Genworth Financial Q1 2024 Earnings Call Transcript

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May 2, 2024

There are 4 speakers on the call.

Operator

A reminder, the conference is being recorded for replay purposes. Also, we ask that you refrain from using cell phones, speakerphones or headsets during the Q and 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.

Speaker 1

Thank you, and good morning. Welcome to Genworth's Q1 2024 earnings call. The slide presentation that accompanies this call is available on the Investor Relations section of the Genworth website, investor. Genworth.com. Our earnings release and financial supplement can also be found there, and we encourage you to review these materials.

Speaker 1

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, Jamal Arland, President and CEO of our U. S. Life Insurance Business and Kelly Selzgeber, Chief Investment Officer, will also be available to take your questions.

Speaker 1

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. In our investor materials, non GAAP measures have been reconciled to GAAP where required in accordance with the SEC rules.

Speaker 1

Also, references to statutory results or 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 very much, Sarah, and good morning, everyone, and thank you for joining our first quarter earnings call. Genworth continued to make strong progress in the Q1 against our strategic priorities to drive long term growth and shareholder value. In the Q1, Genworth reported net income of $139,000,000 or $0.31 per share and adjusted operating income of $85,000,000 or $0.19 per share. Results were led again by NACHT, which had a very strong quarter with adjusted operating income of $135,000,000 to Genworth. ENACT also announced a $250,000,000 expansion of its share repurchase program and an increase in its ordinary dividend to $0.185 per share, up from $0.16 per share.

Speaker 2

We are very pleased with ANAC's continued strong operating performance, capital levels and shareholder distributions. Since ANAC's IPO, Genworth has received approximately $675,000,000 in capital from Enak, including $61,000,000 in the Q1. We are very pleased with our approximately 81 percent ownership stake in Enac as it continues to generate significant earnings and is a key source of cash flows helping fuel our share repurchase program, opportunistic debt reduction and our growth investments in CareScout. Our LTC segment reported adjusted operating income of $3,000,000 in the quarter, driven by seasonally higher claim terminations. Meanwhile, our Life and Annuity segment reported an adjusted operating loss of $15,000,000 driven by losses in life insurance.

Speaker 2

Jerome will cover the performance of these segments in more detail later. On a statutory accounting basis, the U. S. Life insurance companies had a very strong quarter with pretax income estimated at $258,000,000 driven primarily by benefits from LTC in force rate actions, including the impact of legal settlements. Complete statutory results for our U.

Speaker 2

S. Life insurance companies will be available when we file our Q1 statutory statements later this month. Turning to our 3 strategic priorities, we continue to further strengthen the financial and operating capabilities of our legacy LTC Insurance business. We're achieving this primarily through our multiyear rate action plan or MIRAP, the most effective tool we have to bring our legacy LTC Insurance portfolio to breakeven on a go forward basis and ensure the continued self sustainability of the life insurance companies. We achieved a total of $41,000,000 of gross incremental premium approved through March with an average percentage premium increase of 25%.

Speaker 2

This brings our cumulative progress to approximately $28,000,000,000 in approvals on a net present value basis since 2012. Our second strategic priority is develop innovative aging services and solutions through CareScout. On this front, CareScout Services is well positioned to drive future growth for Genworth as we continue to make significant progress on the first phase of our offering with the build out of our CareScout Quality Network, a network of long term care providers. The CareScout Quality Network is now available in over 30 states with more than 200 providers in the network. We continue to add providers to the network that meet our quality credentialing standards and agree to negotiated preferred rates.

Speaker 2

By the end of the year, we anticipate we will have CareScout quality network home care coverage for 2 thirds or more of the age 65 plus census population in the U. S. The CareScout services business model is predicated on earning revenues generated from discounts on LTC claims savings with an initial focus on reducing claim costs on Genworth LTC policyholders' claims. Historically, Genworth policyholders have chosen their care providers with little input from Genworth and more than a third have chosen providers that charge hourly rates above the median cost of care in their respective zip codes. 2 key benefits of the CareScout quality network are the higher quality of care and the lower hourly rates negotiated with the subset of providers that are admitted to the network.

