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GENWORTH FINANCIAL INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our consolidated financial condition
and results of operations should be read in conjunction with our audited
consolidated financial statements and related notes included in "Item
8-Financial Statements and Supplementary Data."
Item 7 of our Annual Report on Form 10-K generally discusses year-to-year comparisons between the years endedDecember 31, 2021 and 2020. Other than our "Consolidated Results of Operations-Executive Summary of Consolidated Financial Results" which includes comparative discussions between 2020 and 2019 that have been re-presented to report our former Australian mortgage insurance business as discontinued operations, discussions of information related to 2019 and year-to-year comparisons between 2020 and 2019 are not included in this Form 10-K. Other than the aforementioned section re-presented to reflect our formerAustralia mortgage insurance business reported as discontinued operations, comparative discussions between 2020 and 2019 can be found in "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Overview
Our business
Genworth Financial , through its principal insurance subsidiaries, offers mortgage and long-term care insurance products.Genworth Financial is the parent company of Enact Holdings, a leading provider of private mortgage insurance inthe United States through its mortgage insurance subsidiaries.Genworth Financial's U.S. life insurance subsidiaries offer long-term care insurance and also manage in-force blocks of life insurance and annuity products which are no longer sold. We report our business results through three operating business segments: Enact (formerly known asU.S. Mortgage Insurance );U.S. Life Insurance ; and Runoff. We also have Corporate and Other activities. OurU.S. Life Insurance segment includes long-term care insurance, life insurance and fixed annuity products. The Runoff segment primarily includes variable annuity, variable life insurance and corporate-owned life insurance products, which have not been actively sold since 2011. Our financial information
The financial information in this Annual Report on Form
10-K
has been derived from our consolidated financial statements.
Revenues and expenses
Our revenues consist primarily of the following:
• Premiums.
Premiums consist primarily of premiums earned on insurance products for
mortgage, long-term care and term life insurance.
• Net investment income.
Net investment income represents the income earned on our investments.
For discussion of the change in net investment income, see the comparison
for this line item under "-Investments and Derivative Instruments."
• Net investment gains (losses).
Net investment gains (losses) consist primarily of realized gains and
losses from the sale of our investments, credit losses, unrealized and
realized gains and losses from our equity securities, limited partnership
investments and derivative instruments. For discussion of the change in
net investment gains (losses), see the comparison for this line item
under "-Investments and Derivative Instruments."
• Policy fees and other income.
Policy fees and other income consists primarily of fees assessed against
policyholder and contractholder account values, surrender charges, cost
of insurance assessed on universal and term universal life insurance
policies, advisory and administration service fees assessed
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on investment contractholder account values, broker/dealer commission
revenues, fee revenue from contract underwriting services and other fees.
Our expenses consist primarily of the following:
• 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 long-term care
insurance, life insurance, accident and health insurance, structured
settlements and single premium immediate annuities with life
contingencies, and claim costs incurred related to mortgage insurance
products.
• Interest credited.
Interest credited represents interest credited on behalf of policyholder
and contractholder general account balances.
• Acquisition and operating expenses, net of deferrals.
Acquisition and operating expenses, net of deferrals, represent costs and
expenses related to the acquisition and ongoing maintenance of insurance
and investment contracts, including commissions, policy issuance expenses
and other underwriting and general operating costs. These costs and
expenses are net of amounts that are capitalized and deferred, which are
costs and expenses that are related directly to the successful
acquisition of new or renewal insurance policies and investment
contracts, such as first-year commissions in excess of ultimate renewal
commissions and other policy issuance expenses.
• Amortization of deferred acquisition costs and intangibles.
Amortization of DAC and intangibles consists primarily of the
amortization of acquisition costs that are capitalized, PVFP and
capitalized software.
• Interest expense.
Interest expense represents interest related to our borrowings that are
incurred at
non-recourse
funding obligations, and interest expense related to the Tax Matters
Agreement and certain reinsurance arrangements being accounted for as
deposits.
• Income taxes.
We tax our businesses at the
21%. Each segment is then adjusted to reflect the unique tax attributes
of that segment, such as permanent differences betweenU.S. GAAP and tax law. The difference between the consolidated provision for income taxes and the sum of the provision for income taxes in each segment is reflected in Corporate and Other activities.
The effective tax rates disclosed herein are calculated using rounded numbers.
As a result, the percentages shown may differ from an effective tax rate
calculated using whole numbers.
We allocate corporate expenses to each of our operating segments using various
methodologies, including based on the amount of capital allocated to each
operating segment.
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Consolidated Results of Operations
The following table sets forth the consolidated results of operations for the
periods indicated:
Increase (decrease) and
Years ended December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Revenues:
Premiums %
$ 3,435 $ 3,836 $ 3,725 $ (401 ) (10 )% $ 111 3
Net investment income % %
3,370 3,227 3,164 143 4 63 2
Net investment gains (losses) (1)
323 492 27 (169 ) (34 )% 465 NM
Policy fees and other income 704 729 789 (25 ) (3 )% (60 ) (8 )%
Total revenues %
7,832 8,284 7,705 (452 ) (5 )% 579 8
Benefits and expenses:
Benefits and other changes in policy %
reserves 4,383 5,214 5,059 (831 ) (16 )% 155 3
Interest credited 508 549 577 (41 ) (7 )% (28 ) (5 )%
Acquisition and operating expenses, %
net of deferrals 1,223 935 909 288 31 % 26 3
Amortization of deferred acquisition %
costs and intangibles
377 463 408 (86 ) (19 )% 55 13
Interest expense 160 195 231 (35 ) (18 )% (36 ) (16 )%
Total benefits and expenses %
6,651 7,356 7,184 (705 ) (10 )% 172 2
Income from continuing operations
before income taxes 1,181 928 521 253 27 % 407 78 %
Provision for income taxes 263 230 139 33 14 % 91 65 %
Income from continuing operations 918 698 382 220 32 % 316 83 %
Income (loss) from discontinued (1)
operations, net of taxes 27 (486 ) 148 513 106 % (634 ) NM
Net income (1)
945 212 530 733 NM (318 ) (60 )%
Less: net income from continuing
operations attributable to (1)
noncontrolling interests 33 - - 33 NM - - %
Less: net income from discontinued
operations attributable to
noncontrolling interests 8 34 187
(26 ) (76 )% (153 ) (82 )%
Net income available to Genworth Financial, Inc.'s common (1) stockholders$ 904 $ 178 $ 343 $ 726 NM$ (165 ) (48 )% Net income available toGenworth Financial, Inc.'s common stockholders: Income from continuing operations available to Genworth Financial, Inc.'s common stockholders$ 885 $ 698 $ 382 $ 187 27 %$ 316 83 % Income (loss) from discontinued operations available to Genworth Financial, Inc.'s common (1) stockholders 19 (520 ) (39 ) 539 104 % (481 ) NM Net income available to Genworth Financial, Inc.'s common (1) stockholders$ 904 $ 178 $ 343 $ 726 NM$ (165 ) (48 )%
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Unless otherwise stated, all references to net income (loss), net income (loss)
per share, adjusted operating income (loss) and adjusted operating income (loss)
per share found in "Item 7-Management's Discussion and
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Analysis of Financial Condition and Results of Operations" should be read as net income (loss) available toGenworth Financial, Inc.'s common stockholders, net income (loss) available toGenworth Financial, Inc.'s common stockholders per share, adjusted operating income (loss) available toGenworth Financial, Inc.'s common stockholders and adjusted operating income (loss) available toGenworth Financial, Inc.'s common stockholders per share, respectively. Use of non-GAAP measures
Reconciliation of net income (loss) to adjusted operating income (loss)
We use non-GAAP financial measures entitled "adjusted operating income (loss)" and "adjusted operating income (loss) per share." Adjusted operating income (loss) per share is derived from adjusted operating income (loss). Our chief operating decision maker evaluates segment performance and allocates resources on the basis of adjusted operating income (loss). We define adjusted operating income (loss) as income (loss) from continuing operations excluding the after-tax effects of income (loss) from continuing operations attributable to noncontrolling interests, net investment gains (losses), gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, initial gains (losses) on insurance block transactions, restructuring costs and infrequent or unusual non-operating items. Initial gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment of non-recourse funding obligations, early termination fees for other financing restructuring and/or initial gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of estimated future credit losses, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, initial gains (losses) on insurance block transactions and restructuring costs are also excluded from adjusted operating income (loss) because, in our opinion, they are not indicative of overall operating trends. Infrequent or unusual non-operating items are also excluded from adjusted operating income (loss) if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income (loss) in accordance withU.S. GAAP, we believe that adjusted operating income (loss), and measures that are derived from or incorporate adjusted operating income (loss), including adjusted operating income (loss) per share on a basic and diluted basis, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses adjusted operating income (loss) as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from adjusted operating income (loss) have occurred in the past and could, and in some cases will, recur in the future. Adjusted operating income (loss) and adjusted operating income (loss) per share on a basic and diluted basis are not substitutes for net income (loss) or net income (loss) per share on a basic and diluted basis determined in accordance withU.S. GAAP. In addition, our definition of adjusted operating income (loss) may differ from the definitions used by other companies. Adjustments to reconcile net income (loss) to adjusted operating income (loss) assume a 21% tax rate and are net of the portion attributable to noncontrolling interests. Net investment gains (losses) are also adjusted for DAC and other intangible amortization and certain benefit reserves. 88
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The following table presents a reconciliation of net income to adjusted
operating income for the years ended
(Amounts in millions) 2021
2020 2019
Net income available to
common stockholders
$ 904 $ 178 $ 343 Add: net income from continuing operations attributable to noncontrolling interests 33 - - Add: net income from discontinued operations attributable to noncontrolling interests 8
34 187
Net income 945
212 530
Less: income (loss) from discontinued operations, net
of taxes
27
(486 ) 148
Income from continuing operations 918 698 382 Less: net income from continuing operations attributable to noncontrolling interests 33 - - Income from continuing operations available to Genworth Financial, Inc.'s common stockholders 885 698 382 Adjustments to income from continuing operations available toGenworth Financial, Inc.'s common stockholders: Net investment (gains) losses, net (1) (324 ) (503 ) (38 ) (Gains) losses on early extinguishment of debt 45 9 - Initial loss from life block transaction 92 - - Expenses related to restructuring 34 3 4 Taxes on adjustments 33 103 7 Adjusted operating income available to Genworth Financial, Inc.'s common stockholders$ 765 $ 310 $ 355
(1) For the years ended
losses were adjusted for DAC and other intangible amortization and certain
benefit reserves of
respectively. In 2021, we paid a pre-tax make-whole premium of$6 million and$20 million related to the early redemption ofGenworth Holdings' senior notes originally scheduled to mature inSeptember 2021 andAugust 2023 , respectively. We also repurchased$146 million principal amount ofGenworth Holdings' senior notes with 2021 maturity dates for a pre-tax loss of$4 million and repurchased$91 million and$118 million principal amount ofGenworth Holdings' senior notes due in 2023 and 2024, respectively, for a pre-tax loss of$15 million . During 2020, we repurchased$84 million principal amount ofGenworth Holdings' senior notes with 2021 maturity dates for a pre-tax gain of$4 million . InJanuary 2020 , we paid a pre-tax make-whole expense of$9 million related to the early redemption ofGenworth Holdings' senior notes originally scheduled to mature inJune 2020 and Rivermont Life Insurance Company I ("Rivermont I"), our indirect wholly-owned special purpose consolidated captive insurance subsidiary, early redeemed all of its$315 million outstanding non-recourse funding obligations originally due in 2050 resulting in a pre-tax loss of$4 million from the write-off of deferred borrowing costs. These transactions were excluded from adjusted operating income as they relate to gains (losses) on the early extinguishment of debt. In the fourth quarter of 2021, we recorded a pre-tax loss of$92 million as a result of ceding certain term life insurance policies as part of a life block transaction. In 2021, 2020 and 2019, we recorded a pre-tax expense of$34 million ,$3 million and$4 million , respectively, related to restructuring costs as we continue to evaluate and appropriately size our organizational 89
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needs and expenses. There were no infrequent or unusual items excluded from
adjusted operating income during the periods presented.
Earnings per share
The following table provides basic and diluted earnings per common share for the years endedDecember 31 : Increase (decrease) and percentage change
(Amounts in millions, except per share amounts) 2021 2020
2019 2021 vs. 2020 2020 vs. 2019 Income from continuing operations available toGenworth Financial, Inc.'s common stockholders per share: Basic$ 1.75 $ 1.38 $ 0.76 $ 0.37 27 %$ 0.62 82 % Diluted$ 1.72 $ 1.36 $ 0.75 $ 0.36 26 %$ 0.61 81 % Net income available toGenworth Financial, Inc.'s common stockholders per share: Basic (1)$ 1.78 $ 0.35 $ 0.68 $ 1.43 NM$ (0.33 ) (49 )% Diluted (1)$ 1.76 $ 0.35 $ 0.67 $ 1.41 NM$ (0.32 ) (48 )% Adjusted operating income available toGenworth Financial, Inc.'s common stockholders per share: Basic$ 1.51 $ 0.61 $ 0.71 $ 0.90 147 %$ (0.10 ) (14 )% Diluted$ 1.48 $ 0.61 $ 0.70 $ 0.87 143 %$ (0.09 ) (13 )% Weighted-average common shares outstanding: Basic 506.9 505.2 502.9 Diluted 514.7 511.6 509.7
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Diluted weighted-average shares outstanding reflect the effects of potentially
dilutive securities including stock options, restricted stock units and other
equity-based compensation.
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The following table presents a summary of adjusted operating income (loss) for
our segments and Corporate and Other activities for the years ended
Increase (decrease) and
percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Adjusted operating income (loss)
available to Genworth
Financial, Inc.'s common stockholders:
Enact segment $ 520 $ 381 $ 568 $ 139 36 % $ (187 ) (33 )%
U.S. Life Insurance segment:
Long-term care insurance (1)
445 237 57 208 88 % 180 NM
Life insurance (269 ) (247 ) (181 ) (22 ) (9 )% (66 ) (36 )%
Fixed annuities 91 78 69 13 17 % 9 13 %
U.S. Life Insurance segment (1) (1)
267 68 (55 ) 199 NM 123 NM
Runoff segment 54 43 56 11 26 % (13 ) (23 )%
Corporate and Other activities (76 ) (182 ) (214 )
106 58 % 32 15 %
Adjusted operating income available toGenworth Financial, Inc.'s common stockholders$ 765 $ 310 $ 355 $ 455 147 %$ (45 ) (13 )%
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
Executive Summary of Consolidated Financial Results
Below is an executive summary of our consolidated financial results for the
periods indicated. Amounts included within this "Executive Summary of
Consolidated Financial Results" are net of taxes, unless otherwise indicated.
For a discussion of selected financial information and detailed descriptions of
operating performance measures see "-Results of Operations and Selected
Financial and Operating Performance Measures by Segment."
2021 compared to 2020
• Net income for the years ended
income was
drove our
the year ended
reported adjusted operating income of
by favorable long-term care insurance operating results, which reported
adjusted operating income of
2021, an increase of 88% compared to the year ended
These improvements were partially offset by an adjusted operating loss of
comparison of adjusted operating income (loss) for our segments and
Corporate and Other activities:
• Our Enact segment had adjusted operating income of
$381 million in 2021 and 2020, respectively.
• The increase was primarily attributable to lower losses mainly
from lower new delinquencies and net favorable reserve adjustments
of $17 million in 2021 compared to unfavorable reserve adjustments
of $51 million in 2020.
• These improvements were partially offset by higher interest
expense associated with Enact Holdings' senior notes issued in
August 2020 , an increase in operating costs and the minority
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IPO of Enact Holdings that closed in September 2021 , which reduced
Genworth Financial's ownership percentage to 81.6% and resulted in
lower net income of $33 million in 2021.
• Our U.S. Life Insurance segment had adjusted operating income of
$267 million and $68 million in 2021 and 2020, respectively.
• Long-term care insurance:
• Adjusted operating income increased $208 million primarily from
higher net investment income, as well as higher premiums and
reduced benefits of $212 million in 2021 from
in-force
rate actions approved and implemented, which included a net
favorable impact from policyholder benefit reduction elections
made as part of a legal settlement.
• The increase was also attributable to favorable development on
incurred but not reported ("IBNR") claims.
• The year ended December 31, 2020 included higher claim reserves
of $157 million associated with changes to incidence and
mortality experience driven by
COVID-19,
which we believe are temporary.
• Life insurance:
• The adjusted operating loss increased $22 million mainly
attributable to an unfavorable unlocking of $70 million in our
universal and term universal life insurance products as part of
our annual review of assumptions in the fourth quarter of 2021
compared to a favorable unlocking of $60 million in 2020 (see
"-Critical Accounting Estimates" for additional information).
• The higher loss was also attributable to higher mortality in
2021 compared to 2020 and higher DAC impairments of $42 million
in 2021 in our universal and term universal life insurance
products principally due to lower future estimated gross
profits.
• The higher loss was partially offset by lower lapses primarily
associated with our large
20-year
term life insurance block written at the end of 2000 as it
entered its post-level premium period.
• Fixed annuities:
• Adjusted operating income increased $13 million mainly
attributable to lower reserves and DAC amortization in our
fixed indexed annuities driven by favorable changes in interest
rates and equity markets.
• These improvements were partially offset by lower net spreads in 2021.
• Our Runoff segment had adjusted operating income of
$43 million in 2021 and 2020, respectively. • The increase was primarily due to favorable equity
market and
interest rate performance in 2021.
• These improvements were partially offset by lower investment income in 2021.
• The year ended December 31, 2020 included an unfavorable
assumption update of $5 million .
• Corporate and Other activities had an adjusted operating loss of
$76 million and $182 million in 2021 and 2020, respectively.
• The decrease in the loss was primarily related to lower interest
expense, higher tax benefits of $21 million from a reduction in
uncertain tax positions due to the expiration of certain statute
of limitations and lower operating costs in 2021.
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2020 compared to 2019
• Net income for the years ended
income was
Insurance segment reported adjusted operating income of
2020 driven mostly by favorable long-term care insurance operating
results, which reported adjusted operating income of
year ended
year ended
adjusted operating loss of
and lower adjusted operating income of
in 2020 compared to 2019. The following is a summary comparison of
adjusted operating income (loss) for our segments and Corporate and Other
activities:
• Our Enact segment had adjusted operating income of
$568 million in 2020 and 2019, respectively.
• The decrease was primarily attributable to higher losses largely
from new delinquencies driven in large part by a significant
increase in borrower forbearance as a result of
COVID-19,
reserve strengthening of $51 million on existing
delinquencies and
from lower net benefits from cures and aging of existing
delinquencies in 2020.
• These decreases were partially offset by higher premiums largely
driven by higher insurance
in-force
and an increase in single premium policy cancellations primarily
due to higher mortgage refinancing in 2020.
• The year ended December 31, 2019 included favorable reserve
adjustments of $18 million mostly associated with lower expected
claim rates and a favorable adjustment of $11 million related to
our single premium earnings pattern review.
• Our U.S. Life Insurance segment had adjusted operating income of
$68 million in 2020 compared to an adjusted operating loss of
$55 million in 2019.
• Long-term care insurance:
• Adjusted operating income increased $180 million primarily from
an increase in claim terminations driven mostly by higher
mortality, as well as favorable development on IBNR claims and
higher investment income in 2020.
• We also increased reserves by $157 million in 2020 to account
for changes to incidence and mortality experience driven by
COVID-19.
• Life insurance:
• The adjusted operating loss increased $66 million predominantly
attributable to higher reserves in our
10-year
term universal life insurance block as it entered its
post-level premium period during the premium grace period,
higher mortality in 2020 compared to 2019, higher lapses
primarily associated with our large
20-year
term life insurance block as it entered its post-level premium
period and a DAC impairment of $50 million in 2020.
• The higher loss was partially offset by a favorable unlocking
of $60 million in our term universal and universal life
insurance products as part of our annual review of assumptions
in the fourth quarter of 2020 compared to unfavorable unlocking
of $107 million in 2019 (see "-Critical Accounting Estimates"
for additional information).
• Fixed annuities:
• Adjusted operating income increased $9 million predominantly
from $39 million of unfavorable charges related to loss
recognition testing in 2019 that did not recur (see
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"-Critical Accounting Estimates-Future policy benefits" for
additional information) and lower interest credited due to
block runoff.
• These improvements were partially offset by lower net spreads in 2020.
• Our Runoff segment had adjusted operating income of
$56 million in 2020 and 2019, respectively. • The decrease was predominantly due to less favorable
equity market
performance, an unfavorable assumption update of $5
million and a
decline in interest rates in 2020.
• These decreases were partially offset by higher net spreads in 2020.
• Corporate and Other activities had an adjusted operating loss of
$182 million and $214 million in 2020 and 2019, respectively.
• The decrease in the loss was primarily related to lower interest
expense in 2020.
• This improvement was partially offset by lower income tax benefits in 2020.
Significant Developments and Strategic Highlights
The periods under review include, among others, the following significant
developments and steps taken in the execution of our strategic priorities.
Enact • PMIERs compliance:
• Enact's PMIERs sufficiency ratio was 165% or
published PMIERs requirements as ofDecember 31, 2021 .
• As of
$5,077 million against $3,074 million net required assets
under PMIERs
compared to available assets of $4,588 million against $3,359
million
net required assets as of December 31, 2020 (PMIERs
sufficiency is
based on the published requirements applicable to private
mortgage
insurers and does not give effect to the GSE restrictions
imposed on
Enact Holdings).
• The increase in the PMIERs sufficiency was driven by a higher volume
of credit risk transfer transactions, elevated lapse driven by
prevailing low interest rates, business cash flows and lower
delinquencies, partially offset by elevated new insurance written.
• As ofDecember 31, 2021 and 2020, Enact's PMIERs required
assets
benefited by $390 million and $1,046 million , respectively, from the
application of a 0.30 multiplier applied to the risk-based required
asset amount factor for certain
non-performing
loans.
For additional information related to PMIERs, see "Item
1-Business-Regulation-Enact-Mortgage Insurance Regulation-Other
and Agency Qualification Requirements."
• Dividends:
• Enact Holdings paid a dividend of
the fourth quarter of 2021.
• Enact Holdings intends to develop a formal dividend policy and
initiate a regular common dividend during 2022.
• Enact Holdings' dividend policy is a critical piece in determining
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• Cumulative economic benefit from
in-force
rate actions:
• During 2021, we continued to make strong progress on our long-term
care insurance
in-force
rate action plan.
• We estimate that the cumulative economic benefit of our long-term care
insurance multi-year
in-force
rate action plan through 2021 was approximately $19.6 billion , on a
net present value basis, of the total expected amount required of
$28.7 billion .
• Completion of annual long-term care insurance assumption review:
• In the fourth quarter of 2021, we completed a review of our
assumptions and methodologies of our claim reserves and future policy
benefits for our long-term care insurance business and
completed loss
recognition testing.
• We made no changes to our existing claim reserves, as experience in
the aggregate was in line with expectations.
• The 2021 U.S. GAAP margins for our long-term care insurance business
remained within the range of approximately $0.5 billion to
$1.0 billion .
• Completion of annual life insurance assumption review:
• We also completed a review of our assumptions and methodologies of our
life insurances business and completed loss recognition
testing in the
fourth quarter of 2021.
• The loss recognition testing margin for our term life insurance
products remained positive in 2021.
• As part of our review in the fourth quarter of 2021, we recorded a
$70 million
after-tax
expense to net income in our universal and term universal life
insurance products primarily related to higher
pre-COVID-19
mortality experience.
For additional information see "-Critical Accounting Estimates."
• Completion of a life block transaction:
• In the fourth quarter of 2021, we recorded an
after-tax
loss of $73 million as a result of ceding certain term life insurance
policies as part of a life block transaction.
• This transaction generated statutory capital in excess of
approximately $170 million for our U.S. life insurance
subsidiaries.
Liquidity and Capital Resources
• Execution of strategic plan to reduce debt maturities:
• We continue to focus on deleveraging with a goal of reducing debt at
Genworth Holdings , the issuer of our outstanding public debt, to
approximately $1.0 billion over time.
• During 2021, Genworth Holdings repaid approximately $2.1 billion of
debt and other obligations, including the repayment of the AXA
promissory note.
• As of December 31, 2021 , Genworth Holdings had outstanding
$1.2 billion of long-term debt, with no debt maturities until
February 2024 .
• During the year ended
Genworth Holdings redeemed and repurchased the following:
• Redemption and repurchase of Genworth Holdings' August 2023 senior
notes.
On December 15, 2021 , Genworth Holdings early redeemed its
remaining 4.90% senior notes
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originally scheduled to mature in August 2023 . The senior notes
were fully redeemed with a cash payment of $334 million , including
accrued interest and a make-whole premium. During the fourth
quarter of 2021 and prior to the early redemption, Genworth
Holdings repurchased $91 million of its August 2023 senior notes
for a
pre-tax
loss of $9 million .
• Repurchase of Genworth Holdings' February 2024 senior notes.
In the fourth quarter of 2021, Genworth Holdings repurchased
$118 million principal amount of its 4.80% senior notes due in
February 2024 for a
pre-tax
loss of $6 million . During the first quarter of 2022 and as of
February 18, 2022 , Genworth Holdings repurchased $33 million
principal amount of its 4.80% senior notes due in February 2024 .
• Redemption and repurchase of Genworth Holdings' September 2021
senior notes.
On July 21, 2021 , Genworth Holdings early redeemed its remaining
7.625% senior notes originally scheduled to mature in September
2021 . The senior notes were fully redeemed with a cash payment of
$532 million , including accrued interest and a make-whole premium.
During the first half of 2021 and prior to the early redemption,
Genworth Holdings repurchased $146 million principal amount of its
September 2021 senior notes for a
pre-tax
loss of $4 million .
• Redemption of Genworth Holdings' February 2021 senior notes.
On February 16, 2021 , Genworth Holdings redeemed its 7.20% senior
notes with a cash payment of $350 million , comprised of the
outstanding principal balance and accrued interest.
See note 12 in our consolidated financial statements under "Item 8-Financial
Statements and Supplementary Data" for additional information on our long-term
borrowings.
• Repayment of the AXA promissory note.
In connection with the Genworth Australia sale, Genworth Holdings
made a mandatory principal payment to AXA of approximately
£176 million ($245 million ) in March 2021 . The mandatory payment
fully repaid the first installment obligation originally due to
AXA in June 2022 and partially prepaid the September 2022
installment payment. On September 21, 2021 , Genworth Holdings used
a portion of the net proceeds from the minority IPO of Enact
Holdings to repay the remaining outstanding balance of the secured
promissory note of approximately £215 million ($296 million ). In
addition, in February 2022 , Genworth Holdings paid AXA the
majority of the remaining unprocessed claims of approximately
$30 million .
