Genworth Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 5 speakers on the call.

Operator

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.

Operator

Also, we ask that you refrain from using cell phones, I would now like to turn the presentation over to Sarah Cruz, Director of Investor Relations. Please go ahead.

Speaker 1

Good morning. Welcome to Genworth's Q2 2023 earnings call. A 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.

Speaker 1

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 Hennigest, President of our U. S.

Speaker 1

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 ks as filed with the SEC. This morning's discussion also includes non GAAP financial measures that we believe may be meaningful to investors.

Speaker 1

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.

Speaker 2

Thank you, Sarah. Good morning, everyone, and thank you for joining our Q2 earnings call. Then we've continued to make progress against our 3 strategic priorities in the Q2 as we navigated a challenging economic environment. Most notably, I'm pleased our Board authorized an additional $350,000,000 in share repurchases, significantly expanding our existing program. Free cash flow to the holding company remains strong, driven by EnAct's return of capital and tax payments in 2023 from Enact and the U.

Speaker 2

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 4, since announcing our original share repurchase authorization in May of 2022. We have $86,000,000 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 Genworth's 2nd quarter earnings.

Speaker 2

Genworth adopted the new long duration target improvements, or LDTI, GAAP accounting guidance In the Q1 this year for our U. S. Life insurance businesses, we have since determined that how we account for the 3 long term care insurance Or LTC legal settlements under LVTI should be changed. Genworth 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.

Speaker 2

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.

Speaker 2

Jerome will cover the accounting treatment of our LTC legal settlements and in force 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 are how we manage the business. Turning to the Q2 results, Genworth reported net income of 137,000,000 Adjusted operating income of $85,000,000 or $0.18 per diluted share. EnAct again had a very strong quarter With net income of $137,000,000 and adjusted operating income of $146,000,000 insurance in force at the end of the quarter was 258,000,000,000 We are pleased with EnAct's continued strong performance.

Speaker 2

In addition, EnAct increased its quarterly dividend payment to $0.16 per share, Authorized a new share repurchase program of $100,000,000 and increased the total expected capital return in 2023 by $50,000,000 to $300,000,000 Genworth received $54,000,000 in capital returns from Mannak in the Q2. Since the Mannak's IPO, Genworth has received approximately $465,000,000 in capital Enabling us to fund our strategic initiatives, including share repurchases. We expect our 81.6 percent ownership of Enac to remain the primary source of free cash flow moving forward. Our LTC business reported an adjusted operating loss of $43,000,000 in the 2nd quarter, Primarily driven by a liability remeasurement loss of $61,000,000 from higher new claims as the LTC blocks age and seasonally lower claim terminations. The estimated LTC statutory pretax loss was $70,000,000 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-one and -two settlement.

Speaker 2

Total pre tax statutory income for the U. S. Life insurance companies is estimated to be $63,000,000 in the second quarter. Life insurance pretax statutory income is estimated at $26,000,000 driven by lower mortality and annuities pretax statutory income It's estimated to be $107,000,000 primarily driven by variable annuities as a result of favorable equity markets and higher interest rates. Life and annuity statutory income and non core statutory income in the 2nd quarter more than offset the LTC statutory loss in the quarter.

Speaker 2

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.

Speaker 2

As Jerome will explain in more detail, LDTI treats unprofitable cap 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 CAP 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 and 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 and L impact compared to the same impact on unprofitable CAAP cohorts.

Speaker 2

Under statutory accounting and similar to pre LDTI GAAP 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 GAAP regarding capped and uncapped Quarterly LTC statutory results should generally be less volatile than U. S. GAAP results under LDTI. As we've said before, the U.

Speaker 2

S. GAAP results for Genworth's 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 EnAct's excess cash and to a lesser extent by future tax payments from EnAct 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.

Speaker 2

Complete statutory results for our U. S. Life insurance companies We'll be available when we file our quarterly statutory statements later this month. Also in the quarter, we received confirmation The trial date and access case against Santander regarding the Payment Protection Insurance misselling 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 on the recoveries AXA receives from Sendin Terra.

