Genworth Financial Inc

Good morning, ladies and gentlemen, and welcome to Genworth Financial's third quarter 2021 earnings conference call. My name is Katie, 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 towards the end of the conference call. As a reminder, the conference is being recorded for replay purposes. Also, we ask 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 Investor Relations. Mr. Owens, you may proceed.

Thank you, operator. Good morning, and thank you for joining Genworth's third quarter 2021 earnings call. All of our speakers are remote this morning, so please excuse any sound quality or technical issues that may arise. A 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 of 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. Following our prepared comments, we will open up the call for a question and answer period. In addition to our speakers, Brian Henegas, President of our US Life Division, and Jerome Upton, Deputy Chief Financial Officer, will also 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 presentations, 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 the filing of the 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 January's third quarter earnings call. We are pleased to report another very strong quarter of operating performance, continuing the recent momentum in our businesses. Net income in the third quarter was $314 million. Adjusted operating income totaled $239 million, up from $125 million in the year-ago period, driven primarily by the U.S. life insurance business. U.S. Life reported adjusted operating income of $93 million for the quarter, up from $71 million in the prior quarter and $14 million in the prior year period. Results were primarily driven by LTC insurance, which reported adjusted operating income of $133 million, reflecting strong earnings from in-force rate actions, including higher benefit reductions as well as higher net investment income. Our U.S. Moores Insurance Subsidiary, an ACT, held its first quarterly earnings call as a publicly traded company this morning following a successful IPO in September. Its results included very strong adjusted operating income, substantial growth in primary insurance and force, and robust capital sufficiency. Dan will provide more details around Enact's performance and its impact on GenWorks consolidated results. We also encourage shareholders to refer to Enact's earnings release and slides posted on its investor relations website for more details. We once again entered the quarter with improved capital sufficiency in both NAPT and our principal life insurance company, Genworth Life Insurance Company, or GLIC. We entered the fourth quarter with a strong cash position of approximately $638 million and exciting plans to further strengthen Genworth's balance sheet and advance our long-term growth agenda. Looking forward, We remain focused on five strategic priorities, which we are working on in parallel. As a reminder, our priorities are to maximize the value of an act, reduce our holding company debt, achieve economic breakeven, and stabilize the legacy LTC portfolio, advance our LTC growth initiatives, and return capital to shareholders. An act is a valuable business with a leading market position and attractive growth opportunities. We monetized part of our ownership stake during the third quarter through the successful minority IPO, which created significant value for both companies. Denworth received aggregate net proceeds of approximately 529 million from the IPO. We used those proceeds to retire in full our outstanding promissory note to AXA of approximately 296 million, nearly a year ahead of schedule. After the IPO, both Moody's and S&P issued upgrades to some of our ratings and outlooks, as well as those of an Act, reflecting further improvement in our financial flexibility and credit risk profile. We are proud of this outcome and the work we've done to date to support these upgrades. After the IPO, our ownership of an Act decreased from 100% to 81.6%. We intend to maintain our position for the foreseeable future. We expect our majority ownership in an Act to generate a significant dividend stream and to be an important source of cash flow going forward. Next, I'd like to highlight the significant reduction in debt that we have achieved. Inclusive of the $296 million AXA note repayment, we have reduced holding company debt by $1.5 billion year-to-date. We are proud of this progress, which brings us closer to our target debt of approximately $1 billion. We also made progress towards stabilizing our legacy LTC portfolio this quarter, primarily through our Multi-Year Rate Action Plan, or MIRAP. We have achieved approximately $323 million in rate action approvals year-to-date, including $117 million in the third quarter, which brings our cumulative total to over $16.3 billion on a net present value basis since 2012. Pursuing these actuarially justified rate actions is critical to achieving break-even on an economic basis for the legacy LTC business over time. You can see the success of this initiative illustrated on slide 11 of our investor presentation, which shows the impact of LTC enforced rate actions, or IFAs, on our statutory pre-tax earnings since 2017. Since 2019, the annual benefit from IFAs has more than offset our statutory losses from our legacy LTC products. In 2021, this included the impact of the legal settlement. As you can see on slide 11, IFAs are critical to ensuring that premiums exceed payouts, helping to mitigate the risk of large losses in our legacy LTC business in the near term. Over the longer term, we will reach a point when premiums will no longer exceed payouts and the losses that give rise to our assumption for shortfall will emerge. That's why we're continuing to pursue IFAs while also addressing high-risk LTC categories, like policies with compounding benefit increases. We're doing this by offering reduced benefit packages, which provide flexibility to policyholders facing premium rate increases, and