See note 23 in our consolidated financial statements under "Item 8-Financial
Statements and Supplementary Data" for additional information.
Completion of Enact Holdings IPO and Dispositions
• Completion of minority IPO of Enact Holdings:
• On
and received net proceeds of approximately$529 million . • Following the completion of the minority IPO,Genworth Financial beneficially owns through its subsidiaries approximately 81.6% of the common shares of Enact Holdings.
See note 22 in our consolidated financial statements under "Item 8-Financial
Statements and Supplementary Data" for additional information.
• Sale of our Australian mortgage insurance business:
• On March 3, 2021 , we completed the sale of our entire ownership
interest of approximately 52% in Genworth Australia through an
underwriting agreement.
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• We sold our approximately 214.3 million shares of Genworth Australia
for AUD2.28 per share and received approximately AUD483
million (
million) in net cash proceeds.
See note 23 in our consolidated financial statements under "Item 8-Financial
Statements and Supplementary Data" for additional information.
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 adjusted operating income (loss).
Management's discussion and analysis by segment contains selected operating performance measures including "sales" and "insurance in-force" or "risk in-force" which are commonly used in the insurance industry as measures of operating performance. Management regularly monitors and reports sales metrics as a measure of volume of new business generated in a period. Sales refer to new insurance written for mortgage insurance products included in our Enact segment. We consider new insurance written to be a measure of our Enact segment's operating performance because it represents a measure of new sales of insurance policies during a specified period, rather than a measure of revenues or profitability during that period. Management regularly monitors and reports insurance in-force and risk in-force for our Enact segment. Insurance in-force is a measure of the aggregate unpaid principal balance as of the respective reporting date for loans insured by ourU.S. mortgage insurance subsidiaries. Risk in-force is based on the coverage percentage applied to the estimated current outstanding loan balance. We consider insurance in-force and risk in-force to be measures of our Enact segment's operating performance because they represent measures of the size of its business at a specific date which will generate revenues and profits in a future period, rather than measures of its revenues or profitability during that period. Management regularly monitors and reports a loss ratio for our businesses. For ourU.S. mortgage insurance businesses included in our Enact segment, the loss ratio is the ratio of benefits and other changes in policy reserves to net earned premiums. For our long-term care insurance business included in ourU.S. Life Insurance segment, the loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums. We consider the loss ratio to be a measure of underwriting performance in these businesses and helps to enhance the understanding of the operating performance of our businesses. Management also regularly monitors and reports adjusted operating income available toGenworth Financial, Inc.'s common stockholders attributable to in-force rate actions in the long-term care insurance business included in ourU.S. Life Insurance segment. In-force rate actions include premium rate increases and associated benefit reductions implemented since 2012, which are presented net of estimated premium taxes, commissions, and other expenses on an after-tax basis. Estimates for in-force rate actions reflect certain simplifying assumptions that may vary materially from actual historical results, including but not limited to, a uniform rate of coinsurance and premium taxes in addition to consistent policyholder behavior over time. Actual policyholder behavior may differ significantly from these assumptions. In addition, estimates exclude reserve updates resulting from profits followed by losses. Management considers adjusted operating income attributable to in-force rate actions to be a measure of its operating performance because it helps bring older generation long-term care insurance blocks closer to a break-even point over time and helps bring the loss ratios on newer long-term care insurance blocks back towards their original pricing.
These operating performance measures enable us to compare our operating
performance across periods without regard to revenues or profitability related
to policies or contracts sold in prior periods or from investments or other
sources.
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Table of Contents Enact segment Trends and conditions Results of our Enact segment are affected primarily by the following factors: competitor actions; unemployment or underemployment levels; other economic and housing market trends, including interest rates, home prices, the number of first-time homebuyers, and mortgage origination volume mix and practices; the levels and aging of mortgage delinquencies; the effect of seasonal variations; the inventory of unsold homes; loan modification and other servicing efforts; and litigation, among other items. References to "Enact" included herein "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations-Enact segment" are, unless the context otherwise requires, to our Enact segment.The United States economy and consumer confidence continued to improve during 2021 from the adverse economic impacts caused by COVID-19. The unemployment rate continued to decrease compared to the beginning of the pandemic and was 3.9% inDecember 2021 . While this unemployment rate is slightly higher compared to the pre-pandemic level of 3.5% inFebruary 2020 , it is markedly lower than the peak of 14.8% inApril 2020 . Even after the continued recovery in 2021, the number of unemployed Americans stands at approximately six million, less than one million higher than inFebruary 2020 . Among the unemployed, those on temporary layoff continued to decrease to less than one million from a peak of 18 million inApril 2020 and the number of permanent job losses decreased to approximately two million. In addition, the number of long term unemployed over 26 weeks has continued to decrease sinceMarch 2021 , falling to approximately two million inDecember 2021 . Mortgage origination activity remained robust, fueled by strong home sales and refinancing, and home prices continued to climb, increasing Enact's average loan amount on new insurance written to$305,000 in 2021 from$276,000 in 2020. Interest rates remained low throughout 2021 but ended the year slightly higher than in 2020. Housing affordability declined as ofNovember 2021 compared toNovember 2020 due to rising home prices, modestly offset by the low interest rate environment and an increase in median family income according to theNational Association of Realtors Housing Affordability Index . Although median family income increased in 2021, it remains below a level that could afford a current median-priced home. InJanuary 2022 , the FHFA introduced new upfront fees charged to borrowers for some high balance and second home loans sold to Fannie Mae and Freddie Mac. Upfront fees for high balance loans will increase between 0.25% and 0.75%, tiered by loan-to-value ratio. For second home loans, the upfront fees will increase between 1.125% and 3.875%, also tiered by loan-to-value ratio. The new pricing framework will take effectApril 1, 2022 . Enact does not anticipate this will significantly impact the private mortgage insurance market or its results of operations, including future growth. The CARES Act requires mortgage servicers to provide up to 180 days of forbearance for borrowers with a federally backed mortgage loan who assert they have experienced a financial hardship related to COVID-19. Forbearance may be extended for an additional 180 days up to a year in total or shortened at the request of the borrower. In addition, onFebruary 25, 2021 , the FHFA announced that borrowers with a mortgage backed by the GSEs who are in an active COVID-19 forbearance plan as ofFebruary 28, 2021 may request up to two additional forbearance extensions for a maximum of 18 months of total forbearance relief. The CARES Act also provides that furnishers of credit reporting information, including servicers, should continue to report a loan as current to credit reporting agencies if the loan is subject to a payment accommodation, such as forbearance, so long as the borrower abides by the terms of the accommodation. Servicer reported forbearance slowed meaningfully beginning inJune 2020 and endedDecember 2021 with approximately 2% or 21,899 of Enact's active primary policies reported in a forbearance plan, of which approximately 47% were reported as delinquent. It is difficult to predict the future level of reported forbearance and how many of the policies in a forbearance plan that remain current on their monthly mortgage payment will go delinquent.
The foreclosure moratorium for mortgages that are purchased by the GSEs expired
on
amend Regulation X of RESPA, which was aimed at
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assisting mortgage borrowers affected by the COVID-19 emergency. The final rule established temporary procedural changes that require a loss mitigation review prior to a servicer's first notice or foreclosure filing on certain mortgages. OnJune 29, 2021 , the FHFA announced that servicers were immediately prohibited from making a first notice or foreclosure filing for mortgages backed by the GSEs before they were formally prohibited by theCFPB Regulation X Final Rule that took effect onAugust 31, 2021 . These announcements generally prohibited servicers from starting foreclosures on mortgages purchased by the GSEs until afterDecember 31, 2021 . The pandemic continued to affect Enact's financial results in 2021 but to a lesser extent than in 2020 as servicer reported forbearance remained elevated but declined compared to 2020. New delinquencies decreased during 2021 compared to 2020 and the annual 2021 new delinquency rate of 3.5% was consistent with Enact's pre-pandemic levels. Despite continued economic recovery during 2021, the full impact of COVID-19 and its adverse economic effects on Enact's future business results are difficult to predict. Given the maximum length of forbearance plans, the resolution of a delinquency in a plan may not be known for several quarters. While Enact continues to monitor regulatory and government actions and the resolution of forbearance delinquencies, it is possible the pandemic could have a significant adverse impact on its future results of operations and financial condition. Market penetration and eventual market size are affected in part by actions that impact housing or housing finance policy taken by the GSEs and theU.S. government, including but not limited to, the FHA and the FHFA. In the past, these actions have included announced changes, or potential changes, to underwriting standards, including changes to the GSEs' automated underwriting systems, FHA pricing, GSE guaranty fees, loan limits and alternative products. OnDecember 17, 2020 , the FHFA published the Enterprise Capital Framework, which includes significantly higher regulatory capital requirements for the GSEs over current requirements. However, onSeptember 15, 2021 , the FHFA announced a Notice of Proposed Rulemaking to amend the Enterprise Capital Framework, including technical corrections to provisions that were published onDecember 17, 2020 . Higher GSE capital requirements could ultimately lead to increased costs to borrowers of GSE loans, which in turn could shift the market away from the GSEs to the FHA or lender portfolios. Such a shift could result in a smaller market for private mortgage insurance. In conjunction with preparing to release the GSEs from conservatorship, onJanuary 14, 2021 , the FHFA and theTreasury Department agreed to amend the PSPAs between theTreasury Department and each of the GSEs to increase the amount of capital each GSE may retain. Among other things, the amendments to the PSPAs limit the number of certain mortgages the GSEs may acquire with two or more prescribed risk factors, including certain mortgages with combined loan-to-value ratios above 90%. However, onSeptember 14, 2021 , theFHFA and Treasury Department suspended certain provisions of the amendments to the PSPAs, including the limit on the number of mortgages with two or more risk factors that the GSEs may acquire. Such suspensions terminate on the later of one year afterSeptember 14, 2021 or six months after theTreasury Department notifies the GSEs of termination. The limit on the number of mortgages with two or more risk factors was based on the market size at the time, and Enact does not expect any material impact to the private mortgage market in the near term. TheCFPB's QM regulations also include the QM Patch for mortgages that comply with certain prohibitions and limitations and meet the GSE underwriting and product guidelines. Mortgages that meet certain requirements are deemed to be QMs until the earlier of the time in which the GSEs exit the FHFA conservatorship or the mandatory compliance date of the final amendments to the QM Rule. OnApril 27, 2021 , theCFPB promulgated a final rule delaying the mandatory compliance date of the amended QM Rule untilOctober 1, 2022 . As provided under the final rule, the prior 43% debt-to-income-based QM Rule definition, the new price-based APOR definition and the QM Patch will all remain available to lenders for loan applications received prior toOctober 1, 2022 . However, onApril 8, 2021 , the GSEs issued notices stating that due to the requirements of the PSPAs they would only acquire loans that meet the new price-based APOR definition set forth under the amended QM Rule for applications received on or afterJuly 1, 2021 . Enact believes that loans which previously qualified under the 43% debt-to-income-based QM Rule definition and the QM Patch will continue to qualify under the new price-based APOR definition and therefore expects little impact from this change. For more information on this 99
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regulation, see "Item 1-Business-Regulation-Enact-Mortgage Insurance Regulation." For more information about the potential future impact, see "Item 1A-Risk Factors-Changes to the role of the GSEs or to the charters or business practices of the GSEs, including actions or decisions to decrease or discontinue the use of mortgage insurance, could adversely affect our business, financial condition and results of operations," and "-Risk Factors-The amount of mortgage insurance written by Enact Holdings could decline significantly if alternatives to private mortgage insurance are used or lower coverage levels of mortgage insurance are selected."
New insurance written of
primarily due to a smaller estimated private mortgage insurance market. The
decrease in the estimated private mortgage insurance available market was
primarily driven by lower refinance originations.
Enact's primary persistency increased to 62% for the year endedDecember 31, 2021 compared to 59% for the year endedDecember 31, 2020 but remained below its historic levels of approximately 80%. The increase in persistency was primarily driven by a decline in the percentage of in-force policies with mortgage rates above current interest rates. Low persistency has impacted business performance trends in several ways including, but not limited to, offsetting insurance in-force growth from new insurance written, accelerating the recognition of earned premiums due to single premium policy cancellations, accelerating the amortization of existing reinsurance transactions reducing their associated PMIERs capital credit and shifting the concentration of Enact's primary insurance in-force to more recent years of policy origination. As ofDecember 31, 2021 , Enact's primary insurance in-force has approximately 5% concentration in 2014 and prior book years. More specifically, its 2005 through 2008 book year concentration is approximately 3%. In contrast, Enact's 2020 book year represents 31% of its primary insurance in-force concentration, while its 2021 book year is 40% as ofDecember 31, 2021 . TheU.S. private mortgage insurance industry is highly competitive. Enact Holdings' market share is influenced by the execution of its go to market strategy, including but not limited to, pricing competitiveness relative to its peers and its selective participation in forward commitment transactions. Enact continues to manage the quality of new business through pricing and its underwriting guidelines, which are modified from time to time when circumstances warrant. The market and underwriting conditions, including the mortgage insurance pricing environment, are within Enact's risk adjusted return appetite enabling it to write new business at returns it views as attractive. Net earned premiums increased in 2021 compared to 2020 primarily from insurance in-force growth, partially offset by the continued lapse of older higher priced policies, a decrease in single premium policy cancellations and higher ceded premiums due to a higher volume of credit risk transfer transactions in 2021. The total number of delinquent loans has declined from the COVID-19 peak in the second quarter of 2020 but remains elevated compared to pre-COVID-19 levels. During this time and consistent with prior years, servicers continued the practice of remitting premiums during the early stages of default. Additionally, Enact has a business practice of refunding the post-delinquent premiums to the insured party if the delinquent loan goes to claim. Enact records a liability and a reduction to net earned premiums for the post-delinquent premiums it expects to refund. The post-delinquent premium liability recorded since the beginning of COVID-19 in the second quarter of 2020 through 2021 was not significant to the change in earned premiums for those periods as a result of the high concentration of new delinquencies being subject to a servicer reported forbearance plan and the lower estimated claim rate for these loans. As a result of COVID-19, certain state insurance regulators required or requested the provision of grace periods of varying lengths to insureds in the event of non-payment of premium. Regulators differed greatly in their approaches but generally focused on the avoidance of cancellation of coverage for non-payment. While most of these requirements and requests have lapsed, it is possible that some or all of them could be re-issued in the event of declarations of new states of emergency that might result from worsening pandemic conditions. Enact currently complies with all state regulatory requirements. If timely payment is not made, future premiums could decrease and the certificate of insurance could be subject to cancellation after 60 days or such longer time as required under applicable law. Enact's loss reserves continue to be impacted by COVID-19. Borrowers who have experienced a financial hardship including, but not limited to, the loss of income due to the closing of a business or the loss of a job have 100
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taken advantage of available forbearance programs and payment deferral options. During the peak of the pandemic, Enact experienced elevated new delinquencies subject to forbearance plans which may ultimately cure at a higher rate than traditional delinquencies. Unlike a hurricane where the natural disaster occurs at a point in time and the rebuild starts soon after, COVID-19 brought ongoing displacement to the mortgage insurance market, making it more difficult to determine the effectiveness of forbearance and the resulting claim rates for new delinquencies in forbearance plans. Given this difference, Enact initially leveraged its prior hurricane experience to estimate claim rates, and has recently added cure activity from COVID-19 related delinquencies as an additional consideration in the establishment of an appropriate claim rate estimate for new delinquencies in forbearance plans that have emerged as a result of COVID-19. Approximately 42% of Enact's primary new delinquencies in 2021 were subject to a forbearance plan as compared to 66% in 2020 and less than 5% in recent quarters prior to COVID-19. The severity of loss on loans that do go to claim may be negatively impacted by the extended forbearance timeline, the associated elevated expenses and the higher loan amount of the recent new delinquencies. These negative influences on loss severity could be mitigated in part by further home price appreciation. For loans insured on or afterOctober 1, 2014 , Enact's mortgage insurance policies limit the number of months of unpaid interest and associated expenses that are included in the mortgage insurance claim amount to a maximum of 36 months. Enact's loss ratio was 13% for the year endedDecember 31, 2021 , compared to 39% for the year endedDecember 31, 2020 . The decrease was largely from lower new delinquencies from the improving economy and net favorable reserve adjustments in 2021 compared to unfavorable reserve adjustments in 2020. New primary delinquencies were 32,624 in 2021 compared 85,074 in 2020. Enact decreased reserves by$22 million in 2021 primarily related to positive frequency and severity development on pre-COVID-19 delinquencies. In 2020, Enact strengthened existing reserves by$65 million primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity. In determining the loss expense estimate during 2021, considerations were given to forbearance and non-forbearance delinquencies, recent cure and claim experience and the ongoing economic impact due to the pandemic. GMICO's risk-to-capital ratio under the current regulatory framework as established underNorth Carolina law and enforced by the NCDOI, GMICO's domestic insurance regulator, was approximately 12.3:1 as ofDecember 31, 2021 and 2020. GMICO's risk-to-capital ratio remains below the NCDOI's maximum risk-to-capital ratio of 25:1.North Carolina's calculation of risk-to-capital excludes the risk in-force for delinquent loans given the established loss reserves against all delinquencies. GMICO's ongoing risk-to-capital ratio will depend principally on the magnitude of future losses incurred by GMICO, the effectiveness of ongoing loss mitigation activities, new business volume and profitability, the amount of policy lapses and the amount of additional capital that is generated or distributed by the business or capital support provided. Under PMIERs, Enact is subject to operational and financial requirements that private mortgage insurers must meet in order to remain eligible to insure loans that are purchased by the GSEs. During 2020, the GSEs issued several amendments to PMIERs. TheDecember 4, 2020 version extended the application of reduced PMIERs capital factors to each non-performing loan that had an initial missed monthly payment occurring on or afterMarch 1, 2020 and prior toApril 1, 2021 and extended the capital preservation period fromMarch 31, 2021 toJune 30, 2021 . OnJune 30, 2021 , the GSEs issued a revised and restated version of the PMIERs Amendment that replaced the version issued onDecember 4, 2020 . TheJune 30, 2021 version allows loans that enter a forbearance plan due to a COVID-19 hardship on or afterApril 1, 2021 to remain eligible for extended application of the reduced PMIERs capital factor for as long as the loan remains in forbearance. TheJune 30, 2021 version also extended the capital preservation period throughDecember 31, 2021 with certain exceptions. In addition, inSeptember 2020 , certain GSE Restrictions were imposed with respect to capital on Enact, which will remain in effect until the collective GSE Conditions are met. For additional details related to PMIERs, the PMIERs Amendment and the GSE Conditions and Restrictions, see "Item 1-Regulation-Enact-Mortgage Insurance Regulation-OtherU.S. Regulation and Agency Qualification Requirements." 101
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As ofDecember 31, 2021 , Enact had estimated available assets of$5,077 million against$3,074 million net required assets under PMIERs compared to available assets of$5,126 million against$2,839 million net required assets as ofSeptember 30, 2021 and available assets of$4,588 million against$3,359 million net required assets as ofDecember 31, 2020 . The sufficiency ratio as ofDecember 31, 2021 was 165% or$2,003 million above the published PMIERs requirements, compared to 181% or$2,287 million above the published PMIERs requirements as ofSeptember 30, 2021 and 137% or$1,229 million above the published PMIERs requirements as ofDecember 31, 2020 . PMIERs sufficiency is based on the published requirements applicable to private mortgage insurers and does not give effect to the GSE Restrictions imposed on Enact. The decrease in the PMIERs sufficiency compared toSeptember 30, 2021 was primarily driven by a$200 million dividend paid in the fourth quarter of 2021, new insurance written and amortization of existing reinsurance transactions, partially offset by elevated lapse driven by prevailing low interest rates, business cash flows and lower delinquencies. Enact's PMIERs required assets as ofDecember 31, 2021 ,September 30, 2021 andDecember 31, 2020 benefited from the application of a 0.30 multiplier applied to the risk-based required asset amount factor for certain non-performing loans. The application of the 0.30 multiplier to all eligible delinquencies provided$390 million of benefit to Enact'sDecember 31, 2021 PMIERs required assets compared to$570 million and$1,046 million of benefit as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. These amounts are gross of any incremental reinsurance benefit from the elimination of the 0.30 multiplier. InJanuary 2022 , Enact executed an excess of loss reinsurance transaction with a panel of reinsurers, which will provide approximately$294 million of reinsurance coverage on a portion of current and expected new insurance written for the 2022 book year. Credit risk transfer transactions provided an aggregate of approximately$1,404 million of PMIERs capital credit as ofDecember 31, 2021 . Enact may execute future credit risk transfer transactions to maintain a prudent level of financial flexibility in excess of the PMIERs capital requirements in response to potential changes in performance and PMIERs requirements over time. Enact Holdings paid dividends of$200 million inDecember 2021 ,$163 million of which was paid toGenworth Holdings and the remainder to minority shareholders. Enact Holdings is currently in the process of evaluating its capital return objectives for 2022. Although not yet established, Enact Holdings intends to develop a formal dividend policy and initiate a regular common dividend during 2022. In addition to a regular common dividend, Enact Holdings will also evaluate the potential for an incremental return of capital, contingent upon economic and business performance, including the resolution of forbearance related delinquencies, among other considerations. Any future dividends will also be subject to market conditions, business and regulatory approvals and will include a proportionate dividend distribution to minority shareholders. 102
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Segment results of operations
The following table sets forth the results of operations relating to our Enact
segment for the periods indicated:
Increase (decrease) and
Years ended December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020
Revenues:
Premiums $ 975 $ 971 $ 856 $ 4 - %
Net investment income 141 133 117 8 6 %
Net investment gains (losses) (2 ) (4 ) 1 2 50 %
Policy fees and other income 4 6 4 (2 ) (33 )%
Total revenues 1,118 1,106 978 12 1 %
Benefits and expenses:
Benefits and other changes in
policy reserves 125 381 50 (256 ) (67 )%
Acquisition and operating
expenses, net of deferrals 230 206 191 24 12 %
Amortization of deferred
acquisition costs and intangibles 15 21 15 (6 ) (29 )%
Interest expense 51 18 - 33 183 %
Total benefits and expenses 421 626 256 (205 ) (33 )%
Income from continuing operations
before income taxes 697 480 722 217 45 %
Provision for income taxes 148 102 153 46 45 %
Income from continuing operations 549 378 569 171 45 %
Less: net income from continuing
operations attributable to (1)
noncontrolling interests 33 - - 33 NM
Income from continuing operations
available to Genworth Financial,
Inc.'s common stockholders 516 378 569 138 37 %
Adjustments to income from
continuing operations available
to Genworth Financial, Inc.'s
common stockholders:
Net investment (gains) losses 2 4 (1 ) (2 ) (50 )%
Expenses related to restructuring (1)
3 - - 3 NM
Taxes on adjustments (1 ) (1 ) - - - %
Adjusted operating income
available to Genworth Financial,
Inc.'s common stockholders $ 520 $ 381 $ 568 $ 139 36 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
2021 compared to 2020
Adjusted operating income available to
stockholders
Adjusted operating income increased primarily attributable to lower losses mainly from lower new delinquencies and net favorable reserve adjustments of$17 million in 2021 compared to unfavorable reserve adjustments of$51 million in 2020, partially offset by higher interest expense associated with Enact Holdings' senior notes issued inAugust 2020 , an increase in operating costs and the minority IPO of Enact Holdings that closed inSeptember 2021 , which reducedGenworth Financial's ownership percentage to 81.6% and resulted in lower net income of$33 million in 2021. 103
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Revenues
Premiums increased mainly attributable to higher insurance in-force, partially offset by continued lapse of older higher priced policies due to the current low interest rate environment, lower single premium policy cancellations and higher ceded premiums in 2021. Net investment income increased primarily due to higher average invested assets and higher income from bond calls, partially offset by lower investment yields in 2021. Benefits and expenses Benefits and other changes in policy reserves decreased largely from lower new delinquencies and net favorable reserve adjustments in 2021 compared to unfavorable reserve adjustments in 2020. Losses from new delinquencies decreased$164 million compared to 2020 driven primarily by a significant increase in borrower forbearance in 2020 as a result of COVID-19 that occurred to a lesser extent in 2021 as the economy began to improve. Enact decreased reserves by$22 million in 2021 primarily related to positive frequency and severity development on pre-COVID-19 delinquencies. In 2020, Enact strengthened existing reserves by$65 million primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity.
Acquisition and operating expenses, net of deferrals, increased primarily
attributable to higher operating costs, expenses associated with strategic
transaction preparations and restructuring costs in 2021.
Amortization of deferred acquisition costs and intangibles decreased primarily due to accelerated DAC amortization of$6 million in 2020 driven by elevated lapses.
Interest expense increased related to Enact Holdings' senior notes issued in
Provision for income taxes. The effective tax rate was 21.3% and 21.2% for the years endedDecember 31, 2021 and 2020, respectively, consistent with theU.S. corporate federal income tax rate.
Net income from continuing operations attributable to noncontrolling interests.
The increase relates to the minority IPO of Enact Holdings on
2021
resulting in lower net income of
Enact selected operating performance measures
The following table sets forth selected operating performance measures regarding
Enact as of or for the dates indicated:
As of or for the years ended
Increase (decrease) and
December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020
Primary insurance
in-force
(1) $ 226,514 $ 207,947 $ 181,785 $ 18,567 9 %
Risk
in-force:
Primary $ 56,881 $ 52,475 $ 46,246 $ 4,406 8 %
Pool 105 146 188 (41 ) (28 )%
Total risk
in-force $ 56,986 $ 52,621 $ 46,434 $ 4,365 8 %
New insurance written
(3 )%
(1) Primary insurance
in-force
represents the aggregate unpaid principal balance for loans Enact insures.
Original loan balances are primarily used to determine premiums.
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Table of Contents 2021 compared to 2020 Primary insurance in-force and risk in-force Primary insurance in-force increased largely from new insurance written, partially offset by lapses and cancellations as Enact continues to experience persistency below its historic norms. Primary persistency was 62% and 59% for the years endedDecember 31, 2021 and 2020, respectively. Total risk in-force increased largely from higher primary insurance in-force.
New insurance written
New insurance written decreased principally due to a smaller private mortgage
insurance available market in 2021.
Loss and expense ratios
The following table sets forth the loss and expense ratios for Enact for the
dates indicated:
Increase
Years ended December 31 , (decrease)
2021 2020 2019 2021 vs. 2020 Loss ratio 13 % 39 % 6 % (26 )% Expense ratio 25 % 23 % 24 % 2 % The loss ratio is the ratio of benefits and other changes in policy reserves to net earned premiums. The expense ratio is the ratio of general expenses to net earned premiums. In Enact, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of DAC and intangibles.
