Genworth Financial Inc

Good morning, ladies and gentlemen, and welcome to Genworth Financial's second quarter 2021 earnings conference call. My name is Lauren, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will facilitate a question and answer session toward the end of today's conference. As a reminder, this conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speaker phones, or headsets during the Q&A portion of today's call. I would now like to turn the presentation over to Tim Owens, Vice President of Industrial Relations. Mr. Owens, you may proceed.

Thank you, operator. Good morning, and thank you for joining Genworth's second quarter 2021 earnings call. Our speakers are remote this morning, so please excuse any sound quality or technical issues that may arise. Our press release and financial supplement were released last night, And this morning, our earnings presentation was posted to our website and will be referenced during our call. We encourage you to review all these materials. Today, you will hear from our President and Chief Executive Officer, Tom McInerney, followed by Dan Sheehan, our Chief Financial Officer and Chief Investment Officer. Due to applicable security law and publicity restrictions, our comments regarding preparations for an IPO of our U.S. mortgage segment and act will be limited to our prepared remarks. Following our prepared comments, we will open up the call for a question and answer period. In addition to our speakers, Rohit Gupta, Chief Executive Officer in ACT, will be available to take your questions. During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors of our most recent annual report on Form 10-K as filed with the SEC. This morning's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our financial supplement, earnings release, and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with SEC rules. Also, references to statutory results are estimates due to the timing of filing of statutory statements. And now I'll turn the call over to our President and CEO, Tom McInerney.

