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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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		23230
(Address of Principal Executive Offices)		(Zip Code)

(804) 281-6000

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

As of October 28, 2014, 496,659,914 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION			3

Item 1.	Financial Statements		3
Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013			3
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013 (Unaudited)			4
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (Unaudited)			5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 and 2013 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 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		83

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		178

Item 4.	Controls and Procedures		178

PART II—OTHER INFORMATION			179

Item 1.	Legal Proceedings		179

Item 1A.	Risk Factors		180

Item 6.	Exhibits		189

Signatures			190

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	September 30, 2014			December 31, 2013
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	62,317		$	58,629
Equity securities available-for-sale, at fair value		313			341
Commercial mortgage loans		6,077			5,899
Restricted commercial mortgage loans related to securitization entities		209			233
Policy loans		1,512			1,434
Other invested assets		2,281			1,686
Restricted other invested assets related to securitization entities, at fair value		404			391

Total investments		73,113			68,613
Cash and cash equivalents		3,477			4,214
Accrued investment income		719			678
Deferred acquisition costs		5,085			5,278
Intangible assets		300			399
Goodwill		316			867
Reinsurance recoverable		17,374			17,219
Other assets		710			639
Separate account assets		9,420			10,138

Total assets	$	110,514		$	108,045

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	34,697		$	33,705
Policyholder account balances		25,827			25,528
Liability for policy and contract claims		7,987			7,204
Unearned premiums		4,085			4,107
Other liabilities ($42 and $50 other liabilities related to securitization entities)		3,605			4,096
Borrowings related to securitization entities ($83 and $75 at fair value)		225			242
Non-recourse funding obligations		2,010			2,038
Long-term borrowings		4,662			5,161
Deferred tax liability		875			206
Separate account liabilities		9,420			10,138

Total liabilities		93,393			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 September 30, 2014 and December 31, 2013, respectively; 497 million and 495 million shares outstanding as of September 30, 2014 and December 31, 2013, respectively		1			1
Additional paid-in capital		11,991			12,127

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		2,047			914
Net unrealized gains (losses) on other-than-temporarily impaired securities		20			12

Net unrealized investment gains (losses)		2,067			926

Derivatives qualifying as hedges		1,753			1,319
Foreign currency translation and other adjustments		114			297

Total accumulated other comprehensive income (loss)		3,934			2,542
Retained earnings		1,939			2,423
Treasury stock, at cost (88 million shares as of September 30, 2014 and December 31, 2013)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		15,165			14,393
Noncontrolling interests		1,956			1,227

Total stockholders’ equity		17,121			15,620

Total liabilities and stockholders’ equity	$	110,514		$	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						Nine months ended
	September 30,						September 30,
	2014			2013			2014			2013
Revenues:
Premiums	$	1,395		$	1,291		$	4,045		$	3,838
Net investment income		805			801			2,423			2,436
Net investment gains (losses)		(27	)		(23	)		(10	)		(63	)
Insurance and investment product fees and other		231			248			683			780

Total revenues		2,404			2,317			7,141			6,991

Benefits and expenses:
Benefits and other changes in policy reserves		1,986			1,169			4,436			3,639
Interest credited		185			184			552			552
Acquisition and operating expenses, net of deferrals		398			407			1,180			1,253
Amortization of deferred acquisition costs and intangibles		143			182			415			441
Goodwill impairment		550			—			550			—
Interest expense		114			124			361			371

Total benefits and expenses		3,376			2,066			7,494			6,256

Income (loss) from continuing operations before income taxes		(972	)		251			(353	)		735
Provision (benefit) for income taxes		(185	)		105			(13	)		254

Income (loss) from continuing operations		(787	)		146			(340	)		481
Income (loss) from discontinued operations, net of taxes		—			2			—			(12	)

Net income (loss)		(787	)		148			(340	)		469
Less: net income attributable to noncontrolling interests		57			40			144			117

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(844	)	$	108		$	(484	)	$	352

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	(1.70	)	$	0.21		$	(0.98	)	$	0.74

Diluted	$	(1.70	)	$	0.21		$	(0.98	)	$	0.73

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	(1.70	)	$	0.22		$	(0.98	)	$	0.71

Diluted	$	(1.70	)	$	0.22		$	(0.98	)	$	0.71

Weighted-average common shares outstanding:
Basic		496.6			494.0			496.4			493.3

Diluted		496.6			499.3			496.4			497.9

Supplemental disclosures:
Total other-than-temporary impairments	$	(13	)	$	(3	)	$	(16	)	$	(17	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		7			(2	)		7			(5	)

Net other-than-temporary impairments		(6	)		(5	)		(9	)		(22	)
Other investments gains (losses)		(21	)		(18	)		(1	)		(41	)

Total net investment gains (losses)	$	(27	)	$	(23	)	$	(10	)	$	(63	)

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)


	Three months ended						Nine months ended
	September 30,						September 30,
	2014			2013			2014			2013
Net income (loss)	$	(787	)	$	148		$	(340	)	$	469

Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired		(68	)		(191	)		1,171			(1,624	)
Net unrealized gains (losses) on other-than-temporarily impaired securities		1			5			8			57
Derivatives qualifying as hedges		101			(139	)		434			(467	)
Foreign currency translation and other adjustments		(379	)		144			(252	)		(313	)

Total other comprehensive income (loss)		(345	)		(181	)		1,361			(2,347	)

Total comprehensive income (loss)		(1,132	)		(33	)		1,021			(1,878	)
Less: comprehensive income (loss) attributable to noncontrolling interests		(61	)		62			56			33

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(1,071	)	$	(95	)	$	965		$	(1,911	)

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 (loss)		—		—			—			(484	)		—			(484	)		144			(340	)
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—		—			1,155			—			—			1,155			16			1,171
Net unrealized gains (losses) on other-than-temporarily impaired securities		—		—			8			—			—			8			—			8
Derivatives qualifying as hedges		—		—			434			—			—			434			—			434
Foreign currency translation and other adjustments		—		—			(148	)		—			—			(148	)		(104	)		(252	)

Total comprehensive income (loss)																965			56			1,021
Dividends to noncontrolling interests		—		—			—			—			—			—			(46	)		(46	)
Stock-based compensation expense and exercises and other		—		9			—			—			—			9			6			15

Balances as of September 30, 2014	$	1	$	11,991		$	3,934		$	1,939		$	(2,700	)	$	15,165		$	1,956		$	17,121

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		—		—			—			—			—			—			(43	)		(43	)
Comprehensive income (loss):
Net income		—		—			—			352			—			352			117			469
Net unrealized gains (losses) on securities not other-than-temporarily impaired		—		—			(1,586	)		—			—			(1,586	)		(38	)		(1,624	)
Net unrealized gains (losses) on other-than-temporarily impaired securities		—		—			57			—			—			57			—			57
Derivatives qualifying as hedges		—		—			(467	)		—			—			(467	)		—			(467	)
Foreign currency translation and other adjustments		—		—			(267	)		—			—			(267	)		(46	)		(313	)

Total comprehensive income (loss)																(1,911	)		33			(1,878	)
Dividends to noncontrolling interests		—		—			—			—			—			—			(39	)		(39	)
Stock-based compensation expense and exercises and other		—		22			—			—			—			22			2			24


Balances as of September 30, 2013	$	1	$	12,149		$	2,939		$	2,215		$	(2,700	)	$	14,604		$	1,241		$	15,845

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)


	Nine months ended
	September 30,
	2014			2013
Cash flows from operating activities:
Net income (loss)	$	(340	)	$	469
Less loss from discontinued operations, net of taxes		—			12
Adjustments to reconcile net income (loss) to net cash from operating activities:
Amortization of fixed maturity securities discounts and premiums and limited partnerships		(87	)		(64	)
Net investment losses (gains)		10			63
Charges assessed to policyholders		(580	)		(612	)
Acquisition costs deferred		(356	)		(332	)
Amortization of deferred acquisition costs and intangibles		415			441
Goodwill impairment		550			—
Deferred income taxes		(194	)		(120	)
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments		110			(15	)
Stock-based compensation expense		21			27
Change in certain assets and liabilities:
Accrued investment income and other assets		(172	)		(66	)
Insurance reserves		1,769			1,679
Current tax liabilities		(187	)		242
Other liabilities and other policy-related balances		181			(699	)
Cash from operating activities—discontinued operations		—			68

Net cash from operating activities		1,140			1,093

Cash flows from investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		3,775			4,046
Commercial mortgage loans		528			686
Restricted commercial mortgage loans related to securitization entities		24			51
Proceeds from sales of investments:
Fixed maturity and equity securities		1,745			3,056
Purchases and originations of investments:
Fixed maturity and equity securities		(7,464	)		(7,872	)
Commercial mortgage loans		(709	)		(667	)
Other invested assets, net		87			80
Policy loans, net		11			(7	)
Proceeds from sale of a subsidiary, net of cash transferred		—			370
Cash from investing activities—discontinued operations		—			(30	)

Net cash from investing activities		(2,003	)		(287	)

Cash flows from financing activities:
Deposits to universal life and investment contracts		2,201			1,979
Withdrawals from universal life and investment contracts		(1,950	)		(2,613	)
Redemption of non-recourse funding obligations		(28	)		(20	)
Proceeds from issuance of long-term debt		144			397
Repayment and repurchase of long-term debt		(621	)		(365	)
Repayment of borrowings related to securitization entities		(24	)		(51	)
Proceeds from sale of subsidiary shares to noncontrolling interests		517			—
Repurchase of subsidiary shares		—			(43	)
Dividends paid to noncontrolling interests		(46	)		(39	)
Other, net		(44	)		(53	)
Cash from financing activities—discontinued operations		—			(3	)

Net cash from financing activities		149			(811	)

Effect of exchange rate changes on cash and cash equivalents		(23	)		(94	)

Net change in cash and cash equivalents		(737	)		(99	)
Cash and cash equivalents at beginning of period		4,214			3,653

Cash and cash equivalents at end of period		3,477			3,554
Less cash and cash equivalents of discontinued operations at end of period		—			—

Cash and cash equivalents of continuing operations at end of period	$	3,477		$	3,554

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering of Genworth common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, under the name Sub XLVI, Inc., and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

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

•

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

•

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

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

We have the following operating segments:

•

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

•

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

•

U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively provide mortgage insurance on a bulk basis with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk.

•

International Protection. We are a leading provider of payment protection coverages (referred to as lifestyle protection) in multiple European countries and have operations in select other countries. Our lifestyle protection insurance products primarily help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death.

•

Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Institutional products consist of funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business.

We also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings 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

a) 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.

b) Accounting Pronouncements Not Yet Adopted

In August 2014, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance related to measuring the financial assets and financial liabilities of a consolidated collateralized financing entity. The guidance is intended to address diversity in practice that has developed in the accounting for the measurement difference between the fair value of financial assets and the fair value of financial liabilities of a collateralized financing entity. The new guidance provides a measurement alternative whereby a reporting entity could measure the financial assets and financial liabilities of the collateralized financing entity in its consolidated financial statements using the more observable of the fair values. This guidance is effective for us on January 1, 2016, with early adoption permitted as of the beginning of an annual reporting period. While we have consolidated variable interest entities that are subject to this guidance, our current practice uses an approach that was acceptable under the old guidance and is consistent with the new measurement alternatives. As a result, we plan to early adopt this new guidance during the first quarter of 2015 and do not expect any impact on our consolidated financial statements.

In June 2014, 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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Earnings (Loss) Per Share

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


	Three months ended September 30,					Nine months ended September 30,
(Amounts in millions, except per share amounts)	2014			2013		2014			2013
Weighted-average shares used in basic earnings (loss) per common share calculations		496.6			494.0		496.4			493.3
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		—			5.3		—			4.6

Weighted-average shares used in diluted earnings (loss) per common share calculations ⁽¹⁾		496.6			499.3		496.4			497.9

Income (loss) from continuing operations:
Income (loss) from continuing operations	$	(787	)	$	146	$	(340	)	$	481
Less: income from continuing operations attributable to noncontrolling interests		57			40		144			117

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	(844	)	$	106	$	(484	)	$	364

Basic per common share	$	(1.70	)	$	0.21	$	(0.98	)	$	0.74

Diluted per common share	$	(1.70	)	$	0.21	$	(0.98	)	$	0.73

Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of taxes	$	—		$	2	$	—		$	(12	)
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	$	—		$	2	$	—		$	(12	)

Basic per common share	$	—		$	—	$	—		$	(0.02	)

Diluted per common share	$	—		$	—	$	—		$	(0.02	)

Net income (loss):
Income (loss) from continuing operations	$	(787	)	$	146	$	(340	)	$	481
Income (loss) from discontinued operations, net of taxes		—			2		—			(12	)

Net income (loss)		(787	)		148		(340	)		469
Less: net income attributable to noncontrolling interests		57			40		144			117

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(844	)	$	108	$	(484	)	$	352

Basic per common share	$	(1.70	)	$	0.22	$	(0.98	)	$	0.71

Diluted per common share	$	(1.70	)	$	0.22	$	(0.98	)	$	0.71

⁽¹⁾

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders and net loss available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2014, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share for the three and nine months ended September 30, 2014, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 5.4 million and 6.4 million, respectively, would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders and net loss available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2014, dilutive potential weighted-average common shares outstanding would have been 502.0 million and 502.8 million, respectively.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) Investments

(a) Net Investment Income

Sources of net investment income were as follows for the periods indicated:


	Three months ended September 30,						Nine months ended September 30,
(Amounts in millions)	2014			2013			2014			2013
Fixed maturity securities—taxable	$	651		$	651		$	1,965		$	1,979
Fixed maturity securities—non-taxable		3			3			9			7
Commercial mortgage loans		82			81			246			244
Restricted commercial mortgage loans related to securitization entities		3			8			11			22
Equity securities		3			3			11			13
Other invested assets		46			41			135			128
Restricted other invested assets related to securitization entities		1			—			3			—
Policy loans		32			33			95			97
Cash, cash equivalents and short-term investments		7			4			19			16

Gross investment income before expenses and fees		828			824			2,494			2,506
Expenses and fees		(23	)		(23	)		(71	)		(70	)

Net investment income	$	805		$	801		$	2,423		$	2,436

(b) Net Investment Gains (Losses)

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


	Three months ended September 30,						Nine months ended September 30,
(Amounts in millions)	2014			2013			2014			2013
Available-for-sale securities:
Realized gains	$	17		$	26		$	62		$	144
Realized losses		(5	)		(38	)		(42	)		(151	)

Net realized gains (losses) on available-for-sale securities		12			(12	)		20			(7	)

