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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

☐	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 ☒ 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 ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 26, 2017, 499,158,848 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, 2017 (Unaudited) and December 31, 2016		3
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)		4
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)		5
	Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2017 and 2016 (Unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)		7
	Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		88

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		173

Item 4.	Controls and Procedures		174

PART II—OTHER INFORMATION			174

Item 1.	Legal Proceedings		174

Item 1A.	Risk Factors		174

Item 6.	Exhibits		175

Signatures			176

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	September 30, 2017			December 31, 2016
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value	$	62,552		$	60,572
Equity securities available-for-sale, at fair value		765			632
Commercial mortgage loans		6,268			6,111
Restricted commercial mortgage loans related to securitization entities		111			129
Policy loans		1,818			1,742
Other invested assets		1,590			2,071
Restricted other invested assets related to securitization entities, at fair value		—			312

Total investments		73,104			71,569
Cash and cash equivalents		2,836			2,784
Accrued investment income		639			659
Deferred acquisition costs		2,342			3,571
Intangible assets and goodwill		315			348
Reinsurance recoverable		17,553			17,755
Other assets		552			673
Deferred tax asset		24			—
Separate account assets		7,264			7,299

Total assets	$	104,629		$	104,658

Liabilities and equity
Liabilities:
Future policy benefits	$	38,022		$	37,063
Policyholder account balances		24,531			25,662
Liability for policy and contract claims		9,384			9,256
Unearned premiums		3,512			3,378
Other liabilities ($1 of other liabilities are related to securitization entities in each period)		2,002			2,916
Borrowings related to securitization entities ($12 are carried at fair value in each period)		59			74
Non-recourse funding obligations		310			310
Long-term borrowings		4,224			4,180
Deferred tax liability		234			53
Separate account liabilities		7,264			7,299

Total liabilities		89,542			90,191

Commitments and contingencies
Equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 588 million and 587 million shares issued as of September 30, 2017 and December 31, 2016, respectively; 499 million and 498 million shares outstanding as of September 30, 2017 and December 31, 2016, respectively		1			1
Additional paid-in capital		11,973			11,962

Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		1,098			1,253
Net unrealized gains (losses) on other-than-temporarily impaired securities		10			9

Net unrealized investment gains (losses)		1,108			1,262

Derivatives qualifying as hedges		2,052			2,085
Foreign currency translation and other adjustments		(125	)		(253	)

Total accumulated other comprehensive income (loss)		3,035			3,094
Retained earnings		760			287
Treasury stock, at cost (88 million shares as of September 30, 2017 and December 31, 2016)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		13,069			12,644
Noncontrolling interests		2,018			1,823

Total equity		15,087			14,467

Total liabilities and equity	$	104,629		$	104,658

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 September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Revenues:
Premiums	$	1,135		$	1,108		$	3,382		$	3,029
Net investment income		797			805			2,388			2,373
Net investment gains (losses)		85			20			220			31
Policy fees and other income		198			217			619			738

Total revenues		2,215			2,150			6,609			6,171

Benefits and expenses:
Benefits and other changes in policy reserves		1,344			1,662			3,796			3,715
Interest credited		164			173			494			523
Acquisition and operating expenses, net of deferrals		265			269			775			990
Amortization of deferred acquisition costs and intangibles		83			94			316			305
Interest expense		73			77			209			262

Total benefits and expenses		1,929			2,275			5,590			5,795

Income (loss) from continuing operations before income taxes		286			(125	)		1,019			376
Provision for income taxes		102			222			348			355

Income (loss) from continuing operations		184			(347	)		671			21
Income (loss) from discontinued operations, net of taxes		(9	)		15			(9	)		(25	)

Net income (loss)		175			(332	)		662			(4	)
Less: net income attributable to noncontrolling interests		68			48			198			151

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	107		$	(380	)	$	464		$	(155	)

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
Basic	$	0.23		$	(0.79	)	$	0.95		$	(0.26	)

Diluted	$	0.23		$	(0.79	)	$	0.94		$	(0.26	)

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share:
Basic	$	0.21		$	(0.76	)	$	0.93		$	(0.31	)

Diluted	$	0.21		$	(0.76	)	$	0.93		$	(0.31	)

Weighted-average common shares outstanding:
Basic		499.1			498.3			498.9			498.3

Diluted		501.6			498.3			501.2			498.3

Supplemental disclosures:
Total other-than-temporary impairments	$	(1	)	$	(2	)	$	(4	)	$	(35	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		—			—			—			—

Net other-than-temporary impairments		(1	)		(2	)		(4	)		(35	)
Other investments gains (losses)		86			22			224			66

Total net investment gains (losses)	$	85		$	20		$	220		$	31

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Net income (loss)	$	175		$	(332	)	$	662		$	(4	)
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities not other-than-temporarily impaired		(89	)		72			(173	)		1,624
Net unrealized gains (losses) on other-than-temporarily impaired securities		—			5			1			6
Derivatives qualifying as hedges		(12	)		54			(33	)		448
Foreign currency translation and other adjustments		81			(1	)		261			223

Total other comprehensive income (loss)		(20	)		130			56			2,301

Total comprehensive income (loss)		155			(202	)		718			2,297
Less: comprehensive income attributable to noncontrolling interests		108			64			313			260

Total comprehensive income (loss) available to Genworth Financial, Inc.’s common stockholders	$	47		$	(266	)	$	405		$	2,037

See Notes to Condensed Consolidated Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in millions)

(Unaudited)


	Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)			Retained earnings			Treasury stock, at cost			Total Genworth Financial, Inc.’s stockholders’ equity			Noncontrolling interests			Total equity
Balances as of December 31, 2016	$	1	$	11,962	$	3,094		$	287		$	(2,700	)	$	12,644		$	1,823		$	14,467
Cumulative effect of change in accounting, net of taxes		—		—		—			9			—			9			—			9
Repurchase of subsidiary shares		—		—		—			—			—			—			(31	)		(31	)
Comprehensive income (loss):
Net income		—		—		—			464			—			464			198			662
Other comprehensive income (loss) net of taxes		—		—		(59	)		—			—			(59	)		115			56

Total comprehensive income															405			313			718
Dividends to noncontrolling interests		—		—		—			—			—			—			(92	)		(92	)
Stock-based compensation expense and exercises and other		—		11		—			—			—			11			5			16

Balances as of September 30, 2017	$	1	$	11,973	$	3,035		$	760		$	(2,700	)	$	13,069		$	2,018		$	15,087

Balances as of December 31, 2015	$	1	$	11,949	$	3,010		$	564		$	(2,700	)	$	12,824		$	1,813		$	14,637
Return of capital to noncontrolling interests		—		—		—			—			—			—			(70	)		(70	)
Comprehensive income:
Net income (loss)		—		—		—			(155	)		—			(155	)		151			(4	)
Other comprehensive income, net of taxes		—		—		2,192			—			—			2,192			109			2,301

Total comprehensive income															2,037			260			2,297
Dividends to noncontrolling interests		—		—		—			—			—			—			(126	)		(126	)
Stock-based compensation expense and exercises and other		—		10		—			—			—			10			1			11

Balances as of September 30, 2016	$	1	$	11,959	$	5,202		$	409		$	(2,700	)	$	14,871		$	1,878		$	16,749

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,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	662		$	(4	)
Less loss from discontinued operations, net of taxes		9			25
Adjustments to reconcile net income (loss) to net cash from operating activities:
Gain on sale of business		—			(26	)
Amortization of fixed maturity securities discounts and premiums and limited partnerships		(107	)		(112	)
Net investment gains		(220	)		(31	)
Charges assessed to policyholders		(534	)		(574	)
Acquisition costs deferred		(67	)		(124	)
Amortization of deferred acquisition costs and intangibles		316			305
Deferred income taxes		234			173
Trading securities, held-for-sale investments and derivative instruments		716			759
Stock-based compensation expense		29			25
Change in certain assets and liabilities:
Accrued investment income and other assets		(21	)		(258	)
Insurance reserves		1,202			691
Current tax liabilities		(27	)		44
Other liabilities, policy and contract claims and other policy-related balances		(260	)		905

Net cash from operating activities		1,932			1,798

Cash flows used by investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		3,396			2,646
Commercial mortgage loans		454			555
Restricted commercial mortgage loans related to securitization entities		18			27
Proceeds from sales of investments:
Fixed maturity and equity securities		3,269			4,064
Purchases and originations of investments:
Fixed maturity and equity securities		(6,709	)		(8,758	)
Commercial mortgage loans		(608	)		(405	)
Other invested assets, net		(521	)		(138	)
Policy loans, net		28			(80	)
Proceeds from sale of businesses, net of cash transferred		—			39
Payments for business purchased, net of cash acquired		(5	)		—

Net cash used by investing activities		(678	)		(2,050	)

Cash flows used by financing activities:
Deposits to universal life and investment contracts		902			1,028
Withdrawals from universal life and investment contracts		(2,003	)		(1,463	)
Redemption of non-recourse funding obligations		—			(1,620	)
Repayment and repurchase of long-term debt		—			(362	)
Repayment of borrowings related to securitization entities		(16	)		(37	)
Repurchase of subsidiary shares		(31	)		—
Return of capital to noncontrolling interests		—			(70	)
Dividends paid to noncontrolling interests		(92	)		(126	)
Other, net		(30	)		(49	)

Net cash used by financing activities		(1,270	)		(2,699	)

Effect of exchange rate changes on cash and cash equivalents		68			36

Net change in cash and cash equivalents		52			(2,915	)
Cash and cash equivalents at beginning of period		2,784			5,993

Cash and cash equivalents at end of period	$	2,836		$	3,078

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 (“IPO”) of Genworth’s common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth’s stockholders voted on and approved a proposal to adopt the Merger Agreement.

The transaction remains subject to closing conditions, including the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions. Both parties are engaging with the relevant regulators regarding the applications and the pending transaction.

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

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

We operate our business through the following five operating segments:

•

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

•

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

•

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

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

•

Runoff. The Runoff segment includes the results of non-strategic products which have not been actively sold but we continue to service our existing blocks of business. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes and guaranteed investment contracts.

In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.

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 2016 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On January 1, 2017, we adopted new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this new accounting guidance on a modified retrospective basis and recorded a previously disallowed deferred tax asset of $9 million with a corresponding increase to cumulative effect of change in accounting within retained earnings at adoption.

On January 1, 2017, we adopted new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. We did not have any significant impact from this guidance on our consolidated financial statements.

On January 1, 2017, we adopted new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance is consistent with our previous accounting practices and, accordingly, did not have any impact on our consolidated financial statements.

On January 1, 2017, we adopted new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is consistent with our previous accounting for derivative contract novations and, accordingly, did not have any impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In August 2017, the Financial Accounting Standards Board (“the FASB”) issued new guidance intended to enable entities to better portray the economics of their derivative risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In certain situations, the amendments also simplify the application of hedge accounting. The guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating adopting this new guidance early and the impact it may have on our consolidated financial statements.

