GENWORTH FINANCIAL, INC.
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

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

For the quarterly period ended June 30, 2007

OR

 

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

For the transition period from                     to                     

Commission file number 001-32195

 


LOGO

GENWORTH FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware   33-1073076
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)
6620 West Broad Street
Richmond, Virginia
  23230
(Address of Principal Executive Offices)   (Zip Code)

(804) 281-6000

(Registrant’s Telephone Number, Including Area Code)

 


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

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

Large Accelerated Filer  x                     Accelerated Filer  ¨                      Non-Accelerated Filer  ¨

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

At July 31, 2007, 442,680,443 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 Statements of Income for the three and six months ended June 30, 2007 and 2006 (Unaudited)

   3

Condensed Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006

   4

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2007 and 2006 (Unaudited)

   5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (Unaudited)

   6

Notes to Condensed Consolidated Financial Statements (Unaudited)

   7

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

   18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   66

Item 4. Controls and Procedures

   66

PART II—OTHER INFORMATION

   67

Item 1. Legal Proceedings

   67

Item 1A. Risk Factors

   67

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   68

Item 4. Submission of Matters to a Vote of Security Holders

   68

Item 6. Exhibits

   69

Signatures

   70

 

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Table of Contents

P ART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)

 

     Three months
ended June 30,
    Six months
ended June 30,
 
         2007             2006             2007             2006      

Revenues:

        

Premiums

   $ 1,549     $ 1,480     $ 3,060     $ 2,851  

Net investment income

     1,024       940       2,008       1,852  

Net investment gains (losses)

     (51 )     (49 )     (70 )     (71 )

Insurance and investment product fees and other

     243       200       477       381  
                                

Total revenues

     2,765       2,571       5,475       5,013  
                                

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,090       978       2,157       1,893  

Interest credited

     391       378       776       750  

Acquisition and operating expenses, net of deferrals

     495       483       984       919  

Amortization of deferred acquisition costs and intangibles

     207       197       420       361  

Interest expense

     124       88       231       170  
                                

Total benefits and expenses

     2,307       2,124       4,568       4,093  
                                

Income from continuing operations before income taxes

     458       447       907       920  

Provision for income taxes

     137       141       272       292  
                                

Income from continuing operations

     321       306       635       628  

Income from discontinued operations, net of taxes

     5       11       15       19  

Gain on sale of discontinued operations, net of taxes

     53       —         53       —    
                                

Income before cumulative effect of accounting change

     379       317       703       647  

Cumulative effect of accounting change, net of taxes

     —         —         —         4  
                                

Net income

   $ 379     $ 317     $ 703     $ 651  
                                

Earnings from continuing operations per common share:

        

Basic

   $ 0.73     $ 0.67     $ 1.44     $ 1.36  
                                

Diluted

   $ 0.72     $ 0.66     $ 1.41     $ 1.33  
                                

Earnings per common share:

        

Basic

   $ 0.86     $ 0.70     $ 1.60     $ 1.41  
                                

Diluted

   $ 0.84     $ 0.68     $ 1.56     $ 1.37  
                                

Weighted-average common shares outstanding:

        

Basic

     439.4       455.8       440.2       461.3  
                                

Diluted

     449.0       468.3       452.0       473.9  
                                

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

     June 30,
2007
    December 31,
2006
 
     (Unaudited)        

Assets

    

Investments:

    

Fixed maturity securities available-for-sale, at fair value

   $ 55,567     $ 54,684  

Equity securities available-for-sale, at fair value

     201       197  

Commercial mortgage loans

     8,798       8,357  

Policy loans

     1,635       1,489  

Other invested assets

     3,445       3,846  
                

Total investments

     69,646       68,573  

Cash and cash equivalents

     2,956       2,436  

Accrued investment income

     697       742  

Deferred acquisition costs

     6,677       6,183  

Intangible assets

     845       831  

Goodwill

     1,601       1,602  

Reinsurance recoverable

     16,658       16,783  

Other assets

     880       864  

Separate account assets

     11,976       10,875  

Assets associated with discontinued operations

     —         1,982  
                

Total assets

   $ 111,936     $ 110,871  
                

Liabilities and stockholders’ equity

    

Liabilities:

    

Future annuity and contract benefits

   $ 64,062     $ 63,299  

Liability for policy and contract claims

     3,286       3,114  

Unearned premiums

     5,073       4,229  

Other policyholder liabilities

     354       385  

Other liabilities

     5,563       5,709  

Non-recourse funding obligations

     3,555       2,765  

Short-term borrowings

     199       199  

Long-term borrowings

     3,755       3,921  

Mandatorily redeemable preferred stock

     100       100  

Deferred tax liability

     1,047       1,522  

Separate account liabilities

     11,976       10,875  

Liabilities associated with discontinued operations

     —         1,423  
                

Total liabilities

     98,970       97,541  
                

Commitments and contingencies

    

Stockholders’ equity:

    

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 521 million and 493 million shares issued as of June 30, 2007 and December 31, 2006, respectively; 443 million shares outstanding as of June 30, 2007 and December 31, 2006

     1       —    

Additional paid-in capital

     11,429       10,759  
                

Accumulated other comprehensive income:

    

Net unrealized investment gains (losses)

     (181 )     435  

Derivatives qualifying as hedges

     159       375  

Foreign currency translation and other adjustments

     572       347  
                

Total accumulated other comprehensive income

     550       1,157  

Retained earnings

     3,484       2,914  

Treasury stock, at cost (78 million and 50 million shares as of June 30, 2007 and December 31, 2006, respectively)

     (2,498 )     (1,500 )
                

Total stockholders’ equity

     12,966       13,330  
                

Total liabilities and stockholders’ equity

   $ 111,936     $ 110,871  
                

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in millions)

(Unaudited)

 

     Additional
paid-in
capital
   Accumulated other
comprehensive
income
    Retained
earnings
    Treasury
stock, at
cost
    Total
stockholders’
equity
 

Balances as of December 31, 2005

   $ 10,671    $ 1,404     $ 1,735     $ (500 )   $ 13,310  
                 

Comprehensive income (loss):

           

Net income

     —        —         651       —         651  

Net unrealized gains (losses) on investment securities

     —        (1,072 )     —         —         (1,072 )

Derivatives qualifying as hedges

     —        (177 )     —         —         (177 )

Foreign currency translation and other adjustments

     —        78       —         —         78  
                 

Total comprehensive income (loss)

              (520 )

Acquisition of treasury stock

     —        —         —         (553 )     (553 )

Dividends to stockholders

     —        —         (69 )     —         (69 )

Stock-based compensation expense and exercises

     38      —         —         —         38  

Other capital transactions

     4      —         —         —         4  
                                       

Balances as of June 30, 2006

   $ 10,713    $ 233     $ 2,317     $ (1,053 )   $ 12,210  
                                       

 

     Common
stock
   Additional
paid-in
capital
   Accumulated other
comprehensive
income
    Retained
earnings
    Treasury
stock, at
cost
    Total
stockholders’
equity
 

Balances as of December 31, 2006

   $  —      $ 10,759    $ 1,157     $ 2,914     $ (1,500 )   $ 13,330  
                    

Cumulative effect of accounting change

     —        —        —         (54 )     —         (54 )

Comprehensive income (loss):

              

Net income

     —        —          703       —         703  

Net unrealized gains (losses) on investment securities

     —        —        (616 )     —         —         (616 )

Derivatives qualifying as hedges

     —        —        (216 )     —         —         (216 )

Foreign currency translation and other adjustments

     —        —        225       —         —         225  
                    

Total comprehensive income (loss)

                 96  

Issuance of common stock

     1      600      —         —         —         601  

Acquisition of treasury stock

     —        —        —         —         (998 )     (998 )

Dividends to stockholders

     —        —        —         (79 )     —         (79 )

Stock-based compensation expense and exercises

     —        67      —         —         —         67  

Other capital transactions

     —        3      —         —         —         3  
                                              

Balances as of June 30, 2007

   $ 1    $ 11,429    $ 550     $ 3,484     $ (2,498 )   $ 12,966  
                                              

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

     Six months
ended June 30,
 
     2007     2006  

Cash flows from operating activities:

    

Net income

   $ 703     $ 651  

Less income from discontinued operations, net of taxes

     (15 )     (19 )

Less gain from discontinued operations, net of taxes

     (53 )     —    

Adjustments to reconcile net income to net cash from operating activities:

    

Amortization of fixed maturity discounts and premiums

     (4 )     11  

Net investment losses (gains)

     70       71  

Charges assessed to policyholders

     (195 )     (177 )

Acquisition costs deferred

     (739 )     (585 )

Amortization of deferred acquisition costs and intangibles

     420       361  

Deferred income taxes

     153       178  

Cumulative effect of accounting change

     —         (4 )

Purchases of trading securities, net of proceeds from sales

     (20 )     —    

Change in certain assets and liabilities:

    

Accrued investment income and other assets

     1       90  

Insurance reserves

     1,549       1,475  

Current tax liabilities

     180       46  

Other liabilities and other policy-related balances

     467       (139 )

Cash from operating activities—discontinued operations

     25       38  
                

Net cash from operating activities

     2,542       1,997  
                

Cash flows from investing activities:

    

Proceeds from maturities and repayments of investments:

    

Fixed maturities

     2,945       2,765  

Commercial mortgage loans

     556       549  

Proceeds from sales of investments:

    

Fixed maturities and equity securities

     3,314       2,914  

Purchases and originations of investments:

    

Fixed maturities and equity securities

     (7,863 )     (5,532 )

Commercial mortgage loans

     (1,001 )     (1,130 )

Other invested assets, net

     (258 )     (1 )

Policy loans, net

     (146 )     (136 )

Payments for businesses purchased, net of cash acquired

     —         (134 )

Cash received from sale of discontinued operations, net of cash sold

     514       —    

Cash from investing activities—discontinued operations

     103       (47 )
                

Net cash from investing activities

     (1,836 )     (752 )
                

Cash flows from financing activities:

    

Proceeds from issuance of investment contracts

     4,207       3,774  

Redemption and benefit payments on investment contracts

     (4,552 )     (4,827 )

Short-term borrowings and other, net

     (63 )     148  

Proceeds from issuance of non-recourse funding obligations

     790       750  

Repayment of long-term debt

     (500 )     —    

Proceeds from the issuance of long-term debt

     349       —    

Dividends paid to stockholders

     (79 )     (69 )

Stock-based compensation awards exercised

     30       20  

Acquisition of treasury stock

     (998 )     (553 )

Proceeds from issuance of common stock

     600       —    

Capital contribution received from GE

     —         2  

Cash from financing activities—discontinued operations

     (21 )     (5 )
                

Net cash from financing activities

     (237 )     (760 )

Effect of exchange rate changes on cash and cash equivalents

     18       (9 )
                

Net change in cash and cash equivalents

     487       476  

Cash and cash equivalents at beginning of period

     2,469       1,875  
                

Cash and cash equivalents at end of period

     2,956       2,351  

Less cash and cash equivalents of discontinued operations at end of period

     —         5  
                

Cash and cash equivalents of continuing operations at end of period

   $ 2,956     $ 2,346  
                

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware on October 23, 2003 in preparation for the corporate formation of certain insurance and related subsidiaries of the General Electric Company (“GE”) and an initial public offering of Genworth common stock, which was completed on May 28, 2004 (“IPO”). In connection with the IPO, Genworth acquired substantially all of the assets and liabilities of GE Financial Assurance Holdings, Inc. (“GEFAHI”). Prior to its IPO, Genworth was a wholly-owned subsidiary of GEFAHI, which was an indirect subsidiary of GE.

The accompanying condensed financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting or economic interest, which we refer to as the “Company,” “we,” “us,” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.

We have the following three operating segments:

 

   

Retirement and Protection. We offer a variety of protection, wealth accumulation, retirement income and institutional investment products. Retail protection products include: life insurance, long-term care insurance and a linked-benefits product that combines long-term care insurance with universal life insurance. Additionally, as part of our senior market products and services, we offer Medicare supplement insurance along with wellness and care coordination services for our long-term care policyholders. Our wealth accumulation and retirement income products include: individual variable annuities, fixed deferred and immediate individual annuities, group variable annuities offered through retirement plans, and a variety of managed account programs, financial planning advisory services and mutual funds. Institutional products include: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”).

 

   

International. In Canada, Australia, New Zealand, Mexico, Japan and multiple European countries, we are a leading provider of mortgage insurance products. We are the largest private mortgage insurer in most of our international markets. We also provide mortgage insurance on a structured, or bulk basis, which aids in the sale of mortgages to the capital markets and helps lenders manage capital and risks. Additionally, we offer services, analytical tools and technology that enable lenders to operate more efficiently and more effectively manage risk. We also offer payment protection coverages in multiple European countries, Canada and Mexico. Our payment protection insurance products help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death.

 

   

U.S. Mortgage Insurance. In the U.S., we offer mortgage insurance products predominately insuring prime-based, individually underwritten residential mortgage loans, also known as “flow” mortgage insurance. We also have begun to increasingly provide mortgage insurance on a structured, or bulk basis, with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate more efficiently and more effectively manage risk.

We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions, the results of a small, non-core business that is managed outside our operating segments and our group life and health insurance business which was sold on May 31, 2007.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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 United States 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. Certain prior year amounts have been reclassified to conform to the current year presentation. These condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of operations and cash flow for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2006 Annual Report on Form 10-K and our Current Report on Form 8-K filed on April 16, 2007 (reflecting our reorganized segment reporting structure and the effects of classifying our group life and health insurance business as discontinued operations).

(2) Accounting Pronouncements

Recently adopted

On December 31, 2006, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. Upon adoption, we recorded a $31 million reduction in comprehensive income on our consolidated balance sheet as of December 31, 2006. However, the cumulative effect of change in accounting, net of tax, should have been recorded as a separate component of accumulated other comprehensive income. As of December 31, 2006, we reported total comprehensive income of $1,081 million. With this revised presentation, total comprehensive income would have been $1,112 million as of December 31, 2006. This revised presentation will be reflected in our Annual Report on Form 10-K as of December 31, 2007.