Impairments:
Total other-than-temporary impairments		(13	)		(3	)		(16	)		(17	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		7			(2	)		7			(5	)

Net other-than-temporary impairments		(6	)		(5	)		(9	)		(22	)

Trading securities		4			(6	)		24			(15	)
Commercial mortgage loans		3			1			9			5
Net gains (losses) related to securitization entities		(1	)		21			14			43
Derivative instruments ⁽¹⁾		(38	)		(19	)		(66	)		(63	)
Contingent consideration adjustment		(1	)		—			(1	)		—
Other		—			(3	)		(1	)		(4	)

Net investment gains (losses)	$	(27	)	$	(23	)	$	(10	)	$	(63	)

⁽¹⁾	See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended September 30, 2014 and 2013 was $225 million and $407 million, respectively, which was approximately 98% and 93%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2014 and 2013 was $732 million and $1,293 million, respectively, which was approximately 95% and 90%, respectively, of book value.

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


	As of or for the three months ended September 30,						As of or for the nine months ended September 30,
(Amounts in millions)	2014			2013			2014			2013
Beginning balance	$	95		$	179		$	101		$	387
Additions:
Other-than-temporary impairments not previously recognized		1			1			2			3
Increases related to other-than-temporary impairments previously recognized		—			2			—			9
Reductions:
Securities sold, paid down or disposed		(7	)		(76	)		(14	)		(293	)

Ending balance	$	89		$	106		$	89		$	106

(c) Unrealized Investment Gains and Losses

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


(Amounts in millions)	September 30, 2014			December 31, 2013
Net unrealized gains (losses) on investment securities:
Fixed maturity securities	$	4,721		$	2,346
Equity securities		34			23
Other invested assets		(2	)		(4	)

Subtotal		4,753			2,365
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(1,442	)		(869	)
Income taxes, net		(1,153	)		(517	)

Net unrealized investment gains (losses)		2,158			979
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		91			53

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	2,067		$	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 September 30,
(Amounts in millions)	2014			2013
Beginning balance	$	2,128		$	1,294
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		(225	)		(411	)
Adjustment to deferred acquisition costs		35			23
Adjustment to present value of future profits		36			9
Adjustment to sales inducements		9			3
Adjustment to benefit reserves		49			68
Provision for income taxes		33			111

Change in unrealized gains (losses) on investment securities		(63	)		(197	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $2 and $(6)		(4	)		11

Change in net unrealized investment gains (losses)		(67	)		(186	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		(6	)		(1	)

Ending balance	$	2,067		$	1,109


	As of or for the nine months ended September 30,
(Amounts in millions)	2014			2013
Beginning balance	$	926		$	2,638
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		2,399			(3,348	)
Adjustment to deferred acquisition costs		(160	)		241
Adjustment to present value of future profits		(55	)		80
Adjustment to sales inducements		(19	)		41
Adjustment to benefit reserves		(339	)		555
Provision for income taxes		(640	)		845

Change in unrealized gains (losses) on investment securities		1,186			(1,586	)
Reclassification adjustments to net investment (gains) losses, net of taxes of $4 and $(10)		(7	)		19

Change in net unrealized investment gains (losses)		1,179			(1,567	)
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		38			(38	)

Ending balance	$	2,067		$	1,109

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity and Equity Securities

As of September 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	$	4,991	$	710	$	—	$	(59	)	$	—		$	5,642
Tax-exempt		346		25		—		(15	)		—			356
Government—non-U.S.		1,902		136		—		(3	)		—			2,035
U.S. corporate		24,398		2,653		19		(114	)		—			26,956
Corporate—non-U.S.		14,691		995		—		(48	)		(1	)		15,637
Residential mortgage-backed		4,864		308		14		(30	)		(1	)		5,155
Commercial mortgage-backed		2,623		117		4		(16	)		—			2,728
Other asset-backed		3,825		29		1		(47	)		—			3,808

Total fixed maturity securities		57,640		4,973		38		(332	)		(2	)		62,317
Equity securities		281		38		—		(6	)		—			313

Total available-for-sale securities	$	57,921	$	5,011	$	38	$	(338	)	$	(2	)	$	62,630

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 September 30, 2014:


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses ⁽¹⁾			Number of securities		Fair value		Gross unrealized losses ⁽¹⁾			Number of securities		Fair value		Gross unrealized losses ⁽²⁾			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	416	$	(5	)		17	$	746	$	(54	)		27	$	1,162	$	(59	)		44
Tax-exempt		—		—			—		110		(15	)		10		110		(15	)		10
Government—non-U.S.		133		(1	)		25		100		(2	)		8		233		(3	)		33
U.S. corporate		2,032		(27	)		295		1,565		(87	)		251		3,597		(114	)		546
Corporate—non-U.S.		1,331		(17	)		213		615		(32	)		80		1,946		(49	)		293
Residential mortgage-backed		369		(3	)		45		318		(28	)		106		687		(31	)		151
Commercial mortgage-backed		181		(1	)		23		454		(15	)		59		635		(16	)		82
Other asset-backed		1,153		(6	)		162		440		(41	)		46		1,593		(47	)		208