In May 2017, the FASB issued new guidance to clarify when to account for a change to share-based compensation as a modification. The new guidance requires modification accounting only if there are changes to the fair value, vesting conditions or classification, as a liability or equity, of the share-based compensation. The guidance is effective, prospectively, for us on January 1, 2018, accordingly, the guidance will not have any impact at adoption.

In March 2017, the FASB issued new guidance shortening the amortization period for the premium component of callable debt securities purchased at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements.

In February 2017, the FASB issued new guidance to clarify the accounting for gains and losses from the derecognition of nonfinancial assets and accounting for partial sales of nonfinancial assets. The new guidance clarifies when transferring ownership interests in a consolidated subsidiary holding nonfinancial assets is within scope. It also states that the reporting entity should identify each distinct nonfinancial asset and derecognize when a counterparty obtains control, and clarifies the accounting for partial sales. The new guidance is currently effective for us on January 1, 2018. We do not expect any significant impacts from this guidance on our consolidated financial statements.

In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance states goodwill impairment is equal to the difference between the carrying value and fair value of the reporting unit up to the amount of recorded goodwill. The new guidance is currently effective for us on January 1, 2020, with early adoption permitted for testing dates after January 1, 2017. We do not expect any significant impacts from this new guidance on our consolidated financial statements.

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In October 2016, the FASB issued new guidance related to the income tax effects of intra-entity transfers of assets other than inventory. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is currently effective for us on January 1, 2018. We are still in process of evaluating the impact the guidance may have on our consolidated financial statements, including any cumulative effect adjustment that will be recorded directly to retained earnings as of the beginning of the period of adoption.

In January 2016, the FASB issued new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Changes to the current financial instruments accounting primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, will be measured at fair value with changes in fair value recognized in net income (loss). As of September 30, 2017, we have approximately $45 million of cumulative unrealized gains related to equity securities included in accumulated other comprehensive income as well as approximately $25 million of gains related to limited partnership investments currently recorded at cost, that will be reclassed to cumulative effect of change in accounting within retained earnings upon adoption of this new accounting guidance. The new guidance also clarifies that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with other deferred tax assets. This new guidance will be effective for us on January 1, 2018. We are still in process of evaluating the full impact 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 common shares outstanding for the periods indicated:


	Three months ended September 30,						Nine months ended September 30,
(Amounts in millions, except per share amounts)	2017			2016			2017			2016
Weighted-average shares used in basic earnings (loss) per share calculations		499.1			498.3			498.9			498.3
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		2.5			—			2.3			—

Weighted-average shares used in diluted earnings (loss) per share calculations⁽¹⁾		501.6			498.3			501.2			498.3

Income (loss) from continuing operations:
Income (loss) from continuing operations	$	184		$	(347	)	$	671		$	21
Less: income from continuing operations attributable to noncontrolling interests		68			48			198			151

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	116		$	(395	)	$	473		$	(130	)

Basic per share	$	0.23		$	(0.79	)	$	0.95		$	(0.26	)

Diluted per share	$	0.23		$	(0.79	)	$	0.94		$	(0.26	)

Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of taxes	$	(9	)	$	15		$	(9	)	$	(25	)
Less: income from discontinued operations, net of taxes, attributable tononcontrolling interests		—			—			—			—

Income (loss) from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders	$	(9	)	$	15		$	(9	)	$	(25	)

Basic per share	$	(0.02	)	$	0.03		$	(0.02	)	$	(0.05	)

Diluted per share	$	(0.02	)	$	0.03		$	(0.02	)	$	(0.05	)

Net income (loss):
Income (loss) from continuing operations	$	184		$	(347	)	$	671		$	21
Income (loss) from discontinued operations, net of taxes		(9	)		15			(9	)		(25	)

Net income (loss)		175			(332	)		662			(4	)
Less: net income attributable to noncontrolling interests		68			48			198			151

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	107		$	(380	)	$	464		$	(155	)

Basic per share	$	0.21		$	(0.76	)	$	0.93		$	(0.31	)

Diluted per share	$	0.21		$	(0.76	)	$	0.93		$	(0.31	)

⁽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 for the three and nine months ended September 30, 2016, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million and 1.8 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 for the three months and nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million and 500.1 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)	2017			2016			2017			2016
Fixed maturity securities—taxable	$	640		$	655		$	1,930			1,930
Fixed maturity securities—non-taxable		3			3			9			9
Commercial mortgage loans		78			79			231			237
Restricted commercial mortgage loans related to securitization entities		3			3			7			8
Equity securities		9			8			26			20
Other invested assets		39			34			106			105
Restricted other invested assets related to securitization entities		—			—			1			3
Policy loans		39			38			120			107
Cash, cash equivalents and short-term investments		10			5			26			16

Gross investment income before expenses and fees		821			825			2,456			2,435
Expenses and fees		(24	)		(20	)		(68	)		(62	)

Net investment income	$	797		$	805		$	2,388		$	2,373

(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)	2017			2016			2017			2016
Available-for-sale securities:
Realized gains	$	40		$	39		$	177		$	205
Realized losses		(10	)		(24	)		(55	)		(75	)

Net realized gains (losses) on available-for-sale securities		30			15			122			130

Impairments:
Total other-than-temporary impairments		(1	)		(2	)		(4	)		(35	)
Portion of other-than-temporary impairments included in other comprehensive income (loss)		—			—			—			—

Net other-than-temporary impairments		(1	)		(2	)		(4	)		(35	)

Trading securities		—			(4	)		1			40
Commercial mortgage loans		1			(1	)		3			1
Net gains (losses) related to securitization entities		1			2			5			(51	)
Derivative instruments⁽¹⁾		54			10			93			(52	)
Contingent consideration adjustment		—			—			—			(2	)