Thank you, Tim. Good morning, everyone, and thank you for joining GenWear's second quarter earnings call. We report a very strong operating performance in the second quarter, continuing the reasonable momentum across our businesses while making progress on our strategic plan to create long-term values. In Q2, GenWear delivered a net income of $240 million, and adjusted operating income of $194 million, driven by continued strong performance at our U.S. mortgage insurance business, now known as an app, as well as in our long-term care insurance business. An app reported very strong results with adjusted operating income of $135 million compared with $126 million in the prior quarter and an adjusted operating loss of $3 million in the prior year period. Relative to the prior quarter, an app reported higher new insurance written lower earned premiums, and a 32% decrease in new delinquencies. Results reflected a loss ratio of 12%, which compares favorably to the prior quarter due to lower losses from new delinquencies and higher reserve strengthening in the prior quarter. US Life Insurance reported adjusted operating income of $71 million for the quarter, compared with $62 million in the prior quarter and an adjusted operating loss of $5 million in the prior year. Results were primarily driven by LTC insurance, which reported adjusted operating income of 98 million, reflecting higher earnings from enforced rate actions, including benefit reductions related to illegal settlement and higher net investment income versus both the prior quarter and prior year. We successfully managed capital levels during the second quarter, ending the quarter with a very strong PMIRES ratio of 165% in an act, or nearly 2 billion above published requirements, and risk-based capital in our principal life insurance company, Glick, of approximately 270%. Genworth also ended the second quarter with a very strong cash position of $842 million in cash and liquid assets at the holding company level. Our strong performance over the past several quarters provides a solid foundation for us to write the next Genworth chapter. As our long-term shareholders know, Genworth's financial stability and flexibility have significantly improved over the past several years. We are now on a more stable trajectory as a result of continued strong operating performance, particularly at NAPT. Strategic actions we've taken to reduce debt and excellent progress to further reduce risk associated with our legacy LTC insurance blocks. We have adequate liquidity to meet our financial obligations, valuable expertise and capabilities, and a focused strategy to drive long-term shareholder value creation. Moving forward, Our primary strategic focus in the near term is to continue to reduce holding company debt. In July, we fully retired our remaining 2021 maturities, reducing parent holding company debt by an additional $513 million to approximately $2 billion, including our previously disclosed liability to AFSA of approximately $345 million. Our goal is to reduce holding company debt to a sustainable level of approximately $1 billion, creating more financial flexibility for Genworth to return capital to shareholders and make prudent investments in future growth. Since 2013, we have reduced holding company debt by a total of approximately $2.2 billion. Related to the obligation to AXA, I mentioned last quarter that AXA has initiated a lawsuit in the U.K. against Andandere seeking to recover payouts it made to policyholders for miscellaneous payment protection insurance. a significant portion of which Genworth agreed to reimburse as part of the 2020 settlement. ESSA's lawsuit against Sendentere is an ongoing matter, and as with typical litigation, we expect the process to play out over the next 18 to 24 months. As I've said before, Genworth is entitled to certain recoveries ESSA may receive from Sendentere. While any recoveries would be very positive for Genworth, our plans are not reliant upon those potential reimbursements. Beyond that, we can't comment further on this litigation. To further accelerate our efforts to reduce debt and improve it and act in general with credit ratings, we remain focused on partially monetizing our ownership in an act through a minority IPO of up to 19.9%. As we have considered various options for an act over the past several years, our objective has been to protect and ultimately unlock its value enabling us to maximize value for general shareholders in any potential transaction. The board and I continue to believe that a future IPO is the best option to do just that. We maintain our positive long-term outlook for the MI sector based on the strong positive trends in the US housing market and expected tailwinds as the economy continues to recover from COVID-19. We continue to monitor the market and will remain prepared to recommence the IPO process subject to various conditions and approvals when market conditions improve. However, as a reminder, we are currently in registration with the FCC and as a result of applicable publicity restrictions, I won't provide any additional details about or discuss the timing of the potential offering. We will be very limited in our comments about an act other than reviewing its quarterly results. We expect our majority ownership stake in an act to generate a significant dividend stream in the future as we work to move our legacy LT books to break even and build a profitable new LTC company. We have received approval from the North Carolina Department of Insurance to dividend 200 million of capital from Gemaco to enact holdings in the fourth quarter of 2021. Subject to market conditions, business performance, other regulatory approvals, and compliance with applicable GST requirements, this increases our confidence in issuing a 200 million dividend in the fourth quarter. Following the planned IPO, We intend to maintain our ownership of an act for the foreseeable future while preserving the option to distribute the remainder to general shareholders in a tax-free spinoff if that is an attractive option in the future. Next, we are working towards stabilizing our legacy LTC portfolio through our multi-year rate action plan, or MIRAP, which will enable us to focus on our long-term LTC growth strategy. We have made exceptional progress on this effort. with over $15.5 billion in net present value from LTC premium increases and benefit reductions achieved since 2012, including an incremental $49 million in rate actions approved during the second quarter. These rate actions provided more options for policyholders, including reduced benefit and stable premium options, which continue to be selected at a higher frequency by our policies. We are working to develop even more benefit options for our policyholders to choose from, when faced with rate actions. As of June 30, 2021, approximately 59% of Genworth LTC policyholders have accepted all premium increases in full, 27% have taken a reduced benefit option, and 14% have opted for a non-forfeiture option. Reducing our legacy LTC liabilities through the MIRAP and other rate action initiatives is critical to achieving break even on an economic basis for the legacy LTC business over time. Our current long term cumulative improvement target on an F present value basis is roughly 22 and a half billion in rate actions, which is the amount needed to address the current expected shortfall in our legacy LTC books of business. Having achieved 15 and a half billion against the current target of 22 and a half billion means we are approximately two thirds of the way towards achieving breakeven. I would note that we will complete our annual LTC assumptions review later this year. And this target could change over time as our experience evolves. Given that state regulators have and will continue to spread LTC premium increases over several years, returning our legacy LTC portfolio to break even on an economic basis is likely five to seven years or more away. We are proud of our steady progress towards this goal. and the MIRAC remains an important strategic initiative for Genworth, since achieving breakeven will expand optionality and increase the potential long-term value of our overall company to shareholders. With these key initiatives underway, we have begun to focus our growth strategy on the future of LTC insurance, and we are advancing our plans through a new insurance company to create a leading possible LTC insurance business in the US. As I said before, there's a great need for long-term care solutions in the U.S. with 54 million Americans age 65 and older at the end of 2019, and with that number expected to increase to 95 million by 2060, while at the same time care costs are rising rapidly. COVID-19 has heightened the focus on long-term care among legislatures and the general public. We believe it also has accelerated the long-term trend of seniors increasingly seeking to receive care in their homes. as was evident throughout the pandemic, if not well before, enabling more must be done to protect and empower seniors, enabling them to remain in the settings of their choice and receive the services and support they need to maintain their dignity as they age. Unfortunately, many older adults, especially those in the middle class, have limited options to pay for long-term care, and the existing funding gap simply is too large for either the public or private sectors to fill on their own. That's why we believe partnership with the public and private sectors is critical. We believe the government and private sectors can collaborate successfully to address the long-term care dilemma, and we are encouraged to see an acknowledgment of this necessary alliance in recently introduced legislation, including the Well-Being Insurance for Seniors to Be at Home, or WISH Act, proposed by US Rep Tom Swayze. We are especially pleased to see that public education is a vital component of his legislation, focusing greater awareness of the likelihood of requiring long-term care during one's later years, the programs that may cover care needs, and the options available to finance care, we encourage families to have the necessary conversations with their loved ones and take appropriate steps to ensure that resources are available to fund their long-term care needs. We expect these recent developments will reignite conversations about reforming the long-term care system in the U.S., and we are eager to participate and lend our unique expertise in this effort. There are only a few players in the LTC insurance market today due to severe financial challenges arising from legacy LTC business. We know the key to success in the future is to learn from the past to design new insurance products with lower and more predictable risks. Through our extensive experience with LTC, We've also identified several opportunities adjacent to insurance, including products and services that help people navigate a complex and fragmented support system to find the best care. We believe that successful reinvigoration of the US LTC market will address both financing and services, and ultimately will hopefully reduce the likelihood of people needing care and or lessening the care that they need. We have a clear picture of a large addressable market for LT solutions in the U.S. and are working hard on developing a new and approved go-to-market strategy. As we've mentioned previously, we also see compelling long-term opportunities in China but have decided to focus our efforts on launching a U.S. business in the near term. Our plan is to launch this new business sometime in 2022 in partnership with highly rated third parties. While Genworth's most significant contribution to any potential partnership would be our intellectual property and expertise, we may also invest a prudent level of capital. We look forward to updating shareholders with more details in due course. To sum up, we are laser focused on five key priorities. One, reducing our holding company debt to approximately $1 billion. Two, maximizing the value of an app. three, returning capital to shareholders, four, achieving economic breakeven and stabilizing the legacy LTC portfolio, and finally, preparing to launch a new LTC joint venture in the U.S. I believe the current market value of our shares does not reflect January's intrinsic value and that the key to driving significant shareholder value will be our execution on these five priorities in the near term. After reaching our 1 billion debt target and realizing the resumption of dividends from an app to the parent company, we expect to generate reliable and sustainable future cash flows that will enable Genworth to consider returning cash to shareholders through a regular dividend and or share repurchases. We know this is especially important step for our shareholders who have been extremely patient throughout the last several years of uncertainty. We will also be in a strong position to continue to prudently invest and new LTC business opportunities, where we are uniquely qualified and positioned to win. We are extremely proud of the work we've done to put the company on this path. Jenwick has an engaged board and leadership team, a skilled and dedicated workforce, and the unparalleled experience and expertise to create long-term value. With that, I'll now turn the call over to Dan to discuss our second quarter results and financial position in more detail.