Subtotal, fixed maturity securities		5,615		(60	)		780		4,348		(274	)		587		9,963		(334	)		1,367
Equity securities		23		(1	)		48		50		(5	)		6		73		(6	)		54

Total for securities in an unrealized loss position	$	5,638	$	(61	)		828	$	4,398	$	(279	)		593	$	10,036	$	(340	)		1,421

% Below cost—fixed maturity securities:
<20% Below cost	$	5,615	$	(60	)		780	$	4,247	$	(231	)		564	$	9,862	$	(291	)		1,344
20%-50% Below cost		—		—			—		101		(42	)		15		101		(42	)		15
>50% Below cost		—		—			—		—		(1	)		8		—		(1	)		8

Total fixed maturity securities		5,615		(60	)		780		4,348		(274	)		587		9,963		(334	)		1,367

% Below cost—equity securities:
<20% Below cost		23		(1	)		48		50		(5	)		6		73		(6	)		54

Total equity securities		23		(1	)		48		50		(5	)		6		73		(6	)		54

Total for securities in an unrealized loss position	$	5,638	$	(61	)		828	$	4,398	$	(279	)		593	$	10,036	$	(340	)		1,421


Investment grade	$	5,109	$	(48	)		708	$	4,089	$	(252	)		513	$	9,198	$	(300	)		1,221
Below investment grade ⁽³⁾		529		(13	)		120		309		(27	)		80		838		(40	)		200

Total for securities in an unrealized loss position	$	5,638	$	(61	)		828	$	4,398	$	(279	)		593	$	10,036	$	(340	)		1,421

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

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

⁽³⁾	Amounts that have been in a continuous unrealized loss position for 12 months or more included $1 million of unrealized losses on other-than-temporarily impaired securities.

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 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 September 30, 2014.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Of the $231 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 “A+” and approximately 92% of the unrealized losses were related to investment grade securities as of September 30, 2014. These unrealized losses were attributable to the lower credit ratings for these securities since acquisition, primarily associated with corporate securities in the utilities and energy and finance and insurance sectors, 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 September 30, 2014. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of September 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	$	9	$	(3	)		1	%		1	$	—	$	—		—	%		—
Corporate—non-U.S.		1		(1	)		—			1		—		—		—			—
Structured securities:
Residential mortgage-backed		10		(5	)		1			4		—		—		—			—
Other asset-backed		72		(26	)		8			4		—		—		—			—

Total structured securities		82		(31	)		9			8		—		—		—			—

Total	$	92	$	(35	)		10	%		10	$	—	$	—		—	%		—


	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	$	1	$	(1	)		—	%		4	$	—	$	(1	)		—	%		8
Other asset-backed		8		(6	)		2			1		—		—			—			—

Total structured securities		9		(7	)		2			5		—		(1	)		—			8

Total	$	9	$	(7	)		2	%		5	$	—	$	(1	)		—	%		8

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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Structured Securities

Of the $39 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.

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 September 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 unrealized 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 September 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	$	2,618	$	2,640
Due after one year through five years		10,458		11,009
Due after five years through ten years		12,474		13,113
Due after ten years		20,778		23,864

Subtotal		46,328		50,626
Residential mortgage-backed		4,864		5,155
Commercial mortgage-backed		2,623		2,728
Other asset-backed		3,825		3,808

Total	$	57,640	$	62,317

As of September 30, 2014, $6,618 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 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 September 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:


	September 30, 2014						December 31, 2013
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	2,147			35	%	$	2,073			35	%
Office		1,642			27			1,558			26
Industrial		1,606			26			1,581			27
Apartments		499			8			491			8
Mixed use/other		207			4			229			4

Subtotal		6,101			100	%		5,932			100	%

Allowance for losses		(24	)					(33	)

Total	$	6,077					$	5,899


	September 30, 2014						December 31, 2013
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
South Atlantic	$	1,651			27	%	$	1,535			26	%
Pacific		1,646			27			1,590			27
Middle Atlantic		835			14			828			14
Mountain		531			9			478			8
East North Central		392			6			404			7
West North Central		374			6			377			6
West South Central		267			5			241			4
New England		265			4			337			6
East South Central		140			2			142			2

Subtotal		6,101			100	%		5,932			100	%

Allowance for losses		(24	)					(33	)

Total	$	6,077					$	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:


	September 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	$	—		$	—		$	4		$	4		$	2,143		$	2,147
Office		—			—			6			6			1,636			1,642
Industrial		—			—			18			18			1,588			1,606
Apartments		—			—			—			—			499			499
Mixed use/other		—			—			—			—			207			207