Net investment gains (losses)	$	85		$	20		$	220		$	31

⁽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, 2017 and 2016 was $286 million and $293 million, respectively, which was approximately 97% and 95%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2017 and 2016 was $1,390 million and $833 million, respectively, which was approximately 96% and 93%, 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)	2017			2016			2017			2016
Beginning balance	$	38		$	62		$	42		$	64
Additions:
Other-than-temporary impairments not previously recognized		—			—			—			1
Reductions:
Securities sold, paid down or disposed		(5	)		(8	)		(9	)		(11	)

Ending balance	$	33		$	54		$	33		$	54

(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, 2017			December 31, 2016
Net unrealized gains (losses) on investment securities:
Fixed maturity securities	$	4,878		$	3,656
Equity securities		49			12

Subtotal⁽¹⁾		4,927			3,668
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(3,134	)		(1,611	)
Income taxes, net		(619	)		(711	)

Net unrealized investment gains (losses)		1,174			1,346
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		66			84

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	1,108		$	1,262

⁽¹⁾	Excludes foreign exchange.

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)	2017			2016
Beginning balance	$	1,180		$	2,789
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		(10	)		228
Adjustment to deferred acquisition costs		(1	)		(17	)
Adjustment to present value of future profits		(3	)		3
Adjustment to sales inducements		—			(6	)
Adjustment to benefit reserves		(92	)		(81	)
Provision for income taxes		36			(41	)

Change in unrealized gains (losses) on investment securities		(70	)		86
Reclassification adjustments to net investment (gains) losses, net of taxes of $10 and $4		(19	)		(9	)

Change in net unrealized investment gains (losses)		(89	)		77
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		(17	)		6

Ending balance	$	1,108		$	2,860


	As of or for the nine months ended September 30,
(Amounts in millions)	2017			2016
Beginning balance	$	1,262		$	1,254
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities		1,377			3,584
Adjustment to deferred acquisition costs		(1,047	)		(291	)
Adjustment to present value of future profits		(36	)		(26	)
Adjustment to sales inducements		(11	)		(46	)
Adjustment to benefit reserves		(429	)		(612	)
Provision for income taxes		51			(917	)

Change in unrealized gains (losses) on investment securities		(95	)		1,692
Reclassification adjustments to net investment (gains) losses, net of taxes of $41 and $33		(77	)		(62	)

Change in net unrealized investment gains (losses)		(172	)		1,630
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		(18	)		24

Ending balance	$	1,108		$	2,860

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity and Equity Securities

As of September 30, 2017, 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	$	4,893	$	784	$	—	$	(7	)	$	—	$	5,670
State and political subdivisions		2,639		247		—		(26	)		—		2,860
Non-U.S. government		2,143		107		—		(24	)		—		2,226
U.S. corporate:
Utilities		4,382		556		—		(15	)		—		4,923
Energy		2,243		207		—		(10	)		—		2,440
Finance and insurance		6,051		547		—		(11	)		—		6,587
Consumer—non-cyclical		4,330		508		—		(10	)		—		4,828
Technology and communications		2,558		193		—		(11	)		—		2,740
Industrial		1,247		102		—		(3	)		—		1,346
Capital goods		2,067		263		—		(9	)		—		2,321
Consumer—cyclical		1,506		111		—		(6	)		—		1,611
Transportation		1,188		124		—		(6	)		—		1,306
Other		358		24		—		(2	)		—		380

Total U.S. corporate		25,930		2,635		—		(83	)		—		28,482

Non-U.S. corporate:
Utilities		1,022		45		—		(5	)		—		1,062
Energy		1,330		140		—		(7	)		—		1,463
Finance and insurance		2,524		177		—		(5	)		—		2,696
Consumer—non-cyclical		692		27		—		(3	)		—		716
Technology and communications		945		71		—		(2	)		—		1,014
Industrial		979		81		—		(2	)		—		1,058
Capital goods		556		33		—		(2	)		—		587
Consumer—cyclical		518		10		—		(1	)		—		527
Transportation		650		71		—		(3	)		—		718
Other		2,594		193		—		(5	)		—		2,782

Total non-U.S. corporate		11,810		848		—		(35	)		—		12,623

Residential mortgage-backed		3,950		255		14		(10	)		—		4,209
Commercial mortgage-backed		3,346		105		2		(39	)		—		3,414
Other asset-backed		3,052		20		1		(5	)		—		3,068

Total fixed maturity securities		57,763		5,001		17		(229	)		—		62,552
Equity securities		720		59		—		(14	)		—		765

Total available-for-sale securities	$	58,483	$	5,060	$	17	$	(243	)	$	—	$	63,317

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:


			Gross unrealized gains				Gross unrealized losses
(Amounts in millions)	Amortized cost or cost		Not other-than- temporarily impaired		Other-than- temporarily impaired		Not other-than- temporarily impaired			Other-than- temporarily impaired		Fair value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	5,439	$	647	$	—	$	(50	)	$	—	$	6,036
State and political subdivisions		2,515		182		—		(50	)		—		2,647
Non-U.S. government		2,024		101		—		(18	)		—		2,107
U.S. corporate:
Utilities		4,137		454		—		(41	)		—		4,550
Energy		2,167		157		—		(24	)		—		2,300
Finance and insurance		5,719		424		—		(46	)		—		6,097
Consumer—non-cyclical		4,335		433		—		(34	)		—		4,734
Technology and communications		2,473		157		—		(32	)		—		2,598
Industrial		1,161		76		—		(14	)		—		1,223
Capital goods		2,043		228		—		(13	)		—		2,258
Consumer—cyclical		1,455		92		—		(17	)		—		1,530
Transportation		1,121		86		—		(17	)		—		1,190
Other		332		17		—		(1	)		—		348