Speaker 2

We continue to monitor the proceedings closely and will update investors of any material developments. Turning to our 3 strategic priorities. We continue to improve the financial condition of our legacy LTC business primarily through our multiyear rate action plan or MIRAP, the most effective tool we have to bring our legacy LTC insurance portfolio Economic breakeven on a go forward basis. We achieved a total of $94,000,000 of gross incremental premium approved in the 2nd quarter, Building upon $50,000,000 of premium approved in the Q1, this brings our cumulative progress to approximately $24,400,000,000 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 improved for the full year to be approximately $275,000,000 this year, Up from previous expectations of $250,000,000 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.

Speaker 2

We appreciate the continued partnership with insurance regulators on efforts to stabilize the LTC industry 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 Genworth's substantial LTC expertise to develop innovative aging care services and solutions in the 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 of senior care providers with an initial launch in Texas.

Speaker 2

Texas is a large LTC insurance market and Genworth has approximately 43,000 policyholders there. We are pleased to say that we have CareScout 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 CareScout Quality Network and have strong momentum to expand the network throughout Texas and nationwide. 2 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 Genworth's 1,000,000 policyholders as well as potential access to other insurers' LTC policyholders.

Speaker 2

At the same time, we made significant progress in developing our new digital technology platform. This platform will facilitate timely matches of Genworth policy And new CaraScout 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 4 decades and the strong team we have to lead these efforts. Over time, with national coverage in the CareScout quality network, We will expand our customer base beyond Genworth policyholders to include other LTC insurance carriers policyholders and then eventually go direct to consumers.

Speaker 2

Moving on to our 3rd strategic priority, we significantly increased the pace of share repurchases in the 2nd quarter. We repurchased $112,000,000 worth of shares at an average price of $5.45 per share And repurchased another $20,000,000 in the month of July. This brings the cumulative total to approximately $264,000,000 worth of shares repurchased since the program's inception in May 2022. Including the expansion of the program we announced on July 31, We now have approximately $436,000,000 of outstanding repurchase authority. We continue to allocate excess cash from Mannak to drive Genworth's long term shareholder value.

Speaker 2

Cash flows from Enact 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 multiyear rate action plan to cover liabilities.

Speaker 2

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.

Speaker 2

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 ANAC's performance and our strong execution against our 3 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. With that, I'll turn the call over to Jerome.

Speaker 3

Thank you, Tom, and good morning, everyone. Today, I will highlight our financial performance and key drivers by segment as well as provide an update on our strong liquidity and capital positions. We are pleased with the progress on our multi year rate action plan, strong cash position at the holding company and the value generated for shareholders through our share buyback program. For the quarter, we reported $137,000,000 of net income Or $0.29 per diluted share $85,000,000 of adjusted operating income or $0.18 per diluted share. Results were driven by Enac's very strong performance of $146,000,000 in adjusted operating income to Genworth, driven by favorable loss performance.

Speaker 3

While our GAAP results were impacted by LTC losses, it is important to note that LTC's GAAP performance Does not alter Genworth's economics or cash flows. We view the U. S. Life insurance companies as having no impact on our enterprise value And we expect shareholder value to continue to be driven by Enact's strong performance and our investments in future growth through CareScout. Before I review results, I would like to supplement Tom's comments regarding the change we have made to our accounting related to the unique LTC Legal Settlements.

Speaker 3

Under LDTI, there is no specific guidance for these unusual legal settlements Or how to treat cash payments to policyholders in connection with these legal settlements known as settlement payments. The accounting change we made for GAAP does not alter the favorable economics of our legal settlements to LTC. It simply impacts the timing and classification of our recognition of the settlement payments. We made this change to align estimates of settlement payments to policyholders with the related estimates of policyholder benefit reductions to ensure that both are recorded in the same financial reporting period. Prior periods for LTC GAAP results have been adjusted for this change.

