		(24	)

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	1,075	$	(1,600	)	$	2,303	$	(1,200	)

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN 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 equity
Balances as of December 31, 2015	$	1	$	11,949		$	3,010		$	564		$	(2,700	)	$	12,824		$	1,813		$	14,637

Return of capital to noncontrolling interests		—		—			—			—			—			—			(70	)		(70	)
Comprehensive income (loss):
Net income		—		—			—			225			—			225			103			328
Other comprehensive income (loss), net of taxes		—		—			2,078			—			—			2,078			93			2,171

Total comprehensive income (loss)																2,303			196			2,499
Dividends to noncontrolling interests		—		—			—			—			—			—			(64	)		(64	)
Stock-based compensation expense and exercises and other		—		6			—			—			—			6			1			7

Balances as of June 30, 2016	$	1	$	11,955		$	5,088		$	789		$	(2,700	)	$	15,133		$	1,876		$	17,009

Balances as of December 31, 2014	$	1	$	11,997		$	4,446		$	1,179		$	(2,700	)	$	14,923		$	1,874		$	16,797

Additional sale of subsidiary shares to noncontrolling interests		—		(65	)		24			—			—			(41	)		267			226
Repurchase of subsidiary shares		—		—			—			—			—			—			(17	)		(17	)
Comprehensive income (loss):
Net income (loss)		—		—			—			(39	)		—			(39	)		104			65
Other comprehensive income (loss), net of taxes		—		—			(1,161	)		—			—			(1,161	)		(128	)		(1,289	)

Total comprehensive income (loss)																(1,200	)		(24	)		(1,224	)
Dividends to noncontrolling interests		—		—			—			—			—			—			(66	)		(66	)
Stock-based compensation expense and exercises and other		—		8			—			—			—			8			3			11

Balances as of June 30, 2015	$	1	$	11,940		$	3,309		$	1,140		$	(2,700	)	$	13,690		$	2,037		$	15,727

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,
	2016			2015
Cash flows from operating activities:
Net income	$	328		$	65
Less loss from discontinued operations, net of taxes		40			313
Adjustments to reconcile net income to net cash from operating activities:
Gain on sale of businesses		(26	)		—
Amortization of fixed maturity securities discounts and premiums and limited partnerships		(67	)		(49	)
Net investment losses (gains)		(11	)		8
Charges assessed to policyholders		(384	)		(393	)
Acquisition costs deferred		(91	)		(155	)
Amortization of deferred acquisition costs and intangibles		211			196
Deferred income taxes		4			103
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments		743			(193	)
Stock-based compensation expense		16			8
Change in certain assets and liabilities:
Accrued investment income and other assets		(186	)		(51	)
Insurance reserves		332			866
Current tax liabilities		56			(91	)
Other liabilities, policy and contract claims and other policy-related balances		101			(97	)
Cash from operating activities—held for sale		—			(19	)

Net cash from operating activities		1,066			511

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		1,680			2,395
Commercial mortgage loans		364			436
Restricted commercial mortgage loans related to securitization entities		20			21
Proceeds from sales of investments:
Fixed maturity and equity securities		2,772			821
Purchases and originations of investments:
Fixed maturity and equity securities		(5,685	)		(4,397	)
Commercial mortgage loans		(317	)		(514	)
Other invested assets, net		(67	)		(39	)
Policy loans, net		(90	)		3
Proceeds from sale of businesses, net of cash transferred		39			—
Cash from investing activities—held for sale		—			13

Net cash from investing activities		(1,284	)		(1,261	)

Cash flows from financing activities:
Deposits to universal life and investment contracts		810			1,142
Withdrawals from universal life and investment contracts		(1,021	)		(1,079	)
Redemption of non-recourse funding obligations		(1,620	)		(30	)
Repayment and repurchase of long-term debt		(362	)		—
Repayment of borrowings related to securitization entities		(30	)		(19	)
Proceeds from sale of subsidiary shares to noncontrolling interests		—			226
Repurchase of subsidiary shares		—			(17	)
Return of capital to noncontrolling interests		(70	)		—
Dividends paid to noncontrolling interests		(64	)		(66	)
Other, net		9			9
Cash from financing activities—held for sale		—			(39	)

Net cash from financing activities		(2,348	)		127

Effect of exchange rate changes on cash and cash equivalents (includes $— and $(3) related to businesses held for sale)		30			(41	)

Net change in cash and cash equivalents		(2,536	)		(664	)
Cash and cash equivalents at beginning of period		5,993			4,918

Cash and cash equivalents at end of period		3,457			4,254
Less cash and cash equivalents held for sale at end of period		—			154

Cash and cash equivalents of continuing operations at end of period	$	3,457		$	4,100

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’s 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, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

The accompanying unaudited condensed financial statements include on a consolidated basis the accounts of Genworth Financial and the affiliate companies in which it holds a majority voting interest or where it is the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.

