Genworth Financial Inc

Good morning, ladies and gentlemen, and welcome to Genworth Financial's second quarter 2023 earnings conference call. My name is Taryn and I will be your coordinator today. At this time, all participants are in listen-only mode. We will facilitate a question and answer session towards the end of this conference call. As a reminder, the 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 Sarah Cruz, Director of Investor Relations. Please go ahead.

Good morning. Welcome to Genworth's second quarter 2023 earnings call. The slide presentation that accompanies this call is available in the Investor Relations section of the Genworth website, investor.genworth.com. Our earnings release can also be found there, and we encourage you to review these materials. Our quarterly financial supplement with updated information for prior periods will be made available at a later date. Speaking today will be Tom McInerney, President and Chief Executive Officer, and Jerome Upton, Chief Financial Officer. Following our prepared remarks, we will open the call up for a question and answer period. In addition to our speakers, Brian Henegas, President of our U.S. Life Insurance business, and Kelly Saltzgeber, Chief Investment 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 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 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, Sarah. Good morning, everyone, and thank you for joining our second quarter earnings call. Denworth continued to make progress against our three strategic priorities in the second quarter as we navigated a challenging economic environment. Most notably, I'm pleased our board authorized an additional $350 million in share repurchases, significantly expanding our existing program. Free cash flow to the holding company remains strong, driven by an act's return to capital and tax payments in 2023 from an act and the U.S. life insurance companies. We continue to view returns to shareholders as an attractive use of our capital in the current environment, and this is reflected in our stock price, which has increased by over 60% as of the market close on Friday, August 4th, since announcing our original share repurchase authorization in May of 2022. We have $86 million remaining on the original share repurchase authority, and this new authorization reflects our strong free cash flow and capital structure, as well as the Board's ongoing confidence in our strategy and future. We apologize for the delay in releasing Generalers' second quarter earnings. Generalers adopted the new Long Duration Target Improvements, or LDTI, GAAP accounting guidance in the first quarter this year for our U.S. life insurance businesses. We have since determined that how we account for the three long-term care insurance or LTC legal settlements under LDTI should be changed. Denworth is now estimating the cost and expenses associated with these settlements similarly to how we estimate the reserve releases from benefit reductions. Any differences between actual experience and our best estimate assumptions will be reported in future quarters. As previously disclosed, The legal settlements are expected to have a net favorable impact to Genworth because of the significant reduction in tail risk. The cumulative economic value and total LTC settlement expenses will not change and will be based on policyholder reduced benefit elections over the implementation of the settlements. However, under the change we are making, Genworth will make initial best estimate assumptions for reduced benefits and expenses under the legal settlements. To the extent actual settlement results differ from best estimates, the differences will be recorded in subsequent quarters until the settlement implementations are completed. For the prior two settlements, Choice 1 and PCS 1 and 2, we have updated our financial statements using the same methodology. Jerome will cover the accounting treatment of our LTC legal settlements and enforce rate actions in more detail. But it's important to remember that U.S. GAAP accounting is non-economic and has no impact on cash flows, capital levels, statutory results, or how we manage the business. Turning to the second quarter results, Genworth reported net income of $137 million and adjusted operating income of $85 million, or 18 cents per diluted share. And ACT again had a very strong quarter with net income of $137 million and adjusted operating income of $146 million. Insurance and force at the end of the quarter was $258 billion. We are pleased with Enact's continued strong performance. In addition, Enact increased its quarterly dividend payment to $0.16 per share, authorized a new share repurchase program of $100 million, and increased the total expected capital return in 2023 by $50 million to $300 million. Genworth received $54 million in capital returns from Enact in the second quarter. Since Enact's IPO, Genworth has received approximately $465 million in capital returns from ENAC, enabling us to fund our strategic initiatives, including share repurchases. We expect our 81.6% ownership of ENAC to remain the primary source of free cash flow moving forward. Our LTC business reported an adjusted operating loss of $43 million in the second quarter, primarily driven by a liability remeasurement loss of $61 million from higher new claims as the LTC blocks age and seasonally lower claim terminations. The estimated LTC statutory pre-tax loss was $70 million, primarily driven by higher new claims given the aging of the block and seasonally lower claim terminations, partially offset by a net benefit related to the PCS-1 and 2 settlement. Total pre-tax statutory income for the U.S. life insurance companies is estimated to be $63 million in the second quarter. Life insurance pre-tax statutory income is estimated at $26 million, driven by lower mortality, and annuities pre-tax statutory income is estimated to be $107 million, primarily driven by variable annuities as a result of favorable equity markets and higher interest rates. Life and annuities statutory income and non-core statutory income in the second quarter more than offset the LTC statutory loss in the quarter. We have pointed out over the last several quarters that investors should evaluate LTC results under both U.S. GAAP and U.S. statutory accounting to have a more complete understanding of LTC results. As Jerome will explain in more detail, LDTI treats unprofitable capped cohorts differently than profitable uncapped cohorts. LDTI requires us to remeasure LTC liabilities each quarter and compare actual performance against best estimate assumptions. On unprofitable capped LTC cohorts, any liability remeasurement is recorded in the quarter. So, for example, a true-up for actual to expected reserve releases for benefit reduction differences in a settlement impacting these cohorts will impact the P&L that quarter. For profitable uncapped LTC cohorts, a liability remeasurement or other differences from best estimate assumptions primarily impacts the net premium ratio reducing the quarterly P&L impact compared to the same impact on unprofitable cap cohorts. Under statutory accounting and similar to pre-LDTI gap accounting, all LTC cohorts are treated similarly and results for capped and uncapped cohorts can offset each other during the