10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 June 30, 2020

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

For the transition period from

Commission file number

001-32195

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 every Interactive Data File required to be submitted 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 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.

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 ☒

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, par value $.001 per share	GNW	New York Stock Exchange

As of July 27, 2020, 594,010,907 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

Table of Contents

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION			3

Item 1.	Financial Statements		3
Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019			3
Condensed Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019 (Unaudited)			4
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (Unaudited)			5
Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2020 and 2019 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (Unaudited)			8
Notes to Condensed Consolidated Financial Statements (Unaudited)			9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		79

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		173

Item 4.	Controls and Procedures		173

PART II—OTHER INFORMATION			174

Item 1.	Legal Proceedings		174

Item 1A.	Risk Factors		174

Item 6.	Exhibits		175

Signatures			176

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)


	June 30, 2020			December 31, 2019
	(Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost of $54,834 and allowance for credit losses of $7 as of June 30, 2020)	$	63,544		$	60,339
Equity securities, at fair value		206			239
Commercial mortgage loans (net of unamortized balance of loan origination fees and costs of $4 as of June 30, 2020 and December 31, 2019)		6,945			6,976
Less: Allowance for credit losses		(28	)		(13	)

Commercial mortgage loans, net		6,917			6,963
Policy loans		2,182			2,058
Other invested assets		2,473			1,632

Total investments		75,322			71,231
Cash, cash equivalents and restricted cash		2,597			3,341
Accrued investment income		601			654
Deferred acquisition costs		1,718			1,836
Intangible assets and goodwill		223			201
Reinsurance recoverable		16,944			17,103
Less: Allowance for credit losses		(44	)		—

Reinsurance recoverable, net		16,900			17,103
Other assets		454			443
Deferred tax asset		286			425
Separate account assets		5,536			6,108

Total assets	$	103,637		$	101,342

Liabilities and equity
Liabilities:
Future policy benefits	$	41,463		$	40,384
Policyholder account balances		22,921			22,217
Liability for policy and contract claims		11,280			10,958
Unearned premiums		1,804			1,893
Other liabilities		2,075			1,428
Non-recourse funding obligations		—			311
Long-term borrowings		2,817			3,277
Separate account liabilities		5,536			6,108
Liabilities related to discontinued operations		653			134

Total liabilities		88,549			86,710

Commitments and contingencies

Equity:
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 594 million and 592 million shares issued as of June 30, 2020 and December 31, 2019, respectively; 506 million and 504 million shares outstanding as of June 30, 2020 and December 31, 2019, respectively		1			1
Additional paid-in capital		11,996			11,990
Accumulated other comprehensive income (loss)		4,447			3,433
Retained earnings		899			1,461
Treasury stock, at cost (88 million shares as of June 30, 2020 and December 31, 2019)		(2,700	)		(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		14,643			14,185
Noncontrolling interests		445			447

Total equity		15,088			14,632

Total liabilities and equity	$	103,637		$	101,342

See Notes to Condensed Consolidated Financial Statements

Table of Contents

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
Revenues:
Premiums	$	1,019		$	1,001		$	2,034		$	1,989
Net investment income		786			816			1,579			1,610
Net investment gains (losses)		159			(46	)		7			29
Policy fees and other income		174			223			355			410

Total revenues		2,138			1,994			3,975			4,038

Benefits and expenses:
Benefits and other changes in policy reserves		1,486			1,251			2,847			2,533
Interest credited		139			146			280			293
Acquisition and operating expenses, net of deferrals		223			229			472			466
Amortization of deferred acquisition costs and intangibles		93			84			209			165
Goodwill impairment		5			—			5			—
Interest expense		44			60			96			120

Total benefits and expenses		1,990			1,770			3,909			3,577

Income from continuing operations before income taxes		148			224			66			461
Provision for income taxes		46			66			36			135

Income from continuing operations		102			158			30			326
Income (loss) from discontinued operations, net of taxes		(520	)		60			(520	)		122

Net income (loss)		(418	)		218			(490	)		448
Less: net income from continuing operations attributable to noncontrolling interests		23			15			17			35
Less: net income from discontinued operations attributable to noncontrolling interests		—			35			—			71

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(441	)	$	168		$	(507	)	$	342

Net income (loss) available to Genworth Financial, Inc.’s common stockholders:
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	79		$	143		$	13		$	291
Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders		(520	)		25			(520	)		51

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(441	)	$	168		$	(507	)	$	342

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
Basic	$	0.16		$	0.29		$	0.03		$	0.58

Diluted	$	0.15		$	0.28		$	0.03		$	0.57

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share:
Basic	$	(0.87	)	$	0.33		$	(1.00	)	$	0.68

Diluted	$	(0.86	)	$	0.33		$	(0.99	)	$	0.67

Weighted-average common shares outstanding:
Basic		505.4			503.4			504.8			502.3

Diluted		512.5			508.7			511.1			508.7

See Notes to Condensed Consolidated Financial Statements

Table of Contents

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)


	Six months ended June 30,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(490	)	$	448
Less (income) loss from discontinued operations, net of taxes		520			(122	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Amortization of fixed maturity securities discounts and premiums		(50	)		(57	)
Net investment (gains) losses		(7	)		(29	)
Charges assessed to policyholders		(314	)		(364	)
Acquisition costs deferred		(9	)		(16	)
Amortization of deferred acquisition costs and intangibles		209			165
Goodwill impairment		5			—
Deferred income taxes		28			98
Derivative instruments, limited partnerships and other		191			18
Stock-based compensation expense		19			10
Change in certain assets and liabilities:
Accrued investment income and other assets		(131	)		(284	)
Insurance reserves		674			609
Current tax liabilities		(1	)		13
Other liabilities, policy and contract claims and other policy-related balances		655			134
Cash from operating activities—discontinued operations		—			172

Net cash from operating activities		1,299			795

Cash flows used by investing activities:
Proceeds from maturities and repayments of investments:
Fixed maturity securities		1,687			1,774
Commercial mortgage loans		302			291
Other invested assets		71			51
Proceeds from sales of investments:
Fixed maturity and equity securities		1,657			2,362
Purchases and originations of investments:
Fixed maturity and equity securities		(4,166	)		(4,054	)
Commercial mortgage loans		(271	)		(561	)
Other invested assets		(236	)		(235	)
Short-term investments, net		59			3
Policy loans, net		10			39
Cash used by investing activities—discontinued operations		—			(21	)

Net cash used by investing activities		(887	)		(351	)

Cash flows used by financing activities:
Deposits to universal life and investment contracts		516			444
Withdrawals from universal life and investment contracts		(914	)		(1,096	)
Redemption of non-recourse funding obligations		(315	)		—
Repayment and repurchase of long-term debt		(471	)		(1	)
Repurchase of subsidiary shares		—			(22	)
Dividends paid to noncontrolling interests		(9	)		(14	)
Other, net		49			55
Cash used by financing activities—discontinued operations		—			(61	)

Net cash used by financing activities		(1,144	)		(695	)

Effect of exchange rate changes on cash, cash equivalents and restricted cash (includes $—and $12 related to discontinued operations)		(12	)		12

Net change in cash, cash equivalents and restricted cash		(744	)		(239	)
Cash, cash equivalents and restricted cash at beginning of period		3,341			2,177

Cash, cash equivalents and restricted cash at end of period		2,597			1,938
Less cash, cash equivalents and restricted cash of discontinued operations at end of period		—			223

Cash, cash equivalents and restricted cash of continuing operations at end of period	$	2,597		$	1,715

See Notes to Condensed Consolidated Financial Statements

Table of Contents

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. (“Parent”), a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and a direct, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as a direct, wholly-owned subsidiary of Asia Pacific Insurance. 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 Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement. The closing of the transaction remains subject to other closing conditions.

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

We operate our business through the following four 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.

•

Australia Mortgage Insurance.

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

•

U.S. Life Insurance.

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

•

Runoff.

The Runoff segment includes the results of products which have not been actively sold

since

2011

, but we continue to service our existing blocks of business. These products primarily include variable annuity, variable life insurance and corporate-owned life insurance, as well as funding agreements.

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

On December 12, 2019, we completed the sale of Genworth MI Canada Inc. (“Genworth Canada”), our former Canada mortgage insurance business, to an affiliate of Brookfield Business Partners L.P. (“Brookfield”) and received approximately $1.7 billion in net cash proceeds. Prior to the sale, in the third quarter of 2019, Genworth Canada was reported as discontinued operations and its financial position, results of operations and cash flows were separately reported for all periods presented. All prior periods reflected herein have been

re-presented

on this basis. See note 14 for additional information related to discontinued operations.