References to “Genworth,” the “Company,” “we” or “our” in the accompanying unaudited condensed consolidated financial statements and these notes thereto are, unless the context otherwise requires, to Genworth Financial on a consolidated basis.

We operate our business through the following five operating segments:

•

U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.

•

Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada.

•

Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.

•

U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.

•

Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold but we continue to service our existing blocks of business. 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 and guaranteed investment contracts.

In addition to our five operating business segments, 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 businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.

On May 9, 2016, Genworth Mortgage Insurance Corporation (“GMICO”), our wholly-owned indirect subsidiary, completed the sale of our European mortgage insurance business. As the held-for-sale criteria were

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

satisfied during the fourth quarter of 2015, our European mortgage insurance business, included in Corporate and Other activities, has been reported as held for sale and its financial position is separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 12 for additional information.

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 2015 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, 2016, we adopted new accounting guidance related to consolidation. The new guidance primarily impacts limited partnerships and similar legal entities, evaluation of fees paid to a decision maker as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination and certain investment funds. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance related to accounting for credit losses on financial instruments. The guidance requires that entities recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most debt instruments not measured at fair value, which would primarily include our commercial mortgage loans and reinsurance receivables. The new guidance retains most of the existing impairment guidance for available-for-sale debt securities but amends the presentation of credit losses to be presented as an allowance as opposed to a write-down and permits the reversal of credit losses when reassessing changes in the credit losses each reporting period. The new guidance is effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019. Upon adoption, a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption will be recorded. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In March 2016, the FASB issued new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The guidance is effective for us on January 1, 2017, with early adoption permitted. We do not expect any significant impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The guidance is effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The guidance is effective for us on January 1, 2017, with early adoption permitted. This guidance is consistent with our accounting for derivative contract novations and, accordingly, we do not expect any impact on our consolidated financial statements.

In February 2016, the FASB issued new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a right-to-use asset and a corresponding liability on the balance sheet. The guidance is effective for us on January 1, 2019, with early adoption permitted. We are still in the process of evaluating the impact this guidance will have on our consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Earnings (Loss) Per Share

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


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions, except per share amounts)	2016			2015			2016			2015
Weighted-average common shares used in basic earnings (loss) per common share calculations		498.5			497.4			498.3			497.2
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		1.9			1.9			1.6			1.9

Weighted-average common shares used in diluted earnings (loss) per common share calculations		500.4			499.3			499.9			499.1

Income from continuing operations:
Income from continuing operations	$	241		$	175		$	368		$	378
Less: income from continuing operations attributable to noncontrolling interests		48			54			103			104

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	193		$	121		$	265		$	274

Basic per common share	$	0.39		$	0.24		$	0.53		$	0.55

Diluted per common share	$	0.39		$	0.24		$	0.53		$	0.55

Loss from discontinued operations:
Loss from discontinued operations, net of taxes	$	(21	)	$	(314	)	$	(40	)	$	(313	)
Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests		—			—			—			—

Loss from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders	$	(21	)	$	(314	)	$	(40	)	$	(313	)

Basic per common share	$	(0.04	)	$	(0.63	)	$	(0.08	)	$	(0.63	)

Diluted per common share	$	(0.04	)	$	(0.63	)	$	(0.08	)	$	(0.63	)

Net income (loss):
Income from continuing operations	$	241		$	175		$	368		$	378
Loss from discontinued operations, net of taxes		(21	)		(314	)		(40	)		(313	)

Net income (loss)		220			(139	)		328			65
Less: net income attributable to noncontrolling interests		48			54			103			104

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	172		$	(193	)	$	225		$	(39	)

Basic per common share	$	0.35		$	(0.39	)	$	0.45		$	(0.08	)

Diluted per common share	$	0.34		$	(0.39	)	$	0.45		$	(0.08	)

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)	2016			2015			2016			2015
Fixed maturity securities—taxable	$	634		$	645		$	1,275		$	1,277
Fixed maturity securities—non-taxable		3			3			6			6
Commercial mortgage loans		77			83			158			168
Restricted commercial mortgage loans related to securitization entities		3			3			5			7
Equity securities		7			4			12			8
Other invested assets		33			37			71			77
Restricted other invested assets related to securitization entities		1			1			3			2
Policy loans		34			35			69			68
Cash, cash equivalents and short-term investments		6			4			11			7

Gross investment income before expenses and fees		798			815			1,610			1,620
Expenses and fees		(19	)		(22	)		(42	)		(46	)

Net investment income	$	779		$	793		$	1,568		$	1,574

(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)	2016			2015			2016			2015
Available-for-sale securities:
Realized gains	$	150		$	20		$	166		$	35
Realized losses		(28	)		(6	)		(51	)		(18	)

Net realized gains (losses) on available-for-sale securities		122			14			115			17

Impairments:
Total other-than-temporary impairments		(22	)		—			(33	)		(3	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		—			—			—			—

Net other-than-temporary impairments		(22	)		—			(33	)		(3	)

Trading securities		16			(16	)		44			(10	)
Commercial mortgage loans		1			2			2			4
Net gains (losses) related to securitization entities		(61	)		2			(53	)		10
Derivative instruments ⁽¹⁾		(24	)		6			(62	)		(26	)
Other		(2	)		—			(2	)		—

Net investment gains (losses)	$	30		$	8		$	11		$	(8	)

⁽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, 2016 and 2015 was $300 million and $144 million, respectively, which was approximately 92% and 96%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2016 and 2015 was $540 million and $284 million, respectively, which was approximately 92% and 94%, respectively, of book value.

The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in 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)	2016			2015			2016			2015
Beginning balance	$	63		$	78		$	64		$	83
Additions:
Other-than-temporary impairments not previously recognized		1			—			1			—
Reductions:
Securities sold, paid down or disposed		(2	)		(3	)		(3	)		(8	)

Ending balance	$	62		$	75		$	62		$	75

(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, 2016			December 31, 2015
Net unrealized gains (losses) on investment securities:
Fixed maturity securities	$	6,419		$	3,140
Equity securities		(15	)		(10	)

Subtotal		6,404			3,130
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(1,944	)		(1,070	)
Income taxes, net		(1,558	)		(711	)

Net unrealized investment gains (losses)		2,902			1,349
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		113			95

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	2,789		$	1,254

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)	2016			2015
Beginning balance	$	2,057		$	2,748
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		1,760			(2,406	)
Adjustment to deferred acquisition costs		(132	)		168
Adjustment to present value of future profits		5			70
Adjustment to sales inducements		(21	)		18
Adjustment to benefit reserves		(357	)		411
Provision for income taxes		(440	)		608

Change in unrealized gains (losses) on investment securities		815			(1,131	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $35 and $5		(65	)		(9	)

Change in net unrealized investment gains (losses)		750			(1,140	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		18			(20	)

Ending balance	$	2,789		$	1,628


	As of or for the six months ended June 30,
(Amounts in millions)	2016			2015
Beginning balance	$	1,254		$	2,453
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		3,356			(1,463	)
Adjustment to deferred acquisition costs		(274	)		70
Adjustment to present value of future profits		(29	)		50
Adjustment to sales inducements		(40	)		3
Adjustment to benefit reserves		(531	)		88
Provision for income taxes		(876	)		446

Change in unrealized gains (losses) on investment securities		1,606			(806	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $29 and $5		(53	)		(9	)

Change in net unrealized investment gains (losses)		1,553			(815	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		18			10

Ending balance	$	2,789		$	1,628

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity and Equity Securities

As of June 30, 2016, 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	$	5,485	$	1,321	$	—	$	—		$	—	$	6,806
State and political subdivisions		2,395		371		—		(15	)		—		2,751
Non-U.S. government		1,947		167		—		(1	)		—		2,113
U.S. corporate:
Utilities		3,941		677		—		(2	)		—		4,616
Energy		2,156		153		—		(43	)		—		2,266
Finance and insurance		5,609		592		19		(14	)		—		6,206
Consumer—non-cyclical		4,035		655		—		(1	)		—		4,689
Technology and communications		2,333		237		—		(13	)		—		2,557
Industrial		1,152		105		—		(8	)		—		1,249
Capital goods		1,870		317		—		(1	)		—		2,186
Consumer—cyclical		1,495		151		—		(4	)		—		1,642
Transportation		1,077		134		—		(1	)		—		1,210
Other		336		27		—		—			—		363

Total U.S. corporate		24,004		3,048		19		(87	)		—		26,984

Non-U.S. corporate:
Utilities		909		60		—		(4	)		—		965
Energy		1,282		110		—		(30	)		—		1,362
Finance and insurance		2,399		181		—		(2	)		—		2,578
Consumer—non-cyclical		770		52		—		(2	)		—		820
Technology and communications		979		74		—		(3	)		—		1,050
Industrial		946		55		—		(16	)		—		985
Capital goods		547		34		—		(1	)		—		580
Consumer—cyclical		514		14		—		—			—		528
Transportation		604		81		—		(5	)		—		680
Other		3,004		291		—		(10	)		—		3,285

Total non-U.S. corporate		11,954		952		—		(73	)		—		12,833

Residential mortgage-backed		4,602		448		9		(4	)		—		5,055
Commercial mortgage-backed		2,790		189		2		(2	)		—		2,979
Other asset-backed		3,324		23		1		(41	)		—		3,307

