GENWORTH FINANCIAL INC - Quarter Report: 2014 June (Form 10-Q)

GENWORTH FINANCIAL, INC.

(Registrant)

Date: July 30, 2014

/s/ Kelly L. Groh

Kelly L. Groh

Vice President and Controller

(Duly Authorized Officer and

Principal Accounting Officer)

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.

•

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

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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

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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.

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	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.

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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

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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.

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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		—		—		—		—		—


	December 31, 2013
	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⁾	$	5,899	$	6,137	$	—	$	—	$	6,137
Restricted commercial mortgage loans		⁽¹⁾		233		258		—		—		258
Other invested assets		⁽¹⁾		307		311		—		221		90
Liabilities:
Long-term borrowings		⁽¹⁾		5,161		5,590		—		5,460		130
Non-recourse funding obligations		⁽¹⁾		2,038		1,459		—		—		1,459
Borrowings related to securitization entities		⁽¹⁾		167		182		—		182		—
Investment contracts		⁽¹⁾		17,330		17,827		—		86		17,741
Other firm commitments:
Commitments to fund limited partnerships		65		—		—		—		—		—
Ordinary course of business lending commitments		138		—		—		—		—		—

⁽¹⁾	These financial instruments do not have notional amounts.

Recurring Fair Value Measurements

We have fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.

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Fixed maturity, equity and trading securities

The valuations of fixed maturity, equity and trading securities are determined using a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. For all exchange-traded equity securities, the valuations are classified as Level 1.

We utilize certain third-party data providers when determining fair value. We consider information obtained from third-party pricing services (“pricing services”) as well as third-party broker provided prices, or broker quotes, in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information. We also use various methods to obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received, including an understanding of the assumptions and inputs utilized to determine the appropriate fair value. For pricing services, we analyze the prices provided by our primary pricing services to other readily available pricing services and perform a detailed review of the assumptions and inputs from each pricing service to determine the appropriate fair value when pricing differences exceed certain thresholds. We also evaluate changes in fair value that are greater than 10% each month to further aid in our review of the accuracy of fair value measurements and our understanding of changes in fair value, with more detailed reviews performed by the asset managers responsible for the related asset class associated with the security being reviewed.

In general, we first obtain valuations from pricing services. If a price is not supplied by a pricing service, we will typically seek a broker quote for public or private fixed maturity securities. In certain instances, we utilize price caps for broker quoted securities where the estimated market yield results in a valuation that may exceed the amount that we believe would be received in a market transaction. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for identical securities are not readily observable and these securities are not typically valued by pricing services. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models.

For pricing services, we obtain an understanding of the pricing methodologies and procedures for each type of instrument. Additionally, on a monthly basis we review a sample of securities, examining the pricing service’s assumptions to determine if we agree with the service’s derived price. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.

For private fixed maturity securities, we utilize an internal model to determine fair value and utilize public bond spreads by sector, rating and maturity to develop the market rate that would be utilized for a similar public bond. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. In certain instances, we utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. While we

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generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating and public bond spread as Level 3. In general, increases (decreases) in credit spreads will decrease (increase) the fair value for our fixed maturity securities.

For broker quotes, we consider the valuation methodology utilized by the third party, but the valuation typically includes significant unobservable inputs. Accordingly, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.

For remaining securities priced using internal models, we maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.

Restricted other invested assets related to securitization entities

We have trading securities related to securitization entities that are classified as restricted other invested assets and are carried at fair value. The trading securities represent asset-backed securities. The valuation for trading securities is determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there is observable market information for transactions of the same or similar instruments, which is provided to us by a third-party pricing service and is classified as Level 2. For certain securities that are not actively traded, we determine fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classify these valuations as Level 3.

Securities lending and derivative counterparty collateral

The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.

Contingent consideration

We have certain contingent purchase price payments and receivables related to acquisitions and sales that are recorded at fair value each period. Fair value is determined using an income approach whereby we project the expected performance of the business and compare our projections of the relevant performance metric to the thresholds established in the purchase or sale agreement to determine our expected payments or receipts. We then discount these expected amounts to calculate the fair value as of the valuation date. We evaluate the underlying projections used in determining fair value each period and update these underlying projections when there have been significant changes in our expectations of the future business performance. The inputs used to determine the discount rate and expected payments or receipts are primarily based on significant unobservable inputs and result in the fair value of the contingent consideration being classified as Level 3. An increase in the discount rate or a decrease in expected payments or receipts will result in a decrease in the fair value of contingent consideration.

Separate account assets

The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.

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Derivatives

We consider counterparty collateral arrangements and rights of set-off when evaluating our net credit risk exposure to our derivative counterparties. Accordingly, we are permitted to include consideration of these arrangements when determining whether any incremental adjustment should be made for both the counterparty’s and our non-performance risk in measuring fair value for our derivative instruments. As a result of these counterparty arrangements, we determined that any adjustment for credit risk would not be material and we do not record any incremental adjustment for our non-performance risk or the non-performance risk of the derivative counterparty for our derivative assets or liabilities. We determine fair value for our derivatives using an income approach with internal models based on relevant market inputs for each derivative instrument. We also compare the fair value determined using our internal model to the valuations provided by our derivative counterparties with any significant differences or changes in valuation being evaluated further by our derivatives professionals that are familiar with the instrument and market inputs used in the valuation.

Interest rate swaps. The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2. For certain other swaps, there are features that provide an option to the counterparty to terminate the swap at specified dates. The interest rate volatility input used to value these options would be considered a significant unobservable input and results in the fair value measurement of the derivative being classified as Level 3. These options to terminate the swap by the counterparty are based on forward interest rate swap curves and volatility. As interest rate volatility increases, our valuation of the derivative changes unfavorably.

Interest rate swaps related to securitization entities. The valuation of interest rate swaps related to securitization entities is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2.

Inflation indexed swaps. The valuation of inflation indexed swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, the current consumer price index and the forward consumer price index curve, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Foreign currency swaps. The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency exchange rates, both of which are considered an observable input, and results in the derivative being classified as Level 2.

Credit default swaps. We have both single name credit default swaps and index tranche credit default swaps. For single name credit default swaps, we utilize an income approach to determine fair value based on using current market information for the credit spreads of the reference entity, which is considered observable inputs based on the reference entities of our derivatives and results in these derivatives being classified as Level 2. For index tranche credit default swaps, we utilize an income approach that utilizes current market information related to credit spreads and expected defaults and losses associated with the reference entities that comprise the respective index associated with each derivative. There are significant unobservable inputs associated with the timing and amount of losses from the reference entities as well as the timing or amount of losses, if any, that will

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be absorbed by our tranche. Accordingly, the index tranche credit default swaps are classified as Level 3. As credit spreads widen for the underlying issuers comprising the index, the change in our valuation of these credit default swaps will be unfavorable.

Credit default swaps related to securitization entities. Credit default swaps related to securitization entities represent customized index tranche credit default swaps and are valued using a similar methodology as described above for index tranche credit default swaps. We determine fair value of these credit default swaps after considering both the valuation methodology described above as well as the valuation provided by the derivative counterparty. In addition to the valuation methodology and inputs described for index tranche credit default swaps, these customized credit default swaps contain a feature that permits the securitization entity to provide the par value of underlying assets in the securitization entity to settle any losses under the credit default swap. The valuation of this settlement feature is dependent upon the valuation of the underlying assets and the timing and amount of any expected loss on the credit default swap, which is considered a significant unobservable input. Accordingly, these customized index tranche credit default swaps related to securitization entities are classified as Level 3. As credit spreads widen for the underlying issuers comprising the customized index, the change in our valuation of these credit default swaps will be unfavorable.

Equity index options. We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rate volatility and time value component associated with the optionality in the derivative, which are considered significant unobservable inputs in most instances. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3. As equity index volatility increases, our valuation of these options changes favorably.

Financial futures. The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.

Equity return swaps. The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Forward bond purchase commitments. The valuation of forward bond purchase commitments is determined using an income approach. The primary input into the valuation represents the current bond prices and interest rates, which are generally considered an observable input, and results in the derivative being classified as Level 2.

Other foreign currency contracts. We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, foreign currency exchange rate volatility, foreign equity index volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate, foreign currency exchange rate volatility and foreign equity index volatility inputs, the derivative is classified as Level 3. As foreign currency exchange rate volatility and foreign equity index volatility increases, the change in our valuation of these options will be favorable for purchase options and unfavorable for options sold. We also have foreign currency forward contracts where the valuation is

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.

GMWB embedded derivatives

We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. In addition to these inputs, we also consider risk and expense margins when determining the projected cash flows that would be determined by another market participant. While the risk and expense margins are considered in determining fair value, these inputs do not have a significant impact on the valuation. We determine fair value using an internal model based on the various inputs noted above. The resulting fair value measurement from the model is reviewed by the product actuarial, risk and finance professionals each reporting period with changes in fair value also being compared to changes in derivatives and other instruments used to mitigate changes in fair value from certain market risks, such as equity index volatility and interest rates.

For GMWB liabilities, non-performance risk is integrated into the discount rate. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to reflect an adjustment for the non-performance risk of the GMWB liabilities. As of June 30, 2014 and December 31, 2013, the impact of non-performance risk resulted in a lower fair value of our GMWB liabilities of $55 million and $46 million, respectively.

To determine the appropriate discount rate to reflect the non-performance risk of the GMWB liabilities, we evaluate the non-performance risk in our liabilities based on a hypothetical exit market transaction as there is no exit market for these types of liabilities. A hypothetical exit market can be viewed as a hypothetical transfer of the liability to another similarly rated insurance company which would closely resemble a reinsurance transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. In determining the appropriate discount rate to incorporate non-performance risk of the GMWB liabilities, we also considered the impacts of state guarantees embedded in the related insurance product as a form of inseparable third-party guarantee. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities.

For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected equity market volatility with more significance being placed on projected near-term volatility and recent historical data. Given the different attributes and market characteristics of GMWB liabilities compared to equity index options in the derivative market, the equity index volatility assumption for GMWB liabilities may be different from the volatility assumption for equity index options, especially for the longer dated points on the curve.

Equity index and fund correlations are determined based on historical price observations for the fund and equity index.

For policyholder assumptions, we use our expected lapse, mortality and utilization assumptions and update these assumptions for our actual experience, as necessary. For our lapse assumption, we adjust our base lapse assumption by policy based on a combination of the policyholder’s current account value and GMWB benefit.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We classify the GMWB valuation as Level 3 based on having significant unobservable inputs, with equity index volatility and non-performance risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase in non-performance risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value.

Fixed index annuity embedded derivatives

We offer fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

Indexed universal life embedded derivatives

We offer indexed universal life products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

Borrowings related to securitization entities

We record certain borrowings related to securitization entities at fair value. The fair value of these borrowings is determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determine fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may impact the valuation. After considering all relevant inputs, we determine fair value of the borrowings using the net valuation of the underlying assets and derivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 3. Increases in the valuation of the underlying assets or decreases in the derivative liabilities will result in an increase in the fair value of these borrowings.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables set forth our assets and liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:


	June 30, 2014
(Amounts in millions)	Total		Level 1		Level 2		Level 3
Assets
Investments:
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	5,483	$	—	$	5,479	$	4
Tax-exempt		353		—		353		—
Government—non-U.S.		2,132		—		2,107		25
U.S. corporate		26,847		—		24,424		2,423
Corporate—non-U.S.		15,749		—		13,895		1,854
Residential mortgage-backed		5,212		—		5,139		73
Commercial mortgage-backed		2,845		—		2,840		5
Other asset-backed		3,739		—		2,471		1,268

Total fixed maturity securities		62,360		—		56,708		5,652

Equity securities		320		243		10		67

Other invested assets:
Trading securities		226		—		195		31
Derivative assets:
Interest rate swaps		593		—		593		—
Foreign currency swaps		4		—		4		—
Credit default swaps		7		—		1		6
Equity index options		4		—		—		4
Forward bond purchase commitments		8		—		8		—
Other foreign currency contracts		1		—		1		—

Total derivative assets		617		—		607		10

Securities lending collateral		277		—		277		—
Derivatives counterparty collateral		76		—		76		—

Total other invested assets		1,196		—		1,155		41

Restricted other invested assets related to securitization entities		404		—		180		224
Reinsurance recoverable ⁽¹⁾		3		—		—		3
Separate account assets		9,911		9,911		—		—

Total assets	$	74,194	$	10,154	$	58,053	$	5,987

Liabilities
Policyholder account balances:
GMWB embedded derivatives ⁽²⁾	$	146	$	—	$	—	$	146
Fixed index annuity embedded derivatives		219		—		—		219
Indexed universal life embedded derivatives		2		—		—		2

Total policyholder account balances		367		—		—		367

Derivative liabilities:
Interest rate swaps		217		—		217		—
Interest rate swaps related to securitization entities		22		—		22		—
Inflation indexed swaps		90		—		90		—
Foreign currency swaps		1		—		1		—
Credit default swaps related to securitization entities		16		—		—		16
Equity return swaps		5		—		5		—
Other foreign currency contracts		7		—		7		—

Total derivative liabilities		358		—		342		16

Borrowings related to securitization entities		83		—		—		83

Total liabilities	$	808	$	—	$	342	$	466

⁽¹⁾	Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2013
(Amounts in millions)	Total			Level 1		Level 2		Level 3
Assets
Investments:
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	4,810		$	—	$	4,805	$	5
Tax-exempt		295			—		295		—
Government—non-U.S.		2,146			—		2,123		23
U.S. corporate		25,035			—		22,635		2,400
Corporate—non-U.S.		15,071			—		13,252		1,819
Residential mortgage-backed		5,225			—		5,120		105
Commercial mortgage-backed		2,898			—		2,892		6
Other asset-backed		3,149			—		1,983		1,166

Total fixed maturity securities		58,629			—		53,105		5,524

Equity securities		341			256		7		78

Other invested assets:
Trading securities		239			—		205		34
Derivative assets:
Interest rate swaps		436			—		436		—
Foreign currency swaps		4			—		4		—
Credit default swaps		11			—		1		10
Equity index options		12			—		—		12
Other foreign currency contracts		8			—		5		3

Total derivative assets		471			—		446		25

Securities lending collateral		187			—		187		—
Derivatives counterparty collateral		70			—		70		—

Total other invested assets		967			—		908		59

Restricted other invested assets related to securitization entities		391			—		180		211
Reinsurance recoverable ⁽¹⁾		(1	)		—		—		(1	)
Separate account assets		10,138			10,138		—		—

Total assets	$	70,465		$	10,394	$	54,200	$	5,871

Liabilities
Policyholder account balances:
GMWB embedded derivatives ⁽²⁾	$	96		$	—	$	—	$	96
Fixed index annuity embedded derivatives		143			—		—		143

Total policyholder account balances		239			—		—		239

Derivative liabilities:
Interest rate swaps		575			—		575		—
Interest rate swaps related to securitization entities		16			—		16		—
Inflation indexed swaps		60			—		60		—
Foreign currency swaps		2			—		2		—
Credit default swaps related to securitization entities		32			—		—		32
Equity return swaps		1			—		1		—
Forward bond purchase commitments		13			—		13		—
Other foreign currency contracts		4			—		3		1

Total derivative liabilities		703			—		670		33

Borrowings related to securitization entities		75			—		—		75

Total liabilities	$	1,017		$	—	$	670	$	347

⁽¹⁾	Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers between levels at the beginning fair value for the reporting period in which the changes occur. Given the types of assets classified as Level 1, which primarily represents mutual fund investments, we typically do not have any transfers between Level 1 and Level 2 measurement categories and did not have any such transfers during any period presented.

Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing and/or rating, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from third-party pricing sources to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.

The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:


	Beginning balance as of April 1, 2014		Total realized and unrealized gains (losses)																				Ending balance as of June 30, 2014		Total gains (losses) included in net income attributable to assets still held
(Amounts in millions)	Beginning balance as of April 1, 2014		Included in net income			Included in OCI		Purchases		Sales			Issuances		Settlements			Transfer into Level 3		Transfer out of Level 3			Ending balance as of June 30, 2014
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	4	$	—		$	—	$	—	$	—		$	—	$	—		$	—	$	—		$	4	$	—
Government—non-U.S.		24		—			—		1		—			—		—			—		—			25		—
U.S. corporate ⁽¹⁾		2,368		6			40		55		(39	)		—		(58	)		87		(36	)		2,423		7
Corporate—non-U.S.		1,798		1			39		132		(76	)		—		(55	)		15		—			1,854		1
Residential mortgage-backed		93		—			1		—		—			—		(2	)		11		(30	)		73		—
Commercial mortgage-backed		13		—			1		—		—			—		(1	)		—		(8	)		5		—
Other asset-backed ⁽¹⁾		1,153		2			11		195		—			—		(41	)		22		(74	)		1,268		—

Total fixed maturity securities		5,453		9			92		383		(115	)		—		(157	)		135		(148	)		5,652		8

Equity securities		78		—			—		—		(11	)		—		—			—		—			67		—

Other invested assets:
Trading securities		31		—			—		—		—			—		—			—		—			31		—
Derivative assets:
Credit default swaps		8		—			—		—		—			—		(2	)		—		—			6		—
Equity index options		11		(11	)		—		4		—			—		—			—		—			4		(11	)
Other foreign currency contracts		1		—			—		—		(1	)		—		—			—		—			—		—

Total derivative assets		20		(11	)		—		4		(1	)		—		(2	)		—		—			10		(11	)

Total other invested assets		51		(11	)		—		4		(1	)		—		(2	)		—		—			41		(11	)

Restricted other invested assets related to securitization entities		218		6			—		—		—			—		—			—		—			224		6
Reinsurance recoverable ⁽²⁾		2		—			—		—		—			1		—			—		—			3		—

Total Level 3 assets	$	5,802	$	4		$	92	$	387	$	(127	)	$	1	$	(159	)	$	135	$	(148	)	$	5,987	$	3

⁽¹⁾	The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads.

⁽²⁾	Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Beginning balance as of April 1, 2013		Total realized and unrealized gains (losses)																					Ending balance as of June 30, 2013		Total gains (losses) included in net income attributable to assets still held
(Amounts in millions)	Beginning balance as of April 1, 2013		Included in net income			Included in OCI			Purchases		Sales			Issuances		Settlements			Transfer into Level 3		Transfer out of Level 3			Ending balance as of June 30, 2013
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	5	$	—		$	—		$	—	$	—		$	—	$	—		$	—	$	—		$	5	$	—
Government—non-U.S.		8		—			—			—		—			—		—			—		—			8		—
U.S. corporate ⁽¹⁾		2,644		6			(49	)		37		(24	)		—		(185	)		50		(20	)		2,459		5
Corporate—non-U.S.		1,970		—			(37	)		16		(19	)		—		(84	)		—		—			1,846		—
Residential mortgage- backed		130		(1	)		—			—		(5	)		—		(8	)		—		—			116		1
Commercial mortgage- backed		26		(2	)		1			—		—			—		(16	)		4		—			13		(1	)
Other asset-backed ⁽¹⁾		951		4			4			59		—			—		(41	)		44		—			1,021		3

Total fixed maturity securities		5,734		7			(81	)		112		(48	)		—		(334	)		98		(20	)		5,468		8

Equity securities		92		2			(1	)		1		(6	)		—		—			—		—			88		—

Other invested assets:
Trading securities		67		4			—			—		(29	)		—		(8	)		—		—			34		—
Derivative assets:
Interest rate swaps		1		(1	)		—			—		—			—		—			—		—			—		(1	)
Credit default swaps		7		1			—			—		—			—		(2	)		—		—			6		1
Equity index options		17		(2	)		—			7		—			—		(9	)		—		—			13		(1	)

Total derivative assets		25		(2	)		—			7		—			—		(11	)		—		—			19		(1	)

Total other invested assets		92		2			—			7		(29	)		—		(19	)		—		—			53		(1	)

Restricted other invested assets related to securitization entities		199		(6	)		—			—		—			—		—			—		—			193		(6	)
Other assets ⁽²⁾		10		(1	)		—			—		—			—		(9	)		—		—			—		—
Reinsurance recoverable ⁽³⁾		6		(3	)		—			—		—			—		—			—		—			3		(3	)

Total Level 3 assets	$	6,133	$	1		$	(82	)	$	120	$	(83	)	$	—	$	(362	)	$	98	$	(20	)	$	5,805	$	(2	)

⁽¹⁾

The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and structured securities. For private fixed rate U.S. corporate securities, the transfers into and out of Level 3 resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. For structured securities, the transfers into and out of Level 3 were attributable to the changes in the observability of inputs used in the valuation as a result of liquidity or marketability of certain instruments that had a significant impact on the primary pricing source used to value the instruments.

⁽²⁾	Represents contingent receivables associated with recent business dispositions.

⁽³⁾	Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Beginning balance as of January 1, 2014			Total realized and unrealized gains (losses)																				Ending balance as of June 30, 2014		Total gains (losses) included in net income attributable to assets still held
(Amounts in millions)	Beginning balance as of January 1, 2014			Included in net income			Included in OCI		Purchases		Sales			Issuances		Settlements			Transfer into Level 3		Transfer out of Level 3			Ending balance as of June 30, 2014
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	5		$	—		$	—	$	—	$	—		$	—	$	(1	)	$	—	$	—		$	4	$	—
Government—non-U.S.		23			—			—		3		—			—		(1	)		—		—			25		—
U.S. corporate ⁽¹⁾		2,400			11			69		145		(39	)		—		(100	)		101		(164	)		2,423		12
Corporate—non-U.S.		1,819			2			48		168		(76	)		—		(90	)		15		(32	)		1,854		2
Residential mortgage- backed		105			—			2		—		(23	)		—		(5	)		24		(30	)		73		—
Commercial mortgage- backed		6			—			3		—		—			—		(2	)		6		(8	)		5		—
Other asset-backed ⁽¹⁾		1,166			3			7		211		(5	)		—		(78	)		58		(94	)		1,268		1

Total fixed maturity securities		5,524			16			129		527		(143	)		—		(277	)		204		(328	)		5,652		15

Equity securities		78			—			—		—		(11	)		—		—			—		—			67		—

Other invested assets:
Trading securities		34			—			—		—		—			—		(3	)		—		—			31		—
Derivative assets:
Credit default swaps		10			—			—		—		—			—		(4	)		—		—			6		—
Equity index options		12			(18	)		—		10		—			—		—			—		—			4		(18	)
Other foreign currency contracts		3			(2	)		—		—		(1	)		—		—			—		—			—		—

Total derivative assets		25			(20	)		—		10		(1	)		—		(4	)		—		—			10		(18	)

Total other invested assets		59			(20	)		—		10		(1	)		—		(7	)		—		—			41		(18	)

Restricted other invested assets related to securitization entities		211			13			—		—		—			—		—			—		—			224		13
Reinsurance recoverable ⁽²⁾		(1	)		2			—		—		—			2		—			—		—			3		2

Total Level 3 assets	$	5,871		$	11		$	129	$	537	$	(155	)	$	2	$	(284	)	$	204	$	(328	)	$	5,987	$	12

⁽¹⁾	The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads.

⁽²⁾	Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(Amounts in millions)	Beginning balance as of January 1, 2013		Total realized and unrealized gains (losses)						Purchases		Sales			Issuances		Settlements			Transfer into Level 3		Transfer out of Level 3			Ending balance as of June 30, 2013		Total gains (losses) included in net income attributable to assets still held
(Amounts in millions)	Beginning balance as of January 1, 2013		Included in net income			Included in OCI			Purchases		Sales			Issuances		Settlements			Transfer into Level 3		Transfer out of Level 3			Ending balance as of June 30, 2013
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	9	$	—		$	—		$	—	$	—		$	—	$	(4	)	$	—	$	—		$	5	$	—
Government—non-U.S.		9		—			—			—		—			—		(1	)		—		—			8		—
U.S. corporate ⁽¹⁾		2,683		8			(31	)		93		(121	)		—		(236	)		112		(49	)		2,459		4
Corporate—non-U.S. ⁽¹⁾		1,983		1			(28	)		69		(19	)		—		(107	)		—		(53	)		1,846		1
Residential mortgage-backed		157		(2	)		1			—		(5	)		—		(19	)		—		(16	)		116		—
Commercial mortgage- backed		35		(4	)		(1	)		—		—			—		(26	)		9		—			13		(3	)
Other asset-backed ⁽¹⁾		864		3			15			124		(44	)		—		(71	)		130		—			1,021		3

Total fixed maturity securities		5,740		6			(44	)		286		(189	)		—		(464	)		251		(118	)		5,468		5

Equity securities		99		2			(1	)		1		(13	)		—		—			—		—			88		—

Other invested assets:
Trading securities		76		7			—			—		(40	)		—		(9	)		—		—			34		2
Derivative assets:
Interest rate swaps		2		(1	)		—			—		—			—		(1	)		—		—			—		(1	)
Credit default swaps		7		4			—			—		—			—		(5	)		—		—			6		3
Equity index options		25		(17	)		—			14		—			—		(9	)		—		—			13		(16	)

Total derivative assets		34		(14	)		—			14		—			—		(15	)		—		—			19		(14	)

Total other invested assets		110		(7	)		—			14		(40	)		—		(24	)		—		—			53		(12	)

Restricted other invested assets related to securitization entities		194		(1	)		—			—		—			—		—			—		—			193		(1	)
Other assets ⁽²⁾		9		—			—			—		—			—		(9	)		—		—			—		—
Reinsurance recoverable ⁽³⁾		10		(8	)		—			—		—			1		—			—		—			3		(8	)

Total Level 3 assets	$	6,162	$	(8	)	$	(45	)	$	301	$	(242	)	$	1	$	(497	)	$	251	$	(118	)	$	5,805	$	(16	)

⁽¹⁾

The transfers into and out of Level 3 were primarily related to private fixed rate U.S. corporate and corporate—non-U.S. securities and structured securities. For private fixed rate U.S. corporate and corporate—non-U.S. securities, the transfers into and out of Level 3 resulted from a change in the observability of the additional premium to the public bond spread to adjust for the liquidity and other features of our private placements and resulted in unobservable inputs having a significant impact on certain valuations for transfers in or no longer having significant impact on certain valuations for transfers out. For structured securities, the transfers into and out of Level 3 were attributable to the changes in the observability of inputs used in the valuation as a result of liquidity or marketability of certain instruments that had a significant impact on the primary pricing source used to value the instruments.

⁽²⁾	Represents contingent receivables associated with recent business dispositions.

⁽³⁾	Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gains and losses included in net income from assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2014			2013			2014			2013
Total realized and unrealized gains (losses) included in net income:
Net investment income	$	13		$	11		$	21		$	20
Net investment gains (losses)		(9	)		(10	)		(10	)		(28	)

Total	$	4		$	1		$	11		$	(8	)

Total gains (losses) included in net income attributable to assets still held:
Net investment income	$	9		$	10		$	17		$	17
Net investment gains (losses)		(6	)		(12	)		(5	)		(33	)

Total	$	3		$	(2	)	$	12		$	(16	)

The amount presented for unrealized gains (losses) included in net income for available-for-sale securities represents impairments and accretion on certain fixed maturity securities.

The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:


	Beginning balance as of April 1, 2014		Total realized and unrealized (gains) losses																		Ending balance as of June 30, 2014		Total (gains) losses included in net (income) attributable to liabilities still held
(Amounts in millions)	Beginning balance as of April 1, 2014		Included in net (income)			Included in OCI		Purchases		Sales			Issuances		Settlements		Transfer into Level 3		Transfer out of Level 3		Ending balance as of June 30, 2014
Policyholder account balances:
GMWB embedded derivatives ⁽¹⁾	$	138	$	(2	)	$	—	$	—	$	—		$	10	$	—	$	—	$	—	$	146	$	(1	)
Fixed index annuity embedded derivatives		180		10			—		—		—			29		—		—		—		219		10
Indexed universal life embedded derivatives		—		—			—		—		—			2		—		—		—		2		—

Total policyholder account balances		318		8			—		—		—			41		—		—		—		367		9

Derivative liabilities:
Credit default swaps related to securitization entities		25		(11	)		—		2		—			—		—		—		—		16		(11	)
Other foreign currency contracts		2		—			—		—		(2	)		—		—		—		—		—		—

Total derivative liabilities		27		(11	)		—		2		(2	)		—		—		—		—		16		(11	)

Borrowings related to securitization entities		79		4			—		—		—			—		—		—		—		83		4

Total Level 3 liabilities	$	424	$	1		$	—	$	2	$	(2	)	$	41	$	—	$	—	$	—	$	466	$	2

⁽¹⁾	Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Beginning balance as of April 1, 2013		Total realized and unrealized (gains) losses																	Ending balance as of June 30, 2013		Total (gains) losses included in net (income) attributable to liabilities still held
(Amounts in millions)	Beginning balance as of April 1, 2013		Included in net (income)			Included in OCI		Purchases		Sales		Issuances		Settlements		Transfer into Level 3		Transfer out of Level 3		Ending balance as of June 30, 2013
Policyholder account balances:
GMWB embedded derivatives ⁽¹⁾	$	272	$	(66	)	$	—	$	—	$	—	$	9	$	—	$	—	$	—	$	215	$	(68	)
Fixed index annuity embedded derivatives		34		1			—		—		—		9		—		—		—		44		1

Total policyholder account balances		306		(65	)		—		—		—		18		—		—		—		259		(67	)

Derivative liabilities:
Credit default swaps related to securitization entities		97		(18	)		—		1		—		—		—		—		—		80		(18	)
Equity index options		1		—			—		—		—		—		—		—		—		1		—

Total derivative liabilities		98		(18	)		—		1		—		—		—		—		—		81		(18	)

Borrowings related to securitization entities		71		3			—		—		—		—		—		—		—		74		3

Total Level 3 liabilities	$	475	$	(80	)	$	—	$	1	$	—	$	18	$	—	$	—	$	—	$	414	$	(82	)

⁽¹⁾	Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.


	Beginning balance as of January 1, 2014		Total realized and unrealized (gains) losses																			Ending balance as of June 30, 2014		Total (gains) losses included in net (income) attributable to liabilities still held
(Amounts in millions)	Beginning balance as of January 1, 2014		Included in net (income)			Included in OCI		Purchases		Sales			Issuances		Settlements			Transfer into Level 3		Transfer out of Level 3		Ending balance as of June 30, 2014
Policyholder account balances:
GMWB embedded derivatives ⁽¹⁾	$	96	$	31		$	—	$	—	$	—		$	19	$	—		$	—	$	—	$	146	$	33
Fixed index annuity embedded derivatives		143		12			—		—		—			65		(1	)		—		—		219		12
Indexed universal life embedded derivatives		—		—			—		—		—			2		—			—		—		2		—

Total policyholder account balances		239		43			—		—		—			86		(1	)		—		—		367		45

Derivative liabilities:
Credit default swaps related to securitization entities		32		(18	)		—		2		—			—		—			—		—		16		(18	)
Other foreign currency contracts		1		1			—		—		(2	)		—		—			—		—		—		—

Total derivative liabilities		33		(17	)		—		2		(2	)		—		—			—		—		16		(18	)

Borrowings related to securitization entities		75		8			—		—		—			—		—			—		—		83		8

Total Level 3 liabilities	$	347	$	34		$	—	$	2	$	(2	)	$	86	$	(1	)	$	—	$	—	$	466	$	35

⁽¹⁾	Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Beginning balance as of January 1, 2013		Total realized and unrealized (gains) losses																	Ending balance as of June 30, 2013		Total (gains) losses included in net (income) attributable to liabilities still held
(Amounts in millions)	Beginning balance as of January 1, 2013		Included in net (income)			Included in OCI		Purchases		Sales		Issuances		Settlements		Transfer into Level 3		Transfer out of Level 3		Ending balance as of June 30, 2013
Policyholder account balances:
GMWB embedded derivatives ⁽¹⁾	$	350	$	(153	)	$	—	$	—	$	—	$	18	$	—	$	—	$	—	$	215	$	(151	)
Fixed index annuity embedded derivatives		27		4			—		—		—		13		—		—		—		44		4

Total policyholder account balances		377		(149	)		—		—		—		31		—		—		—		259		(147	)

Derivative liabilities:
Credit default swaps		1		(1	)		—		—		—		—		—		—		—		—		(1	)
Credit default swaps related to securitization entities		104		(26	)		—		2		—		—		—		—		—		80		(26	)
Equity index options		—		1			—		—		—		—		—		—		—		1		1

Total derivative liabilities		105		(26	)		—		2		—		—		—		—		—		81		(26	)

Borrowings related to securitization entities		62		12			—		—		—		—		—		—		—		74		12

Total Level 3 liabilities	$	544	$	(163	)	$	—	$	2	$	—	$	31	$	—	$	—	$	—	$	414	$	(161	)

⁽¹⁾	Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

The following table presents the gains and losses included in net (income) from liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:


	Three months ended June 30,					Six months ended June 30,
(Amounts in millions)	2014		2013			2014		2013
Total realized and unrealized (gains) losses included in net (income):
Net investment income	$	—	$	—		$	—	$	—
Net investment (gains) losses		1		(80	)		34		(163	)

Total	$	1	$	(80	)	$	34	$	(163	)

Total (gains) losses included in net (income) attributable to liabilities still held:
Net investment income	$	—	$	—		$	—	$	—
Net investment (gains) losses		2		(82	)		35		(161	)

Total	$	2	$	(82	)	$	35	$	(161	)

Purchases, sales, issuances and settlements represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases, sales and settlements of fixed maturity, equity and trading securities and purchases, issuances and settlements of derivative instruments.

Issuances and settlements presented for policyholder account balances represent the issuances and settlements of embedded derivatives associated with our GMWB liabilities where: issuances are characterized as

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance and settlements are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income)” in the tables presented above.

Certain classes of instruments classified as Level 3 are excluded below as a result of not being material or due to limitations in being able to obtain the underlying inputs used by certain third-party sources, such as broker quotes, used as an input in determining fair value. The following table presents a summary of the significant unobservable inputs used for certain fair value measurements that are based on internal models and classified as Level 3 as of June 30, 2014:


(Amounts in millions)	Valuation technique	Fair value		Unobservable input	Range (weighted-average)
Assets
Fixed maturity securities:
U.S. corporate	Internal models	$	2,217	Credit spreads	55bps - 425bps (157bps)
Corporate—non-U.S.	Internal models		1,686	Credit spreads	64bps - 226bps (127bps)
Derivative assets:
Credit default swaps	Discounted cash flows		6	Credit spreads	5bps - 29bps (13bps)
Equity index options	Discounted cash flows		4	Equity index volatility	14% - 22% (21%)
Liabilities
Policyholder account balances:
				Withdrawal utilization rate	—% - 98%
				Lapse rate	—% - 15%
				Non-performance risk (credit spreads)	35bps - 85bps (73bps)
GMWB embedded derivatives ⁽¹⁾	Stochastic cash flow model		146	Equity index volatility	14% - 24% (20%)
Fixed index annuity embedded derivatives	Option budget method		219	Expected future interest credited	—% - 3% (2%)
Indexed universal life embedded derivatives	Option budget method		2	Expected future interest credited	3% - 7% (5%)

⁽¹⁾	Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

(7) Commitments and Contingencies

(a) Litigation and Regulatory Matters

We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, claims payments and procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 (“RESPA”) or related state anti-inducement laws, and mortgage insurance policy rescissions and curtailments, and breaching fiduciary or other duties to customers, including but not limited to breach of customer information. Plaintiffs in class action and other

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations.