which also limit tail risk to general. We're also developing care management initiatives to reduce both the likelihood of people needing care and the level of care they require. Through IFAs, benefit reductions, and care management, we are effectively working to mitigate both near-term and long-term risk associated with our legacy books. And as you can see on slide 10, we've made excellent progress on the long-term challenge as benefit reduction options continue to be selected at a higher frequency by our policyholders. As of September 30, 2021, approximately 43% of GenWars LTC policyholders have opted some form of reduced benefit option. Taking a step back, the cumulative effect of rate increases or IFAs achieved since 2013 has positioned us well to meet obligations over the intermediate term. We've achieved over $16.3 billion in rate increases on a net present value basis against the current estimated $22.5 billion shortfall in our legacy LTC business. The continued focus on benefit reductions and care management will help to reduce risk over the long term. We are currently conducting our annual assumption review and expect to strengthen one of our assumptions, our benefit utilization rate, at the end of the year, just as that we have strengthened other assumptions to bring them in line with long-term expectations. This assumption is a key driver of results and is expected to significantly increase our estimated shortfall, reflecting how our experience has evolved. When our best estimates change and require the strengthening of assumptions, policyholders benefit from stronger reserves backing our liabilities. And as with prior assumption strengthening, we continue to see broad-based support from regulators for actuarially justified rate increases and fully expect the assumption strengthening to be offset by an allowed expansion of our multi-year rate action plan. With a combined effect of prior year IFAs, assumption strengthening coupled with new IFAs, benefit reductions and care management, we remain confident in our ability to achieve economic breakeven. We will share more details from our assumptions review on our fourth quarter call. I want to thank the regulators who are on this journey with us as we work diligently to serve all of our policyholders, find solutions to the issue created by products sold in the past, and forge a new path forward for the LTC industry. I also want to highlight the excellent work being done by our US Life colleagues led by President and CEO Brian Henegas. Brian joined Genworth as Chief Risk Officer in 2020 and took on his current role in February this year. He has been instrumental in further accelerating risk reduction in our legacy LTC blocks so that we are better positioned to pay benefits over the long term. He will continue to play a key leadership role in this effort moving forward, as well as helping us advance our strategic growth agenda in long-term care. Before I move on to our LTC growth initiatives, I want to briefly touch on the upcoming changes to U.S. GAAP accounting under the new Long-Duration Targeted Improvement, or LDTI, standards that were issued by the Financial Accounting Standard Boards. We are preparing for implementation of these new rules and expect to provide shareholders with a view on the expected impacts sometime next year ahead of the effective date in January of 2023. I want to note that the relative impact of these new accounting rules may be greater for a general life insurance company compared to other life insurers, given that our U.S. life portfolio is weighted towards traditional long-duration insurance liabilities, including long-term care insurance. Accordingly, we expect a material impact on our U.S. GAAP balance sheet and income statements upon adoption in 2023 and going forward, including a significant reduction of our U.S. GAAP book value or equity. The U.S. GAAP book value for the legacy life companies is expected to be significantly lower going forward under the new accounting. The old U.S. GAAP long-duration accounting was based on original pricing assumptions. The new LDTI accounting will change from an original pricing regime to a best estimate or market-oriented accounting model. The anticipated reduction in U.S. life's book value is a U.S. GAAP accounting change only. it will not impact economic cash flows. The best indicator of current and future economic cash flows for U.S. life in the legacy LTC business remains the statutory cash flow testing regime under statutory accounting. As a reminder, U.S. insurance regulators primarily focus on statutory accounting results in regulated U.S. insurance companies and approving dividends from operating insurance companies to their holding companies. Bachelor accounting for U.S. Life will not be impacted by the LVTI U.S. GAAP accounting changes. The new rules will have no impact on cash or cash flow, and they do not change U.S. GAAP accounting for NAPT. Also, as a reminder, we view the value of our U.S. Life insurance legacy business at zero, given that we do not expect insurance regulators to approve future dividends from our legacy life companies for the foreseeable future. At the same time, we have no plans to contribute holding company capital into the legacy life insurance businesses. The legacy US life insurance legal entities will continue to fund claims using their existing reserves, statutory capital of $2.5 billion as of the end of June, and the actuarially justified multi-year rate action plan. Given the importance of our statutory results and statutory cash flow and statutory capital levels to our regulators, and our reliance upon these results to track the progress and impact of our LTC multi-year rate action plan, we are including new supplemental statutory earnings and capital information in our slides today and plan to do so moving forward. Now, turning to our next priority, advancing LTC growth initiatives. We continue to work towards launching a new and innovative platform that will help address the societal need