Income Taxes

12 Months Ended

Dec. 31, 2021

Income Taxes

(13) Income Taxes

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

(Amounts in millions)	2021			2020			2019
Domestic	$	1,184		$	931		$	523
Foreign		(3	)		(3	)		(2	)
Income from continuing operations before income taxes	$	1,181		$	928		$	521

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

(Amounts in millions)	2021			2020			2019
Current federal income taxes	$	(32	)	$	—		$	6
Deferred federal income taxes		288			226			114
Total federal income taxes		256			226			120
Current state income taxes		5			3			2
Deferred state income taxes		2			2			5
Total state income taxes		7			5			7
Current foreign income taxes		—			—			12
Deferred foreign income taxes		—			(1	)		—
Total foreign income taxes		—			(1	)		12
Total provision for income taxes	$	263		$	230		$	139

Our current income tax payable was $2 million and $32 million as of December 31, 2021 and 2020, respectively.

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

	2021			2020			2019
Statutory U.S. federal income tax rate		21.0	%		21.0	%		21.0	%
Increase (reduction) in rate resulting from:
Swaps terminated prior to the TCJA		2.5			3.0			4.5
Reduction in uncertain tax positions		(1.8	)		—			—
State income tax, net of federal income tax effect		0.5			0.4			1.1
Other, net		0.1			0.4			0.1
Effective rate		22.3	%		24.8	%		26.7	%

The effective tax rate for the year ended December 31, 2021 decreased compared to the year ended December 31, 2020 primarily attributable to changes in uncertain tax positions due to the expiration of certain statutes of limitations in 2021.

The effective tax rate for the year ended December 31, 2020 decreased compared to the year ended December 31, 2019 primarily attributable to gains on forward starting swaps settled prior to the enactment of the

Tax Cuts and Jobs Act (“TCJA”), which will continue to be tax effected at 35% as they are amortized into net investment income, in relation to higher pre-tax income in 2020.

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

(Amounts in millions)	2021			2020
Assets:
Foreign tax credit carryforwards	$	174		$	136
Net operating loss carryforwards		202			56
Capital loss carryforwards		142			—
State income taxes		388			386
Insurance reserves		178			620
Accrued commission and general expenses		118			123
Liabilities associated with discontinued operations		122			126
Investments		—			10
Other		18			23
Gross deferred income tax assets		1,342			1,480
Valuation allowance		(382	)		(396	)
Total deferred income tax assets		960			1,084
Liabilities:
Net unrealized gains on investment securities		506			590
Net unrealized gains on derivatives		73			70
DAC		98			181
PVFP and other intangibles		38			42
Insurance reserves transition adjustment		99			123
Investments		10			—
Other		17			13
Total deferred income tax liabilities		841			1,019
Net deferred income tax asset	$	119		$	65

The above valuation allowances of $382 million and $396 million as of December 31, 2021 and 2020, respectively, are related to state deferred tax assets and foreign net operating losses. 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 carryforward amounted to $944 million as of December 31, 2021, and has an indefinite carryforward. The benefits of the NOL carryforwards have been recognized in our consolidated financial statements, except to the extent of the valuation allowances described above relating to state and foreign taxes. The foreign NOL carryforwards, which are included in the net operating loss carryforwards line, are fully offset by a valuation allowance. Foreign tax credit carryforwards amounted to $174 million as of December 31, 2021, and will begin to expire in 2025. Capital loss carryforwards amounted to $675 million as of December 31, 2021, and, if unused, will expire in 2026.

Our ability to realize our net deferred tax asset of $119 million, which includes deferred tax assets related to NOL, foreign tax credit and capital loss carryforwards, is primarily dependent upon generating sufficient taxable

income and capital gains in future years. Management has concluded that there is sufficient positive evidence to support the expected realization of the net operating losses, foreign tax credit carryforwards and capital loss 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; and (iii) overall domestic losses that we have incurred are allowed to be reclassified as foreign source income which, 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 that 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 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 $2 million, $3 million, and $4 million for the years ended December 31, 2021, 2020, and 2019, respectively, reflecting accretion of our liability at the Tax Matters Agreement rate of 5.72%. As of December 31, 2021 and 2020, we have recorded the estimated present value of our remaining fixed obligation to GE of $29 million and $41 million, respectively, as other liabilities in our consolidated balance sheets. Both Genworth’s IPO-related deferred tax assets and its obligation to GE are estimates that are subject to change. There is also a contingent portion of the obligation that is recorded in other liabilities in the consolidated balance sheets.

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

(Amounts in millions)	2021			2020			2019
Balance as of January 1	$	62		$	64		$	79
Tax positions related to the current period:
Gross additions		—			—			—
Gross reductions		(3	)		(3	)		(15	)
Tax positions related to the prior years:
Gross additions		—			1			—
Gross reductions		(19	)		—			—
Balance as of December 31	$	40		$	62		$	64

The total amount of unrecognized tax benefits was $40 million as of December 31, 2021, which if recognized would affect the effective tax rate on continuing operations by $25 million.

We believe it is reasonably possible that in 2022, due to the potential resolution of certain potential settlements and other administrative and statutory proceedings and limitations, up to approximately $25 million unrecognized tax benefits will be recognized.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of income tax expense. We recorded $2 million of benefit in 2021 and less than $1 million of expense in both 2020 and 2019 related to interest and penalties.

Our companies have elected to file a single U.S. consolidated income tax return (the “life/non-life consolidated return”). All companies domesticated in the United States 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 2017. Potential state and local examinations for those years are generally restricted to results that are based on closed U.S. federal examinations.