Unless otherwise indicated, references to the condensed consolidated balance sheets, the condensed consolidated statements of income, the condensed consolidated statements of cash flows and the notes to the condensed consolidated financial statements, exclude amounts related to 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. Potential impacts, risks and uncertainties of the coronavirus pandemic

(“COVID-19”)

may include investment valuations and impairments, commercial mortgage loan restructurings, deferred acquisition cost or intangible assets impairments or the acceleration of amortization, deferred tax asset recoverability and increases to insurance reserves, including higher claims reserves in our mortgage insurance businesses, among other matters. 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 2019 Annual Report on Form

10-K.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Each reporting period, we assess our ability to continue as a going concern for one year

from

the date the financial statements are issued. As of June 30, 2020, Genworth Holdings has $494 million of unrestricted cash and cash equivalents. For the quarterly period ended June 30, 2020, our evaluation of our ability to meet our obligations included the following contractual obligations due within one year from the issue date of our unaudited condensed consolidated financial statements included herein:

•

A partial settlement payment in the amount of £100 million ($125 million) paid to

AXA S.A. (“AXA”) on

July

, 2020 in connection with a settlement reached regarding the case titled

AXA S.A. v. Genworth Financial International Holdings, LLC et al.

As part of the settlement agreement, we issued a secured promissory note agreeing to pay AXA

two

installments in 2022. Under the settlement, certain cash flows to

Genworth

Holdings, including dividends and capital raises, above defined thresholds must be paid to AXA until the promissory note is fully repaid. In addition,

over the next year, we expect to pay AXA approximately $25 million in interest on the promissory note, assuming we do not make any pre-payments, and we may make an additional one-time payment of approximately

$40 million for an

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

unrelated liability and other expenses. See note 12 for additional details on the case. See note 14 for additional details related to the sale of our former lifestyle protection insurance business and amounts recorded related to loss from discontinued operations.

•

Genworth Holdings has $356 million of its 7.20% senior notes maturing in February 2021. We are currently in compliance with the terms of our debt agreements and interest payments on our senior notes are forecasted to be $158 million for the next twelve months. See note 9 for additional details on our long-term borrowings.

We also evaluate other conditions and events and their relative significance in relation to our ability to meet our obligations. As an example, we are exposed to risks associated with

COVID-19,

which has disrupted the global economy and financial markets, business operations, and consumer behavior and confidence.

•

Due to higher delinquencies and the impact to capital levels resulting from

COVID-19,

we do not expect to receive further dividends in 2020 from our mortgage insurance subsidiaries.

•

Due to the uncertain macroeconomic conditions surrounding

COVID-19,

on June 30, 2020, Genworth and China Oceanwide agreed to a fifteenth waiver and agreement extending the merger deadline to no later than September 30, 2020.

The consummation of this transaction is dependent on steps outside of our control; accordingly, the associated

post-closing

capital contributions

from China

Oceanwide

have not been included in this evaluation.

While conditions and events occurring and expected to occur raise doubt about our ability to meet our financial obligations for the next year, management’s plans alleviate this doubt.

We are actively taking steps to raise capital to address our obligations, including a debt

financing

as well as, should our pending transaction with China Oceanwide not close, preparing for a 19.9% public offering of our U.S. mortgage insurance business subject to market conditions. We expect to

engage in

a debt

financing

through our U.S. mortgage insurance business later in 2020 which, along with existing cash and cash equivalents, would provide Genworth Holdings sufficient liquidity to meet its obligations and maintain business operations

for one

year from the issue date of the unaudited condensed consolidated financial statements. We believe this debt

financing

is probable to be effectively implemented given the value of the U.S. mortgage insurance business, the healthy conditions of the relevant credit markets, recent similar peer transactions and our history of similar refinancing transactions, among other factors.

The impact of the developing coronavirus pandemic is very difficult to predict

Its

related outcomes and impact on our business

and the capital markets, and our ability to raise capital

will depend on the length of the pandemic

, economic impacts of social, global and political influences, and the

shape of the economic recovery

, among other factors and uncertainties. While these risks exist, we

believe the execution of our plan will provide sufficient funds to meet our obligations for

one

year following the issuance of our unaudited condensed consolidated financial statements.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On January 1, 2020, we adopted new accounting guidance related to disclosure requirements for defined benefit plans as part of the Financial Accounting Standards Board’s (the “FASB”) disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for defined benefit pension and other postretirement benefit plans. We adopted this new accounting guidance using the retrospective method, which did not have a significant impact on our condensed consolidated financial statements and disclosures.

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On January 1, 2020, we adopted new accounting guidance related to fair value disclosure requirements as part of the FASB’s disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for fair value measurements. The guidance includes new disclosure requirements related to changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. We adopted this new accounting guidance using the prospective method for disclosures related to changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty and the retrospective method for all other disclosures. This accounting guidance did not impact our condensed consolidated financial statements but impacted our fair value disclosures.

In March 2020, the FASB issued new accounting guidance related to reference rate reform, which was effective for us on January 1, 2020. The guidance provides temporary guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform, which includes the transition away from the London Interbank Offered Rate (“LIBOR”). This new guidance provides optional practical expedients and exceptions for applying generally accepted accounting principles to investments, derivatives or other transactions affected by reference rate reform such as those that impact the assessment of derivative hedge effectiveness and contract modifications, to include continuing hedge accounting when certain critical terms of a hedging relationship change and modifying certain effectiveness assessments to exclude certain potential sources of ineffectiveness. In addition to the optional practical expedients, the guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. We adopted this guidance prospectively and it did not have a significant impact on our condensed consolidated financial statements or disclosures. However, the amendments in this guidance may be elected over time through December 31, 2022 as reference rate reform activities occur and therefore, this guidance may impact our procedures, including our process for assessing the effectiveness of our cash flow hedging relationships, determined on an individual hedge basis, as we implement measures to transition away from LIBOR.

On January 1, 2020, we adopted new accounting guidance related to accounting for credit losses on financial instruments.

The guidance requires entities to recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most financial instruments not measured at fair value, which primarily includes our commercial mortgage loans, bank loan investments and reinsurance recoverables. The new guidance also requires the recognition of an allowance for expected credit losses as a liability in our consolidated balance sheet for off-balance

sheet

credit exposures, including commitments to fund bank loan investments, private placement investments and commercial mortgage loans. The new guidance did not have a significant impact on other assets not measured at fair value. The FASB also issued an amendment to the guidance allowing entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible instruments, which we did not elect.

For our commercial mortgage loans, we determine the adequacy of the allowance for credit losses utilizing an analytical model that provides various loss scenarios based on historical experience adjusted for current events, trends, economic conditions and reasonable and supportable forecasts that result in a loss in the loan portfolio over the estimated life of the loans. We revert to historical credit loss experience for periods beyond forecasts that are reasonable and supportable. The allowance for credit losses is measured on a collective basis with consideration for debt service coverage ratio,

debt-to-value,

property-type and geographic location. Key

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

inputs into the analytical model include exposure, weighted-average life, return, historical loss rates and forecast

scenarios. Actual amounts realized over time could differ from the amounts estimated for the allowance for credit losses reported in the condensed consolidated financial statements. Commercial mortgage loans are written off against the allowance to the extent principal or interest is deemed uncollectible. Accrued interest related to commercial mortgage loans is included in accrued investment income in our condensed consolidated balance sheet and had a carrying value of $

million as of June

2020

. We do not measure an allowance for credit losses related to accrued interest as uncollectible accrued interest related to our commercial mortgage loans are written off after

days and once

collectability

is determined to be uncertain and not probable. Amounts written off related to accrued interest are recorded as a credit loss expense included in net investment gains (losses).

We adopted the guidance related to our investments carried at amortized cost using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $23 million, net of deferred taxes of $6 million, for commercial mortgage loans and bank loan investments, with an offset to cumulative effect of change in accounting within retained earnings. See note 4 for additional disclosures related to commercial mortgage loans. We adopted the guidance related to our

off-balance

sheet credit exposures using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $1 million, included in other liabilities in our condensed consolidated balance sheet, with an offset to cumulative effect of change in accounting within retained earnings.

The allowance for credit losses for reinsurance recoverables is evaluated based on historical loss experience adjusted for current events and reasonable and supportable forecasts from both internal and external sources. The allowance is measured by reinsurer, taking into consideration the reinsured product type and collateral type, and is calculated based on an externally reported probability of default corresponding to the reinsurer’s credit rating and the expected duration of the reinsurer’s contractual obligation to reimburse us for ceded claims on the underlying policies. Our estimate of the allowance reflects consideration for collateral securing the reinsurance agreements and expected recoveries of amounts previously charged off and expected to be charged off. We also consider other credit risk factors, including, among other factors, the historical frequency and severity of the associated insurance claims, aging of recoverables and regulatory, legal and economic factors, to determine if an additional incremental allowance for credit losses is required. No reversion adjustments are necessary as the starting point for our allowance for credit losses reflects historical loss experience covering the expected duration of the reinsurer’s contractual obligation to reimburse us. If available facts and circumstances indicate the reinsurance recoverable does not reflect expectations consistent with the collective analysis, the reinsurance recoverable is assessed on a separate basis. Write-offs of reinsurance recoverables are deducted from the allowance in the period the reinsurance recoverable is determined to be uncollectible. We adopted the guidance related to our reinsurance recoverables using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $31 million, net of deferred taxes of $9 million, with an offset to cumulative effect of change in accounting within retained earnings. See note 8 for additional disclosures related to reinsurance recoverables.

The new guidance retains most of the existing impairment guidance for

available-for-sale

fixed maturity securities but amends the presentation of credit losses to reflect an allowance for credit losses as opposed to a write-down of the amortized cost of the investment and permits the reversal of credit losses through net income (loss) when reassessing changes in credit losses each reporting period.

Available-for-sale

fixed maturity securities in an unrealized loss position are evaluated to determine whether the decline in fair value is related to credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency/agencies and adverse conditions specifically related to the security, among other factors. If a credit loss exists, the present value of cash flows

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

expected to be collected from the security are compared to the amortized cost basis of the security. If the present

value of cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Estimating the cash flows expected to be collected is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments. When developing the estimate of cash flows expected to be collected, we utilize an analytical model that provides for various loss scenarios and consider the industry sector, current levels of subordination, geographic location and other relevant characteristics of the security or underlying assets, as well as reasonable and supportable forecasts. Losses are written off against the allowance when deemed uncollectible or when we intend to sell or expect we will be required to sell a security prior to recovering our amortized cost. We exclude accrued interest related to

available-for-sale

fixed maturity securities from the estimate of allowance for credit losses. Accrued interest is included in accrued investment income in our condensed consolidated balance sheet and had a carrying value of $544 million as of June 30, 2020. We do not measure an allowance for credit losses related to accrued interest as uncollectible accrued interest related to our

available-for-sale

fixed maturity securities are written off after 90 days and once collectability is determined to be uncertain and not probable. Amounts written off related to accrued interest are recorded as a credit loss expense included in net investment gains (losses). We adopted the guidance related to our

available-for-sale

fixed maturity securities for which a previous other-than-temporary impairment was recognized prior to the date of adoption using the prospective method and the modified retrospective method for all other

available-for-sale

fixed maturity securities, which did not have any impact upon adoption.

Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued new accounting guidance related to simplifying the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is currently effective for us on January 1, 2021 using the retrospective method or modified retrospective method for certain changes and prospective method for all other changes, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements and disclosures.

In August 2018, the FASB issued new accounting guidance that significantly changes the recognition and measurement of long-duration insurance contracts and expands disclosure requirements, which impacts our life insurance deferred acquisition costs (“DAC”) and liabilities. In accordance with the guidance, the more significant changes include:

•

assumptions will no longer be

locked-in

at contract inception and all cash flow assumptions used to estimate the liability for future policy benefits (except the discount rate) will be reviewed at least annually in the same period each year or more frequently if actual experience indicates a change is required. Changes will be recorded in net income (loss) using a retrospective approach with a cumulative

catch-up

adjustment by recalculating the net premium ratio (which will be capped at 100%) using actual historical and updated future cash flow assumptions;

•

the discount rate used to determine the liability for future policy benefits will be a current upper-medium grade (low credit risk) fixed-income instrument yield, which is generally interpreted to mean a

single-A

rated bond rate for the same duration, and is required to be reviewed quarterly, with changes in the discount rate recorded in other comprehensive income (loss);

•

the provision for adverse deviation and the premium deficiency test will be eliminated;

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

market risk benefits associated with deposit-type contracts will be measured at fair value with changes related to instrument-specific credit risk recorded in other comprehensive income (loss) and remaining changes recorded in net income (loss);

•

the amortization method for DAC will generally be on a straight-line basis over the expected contract term; and

•

disclosures will be greatly expanded to include significant assumptions and product liability rollforwards.

We expect this guidance to be effective for us on January 1, 2023, subject to the FASB finalizing an additional

one-year

delay, using the modified retrospective method, with early adoption permitted. Given the nature and extent of the changes to our operations, this guidance is expected to have a significant impact on our condensed consolidated financial statements.

Table of Contents

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					Six months ended
	June 30,					June 30,
(Amounts in millions, except per share amounts)	2020			2019		2020			2019
Weighted-average shares used in basic earnings per share calculations		505.4			503.4		504.8			502.3
Potentially dilutive securities:
Stock options, restricted stock units and stock appreciation rights		7.1			5.3		6.3			6.4

Weighted-average shares used in diluted earnings per share calculations		512.5			508.7		511.1			508.7

Income from continuing operations:
Income from continuing operations	$	102		$	158	$	30		$	326
Less: net income from continuing operations attributable to noncontrolling interests		23			15		17			35

Income from continuing operations available to Genworth Financial, Inc.’s common stockholders	$	79		$	143	$	13		$	291

Basic per share	$	0.16		$	0.29	$	0.03		$	0.58

Diluted per share	$	0.15		$	0.28	$	0.03		$	0.57

Income (loss) from discontinued operations:
Income (loss) from discontinued operations, net of taxes	$	(520	)	$	60	$	(520	)	$	122
Less: net income from discontinued operations attributable to noncontrolling interests		—			35		—			71

Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders	$	(520	)	$	25	$	(520	)	$	51

Basic per share	$	(1.03	)	$	0.05	$	(1.03	)	$	0.10

Diluted per share	$	(1.01	)	$	0.05	$	(1.02	)	$	0.10


Net income (loss):
Income from continuing operations	$	102		$	158	$	30		$	326
Income (loss) from discontinued operations, net of taxes		(520	)		60		(520	)		122

Net income (loss)		(418	)		218		(490	)		448
Less: net income attributable to noncontrolling interests		23			50		17			106

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	(441	)	$	168	$	(507	)	$	342

Basic per share (1)	$	(0.87	)	$	0.33	$	(1.00	)	$	0.68

Diluted per share	$	(0.86	)	$	0.33	$	(0.99	)	$	0.67

(1)	May not total due to whole number calculation.

Table of Contents

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						Six months ended
	June 30,						June 30,
(Amounts in millions)	2020			2019			2020			2019
Fixed maturity securities—taxable	$	601		$	634		$	1,223		$	1,247
Fixed maturity securities—non-taxable		1			2			3			4
Equity securities		2			5			4			9
Commercial mortgage loans		84			85			169			167
Policy loans		49			45			98			91
Other invested assets		66			59			113			118
Cash, cash equivalents, restricted cash and short-term investments		4			11			15			22

Gross investment income before expenses and fees		807			841			1,625			1,658
Expenses and fees		(21	)		(25	)		(46	)		(48	)

Net investment income	$	786		$	816		$	1,579		$	1,610

(b) Net Investment Gains (Losses)

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


	Three months ended						Six months ended
	June 30,						June 30,
(Amounts in millions)	2020			2019			2020			2019
Available-for-sale fixed maturity securities:
Realized gains	$	119		$	10		$	133		$	74
Realized losses		(5	)		(21	)		(6	)		(27	)

Net realized gains (losses) on available-for-sale fixed maturity securities		114			(11	)		127			47

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

Net other-than-temporary impairments		—			—			—			—

Net change in allowance for credit losses on available-for-sale fixed maturity securities		(7	)		—			(7	)		—
Net realized gains (losses) on equity securities sold		—			—			—			3
Net unrealized gains (losses) on equity securities still held		9			5			(10	)		17
Limited partnerships		37			(11	)		(3	)		4
Commercial mortgage loans		1			1			1			—
Derivative instruments (1)		10			(30	)		(95	)		(42	)
Other		(5	)		—			(6	)		—

Net investment gains (losses)	$	159		$	(46	)	$	7		$	29

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

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

See note 2 for a discussion of our policy for evaluating and measuring the allowance for credit losses related to our

available-for-sale

fixed maturity securities. The following table represents the allowance for credit losses aggregated by security type for

available-for-sale

fixed maturity investments as of and for the three and six months ended June 30, 2020:


			Increase from		Increase
			securities		(decrease)				Decrease
			without		from securities				due to change
			allowance in		with allowance				in intent or
	Beginning		previous		in previous		Securities		requirement						Ending
(Amounts in millions)	balance		periods		periods		sold		to sell		Write-offs		Recoveries		balance
Fixed maturity securities:
Non-U.S. corporate	$	—	$	4	$	—	$	—	$	—	$	—	$	—	$	4
Commercial mortgage-backed		—		3		—		—		—		—		—		3

Total available-for-sale fixed maturity securities	$	—	$	7	$	—	$	—	$	—	$	—	$	—	$	7

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 (“OCI”) as of and for the periods indicated:


	Three months		Six months
	ended		ended
	June 30,		June 30,
(Amounts in millions)	2019		2019
Beginning balance	$	23	$	24
Reductions:
Securities sold, paid down or disposed		—		(1	)

Ending balance	$	23	$	23

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Net unrealized gains and losses on

available-for-sale

investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:


(Amounts in millions)	June 30, 2020			December 31, 2019
Net unrealized gains (losses) on fixed maturity securities without an allowance for credit losses (1)	$	8,766		$	6,676
Net unrealized gains (losses) on fixed maturity securities with an allowance for credit losses (1)		(10	)		—
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves		(6,420	)		(4,789	)
Income taxes, net		(501	)		(406	)

Net unrealized investment gains (losses)		1,835			1,481
Less: net unrealized investment gains (losses) attributable to noncontrolling interests		24			25

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.	$	1,811		$	1,456

(1)	Excludes foreign exchange.