On January 1, 2007, we adopted FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. This guidance clarifies the criteria that must be satisfied to recognize the financial statement benefit of a position taken in our tax returns. The criteria for recognition in the consolidated financial statements set forth in FIN No. 48 require an affirmative determination that it is more likely than not, based on a tax position’s technical merits, that we are entitled to the benefit of that position.

Upon adoption of FIN No. 48 on January 1, 2007, the total amount of unrecognized tax benefits was $362 million, of which, $187 million, if recognized, would affect the effective tax rate on continuing operations. As of January 1, 2007, we had accrued interest and penalties of $30 million in our condensed consolidated balance sheet. These amounts of interest and penalties relate to unrecognized tax benefits and are recognized as components of income tax expense.

We file U.S. federal income tax returns and various state and local and foreign income tax returns. With few exceptions, we are no longer subject to U.S. federal or foreign income tax examinations for years prior to 2000. Potential state and local examinations for those years are generally restricted to results that are based on closed U.S. federal examinations. The Internal Revenue Service is currently reviewing our U.S. income tax returns for the 2000 through 2004 tax years and HM Revenue and Customs is currently reviewing our U.K. income tax returns for the 2000 through 2004 tax years. It is reasonably possible that the review of certain of our U.S. income tax returns will be completed in 2007 and the statute of limitations will close with respect to such returns. It is also reasonably possible that the field examination for certain other U.S. federal income tax returns will be completed in 2007 with the issuance of a Revenue Agent Report.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

We believe that it is reasonably possible that in 2007, up to approximately $56 million of unrecognized tax benefits, related to individually immaterial items in the U.S. and foreign jurisdictions, will be recognized.

On January 1, 2007, we adopted the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts. This statement provides guidance on accounting for deferred acquisition costs and other balances on an internal replacement, defined broadly as a modification in product benefits, features, rights, or coverages that occurs by the exchange of an existing contract for a new contract, or by amendment, endorsement, or rider to an existing contract, or by the election of a benefit, feature, right, or coverage within an existing contract. The adoption of SOP 05-1 resulted in the shortening of the period over which our group life and health insurance business deferred acquisition costs are amortized. Transition to the shorter amortization period resulted in a January 1, 2007 cumulative effect adjustment to retained earnings of $54 million, net of tax. The cumulative effect of adoption of SOP 05-1 relates to our discontinued operations which we sold on May 31, 2007.

Not yet adopted

In September 2006, FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for us on January 1, 2008. We do not expect SFAS No. 157 to have a material impact on our consolidated financial statements.

In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement provides an option to report selected financial assets and liabilities, including insurance contracts, at fair value. SFAS No. 159 will be effective for us on January 1, 2008. We have not decided whether we will elect the fair value option for any financial assets or liabilities; and therefore, we do not know the impact, if any, SFAS No. 159 will have on our consolidated financial statements.

In June 2007, the AICPA issued SOP 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. This statement provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (the “Guide”). For those entities that are investment companies under SOP 07-1, it also addresses when specialized industry accounting principles of the Guide should be retained by a parent company in consolidation or by an investor that has the ability to exercise significant influence over the investment company and applies the equity method of accounting to its investment in the entity. In addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method investors in investment companies that retain Investment Company accounting in the parent company’s consolidated financial statements or the financial statements of an equity method investor. SOP 07-1 is effective for us on January 1, 2008. Management is reviewing SOP 07-1 to determine the impact on our consolidated financial statements.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

(3) Earnings per Common Share

Basic and diluted earnings per common share are calculated by dividing net income by the weighted average basic common shares outstanding and by the weighted average diluted common shares outstanding:

 

     Three months
ended June 30,
  

Six months

ended June 30,

(Amounts in millions except per share data)

   2007    2006    2007    2006

Basic earnings per common share:

           

Income from continuing operations

   $ 0.73    $ 0.67    $ 1.44    $ 1.36

Income from discontinued operations, net of taxes

     0.01      0.02      0.03      0.04

Gain from discontinued operations, net of taxes

     0.12      —        0.12      —  

Cumulative effect of accounting change, net of taxes

     —        —        —        0.01
                           

Basic earnings per common share

   $ 0.86    $ 0.70    $ 1.60    $ 1.41
                           

Diluted earnings per common share:

           

Income from continuing operations

   $ 0.72    $ 0.66    $ 1.41    $ 1.33

Income from discontinued operations, net of taxes

     0.01      0.02      0.03      0.04

Gain from discontinued operations, net of taxes

     0.12      —        0.12      —  

Cumulative effect of accounting change, net of taxes

     —        —        —        0.01
                           

Diluted earnings per common share

   $ 0.84    $ 0.68    $ 1.56    $ 1.37
                           

Weighted-average shares used in basic earnings per common share calculations

     439.4      455.8      440.2      461.3

Potentially dilutive securities:

           

Stock purchase contracts underlying Equity Units

     4.3      7.5      6.3      7.5

Stock options, restricted stock units and stock appreciation rights

     5.3      5.0      5.5      5.1
                           

Weighted-average shares used in diluted earnings per common share calculations

     449.0      468.3      452.0      473.9
                           

(4) Discontinued Operations

Sale of Group Life and Health Insurance Business

On May 31, 2007, we completed the sale of our group life and health insurance business for cash consideration of approximately $660 million. Accordingly, the business has been accounted for as discontinued operations and its results of operations, financial position and cash flows are separately reported for all periods presented. The sale resulted in a gain on sale of discontinued operations of $53 million, net of taxes.

Summary operating results of discontinued operations were as follows for the periods indicated:

 

    

Three months

ended June 30,

  

Six months

ended June 30,

(Amounts in millions)

       2007            2006            2007            2006    

Revenues

   $ 129    $ 183    $ 318    $ 366
                           

Income before income taxes

   $ 8    $ 17    $ 24    $ 30

Provision for income taxes

     3      6      9      11
                           

Income from discontinued operations

   $ 5    $ 11    $ 15    $ 19
                           

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The assets and liabilities associated with discontinued operations have been segregated in the condensed consolidated balance sheets. The major asset and liability categories were as follows:

 

(Amounts in millions)

  

December 31,

2006

Assets:

  

Investments

   $ 903

Cash and cash equivalents

     33

Deferred acquisition costs

     142

Intangible assets and goodwill

     145

Reinsurance recoverable and other assets

     759
      

Assets associated with discontinued operations

   $ 1,982
      

Liabilities:

  

Future annuity and contract benefits

   $ 837

Liability for policy and contract claims

     428

Unearned premiums, other liabilities and deferred tax liability

     158
      

Liabilities associated with discontinued operations

   $ 1,423
      

(5) Investments and Derivative Instruments

As of June 30, 2007, the amortized cost or cost, gross unrealized gains (losses), and estimated fair value of our fixed maturities and equity securities classified as available-for-sale were as follows:

 

(Amounts in millions)

   Amortized
cost or
cost
   Gross
unrealized
gains
   Gross
unrealized
losses
    Estimated
fair value

Fixed maturities:

          

U.S. government, agencies and government sponsored entities

   $ 626    $ 12    $ (6 )   $ 632

Tax exempt

     2,313      61      (3 )     2,371

Government—non U.S.

     1,691      55      (21 )     1,725

U.S. corporate

     24,330      366      (632 )     24,064

Corporate—non U.S.

     11,817      117      (277 )     11,657

Mortgage and asset-backed

     15,214      102      (198 )     15,118
                            

Total fixed maturities

     55,991      713      (1,137 )     55,567

Equity securities

     174      29      (2 )     201
                            

Total available-for-sale securities

   $ 56,165    $ 742    $ (1,139 )   $ 55,768
                            

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

As of December 31, 2006, the amortized cost or cost, gross unrealized gains (losses), and estimated fair value of our fixed maturities and equity securities classified as available-for-sale were as follows:

 

(Amounts in millions)

   Amortized
cost or
cost
   Gross
unrealized
gains
   Gross
unrealized
losses
    Estimated
fair value

Fixed maturities:

          

U.S. government, agencies and government sponsored entities

   $ 850    $ 21    $ (7 )   $ 864

Tax exempt

     2,126      106      (1 )     2,231

Government—non U.S.

     1,688      83      (6 )     1,765

U.S. corporate

     24,350      639      (333 )     24,656

Corporate—non U.S.

     10,567      204      (139 )     10,632

Mortgage and asset-backed

     14,490      141      (95 )     14,536
                            

Total fixed maturities

     54,071      1,194      (581 )     54,684

Equity securities

     171      28      (2 )     197
                            

Total available-for-sale securities

   $ 54,242    $ 1,222    $ (583 )   $ 54,881
                            

The fair value of derivative instruments, including interest rate and foreign currency swaps, equity index options and financial futures is based upon pricing valuation models which utilize independent third-party data as inputs. The following table sets forth our positions in derivative instruments and the estimated fair values as of the dates indicated:

 

     June 30, 2007     December 31, 2006  

(Amounts in millions)

   Notional
value
   Estimated
fair value
    Notional
value
   Estimated
fair value
 

Interest rate swaps

   $ 22,363    $ 116     $ 17,832    $ 496  

Foreign currency swaps

     768      (29 )     567      (8 )

Foreign currency forward contracts

     92      (3 )     —        —    

Equity index options

     434      25       323      22  

Financial futures

     20      —         19      —    
                              

Total

   $ 23,677    $ 109     $ 18,741    $ 510  
                              

As of June 30, 2007 and December 31, 2006, the fair value of derivatives in a gain position and recorded in other invested assets was $259 million and $543 million, respectively, and the fair value of derivatives in a loss position and recorded in other liabilities was $150 million and $33 million, respectively.

(6) Commitments and Contingencies

(a) Litigation

We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. Plaintiffs in class action and other lawsuits against us may seek indeterminate amounts which may remain unknown for substantial periods of time. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our financial condition and results of operations. Moreover, even if we ultimately

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

prevail in the litigation, regulatory action or investigation, we could suffer reputational harm, which could have an adverse effect on our business, financial condition or results of operations.

(b) Commitments

As of June 30, 2007, we were committed to fund $222 million in U.S. commercial mortgage loan investments and $469 million in limited partnership investments.

(c) Accelerated Stock Repurchase

In May 2007, we repurchased 16.5 million shares of our Class A Common Stock under an accelerated share repurchase transaction with a broker-dealer counterparty for an initial aggregate purchase price of $600 million. We funded the purchase price with proceeds from the issuance and sale of Class A Common Stock pursuant to the settlement of purchase contracts that were components of our Equity Units. The repurchased shares will be held in treasury, until such time as they may be reissued or retired.

As part of this transaction, we simultaneously entered into a forward contract indexed to the price of our Class A Common Stock, which subjects the transaction to a future price adjustment. Upon settlement of the contract, which is scheduled to occur in October 2007, the price adjustment will be calculated based on the arithmetic mean of the volume weighted average price of our Class A Common Stock during the term of the agreement, less a discount. In the case where we are required to pay, the price adjustment may be settled in shares of Class A Common Stock or in cash at our option. In the case where the broker-dealer counterparty is required to pay, the price adjustment may only be settled in shares of Class A Common Stock.

(d) Pending Acquisition

On July 18, 2007, we entered into an agreement to acquire Liberty Reverse Mortgage, Inc., an independent reverse mortgage lender, for $50 million plus additional contingent consideration. The transaction is subject to regulatory approvals and expected to close in the fourth quarter of 2007.

(7) Borrowings and Other Financings

Commercial Paper Facility

We have a $1.0 billion commercial paper program. The notes under the commercial paper program are offered pursuant to an exemption from registration under the Securities Act of 1933 and may have a maturity of up to 364 days from the date of issue. During the first quarter of 2007, we issued $50 million of commercial paper. During the second quarter of 2007, we reduced the outstanding balance of our commercial paper by $50 million. As of June 30, 2007 and December 31, 2006, the weighted average interest rate on commercial paper outstanding was 5.2% and the weighted average maturity was 28 days and 37 days, respectively.

Long-term Senior Notes

In June 2007, we issued senior notes having an aggregate principal amount of $350 million, with an interest rate equal to 5.65% per year payable semi-annually, and maturing in June 2012 (“2012 Notes”). The 2012 Notes are our direct, unsecured obligations and will rank equally with all of our existing and future unsecured and unsubordinated obligations. We have the option to redeem all or a portion of the 2012 Notes, at any time with

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

proper notice to the note holders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread. The net proceeds of $349 million from the issuance of the 2012 Notes were used to partially repay $500 million of our senior notes which matured in June 2007, with the remainder repaid with cash on hand.

Equity Units

In May 2007, Equity Unit holders purchased 25.5 million of newly issued shares of our Class A Common Stock equal to the settlement rate specified in the stock purchase contract component of the Equity Units for $600 million. In May 2007, we also remarketed the senior notes underlying our Equity Units pursuant to their terms. The interest rate on the senior notes was reset to 5.231%.

Non-recourse Funding Obligations

In April 2007, River Lake Insurance Company IV Limited (“River Lake IV”), a Bermuda long-term insurance company wholly-owned by Genworth Life and Annuity Insurance Company (“GLAIC”), itself an indirect wholly-owned subsidiary of Genworth, issued $500 million in aggregate principal amount of floating rate guaranteed notes due 2028 (the “Guaranteed Notes”) and $40 million in aggregate principal amount of floating rate subordinated notes due 2028 (the “Subordinated Notes” and, together with the Guaranteed Notes, the “Notes”). The Notes were issued pursuant to an indenture, which by its terms requires River Lake IV to pledge substantially all of its available assets to the indenture trustee as collateral for the Notes.

River Lake IV may issue additional series of its floating rate guaranteed notes up to an aggregate principal amount of $925 million (including the Notes). The Notes are direct financial obligations of River Lake IV and are not guaranteed by GLAIC or Genworth. A third-party financial guaranty insurance company (the “Insurer”) will insure the timely payment of scheduled interest payments and the repayment of principal on May 25, 2028 on all series of the floating rate guaranteed notes, including the Guaranteed Notes.

The Notes were issued by River Lake IV to primarily fund statutory reserves for policies subject to Valuation of Life Insurance Policies Regulation (more commonly known as “Regulation XXX”) and its predecessor regulations. River Lake IV has reinsured from GLAIC, on a coinsurance basis, certain term life insurance policies written or reinsured by GLAIC.