2021 compared to 2020
The loss ratio decreased largely from lower new delinquencies and net favorable reserve adjustments in 2021 compared to unfavorable reserve adjustments in 2020. Losses from new delinquencies decreased$164 million compared to 2020 driven primarily by a significant increase in borrower forbearance in 2020 as a result of COVID-19 that occurred to a lesser extent in 2021 as the economy began to improve. Enact decreased reserves by$22 million in 2021 primarily related to positive frequency and severity development on pre-COVID-19 delinquencies. In 2020, Enact strengthened existing reserves by$65 million primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity.
The expense ratio increased mainly driven by higher operating costs, expenses
associated with strategic transaction preparations and restructuring costs,
partially offset by lower DAC amortization in 2021.
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Mortgage insurance loan portfolio
The following table sets forth selected financial information regarding Enact's
loan portfolio as of
(Amounts in millions) 2021 2020 2019 Primary insurance in-force by loan-to-value ratio at origination: 95.01% and above$ 35,455 $ 34,520 $ 32,502 90.01% to 95.00% 95,149 92,689 83,189 85.01% to 90.00% 64,549 56,341 49,305 85.00% and below 31,361 24,397 16,789 Total$ 226,514 $ 207,947 $ 181,785 Primary risk in-force by loan-to-value ratio at origination: 95.01% and above$ 9,907 $ 9,279 $ 8,365 90.01% to 95.00% 27,608 26,774 23,953 85.01% to 90.00% 15,644 13,562 11,933 85.00% and below 3,722 2,860 1,995 Total$ 56,881 $ 52,475 $ 46,246 Primary insurance in-force by credit quality at origination: Over 760$ 89,982 $ 78,488 $ 69,129 740-759 35,874 33,635 29,961 720-739 31,730 30,058 26,184 700-719 27,359 25,870 21,567 680-699 21,270 20,140 16,935 660-679 (1) 10,549 9,819 8,504 640-659 6,124 5,935 5,379 620-639 2,783 2,902 2,794 <620 843 1,100 1,332 Total$ 226,514 $ 207,947 $ 181,785 Primary risk in-force by credit quality at origination: Over 760$ 22,489 $ 19,691 $ 17,606 740-759 9,009 8,497 7,685 720-739 8,055 7,673 6,717 700-719 6,907 6,579 5,464 680-699 5,334 5,100 4,286 660-679 (1) 2,638 2,442 2,113 640-659 1,530 1,472 1,322 620-639 702 737 709 <620 217 284 344 Total$ 56,881 $ 52,475 $ 46,246
(1) Loans with unknown FICO scores are included in the
660-679
category.
The FICO credit score is one indicator of a borrower's credit quality. Enact continues to underwrite predominantly prime loan new business. Based upon FICO at loan closing, the weighted average FICO score of Enact's primary risk in-force was 741 as ofDecember 31, 2021 . 106
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Delinquent loans and claims
Enact's delinquency management process begins with notification by the loan servicer of a delinquency on an insured loan. "Delinquency" is defined in Enact's master policies as the borrower's failure to pay when due an amount equal to the scheduled monthly mortgage payment under the terms of the mortgage. Generally, the master policies require an insured to notify Enact of a delinquency if the borrower fails to make two consecutive monthly mortgage payments prior to the due date of the next mortgage payment. Enact generally considers a loan to be delinquent and establishes required reserves after the insured gives notification that the borrower has failed to make two scheduled mortgage payments. Borrowers default for a variety of reasons, including a reduction of income, unemployment, divorce, illness/death, inability to manage credit, falling home prices and interest rate levels. Borrowers may cure delinquencies by making all of the delinquent loan payments, agreeing to a loan modification, or by selling the property in full satisfaction of all amounts due under the mortgage. In most cases, delinquencies that are not cured result in a claim under Enact's policy. The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for Enact's loan portfolio as ofDecember 31 : 2021 2020 2019 Primary insurance: Insured loans in-force 937,350 924,624 851,070 Delinquent loans 24,820 44,904 16,392
Percentage of delinquent loans (delinquency rate) 2.65 % 4.86 %
1.93 % The delinquency rate as ofDecember 31, 2021 decreased compared toDecember 31, 2020 primarily from a decline in total delinquencies as the economy continues to recover from COVID-19 and as cures outpaced new delinquencies. The delinquency rate increased compared toDecember 31, 2019 primarily as a result of the rise in unemployment and the increase in borrower forbearance driven by COVID-19. The following tables set forth primary delinquencies, direct primary case reserves and risk in-force by aged missed payment status in Enact's loan portfolio as ofDecember 31 : 2021 Direct case reserves Risk Reserves as % (Dollar amounts in millions) Delinquencies (1) in-force of risk in-force Payments in default: 3 payments or less 6,586 $ 35$ 340 10 % 4 - 11 payments 7,360 111 426 26 % 12 payments or more 10,874 460 643 72 % Total 24,820 $ 606$ 1,409 43 % 2020 Direct case reserves Risk Reserves as % (Dollar amounts in millions) Delinquencies (1) in-force of risk in-force Payments in default: 3 payments or less 10,484 $ 43$ 549 8 % 4 - 11 payments 30,324 331 1,853 18 % 12 payments or more 4,096 143 204 70 % Total 44,904 $ 517$ 2,606 20 %
(1) Direct primary case reserves exclude loss adjustment expenses, pool, IBNR and
reinsurance reserves.
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The total increase in reserves as a percentage of risk in-force as ofDecember 31, 2021 was primarily driven by higher reserves in relation to a decrease in delinquent risk in-force. Delinquent risk in-force decreased mainly from lower total delinquencies as cures outpaced new delinquencies in 2021, while reserves increased primarily from new delinquencies, partially offset by net favorable reserve adjustments related to positive frequency and severity development on pre-COVID-19 delinquencies in 2021. As ofDecember 31, 2021 , Enact has experienced an increase in loans that are delinquent for 12 months or more due in large part to borrowers entering a forbearance plan over a year ago driven by COVID-19. The current reserve estimate assumes that remaining delinquencies will have a higher likelihood of going to claim given foreclosure moratoriums and the uncertainty around the lack of progression through the foreclosure process. Forbearance plans may be extended up to 18 months, therefore, it is possible Enact could experience elevated delinquencies in this aged category during 2022. Resolution of a delinquency in a forbearance plan, whether it ultimately results in a cure or a claim, is difficult to estimate and may not be known for several quarters, if not longer. Primary insurance delinquency rates differ from region to region inthe United States at any one time depending upon economic conditions and cyclical growth patterns. The tables below set forth the dispersion of direct primary case reserves and primary delinquency rates for the 10 largest states and the 10 largest Metropolitan Statistical Areas ("MSA") or Metro Divisions ("MD") by Enact's risk in-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender. Percent of primary Percent of direct risk Delinquency rate as of in-force case reserves as of December 31, as of December 31, 2021 December 31, 2021 (1) 2021 2020 2019 By State: California 11 % 12 % 3.17 % 6.20 % 1.42 % Texas 8 % 8 % 2.89 % 5.82 % 2.02 % Florida (2) 7 % 9 % 2.97 % 6.92 % 2.13 % New York (2) 5 % 12 % 3.80 % 6.92 % 2.98 % Illinois (2) 5 % 6 % 3.09 % 5.21 % 2.25 % Michigan 4 % 2 % 1.87 % 2.93 % 1.43 % Arizona 3 % 2 % 2.31 % 4.54 % 1.46 % North Carolina 3 % 2 % 2.18 % 3.84 % 1.79 % Pennsylvania (2) 3 % 3 % 2.38 % 4.11 % 2.12 % Washington 3 % 3 % 2.98 % 5.37 % 1.10 %
(1) Direct primary case reserves exclude loss adjustment expenses, pool, IBNR and
reinsurance reserves.
(2) Jurisdiction predominantly uses a judicial foreclosure process, which
generally increases the amount of time it takes for a foreclosure to be
completed.
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Percent of primary
risk Percent of direct
in-force case reserves as of Delinquency rate as of
as of December 31,
December 31, 2021
December 31, 2021 (1) 2021 2020 2019
By MSA or MD:
Chicago-Naperville, IL MD 3 % 4 % 3.68 % 6.36 % 2.50 %
Phoenix, AZ MSA 3 % 2 % 2.36 % 4.63 % 1.38 %
New York, NY MD 3 % 8 % 5.32 % 10.25 % 3.68 %
Atlanta, GA MSA 2 % 3 % 3.28 % 6.68 % 2.14 %
Washington
DC-Arlington
MD 2 % 2 % 2.96 % 6.09 % 1.47 %
Houston, TX MSA 2 % 3 % 3.61 % 7.59 % 2.62 %
Riverside-San
Bernardino, CA MSA 2 % 2 % 3.42 % 7.08 % 2.08 %
Los Angeles-Long Beach, CA MD 2 % 3 % 3.95 % 7.57 % 1.35 %
Dallas, TX MD 2 % 2 % 2.31 % 5.10 % 1.85 %
Nassau County, NY MD 2 % 4 % 5.55 % 10.64 % 3.47 %
(1) Direct primary case reserves exclude loss adjustment expenses, pool, IBNR and
reinsurance reserves.
The frequency of delinquencies may not correlate directly with the number of claims received because delinquencies may cure. The rate at which delinquencies cure is influenced by borrowers' financial resources and circumstances and regional economic differences. Whether a delinquency leads to a claim correlates highly with the borrower's equity at the time of delinquency, as it influences the borrower's willingness to continue to make payments, and the borrower's or the insured's ability to sell the home for an amount sufficient to satisfy all amounts due under the mortgage loan, as well as the borrower's financial ability to continue making payments. When Enact receives notice of a delinquency, it uses its proprietary model to determine whether a delinquent loan is a candidate for a modification. When the model identifies such a candidate, Enact's loan workout specialists prioritize cases for loss mitigation based upon the likelihood that the loan will result in a claim. Loss mitigation actions include loan modification, extension of credit to bring a loan current, foreclosure forbearance, pre-foreclosure sale and deed-in-lieu. These loss mitigation efforts often are an effective way to reduce Enact's claim exposure and ultimate payouts. The following table sets forth the dispersion of Enact's direct primary case reserves and primary insurance in-force and risk in-force by year of policy origination, weighted average mortgage interest rate and delinquency rate as ofDecember 31, 2021 : Weighted average Percent of direct Primary Primary rate case reserves insurance
Percent risk Percent Delinquency
(Amounts in millions) (1)
(2) in-force of total in-force of total rate Policy Year 2004 and prior 6.20 % 2 %$ 541 - %$ 154 - % 13.24 % 2005 to 2008 5.58 % 22 7,655 3 1,958 3 10.23 % 2009 to 2013 4.32 % 2 1,404 1 370 1 5.54 % 2014 4.49 % 3 1,965 1 534 1 5.51 % 2015 4.17 % 5 4,488 2 1,197 2 4.24 % 2016 3.89 % 8 8,997 4 2,388 4 3.69 % 2017 4.26 % 10 8,962 4 2,324 4 4.78 % 2018 4.78 % 13 9,263 4 2,330 4 5.93 % 2019 4.20 % 19 21,730 10 5,454 10 3.89 % 2020 3.23 % 14 69,963 31 17,574 31 1.50 % 2021 3.08 % 2 91,546 40 22,598 40 0.37 % Total portfolio 3.52 % 100 %$ 226,514 100 %$ 56,881 100 % 2.65 %
(1) Average annual mortgage interest rate weighted by insurance
in-force.
(2) Direct primary case reserves exclude loss adjustment expenses, pool, IBNR and
reinsurance reserves.
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For policy years after 2008, the average annual mortgage interest rate has been consistently below 5%, with its lowest point at 3.08% for policy year 2021. Loss reserves in policy years 2005 through 2008 are outsized compared to their representation of risk in-force. The size of these policy years at origination combined with the significant decline in home prices led to significant losses in policy years prior to 2009. Although uncertainty remains with respect to the ultimate losses Enact will experience on these policy years, they have become a smaller percentage of its total mortgage insurance portfolio. The largest portion of loss reserves has shifted to newer book years as a result of COVID-19 given their significant representation of risk in-force. As ofDecember 31, 2021 , Enact's 2014 and newer policy years represented approximately 96% of primary risk in-force and 74% of total direct primary case reserves. The ratio of the claim paid to the current risk in-force for a loan is referred to as "claim severity." The current risk in-force is equal to the unpaid principal amount multiplied by the coverage percentage. The main determinants of claim severity are the age of the mortgage loan, the value of the underlying property, accrued interest on the loan, expenses advanced by the insured and foreclosure expenses. These amounts depend partly upon the time required to complete foreclosure, which varies depending upon state laws. Pre-foreclosure sales, acquisitions and other early workout and claim administration actions help to reduce overall claim severity. Enact's average primary mortgage insurance claim severity was 103%, 106% and 112% for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The average claim severities do not include the effects of agreements on non-performing loans.U.S. Life Insurance segment COVID-19 The most significant impact in ourU.S. life insurance businesses from COVID-19 in 2021 and 2020 was related to continued elevated mortality. Our long-term care insurance operating results were favorably impacted by higher mortality in 2021 and 2020. Conversely, higher mortality rates had unfavorable impacts in our life insurance products and we have observed minimal impact from COVID-19 in our fixed annuity products. Our products were also negatively impacted by the continued low interest rate environment, particularly as it related to loss recognition testing and asset adequacy analysis in 2021 and 2020. In our long-term care insurance products, we have experienced higher mortality during COVID-19 which has had a favorable impact on claim reserves and our operating results. Although it is not our practice to track cause of death for policyholders and claimants, we believe the favorable results of our long-term care insurance business in 2021 and 2020 were likely impacted by COVID-19, but we expect the impacts to be temporary. We believe COVID-19 has accelerated mortality on our most vulnerable claimants, which may reduce mortality rates in future periods as the impacts of the pandemic subside. Therefore, in the fourth quarter of 2020 and the first quarter of 2021, we strengthened our claim reserves to adjust the mortality assumption by$91 million and$67 million , respectively, to account for the lower future claim termination rates expected on remaining claims. However, during the second quarter of 2021, we experienced lower mortality as the impacts of COVID-19 lessened and we did not establish any additional claim reserves but reduced a portion of the COVID-19 mortality adjustment. As ofDecember 31, 2021 , the balance of our incremental claim reserves associated with COVID-19 mortality was$134 million . As COVID-19 continues to develop, short-term mortality experience may fluctuate, and we would decrease the COVID-19 mortality adjustment if we experience lower mortality. We have also experienced lower new claims incidence in our long-term care insurance business during COVID-19; however, we do not expect this to be permanent but rather a temporary reduction while shelter-in-place and social distancing protocols are in effect and that claims incidence experience will ultimately resemble previous trends. As a result, we have strengthened our IBNR claim reserves during COVID-19 by$75 million throughDecember 31, 2021 . New claims incidence remains below pre-pandemic levels and near-term incidence may continue to be impacted by COVID-19. We continue to utilize virtual assessments to assess eligibility for benefits while in-person assessments have been temporarily discontinued during COVID-19. We 110
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are reviewing the options to resume in-person assessments, with appropriate protocols in place, while having virtual assessments available for those policyholders who would prefer this option. For claimants without the technology to perform virtual assessments, we have alternate options for gathering information. Our long-term care insurance benefit utilization will be monitored for impact, although it is too early to tell the magnitude and/or direction of that impact. Additionally, ourU.S. life insurance companies are dependent on the approval of actuarially justified in-force rate actions in our long-term care insurance business, including those rate actions which were previously filed and are currently pending review and approval. We have experienced some delays and could experience additional delays in receiving approvals of these rate actions during COVID-19; however, these delays did not have a significant impact on our financial results in 2021 or during 2020. We have continued to provide customer service to our policyholders during this uncertain time and are available to address questions or concerns regarding their policies. We are continually assessing our operational processes and monitoring potential impacts to morbidity due to COVID-19. We continue to actively monitor cash and highly liquid investment positions in each of ourU.S. life insurance companies against operating targets that are designed to ensure that we will have the cash necessary to meet our obligations as they come due. The targets are set based on stress scenarios that have the effect of increasing our expected cash outflows and decreasing our expected cash inflows. Liquidity risk is assessed by comparing subsidiary cash to potential cash needs under a stressed liquidity scenario. The stressed scenario reflects potential policyholder surrenders, variability of normal operating cash flow and potential increases in collateral requirements under our cleared derivative program. While the ongoing impact of COVID-19 is very difficult to predict, the related outcomes and impact on theU.S. life insurance business will depend on the length and severity of the pandemic and shape of the economic recovery. Further declines in interest rates as well as equity market volatility as a result of COVID-19 would increase reserves and capital requirements in ourU.S. life insurance business. For sensitivities related to interest rates, lapses and mortality on ourU.S. life insurance products, see "- Critical Accounting Estimates." We will continue to monitor COVID-19 impacts and evaluate all of our assumptions that may need updating as a result of longer-term trends related to the pandemic. See "Item 1A-Risk Factors-COVID-19 could materially adversely affect our financial condition and results of operations."
Trends and conditions
Results of ourU.S. life insurance businesses depend significantly upon the extent to which our actual future experience is consistent with assumptions and methodologies we have used in calculating our reserves. Many factors can affect the results of ourU.S. life insurance businesses. Because these factors are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. We will continue to monitor our experience and assumptions closely and make changes to our assumptions and methodologies, as appropriate, for ourU.S. life insurance products. Even small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our DAC amortization, reserve levels, results of operations and financial condition. Our liability for policy and contract claims is reviewed quarterly and we completed a detailed review of our claim reserve assumptions and methodologies for our long-term care insurance business in the fourth quarter of 2021 as discussed further below. In the fourth quarter of 2021, we performed assumption reviews for ourU.S. life insurance products, including our long-term care and life insurance products, and completed our loss recognition testing as discussed below. For our 2021 assumption updates, we are generally not including data from 2020 in setting any long-term assumptions, as we do not yet have sufficient information around longer term effects of the pandemic. Our review of assumptions, as part of our testing in the fourth quarter of 2021, included 111
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expected claim incidence and terminations, benefit utilization trend, mortality, persistency, interest rates and in-force rate actions, among other assumptions. In addition, we performed cash flow testing separately for each of ourU.S. life insurance companies on a statutory accounting basis in the fourth quarter of 2021. OurU.S. life insurance subsidiaries are subject to the NAIC's RBC standards and other minimum statutory capital and surplus requirements. The RBC of each of ourU.S. life insurance subsidiaries exceeded the level of RBC that would require any of them to take or become subject to any corrective action in their respective domiciliary state as ofDecember 31, 2021 . The consolidated RBC ratio of ourU.S. domiciled life insurance subsidiaries was approximately 289% and 229% as ofDecember 31, 2021 and 2020, respectively. The increase was largely driven by higher statutory earnings in our long-term care insurance business mainly driven by claim experience, premium rate increases and benefit reductions, including policyholder benefit reduction elections made as part of a legal settlement, as well as in our variable annuity products from favorable interest rates and equity markets. We continue to face challenges in our principal life insurance subsidiaries, particularly those subsidiaries that rely heavily on long-term care insurance in-force rate actions as a source of earnings and capital. We may see variability in statutory results and a decline in the RBC ratios of these subsidiaries given the time lag between the approval of in-force rate actions versus when the benefits from the in-force rate actions (including increased premiums and associated benefit reductions) are fully realized in our financial results. Additionally, the RBC ratio of ourU.S. life insurance subsidiaries would be negatively impacted by future increases in our statutory reserves, including results of Actuarial Guideline 38, cash flow testing and assumption reviews, particularly in our long-term care insurance business. Future declines in the RBC ratio of our life insurance subsidiaries could result in heightened supervision and regulatory action. Results of ourU.S. life insurance businesses are also impacted by interest rates. Low interest rates put pressure on the profitability and returns of these businesses as higher yielding investments mature and are replaced with lower-yielding investments. We seek to manage the impact of low interest rates through asset-liability management, investment in alternative assets, including limited partnerships, as well as interest rate hedging strategies for a portion of our long-term care insurance product cash flows. Additionally, certain products have implicit and explicit rate guarantees or optionality that are significantly impacted by changes in interest rates. For a further discussion of the impact of interest rates on ourU.S. life insurance businesses, see "Item 7A-Quantitative and Qualitative Disclosures About Market Risk."
Long-term care insurance
The long-term profitability of our long-term care insurance business depends
upon how our actual experience compares with our valuation assumptions,
including but not limited to morbidity, mortality and persistency. If any of our
assumptions prove to be inaccurate, our reserves may be inadequate, which in the
past has had, and may in the future have, a material adverse effect on our
results of operations, financial condition and business. Results of our
long-term care insurance business are also influenced by our ability to achieve
in-force
rate actions, improve investment yields and manage expenses and reinsurance,
among other factors. Changes in regulations or government programs, including
long-term care insurance rate action legislation, regulation and/or practices,
could also impact our long-term care insurance business either positively or
negatively.
In the fourth quarter of 2021, we completed loss recognition and cash flow
testing and reviewed key assumptions for future policy benefits, or active life
reserves, for our long-term care insurance business, including expected claim
incidence and terminations, expenses, interest rates, benefit utilization trend
and
in-force
rate actions, among other assumptions. The most significant update to our
long-term care insurance assumptions included an unfavorable update to the
benefit utilization trend, which drove significant updates to our
in-force
rate action plan, and assumptions related thereto. Given the expected future
increases in cost of care, we expect our long-term benefit utilization to trend
higher than previously assumed. Prior to this update, we had assumed that the
long-term benefit utilization would improve over time. Based on our experience,
it has not
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improved as much as we predicted, largely due to cost of care growth driven by both broad-based inflation and minimum wage increases in some large states, among other factors. Therefore, we have increased the outlook for our future benefit utilization trend. As ofDecember 31, 2021 , our loss recognition testing margin for our long-term care insurance business, excluding the acquired block, was positive and slightly higher than the 2020 level. We continue to test our acquired block of long-term care insurance separately. In 2021, our loss recognition testing margin for the acquired block was positive but slightly lower than the 2020 level. We will continue to regularly review our methodologies and assumptions in light of emerging experience and may be required to make adjustments to our long-term care insurance reserves in the future, which could also impact our loss recognition and cash flow testing results. For a discussion of additional information related to margins for our long-term care insurance business, see "-Critical Accounting Estimates-Future policy benefits." During the fourth quarter of 2021, we reviewed our assumptions and methodologies relating to our claim reserves of our long-term care insurance business. Based on our review, we did not make any significant changes to the assumptions or methodologies, other than routine updates to investment returns as we typically do each quarter. The prior year claim reserve review, which we completed during the fourth quarter of 2020, had a modest net benefit primarily related to assumption updates to claim incidence and claim and policy terminations, based on our current long-term view of these assumptions. For a discussion of additional information related to changes to our assumptions and methodologies to our long-term care insurance claim reserves, see "-Critical Accounting Estimates-Liability for policy and contract claims." As a result of the review of our claim reserves completed in prior years, we have been establishing higher claim reserves on new claims, which has negatively impacted earnings and we expect this to continue going forward. Also, average claim reserves for new claims are trending higher over time as the mix of claims continues to evolve, with an increasing number of policies with higher daily benefit amounts and higher inflation factors going on claim. In addition, although new claim counts on our older long-term care insurance blocks of business will continue to decrease as the blocks run off, we are gaining more experience on our larger new blocks of business and expect continued growth in new claims on these blocks as policyholders reach older attained ages with higher likelihood of going on claim. Given the ongoing challenges in our long-term care insurance business, we continue pursuing initiatives to improve the risk and profitability profile of our business including: premium rate increases and associated benefit reductions on our in-force policies; managing expense levels; executing investment strategies targeting higher returns; and enhancing our financial and actuarial analytical capabilities. Executing on our multi-year long-term care insurance in-force rate action plan with premium rate increases and associated benefit reductions on our legacy long-term care insurance policies is critical to the business. For an update on in-force rate actions, refer to "Significant Developments andStrategic Highlights-U.S. Life Insurance " and "Item 1-Business-U.S. Life Insurance-In-force rate actions." The approval process for in-force rate actions and the amount and timing of the premium rate increases and associated benefit reductions approved vary by state. In certain states, the decision to approve or disapprove a rate increase can take a significant amount of time, and the approved amount may be phased in over time. After approval, insureds are provided with written notice of the increase and increases are generally applied on the insured's next policy anniversary date. As a result, the benefits of any rate increase are not fully realized until the implementation cycle is complete and are, therefore, expected to be realized over time. In 2019, the NAIC established theLong-Term Care Insurance (EX) Task Force to address efforts to create a national standard for reviewing and approving long-term care insurance rate increase requests. This task force is charged with developing a consistent national approach for reviewing rate increase requests that result in actuarially appropriate increases being granted by the states in a timely manner and eliminates cross-state rate subsidization, among others. InDecember 2021 , theTask Force adopted its framework for the multi-state rate 113
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review process and shifted its focus to monitoring the impact of this new
process on state rate reviews. We are currently evaluating our participation in
the multi-state review process for our upcoming filings.