In April 2014, Genworth Financial, Inc., and a former and current officer were named in a putative class action lawsuit captioned City of Hialeah Employees’ Retirement System v. Genworth Financial, Inc., et al, in the United States District Court for the Southern District of New York. Plaintiff alleges securities law violations involving certain disclosures in 2012 concerning Genworth’s Australian mortgage insurance business, including our plans for an initial public offering of the business. The lawsuit seeks unspecified damages, costs and attorneys’ fees and such equitable/injunctive relief as the court may deem proper. We intend to vigorously defend this action.

As previously disclosed, in December 2009, one of our former non-insurance subsidiaries, one of the former subsidiary’s officers and Genworth Financial, Inc. (now known as Genworth Holdings, Inc.) were named in a putative class action lawsuit captioned Michael J. Goodman and Linda Brown v. Genworth Financial Wealth Management, Inc. et al., in the United States District Court for the Eastern District of New York. Plaintiffs allege securities law and other violations involving the selection of mutual funds by our former subsidiary on behalf of certain of its Private Client Group clients. The lawsuit seeks unspecified monetary and other relief. Oral argument on plaintiffs’ motion to certify a class action was conducted on January 30, 2013. On April 15, 2014, the court issued its decision denying the plaintiffs’ motion to certify a class. On April 29, 2014 plaintiffs filed a motion with the Second Circuit Court of Appeals for leave to appeal the District Court’s denial of their motion to certify a class, which we opposed. On July 9, 2014, the Second Circuit Court of Appeals denied plaintiffs’ motion.

As previously disclosed, in April 2012, two of our U.S. mortgage insurance subsidiaries were named as respondents in two arbitrations, one brought by Bank of America, N.A. and one brought by Countrywide Home Loans, Inc. and Bank of America, N.A. as claimants. Claimants alleged breach of contract and breach of the covenant of good faith and fair dealing and seek a declaratory judgment relating to our denial, curtailment and rescission of mortgage insurance coverage. In June 2012, our U.S. mortgage insurance subsidiaries responded to the arbitration demands and asserted numerous counterclaims against the claimants. On December 31, 2013, the parties reached an agreement to resolve that portion of both arbitrations involving rescission practices. The effectiveness of the agreement was conditioned upon consent by the government-sponsored enterprises (“GSEs”) to and the parties’ execution of a definitive agreement requiring submission of curtailment and denial disputes to a binding alternative dispute proceeding (“Curtailment ADR Agreement”). In March 2014, the parties executed the Curtailment ADR Agreement. In the second quarter of 2014, the GSEs consented to the December 31, 2013 agreement, the final condition precedent to the effectiveness of the rescission settlement. The GSEs also consented to the Curtailment ADR Agreement during the second quarter of 2014. With the effectiveness of the rescission settlement, the parties have commenced the process necessary for a final dismissal of the arbitration demands and counterclaims related to that portion of both arbitrations involving rescission practices. That dismissal is expected to occur in the third quarter of 2014. Claims curtailments and denials are the only

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

remaining areas of dispute under the arbitrations. The parties have selected an arbitration panel. The first phase of the arbitration hearing is scheduled to begin in March 2015. Claimants and our U.S. mortgage insurance subsidiaries are engaged in settlement negotiations regarding a potential resolution of the pending disputes related to claims curtailments or denials. In the event settlement is not reached, we intend to vigorously defend our practices in these arbitrations.

As previously disclosed, beginning in December 2011 and continuing through January 2013, one of our U.S. mortgage insurance subsidiaries was named along with several other mortgage insurers and mortgage lenders as a defendant in twelve putative class action lawsuits alleging that certain “captive reinsurance arrangements” were in violation of RESPA. On June 26, 2014, the court in the Hill action granted our motion for summary judgment. We intend to vigorously defend the remaining actions.

At this time, we cannot determine or predict the ultimate outcome of any of the pending legal and regulatory matters specifically identified above or the likelihood of potential future legal and regulatory matters against us. In light of the inherent uncertainties involved in these matters, no amounts have been accrued. We also are not able to provide an estimate or range of possible losses related to these matters.

(b) Commitments

As of June 30, 2014, we were committed to fund $62 million in limited partnership investments, $105 million in U.S. commercial mortgage loans and $48 million in private placement investments.

(c) Other

During the second quarter of 2014, we experienced meaningful increases in adverse claims experience for our long-term care insurance products, resulting in significant deterioration in operating income which included an increase to our prior year claim reserves of $39 million. As a result of recent experience, and in connection with our regular review of claims reserve assumptions for our long-term care insurance products, we are conducting a comprehensive review of our long-term care insurance claim reserves. The primary areas of focus in this review are: (i) an analysis of potential causes of the meaningful increase in adverse claims experience and (ii) an assessment of the assumptions and methodology underlying the associated reserves, including morbidity, mortality, interest rates and claim terminations. We intend to complete this review before the release of financial results for the third quarter of 2014. We continue to believe that the existing assumptions and methodology provide the most reliable best estimate. However, given the review underway that will include both long-term and recent experience, we will likely change some of our assumptions, which could increase our long-term care insurance claim reserves, and any increase may or may not be material.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8) Borrowings and Other Financings

The following table sets forth total long-term borrowings as of the dates indicated:


(Amounts in millions)	June 30, 2014		December 31, 2013
5.75% Senior Notes, due 2014⁽¹⁾	$	—	$	485
4.59% Senior Notes, due 2015⁽²⁾		—		141
8.625% Senior Notes, due 2016⁽¹⁾		300		300
6.52% Senior Notes, due 2018⁽¹⁾		600		600
5.68% Senior Notes, due 2020⁽²⁾		257		258
7.70% Senior Notes, due 2020⁽¹⁾		400		400
7.20% Senior Notes, due 2021⁽¹⁾		399		399
7.625% Senior Notes, due 2021⁽¹⁾		759		759
Floating Rate Junior Notes, due 2021⁽³⁾		132		125
4.90% Senior Notes, due 2023⁽¹⁾		399		399
4.24% Senior Notes, due 2024⁽²⁾		150		—
4.80% Senior Notes, due 2024⁽¹⁾		400		400
6.50% Senior Notes, due 2034⁽¹⁾		297		297
6.15% Junior Notes, due 2066		598		598

Total	$	4,691	$	5,161

⁽¹⁾

We have the option to redeem all or a portion of the senior notes at any time with notice to the noteholders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread.

⁽²⁾	Senior notes issued by our majority-owned subsidiary, Genworth MI Canada Inc. (“Genworth Canada”).

⁽³⁾	Subordinated floating rate notes issued by our indirect wholly-owned subsidiary, Genworth Financial Mortgage Insurance Pty Limited.

We repaid $485 million of our 5.75% senior notes that matured in June 2014.

On April 1, 2014, Genworth Canada, our majority-owned subsidiary, issued CAD$160 million of 4.24% senior notes due 2024. The senior notes are redeemable at the option of Genworth Canada, in whole or in part, at any time. The net proceeds of the offering were used to redeem, in full, its existing senior notes due December 2015 with a principal amount of CAD$150 million and bearing a fixed annual interest rate of 4.59%. In conjunction with the redemption, Genworth Canada made an early redemption payment to existing noteholders of approximately CAD$7 million and accrued interest of approximately CAD$2 million in the second quarter of 2014.

(9) Segment Information

We operate through three divisions: U.S. Life Insurance, Global Mortgage Insurance and Corporate and Other. Under these divisions, there are five operating business segments. The U.S. Life Insurance Division includes the U.S. Life Insurance segment. The Global Mortgage Insurance Division includes the International Mortgage Insurance and U.S. Mortgage Insurance segments. The Corporate and Other Division includes the International Protection and Runoff segments and Corporate and Other activities. Our operating business segments are as follows: (1) U.S. Life Insurance, which includes our life insurance, long-term care insurance and

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

fixed annuities businesses; (2) International Mortgage Insurance, which includes mortgage insurance-related products and services; (3) U.S. Mortgage Insurance, which includes mortgage insurance-related products and services; (4) International Protection, which includes our lifestyle protection insurance business; and (5) Runoff, which 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, FABNs and GICs.

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 discontinued operations.

We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “net operating income (loss).” We define net operating income (loss) as income (loss) from continuing operations excluding the after-tax effects of income attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and infrequent or unusual non-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment of non-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt and gains (losses) on insurance block transactions are also excluded from net operating income (loss) because, in our opinion, they are not indicative of overall operating trends. Other non-operating items are also excluded from net operating income (loss) if, in our opinion, they are not indicative of overall operating trends.

In the fourth quarter of 2013, we revised our definition of net operating income (loss) to exclude gains (losses) on the early extinguishment of debt and gains (losses) on insurance block transactions to better reflect the basis on which the performance of our business is internally assessed and to reflect management’s opinion that they are not indicative of overall operating trends. All prior periods have been re-presented to reflect this new definition.

The following transaction was excluded from net operating income (loss) for the periods presented as it related to the loss on the early extinguishment of debt. In the second quarter of 2014, we paid an early redemption payment of approximately $2 million, net of taxes and portion attributable to noncontrolling interests, related to the early redemption of Genworth Canada’s notes that were scheduled to mature in 2015.

There were no infrequent or unusual items excluded from net operating income (loss) during the periods presented other than a $13 million, net of taxes, expense recorded in the second quarter of 2013 related to restructuring costs.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that net operating income (loss), and measures that are derived from or incorporate net operating income (loss), are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses net operating income (loss) as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from net operating income (loss) have occurred in the past and could, and in some cases will, recur in the future. Net operating income (loss) is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of net operating income (loss) may differ from the definitions used by other companies.

Adjustments to reconcile net income attributable to Genworth Financial, Inc.’s common stockholders and net operating income assume a 35% tax rate and are net of the portion attributable to noncontrolling interests. Net investment gains (losses) are also adjusted for deferred acquisition costs and other intangible amortization and certain benefit reserves.

The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2014			2013			2014			2013
Revenues:
U.S. Life Insurance segment:
Life insurance	$	504		$	502		$	984		$	996
Long-term care insurance		872			826			1,728			1,601
Fixed annuities		257			275			514			527

U.S. Life Insurance segment’s revenues		1,633			1,603			3,226			3,124

International Mortgage Insurance segment:
Canada		180			194			348			386
Australia		134			144			265			287
Other Countries		6			11			15			21

International Mortgage Insurance segment’s revenues		320			349			628			694

U.S. Mortgage Insurance segment’s revenues		156			151			311			305

International Protection segment’s revenues		223			202			430			407

Runoff segment’s revenues		89			69			162			112

Corporate and Other’s revenues		(6	)		(3	)		(20	)		32

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of net operating income (loss) for our segments and Corporate and Other activities and a reconciliation of net operating income (loss) for our segments and Corporate and Other activities to net income for the periods indicated:


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2014			2013			2014			2013
U.S. Life Insurance segment:
Life insurance	$	39		$	27		$	60		$	63
Long-term care insurance		6			26			52			46
Fixed annuities		24			26			51			55

U.S. Life Insurance segment’s net operating income		69			79			163			164

International Mortgage Insurance segment:
Canada		47			43			88			85
Australia		57			55			119			101
Other Countries		(7	)		(9	)		(11	)		(16	)

International Mortgage Insurance segment’s net operating income		97			89			196			170

U.S. Mortgage Insurance segment’s net operating income		39			13			72			34

International Protection segment’s net operating income		2			1			9			7

Runoff segment’s net operating income		15			6			27			22

Corporate and Other’s net operating loss		(64	)		(55	)		(115	)		(113	)

Net operating income		158			133			352			284
Net investment gains (losses), net		20			15			10			(13	)
Gains (losses) on early extinguishment of debt, net		(2	)		—			(2	)		—
Expenses related to restructuring, net		—			(13	)		—			(13	)
Income (loss) from discontinued operations, net of taxes		—			6			—			(14	)

Net income available to Genworth Financial, Inc.’s common stockholders		176			141			360			244
Add: net income attributable to noncontrolling interests		52			39			87			77

Net income	$	228		$	180		$	447		$	321

The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:


(Amounts in millions)	June 30, 2014		December 31, 2013
Assets:
U.S. Life Insurance	$	80,916	$	77,261
International Mortgage Insurance		9,518		9,194
U.S. Mortgage Insurance		2,322		2,361
International Protection		2,116		2,061
Runoff		13,856		14,062
Corporate and Other		2,916		3,106

Total assets	$	111,644	$	108,045

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(10) Changes in Accumulated Other Comprehensive Income (Loss)

The following tables show the changes in accumulated OCI, net of taxes, by component as of and for the periods indicated:


(Amounts in millions)	Net unrealized investment gains (losses)⁽¹⁾			Derivatives qualifying as hedges⁽²⁾			Foreign currency translation and other adjustments		Total
Balances as of April 1, 2014	$	1,624		$	1,538		$	321	$	3,483
OCI before reclassifications		548			119			148		815
Amounts reclassified from (to) OCI		(14	)		(5	)		—		(19	)

Current period OCI		534			114			148		796

Balances as of June 30, 2014 before noncontrolling interests		2,158			1,652			469		4,279

Less: change in OCI attributable to noncontrolling interests		30			—			88		118

Balances as of June 30, 2014	$	2,128		$	1,652		$	381	$	4,161

⁽¹⁾	Net of adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.

⁽²⁾	See note 5 for additional information.


(Amounts in millions)	Net unrealized investment gains (losses)⁽¹⁾			Derivatives qualifying as hedges⁽²⁾			Foreign currency translation and other adjustments			Total
Balances as of April 1, 2013	$	2,443		$	1,799		$	582		$	4,824
OCI before reclassifications		(1,173	)		(213	)		(353	)		(1,739	)
Amounts reclassified from (to) OCI		(17	)		(5	)		—			(22	)

Current period OCI		(1,190	)		(218	)		(353	)		(1,761	)

Balances as of June 30, 2013 before noncontrolling interests		1,253			1,581			229			3,063

Less: change in OCI attributable to noncontrolling interests		(41	)		—			(38	)		(79	)

Balances as of June 30, 2013	$	1,294		$	1,581		$	267		$	3,142

⁽¹⁾	Net of adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.

⁽²⁾	See note 5 for additional information.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(Amounts in millions)	Net unrealized investment gains (losses)⁽¹⁾			Derivatives qualifying as hedges⁽²⁾			Foreign currency translation and other adjustments		Total
Balances as of January 1, 2014	$	926		$	1,319		$	297	$	2,542
OCI before reclassifications		1,249			347			127		1,723
Amounts reclassified from (to) OCI		(3	)		(14	)		—		(17	)

Current period OCI		1,246			333			127		1,706

Balances as of June 30, 2014 before noncontrolling interests		2,172			1,652			424		4,248

Less: change in OCI attributable to noncontrolling interests		44			—			43		87

Balances as of June 30, 2014	$	2,128		$	1,652		$	381	$	4,161

⁽¹⁾	Net of adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.

⁽²⁾	See note 5 for additional information.


(Amounts in millions)	Net unrealized investment gains (losses)⁽¹⁾			Derivatives qualifying as hedges⁽²⁾			Foreign currency translation and other adjustments			Total
Balances as of January 1, 2013	$	2,638		$	1,909		$	655		$	5,202
OCI before reclassifications		(1,389	)		(315	)		(457	)		(2,161	)
Amounts reclassified from (to) OCI		8			(13	)		—			(5	)

Current period OCI		(1,381	)		(328	)		(457	)		(2,166	)

Balances as of June 30, 2013 before noncontrolling interests		1,257			1,581			198			3,036

Less: change in OCI attributable to noncontrolling interests		(37	)		—			(69	)		(106	)

Balances as of June 30, 2013	$	1,294		$	1,581		$	267		$	3,142

⁽¹⁾	Net of adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.

⁽²⁾	See note 5 for additional information.

The foreign currency translation and other adjustments balance included $6 million and $26 million, respectively, net of taxes of $1 million and $13 million, respectively, related to a net unrecognized postretirement benefit obligation as of June 30, 2014 and 2013. Amount also included taxes of $35 million and $42 million, respectively, related to foreign currency translation adjustments as of June 30, 2014 and 2013.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table shows reclassifications in (out) of accumulated other comprehensive income (loss), net of taxes, for the periods presented:


	Amount reclassified from accumulated other comprehensive income												Affected line item in the consolidated statements of income
	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2014			2013			2014			2013
Net unrealized investment (gains) losses:
Unrealized (gains) losses on investments⁽¹⁾	$	(22	)	$	(26	)	$	(5	)	$	12		Net investment (gains) losses
Provision for income taxes		8			9			2			(4	)	Provision for income taxes

Total	$	(14	)	$	(17	)	$	(3	)	$	8


Derivatives qualifying as hedges:
Interest rate swaps hedging assets	$	(13	)	$	(10	)	$	(28	)	$	(19	)	Net investment income
Interest rate swaps hedging assets		—			(1	)		—			(1	)	Net investment (gains) losses
Interest rate swaps hedging liabilities		(1	)		—			(1	)		(1	)	Interest expense
Inflation indexed swaps		7			5			8			2		Net investment income
Provision for income taxes		2			1			7			6		Provision for income taxes

Total	$	(5	)	$	(5	)	$	(14	)	$	(13	)

⁽¹⁾	Amounts exclude adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves.

(11) Noncontrolling Interests

On May 15, 2014, Genworth Mortgage Insurance Australia Limited (“Genworth Australia”), a holding company for Genworth’s Australian mortgage insurance business, priced its initial public offering of 220,000,000 of its ordinary shares at an initial public offering price of AUD$2.65 per ordinary share. The offering closed on May 21, 2014. Following completion of the offering, Genworth Financial beneficially owns 66.2% of the ordinary shares of Genworth Australia.

The net proceeds of the offering were used by Genworth Australia to repay a portion of certain intercompany funding arrangements with our subsidiaries and those funds were then be distributed to Genworth Holdings. The gross proceeds of the offering (before payment of fees and expenses) were approximately $541 million. Fees and expenses in connection with the offering were approximately $27 million, including approximately $3 million paid in 2013.

Consistent with applicable accounting guidance, changes in noncontrolling interests that do not result in a change of control are accounted for as equity transactions. When there are changes in noncontrolling interests of a subsidiary that do not result in a change of control, any difference between carrying value and fair value related to the change in ownership is recorded as an adjustment to stockholders’ equity. A summary of these changes in

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

ownership interests and the effect on stockholders’ equity for the periods presented was as follows for the periods presented:


(Amounts in millions)	Three months ended June 30, 2014			Six months ended June 30, 2014
Net income available to Genworth Financial, Inc.’s common stockholders	$	176		$	360
Transfers to the noncontrolling interests:
Decrease in Genworth Financial, Inc.’s additional paid-in capital for initial sale of Genworth Australia to noncontrolling interests		(145	)		(145	)

Net transfers to noncontrolling interests		(145	)		(145	)

Change from net income available to Genworth Financial, Inc.’s common stockholders and transfers to noncontrolling interests	$	31		$	215

(12) Condensed Consolidating Financial Information

Genworth Financial provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior notes and the holders of the senior notes, on an unsecured unsubordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior notes indenture in respect of such senior notes. Genworth Financial also provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding subordinated notes and the holders of the subordinated notes, on an unsecured subordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, the outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the subordinated notes indenture in respect of the subordinated notes.

The following condensed consolidating financial information of Genworth Financial and its direct and indirect subsidiaries have been prepared pursuant to rules regarding the preparation of consolidating financial information of Regulation S-X. The condensed consolidating financial information has been prepared as if the guarantee had been in place during the periods presented herein.

The condensed consolidating financial information presents the condensed consolidating balance sheet information as of June 30, 2014 and December 31, 2013, the condensed consolidating income statement information and the condensed consolidating comprehensive income statement information for the three and six months ended June 30, 2014 and 2013 and the condensed consolidating cash flow statement information for the six months ended June 30, 2014 and 2013.

The condensed consolidating financial information reflects Genworth Financial (“Parent Guarantor”), Genworth Holdings (“Issuer”) and each of Genworth Financial’s other direct and indirect subsidiaries (the “All Other Subsidiaries”) on a combined basis, none of which guarantee the senior notes or subordinated notes, as well as the eliminations necessary to present Genworth Financial’s financial information on a consolidated basis and total consolidated amounts.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying condensed consolidating financial information is presented based on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries and intercompany activity.

The following table presents the condensed consolidating balance sheet information as of June 30, 2014:


(Amounts in millions)	Parent Guarantor			Issuer			All Other Subsidiaries			Eliminations			Consolidated
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	—		$	151		$	62,409		$	(200	)	$	62,360
Equity securities available-for-sale, at fair value		—			—			320			—			320
Commercial mortgage loans		—			—			5,986			—			5,986
Restricted commercial mortgage loans related to securitization entities		—			—			217			—			217
Policy loans		—			—			1,514			—			1,514
Other invested assets		—			17			1,946			—			1,963
Restricted other invested assets related to securitization entities, at fair value		—			—			404			—			404
Investments in subsidiaries		16,214			16,239			—			(32,453	)		—

Total investments		16,214			16,407			72,796			(32,653	)		72,764

Cash and cash equivalents		—			1,073			3,065			—			4,138
Accrued investment income		—			—			646			(4	)		642
Deferred acquisition costs		—			—			5,085			—			5,085
Intangible assets		—			—			266			—			266
Goodwill		—			—			867			—			867
Reinsurance recoverable		—			—			17,276			—			17,276
Other assets		2			198			497			(2	)		695
Intercompany notes receivable		—			260			365			(625	)		—
Separate account assets		—			—			9,911			—			9,911

Total assets	$	16,216		$	17,938		$	110,774		$	(33,284	)	$	111,644

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	—		$	—		$	34,497		$	—		$	34,497
Policyholder account balances		—			—			25,834			—			25,834
Liability for policy and contract claims		—			—			7,223			—			7,223
Unearned premiums		—			—			4,191			—			4,191
Other liabilities		(2	)		303			3,406			(5	)		3,702
Intercompany notes payable		3			566			256			(825	)		—
Borrowings related to securitization entities		—			—			233			—			233
Non-recourse funding obligations		—			—			2,024			—			2,024
Long-term borrowings		—			4,151			540			—			4,691
Deferred tax liability		(16	)		(927	)		2,017			—			1,074
Separate account liabilities		—			—			9,911			—			9,911

Total liabilities		(15	)		4,093			90,132			(830	)		93,380

Stockholders’ equity:
Common stock		1			—			—			—			1
Additional paid-in capital		11,986			9,162			17,080			(26,242	)		11,986
Accumulated other comprehensive income (loss)		4,161			4,099			4,152			(8,251	)		4,161
Retained earnings		2,783			584			(2,628	)		2,044			2,783
Treasury stock, at cost		(2,700	)		—			—			—			(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		16,231			13,845			18,604			(32,449	)		16,231
Noncontrolling interests		—			—			2,038			(5	)		2,033

Total stockholders’ equity		16,231			13,845			20,642			(32,454	)		18,264

Total liabilities and stockholders’ equity	$	16,216		$	17,938		$	110,774		$	(33,284	)	$	111,644

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating balance sheet information as of December 31, 2013:


(Amounts in millions)	Parent Guarantor			Issuer			All Other Subsidiaries			Eliminations			Consolidated
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	—		$	150		$	58,679		$	(200	)	$	58,629
Equity securities available-for-sale, at fair value		—			—			341			—			341
Commercial mortgage loans		—			—			5,899			—			5,899
Restricted commercial mortgage loans related to securitization entities		—			—			233			—			233
Policy loans		—			—			1,434			—			1,434
Other invested assets		—			91			1,595			—			1,686
Restricted other invested assets related to securitization entities, at fair value		—			—			391			—			391
Investments in subsidiaries		14,358			14,929			—			(29,287	)		—

Total investments		14,358			15,170			68,572			(29,487	)		68,613

Cash and cash equivalents		—			1,219			2,995			—			4,214
Accrued investment income		—			—			682			(4	)		678
Deferred acquisition costs		—			—			5,278			—			5,278
Intangible assets		—			—			399			—			399
Goodwill		—			—			867			—			867
Reinsurance recoverable		—			—			17,219			—			17,219
Other assets		(2	)		276			367			(2	)		639
Intercompany notes receivable		8			248			393			(649	)		—
Separate account assets		—			—			10,138			—			10,138

Total assets	$	14,364		$	16,913		$	106,910		$	(30,142	)	$	108,045

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	—		$	—		$	33,705		$	—		$	33,705
Policyholder account balances		—			—			25,528			—			25,528
Liability for policy and contract claims		—			—			7,204			—			7,204
Unearned premiums		—			—			4,107			—			4,107
Other liabilities		(3	)		365			3,739			(5	)		4,096
Intercompany notes payable		—			601			248			(849	)		—
Borrowings related to securitization entities		—			—			242			—			242
Non-recourse funding obligations		—			—			2,038			—			2,038
Long-term borrowings		—			4,636			525			—			5,161
Deferred tax liability		(26	)		(796	)		1,028			—			206
Separate account liabilities		—			—			10,138			—			10,138

Total liabilities		(29	)		4,806			88,502			(854	)		92,425

Stockholders’ equity:
Common stock		1			—			—			—			1
Additional paid-in capital		12,127			9,297			17,215			(26,512	)		12,127
Accumulated other comprehensive income (loss)		2,542			2,507			2,512			(5,019	)		2,542
Retained earnings		2,423			303			(2,551	)		2,248			2,423
Treasury stock, at cost		(2,700	)		—			—			—			(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		14,393			12,107			17,176			(29,283	)		14,393
Noncontrolling interests		—			—			1,232			(5	)		1,227

Total stockholders’ equity		14,393			12,107			18,408			(29,288	)		15,620

Total liabilities and stockholders’ equity	$	14,364		$	16,913		$	106,910		$	(30,142	)	$	108,045

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating income statement information for the three months ended June 30, 2014:


(Amounts in millions)	Parent Guarantor		Issuer			All Other Subsidiaries		Eliminations			Consolidated
Revenues:
Premiums	$	—	$	—		$	1,343	$	—		$	1,343
Net investment income		—		—			816		(3	)		813
Net investment gains (losses)		—		(5	)		39		—			34
Insurance and investment product fees and other		—		(3	)		229		(1	)		225

Total revenues		—		(8	)		2,427		(4	)		2,415

Benefits and expenses:
Benefits and other changes in policy reserves		—		—			1,256		—			1,256
Interest credited		—		—			184		—			184
Acquisition and operating expenses, net of deferrals		3		—			401		—			404
Amortization of deferred acquisition costs and intangibles		—		—			138		—			138
Interest expense		—		83			41		(4	)		120

Total benefits and expenses		3		83			2,020		(4	)		2,102

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(Amounts in millions)	Parent Guarantor			Issuer			All Other Subsidiaries		Eliminations			Consolidated
Income (loss) from continuing operations before income taxes and equity in income of subsidiaries		(3	)		(91	)		407		—			313
Provision (benefit) for income taxes		(5	)		(18	)		112		(4	)		85
Equity in income of subsidiaries		174			194			—		(368	)		—

Income from continuing operations		176			121			295		(364	)		228
Income from discontinued operations, net of taxes		—			—			—		—			—

Net income		176			121			295		(364	)		228
Less: net income attributable to noncontrolling interests		—			—			52		—			52

Net income available to Genworth Financial, Inc.’s common stockholders	$	176		$	121		$	243	$	(364	)	$	176

The following table presents the condensed consolidating income statement information for the three months ended June 30, 2013:


(Amounts in millions)	Parent Guarantor			Issuer			All Other Subsidiaries		Eliminations			Consolidated
Revenues:
Premiums	$	—		$	—		$	1,286	$	—		$	1,286
Net investment income		(1	)		1			824		(3	)		821
Net investment gains (losses)		—			7			14		—			21
Insurance and investment product fees and other		—			—			245		(2	)		243

Total revenues		(1	)		8			2,369		(5	)		2,371

Benefits and expenses:
Benefits and other changes in policy reserves		—			—			1,269		—			1,269
Interest credited		—			—			184		—			184
Acquisition and operating expenses, net of deferrals		10			1			402		—			413
Amortization of deferred acquisition costs and intangibles		—			—			137		—			137
Interest expense		—			79			47		(5	)		121

Total benefits and expenses		10			80			2,039		(5	)		2,124

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries		(11	)		(72	)		330		—			247
Provision (benefit) for income taxes		(5	)		(14	)		92		—			73
Equity in income of subsidiaries		147			194			—		(341	)		—

Income from continuing operations		141			136			238		(341	)		174
Income (loss) from discontinued operations, net of taxes		—			(9	)		15		—			6

Net income		141			127			253		(341	)		180
Less: net income attributable to noncontrolling interests		—			—			39		—			39

Net income available to Genworth Financial, Inc.’s common stockholders	$	141		$	127		$	214	$	(341	)	$	141

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating income statement information for the six months ended June 30, 2014:


(Amounts in millions)	Parent Guarantor			Issuer			All Other Subsidiaries		Eliminations			Consolidated
Revenues:
Premiums	$	—		$	—		$	2,650	$	—		$	2,650
Net investment income		—			—			1,625		(7	)		1,618
Net investment gains (losses)		—			(9	)		26		—			17
Insurance and investment product fees and other		—			(3	)		456		(1	)		452

Total revenues		—			(12	)		4,757		(8	)		4,737

Benefits and expenses:
Benefits and other changes in policy reserves		—			—			2,450		—			2,450
Interest credited		—			—			367		—			367
Acquisition and operating expenses, net of deferrals		10			—			772		—			782
Amortization of deferred acquisition costs and intangibles		—			—			272		—			272
Interest expense		—			167			88		(8	)		247

Total benefits and expenses		10			167			3,949		(8	)		4,118

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries		(10	)		(179	)		808		—			619
Provision (benefit) for income taxes		5			(64	)		235		(4	)		172
Equity in income of subsidiaries		375			396			—		(771	)		—

Income from continuing operations		360			281			573		(767	)		447
Income from discontinued operations, net of taxes		—			—			—		—			—

Net income		360			281			573		(767	)		447
Less: net income attributable to noncontrolling interests		—			—			87		—			87

Net income available to Genworth Financial, Inc.’s common stockholders	$	360		$	281		$	486	$	(767	)	$	360

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating income statement information for the six months ended June 30, 2013:


(Amounts in millions)	Parent Guarantor			Issuer			All Other Subsidiaries			Eliminations			Consolidated
Revenues:
Premiums	$	—		$	—		$	2,547		$	—		$	2,547
Net investment income		(1	)		1			1,642			(7	)		1,635
Net investment gains (losses)		—			3			(43	)		—			(40	)
Insurance and investment product fees and other		—			—			535			(3	)		532

Total revenues		(1	)		4			4,681			(10	)		4,674

Benefits and expenses:
Benefits and other changes in policy reserves		—			—			2,470			—			2,470
Interest credited		—			—			368			—			368
Acquisition and operating expenses, net of deferrals		10			1			835			—			846
Amortization of deferred acquisition costs and intangibles		—			—			259			—			259
Interest expense		—			159			98			(10	)		247

Total benefits and expenses		10			160			4,030			(10	)		4,190

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries		(11	)		(156	)		651			—			484
Provision (benefit) for income taxes		(5	)		(53	)		207			—			149
Equity in income of subsidiaries		250			316			—			(566	)		—

Income from continuing operations, net of taxes		244			213			444			(566	)		335
Loss from discontinued operations, net of taxes		—			(14	)		—			—			(14	)

Net income		244			199			444			(566	)		321
Less: net income attributable to noncontrolling interests		—			—			77			—			77

Net income available to Genworth Financial, Inc.’s common stockholders	$	244		$	199		$	367		$	(566	)	$	244

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating comprehensive income statement information for the three months ended June 30, 2014:


(Amounts in millions)	Parent Guarantor		Issuer		All Other Subsidiaries		Eliminations			Consolidated
Net income	$	176	$	121	$	295	$	(364	)	$	228
Other comprehensive income (loss):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		525		514		531		(1,037	)		533
Net unrealized gains (losses) on other-than-temporarily impaired securities		1		1		1		(2	)		1
Derivatives qualifying as hedges		114		114		123		(237	)		114
Foreign currency translation and other adjustments		95		80		148		(175	)		148

Total other comprehensive income (loss)		735		709		803		(1,451	)		796

Total comprehensive income (loss)		911		830		1,098		(1,815	)		1,024
Less: comprehensive income attributable to noncontrolling interests		—		—		113		—			113

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	911	$	830	$	985	$	(1,815	)	$	911

The following table presents the condensed consolidating comprehensive income statement information for the three months ended June 30, 2013:


(Amounts in millions)	Parent Guarantor			Issuer			All Other Subsidiaries			Eliminations			Consolidated
Net income	$	141		$	127		$	253		$	(341	)	$	180
Other comprehensive income (loss):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		(1,175	)		(1,136	)		(1,212	)		2,307			(1,216	)
Net unrealized gains (losses) on other-than-temporarily impaired securities		26			26			26			(52	)		26
Derivatives qualifying as hedges		(218	)		(218	)		(230	)		448			(218	)
Foreign currency translation and other adjustments		(315	)		(303	)		(352	)		617			(353	)

Total other comprehensive income (loss)		(1,682	)		(1,631	)		(1,768	)		3,320			(1,761	)

Total comprehensive income (loss)		(1,541	)		(1,504	)		(1,515	)		2,979			(1,581	)
Less: comprehensive income attributable to noncontrolling interests		—			—			(40	)		—			(40	)

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(1,541	)	$	(1,504	)	$	(1,475	)	$	2,979		$	(1,541	)

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating comprehensive income statement information for the six months ended June 30, 2014:


(Amounts in millions)	Parent Guarantor		Issuer		All Other Subsidiaries		Eliminations			Consolidated
Net income	$	360	$	281	$	573	$	(767	)	$	447
Other comprehensive income (loss):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		1,217		1,189		1,238		(2,405	)		1,239
Net unrealized gains (losses) on other-than-temporarily impaired securities		7		7		7		(14	)		7
Derivatives qualifying as hedges		333		333		355		(688	)		333
Foreign currency translation and other adjustments		119		120		127		(239	)		127

Total other comprehensive income (loss)		1,676		1,649		1,727		(3,346	)		1,706

Total comprehensive income (loss)		2,036		1,930		2,300		(4,113	)		2,153
Less: comprehensive income attributable to noncontrolling interests		—		—		117		—			117

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	2,036	$	1,930	$	2,183	$	(4,113	)	$	2,036

The following table presents the condensed consolidating comprehensive income statement information for the six months ended June 30, 2013:


(Amounts in millions)	Parent Guarantor			Issuer			All Other Subsidiaries			Eliminations			Consolidated
Net income	$	244		$	199		$	444		$	(566	)	$	321
Other comprehensive income (loss):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		(1,396	)		(1,363	)		(1,429	)		2,755			(1,433	)
Net unrealized gains (losses) on other-than-temporarily impaired securities		52			52			52			(104	)		52
Derivatives qualifying as hedges		(328	)		(328	)		(340	)		668			(328	)
Foreign currency translation and other adjustments		(388	)		(358	)		(456	)		745			(457	)

Total other comprehensive income (loss)		(2,060	)		(1,997	)		(2,173	)		4,064			(2,166	)

