GENWORTH FINANCIAL INC (GNW) FY 2021 MD&A

Item 7. 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 ended December 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 former Australia 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 ended December 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 in the 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 as U.S. Mortgage Insurance); U.S. Life Insurance; and Runoff. We also have Corporate and Other activities. Our U.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:

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Our expenses consist primarily of the following:

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:

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 to Genworth Financial, Inc.’s common stockholders, net income (loss) available to Genworth Financial, Inc.’s common stockholders per share, adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and adjusted operating income (loss) available to Genworth 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 with U.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 with U.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.

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The following table presents a reconciliation of net income to adjusted operating income for the years ended December 31:

In 2021, we paid a
pre-tax
make-whole premium of $6 million and $20 million related to the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in September 2021 and August 2023, respectively. We also repurchased $146 million principal amount of Genworth Holdings’ senior notes with 2021 maturity dates for a
pre-tax
loss of $4 million and repurchased $91 million and $118 million principal amount of Genworth 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 of Genworth Holdings’ senior notes with 2021 maturity dates for a
pre-tax
gain of $4 million. In January 2020, we paid a
pre-tax
make-whole expense of $9 million related to the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in June 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

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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 ended December 31:

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 December 31:

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

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2020 compared to 2019

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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

For additional information related to PMIERs, see “Item 1—Business—Regulation—Enact—Mortgage Insurance Regulation—Other U.S. Regulation and Agency Qualification Requirements.”

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U.S. Life Insurance

For additional information see “—Critical Accounting Estimates.”

Liquidity and Capital Resources

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See note 12 in our consolidated financial statements under “Item 8—Financial Statements and Supplementary Data” for additional information on our long-term borrowings.

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

See note 22 in our consolidated financial statements under “Item 8—Financial Statements and Supplementary Data” for additional information.

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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 our U.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 our U.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 our U.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 to Genworth Financial, Inc.’s common stockholders attributable to
in-force
rate actions in the long-term care insurance business included in our U.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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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% in December 2021. While this unemployment rate is slightly higher compared to the
pre-pandemic
level of 3.5% in February 2020, it is markedly lower than the peak of 14.8% in April 2020. Even after the continued recovery in 2021, the number of unemployed Americans stands at approximately six million, less than one million higher than in February 2020. Among the unemployed, those on temporary layoff continued to decrease to less than one million from a peak of 18 million in April 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 since March 2021, falling to approximately two million in December 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 of November 2021 compared to November 2020 due to rising home prices, modestly offset by the low interest rate environment and an increase in median family income according to the National 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.

In January 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 effect April 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, on February 25, 2021, the FHFA announced that borrowers with a mortgage backed by the GSEs who are in an active
COVID-19
forbearance plan as of February 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 in June 2020 and ended December 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 July 31, 2021. However, on June 28, 2021 the CFPB issued a final rule to 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. On June 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 the CFPB Regulation X Final Rule that took effect on August 31, 2021. These announcements generally prohibited servicers from starting foreclosures on mortgages purchased by the GSEs until after December 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 the U.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. On December 17, 2020, the FHFA published the Enterprise Capital Framework, which includes significantly higher regulatory capital requirements for the GSEs over current requirements. However, on September 15, 2021, the FHFA announced a Notice of Proposed Rulemaking to amend the Enterprise Capital Framework, including technical corrections to provisions that were published on December 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, on January 14, 2021, the FHFA and the Treasury Department agreed to amend the PSPAs between the Treasury 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, on September 14, 2021, the FHFA 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 after September 14, 2021 or six months after the Treasury 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.

The CFPB’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. On April 27, 2021, the CFPB promulgated a final rule delaying the mandatory compliance date of the amended QM Rule until October 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 to October 1, 2022. However, on April 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 after July 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

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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 $97.0 billion in 2021 decreased 3% compared to 2020 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 ended December 31, 2021 compared to 59% for the year ended December 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 of December 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 of December 31, 2021.

The U.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

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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 after October 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 ended December 31, 2021, compared to 39% for the year ended December 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 under North Carolina law and enforced by the NCDOI, GMICO’s domestic insurance regulator, was approximately 12.3:1 as of December 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. The December 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 after March 1, 2020 and prior to April 1, 2021 and extended the capital preservation period from March 31, 2021 to June 30, 2021. On June 30, 2021, the GSEs issued a revised and restated version of the PMIERs Amendment that replaced the version issued on December 4, 2020. The June 30, 2021 version allows loans that enter a forbearance plan due to a
COVID-19
hardship on or after April 1, 2021 to remain eligible for extended application of the reduced PMIERs capital factor for as long as the loan remains in forbearance. The June 30, 2021 version also extended the capital preservation period through December 31, 2021 with certain exceptions.

In addition, in September 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—Other U.S. Regulation and Agency Qualification Requirements.”

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As of December 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 of September 30, 2021 and available assets of $4,588 million against $3,359 million net required assets as of December 31, 2020. The sufficiency ratio as of December 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 of September 30, 2021 and 137% or $1,229 million above the published PMIERs requirements 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. The decrease in the PMIERs sufficiency compared to September 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 of December 31, 2021, September 30, 2021 and December 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’s December 31, 2021 PMIERs required assets compared to $570 million and $1,046 million of benefit as of September 30, 2021 and December 31, 2020, respectively. These amounts are gross of any incremental reinsurance benefit from the elimination of the 0.30 multiplier.

In January 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 of December 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 in December 2021, $163 million of which was paid to Genworth 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.

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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:

2021 compared to 2020

Adjusted operating income available to Genworth Financial, Inc.’s common 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 in August 2020, an increase in operating costs and the minority 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.

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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 August 2020.

Provision for income taxes.

The effective tax rate was 21.3% and 21.2% for the years ended December 31, 2021 and 2020, respectively, consistent with the U.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 September 16, 2021, which reduced Genworth Financial’s ownership percentage to 81.6%, resulting in lower net income of $33 million in 2021.

Enact selected operating performance measures

The following table sets forth selected operating performance measures regarding Enact as of or for the dates indicated:

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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 ended December 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:

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 December 31:

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 of December 31, 2021.

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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 of December 31:

The delinquency rate as of December 31, 2021 decreased compared to December 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 to December 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 of December 31:

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The total increase in reserves as a percentage of risk
in-force
as of December 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 of December 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 in the 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.

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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 of December 31, 2021:

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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 of December 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 ended December 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 our U.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 of December 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 through December 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

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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, our U.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 our U.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 the U.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 our U.S. life insurance business. For sensitivities related to interest rates, lapses and mortality on our U.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 our U.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 our U.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 our U.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 our U.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

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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 our U.S. life insurance companies on a statutory accounting basis in the fourth quarter of 2021.

Our U.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 our U.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 of December 31, 2021. The consolidated RBC ratio of our U.S. domiciled life insurance subsidiaries was approximately 289% and 229% as of December 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 our U.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 our U.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 our U.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 of December 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 and Strategic 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 the Long-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. In December 2021, the Task Force adopted its framework for the multi-state rate

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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 of December 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 ended December 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

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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 U.S. Life Insurance segment for the periods indicated:

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The following table sets forth adjusted operating income (loss) for the businesses included in our U.S. Life Insurance segment for the periods indicated:

2021 compared to 2020

Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders

Revenues

Premiums

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Net investment income

Net investment gains (losses)

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

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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

Amortization of deferred acquisition costs and intangibles

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.

U.S. Life Insurance selected operating performance measures

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,

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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:

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:

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: