Income Taxes

12 Months Ended

Dec. 31, 2018

Income Taxes

(13) Income Taxes

Income (loss) from continuing operations before income taxes included the following components for the years ended December 31:

(Amounts in millions)	2018			2017		2016
Domestic	$	(63	)	$	397	$	(283	)
Foreign		511			332		603
Income from continuing operations before income taxes	$	448		$	729	$	320

The total provision (benefit) for income taxes was as follows for the years ended December 31:

(Amounts in millions)	2018			2017			2016
Current federal income taxes	$	11		$	(32	)	$	55
Deferred federal income taxes		(18	)		(274	)		115
Total federal income taxes		(7	)		(306	)		170
Current state income taxes		1			1			1
Deferred state income taxes		—			6			2
Total state income taxes		1			7			3
Current foreign income taxes		134			192			183
Deferred foreign income taxes		23			(100	)		2
Total foreign income taxes		157			92			185
Total provision (benefit) for income taxes	$	151		$	(207	)	$	358

Our current income tax receivable was $41 million as of December 31, 2018. Our current income tax payable was $28 million as of December 31, 2017.

The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the years ended December 31:

(Amounts in millions)	2018		2017		2016
Statutory U.S. federal income tax rate	21.0	%	35.0	%	35.0	%
Increase (reduction) in rate resulting from:
Effect of foreign operations	7.7		—		(1.6	)
Swaps terminated prior to the TCJA	5.1		—		—
Stock-based compensation	1.3		0.4		1.6
Valuation allowance	(1.7	)	(35.4	)	72.8
Net impact of repatriating foreign earnings	—		—		2.8
Other, net	(0.2	)	1.5		1.3
TCJA, impact from change in rate	2.7		(21.1	)	—
TCJA, impact from foreign operations	(2.2	)	(8.8	)	—
Effective rate	33.7	%	(28.4	)%	111.9	%

For the year ended December 31, 2018, the increase in the effective rate compared to the year ended December 31, 2017 was primarily due to the impacts of tax reform in 2017 and a release of our valuation allowance in 2017 that did not recur. The 2018 effective tax rate also included the rate differential on our foreign subsidiaries, which are now taxed at a higher marginal rate than our U.S. businesses and tax expense related to gains 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.

For the year ended December 31, 2017, the decrease in the effective tax rate was primarily related to changes in U.S. tax legislation under the TCJA. We released $258 million of our valuation allowance principally from the TCJA and improvements in business performance, mostly in our U.S. mortgage insurance business, as well as lower operating earnings volatility in our U.S. life insurance businesses. In addition, under the TCJA, corporate tax rates decreased which reduced the tax rate applied to the overall U.S. jurisdiction deferred tax assets. The decrease from the TCJA related to foreign operations was principally driven by the release of shareholder liability taxes, partially offset by higher taxes associated with the transition tax.

The components of our deferred income taxes were as follows as of December 31:

(Amounts in millions)	2018			2017
Assets:
Foreign tax credit carryforwards	$	265		$	603
Net operating loss carryforwards		298			499
State income taxes		326			347
Insurance reserves		706			146
Accrued commission and general expenses		116			127
Net unrealized losses on derivatives		10			—
Investments		5			27
Other		42			34
Gross deferred income tax assets		1,768			1,783
Valuation allowance		(334	)		(363	)
Total deferred income tax assets		1,434			1,420
Liabilities:
Net unrealized gains on investment securities		153			325
Net unrealized gains on derivatives		—			28
DAC		336			396
PVFP and other intangibles		52			38
Insurance reserves transition adjustment		149			134
Other		32			22
Total deferred income tax liabilities		722			943
Net deferred income tax asset	$	712		$	477

The above valuation allowances of $334 million and $363 million as of December 31, 2018 and 2017, respectively, related to state deferred tax assets, foreign net operating losses and, in 2017, a specific federal separate tax return net operating loss deferred tax asset. The state deferred tax assets related primarily to the future deductions associated with the Section 338 elections and non-insurance net operating loss (“NOL”) carryforwards.