Total comprehensive income (loss)		(1,816	)		(1,798	)		(1,729	)		3,498			(1,845	)
Less: comprehensive income attributable to noncontrolling interests		—			—			(29	)		—			(29	)

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(1,816	)	$	(1,798	)	$	(1,700	)	$	3,498		$	(1,816	)

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating cash flow statement information for the six months ended June 30, 2014:


	Parent Guarantor			Issuer			All Other Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	360		$	281		$	573		$	(767	)	$	447
Adjustments to reconcile net income to net cash from operating activities:
Equity in income from subsidiaries		(375	)		(396	)		—			771			—
Dividends from subsidiaries		—			563			(563	)		—			—
Amortization of fixed maturity discounts and premiums and limited partnerships		—			—			(69	)		—			(69	)
Net investment losses (gains)		—			9			(26	)		—			(17	)
Charges assessed to policyholders		—			—			(376	)		—			(376	)
Acquisition costs deferred		—			—			(239	)		—			(239	)
Amortization of deferred acquisition costs and intangibles		—			—			272			—			272
Deferred income taxes		10			(117	)		139			(4	)		28
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments		—			—			79			—			79
Stock-based compensation expense		10			—			5			—			15
Change in certain assets and liabilities:
Accrued investment income and other assets		(3	)		59			(148	)		—			(92	)
Insurance reserves		—			—			1,102			—			1,102
Current tax liabilities		(12	)		(19	)		(133	)		—			(164	)
Other liabilities and other policy-related balances		13			27			(448	)		—			(408	)

Net cash from operating activities		3			407			168			—			578

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		—			—			2,568			—			2,568
Commercial mortgage loans		—			—			262			—			262
Restricted commercial mortgage loans related to securitization entities		—			—			17			—			17
Proceeds from sales of investments:
Fixed maturity and equity securities		—			—			1,256			—			1,256
Purchases and originations of investments:
Fixed maturity and equity securities		—			—			(4,873	)		—			(4,873	)
Commercial mortgage loans		—			—			(347	)		—			(347	)
Other invested assets, net		—			—			175			—			175
Policy loans, net		—			—			4			—			4
Intercompany notes receivable		8			(12	)		28			(24	)		—
Capital contributions to subsidiaries		(12	)		—			12			—			—

Net cash from investing activities		(4	)		(12	)		(898	)		(24	)		(938	)

Cash flows from financing activities:
Deposits to universal life and investment contracts		—			—			1,548			—			1,548
Withdrawals from universal life and investment contracts		—			—			(1,270	)		—			(1,270	)
Redemption and repurchase of non-recourse funding obligations		—			—			(14	)		—			(14	)
Proceeds from the issuance of long-term debt		—			—			144			—			144
Repayment and repurchase of long-term debt		—			(485	)		(136	)		—			(621	)
Repayment of borrowings related to securitization entities		—			—			(17	)		—			(17	)
Proceeds from sale of subsidiary shares to noncontrolling interests		—			—			519			—			519
Dividends paid to noncontrolling interests		—			—			(27	)		—			(27	)
Proceeds from intercompany notes payable		3			(35	)		8			24			—
Other, net		(2	)		(21	)		(9	)		—			(32	)

Net cash from financing activities		1			(541	)		746			24			230

Effect of exchange rate changes on cash and cash equivalents		—			—			54			—			54

Net change in cash and cash equivalents		—			(146	)		70			—			(76	)
Cash and cash equivalents at beginning of period		—			1,219			2,995			—			4,214

Cash and cash equivalents at end of period	$	—		$	1,073		$	3,065		$	—		$	4,138

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the condensed consolidating cash flow statement information for the six months ended June 30, 2013:


	Parent Guarantor			Issuer			All Other Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income	$	244		$	199		$	444		$	(566	)	$	321
Less loss from discontinued operations, net of taxes		—			14			—			—			14
Adjustments to reconcile net income to net cash from operating activities:
Equity in income from subsidiaries		(250	)		(316	)		—			566			—
Dividends from subsidiaries		135			150			(285	)		—			—
Amortization of fixed maturity discounts and premiums and limited partnerships		—			—			(40	)		—			(40	)
Net investment losses (gains)		—			(3	)		43			—			40
Charges assessed to policyholders		—			(3	)		(401	)		—			(404	)
Acquisition costs deferred		—			—			(212	)		—			(212	)
Amortization of deferred acquisition costs and intangibles		—			—			259			—			259
Deferred income taxes		(3	)		(46	)		(164	)		—			(213	)
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments		—			—			35			—			35
Stock-based compensation expense		11			—			6			—			17
Change in certain assets and liabilities:
Accrued investment income and other assets		(1	)		68			(46	)		—			21
Insurance reserves		—			—			1,183			—			1,183
Current tax liabilities		—			(7	)		267			—			260
Other liabilities and other policy-related balances		(4	)		26			(660	)		—			(638	)
Cash from operating activities—discontinued operations		—			(14	)		17			—			3

Net cash from operating activities		132			68			446			—			646

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		—			—			2,820			—			2,820
Commercial mortgage loans		—			—			474			—			474
Restricted commercial mortgage loans related to securitization entities		—			—			31			—			31
Proceeds from sales of investments:
Fixed maturity and equity securities		—			—			2,245			—			2,245
Purchases and originations of investments:
Fixed maturity and equity securities		—			—			(4,558	)		—			(4,558	)
Commercial mortgage loans		—			—			(431	)		—			(431	)
Other invested assets, net		—			—			113			—			113
Policy loans, net		—			—			(1	)		—			(1	)
Intercompany notes receivable		(1	)		15			30			(44	)		—
Capital contributions to subsidiaries		(131	)		(1	)		132			—			—
Proceeds from sale of a subsidiary, net of cash transferred		—			—			25			—			25
Cash from investing activities—discontinued operations		—			—			—			—			—

Net cash from investing activities		(132	)		14			880			(44	)		718

Cash flows from financing activities:
Deposits to universal life and investment contracts		—			—			920			—			920
Withdrawals from universal life and investment contracts		—			—			(2,059	)		—			(2,059	)
Redemption and repurchase of non-recourse funding obligations		—			—			(12	)		—			(12	)
Repayment and repurchase of long-term debt		—			(15	)		—			—			(15	)
Repayment of borrowings related to securitization entities		—			—			(32	)		—			(32	)
Repurchase of subsidiary shares		—			—			(21	)		—			(21	)
Dividends paid to noncontrolling interests		—			—			(26	)		—			(26	)
Proceeds from intercompany notes payable		—			(30	)		(14	)		44			—
Other, net		—			(24	)		7			—			(17	)
Cash from financing activities—discontinued operations		—			—			—			—			—

Net cash from financing activities		—			(69	)		(1,237	)		44			(1,262	)

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

Net change in cash and cash equivalents		—			13			(29	)		—			(16	)
Cash and cash equivalents at beginning of period		—			843			2,810			—			3,653

Cash and cash equivalents at end of period		—			856			2,781			—			3,637
Less cash and cash equivalents of discontinued operations at end of period		—			—			24			—			24

Cash and cash equivalents of continuing operations at end of period	$	—		$	856		$	2,757		$	—		$	3,613

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our insurance company subsidiaries are restricted by state and foreign laws and regulations as to the amount of dividends they may pay to their parent without regulatory approval in any year, the purpose of which is to protect affected insurance policyholders and contractholders, not stockholders. Any dividends in excess of limits are deemed “extraordinary” and require approval. Based on estimated statutory results as of December 31, 2013, in accordance with applicable dividend restrictions, our subsidiaries could pay dividends of approximately $1.0 billion to us in 2014 without obtaining regulatory approval, and the remaining net assets are considered restricted. While the $1.0 billion is unrestricted, we do not expect our insurance subsidiaries to pay dividends to us in 2014 at this level as they retain capital for growth and to meet capital requirements and desired thresholds. As of June 30, 2014, both Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $15.2 billion.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included herein and with our 2013 Annual Report on Form 10-K.

Cautionary note regarding forward-looking statements

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to global political, economic, business, competitive, market, regulatory and other factors and risks, including, but not limited to, the following:

•

Risks relating to our businesses, including downturns and volatility in global economies and equity and credit markets; downgrades or potential downgrades in our financial strength or credit ratings; interest rate fluctuations and levels; adverse capital and credit market conditions; the valuation of fixed maturity, equity and trading securities; defaults or other events impacting the value of our fixed maturity securities portfolio; defaults on our commercial mortgage loans or the mortgage loans underlying our investments in commercial mortgage-backed securities and volatility in performance; availability, affordability and adequacy of reinsurance; defaults by counterparties to reinsurance arrangements or derivative instruments; an adverse change in risk-based capital and other regulatory requirements; insufficiency of reserves and required increases to reserve liabilities; legal and regulatory constraints on dividend distributions by our subsidiaries; competition, including from government-owned and government-sponsored enterprises (“GSEs”) offering mortgage insurance; loss of key distribution partners; regulatory restrictions on our operations and changes in applicable laws and regulations; legal or regulatory investigations or actions; the failure of or any compromise of the security of our computer systems and confidential information contained therein; the occurrence of natural or man-made disasters or a pandemic; the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act; ineffective or inadequate risk management program; changes in accounting and reporting standards; goodwill impairments; impairments of or valuation allowances against our deferred tax assets; significant deviations from our assumptions in our insurance policies and annuity contracts; accelerated amortization of deferred acquisition costs and present value of future profits; ability to increase premiums on in-force and future long-term care insurance products, including any current rate actions and any future rate actions; the failure of demand for life insurance, long-term care insurance and fixed annuity products to increase; medical advances, such as genetic research and diagnostic imaging, and related legislation; ability to continue to implement actions to mitigate the impact of statutory reserve requirements; political and economic instability or changes in government policies; fluctuations in foreign currency exchange rates and international securities markets; the significant portion of our international mortgage insurance risk in-force with high loan-to-value ratios; increases in U.S. mortgage insurance default rates; failure to meet, or have waived to the extent needed, our U.S. mortgage insurance subsidiaries’ minimum statutory capital requirements and hazardous financial condition standards; the influence of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and a small number of large mortgage lenders and investors and changes to the role or structure of Fannie Mae and Freddie Mac; failure to meet the revised GSE eligibility standards (the “MI Eligibility Standards”) or the capital required to meet the revised standards may be higher than anticipated; ability to realize the benefits of our rescissions and curtailments; the extent to which loan modifications and other similar programs may provide benefits to us; deterioration in economic conditions or a decline in home prices in the United States; problems associated with foreclosure process defects in the United States that may defer claim

payments; decreases in the volume of high loan-to-value mortgage originations or increases in mortgage insurance cancellations in the United States; increases in the use of alternatives to private mortgage insurance in the United States and reductions by lenders in the level of coverage they select; the impact of the use of reinsurance with reinsurance companies affiliated with our U.S. mortgage lending customers; and potential liabilities in connection with our U.S. contract underwriting services;

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Other risks, including the risk that the anticipated benefits of the announced expense reduction are not realized and we may lose key personnel related to actions like this as well as general uncertainty in the timing of our turnaround; the possibility that in certain circumstances we will be obligated to make payments to General Electric Company (“GE”) under the tax matters agreement with GE even if our corresponding tax savings are never realized and payments could be accelerated in the event of certain changes in control; and provisions of our certificate of incorporation and bylaws and the tax matters agreement with GE may discourage takeover attempts and business combinations that stockholders might consider in their best interests; and

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Risks relating to our common stock, including the suspension of dividends and stock price fluctuations.

We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Overview

Our business

We are a leading financial services company dedicated to providing insurance, investment and financial solutions to our customers, with a presence in more than 25 countries. We operate through three divisions: U.S. Life Insurance, Global Mortgage Insurance and Corporate and Other. Under these divisions, there are five operating business segments. The U.S. Life Insurance Division includes the U.S. Life Insurance segment. The Global Mortgage Insurance Division includes the International Mortgage Insurance and U.S. Mortgage Insurance segments. The Corporate and Other Division includes the International Protection and Runoff segments and Corporate and Other activities. We have the following operating segments:

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Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business.

We also have Corporate and Other activities which include debt financing expenses that are incurred at Genworth Holdings, Inc. (“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.

Business trends and conditions

Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions.

General conditions and trends affecting our businesses

Financial and economic environment. The stability of both the financial markets and global economies in which we operate impacts the sales, revenue growth and profitability trends of our businesses. While equity and credit markets generally improved during 2013, credit market volatility continued into the first half of 2014 and credit spreads continued to further compress during the first half of 2014. Although the U.S. and several international financial markets experienced improvement during 2013 and into the first half of 2014, there are still concerns regarding global economies and the rate and strength of recovery, particularly given recent geographical events in Eastern Europe and the Middle East.

The U.S. housing market showed signs of recovery during 2012 and 2013 with home prices rising in a number of regions and cities, but ongoing weakness in the U.S. economy continued to impact the rate of recovery. Unemployment and underemployment levels in the United States remained elevated in 2013. The June 2014 unemployment rate in the United States declined from the March 2014 and December 2013 unemployment rates. We expect unemployment and underemployment levels in the United States to remain elevated relative to those levels prevailing before 2009 and gradually decrease over time. In Canada, stable economic conditions have persisted with housing affordability benefiting from low interest rates and employment growth and average home prices increased modestly during 2013 and into the first half of 2014. While the unemployment rate in Canada decreased slightly during 2013 and into the first quarter of 2014, it increased slightly during the second quarter of 2014 but remained near its lowest level since December 2008. In Australia, the overall housing market generally improved as modest economic growth and low interest rates persisted, coupled with average home prices increasing across most regions during 2013 and into the first half of 2014. Unemployment in Australia increased slightly during 2013, remaining close to its highest level in three years. It remained consistent through March 2014 and increased in June 2014. The Chinese economy had experienced significant growth over the past decade. This growth slowed during 2013 and into the first half of 2014 and the new Chinese administration began to implement economic and credit market reforms. Gross domestic product growth in China in 2013 and the first half of 2014 was close to that of 2012, but significantly lower from growth over the last decade even with improvement in the second quarter of 2014. Given the relative size of the Chinese economy, the impact of a significant change in the pace of economic expansion in China could impact global economies, partly as a result of lower commodity imports, particularly those from the Asia Pacific region, including Australia. Europe remained a challenging region with slow growth or a declining economic environment with lower lending activity and reduced consumer spending, particularly in Greece, Spain, Portugal, Ireland and Italy, in part as a result of actual or anticipated austerity measures, but certain areas within Europe have shown a modest level of improvement during the second half of 2013 and into the first half of 2014. See “—Trends and conditions affecting our segments” below for a discussion regarding the impacts the financial markets and global economies have on our businesses.

Slow or varied levels of economic growth, coupled with uncertain financial markets and economic outlooks, changes in government policy, regulatory reforms and other changes in market conditions, influenced, and we believe will continue to influence, investment and spending decisions by consumers and businesses as they adjust their consumption, debt, capital and risk profiles in response to these conditions. These trends change as investor confidence in the markets and the outlook for some consumers and businesses shift. As a result, our sales, revenues and profitability trends of certain insurance and investment products have been and could be further impacted negatively or positively going forward. In particular, factors such as government spending, monetary policies, the volatility and strength of the capital markets, anticipated tax policy changes and the impact of global financial regulation reform will continue to affect economic and business outlooks and consumer behaviors moving forward.

The U.S. and international governments, Federal Reserve, other central banks and other legislative and regulatory bodies have taken certain actions to support the economy and capital markets, influence interest rates, influence housing markets and mortgage servicing and provide liquidity to promote economic growth. These include various mortgage restructuring programs implemented or under consideration by the GSEs, lenders, servicers and the U.S. government. Outside of the United States, various governments and central banks have taken and continue to take actions to stimulate economies, stabilize financial systems and improve market liquidity. In aggregate, these actions had a positive effect in the short term on these countries and their markets; however, there can be no assurance as to the future level of impact these types of actions may have on the economic and financial markets, including levels of volatility. A delayed economic recovery period, a U.S. or global recession or regional or global financial crisis could materially and adversely affect our business, financial condition and results of operations.

We manage our product offerings, liquidity, capital, investment and asset-liability management strategies to moderate risk especially during periods of strained economic and financial market conditions. In addition, we continue to review our product and distribution management strategies to align with our strengths, profitability targets and risk tolerance.

Credit and investment markets. The Federal Reserve continued to reduce its asset purchases to $35.0 billion per month in July, down $10.0 billion at each Federal Reserve meeting since December 2013 from the originally announced $85.0 billion per month, and could end its Long-Term Securities Asset Purchases Program by October 2014. Despite the Federal Reserve withdrawing stimulus and normalizing monetary policy, global interest rates continued to fall, driven primarily by mixed U.S. economic data, sluggish growth concerns and further easing measures initiated by the European Central Bank.

Credit spreads for most fixed income asset classes continued to compress further throughout the first half of 2014 driven by global liquidity and strong demand. The performance was further supported by stable credit fundamentals and demand for fixed income products. The environment of continued accommodative policy stance from global central banks, along with historic lows in rate and equity volatility was beneficial for riskier assets, despite certain geopolitical concerns.

We recorded net other-than-temporary impairments of $3 million during the six months ended June 30, 2014 compared to $17 million during the six months ended June 30, 2013. Impairments have decreased across all asset classes due to improving economic conditions. Declines in interest rates and credit spreads have increased the value of our investments and derivatives, resulting in increases in net unrealized investment gains on securities of $1,246 million and derivatives qualifying as hedges of $333 million in other comprehensive income (loss) for the six months ended June 30, 2014. Economic conditions will continue to impact the valuation of our investment portfolios and the amount of other-than-temporary impairments.

Looking ahead, while we view the current credit environment as stable and corporate defaults are expected to remain low, company-specific spread widening could occur given an environment in which companies are rewarded to increase debt and return funds to shareholders. In addition, uncertainty relating to developments in

emerging markets could continue to result in spread volatility in emerging market bonds. We believe the current credit environment provides us with opportunities to invest across a variety of asset classes, but our returns will continue to be pressured because of low interest rates. The current environment will also provide opportunities to continue execution of various risk management disciplines involving further diversification within the investment portfolio. See “—Investments and Derivative Instruments” for additional information on our investment portfolio.

Trends and conditions affecting our segments

U.S. Life Insurance

Life insurance. Results of our life insurance business are impacted by sales, competitor actions, mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements. Additionally, sales of our products and persistency of our insurance in-force are dependent on competitive product features and pricing, underwriting, distribution and customer service. Shifts in consumer demand, competitors’ actions, relative pricing, return on capital or reinsurance decisions and other factors, such as regulatory matters affecting life insurance policy reserve levels, can also affect our sales levels.

In 2013, we experienced favorable mortality results in our universal life, term universal life and term life insurance products as compared to priced mortality assumptions. In the second quarter of 2014, we experienced improved mortality results for our universal life and term life insurance products compared to the first quarter of 2014. Mortality levels may deviate each period from historical trends. As our 15-year term life insurance policies written in 1999 and 2000 approach their post-level rate period, we have experienced lower persistency compared to pricing. Due to the relatively small number of policies currently approaching their post-level rate period and the small difference between actual and priced for persistency, the impact on our financial statements has not been material. As more policies approach their post-level rate period, we would expect amortization of deferred acquisition costs to accelerate and lower profitability in our term life insurance products if persistency is lower compared to pricing.

Life insurance sales increased 68% during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 largely attributable to our term life insurance products. Sales of our term life insurance products increased from competitive pricing and improved service platforms. Sales levels were in line with expected results as the business is transitioning to a broader set of competitive permanent life product offerings, including indexed universal life and linked benefits, and growth in sales on these products is expected to continue.

Regulations XXX and AXXX require insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and for certain universal life insurance policies with secondary guarantees. This increases the capital required to write these products. We have committed funding sources for approximately 95% of our anticipated peak level reserves currently required under Regulations XXX and AXXX. The National Association of Insurance Commissioners (“NAIC”) adopted revised statutory reserving requirements for new and in-force secondary guarantee universal life business subject to Actuarial Guideline 38 (“AG 38”) provisions, which became effective December 31, 2012. These requirements reflected an agreement reached and developed by a NAIC Joint Working Group which included regulators from several states, including New York. The financial impact related to the revised statutory reserving requirements on our in-force reserves subject to the new guidance was not significant as of December 31, 2012. On September 11, 2013, the New York Department of Financial Services (the “NYDFS”) announced that it no longer supported the agreement reached by the NAIC Working Group and that it would require New York licensed companies, including our New York domiciled insurance subsidiary, to use an alternative interpretation of AG 38 for universal life insurance products with secondary guarantees. We have been in discussions with the NYDFS about its alternative interpretation and recorded $80 million of additional statutory reserves as of December 31, 2013. We continue to work with the NYDFS to determine potential future impacts. The NYDFS has not finalized a permanent update to the regulation. Depending on the final regulation, our New York domiciled insurance subsidiary’s statutory reserves could increase significantly over time.

Uncertainties associated with our continued use of U.S.-domiciled captive life reinsurance subsidiaries are primarily related to potential regulatory changes. During 2012, the NAIC began a review of the insurance industry’s use of captive life reinsurance subsidiaries and is considering changes to its model regulations. We are currently unable to predict the ultimate outcome of the NAIC’s review.

Although we do not believe it to be likely, and the conceptual framework currently being considered by the NAIC allows for their continued use, a potential outcome of the NAIC review is that the life insurance industry may be prohibited from continuing to use captive life reinsurance subsidiaries. The expected effect of such prohibition would depend on the specific changes to state regulations that are adopted as a result of the NAIC review, including whether current captive life reinsurance structures would be allowed to continue in existence or, if not, the method and timing of their dissolution, as well as the cost and availability of alternative financing. At this time, given the uncertainty around these matters, we are unable to estimate the expected effects on our consolidated operations and financial position of the discontinuance of the use of captive life reinsurance subsidiaries to finance statutory reserves subject to Regulations XXX and AXXX and AG 38 in the future. If we were to discontinue our use of captive life reinsurance subsidiaries to finance statutory reserves in response to regulatory changes on a prospective basis, the reasonably likely impact would be increased costs related to alternative financing, such as third-party reinsurance, and potential reductions in or discontinuance of new term life or universal life with secondary guarantees insurance sales, all of which would adversely impact our consolidated results of operations and financial condition. In addition, we cannot be certain that affordable alternative financing would be available.

Long-term care insurance. Results of our long-term care insurance business are influenced by sales, competitor actions, morbidity, mortality, persistency, investment yields, expenses, changes in regulations and reinsurance. Additionally, sales of our products are impacted by the relative competitiveness of our offerings based on product features, pricing and commission levels, including the impact of in-force rate actions on distribution and consumer demand. Changes in regulations or government programs, including long-term care insurance rate action legislation, could impact our long-term care insurance business positively or negatively.

During the second quarter of 2014, we experienced meaningful increases in adverse claims experience for our long-term care insurance products, resulting in significant deterioration in operating income. The adverse claims experience in the second quarter of 2014 was due primarily to higher severity on both new and existing claims compared to the first quarter of 2014 and the second quarter of 2013, as well as an increase in new claims compared to the second quarter of 2013. As a result of recent experience, and in connection with our regular review of claims reserve assumptions for our long-term care insurance products, we are conducting a comprehensive review of our long-term care insurance claim reserves. The primary areas of focus in this review are: (i) an analysis of potential causes of the meaningful increases in adverse claims experience and (ii) an assessment of the assumptions and methodology underlying the associated reserves, including morbidity, mortality, interest rates and claim terminations. We intend to complete this review before the release of financial results for the third quarter of 2014. We continue to believe that the existing assumptions and methodology provide the most reliable best estimate. However, given the review underway that will consider both long-term and recent experience, we will likely change some of our assumptions, which could increase our long-term care insurance claim reserves, and any increase may or may not be material.

The results in the second quarter of 2014 were impacted by higher incurred losses due to higher severity on new and existing claims as compared to the first quarter of 2014. While the number of new claims in the second quarter of 2014 was slightly lower than in the first quarter of 2014, the new claims had higher average claim reserves as a result of a shift to policies with higher daily benefits, as well as policies with lifetime benefits, for which claims are expected to be paid for a longer period of time. Severity of existing claims was also higher in the second quarter of 2014 compared to the first quarter of 2014 as fewer claims were closed during the second quarter of 2014, which contributed to higher paid claims and a higher ending claim reserve.

We expect to complete our 2014 annual U.S. GAAP margin analysis during the fourth quarter of 2014. Currently, the assumptions that have the most significant impact on our margins are morbidity, lapse rates, in-force rate increases and discount rate. To the extent we change some of our assumptions as part of the

comprehensive review of our long-term care insurance claim reserves, these changes could have a significant impact on our margins on this business.

The annual loss ratios of our long-term care insurance business have ranged from 62% to 68% over the last five years and have been increasing over the past several years. We experience volatility in our loss ratios on a quarterly basis, which has produced loss ratios outside of the annual range, from period-to-period caused by variances in terminations, claim severity and changes in claim counts. Our rate actions may cause fluctuations in our loss ratios mainly when policyholders choose a reduced benefit option and reserves are adjusted during the period to reflect the policy modification. In addition, we evaluate claim reserves (including the underlying assumptions, e.g., morbidity) and refine our estimates from time to time which may also cause volatility in our operating results and loss ratios.

Our long-term care insurance sales decreased 42% during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 and increased 18% in the second quarter of 2014 from the first quarter of 2014. The lower sales in part reflected changes to our ability to generate consumer leads through affinity relationships, including the fact that effective June 1, 2013, we no longer offer AARP-branded long-term care insurance products. We have also been affected by the long-term care insurance industry trends in sales which were down approximately 30% year over year as companies have introduced price increases and product changes coupled with consumer concern tied to industry rate actions. In 2013, we also took steps to improve our profit and risk profile with the introduction of a product that included gender distinct pricing for single applicants and blood and lab underwriting requirements for all applicants. That product has been launched and is currently being sold in 47 states. In addition, in the fourth quarter of 2013, we began filing for regulatory approval of a new product which gives consumers the flexibility to choose the right fit for their long-term care needs, combined with the simplicity of prepackaged benefits. As of June 30, 2014, this new product had been filed in 50 states and approved in 45 states, and was launched in 42 states on July 21, 2014. In support of these products, we are continuing to invest in distribution and marketing to increase long-term care insurance sales over time and expect to see some impact from these actions during the second half of 2014.

We also manage risk and limit capital allocated to our long-term care insurance business through utilization of internal and external reinsurance in the form of coinsurance. We have a portion of our long-term care insurance business reinsured internally by one of our Bermuda-domiciled captive life reinsurance subsidiaries. One of our strategic priorities is to repatriate our long-term care insurance business into our U.S.-domiciled life insurance company which we will likely complete in 2015. There will be no impact on our U.S. generally accepted accounting principles (“U.S. GAAP”) consolidated results of operations and financial condition as the financial impact of this reinsurance eliminates in consolidation and we anticipate a modest impact on our U.S. life insurance company risk-based capital ratio. In the first quarter of 2014, we executed an external reinsurance agreement reinsuring 20% of all sales of the product introduced in early 2013. In July 2014, we executed an external reinsurance agreement reinsuring 20% of all sales of the product launched in July 2014. External new business reinsurance levels vary and are dependent on a number of factors, including price, risk tolerance and capital levels. Over time, there can be no assurance that affordable, or any, reinsurance will continue to be available.

As a result of ongoing challenges in our long-term care insurance business, we continue pursuing initiatives to improve the risk and profitability profile of our business including: price increases on our in-force liabilities; product refinements; changes to our current product offerings in certain states; investing in care coordination capabilities and service offerings; refining underwriting requirements; maintaining tight expense management; actively exploring additional reinsurance strategies; executing effective investment strategies; and considering other actions to improve the performance of the overall block. These efforts have included evaluating the need for future in-force premium rate increases on issued policies. In the third quarter of 2012, we initiated a round of long-term care insurance in-force premium rate increases with an expectation of achieving an average premium increase in excess of 50% on the older generation policies and an average premium increase in excess of 25% on an earlier series of new generation policies. Subject to regulatory approval, this premium rate increase is

expected to generate approximately $250 million to $300 million of additional annual premiums when fully implemented over the next several years. We also expect our reserve levels, and thus our expected profitability, to be impacted by policyholder behavior which could include taking reduced benefits or non-forfeiture options within their policy coverage. The goal of our rate actions is to mitigate losses on the older generation products and help offset higher than priced-for loss ratios due to unfavorable business mix and lower lapse rates than expected on certain newer generation products which remain profitable but with returns lower than original expectations. As of June 30, 2014, this round of rate actions had been approved in 43 states. After refining our net premium projections, our revised estimate of the net premiums increase from these 43 state approvals is approximately $190 million to $200 million when fully implemented by 2017. In the third quarter of 2013, we began filing for regulatory approval for premium rate increases ranging between 6% and 13% on more than $800 million in annualized in-force premiums on another series of new generation policies. As of June 30, 2014, we have received approvals in 18 states. The premium rate increases on these policies will help offset higher than priced-for loss ratios, which have been caused by lower than anticipated lapse rates and improvements in life expectancy. The approval process of an in-force rate increase and the amount and timing of the rate increase approved varies by state. In certain states, the decision to approve or disapprove a rate increase can take several years. Upon approval, insureds are provided with written notice of the increase and increases are generally applied on the insured’s policy anniversary date. Therefore, the benefits of any rate increase are not fully realized until the implementation cycle is complete.

Continued low interest rates have put pressure on the profitability and returns of our long-term care insurance business as higher yielding investments have matured and been replaced with lower yielding investments. We seek to manage the impact of low interest rates through asset-liability management combined with hedging strategies for our long-term care insurance product cash flows.

Fixed annuities. Results of our fixed annuities business are affected by investment performance, interest rate levels, slope of the interest rate yield curve, net interest spreads, equity market conditions, mortality, policyholder surrenders, expense and commission levels, new product sales, competitor actions and competitiveness of our offerings. Our competitive position within many of our distribution channels and our ability to grow this business depends on many factors, including product offerings and relative pricing.

In fixed annuities, sales may fluctuate as a result of consumer demand, competitor actions, changes in interest rates, credit spreads, relative pricing, return on capital decisions and our approach to managing risk. We monitor and change prices and crediting rates on fixed annuities to maintain spreads and targeted returns. We have targeted distributors and producers and maintained sales capabilities that align with our strategy. We expect to continue to manage these distribution relationships while selectively adding or shifting towards other product offerings, including fixed indexed annuities.

In December 2011, we introduced new fixed indexed annuities to our product offering. Equity market performance and volatility could result in additional gains or losses, although associated hedging activities are expected to mitigate these impacts.

Refinements of product offerings and related pricing, including ongoing evaluation of commission structures and changes in investment strategies, support our objective of achieving appropriate risk-adjusted returns. Sales of fixed annuities increased $630 million during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase in sales was a function of increased penetration in the indexed annuity market, higher overall interest rate environment in the current year compared to the first half of 2013, and relatively low sales in the first half of 2013 due to price competition.

International Mortgage Insurance

Results of our international mortgage insurance business are affected by changes in regulatory environments, employment levels, consumer borrowing behavior, lender mortgage-related strategies, including lender servicing practices, and other economic and housing market influences, including interest rate trends,

home price appreciation or depreciation, mortgage origination volume, levels and aging of mortgage delinquencies and movements in foreign currency exchange rates.

Canada and Australia comprise approximately 98% of our international mortgage insurance primary risk in-force. These established markets will continue to be key drivers of revenues and earnings in our international mortgage insurance business. During 2013 and the first quarter of 2014, foreign currencies continued weakening against the U.S. dollar, which negatively impacted the underlying reported results of our international mortgage insurance business. However, during the second quarter of 2014, many foreign currencies, including the Canadian dollar and the Australian dollar strengthened relative to the U.S. dollar. Any future movement in foreign exchange rates could impact future results.

In Canada, stable economic conditions have persisted with housing affordability benefiting from low interest rates and employment growth. While the unemployment rate decreased slightly during 2013 and into the first quarter of 2014, it increased slightly during the second quarter of 2014 but remained near its lowest level since December 2008. We expect the unemployment rate to stay near current levels throughout 2014. Additionally, average home prices increased modestly during 2013 and into the first half of 2014 and we expect home prices to remain flat or increase modestly in 2014, as a balanced housing market persists. However, some market observers have expressed concerns about the strength of the Canadian housing market, and we will continue to closely monitor the market. The Bank of Canada has maintained the overnight rate at 1.0% during recent years and we expect this rate to be maintained at or near this level in 2014.

We believe the favorable macroeconomic factors in Canada are supportive of a relatively stable housing market, including the high loan-to-value mortgage market. Going forward, we expect the growth rate of the high loan-to-value market to keep pace with growth in the overall housing resale market and home price appreciation. We expect that the 2014 residential mortgage insurance premium opportunity for high loan-to-value mortgages will be modestly higher than in 2013, in line with the expected increase in housing resale activity and an increase in mortgage insurance premium rates by an average of 15%, which became effective May 1, 2014 for new business.

In the 2013 federal budget, the Canadian government proposed to gradually limit the insurance of low loan-to-value mortgages to only those mortgages that will be used in the Canada Mortgage and Housing Corporation (“CMHC”) securitization programs. In addition, the Canadian government intends to prohibit the use of any taxpayer-backed insured mortgage, both high and low loan-to-value, as collateral in securitization vehicles that are not sponsored by CMHC. We are in ongoing discussions with the Canadian government as it designs the structure to implement the proposed changes. It is difficult to determine the impact of the changes on the business until all the related legislation has been introduced. We anticipate the proposed changes will be implemented in 2014. Flow new insurance written in Canada in 2013 decreased modestly primarily due to a smaller mortgage origination market, particularly for high loan-to-value refinance transactions, as a result of recent revisions to mortgage insurance eligibility rules. During the second quarter of 2014, flow new insurance written increased compared to the first quarter of 2014 primarily from a harsh and prolonged winter that we believe delayed home sales in the first quarter of 2014. Flow new insurance written in the second quarter of 2014 was lower than the second quarter of 2013 primarily due to foreign exchange rate fluctuations. As our large 2007 and 2008 book years are mostly past their peak earnings period, earned premiums in Canada declined in 2013 and into the first half of 2014.

During 2013, losses in Canada decreased from previous levels as the total number of delinquencies and the proportion of new higher severity delinquencies declined, and we continued to realize benefits from our loss mitigation activities. Losses decreased sequentially during each of the four quarters of 2013 and into the first half of 2014 due to fewer new delinquencies as a result of strong credit quality of recent books and a stable economic environment, and a lower average reserve per delinquency due to a higher proportion of delinquencies in provinces where severity has been lower and home prices have appreciated.

In Australia, the overall economy continued to expand during 2013 and into the first half of 2014, though at a more modest pace than in prior years, with ongoing evidence of variation in economic activity across sectors

and regions. At the same time, housing activity improved primarily from sustained low interest rates. The unemployment rate increased slightly during 2013, remaining close to its highest level in three years. It remained consistent through March 2014 and increased in June 2014. The unemployment rate is expected to increase modestly from current levels through 2014. The overall housing market in Australia improved during 2013 and through the first half of 2014. During 2013, average home prices improved across all regions and during the first half of 2014 grew at the highest rate since early 2010. We expect average national home prices to increase modestly throughout the remainder of 2014. During recent years, the Reserve Bank of Australia has gradually lowered the official cash rate to 2.50%, with the latest interest rate cut occurring in August 2013, as Australian and global economic conditions were somewhat weaker than expected. This historically low level of interest rates is now below the low point reached during the global financial crisis when rates were lowered to 3.00%. While we do not expect cash rates to be reduced significantly from the current level in 2014, the Reserve Bank of Australia has indicated that it will continue to monitor the outlook and adjust monetary policy as needed to support the broader economy.