The change in net unrealized gains (losses) on

available-for-sale

investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:


	As of or for the
	three months ended
	June 30,
(Amounts in millions)	2020			2019
Beginning balance	$	1,140		$	943
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on fixed maturity securities		3,911			1,957
Adjustment to deferred acquisition costs		(111	)		(52	)
Adjustment to present value of future profits		5			(2	)
Adjustment to sales inducements		(34	)		(12	)
Adjustment to benefit reserves		(2,802	)		(1,412	)
Provision for income taxes		(207	)		(104	)

Change in unrealized gains (losses) on investment securities		762			375
Reclassification adjustments to net investment (gains) losses, net of taxes of $24 and $(1)		(88	)		1

Change in net unrealized investment gains (losses)		674			376
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		3			14

Ending balance	$	1,811		$	1,305

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	As of or for the
	six months ended
	June 30,
(Amounts in millions)	2020			2019
Beginning balance	$	1,456		$	595
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on fixed maturity securities		2,199			3,956
Adjustment to deferred acquisition costs		57			(1,041	)
Adjustment to present value of future profits		4			(55	)
Adjustment to sales inducements		2			(31	)
Adjustment to benefit reserves		(1,694	)		(1,800	)
Provision for income taxes		(120	)		(227	)

Change in unrealized gains (losses) on investment securities		448			802
Reclassification adjustments to net investment (gains) losses, net of taxes of $25 and $12		(94	)		(46	)

Change in net unrealized investment gains (losses)		354			756
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests		(1	)		46

Ending balance	$	1,811		$	1,305

Amounts reclassified out of accumulated other comprehensive income (loss) to net investment gains (losses) include realized gains (losses) on sales of securities, which are determined on a specific identification basis.

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(d) Fixed Maturity Securities

As of June 30, 2020, the amortized cost or cost, gross unrealized gains (losses), allowance for credit losses and fair value of our fixed maturity securities classified as

available-for-sale

were as follows:


	Amortized		Gross		Gross			Allowance
	cost or		unrealized		unrealized			for credit			Fair
(Amounts in millions)	cost		gains		losses			losses			value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	3,877	$	1,725	$	—		$	—		$	5,602
State and political subdivisions		2,503		496		(1	)		—			2,998
Non-U.S. government		1,424		125		(7	)		—			1,542
U.S. corporate:
Utilities		4,392		879		(1	)		—			5,270
Energy		2,454		203		(63	)		—			2,594
Finance and insurance		7,400		1,017		(14	)		—			8,403
Consumer—non-cyclical		5,132		1,147		(2	)		—			6,277
Technology and communications		2,912		503		(4	)		—			3,411
Industrial		1,350		157		(4	)		—			1,503
Capital goods		2,580		454		(6	)		—			3,028
Consumer—cyclical		1,748		224		(6	)		—			1,966
Transportation		1,335		254		(24	)		—			1,565
Other		340		38		—			—			378

Total U.S. corporate		29,643		4,876		(124	)		—			34,395

Non-U.S. corporate:
Utilities		811		68		—			—			879
Energy		1,141		148		(14	)		—			1,275
Finance and insurance		2,199		284		(16	)		(1	)		2,466
Consumer—non-cyclical		692		86		(1	)		—			777
Technology and communications		1,066		182		(1	)		—			1,247
Industrial		883		116		(4	)		—			995
Capital goods		565		50		(2	)		—			613
Consumer—cyclical		380		27		—			—			407
Transportation		560		84		(6	)		(3	)		635
Other		1,376		218		(3	)		—			1,591

Total non-U.S. corporate		9,673		1,263		(47	)		(4	)		10,885

Residential mortgage-backed		1,927		259		(2	)		—			2,184
Commercial mortgage-backed		2,800		225		(52	)		(3	)		2,970
Other asset-backed		2,987		30		(49	)		—			2,968

Total available-for-sale fixed maturity securities	$	54,834	$	8,999	$	(282	)	$	(7	)	$	63,544

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of December 31, 2019, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as

available-for-sale

were as follows:


			Gross unrealized gains				Gross unrealized losses
	Amortized		Not other-than-		Other-than-		Not other-than-			Other-than-
	cost or		temporarily		temporarily		temporarily			temporarily		Fair
(Amounts in millions)	cost		impaired		impaired		impaired			impaired		value
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	4,073	$	952	$	—	$	—		$	—	$	5,025
State and political subdivisions		2,394		355		—		(2	)		—		2,747
Non-U.S. government		1,235		117		—		(2	)		—		1,350
U.S. corporate:
Utilities		4,322		675		—		—			—		4,997
Energy		2,404		303		—		(8	)		—		2,699
Finance and insurance		6,977		798		—		(1	)		—		7,774
Consumer—non-cyclical		4,909		796		—		(4	)		—		5,701
Technology and communications		2,883		363		—		(1	)		—		3,245
Industrial		1,271		125		—		—			—		1,396
Capital goods		2,345		367		—		(1	)		—		2,711
Consumer—cyclical		1,590		172		—		(2	)		—		1,760
Transportation		1,320		187		—		(1	)		—		1,506
Other		292		30		—		—			—		322

Total U.S. corporate		28,313		3,816		—		(18	)		—		32,111

Non-U.S. corporate:
Utilities		779		50		—		—			—		829
Energy		1,140		179		—		—			—		1,319
Finance and insurance		2,087		232		—		—			—		2,319
Consumer—non-cyclical		631		55		—		(2	)		—		684
Technology and communications		1,010		128		—		—			—		1,138
Industrial		896		92		—		—			—		988
Capital goods		565		40		—		—			—		605
Consumer—cyclical		373		24		—		—			—		397
Transportation		557		73		—		(1	)		—		629
Other		1,431		188		—		(2	)		—		1,617

Total non-U.S. corporate		9,469		1,061		—		(5	)		—		10,525

Residential mortgage-backed		2,057		199		15		(1	)		—		2,270
Commercial mortgage-backed		2,897		137		—		(8	)		—		3,026
Other asset-backed		3,262		30		—		(7	)		—		3,285

Total available-for-sale fixed maturity securities	$	53,700	$	6,667	$	15	$	(43	)	$	—	$	60,339

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our fixed maturity securities for which an allowance for credit losses has not been recorded, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of June 30, 2020:


	Less than 12 months							12 months or more							Total
			Gross							Gross							Gross
	Fair		unrealized			Number of		Fair		unrealized			Number of		Fair		unrealized			Number of
(Dollar amounts in millions)	value		losses			securities		value		losses			securities		value		losses			securities
Description of Securities
Fixed maturity securities:
State and political subdivisions	$	23	$	(1	)		6	$	—	$	—			—	$	23	$	(1	)		6
Non-U.S. government		207		(7	)		18		—		—			—		207		(7	)		18
U.S. corporate		1,785		(107	)		291		182		(17	)		18		1,967		(124	)		309
Non-U.S. corporate		613		(37	)		125		12		(2	)		2		625		(39	)		127
Residential mortgage-backed		36		(1	)		11		8		(1	)		4		44		(2	)		15
Commercial mortgage-backed		625		(50	)		105		—		—			—		625		(50	)		105
Other asset-backed		1,329		(38	)		291		263		(11	)		62		1,592		(49	)		353

Total for fixed maturity securities in an unrealized loss position	$	4,618	$	(241	)		847	$	465	$	(31	)		86	$	5,083	$	(272	)		933

% Below cost:
<20% Below cost	$	4,538	$	(211	)		825	$	442	$	(24	)		83	$	4,980	$	(235	)		908
20%-50% Below cost		80		(30	)		22		22		(6	)		2		102		(36	)		24
>50% Below cost		—		—			—		1		(1	)		1		1		(1	)		1

Total for fixed maturity securities in an unrealized loss position	$	4,618	$	(241	)		847	$	465	$	(31	)		86	$	5,083	$	(272	)		933

Investment grade	$	3,731	$	(163	)		701	$	330	$	(18	)		71	$	4,061	$	(181	)		772
Below investment grade		887		(78	)		146		135		(13	)		15		1,022		(91	)		161

Total for fixed maturity securities in an unrealized loss position	$	4,618	$	(241	)		847	$	465	$	(31	)		86	$	5,083	$	(272	)		933

Table of Contents

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, for which an allowance for credit loss has not been recorded, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of June 30, 2020:


	Less than 12 months							12 months or more							Total
			Gross							Gross							Gross
	Fair		unrealized			Number of		Fair		unrealized			Number of		Fair		unrealized			Number of
(Dollar amounts in millions)	value		losses			securities		value		losses			securities		value		losses			securities
Description of Securities
U.S. corporate:
Utilities	$	35	$	(1	)		6	$	—	$	—			—	$	35	$	(1	)		6
Energy		594		(50	)		93		88		(13	)		11		682		(63	)		104
Finance and insurance		429		(14	)		56		—		—			—		429		(14	)		56
Consumer—non-cyclical		80		(1	)		17		43		(1	)		2		123		(2	)		19
Technology and communications		89		(4	)		20		—		—			—		89		(4	)		20
Industrial		98		(4	)		9		—		—			—		98		(4	)		9
Capital goods		90		(5	)		14		14		(1	)		1		104		(6	)		15
Consumer—cyclical		181		(4	)		32		37		(2	)		4		218		(6	)		36
Transportation		189		(24	)		44		—		—			—		189		(24	)		44

Subtotal, U.S. corporate securities		1,785		(107	)		291		182		(17	)		18		1,967		(124	)		309

Non-U.S. corporate:
Energy		150		(14	)		23		—		—			—		150		(14	)		23
Finance and insurance		215		(10	)		43		—		—			—		215		(10	)		43
Consumer—non-cyclical		—		—			—		6		(1	)		1		6		(1	)		1
Technology and communications		34		(1	)		16		—		—			—		34		(1	)		16
Industrial		80		(4	)		11		—		—			—		80		(4	)		11
Capital goods		62		(2	)		8		—		—			—		62		(2	)		8
Transportation		42		(4	)		15		—		—			—		42		(4	)		15
Other		30		(2	)		9		6		(1	)		1		36		(3	)		10

Subtotal, non-U.S. corporate securities		613		(37	)		125		12		(2	)		2		625		(39	)		127

Total for corporate securities in an unrealized loss position	$	2,398	$	(144	)		416	$	194	$	(19	)		20	$	2,592	$	(163	)		436

We did not recognize an allowance for credit losses on securities in an unrealized loss position included in the tables above. Based on a qualitative and quantitative review of the issuers of the securities, we believe the decline in fair value is largely due to recent market volatility and is not indicative of credit losses. The issuers continue to make timely principal and interest payments. For all securities in an unrealized loss position without an allowance for credit losses, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost.

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the gross unrealized losses and fair values of our fixed maturity securities, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of December 31, 2019:


	Less than 12 months							12 months or more							Total
(Dollar amounts in millions)	Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities		Fair value		Gross unrealized losses			Number of securities
Description of Securities
Fixed maturity securities:
State and political subdivisions	$	91	$	(2	)		14	$	—	$	—			—	$	91	$	(2	)		14
Non-U.S. government		224		(2	)		20		—		—			—		224		(2	)		20
U.S. corporate		123		(5	)		27		302		(13	)		33		425		(18	)		60
Non-U.S. corporate		79		(1	)		12		62		(4	)		7		141		(5	)		19
Residential mortgage-backed		22		(1	)		10		—		—			—		22		(1	)		10
Commercial mortgage-backed		381		(5	)		51		14		(3	)		3		395		(8	)		54
Other asset-backed		532		(2	)		97		439		(5	)		115		971		(7	)		212

Total for fixed maturity securities in an unrealized loss position	$	1,452	$	(18	)		231	$	817	$	(25	)		158	$	2,269	$	(43	)		389

% Below cost:
<20% Below cost	$	1,452	$	(18	)		231	$	807	$	(20	)		155	$	2,259	$	(38	)		386
20%-50% Below cost		—		—			—		10		(5	)		3		10		(5	)		3

Total for fixed maturity securities in an unrealized loss position	$	1,452	$	(18	)		231	$	817	$	(25	)		158	$	2,269	$	(43	)		389

Investment grade	$	1,408	$	(14	)		223	$	702	$	(15	)		145	$	2,110	$	(29	)		368
Below investment grade		44		(4	)		8		115		(10	)		13		159		(14	)		21

Total for fixed maturity securities in an unrealized loss position	$	1,452	$	(18	)		231	$	817	$	(25	)		158	$	2,269	$	(43	)		389

Table of Contents

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 December 31, 2019:


	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:
Energy	$	54	$	(3	)		10	$	80	$	(5	)		10	$	134	$	(8	)		20
Finance and insurance		—		—			—		34		(1	)		4		34		(1	)		4
Consumer—non-cyclical		34		(1	)		9		93		(3	)		9		127		(4	)		18
Technology and communications		—		—			—		18		(1	)		2		18		(1	)		2
Capital goods		35		(1	)		8		—		—			—		35		(1	)		8
Consumer—cyclical		—		—			—		54		(2	)		6		54		(2	)		6
Transportation		—		—			—		23		(1	)		2		23		(1	)		2

Subtotal, U.S. corporate securities		123		(5	)		27		302		(13	)		33		425		(18	)		60

Non-U.S. corporate:
Consumer—non-cyclical		—		—			—		31		(2	)		3		31		(2	)		3
Transportation		—		—			—		25		(1	)		3		25		(1	)		3
Other		79		(1	)		12		6		(1	)		1		85		(2	)		13

Subtotal, non-U.S. corporate securities		79		(1	)		12		62		(4	)		7		141		(5	)		19

Total for corporate securities in an unrealized loss position	$	202	$	(6	)		39	$	364	$	(17	)		40	$	566	$	(23	)		79

The scheduled maturity distribution of fixed maturity securities as of June 30, 2020 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	$	1,494	$	1,517
Due after one year through five years		9,518		10,054
Due after five years through ten years		12,978		14,478
Due after ten years		23,130		29,373

Subtotal		47,120		55,422
Residential mortgage-backed		1,927		2,184
Commercial mortgage-backed		2,800		2,970
Other asset-backed		2,987		2,968

Total	$	54,834	$	63,544

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of June 30, 2020, securities issued by finance and insurance,

consumer—non-cyclical,

utilities and technology and communications industry groups represented approximately 24%, 16%, 14% and 10%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of June 30, 2020, 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 credit losses.

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


	June 30, 2020						December 31, 2019
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Property type:
Retail	$	2,531			36	%	$	2,590			37	%
Industrial		1,655			24			1,670			24
Office		1,636			24			1,632			23
Apartments		583			8			541			8
Mixed use		279			4			281			4
Other		261			4			266			4

Subtotal		6,945			100	%		6,980			100	%

Unamortized balance of loan origination fees		—						(4	)
Allowance for credit losses		(28	)					(13	)

Total	$	6,917					$	6,963

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	June 30, 2020						December 31, 2019
(Amounts in millions)	Carrying value			% of total			Carrying value			% of total
Geographic region:
South Atlantic	$	1,751			25	%	$	1,715			25	%
Pacific		1,623			23			1,673			24
Middle Atlantic		989			14			992			14
Mountain		765			11			753			11
West North Central		476			7			488			7
East North Central		457			7			455			6
West South Central		436			6			433			6
New England		254			4			257			4
East South Central		194			3			214			3

Subtotal		6,945			100	%		6,980			100	%

Unamortized balance of loan origination fees		—						(4	)
Allowance for credit losses		(28	)					(13	)

Total	$	6,917					$	6,963

The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:


	June 30, 2020
(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		$	2,521		$	2,531
Industrial		—			—			—			—			1,655			1,655
Office		—			—			—			—			1,636			1,636
Apartments		—			—			—			—			583			583
Mixed use		—			—			—			—			279			279
Other		—			—			—			—			261			261

Total amortized cost	$	10		$	—		$	—		$	10		$	6,935		$	6,945

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

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2019
(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	$	—		$	—		$	—		$	—		$	2,590		$	2,590
Industrial		—			—			—			—			1,670			1,670
Office		—			—			—			—			1,632			1,632
Apartments		—			—			—			—			541			541
Mixed use		—			—			—			—			281			281
Other		—			—			—			—			266			266

Total recorded investment	$	—		$	—		$	—		$	—		$	6,980		$	6,980

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

For a discussion of our policy related to placing commercial mortgage loans on

non-accrual

status, see Note 2—Summary of Significant Accounting Policies included in the Notes to Consolidated Financial Statements in our 2019 Annual Report on Form

10-K.

As of June 30, 2020 and December 31, 2019, we had no commercial mortgage loans on

non-accrual

status.

During the six months ended June 30, 2020 and the year ended December 31, 2019, we did not have any modifications or extensions that were considered troubled debt restructurings.