Life insurance
Results of our life insurance business are impacted primarily by mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements, among other factors. We no longer solicit sales of traditional life insurance products; however, we continue to service our existing retained and reinsured blocks of business. Mortality levels may deviate each period from historical trends. Overall mortality experience was higher in 2021 compared to 2020, attributable in part to COVID-19. We have experienced higher mortality than our then-current and priced-for assumptions in recent years for our universal life insurance blocks. We have also been experiencing higher mortality related charges resulting from an increase in rates charged by our reinsurance partners reflecting natural block aging and higher mortality compared to expectations. In the fourth quarters of 2021 and 2020, we performed our annual review of life insurance assumptions and loss recognition testing. Our reviews focused on assumptions for mortality, interest rates and persistency, among other assumptions. Our mortality assumption was updated to align with the overall pre-COVID-19 experience in later-duration as well as in targeted blocks such as term universal life insurance, conversion policies and post-level term. As ofDecember 31, 2021 , the loss recognition testing margin for our term and whole life insurance products was positive and consistent with the 2020 level. As part of our review in the fourth quarter of 2021, we recorded a$70 million after-tax expense to net income in our universal and term universal life insurance products primarily related to higher pre-COVID-19 mortality experience. As part of our review in the fourth quarter of 2020, we recorded a$60 million after-tax benefit in our term universal and universal life insurance products primarily from favorable assumption updates. The favorable updates in our term universal life insurance product in 2020 were primarily driven by a model refinement related to persistency and grace period timing. Other 2020 assumption updates mostly focused on future cost of insurance rates and long-term trends in mortality, persistency and interest rates. For the year endedDecember 31, 2021 , in connection with our review of DAC for recoverability, we recorded after-tax charges of$92 million in our universal and term universal life insurance products compared to a$50 million after-tax charge in 2020. For a discussion of additional information related to changes to our assumptions and DAC recoverability related to our life insurance business, see "-Critical Accounting Estimates." Our mortality experience for older ages is emerging and we continue to monitor trends in mortality improvement. We will continue to regularly review our mortality assumptions as well as all of our other assumptions in light of emerging experience. We may be required to make further adjustments in the future to our assumptions which could impact our universal and term universal life insurance reserves or the loss recognition testing results of our term life insurance products. Any further materially adverse changes to our assumptions, including mortality, persistency or interest rates, could have a materially negative impact on our results of operations, financial condition and business. For a discussion of additional information related to changes to our life insurance assumptions, see "-Critical Accounting Estimates." Compared to 1998 and prior years, we had a significant increase in term life insurance sales between 1999 and 2009, particularly in 1999 and 2000. The blocks of business issued since 2000 vary in size as compared to the large 1999 and 2000 blocks of business. As our large 10- and 15-year level premium period term life insurance policies written in 1999 and 2000 transitioned to their post-level guaranteed premium rate period, we experienced lower persistency compared to our pricing and valuation assumptions which accelerated DAC amortization in previous years. As our large 20-year level premium period business written in 1999 entered its 114
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post-level period, we experienced higher lapses resulting in accelerated DAC amortization in 2019. This trend continued in the first quarter of 2020 for the 1999 block, as it reached the end of its level premium period. Additionally, we experienced a similar trend with the 20-year level premium period business written in 2000 as it entered its post-level period during 2020 and into the first quarter of 2021 due to the 60-day grace period. If lapse experience on future 10-, 15- and 20-year level premium period blocks emerges similar to our large 20-year level premium period business written in 1999 and 2000, we would expect volatility in DAC amortization if persistency is lower than original assumptions, which would reduce profitability in our term life insurance products. However, going forward, given our smaller block sizes and reinsurance agreements in place, we would expect the impact to DAC amortization on policies entering the post-level period to be lower than what we experienced in 2019 and 2020. We have also taken actions to mitigate potentially unfavorable impacts through the use of reinsurance, particularly for certain term life insurance policies issued between 2001 and 2004.
Fixed annuities
Results of our fixed annuities business are affected primarily by investment
performance, interest rate levels, the slope of the interest rate yield curve,
net interest spreads, equity market conditions, mortality, persistency and
expense and commission levels. We no longer solicit sales of traditional fixed
annuity products; however, we continue to service our existing retained and
reinsured blocks of business.
We monitor and change crediting rates on fixed annuities on a regular basis to
maintain spreads and targeted returns, if applicable. However, if interest rates
remain at current levels or decrease, we could see declines in spreads which
impact the margins on our products, particularly our single premium immediate
annuity products. We had premium deficiencies in our single premium immediate
annuity products in 2016 through 2019 that resulted in the establishment of
additional future policy benefit reserves that were reflected as charges to net
income. In 2021 and 2020, the results of our loss recognition testing did not
result in a premium deficiency; therefore, our liability for future policy
benefits was sufficient. If investment performance deteriorates or interest
rates decrease or remain at the current levels for an extended period of time,
we could incur additional charges in the future. The impacts of future adverse
changes in our assumptions could result in the establishment of additional
future policy benefit reserves and would be immediately reflected as a loss if
our margin for this block is again reduced below zero. Any favorable variation
would result in additional margin and higher income recognized over the
remaining duration of the
in-force
block but would not have an immediate benefit to net income. For additional
information, see "-Critical Accounting Estimates-Future Policy Benefits."
For fixed indexed annuities, equity market and interest rate performance and
volatility could also result in additional gains or losses, although associated
hedging activities are expected to partially mitigate these impacts.
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Segment results of operations
The following table sets forth the results of operations relating to our
Life Insurance
Increase (decrease) and
Years ended December 31, percentage change (Amounts in millions) 2021 2020 2019 2021 vs. 2020 Revenues: Premiums$ 2,454 $ 2,858 $ 2,861 $ (404 ) (14 )% Net investment income 3,029 2,878 2,852 151 5 % Net investment gains (losses) 329 517 82 (188 ) (36 )% Policy fees and other income 565 595 643 (30 ) (5 )% Total revenues 6,377 6,848 6,438 (471 ) (7 )% Benefits and expenses: Benefits and other changes in policy reserves 4,230 4,781 4,979 (551 ) (12 )% Interest credited 346 383 419 (37 ) (10 )% Acquisition and operating expenses, net of deferrals 865 620 604 245 40 % Amortization of deferred acquisition costs and intangibles 340 418 372 (78 ) (19 )% Interest expense - 5 17 (5 ) (100 )% Total benefits and expenses 5,781 6,207 6,391 (426 ) (7 )% Income from continuing operations before income taxes 596 641 47 (45 ) (7 )% Provision for income taxes 155 163 34 (8 ) (5 )% Income from continuing operations 441 478 13 (37 ) (8 )% Adjustments to income from continuing operations: Net investment (gains) losses, net (2) (330 ) (525 ) (89 ) 195 37 % Gains (losses) on early extinguishment of debt - 4 - (4 ) (100 )% Initial loss from life block (1) transaction 92 - - 92 NM Expenses related to restructuring (1) 17 1 3 16 NM Taxes on adjustments 47 110 18 (63 ) (57 )% Adjusted operating income (loss) available to Genworth Financial, (1) Inc.'s common stockholders$ 267 $ 68 $ (55 ) $ 199 NM
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
(2) For the years ended
losses were adjusted for DAC and other intangible amortization and certain
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The following table sets forth adjusted operating income (loss) for the businesses included in ourU.S. Life Insurance segment for the periods indicated: Increase (decrease) Years ended and percentage December 31, change (Amounts in millions) 2021 2020 2019 2021 vs. 2020 Adjusted operating income (loss) available toGenworth Financial, Inc.'s common stockholders: Long-term care insurance$ 445 $ 237 $ 57 $ 208 88 % Life insurance (269 ) (247 ) (181 ) (22 ) (9 )% Fixed annuities 91 78 69 13 17 % Total adjusted operating income (loss) available to Genworth (1)
$ 199 NM
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
2021 compared to 2020
Adjusted operating income (loss) available to
stockholders
• Adjusted operating income in our long-term care insurance business
increased
well as higher premiums and reduced benefits of
in-force
rate actions approved and implemented, which included a net favorable
impact from policyholder benefit reduction elections made as part of a
legal settlement. The increase was also attributable to favorable
development on IBNR claims. The year ended
higher claim reserves of$157 million associated with changes to incidence and mortality experience driven by COVID-19, which we believe are temporary.
• The adjusted operating loss in our life insurance business increased
as part of our annual review of assumptions in the fourth quarter of 2021
compared to a favorable unlocking of
Accounting Estimates" for additional information). The higher loss was
also attributable to higher mortality in 2021 compared to 2020 and higher
DAC impairments of$42 million in 2021 in our universal and term universal life insurance products principally due to lower future estimated gross profits. The higher loss was partially offset by lower lapses primarily associated with our large 20-year
term life insurance block written at the end of 2000 as it entered its
post-level premium period.
• Adjusted operating income in our fixed annuities business increased
our fixed indexed annuities driven by favorable changes in interest rates
and equity markets, partially offset by lower net spreads in 2021.
Revenues
Premiums
• Our long-term care insurance business decreased $30 million primarily
driven by policy terminations and policies entering
paid-up
status in 2021, partially offset by
2021 from
in-force
rate actions approved and implemented.
• Our life insurance business decreased
higher ceded reinsurance in 2021. We initially ceded
certain term life insurance premiums under a new reinsurance treaty as
part of a life block transaction in the fourth quarter of 2021. The
decrease was also attributable to the continued runoff of our term and
whole life insurance products in 2021.
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Net investment income
• Our long-term care insurance business increased
higher income of
U.S. Government Treasury Inflation Protected Securities ("TIPS") and bond calls. The increase was also attributable to higher average invested assets in 2021.
• Our life insurance business decreased
lower yields in 2021.
• Our fixed annuities business decreased
to lower average invested assets in 2021 due to block runoff.
Net investment gains (losses)
• Net investment gains in our long-term care insurance business decreased
$282 million principally due to net gains from the sale ofU.S. government securities in 2020 due to portfolio rebalancing and asset exposure management that did not recur, partially offset by higher
unrealized gains from changes in the fair value of equity securities in
2021.
• Net investment gains in our life insurance business increased
predominantly from higher net gains from the sale of investment
securities and higher unrealized gains from changes in the fair value of
equity securities in 2021.
• Net investment losses in our fixed annuities business decreased
$40 million primarily related to lower net derivative losses in 2021.
Policy fees and other income.
The decrease was mostly attributable to our life insurance business primarily
driven by the runoff of our
in-force
blocks. The year ended December 31, 2020 included an unfavorable unlocking of
$6 million in our universal and term universal life insurance products as part
of our annual review of assumptions in the fourth quarter of 2020.
Benefits and expenses
Benefits and other changes in policy reserves
• Our long-term care insurance business decreased
due to a more favorable impact of
2021 related to
in-force
rate actions approved and implemented, which included policyholder
benefit reduction elections made as part of a legal settlement, and from
favorable development on IBNR claims. Given our assumption that
COVID-19
accelerated mortality on our most vulnerable claimants and temporarily
decreased the number of new claims submitted, we increased claim reserves
by $199 million in 2020. In 2021, as the impacts of
COVID-19
lessened, we modestly strengthened our claim reserves by
account for changes to incidence and mortality experience driven by
COVID-19.
These decreases were partially offset by aging of the
in-force
block and higher incremental reserves of $347 million recorded in
connection with an accrual for profits followed by losses in 2021. The
year endedDecember 31, 2020 included a$17 million net favorable impact from the completion of our annual review of assumptions and methodologies.
• Our life insurance business decreased
higher ceded reinsurance in 2021. We initially ceded
certain term life insurance reserves under a new reinsurance treaty as
part of a life block transaction in the fourth quarter of 2021. This
decrease was partially offset by an unfavorable unlocking of
in our universal and term universal life insurance products as part of
our annual review of assumptions in the fourth quarter of 2021 compared
to a favorable unlocking of
Accounting Estimates-Policyholder account balances" for additional
information). Mortality was also higher in 2021 compared to 2020
attributable in part to
COVID-19.
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• Our fixed annuities business decreased
reserves in our fixed indexed annuities driven by favorable interest rate
and equity market changes in 2021 compared to an unfavorable market in
2020.
Interest credited.
The decrease in interest credited was driven by declines of $24 million and
$13 million in our fixed annuities and life insurance products, respectively,
due to lower average account values from block runoff and lower crediting rates
in 2021.
Acquisition and operating expenses, net of deferrals
• Our long-term care insurance business increased
related to higher premium taxes, commissions and other expenses of
$220 million in 2021 associated with our
in-force
rate action plan, which included expenses related to policyholder benefit
reduction elections made as part of a legal settlement.
• Our life insurance business increased $26 million predominately from
reinsurance costs recorded in connection with a life block transaction
completed in the fourth quarter of 2021.
Amortization of deferred acquisition costs and intangibles
• Our long-term care insurance business increased
from policy terminations and policies entering
paid-up
status in 2021.
• Our life insurance business decreased
to higher prior year lapses in our
20-year
term life insurance block written in 2000 and a less unfavorable
unlocking of $40 million in our universal and term universal life
insurance products as part of our annual review of assumptions in the
fourth quarter of 2021 compared to 2020. These decreases were partially
offset by higher DAC impairments of
and term universal life insurance products principally due to lower
future estimated gross profits.
• Our fixed annuities business decreased
lower DAC amortization reflecting the impact of favorable market changes
in 2021.
Interest expense.
The decrease in interest expense was due to our life insurance business
principally related to the early redemption of
non-recourse
funding obligations, partially offset by the
write-off
of $4 million in deferred borrowing costs in 2020.
Provision for income taxes.
The effective tax rate was 26.1% and 25.5% for the years ended December 31, 2021
and 2020, respectively. The increase in the effective tax rate is primarily
attributable to higher tax expense on forward starting swaps settled prior to
the enactment of the TCJA, which are tax effected at 35% as they are amortized
into net investment income, in relation to lower
pre-tax
income in 2021.
Long-term care insurance
As part of our strategy for our long-term care insurance business, we have been implementing, and expect to continue to pursue, significant premium rate increases and associated benefit reductions on older generation blocks of business in order to bring those blocks closer to a break-even point over time and reduce the strain on earnings and capital. We are also requesting premium rate increases and associated benefit reductions on newer blocks of business, as needed, some of which will be significant, to help bring their loss ratios back towards their original pricing. In aggregate, we estimate that we have achieved approximately$19.6 billion , on a net present value basis, of approved in-force rate increases since 2012. The$19.6 billion we have achieved has grown significantly since 2020 due in part to the value of our 2021 rate action approvals of$2.3 billion . Additionally, 119
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the benefit utilization trend assumption update for higher cost of care growth increased the value of the benefit reductions in connection with our previously achieved rate actions by$2.8 billion . We continue to work closely with the NAIC and state regulators to demonstrate the broad-based need for actuarially justified rate increases and associated benefit reductions in order to pay future claims.
The following table summarizes the impact from cumulative
in-force
rate actions on the results of operations of our long-term care insurance
business for the periods indicated:
Increase (decrease) and
Years ended December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020
Premiums $ 830 $ 746 $ 632 $ 84 11 %
Plus: Benefits and other changes
in policy reserves
(2) 912 507 614 405 80 %
Less: Acquisition and operating
expenses, net of deferrals (1)
(3) 282 62 52 220 NM
Adjusted operating income before
taxes 1,460 1,191 1,194 269 23 %
Income taxes 307 250 251 57 23 %
Adjusted operating income
(4) $ 1,153 $ 941 $ 943 $ 212 23 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
(2) Amounts represent benefit reductions elected by policyholders as an
alternative to increased premiums. These amounts reduced benefits and other
changes in policy reserves in our long-term care insurance business for the
periods indicated.
(3) Amounts include premium taxes, commissions and other expenses associated with
our long-term care insurance
in-force
rate action plan, which included expenses of
policyholder benefit reduction elections made as part of a legal settlement
for the year ended
expenses was
(4) Adjusted operating income available to
stockholders attributable to
in-force
rate actions excludes reserve updates resulting from profits followed by
losses.
See our results of operations above for additional details.
The following table presents net earned premiums and the loss ratio for our
long-term care insurance business for the periods indicated:
Increase (decrease) and
Years ended December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020
Net earned premiums:
Individual long-term care insurance
(1) $ 2,466 $ 2,497 $ 2,464 $ (31 ) (1 )%
Group long-term care insurance 124 123 119 1 1 %
Total $ 2,590 $ 2,620 $ 2,583 $ (30 ) (1 )%
Loss ratio 61 % 71 % 77 % (10 )%
(1) For the years ended
increased premiums of$830 million ,$746 million and$632 million , respectively, from in-force rate actions approved and implemented.
The loss ratio is the ratio of benefits and other changes in reserves less
tabular interest on reserves less loss adjustment expenses to net earned
premiums.
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2021 compared to 2020
Net earned premiums decreased in 2021 primarily driven by policy terminations and policies entering paid-up status, partially offset by$84 million of increased premiums in 2021 from in-force rate actions approved and implemented.
The loss ratio decreased in 2021 due to the lower benefits and other changes in
reserves as discussed above.
Life insurance
The following table sets forth selected operating performance measures regarding
our life insurance business as of or for the dates indicated:
Increase (decrease) and
As of or for years ended December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020
Term and whole life insurance
Net earned premiums
(1) $ (136 ) $ 238 $ 278 $ (374 ) (157 )%
Life insurance
in-force,
net of reinsurance 47,297 59,919 81,644 (12,622 ) (21 )%
Life insurance
in-force
before reinsurance 332,793 362,082 399,887 (29,289 ) (8 )%
Term universal life insurance
Net deposits $ 203 $ 217 $ 228 $ (14 ) (6 )%
Life insurance
in-force,
net of reinsurance 99,471 107,048 112,720 (7,577 ) (7 )%
Life insurance
in-force
before reinsurance 100,119 107,774 113,487 (7,655 ) (7 )%
Universal life insurance
Net deposits $ 259 $ 269 $ 360 $ (10 ) (4 )%
Life insurance
in-force,
net of reinsurance 31,117 32,501 33,917 (1,384 ) (4 )%
Life insurance
in-force
before reinsurance 35,228 36,839 38,566 (1,611 ) (4 )%
Total life insurance
Net earned premiums and deposits
(1) $ 326 $ 724 $ 866 $ (398 ) (55 )%
Life insurance
in-force,
net of reinsurance 177,885 199,468 228,281 (21,583 ) (11 )%
Life insurance
in-force
before reinsurance 468,140 506,695 551,940 (38,555 ) (8 )%
(1) In the fourth quarter of 2021, we ceded premiums of
with certain term life insurance policies under a new reinsurance treaty as
part of a life block transaction.
We no longer solicit sales of our traditional life insurance products; however,
we continue to service our existing blocks of business.
2021 compared to 2020
Term and whole life insurance
Net earned premiums decreased primarily attributable to higher ceded reinsurance in 2021. We initially ceded$360 million of certain term life insurance premiums under a new reinsurance treaty as part of a life block transaction in the fourth quarter of 2021. The decrease in net earned premiums was also attributable to the continued runoff of our term life insurance products. Life insurance in-force also decreased as a result of the continued runoff of our term life insurance products, including from 2020 lapse experience in our large 20-year term life insurance block written in 2000.
Universal and term universal life insurance
Net deposits decreased in 2021 primarily attributable to the continued runoff of
our
in-force
blocks.
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Fixed annuities
The following table sets forth selected operating performance measures regarding
our fixed annuities as of or for the dates indicated:
As of or for years ended
Increase (decrease) and
December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020
Account value, beginning of period
$ (1,208 ) (9 )% Deposits 83 80 85 3 4 % Surrenders, benefits and product charges (1,976 ) (1,886 ) (2,137 ) (90 ) (5 )% Net flows (1,893 ) (1,806 ) (2,052 ) (87 ) (5 )% Interest credited and investment performance 349 405 486 (56 ) (14 )% Effect of accumulated net unrealized investment gains (losses) (108 ) 193 241 (301 ) (156 )% Account value, end of period$ 10,163 $ 11,815 $ 13,023 $ (1,652 ) (14 )%
We no longer solicit sales of our traditional fixed annuity products; however,
we continue to service our existing block of business.
2021 compared to 2020
Account value as of
surrenders and benefits exceeded favorable market performance and interest
credited.
Runoff segment
Trends and conditions
Results of our Runoff segment are affected primarily by investment performance,
interest rate levels, net interest spreads, equity market conditions, mortality,
surrenders and scheduled maturities. In addition, the results of our Runoff
segment can significantly impact our regulatory capital requirements,
distributable earnings and liquidity. We use hedging strategies as well as
liquidity planning and asset-liability management to help mitigate the impacts.
In addition, we may consider reinsurance opportunities to further mitigate
volatility in results and manage capital in the future.
Equity market volatility and interest rate movements have caused fluctuations in
the results of our variable annuity products and regulatory capital
requirements. In the future, equity and interest rate market performance and
volatility could result in additional gains or losses in these products although
associated hedging activities are expected to partially mitigate these impacts.
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Segment results of operations
The following table sets forth the results of operations relating to our Runoff
segment for the periods indicated:
Years ended
Increase (decrease) and
December 31, percentage change (Amounts in millions) 2021 2020 2019 2021 vs. 2020 Revenues: Net investment income$ 194 $ 210 $ 187 $ (16 ) (8 )% Net investment gains (losses) 3 (26 ) (25 ) 29 112 % Policy fees and other income 134 130 140 4 3 % Total revenues 331 314 302 17 5 % Benefits and expenses: Benefits and other changes in policy reserves 27 48 27 (21 ) (44 )% Interest credited 162 166 158 (4 ) (2 )% Acquisition and operating expenses, net of deferrals 53 48 52 5 10 % Amortization of deferred acquisition costs and intangibles 20 23 18 (3 ) (13 )% Total benefits and expenses 262 285 255 (23 ) (8 )% Income from continuing operations before income taxes 69 29 47 40 138 % Provision for income taxes (1) 13 4 8 9 NM Income from continuing operations 56 25 39 31 124 % Adjustments to income from continuing operations: Net investment (gains) losses, net (2) (3 ) 23 21 (26 ) (113 )% Taxes on adjustments 1 (5 ) (4 ) 6 120 % Adjusted operating income available toGenworth Financial, Inc.'s common stockholders$ 54 $ 43 $ 56 $ 11 26 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
(2) For the years ended
were adjusted for DAC and other intangible amortization and certain benefit
reserves of
2021 compared to 2020
Adjusted operating income available to
stockholders
Adjusted operating income increased primarily due to favorable equity market and interest rate performance, partially offset by lower investment income in 2021. The year endedDecember 31, 2020 included an unfavorable assumption update of$5 million . Revenues
Net investment income decreased largely due to lower average invested assets in
our variable annuity products and lower policy loan income in our
corporate-owned life insurance products in 2021.
The change to net investment gains in 2021 from net investment losses in 2020 was primarily related to gains on embedded derivatives associated with our variable annuity products with GMWBs in 2021 compared to losses in 2020, partially offset by derivative losses in 2021 compared to derivative gains in 2020.
Policy fees and other income increased principally from higher fee income driven
mostly by an increase in the average account values in our variable annuity
products in 2021.
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Benefits and expenses
Benefits and other changes in policy reserves decreased primarily attributable to lower GMDB reserves in our variable annuity products due to favorable equity market and interest rate performance. The year endedDecember 31, 2020 included an unfavorable assumption update of$7 million .
Interest credited decreased largely due to our corporate-owned life insurance
products in 2021.
Acquisition and operating expenses, net of deferrals, increased mainly from
higher commissions in our variable annuity products in 2021.
Amortization of deferred acquisition costs and intangibles decreased mainly
related to lower DAC amortization in our variable annuity products principally
from favorable equity market performance in 2021.
Provision for income taxes. The effective tax rate increased to 18.5% for the year endedDecember 31, 2021 from 14.5% for the year endedDecember 31, 2020 . The increase was primarily attributable to tax benefits from tax favored items in relation to higher pre-tax income in 2021.
Runoff selected operating performance measures
Variable annuity and variable life insurance products
The following table sets forth selected operating performance measures regarding
our variable annuity and variable life insurance products as of or for the dates
indicated:
As of or for the years ended Increase (decrease) and
December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020
Account value, beginning of period
(1 )% Deposits 19 20 25 (1 ) (5 )% Surrenders, benefits and product charges (607 ) (559 ) (640 ) (48 ) (9 )% Net flows (588 ) (539 ) (615 ) (49 ) (9 )% Interest credited and investment performance 426 498 739 (72 ) (14 )% Account value, end of period$ 4,839 $ 5,001 $ 5,042 $ (162 ) (3 )% We no longer solicit sales of our variable annuity or variable life insurance products; however, we continue to service our existing blocks of business and accept additional deposits on existing contracts and policies.
2021 compared to 2020
Account value as ofDecember 31, 2021 decreased compared toDecember 31, 2020 primarily related to surrenders, partially offset by favorable equity market performance in 2021. 124
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Funding agreements
The following table presents the account value of our funding agreements as of
or for the dates indicated:
As of or for the years ended Increase (decrease) and
December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020
Account value, beginning of period $ 300 $ 253 $ 381 $ 47 19 %
Deposits - 150 - (150 ) (100 )%
Surrenders and benefits (52 ) (106 ) (136 ) 54 51 %
Net flows (1)
(52 ) 44 (136 ) (96 ) NM
Interest credited 2 3 8 (1 ) (33 )%
Account value, end of period $ 250 $ 300 $ 253 $ (50 ) (17 )%
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
2021 compared to 2020
Account value as of
mainly attributable to a maturity payment in 2021.
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Corporate and Other Activities
Results of operations
The following table sets forth the results of operations relating to Corporate
and Other activities for the periods indicated:
Increase (decrease) and
Years ended December 31, percentage change
(Amounts in millions) 2021 2020 2019 2021 vs. 2020
Revenues:
Premiums $ 6 $ 7 $ 8 $ (1 ) (14 )%
Net investment income 6 6 8 - - %
Net investment gains (losses) (1)
(7 ) 5 (31 ) (12 ) NM
Policy fees and other income 1 (2 ) 2 3 150 %
Total revenues 6 16 (13 ) (10 ) (63 )%
Benefits and expenses:
Benefits and other changes in policy
reserves 1 4 3 (3 ) (75 )%
Acquisition and operating expenses, net
of deferrals 75 61 62 14 23 %
Amortization of deferred acquisition
costs and intangibles 2 1 3 1 100 %
Interest expense 109 172 214 (63 ) (37 )%
Total benefits and expenses 187 238 282 (51 ) (21 )%
Loss from continuing operations before
income taxes (181 ) (222 ) (295 ) 41 18 %
Benefit for income taxes (53 ) (39 ) (56 ) (14 ) (36 )%
Loss from continuing operations (128 ) (183 ) (239 ) 55 30 %
Adjustments to loss from continuing
operations:
Net investment (gains) losses (1)
7 (5 ) 31 12 NM
(Gains) losses on early extinguishment (1)
of debt 45 5 - 40 NM
Expenses related to restructuring (1)
14 2 1 12 NM
Taxes on adjustments (1)
(14 ) (1 ) (7 ) (13 ) NM
Adjusted operating loss available to
Genworth Financial Inc.'s common
stockholders $ (76 ) $ (182 ) $ (214 ) $ 106 58 %
(1) We define "NM" as not meaningful for increases or decreases greater than
200%.
2021 compared to 2020
Adjusted operating loss available to
stockholders
The adjusted operating loss decreased primarily related to lower interest
expense, higher tax benefits of
positions due to the expiration of certain statute of limitations and lower
operating costs in 2021.
Revenues
The change to net investment losses in 2021 from net investment gains in 2020 was predominantly related to higher derivative losses and lower net realized gains from the sale of investment securities in 2021.
Benefits and expenses
Acquisition and operating expenses, net of deferrals, increased mainly driven by
a
senior notes compared to a
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make-whole premiums of$17 million related to the early redemption ofGenworth Holdings' senior notes and higher restructuring costs of$12 million in 2021, partially offset by lower operating costs. Interest expense decreased largely from the redemption ofGenworth Holdings' senior notes due inFebruary 2021 , the repurchase and early redemption ofGenworth Holdings' senior notes due inSeptember 2021 and from a lower floating rate of interest on our junior subordinated notes. The increase in the benefit for income taxes was primarily related to a reduction in uncertain tax positions due to the expiration of certain statute of limitations, partially offset by a lower pre-tax loss in 2021.