Total mortgage market activity in Australia improved during 2013 as consumer confidence improved and affordability rose to its highest level in recent years. In the first half of 2014, although home price appreciation reduced housing affordability, demand for housing activity was driven by low interest rates, limited new supply and population growth. This growth was also reflected in the higher loan-to-value mortgage origination market, and has underpinned improving levels of flow new insurance written throughout 2013. Earned premiums in Australia increased during 2013 and the first half of 2014 (excluding foreign exchange impacts) as a result of higher written premiums and the seasoning of our in-force block of business.

The overall delinquency rate continued to decrease during 2013 and the first quarter of 2014, with an expected minor seasonal increase occurring in the second quarter of 2014. The level and number of paid claims in 2013 and the first half of 2014 continued to decline due to increased borrower sales activity as well as improved severity. Losses declined sequentially throughout 2013 driven by fewer claims paid, increased borrower sales activity and improved severity. During the second quarter of 2014, losses were lower compared to the second quarter of 2013 due to a strong housing market driven by lower interest rates and stable macroeconomic conditions.

On May 15, 2014, Genworth Mortgage Insurance Australia Limited (“Genworth Australia”), a holding company for Genworth’s Australian mortgage insurance business, priced its initial public offering (“IPO”) of 220,000,000 of its ordinary shares at an initial public offering price of AUD$2.65 per ordinary share. The offering closed on May 21, 2014. Following completion of the offering, Genworth Financial beneficially owns 66.2% of the ordinary shares of Genworth Australia.

The overall economic environment in Europe began recovering in the second quarter of 2013 and is expected to continue to improve in 2014, but remains fragile. As a result of the lingering economic recession, we have seen an elevated number of delinquencies and lower cures, most notably in Ireland, contributing to losses in our European mortgage insurance business. In Ireland, we experienced increased delinquencies and reserves at the beginning of 2013 but more recently have observed a moderate improvement primarily driven by our loss mitigation efforts and lower number of new delinquencies. In the fourth quarter of 2013, lender settlements, primarily in Ireland, reduced delinquencies by approximately 2,400 and the outstanding risk in-force in Ireland by approximately 50%. For the remainder of 2014, we expect to continue our strategy of only writing new business in Italy, Finland, Germany and the United Kingdom.

U.S. Mortgage Insurance

Results of our U.S. mortgage insurance business are affected by the following factors: competitor actions; unemployment; underemployment; other economic and housing market trends, including interest rates, home prices, mortgage origination volume mix and practices; the levels and aging of mortgage delinquencies, which may be affected by seasonal variations, the inventory of unsold homes, lender modification and other servicing efforts; and resolution of pending or any future litigation among other items. The impact of prior years’ weakness

and uncertainty in the domestic economy, related levels of unemployment and underemployment and resulting increase in foreclosures, the number of borrowers seeking loan modifications and the level of housing inventories with the related impact on home values, all combined to contribute adversely to the performance of our insured portfolio relating to our 2005 through 2008 book years. Going forward, we expect moderate economic growth characterized by ongoing modest improvement in home values coupled with an expectation that unemployment and underemployment levels will continue to gradually decrease over time. Our profitability expectations are subject to the continued recovery of the U.S. housing market, the extent of seasonality that has been historically experienced in the second half of the year, and certain other items such as the cost of resolution of pending litigation.

Prior to 2012, the convergence of a weak housing market, tightened lending standards, the lack of consumer confidence and the lack of liquidity in some mortgage securitization markets, along with volatility in mortgage interest rates, came together to drive a smaller mortgage origination market. During this same period, the private mortgage insurance penetration rate was driven down by growth in the Federal Housing Administration (“FHA”) originations, associated with multiple pricing, underwriting and loan size factors, and the negative impact of GSE guarantee fees and loan level pricing which made private mortgage insurance solutions less competitive with FHA solutions. Driven by lower interest rates and a strong refinancing market, the mortgage originations market recovered and strengthened during 2012 and 2013. During this same period, the private mortgage insurance industry saw its market penetration rate improve as the private mortgage insurance industry became more competitive versus the FHA alternative driven in part by FHA price, risk management and cancelability actions. In the first quarter of 2014, mortgage originations were lower than those in the prior quarter as a result of expected seasonal trends, lower refinance activity and adverse weather conditions throughout much of the United States, while the private mortgage insurance penetration rate was flat quarter over quarter. In the second quarter, the mortgage originations market rebounded due to expected seasonal improvement and from the weather related lows experienced in the first quarter. Purchase originations, which grew faster than refinancing activities over this same period, drove an increase in the private mortgage insurance penetration rate from the prior quarter. As the mortgage originations market moves from a higher level of refinancing activities to that of a higher purchase origination market, we continue to believe the private mortgage insurance industry is likely to regain market share over time absent any other market forces. While tightened credit standards for mortgage originations remain in place, we are seeing a modest easing of lender credit policy standards for loans that fall within our own credit guidelines. In December 2013, the acting director of the Federal Housing Finance Agency (“FHFA”) published a proposal to increase GSE loan fees. In January 2014, the newly appointed director of the FHFA suspended implementation of the proposed increases. FHFA subsequently published a request for input on a series of questions related to GSE fee policy and implementation. Responses to the request are due August 4, 2014. Changes to the existing GSE fees could have an impact on mortgage originations and on the competitiveness of private mortgage insurance versus that of FHA insurance.

In late 2013, we announced reduced pricing and expanded underwriting guidelines that are more in line with industry prices and guideline standards, which we believe over time will increase our competitiveness in the mortgage insurance market while maintaining what we believe will be a profitable book of business. As a result, our U.S. mortgage insurance market share in the second quarter of 2014 is up slightly compared with the first quarter of 2014 driven in part by the impact of favorable pricing over prior periods and our differentiated service offering. Our recent principal sources of competition include other private mortgage guaranty insurers, but we cannot predict the impact on our business of the change in the mix of private mortgage guaranty insurer competition following the financial crisis when certain legacy competitors ceased writing new business while other new entrants began writing business in recent periods. Even though home affordability is above historical levels in certain regions of the United States, an ongoing rise in interest rates may slow the housing recovery. Conversely, rising interest rates and resulting slowing down of refinance activity levels improves the persistency levels of our insured portfolio as fewer loans pay off and corresponding mortgage insurance coverage remains in force. Meanwhile, we continue to manage the quality of new business through prudent underwriting guidelines, which we modify from time to time when circumstances warrant in a manner we expect will limit the amount of coverage we write on riskier loans. As of June 30, 2014, loans modified through the Home Affordable Refinance

Program (“HARP”), accounted for approximately $0.4 billion of insurance in the second quarter of 2014, and approximately $19.2 billion of insurance for the ever to-date period through June 30, 2014. For financial reporting purposes, we report HARP modified loans as a modification of the coverage on existing insurance in-force rather than new insurance written. Loans modified through HARP have extended amortization periods and reduced interest rates, which reduce borrower’s monthly payments. Over time, these modified loans are expected to result in extended premium streams and a lower incidence of default. The government has recently extended HARP through the year ending December 31, 2016.

In June 2013, the FHFA announced strategic priorities for the GSEs and indicated that there could be changes to the guidelines contained within the private mortgage insurer eligibility requirements (the “PMIERs”). On July 10, 2014, at the direction of the FHFA each GSE released publicly a draft of their respective revised PMIERs. These guidelines, as drafted, contemplate an effective date for compliance 180 days after the final publication date, which final publication is anticipated to be on or about year-end 2014. In addition, the guidelines permit a transition period, subject to GSE approval, of two years from the publication date to meet the required capital levels. We will provide comments, which are due September 8, 2014, pursuant to the request for input and we will continue to work with the FHFA and GSEs over the 60-day public comment period in an effort to make appropriate refinements before the new guidelines are finalized.

The FHFA and the GSEs have stated that the revised PMIERs are primarily intended to strengthen counterparty operational and financial requirements for qualified mortgage insurers. More specifically, these guidelines establish performance monitoring policies and procedures as well as define claim remediation options for mortgage insurers. The operational requirements contained within the revised guidelines update existing requirements regarding operational standards and practices and impose strict control over master policy terms, claims processing routines and claim loss mitigation activities. There is also a strong focus within the operational requirements guidelines on mortgage insurers quality control requirements and lender/servicer performance monitoring practices. In addition, the requirements include an operational scorecard reporting mechanism. The revised financial requirements within the guidelines include the establishment of a new risk-based sources and uses capital adequacy test for qualified mortgage insurers, which includes a minimum available asset requirement of $400 million and a risk-based required available asset amount of not less that 5.6% of a qualified insurer’s performing risk in-force. Asset restrictions within the guidelines limit available assets to highly liquid securities, including cash, bonds and publicly traded common and preferred stock, which are to be recorded as available assets at market capitalization value discounted by 25%. Capital requirements within the guidelines also vary by the attributes associated with the underlying insured loans. For example, capital requirements are higher for a non-performing insured in-force portfolio or one comprised of lower credit quality insured loans, such as those with low Fair Isaac Company credit scores or higher loan-to-value attributes. Conversely, capital requirements within the guidelines are lower for a performing in-force portfolio or a portfolio comprised of loans with higher credit quality attributes.

Based on our current views of the U.S. housing market, expected earnings and capital generation from our U.S. mortgage insurance business, anticipated prepayment of our in-force portfolio in the ordinary course, the amount and loan characteristics of new U.S. mortgage insurance business anticipated to be written and the $300 million contributed in the second quarter of 2014, which had been previously set aside, our preliminary estimate of the additional capital required to be fully compliant, assuming an effective date of June 30, 2015, will be between $450 million to $550 million and will decrease to less than $175 million by December 31, 2016. We have a variety of capital resources that could be utilized to satisfy capital requirements, and initially intend to utilize reinsurance transactions, and if needed, cash available at the holding company, which includes the proceeds of the completed Australian IPO, to fund them. Other potential sources include, but are not limited to, continued earnings from the business, available deferred tax assets, and proceeds from the issuance of securities at Genworth Financial or Genworth Holdings.

GSEs if we do not comply by the anticipated effective date. We believe that our U.S. mortgage insurance business is well positioned to meet the draft version of the operational and financial requirements contained in the revised guidelines within the prescribed transition period and expect the business to maintain its strong presence in the private mortgage insurance market.

In December 2013, Genworth Holdings issued $400 million of senior notes in anticipation of increased capital requirements then expected to be imposed by the GSEs in connection with their revised PMIERs. Following the issuance of the senior notes in December 2013, Genworth Financial contributed $100 million of the proceeds to Genworth Mortgage Insurance Corporation (“GEMICO”), our primary U.S. mortgage insurance subsidiary, with an additional $300 million contributed to Genworth Mortgage Holdings, LLC, a U.S. mortgage holding company. In advance of the release of the draft PMIERs, in May 2014, we contributed the $300 million that was being held at the U.S. mortgage holding company to GEMICO.

As of June 30, 2014, reflecting the favorable impact of the above-referenced $300 million capital contribution in May 2014, GEMICO’s risk-to-capital ratio under the current regulatory framework as established under North Carolina law and enforced by the North Carolina Department of Insurance (“NCDOI”), GEMICO’s domestic insurance regulator, was approximately 14.0:1, compared with a risk-to-capital ratio of approximately 18.4:1 as of March 31, 2014. This risk-to-capital ratio remains below the NCDOI’s maximum risk-to-capital ratio of 25:1. The NCDOI’s current regulatory framework by which GEMICO’s risk-to-capital ratio is calculated differs from the draft capital requirement methodology that is intended to be effective under the new PMIERs once those new regulations are implemented. GEMICO’s ongoing risk-to-capital ratio will depend principally on the magnitude of future losses incurred by GEMICO, the effectiveness of ongoing loss mitigation activities, new business volume and profitability, as well as the amount of policy lapses and the amount of additional capital that is generated within the business or capital support (if any) that we provide. Our estimate of the amount and timing of future losses is inherently uncertain, requires significant judgment and may change significantly over time.

The NAIC is reviewing the current Mortgage Guaranty Model Act, including minimum capital and surplus requirements for mortgage insurers through the Mortgage Guaranty Insurance Working Group (the “MGIWG”). The MGIWG has not established a date by which it must make proposals to change such requirements. However, as we learn more specific information about these NAIC activities, we continue to assess the potential impact, if any, that these new requirements may have on our U.S. mortgage insurance business and evaluate the options potentially available to meet any legislative or regulatory measures adopted as a result of the NAIC recommendations.

Effective July 2013, Fannie Mae no longer purchases loans with down payments of less than 5% (subject to certain limited exceptions). Freddie Mac has had a similar policy in place since June 2011. We believe this will limit the demand for private mortgage insurance on loans with down payments below 5%. In addition, FHFA issued for comment a proposal to reduce GSE loan limits. Comments on that proposal were due in March 2014 and the FHFA has not yet issued a final determination. If implemented, these actions could also limit demand for mortgage loans with private mortgage insurance coverage. In August 2013, U.S. federal regulators issued a notice of revised proposed rules to implement the credit risk retention provision under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The revised rules propose to define “qualified residential mortgages” to include low-down-payment mortgage loans, which is consistent with the definition of “qualified mortgages” that is already adopted by the Consumer Financial Protection Bureau (“CFPB”). If finalized, this rule would have the effect of including many low-down-payment mortgage loans within the definition of qualified residential mortgage, which could increase the demand for mortgage loans with private mortgage insurance coverage. We also continue to believe that the mortgage insurance industry level of market penetration and eventual market size will continue to be affected by any actions taken by the GSEs, the FHA or the U.S. government impacting housing or housing finance policy, underwriting standards, loan limits or related reforms.

While we continue to experience an ongoing decrease in the level of new delinquencies, the performance of our portfolio continues to be adversely affected by our 2005 through 2008 book years, although we believe these

loans peaked in their delinquency development during the first quarter of 2010. While this amount has declined from prior years, delinquencies for these book years continue as the principal source of new delinquencies reported to us. Beginning in mid-2010, we saw an increase in foreclosure starts as well as an increase in our paid claims as late stage delinquency loans go through foreclosure. While foreclosure starts continue at a pace higher than foreclosure start levels in periods before mid-2010, we are seeing a decline in the number of foreclosure starts currently, which we believe is in part a result of the implementation of a new CFPB mortgage servicing rule (the “CFPB Rule”) that requires lenders and servicers to defer foreclosure starts until a borrower is at least 120-days delinquent to permit possible loan modification or workout solutions. We believe the deferral of the foreclosure start date, coupled with the CFPB Rule’s early intervention provisions that require a lender or servicer to utilize good faith efforts to establish live contact with delinquent borrowers and provide written notice of available loss mitigation options, may result in additional loan workout or modification solutions that would ultimately reduce the number of foreclosure actions from these early stage delinquencies. This decrease in the number of foreclosure starts, along with the declining rate at which foreclosures are initiated, were consistent with the current lower level of early stage or pre-foreclosure delinquencies within our delinquency inventory. In addition, we saw differences in performance among loan servicers regarding the ability to modify loans and avoid foreclosure. Moreover, a lengthening of the foreclosure process itself particularly in judicial foreclosure states has led to increased claims expense relative to foreclosures conducted in the pre-financial crisis environment. Depending on how experience evolves, we may need to adjust our reserve frequency or severity assumptions which could either increase or decrease reserves over time as experience from these programs emerges.

Expanded efforts in the mortgage servicing market to modify loans and improved performance of our 2009 through 2013 book years compared with the performance of prior book years, coupled with the diminished impact of our 2005 through 2008 book years as those loans are resolved, resulted in continued reductions in overall delinquency levels through 2013 and through the first half of 2014. As the aging of delinquencies continued to increase through the first half of 2014, loan modification efforts have continued to remain more difficult to complete. Both foreclosures and liquidations remained elevated through the same period, thereby resulting in ongoing elevated levels of loss reserves and claims. We believe that the ability to cure delinquent loans is dependent upon such things as employment levels, home values and mortgage interest rates. In addition, while we continue to execute on our loan modification strategy, which cures the underlying delinquencies and improves the ability of borrowers to meet the debt service on the mortgage loans going forward, we have seen the level of ongoing loan modification actions moderating during 2011 through the first half of 2014 compared with the levels we experienced during preceding periods. We expect our level of loan modifications to continue to decline going forward in line with the expected reduction in delinquent loans and because of the continuing aging of delinquencies. However, we further expect the rate at which we modify delinquent loans to remain steady as new programs take effect and the overall economy continues improving over time.

Our loss mitigation activities, including those relating to workouts, loan modifications, pre-sales, rescissions, claims administration (including curtailment of claim amounts) and targeted settlements, net of reinstatements or adjustments, resulted in an estimated reduction of expected losses of $216 million and $303 million, respectively, including $156 million and $175 million, respectively, from workouts and loan modifications during the six months ended June 30, 2014 and 2013.

Since 2010, benefits from loss mitigation activities have shifted from rescissions to loan modification activities and reviews of loan servicing and claims administration compliance from which we expect a majority of our loss mitigation benefits to arise going forward. While we expect to continue evaluating compliance of the insured or its loan servicer with respect to its servicing obligations under our master policy for loans insured thereunder and may curtail claim amounts payable based on our evaluations of such compliance, we cannot give assurance on the extent or level at which such claim curtailments will continue. Although loan servicers continue to pursue a wide range of approaches to execute appropriate loan modifications, government-sponsored programs such as Home Affordable Modification Program (“HAMP”) continue to result in fewer modifications as alternative programs have gained momentum. With lower benefits from government-sponsored programs and the

impact from alternative programs to date, we have experienced higher levels of loss reserves and/or paid claims. Recently, the Obama Administration announced that it would extend HAMP through December 31, 2015, and expand borrower eligibility by adjusting certain underwriting requirements. In addition, incentives paid to the owner of a loan that qualifies for principal reduction under HAMP are being increased and, for the first time, will be offered to the GSEs. However, to date, the GSEs are not participating in this program. While the impact of the these program extensions to date has remained positive, there can be no assurance that the increase in the number of loans that are modified under HAMP, including mortgage loans we insure currently, is sustainable over time or that any such modifications will succeed in avoiding foreclosure. In addition, while borrowers who benefitted from loan modifications under HAMP were provided mortgage payment relief through substantial interest rate reductions, beginning in the third quarter of 2014, those same borrowers will begin to experience a gradual interest rate increase of up to 1% a year until their mortgage interest rate adjusts to the market rate at the time of their loan modification. These interest rate resets are in accordance with the terms and conditions agreed to at the time of the underlying HAMP loan modification. While the government and the mortgage services industry remain committed to working with borrowers under this program, we cannot predict how these HAMP interest rate resets will affect the successes achieved under this program or if the resulting effect of avoiding foreclosure is sustainable over time once the impact of the rate reset process evolves. Depending upon the mix of loss mitigation activity, market trends, employment levels in future periods and other general economic impacts which influence the U.S. residential housing market, we could see additional adverse loss reserve development going forward. We expect the primary source of new reserves and losses to come from new delinquencies.

We have lender captive reinsurance programs in place in which we share portions of our premiums associated with flow insurance written on loans originated or purchased by lenders with captive insurance entities of these lenders in exchange for an agreed upon level of loss coverage above a specified attachment point. We have exhausted certain captive reinsurance tiers for our 2004 through 2008 book years based on loss development trends. While we continue to receive cash benefits from these captive arrangements at the time of claim payment, the level of benefit is expected to continue to decline going forward due to exhaustion of reinsurance as more reinsurers satisfy their contractual obligations such that remaining risk is borne by GEMICO. All of our captive reinsurance arrangements are in runoff with no new books of business being added going forward. However, while we have no plans currently to expand our lender captive reinsurance program, we will continue to consider appropriate new third-party reinsurance arrangements as potential available sources of capital for our U.S. mortgage insurance business.

International Protection

Growth and performance of our lifestyle protection insurance business is dependent in part on economic conditions and other factors, including competitor actions, consumer lending and spending levels, unemployment trends, client account penetration and mortality and morbidity trends. Additionally, the types and mix of our products will vary based on regulatory and consumer acceptance of our products.

Although consumer lending levels in Europe have stabilized, they remain challenged particularly given concerns regarding various European economies and the lingering effect of the European debt crisis. Unemployment rates in the second quarter of 2014 remained at levels experienced in the first quarter of 2014 with regional variation; however, in aggregate, European gross domestic product continued to grow in the first half of 2014, building on the growth in the second half of 2013 and reversing the negative trend experienced in the first half of 2013.

Net operating income of our lifestyle protection insurance business for the six months ended June 30, 2014 increased slightly from the six months ended June 30, 2013 as higher premiums and favorable taxes were mostly offset by higher losses and lower net investment income. New claim registrations decreased 16% in the six months ended June 30, 2014 from 2013 levels. We could experience higher losses if claim registrations increase, particularly with continued high unemployment in Europe. Our loss ratio for the six months ended June 30, 2014 was 27% compared to 25% for six months ended June 30, 2013 as losses increased, partially offset by higher premiums in the current year.

In Southern Europe, stressed economies have resulted in a decline in consumer lending where most of our insurance coverages attach as banks tightened lending criteria and consumer demand declined, while in Northern Europe consumer lending levels have stabilized. We have strengthened our focus in Europe on key strategic client relationships and are de-emphasizing our distribution with some other distributors where we are not expect to achieve desired sales and profitability levels. This focus should enable us to better serve our strategic clients and promote improved profitability and a lower cost structure over time. Additionally, we continue to pursue expanding our geographical distribution into Latin America and China and have secured agreements with large insurance partners in both of these regions. We are currently working with these partners to establish product, distribution and servicing capabilities and are now actively selling products in Peru, Colombia and Mexico.

Assuming the economies and lending environment in Europe are stable and do not improve in the near term, we expect our lifestyle protection insurance business to produce only slightly positive earnings in 2014. With our focus on enhanced distribution capabilities in Europe and growth in select new markets, we anticipate these efforts, coupled with sound risk and cost management disciplines, should, over time, improve profitability and help offset the impact of economic or employment pressures as well as lower levels of consumer lending in Europe. However, depending on the economic situation in Europe, we could experience declines in sales and operating results.

Distributor conduct associated with the sale of payment protection insurance products is currently under regulatory scrutiny in Ireland and Italy. While the outcome of these reviews is unknown at this time and our distributors are not Genworth employees, the outcome could impact how the product is distributed and could have a negative impact on our sales.

Runoff

Results of our Runoff segment are affected by investment performance, interest rate levels, net interest spreads, equity market conditions, mortality, policyholder loan activity, policyholder surrenders and scheduled maturities. In addition, the results of our Runoff segment can significantly impact our operating performance, regulatory capital requirements, distributable earnings and liquidity.

In January 2011, we discontinued sales of our individual and group variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts. Since then, equity market volatility has caused fluctuations in the results of our variable annuity products and regulatory capital requirements. In the future, equity and interest rate market performance and volatility could result in additional gains or losses in our variable annuity products although associated hedging activities are expected to partially mitigate these impacts. Volatility in the results of our variable annuity products can result in favorable or unfavorable impacts on earnings and statutory capital. In addition to the use of hedging activities to help mitigate impacts related to equity market volatility and interest rate risks, in the future, we may pursue reinsurance opportunities to further mitigate volatility in results and manage capital.

The results of our institutional products are impacted by scheduled maturities, as well as liquidity levels. However, we believe our liquidity planning and our asset-liability management will mitigate this risk. While we do not actively sell institutional products, we may periodically issue funding agreements for asset-liability matching purposes.

We expect to manage our runoff products for at least the next several years. Several factors may impact the time period for these products to runoff including the specific policy types, economic conditions and management strategies.

Consolidated Results of Operations

The following is a discussion of our consolidated results of operations and should be read in conjunction with “—Business trends and conditions.” For a discussion of our segment results, see “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.”

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table sets forth the consolidated results of operations for the periods indicated:


	Three months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013
Revenues:
Premiums	$	1,343	$	1,286	$	57		4	%
Net investment income		813		821		(8	)	(1	)%
Net investment gains (losses)		34		21		13		62	%
Insurance and investment product fees and other		225		243		(18	)	(7	)%

Total revenues		2,415		2,371		44		2	%

Benefits and expenses:
Benefits and other changes in policy reserves		1,256		1,269		(13	)	(1	)%
Interest credited		184		184		—		—	%
Acquisition and operating expenses, net of deferrals		404		413		(9	)	(2	)%
Amortization of deferred acquisition costs and intangibles		138		137		1		1	%
Interest expense		120		121		(1	)	(1	)%

Total benefits and expenses		2,102		2,124		(22	)	(1	)%

Income from continuing operations before income taxes		313		247		66		27	%
Provision for income taxes		85		73		12		16	%

Income from continuing operations		228		174		54		31	%
Income from discontinued operations, net of taxes		—		6		(6	)	(100	)%

Net income		228		180		48		27	%
Less: net income attributable to noncontrolling interests		52		39		13		33	%

Net income available to Genworth Financial, Inc.’s common stockholders	$	176	$	141	$	35		25	%

Premiums. Premiums consist primarily of premiums earned on insurance products for life, long-term care and accident and health insurance, single premium immediate annuities and structured settlements with life contingencies, lifestyle protection insurance and mortgage insurance.

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Our International Protection segment increased $45 million, including an increase of $10 million attributable to changes in foreign exchange rates, primarily due to $27 million of premiums driven by an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting and higher volume driven by growth in France from a new client in the current year. These increases were partially offset by lower premiums from our runoff clients.

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Our U.S. Life Insurance segment increased $24 million mainly related to our long-term care insurance business from $25 million of increased premiums from in-force rate actions and growth of our in-force block from new sales in the current year.

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Our International Mortgage Insurance segment decreased $14 million, including a decrease of $21 million attributable to changes in foreign exchange rates. Excluding the effects of foreign exchange, premiums increased driven by Australia primarily as a result of the seasoning of our in-force block of business as larger, newer books reach their peak earnings period and higher premiums resulting from policy cancellations and new insurance written, partially offset by higher ceded reinsurance premiums in the current year. This increase was partially offset by $13 million of lower premiums in Canada primarily driven by changes in foreign exchange rates and the seasoning of our larger 2007 and 2008 in-force blocks of business, which are past their peak earnings period. Other Countries also decreased $2 million primarily as a result of lower premiums attributable to lender settlements in the prior year and higher ceded reinsurance premiums in the current year.

Net investment income. Net investment income represents the income earned on our investments.

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Annualized weighted-average investment yields were 4.6% and 4.8% for the three months ended June 30, 2014 and 2013, respectively. Annualized weighted-average investment yields decreased primarily attributable to lower reinvestment yields on higher average invested assets in the current year.

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The three months ended June 30, 2014 included a decrease of $5 million attributable to changes in foreign exchange rates.

Net investment gains (losses). Net investment gains (losses) consist primarily of realized gains and losses from the sale or impairment of our investments and unrealized and realized gains and losses from our trading securities and derivative instruments. For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

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We recorded $2 million of net other-than-temporary impairments during the three months ended June 30, 2014 compared to $5 million during the three months ended June 30, 2013. Of total impairments during the three months ended June 30, 2014 and 2013, $1 million and $3 million, respectively, related to structured securities, including $1 million related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities for both periods. During the three months ended June 30, 2014 and 2013, we also recorded $1 million and $2 million, respectively, of impairments related to commercial mortgage loans.

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Net investment losses related to derivatives of $7 million during the three months ended June 30, 2014 were primarily associated with guaranteed minimum withdrawal benefit (“GMWB”) losses, including decreases in the values of instruments used to protect statutory surplus from equity market fluctuation. We also had losses related to derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries, as well as losses related to a non-qualified derivative strategy to mitigate interest rate risk with our statutory capital positions. These losses were partially offset by gains related to derivatives used to hedge foreign currency risk of assets held and proceeds from the IPO of our Australian mortgage insurance business. In addition, there were gains related to our hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to a decrease in long-term interest rates. Net investment losses related to derivatives of $2 million during the three months ended June 30, 2013 were primarily associated with GMWB losses due to decreases in the values of instruments used to protect statutory surplus from declines in the Standard & Poor’s Financial Services, LLC (“S&P”) index and policyholder funds underperforming as compared to market indices. In addition, there were losses related to our hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to an increase in long-term interest rates. These losses were partially offset by gains related to a non-qualified derivative strategy to mitigate interest rate risk with our statutory capital positions and gains related to derivatives used to hedge foreign currency risk associated with near-term expected dividend payments from certain subsidiaries.

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We recorded lower net gains related to the sale of available-for-sale securities during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Net gains during the three months ended June 30, 2014 included a gain on a previously impaired financial hybrid security that was called by the issuer. We recorded $8 million of gains related to trading securities during the three months ended June 30, 2014 compared to $19 million of losses during the three months ended June 30, 2013 due to higher unrealized gains resulting from changes in the long-term interest rate environment. We also recorded $6 million of lower net gains related to securitization entities during the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily associated with derivatives.

Insurance and investment product fees and other. Insurance and investment product fees and other consist primarily of fees assessed against policyholder and contractholder account values, surrender charges, cost of insurance assessed on universal and term universal life insurance policies, advisory and administration service fees assessed on investment contractholder account values, broker/dealer commission revenues and other fees.

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Our U.S. Life Insurance segment decreased $15 million predominately from our life insurance business largely related to mortality experience in our universal life insurance products and a $4 million unfavorable correction in the current year, as well as a decrease from our term universal life insurance product that we no longer offer.

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Our International Mortgage Insurance segment decreased $4 million primarily due to non-functional currency transactions attributable to changes in foreign exchange rates on partial payments of intercompany loans related to our Australian mortgage insurance business in the current year.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of benefits paid and reserve activity related to current claims and future policy benefits on insurance and investment products for life, long-term care and accident and health insurance, structured settlements and single premium immediate annuities with life contingencies, lifestyle protection insurance and claim costs incurred related to mortgage insurance products.

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Our International Mortgage Insurance segment decreased $35 million, including a decrease of $3 million attributable to changes in foreign exchange rates. In Canada, losses decreased $20 million primarily driven by lower losses incurred as a result of improved performance of our newer in-force blocks of business in the current year and lower severity of claims due to a higher proportion of delinquencies in provinces where severity has been lower and home price appreciation has been higher. In Australia, losses decreased $12 million primarily driven by improved aging on our existing delinquencies from higher home price appreciation and a lower volume of existing delinquencies converting to mortgages in possession in the current year. Paid claims also decreased in the current year as a result of a decrease in both the number of claims and the average claim payment. These decreases were partially offset by a lower cure rate in the current year. Other Countries decreased $3 million primarily from lower new delinquencies, net of cures, and improved aging on our existing delinquencies in the current year. The decrease was also attributable to lender settlements in the prior year.

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Our U.S. Mortgage Insurance segment decreased $35 million primarily driven by fewer new delinquencies, as well as lower reserves on new delinquencies, and improvements in net cures and aging on existing delinquencies in the current year. Reserves for prior year delinquencies benefitted $15 million during the current year from improvements in net cures and aging.

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Our Runoff segment decreased $4 million primarily attributable to a decrease in our guaranteed minimum death benefit (“GMDB”) reserves in our variable annuity products due to favorable equity market performance in the current year.

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Our U.S. Life Insurance segment increased $46 million. Our long-term care insurance business increased $72 million from the aging and growth of our in-force block and higher severity and frequency of new and existing claims in the current year. These increases were partially offset by reduced benefits of $30 million from in-force rate actions and a $4 million unfavorable adjustment in

the prior year that did not recur. Reserves for prior year claims increased $39 million mainly from higher severity of existing claims in the current year. Our life insurance business decreased $23 million primarily related to slower reserve growth resulting from a favorable correction to our term universal life insurance reserves and unlocking of mortality and interest assumptions in the third quarter of 2013. This decrease was partially offset by higher claims in our term and term universal life insurance products in the current year. Our fixed annuities business decreased $3 million largely attributable to lower interest credited on reserves in the current year.

•

Our International Protection segment increased $15 million, including an increase of $3 million attributable to changes in foreign exchange rates, primarily driven by $8 million of higher benefits related to an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. The increase was also driven by higher reserves in France from a new client and higher claims of $3 million related to the ferry disaster in Korea, partially offset by a decline in new claim registrations in the current year.

Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances.

Acquisition and operating expenses, net of deferrals. Acquisition and operating expenses, net of deferrals, represent costs and expenses related to the acquisition and ongoing maintenance of insurance and investment contracts, including commissions, policy issuance expenses and other underwriting and general operating costs. These costs and expenses are net of amounts that are capitalized and deferred, which are costs and expenses that are related directly to the successful acquisition of new or renewal insurance policies and investment contracts, such as first-year commissions in excess of ultimate renewal commissions and other policy issuance expenses.

•

Our U.S. Life Insurance segment decreased $21 million primarily attributable to a decrease in our long-term care insurance business of $10 million predominately related to a $7 million restructuring charge in the prior year that did not recur and from lower production in the current year. Our fixed annuities business decreased $6 million primarily from a favorable adjustment related to guarantee funds in the current year and a restructuring charge in the prior year that did not recur. Our life insurance business decreased $5 million largely from a restructuring charge of $3 million in the prior year that did not recur.

•

Our International Protection segment increased $16 million, including an increase of $7 million attributable to changes in foreign exchange rates, due to higher commissions of $17 million related to an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. This increase was partially offset by lower operating and profit sharing expenses in the current year and a restructuring charge of $4 million in the prior year that did not recur.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles consists primarily of the amortization of acquisition costs that are capitalized, present value of future profits and capitalized software.

•

Our International Protection segment increased $4 million, including an increase of $2 million attributable to changes in foreign exchange rates, as a result of higher premium volume in the current year.

•

Corporate and Other activities decreased $4 million mainly related to higher software allocations to our operating segments in the current year.

Interest expense. Interest expense represents interest related to our borrowings that are incurred at Genworth Holdings or subsidiaries and our non-recourse funding obligations and interest expense related to the Tax Matters Agreement and certain reinsurance arrangements being accounted for as deposits.

Provision for income taxes. The effective tax rate decreased to 27.2% for the three months ended June 30, 2014 from 29.6% for the three months ended June 30, 2013. The decrease in the effective tax rate was primarily attributable to increased tax benefits on lower taxed foreign income, partially offset by the tax effects of stock-

based compensation expense and lower benefits from tax favored investments in the current year. The three months ended June 30, 2014 included a decrease of $5 million attributable to changes in foreign exchange rates.

Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portion of income in a subsidiary attributable to third parties. The increase primarily related to the IPO of our Australian mortgage insurance business in May 2014, which reduced our ownership percentage to 66.2%, resulting in lower net income of $11 million in the current year.

Net income available to Genworth Financial, Inc.’s common stockholders. We had higher net income available to Genworth Financial, Inc.’s common stockholders in the current year primarily related to lower losses in our international mortgage and U.S. mortgage insurance businesses from lower new delinquencies. The increase was also attributable to lower net investment losses, higher tax benefits and $34 million of increased premiums and reduced benefits from in-force rate actions in our long-term care insurance business in the current year. These increases were partially offset by higher severity and frequency on new and existing claims in our long-term care insurance business and overall lower net investment income in the current year. The current year also included a decrease of $11 million attributable to the IPO of 33.8% of our Australian mortgage insurance business. The prior year also included $6 million of income from discontinued operations, net of taxes, related to the sale of our wealth management business that was sold in August 2013. For a discussion of each of our segments and Corporate and Other activities, see the “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.” Included in net income available to Genworth Financial, Inc.’s common stockholders for the three months ended June 30, 2014 was a decrease of $11 million, net of taxes, attributable to changes in foreign exchange rates.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table sets forth the consolidated results of operations for the periods indicated:


	Six months ended June 30,					Increase (decrease) and percentage change
(Amounts in millions)	2014		2013			2014 vs. 2013
Revenues:
Premiums	$	2,650	$	2,547		$	103		4	%
Net investment income		1,618		1,635			(17	)	(1	)%
Net investment gains (losses)		17		(40	)		57		143	%
Insurance and investment product fees and other		452		532			(80	)	(15	)%

Total revenues		4,737		4,674			63		1	%

Benefits and expenses:
Benefits and other changes in policy reserves		2,450		2,470			(20	)	(1	)%
Interest credited		367		368			(1	)	—	%
Acquisition and operating expenses, net of deferrals		782		846			(64	)	(8	)%
Amortization of deferred acquisition costs and intangibles		272		259			13		5	%
Interest expense		247		247			—		—	%

Total benefits and expenses		4,118		4,190			(72	)	(2	)%

Income from continuing operations before income taxes		619		484			135		28	%
Provision for income taxes		172		149			23		15	%

Income from continuing operations		447		335			112		33	%
Loss from discontinued operations, net of taxes		—		(14	)		14		100	%

Net income		447		321			126		39	%
Less: net income attributable to noncontrolling interests		87		77			10		13	%

Net income available to Genworth Financial, Inc.’s common stockholders	$	360	$	244		$	116		48	%

Premiums

•

Our U.S. Life Insurance segment increased $76 million primarily related to our long-term care insurance business from $47 million of increased premiums from in-force rate actions, $14 million of unfavorable adjustments in the prior year that did not recur and growth of our in-force block from new sales in the current year.

•

Our International Protection segment increased $55 million, including an increase of $13 million attributable to changes in foreign exchange rates, from $27 million of higher premiums primarily driven by an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. The increase in the current year was also attributable to higher volume driven by a new client in France and a favorable adjustment of $4 million related to German premium taxes, partially offset by lower premiums from our runoff clients.

•

Our U.S. Mortgage Insurance segment increased $6 million mainly attributable to higher average flow insurance in-force and lower ceded reinsurance premiums in the current year.

•

Our International Mortgage Insurance segment decreased $33 million, including a decrease of $48 million attributable to changes in foreign exchange rates. Excluding the effects of foreign exchange, premiums increased in Australia primarily as a result of the seasoning of our in-force block of business as larger, newer books reach their peak earnings period and higher premiums resulting from policy cancellations and new insurance written, partially offset by higher ceded reinsurance premiums in the current year. This increase was partially offset by a $27 million decrease in Canada primarily driven by changes in foreign exchange rates and the seasoning of our larger 2007 and 2008 in-force blocks of business, which are past their peak earnings period. In Other Countries, premiums decreased $3 million primarily as a result of lower premiums attributable to lender settlements in the prior year and higher ceded reinsurance premiums in the current year.

Net investment income

•

Annualized weighted-average investment yields were 4.6% and 4.7% for the six months ended June 30, 2014 and 2013, respectively. The annualized weighted-average investment yields decreased primarily attributable to lower reinvestment yields on higher average invested assets and $7 million of lower gains related to bond calls and mortgage loan prepayments, partially offset by $16 million of higher gains related to limited partnerships in the current year.

•

The six months ended June 30, 2014 included a decrease of $15 million attributable to changes in foreign exchange rates.

Net investment gains (losses). For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

•

We recorded $3 million of net other-than-temporary impairments during the six months ended June 30, 2014 compared to $17 million during the six months ended June 30, 2013. Of total impairments during the six months ended June 30, 2014 and 2013, $1 million and $9 million, respectively, related to structured securities, including $1 million and $4 million, respectively, related to sub-prime and Alt-A residential mortgage-backed and asset-backed securities. Impairments related to corporate securities as a result of bankruptcies, receivership or concerns about the issuer’s ability to continue to make contractual payments or where we have intent to sell were $6 million during the six months ended June 30, 2013.

•

derivative strategy to mitigate interest rate risk with our statutory capital positions, in addition to losses related to derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries, proceeds from the IPO of our Australian mortgage insurance business and assets held. These losses were partially offset by gains related to our hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to a decrease in long-term interest rates. Net investment losses related to derivatives of $44 million during the six months ended June 30, 2013 were primarily associated with GMWB losses due to decreases in the values of instruments used to protect statutory surplus from declines in the S&P index and policyholder funds underperforming as compared to market indices. In addition, there were losses related to our hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to an increase in long-term interest rates. These losses were partially offset by gains related to a non-qualified derivative strategy to mitigate interest rate risk with our statutory capital positions. Additionally, there were gains on credit default swaps where we sold protection to improve diversification and portfolio yield from narrowing credit spreads.

•

We recorded higher net gains related to the sale of available-for-sale securities during the six months ended June 30, 2014 compared to the six months ended June 30, 2013, including a gain on a previously impaired financial hybrid security that was called by the issuer during the six months ended June 30, 2014. We recorded $20 million of gains related to trading securities during the six months ended June 30, 2014 compared to $9 million of losses during the six months ended June 30, 2013 due to higher unrealized gains resulting from changes in the long-term interest rate environment. We recorded $7 million of lower net gains related to securitization entities during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily related to lower gains on derivatives, partially offset by gains on trading securities in the current year compared to losses in the prior year.

Insurance and investment product fees and other

•

Corporate and Other activities decreased $43 million attributable to the sale of our reverse mortgage business on April 1, 2013.

•

Our U.S. Life Insurance segment decreased $32 million predominately from our life insurance business related to mortality experience in our universal life insurance products and a $4 million unfavorable correction in the current year, as well as a decrease in our term universal life insurance product that we no longer offer.

Benefits and other changes in policy reserves

•

Our International Mortgage Insurance segment decreased $88 million, including a decrease of $8 million attributable to changes in foreign exchange rates. In Australia, losses decreased $43 million primarily driven by improved aging on our existing delinquencies from higher home price appreciation and a lower volume of existing delinquencies converting to mortgages in possession in the current year. Paid claims also decreased in the current year as a result of a decrease in both the number of claims and the average claim payment. In Canada, losses decreased $38 million primarily driven by lower severity of claims due to a higher proportion of delinquencies in provinces where severity has been lower and home price appreciation has been higher and lower losses incurred as a result of improved performance of our newer in-force blocks of business in the current year. In Other Countries, losses decreased $7 million primarily from lower new delinquencies, net of cures, and improved aging on our existing delinquencies in the current year. The decrease was also attributable to lender settlements in the prior year.

•

Our U.S. Mortgage Insurance segment decreased $56 million primarily driven by fewer new delinquencies, as well as lower reserves on new delinquencies, and improvements in net cures and aging on existing delinquencies in the current year, partially offset by a net reserve strengthening of

$17 million in the current year. In the first quarter of 2014, we strengthened reserves to reflect the expectation in future periods of increased claim severity primarily for late-stage delinquencies, partially offset by lower claim rates for early-stage delinquencies. Reserves for prior year delinquencies benefitted $26 million during the current year from improvements in net cures and aging.

•

Our U.S. Life Insurance segment increased $102 million. Our long-term care insurance business increased $108 million primarily from the aging and growth of our in-force block, higher severity and frequency of new and existing claims and $21 million of net favorable adjustments in the prior year that did not recur. These increases were partially offset by reduced benefits of $72 million from in-force rate actions in the current year. Reserves for prior year claims increased $47 million mainly from higher severity of existing claims in the current year. Our life insurance business decreased $6 million primarily related to slower reserve growth resulting from a favorable correction to our term universal life insurance reserves and unlocking of mortality and interest assumptions in the third quarter of 2013. This decrease was largely offset by higher claims in the current year.

•

Our International Protection segment increased $22 million, including an increase of $4 million attributable to changes in foreign exchange rates, primarily driven by $8 million of higher benefits related to an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. The increase was also driven by higher reserves in France from a new client and higher claims of $3 million related to the ferry disaster in Korea, partially offset by a decline in new claim registrations in the current year.

Acquisition and operating expenses, net of deferrals

•

Corporate and Other activities decreased $42 million primarily as a result of a decrease of $46 million associated with our reverse mortgage business which was sold on April 1, 2013, partially offset by higher net expenses after allocations to our operating segments in the current year.

•

Our U.S. Life Insurance segment decreased $23 million from a decrease in our long-term care insurance business of $11 million predominately from a $7 million restructuring charge in the prior year that did not recur and lower production in the current year. Our fixed annuities business decreased $7 million largely from favorable adjustment related to guarantee funds in the current year and a restructuring charge in the prior year that did not recur. Our life insurance business decreased $5 million mainly from a restructuring charge of $3 million in the prior year that did not recur.

•

Our U.S. Mortgage Insurance segment decreased $7 million decreased primarily from a settlement of approximately $4 million with the CFPB to end its review of industry captive reinsurance arrangements in the prior year that did not recur and lower operating expenses in the current year.

•

Our International Mortgage Insurance segment decreased $5 million, including a decrease of $7 million attributable to changes in foreign exchange rates. Excluding the effects of foreign exchange, acquisition and operating expenses, net of deferrals, increased from an $8 million increase in Canada primarily from an early redemption payment of $6 million in May 2014 related to the redemption of Genworth MI Canada Inc.’s (“Genworth Canada”) senior notes that were scheduled to mature in 2015 and higher expenses related to stock options from an increase in the share price in the current year. This increase was partially offset by a $9 million decrease in Australia primarily from lower operating expenses related to contract fees. Other Countries decreased $4 million from lower operating expenses in the current year and a $1 million restructuring charge in the prior year that did not recur.

•

Our International Protection segment increased $15 million, including an increase of $9 million attributable to changes in foreign exchange rates, driven by higher commissions of $17 million related to an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. This increase was partially offset by lower operating and profit sharing expenses in the current year and a restructuring charge of $4 million in the prior year that did not recur.

Amortization of deferred acquisition costs and intangibles

•

Our Runoff segment increased $26 million related to our variable annuity products primarily from lower net investment losses and a change in lapse assumptions in the current year.

•

Our International Protection segment increased $6 million, including an increase of $2 million attributable to changes in foreign exchange rates, mainly as a result of higher premium volume in the current year.

•

Our U.S. Life Insurance segment decreased $11 million. Our life insurance business decreased $15 million primarily related to unfavorable mortality in our universal life insurance products in the current year. Our long-term care insurance business increased $4 million largely related to growth of our in-force block, partially offset by the write-off of computer software included in a restructuring charge in the prior year that did not recur.

•

Corporate and Other activities decreased $6 million mainly related to higher software allocations to our operating segments in the current year.

Provision for income taxes. The effective tax rate decreased to 27.8% for the six months ended June 30, 2014 from 30.8% for the six months ended June 30, 2013. The decrease in the effective tax rate was primarily attributable to increased tax benefits on lower taxed foreign income, prior year favorable tax adjustments of $15 million recorded in the current year and changes in valuation allowances, partially offset by the tax effects of stock-based compensation expense and a decrease in benefits from tax favored investments in the current year. The six months ended June 30, 2014 included a decrease of $11 million attributable to changes in foreign exchange rates.

Net income attributable to noncontrolling interests. The increase primarily related to the IPO of our Australian mortgage insurance business in May 2014, which reduced our ownership percentage to 66.2%, resulting in lower net income of $11 million in the current year.

Net income available to Genworth Financial, Inc.’s common stockholders. We had higher net income available to Genworth Financial, Inc.’s common stockholders in the current year primarily related to significantly lower losses in our U.S. mortgage insurance business. The increase was also attributable to $75 million of increased premiums and reduced benefits from in-force rate actions in our long-term care insurance business in the current year and a $13 million restructuring charge in the prior year that did not recur. These increases were partially offset by higher severity and frequency on new and existing claims in our long-term care insurance business in the current year. The current year also included a decrease of $11 million attributable to the IPO of 33.8% of our Australian mortgage insurance business. The prior year also included a loss of $14 million from discontinued operations, net of taxes, related to the sale of our wealth management business that was sold in August 2013. For a discussion of each of our segments and Corporate and Other activities, see the “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.” Included in net income available to Genworth Financial, Inc.’s common stockholders for the six months ended June 30, 2014 was a decrease of $27 million, net of taxes, attributable to changes in foreign exchange rates.

Reconciliation of net income to net operating income

Net operating income for the three months ended June 30, 2014 was $158 million compared to $133 million for the three months ended June 30, 2013. Net operating income for the six months ended June 30, 2014 was $352 million compared to $284 million for the six months ended June 30, 2013. We define net operating income (loss) as income (loss) from continuing operations excluding the after-tax effects of income attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and infrequent or unusual non-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment of non-recourse funding obligations, early termination fees for other

financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt and gains (losses) on insurance block transactions are also excluded from net operating income (loss) because, in our opinion, they are not indicative of overall operating trends. Other non-operating items are also excluded from net operating income (loss) if, in our opinion, they are not indicative of overall operating trends.

While some of these items may be significant components of net income available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that net operating income, and measures that are derived from or incorporate net operating income, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses net operating income as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from net operating income have occurred in the past and could, and in some cases will, recur in the future. Net operating income is not a substitute for net income available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of net operating income may differ from the definitions used by other companies.

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The following table includes a reconciliation of net income to net operating income for the periods indicated:


	Three months ended June 30,						Six months ended June 30,
(Amounts in millions)	2014			2013			2014			2013
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
Adjustments to net income available to Genworth Financial, Inc.’s common stockholders:
Net investment (gains) losses, net		(20	)		(15	)		(10	)		13
(Gains) losses on early extinguishment of debt, net		2			—			2			—
Expenses related to restructuring, net		—			13			—			13
(Income) loss from discontinued operations, net of taxes		—			(6	)		—			14

Net operating income	$	158		$	133		$	352		$	284

Earnings per share

The following table provides basic and diluted net income available to Genworth Financial, Inc.’s common stockholders and net operating income per common share 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
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

Net operating income per common share:
Basic	$	0.32	$	0.27	$	0.71	$	0.58

Diluted	$	0.31	$	0.27	$	0.70	$	0.57

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

Diluted		503.6		497.5		503.2		497.2

Diluted weighted-average shares outstanding reflect the effects of potentially dilutive securities including stock options, restricted stock units and other equity-based compensation.

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Results of Operations and Selected Financial and Operating Performance Measures by Segment

Our chief operating decision maker evaluates segment performance and allocates resources on the basis of net operating income (loss). See note 9 in our “—Notes to Condensed Consolidated Financial Statements” for a reconciliation of net operating income (loss) of our segments and Corporate and Other activities to net income available to Genworth Financial, Inc.’s common stockholders.

Management’s discussion and analysis by segment contains selected operating performance measures including “sales” and “insurance in-force” or “risk in-force” which are commonly used in the insurance industry as measures of operating performance.

Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refer to: (1) annualized first-year premiums for term life and long-term care insurance products; (2) annualized first-year deposits plus 5% of excess deposits for universal and term universal life insurance products; (3) 10% of premium deposits for linked-benefits products; (4) new and additional premiums/deposits for fixed annuities; (5) new insurance written for mortgage insurance; and (6) net premiums written for our lifestyle protection insurance business. Sales do not include renewal premiums on policies or contracts written during prior periods. We consider annualized first-year premiums/deposits, premium equivalents, new premiums/deposits, new insurance written and net premiums written to be a measure of our operating performance because they represent a measure of new sales of insurance policies or contracts during a specified period, rather than a measure of our revenues or profitability during that period.

Management regularly monitors and reports insurance in-force and risk in-force. Insurance in-force for our life, international mortgage and U.S. mortgage insurance businesses is a measure of the aggregate face value of outstanding insurance policies as of the respective reporting date. For risk in-force in our international mortgage insurance business, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor of 35% that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Canada and Australia. Risk in-force for our U.S. mortgage insurance business is our obligation that is limited under contractual terms to the amounts less than 100% of the mortgage loan value. We consider insurance in-force and risk in-force to be measures of our operating performance because they represent measures of the size of our business at a specific date which will generate revenues and profits in a future period, rather than measures of our revenues or profitability during that period.

We also include information related to loss mitigation activities for our U.S. mortgage insurance business. We define loss mitigation activities as rescissions, cancellations, borrower loan modifications, repayment plans, lender- and borrower-titled pre-sales, claims administration and other loan workouts. Estimated savings related to rescissions are the reduction in carried loss reserves, net of premium refunds and reinstatement of prior rescissions. Estimated savings related to loan modifications and other cure-related loss mitigation actions represent the reduction in carried loss reserves. Estimated savings related to claims mitigation activities represent amounts deducted or “curtailed” from claims due to acts or omissions by the insured or the servicer with respect to the servicing of an insured loan that is not in compliance with obligations under our master policy. For non-cure related actions, including pre-sales, the estimated savings represent the difference between the full claim obligation and the actual amount paid. Loans subject to our loss mitigation actions, the results of which have been included in our reported estimated loss mitigation savings, are subject to re-default and may result in a potential claim in future periods, as well as potential future loss mitigation savings depending on the resolution of the re-defaulted loan. We believe that this information helps to enhance the understanding of the operating performance of our U.S. mortgage insurance business as loss mitigation activities specifically impact current and future loss reserves and level of claim payments.

Management also regularly monitors and reports a loss ratio for our businesses. For our long-term care insurance business, the loss ratio is the ratio of benefits and other changes in reserves less tabular interest on

102

reserves less loss adjustment expenses to net earned premiums. For our mortgage and lifestyle protection insurance businesses, the loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. We consider the loss ratio to be a measure of underwriting performance in these businesses and helps to enhance the understanding of the operating performance of our businesses.

An assumed tax rate of 35% is utilized in certain adjustments to net operating income and in the explanation of specific variances of operating performance.

These operating performance measures enable us to compare our operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources.

The following discussions of our segment results of operations should be read in conjunction with the “—Business trends and conditions.”

U.S. Life Insurance Division

Division results of operations

The following table sets forth the results of operations relating to our U.S. Life Insurance Division for the periods indicated. See below for a discussion by segment.


	Three months ended June 30,					Increase (decrease) and percentage change					Six months ended June 30,					Increase (decrease) and percentage change
(Amounts in millions)	2014		2013			2014 vs. 2013					2014		2013			2014 vs. 2013
Net operating income:
U.S. Life Insurance segment:
Life insurance	$	39	$	27		$	12		44	%	$	60	$	63		$	(3	)	(5	)%
Long-term care insurance		6		26			(20	)	(77	)%		52		46			6		13	%
Fixed annuities		24		26			(2	)	(8	)%		51		55			(4	)	(7	)%

U.S. Life Insurance segment		69		79			(10	)	(13	)%		163		164			(1	)	(1	)%

Total net operating income		69		79			(10	)	(13	)%		163		164			(1	)	(1	)%
Adjustments to net operating income:
Net investment gains (losses), net		17		10			7		70	%		18		2			16		NM	⁽¹⁾
Expenses related to restructuring, net		—		(9	)		9		100	%		—		(9	)		9		100	%

Net income available to Genworth Financial, Inc.’s common stockholders	$	86	$	80		$	6		8	%	$	181	$	157		$	24		15	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

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U.S. Life Insurance segment

Segment results of operations

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:


	Three months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Revenues:
Premiums	$	762		$	738		$	24		3	%
Net investment income		671			658			13		2	%
Net investment gains (losses)		25			17			8		47	%
Insurance and investment product fees and other		175			190			(15	)	(8	)%

Total revenues		1,633			1,603			30		2	%

Benefits and expenses:
Benefits and other changes in policy reserves		1,087			1,041			46		4	%
Interest credited		155			155			—		—	%
Acquisition and operating expenses, net of deferrals		156			177			(21	)	(12	)%
Amortization of deferred acquisition costs and intangibles		81			80			1		1	%
Interest expense		21			24			(3	)	(13	)%

Total benefits and expenses		1,500			1,477			23		2	%

Income from continuing operations before income taxes		133			126			7		6	%
Provision for income taxes		47			46			1		2	%

Income from continuing operations		86			80			6		8	%
Adjustments to income from continuing operations:
Net investment (gains) losses, net		(17	)		(10	)		(7	)	(70	)%
Expenses related to restructuring, net		—			9			(9	)	(100	)%

Net operating income	$	69		$	79		$	(10	)	(13	)%

The following table sets forth net operating income for the businesses included in our U.S. Life Insurance segment for the periods indicated:


	Three months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013
Net operating income:
Life insurance	$	39	$	27	$	12		44	%
Long-term care insurance		6		26		(20	)	(77	)%
Fixed annuities		24		26		(2	)	(8	)%

Total net operating income	$	69	$	79	$	(10	)	(13	)%

104

Net operating income

•

Our life insurance business increased $12 million principally as a result of slower reserve growth resulting from a favorable correction to our term universal life insurance reserves and unlocking of mortality and interest assumptions in the third quarter of 2013. The increase was also attributable to mortality, which improved modestly in the current year.

•

Our long-term care insurance business decreased $20 million largely attributable to higher severity and frequency on new and existing claims in the current year. These decreases were partially offset by $34 million of increased premiums and reduced benefits from in-force rate actions in the current year.

•

Our fixed annuities business decreased $2 million primarily related to lower investment income and unfavorable mortality, partially offset by a favorable adjustment related to guarantee funds in the current year.

Revenues

Premiums. The increase was mainly attributable to our long-term care insurance business largely related to $25 million of increased premiums from in-force rate actions and growth of our in-force block from new sales in the current year.

Net investment income

•

Our life insurance business increased $4 million primarily due to higher average invested assets in the current year.

•

Our long-term care insurance business increased $15 million largely from an increase in average invested assets due to growth of our in-force block in the current year.

•

Our fixed annuities business decreased $6 million principally from $8 million of lower bond calls and mortgage loan prepayments in the current year.

Net investment gains (losses). For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

•

Net investment gains in our life insurance business increased $14 million largely from a gain on a previously impaired financial hybrid security that was called by the issuer in the current year.

•

Our long-term care insurance business had $3 million of net investment gains in the current year primarily from net gains from the sale of investment securities and derivative gains. Net investment losses of $2 million in the prior year were mainly from impairments and net losses from the sale of investment securities.

•

Our fixed annuities business had $1 million of net investment losses in the current year largely from net losses from the sale of investment securities which were mostly offset by derivative gains. Net investment gains of $10 million in the prior year were primarily from a call of an investment security.

Insurance and investment product fees and other. The decrease was primarily attributable to our life insurance business largely related to mortality experience in our universal life insurance products and a $4 million unfavorable correction in the current year, as well as a decrease from our term universal life insurance product that we no longer offer.

Benefits and expenses

Benefits and other changes in policy reserves

•

Our life insurance business decreased $23 million primarily related to slower reserve growth resulting from a favorable correction to our term universal life insurance reserves and unlocking of mortality and interest assumptions in the third quarter of 2013. This decrease was partially offset by higher claims in our term and term universal life insurance products in the current year.

105

•

Our long-term care insurance business increased $72 million primarily from the aging and growth of our in-force block and higher severity and frequency of new and existing claims in the current year. These increases were partially offset by reduced benefits of $30 million from in-force rate actions and a $4 million unfavorable adjustment in the prior year that did not recur. Reserves for prior year claims increased $39 million mainly from higher severity of existing claims in the current year.

•

Our fixed annuities business decreased $3 million largely attributable to lower interest credited on reserves in the current year.

Acquisition and operating expenses, net of deferrals

•

Our life insurance business decreased $5 million largely from a restructuring charge of $3 million in the prior year that did not recur.

•

Our long-term care insurance business decreased $10 million primarily related to a $7 million restructuring charge in the prior year that did not recur and from lower production in the current year.

•

Our fixed annuities business decreased $6 million largely attributable to a favorable adjustment related to guarantee funds in the current year and a restructuring charge in the prior year that did not recur.

Amortization of deferred acquisition costs and intangibles. The increase was primarily related to our long-term care insurance business mostly attributable to growth of our in-force block, partially offset by the write-off of computer software included in a restructuring charge in the prior year that did not recur.

Interest expense. Interest expense decreased driven by our life insurance business principally related to lower letter of credit fees in the current year.

Provision for income taxes. The effective tax rate decreased to 35.3% for the three months ended June 30, 2014 from 36.5% for the three months ended June 30, 2013. The decrease in the effective tax rate was primarily attributable to state income taxes.

106

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:


	Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Revenues:
Premiums	$	1,521		$	1,445		$	76		5	%
Net investment income		1,331			1,296			35		3	%
Net investment gains (losses)		28			5			23		NM	⁽¹⁾
Insurance and investment product fees and other		346			378			(32	)	(8	)%

Total revenues		3,226			3,124			102		3	%

Benefits and expenses:
Benefits and other changes in policy reserves		2,117			2,015			102		5	%
Interest credited		309			307			2		1	%
Acquisition and operating expenses, net of deferrals		317			340			(23	)	(7	)%
Amortization of deferred acquisition costs and intangibles		156			167			(11	)	(7	)%
Interest expense		42			47			(5	)	(11	)%

Total benefits and expenses		2,941			2,876			65		2	%

Income from continuing operations before income taxes		285			248			37		15	%
Provision for income taxes		104			91			13		14	%

Income from continuing operations		181			157			24		15	%
Adjustments to income from continuing operations:
Net investment (gains) losses, net		(18	)		(2	)		(16	)	NM	⁽¹⁾
Expenses related to restructuring, net		—			9			(9	)	(100	)%

Net operating income	$	163		$	164		$	(1	)	(1	)%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

The following table sets forth net operating income for the businesses included in our U.S. Life Insurance segment for the periods indicated:


	Six months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013
Net operating income:
Life insurance	$	60	$	63	$	(3	)	(5	)%
Long-term care insurance		52		46		6		13	%
Fixed annuities		51		55		(4	)	(7	)%

Total net operating income	$	163	$	164	$	(1	)	(1	)%

107

Net operating income

•

Our life insurance business decreased $3 million principally due to higher mortality experience in the first quarter of 2014, partially offset by slower reserve growth resulting from a favorable correction in our term universal life insurance reserves and unlocking of mortality and interest assumptions in the third quarter of 2013.

•

Our long-term care insurance business increased $6 million largely attributable to $75 million of increased premiums and reduced benefits from in-force rate actions in the current year. This increase was largely offset by higher severity and frequency on new and existing claims in the current year.

•

Our fixed annuities business decreased $4 million primarily related to unfavorable mortality and lower investment income, partially offset by a favorable adjustment related to guarantee funds in the current year.

Revenues

Premiums. The increase was attributable to our long-term care insurance business largely related to $47 million of increased premiums from in-force rate actions, $14 million of unfavorable adjustments in the prior year that did not recur and growth of our in-force block from new sales in the current year.

Net investment income

•

Our long-term care insurance business increased $41 million largely from an increase in average invested assets due to growth of our in-force block and an $8 million favorable correction to investment amortization for preferred stock in the current year. Net investment income also included $4 million of higher gains from limited partnerships in the current year.

•

Our fixed annuities business decreased $7 million principally from $6 million of lower bond calls and mortgage loan prepayments in the current year.

Net investment gains (losses). For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

•

Net investment gains in our life insurance business increased $19 million largely from a gain on a previously impaired financial hybrid security that was called by the issuer and lower impairments in the current year.

•

Our long-term care insurance business had $3 million of net investment gains in the current year primarily from derivative gains and net gains from the sale of investment securities. Net investment losses of $5 million in the prior year were mainly from impairments and net losses from the sale of investment securities, partially offset by derivative gains.

•

Net investment gains in our fixed annuities business decreased $4 million principally related to a gain on a call of an investment security in the prior year, partially offset by higher derivative gains and lower impairments in the current year.

Insurance and investment product fees and other. The decrease was primarily attributable to our life insurance business largely related to mortality experience in our universal life insurance products and a $4 million unfavorable correction in the current year, as well as a decrease from our term universal life insurance product that we no longer offer.

108

Benefits and expenses

Benefits and other changes in policy reserves

•

Our life insurance business decreased $6 million primarily related to slower reserve growth resulting from a favorable correction to our term universal life insurance reserves and unlocking of mortality and interest assumptions in the third quarter of 2013. This decrease was largely offset by higher claims in the current year.

•

Our long-term care insurance business increased $108 million primarily from the aging and growth of our in-force block, higher severity and frequency of new and existing claims and $21 million of net favorable adjustments in the prior year that did not recur. These increases were partially offset by reduced benefits of $72 million from in-force rate actions in the current year. Reserves for prior year claims increased $47 million mainly from higher severity of existing claims in the current year.

Acquisition and operating expenses, net of deferrals

•

Our life insurance business decreased $5 million largely from a restructuring charge of $3 million in the prior year that did not recur.

•

Our long-term care insurance business decreased $11 million primarily related to a $7 million restructuring charge in the prior year that did not recur and from lower production in the current year.

•

Our fixed annuities business decreased $7 million predominately from a favorable adjustment related to guarantee funds in the current year and a restructuring charge in the prior year that did not recur.

Amortization of deferred acquisition costs and intangibles

•

Our life insurance business decreased $15 million primarily related to mortality experience in our universal life insurance products in the current year.

•

Our long-term care insurance business increased $4 million largely related to growth of our in-force block, partially offset by the write-off of computer software included in a restructuring charge in the prior year that did not recur.

Interest expense. Interest expense decreased driven by our life insurance business principally related to lower letter of credit fees in the current year.

Provision for income taxes. The effective tax rate decreased to 36.5% for the six months ended June 30, 2014 from 36.7% for the six months ended June 30, 2013. The decrease in the effective tax rate was primarily attributable to state taxes.

109

U.S. Life Insurance selected operating performance measures

Life insurance

The following tables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:


	Three months ended June 30,				Increase (decrease) and percentage change					Six months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013					2014		2013		2014 vs. 2013
Term and whole life insurance
Net earned premiums	$	171	$	173	$	(2	)	(1	)%	$	354	$	354	$	—		—	%
Sales		14		4		10		NM	⁽¹⁾		27		8		19		NM	⁽¹⁾
Term universal life insurance
Net deposits	$	70	$	73	$	(3	)	(4	)%	$	139	$	143	$	(4	)	(3	)%
Sales		—		—		—		—	%		—		1		(1	)	(100	)%
Universal life insurance
Net deposits	$	140	$	127	$	13		10	%	$	268	$	272	$	(4	)	(1	)%
Sales:
Universal life insurance		7		5		2		40	%		13		14		(1	)	(7	)%
Linked-benefits		5		3		2		67	%		7		5		2		40	%
Total life insurance
Net earned premiums and deposits	$	381	$	373	$	8		2	%	$	761	$	769	$	(8	)	(1	)%
Sales:
Term life insurance		14		4		10		NM	⁽¹⁾		27		8		19		NM	⁽¹⁾
Term universal life insurance		—		—		—		—	%		—		1		(1	)	(100	)%
Universal life insurance		7		5		2		40	%		13		14		(1	)	(7	)%
Linked-benefits		5		3		2		67	%		7		5		2		40	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.


	As of June 30,				Percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013
Term and whole life insurance
Life insurance in-force, net of reinsurance	$	341,383	$	336,008		2	%
Life insurance in-force before reinsurance		524,743		528,874		(1	)%
Term universal life insurance
Life insurance in-force, net of reinsurance	$	130,270	$	134,868		(3	)%
Life insurance in-force before reinsurance		131,296		135,937		(3	)%
Universal life insurance
Life insurance in-force, net of reinsurance	$	42,454	$	43,773		(3	)%
Life insurance in-force before reinsurance		49,004		50,558		(3	)%
Total life insurance
Life insurance in-force, net of reinsurance	$	514,107	$	514,649		—	%
Life insurance in-force before reinsurance		705,043		715,369		(1	)%

Term and whole life insurance

Sales of our term life insurance product have increased in the current year from pricing decreases and improved service platforms. Our life insurance in-force, net of reinsurance, increased primarily from sales growth of our term life insurance products and lower ceded reinsurance in the current year. Our life insurance in-force before reinsurance decreased from the runoff of our term life insurance products issued prior to resuming sales of these products and the runoff of our whole life insurance products.

110

Term universal life insurance

We no longer solicit sales of term universal life insurance products; however, we continue to service our existing block of business.

Universal life insurance

Net deposits and sales increased during the three months ended June 30, 2014 compared to the three months ended June 30, 2013 as we transitioned to a new universal life insurance product offering. Our life insurance in-force decreased primarily from lower deposits and sales for the six months ended June 30, 2014. Net deposits and sales decreased during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 from our modification and re-pricing of certain product offerings in response to regulatory changes.

Long-term care insurance

The following table sets forth selected operating performance measures regarding our individual and group long-term care insurance products for the periods indicated:


	Three months ended June 30,						Increase (decrease) and percentage change					Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013					2014			2013			2014 vs. 2013
Net earned premiums:
Individual long-term care insurance	$	553		$	529		$	24		5	%	$	1,092		$	1,019		$	73		7	%
Group long-term care insurance		24			21			3		14	%		50			44			6		14	%

Total	$	577		$	550		$	27		5	%	$	1,142		$	1,063		$	79		7	%

Annualized first-year premiums and deposits:
Individual long-term care insurance	$	24		$	38		$	(14	)	(37	)%	$	45		$	73		$	(28	)	(38	)%
Group long-term care insurance		2			5			(3	)	(60	)%		3			10			(7	)	(70	)%

Total	$	26		$	43		$	(17	)	(40	)%	$	48		$	83		$	(35	)	(42	)%

Loss ratio		73	%		67	%		6	%				68	%		67	%		1	%

The loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums.

Net earned premiums increased for the three and six months ended June 30, 2014 mainly attributable to increased premiums from in-force rate actions of $25 million and $47 million, respectively, and from growth of our in-force block from new sales in the current year. The six months ended June 30, 2013 also included $14 million of net unfavorable adjustments that did not recur.

Annualized first-year premiums and deposits decreased principally from changes in pricing and product options previously announced.

The loss ratio increased for the three months ended June 30, 2014 largely attributable to higher severity and frequency of new and existing claims, partially offset by $55 million of increased premiums and reduced benefits from in-force rate actions and a $4 million unfavorable adjustment in the prior year that did not recur. Reserves for prior year claims increased $39 million during the three months ended June 30, 2014 mainly from higher severity of existing claims in the current year.

The loss ratio increased for the six months ended June 30, 2014 largely attributable to higher severity and frequency of new and existing claims and $7 million of net favorable adjustments in the prior year that did not recur. These increases were mostly offset by $119 million of increased premiums and reduced benefits from in-force rate actions in the current year. Reserves for prior year claims increased $47 million during the six months ended June 30, 2014 mainly from higher severity of existing claims in the current year.