Speaker 3

There are no changes to statutory accounting for these settlements. Now turning to ANAC's results on Slide 6. Primary insurance in force increased 9% year over year to $258,000,000,000 Driven by new insurance written and continued elevated persistency, EnAct is well positioned to continue to drive growth with a well performing portfolio and strong capital position and we'll continue to create long term shareholder value. Slide 7 shows Enact had a favorable $63,000,000 reserve release, which drove a loss ratio of negative 2%. The reserve release primarily reflects favorable cures on 2020 through first half twenty twenty two delinquencies, including COVID-nineteen related delinquencies.

Speaker 3

Both the NAC's prior quarter and prior year results included favorable reserve releases as well, $70,000,000 $96,000,000 respectively, primarily from cures on COVID-nineteen delinquencies. Enac's estimated PMIERs efficiency ratio remains strong at 162% or approximately $2,000,000,000 above PMIERs requirements. As a result of its continued strong performance and confidence in its outlook, EnAct increased its quarterly dividend payment last quarter from $0.14 to $0.16 per share, which generated proceeds of $21,000,000 to Genworth in June. Enact now expects to return $300,000,000 of capital to its shareholders this year and authorized a new share repurchase program of 100,000,000 Based on our 81.6 percent ownership of Enac, we anticipate receiving approximately $245,000,000 for the full year through a combination $96,000,000 in capital returns from Enact. Going forward, returns of capital from Enact will continue to enable Genworth to generate excess cash flow for capital deployment.

Speaker 3

Turning to Long Term Care Insurance, Slide 8 highlights our strategic focus for LTC And the progress on our multi year rate action plan to protect our claims paying ability and build resiliency for the U. S. Life insurance companies to be managed on a standalone basis. We have a very successful track record of working with state insurance regulators to achieve premium rate increases as demonstrated over the last 11 years. Through the Q2, we have achieved in force rate actions of $24,400,000,000

Speaker 1

on a

Speaker 3

net present value basis since 2012. We feel confident in our continued ability to execute on the multi year rate action plan And favorable reduced benefit impacts from recent legal settlements have accelerated this progress and further reduced the tail risk on the block. To date, we've seen a policyholder response rate of 47.5% to reduce benefits, which significantly reduces risk on these policies Long Term Care Insurance GAAP results are covered on Slides 5, 9 and 10, as we've mentioned, we are focused on cash flows and achieving economic breakeven for LTC. Under LDTI accounting, we expect ongoing volatility in our LTC quarterly GAAP results as we remeasure Our actual experience versus our best estimate assumptions, which are now recorded at a granular policy cohort level. However, these results do not impact our cash flows, economic value or change how we're managing the business.

Speaker 3

As shown on Slide 5, our LTC segment reported an adjusted operating loss of $43,000,000 for the 2nd quarter Compared to adjusted operating income of $23,000,000 in the prior quarter and adjusted operating income of $17,000,000 in the prior year. Turning to Slide 9, the 2nd quarter loss was primarily due to a liability remeasurement loss of 61,000,000 Principally on our unprofitable or CAP cohorts. The liability remeasurement loss was driven by an $85,000,000 difference And our actual to expected experience from lower terminations and higher claims, partially offset by a favorable $24,000,000 cash flow assumption update related to the timing and amount of anticipated in force rate actions. Referring to slides 9 and 10, The LTC liability remeasurement under GAAP accounting is relative to our $41,600,000,000 liability for future policy benefits. Quarterly actual to expected variations on such a large reserve balance can appear to have a significant impact, but do not change cash flows, The long term economics or reserve adequacy of the LTC business.

Speaker 3

Going forward, quarterly volatility on the GAAP income statement will be driven by 2 1st, as noted on Slide 10, under LDTI accounting, we are now required to remeasure the liability At a more granular cohort level based on policy issue year. Amongst the policy year cohorts, our LTC book is generally split evenly between CAF Cohorts, which are unprofitable blocks and have a net premium ratio capped at 100% and uncapped cohorts, which are the profitable blocks with positive margins and net premium ratios below 100%. The policyholders in the profitable uncapped cohorts are Younger, still over a decade or more away from their peak claim years and we have more premium runway on those policies with our multi year rate action plan. In contrast, the cap cohorts are our older unprofitable blocks with higher claims and much shorter premium runways. Prior to the implementation of LVTI Accounting, we did not have this cohorting concept.