Investments and Derivative Instruments
General macroeconomic environment
The stability of both the financial markets and global economies in which we
operate impacts the sales, revenue growth and profitability trends of our
businesses as well as the value of assets and liabilities.
Varied levels of economic performance, coupled with uncertain economic outlooks, changes in government policy, global trade, regulatory and tax reforms, and other changes in market conditions, such as inflation, will continue to influence investment and spending decisions by consumers and businesses as they adjust their consumption, debt, capital and risk profiles in response to these conditions, including as a result of COVID-19. These trends change as investor confidence in the markets and the outlook for some consumers and businesses shift. As a result, our sales, revenues and profitability trends of certain insurance and investment products as well as the value of assets and liabilities could be impacted going forward. In particular, factors such as the length of COVID-19 and the speed of the economic recovery, government responses to COVID-19 (such as government stimulus), government spending, monetary policies (such as tightening quantitative easing), the volatility and strength of the capital markets, changes in tax policy and/or inU.S. tax legislation, inflation, international trade and the impact of global financial regulation reform will continue to affect economic and business outlooks, level of interest rates, consumer confidence and consumer behavior moving forward. TheU.S. Federal Reserve is expected to combat high inflation through changes in its monetary policy, including through raising the benchmark prime lending rate. During the fourth quarter of 2021, theU.S. Federal Reserve maintained interest rates near zero as theU.S. economy continued to recover from the negative impact of COVID-19. During itsNovember 2021 meeting, theU.S. Federal Reserve announced it would begin tapering its asset purchases and announced in itsDecember 2021 meeting that it would accelerate this reduction inJanuary 2022 with a targeted end to its asset purchase program byMarch 2022 . TheU.S. Federal Reserve also revised its interest rate forecast during itsDecember 2021 meeting and now projects three 25 basis point rate increases in 2022, with the first expected as early asMarch 2022 . TheU.S. economy continued to show signs of recovery from COVID-19 during the fourth quarter of 2021, demonstrated by gross domestic product growth of 6.9%. However, supply chain disruptions, rising commodity prices and a tightening labor market have elevated inflationary pressures in theU.S. economy. Crude oil prices reached a seven-year high inOctober 2021 and the unemployment rate decreased to 3.9% as ofDecember 31, 2021 but labor participation continues to be suppressed. TheDecember 2021 consumer price index reported the highest annualU.S. inflation rate in nearly 40 years, which influenced theU.S. Federal Reserve's policy changes during the fourth quarter of 2021. Although inflation continued to trend higher throughout 2021, it did not have a material effect on our 2021 results of operations. However, persistently high inflation may impact future healthcare costs and the cost of care in our long-term care insurance business. Several assumptions were updated as part of ourU.S. life insurance business annual assumption review, including benefit utilization, or cost of care growth. Prior to the completion of ourU.S. life insurance business annual assumption review, we had assumed that long-term benefit utilization would improve over time. However, given the high inflation and minimum wage increases in some large states, we now expect long-term benefit utilization to trend higher than we previously assumed. 127
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TheU.S. and international governments, theU.S. Federal Reserve , other central banks and other legislative and regulatory bodies have taken certain actions in response to COVID-19 to support the global economy and capital markets. These policies and actions have generally been supportive to the worldwide economy; however, in spite of these supportive policies theU.S. economy contracted in 2020 and the world economy fell into a recession. Gross domestic product rebounded sharply in 2021 due in part to the continued rollout of the vaccine and the tempered re-opening of theU.S. economy. However, given the potential for future actions to be taken to mitigate the risk of a virus re-emergence due to variants, or due to high inflation and supply chain disruptions, it is possible theU.S. economy could fall into a recession. Moreover, we continue to closely monitor the operating results and financial position of Enact Holdings, particularly related to new delinquency trends and whether borrowers in a forbearance plan ultimately cure or result in a claim payment. Furthermore, rising interest rates may impact mortgage origination volume which could impede Enact Holdings' financial progress, including its ability to return capital through dividends toGenworth . If these trends move in an unfavorable direction in contrast to our current projections, our liquidity, financial position and results of operations could be adversely impacted.
Trends and conditions
Investments
U.S. Treasury yields fluctuated during the fourth quarter of 2021 largely due to expected changes in theU.S. Federal Reserve's monetary policy, inflation concerns and the new COVID-19 omicron variant. TheU.S. Treasury yield curve flattened significantly at the end of the fourth quarter of 2021, with the two-year and three-yearTreasury yields increasing, mostly from expectations of interest rate increases by theU.S. Federal Reserve , and the 30-yearTreasury yield decreasing slightly. During the fourth quarter of 2021, the 10-yearTreasury yield fell before slowly recovering as fears of the COVID-19 omicron variant's economic impacts subsided, ending the fourth quarter of 2021 in line with the yield as ofSeptember 30, 2021 . Credit markets were resilient at the beginning of the fourth quarter of 2021, but as interest rate and equity volatility increased towards the end of 2021, credit spreads began to widen modestly. The onset of the COVID-19 omicron variant in lateNovember 2021 widened credit spreads to its highest levels in 2021 but spreads tightened again as both equity markets and interest rates stabilized. Despite added macroeconomic volatility, driven mostly by the COVID-19 omicron variant, the shift inU.S. Federal Reserve policy, political gridlock and rising geopolitical tension, investment grade credit spreads remained near post-financial crisis lows throughout 2021. Higher yields inthe United States , compared to the rest of the global market, continued to makethe United States credit market attractive to both domestic and foreign investors. As ofDecember 31, 2021 , we did not have any modifications or extensions of commercial mortgage loans that were considered troubled debt restructurings. Modified loans represented less than 1% of our total loan portfolio as ofDecember 31, 2021 , as borrowers have sought additional relief related to COVID-19. We are working with individual borrowers impacted by COVID-19 to provide alternative forms of relief for a specified period of time. The modified loan population continues to decrease as modification terms expire and property valuations stabilize. Most of our borrowers are current on payments and we did not experience a significant impact from troubled debt restructurings in 2021.
As of
investment grade, comprised 82% of our total invested assets and cash.
Derivatives
As ofDecember 31, 2021 ,$946 million notional of our derivatives portfolio was cleared through theChicago Mercantile Exchange ("CME"). The customer swap agreements that govern our cleared derivatives contain provisions that enable our clearing agents to request initial margin in excess of CME requirements. As ofDecember 31, 2021 , we posted initial margin of$67 million to our clearing agents, which represented 128
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$33 million more than was otherwise required by the clearinghouse. Because our clearing agents serve as guarantors of our obligations to the CME, the customer agreements contain broad termination provisions that are not specifically dependent on ratings. As ofDecember 31, 2021 ,$9.3 billion notional of our derivatives portfolio was in bilateral OTC derivative transactions pursuant to which we have posted aggregate independent amounts of$469 million and are holding collateral from counterparties in the amount of$308 million . InJuly 2017 , theUnited Kingdom Financial Conduct Authority announced its intention to transition away from LIBOR, with its full elimination to occur after 2021. The LIBOR tenors, such as the three-month LIBOR, have various phase-out dates with the last committed publication date ofJune 30, 2023 . The Alternate Reference Rate Committee ("ARRC"), convened by theBoard of Governors of theFederal Reserve System and theNew York Federal Reserve Bank , has endorsed the Secured Overnight Financing Rate ("SOFR") as its preferred replacement benchmark forU.S. dollar LIBOR. SOFR is calculated and published by theNew York Federal Reserve Bank and reflects the combination of three overnightU.S. TreasuryRepo Rates . The rate is different from LIBOR, in that it is a risk-free rate, is backward-looking instead of forward-looking, is a secured rate and currently is available primarily as an overnight rate rather than a 1-, 3- or 6-month rate available for LIBOR. Upon the announcement, we formed a working group comprised of finance, investments, derivative, and tax professionals, as well as lawyers (the "Working Group") to evaluate contracts and perform analysis of our LIBOR-based derivative instrument and investment exposure, as well as debt (including subordinated debt andFederal Home Loan Bank loans), reinsurance agreements and institutional products within the Runoff segment, as a result of the elimination of LIBOR.The Working Group took inventory of all investments with LIBOR exposure and developed a transition plan for the nearly 400 instruments identified. We have completed our assessment of operational readiness for LIBOR cessation related to our various instruments and ourWorking Group will continue to monitor the process of elimination and replacement of LIBOR, including any new accounting pronouncements that may be issued to provide further transition relief due to the extended cessation dates of certain LIBOR tenors. Since the initial announcement, we have terminated the majority of our LIBOR-based swaps and entered into alternative rate swaps. In anticipation of the elimination of LIBOR, we plan to continue to convert our remaining LIBOR-based derivatives in a similar manner. In addition, our non-recourse funding obligations with interest rates based on one-month LIBOR were redeemed inJanuary 2020 . Moreover, we will continue to monitor the developments coming from ARRC, who is expected to authorize the use of an alternative rate to replace the current contractual three-month LIBOR rate applied toGenworth Holdings' junior subordinated notes due in 2066. Although uncertainty remains surrounding the final cessation and transition away from LIBOR, we do not expect a material adverse impact on our results of operations or financial condition. 129
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Investment results
The following table sets forth information about our investment income,
excluding net investment gains (losses), for each component of our investment
portfolio for the years ended
Increase (decrease)
2021 2020 2019 2021 vs. 2020
(Amounts in millions) Yield Amount Yield Amount Yield Amount Yield Amount
Fixed maturity securities-taxable 4.5 % $ 2,411 4.7 % $ 2,448 4.7 % $ 2,444 (0.2 )% $ (37 )
Fixed maturity
securities-non-taxable 5.6 % 7 4.3 % 6 6.1 % 8 1.3 % 1
Equity securities 4.0 % 9 4.2 % 12 6.2 % 12 (0.2 )% (3 )
Commercial mortgage loans 5.5 % 376 5.0 % 345 5.0 % 348 0.5 % 31
Policy loans 9.3 % 189 9.5 % 199 8.9 % 180 (0.2 )% (10 )
Limited partnerships
(1) 15.7 % 223 9.1 % 72 8.5 % 44 6.6 % 151
Other invested assets
(2) 69.7 % 241 56.0 % 223 56.2 % 190 13.7 % 18
Cash, cash equivalents, restricted cash
and short-term investments - % 1 0.5 % 15 1.6 % 33 (0.5 )%
(14 )
Gross investment income before expenses and fees 5.2 % 3,457 5.0 % 3,320 5.1 % 3,259 0.2 % 137 Expenses and fees (0.1 )% (87 ) (0.1 )% (93 ) (0.2 )% (95 ) - % 6 Net investment income 5.1 %$ 3,370 4.9 %$ 3,227 4.9 %$ 3,164 0.2 %$ 143 Average invested assets and cash$ 66,099 $ 65,982 $ 64,091 $ 117
(1) Limited partnership investments are primarily equity-based and do not have
fixed returns by period.
(2) Investment income for other invested assets includes amortization of
terminated cash flow hedges, which have no corresponding book value within
the yield calculation.
Yields are based on net investment income as reported underU.S. GAAP and are consistent with how we measure our investment performance for management purposes. Yields are annualized, for interim periods, and are calculated as net investment income as a percentage of average quarterly asset carrying values except for fixed maturity securities, derivatives and derivative counterparty collateral, which exclude unrealized fair value adjustments and securities lending activity, which is included in other invested assets and is calculated net of the corresponding securities lending liability. Annualized weighted-average investment yields increased in 2021 compared to 2020 primarily driven by higher investment income on slightly higher average invested assets. Net investment income included higher income of$151 million from limited partnerships,$48 million from bond calls and commercial mortgage loan prepayments and$45 million of higher income related to inflation-driven volatility on TIPS in 2021. 130
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The following table sets forth net investment gains (losses) for the years endedDecember 31 : (Amounts in millions) 2021 2020 2019 Realized investment gains (losses): Available-for-sale fixed maturity securities: Realized gains$ 67 $ 471 $ 90 Realized losses (10 ) (29 ) (38 ) Net realized gains (losses) on available-for-sale fixed maturity securities 57 442 52 Net realized gains (losses) on equity securities sold (7 ) (1 ) - Net realized gains (losses) on limited partnerships 3 - 1 Total net realized investment gains (losses) 53 441 53
Impairments:
Total other-than-temporary impairments - - (1 )
Portion of other-than-temporary impairments included in
other comprehensive income (loss)
- - - Net other-than-temporary impairments - - (1 ) Net change in allowance for credit losses on available-for-sale fixed maturity securities (6 ) (5 ) - Write-down of available-for-sale fixed maturity securities (1 )
(4 ) -
Net unrealized gains (losses) on equity securities still
held
1 4 14 Net unrealized gains (losses) on limited partnerships 264 112 28 Commercial mortgage loans (3 ) (2 ) (2 ) Derivative instruments 14 (49 ) (70 ) Other 1 (5 ) 5 Net investment gains (losses)$ 323 $ 492 $ 27 2021 compared to 2020
• We recorded net gains related to the sale of
available-for-sale
fixed maturity securities of $57 million in 2021 primarily from sales of
U.S. corporate securities. Net gains related to the sale of
available-for-sale
fixed maturity securities of $442 million in 2020 were primarily driven
by the sale of
and asset exposure management as a result of the prolonged low interest
rate environment.
• We recorded higher net unrealized gains of
partnership investments in 2021 compared to 2020 primarily driven by
higher average limited partnership investments, as well as favorable
performance of private equity investments in 2021.
• Net investment gains related to derivatives of
primarily associated with embedded derivatives related to our indexed
universal life insurance products, partially offset by losses from
decreases in the values of investments used to protect statutory surplus
from equity market fluctuations and losses associated with embedded
derivatives related to our fixed indexed annuity products.
Net investment losses related to derivatives of
primarily associated with embedded derivatives related to our fixed indexed
annuity and runoff variable annuity products.
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Investment portfolio
The following table sets forth our cash, cash equivalents, restricted cash and
invested assets as of
2021 2020
(Amounts in millions) Carrying value % of total Carrying value % of total
Available-for-sale
fixed maturity securities:
Public $ 42,501 58 % $ 44,776 58 %
Private 17,979 24 18,719 24
Equity securities 198 - 386 -
Commercial mortgage loans,
net 6,830 9 6,743 9
Policy loans 2,050 3 1,978 3
Limited partnerships 1,900 3 1,049 1
Other invested assets 820 1 1,050 2
Cash, cash equivalents and
restricted cash 1,571 2 2,561 3
Total cash, cash
equivalents, restricted cash
and invested assets $ 73,849 100 % $ 77,262 100 %
For a discussion of the change in cash, cash equivalents, restricted cash and
invested assets, see the comparison for this line item under "-Consolidated
Balance Sheets." See note 4 to our consolidated financial statements under "Item
8-Financial Statements and Supplementary Data" for additional information
related to our investment portfolio.
We hold fixed maturity and equity securities, derivatives, embedded derivatives
and certain other financial instruments, which are carried at fair value. Fair
value is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date. As of
December 31, 2021 , approximately 6% of our investment holdings recorded at fair
value was based on significant inputs that were not market observable and were
classified as Level 3 measurements. See note 16 to our consolidated financial
statements under "Item 8-Financial Statements and Supplementary Data" for
additional information related to fair value.
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Fixed maturity securities
As ofDecember 31, 2021 , the amortized cost or cost, gross unrealized gains (losses), allowance for credit losses and fair value of our fixed maturity securities classified as available-for-sale were as follows: Amortized Gross Gross Allowance cost or unrealized unrealized for credit Fair (Amounts in millions) cost gains losses losses value Fixed maturity securities:U.S. government, agencies and government-sponsored enterprises$ 3,368 $ 1,184 $ - $ -$ 4,552 State and political subdivisions 2,982 474 (6 ) - 3,450 Non-U.S. government 762 86 (13 ) - 835 U.S. corporate: Utilities 4,330 783 (9 ) - 5,104 Energy 2,581 363 (10 ) - 2,934 Finance and insurance 8,003 1,012 (24 ) - 8,991 Consumer-non-cyclical 5,138 1,029 (8 ) - 6,159 Technology and communications 3,345 476 (13 ) - 3,808 Industrial 1,322 175 (3 ) - 1,494 Capital goods 2,334 415 (4 ) - 2,745 Consumer-cyclical 1,703 203 (7 ) - 1,899 Transportation 1,122 249 - - 1,371 Other 379 41 (1 ) - 419 Total U.S. corporate 30,257 4,746 (79 ) - 34,924 Non-U.S. corporate: Utilities 867 63 (2 ) - 928 Energy 1,194 190 (1 ) - 1,383 Finance and insurance 2,171 270 (9 ) - 2,432 Consumer-non-cyclical 664 81 (2 ) - 743 Technology and communications 1,085 166 (1 ) - 1,250 Industrial 933 117 (3 ) - 1,047 Capital goods 640 66 (1 ) - 705 Consumer-cyclical 316 27 (2 ) - 341 Transportation 422 68 (1 ) - 489 Other 1,052 169 (4 ) - 1,217 Total non-U.S. corporate 9,344 1,217 (26 ) - 10,535 Residential mortgage-backed 1,325 116 (1 ) - 1,440 Commercial mortgage-backed 2,435 152 (3 ) - 2,584 Other asset-backed 2,138 29 (7 ) - 2,160 Total available-for-sale fixed maturity securities$ 52,611 $ 8,004 $ (135 ) $ -$ 60,480 133
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As ofDecember 31, 2020 , the amortized cost or cost, gross unrealized gains (losses), allowance for credit losses and fair value of our fixed maturity securities classified as available-for-sale were as follows: Amortized Gross Gross Allowance cost or unrealized unrealized for credit Fair (Amounts in millions) cost gains losses losses value Fixed maturity securities:U.S. government, agencies and government-sponsored enterprises$ 3,401 $ 1,404 $ - $ -$ 4,805 State and political subdivisions 2,622 544 (1 ) - 3,165 Non-U.S. government 728 130 (4 ) - 854 U.S. corporate: Utilities 4,226 970 (2 ) - 5,194 Energy 2,532 367 (16 ) - 2,883 Finance and insurance 7,798 1,306 (2 ) - 9,102 Consumer-non-cyclical 5,115 1,323 (1 ) - 6,437 Technology and communications 3,142 619 - - 3,761 Industrial 1,370 232 - - 1,602 Capital goods 2,456 535 - - 2,991 Consumer-cyclical 1,663 284 - - 1,947 Transportation 1,198 304 (2 ) - 1,500 Other 395 45 - - 440 Total U.S. corporate 29,895 5,985 (23 ) - 35,857 Non-U.S. corporate: Utilities 838 84 - - 922 Energy 1,172 209 (1 ) - 1,380 Finance and insurance 2,130 353 (6 ) (1 ) 2,476 Consumer-non-cyclical 662 112 (1 ) - 773 Technology and communications 1,062 229 - - 1,291 Industrial 969 159 - - 1,128 Capital goods 510 67 (1 ) - 576 Consumer-cyclical 331 41 (1 ) - 371 Transportation 483 88 (1 ) - 570 Other 1,088 236 - - 1,324 Total non-U.S. corporate 9,245 1,578 (11 ) (1 ) 10,811 Residential mortgage-backed (1) 1,698 211 - - 1,909 Commercial mortgage-backed 2,759 231 (13 ) (3 ) 2,974 Other asset-backed 3,069 55 (4 ) - 3,120 Total available-for-sale fixed maturity securities$ 53,417 $ 10,138 $ (56 ) $ (4 )$ 63,495
(1) Fair value included
Alt-A
residential mortgage loans.
Fixed maturity securities decreased$3.0 billion principally from a decrease in net unrealized gains related to an increase in interest rates, as well as sales, maturities and repayments exceeding purchases in 2021. 134
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Other invested assets
The following table sets forth the carrying values of our other invested assets as ofDecember 31 : 2021 2020 (Amounts in millions) Carrying value % of total Carrying value % of total Derivatives $ 414 50 % $ 574 55 % Bank loan investments 363 45 344 33 Short-term investments 26 3 45 4 Securities lending collateral - - 67 6 Other investments 17 2 20 2 Total other invested assets $ 820 100 % $ 1,050 100 %
Derivatives decreased largely from an increase in interest rates and
terminations in 2021. Securities lending collateral decreased due to our
suspension of the securities lending program in 2021.
Derivatives
The activity associated with derivative instruments can generally be measured by
the change in notional value over the periods presented. However, for GMWB
embedded derivatives, fixed index annuity embedded derivatives and indexed
universal life embedded derivatives, the change between periods is best
illustrated by the number of policies. The following tables represent activity
associated with derivative instruments as of the dates indicated:
December 31, Maturities/ December 31,
(Notional in millions) Measurement 2020 Additions terminations 2021
Derivatives designated as hedges
Cash flow hedges:
Interest rate swaps Notional $ 8,178 $ - $ (525 ) $ 7,653
Foreign currency swaps Notional 127 - - 127
Total cash flow hedges 8,305 - (525 ) 7,780
Total derivatives designated as
hedges 8,305 - (525 ) 7,780
Derivatives not designated as
hedges
Interest rate swaps Notional 4,674 - (4,674 ) -
Equity index options Notional 2,000 1,438 (1,992 ) 1,446
Financial futures Notional 1,104 3,887 (4,045 ) 946
Other foreign currency contracts Notional 1,186 25 (1,128 ) 83
Total derivatives not designated
as hedges 8,964 5,350 (11,839 ) 2,475
Total derivatives $ 17,269 $ 5,350 $ (12,364 ) $ 10,255
December 31, Maturities/ December 31,
(Number of policies) Measurement 2020 Additions terminations 2021
Derivatives not designated as
hedges
GMWB embedded derivatives Policies 23,713 - (1,909 ) 21,804
Fixed index annuity embedded
derivatives Policies 12,778 - (3,434 ) 9,344
Indexed universal life
embedded derivatives Policies 842 - (36 ) 806
The decrease in the notional value of derivatives was primarily attributable to
the termination of interest rate swaps used to protect statutory capital from
interest rate fluctuations, the termination of foreign currency
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derivatives previously entered into to hedge payments to AXA under the
promissory note that was fully repaid in the third quarter of 2021 and the
termination of interest rate swaps used to hedge interest rate fluctuations on
The number of policies related to our embedded derivatives decreased as these
products are no longer being offered and continue to runoff.
Critical Accounting Estimates
The accounting estimates and assumptions (including sensitivities) discussed in this section are those that we consider to be critical to an understanding of our consolidated financial statements because their application places significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. For all of these accounting estimates and assumptions (including sensitivities), we caution that future events seldom develop as estimated and management's best estimates often require adjustment. See "Cautionary Note Regarding Forward-looking Statements." Insurance liabilities and reserves . We calculate and maintain reserves for the estimated future payment of claims to our policyholders and contractholders based on actuarial assumptions and in accordance withU.S. GAAP and industry practice. We build these reserves as the estimated value of those obligations increases, and we release these reserves as those future obligations are paid, experience changes or policies lapse. The reserves we establish reflect estimates and actuarial assumptions and methodologies with regard to our future experience, involve the exercise of significant judgment and are inherently uncertain. Our future financial results depend significantly upon the extent to which our actual future experience is consistent with the assumptions we have used in determining our reserves as well as the assumptions originally used in pricing our products. Many factors, and changes in these factors, can affect future experience including, but not limited to: interest rates; investment returns and volatility; economic and social conditions, such as inflation, unemployment, home price appreciation or depreciation, and healthcare experience; policyholder persistency or lapses; insured mortality; insured morbidity; future premium rate increases and associated benefit reductions; expenses; and doctrines of legal liability and damage awards in litigation. Because these assumptions relate to factors that are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserve levels, results of operations and financial condition. Moreover, we may not be able to mitigate the impact of unexpected adverse experience by increasing premiums and/or other charges to policyholders (where we have the right to do so) or by offering benefit reductions as an alternative to increasing premiums.
Future policy benefits
The liability for future policy benefits is equal to the present value of
expected future benefits and expenses, less the present value of expected future
net premiums based on assumptions including projected interest rates and
investment returns, health care experience, policyholder persistency or lapses,
insured mortality, insured morbidity and expenses, all of which are
locked-in
at the time the policies are issued or acquired. In our long-term care insurance
business, our assumptions used in loss recognition testing also include
significant premium rate increases and associated benefit reductions that have
been filed and approved or are anticipated to be approved (including premium
rate increases and associated benefit reductions not yet filed). The liability
for future policy benefits is reviewed at least annually as a part of our loss
recognition testing using current assumptions based on the manner of acquiring,
servicing and measuring the profitability of the insurance contracts. Loss
recognition testing is generally performed at the line of business level, with
acquired blocks and certain reinsured blocks tested separately. Changes in how
we manage certain polices could require separate loss recognition testing and
could result in future charges to net income. If loss recognition testing
indicates a
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premium deficiency, the liability for future policy benefits is measured using updated assumptions, which become the new locked-in assumptions utilized going forward unless another premium deficiency charge is recorded.
See notes 2 and 9 in our consolidated financial statements under "Item
8-Financial Statements and Supplementary Data" for additional information
related to insurance reserves.
Long-term care insurance block, excluding our acquired block
We annually perform loss recognition testing for the liability for future policy benefits for our long-term care insurance products in the aggregate, excluding our acquired block of long-term care insurance, which is tested separately. The results of loss recognition testing are driven by changes to assumptions and methodologies primarily impacting claim termination rates, incidence and benefit utilization rates, mortality and lapse rates, as well as in-force rate actions. Claim termination rates refer to the expected rates at which claims end. Incidence rates represent the likelihood the policyholder will go on claim. Benefit utilization rates estimate how much of the available policy benefits are expected to be used. As ofDecember 31, 2021 and 2020, the liability for future policy benefits associated with our long-term care insurance block, excluding the acquired block, was$26.6 billion and$26.9 billion , respectively. A summary of certain of our significant estimates and assumptions used in the calculation of our long-term care insurance loss recognition testing margin was as follows for the periods presented: Other Block (Excluding Increase (decrease) and the Acquired Block) December 31, percentage change (Amounts in millions) 2021 2020 2021 vs. 2020 Select estimates and assumptions used in loss recognition testing: Present value of expected future benefits$ 49,495 $ 50,840 $ (1,345 ) (3 )% Future in-force rate action assumption$ 9,000 $ 8,000 $ 1,000 13 % Discount rate assumption ) 0 / 000 5.25 % 5.34 % (9 (2 )% In 2021 and 2020, the results of our loss recognition testing on our long-term care insurance block, excluding the acquired block, indicated that our DAC was recoverable and reserves were sufficient, with a margin of approximately$450 million to$900 million as ofDecember 31, 2021 compared to approximately$400 million to$800 million as ofDecember 31, 2020 . The margin in 2021 included updates for lapse, mortality, incidence, expenses, interest rates and benefit utilization (including cost of care growth), among others. The decrease in the present value of expected future benefits was primarily attributable to actual benefit reductions in 2021 and expected future benefit reductions associated with our in-force rate action plan (among other factors). The decrease was partially offset by assumption updates, most notably long-term benefit utilization, which we expect to trend higher than previously assumed due in part to higher cost of care growth driven by inflation. Our assumption for future in-force rate actions is based on our best estimate of the rate increases we expect given our current plans for rate increase filings and our historical experience regarding rate increase approvals. The increase in future rate actions in 2021 was the result of expected future in-force rate actions not yet filed, including in connection with the impacts from assumption updates, partially offset by in-force rate actions approved and implemented during 2021. An increase in the expected amount of in-force rate actions would favorably impact the results of our long-term care insurance margin testing, whereas any unexpected reduction in the amount of in-force rate actions would negatively impact our margins and could result in a premium deficiency. 137
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We assume a static discount rate that is in line with our current portfolio yield. This rate represents our expected investment returns based on the portfolio of assets supporting the netU.S. GAAP liability as of the calculation date and, therefore, excludes the impacts of qualifying hedge gains that are not currently amortizing. Because the discount rate is based on our current portfolio yields, changes in interest rates do not impact our loss recognition testing margins unless they result in changes to investment yields. Returns on new investments would need to exceed our current portfolio yield to benefit loss recognition testing margins.