Total U.S. corporate		24,943		2,124		—		(239	)		—		26,828

Non-U.S. corporate:
Utilities		940		40		—		(11	)		—		969
Energy		1,234		109		—		(12	)		—		1,331
Finance and insurance		2,413		134		—		(9	)		—		2,538
Consumer—non-cyclical		711		17		—		(14	)		—		714
Technology and communications		953		44		—		(10	)		—		987
Industrial		928		39		—		(9	)		—		958
Capital goods		518		21		—		(4	)		—		535
Consumer—cyclical		434		10		—		(2	)		—		442
Transportation		619		65		—		(7	)		—		677
Other		2,967		190		—		(13	)		—		3,144

Total non-U.S. corporate		11,717		669		—		(91	)		—		12,295

Residential mortgage-backed		4,122		259		10		(12	)		—		4,379
Commercial mortgage-backed		3,084		98		3		(56	)		—		3,129
Other asset-backed		3,170		15		1		(35	)		—		3,151

Total fixed maturity securities		57,014		4,095		14		(551	)		—		60,572
Equity securities		628		31		—		(27	)		—		632

Total available-for-sale securities	$	57,642	$	4,126	$	14	$	(578	)	$	—	$	61,204

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, 2017:


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Grossunrealizedlosses			Number of securities		Fair value		Grossunrealizedlosses			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsoredenterprises	$	283	$	(6	)		22	$	31	$	(1	)		4	$	314	$	(7	)		26
State and political subdivisions		213		(5	)		45		230		(21	)		23		443		(26	)		68
Non-U.S. government		922		(23	)		36		24		(1	)		14		946		(24	)		50
U.S. corporate		2,335		(47	)		333		766		(36	)		106		3,101		(83	)		439
Non-U.S. corporate		1,562		(22	)		222		261		(13	)		36		1,823		(35	)		258
Residential mortgage-backed		656		(9	)		80		33		(1	)		28		689		(10	)		108
Commercial mortgage-backed		837		(25	)		120		201		(14	)		30		1,038		(39	)		150
Other asset-backed		736		(4	)		131		173		(1	)		40		909		(5	)		171

Subtotal, fixed maturitysecurities		7,544		(141	)		989		1,719		(88	)		281		9,263		(229	)		1,270
Equity securities		82		(5	)		142		111		(9	)		89		193		(14	)		231

Total for securities in an unrealizedloss position	$	7,626	$	(146	)		1,131	$	1,830	$	(97	)		370	$	9,456	$	(243	)		1,501

% Below cost—fixed maturitysecurities:
<20% Below cost	$	7,544	$	(141	)		989	$	1,719	$	(88	)		281	$	9,263	$	(229	)		1,270

Total fixed maturity securities		7,544		(141	)		989		1,719		(88	)		281		9,263		(229	)		1,270

% Below cost—equity securities:
<20% Below cost		79		(4	)		139		111		(9	)		89		190		(13	)		228
20%-50% Below cost		3		(1	)		3		—		—			—		3		(1	)		3

Total equity securities		82		(5	)		142		111		(9	)		89		193		(14	)		231

Total for securities in an unrealizedloss position	$	7,626	$	(146	)		1,131	$	1,830	$	(97	)		370	$	9,456	$	(243	)		1,501

Investment grade	$	7,437	$	(139	)		984	$	1,656	$	(90	)		287	$	9,093	$	(229	)		1,271
Below investment grade		189		(7	)		147		174		(7	)		83		363		(14	)		230

Total for securities in an unrealizedloss position	$	7,626	$	(146	)		1,131	$	1,830	$	(97	)		370	$	9,456	$	(243	)		1,501

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of September 30, 2017:


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
U.S. corporate:
Utilities	$	468	$	(10	)		69	$	104	$	(5	)		17	$	572	$	(15	)		86
Energy		123		(1	)		22		146		(9	)		16		269		(10	)		38
Finance and insurance		542		(7	)		75		154		(4	)		21		696		(11	)		96
Consumer—non-cyclical		325		(7	)		50		84		(3	)		12		409		(10	)		62
Technology and communications		208		(4	)		30		127		(7	)		19		335		(11	)		49
Industrial		55		(1	)		12		56		(2	)		8		111		(3	)		20
Capital goods		274		(8	)		31		8		(1	)		2		282		(9	)		33
Consumer—cyclical		127		(2	)		18		70		(4	)		9		197		(6	)		27
Transportation		190		(5	)		24		17		(1	)		2		207		(6	)		26
Other		23		(2	)		2		—		—			—		23		(2	)		2

Subtotal, U.S. corporatesecurities		2,335		(47	)		333		766		(36	)		106		3,101		(83	)		439

Non-U.S. corporate:
Utilities		227		(4	)		31		19		(1	)		2		246		(5	)		33
Energy		142		(3	)		21		69		(4	)		11		211		(7	)		32
Finance and insurance		324		(3	)		49		50		(2	)		9		374		(5	)		58
Consumer—non-cyclical		131		(2	)		16		34		(1	)		4		165		(3	)		20
Technology and communications		80		(1	)		17		12		(1	)		2		92		(2	)		19
Industrial		67		(1	)		10		11		(1	)		2		78		(2	)		12
Capital goods		34		(1	)		6		34		(1	)		3		68		(2	)		9
Consumer—cyclical		101		(1	)		15		—		—			—		101		(1	)		15
Transportation		61		(1	)		13		32		(2	)		3		93		(3	)		16
Other		395		(5	)		44		—		—			—		395		(5	)		44

Subtotal, non-U.S. corporatesecurities		1,562		(22	)		222		261		(13	)		36		1,823		(35	)		258

Total for corporate securities in an unrealized loss position	$	3,897	$	(69	)		555	$	1,027	$	(49	)		142	$	4,924	$	(118	)		697

As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to increase in interest rates, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 2% as of September 30, 2017.

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

Of the $88 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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

92% of the unrealized losses were related to investment grade securities as of September 30, 2017. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 5% as of September 30, 2017. As of September 30, 2017, the company did not have any 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.


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Grossunrealizedlosses			Number of securities		Fair value		Grossunrealizedlosses			Number of securities
Description of Securities
Fixed maturity securities:
U.S. government, agencies and government-sponsoredenterprises	$	1,074	$	(50	)		37	$	—	$	—			—	$	1,074	$	(50	)		37
State and political subdivisions		644		(32	)		109		142		(18	)		12		786		(50	)		121
Non-U.S. government		497		(18	)		51		—		—			—		497		(18	)		51
U.S. corporate		5,221		(190	)		711		662		(49	)		94		5,883		(239	)		805
Non-U.S. corporate		2,257		(66	)		330		408		(25	)		57		2,665		(91	)		387
Residential mortgage-backed		725		(11	)		100		58		(1	)		35		783		(12	)		135
Commercial mortgage-backed		1,091		(55	)		168		25		(1	)		9		1,116		(56	)		177
Other asset-backed		1,069		(13	)		184		328		(22	)		68		1,397		(35	)		252

Subtotal, fixed maturitysecurities		12,578		(435	)		1,690		1,623		(116	)		275		14,201		(551	)		1,965
Equity securities		119		(9	)		182		114		(18	)		47		233		(27	)		229

Total for securities in an unrealizedloss position	$	12,697	$	(444	)		1,872	$	1,737	$	(134	)		322	$	14,434	$	(578	)		2,194

% Below cost—fixed maturitysecurities:
<20% Below cost	$	12,578	$	(435	)		1,690	$	1,543	$	(90	)		267	$	14,121	$	(525	)		1,957
20%-50% Below cost		—		—			—		80		(26	)		8		80		(26	)		8

Total fixed maturity securities		12,578		(435	)		1,690		1,623		(116	)		275		14,201		(551	)		1,965

% Below cost—equity securities:
<20% Below cost		118		(8	)		167		101		(14	)		38		219		(22	)		205
20%-50% Below cost		1		(1	)		15		13		(4	)		9		14		(5	)		24

Total equity securities		119		(9	)		182		114		(18	)		47		233		(27	)		229

Total for securities in an unrealizedloss position	$	12,697	$	(444	)		1,872	$	1,737	$	(134	)		322	$	14,434	$	(578	)		2,194

Investment grade	$	12,339	$	(432	)		1,657	$	1,354	$	(108	)		250	$	13,693	$	(540	)		1,907
Below investment grade		358		(12	)		215		383		(26	)		72		741		(38	)		287

Total for securities in an unrealizedloss position	$	12,697	$	(444	)		1,872	$	1,737	$	(134	)		322	$	14,434	$	(578	)		2,194

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
U.S. corporate:
Utilities	$	855	$	(39	)		130	$	21	$	(2	)		5	$	876	$	(41	)		135
Energy		190		(5	)		30		276		(19	)		38		466		(24	)		68
Finance and insurance		1,438		(38	)		177		113		(8	)		15		1,551		(46	)		192
Consumer—non-cyclical		921		(34	)		117		—		—			—		921		(34	)		117
Technology and communications		507		(22	)		70		126		(10	)		17		633		(32	)		87
Industrial		226		(7	)		38		77		(7	)		10		303		(14	)		48
Capital goods		322		(12	)		50		6		(1	)		1		328		(13	)		51
Consumer—cyclical		431		(16	)		56		26		(1	)		6		457		(17	)		62
Transportation		302		(16	)		41		17		(1	)		2		319		(17	)		43
Other		29		(1	)		2		—		—			—		29		(1	)		2

Subtotal, U.S. corporatesecurities		5,221		(190	)		711		662		(49	)		94		5,883		(239	)		805

Non-U.S. corporate:
Utilities		240		(10	)		32		14		(1	)		1		254		(11	)		33
Energy		105		(3	)		18		91		(9	)		16		196		(12	)		34
Finance and insurance		474		(8	)		79		71		(1	)		16		545		(9	)		95
Consumer—non-cyclical		308		(14	)		30		—		—			—		308		(14	)		30
Technology and communications		232		(9	)		34		28		(1	)		2		260		(10	)		36
Industrial		165		(5	)		21		91		(4	)		10		256		(9	)		31
Capital goods		104		(2	)		14		28		(2	)		2		132		(4	)		16
Consumer—cyclical		90		(2	)		17		—		—			—		90		(2	)		17
Transportation		106		(5	)		16		25		(2	)		2		131		(7	)		18
Other		433		(8	)		69		60		(5	)		8		493		(13	)		77

Subtotal, non-U.S. corporatesecurities		2,257		(66	)		330		408		(25	)		57		2,665		(91	)		387

Total for corporate securities in an unrealized loss position	$	7,478	$	(256	)		1,041	$	1,070	$	(74	)		151	$	8,548	$	(330	)		1,192

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The scheduled maturity distribution of fixed maturity securities as of September 30, 2017 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.