Speaker 3

We would review the block in total, So profitable and unprofitable policies were considered together, resulting in positive margin in the aggregate. Now, however, under LDTI because the cap policy cohorts have no margin, the actual to While the profitable uncapped cohorts have margin, their earnings impact When we evaluate actual to expected experience, we'll be more modest because their margin absorbs experience variations with a recalculation of the net premium ratio. For us, this new LDTI cohorting requirement is a significant change in the accounting given the dynamics of our legacy LTC block. The second reason we expect increased volatility in our LTC GAAP results going forward is from the disparate impact of in force rate actions and legal settlements On the different cohorts under LDTI accounting, reserves are under best estimate assumptions updated least annually in the 4th quarter And now include an estimate for benefit reductions from in force rate actions and settlements, including an estimate for settlement payments. The reserve releases from policyholder reduced benefit elections and settlement payments will impact the income statement on a quarterly basis To the extent that actual experience differs from assumptions and it will be more pronounced for our unprofitable capped cohorts.

Speaker 3

Previously under old GAAP reserve releases and settlement payments were recorded the income statement as policyholders made reduced benefit elections Similar to statutory, this is a fundamental change between old GAAP accounting and new LDTI GAAP accounting. While the reserving methodology has changed, there was no change to how the company accounts for premiums related to in force rate actions. When looking at the impacts from in force rate actions on a GAAP basis, an investor will not get the full picture of the favorable economics of the in force rate actions and settlements because the benefit reductions are included in best estimate assumptions. In the Q4 of 2022, there was a material liability remeasurement gain for LTC, which reflected a favorable cash flow assumption update of approximately $300,000,000 largely from an update to our best estimate reserve assumptions for the inclusion of our second legal settlement which impacted our PCS-one and 2 policies. The approximate $300,000,000 gain is now inclusive of our estimate for PCS-one and 2 settlement payments of approximately $200,000,000 Based on the accounting change we highlighted, whereas previously the settlement payments were recorded over time as incurred.

Speaker 3

As we've discussed, the PCS-one and 2 settlement represents approximately 15% of the overall LTC block And Impac's older, unprofitable, principally capped cohorts, which is why the expected net reserve reduction impacted the liability remeasurement line And the income statement. As we look ahead, we will be updating our best estimate assumptions later this year for the 3rd legal settlement on our Choice 2 policies. Choice 2 is one of our newer blocks with policies written between 2,003 2011. It accounts for over 35% of our total LTC policies and approximately 90% of the block currently contains profitable Uncapped cohorts with margin. The LDTI accounting impact for the Choice 2 settlement will be very different And the impact we saw for the PCS-one and PCS-two settlements, because the Choice 2 block is mostly uncapped, while PCS-one and -two blocks were predominantly capped.

Speaker 3

Therefore, while we expect the Choice 2 settlement to result in a significant reduction And Genworth's LTC tail risk and to be a net positive for Genworth over the long term, we expect a very small income statement impact when we update our GAAP assumptions The benefit to Genworth will depend on the rate at which policyholders elect to reduce benefits. And since these cohorts are mostly uncapped, the majority of the impact will be realized over the lifetime of the cohorts. For these reasons, we encourage investors to review our statutory results, which we believe better represent the underlying performance of the U. S. Life insurance companies And particularly LTC.