The following sensitivities reflect hypothetical changes to certain of our
significant estimates and assumptions and the associated impact it would have on
our 2021 long-term care insurance loss recognition testing margin:
Other Block
(Excluding the
(Amounts in millions) Acquired Block)
Sensitivities on loss recognition testing
(1):
5% relative increase in future claim costs $ (2,475 )
10% reduction in benefit of future
in-force
rate actions $ (900 )
Discount rate decrease of 25 basis points
(2) $ (1,150 )
(1) The margin impacts are each discrete and do not reflect the impact one factor
may have on another. For example, the increase in claim costs does not
include any offsetting impacts from potential future
in-force
rate actions. Any such offset from
in-force
rate actions would primarily impact our long-term care insurance block,
excluding the acquired block.
(2) The 25 basis point decrease in the discount rate refers to a reduction in our
portfolio yields.
Any future adverse changes in our assumptions could result in both the impairment of DAC associated with our long-term care insurance products as well as the establishment of additional future policy benefit reserves. Any favorable variation would result in additional margin and higher income recognized over the remaining duration of the in-force block. Our positive margin for our long-term care insurance block, excluding the acquired block, is dependent on our assumptions regarding our ability to successfully implement our in-force rate action strategy involving premium rate increases and associated benefit reductions. For our long-term care insurance block, excluding the acquired block, any adverse changes in assumptions would only be reflected in net income as a loss to the extent the margin was reduced below zero.
Profits followed by losses
With respect to our long-term care insurance block, excluding the acquired block, while loss recognition testing supports that in the aggregate our reserves are sufficient, our future projections indicate we have projected profits in earlier periods followed by projected losses in later periods. As a result of this pattern of projected profits followed by projected losses, we will ratably accrue additional future policy benefit reserves over the profitable periods, currently expected to be through 2031, by the amounts necessary to offset estimated losses during the periods that follow. Such additional reserves are updated each period and calculated based on our estimate of the amount necessary to offset the losses in future periods utilizing expected income and current best estimate assumptions based on actual and anticipated experience, consistent with our loss recognition testing. We adjust the accrual rate prospectively, over the remaining profitable periods, without any catch-up adjustment. During the years endedDecember 31, 2021 and 2020, we increased our long-term care insurance future policy benefit reserves by$649 million and$302 million , respectively, to accrue for profits followed by losses. As ofDecember 31, 2021 and 2020, the total amount accrued for profits followed by losses was$1,274 million and$625 million , respectively. The accrual is recorded quarterly and is impacted by the pattern and present value of expected future losses which are updated annually at the time in which we perform loss recognition testing. During the fourth quarter of 2021, we updated our loss recognition testing assumptions, which included changes from our annual assumption review completed in the fourth quarter of 2021 as well as updates to our future in-force rate actions. The present value of expected future losses was approximately$2.5 billion and$2.1 billion as ofDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 and 2020, we estimate a factor of 138
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approximately 76% of those profits on our long-term care insurance block, excluding the acquired block, will be accrued in the future to offset estimated future losses during later periods. The factor was unchanged compared toDecember 31, 2020 due mostly to higher actual profits in 2021 resulting in a larger increase in accrued future policy benefits for profits followed by losses, as well as updates to our future in-force rate actions, offset by the updated profit pattern from our annual review of assumptions completed in the fourth quarter of 2021. There may be future adjustments to this estimate reflecting any variety of new and adverse trends that could result in increases to future policy benefit reserves for our profits followed by losses accrual, and such future increases could possibly be material to our results of operations and financial condition and liquidity.
Acquired block of long-term care insurance
In 2014, we had a premium deficiency in our acquired block of long-term care insurance; therefore, our assumptions that were updated in connection with the premium deficiency have remained locked-in. These updated assumptions will remain locked-in unless, and until such time as, another premium deficiency occurs. As ofDecember 31, 2021 and 2020, the liability for future policy benefits associated with our acquired block of long-term care insurance was$1.6 billion and$1.9 billion , respectively. A summary of certain of our significant estimates and assumptions used in the calculation of our long-term care insurance loss recognition testing margin was as follows for the periods presented: Acquired Block Increase (decrease) and December 31, percentage change (Amounts in millions) 2021 2020 2021 vs. 2020 Select estimates and assumptions used in loss recognition testing: Present value of expected future benefits$ 2,118 $ 2,403 $ (285 ) (12 )% Discount rate assumption ) 0 / 000 6.06 % 6.44 % (38 (6 )% Our acquired block of long-term care insurance had positive margin of approximately$50 million to$100 million as ofDecember 31, 2021 compared to approximately$100 million to$200 million as ofDecember 31, 2020 . The margin in 2021 included updates for most assumptions; however, the change in the discount rate was the most impactful to the overall decrease in the 2021 margin compared to 2020.
The following sensitivities reflect hypothetical changes to certain of our
significant estimates and assumptions and the associated impact it would have on
our 2021 long-term care insurance loss recognition testing margin:
Acquired
(Amounts in millions) Block
Sensitivities on loss recognition testing margin
(1):
5% relative increase in future claim costs $ (106 )
Discount rate decrease of 25 basis points
(2) $ (28 )
(1) The margin impacts are each discrete and do not reflect the impact one factor
may have on another. For example, the increase in claim costs does not
include any incremental adverse impacts from a potential decrease in the
discount rate.
(2) The 25 basis point decrease in the discount rate refers to a reduction in our
portfolio yields.
Due to the age of our acquired block, it would not benefit significantly from
future
in-force
rate actions, and therefore, there is a higher likelihood that adverse changes
in our assumptions would result in an additional premium deficiency. The impacts
of future adverse changes in our assumptions resulting in another premium
deficiency would result in the establishment of additional future policy benefit
reserves and would be immediately reflected in net income as a loss if our
margin for this block is again reduced below zero. Any favorable variation would
result in additional margin and higher income recognized over the remaining
duration of the
in-force
block but would not have an immediate benefit to net income.
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Term and whole life insurance
Similar to our long-term care insurance products, we annually perform loss recognition testing for the liability for future policy benefits for our term and whole life insurance products in the aggregate, excluding our acquired block and certain reinsured blocks, which are tested separately. As ofDecember 31, 2021 and 2020, the liability for future policy benefits associated with our term and whole life insurance products was$2.0 billion and$2.1 billion , respectively. The risks we face in these products mostly include adverse variations in mortality and lapse assumptions. Adverse experience in one or all of these risks could result in the DAC associated with our term and whole life insurance products, excluding our acquired block, and PVFP associated with our acquired block of term and whole life insurance products to no longer be fully recoverable and could require establishment of additional future policy benefit reserves. Any favorable variation would result in additional margin and higher income recognized over the remaining duration of the in-force block. A summary of certain of our significant estimates used in the calculation of our term and whole life insurance loss recognition testing margin was as follows for the periods presented: Other Block (Excluding the Acquired Block and Increase (decrease) and Certain Reinsured Blocks) December 31, percentage change (Amounts in millions) 2021 2020 2021 vs. 2020 Select estimates used in loss recognition testing: Total present value of expected future premiums$ 2,612 $ 2,657 $ (45 ) (2 )% Total present value of expected death benefits and expenses$ 2,109 $ 2,115 $ (6 ) - % As ofDecember 31, 2021 and 2020, we had margin of approximately$300 million to$800 million , and a DAC balance of$0.8 billion and$1.1 billion , respectively, on our term and whole life insurance products, excluding the acquired block and certain reinsured blocks. In 2021, we updated many of our assumptions, including emerging mortality experience. The decrease in both the present value of expected future premiums and death benefits and expenses in 2021 was primarily attributable to higher mortality experience. If our margin is reduced below zero for our term and whole life insurance products, excluding our acquired block and certain reinsured blocks, we would amortize DAC up to the amount of DAC recorded on our balance sheet and if DAC was fully written off, establish additional future policy benefit reserves, either of which would result in a charge to net income. A summary of certain of our significant estimates used in the calculation of our term and whole life insurance loss recognition testing margin was as follows for the periods presented: Acquired Block Increase (decrease) and December 31, percentage change (Amounts in millions) 2021 2020 2021 vs. 2020 Select estimates used in loss recognition testing: Total present value of expected future premiums$ 506 $ 521 $ (15 ) (3 )% Total present value of expected death benefits and expenses$ 317 $ 332 $ (15 ) (5 )% As ofDecember 31, 2021 and 2020, we had margin of approximately$100 million to$300 million , and a PVFP balance of$71 million and$73 million , respectively, on our acquired block of term and whole life insurance products. If our margin is reduced below zero for our acquired block of term and whole life insurance 140
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products, we would amortize PVFP up to the amount of PVFP recorded on our
balance sheet and if PVFP was fully written off, establish additional future
policy benefit reserves, either of which would result in a charge to net income.
In the fourth quarter of 2021, we ceded certain term life insurance policies as part of a life block transaction. As ofDecember 31, 2021 , the margin associated with this block was positive but not significant and has a DAC balance of$224 million . If the margin of this block is reduced below zero, we would amortize DAC up to the amount of DAC recorded on our balance sheet and if DAC was fully written off, establish additional future policy benefit reserves, either of which would result in a charge to net income.
The following sensitivities reflect hypothetical changes to certain of our
significant estimates and assumptions and the associated impact it would have on
our 2021 term and whole life insurance loss recognition testing margin:
Other Block
(Excluding
the Acquired
Block and
Certain
Reinsured Acquired
(Amounts in millions) Blocks) Block Total
Sensitivities on loss recognition testing
(1):
2% higher mortality $ (59 ) $ (8 ) $ (67 )
10% increase in lapses $ (265 ) $ (41 ) $ (306 )
(1) The margin impacts are each discrete and do not reflect the impact one factor
may have on another.
The sensitivities in the table above are changes that we consider to be
reasonably possible given historical changes in market conditions and our
experience with these products.
Fixed immediate annuities
As ofDecember 31, 2021 and 2020, the liability for future policy benefits associated with our fixed annuity products with life contingencies was$11.3 billion and$11.8 billion , respectively. We regularly review our assumptions for these products and perform loss recognition testing at least annually. In 2016, we had a premium deficiency in our single premium immediate annuity products that resulted in the write-off of the entire DAC balance associated with these products. Subsequent to 2016, additional premium deficiencies have occurred in our single premium immediate annuity products that resulted in the establishment of additional future policy benefit reserves and were reflected as losses in net income. In 2019, we determined we had an additional premium deficiency in our single premium immediate annuity products as a result of loss recognition testing. We increased our future policy benefit reserves by$39 million and recognized a corresponding loss in net income associated with the 2019 test. The premium deficiency test results were primarily driven by the low interest rate environment and updated assumptions. These updated assumptions resulting from our 2019 loss recognition testing will remain locked-in until such time as we determine another premium deficiency exists. In 2021 and 2020, the results of our loss recognition testing did not result in a premium deficiency; therefore, our liability for future policy benefits was sufficient, with a margin of approximately$85 million as ofDecember 31, 2021 compared to approximately$130 million as ofDecember 31, 2020 . The decrease in the margin in 2021 was primarily due to a change in our mortality assumption. 141
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A summary of certain of our significant estimates and assumptions used in the
calculation of our fixed immediate annuity products loss recognition testing
margin was as follows for the periods presented:
Increase (decrease) and
December 31, percentage change
(Amounts in millions) 2021 2020 2021 vs. 2020
Select estimates and
assumptions used in loss
recognition testing:
Total present value of
expected benefits and expenses $ 3,430 $ 3,610 $ (180 ) (5 )%
Reported investment yield )
0
/
000
5.79 % 5.86 % (7 (1 )%
The following sensitivities reflect hypothetical changes to certain of our
significant estimates and assumptions and the associated impact it would have on
our 2021 fixed immediate annuity products loss recognition testing margin:
Fixed Immediate
(Amounts in millions) Annuity Products
Sensitivities on loss recognition testing
(1):
2% lower mortality $ (20 )
10 basis point reduction in investment yields $ (26 )
(1) The margin impacts are each discrete and do not reflect the impact one factor
may have on another.
Currently, these reductions are not sufficient to reduce our margin for this block below zero. However, if our margin for this block is again reduced below zero, the impacts of future adverse changes in our assumptions would result in the establishment of additional future policy benefit reserves and would be immediately reflected as a loss in net income. Any favorable variation would result in additional margin and higher income recognized over the remaining duration of the in-force block but would not have an immediate benefit to net income.
Policyholder account balances
The liability for policyholder account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date for investment-type and universal and term universal life insurance contracts. We are also required to establish additional benefit reserves for guarantees or product features in addition to the contract value where the additional benefit reserves are calculated by applying a benefit ratio to accumulated contractholder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past and anticipated future claims experience, which includes assumptions for insured mortality, interest rates and policyholder persistency or lapses, among other assumptions. We perform an annual review of assumptions for our universal and term universal life insurance products, typically in the fourth quarter. Our 2021 review resulted in an increase in the liability for policyholder account balances of$87 million , with a corresponding pre-tax loss recorded to net income, predominantly driven by higher pre-COVID-19 mortality. Other assumption updates mostly focused on long-term interest rate trends. Our 2020 review resulted in a decrease in the liability for policyholder account balances of$118 million , with a corresponding pre-tax benefit recorded to net income, primarily due to a model refinement in our term universal life insurance product related to persistency and grace period timing and lower projected cost of insurance assessments on our universal life insurance products. Our 2019 review resulted in an increase in the liability for policyholder account balances of$72 million with a corresponding pre-tax loss recorded to net income. The 2019 test results were predominantly impacted by emerging mortality experience, lower expected growth in interest rates and a prolonged low interest rate environment. 142
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As ofDecember 31, 2021 and 2020, we had DAC of $- and$245 million , respectively, and total policyholder account balances including reserves in excess of the contract value of$9.0 billion and$9.7 billion , respectively, related to our universal and term universal life insurance products. The decrease in DAC and policyholder account balances in 2021 compared to 2020 was primarily attributable to shadow accounting adjustments associated with a decrease in unrealized gains in 2021. As ofDecember 31, 2021 , for our universal and term universal life insurance products, we estimate that a 100 basis point reduction in interest rates from theDecember 31, 2021 level, or 2% higher mortality, scenarios that we consider to be reasonably possible given historical changes in market conditions and experience on these products, would result in a loss recorded to net income of approximately$35 million and$40 million , respectively. Adverse experience in persistency could also result in the DAC amortization associated with these products to be accelerated as well as the establishment of higher additional benefit reserves. Any favorable changes in these assumptions would result in lower DAC amortization as well as a reduction in the liability for policyholder account balances.
Liability for policy and contract claims
The liability for policy and contract claims represents the amount needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the end of the respective reporting period. The estimated liability includes requirements for future payments of: (a) claims that have been reported to the insurer; (b) claims related to insured events that have occurred but that have not been reported to the insurer as of the date the liability is estimated; and (c) claim adjustment expenses. Claim adjustment expenses include costs incurred in the claim settlement process such as legal fees and costs to record, process and adjust claims.
Our liability for policy and contract claims is reviewed regularly, with changes
in our estimates of future claims recorded through net income.
The following table sets forth our recorded liability for policy and contract claims as ofDecember 31 : (Amounts in millions) 2021 2020U.S. Life Insurance segment: Long-term care insurance$ 10,861 $ 10,518 Life insurance 308 378 Fixed annuities 14 12 Enact segment 641 555 Runoff segment 8 12 Other mortgage insurance (1) 9 11
Total liability for policy and contract claims
(1) Amounts included in Corporate and Other activities.
Long-term care insurance
The liability for policy and contract claims, also known as claim reserves, for
our long-term care insurance products represents the present value of the amount
needed to provide for the estimated ultimate cost of settling claims relating to
insured events that have occurred on or before the end of the respective
reporting period. Key assumptions include investment returns, health care
experience, insured mortality, insured morbidity and expenses. Our discount rate
assumption assumes a static discount rate in line with our current portfolio
yield.
During the fourth quarter of 2021, we reviewed our assumptions and methodologies
relating to our claim reserves for our long-term care insurance business but did
not make any significant changes to the assumptions
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or methodologies, other than routine updates to investment returns as we typically do each quarter. These updates did not have a significant impact on claim reserve levels. During the fourth quarter of 2020, we reviewed our assumptions and methodologies relating to our claim reserves of our long-term care insurance business and made certain changes to our assumptions or methodologies, particularly those assumptions used to calculate our IBNR reserves. In total, these updates reduced our liability for policy and contract claims by $38 million. As experience has emerged in the past, we have made resulting changes to our assumptions that have had a material impact on our results of operations and financial position. Our experience will continue to emerge and as a result there is a potential for future assumption reviews to result in further updates. Mortgage insurance Estimates of mortgage insurance reserves for losses and loss adjustment expenses are based on notices of mortgage loan defaults and estimates of defaults that have been incurred but have not been reported by loan servicers, using assumptions developed based on past experience and the expectation of future development. The estimates are determined using either a factor-based approach, in which assumptions of claim rates for loans in default and the average amount paid for loans that result in a claim are calculated using traditional actuarial techniques, or a case-based approach, in which each individual delinquent loan is reviewed and a best-estimate loss is determined based on the status of the insured loan and an estimation of net sale proceeds from the disposition of the mortgaged property. Assumptions also include provisions for loans within Enact Holdings' delinquency inventory that will be rescinded or modified (collectively referred to as "loss mitigation actions") based on the effects that such loss mitigation actions have had on Enact Holdings' historical claim frequency rates, including an estimate for reinstatement of previously rescinded coverage. Each of these inherently judgmental assumptions is established in a respective geography based on historical and expected experience. Enact Holdings has established processes, as well as contractual rights, to ensure it receives timely information from loan servicers to aid in the establishment of its estimates. In addition, when Enact Holdings has obtained sufficient facts and circumstances through its investigative process, it has the unilateral right under its master policies and at law to rescind coverage on the underlying loan certificate as if coverage never existed. As is common accounting practice in the mortgage insurance industry and in accordance withU.S. GAAP, loss reserves are not established for future claims on insured loans that are not currently in default. Management of Enact Holdings reviews the loss reserves quarterly for adequacy, and if necessary, updates the assumptions used for estimating and calculating such reserves based on actual experience and historical frequency of claim and severity of loss rates that are applied to the current population of delinquencies. Factors considered in establishing loss reserves include claim frequency patterns (reflecting the loss mitigation actions on such claim patterns), the aged category of the delinquency (i.e., age and progression of delinquency to claim), the severity of loss and loan coverage percentage. The establishment of Enact Holdings' mortgage insurance loss reserves is subject to inherent uncertainty and requires judgment. The actual amount of the claim payments may vary significantly from the loss reserve estimates. Enact Holdings' estimates could be adversely affected by several factors, including but not limited to, whether borrowers in forbearance due to
COVID-19
will ultimately cure or result in a claim payment, a deterioration of regional
or national economic conditions leading to a reduction in borrowers' income and
thus their ability to make mortgage payments, a drop in housing values that
could expose Enact Holdings to greater loss on resale of properties obtained
through foreclosure proceedings and an adverse change in the effectiveness of
loss mitigation actions that could result in an increase in the frequency of
expected claim rates. Enact Holdings' estimates are also affected by the extent
of fraud and misrepresentation that are uncovered in the loans that are insured
and the coverage upon which Enact Holdings has consequently rescinded or may
rescind going forward. Enact Holdings' loss reserving methodology includes
estimates of the number of loans in its delinquency inventory that will be
rescinded or modified, as well as estimates of the number of loans for which
coverage may be reinstated under certain conditions following a rescission
action.
In considering the potential sensitivity of the factors underlying Enact
Holdings' best estimate of its mortgage insurance reserves for losses, it is
possible that even a relatively small change in estimated
delinquency-to-claim
rate ("frequency") or a relatively small percentage change in estimated claim
amount
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("severity") could have a significant impact on reserves and, correspondingly,
on results of operations. For example, based on Enact Holdings actual experience
during the three-year period ended December 31, 2021, a quarterly change of 6%
in its average frequency reserve factor would change the gross loss reserve
amount for such quarter by approximately $95 million and a change of 4% in its
average severity reserve factor would change the gross loss reserve amount for
such quarter by approximately $24 million.
Deferred acquisition costs.
DAC represents costs that are directly related to the successful acquisition of
new and renewal insurance policies and investment contracts which are deferred
and amortized over the estimated life of the related insurance policies. These
costs primarily include commissions in excess of ultimate renewal commissions
and underwriting and contract and policy issuance expenses for policies
successfully acquired. DAC is subsequently amortized to expense in relation to
the anticipated recognition of premiums or gross profits.
The amortization of DAC for traditional long-duration insurance products
(including term life insurance, life-contingent structured settlements and
immediate annuities and long-term care insurance) is determined as a level
proportion of premiums based on accepted actuarial methods and reasonable
assumptions, including related to projected interest rates and investment
returns, health care experience (including type of care and cost of care),
policyholder persistency or lapses (i.e., the probability that a policy or
contract will remain
in-force
from one period to the next), insured mortality (i.e., life expectancy or
longevity), insured morbidity (i.e., frequency and severity of claim, including
claim termination rates and benefit utilization rates) and expenses, established
when the contract or policy is issued. U.S. GAAP requires that assumptions for
these types of products not be modified (or unlocked) unless recoverability
testing, also known as loss recognition testing, deems them to be inadequate.
Amortization is adjusted each period to reflect actual lapses or terminations.
Accordingly, we could experience accelerated amortization of DAC and a charge to
net income if policies lapse or terminate earlier than originally assumed, or if
we fail recoverability testing.
Amortization of DAC for deferred annuity and universal life insurance contracts
is based on expected gross profits. Expected gross profits are adjusted
quarterly to reflect actual experience to date or for the unlocking of
underlying key assumptions including interest rates, policyholder persistency or
lapses, insured mortality and expenses. The estimation of expected gross profits
is subject to change given the inherent uncertainty as to the underlying key
assumptions employed and the long duration of our policy or contract
liabilities. Changes in expected gross profits reflecting the unlocking of
underlying key assumptions could result in a material increase or decrease in
the amortization of DAC depending on the magnitude of the change in underlying
assumptions. Significant factors that could result in a material increase or
decrease in DAC amortization for these products include material changes in
withdrawal or lapse rates, investment spreads or mortality assumptions. For the
years ended December 31, 2021, 2020 and 2019, key assumptions were unlocked in
our U.S. Life Insurance and Runoff segments to reflect our current expectation
of future investment spreads, lapse rates and mortality.
We review DAC for recoverability at least annually. For deferred annuity and
universal life insurance contracts, if the present value of expected future
gross profits is less than the unamortized DAC for a line of business, a charge
to net income is recorded for additional DAC amortization. For traditional
long-duration and short-duration contracts, if the benefit reserves plus the
current estimate of expected future gross premiums and interest income for a
line of business are less than the current estimate of expected future benefits
and expenses (including any unamortized DAC), a charge to net income is recorded
for additional DAC amortization or for increased benefit reserves. The
evaluation of DAC recoverability is subject to inherent uncertainty and requires
significant judgment and estimates to determine the present values of future
premiums, estimated gross profits and expected benefits and expenses of our
businesses. In 2021 and 2020, in connection with our review of DAC for
recoverability, we wrote off $117 million and $63 million, respectively, of DAC
in our universal and term universal life insurance products principally due to
lower future estimated gross profits.
The amortization of DAC for mortgage insurance is based on expected gross
margins. Expected gross margins, defined as premiums less losses, are set based
on assumptions for future persistency and loss
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development of the business. These assumptions are updated for actual experience to date or as our expectations of future experience are revised based on experience studies. Due to the inherent uncertainties in making assumptions about future events, materially different experience from expected results in persistency or loss development could result in a material increase or decrease to DAC amortization. The DAC amortization methodology for our variable products (variable annuities and variable universal life insurance) includes a long-term average appreciation assumption of 7.5% to 8.0%. When actual returns vary from the expected 7.5% to 8.0%, we assume a reversion to the expected return over a three-year period. The following table sets forth the increase (decrease) in amortization of DAC related to unlocking of underlying key assumptions by segment for the years ended December 31: (Amounts in millions) 2021 2020 2019 U.S. Life Insurance $ 2 $ 48 $ 58 Enact - 6 - Runoff (2 ) (2 ) (2 ) Total $ - $ 52 $ 56
Impacts on DAC from assumption reviews
In the fourth quarter of 2020, as part of our annual review of assumptions, we increased DAC amortization by $48 million in our universal and term universal life insurance products predominantly due to changes in expected gross profits driven mostly by lower projected cost of insurance assessments on our universal life insurance products and a model refinement in our term universal life insurance product related to persistency and grace period timing. In the fourth quarter of 2019, as part of our annual review of assumptions, we increased DAC amortization by $58 million in our universal and term universal life insurance products, reflecting updated assumptions primarily related to the lower interest rate environment.
In the fourth quarter of 2020, as part of a periodic review of assumptions, our
Enact segment increased DAC amortization by $6 million primarily driven by
elevated lapses in 2020. For the years ended December 31, 2021 and 2019, no
assumptions were unlocked in our Enact segment.
See notes 2 and 6 in our consolidated financial statements under "Item
8-Financial Statements and Supplementary Data" for additional information
related to DAC.
Valuation of fixed maturity securities.
Our portfolio of fixed maturity securities comprises primarily investment grade
securities, which are carried at fair value.