Total fixed maturity securities		56,501		6,519		31		(223	)		—		62,828
Equity securities		504		19		—		(42	)		—		481

Total available-for-sale securities	$	57,005	$	6,538	$	31	$	(265	)	$	—	$	63,309

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2015, 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	$	5,487	$	732	$	—	$	(16	)	$	—	$	6,203
State and political subdivisions		2,287		181		—		(30	)		—		2,438
Non-U.S. government		1,910		110		—		(5	)		—		2,015
U.S. corporate:
Utilities		3,355		364		—		(26	)		—		3,693
Energy		2,560		103		—		(162	)		—		2,501
Finance and insurance		5,268		392		15		(43	)		—		5,632
Consumer—non-cyclical		3,755		371		—		(30	)		—		4,096
Technology and communications		2,108		123		—		(38	)		—		2,193
Industrial		1,164		53		—		(44	)		—		1,173
Capital goods		1,774		188		—		(12	)		—		1,950
Consumer—cyclical		1,602		95		—		(22	)		—		1,675
Transportation		1,023		75		—		(12	)		—		1,086
Other		385		22		—		(5	)		—		402

Total U.S. corporate		22,994		1,786		15		(394	)		—		24,401

Non-U.S. corporate:
Utilities		815		37		—		(9	)		—		843
Energy		1,700		64		—		(78	)		—		1,686
Finance and insurance		2,327		152		2		(8	)		—		2,473
Consumer—non-cyclical		746		24		—		(18	)		—		752
Technology and communications		978		36		—		(26	)		—		988
Industrial		1,063		19		—		(96	)		—		986
Capital goods		602		19		—		(17	)		—		604
Consumer—cyclical		522		8		—		(4	)		—		526
Transportation		559		52		—		(6	)		—		605
Other		2,574		187		—		(25	)		—		2,736

Total non-U.S. corporate		11,886		598		2		(287	)		—		12,199

Residential mortgage-backed		4,777		330		11		(17	)		—		5,101
Commercial mortgage-backed		2,492		84		3		(20	)		—		2,559
Other asset-backed		3,328		11		1		(59	)		—		3,281

Total fixed maturity securities		55,161		3,832		32		(828	)		—		58,197
Equity securities		325		8		—		(23	)		—		310

Total available-for-sale securities	$	55,486	$	3,840	$	32	$	(851	)	$	—	$	58,507

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, 2016:


	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			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
Fixed maturity securities:
State and political subdivisions	$	40	$	(1	)		6	$	144	$	(14	)		12	$	184	$	(15	)		18
Non-U.S. government		—		—			—		10		(1	)		10		10		(1	)		10
U.S. corporate		630		(22	)		93		1,080		(65	)		159		1,710		(87	)		252
Non-U.S. corporate		352		(8	)		49		752		(65	)		112		1,104		(73	)		161
Residential mortgage-backed		118		(1	)		24		99		(3	)		36		217		(4	)		60
Commercial mortgage-backed		107		(1	)		15		94		(1	)		25		201		(2	)		40
Other asset-backed		842		(12	)		164		393		(29	)		79		1,235		(41	)		243

Subtotal, fixed maturity securities		2,089		(45	)		351		2,572		(178	)		433		4,661		(223	)		784
Equity securities		80		(6	)		198		124		(36	)		44		204		(42	)		242

Total for securities in an unrealized loss position	$	2,169	$	(51	)		549	$	2,696	$	(214	)		477	$	4,865	$	(265	)		1,026

% Below cost—fixed maturity securities:
<20% Below cost	$	2,082	$	(42	)		349	$	2,400	$	(108	)		411	$	4,482	$	(150	)		760
20%-50% Below cost		7		(3	)		2		172		(70	)		22		179		(73	)		24

Total fixed maturity securities		2,089		(45	)		351		2,572		(178	)		433		4,661		(223	)		784

% Below cost—equity securities:
<20% Below cost		76		(5	)		181		32		(3	)		12		108		(8	)		193
20%-50% Below cost		4		(1	)		17		92		(33	)		32		96		(34	)		49

Total equity securities		80		(6	)		198		124		(36	)		44		204		(42	)		242

Total for securities in an unrealized loss position	$	2,169	$	(51	)		549	$	2,696	$	(214	)		477	$	4,865	$	(265	)		1,026


Investment grade	$	1,738	$	(29	)		306	$	2,192	$	(142	)		380	$	3,930	$	(171	)		686
Below investment grade		431		(22	)		243		504		(72	)		97		935		(94	)		340

Total for securities in an unrealized loss position	$	2,169	$	(51	)		549	$	2,696	$	(214	)		477	$	4,865	$	(265	)		1,026