111

Fixed annuities

The following table sets forth selected operating performance measures regarding our fixed annuities as of or for the dates 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
Single Premium Deferred Annuities
Account value, beginning of period	$	12,070		$	10,881		$	11,807		$	11,038
Deposits		404			166			900			234
Surrenders, benefits and product charges		(320	)		(281	)		(632	)		(583	)

Net flows		84			(115	)		268			(349	)
Interest credited		79			76			158			153

Account value, end of period	$	12,233		$	10,842		$	12,233		$	10,842

Single Premium Immediate Annuities
Account value, beginning of period	$	5,875		$	6,319		$	5,837		$	6,442
Premiums and deposits		59			71			108			136
Surrenders, benefits and product charges		(213	)		(228	)		(428	)		(463	)

Net flows		(154	)		(157	)		(320	)		(327	)
Interest credited		67			72			135			145
Effect of accumulated net unrealized investment gains (losses)		103			(224	)		239			(250	)

Account value, end of period	$	5,891		$	6,010		$	5,891		$	6,010

Structured Settlements
Account value, net of reinsurance, beginning of period	$	1,092		$	1,101		$	1,093		$	1,101
Surrenders, benefits and product charges		(21	)		(18	)		(36	)		(33	)

Net flows		(21	)		(18	)		(36	)		(33	)
Interest credited		14			14			28			29

Account value, net of reinsurance, end of period	$	1,085		$	1,097		$	1,085		$	1,097

Total premiums from fixed annuities	$	14		$	15		$	25		$	28

Total deposits from fixed annuities	$	449		$	222		$	983		$	342

Single Premium Deferred Annuities

Account value of our single premium deferred annuities increased as deposits and interest credited outpaced surrenders. Sales have increased driven by competitive pricing while maintaining targeted returns.

Single Premium Immediate Annuities

Account value of our single premium immediate annuities increased compared to March 31, 2014 and December 31, 2013 as unrealized gains, interest credited and premiums and deposits exceeded benefits. Sales continued to be pressured under current market conditions and from continued low interest rates.

Structured Settlements

We no longer solicit sales of structured settlements; however, we continue to service our existing block of business.

112

Valuation systems and processes

Our U.S. Life Insurance segment will continue to migrate to a new valuation and projection platform for certain lines of business, while we upgrade platforms for other lines of business. The migration and upgrades are part of our ongoing efforts to improve the infrastructure and capabilities of our information systems and our routine assessment and refinement of financial, actuarial, investment and risk management capabilities enterprise wide. These efforts will also provide our U.S. Life Insurance segment with improved platforms to support emerging accounting guidance and ongoing changes in capital regulations. Concurrently, valuation processes and methodologies will be reviewed. Any material changes in balances, margins or income trends that may result from these activities will be disclosed accordingly.

Global Mortgage Insurance Division

Division results of operations

The following table sets forth the results of operations relating to our Global Mortgage Insurance Division for the periods indicated. See below for a discussion by segment.


	Three months ended June 30,						Increase (decrease) and percentage change					Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013					2014			2013			2014 vs. 2013
Net operating income (loss):
International Mortgage Insurance segment:
Canada	$	47		$	43		$	4		9	%	$	88		$	85		$	3		4	%
Australia		57			55			2		4	%		119			101			18		18	%
Other Countries		(7	)		(9	)		2		22	%		(11	)		(16	)		5		31	%

International Mortgage Insurance segment		97			89			8		9	%		196			170			26		15	%

U.S. Mortgage Insurance segment		39			13			26		200	%		72			34			38		112	%

Total net operating income		136			102			34		33	%		268			204			64		31	%
Adjustments to net operating income:
Net investment gains (losses), net		4			5			(1	)	(20	)%		3			6			(3	)	(50	)%
Gains (losses) on early extinguishment of debt, net		(2	)		—			(2	)	NM	⁽¹⁾		(2	)		—			(2	)	NM	⁽¹⁾
Expenses related to restructuring, net		—			(1	)		1		100	%		—			(1	)		1		100	%

Net income available to Genworth Financial, Inc.’s common stockholders	$	138		$	106		$	32		30	%	$	269		$	209		$	60		29	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

113

International Mortgage Insurance segment

Segment results of operations

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table sets forth the results of operations relating to our International Mortgage Insurance segment for the periods indicated:


	Three months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Revenues:
Premiums	$	237		$	251		$	(14	)	(6	)%
Net investment income		75			85			(10	)	(12	)%
Net investment gains (losses)		12			13			(1	)	(8	)%
Insurance and investment product fees and other		(4	)		—			(4	)	NM	⁽¹⁾

Total revenues		320			349			(29	)	(8	)%

Benefits and expenses:
Benefits and other changes in policy reserves		45			80			(35	)	(44	)%
Acquisition and operating expenses, net of deferrals		59			61			(2	)	(3	)%
Amortization of deferred acquisition costs and intangibles		15			17			(2	)	(12	)%
Interest expense		8			8			—		—	%

Total benefits and expenses		127			166			(39	)	(23	)%

Income from continuing operation before income taxes		193			183			10		5	%
Provision for income taxes		42			51			(9	)	(18	)%

Income from continuing operations		151			132			19		14	%
Less: net income attributable to noncontrolling interests		52			39			13		33	%

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders		99			93			6		6	%
Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:
Net investment (gains) losses, net		(4	)		(5	)		1		20	%
(Gains) losses on early extinguishment of debt, net		2			—			2		NM	⁽¹⁾
Expenses related to restructuring, net		—			1			(1	)	(100	)%

Net operating income	$	97		$	89		$	8		9	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

114

The following table sets forth net operating income (loss) for the businesses included in our International Mortgage Insurance segment for the periods indicated:


	Three months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Net operating income:
Canada	$	47		$	43		$	4	9	%
Australia		57			55			2	4	%
Other Countries		(7	)		(9	)		2	22	%

Total net operating income	$	97		$	89		$	8	9	%

Net operating income

•

Our Canadian mortgage insurance business increased $4 million, including a decrease of $4 million attributable to changes in foreign exchange rates, primarily attributable to lower losses, partially offset by higher operating expenses and lower premiums in the current year.

•

Our Australian mortgage insurance business increased $2 million, including a decrease of $6 million attributable to changes in foreign exchange rates, primarily from higher premiums and lower losses. Additionally, the IPO of our Australian mortgage insurance in May 2014 reduced our ownership percentage to 66.2%, resulting in lower net operating income of $11 million in the current year.

•

Other Countries’ net operating loss decreased $2 million, including a decrease of $1 million attributable to changes in foreign exchange rates, primarily from lower operating expenses and losses, partially offset by lower premiums in the current year.

Revenues

Premiums

•

Our Canadian mortgage insurance business decreased $13 million, including a decrease of $10 million attributable to changes in foreign exchange rates, primarily driven by the seasoning of our larger 2007 and 2008 in-force blocks of business, which are past their peak earnings period.

•

Our Australian mortgage insurance business increased $1 million, including a decrease of $11 million attributable to changes in foreign exchange rates, primarily as a result of the seasoning of our in-force block of business as larger, newer books reach their peak earnings period and higher premiums resulting from policy cancellations and new insurance written, partially offset by higher ceded reinsurance premiums in the current year.

•

Other Countries decreased $2 million primarily as a result of lower premiums attributable to lender settlements in the prior year and higher ceded reinsurance premiums in the current year.

Net investment income. Net investment income decreased $10 million, including a decrease of $7 million attributable to changes in foreign exchange rates. The decrease was also related to lower reinvestment yields during the current year, mainly in Australia.

Insurance and investment product fees and other. The decrease was primarily due to non-functional currency transactions attributable to changes in foreign exchange rates on partial payments of intercompany loans related to our Australian mortgage insurance business in the current year.

115

Benefits and expenses

Benefits and other changes in policy reserves

•

Our Canadian mortgage insurance business decreased $20 million, including a decrease of $1 million attributable to changes in foreign exchange rates, primarily driven by lower losses incurred as a result of improved performance of our newer in-force blocks of business in the current year and lower severity of claims due to a higher proportion of delinquencies in provinces where severity has been lower and home price appreciation has been higher.

•

Our Australian mortgage insurance business decreased $12 million, including a decrease of $2 million attributable to changes in foreign exchange rates, primarily driven by improved aging on our existing delinquencies from higher home price appreciation and a lower volume of existing delinquencies converting to mortgages in possession in the current year. Paid claims also decreased in the current year as a result of a decrease in both the number of claims and the average claim payment. These decreases were partially offset by a lower cure rate in the current year.

•

Other Countries decreased $3 million primarily from lower new delinquencies, net of cures, and improved aging on our existing delinquencies in the current year. The decrease was also attributable to lender settlements in the prior year.

Acquisition and operating expenses, net of deferrals

•

Our Canadian mortgage insurance business increased $6 million, including a decrease of $2 million attributable to changes in foreign exchange rates, primarily from an early redemption payment of $6 million in May 2014 related to the redemption of Genworth Canada’s senior notes that were scheduled to mature in 2015 and higher expenses related to stock options from an increase in the share price in the current year.

•

Our Australian mortgage insurance business decreased $4 million, including a decrease of $2 million attributable to changes in foreign exchange rates, primarily associated with lower operating expenses related to contract fees, partially offset by higher employee compensation and benefit expenses in the current year.

•

Other Countries decreased $4 million, including an increase of $1 million attributable to changes in foreign exchange rates, primarily from lower operating expenses in the current year. The prior year also included a $1 million restructuring charge that did not recur.

Provision for income taxes. The effective tax rate decreased to 21.8% for the three months ended June 30, 2014 from 27.9% for the three months ended June 30, 2013. The decrease in the effective tax rate was primarily attributable to increased tax benefits from lower taxed foreign income. The three months ended June 30, 2014 included a decrease of $5 million attributable to changes in foreign exchange rates.

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Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table sets forth the results of operations relating to our International Mortgage Insurance segment for the periods indicated:


	Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Revenues:
Premiums	$	472		$	505		$	(33	)	(7	)%
Net investment income		149			173			(24	)	(14	)%
Net investment gains (losses)		9			16			(7	)	(44	)%
Insurance and investment product fees and other		(2	)		—			(2	)	NM	⁽¹⁾

Total revenues		628			694			(66	)	(10	)%

Benefits and expenses:
Benefits and other changes in policy reserves		92			180			(88	)	(49	)%
Acquisition and operating expenses, net of deferrals		108			113			(5	)	(4	)%
Amortization of deferred acquisition costs and intangibles		30			33			(3	)	(9	)%
Interest expense		16			17			(1	)	(6	)%

Total benefits and expenses		246			343			(97	)	(28	)%

Income from continuing operations before income taxes		382			351			31		9	%
Provision for income taxes		98			99			(1	)	(1	)%

Income from continuing operations		284			252			32		13	%
Less: net income attributable to noncontrolling interests		87			77			10		13	%

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders		197			175			22		13	%
Adjustments to income from continuing operations available to Genworth Financial, Inc.‘s common stockholders:
Net investment (gains) losses, net		(3	)		(6	)		3		50	%
(Gains) losses on early extinguishment of debt, net		2			—			2		NM	⁽¹⁾
Expenses related to restructuring, net		—			1			(1	)	(100	)%

Net operating income	$	196		$	170		$	26		15	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

The following table sets forth net operating income for the businesses included in our International Mortgage Insurance segment for the periods indicated:


	Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Net operating income:
Canada	$	88		$	85		$	3	4	%
Australia		119			101			18	18	%
Other Countries		(11	)		(16	)		5	31	%

Total net operating income	$	196		$	170		$	26	15	%

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Net operating income

•

Our Canadian mortgage insurance business increased $3 million, including decrease of $8 million attributable to changes in foreign exchange rates, primarily from lower losses in the current year. This increase was partially offset by higher operating expenses and lower premiums in the current year.

•

Our Australian mortgage insurance business increased $18 million, including a decrease of $18 million attributable to changes in foreign exchange rates, primarily from lower losses and higher premiums. Additionally, the IPO of our Australian mortgage insurance in May 2014 reduced our ownership percentage to 66.2%, resulting in lower net operating income of $11 million in the current year.

•

Other Countries’ net operating loss decreased $5 million, including a decrease of $1 million attributable to changes in foreign exchange rates, primarily from lower losses and operating expenses, partially offset by lower premiums in the current year.

Revenues

Premiums

•

Our Canadian mortgage insurance business decreased $27 million, including a decrease of $21 million attributable to changes in foreign exchange rates, primarily driven by the seasoning of our larger 2007 and 2008 in-force blocks of business, which are past their peak earnings period.

•

Our Australian mortgage insurance business decreased $3 million, including a decrease of $27 million attributable to changes in foreign exchange rates. Excluding the effects of foreign exchange, premiums increased primarily as a result of the seasoning of our in-force block of business as larger, newer books reach their peak earnings period and higher premiums resulting from policy cancellations and new insurance written, partially offset by higher ceded reinsurance premiums in the current year.

•

Other Countries decreased $3 million primarily as a result of lower premiums attributable to lender settlements in the prior year and higher ceded reinsurance premiums in the current year.

Net investment income. Net investment income decreased $24 million, including a decrease of $17 million attributable to changes in foreign exchange rates. The decrease was also primarily due to lower reinvestment yields during the current year, mainly in Australia.

Net investment gains (losses). For further discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.” The decrease was primarily from lower net investment gains related to sales of securities in Canada in the current year.

Benefits and expenses

Benefits and other changes in policy reserves

•

Our Canadian mortgage insurance business decreased $38 million, including a decrease of $3 million attributable to changes in foreign exchange rates, primarily driven by lower severity of claims due to a higher proportion of delinquencies in provinces where severity has been lower and home price appreciation has been higher and lower losses incurred as a result of improved performance of our newer in-force blocks of business in the current year.

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•

Our Australian mortgage insurance business decreased $43 million, including a decrease of $5 million attributable to changes in foreign exchange rates, primarily driven by improved aging on our existing delinquencies from higher home price appreciation and a lower volume of existing delinquencies converting to mortgages in possession in the current year. Paid claims also decreased in the current year as a result of a decrease in both the number of claims and the average claim payment.

•

Other Countries decreased $7 million primarily from lower new delinquencies, net of cures, and improved aging on our existing delinquencies in the current year. The decrease was also attributable to lender settlements in the prior year.

Acquisition and operating expenses, net of deferrals

•

Our Canadian mortgage insurance business increased $8 million, including a decrease of $3 million attributable to changes in foreign exchange rates, primarily from an early redemption payment of $6 million in May 2014 related to the redemption of Genworth Canada’s senior notes that were scheduled to mature in 2015 and higher expenses related to stock options from an increase in the share price in the current year.

•

Our Australian mortgage insurance business decreased $9 million, including a decrease of $5 million attributable to changes in foreign exchange rates, primarily from lower operating expenses related to contract fees.

•

Amortization of deferred acquisition costs and intangibles. The decrease was largely driven by changes in foreign exchange rates.

Provision for income taxes. The effective tax rate decreased to 25.7% for the six months ended June 30, 2014 from 28.2% for the six months ended June 30, 2013. The decrease in the effective tax rate was primarily attributable to increased tax benefits from lower taxed foreign income. The six months ended June 30, 2014 included a decrease of $11 million attributable to changes in foreign exchange rates.

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International Mortgage Insurance selected operating performance measures

The following tables set forth selected operating performance measures regarding our International Mortgage Insurance segment as of or for the dates indicated:


	As of June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013
Primary insurance in-force:
Canada	$	314,500	$	285,200	$	29,300		10	%
Australia		288,500		266,500		22,000		8	%
Other Countries		26,000		31,300		(5,300	)	(17	)%

Total	$	629,000	$	583,000	$	46,000		8	%

Risk in-force:
Canada	$	110,100	$	99,800	$	10,300		10	%
Australia		101,000		93,300		7,700		8	%
Other Countries ⁽¹⁾		3,600		4,200		(600	)	(14	)%

Total	$	214,700	$	197,300	$	17,400		9	%

⁽¹⁾	Risk in-force as of June 30, 2014 and 2013 excluded $298 million and $250 million, respectively, of risk in-force in Europe ceded under quota share reinsurance agreements.


	Three months ended June 30,				Increase (decrease) and percentage change					Six months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013					2014		2013		2014 vs. 2013
New insurance written:
Canada	$	12,500	$	11,100	$	1,400		13	%	$	18,300	$	16,800	$	1,500		9	%
Australia		7,900		9,600		(1,700	)	(18	)%		15,700		17,500		(1,800	)	(10	)%
Other Countries		500		400		100		25	%		900		800		100		13	%

Total	$	20,900	$	21,100	$	(200	)	(1	)%	$	34,900	$	35,100	$	(200	)	(1	)%

Net premiums written:
Canada	$	146	$	134	$	12		9	%	$	223	$	218	$	5		2	%
Australia		125		132		(7	)	(5	)%		251		249		2		1	%
Other Countries		1		7		(6	)	(86	)%		7		12		(5	)	(42	)%

Total	$	272	$	273	$	(1	)	—	%	$	481	$	479	$	2		—	%

Primary insurance in-force and risk in-force

Our businesses in Canada and Australia currently provide 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our risk in-force, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Canada and Australia. For the three and six months ended June 30, 2014 and 2013, this factor was 35%.

In Canada, primary insurance in-force and risk in-force increased primarily as a result of flow new insurance written and bulk transactions, partially offset by decreases of $4.5 billion and $1.6 billion, respectively, attributable to changes in foreign exchange rates in the current year.

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In Australia, primary insurance in-force and risk in-force increased mainly attributable to flow new insurance written and included increases of $9.2 billion and $3.2 billion, respectively, attributable to changes in foreign exchange rates in the current year.

In Other Countries, primary insurance in-force and risk in-force decreased mainly attributable to lender settlements, primarily in Ireland, in the fourth quarter of 2013, partially offset by increases of $1.3 billion and $0.2 billion, respectively, attributable to changes in foreign exchange rates in the current year.

New insurance written

For the three months and six months ended June 30, 2014, new insurance written in Canada increased primarily as a result of higher bulk transactions and an increase in flow new insurance written attributable to increased market penetration. The three and six months ended June 30, 2014 included decreases of $800 million and $1,400 million, respectively, attributable to changes in foreign exchange rates in Canada.

For the three months ended June 30, 2014, new insurance written in Australia decreased mainly attributable to bulk transactions in the prior year that did not recur and a decrease in flow new insurance written driven by a decrease of $800 million attributable to changes in foreign exchange rates in the current year. For the six months ended June 30, 2014, new insurance written in Australia decreased $2,100 million driven by changes in foreign exchange rates. Excluding the effects of foreign exchange, new insurance written in Australia increased mainly attributable to higher flow average price and improved housing market activity as interest rates remained low in the current year, partially offset by bulk transactions in the prior year that did not recur.

For the three and six months ended June 30, 2014, new insurance written in Other Countries increased slightly from flow new insurance written but remained at low levels as the mortgage originations market in Europe continued to be pressured by a weak economic environment.

Net premiums written

Most of our international mortgage insurance policies provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premiums earned over time in accordance with the expected pattern of risk emergence. As of June 30, 2014, our unearned premium reserves were $2,887 million, including an increase of $100 million attributable to changes in foreign exchange rates, compared to $2,780 million as of June 30, 2013.

In Canada, net premiums written increased during the three and six months ended June 30, 2014 primarily from higher flow volume attributable to increased market penetration and higher bulk transactions in the current year. In addition, the price increase on high loan-to-value premiums effective May 1, 2014 resulted in higher net premiums written. The three and six months ended June 30, 2014 included decreases of $11 million and $18 million, respectively, attributable to changes in foreign exchange rates in Canada.

For the three months ended June 30, 2014, net premiums written in Australia decreased driven by changes in foreign exchange rates. Excluding the effects of foreign exchange for the three months ended June 30, 2014, net premiums written increased in Australia during the three and six months ended June 30, 2014 primarily from higher flow average price and volume, partially offset by lower loan-to-value mortgage originations and higher ceded reinsurance premiums in the current year. The three and six months ended June 30, 2014 included decreases of $13 million and $34 million, respectively, attributable to changes in foreign exchange rates in Australia.

In Other Countries, net premiums written decreased during the three and six months ended June 30, 2014 primarily from higher ceded reinsurance premiums in the current year.

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Loss and expense ratios

The following table sets forth the loss and expense ratios for our International Mortgage Insurance segment for the dates indicated:


	Three months ended June 30,						Increase (decrease)			Six months ended June 30,						Increase (decrease)
	2014			2013			2014 vs. 2013			2014			2013			2014 vs. 2013
Loss ratio:
Canada		12	%		25	%		(13	)%		16	%		28	%		(12	)%
Australia		23	%		35	%		(12	)%		20	%		41	%		(21	)%
Other Countries		90	%		110	%		(20	)%		71	%		100	%		(29	)%
Total		19	%		32	%		(13	)%		20	%		36	%		(16	)%

Expense ratio:
Canada		26	%		23	%		3	%		30	%		28	%		2	%
Australia		23	%		25	%		(2	)%		21	%		26	%		(5	)%
Other Countries		NM	⁽¹⁾		177	%		NM	⁽²⁾		277	%		176	%		101	%
Total		28	%		28	%		—	%		29	%		30	%		(1	)%

⁽¹⁾	We define “NM” as not meaningful for percentages greater than 500%.

⁽²⁾	We define “NM” as not meaningful for changes greater than 500%.

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. The expense ratio is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition costs and intangibles.

Loss ratio

The loss ratio in Canada for the three months ended June 30, 2014 decreased primarily driven by lower losses incurred as a result of improved performance of our newer in-force blocks of business in the current year and lower severity of claims due to a higher proportion of delinquencies in provinces where severity has been lower and home price appreciation has been higher. The loss ratio in Canada for the six months ended June 30, 2014 decreased primarily driven by lower severity of claims due to a higher proportion of delinquencies in provinces where severity has been lower and home price appreciation has been higher and lower losses incurred as a result of improved performance of our newer in-force blocks of business in the current year. Partially offsetting these decreases were lower premiums during the three and six months ended June 30, 2014 from the seasoning of our larger 2007 and 2008 in-force blocks of business, which are past their peak earnings period.

For the three and six months ended June 30, 2014, the loss ratio in Australia decreased primarily driven by improved aging on our existing delinquencies from higher home price appreciation and a lower volume of existing delinquencies converting to mortgages in possession in the current year. Paid claims also decreased in the current year as a result of a decrease in both the number of claims and the average claim payment. These decreases were partially offset by a lower cure rate during the three months ended June 30, 2014.

In Other Countries, the loss ratio decreased for the three and six months ended June 30, 2014 primarily from lower new delinquencies, net of cures, and improved aging on our existing delinquencies in the current year. The decrease was also attributable to lender settlements in the prior year.

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Expense ratio

In Canada, the expense ratio increased during the three and six months ended June 30, 2014 as higher operating expenses from the early redemption payment of $6 million in May 2014 related to the redemption of Genworth Canada’s senior notes that were scheduled to mature in 2015 and higher expenses related to stock options from an increase in the share price in the current year were not fully offset by the impact of higher net premiums written. Excluding the early redemption payment of $6 million, the expense ratio for the three and six months ended June 30, 2014 would have been 21% and 27%, respectively.

The expense ratio in Australia decreased for the three months ended June 30, 2014 from lower operating expenses related to contract fees, partially offset by higher employee compensation and benefit expenses in the current year. This was partially offset by lower net premiums written from changes in foreign exchange rates in the current year. The expense ratio in Australia decreased for the six months ended June 30, 2014 from lower operating expenses related to contract fees in the current year.

In Other Countries, the expense ratio increased for the three and six months ended June 30, 2014 primarily from higher ceded net premiums written in the current year, partially offset by lower operating expenses in the current year and a $1 million restructuring charge in the prior year that did not recur.

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Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our international mortgage insurance portfolio as of the dates indicated:


	June 30, 2014			December 31, 2013			June 30, 2013
Canada:
Primary insured loans in-force		1,602,928			1,527,554			1,464,060
Delinquent loans		1,703			1,830			1,778
Percentage of delinquent loans (delinquency rate)		0.11	%		0.12	%		0.12	%

Flow loan in-force		1,213,846			1,187,753			1,151,957
Flow delinquent loans		1,493			1,591			1,562
Percentage of flow delinquent loans (delinquency rate)		0.12	%		0.13	%		0.14	%

Bulk loans in-force		389,082			339,801			312,103
Bulk delinquent loans		210			239			216
Percentage of bulk delinquent loans (delinquency rate)		0.05	%		0.07	%		0.07	%

Australia:
Primary insured loans in-force		1,481,201			1,474,181			1,459,376
Delinquent loans		5,405			4,980			5,820
Percentage of delinquent loans (delinquency rate)		0.36	%		0.34	%		0.40	%

Flow loan in-force		1,362,236			1,350,571			1,330,157
Flow delinquent loans		5,125			4,760			5,513
Percentage of flow delinquent loans (delinquency rate)		0.38	%		0.35	%		0.41	%

Bulk loans in-force		118,965			123,610			129,219
Bulk delinquent loans		280			220			307
Percentage of bulk delinquent loans (delinquency rate)		0.24	%		0.18	%		0.24	%

Other Countries:
Primary insured loans in-force		188,034			193,647			194,634
Delinquent loans		10,065			10,049			12,091
Percentage of delinquent loans (delinquency rate)		5.35	%		5.19	%		6.21	%

Flow loan in-force		112,715			113,616			139,928
Flow delinquent loans		6,750			6,442			8,087
Percentage of flow delinquent loans (delinquency rate)		5.99	%		5.67	%		5.78	%

Bulk loans in-force		75,319			80,031			54,706
Bulk delinquent loans		3,315			3,607			4,004
Percentage of bulk delinquent loans (delinquency rate)		4.40	%		4.51	%		7.32	%

Total:
Primary insured loans in-force		3,272,163			3,195,382			3,118,070
Delinquent loans		17,173			16,859			19,689
Percentage of delinquent loans (delinquency rate)		0.52	%		0.53	%		0.63	%

Flow loan in-force		2,688,797			2,651,940			2,622,042
Flow delinquent loans		13,368			12,793			15,162
Percentage of flow delinquent loans (delinquency rate)		0.50	%		0.48	%		0.58	%

Bulk loans in-force		583,366			543,442			496,028
Bulk delinquent loans ⁽¹⁾		3,805			4,066			4,527
Percentage of bulk delinquent loans (delinquency rate)		0.65	%		0.75	%		0.91	%

⁽¹⁾	Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 3,778 as of June 30, 2014, 4,030 as of December 31, 2013 and 4,496 as of June 30, 2013.

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In Canada, flow loans in-force increased from new policies written and flow delinquent loans decreased compared to December 31, 2013 as paid claims and cures more than offset new delinquencies in the current year. Bulk loans in-force increased from higher bulk transactions in the current year.

In Australia, flow loans in-force increased as a result of new policies written, partially offset by policy cancellations in the current year. Flow delinquent loans increased compared to December 31, 2013 as new delinquencies more than offset paid claims and cures.

In Other Countries, flow delinquent loans decreased compared to June 30, 2013 mainly attributable to lender settlements, primarily in Ireland, in the fourth quarter of 2013.

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U.S. Mortgage Insurance segment

Segment results of operations

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:


	Three months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013
Revenues:
Premiums	$	144	$	141	$	3		2	%
Net investment income		11		10		1		10	%
Net investment gains (losses)		—		—		—		—	%
Insurance and investment product fees and other		1		—		1		NM	⁽¹⁾

Total revenues		156		151		5		3	%

Benefits and expenses:
Benefits and other changes in policy reserves		62		97		(35	)	(36	)%
Acquisition and operating expenses, net of deferrals		34		35		(1	)	(3	)%
Amortization of deferred acquisition costs and intangibles		2		2		—		—	%

Total benefits and expenses		98		134		(36	)	(27	)%

Income from continuing operations before income taxes		58		17		41		NM	⁽¹⁾
Provision for income taxes		19		4		15		NM	⁽¹⁾

Income from continuing operations		39		13		26		200	%
Adjustment to income from continuing operations:
Net investment (gains) losses, net		—		—		—		—	%

Net operating income	$	39	$	13	$	26		200	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating income

The increase in net operating income was mainly attributable to fewer new delinquencies, as well as lower reserves on new delinquencies, and improvements in net cures and aging on existing delinquencies in the current year.

Revenues

Premiums increased mainly attributable to higher average flow insurance in-force and lower ceded reinsurance premiums in the current year.

Benefits and expenses

Benefits and other changes in policy reserves decreased primarily driven by fewer new delinquencies, as well as lower reserves on new delinquencies, and improvements in net cures and aging on existing delinquencies in the current year. Reserves for prior year delinquencies benefitted $15 million during the current year from improvements in net cures and aging.

Provision for income taxes. The effective tax rate increased to 32.8% for the three months ended June 30, 2014 from 23.5% for the three months ended June 30, 2013. The increase in the effective tax rate was primarily attributable to changes in tax favored investment benefits in relation to pre-tax income, partially offset by the loss of foreign credits and the non-deductibility of the CFPB settlement in the prior year.

126

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:


	Six month ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013
Revenues:
Premiums	$	281	$	275	$	6		2	%
Net investment income		29		29		—		—	%
Net investment gains (losses)		—		—		—		—	%
Insurance and investment product fees and other		1		1		—		—	%

Total revenues		311		305		6		2	%

Benefits and expenses:
Benefits and other changes in policy reserves		125		181		(56	)	(31	)%
Acquisition and operating expenses, net of deferrals		67		74		(7	)	(9	)%
Amortization of deferred acquisition costs and intangibles		4		3		1		33	%

Total benefits and expenses		196		258		(62	)	(24	)%

Income from continuing operations before income taxes		115		47		68		145	%
Provision for income taxes		43		13		30		NM	⁽¹⁾

Income from continuing operations		72		34		38		112	%
Adjustment to income from continuing operations:
Net investment (gains) losses, net		—		—		—		—	%

Net operating income	$	72	$	34	$	38		112	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating income

Net operating income increased in the current year mainly attributable to the decline in new delinquencies, as well as lower reserves on new delinquencies, and improvements in net cures and aging on existing delinquencies, partially offset by a net reserve strengthening of $11 million and unfavorable tax adjustments of $6 million recorded in the current year.

Revenues

Premiums increased driven by higher average flow insurance in-force and lower ceded reinsurance premiums in the current year.

Benefits and expenses

Benefits and other changes in policy reserves decreased driven by a decline in new delinquencies, as well as lower reserves on new delinquencies, and improvements in net cures and aging on existing delinquencies in the current year, partially offset by a net reserve strengthening of $17 million in the current year. In the first quarter of 2014, we strengthened reserves to reflect the expectation in future periods of increased claim severity primarily for late-stage delinquencies, partially offset by lower claim rates for early-stage delinquencies. Overall delinquencies continued to decline from factors such as increased cure rates resulting from improvements in the

127

overall housing market, fewer new delinquencies and ongoing loss mitigation efforts. Reserves for prior year delinquencies benefitted $26 million during the current year from improvements in net cures and aging.

Acquisition and operating expenses, net of deferrals, decreased primarily from a settlement of approximately $4 million with the CFPB to end its review of industry captive reinsurance arrangements in the prior year that did not recur and lower operating expenses in the current year.

Provision for income taxes. The effective tax rate increased to 37.4% for the six months ended June 30, 2014 from 27.7% for the six months ended June 30, 2013. The increase in the effective tax rate was primarily attributable to changes in tax favored investment benefits in relation to pre-tax income and changes in the state tax valuation allowance, partially offset by the loss of foreign credits and the non-deductibility of the CFPB settlement in the prior year.

U.S. Mortgage Insurance selected operating performance measures

The following tables set forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:


	As of June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013
Primary insurance in-force	$	110,500	$	108,800	$	1,700	2	%
Risk in-force		27,500		26,600		900	3	%


	Three months ended June 30,				Increase (decrease) and percentage change					Six months ended June 30,				Increase (decrease) and percentage change
(Amounts in millions)	2014		2013		2014 vs. 2013					2014		2013		2014 vs. 2013
New insurance written	$	6,100	$	6,300	$	(200	)	(3	)%	$	10,000	$	11,000	$	(1,000	)	(9	)%
Net premiums written		151		144		7		5	%		295		279		16		6	%

Primary insurance in-force and risk in-force

Primary insurance in-force increased as the result of an increase of $3.0 billion in flow insurance in-force, which increased from $103.5 billion as of June 30, 2013 to $106.5 billion as of June 30, 2014, as a result of new insurance written during 2013. This increase was partially offset by a decline of $1.3 billion in bulk insurance in-force, which decreased from $5.3 billion as of June 30, 2013 to $4.0 billion as of June 30, 2014, from cancellations and lapses. In addition, risk in-force increased primarily as a result of higher flow new insurance written, partially offset by the decline in bulk risk in-force. Flow persistency was 84% and 81% for the six months ended June 30, 2014 and 2013, respectively.

New insurance written

New insurance written decreased for the three and six months ended June 30, 2014 primarily driven by a decline in the mortgage insurance origination market. Mortgage refinance originations also remained low as a result of higher interest rates during the current year.

Net premiums written

Net premiums written for the three and six months ended June 30, 2014 increased due to higher average flow insurance in-force and lower ceded reinsurance premiums in the current year.

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Loss and expense ratios

The following table sets forth the loss and expense ratios for our U.S. Mortgage Insurance segment for the dates indicated:


	Three months ended June 30,						Increase (decrease)			Six months ended June 30,						Increase (decrease)
	2014			2013			2014 vs. 2013			2014			2013			2014 vs. 2013
Loss ratio		43	%		70	%		(27	)%		45	%		66	%		(21	)%
Expense ratio		23	%		25	%		(2	)%		24	%		28	%		(4	)%

The loss ratio for the three months ended June 30, 2014 decreased primarily driven by a decline in new delinquencies, as well as lower reserves on new delinquencies, and improvements in net cures and aging on existing delinquencies in the current year. Reserves for prior year delinquencies benefitted $15 million for the three months ended June 30, 2014 from improvements in net cures and aging.

The decrease in the loss ratio for the six months ended June 30, 2014 was primarily attributable to fewer new delinquencies, as well as lower reserves on new delinquencies, and improved net cures and aging on existing delinquencies in the current year, partially offset by a net reserve strengthening of $17 million in the current year. In the first quarter of 2014, we strengthened reserves to reflect the expectation in future periods of increased claim severity primarily for late-stage delinquencies, partially offset by lower claim rates for early-stage delinquencies. Reserves for prior year delinquencies benefitted $26 million during the six months ended June 30, 2014 from improvements in net cures and aging.

The expense ratio decreased for the three months ended June 30, 2014 from higher net premiums written in the current year. The expense ratio decreased for the six months ended June 30, 2014 as a result of the settlement of approximately $4 million with the CFPB to end its review of industry captive reinsurance arrangements in the prior year did not recur, lower operating expenses and higher net premiums written.