The holders of the Notes cannot require payment of principal or interest on the Notes from the Company or any of its subsidiaries, other than River Lake IV, the direct issuer of the Notes. River Lake IV will pay interest on the principal amount of the Notes on a monthly basis. The holders of the Notes will have the right to accelerate payment of principal of the Notes, subject to applicable notice and cure provisions, in the event of River Lake IV’s or the Insurer’s nonpayment of amounts due with respect to the Guaranteed Notes, River Lake IV’s bankruptcy or insolvency, the failure of the security interest in the collateral granted by River Lake IV to the indenture trustee to be perfected, the nonpayment by River Lake IV of amounts due to the Insurer, the breach in any material respect of River Lake IV’s representations or warranties, or the breach by River Lake IV of any material covenant. River Lake IV reserves the right to redeem the Notes at any time, subject to the terms of the Notes.

In June 2007, River Lake Insurance Company II (“River Lake II”), a special purpose financial captive insurance company wholly-owned by GLAIC, issued $250 million in aggregate principal amount of floating rate surplus notes due 2035. This transaction represented the third and final issuance of surplus notes by River Lake II, bringing the total aggregate principal amount of surplus notes issued by River Lake II to $850 million.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

As of June 30, 2007 and December 31, 2006, the weighted average interest rate on our non-recourse funding obligations was 5.4%. The non-recourse funding obligations bear variable interest rates and their carrying value approximates fair value as of June 30, 2007.

Revolving Credit Facilities

We have a $1.0 billion five-year revolving credit facility that matures in May 2012 (as extended during the second quarter of 2007 pursuant to the terms of the facility) and a $1.0 billion revolving credit facility that matures in April 2010. These facilities bear variable interest rates based on one-month LIBOR plus a margin. As of June 30, 2007, we had no borrowings under these facilities; however, we utilized $172 million of the commitment under these facilities for the issuance of a letter of credit primarily for the benefit of one of our U.S. Mortgage Insurance subsidiaries.

Commercial Mortgage Loan Repurchase Facility

In March 2007, Genworth Financial Commercial Mortgage Warehouse LLC, an indirect subsidiary of Genworth, entered into a $300 million repurchase facility maturing March 22, 2010. The facility may be permanently increased to $500 million upon 30-days’ advance written notice. The sole purpose of this facility is to finance the purchase of commercial mortgage loans with the intent to securitize such loans in the future. As of June 30, 2007, there were no amounts outstanding under this facility.

(8) Segment Information

On January 9, 2007, we announced a significant organizational repositioning to more directly align high growth retirement and protection, international and mortgage insurance business opportunities. Additionally, our group life and health insurance business, previously included in our former Protection segment, is now included in Corporate and Other activities. The following discussion reflects our reorganized operating segments for all periods presented.

We conduct our operations in three operating business segments: (1) Retirement and Protection, which includes our managed money products and services, retirement income products, institutional products, life insurance and long-term care insurance; (2) International, which includes international mortgage insurance and payment protection insurance; and (3) U.S. Mortgage Insurance, which includes mortgage-related products and services that facilitate homeownership by enabling borrowers to buy homes with low-down-payment mortgages. We also have Corporate and Other activities which include interest and other debt financing expenses, other corporate income and expenses not allocated to the segments, eliminations of inter-segment transactions and the results of a small, non-core business that is managed outside of our operating segments. Our group life and health insurance business, which we agreed to sell in January 2007, was accounted for as discontinued operations and included in Corporate and Other activities. This business was sold on May 31, 2007.

We allocate invested assets, net investment income and net investment gains (losses) from Corporate and Other activities to our Retirement and Protection segment using an approach based principally upon the investment portfolios established to support the segment’s products and targeted capital levels. We do not allocate invested assets, net investment income and net investment gains (losses) from Corporate and Other activities to our International or U.S. Mortgage Insurance segments because they have their own separate investment portfolios.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

We use the same accounting policies and procedures to measure segment income and assets as our consolidated net income and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “net operating income.” We define net operating income (loss) as income (loss) from continuing operations excluding after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A significant component of our net investment gains (losses) are the result of credit-related impairments and credit-related gains and losses, the timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are often subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income in accordance with U.S. GAAP, we believe that net operating income, and measures that are derived from or incorporate net operating income, are appropriate measures that are useful to investors because they identify the income attributable to the ongoing operations of the business. However, net operating income (loss) is not a substitute for net income determined in accordance with U.S. GAAP. In addition, our definition of net operating income may differ from the definitions used by other companies.

There were no infrequent or unusual non-operating items excluded from net operating income during the periods presented other than a $14 million after-tax expense recorded in the first quarter of 2007 related to our segment reorganization costs.

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

 

    

Three months

ended June 30,

  

Six months

ended June 30,

(Amounts in millions)

   2007    2006    2007    2006

Revenues:

           

Retirement and Protection

   $ 1,929    $ 1,832    $ 3,847    $ 3,595

International

     624      556      1,211      1,055

U.S. Mortgage Insurance

     194      162      375      318

Corporate and Other

     18      21      42      45
                           

Total revenues

   $ 2,765    $ 2,571    $ 5,475    $ 5,013
                           

 

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Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table reflects net operating income (loss) of our segments and Corporate and Other activities determined in accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, and a reconciliation of net operating income (loss) of our segments and Corporate and Other activities to net income for the periods indicated:

 

     Three months
ended June 30,
    Six months
ended June 30,
 

(Amounts in millions)

       2007             2006             2007             2006      

Retirement and Protection

   $ 180     $ 171     $ 365     $ 349  

International

     142       119       265       221  

U.S. Mortgage Insurance

     66       72       131       144  

Corporate and Other

     (37 )     (34 )     (70 )     (49 )
                                

Net operating income

     351       328       691       665  

Net investment gains (losses), net of taxes and other adjustments

     (30 )     (22 )     (42 )     (37 )

Expenses related to reorganization, net of taxes

     —         —         (14 )     —    
                                

Income from continuing operations

     321       306       635       628  

Income from discontinued operations, net of taxes

  

 

5

 

    11       15       19  

Gain on sale from discontinued operations, net of taxes

     53       —         53       —    
                                

Income before cumulative effect of accounting change

     379       317       703       647  

Cumulative effect of accounting change

     —         —         —         4  
                                

Net income

   $ 379     $ 317     $ 703     $ 651  
                                

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

 

(Amounts in millions)

   June 30,
2007
   December 31,
2006

Assets:

     

Retirement and Protection

   $ 94,864    $ 92,820

International

     10,214      8,518

U.S. Mortgage Insurance

     3,370      3,237

Corporate and Other

     3,488      4,314
             

Segment assets from continuing operations

     111,936      108,889

Assets associated with discontinued operations

     —        1,982
             

Total assets

   $ 111,936    $ 110,871
             

 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included herein.

Cautionary note regarding forward-looking statements

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

 

   

Risks relating to our businesses, including interest rate fluctuations, downturns and volatility in equity markets, defaults in portfolio securities, downgrades in our financial strength and credit ratings, insufficiency of reserves, legal constraints on dividend distributions by subsidiaries, competition, availability and adequacy of reinsurance, defaults by counterparties, regulatory restrictions on our operations and changes in applicable laws and regulations, legal or regulatory investigations or actions, political or economic instability, the failure or any compromise of the security of our computer systems, and the occurrence of natural or man-made disasters or a pandemic disease;

 

   

Risks relating to our Retirement and Protection segment, including unexpected changes in morbidity and mortality, accelerated amortization of deferred acquisition costs and present value of future profits, goodwill impairments, reputational risks as a result of our plans to file for an increase in the premiums on certain in-force long-term care insurance products, medical advances such as genetic mapping research, unexpected changes in persistency rates, increases in statutory reserve requirements, and the failure of demand for long-term care insurance to increase as we expect;

 

   

Risks relating to our International segment, including political and economic instability, foreign exchange rate fluctuations, unexpected changes in unemployment rates, deterioration in economic conditions or decline in home price appreciation, unexpected increases in mortgage insurance default rates or severity of defaults, decreases in the volume of high loan-to-value international mortgage originations, increased competition with government-owned and government-sponsored entities offering mortgage insurance, changes in regulations, and growth in the global mortgage insurance market that is lower than we expect;

 

   

Risks relating to our U.S. Mortgage Insurance segment, including the influence of Fannie Mae, Freddie Mac and a small number of large mortgage lenders and investors, decreases in the volume of high loan-to-value mortgage originations or increases in mortgage insurance cancellations, increases in the use of simultaneous second mortgages and other alternatives to private mortgage insurance and reductions by lenders in the level of coverage they select, unexpected increases in mortgage insurance default rates or severity of defaults, deterioration in economic conditions or a decline in home price appreciation, increases in the use of reinsurance with reinsurance companies affiliated with our mortgage lending customers, increased competition with government-owned and government-sponsored entities offering mortgage insurance, changes in regulations, legal actions under Real Estate Settlement Practices Act, and potential liabilities in connection with our U.S. contract underwriting services; and

 

   

Other risks, including the possibility that in certain circumstances we will be obligated to make payments to GE under our tax matters agreement even if our corresponding tax savings are never realized and payments could be accelerated in the event of certain changes in control, and provisions of our certificate of incorporation and by-laws and our tax matters agreement with GE may discourage takeover attempts and business combinations that stockholders might consider in their best interests.

 

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Table of Contents

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

Overview

Our business

We are a leading financial security company in the U.S. with an expanding international presence. We have three operating segments: Retirement and Protection, International and U.S. Mortgage Insurance.

On January 9, 2007, we announced a significant organizational repositioning to more directly align high growth retirement and protection, international and mortgage insurance business opportunities. Additionally, our group life and health insurance business, previously included in our Protection segment, is now included in Corporate and Other activities. This business was sold on May 31, 2007. The following discussion reflects our reorganized operating segments.

 

   

Retirement and Protection. We offer a variety of protection, wealth accumulation, retirement income and institutional investment products. Retail protection products include: life insurance, long-term care insurance and a linked-benefits product that combines long-term care insurance with universal life insurance. Additionally, as part of our senior market products and services, we offer Medicare supplement insurance along with wellness and care coordination services for our long-term care policyholders. Our wealth accumulation and retirement income products include: individual variable annuities, fixed deferred and immediate individual annuities, group variable annuities offered through retirement plans, and a variety of managed account programs, financial planning advisory services and mutual funds. Institutional products include: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). For the three months ended June 30, 2007, our Retirement and Protection segment’s net income and net operating income were $153 million and $180 million, respectively. For the six months ended June 30, 2007, our Retirement and Protection segment’s net income and net operating income were $326 million and $365 million, respectively.

 

   

International. In Canada, Australia, New Zealand, Mexico, Japan and multiple European countries, we are a leading provider of mortgage insurance products. We are the largest private mortgage insurer in most of our international markets. We also provide mortgage insurance on a structured, or bulk basis, which aids in the sale of mortgages to the capital markets and helps lenders manage capital and risks. Additionally, we offer services, analytical tools and technology that enable lenders to operate more efficiently and more effectively manage risk. We also offer payment protection coverages in multiple European countries, Canada and Mexico. Our payment protection insurance products help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death. For the three months ended June 30, 2007, our International segment’s net income and net operating income were $139 million and $142 million, respectively. For the six months ended June 30, 2007, our International segment’s net income and net operating income were $262 million and $265 million, respectively.

 

   

U.S. Mortgage Insurance. In the U.S., we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as “flow” mortgage insurance. We also have begun to increasingly provide mortgage insurance on a structured, or bulk basis, with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate more efficiently and more effectively manage risk. For the three months ended June 30, 2007, our U.S. Mortgage Insurance segment’s net income and net operating income were both $66 million. For the six months ended June 30, 2007, our U.S. Mortgage Insurance segment’s net income and net operating income were both $131 million.

We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions,

 

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the results of a small, non-core business that is managed outside our operating segments and our group life and health insurance business, which we agreed to sell in January 2007 and was accounted for as discontinued operations. This business was sold on May 31, 2007. For the three months ended June 30, 2007, Corporate and Other had both a loss from continuing operations and a net operating loss of $37 million. For the six months ended June 30, 2007, Corporate and Other had a loss from continuing operations and a net operating loss of $84 million and $70 million, respectively.

Trends and conditions affecting our segments

Retirement and Protection

Managed money. We offer asset management products to individual investors and support services for independent broker-dealers and registered investment advisors. The asset management industry is witnessing rapid increases of independent broker-dealer representatives and registered investment advisors, as registered representatives are leaving large national firms to join these independent firms or form their own firms. These new small firms need client and back office support services and access to technology. Further, individuals are increasingly transferring their assets to separately managed products. We expect these trends to continue and possibly accelerate in the future. As a result of these trends, we have expanded our presence in this market with the October 2006 acquisition of AssetMark Investment Services, Inc. (“AssetMark”), a leading provider of open architecture asset management solutions to independent financial advisors. Our asset management products consist of separately managed accounts and managed mutual fund accounts. We receive a management fee based upon the amount of assets under management. The results of our asset management business are a function of net flows and investment performance of assets under management, which are influenced by the relative performance of our products’ underlying investments and the overall equity market environment.

Retirement income. Results for our retirement income business are affected by investment performance, interest rate levels, slope of the interest rate yield curve, net interest spreads, equity market fluctuations, mortality and the impact of new product sales and lapses. In addition, our competitive position within many of our distribution channels, as well as our ability to retain business, depends significantly upon product features, including current and minimum crediting rates on spread-based products relative to our competitors, surrender charge periods in fixed annuities as well as guaranteed features we offer in variable products. We continually evaluate our competitive position based upon each of those features, and we make adjustments as appropriate to meet our target return thresholds.

The current interest rate environment coupled with the relatively flat shape of the yield curve has reduced the attractiveness of some fixed annuities relative to investment alternatives, such as certificates of deposit. This interest rate and yield curve environment has had an adverse impact on both sales and retention of fixed annuities with the latter resulting in an acceleration of the amortization of related deferred acquisition costs. In recent quarters, we have experienced improved spreads in fixed annuities associated with the runoff and crediting rate resets of lower return business. We expect these trends to continue.