Speaker 3

As shown on Slide 11, LTC statutory pretax earnings $67,000,000 for the first half of the year are down significantly from the $265,000,000 in the first half of twenty twenty two, Driven by a second quarter estimated loss of $71,000,000 from seasonally lower terminations and higher claims, Partially offset by continued favorable premium increases and benefit reductions from in force rate actions, including from the PCS-one and 2 legal settlement. Statutory results provide more visibility into the positive economic impact the in force rate actions And legal settlements have on our business. As a reminder, we had a number of favorable impacts in the prior quarter and prior year That did not reoccur at the same level. Last quarter, we saw seasonally high LTC claim terminations And 2nd quarter terminations were lower as expected in line with pre pandemic seasonal trends. In the Q2 of 2022, we had higher terminations, likely some continued impacts from COVID and higher Variable Investment Income.

Speaker 3

As the implementation of Choice 2 legal settlement ramps up in the second half of the year, We expect it to have positive impacts on our LTC statutory results. Slide 12 illustrates The trend we've been seeing that paid claims continue to increase as the blocks age and will continue to do so as peak claim years On our largest Choice 2 block are over a decade away. The average age on our Choice 2 block is 73 as shown on Slide 21. Peak claims years occur when attained age is in the mid-80s. The average attained age for the 2 smallest and oldest blocks pre PCS And PCS-one are 8987 respectively.

Speaker 3

Claims on those blocks will decrease, But we'll be more than offset by increasing claims on our Choice 1 and Choice 2 blocks, which represent 58% of total LTC in force lives. We saw reduced claims growth in 2020 through 2022 driven by the COVID-nineteen pandemic as terminations were high for both healthy and disabled lives and people appear to have delayed seeking care and going on claim. We will continue to monitor new claims growth and we have considered this trend in our plans to bring the LTC block to breakeven. To that end, we made further progress on our multi year rate action plan this quarter, achieving $94,000,000 of gross premium approvals as shown on Slide 13. As I mentioned, our cumulative net present value of achieved in force rate actions is now $24,400,000,000 Up $600,000,000 from $23,800,000,000 at the end of the Q1 of 2023.

Speaker 3

In addition to the multi year rate action plan, the LTC legal settlements have been greatly beneficial to both Genworth and our policyholders. For policyholders, many have elected to reduce their benefits while maintaining meaningful coverage and in turn reduce or eliminate their premiums. For Genworth, benefit reductions allow us to release reserves and reduce our tail risk on these policies. Slide 14 shows the increase year over year we've seen in policyholder benefit reductions. Turning to slide 15.

Speaker 3

Our Life and Annuity segment reported adjusted operating income of $2,000,000 driven by an adjusted operating loss in life insurance of $17,000,000 offset by adjusted operating income from fixed annuities of $10,000,000 $9,000,000 from variable annuities. Life and annuities were also impacted by the seasonally low mortality this quarter. In Life Insurance, mortality was improved versus the prior quarter and prior year and results reflected lower DAC amortization expense due to lower lapses and block runoff. Fixed annuities results were down versus the prior quarter And prior year from unfavorable fixed payout annuity mortality and lower net spreads. Variable annuities were flat versus The prior quarter and up versus the prior year from favorable impacts from the aging of the block, partially offset by lower fee income.

Speaker 3

As shown on Slide 16, we are estimating 2nd quarter pre tax statutory income for our U. S. Life insurance companies in total To be $63,000,000 results were driven by strong variable annuity performance from net favorable equity markets and interest rate impacts and by life insurance earnings from seasonally low mortality, which were partially offset by the LTC pretax loss of 71,000,000 that I previously mentioned. The consolidated risk based capital ratio for Genworth Life Insurance Company or GLIC Is estimated at 293% at the end of June, down slightly from 2 95% in the Q1 as a result of higher required capital As the LTC block ages, our final statutory results will be available on our investor website with our Q2 filings later this month. We will continue to manage our U.

Speaker 3

S. Life insurance companies on a standalone basis. Our focus is on stabilizing the legacy LTC block through our multi year rate action plan as it is our most effective tool for managing LTC's risk. We do not expect to receive dividends from the business or to contribute capital into it. Therefore, we think it would be reasonable for investors valuing Genworth as a whole To ascribe no value to the U.