U.S. federal NOL carryforwards amounted to $1,319 million as of December 31, 2018, and, if unused, will expire beginning in 2028. Foreign tax credit carryforwards amounted to $265 million as of December 31, 2018, and, if unused, will begin to expire in 2024.

We are in a three-year cumulative pre-tax income position in our U.S. jurisdiction as of December 31, 2018, however, we have been in a three-year cumulative loss position in recent years. A cumulative loss position is considered significant negative evidence in assessing the realizability of our deferred tax assets. Our ability to realize our net deferred tax asset of $712 million, which includes deferred tax assets related to NOL and foreign tax credit carryforwards, is primarily dependent upon generating sufficient taxable income in future years. Management has concluded that there is sufficient positive evidence to support the expected realization of the net operating losses and foreign tax credit carryforwards. This positive evidence includes the fact that: (i) we are currently in a cumulative three-year income position; (ii) our U.S. operating forecasts are profitable, which include: in-force premium rate increases and associated benefit reductions already obtained in our long-term care insurance business, favorable development in interest rates, improvements in business performance driven mostly by our U.S. mortgage insurance business and favorable changes in U.S. tax legislation under the TCJA; and (iii) overall domestic losses that we have incurred are now, under the TCJA, allowed to be reclassified as foreign source income to the extent of 100% of domestic source income produced in subsequent years, and such resulting foreign source income, along with future projections of foreign source income, is sufficient to cover the foreign tax credits being carried forward. After consideration of all available evidence, we have concluded that it is more likely than not that our deferred tax assets, with the exception of certain foreign net operating losses and state deferred tax assets for which a valuation allowance has been established, will be realized. If our actual results do not validate the current projections of pre-tax income, we may be required to record an additional valuation allowance which could have a material impact on our consolidated financial statements in future periods.

As a consequence of our separation from GE and our joint election with GE to treat that separation as an asset sale under Section 338 of the Internal Revenue Code, we became entitled to additional tax deductions in post IPO periods. We are obligated, pursuant to our Tax Matters Agreement with GE, to make fixed payments to GE over the next five years on an after-tax basis and subject to a cumulative maximum of $640 million, which is 80% of the projected tax savings associated with the Section 338 deductions. We recorded net interest expense of $6 million, $7 million and $10 million for the years ended December 31, 2018, 2017 and 2016, respectively, reflecting accretion of our liability at the Tax Matters Agreement rate of 5.72%. As of December 31, 2018 and 2017, we have recorded the estimated present value of our remaining obligation to GE of $90 million and $119 million, respectively, as a liability in our consolidated balance sheets. Both our IPO-related deferred tax assets and our obligation to GE are estimates that are subject to change.

A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:

(Amounts in millions)	2018			2017			2016
Balance as of January 1	$	42		$	34		$	28
Tax positions related to the current period:
Gross additions		2			2			6
Gross reductions		(3	)		(1	)		—
Tax positions related to the prior years:
Gross additions		40			13			—
Gross reductions		(2	)		(6	)		—
Balance as of December 31	$	79		$	42		$	34

The total amount of unrecognized tax benefits was $79 million as of December 31, 2018, which if recognized would affect the effective tax rate on continuing operations by $43 million.

We believe it is reasonably possible that in 2019  the unrecognized tax benefit could decrease up to approximately $62 million due to potential settlements and other administrative and statutory proceedings/limitations.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of income tax expense. We recorded less than $1 million of benefits, in each respective year, related to interest and penalties for 2018, 2017 and 2016.