quarter. Therefore, because of the disparate treatment between statutory and gap regarding capped and uncapped cohorts, quarterly LTC statutory results should generally be less volatile than U.S. GAAP results under LDTI. As I've said before, the U.S. GAAP results for generous LTC and life and annuities businesses do not have any impact on free cash flow to the holding company. Free cash flow to the holding company is primarily driven by an act's excess cash and to a lesser extent by future tax payments from an act and USLI if the holding company has tax credits available. Statutory earnings are similar to tax earnings, and taxes paid to the holding company can be significantly different than the U.S. GAAP tax rate. Complete statutory results for our U.S. life insurance companies will be available when we file our quarterly statutory statements later this month. Also in the quarter, we received confirmation that the trial date and access case against Santander regarding the payment protection insurance mis-selling case is set for March 2025. As a reminder to investors, Genworth is not a party to the case, but if AXA is successful in pursuing its claims, we will share in the recoveries AXA receives from send-in tariff. We continue to monitor the proceedings closely and will update investors in many material developments. Turning to our three strategic priorities, we continue to improve the financial condition of our legacy LTC business, primarily through our Multi-Year Rate Action Plan, or MIRAP. the most effective tool we have to bring our legacy LTC insurance portfolio to economic breakeven on a go-forward basis. We achieved a total of $94 million of gross incremental premium approved in the second quarter, building upon $50 million of premium approved in the first quarter. This brings our cumulative progress to approximately $24.4 billion in approvals on a net present value basis since 2012. We are very pleased with our progress in the first half of the year and now expect our total gross incremental premium approved for the full year to be approximately $275 million this year, up from previous expectations of $250 million. I also want to mention the report issued by the New York State Department of Financial Services in early June on the long-term care insurance market. The report includes important commentary on the overall state of the LTC industry, acknowledges the need for LTC premium rate action approvals on New York LTC policies, and provides a balanced view of a way forward in sustaining this important insurance market. We appreciate the continued partnership with insurance regulators on efforts to stabilize the LTC industry through premium rate increase approvals and to ensure long-term policyholder commitments are able to be honored. Turning to the next strategic priority, we continue to leverage General Substantial LTC expertise to develop innovative aging care services and solutions and a new CareScout Services business. We continue to execute on our growth initiatives around CareScout Services to meet the large and growing demand for senior care that is not adequately addressed in the market today. We have planned for several phases of new services and products over the next several years. Our first phase includes the build-out of our CareScout Quality Network for senior care providers with an initial launch in Texas. Texas is a large LTC insurance market And Genworth has approximately 43,000 policyholders there. We are pleased to say that we have Care Scout Quality Network coverage for approximately 50% of the age 65 plus Texas population with providers that have met our quality credentialing standards and agreed to negotiated discounted rates. We are in discussions with dozens of other home care providers in the state to join the Care Scout Quality Network and have strong momentum to expand the network throughout Texas and nationwide. Two other large LTC markets, Arizona and Florida, are likely to be included in CareScout's next areas of focus. We are very pleased that each of these providers understands CareScout Services' value proposition around patient-centered quality care and the potential access to Genoa's 1 million policyholders, as well as potential access to other insurers' LTC policyholders. At the same time, we made significant progress in developing our new digital technology platform. This platform will facilitate timely matches of Genworth policyholders and new CareScout customers with quality care providers in our network. With the discounted rates negotiated, Genworth policyholders will be able to extend their available benefits, and Genworth will realize claims savings over time, driving further risk mitigation for the legacy LTC block. As we build out our CareScout services business, we will continue to leverage existing relationships with thousands of care providers, experience from processing over 360,000 LTC claims, significant proprietary claim data gathered from LTC policyholders over four decades, and the strong team we have to lead these efforts. Over time, with national coverage in the Care Scout Quality Network, we'll expand our customer base beyond Genworth policyholders to include other LTC insurance carriers' policyholders, and then eventually go direct to consumers. Moving on to our third strategic priority, we significantly increased the pace of share repurchases in the second quarter. We repurchased 112 million worth of shares at an average price of $5.45 per share and repurchased another 20 million in the month of July. This brings the cumulative total to approximately 264 million worth of shares repurchased since the program's inception in May 2022. Including the expansion of the program we announced on July 31st, we now have approximately $436 million of outstanding repurchase authority. We continue to allocate excess cash from MNAC to drive General's long-term shareholder value. Cash flows from MNAC have fueled our share repurchase program and enabled us to invest in our long-term growth strategy in CareScout. When we think about capital allocation, it is important to remember our commitment to managing the U.S. life insurance companies on a standalone basis. They operate as a closed system, leveraging existing reserves and capital, current premiums, as well as future new premiums under the LTC Multi-Year Rate Action Plan to cover liabilities. We have no plans to put additional capital into the U.S. life insurance companies. And given the long tail of our long-term care insurance policies, with peak claim years still over a decade away, we also do not expect to extract capital from the U.S. life companies. While we believe there is tremendous value in the intellectual property, data, and experience we've amassed from the LTC business, our view of Genworth's enterprise value and future potential are rooted in our 81.6% ownership stake in ENACT and our plans to develop CareScout into a comprehensive set of products and services to address the complex challenges of aging and senior care. In closing, I am very pleased with Enact's performance and our strong execution against our three strategic priorities during the first half of the year. We are working from a significantly improved financial foundation with a high-quality holding company balance sheet and strong free cash flow, primarily from Enact.