Speaker 2

Providers are willing to accept lower hourly rates in exchange for potential access to Genworth's 1,000,000 LTC policyholders. Currently, 85% to 90% of the providers approved for our network have agreed to hourly rates below the median cost of care for their respective zip codes. While Genworth policyholders can choose a care provider outside of the Care Scout quality network, we assume many will choose providers in the network because they will allow their policy benefits to potentially last longer while receiving care from high quality person centered care providers. Genworth Life Insurance Company and CareScout Services have negotiated an arm's length agreement that is triggered when a Genworth policyholder chooses a CareScout quality network provider. Genworth, of course, benefits from 100% of the applicable cost discount negotiated with the provider.

Speaker 2

The life insurance company retained 75% of the value of the discount through lower claim costs, which we continue to forecast between $1,000,000,000 to $1,500,000,000 in savings over time on an at present value basis. The remaining 25% of the value of the discount is paid as a fee to CareScout services for the use of their network. As the number of matches between individuals on claim and CareScout Quality Network Providers grows, CareScout Services revenues will increase. With the network in place across the country by the end of the year, we expect CareScout revenues to grow as matches increase in 2025. Over time, with national coverage in the CareScout quality network, we will expand our customer base beyond general policyholders to include other LTC insurance carriers policyholders and then eventually go directly to consumers.

Speaker 2

As we have said before, we believe a holistic approach to making aging more dignified, connected and fulfilling includes offering insurance and other funding solutions to help pay for long term care. We continue to build the foundation for these offerings in CareScout and now expect to complete this foundational work by the end of the year with a goal of formally offering a first insurance product in early 2025. As we work through designing a pricing our new LTC insurance products and its related assumptions, we are leveraging our unparalleled experience and paying over 370,000 LTC claims. When I look at the LTC insurance products currently available in the market, I believe that the price points for many of these products reflect pricing assumptions that are aggressive. Moving to our 3rd strategic priority, capital management.

Speaker 2

We continue to allocate excess cash from EnAct to drive Genworth's long term shareholder value. In the Q1, we made excellent progress continuing to execute our share repurchase program. In total, we have repurchased approximately $434,000,000 of shares at an average price of $5.42 per share since the program's inception in May 2022. Cash flows from MNAC have also enabled us to invest in long term growth and we continue to expect approximately $35,000,000 of capital contributions to CareScout services this year as we build out the CareScout quality network. We will continue to prudently scale and diversify CareScout Services in a way that will leverage our intellectual property, successfully drive claim savings in our legacy LTC block, introduce new offerings to the market and drive long term growth.

Speaker 2

Before I wrap up, I wanted to take a moment to remind investors that the trial date and access case against Santander regarding the payment protection insurance misselling case is still set for March of next year. As we have said before, Genworth is not a party to the case, but we previously owned the payment protection insurance business before selling it to AXA in 2015. If AXA is successful in pursuing its claims, we will share in the recoveries AXA receives from Santander. We continue to monitor the proceedings closely and we'll update investors with any material developments. In closing, I'm very pleased with our continued progress against our strategic priorities year to date along with Enac's strong performance.

Speaker 2

And with that, I'll turn the call over to Jerome. Thank you, Tom,

Speaker 3

and good morning, everyone. I'm very pleased with the ongoing value creation delivered by EnAct and progress on our LTC in force rate actions as well as our capital optimization and continued improvement in financial flexibility. I'll first discuss Genworth's results and drivers in more detail, then I'll provide an update on our investment portfolio and liquidity before we open the call for Q and A. Per slide 5, and as Tom mentioned, 1st quarter adjusted operating income was $85,000,000 driven primarily by an act. Our Long Term Care Insurance segment operating income of $3,000,000 including a liability remeasurement gain from actual to expected experience, primarily driven by seasonally high mortality.