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of June 30, 2016:


	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			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
U.S. corporate:
Utilities	$	34	$	(1	)		9	$	36	$	(1	)		5	$	70	$	(2	)		14
Energy		231		(14	)		30		382		(29	)		57		613		(43	)		87
Finance and insurance		158		(1	)		24		188		(13	)		23		346		(14	)		47
Consumer—non-cyclical		—		—			—		72		(1	)		10		72		(1	)		10
Technology and communications		95		(4	)		13		111		(9	)		23		206		(13	)		36
Industrial		41		(1	)		5		137		(7	)		19		178		(8	)		24
Capital goods		—		—			—		24		(1	)		4		24		(1	)		4
Consumer—cyclical		71		(1	)		12		88		(3	)		14		159		(4	)		26
Transportation		—		—			—		42		(1	)		4		42		(1	)		4
Other		—		—			—		—		—			—		—		—			—

Subtotal, U.S. corporate securities		630		(22	)		93		1,080		(65	)		159		1,710		(87	)		252

Non-U.S. corporate:
Utilities		—		—			—		26		(4	)		3		26		(4	)		3
Energy		58		(3	)		8		177		(27	)		28		235		(30	)		36
Finance and insurance		188		(1	)		26		94		(1	)		19		282		(2	)		45
Consumer—non-cyclical		—		—			—		41		(2	)		5		41		(2	)		5
Technology and communications		48		(1	)		4		55		(2	)		8		103		(3	)		12
Industrial		34		(1	)		8		141		(15	)		21		175		(16	)		29
Capital goods		—		—			—		54		(1	)		7		54		(1	)		7
Consumer—cyclical		—		—			—		—		—			—		—		—			—
Transportation		24		(2	)		3		53		(3	)		6		77		(5	)		9
Other		—		—			—		111		(10	)		15		111		(10	)		15

Subtotal, non-U.S. corporate securities		352		(8	)		49		752		(65	)		112		1,104		(73	)		161

Total for corporate securities in an unrealized loss position	$	982	$	(30	)		142	$	1,832	$	(130	)		271	$	2,814	$	(160	)		413

As indicated in the tables 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 increased market volatility, mostly concentrated in our corporate securities. 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 2% as of June 30, 2016.

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

Of the $108 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB-” and approximately 65% of the unrealized losses were related to investment grade securities as of June 30, 2016. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

approximately 4% as of June 30, 2016. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of June 30, 2016:


	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:
State and political subdivisions	$	9	$	(3	)		1	%		1	$	—	$	—		—	%		—
U.S. corporate:
Energy		13		(4	)		1			1		—		—		—			—
Finance and insurance		10		(5	)		2			1		—		—		—			—

Total U.S. corporate		23		(9	)		3			2		—		—		—			—

Non-U.S. corporate:
Utilities		11		(4	)		2			1		—		—		—			—
Energy		23		(8	)		3			3		—		—		—			—

Total non-U.S. corporate		34		(12	)		5			4		—		—		—			—

Structured securities:
Other asset-backed		43		(18	)		7			4		—		—		—			—

Total structured securities		43		(18	)		7			4		—		—		—			—

Total	$	109	$	(42	)		16	%		11	$	—	$	—		—	%		—


	Below Investment Grade
	20% to 50%										Greater than 50%
(Dollar amounts in millions)	Fair value		Gross unrealized losses			% of total gross unrealized losses			Number of securities		Fair value		Gross unrealized losses		% of total gross unrealized losses			Number of securities
Fixed maturity securities:
U.S. corporate:
Energy	$	11	$	(5	)		2	%		3	$	—	$	—		—	%		—
Finance and insurance		7		(3	)		1			1		—		—		—			—

Total U.S. corporate		18		(8	)		3			4		—		—		—			—

Non-U.S. corporate:
Energy		29		(10	)		4			3		—		—		—			—
Industrial		9		(4	)		1			3		—		—		—			—

Total non-U.S. corporate		38		(14	)		5			6		—		—		—			—

Structured securities:
Other asset-backed		7		(6	)		2			1		—		—		—			—

Total structured securities		7		(6	)		2			1		—		—		—			—

Total	$	63	$	(28	)		10	%		11	$	—	$	—		—	%		—

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing 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.

U.S. corporate

As indicated above, $17 million of gross unrealized losses were related to U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for U.S. corporate fixed maturity securities, $9 million, or 53%, related to the energy sector and $8 million, or 47%, related to the finance and insurance sector. Ongoing low oil prices and market volatility adversely impacted the fair value of these securities.

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

Non-U.S. corporate

As indicated above, $26 million of gross unrealized losses were related to non-U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for non-U.S. corporate fixed maturity securities, $18 million, or 69%, related to the energy sector. Ongoing low oil prices have adversely impacted the fair value of these securities.