(Amounts in millions)	Amortized cost or cost		Fair value
Due one year or less	$	1,943	$	1,966
Due after one year through five years		10,901		11,333
Due after five years through ten years		12,363		12,933
Due after ten years		22,208		25,629

Subtotal		47,415		51,861
Residential mortgage-backed		3,950		4,209
Commercial mortgage-backed		3,346		3,414
Other asset-backed		3,052		3,068

Total	$	57,763	$	62,552

As of September 30, 2017, $12,426 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2017, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 23%, 15% and 13%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of September 30, 2017, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	September 30, 2017						December 31, 2016
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	2,220			35	%	$	2,178			36	%
Industrial		1,608			26			1,533			25
Office		1,465			23			1,430			23
Apartments		489			8			455			7
Mixed use		222			4			245			4
Other		277			4			284			5

Subtotal		6,281			100	%		6,125			100	%

Unamortized balance of loan origination fees and costs		(3	)					(2	)
Allowance for losses		(10	)					(12	)

Total	$	6,268					$	6,111


	September 30, 2017						December 31, 2016
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
South Atlantic	$	1,620			26	%	$	1,546			25	%
Pacific		1,600			26			1,567			27
Middle Atlantic		904			14			915			15
Mountain		556			9			554			9
West North Central		441			7			435			7
East North Central		386			6			388			6
West South Central		327			5			311			5
New England		237			4			206			3
East South Central		210			3			203			3

Subtotal		6,281			100	%		6,125			100	%

Unamortized balance of loan origination fees and costs		(3	)					(2	)
Allowance for losses		(10	)					(12	)

Total	$	6,268					$	6,111

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, 2017
(Amounts in millions)	31 - 60 days past due			61 - 90 days past due			Greater than 90 days past due			Total past due			Current			Total
Property type:
Retail	$	—		$	—		$	—		$	—		$	2,220		$	2,220
Industrial		—			—			—			—			1,608			1,608
Office		6			—			—			6			1,459			1,465
Apartments		—			—			—			—			489			489
Mixed use		—			—			—			—			222			222
Other		—			—			—			—			277			277

Total recorded investment	$	6		$	—		$	—		$	6		$	6,275		$	6,281

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


	December 31, 2016
(Amounts in millions)	31 - 60 days past due			61 - 90 days past due			Greater than 90 days past due			Total past due			Current			Total
Property type:
Retail	$	—		$	—		$	—		$	—		$	2,178		$	2,178
Industrial		1			—			12			13			1,520			1,533
Office		—			—			—			—			1,430			1,430
Apartments		—			—			—			—			455			455
Mixed use		—			—			—			—			245			245
Other		—			—			—			—			284			284

Total recorded investment	$	1		$	—		$	12		$	13		$	6,112		$	6,125

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

As of September 30, 2017 and December 31, 2016, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. As of September 30, 2017, we had one commercial mortgage loan past due for less than 90 days on non-accrual status due to the borrower filing for bankruptcy in September 2017. We did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of December 31, 2016.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of September 30, 2017, none of our commercial mortgage loans were greater than 90 days past due.

During the nine months ended September 30, 2017 and the year ended December 31, 2016, we modified or extended 7 and 16 commercial mortgage loans, respectively, with a total carrying value of $19 million and $85 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, except during the year ended December 31, 2016, one loan with a carrying value $1 million at the time of modification was considered a troubled debt restructuring. This loan was sold in the fourth quarter of 2016.

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)	2017		2016		2017			2016
Allowance for credit losses:
Beginning balance	$	10	$	13	$	12		$	15
Charge-offs		—		—		—			(4	)
Recoveries		—		—		—			—
Provision		—		—		(2	)		2

Ending balance	$	10	$	13	$	10		$	13

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

Ending allowance for loans not individually impaired that were evaluated collectively for impairment	$	10	$	13	$	10		$	13

Recorded investment:
Ending balance	$	6,281	$	6,032	$	6,281		$	6,032

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

Ending balance of loans not individually impaired that were evaluated collectively for impairment	$	6,281	$	6,015	$	6,281		$	6,015

As of September 30, 2017, we had no individually impaired commercial mortgage loans. As of September 30, 2016, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $7 million, charge-offs of $2 million and an average recorded investment of $3 million. As of December 31, 2016, we had one individually impaired loan within the industrial property type with a recorded investment of $12 million, an unpaid principal balance of $15 million and charge-offs of $3 million.

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual 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, 2017
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greaterthan 100%⁽¹⁾			Total
Property type:
Retail	$	933		$	499		$	788		$	—		$	—		$	2,220
Industrial		747			356			503			2			—			1,608
Office		583			393			473			14			2			1,465
Apartments		236			105			143			5			—			489
Mixed use		101			59			62			—			—			222
Other		68			29			180			—			—			277

Total recorded investment	$	2,668		$	1,441		$	2,149		$	21		$	2		$	6,281

% of total		43	%		23	%		34	%		—	%		—	%		100	%

Weighted-average debt service coverage ratio		2.65			1.85			1.60			0.63			1.04			2.10

⁽¹⁾	Included a loan with a recorded investment of $2 million in good standing, where the borrower continued to make timely payments, with a loan-to-value of 103%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.


	December 31, 2016
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greaterthan 100%⁽¹⁾			Total
Property type:
Retail	$	743		$	511		$	913		$	11		$	—		$	2,178
Industrial		605			430			484			14			—			1,533
Office		431			310			656			26			7			1,430
Apartments		188			89			173			5			—			455
Mixed use		67			87			91			—			—			245
Other		60			30			194			—			—			284

Total recorded investment	$	2,094		$	1,457		$	2,511		$	56		$	7		$	6,125

% of total		34	%		24	%		41	%		1	%		—	%		100	%

Weighted-average debt service coverage ratio		2.20			1.88			1.61			0.80			(0.07	)		1.87

⁽¹⁾	Included a loan with a recorded investment of $7 million in good standing, where the borrower continued to make timely payments, with a loan-to-value of 105%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.