Speaker 3

Looking ahead, despite the favorable seasonal impact in the Q1, due to short term deviations of actual results compared to long term assumptions, we continue to expect LTC earnings pressure throughout the remainder of the year and expect a liability remeasurement loss from actual to expected experience for the full year on a GAAP basis. As a reminder, last year we recorded the full year pretax actual to expected loss of 269,000,000 dollars with a quarterly average loss of about $65,000,000 after experiencing positive first quarter results. And as we have said before, GAAP results continue to be volatile. We believe statutory results better represent the underlying performance of the life companies, including the positive impacts resulting from our in force rate actions. The results from Enact and LTC were partially offset by adjusted operating losses of $15,000,000 in life and annuities and $38,000,000 in corporate and other.

Speaker 3

Life and annuities included an adjusted operating loss in life insurance of $33,000,000 reflecting the unfavorable impacts of seasonally high mortality as well as adjusted operating income of $11,000,000 from fixed annuities and $7,000,000 from variable annuities. The loss in corporate and other was driven by unfavorable tax timing of $15,000,000 that we expect to reverse by year end and higher expenses related to new growth initiatives with CareScout Services. Now taking a closer look at ANAC's performance on Slide 6, ANAC delivered a very strong Q1, including high quality growth in its insured portfolio and strong profitability. Enac's adjusted operating income of $135,000,000 to Genworth was down 6% versus the prior year as a result of a smaller reserve release in the quarter. Primary insurance in force increased 4% year over year to $264,000,000,000 driven by new insurance written and continued elevated $8,000,000,000 at the end of the Q1 of 2024, while at the same time, EnAct has delivered significant capital returns to Genworth.

Speaker 3

As shown on Slide 7, Enac had a favorable $54,000,000 pre tax reserve release in the 1st quarter, which drove a loss ratio of 8%. The reserve release primarily reflects favorable cure performance from early 2023 and prior delinquencies. EnAct has a strong estimated PMIERs sufficiency ratio of $900,000,000 above PMIERs requirements. Enac continues to deliver strong cash flows to Genworth. The combination of Enac's quarterly dividend and its share repurchase program generated a total of $61,000,000 in proceeds to Genworth in the Q1.

Speaker 3

As EnAct announced yesterday, it has increased its quarterly dividend and expanded its share repurchase program by $250,000,000 and continues to expect to return a total of $300,000,000 to its shareholders in 2024. Based on our 81.5 percent ownership position, we expect to receive $245,000,000 from EnAct for the full year. EnAct's updated program enables Genworth to potentially receive proceeds earlier in the year than previously anticipated, which would allow us to be more opportunistic with our own share repurchases throughout the year. Turning to long term care insurance, starting on Slide 8, we are making strong progress on our strategy to achieve economic breakeven on a go forward basis in the legacy LTC business. We continue to significantly reduce tail risk through our multi year rate action plan or MIRAP and legal settlements.

Speaker 3

As of the end of the first quarter, we have achieved in force rate actions worth approximately $28,000,000,000 on a net present value basis and have seen a cumulative policyholder response rate of 53% to reduce benefits. Upon the completion later this year of the 3rd and final legal settlement on our large Choice 2 block, approximately 70% of the LTC block will have been offered reduced benefit options under these settlements. Slide 9 shows more details on the in force rate action filings approved in recent periods as well as a positive trend we've seen in policyholder reduction elections. We continue to expect strong approvals for the full year. As more policyholders elect to reduce their benefits as a part of the MIRAAP or the recent legal settlements, they're able to maintain meaningful coverage while reducing Genworth's tail risk on these policies and further protecting our ability to pay claims over the long term.

Speaker 3

As we said before, we manage the U. S. Life insurance companies on a standalone basis. They operate as a closed system, leveraging existing reserves and capital to cover future claims and other obligations. We will not put capital into the legacy life insurance companies and given the long tail nature of our LTC insurance policies with peak claim year still well over a decade away, we also do not expect capital returns from this segment.