We continue to focus on our Income Distribution Series of variable annuity products and riders. We have witnessed a decline in defined benefit retirement plans in favor of defined contribution plans with more of the responsibility for retirement income planning falling on the individual. Additionally, U.S. savings rates are at historical lows. We believe these factors support demand for individual and group retirement income products that provide various forms of guaranteed benefits with the opportunity to realize upside market performance. Our Income Distribution Series provides the contractholder with the ability to receive a guaranteed minimum income stream that they cannot outlive, along with an opportunity to participate in market appreciation. However, through various techniques, these products are designed to reduce some of our risks that generally accompany traditional products with guaranteed living benefits. We are targeting individuals who are focused on building a personal portable retirement plan or are moving from the accumulation to the distribution phase of their retirement planning.

 

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Life insurance. Results in our life insurance business are impacted by sales, mortality, persistency, investment yields and statutory reserve requirements. Additionally, sales of our products are dependent on competitive product features and pricing, distribution penetration and customer service. Valuation of Life Insurance Policies Regulation (more commonly known as “Regulation XXX”) requires insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees, which increases the capital required to write these products. For term life insurance, we have implemented capital management actions that improve our new business returns and have, in part, enabled us to decrease our premium rates.

Several competitors have taken similar capital management actions. Additionally, we have seen some competitors lower their term life insurance prices, which has made the market more competitive. We have also experienced a shift in focus by our distributors from term life insurance to universal life insurance products. In response to this shift in focus by our distributors, we are building our universal life capabilities and maintaining a disciplined approach to term life insurance pricing. Our sales levels and returns on new term life insurance business have been and may continue to be impacted by the increased competition and shift in distribution focus.

Long-term care insurance. Results of our long-term care insurance business are influenced by morbidity, persistency, investment yields, new product sales, expenses and reinsurance. Industry-wide annualized first-year premiums of individual long-term care insurance increased approximately 3% for the three months ended March 31, 2007 compared to the three months ended March 31, 2006, according to data published by LIMRA International. Our sales growth over the past year in a challenging market reflects the breadth of our distribution and progress across multiple growth initiatives with an emphasis on broadening our product offerings. For example, for the six months ended June 30, 2007, we have experienced sales growth in our recently introduced linked-benefits product. In addition, in July 2007, AARP selected us as its provider to offer new long-term care insurance products to its approximately 38 million members. However, the continued low interest rate environment and the impact of lower termination rates on older issued policies, some with expiring reinsurance coverage, are causing higher benefits and other changes in policy reserves, resulting in lower net operating income. In response to these trends, we will continue to pursue multiple growth initiatives, continue investing in case management improvements, maintain tight expense management, actively explore reinsurance and capital market solutions, execute investment strategies and, if appropriate, consider other actions to improve profitability of the block. On July 26, 2007, we announced our plans to file for a premium rate increase of between 8% and 12% on most of our block of older issued long-term care insurance policies. This block represents approximately $700 million, or 40%, of our total annual long-term care insurance premium in-force.

International

International mortgage insurance. The results of our international mortgage insurance business are affected by changes in regulatory environments, employment and other economic and housing market trends, including interest rate trends, home price appreciation, mortgage origination volume, levels of mortgage delinquencies and movements in foreign currency exchange rates. Our international mortgage insurance business has continued to expand with favorable operating results. We expect that the growth of our established international mortgage insurance business and our entry into new international markets will continue to contribute an increasing portion of this segment’s total revenues and profits.

As a result of the expansion of our international business in recent years, as of June 30, 2007, approximately 61% of our international risk in-force has not yet reached its anticipated highest claim frequency years, which are generally between the third and seventh year of the loan. We expect our loss experience on these loans will increase as these books of business continue to mature.

Payment protection insurance. Growth of our payment protection insurance business is dependent on economic conditions including consumer lending levels, client account penetration and the number of countries and markets we enter. Additionally, the types and mix of our products will vary based on regulatory and consumer acceptance of our products. Our payment protection insurance business continues to show growth from increased penetration of existing relationships and the addition of new distribution relationships in existing and new countries.

 

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U.S. Mortgage Insurance

The results of our U.S. mortgage insurance business are affected by employment and other economic and housing markets trends, including interest rate trends, home price appreciation, mortgage origination volume and the levels and aging of mortgage delinquencies including seasonal trends.

We believe the demand for flow private mortgage insurance increased during the six months ended June 30, 2007 as compared to the same period in 2006. This increase was driven by a number of market conditions, which included: increased regulatory and market focus on credit risk, tightened underwriting standards, an increase in the volume of mortgages purchased by the government-sponsored entities (“GSE”), the decline in simultaneous second mortgages and mortgage insurance tax deductibility. The bulk mortgage insurance market is increasing as a percentage of the overall primary mortgage insurance market, which we believe is driven, in part, by an increase in GSE Alt-A penetration, portfolio transactions which have increased recently driven by regulatory pressure on lenders to decrease the risk in their mortgage loan portfolios, as well as an increase in non-prime mortgage-backed security issuances. We have increased our participation in selected segments of the bulk market where we believe we will be able to meet our targeted risk-adjusted returns and continue to evaluate additional opportunities this market presents.

The recent rise in interest rates and lower or negative home price appreciation in the U.S. have contributed to rising persistency rates. The persistency rate for the six months ended June 30, 2007 was 78%, which represents the highest persistency rate we have experienced in more than six years.

Primary insurance in-force increased from $120.5 billion as of March 31, 2007 to $135.5 billion as of June 30, 2007, which is our sixth sequential quarter increase of primary insurance in-force. In addition, net earned premiums have grown from $232 million for the six months ended June 30, 2006 to $285 million for the six months ended June 30, 2007. These increases in primary insurance in-force and net earned premiums reflect an increase in both our flow and bulk product writings as a result of increased demand for private mortgage insurance as well as higher persistency. We believe that the increased demand for private mortgage insurance, sustained higher interest rates, increased persistency and our ongoing growth strategy will lead to growing levels of insurance in-force and related net earned premiums.

We believe that the U.S. economy overall remains relatively strong based on continued gross domestic product growth and low levels of unemployment. However, we also believe that the U.S. housing market has slowed and the rate of home price appreciation has declined or turned negative in the majority of markets. In addition, there has been a significant increase in the default levels in the adjustable rate sub-prime market, according to the Mortgage Bankers Association, which we believe has resulted in an increase in housing supply levels and has further pressured home price appreciation. Over 90% of our primary risk in-force in the U.S. is considered prime, based on FICO credit scores of the underlying mortgage loans. Continued low or negative home price appreciation may cause further increases in our incurred losses and the related loss ratio.

The Great Lakes region has experienced an economic slowdown and has seen a more pronounced weakness in their housing markets as well as a decline in home prices. While our portfolio concentration in the Great Lakes region is less than 10% of our total risk in-force, this region’s weakness has contributed disproportionately to the increase in our U.S. paid losses. In addition, throughout the U.S., we have experienced an increase in the average loan balance of mortgage loan delinquencies and we have seen increases in loan delinquencies in some of the higher loan balance states including Florida, California, Arizona and several Northeastern states. These factors have both contributed to an increase in our incurred losses.

As a result of the significant U.S. refinancing activity since 2002, as of June 30, 2007, approximately 65% of our U.S. risk in-force had not yet reached its anticipated highest claim frequency years, which are generally between the third and seventh year of the loan. We expect our loss experience on these loans will increase as these books of business continue to mature.

 

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Consolidated Results of Operations

The following is a discussion of our consolidated results of operations. For a discussion of our segment results, see “—Results of Operations by Segment.

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

The following is a summary of net income for the periods indicated:

 

     Three months
ended June 30,
    Increase (decrease) and
percentage change
 

(Amounts in millions)

         2007                 2006                       2007 vs. 2006              

Revenues:

        

Premiums

   $ 1,549     $ 1,480     $ 69     5 %

Net investment income

     1,024       940       84     9 %

Net investment gains (losses)

     (51 )     (49 )     (2 )   (4 )%

Insurance and investment product fees and other

     243       200       43     22 %
                          

Total revenues

     2,765       2,571       194     8 %
                          

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,090       978       112     11 %

Interest credited

     391       378       13     3 %

Acquisition and operating expenses, net of deferrals

     495       483       12     2 %

Amortization of deferred acquisition costs and intangibles

     207       197       10     5 %

Interest expense

     124       88       36     41 %
                          

Total benefits and expenses

     2,307       2,124       183     9 %
                          

Income from continuing operations before income taxes

     458       447       11     2 %

Provision for income taxes

     137       141       (4 )   (3 )%
                          

Income from continuing operations

     321       306       15     5 %

Income from discontinued operations, net of taxes

     5       11       (6 )   (55 )%

Gain on sale from discontinued operations, net of taxes

     53       —         53     NM (1)
                          

Net income

   $ 379     $ 317     $ 62     20 %
                          

(1)

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

Premiums. Premiums consist primarily of premiums earned on insurance products for individual life, long-term care, Medicare supplement, single premium immediate annuities and structured settlements with life contingencies, payment protection and mortgage insurance policies.

 

   

Our International segment increased $36 million as a result of a $44 million increase in our international mortgage insurance business, partially offset by a decrease of $8 million from our payment protection insurance business. The three months ended June 30, 2007 included an increase of $33 million attributable to changes in foreign exchange rates.

 

   

Our U.S. Mortgage Insurance segment increased $32 million.

 

   

Our Retirement and Protection segment increased $3 million primarily due to a $40 million increase in our long-term care insurance business and a $12 million increase in our life insurance business, offset by a $49 million decrease in our retirement income business.

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

 

   

Our Retirement and Protection segment increased driven largely by higher invested assets as a result of an increase in assets under management in our institutional business, the investment of net insurance cash flows attributable to growth of our long-term care and life insurance in-force blocks and an

 

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increase related to securities purchased using proceeds from the issuance of non-recourse funding obligations supporting certain term and universal life insurance reserves.

 

   

Our International segment increased as a result of higher invested assets from the investment of net insurance cash flows primarily related to the growth in the international mortgage insurance in-force and additional cash from capital contributions. The three months ended June 30, 2007 included an increase of $8 million attributable to changes in foreign exchange rates.

 

   

Additionally, higher net investment income was due to an increase in weighted average investment yields to 5.9% for the three months ended June 30, 2007 from 5.8% for the three months ended June 30, 2006. The increase in weighted average investment yields was primarily attributable to increased investment income from bond calls and increased yields on floating rate investments supporting floating rate policyholder and non-recourse funding liabilities. This increase was partially offset by a decline in yield related to commercial mortgage loans primarily as a result of a favorable adjustment to our commercial mortgage loan loss reserves in the prior year.

 

   

Net investment income for the three months ended June 30, 2007 included $27 million of investment income from bond calls, commercial mortgage loan prepayments and limited partnership investments as compared to $35 million in investment income from a reduction in commercial mortgage loan loss reserves, bond calls, commercial mortgage loan prepayments and limited partnership investments in the prior year.

Net investment gains (losses). Net investment gains (losses) consist of realized gains and (losses) from the sale or impairment of our investments, unrealized and realized gains and (losses) from our trading securities, fair value hedging relationships, non-qualifying derivatives and embedded derivatives. For a discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

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

 

   

Our Retirement and Protection segment increased $49 million driven by a $35 million increase in our managed money business, a $9 million increase in our life insurance business and an $8 million increase from our retirement income business.

 

   

Our U.S. Mortgage Insurance segment increased $2 million.

 

   

Our International segment decreased $5 million related to our international mortgage insurance business.

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

 

   

Our Retirement and Protection segment increased $44 million attributable to a $59 million increase in our long-term care insurance business and a $31 million increase in our life insurance business, offset by a $46 million decrease in our retirement income business.

 

   

Our U.S. Mortgage Insurance segment increased $36 million.

 

   

Our International segment increased $32 million as a result of an increase in our international mortgage insurance business of $35 million, partially offset by a decrease of $3 million in our payment protection insurance business. The three months ended June 30, 2007 included an increase of $8 million attributable to changes in foreign exchange rates.

 

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Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances. Interest credited related to our Retirement and Protection segment increased $13 million primarily due to a $26 million increase related to our institutional business, partially offset by a $17 million decrease in our retirement income business.

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

 

   

Our Retirement and Protection segment increased $14 million attributable to an increase of $26 million from our managed money business, partially offset by a decrease in our long-term care insurance business of $6 million and a decrease of $4 million in our life insurance business.

 

   

Our International segment increased $3 million. The three months ended June 30, 2007 included an increase of $12 million attributable to changes in foreign exchange rates.

 

   

Corporate and Other activities decreased $5 million.

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

 

   

Our Retirement and Protection segment increased $6 million due to an increase in our long-term care insurance business.

 

   

Our International segment increased $3 million related to an increase in our international mortgage insurance business of $5 million, partially offset by a decrease in our payment protection insurance business of $2 million. The three months ended June 30, 2007 included an increase of $8 million attributable to changes in foreign exchange rates.

Interest expense

 

   

Our Retirement and Protection segment increased $16 million in our life insurance business from the issuances of additional non-recourse funding obligations and increase in average floating rates paid on those obligations.

 

   

Our International segment increased $10 million primarily from our payment protection insurance business.

 

   

Corporate and Other activities increased $10 million.

Provision for income taxes. The effective tax rate decreased to 29.9% for the three months ended June 30, 2007 from 31.5% for the three months ended June 30, 2006. The three months ended June 30, 2007 included an increase of $3 million attributable to changes in foreign exchange rates. The decrease in effective tax rate was primarily attributable to the increase in lower taxed foreign income, partially offset by a decrease in tax-exempt investment income.

Net income. The increase in net income reflects increases in our International segment and Retirement and Protection segment net income offset by a decrease in our U.S. Mortgage Insurance segment and an increase in our Corporate and Other activities net operating loss, as discussed under “—Results of Operations by Segment.” Included in net income was an increase of $10 million, net of tax, attributable to changes in foreign exchange rates. Additionally, we completed the sale of our group life and health insurance business in the second quarter of 2007. The sale resulted in a gain on sale of discontinued operations of $53 million, net of taxes.