Our companies have elected to file a single life/non-life consolidated return. All companies domesticated in the United States and our former Bermuda subsidiary, which elected to be taxed as a U.S. domestic company, are included in the life/non-life consolidated return as allowed by the tax law and regulations. We have a tax sharing agreement in place and all intercompany balances related to this agreement are settled at least annually. With possible exceptions, we are no longer subject to U.S. federal tax examinations for years through 2014. Potential state and local examinations for those years are generally restricted to results that are based on closed U.S. federal examinations. Our Australia mortgage insurance business is generally no longer subject to examinations by the Australian Tax Office (“ATO”) for years prior to 2013. In November 2017, the ATO completed a risk review of Genworth Mortgage Insurance Australia Limited (“Genworth Australia”) for the years 2013-2015. The outcome of their review was a low risk rating for those years. The ATO is intending to carry out a Streamlined Assurance Review of Genworth Australia for the years 2016 and 2017. Our Canada mortgage insurance business generally is no longer subject to examination by Canadian Revenue Agency and provincial taxing authorities for years prior to 2013. There are no significant ongoing audits with respect to the U.S. or Canadian taxing authorities at this time.

Due to the complexities involved in accounting for the TCJA enacted in 2017, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 118, which required companies to include in its financial statements a reasonable estimate of the impact of the TCJA on earnings to the extent such reasonable estimate could be determined. For specific effects of the TCJA for which a reasonable estimate could not be made, SAB 118 allowed companies to continue to apply the tax law in effect before the enactment of the TCJA on December 22, 2017.

During 2018, as prescribed by SAB 118, we finalized our provisional estimates for all the changes in tax law under the TCJA and recorded the following:

Deferred tax assets and liabilities

We recorded a provisional tax benefit of $154 million in 2017 related to remeasurement of certain deferred tax assets and liabilities as a result of the newly enacted tax rate. The Internal Revenue Service has indicated that additional guidance will be forthcoming with respect to several technical areas within the TCJA, which could affect the measurement of these balances or potentially give rise to new deferred tax amounts. In the fourth quarter of 2018, we reversed a previously recorded $19 million provisional tax expense related to a revaluation of deferred tax assets and liabilities on our foreign subsidiaries. This reversal was the result of a change in expected filing position on our 2018 tax return in light of the TCJA, bringing our net adjustment for this provisional item to zero for 2018.

Foreign tax effects

We recorded a provisional tax expense of $63 million in 2017 related to the one-time transition tax on mandatory deemed repatriation of earnings and profits. During 2018 we recorded a tax benefit of $10 million related to the one-time transition tax as we refined our calculations of post-1986 foreign earnings and profits previously deferred from U.S. federal taxation, related tax pools and the amounts held in cash and other specified assets.

Throughout the measurement period, we analyzed the impact of the Global Intangible Low Taxed Income (“GILTI”) and Base Erosion Anti-Abuse Tax (“BEAT”), including accounting policy elections. As part of this analysis, we evaluated several alternatives for our future tax filings in light of the GILTI provisions. During the fourth quarter of 2018 we completed the accounting for the initial impacts of the provisions and no measurement period adjustments were recorded. Accordingly, we have made a policy election to account for the GILTI tax as incurred (i.e. as a “period cost”) therefore, we have not included deferred taxes on basis differences that may affect the amount of the GILTI inclusion upon reversal. We included the current period impact of the GILTI and BEAT provisions in our 2018 results, which did not have a significant impact on our consolidated financial statements.

Insurance reserve transition adjustment

We recorded a provisional reclassification in deferred tax assets and liabilities in the amount of $134 million in 2017 related to the transition adjustment required under the TCJA with respect to life insurance policyholder reserves. Under the TCJA this transition adjustment is to be taken into account ratably over eight taxable years. During 2018, we updated our provisional estimate and identified a measurement period increase to this reclassification of $36 million, which was reflected in our consolidated balance sheet as of December 31, 2018. This measurement period adjustment had no impact on income from continuing operations.

State tax effects

We have completed the analysis of state income tax effects of the TCJA, including the treatment of the one-time transition tax and GILTI. We determined that the impact to the financial statements was not significant in 2018, and accordingly no measurement period adjustment was recorded.