Total recorded investment	$	—		$	—		$	28		$	28		$	6,073		$	6,101

% of total commercial mortgage loans		—	%		—	%		—	%		—	%		100	%		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
Office		—			—			6			6			1,552			1,558
Industrial		2			2			16			20			1,561			1,581
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 September 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 also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of September 30, 2014 and December 31, 2013.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of September 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 nine months ended September 30, 2014 and the year ended December 31, 2013, we modified or extended 19 and 33 commercial mortgage loans, respectively, with a total carrying value of $220 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 September 30,						Nine months ended September 30,
(Amounts in millions)	2014			2013			2014			2013
Allowance for credit losses:
Beginning balance	$	27		$	38		$	33		$	42
Charge-offs		—			(1	)		(1	)		(3	)
Recoveries		—			—			—			—
Provision		(3	)		(1	)		(8	)		(3	)

Ending balance	$	24		$	36		$	24		$	36

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

Ending allowance for loans not individually impaired that were evaluated collectively for impairment	$	24		$	36		$	24		$	36

Recorded investment:
Ending balance	$	6,101		$	5,893		$	6,101		$	5,893

Ending balance of individually impaired loans	$	17		$	2		$	17		$	2

Ending balance of loans not individually impaired that were evaluated collectively for impairment	$	6,084		$	5,891		$	6,084		$	5,891

As of September 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 September 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:


	September 30, 2014
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100% ⁽¹⁾			Total
Property type:
Retail	$	669		$	382		$	996		$	88		$	12		$	2,147
Office		400			266			787			131			58			1,642
Industrial		447			333			709			86			31			1,606
Apartments		216			77			183			8			15			499
Mixed use/other		51			43			107			6			—			207

Total recorded investment	$	1,783		$	1,101		$	2,782		$	319		$	116		$	6,101

% of total		29	%		18	%		46	%		5	%		2	%		100	%

Weighted-average debt service coverage ratio		2.08			1.74			1.58			1.00			0.73			1.71

⁽¹⁾	Included $17 million of impaired loans, $6 million of loans past due and not individually impaired and $93 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 130%.


	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
Office		397			191			716			191			63			1,558
Industrial		430			237			748			146			20			1,581
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 loans past due and not individually impaired 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:


	September 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	$	96		$	300		$	469		$	897		$	385		$	2,147
Office		116			173			212			754			380			1,635
Industrial		170			102			271			783			280			1,606
Apartments		2			30			114			209			144			499
Mixed use/other		6			2			34			119			46			207

Total recorded investment	$	390		$	607		$	1,100		$	2,762		$	1,235		$	6,094

% of total		6	%		10	%		18	%		46	%		20	%		100	%

Weighted-average loan-to-value		79	%		65	%		63	%		60	%		44	%		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
Office		131			181			225			637			376			1,550
Industrial		195			100			270			721			295			1,581
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 September 30, 2014 and December 31, 2013, we had floating rate commercial mortgage loans of $7 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 and the changes in fair value for these securities 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Derivative assets						Derivative liabilities
		Fair value						Fair value
(Amounts in millions)	Balance sheet classification	September 30, 2014		December 31, 2013			Balance sheet classification	September 30, 2014		December 31, 2013
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Other invested assets	$	253	$	121		Other liabilities	$	33	$	569
Inflation indexed swaps	Other invested assets		—		—		Other liabilities		70		60
Foreign currency swaps	Other invested assets		4		4		Other liabilities		—		2
Forward bond purchase commitments	Other invested assets		5		—		Other liabilities		—		13

Total cash flow hedges			262		125				103		644

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

Total fair value hedges			—		1				—		—

Total derivatives designated as hedges			262		126				103		644

Derivatives not designated as hedges
Interest rate swaps	Other invested assets		373		314		Other liabilities		96		6
Interest rate swaps related to securitization entities	Restricted other invested assets		—		—		Other liabilities		22		16
Foreign currency swaps	Other invested assets		—		—		Other liabilities		3		—
Credit default swaps	Other invested assets		5		11		Other liabilities		—		—
Credit default swaps related to securitization entities	Restricted other invested assets		—		—		Other liabilities		19		32
Equity index options	Other invested assets		11		12		Other liabilities		—		—
Financial futures	Other invested assets		—		—		Other liabilities		—		—
Equity return swaps	Other invested assets		5		—		Other liabilities		—		1
Other foreign currency contracts	Other invested assets		8		8		Other liabilities		8		4
GMWB embedded derivatives	Reinsurance recoverable ⁽¹⁾		8		(1	)	Policyholder account balances ⁽²⁾		218		96
Fixed index annuity embedded derivatives	Other assets		—		—		Policyholder account balances ⁽³⁾		246		143
Indexed universal life embedded derivatives	Reinsurance recoverable		—		—		Policyholder account balances ⁽⁴⁾		3		—

Total derivatives not designated as hedges			410		344				615		298

Total derivatives		$	672	$	470			$	718	$	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			September 30, 2014
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Notional	$	13,926	$	—	$	(597	)	$	13,329
Inflation indexed swaps	Notional		561		15		(3	)		573
Foreign currency swaps	Notional		35		—		—			35
Forward bond purchase commitments	Notional		237		—		(189	)		48