129

Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our U.S. mortgage insurance portfolio as of the dates indicated:


	June 30, 2014			December 31, 2013			June 30, 2013
Primary insurance:
Insured loans in-force		620,415			624,236			633,685
Delinquent loans		42,605			51,459			58,199
Percentage of delinquent loans (delinquency rate)		6.87	%		8.24	%		9.18	%

Flow loan in-force		585,719			586,546			590,949
Flow delinquent loans		40,897			49,255			55,413
Percentage of flow delinquent loans (delinquency rate)		6.98	%		8.40	%		9.38	%

Bulk loans in-force		34,696			37,690			42,736
Bulk delinquent loans⁽¹⁾		1,708			2,204			2,786
Percentage of bulk delinquent loans (delinquency rate)		4.92	%		5.85	%		6.52	%
A minus and sub-prime loans in-force		36,219			39,307			42,993
A minus and sub-prime loans delinquent loans		8,238			10,023			10,803
Percentage of A minus and sub-prime delinquent loans (delinquency rate)		22.74	%		25.50	%		25.13	%

Pool insurance:
Insured loans in-force		10,336			11,354			12,063
Delinquent loans		546			628			634
Percentage of delinquent loans (delinquency rate)		5.28	%		5.53	%		5.26	%

⁽¹⁾	Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 1,147 as of June 30, 2014, 1,491 as of December 31, 2013 and 1,526 as of June 30, 2013.

Delinquency and foreclosure levels that developed principally in our 2005 through 2008 book years have declined as the United States has continued to experience improvement in its residential real estate market. We also have seen a decline in new delinquencies and lower foreclosure starts in the current year.

The following tables set forth flow delinquencies, direct case reserves and risk in-force by aged missed payment status in our U.S. mortgage insurance portfolio as of the dates indicated:


	June 30, 2014
			Direct case		Risk		Reserves as %
(Dollar amounts in millions)	Delinquencies		reserves⁽¹⁾		in-force		of risk in-force
Payments in default:
3 payments or less		10,780	$	76	$	427		18	%
4-11 payments		9,601		242		398		61	%
12 payments or more		20,516		765		1,016		75	%

Total		40,897	$	1,083	$	1,841		59	%

⁽¹⁾	Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.

130


	December 31, 2013
			Direct case		Risk		Reserves as %
(Dollar amounts in millions)	Delinquencies		reserves⁽¹⁾		in-force		of risk in-force
Payments in default:
3 payments or less		13,436	$	121	$	523		23	%
4-11 payments		11,854		305		486		63	%
12 payments or more		23,965		851		1,178		72	%

Total		49,255	$	1,277	$	2,187		58	%

⁽¹⁾	Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.

Primary insurance delinquency rates differ from region to region in the United States at any one time depending upon economic conditions and cyclical growth patterns. The tables below set forth our primary delinquency rates for the various regions of the United States and the 10 largest states by our risk in-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.


	Percent of primary risk in-force as of June 30, 2014			Percent of total reserves as of June 30, 2014⁽¹⁾			Delinquency rate
	Percent of primary risk in-force as of June 30, 2014			Percent of total reserves as of June 30, 2014⁽¹⁾			June 30, 2014			December 31, 2013			June 30, 2013
By Region:
Southeast ⁽²⁾		20	%		30	%		9.01	%		11.02	%		12.69	%
South Central ⁽³⁾		16			7			4.73	%		5.85	%		6.29	%
Northeast ⁽⁴⁾		15			25			11.17	%		12.30	%		12.50	%
Pacific ⁽⁵⁾		12			10			5.28	%		6.47	%		7.96	%
North Central ⁽⁶⁾		11			10			5.89	%		7.39	%		8.62	%
Great Lakes ⁽⁷⁾		10			6			4.90	%		6.03	%		6.78	%
New England ⁽⁸⁾		6			5			6.69	%		7.74	%		8.57	%
Mid-Atlantic ⁽⁹⁾		5			5			6.79	%		8.18	%		8.85	%
Plains ⁽¹⁰⁾		5			2			4.50	%		5.46	%		5.93	%

Total		100	%		100	%		6.87	%		8.24	%		9.18	%

⁽¹⁾	Total reserves were $1,256 million as of June 30, 2014.

⁽²⁾	Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee.

⁽³⁾	Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah.

⁽⁴⁾	New Jersey, New York and Pennsylvania.

⁽⁵⁾	Alaska, California, Hawaii, Nevada, Oregon and Washington.

⁽⁶⁾	Illinois, Minnesota, Missouri and Wisconsin.

⁽⁷⁾	Indiana, Kentucky, Michigan and Ohio.

⁽⁸⁾	Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

⁽⁹⁾	Delaware, Maryland, Virginia, Washington D.C. and West Virginia.

⁽¹⁰⁾	Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming.

131


	Percent of primary risk in-force as of June 30, 2014			Percent of total reserves as of June 30, 2014 ⁽¹⁾			Delinquency rate
	Percent of primary risk in-force as of June 30, 2014			Percent of total reserves as of June 30, 2014 ⁽¹⁾			June 30, 2014			December 31, 2013			June 30, 2013
By State:
California		7	%		4	%		3.42	%		4.27	%		5.39	%
Texas		7	%		3	%		4.66	%		5.68	%		5.74	%
New York		6	%		11	%		11.11	%		11.90	%		11.58	%
Florida		6	%		21	%		15.71	%		19.50	%		23.12	%
Illinois		5	%		6	%		7.82	%		9.67	%		11.95	%
New Jersey		4	%		10	%		15.45	%		16.76	%		18.05	%
Pennsylvania		4	%		4	%		8.25	%		9.73	%		9.94	%
Georgia		4	%		3	%		6.76	%		8.48	%		9.73	%
Ohio		4	%		2	%		5.44	%		6.69	%		7.29	%
North Carolina		4	%		2	%		6.04	%		7.43	%		8.47	%

⁽¹⁾	Total reserves were $1,256 million as of June 30, 2014.

The following table sets forth the dispersion of our total reserves and primary insurance in-force and risk in-force by year of policy origination and average annual mortgage interest rate as of June 30, 2014:


							Primary					Primary
	Average			Percent of total			insurance		Percent			risk		Percent
(Amounts in millions)	rate			reserves ⁽¹⁾			in-force		of total			in-force		of total
Policy Year
2003 and prior		6.41	%		7.4	%	$	3,962		3.6	%	$	903		3.3	%
2004		5.74	%		5.2			2,631		2.4			628		2.3
2005		5.71	%		12.4			5,154		4.6			1,372		5.0
2006		5.96	%		17.8			7,857		7.1			1,992		7.3
2007		5.89	%		37.4			18,641		16.9			4,670		17.1
2008		5.42	%		17.7			16,547		15.0			4,175		15.3
2009		4.98	%		0.6			2,996		2.7			672		2.5
2010		4.69	%		0.6			3,950		3.6			924		3.4
2011		4.49	%		0.4			5,305		4.8			1,310		4.8
2012		3.78	%		0.3			12,812		11.6			3,157		11.5
2013		3.95	%		0.2			20,775		18.8			5,048		18.5
2014		4.48	%		—			9,881		8.9			2,463		9.0

Total portfolio		5.08	%		100.0	%	$	110,511		100.0	%	$	27,314		100.0	%

⁽¹⁾	Total reserves were $1,256 million as of June 30, 2014.

132

Corporate and Other Division

Division results of operations

The following table sets forth the results of operations relating to our Corporate and Other Division for the periods indicated. See below for a discussion by segment.


	Three months ended June 30,						Increase (decrease) and percentage change					Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013					2014			2013			2014 vs. 2013
Net operating income (loss):
International Protection segment	$	2		$	1		$	1		100	%	$	9		$	7		$	2		29	%
Runoff segment		15			6			9		150	%		27			22			5		23	%
Corporate and Other activities		(64	)		(55	)		(9	)	(16	)%		(115	)		(113	)		(2	)	(2	)%

Total net operating loss		(47	)		(48	)		1		2	%		(79	)		(84	)		5		6	%
Adjustments to net operating loss:
Net investment gains (losses), net		(1	)		—			(1	)	NM	⁽¹⁾		(11	)		(21	)		10		NM	⁽¹⁾
Expenses from restructuring, net		—			(3	)		3		100	%		—			(3	)		3		100	%
Income (loss) from discontinued operations, net of taxes		—			6			(6	)	(100	)%		—			(14	)		14		100	%

Net loss available to Genworth Financial, Inc.’s common stockholders	$	(48	)	$	(45	)	$	(3	)	(7	)%	$	(90	)	$	(122	)	$	32		26	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

133

International Protection segment

Segment results of operations

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table sets forth the results of operations relating to our International Protection segment for the periods indicated:


	Three months ended June 30,					Increase (decrease) and percentage change
(Amounts in millions)	2014		2013			2014 vs. 2013
Revenues:
Premiums	$	199	$	154		$	45		29	%
Net investment income		22		31			(9	)	(29	)%
Net investment gains (losses)		—		16			(16	)	(100	)%
Insurance and investment product fees and other		2		1			1		100	%

Total revenues		223		202			21		10	%

Benefits and expenses:
Benefits and other changes in policy reserves		56		41			15		37	%
Acquisition and operating expenses, net of deferrals		126		110			16		15	%
Amortization of deferred acquisition costs and intangibles		30		26			4		15	%
Interest expense		9		11			(2	)	(18	)%

Total benefits and expenses		221		188			33		18	%

Income from continuing operations before income taxes		2		14			(12	)	(86	)%
Provision for income taxes		—		5			(5	)	(100	)%

Income from continuing operations		2		9			(7	)	(78	)%
Adjustments to income from continuing operations:
Net investment (gains) losses, net		—		(11	)		11		100	%
Expenses related to restructuring, net		—		3			(3	)	(100	)%

Net operating income	$	2	$	1		$	1		100	%

Net operating income

Net operating income increased marginally as higher premiums and tax benefits were mostly offset by higher claim reserves and lower net investment income in the current year.

Revenues

Premiums increased $27 million primarily driven by an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting and higher volume driven by growth in France from a new client in the current year. These increases were partially offset by lower premiums from our runoff clients. The three months ended June 30, 2014 included an increase of $10 million attributable to changes in foreign exchange rates.

Net investment income decreased mainly due to lower reinvestment yields and an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. These decreases were partially offset by reinsurance agreements accounted for under the deposit method of accounting as certain of these arrangements were in a higher gain position in the current year. The three months ended June 30, 2014 included an increase of $2 million attributable to changes in foreign exchange rates.

134

Net investment gains decreased primarily attributable to higher gains from the sale of investments in the prior year.

Benefits and expenses

Benefits and other changes in policy reserves increased $8 million related to an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. The increase was also driven by higher reserves in France from a new client and higher claims of $3 million related to the ferry disaster in Korea, partially offset by a decline in new claim registrations in the current year. The three months ended June 30, 2014 included an increase of $3 million attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, increased mainly due to higher commissions of $17 million related to an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. This increase was partially offset by lower operating and profit sharing expenses in the current year and a restructuring charge of $4 million in the prior year that did not recur. The three months ended June 30, 2014 included an increase of $7 million attributable to changes in foreign exchange rates.

Amortization of deferred acquisition costs and intangibles increased primarily as a result of higher premium volume in the current year. The three months ended June 30, 2014 included an increase of $2 million attributable to changes in foreign exchange rates.

Interest expense decreased primarily driven by an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting, which was mostly offset by reinsurance agreements accounted for under the deposit method of accounting as certain of these arrangements were in a higher loss position.

Provision for income taxes. The effective tax rate decreased to zero for the three months ended June 30, 2014 from 35.7% for the three months ended June 30, 2013. The decrease in the effective tax rate was primarily attributable to changes in foreign income.

135

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table sets forth the results of operations relating to our International Protection segment for the periods indicated:


	Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Revenues:
Premiums	$	374		$	319		$	55		17	%
Net investment income		52			64			(12	)	(19	)%
Net investment gains (losses)		1			22			(21	)	(95	)%
Insurance and investment product fees and other		3			2			1		50	%

Total revenues		430			407			23		6	%

Benefits and expenses:
Benefits and other changes in policy reserves		102			80			22		28	%
Acquisition and operating expenses, net of deferrals		235			220			15		7	%
Amortization of deferred acquisition costs and intangibles		60			54			6		11	%
Interest expense		24			25			(1	)	(4	)%

Total benefits and expenses		421			379			42		11	%

Income from continuing operations before income taxes		9			28			(19	)	(68	)%
Provision (benefit) for income taxes		(1	)		9			(10	)	(111	)%

Income from continuing operations		10			19			(9	)	(47	)%
Adjustments to income from continuing operations:
Net investment (gains) losses, net		(1	)		(15	)		14		93	%
Expenses related to restructuring, net		—			3			(3	)	(100	)%

Net operating income	$	9		$	7		$	2		29	%

Net operating income

Net operating income increased marginally as higher premiums and tax benefits were mostly offset by higher claim reserves and lower net investment income in the current year.

Revenues

Premiums increased $27 million primarily driven by an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. The increase in the current year was also attributable to higher volume driven by a new client in France and a favorable adjustment of $4 million related to German premium taxes, partially offset by lower premiums from our runoff clients. The six months ended June 30, 2014 included an increase of $13 million attributable to changes in foreign exchange rates.

Net investment income decreased principally attributable to lower reinvestment yields and reinsurance agreements accounted for under the deposit method of accounting as certain of these arrangements were in a lower gain position in the current year in the current year. These decreases were mostly offset by an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. The six months ended June 30, 2014 included an increase of $2 million attributable to changes in foreign exchange rates.

Net investment gains decreased mainly due to higher gains from the sale of investments in the prior year.

136

Benefits and expenses

Benefits and other changes in policy reserves increased driven by $8 million related to an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. The increase was also driven by higher reserves in France from a new client and higher claims of $3 million related to the ferry disaster in Korea, partially offset by a decline in new claim registrations in the current year. The six months ended June 30, 2014 included an increase of $4 million attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, increased largely from higher commissions of $17 million related to an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. This increase was partially offset by lower operating and profit sharing expenses in the current year and a restructuring charge of $4 million in the prior year that did not recur. The six months ended June 30, 2014 included an increase of $9 million attributable to changes in foreign exchange rates.

Amortization of deferred acquisition costs and intangibles increased primarily as a result of higher premium volume in the current year. The six months ended June 30, 2014 included an increase of $2 million attributable to changes in foreign exchange rates.

Interest expense decreased largely related to an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting, mostly offset by reinsurance arrangements accounted for under the deposit method of accounting as certain of these arrangements were in a higher loss position in the current year.

Provision (benefit) for income taxes. The effective tax rate decreased to (11.1)% for the six months ended June 30, 2014 from 32.1% for the six months ended June 30, 2013. This decrease in the effective tax rate was primarily attributable to a favorable tax correction recorded in the current year, partially offset by changes in foreign income.

International Protection selected operating performance measures

The following table sets forth selected operating performance measures regarding our International Protection segment for the periods indicated:


	Three months ended June 30,						Increase (decrease) and percentage change					Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013					2014			2013			2014 vs. 2013
Net Premiums Written:
Northern Europe	$	104		$	106		$	(2	)	(2	)%	$	219		$	212		$	7		3	%
Southern Europe		86			74			12		16	%		194			152			42		28	%
Structured Deals		41			49			(8	)	(16	)%		71			77			(6	)	(8	)%
New Markets		15			14			1		7	%		26			35			(9	)	(26	)%

Pre-deposit accounting basis		246			243			3		1	%		510			476			34		7	%

Deposit accounting adjustments		47			94			(47	)	(50	)%		115			174			(59	)	(34	)%

Total	$	199		$	149		$	50		34	%	$	395		$	302		$	93		31	%

Loss ratio		28	%		26	%		2	%				27	%		25	%		2	%

137

Net premiums written

For the three and six months ended June 30, 2014, total net premiums written increased primarily driven by an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting. The increase was also attributable to sales growth in Italy and Germany in the current year. For the six months ended June 30, 2014, the increase was also attributable to growth in France from a new client and a favorable adjustment related to German premium taxes in the current year. The three and six months ended June 30, 2014 included increases of $11 million and $14 million, respectively, attributable to changes in foreign exchange rates.

Loss ratio

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums.

For the three months ended June 30, 2014, the loss ratio increased mainly driven by an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting, which impacted both benefits and premiums. The increase was also driven by higher claims related to the ferry disaster in Korea in the current year, partially offset by higher favorable claim reserve adjustments in the prior year. These increases were partially offset by higher premiums attributable to growth in France from a new client in the current year.

For the six months ended June 30, 2014, the loss ratio increased mainly driven by an amendment to a reinsurance agreement in the current year retroactive to January 1, 2014 that was previously accounted for under the deposit method of accounting, which impacted both benefits and premiums. The increase was also driven by higher claims related to the ferry disaster in Korea and higher reserves in France from a new client in the current year, partially offset by higher favorable claim reserve adjustments in the prior year. These increases were partially offset by higher premiums attributable to growth in France from a new client and a favorable adjustment related to German premium taxes in the current year.

138

Runoff segment

Segment results of operations

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:


	Three months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Revenues:
Premiums	$	1		$	2		$	(1	)	(50	)%
Net investment income		33			34			(1	)	(3	)%
Net investment gains (losses)		3			(20	)		23		115	%
Insurance and investment product fees and other		52			53			(1	)	(2	)%

Total revenues		89			69			20		29	%

Benefits and expenses:
Benefits and other changes in policy reserves		6			10			(4	)	(40	)%
Interest credited		29			29			—		—	%
Acquisition and operating expenses, net of deferrals		20			22			(2	)	(9	)%
Amortization of deferred acquisition costs and intangibles		10			8			2		25	%
Interest expense		1			1			—		—	%

Total benefits and expenses		66			70			(4	)	(6	)%

Income (loss) from continuing operations before income taxes		23			(1	)		24		NM	⁽¹⁾
Provision for income taxes		5			—			5		NM	⁽¹⁾

Income (loss) from continuing operations		18			(1	)		19		NM	⁽¹⁾
Adjustment to income (loss) from continuing operations:
Net investment (gains) losses, net		(3	)		7			(10	)	(143	)%

Net operating income	$	15		$	6		$	9		150	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating income

Net operating income increased primarily related to our variable annuity products largely driven by favorable equity market performance in the current year.

Revenues

Net investment gains in the current year were principally from derivative gains and gains on embedded derivatives associated with our variable annuity products with GMWBs, partially offset by net investment losses from the sale of investment securities. Net investment losses in the prior year were largely related to derivative losses and net investment losses from the sale of investment securities, partially offset by gains on embedded derivatives associated with our variable annuity products with GMWBs.

Benefits and expenses

Benefits and other changes in policy reserves decreased primarily attributable to a decrease in our GMDB reserves in our variable annuity products due to favorable equity market performance in the current year.

139

Provision for income taxes. The effective tax rate increased to 21.7% for the three months ended June 30, 2014. For the three months ended June 30, 2013 the effective tax rate was zero. The increase in the effective tax rate was primarily related to tax favored investments in relation to pre-tax income in the current year compared to the prior year.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:


	Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Revenues:
Premiums	$	2		$	3		$	(1	)	(33	)%
Net investment income		65			68			(3	)	(4	)%
Net investment gains (losses)		(10	)		(68	)		58		85	%
Insurance and investment product fees and other		105			109			(4	)	(4	)%

Total revenues		162			112			50		45	%

Benefits and expenses:
Benefits and other changes in policy reserves		14			14			—		—	%
Interest credited		58			61			(3	)	(5	)%
Acquisition and operating expenses, net of deferrals		40			42			(2	)	(5	)%
Amortization of deferred acquisition costs and intangibles		21			(5	)		26		NM	⁽¹⁾
Interest expense		1			1			—		—	%

Total benefits and expenses		134			113			21		19	%

Income (loss) from continuing operations before income taxes		28			(1	)		29		NM	⁽¹⁾
Provision for income taxes		5			3			2		67	%

Income (loss) from continuing operations		23			(4	)		27		NM	⁽¹⁾
Adjustment to income (loss) from continuing operations:
Net investment (gains) losses, net		4			26			(22	)	(85	)%

Net operating income	$	27		$	22		$	5		23	%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating income

Net operating income increased primarily related to our variable annuity products largely driven by favorable equity market performance in the current year.

Revenues

The decrease in net investment losses was primarily related to derivative gains in the current year compared to derivative losses in the prior year. The decrease was also attributable to lower net investment losses from the sale of investment securities in the current year, partially offset by losses on embedded derivatives associated with our variable annuity products with GMWBs in the current year compared to gains in the prior year.

Insurance and investment product fees and other decreased mainly attributable to a final settlement related to the sale of our Medicare supplement insurance business in the prior year that did not recur.

140

Benefits and expenses

Interest credited decreased largely related to our institutional products as a result of lower interest paid on our floating rate policyholder liabilities in the current year due to a decrease in outstanding liabilities.

Amortization of deferred acquisition costs and intangibles increased related to our variable annuity products primarily from lower net investment losses and a change in lapse assumptions in the current year.

Provision for income taxes. The effective tax rate increased to 17.9% for the six months ended June 30, 2014 from (300.0)% for the six months ended June 30, 2013. The increase in the effective tax rate was primarily related to tax favored investments in relation to pre-tax income in the current year compared to the prior year.

Runoff selected operating performance measures

Variable annuity and variable life insurance products

The following table sets forth selected operating performance measures regarding our variable annuity and variable life insurance products as of or for the dates 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
Variable Annuities—Income Distribution Series ⁽¹⁾
Account value, beginning of period	$	5,990		$	6,202		$	6,061		$	6,141
Deposits		13			18			29			38
Surrenders, benefits and product charges		(210	)		(183	)		(408	)		(356	)

Net flows		(197	)		(165	)		(379	)		(318	)
Interest credited and investment performance		191			(54	)		302			160

Account value, end of period	$	5,984		$	5,983		$	5,984		$	5,983

Traditional Variable Annuities
Account value, net of reinsurance, beginning of period	$	1,598		$	1,674		$	1,643		$	1,662
Deposits		4			2			7			5
Surrenders, benefits and product charges		(80	)		(80	)		(158	)		(161	)

Net flows		(76	)		(78	)		(151	)		(156	)
Interest credited and investment performance		61			5			91			95

Account value, net of reinsurance, end of period	$	1,583		$	1,601		$	1,583		$	1,601

Variable Life Insurance
Account value, beginning of period	$	313		$	301		$	316		$	292
Deposits		2			2			4			4
Surrenders, benefits and product charges		(8	)		(11	)		(19	)		(20	)

Net flows		(6	)		(9	)		(15	)		(16	)
Interest credited and investment performance		10			1			16			17

Account value, end of period	$	317		$	293		$	317		$	293

⁽¹⁾

The Income Distribution Series products are comprised of our deferred and immediate variable annuity products, including those variable annuity products with rider options that provide guaranteed income benefits, including GMWBs and certain types of guaranteed annuitization benefits. These products do not include fixed single premium immediate annuities or deferred annuities, which may also serve income distribution needs.

141

Variable Annuities—Income Distribution Series

Account value related to our income distribution series products decreased compared to March 31, 2014 and December 31, 2013 mainly attributable to surrenders outpacing favorable equity market performance and interest credited in the current year. We no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts.

Traditional Variable Annuities

In our traditional variable annuities, the decrease in account value was primarily the result of surrenders outpacing favorable equity market performance in the current year. We no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts.

Variable Life Insurance

We no longer solicit sales of variable life insurance; however, we continue to service our existing block of business.

Institutional products

The following table sets forth selected operating performance measures regarding our institutional products as of or for the dates 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
GICs, FABNs and Funding Agreements
Account value, beginning of period	$	891		$	1,970		$	896		$	2,153
Surrenders and benefits		(225	)		(900	)		(232	)		(1,067	)

Net flows		(225	)		(900	)		(232	)		(1,067	)
Interest credited		1			7			3			22
Foreign currency translation		—			—			—			(31	)

Account value, end of period	$	667		$	1,077		$	667		$	1,077

Account value related to our institutional products decreased mainly attributable to scheduled maturities of these products. Interest credited declined due to a decrease in average outstanding liabilities. We consider the issuance of our institutional contracts on an opportunistic basis.

142

Corporate and Other Activities

Results of operations

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:


	Three months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Revenues:
Net investment income	$	1		$	3		$	(2	)	(67	)%
Net investment gains (losses)		(6	)		(5	)		(1	)	(20	)%
Insurance and investment product fees and other		(1	)		(1	)		—		—	%

Total revenues		(6	)		(3	)		(3	)	(100	)%

Benefits and expenses:
Acquisition and operating expenses, net of deferrals		9			8			1		13	%
Amortization of deferred acquisition costs and intangibles		—			4			(4	)	(100	)%
Interest expense		81			77			4		5	%

Total benefits and expenses		90			89			1		1	%

Loss from continuing operations before income taxes		(96	)		(92	)		(4	)	(4	)%
Benefit for income taxes		(28	)		(33	)		5		15	%

Loss from continuing operations		(68	)		(59	)		(9	)	(15	)%
Adjustment to loss from continuing operations:
Net investment (gains) losses, net		4			4			—		—	%

Net operating loss	$	(64	)	$	(55	)	$	(9	)	(16	)%

Net operating loss

We reported a higher net operating loss in the current year primarily attributable to lower tax benefits in the current year.

Revenues

Net investment income decreased primarily from lower average invested assets in the current year.

Benefits and expenses

Amortization of deferred acquisition costs and intangibles decreased mainly related to higher software allocations to our operating segments in the current year.

Interest expense increased largely driven by debt issuances in August and December of 2013, partially offset by the repurchase of $350 million of senior notes in August 2013.

The decrease in the income tax benefit was primarily related to the tax effects of stock-based compensation expense in the current year.

143

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:


	Six months ended June 30,						Increase (decrease) and percentage change
(Amounts in millions)	2014			2013			2014 vs. 2013
Revenues:
Net investment income	$	(8	)	$	5		$	(13	)	NM	⁽¹⁾
Net investment gains (losses)		(11	)		(15	)		4		27	%
Insurance and investment product fees and other		(1	)		42			(43	)	(102	)%

Total revenues		(20	)		32			(52	)	(163	)%

Benefits and expenses:
Acquisition and operating expenses, net of deferrals		15			57			(42	)	(74	)%
Amortization of deferred acquisition costs and intangibles		1			7			(6	)	(86	)%
Interest expense		164			157			7		4	%

Total benefits and expenses		180			221			(41	)	(19	)%

Loss from continuing operations before income taxes		(200	)		(189	)		(11	)	(6	)%
Benefit for income taxes		(77	)		(66	)		(11	)	(17	)%

Loss from continuing operations		(123	)		(123	)		—		—	%
Adjustment to loss from continuing operations:
Net investment (gains) losses, net		8			10			(2	)	(20	)%

Net operating loss	$	(115	)	$	(113	)	$	(2	)	(2	)%

⁽¹⁾	We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating loss

We reported a higher net operating loss in the current year primarily attributable to lower net investment income, partially offset by higher tax benefits mainly from favorable tax adjustments of $17 million recorded in the current year.

Revenues

Net investment income decreased primarily from the sale of our reverse mortgage business on April 1, 2013 and lower average invested assets in the current year.

We had lower net investment losses in the current year primarily attributable to gains from the sale of investment securities in the current year compared to losses in the prior year, partially offset by derivative losses in the current year compared to derivative gains in the prior year.

Insurance and investment product fees and other decreased as a result of the sale of our reverse mortgage business on April 1, 2013.

Benefits and expenses

Acquisition and operating expenses, net of deferrals, decreased $46 million as a result of the sale of our reverse mortgage business on April 1, 2013, partially offset by higher net expenses after allocations to our operating segments in the current year.

144

Amortization of deferred acquisition costs and intangibles decreased mainly related to higher software allocations to our operating segments in the current year.

Interest expense increased largely driven by debt issuances in August and December of 2013, partially offset by the repurchase of $350 million of senior notes in August 2013.

The increase in the income tax benefit was primarily related to favorable adjustments of $17 million recorded in the current year primarily from the release of a valuation allowance and state and federal true ups related to the prior year tax return. The increase was partially offset by the tax effects of stock-based compensation expense in the current year.

Investments and Derivative Instruments

Investment results

The following tables set forth information about our investment income, excluding net investment gains (losses), for each component of our investment portfolio for the periods indicated:


	Three months ended June 30,												Increase (decrease)
(Amounts in millions)	2014						2013						2014 vs. 2013
	Yield			Amount			Yield			Amount			Yield			Amount
Fixed maturity securities—taxable		4.7	%	$	666			4.9	%	$	672			(0.2	)%	$	(6	)
Fixed maturity securities—non-taxable		3.5	%		3			2.9	%		2			0.6	%		1
Commercial mortgage loans		5.5	%		81			5.5	%		81			—	%		—
Restricted commercial mortgage loans related to securitization entities		6.7	%		4			8.6	%		7			(1.9	)%		(3	)
Equity securities		5.3	%		4			5.7	%		6			(0.4	)%		(2	)
Other invested assets ⁽¹⁾		29.9	%		39			20.2	%		39			9.7	%		—
Restricted other invested assets related to securitization entities		1.0	%		1			—	%		—			1.0	%		1
Policy loans		8.7	%		32			7.8	%		32			0.9	%		—
Cash, cash equivalents and short-term investments		0.6	%		7			0.5	%		5			0.1	%		2

Gross investment income before expenses and fees		4.7	%		837			4.9	%		844			(0.2	)%		(7	)
Expenses and fees		(0.1	)%		(24	)		(0.1	)%		(23	)		—	%		(1	)

Net investment income		4.6	%	$	813			4.8	%	$	821			(0.2	)%	$	(8	)

Average invested assets and cash				$	70,223					$	68,503					$	1,720

⁽¹⁾	Included in other invested assets was $14 million and $21 million of net investment income related to reinsurance arrangements accounted for under the deposit method during the three months ended June 30, 2014 and 2013, respectively.

145


	Six months ended June 30,												Increase (decrease)
	2014						2013						2014 vs. 2013
(Amounts in millions)	Yield			Amount			Yield			Amount			Yield			Amount
Fixed maturity securities—taxable		4.7	%	$	1,314			4.8	%	$	1,328			(0.1	)%	$	(14	)
Fixed maturity securities—non-taxable		3.6	%		6			2.8	%		4			0.8	%		2
Commercial mortgage loans		5.5	%		164			5.6	%		163			(0.1	)%		1
Restricted commercial mortgage loans related to securitization entities		7.1	%		8			8.6	%		14			(1.5	)%		(6	)
Equity securities		5.2	%		8			4.5	%		10			0.7	%		(2	)
Other invested assets ⁽¹⁾		33.3	%		89			20.0	%		87			13.3	%		2
Restricted other invested assets related to securitization entities		1.0	%		2			—	%		—			1.0	%		2
Policy loans		8.6	%		63			7.9	%		64			0.7	%		(1	)
Cash, cash equivalents and short-term investments		0.5	%		12			0.6	%		12			(0.1	)%		—

Gross investment income before expenses and fees		4.7	%		1,666			4.8	%		1,682			(0.1	)%		(16	)
Expenses and fees		(0.1	)%		(48	)		(0.1	)%		(47	)		—	%		(1	)

Net investment income		4.6	%	$	1,618			4.7	%	$	1,635			(0.1	)%	$	(17	)

Average invested assets and cash				$	70,027					$	68,924					$	1,103

⁽¹⁾	Included in other invested assets was $35 million and $43 million of net investment income related to reinsurance arrangements accounted for under the deposit method during the six months ended June 30, 2014 and 2013, respectively.

Yields are based on net investment income as reported under U.S. GAAP and are consistent with how the company measures its investment performance for management purposes. Yields are annualized, for interim periods, and are calculated as net investment income as a percentage of average quarterly asset carrying values except for fixed maturity and equity securities, derivatives and derivative counterparty collateral, which exclude unrealized fair value adjustments and securities lending activity, which is included in other invested assets and is calculated net of the corresponding securities lending liability.

For the three months ended June 30, 2014, annualized weighted-average investment yields decreased primarily attributable to lower reinvestment yields on higher average invested assets in the current year. The three months ended June 30, 2014 included a decrease of $5 million attributable to changes in foreign exchange rates.

For the six months ended June 30, 2014, annualized weighted-average investment yields decreased primarily attributable to lower reinvestment yields on higher average invested assets and $7 million of lower gains related to bond calls and mortgage loan prepayments, partially offset by $16 million of higher gains related to limited partnerships in the current year. The six months ended June 30, 2014 included a decrease of $15 million attributable to changes in foreign exchange rates.

146

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		(7	)		(2	)		(28	)		(44	)
Contingent consideration adjustment		—			(1	)		—			—
Other		(1	)		—			(1	)		(1	)

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

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

•

Net investment losses related to derivatives of $7 million during the three months ended June 30, 2014 were primarily associated with GMWB losses, including decreases in the values of instruments used to protect statutory surplus from equity market fluctuation. We also had losses related to derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries, as well as losses related to a non-qualified derivative strategy to mitigate interest rate risk with our statutory capital positions. These losses were partially offset by gains related to derivatives used to hedge foreign currency risk of assets held and proceeds from the IPO of our Australian mortgage insurance business. In addition, there were gains related to our hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to a decrease in long-term interest rates. Net investment losses related to derivatives of $2 million during the three months ended June 30, 2013 were primarily associated with GMWB losses due to decreases in the values of instruments used to protect statutory surplus from declines in the S&P index and policyholder funds underperforming as compared to market indices. In addition, there were losses related to our hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to an increase in long-term interest rates. These losses were partially offset by gains related to a non-qualified derivative strategy to mitigate interest rate risk with our statutory capital positions and gains related to derivatives used to hedge foreign currency risk associated with near-term expected dividend payments from certain subsidiaries.

147

•

The aggregate fair value of securities sold at a loss during the three months ended June 30, 2014 and 2013 was $243 million from the sale of 61 securities and $308 million from the sale of 95 securities, respectively, which was approximately 95% and 87%, respectively, of book value. The loss on sales of securities during the three months ended June 30, 2014 was primarily driven by widening credit spreads. Generally, securities that are sold at a loss represent either small dollar amounts or percentage losses upon disposition. The securities sold at a loss in the second quarter of 2014 included three U.S. corporate securities that were sold for a total loss of $10 million related to portfolio repositioning activities. The securities sold at a loss in the second quarter of 2013 included three asset-backed securities that were sold for a total loss of $10 million and one mortgage-backed security that was sold for a total loss of $4 million related to portfolio repositioning activities.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

•

Net investment losses related to derivatives of $28 million during the six months ended June 30, 2014 were primarily associated with GMWB losses, including decreases in the values of instruments used to protect statutory surplus from equity market fluctuation. We also had losses related to a non-qualified derivative strategy to mitigate interest rate risk with our statutory capital positions, in addition to losses related to derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries, proceeds from the IPO of our Australian mortgage insurance business and assets held. These losses were partially offset by gains related to our hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to a decrease in long-term interest rates. Net investment losses related to derivatives of $44 million during the six months ended June 30, 2013 were primarily associated with GMWB losses due to decreases in the values of instruments used to protect statutory surplus from declines in the S&P index and policyholder funds underperforming as compared to market indices. In addition, there were losses related to our hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to an increase in long-term interest rates. These losses were partially offset by gains related to a non-qualified derivative strategy to mitigate interest rate risk with our statutory capital positions. Additionally, there were gains on credit default swaps where we sold protection to improve diversification and portfolio yield from narrowing credit spreads.

148

•

We recorded higher net gains related to the sale of available-for-sale securities during the six months ended June 30, 2014 compared to the six months ended June 30, 2013, including a gain on a previously impaired financial hybrid security that was called by the issuer in the current year. We recorded $20 million of gains related to trading securities during the six months ended June 30, 2014 compared to $9 million of losses during the six months ended June 30, 2013 due to higher unrealized gains resulting from changes in the long-term interest rate environment. We recorded $7 million of lower net gains related to securitization entities during the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily related to lower gains on derivatives, partially offset by gains on trading securities in the current year compared to losses in the prior year.