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

Structured Securities

Of the $24 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, none 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.

While we consider 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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 use 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, 2016.

Despite the considerable analysis and rigor employed on our structured securities, it is reasonably possible that the underlying collateral of these investments may 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			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	883	$	(16	)		32	$	—	$	—			—	$	883	$	(16	)		32
State and political subdivisions		464		(15	)		81		163		(15	)		17		627		(30	)		98
Non-U.S. government		366		(5	)		49		—		—			—		366		(5	)		49
U.S. corporate		5,836		(332	)		817		466		(62	)		83		6,302		(394	)		900
Non-U.S. corporate		3,016		(170	)		400		486		(117	)		87		3,502		(287	)		487
Residential mortgage-backed		756		(10	)		88		103		(7	)		38		859		(17	)		126
Commercial mortgage-backed		780		(19	)		116		39		(1	)		13		819		(20	)		129
Other asset-backed		1,944		(22	)		349		336		(37	)		55		2,280		(59	)		404

Subtotal, fixed maturity securities		14,045		(589	)		1,932		1,593		(239	)		293		15,638		(828	)		2,225
Equity securities		153		(23	)		64		—		—			—		153		(23	)		64

Total for securities in an unrealized loss position	$	14,198	$	(612	)		1,996	$	1,593	$	(239	)		293	$	15,791	$	(851	)		2,289

% Below cost—fixed maturity securities:
<20% Below cost	$	13,726	$	(472	)		1,877	$	1,259	$	(78	)		238	$	14,985	$	(550	)		2,115
20%-50% Below cost		319		(116	)		54		316		(139	)		50		635		(255	)		104
>50% Below cost		—		(1	)		1		18		(22	)		5		18		(23	)		6

Total fixed maturity securities		14,045		(589	)		1,932		1,593		(239	)		293		15,638		(828	)		2,225

% Below cost—equity securities:
<20% Below cost		133		(18	)		56		—		—			—		133		(18	)		56
20%-50% Below cost		20		(5	)		8		—		—			—		20		(5	)		8

Total equity securities		153		(23	)		64		—		—			—		153		(23	)		64

Total for securities in an unrealized loss position	$	14,198	$	(612	)		1,996	$	1,593	$	(239	)		293	$	15,791	$	(851	)		2,289


Investment grade	$	13,342	$	(524	)		1,834	$	1,245	$	(135	)		225	$	14,587	$	(659	)		2,059
Below investment grade		856		(88	)		162		348		(104	)		68		1,204		(192	)		230

Total for securities in an unrealized loss position	$	14,198	$	(612	)		1,996	$	1,593	$	(239	)		293	$	15,791	$	(851	)		2,289

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			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
U.S. corporate:
Utilities	$	485	$	(25	)		74	$	14	$	(1	)		7	$	499	$	(26	)		81
Energy		1,162		(134	)		163		131		(28	)		22		1,293		(162	)		185
Finance and insurance		1,142		(35	)		160		94		(8	)		15		1,236		(43	)		175
Consumer—non-cyclical		836		(26	)		107		51		(4	)		10		887		(30	)		117
Technology and communications		658		(36	)		95		23		(2	)		5		681		(38	)		100
Industrial		476		(33	)		64		44		(11	)		9		520		(44	)		73
Capital goods		293		(10	)		48		26		(2	)		4		319		(12	)		52
Consumer—cyclical		427		(18	)		60		63		(4	)		10		490		(22	)		70
Transportation		273		(10	)		38		20		(2	)		1		293		(12	)		39
Other		84		(5	)		8		—		—			—		84		(5	)		8

Subtotal, U.S. corporate securities		5,836		(332	)		817		466		(62	)		83		6,302		(394	)		900

Non-U.S. corporate:
Utilities		130		(6	)		20		32		(3	)		6		162		(9	)		26
Energy		589		(48	)		71		127		(30	)		20		716		(78	)		91
Finance and insurance		478		(7	)		77		30		(1	)		8		508		(8	)		85
Consumer—non-cyclical		261		(14	)		27		37		(4	)		4		298		(18	)		31
Technology and communications		324		(15	)		37		33		(11	)		9		357		(26	)		46
Industrial		495		(54	)		67		110		(42	)		18		605		(96	)		85
Capital goods		154		(8	)		22		41		(9	)		9		195		(17	)		31
Consumer—cyclical		155		(4	)		20		—		—			—		155		(4	)		20
Transportation		147		(6	)		17		—		—			—		147		(6	)		17
Other		283		(8	)		42		76		(17	)		13		359		(25	)		55

Subtotal, non-U.S. corporate securities		3,016		(170	)		400		486		(117	)		87		3,502		(287	)		487