Total cash flow hedges			14,759		15		(789	)		13,985

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

Total fair value hedges			6		—		(1	)		5

Total derivatives designated as hedges			14,765		15		(790	)		13,990

Derivatives not designated as hedges
Interest rate swaps	Notional		4,822		253		(6	)		5,069
Interest rate swaps related to securitization entities	Notional		91		—		(10	)		81
Credit default swaps	Notional		639		5		—			644
Credit default swaps related to securitization entities	Notional		312		—		—			312
Equity index options	Notional		777		439		(394	)		822
Financial futures	Notional		1,260		4,299		(4,226	)		1,333
Equity return swaps	Notional		110		223		(223	)		110
Foreign currency swaps	Notional		—		104		—			104
Other foreign currency contracts	Notional		487		677		(786	)		378

Total derivatives not designated as hedges			8,498		6,000		(5,645	)		8,853

Total derivatives		$	23,263	$	6,015	$	(6,435	)	$	22,843


(Number of policies)	Measurement	December 31, 2013		Additions		Maturities/ terminations			September 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		228		—			257

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 September 30, 2014:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income (loss) from OCI			Classification of gain (loss) reclassified into net income (loss)	Gain (loss) recognized in net income (loss)⁽¹⁾		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	151		$	17		Net investment income	$	2	Net investment gains (losses)
Interest rate swaps hedging liabilities		(8	)		—		Interest expense		—	Net investment gains (losses)
Inflation indexed swaps		20			(3	)	Net investment income		—	Net investment gains (losses)
Foreign currency swaps		2			—		Net investment income		—	Net investment gains (losses)
Forward bond purchase commitments		4			—		Net investment income		—	Net investment gains (losses)

Total	$	169		$	14			$	2

⁽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 September 30, 2013:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income (loss) from OCI			Classification of gain (loss) reclassified into net income (loss)	Gain (loss) recognized in net income (loss)⁽¹⁾			Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	(199	)	$	15		Net investment income	$	(2	)	Net investment gains (losses)
Interest rate swaps hedging liabilities		9			—		Interest expense		—		Net investment gains (losses)
Inflation indexed swaps		(2	)		(3	)	Net investment income		—		Net investment gains (losses)
Foreign currency swaps		(1	)		—		Interest expense		—		Net investment gains (losses)
Forward bond purchase commitments		(11	)		—		Net investment income		—		Net investment gains (losses)

Total	$	(204	)	$	12			$	(2	)

⁽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 nine months ended September 30, 2014:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income (loss) from OCI			Classification of gain (loss) reclassified into net income (loss)	Gain (loss) recognized in net income (loss)⁽¹⁾		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	723		$	45		Net investment income	$	9	Net investment gains (losses)
Interest rate swaps hedging liabilities		(42	)		1		Interest expense		—	Net investment gains (losses)
Inflation indexed swaps		(10	)		(11	)	Net investment income		—	Net investment gains (losses)
Foreign currency swaps		2			—		Net investment income		—	Net investment gains (losses)
Forward bond purchase commitments		32			—		Net investment income		—	Net investment gains (losses)

Total	$	705		$	35			$	9

⁽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 nine months ended September 30, 2013:


(Amounts in millions)	Gain (loss) recognized in OCI			Gain (loss) reclassified into net income (loss) from OCI			Classification of gain (loss) reclassified into net income (loss)	Gain (loss) recognized in net income (loss)⁽¹⁾			Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	(702	)	$	34		Net investment income	$	(12	)	Net investment gains (losses)
Interest rate swaps hedging assets		—			1		Net investment gains (losses)		—		Net investment gains (losses)
Interest rate swaps hedging liabilities		31			1		Interest expense		—		Net investment gains (losses)
Inflation indexed swaps		32			(5	)	Net investment income		—		Net investment gains (losses)
Foreign currency swaps		(1	)		—		Interest expense		—		Net investment gains (losses)
Forward bond purchase commitments		(50	)		—		Net investment income		—		Net investment gains (losses)

Total	$	(690	)	$	31			$	(12	)

⁽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 September 30,
(Amounts in millions)	2014			2013
Derivatives qualifying as effective accounting hedges as of July 1	$	1,652		$	1,581
Current period increases (decreases) in fair value, net of deferred taxes of $(59) and $73		110			(131	)
Reclassification to net (income) loss, net of deferred taxes of $5 and $4		(9	)		(8	)

Derivatives qualifying as effective accounting hedges as of September 30	$	1,753		$	1,442


	Nine months ended September 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 $(248) and $244		457			(446	)
Reclassification to net (income) loss, net of deferred taxes of $12 and $10		(23	)		(21	)

Derivatives qualifying as effective accounting hedges as of September 30	$	1,753		$	1,442

The total of derivatives designated as cash flow hedges of $1,753 million, net of taxes, recorded in stockholders’ equity as of September 30, 2014 is expected to be reclassified to net income (loss) in the future,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, $51 million, net of taxes, is expected to be reclassified to net income (loss) 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 (loss) during the three or nine months ended September 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 (loss). In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income (loss). 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 September 30, 2014 and 2013.