The following table sets forth the allowance for credit losses related to commercial mortgage loans as of or for the periods indicated:


	Three months ended June 30,					Six months ended June 30,
(Amounts in millions)	2020			2019		2020			2019
Allowance for credit losses:
Beginning balance	$	29		$	10	$	13		$	9
Cumulative effect of change in accounting		—			—		16			—
Provision		(1	)		1		(1	)		2
Write-offs		—			—		—			—
Recoveries		—			—		—			—

Ending balance	$	28		$	11	$	28		$	11

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

debt-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

debt-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

debt-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

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 is not used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

The following tables set forth the

debt-to-value

of commercial mortgage loans by property type as of the dates indicated:


	June 30, 2020
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100%			Total
Property type:
Retail	$	963		$	572		$	996		$	—		$	—		$	2,531
Industrial		758			344			553			—			—			1,655
Office		530			359			739			8			—			1,636
Apartments		218			98			267			—			—			583
Mixed use		104			67			108			—			—			279
Other		57			65			139			—			—			261

Total amortized cost	$	2,630		$	1,505		$	2,802		$	8		$	—		$	6,945

% of total		38	%		22	%		40	%		—	%		—	%		100	%

Weighted-average debt service coverage ratio		2.31			1.80			1.56			1.42			—			1.90


	December 31, 2019
(Amounts in millions)	0% - 50%			51% - 60%			61% - 75%			76% - 100%			Greater than 100%			Total
Property type:
Retail	$	986		$	579		$	1,025		$	—		$	—		$	2,590
Industrial		808			337			525			—			—			1,670
Office		529			380			723			—			—			1,632
Apartments		211			110			220			—			—			541
Mixed use		104			70			107			—			—			281
Other		56			69			141			—			—			266

Total recorded investment	$	2,694		$	1,545		$	2,741		$	—		$	—		$	6,980

% of total		39	%		22	%		39	%		—	%		—	%		100	%

Weighted-average debt service coverage ratio		2.32			1.81			1.55			—			—			1.90

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2020
(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	$	63		$	136		$	599		$	1,118		$	615		$	2,531
Industrial		24			64			215			670			682			1,655
Office		28			112			269			751			476			1,636
Apartments		11			25			178			184			185			583
Mixed use		3			18			37			106			115			279
Other		33			145			19			31			33			261

Total amortized cost	$	162		$	500		$	1,317		$	2,860		$	2,106		$	6,945

% of total		3	%		7	%		19	%		41	%		30	%		100	%

Weighted-average debt-to-value		57	%		61	%		63	%		58	%		41	%		54	%


	December 31, 2019
(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	$	68		$	141		$	596		$	1,148		$	637		$	2,590
Industrial		24			51			221			658			716			1,670
Office		44			89			277			751			471			1,632
Apartments		16			32			129			175			189			541
Mixed use		4			16			37			107			117			281
Other		34			147			20			31			34			266

Total recorded investment	$	190		$	476		$	1,280		$	2,870		$	2,164		$	6,980

% of total		3	%		7	%		18	%		41	%		31	%		100	%

Weighted-average debt-to-value		59	%		61	%		63	%		58	%		41	%		54	%

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables set forth commercial mortgage loans by year of origination and credit quality indicator as of June 30, 2020:


(Amounts in millions)	2020		2019		2018		2017		2016		2015 and prior		Total
Debt-to-value:
0% - 50%	$	4	$	15	$	36	$	105	$	118	$	2,352	$	2,630
51% - 60%		29		33		190		289		155		809		1,505
61% - 75%		236		748		766		337		226		489		2,802
76% - 100%		—		—		8		—		—		—		8
Greater than 100%		—		—		—		—		—		—		—

Total amortized cost	$	269	$	796	$	1,000	$	731	$	499	$	3,650	$	6,945

Debt service coverage ratio:
Less than 1.00	$	—	$	—	$	33	$	3	$	—	$	126	$	162
1.00 - 1.25		39		12		107		73		13		256		500
1.26 - 1.50		62		359		261		97		88		450		1,317
1.51 - 2.00		130		357		505		322		268		1,278		2,860
Greater than 2.00		38		68		94		236		130		1,540		2,106

Total amortized cost	$	269	$	796	$	1,000	$	731	$	499	$	3,650	$	6,945

Write-offs, gross	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Recoveries		—		—		—		—		—		—		—

Write-offs, net	$	—	$	—	$	—	$	—	$	—	$	—	$	—

(f) Limited Partnerships or Similar Entities

Limited partnerships are accounted for at fair value when our partnership interest is considered minor (generally less than 3% ownership in the limited partnerships) and we exercise no influence over operating and financial policies. If our ownership percentage exceeds that threshold, limited partnerships are accounted for using the equity method of accounting. In applying either method, we use financial information provided by the investee generally on a

one-to-three

month lag. However, for limited partnerships measured at fair value, we consider whether an adjustment to the estimated fair value is necessary when the measurement date is not aligned with our reporting date.

Investments in limited 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 June 30, 2020 and December 31, 2019, the total carrying value of these investments was $743 million and $616 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 some of these risks.

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 cash flow hedges.

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


	Derivative assets						Derivative liabilities
			Fair value						Fair value
(Amounts in millions)	Balance sheet classification		June 30, 2020		December 31, 2019		Balance sheet classification		June 30, 2020		December 31, 2019
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps		Other invested assets	$	939	$	197		Other liabilities	$	—	$	10
Foreign currency swaps		Other invested assets		17		4		Other liabilities		—		—

Total cash flow hedges				956		201				—		10

Total derivatives designated as hedges				956		201				—		10

Derivatives not designated as hedges
Equity index options		Other invested assets		66		81		Other liabilities		—		—
Financial futures		Other invested assets		—		—		Other liabilities		—		—
Other foreign currency contracts		Other invested assets		2		8		Other liabilities		1		1
GMWB embedded derivatives		Reinsurance recoverable (1)		38		20		Policyholder account balances (2)		559		323
Fixed index annuity embedded derivatives		Other assets		—		—		Policyholder account balances (3)		447		452
Indexed universal life embedded derivatives		Reinsurance recoverable		—		—		Policyholder account balances (4)		23		19

Total derivatives not designated as hedges				106		109				1,030		795

Total derivatives			$	1,062	$	310			$	1,030	$	805

(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.

The fair value of derivative positions presented above was not offset by the respective collateral amounts received or provided under these agreements.

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, 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, 2019		Additions		Maturities/ terminations			June 30, 2020
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps	Notional	$	8,968	$	1,158	$	(1,880	)	$	8,246
Foreign currency swaps	Notional		110		—		—			110

Total cash flow hedges			9,078		1,158		(1,880	)		8,356

Total derivatives designated as hedges			9,078		1,158		(1,880	)		8,356

Derivatives not designated as hedges
Interest rate swaps	Notional		4,674		—		—			4,674
Equity index options	Notional		2,451		883		(1,126	)		2,208
Financial futures	Notional		1,182		3,082		(2,914	)		1,350
Other foreign currency contracts	Notional		628		3,009		(2,618	)		1,019

Total derivatives not designated as hedges			8,935		6,974		(6,658	)		9,251

Total derivatives		$	18,013	$	8,132	$	(8,538	)	$	17,607


(Number of policies)	Measurement	December 31, 2019		Additions		Maturities/ terminations			June 30, 2020
Derivatives not designated as hedges
GMWB embedded derivatives	Policies		25,623		—		(992	)		24,631
Fixed index annuity embedded derivatives	Policies		15,441		—		(668	)		14,773
Indexed universal life embedded derivatives	Policies		884		—		(28	)		856

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; and (v) other instruments to hedge the cash flows of various forecasted transactions.

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about the

pre-tax

income (loss) effects of cash flow hedges for the three months ended June 30, 2020:


(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)		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	(57	)	$	46	Net investment income	$	—	Net investment gains (losses)
Interest rate swaps hedging liabilities		1			—	Interest expense		—	Net investment gains (losses)
Foreign currency swaps		(4	)		—	Net investment income		—	Net investment gains (losses)

Total	$	(60	)	$	46		$	—

The following table provides information about the

pre-tax

income (loss) effects of cash flow hedges for the three months ended June 30, 2019:


(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)		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	216		$	42		Net investment income	$	—	Net investment gains (losses)
Interest rate swaps hedging assets		—			(4	)	Net investment gains (losses)		—	Net investment gains (losses)
Interest rate swaps hedging liabilities		(20	)		—		Interest expense		—	Net investment gains (losses)
Foreign currency swaps		2			(1	)	Net investment income		—	Net investment gains (losses)

Total	$	198		$	37			$	—

The following table provides information about the

pre-tax

income (loss) effects of cash flow hedges for the six months ended June 30, 2020:


(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)		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	984		$	89	Net investment income	$	—	Net investment gains (losses)
Interest rate swaps hedging assets		—			4	Net investment gains (losses)		—	Net investment gains (losses)
Interest rate swaps hedging liabilities		(62	)		—	Interest expense		—	Net investment gains (losses)
Foreign currency swaps		13			—	Net investment income		—	Net investment gains (losses)

Total	$	935		$	93		$	—

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides information about the

pre-tax

income (loss) effects of cash flow hedges for the six months ended June 30, 2019:


(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)		Classification of gain (loss) recognized in net income (loss)
Interest rate swaps hedging assets	$	353		$	80		Net investment income	$	—	Net investment gains (losses)
Interest rate swaps hedging assets		—			2		Net investment gains (losses)		—	Net investment gains (losses)
Interest rate swaps hedging liabilities		(32	)		—		Interest expense		—	Net investment gains (losses)
Foreign currency swaps		(1	)		(1	)	Net investment income		—	Net investment gains (losses)
Foreign currency swaps		—			—		Net investment gains (losses)		2	Net investment gains (losses)

Total	$	320		$	81			$	2

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


	Three months ended June 30,
(Amounts in millions)	2020			2019
Derivatives qualifying as effective accounting hedges as of April 1	$	2,755		$	1,850
Current period increases (decreases) in fair value, net of deferred taxes of $12 and $(41)		(48	)		157
Reclassification to net (income), net of deferred taxes of $16 and $13		(30	)		(24	)

Derivatives qualifying as effective accounting hedges as of June 30	$	2,677		$	1,983


	Six months ended June 30,
(Amounts in millions)	2020			2019
Derivatives qualifying as effective accounting hedges as of January 1	$	2,002		$	1,781
Current period increases (decreases) in fair value, net of deferred taxes of $(200) and $(66)		735			254
Reclassification to net (income), net of deferred taxes of $33 and $29		(60	)		(52	)

Derivatives qualifying as effective accounting hedges as of June 30	$	2,677		$	1,983

The total of derivatives designated as cash flow hedges of $2,677 million, net of taxes, recorded in stockholders’ equity as of June 30, 2020 is expected to be reclassified to net income (loss) in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $123 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 2057. During the six months ended June 30, 2020 and 2019, we reclassified $1 million

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

and $2 million, respectively, to net income (loss) in connection with forecasted transactions that were no longer considered probable of occurring.

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) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iii) interest rate caps where the hedging relationship does not qualify for hedge accounting; (iv) foreign currency forward contracts to mitigate currency risk associated with

non-functional

currency investments held by certain foreign subsidiaries; and (v) foreign currency options and forward contracts to mitigate currency risk associated with future dividends or other cash flows from certain foreign subsidiaries to our holding company. 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 insurance products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

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 June 30,						Classification of gain (loss) recognized in net income (loss)
(Amounts in millions)	2020			2019
Interest rate swaps	$	(2	)	$	(3	)	Net investment gains (losses)
Equity index options		4			10		Net investment gains (losses)
Financial futures		(123	)		17		Net investment gains (losses)
Other foreign currency contracts		44			(7	)	Net investment gains (losses)
GMWB embedded derivatives		129			(22	)	Net investment gains (losses)
Fixed index annuity embedded derivatives		(45	)		(20	)	Net investment gains (losses)
Indexed universal life embedded derivatives		3			(1	)	Net investment gains (losses)

Total derivatives not designated as hedges	$	10		$	(26	)


	Six months ended June 30,						Classification of gain (loss) recognized in net income (loss)
(Amounts in millions)	2020			2019
Interest rate swaps	$	(12	)	$	(4	)	Net investment gains (losses)
Equity index options		(9	)		27		Net investment gains (losses)
Financial futures		138			(27	)	Net investment gains (losses)
Other foreign currency contracts		(3	)		(7	)	Net investment gains (losses)
GMWB embedded derivatives		(207	)		23		Net investment gains (losses)
Fixed index annuity embedded derivatives		(13	)		(58	)	Net investment gains (losses)
Indexed universal life embedded derivatives		7			—		Net investment gains (losses)

Total derivatives not designated as hedges	$	(99	)	$	(46	)

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Derivative Counterparty Credit Risk

Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:


	June 30, 2020									December 31, 2019
(Amounts in millions)	Derivative assets (1)			Derivative liabilities (2)			Net derivatives			Derivative assets (1)			Derivative liabilities (2)			Net derivatives
Amounts presented in the balance sheet:
Gross amounts recognized	$	1,024		$	1		$	1,023		$	291		$	11		$	280
Gross amounts offset in the balance sheet		—			—			—			—			—			—

Net amounts presented in the balance sheet		1,024			1			1,023			291			11			280
Gross amounts not offset in the balance sheet:
Financial instruments (3)		(1	)		(1	)		—			(7	)		(7	)		—
Collateral received		(864	)		—			(864	)		(179	)		—			(179	)
Collateral pledged		—			(434	)		434			—			(405	)		405
Over collateralization		19			433			(414	)		18			401			(383	)

Net amount	$	178		$	(1	)	$	179		$	123		$	—		$	123

(1)	Included $1 million of accruals on derivatives classified as other assets as of December 31, 2019 and does not include amounts related to embedded derivatives as of June 30, 2020 and December 31, 2019.

(2)	Does not include amounts related to embedded derivatives as of June 30, 2020 and December 31, 2019.

(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.

(6) Fair Value of Financial Instruments

Recurring Fair Value Measurements

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

Fixed maturity, short-term investments and equity securities

The fair value of fixed maturity securities, short-term investments and equity securities are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or broker quotes, which use a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. In certain cases where market information is not available for a specific security but is available for similar securities, that security is valued using market information for similar securities, which is also a market approach. When market

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

information is not available for a specific security (or similar securities) or is available but such information is less relevant or reliable, an income approach or a combination of a market and income approach is utilized. For securities with optionality, such as call or prepayment features (including mortgage-backed or asset-backed securities), an income approach may be used. In addition, a combination of the results from market and income approaches may be used to estimate fair value. These valuation techniques may change from period to period, based on the relevance and availability of market data.

Further, while we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information.

In general, we first obtain valuations from pricing services. If prices are unavailable for public securities, we obtain broker quotes. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for similar securities are not readily observable and these securities are not typically valued by pricing services.

Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.

Broker quotes are typically based on an income approach given the lack of available market data. As the valuation typically includes significant unobservable inputs, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.

For private fixed maturity securities, we utilize an income approach where we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating or public bond spread as Level 3. In general, a significant increase (decrease) in credit spreads would have resulted in a significant decrease (increase) in the fair value for our fixed maturity securities as of June 30, 2020.

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

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

A summary of the inputs used for our fixed maturity securities, short-term investments and equity securities based on the level in which instruments are classified is included below. We have combined certain classes of instruments together as the nature of the inputs is similar.

Level 1 measurements

Equity securities.

The primary inputs to the valuation of exchange-traded equity securities include quoted prices for the identical instrument.

Separate account assets.

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

Level 2 measurements

Fixed maturity securities

•

Third-party pricing services:

In estimating the fair value of fixed maturity securities, approximately 90%

our portfolio was priced using third-party pricing services as of June 30, 2020. These pricing services utilize industry-standard valuation techniques that include market-based approaches, income-based approaches, a combination of market-based and income-based approaches or other proprietary, internally generated models as part of the valuation processes. These third-party pricing vendors maximize the use of publicly available data inputs to generate valuations for each asset class. Priority and type of inputs used may change frequently as certain inputs may be more direct drivers of valuation at the time of pricing. Examples of significant inputs incorporated by third-party pricing services may include sector and issuer spreads, seasoning, capital structure, security optionality, collateral data, prepayment assumptions, default assumptions, delinquencies, debt covenants, benchmark yields, trade data, dealer quotes, credit ratings, maturity and weighted-average life. We conduct regular meetings with our third-party pricing services for the purpose of understanding the methodologies, techniques and inputs used by the third-party pricing providers.

Table of Contents

GENWORTH FINANCIAL,

INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents a summary of the significant inputs used by our third-party pricing services for certain fair value measurements of fixed maturity securities that are classified as Level 2 as of June 30, 2020:


(Amounts in millions)	Fair value		Primary methodologies	Significant inputs
U.S. government, agencies and government-sponsored enterprises	$	5,602	Price quotes from trading desk, broker feeds	Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread
State and political subdivisions	$	2,935	Multi-dimensional attribute-based modeling systems, third-party pricing vendors	Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes
Non-U.S. government	$	1,527	Matrix pricing, spread priced to benchmark curves, price quotes from market makers	Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources
U.S. corporate	$	30,874	Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, OAS-based models	Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports
Non-U.S. corporate	$	8,589	Multi-dimensional attribute-based modeling systems, OAS-based models, price quotes from market makers	Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources
Residential mortgage-backed	$	2,160	OAS-based models, single factor binomial models, internally priced	Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports


Commercial mortgage-backed	$	2,949	Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model	Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports
Other asset-backed	$	2,847	Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers	Spreads to daily updated swaps curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•

Internal models:

A portion of our

non-U.S.

government, U.S. corporate and

non-U.S.

corporate securities are valued using internal models. The fair value of these fixed maturity securities was $15 million, $1,189 million and $602 million, respectively, as of June 30, 2020. Internally modeled securities are primarily private fixed maturity securities where we use market observable inputs such as an interest rate yield curve, published credit spreads for similar securities based on the external ratings of the instrument and related industry sector of the issuer. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps and liquidity premiums are established using inputs from market participants.