Speaker 3

S. Life insurance companies other than the intellectual property we are leveraging for our CareScout initiatives. We see tremendous value in EnAct as evidenced by their strong capital returns and in our ability to grow CareScout over time. Rounding out GAAP results for the quarter, corporate and others current quarter adjusted operating loss of $20,000,000 was higher compared to the prior year, driven by investment and future growth of CareScout. Moving to our investment portfolio, We remain well positioned to manage through ongoing economic uncertainty.

Speaker 3

We have not seen any notable deterioration in the macro environment since our last quarterly update. However, given the heightened focus on investment holdings, especially in commercial real estate, we continue to disclose our portfolio positions on Slide 1718 in our investor presentation. With the regional bank pressures, we've rebalanced and optimized our holdings to exit higher risk regional banks and trim our overall exposure. We said last quarter that we had sold our position in First Republic Bank And the corresponding $9,000,000 pre tax loss is reflected in our net investment gain number this quarter. The portfolio continues to benefit from the high interest rate environment, which allows us to invest at attractive new money rates.

Speaker 3

As a reminder, the majority of our assets are in investment grade fixed maturities that are listed as available for sale, but we generally buy and hold the bonds to support The U. S. Life Insurance Company's liabilities. Because the liabilities are very long duration, especially for LTC, we have limited liquidity risk. As seen on Slide 18, our commercial real estate holdings continue to account for approximately 16% of our total portfolio and are concentrated in higher quality investment grade assets with modest office exposure of less than 20% on a weighted average basis.

Speaker 3

Broad credit performance has been stable across the quarter and we remain confident in the quality of our commercial real estate portfolio and that it's well positioned amidst volatility. Turning to the holding company on Slide 19. After repurchasing $112,000,000 worth of shares in the quarter, We ended the period with $222,000,000 of cash and liquid assets. After reaching our holding company target last September, We strive to maintain a debt to capital ratio of 25% or below, which attributes no equity value to the U. S.

Speaker 3

Life insurance companies. As of the Q2, our debt to capital ratio was 23%, which we view as optimal given our low debt service relative to our size. We received $54,000,000 of capital from EnAct and $63,000,000 from intercompany tax payments in the quarter. Year to date, we've received $111,000,000 in tax payments and for the full year, we continue to expect a total of approximately $175,000,000 to 200,000,000 There's approximately $75,000,000 of remaining holding company deferred tax assets, mainly foreign tax credits that we expect to utilize this year dependent on the taxable income generated by our subsidiaries. Once these tax assets are exhausted, We anticipate becoming a federal taxpayer.

Speaker 3

Tom described our capital allocation strategy and I'll reiterate that our top Priorities remain investing in long term growth through CareScout and returning cash to shareholders through our expanded share repurchase program. We're very pleased the Board authorized the expansion of our share repurchase program by $350,000,000 Through July, we completed 75% of the initial $350,000,000 program that began in May 2022 and we expect to complete the remaining amount by the end of this year. The program's expansion allows us to continue to return capital to shareholders as we head into 2024. Through the first half of this year, we delivered on our strategic priorities to drive value for our shareholders, while proactively managing our liabilities and the risk in our legacy long term care insurance block. The multi year rate action plan continues to be successful And with the additional benefit from the 3 legal settlements, it enhances our ability to honor policyholder commitments and stabilize the legacy LTC block.

Speaker 3

I'm excited about the future of Genworth as we utilize our deep knowledge in the senior care space to innovate new aging care services and solutions with CareScout. EnAct remains very well positioned in the mortgage insurance market and their business performance and increased capital return guidance Will enable us to continue to return capital to Genworth shareholders. Now, let's open up the line for questions.

Operator

Ladies and gentlemen, we will now begin the Q and A portion of the call. As a reminder, please refrain from using cell phones, We'll take our first question from Joshua Esteroff with CreditSights. Please go ahead.