for long-term care in the U.S. The need for senior care is large and growing, driven by an aging population, longer life expectancy, increasing need for care, and rising care costs. As reported in our Beyond Dollar study published earlier this week, long-term care needs continue to have significant impacts on aging Americans and their families. The vast majority of Americans are unprepared financially and unsupported in navigating care and health needs in their daily lives. While the need is substantial, fast and curt standalone LTC insurance offerings have been largely unsuccessful in addressing the needs of customers who face these challenges, resulting in historically low LTC product penetration. Meanwhile, insurers have struggled with an ineffective distribution model and unprofitable economics and have attempted to innovate only on the edges to increase lives insured with hybrid offerings. We believe the market is ripe for innovation. and that Genworth, with our 40-plus years of LTC experience and expertise, is uniquely prepared to capitalize on this opportunity. As we've said before, we believe a successful reinvigoration of the U.S. LTC market will address both financing and services and ultimately will help to reduce the likelihood of people needing care and or less than the cost of care that they need. Our long-term LTC growth strategy assumes that future revenues will be weighted more towards capital-like service and advice offerings versus risk-bearing, highly regulated, and capital-intensive LTC insurance products. We believe future LTC products and services will require significantly less capital, have less risk, and produce higher returns for shareholders. We believe the capital requirements will be moderate given the anticipated lower level of risk. As an initial step, we're working on expanding our services offering through our existing subsidiary, CareScout, which is a leading provider of clinical assessments and care support solutions for insurers, healthcare organizations, and consumers. We plan to invest a modest initial amount, approximately $5 to $10 million, to recapitalize and scale this CareScout business so that we can offer more fee-based services going forward. But at the same time, we're also working with a highly rated reinsurance partner, on launching LTC insurance products with lower and more predictable risks than in the past. The first product will be a low-risk individual LTC insurance product with a significant amount of the risk reinsured by a partner. However, we firmly believe that the ability to re-rate LTC policies annually is absolutely critical to the success of future LTC insurance products. Accordingly, we don't intend to start writing new business until NF states support the need for annual re-rating, enabling us to launch a business that is sustainable, scalable, and profitable. We're engaging with our state insurance regulators on this topic, and we're working towards launching our first new LTC insurance product with our reinsurance partner in the first half of next year. We are still in early stages of engaging with rating agencies and other stakeholders and look forward to sharing our progress towards launching this new business on future calls. As we chart a course to future growth, returning capital to shareholders remains a top priority. After we achieve our debt target of approximately $1 billion, we plan to return capital to shareholders via regular dividends and or share buybacks, while also making prudent investments in our LTC growth initiatives. This commitment to shareholders is an important part of our story in the near to medium term. And over the longer term, we believe there is a significant opportunity to transform the LTC industry through the successful execution of our growth strategy. Our vision to build a leading profitable platform that offers holistic solutions to the challenges of aging is a unique value proposition in the marketplace and will put Genworth in a category of one. We know that realizing this vision will take time and we can't do it alone. It will take partnerships with other companies, and continued collaboration with regulators and other stakeholders to bring these new solutions to market and create value over time. We look forward to sharing updates in due course. Before I turn the call over to Dan, I would like to acknowledge the significant contributions from both our General Counsel, Ward Bobbitts, and our Chief Human Resources Officer, Pam Harrison, both of whom we recently announced are departing the company effective at the end of the year. They have both served as important counsel and partners in guiding Genworth's progress. As we move into the next phase of Genworth's journey on more stable footing, they each have decided that now is the right time to move on to their own next phases. Ward's decision to retire comes after 24 years with Genworth, seeing the company through its recovery from the financial crisis and its several strategic review processes, throughout which he has built strong relationships within Genworth, and the regulatory community. This is a well-deserved retirement, and I'm thankful for Ward's leadership of the legal team and Ward's many contributions over his tenure. Pam has been a fantastic HR advisor and partnered me, and I appreciate all she did for Genworth and me as we worked through several very complicated strategic transactions, the Enact IPO, significant disruptions and remote work challenges as a result of COVID-19, and the right-sizing of our corporate staff functions, given that Genworth has two remaining businesses, an app, and U.S. Life. I respect her decision to depart Genworth to be closer to her family in New Jersey, and I wish her and her family well. Both positions will be filled by long-serving Genworth leaders, and I have every confidence in their ability to help lead Genworth through its next chapter. With that, I'll now turn the call over to Dan to discuss our third quarter results and financial position in more detail.