Total for corporate securities in an unrealized loss position	$	8,852	$	(502	)		1,217	$	952	$	(179	)		170	$	9,804	$	(681	)		1,387

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The scheduled maturity distribution of fixed maturity securities as of June 30, 2016 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	$	1,827	$	1,851
Due after one year through five years		10,429		11,024
Due after five years through ten years		11,969		12,708
Due after ten years		21,560		25,904

Subtotal		45,785		51,487
Residential mortgage-backed		4,602		5,055
Commercial mortgage-backed		2,790		2,979
Other asset-backed		3,324		3,307

Total	$	56,501	$	62,828

As of June 30, 2016, $9,489 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of June 30, 2016, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 22%, 14% and 14%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of June 30, 2016, 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 principal payments, 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, 2016						December 31, 2015
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	2,132			35	%	$	2,116			34	%
Industrial		1,563			25			1,562			25
Office		1,479			24			1,516			24
Apartments		441			7			465			8
Mixed use		232			4			234			4
Other		289			5			294			5

Subtotal		6,136			100	%		6,187			100	%

Unamortized balance of loan origination fees and costs		(2	)					(2	)
Allowance for losses		(13	)					(15	)

Total	$	6,121					$	6,170


	June 30, 2016						December 31, 2015
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
Pacific	$	1,563			26	%	$	1,581			26	%
South Atlantic		1,522			25			1,574			25
Middle Atlantic		894			15			890			14
Mountain		562			9			585			10
West North Central		450			7			416			7
East North Central		377			6			386			6
West South Central		309			5			294			5
New England		266			4			268			4
East South Central		193			3			193			3

Subtotal		6,136			100	%		6,187			100	%

Unamortized balance of loan origination fees and costs		(2	)					(2	)
Allowance for losses		(13	)					(15	)

Total	$	6,121					$	6,170

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, 2016
(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	$	8		$	—		$	—		$	8		$	2,124		$	2,132
Industrial		—			—			13			13			1,550			1,563
Office		5			—			5			10			1,469			1,479
Apartments		—			—			—			—			441			441
Mixed use		—			—			—			—			232			232
Other		—			—			—			—			289			289

Total recorded investment	$	13		$	—		$	18		$	31		$	6,105		$	6,136

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


	December 31, 2015
(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	$	—		$	—		$	—		$	—		$	2,116		$	2,116
Industrial		—			—			—			—			1,562			1,562
Office		6			—			5			11			1,505			1,516
Apartments		—			—			—			—			465			465
Mixed use		—			—			—			—			234			234
Other		—			—			—			—			294			294

Total recorded investment	$	6		$	—		$	5		$	11		$	6,176		$	6,187

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

As of June 30, 2016 and December 31, 2015, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of June 30, 2016 and December 31, 2015.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of June 30, 2016, 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 the loans was expected to be recoverable.

During the six months ended June 30, 2016 and the year ended December 31, 2015, we modified or extended 7 and 21 commercial mortgage loans, respectively, with a total carrying value of $56 million and $110 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, but one loan with a carrying value $1 million was considered a troubled debt restructuring.

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)	2016			2015			2016			2015
Allowance for credit losses:
Beginning balance	$	15		$	20		$	15		$	22
Charge-offs		(4	)		—			(4	)		(3	)
Provision		2			(2	)		2			(1	)

Ending balance	$	13		$	18		$	13		$	18

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

Ending allowance for loans not individually impaired that were evaluated collectively for impairment	$	13		$	18		$	13		$	18

Recorded investment:
Ending balance	$	6,136		$	6,194		$	6,136		$	6,194

Ending balance of individually impaired loans	$	23		$	18		$	23		$	18

Ending balance of loans not individually impaired that were evaluated collectively for impairment	$	6,113		$	6,176		$	6,113		$	6,176

As of June 30, 2016, we had an individually impaired commercial mortgage loan included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, which were recorded in the second quarter of 2016.

As of June 30, 2016 and December 31, 2015, we had an individually impaired commercial mortgage loan included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, which were recorded in the third quarter of 2015.

As of December 31, 2015, we had an individually impaired commercial mortgage loan included within the industrial property type with a recorded investment of $14 million, an unpaid principal balance of $15 million and charge-offs of $1 million, which were recorded in the first quarter of 2014. As of December 31, 2015, this loan had interest income of $1 million. In the second quarter of 2016, we recorded additional charge-offs of $2 million related to this loan. As of June 30, 2016, the individually impaired loan within the industrial property type had a recorded investment of $13 million, an unpaid principal balance of $16 million and total charge-offs of $3 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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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


	June 30, 2016
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100% ⁽¹⁾			Total
Property type:
Retail	$	755		$	417		$	877		$	82		$	1		$	2,132
Industrial		578			448			470			63			4			1,563
Office		458			290			651			66			14			1,479
Apartments		176			63			192			10			—			441
Mixed use		56			43			130			3			—			232
Other		61			61			167			—			—			289

Total recorded investment	$	2,084		$	1,322		$	2,487		$	224		$	19		$	6,136

% of total		34	%		22	%		40	%		4	%		—	%		100	%

Weighted-average debt service coverage ratio		2.17			1.82			1.57			1.07			0.30			1.80

⁽¹⁾	Included $19 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 121%.


	December 31, 2015
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100% ⁽¹⁾			Total
Property type:
Retail	$	785		$	417		$	800		$	103		$	11		$	2,116
Industrial		515			478			499			65			5			1,562
Office		493			341			580			83			19			1,516
Apartments		196			66			182			21			—			465
Mixed use		56			48			124			3			3			234
Other		54			55			185			—			—			294

Total recorded investment	$	2,099		$	1,405		$	2,370		$	275		$	38		$	6,187

% of total		34	%		23	%		38	%		4	%		1	%		100	%

Weighted-average debt service coverage ratio		2.13			1.82			1.57			1.12			0.55			1.79

⁽¹⁾	Included $38 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 123%.

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, 2016
(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	$	72		$	223		$	449		$	881		$	507		$	2,132
Industrial		81			179			203			698			402			1,563
Office		70			99			201			760			349			1,479
Apartments		4			37			69			200			131			441
Mixed use		3			11			28			131			59			232
Other		10			57			134			59			29			289

Total recorded investment	$	240		$	606		$	1,084		$	2,729		$	1,477		$	6,136

% of total		4	%		10	%		18	%		44	%		24	%		100	%

Weighted-average loan-to-value		72	%		63	%		61	%		57	%		43	%		56	%


	December 31, 2015
(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	$	67		$	221		$	433		$	882		$	513		$	2,116
Industrial		94			181			208			672			407			1,562
Office		85			114			265			699			346			1,509
Apartments		6			41			74			199			145			465
Mixed use		3			11			28			135			57			234
Other		—			58			146			60			30			294

Total recorded investment	$	255		$	626		$	1,154		$	2,647		$	1,498		$	6,180

% of total		4	%		10	%		19	%		43	%		24	%		100	%

Weighted-average loan-to-value		74	%		64	%		58	%		58	%		43	%		56	%

As of June 30, 2016, we did not have any floating rate commercial mortgage loans. As of December 31, 2015, we had floating rate commercial mortgage loans of $7 million.

(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 and whereby the changes in fair value are recorded in current period income (loss). The trading securities comprise asset-backed securities, including highly rated bonds that are primarily backed by credit card receivables.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In June 2016, we amended and exercised a clean-up call on our consolidated securitization entity writing off our residual interest and settling the outstanding debt of $70 million. As a result of this transaction, we recorded $64 million of realized investment losses related to the write-off of our residual interest in those entities and a $64 million gain related to the early extinguishment of debt which was included in other income. There was no impact to net income.

In addition, the policy loan securitization entities in which we previously held a residual interest were not required to be consolidated in our balance sheets. In June 2016, we repurchased $134 million of policy loans from those entities. The policy loans are now included in our consolidated balance sheet.

(h) Limited Partnerships or Similar Entities

Investments in partnerships or similar entities are generally considered VIEs due to the equity group’s lack of sufficient financial control. Generally, these investments are limited partner or non-managing member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of June 30, 2016 and December 31, 2015, the total carrying value of these investments was $181 million and $165 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.

(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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016		December 31, 2015		Balance sheet classification	June 30, 2016		December 31, 2015
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Other invested assets	$	628	$	629	Other liabilities	$	87	$	37
Inflation indexed swaps	Other invested assets		—		—	Other liabilities		—		33
Foreign currency swaps	Other invested assets		7		8	Other liabilities		—		—

Total cash flow hedges			635		637			87		70

Total derivatives designated as hedges			635		637			87		70

Derivatives not designated as hedges
Interest rate swaps	Other invested assets		562		425	Other liabilities		337		183
Interest rate swaps related to securitization entities	Restricted other invested assets		—		—	Other liabilities		—		30
Foreign currency swaps	Other invested assets		—		—	Other liabilities		19		27
Credit default swaps	Other invested assets		—		1	Other liabilities		—		—
Credit default swaps related to securitization entities	Restricted other invested assets		—		—	Other liabilities		3		14
Equity index options	Other invested assets		57		30	Other liabilities		—		—
Financial futures	Other invested assets		—		—	Other liabilities		—		—
Equity return swaps	Other invested assets		9		2	Other liabilities		—		1
Other foreign currency contracts	Other invested assets		6		17	Other liabilities		33		34
GMWB embedded derivatives

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company