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, 2017
(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	$	43		$	242		$	298		$	999		$	638		$	2,220
Industrial		24			63			180			679			662			1,608
Office		72			67			151			521			654			1,465
Apartments		—			20			75			193			201			489
Mixed use		2			4			26			86			104			222
Other		1			149			15			72			40			277

Total recorded investment	$	142		$	545		$	745		$	2,550		$	2,299		$	6,281

% of total		2	%		9	%		12	%		40	%		37	%		100	%

Weighted-average loan-to-value		57	%		60	%		58	%		57	%		41	%		52	%


	December 31, 2016
(Amounts in millions)	Less than 1.00			1.00 - 1.25			1.26 - 1.50			1.51 - 2.00			Greater than 2.00			Total
Property type:
Retail	$	67		$	204		$	425		$	899		$	583		$	2,178
Industrial		71			113			236			599			514			1,533
Office		91			117			172			609			441			1,430
Apartments		19			22			44			217			153			455
Mixed use		2			9			19			128			87			245
Other		1			148			60			55			20			284

Total recorded investment	$	251		$	613		$	956		$	2,507		$	1,798		$	6,125

% of total		4	%		10	%		16	%		41	%		29	%		100	%

Weighted-average loan-to-value		61	%		60	%		59	%		58	%		45	%		55	%

As of September 30, 2017 and December 31, 2016, we did not have any floating rate commercial mortgage loans.

(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 previously had consolidated securitization entities that held certain investments that were recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities held certain investments as trading securities whereby the changes in fair value were recorded in current period

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

income (loss). The trading securities comprised asset-backed securities, including highly rated bonds that were primarily backed by credit card receivables. In 2017, these trading securities were sold as we repositioned these assets in connection with the maturity of the associated liabilities.

(h) Limited Partnerships or Similar Entities

Investments in partnerships or similar entities are generally considered VIEs when the equity group lacks sufficient financial control. Generally, these investments are limited partner or non-managing member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of September 30, 2017 and December 31, 2016, the total carrying value of these investments was $208 million and $178 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.

(5) Derivative Instruments

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

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 30,2017⁽⁵⁾		December 31, 2016		Balance sheet classification		September 30,2017⁽⁵⁾		December 31, 2016
Derivatives designated ashedges
Cash flow hedges:
Interest rate swaps	Other invested assets	$	70	$	237		Other liabilities	$	39	$	203
Foreign currency swaps	Other invested assets		2		4		Other liabilities		—		—

Total cash flow hedges			72		241				39		203

Total derivativesdesignated as hedges			72		241				39		203

Derivatives not designated ashedges
Interest rate swaps	Other invested assets		—		359		Other liabilities		—		146
Foreign currency swaps	Other invested assets		10		—		Other liabilities		—		5
Credit default swaps related tosecuritization entities	Restricted other invested assets		—		—		Other liabilities		—		1
Equity index options	Other invested assets		81		72		Other liabilities		—		—
Financial futures	Other invested assets		—		—		Other liabilities		—		—
Equity return swaps	Other invested assets		—		1		Other liabilities		2		1
Other foreign currencycontracts	Other invested assets		98		35		Other liabilities		23		27
GMWB embedded derivatives	Reinsurance recoverable⁽¹⁾		14		16		Policyholder account balances⁽²⁾		257		303
Fixed index annuity embeddedderivatives	Other assets		—		—		Policyholder account balances⁽³⁾		394		344
Indexed universal life embedded derivatives	Reinsurance recoverable		—		—		Policyholder account balances⁽⁴⁾		14		11

Total derivatives notdesignated as hedges			203		483				690		838

Total derivatives		$	275	$	724			$	729	$	1,041

⁽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.

⁽⁵⁾

In the third quarter of 2017, recent central clearing parties rule changes impacted our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and is now treated as daily settlements of the derivative contract. The change reduced the value of our derivative assets and derivative liabilities by $509 million and $274 million, respectively, in the third quarter of 2017.

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 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, 2016		Additions		Maturities/ terminations			September 30, 2017
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps		Notional	$	11,570	$	—	$	(306	)	$	11,264
Foreign currency swaps		Notional		22		—		—			22

Total cash flow hedges				11,592		—		(306	)		11,286

Total derivatives designated as hedges				11,592		—		(306	)		11,286

Derivatives not designated as hedges
Interest rate swaps		Notional		4,679		—		—			4,679
Foreign currency swaps		Notional		201		95		(14	)		282
Credit default swaps		Notional		39		—		—			39
Credit default swaps related to securitization entities		Notional		312		—		(200	)		112
Equity index options		Notional		2,396		1,584		(1,484	)		2,496
Financial futures		Notional		1,398		4,300		(4,376	)		1,322
Equity return swaps		Notional		165		186		(258	)		93
Other foreign currency contracts		Notional		3,130		2,163		(691	)		4,602

Total derivatives not designated as hedges				12,320		8,328		(7,023	)		13,625

Total derivatives			$	23,912	$	8,328	$	(7,329	)	$	24,911


(Number of policies)	Measurement		December 31, 2016		Additions		Maturities/ terminations			September 30, 2017
Derivatives not designated as hedges
GMWB embedded derivatives		Policies		33,238		—		(2,127	)		31,111
Fixed index annuity embedded derivatives		Policies		17,549		—		(367	)		17,182
Indexed universal life embedded derivatives		Policies		1,074		1		(66	)		1,009

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

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2017:


(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 innet income (loss)⁽¹⁾		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	17		$	34		Net investment income	$	—		Net investment gains (losses)
Foreign currency swaps		(1	)		—		Net investment income		—		Net investment gains (losses)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company