•

The aggregate fair value of securities sold at a loss during the six months ended June 30, 2014 and 2013 was $507 million from the sale of 105 securities and $885 million from the sale of 202 securities, respectively, which was approximately 93% and 89%, respectively, of book value. The loss on sales of securities during the six months ended June 30, 2014 was primarily driven by widening credit spreads. Generally, securities that are sold at a loss represent either small dollar amounts or percentage losses upon disposition. The securities sold at a loss during the six months ended June 30, 2014 included three U.S. corporate securities sold for a total loss of $8 million and one foreign corporate security sold for a total loss of $3 million in the first quarter of 2014 and three U.S. corporate securities that were sold for a total loss of $10 million in the second quarter of 2014 related to portfolio repositioning activities. The securities sold at a loss during the six months ended June 30, 2013 included three mortgage-backed securities sold for a total loss of $19 million, one asset-backed security sold for a total loss of $3 million and one corporate security sold for a total loss of $3 million in the first quarter of 2013 and three asset-backed securities that were sold for a total loss of $10 million and one mortgage-backed security that was sold for a total loss of $4 million in the second quarter of 2013 related to portfolio repositioning activities.

Investment portfolio

The following table sets forth our cash, cash equivalents and invested assets as of the dates indicated:


	June 30, 2014					December 31, 2013
(Amounts in millions)	Carrying value		% of total			Carrying value		% of total
Fixed maturity securities, available-for-sale:
Public	$	46,667		61	%	$	44,375		61	%
Private		15,693		20			14,254		20
Commercial mortgage loans		5,986		8			5,899		8
Other invested assets		1,963		3			1,686		2
Policy loans		1,514		2			1,434		2
Restricted other invested assets related to securitization entities		404		1			391		1
Equity securities, available-for-sale		320		—			341		—
Restricted commercial mortgage loans related to securitization entities		217		—			233		—
Cash and cash equivalents		4,138		5			4,214		6

Total cash, cash equivalents and invested assets	$	76,902		100	%	$	72,827		100	%

For a discussion of the change in cash, cash equivalents and invested assets, see the comparison for this line item under “—Consolidated Balance Sheets.” See note 4 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to our investment portfolio.

149

We hold fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral and certain other financial instruments, which are carried at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. As of June 30, 2014, approximately 9% of our investment holdings recorded at fair value was based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 6 in our “—Notes to Condensed Consolidated Financial Statements” for additional information related to fair value.

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:


	Amortized cost or cost		Gross unrealized gains				Gross unrealized losses						Fair value
(Amounts in millions)	Amortized cost or cost		Not other-than- temporarily impaired		Other-than- temporarily impaired		Not other-than- temporarily impaired			Other-than- temporarily impaired			Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	4,894	$	677	$	—	$	(88	)	$	—		$	5,483
Tax-exempt ⁽¹⁾		353		21		—		(21	)		—			353
Government—non-U.S. ⁽²⁾		1,989		146		—		(3	)		—			2,132
U.S. corporate ^{(2), (3)}		24,113		2,809		19		(94	)		—			26,847
Corporate—non-U.S. ⁽²⁾		14,695		1,087		—		(33	)		—			15,749
Residential mortgage-backed ⁽⁴⁾		4,923		309		14		(33	)		(1	)		5,212
Commercial mortgage-backed		2,721		138		4		(17	)		(1	)		2,845
Other asset-backed ⁽⁴⁾		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

⁽¹⁾	Fair value included municipal bonds of $271 million related to special revenue bonds, $77 million related to general obligation bonds and $5 million related to other municipal bonds.

⁽²⁾	Fair value included European periphery exposure of $242 million in Ireland, $225 million in Spain, $152 million in Italy and $16 million in Portugal.

⁽³⁾	Fair value included municipal bonds of $1,270 million related to special revenue bonds and $524 million related to general obligation bonds.

⁽⁴⁾	Fair value included $65 million collateralized by sub-prime residential mortgage loans and $93 million collateralized by Alt-A residential mortgage loans.

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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:


	Amortized cost or cost		Gross unrealized gains				Gross unrealized losses						Fair value
(Amounts in millions)	Amortized cost or cost		Not other-than- temporarily impaired		Other-than- temporarily impaired		Not other-than- temporarily impaired			Other-than- temporarily impaired			Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	4,710	$	331	$	—	$	(231	)	$	—		$	4,810
Tax-exempt ⁽¹⁾		324		7		—		(36	)		—			295
Government—non-U.S. ⁽²⁾		2,057		104		—		(15	)		—			2,146
U.S. corporate ^{(2), (3)}		23,614		1,761		19		(359	)		—			25,035
Corporate—non-U.S. ⁽²⁾		14,489		738		—		(156	)		—			15,071
Residential mortgage-backed ⁽⁴⁾		5,058		232		9		(70	)		(4	)		5,225
Commercial mortgage-backed		2,886		75		2		(62	)		(3	)		2,898
Other asset-backed ⁽⁴⁾		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

⁽¹⁾	Fair value included municipal bonds of $218 million related to special revenue bonds, $72 million related to general obligation bonds and $5 million related to other municipal bonds.

⁽²⁾	Fair value included European periphery exposure of $211 million in Spain, $210 million in Ireland, $155 million in Italy and $15 million in Portugal.

⁽³⁾	Fair value included municipal bonds of $1,089 million related to special revenue bonds and $476 million related to general obligation bonds.

⁽⁴⁾	Fair value included $69 million collateralized by sub-prime residential mortgage loans and $98 million collateralized by Alt-A residential mortgage loans.

Fixed maturity securities increased $3.7 billion principally from higher net unrealized gains attributable to changes in interest rates in the current year and as purchases exceeded sales and maturities.

The majority of our unrealized losses were related to securities held in our U.S. Life Insurance segment. Our U.S. Mortgage Insurance segment had gross unrealized losses of $24 million and $44 million as of June 30, 2014 and December 31, 2013, respectively.

Our exposure in peripheral European countries consists of fixed maturity securities and trading bonds in Portugal, Ireland, Italy and Spain. Investments in these countries are primarily made to support our international businesses and to diversify our U.S. corporate fixed maturity securities with European bonds denominated in U.S. dollars. During the six months ended June 30, 2014, our exposure to the peripheral European countries increased by $44 million to $635 million with unrealized gains of $52 million. Our exposure as of June 30, 2014 was diversified with direct exposure to local economies of $246 million, indirect exposure through debt issued by subsidiaries outside of the European periphery of $110 million and exposure to multinational companies where the majority of revenues come from outside of the country of domicile of $279 million.

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Commercial mortgage loans

The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:


	June 30, 2014
(Dollar amounts in millions)	Total recorded investment		Number of loans		Loan-to-value ⁽¹⁾			Delinquent principal balance		Number of delinquent loans
Loan Year
2004 and prior	$	835		437		40	%	$	—		—
2005		980		244		55	%		—		—
2006		918		235		62	%		33		6
2007		788		153		68	%		—		—
2008		234		51		67	%		6		1
2009		—		—		—	%		—		—
2010		132		60		44	%		—		—
2011		268		53		57	%		—		—
2012		657		96		63	%		—		—
2013		855		138		66	%		—		—
2014		346		61		68	%		—		—

Total	$	6,013		1,528		59	%	$	39		7

⁽¹⁾	Represents weighted-average loan-to-value as of June 30, 2014.


	December 31, 2013
(Dollar amounts in millions)	Total recorded investment		Number of loans		Loan-to-value ⁽¹⁾			Delinquent principal balance		Number of delinquent loans
Loan Year
2004 and prior	$	941		486		41	%	$	—		—
2005		1,025		253		55	%		—		—
2006		964		242		62	%		32		6
2007		812		157		70	%		1		1
2008		237		51		68	%		6		1
2009		—		—		—	%		—		—
2010		142		63		44	%		—		—
2011		273		54		58	%		—		—
2012		673		97		63	%		—		—
2013		865		138		67	%		—		—

Total	$	5,932		1,541		59	%	$	39		8

⁽¹⁾	Represents weighted-average loan-to-value as of December 31, 2013.

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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

Other invested assets

The following table sets forth the carrying values of our other invested assets as of the dates indicated:


	June 30, 2014					December 31, 2013
(Amounts in millions)	Carrying value		% of total			Carrying value		% of total
Derivatives	$	616		32	%	$	471		28	%
Derivatives counterparty collateral		417		21			199		12
Securities lending collateral		277		14			187		11
Limited partnerships		263		13			282		17
Trading securities		226		12			239		14
Short-term investments		82		4			220		13
Other investments		82		4			88		5


Total other invested assets	$	1,963		100	%	$	1,686		100	%

Our investments in derivatives and derivatives counterparty collateral increased primarily attributable to changes in the long-term interest rate environment in the current year. Securities lending collateral also increased primarily driven by market demand. Short-term investments decreased from net maturities and sales in the current year.

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Derivatives

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB and fixed index annuity 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


(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

The decrease in the notional value of derivatives was primarily attributable to a $0.5 billion notional decrease in qualified interest rate swaps and forward bond purchase commitments related to our interest rate hedging strategy associated with our long-term care insurance products.

The number of policies related to our GMWB embedded derivatives decreased as variable annuity products are no longer being offered. The number of policies related to our fixed index annuity and indexed universal life embedded derivatives increased as a result of product sales.

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Consolidated Balance Sheets

Total assets. Total assets increased $3,599 million from $108,045 million as of December 31, 2013 to $111,644 million as of June 30, 2014.

•

Cash, cash equivalents and invested assets increased $4,075 million primarily from an increase of $4,151 million in invested assets. Our fixed maturity securities portfolio increased $3,731 million principally attributable to higher unrealized gains attributable to changes in interest rates in the current year and as purchases exceeded sales and maturities. Other invested assets increased $277 million primarily driven by an increase in derivatives and derivatives counterparty collateral largely attributable to changes in the long-term interest rate environment in the current year. Securities lending collateral also increased primarily driven by market demand. These increases in other invested assets were partially offset by a decrease in short-term investments from net maturities and sales in the current year.

•

Separate account assets decreased $227 million as death and surrender benefits exceeded favorable market performance in the current year.

Total liabilities. Total liabilities increased $955 million from $92,425 million as of December 31, 2013 to $93,380 million as of June 30, 2014.

•

Our policyholder-related liabilities increased $1,201 million primarily as a result of an increase in our long-term care insurance business from growth of our in-force block and higher claims in the current year. Our fixed annuities and life insurance businesses also increased related to growth of our in-force blocks. Our international mortgage insurance business increased mainly related to higher unearned premiums from changes in foreign exchange rates in the current year. These increases were partially offset by a decrease in our U.S. mortgage insurance business due to lower delinquencies in the current year and the continued runoff of our variable annuity and institutional products.

•

Other liabilities decreased $394 million mainly related to a decrease in derivatives and derivative counterparty collateral largely attributable to changes in the long-term interest rate environment in the current year.

•

Long-term borrowings decreased $470 million largely related to the repayment of $485 million on our senior notes that matured in June 2014. In addition, Genworth Canada issued CAD$160 million of senior notes due in 2024 and used the proceeds to repay CAD$150 million of senior notes that were scheduled to mature in 2015. The remaining change related to changes in foreign exchange rates on our Canadian and Australian debt.

•

Deferred tax liability increased $868 million primarily from an increase in unrealized net investment gains in the current year.

•

Separate account liabilities decreased $227 million as death and surrender benefits exceeded favorable market performance in the current year.

Total stockholders’ equity. Total stockholders’ equity increased $2,644 million from $15,620 million as of December 31, 2013 to $18,264 million as of June 30, 2014.

•

Additional paid-in capital decreased $141 million largely attributable to the IPO of 33.8% of our Australian mortgage insurance business in May 2014.

•

We reported net income available to Genworth Financial, Inc.’s common stockholders of $360 million in the current year.

•

Accumulated other comprehensive income (loss) increased $1,619 million predominately attributable to higher net unrealized investment gains and derivatives qualifying as hedges mainly related to changes in the long-term interest rate environment in the current year.

•

Noncontrolling interests increased $806 million predominately attributable to the IPO of 33.8% of our Australian mortgage insurance business in May 2014.

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Liquidity and Capital Resources

Liquidity and capital resources represent our overall financial strength and our ability to generate cash flows from our businesses, borrow funds at competitive rates and raise new capital to meet our operating and growth needs.

Genworth and subsidiaries

The following table sets forth our unaudited condensed consolidated cash flows for the six months ended June 30:


(Amounts in millions)	2014			2013
Net cash from operating activities	$	578		$	646
Net cash from investing activities		(938	)		718
Net cash from financing activities		230			(1,262	)

Net increase (decrease) in cash before foreign exchange effect	$	(130	)	$	102

Our principal sources of cash include sales of our products and services, income from our investment portfolio and proceeds from sales of investments. As an insurance business, we typically generate positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed policy acquisition costs, benefits paid, redemptions and operating expenses. These positive cash flows are then invested to support the obligations of our insurance and investment products and required capital supporting these products. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. Cash inflows from operating activities during the current year decreased compared to the prior year primarily as higher tax payments were partially offset by lower claim payments in the current year.

In analyzing our cash flow, we focus on the change in the amount of cash available and used in investing activities. We had cash outflows from investing activities during the current year as purchases of fixed maturity securities exceeded maturities and sales. We had cash inflows from investing activities during the prior year as maturities and sales of fixed maturity securities exceeded purchases.

Changes in cash from financing activities primarily relate to the issuance of, and redemptions and benefit payments on, universal life insurance and investment contracts; the issuance and acquisition of debt and equity securities; the issuance and repayment or repurchase of borrowings and non-recourse funding obligations; and dividends to our stockholders and other capital transactions. We had cash inflows from financing activities during the current year as deposits exceeded withdrawals of our investment contracts in the current year. In addition, the proceeds from the IPO of 33.8% of our Australian mortgage insurance business and issuance of senior notes by Genworth Canada were mostly offset by the repayment of senior notes in the current year. We had cash outflows from financing activities during the prior year as withdrawals exceeded deposits on our investment contracts from scheduled maturities of our institutional products in the prior year.

In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on our consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary.

Under the securities lending program in the United States, the borrower is required to provide collateral, which can consist of cash or government securities, on a daily basis in amounts equal to or exceeding 102% of the applicable securities loaned. Currently, we only accept cash collateral from borrowers under the program.

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Cash collateral received by us on securities lending transactions is reflected in other invested assets with an offsetting liability recognized in other liabilities for the obligation to return the collateral. Any cash collateral received is reinvested by our custodian based upon the investment guidelines provided within our agreement. In the United States, the reinvested cash collateral is primarily invested in a money market fund approved by the NAIC, U.S. and foreign government securities, U.S. government agency securities, asset-backed securities and corporate debt securities. As of June 30, 2014 and December 31, 2013, the fair value of securities loaned under our securities lending program in the United States was $279 million and $191 million, respectively. As of June 30, 2014 and December 31, 2013, the fair value of collateral held under our securities lending program in the United States was $277 million and $187 million, respectively, and the offsetting obligation to return collateral of $288 million and $199 million, respectively, was included in other liabilities in our consolidated balance sheets. We did not have any non-cash collateral provided by the borrower in our securities lending program in the United States as of June 30, 2014 and December 31, 2013.

Under our securities lending program in Canada, the borrower is required to provide collateral consisting of government securities on a daily basis in amounts equal to or exceeding 105% of the fair value of the applicable securities loaned. Securities received from counterparties as collateral are not recorded on our consolidated balance sheet given that the risk and rewards of ownership is not transferred from the counterparties to us in the course of such transactions. Additionally, there was no cash collateral as cash collateral is not permitted as an acceptable form of collateral under the program. In Canada, the lending institution must be included on the approved Securities Lending Borrowers List with the Canadian regulator and the intermediary must be rated at least “AA-” by S&P. As of June 30, 2014 and December 31, 2013, the fair value of securities loaned under our securities lending program in Canada was $137 million and $229 million, respectively.

We also have a repurchase program in which we sell an investment security at a specified price and agree to repurchase that security at another specified price at a later date. Repurchase agreements are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired, including accrued interest, as specified in the respective agreements. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty and us against credit exposure. Cash received is invested in fixed maturity securities. As of June 30, 2014 and December 31, 2013, the fair value of securities pledged under the repurchase program was $700 million and $890 million, respectively, and the repurchase obligation of $630 million and $919 million, respectively, was included in other liabilities in our consolidated balance sheets.

Genworth—holding company

Genworth Financial and Genworth Holdings each acts as a holding company for their respective subsidiaries and do not have any significant operations of their own. Dividends from their respective subsidiaries, payments to them under tax sharing and expense reimbursement arrangements with their subsidiaries and proceeds from borrowings or securities issuances are their principal sources of cash to meet their obligations. Insurance laws and regulations regulate the payment of dividends and other distributions to Genworth Financial and Genworth Holdings by their insurance subsidiaries. We expect dividends paid by the insurance subsidiaries will vary depending on strategic objectives, regulatory requirements and business performance.

The primary uses of funds at Genworth Financial and Genworth Holdings include payment of holding company general operating expenses (including taxes), payment of principal, interest and other expenses on current and any future borrowings, payments under current and any future guarantees (including guarantees of certain subsidiary obligations), payment of amounts owed to GE under the Tax Matters Agreement, payments to subsidiaries (and, in the case of Genworth Holdings, to Genworth Financial) under tax sharing agreements, contributions to subsidiaries, repurchases of debt and equity securities, potentially payments for acquisitions, payment of dividends on Genworth Financial common stock (to the extent declared by Genworth Financial’s Board of Directors) and, in the case of Genworth Holdings, loans, dividends or other distributions to Genworth

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Financial. In deploying future capital, such as proceeds from the recent IPO of our Australian mortgage insurance business, important current priorities include focusing on our operating businesses so they remain appropriately capitalized, and accelerating progress on reducing overall indebtedness. We may from time to time seek to repurchase or redeem outstanding notes for cash (with cash on hand or proceeds from the issuance of new debt) in open market purchases, tender offers, privately negotiated transactions or otherwise.

Our Board of Directors has suspended the payment of dividends on our common stock indefinitely. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will be dependent on many factors including the receipt of dividends from our operating subsidiaries, our financial condition and operating results, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, our credit and financial strength ratings and such other factors as the Board of Directors deems relevant. In addition, our Board of Directors has suspended repurchases of our common stock under our stock repurchase program indefinitely. The resumption of our stock repurchase program will be at the discretion of our Board of Directors.

Genworth Holdings had $1,073 million and $1,219 million of cash and cash equivalents as of June 30, 2014 and December 31, 2013, respectively. Genworth Holdings also held $150 million in U.S. government securities as of June 30, 2014 and December 31, 2013.

During the six months ended June 30, 2014, we received dividends from our international subsidiaries of $563 million, including approximately $500 million from the net proceeds of the IPO of our Australian mortgage insurance business. During the six months ended June 30, 2014, Genworth Financial contributed $12 million to Genworth Holdings for expenses related to the IPO which subsequently contributed it to its subsidiaries. The net proceeds of $500 million received by Genworth Holdings were net of capital contributions for these expenses which will be paid to Genworth Holdings in the third quarter of 2014.

Regulated insurance subsidiaries

The liquidity requirements of our regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to us, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements.

Our insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. Our insurance subsidiaries’ principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income, including commissions, cost of insurance, mortality, expense and surrender charges, contract underwriting fees, investment management fees and dividends and distributions from their subsidiaries. The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets.

Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar duration such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. In June 2014, one of our U.S. life insurance subsidiaries completed a life reinsurance transaction that generated approximately $90 million in additional unassigned surplus on a U.S. statutory basis. As of June 30, 2014, our total cash, cash

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equivalents and invested assets were $76.9 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership interests and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 31% of the carrying value of our total cash, cash equivalents and invested assets as of June 30, 2014.

On April 29, 2014, Genworth Canada announced acceptance by the Toronto Stock Exchange of Genworth Canada’s Notice of Intention to Make a Normal Course Issuer Bid (“NCIB”). Pursuant to the NCIB, Genworth Canada may, if considered advisable, purchase from time to time over the next 12 months, up to an aggregate of 4.7 million of its issued and outstanding common shares. If Genworth Canada decides to repurchase shares through the NCIB, we may participate in the NCIB in order to maintain our overall ownership at its current level.

In May 2014, our U.S. mortgage holding company contributed $300 million to GEMICO, our primary U.S. mortgage insurance subsidiary.

In June 2013, the FHFA announced strategic priorities for the GSEs and indicated that there could be changes to the guidelines contained within the PMIERs. On July 10, 2014, at the direction of the FHFA, each GSE released publicly a draft of its revised PMIERs. These guidelines, as drafted, contemplate an effective date for compliance 180 days after the final publication date, which is anticipated to be on or about year-end 2014. In addition, the guidelines permit a transition period, subject to GSE approval, of two years from the publication date to meet the required capital levels.

It is our intent that our U.S. mortgage insurance business will meet the additional capital requirements contained within the guidelines of the revised PMIERs by the anticipated effective date of June 30, 2015, depending upon the availability of the capital and reinsurance markets, the performance of our businesses and absent any unforeseen developments. We will seek to utilize the transition period as approved by the FHFA and GSEs if we do not comply by the anticipated effective date. We believe that our U.S. mortgage insurance business is well positioned to meet the draft version of the operational and financial requirements contained within the revised guidelines within the prescribed transition period and expect the business to maintain its strong presence in the private mortgage insurance market.

Capital resources and financing activities

We repaid $485 million of our 5.75% senior notes that matured in June 2014.

On April 1, 2014, Genworth Canada, our majority-owned subsidiary, issued CAD$160 million of 4.242% senior notes due 2024. The senior notes are redeemable at the option of Genworth Canada, in whole or in part, at any time. The net proceeds of the offering were used to redeem, in full, its existing senior notes due December 2015 with a principal amount of CAD$150 million and bearing a fixed annual interest rate of 4.59%. In conjunction with the redemption, Genworth Canada made an early redemption payment to existing noteholders of approximately CAD$7 million in the second quarter of 2014.

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We believe existing cash held at Genworth Holdings combined with dividends from subsidiaries, payments under tax sharing and expense reimbursement arrangements with subsidiaries and proceeds from borrowings or securities issuances will provide us with sufficient capital flexibility and liquidity to meet our future operating requirements. We actively monitor our liquidity position, liquidity generation options and the credit markets given changing market conditions. We manage liquidity at Genworth Holdings to maintain a minimum balance of one and half times expected annual debt interest payments plus an additional excess of $350 million, although the excess amount may be lower during the quarter due to the timing of cash inflows and outflows. We will evaluate the target level of the excess amount as circumstances warrant. We cannot predict with any certainty the impact to us from any future disruptions in the credit markets or further downgrades by one or more of the rating agencies of the financial strength ratings of our insurance company subsidiaries and/or the credit ratings of our holding companies. The availability of additional funding will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, the overall availability of credit to the financial services industry, the level of activity and availability of reinsurance, our credit ratings and credit capacity and the performance of and outlook for our business.

Contractual obligations and commercial commitments

We enter into obligations with third parties in the ordinary course of our operations. However, we do not believe that our cash flow requirements can be assessed based upon analysis of these obligations as the funding of these future cash obligations will be from future cash flows from premiums, deposits, fees and investment income that are not reflected herein. Future cash outflows, whether they are contractual obligations or not, also will vary based upon our future needs. Although some outflows are fixed, others depend on future events. Examples of fixed obligations include our obligations to pay principal and interest on fixed rate borrowings. Examples of obligations that will vary include obligations to pay interest on variable rate borrowings and insurance liabilities that depend on future interest rates and market performance. Many of our obligations are linked to cash-generating contracts. These obligations include payments to contractholders that assume those contractholders will continue to make deposits in accordance with the terms of their contracts. In addition, our operations involve significant expenditures that are not based upon “commitments.”

Except as described above, there have been no material additions or changes to our contractual obligations and commercial commitments as set forth in our 2013 Annual Report on Form 10-K filed on March 3, 2014.

Securitization Entities

There were no off-balance sheet securitization transactions during the six months ended June 30, 2014 or 2013.

New Accounting Standards

For a discussion of recently adopted accounting standards, see note 2 in our “—Notes to Condensed Consolidated Financial Statements.”

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. The following is a discussion of our market risk exposures and our risk management practices.

While equity and credit markets generally improved during 2013, credit market volatility continued into the first half of 2014 and credit spreads continued to further compress further during the first half of 2014.

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Additionally, U.S. Treasury yields remained at historically low levels during the first half of 2014. See “—Business trends and conditions” and “—Investments and Derivative Instruments” in “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of recent market conditions.

In the second quarter of 2014, the U.S. dollar weakened against currencies in Australia and the United Kingdom as well as the Euro as compared to the second quarter of 2013. However, the U.S. dollar strengthened against the currency in Canada in the second quarter of 2014 compared to the second quarter of 2013. This has generally resulted in higher levels of reported revenues and net income, assets, liabilities and accumulated other comprehensive income (loss) in our U.S. dollar consolidated financial statements. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact of changes in foreign currency exchange rates.

There were no other material changes in our market risks since December 31, 2013.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2014, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2014.

Changes in Internal Control Over Financial Reporting During the Quarter Ended June 30, 2014

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Legal Proceedings

We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, claims payments and procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement Procedures Act (“RESPA”) or related state anti-inducement laws, and mortgage insurance policy rescissions and curtailments, and breaching fiduciary or other duties to customers, including but not limited to breach of customer information. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state,

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federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations.

Except as disclosed below, there were no material developments during the three months ended June 30, 2014 in any of the legal proceedings identified in Part I, Item 3 of our 2013 Annual Report on Form 10-K, as updated in Part II, Item 1 of our Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 2014. In addition, except as disclosed below, there were no new material legal proceedings initiated during the three months ended June 30, 2014.

As previously disclosed, in April 2012, two of our U.S. mortgage insurance subsidiaries were named as respondents in two arbitrations, one brought by Bank of America, N.A. and one brought by Countrywide Home Loans, Inc. and Bank of America, N.A. as claimants. Claimants alleged breach of contract and breach of the covenant of good faith and fair dealing and seek a declaratory judgment relating to our denial, curtailment and rescission of mortgage insurance coverage. In June 2012, our U.S. mortgage insurance subsidiaries responded to the arbitration demands and asserted numerous counterclaims against the claimants. On December 31, 2013, the parties reached an agreement to resolve that portion of both arbitrations involving rescission practices. The effectiveness of the agreement was conditioned upon consent by the GSEs to and the parties’ execution of a definitive agreement requiring submission of curtailment and denial disputes to a binding alternative dispute proceeding (“Curtailment ADR Agreement”). In March 2014, the parties executed the Curtailment ADR Agreement. In the second quarter of 2014, the GSEs consented to the December 31, 2013 agreement, the final condition precedent to the effectiveness of the rescission settlement. The GSEs also consented to the Curtailment ADR Agreement during the second quarter of 2014. With the effectiveness of the rescission settlement, the parties have commenced the process necessary for a final dismissal of the arbitration demands and counterclaims related to that portion of both arbitrations involving rescission practices. That dismissal is expected to occur in the third quarter of 2014. Claims curtailments and denials are the only remaining areas of dispute under the arbitrations. The parties have selected an arbitration panel. The first phase of the arbitration hearing is scheduled to begin in March 2015. Claimants and our U.S. mortgage insurance subsidiaries are engaged in settlement negotiations regarding a potential resolution of the pending disputes related to claims curtailments or denials. In the event settlement is not reached, we intend to vigorously defend our practices in these arbitrations.

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At this time, we cannot determine or predict the ultimate outcome of any of the pending legal and regulatory matters specifically identified above or the likelihood of potential future legal and regulatory matters against us. We also are not able to provide an estimate or range of possible losses related to these matters. Therefore, we cannot ensure that the current investigations and proceedings will not have a material adverse effect on our business, financial condition or results of operations. In addition, it is possible that related investigations and proceedings may be commenced in the future, and we could become subject to additional unrelated investigations and lawsuits. Increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal precedents and industry-wide regulations or practices that could adversely affect our business, financial condition and results of operations.

Item 1A.

Risk Factors

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our 2013 Annual Report on Form 10-K which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. Except as disclosed below, there have been no material changes to the risk factors set forth in the above-referenced filing as of June 30, 2014.

The GSEs are conducting a review of their eligibility standards for private mortgage insurers (which have also become known as the PMIERs) and have released draft versions of new PMIERs. If we are unable to meet the revised PMIERs upon their implementation, we may not be eligible to write new insurance on loans sold to or guaranteed by the GSEs, or the capital required to meet the new PMIERs may be higher than we anticipate, either of which would have a material adverse effect on our business, results of operations and financial condition.

Private mortgage insurers must satisfy PMIERs. Each GSE’s Congressional charter generally prohibits it from purchasing or guaranteeing a mortgage where the loan-to-value ratio exceeds 80% of home value unless the portion of the unpaid principal balance of the mortgage, which is in excess of 80% of the value of the property securing the mortgage, is protected against default by lender recourse, participation or by a qualified insurer. In furtherance of their respective charter requirements, each GSE has adopted PMIERs to establish when a mortgage insurer is qualified to issue coverage that will be acceptable to the respective GSE for purchase or guarantee of high loan-to-value mortgages.

The GSEs have the authority to implement new requirements at any time. In June 2013, the FHFA announced strategic priorities for the GSEs and indicated that there could be changes to the guidelines contained within the PMIERs. On July 10, 2014, at the direction of the FHFA, each GSE released publicly a draft of its revised PMIERs. A 60-day public comment period commenced after publication of the draft revised PMIERs, after which the FHFA and the GSEs will review and consider any commentary received before the draft revised PMIERs are finalized. The revised guidelines contained within the PMIERs, as drafted, contemplate an effective date for compliance 180 days after the final publication date, which is anticipated to be on or about year-end 2014. In addition, the guidelines permit a transition period, subject to GSE approval, of two years from the publication date to meet the revised capital levels.

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the amount and loan characteristics of new U.S. mortgage insurance business anticipated to be written, our preliminary estimate of the additional capital required to be fully compliant with the financial capital requirements contained in the draft revised PMIERs, assuming an effective date of June 30, 2015, will be between $450 million to $550 million and will decrease to less than $175 million by December 31, 2016. The amount of additional capital that will be required is dependent on, among other things: (i) the extent the final PMIERs as ultimately adopted differ materially from the draft PMIERs released on July 10, 2014, including with respect to the amount and timing of additional capital requirements and the amount of capital credit provided to various types of assets, and (ii) the application and interpretation of the guidelines by the GSEs and FHFA as they are implemented. Our ability to meet the final guidelines contained within the PMIERs is subject to the foregoing factors, as well as, among other things: (i) the housing market developing consistent with our current expectations, (ii) our generating expected U.S. mortgage insurance business earnings and capital levels, reducing risk in-force and reducing delinquencies as anticipated, and writing anticipated amounts and types of new U.S. mortgage insurance business, (iii) other sources of funding currently considered being available on the terms currently contemplated or at all, (iv) meeting our projected overall financial performance, capital and liquidity levels being as anticipated and (v) the approval by the GSEs of a transition period for us to meet financial requirements, if needed.

Although we believe we could utilize one or more of these additional sources of capital so that we would continue to be an eligible mortgage insurer after the revised PMIERs are fully effective, there can be no assurance this will be the case. As of the year ended December 31, 2013, Fannie Mae and Freddie Mac purchased the majority of the flow mortgage loans that we insure. If we are unable to meet existing or revised PMIERs or determine not to or are unable to utilize additional sources of capital, we may not be eligible to write new insurance on loans sold to or guaranteed by the GSEs, which would have a material adverse effect on our business, results of operations and financial condition.

If our reserves for future policy claims are inadequate, we may be required to increase our reserve liabilities, which could adversely affect our results of operations and financial condition.

We calculate and maintain reserves for estimated future payments of claims to our policyholders and contractholders in accordance with U.S. GAAP and industry accounting practices. We release these reserves as those future obligations are extinguished. The reserves we establish reflect estimates and actuarial assumptions with regard to our future experience. These estimates and actuarial assumptions involve the exercise of significant judgment. Our future financial results depend significantly upon the extent to which our actual future experience is consistent with the assumptions we have used in pricing our products and determining our reserves. Many factors, and changes in these factors, can affect future experience, including, but not limited to: interest rates; market returns and volatility; economic and social conditions, such as inflation, unemployment, home price appreciation or depreciation, and health care experience; policyholder persistency; insured life expectancy or longevity; insured morbidity; and doctrines of legal liability and damage awards in litigation. Therefore, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Moreover, we may not be able to mitigate the impact of unexpected adverse experience by increasing premiums add/or other charges to policyholders.

We regularly review our reserves and associated assumptions as part of our ongoing assessment of our business performance and risks. If we conclude that our reserves are insufficient to cover actual or expected policy and contract benefits and claim payments (as we have on various occasions in the past) as a result of changes in experience, assumptions or otherwise, we would be required to increase our reserves and incur charges for the period in which we make the determination. The amounts of such increases may be significant (as they have been on occasions in the past) and this would adversely affect our results of operations and financial condition and may put additional strain on our available liquidity.

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During the second quarter of 2014, we experienced meaningful increases in adverse claims experience for our long-term care insurance products, resulting in significant deterioration in operating income. The adverse claims experience in the second quarter of 2014 was due primarily to higher severity on both new and existing claims compared to the first quarter of 2014 and the second quarter of 2013, as well as an increase in new claims compared to the second quarter of 2013. As a result of recent experience, and in connection with our regular review of claims reserve assumptions for our long-term care insurance products, we are conducting a comprehensive review of our long-term care insurance claim reserves. The primary areas of focus in this review are: (i) an analysis of potential causes of the meaningful increases in adverse claims experience and (ii) an assessment of the assumptions and methodology underlying the associated reserves, including morbidity, mortality, interest rates and claim terminations. We intend to complete this review before the release of financial results for the third quarter of 2014. Given the review currently underway that will consider both long-term and recent experience, we will likely change some of our assumptions, which could increase our long-term care insurance claim reserves, and any increase may be material. Any such change in assumptions or increase in reserves could have a material adverse effect on our financial condition, statutory reserve and capital levels and/or results of operations.

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Item 6.

Exhibits


Number		Description
2.1		Offer Management Agreement among Genworth Mortgage Insurance Australia Limited, Genworth Financial, Inc., Genworth Financial Mortgage Insurance Pty Limited, Genworth Financial Mortgage Indemnity Limited and the joint lead managers named therein (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on May 21, 2014).

10.1		Master Agreement, dated April 23, 2014, between Genworth Financial, Inc. and Genworth Mortgage Insurance Australia Limited

10.2		Shareholder Agreement, dated May 21, 2014, among Genworth Mortgage Insurance Australia Limited, Brookfield Life Assurance Company Limited, Genworth Financial International Holdings, Inc. and Genworth Financial, Inc.

10.3		Assignment and Assumption Agreement for Shareholder Agreement, dated July 11, 2014, among Genworth MI Canada Inc., Genworth Mortgage Insurance Corporation and Genworth Residential Mortgage Assurance Corporation

12		Statement of Ratio of Income to Fixed Charges

31.1		Certification of Thomas J. McInerney

31.2		Certification of Martin P. Klein

32.1		Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code— Thomas J. McInerney

32.2		Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code— Martin P. Klein

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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