 

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Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

The following is a summary of net income for the periods indicated:

 

    

Six months

ended June 30,

    Increase (decrease) and
percentage change
 

(Amounts in millions)

         2007                 2006                       2007 vs. 2006              

Revenues:

        

Premiums

   $ 3,060     $ 2,851     $ 209     7 %

Net investment income

     2,008       1,852       156     8 %

Net investment gains (losses)

     (70 )     (71 )     1     1 %

Insurance and investment product fees and other

     477       381       96     25 %
                          

Total revenues

     5,475       5,013       462     9 %
                          

Benefits and expenses:

        

Benefits and other changes in policy reserves

     2,157       1,893       264     14 %

Interest credited

     776       750       26     3 %

Acquisition and operating expenses, net of deferrals

     984       919       65     7 %

Amortization of deferred acquisition costs and intangibles

     420       361       59     16 %

Interest expense

     231       170       61     36 %
                          

Total benefits and expenses

     4,568       4,093       475     12 %
                          

Income from continuing operations before income taxes

     907       920       (13 )   (1 )%

Provision for income taxes

     272       292       (20 )   (7 )%
                          

Income from continuing operations

     635       628       7     1 %

Income from discontinued operations, net of taxes

     15       19       (4 )   (21 )%

Gain on sale of discontinued operations, net of taxes

     53       —         53     NM (1)
                          

Income before cumulative effect of accounting change

     703       647       56     9 %

Cumulative effect of accounting change

     —         4       (4 )   (100 )%
                          

Net income

   $ 703     $ 651     $ 52     8 %
                          

(1)

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

Premiums

 

   

Our International segment increased $107 million as a result of an $86 million increase in our international mortgage insurance business and an increase of $21 million from our payment protection insurance business. The six months ended June 30, 2007 included an increase of $65 million attributable to changes in foreign exchange rates.

 

   

Our U.S. Mortgage Insurance segment increased $53 million.

 

   

Our Retirement and Protection segment increased $51 million primarily due to a $100 million increase in our long-term care insurance business and a $26 million increase in our life insurance business, offset by a $75 million decrease in our retirement income business.

Net investment income

 

   

Our Retirement and Protection segment increased largely driven by higher invested assets as a result of an increase in assets under management in our institutional business, the investment of net insurance cash flows attributable to growth of our long-term care and life insurance in-force blocks and an increase related to securities purchased using proceeds from the issuance of non-recourse funding obligations supporting certain term and universal life insurance reserves.

 

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Our International segment increased as a result of higher invested assets from the investment of net insurance cash flows primarily related to the growth in the international mortgage insurance in-force and additional cash from capital contributions. The six months ended June 30, 2007 included an increase of $12 million attributable to changes in foreign exchange rates.

 

   

Additionally, higher net investment income was due to an increase in weighted average investment yields to 5.9% for the six months ended June 30, 2007 from 5.8% for the six months ended June 30, 2006. The increase in weighted average investment yields was primarily attributable to increased yields on floating rate investments supporting floating rate policyholder and non-recourse funding liabilities and increased investment income from bond calls. This increase was partially offset by a decline in yield related to commercial mortgage loans primarily as a result of a favorable adjustment to our commercial mortgage loan loss reserves in the prior year.

 

   

Net investment income for the six months ended June 30, 2007 included $40 million of investment income from bond calls, commercial mortgage loan prepayments and limited partnership investments as compared to $54 million in investment income from a reduction in commercial mortgage loan loss reserves, bond calls, commercial mortgage loan prepayments and limited partnership investments in the prior year.

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

Insurance and investment product fees and other

 

   

Our Retirement and Protection segment increased $103 million primarily driven by a $69 million increase in our managed money business, a $19 million increase in our life insurance business and a $16 million increase from our retirement income business.

 

   

Our U.S. Mortgage Insurance segment increased $4 million.

 

   

Our International segment decreased $8 million related to our international mortgage insurance business.

Benefits and other changes in policy reserves

 

   

Our Retirement and Protection segment increased $132 million as a result of a $143 million increase in our long-term care insurance business and a $44 million increase in our life insurance business, offset by a $55 million decrease in our retirement income business.

 

   

Our U.S. Mortgage Insurance segment increased $69 million.

 

   

Our International segment increased $64 million driven by an increase in our international mortgage insurance business of $57 million and an increase of $7 million in our payment protection insurance business. The six months ended June 30, 2007 included an increase of $14 million attributable to changes in foreign exchange rates.

Interest credited. Interest credited related to our Retirement and Protection segment increased $26 million primarily due to a $53 million increase related to our institutional business, partially offset by a $36 million decrease in our retirement income business.

Acquisition and operating expenses, net of deferrals

 

   

Our Retirement and Protection segment increased $37 million primarily attributable to an increase of $49 million from our managed money business, offset by a decrease of $9 million in our life insurance business and a decrease in our long-term care insurance business of $3 million.

 

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Our International segment increased $19 million attributable to an increase of $9 million related to our international mortgage insurance business and an increase of $10 million related to our payment protection insurance business. The six months ended June 30, 2007 included an increase of $32 million attributable to changes in foreign exchange rates.

 

   

Corporate and Other activities increased $10 million.

Amortization of deferred acquisition costs and intangibles

 

   

Our Retirement and Protection segment increased $27 million primarily attributable to a $10 million increase in our retirement income business, a $9 million increase from our life insurance business and a $7 million increase in our long-term care insurance business.

 

   

Our International segment increased $18 million related to an increase in our international mortgage insurance business of $8 million and an increase of $10 million in our payment protection insurance business. The six months ended June 30, 2007 included an increase of $14 million attributable to changes in foreign exchange rates.

 

   

Corporate and Other activities increased $13 million.

Interest expense

 

   

Our Retirement and Protection segment increased $33 million related to our life insurance business from the issuances of additional non-recourse funding obligations and increase in average floating rates paid on those obligations.

 

   

Our International segment increased $14 million primarily from our payment protection insurance business.

 

   

Corporate and Other activities increased $14 million.

Provision for income taxes. The effective tax rate decreased to 30.0% for the six months ended June 30, 2007 from 31.7% for the six months ended June 30, 2006. The six months ended June 30, 2007 included an increase of $3 million attributable to changes in foreign exchange rates. The decrease was primarily attributable to lower taxed foreign income and a favorable examination development, partially offset by a decrease in tax-exempt investment income.

Net income. The increase in net income reflects increases in our International segment and Retirement and Protection segment net income offset by a decrease in our U.S. Mortgage Insurance segment and an increase in our Corporate and Other activities net operating loss, as discussed under “—Results of Operations by Segment.” Included in net income was an increase of $14 million, net of tax, attributable to changes in foreign exchange rates. Additionally, we completed the sale of our group life and health insurance business in the second quarter of 2007. The sale resulted in a gain on sale of discontinued operations of $53 million, net of taxes.

 

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Earnings per share

The following table provides basic and diluted earnings per common share for the periods indicated:

 

    

Three months

ended June 30,

  

Six months

ended June 30,

(Amounts in millions, except per share amounts)

   2007    2006    2007    2006

Earnings from continuing operations per common share:

           

Basic

   $ 0.73    $ 0.67    $ 1.44    $ 1.36
                           

Diluted

   $ 0.72    $ 0.66    $ 1.41    $ 1.33
                           

Earnings per common share:

           

Basic

   $ 0.86    $ 0.70    $ 1.60    $ 1.41
                           

Diluted

   $ 0.84    $ 0.68    $ 1.56    $ 1.37
                           

Weighted-average common shares outstanding:

           

Basic

     439.4      455.8      440.2      461.3
                           

Diluted

     449.0      468.3      452.0      473.9
                           

Weighted average shares outstanding declined reflecting repurchases of 43.7 million shares since the end of the first quarter of 2006 through June 30, 2007. Diluted weighted average shares outstanding for both the 2007 and 2006 quarters reflect the effects of potentially dilutive securities including stock purchase contracts underlying Equity Units, stock options, restricted stock units and other equity-based compensation.

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

Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “net operating income.” We define net operating income (loss) as income (loss) from continuing operations excluding after-tax net investment gains (losses) and other adjustments and infrequent or unusual non-operating items. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A significant component of our net investment gains (losses) are the result of credit-related impairments and credit-related gains and losses, the timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) are often subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Infrequent or unusual non-operating items are also excluded from net operating income if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income in accordance with U.S. GAAP, we believe that net operating income, and measures that are derived from or incorporate net operating income, are appropriate measures that are useful to investors because they identify the income attributable to the ongoing operations of the business. However, net operating income (loss) is not a substitute for net income determined in accordance with U.S. GAAP. In addition, our definition of net operating income may differ from the definitions used by other companies. See note 8 in our “—Notes to Condensed Consolidated Financial Statements” for a reconciliation of net operating income (loss) of our segments and Corporate and Other activities to net income.

Related to our payment protection insurance business in our International segment, there were reclassifications of certain reinsured assumed business from reinsurance accounting to the deposit method of accounting (“reinsurance accounting change”) in the fourth quarter of 2006. Prior year amounts have not been reclassified, as such amounts were not material to our consolidated financial statements. The reclassification impacted premiums, net investment income, benefits and other changes in policy reserves and interest expense; however, it had no impact on net income or net operating income for all periods presented.

 

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Management’s discussion and analysis by segment also contains selected operating performance measures including “sales,” “assets under management” and “insurance in-force” or “risk in-force” which are commonly used in the insurance and investment industries as measures of operating performance.

Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refers to (1) annualized first-year premiums for term life insurance, long-term care insurance and Medicare supplement insurance; (2) new and additional premiums/deposits for universal life insurance, linked-benefits, spread-based and variable products; (3) gross flows and net flows, which represent gross flows less redemptions, for our managed money business; (4) written premiums and deposits, gross of ceded reinsurance and cancellations, and premium equivalents, where we earn a fee for administrative services only business, for payment protection insurance; (5) new insurance written for mortgage insurance, which in each case reflects the amount of business the company generated during each period presented; and (6) written premiums net of cancellations for our Mexican insurance operations. Sales do not include renewal premiums on policies or contracts written during prior periods. We consider annualized first-year premiums, new premiums/deposits, gross and net flows, written premiums, premium equivalents and new insurance written to be a measure of our operating performance because they represent a measure of new sales of insurance policies or contracts during a specified period, rather than a measure of our revenues or profitability during that period.

Management regularly monitors and reports assets under management for our managed money business, insurance in-force and risk in-force. Assets under management for our managed money business represent third-party assets under management that are not consolidated in our financial statements. Insurance in-force for our life insurance, international mortgage insurance and U.S. mortgage insurance businesses is a measure of the aggregate face value of outstanding insurance policies as of the respective reporting date. Risk in-force for our international mortgage insurance and U.S. mortgage insurance businesses is a measure that recognizes that the loss on any particular mortgage loan will be reduced by the net proceeds received upon sale of the underlying property. We consider assets under management for our managed money business, insurance in-force and risk in-force to be a measure of our operating performance because they represent a measure of the size of our business at a specific date, rather than a measure of our revenues or profitability during that period.

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

 

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Retirement and Protection segment

Segment results of operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

The following table sets forth the results of operations relating to our Retirement and Protection segment:

 

    

Three months

ended June 30,

    Increase (decrease) and
percentage change
 

(Amounts in millions)

         2007                 2006                       2007 vs. 2006              

Revenues:

         

Premiums

   $ 887     $ 884     $ 3    —   %

Net investment income

     860       817       43    5 %

Net investment gains (losses)

     (45 )     (47 )     2    4 %

Insurance and investment product fees and other

     227       178       49    28 %
                         

Total revenues

     1,929       1,832       97    5 %
                         

Benefits and expenses:

         

Benefits and other changes in policy reserves

     917       873       44    5 %

Interest credited

     391       378       13    3 %

Acquisition and operating expenses, net of deferrals

     222       208       14    7 %

Amortization of deferred acquisition costs and intangibles

     112       106       6    6 %

Interest expense

     51       35       16    46 %
                         

Total benefits and expenses

     1,693       1,600       93    6 %
                         

Income from continuing operations before income taxes

     236       232       4    2 %

Provision for income taxes

     83       83       —      —   %
                         

Net income

     153       149       4    3 %

Adjustment to net income:

         

Net investment (gains) losses, net of taxes and other adjustments

     27       22       5    23 %
                         

Net operating income

   $ 180     $ 171     $ 9    5 %
                         

The following table sets forth net operating income for the businesses included in our Retirement and Protection segment:

 

     Three months
ended June 30,
   Increase (decrease) and
percentage change
 

(Amounts in millions)

       2007            2006                2007 vs. 2006          

Net operating income:

          

Managed money

   $ 11    $ 6    $ 5     83 %

Retirement income

     43      38      5     13 %

Institutional

     10      13      (3 )   (23 )%

Life insurance

     75      77      (2 )   (3 )%

Long-term care insurance

     41      37      4     11 %
                        

Total net operating income

   $ 180    $ 171    $ 9     5 %
                        

Net operating income

 

   

Our managed money business increased $5 million primarily due to our fourth quarter of 2006 acquisition of AssetMark, growth in our assets under management in our existing platforms and favorable equity market performance.

 

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Our retirement income business increased $5 million mainly the result of an increase in income from fee-based products as a result of growth in assets under management of our Income Distribution Series of variable annuity products and riders and a lower effective tax rate, partially offset by lower municipal GIC advisory fees and lower spread-based retail assets under management from withdrawals of older issued blocks more than offsetting new deposits as crediting rates are being reset to lower rates.

 

   

Our institutional business decreased $3 million attributable to prior year favorable investment income items that did not recur in the current year, partially offset by growth in assets under management.

 

   

Our life insurance business decreased $2 million primarily due to less favorable mortality as compared to the prior year, partially offset by growth in the in-force block of term life insurance.