Equity securities.

The primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active.

Securities lending collateral

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

Short-term investments

The fair value of short-term investments classified as Level 2 is determined after considering prices obtained by third-party pricing services.

Level 3 measurements

Fixed maturity securities

•

Broker quotes:

A portion of our state and political subdivisions, U.S. corporate,

non-U.S.

corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

valued using broker quotes. Broker quotes are obtained from third-party providers that have current market knowledge to provide a reasonable price for securities not routinely priced by third-party pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was $863 million as of June 30, 2020.

•

Internal models:

A portion of our state and political subdivisions, U.S. corporate,

non-U.S.

corporate, residential mortgage-backed and other asset-backed securities are valued using internal models. The primary inputs to the valuation of the bond population include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, duration, call provisions, issuer rating, benchmark yields and credit spreads. Certain private fixed maturity securities are valued using an internal model using market observable inputs such as the interest rate yield curve, as well as published credit spreads for similar securities, which includes significant unobservable inputs. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps are established using inputs from market participants. For structured securities, the primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, weighted-average coupon, weighted-average maturity, issuer rating, structure of the security, expected prepayment speeds and volumes, collateral type, current and forecasted loss severity, average delinquency rates, vintage of the loans, geographic region, debt service coverage ratios, payment priority with the tranche, benchmark yields and credit spreads. The fair value of our Level 3 fixed maturity securities priced using internal models was $3,392 million as of June 30, 2020.

Equity securities.

The primary inputs to the valuation include broker quotes where the underlying inputs are unobservable and for internal models, structure of the security and issuer rating.

Net asset value

Limited partnerships

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. We utilize the net asset value (“NAV”) from the underlying fund statements as a practical expedient for fair value.

Derivatives

We consider counterparty collateral arrangements and rights of

set-off

when evaluating our net credit risk exposure to our derivative counterparties. Accordingly, we are permitted to include consideration of these arrangements when determining whether any incremental adjustment should be made for both the counterparty’s and our

non-performance

risk in measuring fair value for our derivative instruments. As a result of these counterparty arrangements, we determined that any adjustment for credit risk would not be material and we have not recorded any incremental adjustment for our

non-performance

risk or the

non-performance

risk of the derivative counterparty for our derivative assets or liabilities.

Interest rate swaps.

The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2.

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Interest rate caps.

The valuation of interest rate caps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, forward interest rate volatility and time value component associated with the optionality in the derivative which are generally considered observable inputs and results in the derivatives being classified as Level 2.

Foreign currency swaps.

The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency

exchange rates, both of which are considered observable inputs, and results in the derivative being classified as Level

Equity index options.

We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rates, equity index volatility, equity index and time value component associated with the optionality in the derivative. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3. As of June 30, 2020, a significant increase (decrease) in the equity index volatility discussed above would have resulted in a significantly higher (lower) fair value measurement.

Financial futures.

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

Equity return swaps.

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

Other foreign currency contracts.

We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, foreign currency exchange rate volatility and time value component associated with the optionality in the derivative, which are generally considered observable inputs and results in the derivative being classified as Level 2. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.

GMWB embedded derivatives

We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. We determine fair value using an internal model based on the various inputs noted above.

Non-performance

risk is integrated into the discount rate used to value GMWB liabilities. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

reflect an adjustment for the non-performance risk of the GMWB liabilities.

As of June 30, 2020 and December 31, 2019, the impact of

non-performance

risk resulted in a lower fair value of our GMWB liabilities of $91 million and $62 million, respectively.

We classify the GMWB valuation as Level 3 based on having significant

unobservable

inputs, with equity index volatility and

non-performance

risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase in

non-performance

risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value. As of June 30, 2020, a significant change in the unobservable inputs discussed above would have resulted in a significantly lower or higher fair value measurement.

Fixed index annuity embedded derivatives

We have fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate

non-performance

risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease. As of June 30, 2020, a significant change in the unobservable inputs discussed above would have resulted in a significantly lower or higher fair value measurement.

Indexed universal life embedded derivatives

We have indexed universal life insurance products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate

non-performance

Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2020
(Amounts in millions)	Total		Level 1		Level 2		Level 3		NAV (1)
Assets
Investments:
Fixed maturity securities:
U.S. government, agencies and government-sponsored enterprises	$	5,602	$	—	$	5,602	$	—	$	—
State and political subdivisions		2,998		—		2,935		63		—
Non-U.S. government		1,542		—		1,542		—		—
U.S. corporate:
Utilities		5,270		—		4,334		936		—
Energy		2,594		—		2,471		123		—
Finance and insurance		8,403		—		7,852		551		—
Consumer—non-cyclical		6,277		—		6,174		103		—
Technology and communications		3,411		—


	Three months ended June 30, 2020
														Total
														Genworth
						Accumulated								Financial,
			Additional			other					Treasury			Inc.’s
	Common		paid-in			comprehensive		Retained			stock, at			stockholders’			Noncontrolling			Total
	stock		capital			income (loss)		earnings			cost			equity			interests			equity
Balances as of March 31, 2020	$	1	$	11,993		$	3,815	$	1,340		$	(2,700	)	$	14,449		$	385		$	14,834
Comprehensive income (loss):
Net loss		—		—			—		(441	)		—			(441	)		23			(418	)
Other comprehensive income, net of taxes		—		—			632		—			—			632			37			669
Total comprehensive income															191			60			251
Stock-based compensation expense and exercises and other		—		3			—		—			—			3			—			3
Balances as of June 30, 2020	$	1	$	11,996		$	4,447	$	899		$	(2,700	)	$	14,643		$	445		$	15,088


	Three months ended June 30, 2019
														Total
														Genworth
						Accumulated								Financial,
			Additional			other					Treasury			Inc.’s
	Common		paid-in			comprehensive		Retained			stock, at			stockholders’			Noncontrolling			Total
	stock		capital			income (loss)		earnings			cost			equity			interests			equity
Balances as of March 31, 2019	$	1	$	11,989		$	2,492	$	1,292		$	(2,700	)	$	13,074		$	1,808		$	14,882
Repurchase of subsidiary shares		—		—			—		—			—			—			(32	)		(32	)
Comprehensive income:
Net income		—		—			—		168			—			168			50			218
Other comprehensive income, net of taxes		—		—			521		—			—			521			31			552

Total comprehensive income															689			81			770
Dividends to noncontrolling interests		—		—			—		—			—			—			(25	)		(25	)
Stock-based compensation expense and exercises and other		—		(6	)		—		—			—			(6	)		3			(3	)

Balances as of June 30, 2019	$	1	$	11,983		$	3,013	$	1,460		$	(2,700	)	$	13,757		$	1,835		$	15,592


	Six months ended June 30, 2020
														Total
														Genworth
						Accumulated								Financial,
			Additional			other					Treasury			Inc.’s
	Common		paid-in			comprehensive		Retained			stock, at			stockholders’			Noncontrolling			Total
	stock		capital			income (loss)		earnings			cost			equity			interests			equity
Balances as of December 31, 2019	$	1	$	11,990		$	3,433	$	1,461		$	(2,700	)	$	14,185		$	447		$	14,632
Cumulative effect of change in accounting, net of taxes		—		—			—		(55	)		—			(55	)		—			(55	)
Comprehensive income (loss):
Net loss		—		—			—		(507	)		—			(507	)		17			(490	)
Other comprehensive income (loss), net of taxes		—		—			1,014		—			—			1,014			(10	)		1,004

Total comprehensive income															507			7			514
Dividends to noncontrolling interests		—		—			—		—			—			—			(9	)		(9	)
Stock-based compensation expense and exercises and other		—		6			—		—			—			6			—			6

Balances as of June 30, 2020	$	1	$	11,996		$	4,447	$	899		$	(2,700	)	$	14,643		$	445		$	15,088


	Six months ended June 30, 2019
														Total
														Genworth
						Accumulated								Financial,
			Additional			other					Treasury			Inc.’s
	Common		paid-in			comprehensive		Retained			stock, at			stockholders’			Noncontrolling			Total
	stock		capital			income (loss)		earnings			cost			equity			interests			equity
Balances as of December 31, 2018	$	1	$	11,987		$	2,044	$	1,118		$	(2,700	)	$	12,450		$	1,739		$	14,189
Repurchase of subsidiary shares		—		—			—		—			—			—			(44	)		(44	)
Comprehensive income:
Net income		—		—			—		342			—			342			106			448
Other comprehensive income, net of taxes		—		—			969		—			—			969			86			1,055

Total comprehensive income															1,311			192			1,503
Dividends to noncontrolling interests		—		—			—		—			—			—			(53	)		(53	)
Stock-based compensation expense and exercises and other		—		(4	)		—		—			—			(4	)		1			(3	)

Balances as of June 30, 2019	$	1	$	11,983		$	3,013	$	1,460		$	(2,700	)	$	13,757		$	1,835		$	15,592