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


	Derivative instrument								Hedged item
(Amounts in millions)	Gain (loss) recognized in net income (loss)			Classification of gain (losses) recognized in net income (loss)	Other impacts to net income (loss)		Classification of other impacts to net income (loss)		Gain (loss) recognized in net income (loss)		Classification of gain (losses) recognized in net income (loss)
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 (loss) effects of the derivative instruments that are presented in the same 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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 (loss) for the effects of derivatives not designated as hedges for the periods indicated:


	Three months ended September 30,						Classification of gain (loss) recognized in net income (loss)
(Amounts in millions)	2014			2013
Interest rate swaps	$	(3	)	$	(3	)	Net investment gains (losses)
Interest rate swaps related to securitization entities		1			(1	)	Net investment gains (losses)
Credit default swaps		—			4		Net investment gains (losses)
Credit default swaps related to securitization entities		(2	)		24		Net investment gains (losses)
Equity index options		(1	)		(13	)	Net investment gains (losses)
Financial futures		22			(28	)	Net investment gains (losses)
Equity return swaps		6			(18	)	Net investment gains (losses)
Other foreign currency contracts		5			(2	)	Net investment gains (losses)
Foreign currency swaps		(4	)		—		Net investment gains (losses)
GMWB embedded derivatives		(58	)		46		Net investment gains (losses)
Fixed index annuity embedded derivatives		(7	)		(3	)	Net investment gains (losses)

Total derivatives not designated as hedges	$	(41	)	$	6

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Nine months ended September 30,						Classification of gain (loss) recognized in net income (loss)
(Amounts in millions)	2014			2013
Interest rate swaps	$	(8	)	$	(8	)		Net investment gains (losses)
Interest rate swaps related to securitization entities		(5	)		8			Net investment gains (losses)
Credit default swaps		—			10			Net investment gains (losses)
Credit default swaps related to securitization entities		16			49			Net investment gains (losses)
Equity index options		(19	)		(31	)		Net investment gains (losses)
Financial futures		66			(181	)		Net investment gains (losses)
Equity return swaps		1			(27	)		Net investment gains (losses)
Other foreign currency contracts		(6	)		1			Net investment gains (losses)
Foreign currency swaps		(3	)		—			Net investment gains (losses)
GMWB embedded derivatives		(87	)		191			Net investment gains (losses)
Fixed index annuity embedded derivatives		(19	)		(7	)		Net investment gains (losses)

Total derivatives not designated as hedges	$	(64	)	$	5

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:


	September 30, 2014
	Gross amounts recognized		Gross amounts offset in the balance sheet		Net amounts presented in the balance sheet		Gross amounts not offset in the balance sheet						Over collateralization			Net amount
(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⁾	$	707	$	—	$	707	$	(166	)	$	(521	)	$	5		$	25
Derivative liabilities ⁽²⁾		236		—		236		(166	)		(77	)		9			2

Net derivatives	$	471	$	—	$	471	$	—		$	(444	)	$	(4	)	$	23

⁽¹⁾	Included $43 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives.

⁽²⁾	Included $26 million of accruals on derivatives classified as other liabilities and does not include amounts related to embedded derivatives and derivatives related to securitization entities.

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2013
	Gross amounts recognized			Gross amounts offset in the balance sheet		Net amounts presented in the balance sheet			Gross amounts not offset in the balance sheet						Over collateralization			Net amount
(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 September 30, 2014 and December 31, 2013, we could have been allowed to claim or required to disburse up to the net amounts shown in the last column of the charts above. The charts above exclude embedded derivatives and derivatives related to securitization entities as those derivatives are not subject to master netting arrangements.

Credit Derivatives

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

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	September 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:


	September 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 in less than one year⁽²⁾		250		2		—		—		—		—
9% - 12% matures after one year through five years⁽²⁾		—		—		—		250		5		—
10% - 15% matures in less than one year⁽³⁾		250		—		—		250		2		—

Total credit default swap index tranches		600		4		—		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		—		19		300		—		31

Total customized credit default swap index tranches related to securitization entities		312		—		19		312		—		32

Total credit default swaps on index tranches	$	912	$	4	$	19	$	912	$	10	$	32

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

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

⁽³⁾	The current attachment/detachment as of September 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,

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 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.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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:


	September 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⁾	$	6,077	$	6,438	$	—	$	—	$	6,438
Restricted commercial mortgage loans			⁽¹⁾		209		234		—		—		234
Other invested assets			⁽¹⁾		252		264		—		178		86
Liabilities:
Long-term borrowings			⁽¹⁾		4,662		5,111		—		4,983		128
Non-recourse funding obligations			⁽¹⁾		2,010		1,445		—		—		1,445
Borrowings related to securitization entities			⁽¹⁾		142		154		—		154		—
Investment contracts			⁽¹⁾		17,376		17,887		—		7		17,880
Other firm commitments:
Commitments to fund limited partnerships		49			—		—		—		—		—
Ordinary course of business lending commitments		112			—		—		—		—		—


	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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company