 

   

Our long-term care insurance business increased $4 million predominately a result of a $9 million, net of tax, bond call in the current year. The prior year included $6 million, net of tax, of favorable adjustments. In addition, the performance of newer issued policies was partially offset by unfavorable performance of older issued policies. The revenues and benefits and expenses for Continental Life Insurance Company of Brentwood, Tennessee (“Continental Life”), which was acquired on May 1, 2006, reflect a two-month period for 2006 compared to a three-month period for 2007.

Revenues

Premiums

 

   

Our long-term care insurance business increased $40 million mainly attributable to growth in the in-force block and a $19 million increase due to the Continental Life acquisition.

 

   

Our life insurance business increased $12 million mainly due to in-force growth from new sales and renewal premiums of term life insurance offset by lapses and continued runoff of our whole life block.

 

   

Our retirement income business decreased $49 million attributable to lower life contingent sales in our spread-based retail products primarily due to our continued pricing discipline in the current interest rate and yield curve environment and our decision in the third quarter of 2006 to discontinue sales of our life-contingent structured settlement annuities.

Net investment income

 

   

Our long-term care insurance increased $29 million partially due to growth in the in-force block. The current quarter increase also included a $14 million bond call from a single issuer that did not occur in the prior year.

 

   

Our institutional business increased $22 million attributable to increased assets under management.

 

   

Our life insurance business increased $18 million mainly due to growth of the in-force block and an increase in securities purchased using proceeds from the issuance of non-recourse funding obligations supporting certain term and universal life insurance reserves.

 

   

Our retirement income business decreased $26 million as result of a decline in assets under management for our spread-based retail products.

Insurance and investment product fees and other

 

   

Our managed money business increased $35 million primarily attributable to an increase of $23 million from the acquisition of AssetMark, as well as growth in assets under management in our existing platforms.

 

   

Our life insurance business increased $9 million principally the result of increased sales of our universal life insurance products.

 

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Our retirement income business increased $8 million mainly due to increased assets under management from continued sales of our Income Distribution Series of variable annuity products and riders.

Benefits and expenses

Benefits and other changes in policy reserves

 

   

Our long-term care insurance business increased $59 million mainly as a result of the aging and growth of the in-force block and a $14 million increase from the Continental Life acquisition. The prior year included a $24 million favorable adjustment related to group long-term care policies which did not recur in the current year. In addition, the performance of newer issued policies was offset by unfavorable performance of older issued policies.

 

   

Our life insurance business increased $31 million largely attributable to growth in the term life insurance in-force blocks and less favorable mortality as compared to the prior year.

 

   

Our retirement income business decreased $46 million principally attributable to a $42 million decrease in our spread-based retail products due to lower life-contingent sales primarily as a result of our continued pricing discipline in the current interest rate and yield curve environment and our decision in the third quarter of 2006 to discontinue sales of our life-contingent structured settlement annuities.

Interest credited

 

   

Our institutional business increased $26 million mainly attributable to growth in assets under management.

 

   

Our retirement income business decreased $17 million from lower account values on fixed annuities associated with surrenders more than offsetting sales and crediting rates being reset to current, lower rates as the fixed annuities reach the end of their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals

 

   

Our managed money business increased $26 million attributable to an increase of $16 million from the AssetMark acquisition and growth of our assets under management.

 

   

Our long-term care insurance business decreased $6 million mainly from an $8 million unfavorable reinsurance adjustment in the prior year that did not recur.

 

   

Our life insurance business decreased $4 million due to continued productivity efficiencies more than offsetting higher expenses associated with continued growth of insurance in-force.

Amortization of deferred acquisition costs and intangibles. Our long-term care insurance business increased $6 million mainly attributable to a $9 million increase from the Continental Life acquisition, partially offset by lower terminations of our in-force block.

Interest expense. Our life insurance business increased $16 million from the issuance of additional non-recourse funding obligations and an increase in average floating rates paid on those obligations.

Provision for income taxes. The effective tax rate decreased to 35.2% for the three months ended June 30, 2007 from 35.8% for the three months ended June 30, 2006. This decrease in effective tax rate was primarily attributable to an increase in the dividends received deduction and accrued interest on examination developments.

 

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Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

The following table sets forth the results of operations relating to our Retirement and Protection segment:

 

    

Six months

ended June 30,

    Increase (decrease) and
percentage change
 

(Amounts in millions)

       2007             2006                 2007 vs. 2006          

Revenues:

        

Premiums

   $ 1,761     $ 1,710     $ 51     3 %

Net investment income

     1,704       1,594       110     7 %

Net investment gains (losses)

     (64 )     (52 )     (12 )   (23 )%

Insurance and investment product fees and other

     446       343       103     30 %
                          

Total revenues

     3,847       3,595       252     7 %
                          

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,825       1,693       132     8 %

Interest credited

     776       750       26     3 %

Acquisition and operating expenses, net of deferrals

     434       397       37     9 %

Amortization of deferred acquisition costs and intangibles

     216       189       27     14 %

Interest expense

     94       61       33     54 %
                          

Total benefits and expenses

     3,345       3,090       255     8 %
                          

Income from continuing operations before income taxes

     502       505       (3 )   (1 )%

Provision for income taxes

     176       181       (5 )   (3 )%
                          

Net income

     326       324       2     1 %

Adjustment to net income:

        

Net investment (gains) losses, net of taxes and other adjustments

     39       25       14     56 %
                          

Net operating income

   $ 365     $ 349     $ 16     5 %
                          

The following table sets forth net operating income for the businesses included in our Retirement and Protection segment:

 

     Six months
ended June 30,
   Increase (decrease) and
percentage change
 

(Amounts in millions)

       2007            2006                2007 vs. 2006          

Net operating income:

          

Managed money

   $ 21    $ 8    $ 13     163 %

Retirement income

     89      87      2     2 %

Institutional

     24      23      1     4 %

Life insurance

     153      151      2     1 %

Long-term care insurance

     78      80      (2 )   (3 )%
                        

Total net operating income

   $ 365    $ 349    $ 16     5 %
                        

Net operating income

 

   

Our managed money business increased $13 million due to our fourth quarter of 2006 acquisition of AssetMark and growth in our assets under management in our existing platforms.

 

   

Our retirement income business increased $2 million mainly as the result of an increase in income from fee-based products as a result of growth in assets under management of our Income Distribution Series of variable annuity products and riders and a lower effective tax rate, partially offset by lower municipal GIC advisory fees and lower spread-based retail assets under management from withdrawals of older issued blocks more than offsetting new deposits as crediting rates are being reset to lower rates.

 

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Our institutional business increased $1 million attributable to growth in assets under management and increased spreads, primarily in our fixed GIC products, partially offset by prior year favorable investment income items that did not recur in the current year.

 

   

Our life insurance business increased $2 million primarily due to growth in the in-force block of term life insurance, partially offset by less favorable mortality as compared to the prior year.

 

   

Our long-term care insurance business decreased $2 million as the performance of newer issued policies was offset by unfavorable performance of older issued policies. The current year includes $10 million, net of tax, in bond calls. The prior year included $8 million, net of tax, of favorable adjustments. The revenues and benefits and expenses for Continental Life reflect a two-month period for 2006 compared to a six-month period for 2007.

Revenues

Premiums

 

   

Our long-term care insurance business increased $100 million mainly attributable to growth in the in-force block and a $63 million increase due to the Continental Life acquisition.

 

   

Our life insurance business increased $26 million mainly due to in-force growth from new sales and renewal premiums of term life insurance, partially offset by lapses and continued runoff of our whole life block.

 

   

Our retirement income business decreased $75 million attributable to lower life-contingent sales in our spread-based retail products primarily due to our continued pricing discipline in the current interest rate and yield curve environment and our decision in the third quarter of 2006 to discontinue sales of our life-contingent structured settlement annuities.

Net investment income

 

   

Our long-term care insurance increased $51 million largely due to growth in the in-force block. The current year also included $15 million in bond calls.

 

   

Our institutional business increased $56 million attributable to increased yields on floating rate investments supporting certain floating rate policyholder liabilities and higher asset balances.

 

   

Our life insurance business increased $37 million mainly due to growth of the in-force block and an increase in securities purchased using proceeds from the issuance of non-recourse funding obligations supporting certain term and universal life insurance reserves.

 

   

Our retirement income business decreased $35 million as result of a decline in assets under management for our spread-based retail products.

Insurance and investment product fees and other

 

   

Our managed money business increased $69 million primarily attributable to an increase of $44 million from the acquisition of AssetMark, as well as growth in assets under management in our existing platforms.

 

   

Our life insurance business increased $19 million principally the result of increased sales in our universal life insurance products.

 

   

Our retirement income business increased $16 million mainly due to increased assets under management from continued sales of our Income Distribution Series of variable annuity products and riders.

 

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Benefits and expenses

Benefits and other changes in policy reserves

 

   

Our long-term care insurance business increased $143 million mainly as a result of the aging and growth of the in-force block and a $50 million increase from the Continental Life acquisition. The prior year included a $27 million favorable adjustment related to our group long-term policies which did not recur in the current year. In addition, the performance of newer issued policies was offset by unfavorable performance of older issued policies.

 

   

Our life insurance business increased $44 million principally attributable to growth of our term life insurance in-force block and less favorable mortality as compared to the prior year, partially offset by a current year favorable reserve adjustment.

 

   

Our retirement income business decreased $55 million largely due to a decrease in our spread-based retail products due to lower life-contingent sales primarily due to our continued pricing discipline in the current interest rate and yield curve environment and our decision in the third quarter of 2006 to discontinue sales of our life-contingent structured settlement annuities.

Interest credited

 

   

Our institutional business increased $53 million mainly attributable to growth in assets under management and an increase in crediting rates.

 

   

Our retirement income business decreased $36 million from lower account values on fixed annuities associated with surrenders more than offsetting sales and crediting rates being reset to current, lower rates as the fixed annuities reach the end of their initial crediting rate guarantee period.

Acquisition and operating expenses, net of deferrals

 

   

Our managed money business increased $49 million from an increase of $31 million from the AssetMark acquisition and growth of our assets under management.

 

   

Our life insurance business decreased $9 million due to continued productivity efficiencies more than offsetting higher expenses associated with continued growth of insurance in-force.

 

   

Our long-term care insurance business decreased $3 million driven by continued productivity efficiencies. An $8 million increase from the Continental Life acquisition was offset by $8 million unfavorable reinsurance adjustment in the prior year that did not recur.

Amortization of deferred acquisition costs and intangibles

 

   

Our retirement income business increased $10 million as a result of higher fixed annuity lapses in our spread-based products and growth in our variable annuity block.

 

   

Our life insurance business increased $9 million mainly due to growth in the in-force block and less favorable persistency.

 

   

Our long-term care insurance business increased $7 million attributable to a $12 million increase from the Continental Life acquisition, partially offset by lower terminations of our in-force block.

Interest expense. Our life insurance business increased $33 million from the issuance of additional non-recourse funding obligations and an increase in average floating rates paid on those obligations.

Provision for income taxes. The effective tax rate decreased to 35.1% for the six months ended June 30, 2007 from 35.8% for the six months ended June 30, 2006. This decrease in effective tax rate was primarily attributable to an increase in the dividends received deduction, which included a favorable examination development, and accrued interest on examination developments.

 

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Retirement and Protection selected financial and operating performance measures

Managed money

The following table sets forth selected financial performance measures regarding our managed money business as of or for the periods indicated:

 

     As of or for the three
months ended June 30,
    As of or for the six
months ended June 30,
 

(Amounts in millions)

  

      2007      

          2006                   2007                 2006        

Assets under management, beginning of period

   $ 18,806     $ 5,824     $ 17,293     $ 5,180  

Gross flows

     1,759       643       3,471       1,225  

Redemptions

     (494 )     (165 )     (925 )     (357 )
                                

Net flows

     1,265       478       2,546       868  

Market performance and product fees

     612       (159 )     844       95  
                                

Assets under management, end of period

   $ 20,683     $ 6,143     $ 20,683     $ 6,143  
                                

Managed money includes third-party assets managed by AssetMark, Genworth Financial Asset Management and Genworth Financial Advisers.

The increase in these assets was primarily due to the fourth quarter of 2006 acquisition of AssetMark and higher net flows in managed money accounts from new and existing clients, as well as favorable equity market performance. The increase in gross and net flows was the result of the AssetMark acquisition, expansion of our distribution network, growth in our sales force and changes in our fee structure. The account value as of June 30, 2007 for AssetMark was $11.2 billion.

Retirement income

Fee-based retail products

The following table sets forth selected financial performance measures regarding our fee-based retail products as of or for the periods indicated:

 

     As of or for the three
months ended June 30,
    As of or for the six
months ended June 30,
 

(Amounts in millions)

         2007                 2006                 2007                 2006        

Income Distribution Series(1)

        

Account value, net of reinsurance, beginning of period

   $ 2,813     $ 1,235     $ 2,402     $ 911  

Deposits

     482       350       903       631  

Interest credited and investment performance

     132       (5 )     182       54  

Surrenders, benefits and product charges

     (66 )     (25 )     (126 )     (41 )
                                

Account value, net of reinsurance, end of period

   $ 3,361     $ 1,555     $ 3,361     $ 1,555  
                                

Traditional variable annuities

        

Account value, net of reinsurance, beginning of period

   $ 1,905     $ 1,360     $ 1,780     $ 1,182  

Deposits

     149       147       279       279  

Interest credited and investment performance

     100       (19 )     136       59  

Surrenders, benefits and product charges

     (56 )     (30 )     (97 )     (62 )
                                

Account value, net of reinsurance, end of period

   $ 2,098     $ 1,458     $ 2,098     $ 1,458  
                                

Variable life insurance

        

Account value, beginning of period

   $ 396     $ 377     $ 391     $ 363  

Deposits

     7       7       12       16  

Interest credited and investment performance

     19       (5 )     31       13  

Surrenders, benefits and product charges

     (14 )     (12 )     (26 )     (25 )
                                

Account value, end of period

   $ 408     $ 367     $ 408     $ 367  
                                

 

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(1)

The Income Distribution Series products are comprised of our retirement income deferred and immediate variable annuity products, including those variable annuity products with rider options that provide similar income features. These products do not include fixed single premium immediate annuities or deferred annuities, which may also serve income distribution needs.