The methodologies, estimates and assumptions used in valuing our fixed maturity
securities evolve over time and are subject to different interpretations, all of
which can lead to materially different estimates of fair value. Additionally,
because the valuation is based on market conditions at a specific point in time,
the
period-to-period
changes in fair value may vary significantly due to changing interest rates,
external macroeconomic, and credit market conditions. For example, widening
credit spreads will generally result in a decrease, while tightening of credit
spreads will generally result in an increase, in the fair value of our fixed
maturity securities. As well, during periods of increasing interest rates, the
market values of lower-yielding assets will decline. See "Item 7A-Quantitative
and Qualitative Disclosures About Market Risk-Sensitivity Analysis-Interest Rate
Risk" for the impact of hypothetical changes in interest rates on our
investments portfolio.
Estimates of fair value for fixed maturity securities are obtained primarily
from industry-standard pricing models utilizing observable market inputs. For
our less liquid securities, such as our privately placed securities,
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we utilize independent market data to employ alternative valuation methods
commonly used in the financial services industry to estimate fair value. These
securities are categorized into a three-level hierarchy based on the
observability of the inputs used in estimating the fair value.
Our valuation techniques maximize the use of observable inputs. However, for
certain less liquid securities, categorized as Level 3, the valuation inputs and
assumptions cannot be corroborated with observable market data and require
greater estimation, resulting in values that are less certain. Additionally, the
availability of observable market information may change as certain inputs may
be more direct drivers of valuation at the time of pricing, or if certain assets
previously in active markets become less liquid due to changes in the financial
environment. As a result, more securities may be categorized as Level 3 and
require more subjectivity and management judgment. As of December 31, 2021, 6%
of our total fixed maturity securities related to Level 3 private fixed
maturities valued using internal pricing models. See notes 2, 4 and 16 in our
consolidated financial statements under "Item 8-Financial Statements and
Supplementary Data" for additional information related to the valuation of fixed
maturity securities and a description of the fair value measurement estimates
and level assignments.
The following tables summarize the primary sources of data considered when
determining fair value of each class of fixed maturity securities as of
December 31:
2021
(Amounts in millions) Total Level 1 Level 2 Level 3
Fixed maturity securities:
Pricing services $ 53,852 $ - $ 53,852 $ -
Broker quotes 312 - - 312
Internal models 6,316 - 2,820 3,496
Total fixed maturity securities $ 60,480 $ - $ 56,672 $
3,808
2020
(Amounts in millions) Total Level 1 Level 2 Level 3
Fixed maturity securities:
Pricing services $ 57,229 $ - $ 57,229 $ -
Broker quotes 730 - - 730
Internal models 5,536 - 2,177 3,359
Total fixed maturity securities $ 63,495 $ - $ 59,406 $
4,089
Consolidated Balance Sheets
Total assets
. Total assets decreased $6,576 million from $105,747 million as of December 31,
2020 to $99,171 million as of December 31, 2021.
• Cash, cash equivalents, restricted cash and invested assets decreased
$3,413 million primarily from decreases of $3,015 million, $990 million
and $230 million in fixed maturity securities, cash, cash
equivalents,
restricted cash and other invested assets, respectively. The
decrease
in fixed maturity securities was predominantly related to a
decrease in
unrealized gains due to an increase in interest rates and from
net
sales in 2021. The decrease in cash, cash equivalents and
restricted
cash was largely related to net withdrawals from our investment
contracts, the redemption and repurchase of certain Genworth
Holdings'
senior notes, including the full redemption of senior notes
originally
scheduled to mature in September 2021 and August 2023, and
payments of
$564 million to AXA primarily associated with a secured
promissory
note. These decreases to cash were partially offset by net
proceeds of
approximately $529 million and $370 million received from the
minority
IPO of Enact Holdings and the sale of Genworth Australia,
respectively,
and by net sales of investment securities in
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2021. The decrease in other invested assets was predominantly driven by
the termination of certain derivative contracts, lower derivative asset
valuations due to an increase in interest rates and from the suspension
of our securities lending program in 2021 that resulted in lower cash
collateral.
• DAC decreased $341 million principally attributable to DAC impairments in
our universal and term universal life insurance products. During 2021 and
in connection with our periodic reviews of DAC for recoverability, we
wrote off $117 million of DAC in our universal and term universal life
insurance products due principally to lower future estimated gross
profits. The decrease was also attributable to lapses in our life
insurance products and higher policy terminations in our long-term care
insurance business in 2021.
• Deferred tax asset increased $54 million largely due to a decrease in
unrealized gains on derivatives and investments and from deferred tax
assets of $87 million and $54 million recorded in connection with the
sale of Genworth Australia and the minority IPO of Enact Holdings,
respectively, partially offset by a net deferred tax liability based on
pre-tax
earnings.
• Assets related to discontinued operations decreased $2,817 million due to
the sale and deconsolidation of Genworth Australia in 2021.
Total liabilities
. Total liabilities decreased $7,022 million from $89,927 million as of
December 31, 2020 to $82,905 million as of December 31, 2021.
• Future policy benefits decreased $1,167 million primarily driven by
shadow accounting adjustments associated with a decrease in unrealized
gains in 2021. The shadow accounting adjustments decreased future policy
benefits by approximately $1,270 million, mostly in our long-term care
insurance business, with an offsetting amount recorded in other
comprehensive income (loss). The decrease was also attributable to
reduced benefits of $920 million in 2021 related to
in-force
actions approved and implemented, which included policyholder benefit
reduction elections made as part of a legal settlement in our long-term
care insurance business. Net outflows driven by surrenders and benefits
in our single premium immediate annuity products and runoff of our term
life insurance products, including from higher lapses in 2021, also drove
the decrease. These decreases were partially offset by aging of our
long-term care insurance
in-force
block and higher incremental reserves of $649 million recorded in
connection with an accrual for profits followed by losses in 2021.
• Policyholder account balances decreased $2,149 million largely
attributable to surrenders and benefits in our deferred annuity products
and from scheduled maturities of certain funding agreements in our
universal life insurance and institutional products in 2021. The decrease
was also attributable to shadow accounting adjustments associated with a
decrease in unrealized gains in 2021. The shadow accounting adjustments
decreased policyholder account balances by approximately $503 million,
mostly in our universal life insurance products, with an offsetting
amount recorded in other comprehensive income (loss). These decreases
were partially offset by higher reserves of $87 million associated with
an unfavorable unlocking in our term universal and universal life
insurance products related to our annual review of assumptions in 2021.
• Liability for policy and contract claims increased $355 million largely
related to our long-term care insurance business primarily attributable
to new claims and claim severity as a result of the aging of the
in-force
block and a $10 million increase to claim reserves to account for changes
to incidence and mortality experience driven by
COVID-19,
which we believe are temporary. The increase was also attributable to our
Enact segment primarily driven by new delinquencies, partially offset by
net favorable reserve adjustments related to positive frequency and
severity development on
pre-COVID-19
delinquencies in 2021. These increases were also partially offset by
fewer pending claims in our life insurance business and higher claim
terminations in our long-term care insurance business in 2021.
• Long-term borrowings decreased $1,504 million mainly attributable to the
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repurchase of $118 million of
notes in the fourth quarter of 2021. See note 12 in our consolidated
financial statements under "Item 8 -Financial Statements and
Supplementary Data" for additional details.
• Liabilities related to discontinued operations decreased $2,336 million
predominantly from the sale and deconsolidation of Genworth Australia,
which also resulted in a mandatory payment of approximately $247 million,
including accrued interest, to AXA under the secured promissory note in
2021. In addition, during the third quarter of 2021, Genworth Holdings
repaid the remaining outstanding balance of the secured promissory note
due to AXA of approximately $296 million. See note 23 in our consolidated
financial statements under "Item 8 -Financial Statements and
Supplementary Data" for additional details.
Total equity
. Total equity increased $446 million from $15,820 million as of December 31,
2020 to $16,266 million as of December 31, 2021.
• We reported net income available to Genworth Financial, Inc.'s common
stockholders of $904 million for the year ended December 31, 2021.
• Unrealized gains on investments and derivatives qualifying as hedges
decreased $354 million and $186 million, respectively, primarily from an
increase in interest rates in 2021.
• Additional
paid-in
capital decreased $150 million largely attributable to the IPO of 18.4%
of Enact Holdings in September 2021.
• Noncontrolling interests increased $254 million related to the IPO of
18.4% of Enact Holdings in September 2021, partially offset by the
deconsolidation of the ownership interest attributable to noncontrolling
interests of Genworth Australia recorded in connection with the final
disposition in March 2021.
Liquidity and Capital Resources
Liquidity and capital resources represent our overall financial strength and our ability to generate cash flows from our businesses, borrow funds at competitive rates and raise new capital to meet our operating needs.
Overview of cash flows-
The following table sets forth our condensed consolidated cash flows for the years ended December 31: (Amounts in millions) 2021 2020 2019 Net cash from operating activities $ 437 $ 1,960 $ 2,079 Net cash from (used by) investing activities 896 (1,153 ) 1,301 Net cash used by financing activities (2,419 )
(1,507 ) (2,217 )
Net increase (decrease) in cash before foreign
exchange effect $ (1,086 ) $ (700 ) $ 1,163
Our principal sources of cash include sales of our products and services, income
from our investment portfolio and proceeds from sales of investments. As an
insurance business, we typically generate positive cash flows from operating
activities, as premiums collected from our insurance products and income
received from our investments typically exceed policy acquisition costs,
benefits paid, redemptions and operating expenses. Our cash flows from operating
activities are affected by the timing of premiums, fees and investment income
received and benefits and expenses paid. Positive cash flows from operating
activities are then invested to support the obligations of our insurance and
investment products and required capital supporting these products. In analyzing
our cash flow, we focus on the change in the amount of cash available and used
in investing activities. Changes in cash from financing activities primarily
relate to the issuance of, and redemptions and benefit payments on,
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universal life insurance and investment contracts; deposits from Federal Home Loan Banks; the issuance of debt and equity securities; the repayment or repurchase of borrowings and non-recourse funding obligations; and other capital transactions. We had lower cash inflows from operating activities in 2021 primarily from an initial cash payment of $360 million made in connection with a new reinsurance agreement under which we ceded certain term life insurance policies, higher payments to AXA and from lower collateral received from counterparties related to our derivative positions. During 2021, we fully repaid a secured promissory note plus accrued interest of $543 million due to AXA and settled an unrelated liability for $18 million associated with underwriting losses on a product sold by a distributor in our former lifestyle protection insurance business. During 2020, we paid AXA $269 million comprised of an interim litigation payment, an initial amount under the settlement agreement reached in July 2020 and interest on the secured promissory note. We had cash inflows from investing activities in 2021 largely from net sales of fixed maturity securities and net proceeds from the sale of Genworth Australia, partially offset by net capital calls on limited partnerships. We had cash outflows from investing activities in 2020 mainly from net purchases of fixed maturity and equity securities and net capital calls on limited partnerships, partially offset by commercial mortgage loan repayments outpacing originations and policy loan repayments. We had higher cash outflows from financing activities in 2021 principally from higher repayment and repurchase of long-term debt, partially offset by net proceeds of $529 million from the minority IPO of Enact Holdings completed on September 20, 2021 and lower net withdrawals from our investment contracts. In 2021,Genworth Holdings repurchased $91 million and $118 million principal amount of its 4.90% senior notes due in 2023 and its 4.80% senior notes due in 2024, respectively, and early redeemed the remaining $309 million of its 4.90% senior notes originally scheduled to mature in August 2023.Genworth Holdings also repurchased $146 million and early redeemed the remaining $513 million principal balance of its 7.625% senior notes originally due in September 2021 and redeemed $338 million principal balance of its 7.20% senior notes due in February 2021. In 2020,Genworth Holdings redeemed $397 million of its senior notes due in June 2020, Rivermont I early redeemed its $315 million non-recourse funding obligations originally due in 2050 andGenworth Holdings repurchased $84 million principal amount of its senior notes with 2021 maturity dates. We also received net proceeds of $738 million in 2020 from the issuance of Enact Holdings' senior notes due in 2025.
In consideration of our liquidity, it is important to separate the needs of our holding companies from the needs of their respective subsidiaries.Genworth Financial andGenworth Holdings each act as a holding company for their respective subsidiaries and do not have any significant operations of their own. Accordingly, our holding companies are highly dependent upon their respective subsidiaries to pay dividends and make other payments to meet their respective obligations. Moreover, management's focus is predominantly onGenworth Holdings' liquidity given it is the issuer of our outstanding public debt.Genworth Financial's andGenworth Holdings' principal sources of cash are derived from dividends from their respective subsidiaries, subsidiary payments to them under tax sharing and expense reimbursement arrangements and proceeds from borrowings or securities issuances. Our liquidity is highly dependent on the performance of Enact Holdings and its ability to pay dividends to us as anticipated. Although the business performance and financial results of ourU.S. life insurance subsidiaries have improved significantly, they currently have negative unassigned surplus of approximately $1.0 billion under statutory accounting and as a result, we do not expect these subsidiaries to pay dividends for the foreseeable future.Genworth Financial has the right to appoint a majority of directors to the board of directors of Enact Holdings; however, actions taken by Enact Holdings and its board of directors (including in the case of the payment of dividends to us, the approval of Enact Holdings' independent capital committee) are subject to and may be limited by the interests of Enact 150
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Holdings, including but not limited to, its use of capital for growth
opportunities and regulatory requirements. In addition, insurance laws and
regulations regulate the payment of dividends and other distributions to
"-Regulated insurance subsidiaries" for additional details.
The primary use of funds atGenworth Financial andGenworth Holdings include payment of principal, interest and other expenses on current and any future borrowings or other obligations (including payments to AXA associated with claims still being processed reported as discontinued operations), payment of holding company general operating expenses (including employee benefits and taxes), payments under current and any future guarantees (including guarantees of certain subsidiary obligations), payment of amounts owed toGE under the Tax Matters Agreement, payments to subsidiaries (and, in the case ofGenworth Holdings , toGenworth Financial ) under tax sharing agreements, contributions to subsidiaries, repurchases of debt securities and, in the case ofGenworth Holdings , loans, dividends or other distributions toGenworth Financial . For more information on our tax obligations, refer to note 13 in our consolidated financial statements under "Item 8-Financial Statements and Supplementary Data." Our future use of liquidity and capital will prioritize reducing overall indebtedness ofGenworth Holdings . Our goal is to reduce debt atGenworth Holdings to approximately $1.0 billion over time. We may from time to time seek to repurchase or redeem outstanding notes for cash (with cash on hand, proceeds from the issuance of new debt and/or the proceeds from asset or stock sales) in open market purchases, tender offers, privately negotiated transactions or otherwise. We currently seek to address our indebtedness over time through repurchases, redemptions and/or repayments at maturity. In November 2008,Genworth Financial's Board of Directors suspended the payment of dividends to its shareholders and the repurchase of common stock under the Company's stock repurchase program indefinitely. Given the significant improvement in the operating and financial performance ofGenworth Financial and its subsidiaries, and the $2.1 billion of debt reduction in 2021,Genworth Financial's Board of Directors will consider implementing a new share repurchase program and new dividend policy later in 2022. Any future capital management considerations are primarily dependent on the repayment ofGenworth Holdings' February 2024 debt and Enact Holdings' future dividend policy. IfGenworth Financial's Board of Directors ultimately decides to approve a new share repurchase program or new dividend policy, any amounts used for the purpose of returning capital toGenworth Financial's shareholders will be dependent on many factors. These factors will include, in addition to any other factors that may arise in the future, the receipt of dividends from Enact Holdings, intercompany cash tax payments from operating subsidiaries,Genworth's operating results and financial condition, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, debt obligations ofGenworth Holdings and Enact Holdings, our credit and financial strength ratings, the capital needs of our subsidiaries for future growth and other factorsGenworth Financial's Board of Directors deems relevant. As of December 31, 2021,Genworth Holdings had $353 million of unrestricted cash, cash equivalents and liquid assets.Genworth Holdings received net cash proceeds of $370 million and $529 million from the sale of Genworth Australia in March 2021 and the minority IPO of Enact Holdings in September 2021, respectively, of which $543 million was used to prepay the outstanding principal balance and accrued interest of the AXA promissory note originally due in 2022. In addition, on December 15, 2021,Genworth Holdings early redeemed its 4.90% senior notes originally scheduled to mature in August 2023. As of December 31, 2021,Genworth Holdings had $282 million of senior notes due in February 2024, thereafter, no debt maturities are due until June 2034. During the first quarter of 2022 and as of February 18, 2022,Genworth Holdings repurchased $33 million principal amount of its senior notes due in February 2024, and may early repay the remaining outstanding balance of its senior notes due in February 2024 with cash on hand, expected dividends from Enact Holdings and/or intercompany cash tax payments from its subsidiaries. Interest payments onGenworth Holdings' remaining senior notes are forecasted to be approximately $65 million due between January 2022 through March 2023. For further information about our borrowings, refer to note 12 in our consolidated financial statements under "Item 8-Financial Statements and Supplementary Data." In 151
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addition, in February 2022,
remaining unprocessed claims of approximately $30 million, and accordingly, has
no significant amounts due to AXA over the next twelve months.
We believeGenworth Holdings' unrestricted cash, cash equivalents and liquid assets provide sufficient liquidity to meet its financial obligations and maintain business operations for one year from the date the financial statements are issued based on relevant conditions and events that are known and reasonably estimable, including current cash and management actions in the normal course. Furthermore, we believeGenworth Holdings has adequate liquidity to meet its future financial obligations in 2023 and thereafter; however, we do expect intercompany cash tax payments fromGenworth Holdings' subsidiaries to be lower over the next few years as compared to the amounts received during 2021. Otherwise, we do not anticipate any current known trends, demands or contractual commitments resulting in our liquidity, includingGenworth Holdings , significantly increasing or decreasing in future periods. However, the impact of COVID-19 is very difficult to predict. It may preclude Enact Holdings from returning capital to us through dividends and could adversely impact our overall liquidity and ability to raise capital. Enact Holdings intends to develop a formal dividend policy and initiate a regular common dividend during 2022. Future dividends are dependent on a variety of economic and business conditions, including the resolution of forbearance related delinquencies. Enact Holdings' dividend policy is a critical piece in determiningGenworth's future cash flows. We actively monitor our liquidity position (most notably atGenworth Holdings ), liquidity generation options and the credit markets given changing market conditions.Genworth Holdings' cash management target is to maintain a cash buffer of two times expected annual external debt interest payments.Genworth Holdings may move below or above this targeted cash buffer during any given quarter due to the timing of cash outflows and inflows or from future actions. Management ofGenworth Financial continues to evaluateGenworth Holdings' target level of liquidity as circumstances warrant. Additionally,Genworth Financial will continue to evaluate market influences on the valuation ofGenworth Holdings' senior debt and expects to consider additional opportunities to repurchase debt over time. However, we cannot predict with certainty the impact to us from future disruptions in the credit markets or any future downgrades by one or more of the rating agencies of the financial strength ratings of our insurance company subsidiaries and/or the credit ratings ofGenworth Holdings' debt.
Genworth Holdings had $331 million and $1,078 million of cash, cash equivalents and restricted cash as of December 31, 2021 and 2020, respectively, which included $46 million of restricted cash equivalents as of December 31, 2020.Genworth Holdings also held $25 million inU.S. government securities as of December 31, 2021 and 2020, which included approximately $3 million and $25 million, respectively, of restricted assets. The decrease inGenworth Holdings' cash, cash equivalents and restricted cash was principally driven by the repayment and repurchase of long-term debt, including payments of $564 million to AXA reported as discontinued operations, partially offset by net proceeds from the Genworth Australia sale and the minority IPO of Enact Holdings, and dividends from Enact Holdings.Genworth Holdings early redeemed its 4.90% senior notes originally scheduled to mature in August 2023 for a total cash payment of $334 million. Prior to the early redemption,Genworth Holdings repurchased $91 million of its 4.90% senior notes due in August 2023 and $118 million of its 4.80% senior notes due in 2024.Genworth Holdings also repurchased $146 million and early redeemed the remainder of its 7.625% senior notes due in September 2021 with a total cash payment of $532 million. In addition,Genworth Holdings repurchased and repaid its 7.20% senior notes due in February 2021 for $350 million. For additional details on the decrease in cash, cash equivalents and restricted cash, see below under "-Capital resources and financing activities." On March 3, 2021, we completed the sale of Genworth Australia and received net proceeds of approximately AUD483 million ($370 million). The sale ofGenworth Australia resulted in a mandatory payment of approximately £178 million ($247 million) related to the outstanding secured promissory note issued to AXA, including accrued interest of $2 million. On September 21, 2021,Genworth Holdings used a portion of the $529 million net proceeds from the minority IPO of Enact Holdings to repay the remaining outstanding balance of the secured promissory note of approximately £215 million ($296 million). In addition, pursuant to a 152
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guarantee agreement with Genworth Financial International Holdings, LLC ("GFIH")
discussed below in "-Guarantees and other
off-balance
sheet commitments," Genworth Holdings paid AXA approximately €15 million ($18
million) in the second quarter of 2021 to settle amounts owed related to
underwriting losses on a product sold by a distributor in our former lifestyle
protection insurance business.
During the years ended December 31, 2021, 2020 and 2019, Genworth Holdings
received cash dividends from its international subsidiaries of $370 million,
$11 million and $1,486 million, respectively. Dividends received by Genworth
Holdings in 2021 include the net proceeds from the sale of Genworth Australia.
Our international subsidiaries had to preserve capital due to the adverse
impacts caused by
COVID-19
and accordingly reduced the amount of dividends paid toGenworth Holdings during 2020. Dividends received byGenworth Holdings in 2019 included $1,235 million of net proceeds related to the sale of Genworth Canada. During 2021 and 2020,Genworth Holdings received cash dividends from Enact Holdings of $163 million and $437 million, respectively. In 2019 and prior to an internal company reorganization, Enact Holdings paid cash dividends of $250 million directly toGenworth Financial . Dividends paid by Enact Holdings in 2021 included a proportionate dividend distribution to minority shareholders. Dividends received byGenworth Holdings in 2020 were from net proceeds received from Enact Holdings' senior notes issued in August 2020. Enact Holdings' board of directors evaluates economic and business conditions, including the resolution of forbearance related delinquencies, to determine the amount and timing of future dividends. Future dividends are also subject to market conditions, business performance, business and regulatory approvals, among other considerations, and will include a proportionate dividend distribution to minority shareholders. There were no dividends paid toGenworth Holdings by its domestic life insurance subsidiaries during the years ended December 31, 2021, 2020 or 2019. Although the business performance and financial results of ourU.S. life insurance subsidiaries have improved significantly, they currently have negative unassigned surplus of approximately $1.0 billion under statutory accounting and as a result, we do not expect these subsidiaries to pay dividends for the foreseeable future.
Capital resources and financing activities
Our current capital resource plans do not include any additional debt offerings or minority sales of Enact Holdings. The availability of additional capital resources will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, credit ratings and the performance of and outlook for Enact Holdings and the payment of dividends therefrom. For a discussion of certain risks associated with our liquidity and dependency on dividends paid by Enact Holdings, see "Item 1A-Risk Factors-Genworth Financial andGenworth Holdings depend on the ability of their respective subsidiaries to pay dividends and make other payments and distributions to each of them and to meet their obligations," and "-Risk Factors- Our sources of capital have become more limited, and under certain conditions we may need to seek additional capital on unfavorable terms." These risks may be exacerbated by the economic impact of COVID-19. On December 15, 2021,Genworth Holdings early redeemed its 4.90% senior notes originally scheduled to mature in August 2023. The senior notes were fully redeemed with a cash payment of $334 million, comprised of the outstanding principal balance of $309 million, accrued interest of $5 million and a make-whole premium of $20 million. Prior to the early redemption,Genworth Holdings repurchased $91 million principal amount of its 4.90% senior notes due in September 2021 for a pre-tax loss of $9 million and paid accrued interest thereon. In the fourth quarter of 2021,Genworth Holdings repurchased $118 million of its 4.80% senior notes due in 2024 for a pre-tax loss of $6 million and paid accrued interest thereon. During the first quarter of 2022 and as of February 18, 2022,Genworth Holdings repurchased $33 million of its 4.80% senior notes due in 2024.
On July 21, 2021,
originally scheduled to mature in September 2021. The senior notes were fully
redeemed with a cash payment of $532 million, comprised of the outstanding
principal balance of $513 million, accrued interest of $13 million and a make-
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whole premium of $6 million. Prior to the early redemption,Genworth Holdings repurchased $146 million principal amount of its 7.625% senior notes due in September 2021 for a pre-tax loss of $4 million and paid accrued interest thereon.Genworth Holdings paid its 7.20% senior notes with a principal balance of $338 million at maturity on February 16, 2021.Genworth Holdings' 7.20% senior notes were fully redeemed with a cash payment of $350 million, comprised of the outstanding principal balance and accrued interest. On August 21, 2020, Enact Holdings issued $750 million of its 6.50% senior notes due in 2025. Interest on the notes is payable semi-annually in arrears on February 15 and August 15 of each year. The notes mature on August 15, 2025. Enact Holdings may redeem the notes, in whole or in part, at any time prior to February 15, 2025 at its option, by paying a make-whole premium, plus accrued and unpaid interest. At any time on or after February 15, 2025, Enact Holdings may redeem the notes, in whole or in part, at its option, at 100% of the principal amount, plus accrued and unpaid interest. The notes contain customary events of default, which subject to certain notice and cure conditions, can result in the acceleration of the principal and accrued interest on the outstanding notes if Enact Holdings breaches the terms of the indenture. During 2020,Genworth Holdings repurchased $84 million principal amount of its senior notes with 2021 maturity dates for a pre-tax gain of $4 million. In March 2020,Genworth Holdings repaid a $200 million intercompany note due to GLIC with a maturity date of March 31, 2020. On January 21, 2020,Genworth Holdings early redeemed $397 million of its 7.70% senior notes originally scheduled to mature in June 2020 using cash proceeds received from the sale of Genworth Canada. The senior notes were fully redeemed with a cash payment of $409 million, comprised of the outstanding principal balance, accrued interest and a make-whole premium of $9 million. In January 2020, upon receipt of approval from the Director of Insurance of theState of South Carolina , Rivermont I, our indirect wholly-owned special purpose consolidated captive insurance subsidiary, redeemed all $315 million of its outstanding non-recourse funding obligations due in 2050. The early redemption resulted in a pre-tax loss of $4 million from the write-off of deferred borrowing costs.