Speaker 4

Hey, good morning. Thank you for your time. Maybe two questions if I can on LDTI and LTC. First, with regards to the intercompany tax sharing payments, can you remind me whether Genworth's Taryn's ability to build its subsidiaries is based on GAAP or statutory profitability. And basically, what I'm trying to get a sense of is whether or not the quarterly volatility GAAP LTC earnings from implementation of LDTI might impact these intercompany tax payments.

Speaker 2

So I'll Jerome, I'll take the first part of that and just say that It's a good question. Our statutory results are much closer to tax results And therefore, looking at the ability to utilize those remaining tax credits, it's more driven by It's taxable earnings, but it's closer to statutory where GAAP can be quite different.

Speaker 4

Got it. Thank you. And then second, with regards to LTC, how should we expect GAAP reserves to develop relative to statutory reserves under the LDTI regime. And I understand that LDTI doesn't impact the statutory financials, but over time, Should we expect GAAP reserves potentially to drift away from statutory reserves unless there's some kind of unlocking event?

Speaker 2

So Jerome or Andy, do you want to take that?

Speaker 3

Yes. Josh, I would just describe this as OBTI is totally different basis of accounting. So GAAP is a totally different basis of accounting from stat And the reserves under U. S. GAAP are going to be on a best estimate basis are going to be discounted at a locked in rate and then further discounted And this is only this only impacts the balance sheet, but they're further discounted based on the single A rate.

Speaker 3

And that really just impacts reserves on the balance sheet when you go to the single A rate, But you also have the locked in rate. On a statutory side, you have a very prescriptive methodology that we use, particularly on the active And so it would be very difficult for me to tell you that they're going to combine or go together versus Drift apart, if I had to, I would just say that there will be demonstrative differences between the two, It would be very difficult to quantify for you. And you know from an LDTI perspective, I would just also highlight that I mean, we've said that we really focus on statutory accounting. The LDTI income will be volatile because half of our block has capped cohorts thus versus the other half with uncapped cohorts. And statutory accounting is really our focus because It's what we review with our regulators.

Speaker 3

It's what we review with our rating agencies. And it's been a consistent basis of accounting that highlights the progress we're making with the company on breakeven.

Speaker 4

Thank you very much. Appreciate everyone's time and color.

Speaker 2

Thanks for your questions, Josh.

Operator

Ladies and gentlemen, I will now turn the call back over to Mr. McInerny for closing comments.

Speaker 2

Thank you very much. In closing, I would just say that as both Jerome and I have talked about, we believe it's important for investors and analysts to evaluate LTC and life annuities under both U. S. GAAP and statutory accounting. U.

Speaker 2

S. GAAP results will generally be more volatile, as we And statutory, because of the disparate treatment of the different LTC cohorts, there are roughly fifty-fifty between the older Tapped on profitable and relatively newer uncapped and profitable blocks. But we also want to emphasize that Because we look at USLI or the life companies as a closed system, they have little impact on wholly company Cash and capital other than the tax payments assuming that we have tax credits to offset that. We value and have valued and I've said to investors for a long time that we value the life company at CERO at this point because we're not putting capital in or taking it out. And I was the main effort there is the focus on the multiyear rate action plan and get The LTC business, it's a breakeven.

Speaker 2

We think that's a few years out. And our focus is the enterprise value It's really more based on our 81.6 percent holdings in that. And we're very encouraged by the early days in CareScout. We talked about Jerome talked about the great progress in Texas. We launched that earlier this year and we've got about 50% of the state covered in terms of By our approved quality network covering about 50% of the 65 plus group.

Speaker 2

We're proud of the progress against our 3 strategic priorities and I went through those and obviously we're very pleased with Anak's continued strong results. We continue to allocate the excess cash from Manatt, which had another great quarter to drive long term shareholder value, Both investing in Cariscount going forward as well as returning capital to shareholders through the share repurchase program and we're pleased that the Board authorized significant increase of another $350,000,000 Thank you all for your interest and For Genworth, we really appreciate it. We'll see you next quarter. And with that, operator, I'll turn it back over to you.

Operator

Ladies and gentlemen, this

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Earnings Conference Call
Genworth Financial Q2 2023
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