Income Distribution Series

We experienced an increase in assets under management attributable to continued sales growth of our guaranteed minimum withdrawal for life benefit rider and favorable equity markets.

Traditional variable annuities

In our traditional variable annuities, the increase in assets under management was principally the result of ongoing sales of our traditional variable annuity products and favorable equity markets exceeding surrenders and benefits.

Spread-based retail products

The following table sets forth selected financial performance measures regarding our spread-based retail products as of or for the periods indicated:

 

     As of or for the three
months ended June 30,
    As of or for the six
months ended June 30,
 

(Amounts in millions)

         2007                 2006                 2007                 2006        

Fixed annuities

        

Account value net of reinsurance, beginning of period

   $ 13,522     $ 15,241     $ 13,972     $ 15,547  

Deposits

     144       326       351       593  

Interest credited

     119       139       243       284  

Surrenders, benefits and product charges

     (899 )     (871 )     (1,680 )     (1,589 )
                                

Account value net of reinsurance, end of period

   $ 12,886     $ 14,835     $ 12,886     $ 14,835  
                                

Single premium immediate annuities

        

Account value net of reinsurance, beginning of period

   $ 6,261     $ 5,772     $ 6,174     $ 5,680  

Net earned premiums and deposits

     261       290       498       540  

Interest credited

     85       78       169       158  

Surrenders, benefits and product charges

     (240 )     (252 )     (474 )     (490 )
                                

Account value net of reinsurance, end of period

   $ 6,367     $ 5,888     $ 6,367     $ 5,888  
                                

Structured settlements

        

Account value net of reinsurance, beginning of period

   $ 1,058     $ 925     $ 1,011     $ 871  

Net earned premiums and deposits

     30       45       77       103  

Interest credited

     15       13       29       25  

Surrenders, benefits and product charges

     (15 )     (17 )     (29 )     (33 )
                                

Account value net of reinsurance, end of period

   $ 1,088     $ 966     $ 1,088     $ 966  
                                

Total premiums from spread-based retail products

   $ 151     $ 200     $ 305     $ 380  
                                

Total deposits on spread-based retail products

   $ 284     $ 461     $ 621     $ 856  
                                

 

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Fixed annuities

Surrenders exceeded deposits during the first half of 2007 and 2006 as the current interest rate and unfavorable yield curve environment along with competitive pressures have reduced the attractiveness of certain fixed annuities relative to investment alternatives, such as certificates of deposit. This interest rate and yield curve environment has had an adverse impact on both sales and retention of fixed annuities and we expect this trend to continue if the current interest rate and yield curve environment remains unchanged. In recent quarters, we have experienced improved spreads in fixed annuities principally from runoff and crediting rate resets on lower return business.

Single premium immediate annuities

The account value, net of reinsurance, increased primarily due to interest credited on the account values as premiums and deposits were offset by surrenders and benefits.

Structured settlements

Upon completion of a strategic review of our structured settlement annuities, we decided in the third quarter of 2006 to no longer solicit sales of this product as a result of a continued challenging and competitive long-term interest rate environment. However, we continue to service our existing block of business.

Institutional

The following table sets forth selected financial performance measures regarding our institutional business as of or for the periods indicated:

 

     As of or for the three
months ended June 30,
    As of or for the six
months ended June 30,
 

(Amounts in millions)

         2007                 2006                 2007                 2006        

Account value, beginning of period

   $ 10,724     $ 9,766     $ 10,483     $ 9,777  

Deposits(1)

     1,107       498       1,829       1,478  

Interest credited

     147       123       288       237  

Surrenders and benefits(1)

     (460 )     (501 )     (1,089 )     (1,606 )

Foreign currency translation

     (3 )     —         4       —    
                                

Account value, end of period

   $ 11,515     $ 9,886     $ 11,515     $ 9,886  
                                

(1)

“Surrenders and benefits” include contracts that have matured but are redeposited with us and reflected as deposits. For the three months ended June 30, 2007 and 2006, surrenders and deposits that were redeposited and are now reflected under “Deposits” amounted to $100 million each. For the six months ended June 30, 2007 and 2006, surrenders and deposits included $200 million and $310 million, respectively, that were redeposited and reflected under “Deposits.”

The increase in account values was primarily the result of the increase in the first half of 2007 in our FABNs, which include the registered note and the global medium term note (“GMTN”) programs. In the second quarter of 2007, we issued $650 million of registered notes. The GMTN program was launched in the first quarter of 2007 and resulted in issuances of $600 million. The increase in interest credited was driven by an increase in account value as well as higher crediting rates on our floating rate products due to an increase in short-term interest rates compared to 2006. These increases were partially offset by scheduled maturities of fixed GICs.

 

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Life insurance

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

 

    

Three months

ended June 30,

  

Increase (decrease) and

percentage change

   

Six months

ended June 30,

  

Increase (decrease) and

percentage change

 

(Amounts in millions)

       2007            2006                2007 vs. 2006                 2007            2006                2007 vs. 2006          

Term life insurance

                    

Net earned premiums

   $ 231    $ 221    $ 10     5 %   $ 460    $ 434    $ 26     6 %

Annualized first-year premiums

     29      37      (8 )   (22 )%     58      71      (13 )   (18 )%

Universal and whole life insurance

                    

Net earned premiums and deposits

   $ 134    $ 118    $ 16     14 %   $ 277    $ 240    $ 37     15 %

Universal life annualized first-year deposits

     15      10      5     50 %     26      19      7     37 %

Universal life excess deposits

     41      22      19     86 %     89      41      48     117 %

Total life insurance

                    

Net earned premiums and deposits

   $ 365    $ 339    $ 26     8 %   $ 737    $ 674    $ 63     9 %

Annualized first-year premiums

     29      37      (8 )   (22 )%     58      71      (13 )   (18 )%

Annualized first-year deposits

     15      10      5     50 %     26      19      7     37 %

Excess deposits

     41      22      19     86 %     89      41      48     117 %

 

     As of June 30,    Percentage
change
 

(Amounts in millions)

   2007    2006    2007 vs. 2006  

Term life insurance

        

Life insurance in-force, net of reinsurance

   $ 449,654    $ 409,103    10 %

Life insurance in-force before reinsurance

     610,071      571,014    7 %

Universal and whole life insurance

        

Life insurance in-force, net of reinsurance

   $ 41,303    $ 40,850    1 %

Life insurance in-force before reinsurance

     50,290      49,207    2 %

Total life insurance

        

Life insurance in-force, net of reinsurance

   $ 490,957    $ 449,953    9 %

Life insurance in-force before reinsurance

     660,361      620,221    6 %

 

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Term life insurance

The increase in term life insurance net earned premiums and insurance in-force was mainly due to growth of the in-force block of business. Annualized first-year premiums decreased as a result of increased price competition and a shift to universal life products by our distributors.

Universal and whole life insurance

Universal life annualized first-year and excess deposits increased largely from a shift from term life insurance products by our distributors and new product offerings gaining momentum. The in-force block remained flat mainly as a result of the growth in universal life insurance being offset by the continued runoff of our closed block of whole life insurance.

Long-term care insurance

The following table sets forth selected financial and operating performance measures regarding our long-term care insurance business, which includes individual and group long-term care insurance, Medicare supplement insurance, a linked-benefits product (that combines universal life insurance and long-term care insurance product features), as well as several runoff blocks of accident and health insurance and corporate-owned life insurance for the periods indicated:

 

     Three months
ended June 30,
  

Increase

(decrease) and

percentage change

   

Six months

ended June 30,

  

Increase

(decrease) and

percentage change

 

(Amounts in millions)

     2007        2006          2007 vs. 2006           2007        2006          2007 vs. 2006      

Net earned premiums:

                    

Long-term care

   $ 430    $ 407    $ 23   6 %   $ 849    $ 806    $ 43   5 %

Medicare supplement and other

     68      51      17   33 %     134      77      57   74 %
                                                    

Total

   $ 498    $ 458    $ 40   9 %   $ 983    $ 883    $ 100   11 %
                                                    

Annualized first-year premiums and deposits

   $ 54    $ 51    $ 3   6 %   $ 106    $ 99    $ 7   7 %

Net earned premiums increased primarily due to growth in the individual long-term care insurance in-force block from new sales. Medicare supplement net earned premiums increased mainly as a result of the Continental Life acquisition in the second quarter of 2006.

Annualized first-year premiums and deposits increased primarily attributable to the introduction of our linked-benefits product in 2006 with sales beginning in the fourth quarter of 2006. Our acquisition of Continental Life contributed an increase of $5 million in the first half of the year and was more than offset by a decline in our existing block of Medicare supplement insurance. The decline of annualized first-year premiums in our existing block of Medicare supplement insurance was the result of pricing actions and limited plan withdrawals in selected markets in the second quarter of 2006. Annualized first-year premiums were flat compared to the prior year.

 

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International segment

Segment results of operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

The following table sets forth the results of operations relating to our International segment:

 

    

Three months

ended June 30,

  

Increase

(decrease) and

percentage change

 

(Amounts in millions)

         2007                 2006              2007 vs. 2006      

Revenues:

         

Premiums

   $ 509     $ 473    $ 36     8 %

Net investment income

     113       71      42     59 %

Net investment gains (losses)

     (5 )     —        (5 )   NM (1)

Insurance and investment product fees and other

     7       12      (5 )   (42 )%
                         

Total revenues

     624       556      68     12 %
                         

Benefits and expenses:

         

Benefits and other changes in policy reserves

     112       80      32     40 %

Acquisition and operating expenses, net of deferrals

     229       226      3     1 %

Amortization of deferred acquisition costs and intangibles

     86       83      3     4 %

Interest expense

     10       —        10     NM (1)
                         

Total benefits and expenses

     437       389      48     12 %
                         

Income from continuing operations before income taxes

     187       167      20     12 %

Provision for income taxes

     48       48      —       —   %
                         

Net income

     139       119      20     17 %

Adjustment to net income:

         

Net investment (gains) losses, net of taxes and other adjustments

     3       —        3     NM (1)
                         

Net operating income

   $ 142     $ 119    $ 23     19 %
                         

(1)

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

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

 

   

Three months

ended June 30,

 

Increase

(decrease) and

percentage change

 

(Amounts in millions)

        2007               2006             2007 vs. 2006      

Net operating income:

       

International mortgage insurance

  $ 107   $ 90   $ 17   19 %

Payment protection insurance

    35     29     6   21 %
                   

Total net operating income

  $ 142   $ 119   $ 23   19 %
                   

Net operating income

 

   

Net operating income increased $17 million in our international mortgage insurance business and $6 million in our payment protection insurance business.

 

   

The three months ended June 30, 2007 included increases of $7 million and $3 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

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The increase in our international mortgage insurance business was driven by growth and seasoning of our insurance in-force in Canada and Australia, as well as a decrease in the effective tax rate. These increases were partially offset by a higher loss ratio in Australia, as well as favorable loss results in the prior year in Canada.

 

   

The increase in our payment protection insurance business was primarily associated with growth in production in continental Europe and Ireland, structured transactions and a lower effective tax rate.

Revenues

Premiums

 

   

Our international mortgage insurance business increased $44 million and our payment protection business decreased $8 million.

 

   

The three months ended June 30, 2007 included increases of $12 million and $21 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

   

The increase in our international mortgage insurance business was primarily a result of growth and seasoning of our international in-force block.

 

   

Our payment protection insurance business decreased principally attributable to our runoff block of business and a decrease related to certain reinsurance arrangements are now being accounted for as deposits (“reinsurance accounting change”) while prior year amounts have not been reclassified. The accounting change had no impact on net income or net operating income for all periods presented. Partially offsetting these decreases was an increase attributable to growth in continental Europe and Ireland, structured transactions and continued market penetration in new markets.

Net investment income

 

   

Our international mortgage insurance business increased $21 million and our payment protection insurance business increased $21 million.

 

   

The three months ended June 30, 2007 included increases of $5 million and $3 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

   

The increase in our international mortgage insurance business was largely due to an increase in invested assets associated with growth in sales and related unearned premiums.

 

   

The increase in our payment protection insurance business was principally attributable to income related to growth in business accounted for under the deposit method and the reinsurance accounting change.

Insurance and investment product fees and other. The decrease was primarily a result of the elimination of the Canadian application fees in our international mortgage insurance business in the third quarter of 2006.

Benefits and expenses

Benefits and other changes in policy reserves

 

   

Our international mortgage insurance business increased $35 million and our payment protection insurance business decreased $3 million.

 

   

The three months ended June 30, 2007 included increases of $5 million and $3 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

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The increase in our international mortgage insurance business was primarily a result of seasoning of large blocks of insurance in-force in Canada and Australia, as well as favorable loss results in the prior year in Canada.

 

   

The decrease in our payment protection insurance business was driven by the effects of the reinsurance accounting change.

Acquisition and operating expenses, net of deferrals

 

   

Our international mortgage insurance business increased $2 million and our payment protection insurance business increased $1 million.

 

   

The three months ended June 30, 2007 included increases of $2 million and $10 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

   

Our payment protection insurance business decreased, excluding the effects of foreign exchange, principally driven by a decrease in commissions on the runoff block of business and the reinsurance accounting change.

Amortization of deferred acquisition costs and intangibles

 

   

Our international mortgage insurance business increased $5 million and our payment protection insurance business decreased $2 million.

 

   

The three months ended June 30, 2007 included increases of $1 million and $7 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

   

The increase in our international mortgage insurance business was mainly due to the growth and seasoning of our insurance in-force.

 

   

The decrease in our payment protection insurance business was primarily from the effects of the reinsurance accounting change.

Interest expense. The increase was primarily due to reciprocal reinsurance transactions, which we accounted for under the deposit method in our payment protection insurance business.

Provision for income taxes. Provision for income taxes remained flat and included a $3 million increase attributable to changes in foreign exchange rates. The effective tax rate decreased to 25.7% for the three months ended June 30, 2007 from 28.7% for the three months ended June 30, 2006. This decrease in the effective tax rate was primarily attributable to the increase in lower taxed foreign income.