Regulated insurance subsidiaries
Insurance laws and regulations regulate the payment of dividends and other
distributions to us by our insurance subsidiaries. See note 17 in our
consolidated financial statements under "Item 8-Financial Statements and
Supplementary Data" for additional information regarding the payment of
dividends. In general, dividends in excess of prescribed limits are deemed
"extraordinary" and require insurance regulatory approval. Based on estimated
statutory results as of December 31, 2021, in accordance with applicable
dividend restrictions, Enact Holdings could pay ordinary dividends of
approximately $70 million in 2022. However, Enact Holdings may not pay dividends
in 2022 at this level as they may need to retain capital for regulatory
purposes, including as a result of
COVID-19,
and preserve capital for future growth or to meet capital requirements.
The liquidity requirements of our regulated insurance subsidiaries principally
relate to the liabilities associated with their various insurance and investment
products, operating costs and expenses, the payment of dividends to us,
contributions to their subsidiaries, payment of principal and interest on their
outstanding debt obligations and income taxes. Liabilities arising from
insurance and investment products include the payment of benefits and claims, as
well as cash payments in connection with policy surrenders and withdrawals,
policy loans and obligations to redeem funding agreements.
Given our insurance product mix, payments to policyholders for insurance
benefits are generally consistent each year with the exception of products that
provide long-duration coverage, such as long-term care insurance. For example,
our current projections reflect average annual claim payments of approximately
$2.5 billion over the next five years primarily driven by surrender and benefit
payments associated with fixed annuity products. Actual claims experience on
products that provide long-duration coverage typically emerge over many years,
change over time and are difficult to accurately predict. Therefore, we cannot
determine with precision the
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ultimate amounts we will pay for actual claims or the timing of those payments. Moreover, for long-duration coverage products, we generally assume a significant amount of claim payments will come due in five or more years from the date of our Annual Report on Form 10-K. For example, in 2027 and thereafter, we assume approximately $99.3 billion of claims and benefit payments will be paid to policyholders or approximately 89% of our total undiscounted claims and benefit payments. These assumed payments are principally associated with our long-term care insurance products given their long-duration coverages. These amounts are derived from estimates and actuarial assumptions used in establishing our reserves; however, they have not been discounted to present value like our obligations to policyholders reported in our consolidated balance sheets in accordance withU.S. GAAP, where the liabilities are discounted consistent with the present value concept under accounting guidance related to accounting and reporting by insurance enterprises. Therefore, these undiscounted amounts significantly exceed the liabilities recorded in reserves for future policy benefits and the liability for policy and contract claims. These undiscounted amounts include estimated claims and benefits, policy surrender and commission obligations calculated consistent withU.S. GAAP on in-force long-duration insurance policies and investment contracts and also include estimated claims obligations on mortgage insurance policies in-force and amounts established for recourse and indemnification related to the contract underwriting business in our Enact segment. Due to the significance of the assumptions used in estimating our claim and benefit obligations, these assumed amounts could materially differ from actual results. Our insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. Our insurance subsidiaries' principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income, including commissions, cost of insurance, mortality, expense and surrender charges, contract underwriting fees, investment management fees and dividends and distributions from their subsidiaries. The principal cash inflows from investment activities result from maturities and repayments of investments and, as necessary, sales of invested assets. Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar duration such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. As of December 31, 2021, our total cash, cash equivalents, restricted cash and invested assets were $73.8 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, bank loans, limited partnership investments and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 39% of the carrying value of our total cash, cash equivalents, restricted cash and invested assets as of December 31, 2021. Guarantees and other off-balance sheet commitments
subject to adjustments, to one of its insurance subsidiaries to support its
mortgage insurance business in
terminated this limited guarantee in regard to new business. We believe this
insurance subsidiary has adequate reserves to cover its underlying obligations.
Genworth Holdings provided an unlimited guarantee for the benefit of policyholders for the payment of valid claims by our European mortgage insurance subsidiary prior to its sale in May 2016. Following the sale of thisUnited Kingdom subsidiary to AmTrust Financial Services, Inc., the guarantee was limited to the payment of valid claims on policies in-force prior to the sale date and those written approximately 90 days subsequent to the date of the sale, and AmTrust Financial Services, Inc. has agreed to provide us with a limited indemnification in the event there is any exposure under the guarantee. As of December 31, 2021, the risk in-force of active policies was approximately $1.1 billion. 155
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Genworth Holdings has a Tax Matters Agreement withGE , our former parent company, which represents an obligation ofGenworth Holdings toGE . The balance of the fixed portion of the obligation was $29 million as of December 31, 2021.Genworth Financial andGenworth Holdings have joint and several guarantees associated with this Tax Matters Agreement.Genworth Financial provides a full and unconditional guarantee to the trustee ofGenworth Holdings' outstanding senior and subordinated notes and the holders of the senior and subordinated notes, on an unsecured unsubordinated and subordinated basis, respectively, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes and outstanding subordinated notes, and the full and punctual payment of all other amounts payable byGenworth Holdings under the senior and subordinated notes indentures in respect of such senior and subordinated notes. On March 1, 2021,Genworth Holdings entered into a guarantee agreement with GFIH wherebyGenworth Holdings agreed to contribute additional capital to GFIH related to certain of its liabilities, or otherwise satisfy or discharge those liabilities. The liabilities include but are not limited to, claims and financial obligations or other liabilities of GFIH that existed immediately prior to the distribution of the net proceeds from the Genworth Australia sale. Pursuant to the agreement,Genworth Holdings paid AXA approximately €15 million ($18 million) in the second quarter of 2021 to settle amounts owed related to underwriting losses on a product sold by a distributor in our former lifestyle protection insurance business.Genworth Financial and certain of its holding companies also provide guarantees to third parties for the performance of certain obligations of their subsidiaries. We estimate that our potential obligations under such guarantees were $10 million and $4 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, we were committed to fund $28 million in commercial mortgage loan investments, $141 million of bank loan investments which had not yet been drawn, $1,185 million in limited partnership investments and $97 million in private placement investments. 156
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Supplemental Condensed Consolidating Financial Information
Genworth Financial provides a full and unconditional guarantee to the trustee ofGenworth Holdings' outstanding senior and subordinated notes and the holders of the senior and subordinated notes, on an unsecured unsubordinated and subordinated basis, respectively, of the full and punctual payment of the principal of, premium, if any, and interest on, and all other amounts payable under, each outstanding series of senior notes and outstanding subordinated notes, and the full and punctual payment of all other amounts payable byGenworth Holdings under the senior and subordinated notes indentures in respect of such senior and subordinated notes. The following supplemental condensed consolidating financial information ofGenworth Financial and its direct and indirect subsidiaries has been prepared pursuant to rules regarding the preparation of consolidating financial information of Regulation S-X, as amended by theSEC on March 2, 2020. The supplemental condensed consolidating financial information presents the condensed consolidating balance sheet information as of December 31, 2021 and 2020 and the condensed consolidating income statement information, condensed consolidating comprehensive income statement information and condensed consolidating cash flow statement information for the years ended December 31, 2021 and 2020. The supplemental condensed consolidating financial information reflectsGenworth Financial ("Parent Guarantor"),Genworth Holdings ("Issuer") and each ofGenworth Financial's other direct and indirect subsidiaries (the "All Other Subsidiaries") on a combined basis, none of which guarantee the senior notes or subordinated notes, as well as the eliminations necessary to presentGenworth Financial's financial information on a consolidated basis and total consolidated amounts. The accompanying supplemental condensed consolidating financial information is presented based on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the subsidiaries' cumulative results of operations, capital contributions and distributions, and other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries and intercompany activity. 157
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The following table presents the condensed consolidating balance sheet
information as of December 31, 2021:
Parent All Other
(Amounts in millions) Guarantor Issuer Subsidiaries Eliminations Consolidated
Assets
Investments:
Fixed maturity securities
available-for-sale,
at fair value (amortized cost of
$52,611 and allowance for credit
losses of $-) $ - $ - $ 60,480 $ - $ 60,480
Equity securities, at fair value - - 198 - 198
Commercial mortgage loans (net of
unamortized balance of loan
origination fees and costs of $4) - - 6,856 - 6,856
Less: Allowance for credit losses - - (26 ) - (26 )
Commercial mortgage loans, net - - 6,830 - 6,830
Policy loans - - 2,050 - 2,050
Limited partnerships - - 1,900 - 1,900
Other invested assets - 27 793 - 820
Investments in subsidiaries 15,517 15,626 - (31,143 ) -
Total investments 15,517 15,653 72,251 (31,143 ) 72,278
Cash, cash equivalents and
restricted cash - 331 1,240 - 1,571
Accrued investment income - - 647 - 647
Deferred acquisition costs - - 1,146 - 1,146
Intangible assets - - 143 - 143
Reinsurance recoverable - - 16,868 - 16,868
Less: Allowance for credit losses - - (55 ) - (55 )
Reinsurance recoverable, net - - 16,813 - 16,813
Other assets 5 207 176 - 388
Intercompany notes receivable - 15 1 (16 ) -
Deferred tax assets 4 555 (440 ) - 119
Separate account assets - - 6,066 - 6,066
Total assets $ 15,526 $ 16,761 $ 98,043 $ (31,159 ) $ 99,171
Liabilities and equity
Liabilities:
Future policy benefits $ - $ - $ 41,528 $ - $ 41,528
Policyholder account balances - - 19,354 - 19,354
Liability for policy and contract
claims - - 11,841 - 11,841
Unearned premiums - - 672 - 672
Other liabilities 4 64 1,443 - 1,511
Intercompany notes payable 12 1 3 (16 ) -
Long-term borrowings - 1,159 740 - 1,899
Separate account liabilities - - 6,066 - 6,066
Liabilities related to discontinued
operations - 30 4 - 34
Total liabilities 16 1,254 81,651 (16 ) 82,905
Equity:
Common stock 1 - 4 (4 ) 1
Additional
paid-in
capital 11,858 12,724 18,135 (30,859 ) 11,858
Accumulated other comprehensive
income (loss) 3,861 3,861 3,906 (7,767 ) 3,861
Retained earnings 2,490 (1,078 ) (6,709 ) 7,787 2,490
Treasury stock, at cost (2,700 ) - - - (2,700 )
Total Genworth Financial, Inc.'s
stockholders' equity 15,510 15,507 15,336 (30,843 ) 15,510
Noncontrolling interests - - 1,056 (300 ) 756
Total equity 15,510 15,507 16,392 (31,143 ) 16,266
Total liabilities and equity $ 15,526 $ 16,761 $ 98,043 $ (31,159 ) $ 99,171
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The following table presents the condensed consolidating balance sheet
information as of December 31, 2020:
Parent All Other
(Amounts in millions) Guarantor Issuer Subsidiaries Eliminations Consolidated
Assets
Investments:
Fixed maturity securities
available-for-sale,
at fair value (amortized cost of
$53,417 and allowance for credit
losses of $4) $ - $ - $ 63,495 $ - $ 63,495
Equity securities, at fair value - - 386 - 386
Commercial mortgage loans (net of
unamortized balance of loan
origination fees and costs of $4) - - 6,774 - 6,774
Less: Allowance for credit losses - - (31 ) - (31 )
Commercial mortgage loans, net - - 6,743 - 6,743
Policy loans - - 1,978 - 1,978
Limited partnerships - - 1,049 - 1,049
Other invested assets - 67 983 - 1,050
Investments in subsidiaries 15,358 16,673 - (32,031 ) -
Total investments 15,358 16,740 74,634 (32,031 ) 74,701
Cash, cash equivalents and
restricted cash - 1,078 1,483 - 2,561
Accrued investment income - - 655 - 655
Deferred acquisition costs - - 1,487 - 1,487
Intangible assets - - 157 - 157
Reinsurance recoverable - - 16,864 - 16,864
Less: Allowance for credit losses - - (45 ) - (45 )
Reinsurance recoverable, net - - 16,819 - 16,819
Other assets 2 146 256 - 404
Intercompany notes receivable - 19 - (19 ) -
Deferred tax assets 13 767 (715 ) - 65
Separate account assets - - 6,081 - 6,081
Assets related to discontinued
operations - - 2,817 - 2,817
Total assets $ 15,373 $ 18,750 $ 103,674 $ (32,050 ) $ 105,747
Liabilities and equity
Liabilities:
Future policy benefits $ - $ - $ 42,695 $ - $ 42,695
Policyholder account balances - - 21,503 - 21,503
Liability for policy and contract
claims - - 11,486 - 11,486
Unearned premiums - - 775 - 775
Other liabilities 55 156 1,403 - 1,614
Intercompany notes payable - - 19 (19 ) -
Long-term borrowings - 2,665 738 - 3,403
Separate account liabilities - - 6,081 - 6,081
Liabilities related to
discontinued operations - 581 1,789 - 2,370
Total liabilities 55 3,402 86,489 (19 ) 89,927
Equity:
Common stock 1 - 3 (3 ) 1
Additional
paid-in
capital 12,008 12,890 18,562 (31,452 ) 12,008
Accumulated other comprehensive
income (loss) 4,425 4,426 4,499 (8,925 ) 4,425
Retained earnings 1,584 (1,968 ) (6,681 ) 8,649 1,584
Treasury stock, at cost (2,700 ) - - - (2,700 )
Total Genworth Financial, Inc.'s
stockholders' equity 15,318 15,348 16,383 (31,731 ) 15,318
Noncontrolling interests - - 802 (300 ) 502
Total equity 15,318 15,348 17,185 (32,031 ) 15,820
Total liabilities and equity $ 15,373 $ 18,750 $
103,674 $ (32,050 ) $ 105,747
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The following table presents the condensed consolidating income statement
information for the year ended December 31, 2021:
Parent All Other
(Amounts in millions) Guarantor Issuer Subsidiaries Eliminations Consolidated
Revenues:
Premiums $ - $ - $ 3,435 $ - $ 3,435
Net investment income (3 ) - 3,373 - 3,370
Net investment gains (losses) - - 323 - 323
Policy fees and other income - (1 ) 703 2 704
Total revenues (3 ) (1 ) 7,834 2 7,832
Benefits and expenses:
Benefits and other changes in
policy reserves - - 4,383 - 4,383
Interest credited - - 508 - 508
Acquisition and operating
expenses, net of deferrals 25 44 1,154 - 1,223
Amortization of deferred
acquisition costs and
intangibles - - 377 - 377
Interest expense (1 ) 109 50 2 160
Total benefits and expenses 24 153 6,472 2 6,651
Income (loss) from continuing
operations before income taxes
and equity in income of
subsidiaries (27 ) (154 ) 1,362 - 1,181
Provision (benefit) for income
taxes (1 ) (33 ) 297 - 263
Equity in income of subsidiaries 930 1,041 - (1,971 ) -
Income from continuing
operations 904 920 1,065 (1,971 ) 918
Income from discontinued
operations, net of taxes - 13 14 - 27
Net income 904 933 1,079 (1,971 ) 945
Less: net income from continuing
operations attributable to
noncontrolling interests - - 33 - 33
Less: net income from
discontinued operations
attributable to noncontrolling
interests - - 8 - 8
Net income available to Genworth
Financial, Inc.'s common
stockholders $ 904 $ 933 $ 1,038 $ (1,971 ) $ 904
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The following table presents the condensed consolidating income statement
information for the year ended December 31, 2020:
Parent All Other
(Amounts in millions) Guarantor Issuer Subsidiaries Eliminations Consolidated
Revenues:
Premiums $ - $ - $ 3,836 $ - $ 3,836
Net investment income (3 ) 5 3,228 (3 ) 3,227
Net investment gains (losses) - 6 486 - 492
Policy fees and other income - 3 730 (4 ) 729
Total revenues (3 ) 14 8,280 (7 ) 8,284
Benefits and expenses:
Benefits and other changes in
policy reserves - - 5,214 - 5,214
Interest credited - - 549 - 549
Acquisition and operating
expenses, net of deferrals 31 6 898 - 935
Amortization of deferred
acquisition costs and
intangibles - - 463 - 463
Interest expense 1 175 26 (7 ) 195
Total benefits and expenses 32 181 7,150 (7 ) 7,356
Income (loss) from continuing
operations before income taxes
and equity in income of
subsidiaries (35 ) (167 ) 1,130 - 928
Provision (benefit) for income
taxes (2 ) (41 ) 273 - 230
Equity in income of subsidiaries 210 912 - (1,122 ) -
Income from continuing
operations 177 786 857 (1,122 ) 698
Income (loss) from discontinued
operations, net of taxes 1 (573 ) 86 - (486 )
Net income 178 213 943 (1,122 ) 212
Less: net income from continuing
operations attributable to
noncontrolling interests - - - - -
Less: net income from
discontinued operations
attributable to noncontrolling
interests - - 34 - 34
Net income available to Genworth
Financial, Inc.'s common
stockholders $ 178 $ 213 $ 909 $ (1,122 ) $ 178
161
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Table of Contents
The following table presents the condensed consolidating comprehensive income
statement information for the year ended December 31, 2021:
Parent All Other
(Amounts in millions) Guarantor Issuer
Subsidiaries Eliminations Consolidated
Net income
$ 904 $ 933 $ 1,079 $ (1,971 ) $ 945 Other comprehensive income (loss), net of taxes: Net unrealized gains (losses) on securities without an allowance for credit losses (334 ) (335 ) (371 ) 670 (370 ) Net unrealized gains (losses) on securities with an allowance for credit losses 6 6 6 (12 ) 6 Derivatives qualifying as hedges (186 ) (186 ) (215 ) 401 (186 ) Foreign currency translation and other adjustments (24 ) (24 ) 149 47 148 Total other comprehensive income (loss) (538 ) (539 ) (431 ) 1,106 (402 ) Total comprehensive income 366 394 648 (865 ) 543 Less: comprehensive income attributable to noncontrolling interests - - 177 - 177 Total comprehensive income available to Genworth Financial, Inc.'s common stockholders $ 366 $ 394 $
471 $ (865 ) $ 366
The following table presents the condensed consolidating comprehensive income
statement information for the year ended December 31, 2020:
Parent All
Other
(Amounts in millions) Guarantor Issuer
Subsidiaries Eliminations Consolidated
Net income
$ 178 $ 213 $ 943 $ (1,122 ) $ 212
Other comprehensive income (loss),
net of taxes:
Net unrealized gains (losses) on
securities without an allowance
for credit losses 764 765 765 (1,530 ) 764
Net unrealized gains (losses) on
securities with an allowance for
credit losses (6 ) (6 ) (6 ) 12 (6 )
Derivatives qualifying as hedges 209 209 241 (450 ) 209
Foreign currency translation and
other adjustments 25 25 55 (50 ) 55
Total other comprehensive income
(loss) 992 993 1,055 (2,018 ) 1,022
Total comprehensive income 1,170 1,206 1,998 (3,140 ) 1,234
Less: comprehensive income
attributable to noncontrolling
interests - - 64 - 64
Total comprehensive income
available to Genworth Financial,
Inc.'s common stockholders $ 1,170 $ 1,206 $ 1,934 $ (3,140 ) $ 1,170
162
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The following table presents the condensed consolidating cash flow statement
information for the year ended December 31, 2021:
Parent All Other
(Amounts in millions) Guarantor Issuer Subsidiaries Eliminations Consolidated
Cash flows from (used by) operating
activities:
Net income $ 904 $ 933
$ 1,079 $ (1,971 ) $ 945
Less income from discontinued
operations, net of taxes
- (13 ) (14 ) - (27 )
Adjustments to reconcile net income
to net cash from (used by)
operating activities:
Equity in income from subsidiaries (930 ) (1,041 ) - 1,971 -
Dividends from subsidiaries - 552 (552 ) - -
Amortization of fixed maturity
securities discounts and premiums - 6 (182 ) - (176 )
Net investment (gains) losses - - (323 ) - (323 )
Charges assessed to policyholders - - (620 ) - (620 )
Acquisition costs deferred - - (8 ) - (8 )
Amortization of deferred
acquisition costs and intangibles - - 377 - 377
Deferred income taxes - 341 (51 ) - 290
Derivative instruments, limited
partnerships and other - 75 (434 ) - (359 )
Stock-based compensation expense 40 - - - 40
Change in certain assets and
liabilities:
Accrued investment income and other
assets (1 ) 9 (137 ) - (129 )
Insurance reserves - - 642 - 642
Current tax liabilities (5 ) 17 (46 ) - (34 )
Other liabilities, policy and
contract claims and other
policy-related balances (13 ) (40 ) 363 - 310
Cash from (used by) operating
activities-discontinued operations - (564 ) 73 - (491 )
Net cash from (used by) operating
activities (5 ) 275 167 - 437
Cash flows from (used by) investing
activities:
Proceeds from maturities and
repayments of investments:
Fixed maturity securities - - 4,162 - 4,162
Commercial mortgage loans - - 874 - 874
Limited partnerships and other
invested assets - - 255 - 255
Proceeds from sales of investments:
Fixed maturity and equity
securities - - 2,273 - 2,273
Purchases and originations of
investments:
Fixed maturity and equity
securities - - (5,216 ) - (5,216 )
Commercial mortgage loans - - (963 ) - (963 )
Limited partnerships and other
invested assets - - (767 ) - (767 )
Short-term investments, net - - 18 - 18
Policy loans, net - - 57 - 57
Intercompany notes receivable, net - 4 (1 ) (3 ) -
Capital contributions to
subsidiaries (2 ) - 2 - -
Proceeds from sale of business, net
of cash transferred - - 270 - 270
Cash used by investing
activities-discontinued operations - - (67 ) - (67 )
Net cash from (used by) investing
activities (2 ) 4 897 (3 ) 896
Cash flows from (used by) financing
activities:
Deposits to universal life and
investment contracts - - 669 - 669
Withdrawals from universal life and
investment contracts - - (2,071 ) - (2,071 )
Repayment and repurchase of
long-term debt - (1,541 ) - - (1,541 )
Intercompany notes payable, net 12 1 (16 ) 3 -
Proceeds from sale of subsidiary
shares to noncontrolling interests - 529 - - 529
Dividends paid to noncontrolling
interests - - (37 ) - (37 )
Other, net (5 ) (15 ) 52 - 32
Net cash from (used by) financing
activities 7 (1,026 ) (1,403 ) 3 (2,419 )
Effect of exchange rate changes on
cash, cash equivalents and
restricted cash (includes $(1)
related to discontinued operations) - - 1 - 1
Net change in cash, cash
equivalents and restricted cash - (747 ) (338 ) - (1,085 )
Cash, cash equivalents and
restricted cash at beginning of
period - 1,078 1,578 - 2,656
Cash, cash equivalents and
restricted cash at end of period - 331 1,240 - 1,571
Less cash, cash equivalents and
restricted cash of discontinued
operations at end of period - - - - -
Cash, cash equivalents and
restricted cash of continuing
operations at end of period $ - $ 331 $ 1,240 $ - $ 1,571
163
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Table of Contents
The following table presents the condensed consolidating cash flow statement
information for the year ended December 31, 2020:
Parent All Other
(Amounts in millions) Guarantor Issuer Subsidiaries Eliminations Consolidated
Cash flows from operating
activities:
Net income $ 178 $ 213 $ 943 $ (1,122 ) $ 212
Less (income) loss from
discontinued operations, net of
taxes (1 ) 573 (86 ) - 486
Adjustments to reconcile net income
to net cash from operating
activities:
Equity in income from subsidiaries (210 ) (912 ) - 1,122 -
Dividends from subsidiaries - 437 (437 ) - -
Amortization of fixed maturity
securities discounts and premiums - 6 (163 ) - (157 )
Net investment (gains) losses - (6 ) (486 ) - (492 )
Charges assessed to policyholders - - (646 ) - (646 )
Acquisition costs deferred - - (3 ) - (3 )
Amortization of deferred
acquisition costs and intangibles - - 463 - 463
Deferred income taxes (1 ) 212 17 - 228
Derivative instruments, limited
partnerships and other - (70 ) (42 ) - (112 )
Stock-based compensation expense 39 - - - 39
Change in certain assets and
liabilities:
Accrued investment income and other
assets 2 16 (105 ) (5 ) (92 )
Insurance reserves - - 1,217 - 1,217
Current tax liabilities (1 ) 41 (34 ) - 6
Other liabilities, policy and
contract claims and other
policy-related balances 11 30 784 5 830
Cash from (used by) operating
activities-discontinued operations - (258 ) 239 - (19 )
Net cash from operating activities 17 282 1,661 - 1,960
Cash flows from (used by) investing
activities:
Proceeds from maturities and
repayments of investments:
Fixed maturity securities - - 3,637 - 3,637
Commercial mortgage loans - - 744 - 744
Limited partnerships and other
invested assets - - 182 - 182
Proceeds from sales of investments:
Fixed maturity and equity
securities - - 3,040 - 3,040
Purchases and originations of
investments:
Fixed maturity and equity
securities - - (7,763 ) - (7,763 )
Commercial mortgage loans - - (547 ) - (547 )
Limited partnerships and other
invested assets - - (449 ) - (449 )
Short-term investments, net - 45 (10 ) - 35
Policy loans, net - - 190 - 190
Intercompany notes receivable, net (10 ) (16 ) 200 (174 ) -
Capital contributions to
subsidiaries (2 ) - 2 - -
Cash used by investing
activities-discontinued operations - - (222 ) - (222 )
Net cash from (used by) investing
activities (12 ) 29 (996 ) (174 ) (1,153 )
Cash flows used by financing
activities:
Deposits to universal life and
investment contracts - - 862 - 862
Withdrawals from universal life and
investment contracts - - (2,282 ) - (2,282 )
Redemption of
non-recourse
funding obligations - - (315 ) - (315 )
Proceeds from the issuance of
long-term debt - - 738 - 738
Repayment and repurchase of
long-term debt - (490 ) - - (490 )
Intercompany notes payable, net - (190 ) 16 174 -
Other, net (5 ) (14 ) 17 - (2 )
Cash used by financing
activities-discontinued operations - - (18 ) - (18 )
Net cash used by financing
activities (5 ) (694 ) (982 ) 174 (1,507 )
Effect of exchange rate changes on
cash, cash equivalents and
restricted cash (includes $18
related to discontinued operations) - - 15 - 15
Net change in cash, cash
equivalents and restricted cash - (383 ) (302 ) - (685 )
Cash, cash equivalents and
restricted cash at beginning of
period - 1,461 1,880 - 3,341
Cash, cash equivalents and
restricted cash at end of period - 1,078 1,578 - 2,656
Less cash, cash equivalents and
restricted cash of discontinued
operations at end of period - - 95 - 95
Cash, cash equivalents and
restricted cash of continuing
operations at end of period $ - $ 1,078 $ 1,483 $ - $ 2,561
164
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Table of Contents
As of December 31, 2021,
subsidiaries had restricted net assets of $15.4 billion and $15.6 billion,
respectively. For additional information on
management plans, including a potential new dividend policy, see
"Part II-Item 5-Dividends."
For additional information on significant restrictions on dividends by subsidiaries ofGenworth Financial andGenworth Holdings , see note 17 in our consolidated financial statements under "Part II-Item 8-Financial Statements and Supplementary Data."
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