 

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Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

The following table sets forth the results of operations relating to our International segment:

 

    

Six months

ended June 30,

   Increase (decrease) and
percentage change
 

(Amounts in millions)

         2007                 2006                      2007 vs. 2006              

Revenues:

         

Premiums

   $ 1,002     $ 895    $ 107     12 %

Net investment income

     201       138      63     46 %

Net investment gains (losses)

     (5 )     1      (6 )   NM (1)

Insurance and investment product fees and other

     13       21      (8 )   (38 )%
                         

Total revenues

     1,211       1,055      156     15 %
                         

Benefits and expenses:

         

Benefits and other changes in policy reserves

     219       155      64     41 %

Acquisition and operating expenses, net of deferrals

     453       434      19     4 %

Amortization of deferred acquisition costs and intangibles

     173       155      18     12 %

Interest expense

     14       —        14     NM (1)
                         

Total benefits and expenses

     859       744      115     15 %
                         

Income from continuing operations before income taxes

     352       311      41     13 %

Provision for income taxes

     90       90      —       —   %
                         

Net income

     262       221      41     19 %

Adjustment to net income:

         

Net investment (gains) losses, net of taxes and other adjustments

     3       —        3     NM (1)
                         

Net operating income

   $ 265     $ 221    $ 44     20 %
                         

(1)

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

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

 

    

Six months

ended June 30,

   Increase (decrease) and
percentage change
 

(Amounts in millions)

         2007                2006                  2007 vs. 2006          

Net operating income:

           

International mortgage insurance

   $ 201    $ 167    $ 34    20 %

Payment protection insurance

     64      54      10    19 %
                       

Total net operating income

   $ 265    $ 221    $ 44    20 %
                       

Net operating income

 

   

Our international mortgage insurance business increased $34 million and our payment protection insurance business increased $10 million.

 

   

The six months ended June 30, 2007 included increases of $9 million and $5 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

   

The increase in our international mortgage insurance business was driven by growth and seasoning of our insurance in-force in Canada and Australia, as well as a decrease in the effective tax rate. These increases were partially offset by a higher loss ratio in Australia, as well as favorable loss results in the prior year in Canada and higher expenses related to the continued investment in global expansion.

 

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The increase in our payment protection insurance business was primarily associated with growth in production in continental Europe and Ireland and a lower effective tax rate.

Revenues

Premiums

 

   

Our international mortgage insurance business increased $86 million and our payment protection insurance business increased $21 million.

 

   

The six months ended June 30, 2007 included increases of $16 million and $49 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

   

The increase in our international mortgage insurance business was primarily a result of growth and seasoning of our international in-force block.

 

   

Our payment protection insurance business decreased, excluding the effects of foreign exchange, primarily as a result of our runoff block of business and the reinsurance accounting change. Partially offsetting these decreases was an increase driven by business growth in existing and new markets.

Net investment income

 

   

Our international mortgage insurance business increased $32 million and our payment protection insurance business increased $31 million.

 

   

The six months ended June 30, 2007 included increases of $6 million attributable to changes in foreign exchange rates in both our international mortgage insurance and payment protection insurance businesses.

 

   

The increase in our international mortgage insurance business was largely due to an increase in invested assets associated with this business.

 

   

The increase in our payment protection insurance business was principally attributable to income related to growth in business accounted for under the deposit method and the reinsurance accounting change.

Insurance and investment product fees and other. The decrease was primarily due to the elimination of Canadian application fees in our international mortgage insurance business in the third quarter of 2006.

Benefits and expenses

Benefits and other changes in policy reserves

 

   

Our international mortgage insurance business increased $57 million and our payment protection insurance business increased $7 million.

 

   

The six months ended June 30, 2007 included increases of $7 million attributable to changes in foreign exchange rates in both our international mortgage insurance and payment protection insurance businesses.

 

   

The increase in our international mortgage insurance business was primarily a result of seasoning of large blocks of insurance in-force in Canada and Australia, as well as favorable loss results in the prior year in Canada.

 

   

Our payment protection insurance business was flat, excluding the effects of foreign exchange, as a result of a reduction of claim reserves in our runoff block in 2006 that did not recur and an increase in claims due to growth in production that were offset by the effects of the reinsurance accounting change.

 

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Acquisition and operating expenses, net of deferrals

 

   

Our international mortgage insurance business increased $9 million and our payment protection insurance business increased $10 million.

 

   

The six months ended June 30, 2007 included increases of $4 million and $28 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

   

The increase in our international mortgage insurance business was principally driven by our continued investment in our existing international platform and potential new international platforms, partially offset by the elimination of Canadian application fees in the third quarter of 2006.

 

   

Our payment protection insurance business decreased, excluding the effects of foreign exchange, largely attributable to a decrease in commissions on the runoff block of business and from the effects of the reinsurance accounting change.

Amortization of deferred acquisition costs and intangibles

 

   

Our international mortgage insurance business increased $8 million and our payment protection insurance business increased $10 million.

 

   

The six months ended June 30, 2007 included increases of $1 million and $13 million attributable to changes in foreign exchange rates for our international mortgage insurance and payment protection insurance businesses, respectively.

 

   

The increase in our international mortgage insurance business was mainly due to the growth and seasoning of our insurance in-force.

 

   

Our payment protection insurance business decreased, excluding the effects of foreign exchange, primarily from the effects of the reinsurance accounting change.

Interest expense. The increase was primarily due to reciprocal reinsurance transactions, which we accounted for under the deposit method in our payment protection insurance business.

Provision for income taxes. Provision for income taxes remained flat and included a $3 million increase attributable to changes in foreign exchange rates. The effective tax rate decreased to 25.6% for the six months ended June 30, 2007 from 28.9% for the six months ended June 30, 2006. This decrease in the effective tax rate was primarily attributable to the increase in lower taxed foreign income.

 

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International selected financial and operating performance measures

International mortgage insurance

The following tables set forth selected financial and operating performance measures regarding our international mortgage business as of or for the dates indicated:

 

     As of June 30,    Increase (decrease) and
percentage change
 

(Amounts in millions)

         2007                2006                      2007 vs. 2006              

Primary insurance in-force

   $ 414,900    $ 271,600    $ 143,300    53 %

Risk in-force

     131,600      86,600      45,000    52 %

 

   

Three months

ended June 30,

  Increase (decrease) and
percentage change
   

Six months

ended June 30,

  Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007           2006                   2007 vs. 2006                     2007           2006                   2007 vs. 2006              

New insurance written

  $ 44,500   $ 21,700   $ 22,800   105 %   $ 72,700   $ 42,100   $ 30,600   73 %

Net premiums written

    428     244     184   75 %     750     448     302   67 %

Net premiums earned

    195     151     44   29 %     368     282     86   30 %

Primary insurance in-force and risk in-force

Our businesses in Australia, New Zealand and Canada currently provide 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our risk in-force, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Australia, New Zealand and Canada. For the three and six months ended June 30, 2007 and 2006, this factor was 35%.

Primary insurance in-force and risk in-force increased primarily as a result of an increase in new insurance written as we continue to execute our global expansion strategy and expand our market share. Our international mortgage insurance primary insurance in-force and risk in-force included increases of $36.8 billion and $12.1 billion attributable to changes in foreign exchange rates for the period ended June 30, 2007, respectively.

New insurance written

New insurance written increased attributable to growth in flow and bulk new insurance written primarily as a result of continued account penetration in Canada, the ongoing expansion of our customer base in Europe, higher short-term bulk new insurance written in Canada and higher bulk new insurance written in Australia. The three and six months ended June 30, 2007 included increases of $2.9 billion and $3.9 billion attributable to changes in foreign exchange rates, respectively.

Net premiums written and net premiums earned

Net premiums written increased primarily due to increases in new insurance written in our international mortgage insurance business. The three and six months ended June 30, 2007 included increases of $24 million and $31 million attributable to changes in foreign exchange rates, respectively.

Most of our international mortgage insurance policies provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premiums earned over time in accordance with the expected pattern of risk emergence. As of June 30, 2007, our unearned premium reserves increased to $2.9 billion from $2.1 billion as of June 30, 2006.

 

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Net premiums earned increased driven by growth and seasoning of our insurance in-force block. The three and six months ended June 30, 2007 included increases of $12 million and $16 million attributable to changes in foreign exchange rates, respectively.

Loss and expense ratios

 

     Three months
ended June 30,
    Increase (decrease)    

Six months

ended June 30,

    Increase (decrease)  
         2007             2006                     2007 vs. 2006                     2007             2006                     2007 vs. 2006              

Loss ratio

   31 %   17 %   14 %   30 %   19 %   11 %

Expense ratio

   13 %   20 %   (7 )%   15 %   21 %   (6 )%

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

For the three and six months ended June 30, 2007, the increase in the loss ratio was attributable to higher incurred losses as a result of seasoning of large blocks of insurance in-force in Canada and Australia, as well as favorable loss results in the prior year in Canada.

For the three and six months ended June 30, 2007, the decrease in the expense ratio was primarily the result of higher net premiums written largely driven by Canada, partially offset by an increase in costs in our existing international platforms and continued investment in potential platforms.

Payment protection insurance

The following table sets forth selected financial and operating performance measures regarding our payment protection insurance and other related consumer protection insurance products for the periods indicated:

 

    Three months
ended June 30,
  Increase (decrease) and
percentage change
   

Six months

ended June 30,

  Increase (decrease) and
percentage change
 

(Amounts in millions)

      2007           2006               2007 vs. 2006                 2007           2006               2007 vs. 2006          

Payment protection insurance gross written premiums, premium equivalents and deposits

  $ 868   $ 500   $ 368     74 %   $ 1,454   $ 919   $ 535   58 %

Mexico operations gross written premiums

    18     15     3     20 %     37     31     6   19 %

Net earned premiums

    314     322     (8 )   (2 )%     634     613     21   3 %

Gross written premiums, premium equivalents and deposits

The increase in gross written premiums, premium equivalents and deposits, gross of ceded reinsurance and cancellations, for the second quarter of 2007 was largely related to increased sales growth in continental Europe and Ireland and continued market penetration in Poland, Greece and Mexico. The 2007 production reflects several reinsurance assumed arrangements accounted for under the deposit method entered into in the second half of 2006 and the first half of 2007, which cover Canadian and U.K. risks. Additionally, we entered into a significant structured transaction with a lender in the U.K. in the second quarter of 2007 resulting in written premiums of $199 million. The three and six months ended June 30, 2007 included increases of $65 million and $112 million, respectively, attributable to changes in foreign exchange rates.

 

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Net earned premiums

For the three months ended June 30, 2007, net earned premiums for our payment protection insurance business decreased principally attributable to the reinsurance accounting change and our runoff block of business. Partially offsetting these decreases was an increase attributable to growth in continental Europe and Ireland and continued market penetration in Poland, Greece and Mexico. The three months ended June 30, 2007 included an increase of $21 million attributable to changes in foreign exchange rates.

For the six months ended June 30, 2007, our payment protection insurance business decreased $29 million primarily as a result of $28 million related to the reinsurance accounting change and our runoff block of business. Partially offsetting these decreases was business growth in existing continental European markets and new markets. The six months ended June 30, 2007 included an increase of $50 million attributable to changes in foreign exchange rates.

U.S. Mortgage Insurance segment

Segment results of operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

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

 

     Three months
ended June 30,
    Increase (decrease) and
percentage change
 

(Amounts in millions)

         2007                2006                       2007 vs. 2006              

Revenues:

         

Premiums

   $ 148    $ 116     $ 32     28 %

Net investment income

     36      37       (1 )   (3 )%

Net investment gains (losses)

     —        1       (1 )   (100 )%

Insurance and investment product fees and other

     10      8       2     25 %
                         

Total revenues

     194      162       32     20 %
                         

Benefits and expenses:

         

Benefits and other changes in policy reserves

     60      24       36     150 %

Acquisition and operating expenses, net of deferrals

     34      34       —       —   %

Amortization of deferred acquisition costs and intangibles

     8      7       1     14 %
                         

Total benefits and expenses

     102      65       37     57 %
                         

Income from continuing operations before income taxes

     92      97       (5 )   (5 )%

Provision for income taxes

     26      24       2     8 %
                         

Net income

     66      73       (7 )   (10 )%

Adjustment to net income:

         

Net investment (gains) losses, net of taxes and other adjustments

     —        (1 )     1     100 %
                         

Net operating income

   $ 66    $ 72     $ (6 )   (8 )%
                         

Net operating income

Net operating income decreased as a result of an increase in losses and a higher effective tax rate, partially offset by an increase in premiums primarily from the growth of our primary insurance in-force block.

Revenues

Premiums increased primarily driven by an increase in our primary insurance in-force and $3 million of higher premiums assumed from our international mortgage insurance business through our inter-segment reinsurance arrangement.

 

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Benefits and expenses

Benefits and other changes in policy reserves increased due to an increase in the number of delinquencies as a result of growing levels of insurance in-force, a further weakening in home price appreciation and loss development in certain high loan balance states.

Provision for income taxes. The effective tax rate increased to 28.3% for the three months ended June 30, 2007 from 24.7% for the three months ended June 30, 2006. This increase in the effective tax rate was primarily attributable to a decrease in tax-exempt investment income in 2007.

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

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

 

     Six months
ended June 30,
    Increase (decrease) and
percentage change
 

(Amounts in millions)

         2007                2006                       2007 vs. 2006              

Revenues:

         

Premiums

   $ 285    $ 232     $ 53     23 %

Net investment income

     73      72       1     1 %

Net investment gains (losses)

     —        1       (1 )   (100 )%

Insurance and investment product fees and other

     17      13       4     31 %
                         

Total revenues

     375      318       57     18 %
                         

Benefits and expenses:

         

Benefits and other changes in policy reserves

     112      43       69     160 %

Acquisition and operating expenses, net of deferrals

     66      67       (1 )   (1 )%

Amortization of deferred acquisition costs and intangibles

     16      15       1     7 %
                         

Total benefits and expenses

     194      125       69     55 %
                         

Income from continuing operations before income taxes

     181      193       (12 )   (6 )%

Provision for income taxes

     50      48       2     4 %
                         

Net income

     131      145       (14 )   (10 )%

Adjustment to net income:

         

Net investment (gains) losses, net of taxes and other adjustments

     —        (1 )     1