Speaker 3

As shown on slide 10, we had total LTC statutory pretax income of $151,000,000 reflecting a significant benefit from in force rate actions and legal settlements of $462,000,000 Slide 11 shows our very strong overall statutory pretax income for the U. S. Life insurance companies of $258,000,000 This was led by LTC and the favorable impacts with in force rate actions and legal settlements, as well as a $97,000,000 benefit to variable annuities from equity market and interest rate movements in the quarter. In addition, 1st quarter results reflect the net favorable impact of seasonally high mortality, which typically trends lower through the remainder of the year. The consolidated risk based capital ratio for Genworth Life Insurance Company or GLIC was 3 14% at the end of March compared to 303% at the end of last year, driven by strong statutory earnings.

Speaker 3

GLIC's consolidated balance sheet remains sound with capital and surplus as of the end of March of $3,500,000,000 Our final statutory results will be available on our investor website with our Q1 filings later this month. Moving to our investment portfolio, which is summarized on slide 12, we remain confident in our positioning and believe we have the right strategy given the products in our portfolio and the long duration of our liabilities with very limited liquidity risk. As a reminder, the majority of our assets are in investment grade fixed maturities that we generally buy and hold to support the U. S. Life insurance companies' liabilities with unrealized gains and losses impacting equity through changes in other comprehensive income.

Speaker 3

The portfolio continues to benefit from the high interest rate environment and we continue to monitor our commercial real estate exposure, which is approximately 16% of our total portfolio. It has a manageable maturity schedule and is concentrated in higher quality investment grade assets with office exposure less than 20% of our real estate investments. Next, turning to the holding company on Slide 13. We received $61,000,000 of capital from ANAC during the Q1, which included accelerated returns from its share repurchase program. We ended the quarter with $253,000,000 of cash and liquid assets.

Speaker 3

Outflows in the quarter included $78,000,000 of other items, largely related to annual employee benefit payments that are reimbursed by our subsidiaries throughout the year. Tom reviewed our capital allocation strategy and I'll reiterate that our top priorities shown on Slide 14 are to invest in long term growth through CareScout, return cash to shareholders through our share repurchase program when our share price is below intrinsic value and opportunistically pay down debt when attractive to us. We continue to return capital to shareholders via share repurchases in the Q1, repurchasing $63,000,000 at an average price of $6.17 per share and another $12,000,000 through April 30. We have $266,000,000 remaining under our current authorization as of the end of April and continue to expect to allocate roughly $125,000,000 to $150,000,000 to share repurchases in 2024. We were able to execute repurchases at an accelerated pace in the Q1 due to cash received late in the Q4 from ANAC, through the Q1 from Mannak share repurchase program and due to our share price being below our intrinsic value.

Speaker 3

Our expected range for the full year may vary depending on our share price and market conditions and as a reminder is lower than the amount we repurchased in 2023 given that we have fully utilized our holding company tax assets. We're very pleased with the value created for shareholders through our share repurchase program. We also repurchased $6,000,000 of debt in the Q1, reducing our total holding company debt to 850,000,000 dollars We maintain a debt to capital ratio below 25%, attributing no equity value to LTC, life and annuities. We are very comfortable with our financial flexibility given our liquidity level, sustainable cash flows from Enac and manageable debt level. In closing, we are delivering on our strategic priorities while proactively managing our liabilities and risk.

Speaker 3

The multi year rate action plan and the additional benefit from the 3 LTC legal settlements are enhancing our ability to honor policyholder commitments and further stabilize the legacy LTC block. Enact is a strong driver of shareholder value as evidenced by its stable earnings, increasing book value and capital returns. Looking ahead, we will continue to focus on delivering sustainable long term growth through EnAct and CareScout, while returning meaningful value to shareholders through share repurchases and opportunistically repurchasing holding company debt. 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. It appears that there are no questions at this time. Ladies and gentlemen, I will now turn the call back over to Mr. McInerney for closing comments.

Speaker 2

Thank you very much, Cynthia. What I'd like to do is just sum up and say we're very pleased with the trajectory of Genworth's key value drivers along with another very strong quarter for EnAct and for the U. S. Life companies a very strong statutory income in the quarter of $258,000,000 I want to thank all of you for your interest and support of Genworth. I guess we'll see you next in the upcoming shareholders meeting, which is in later in May.

Speaker 2

And then we look forward to seeing you again next quarter. And with that, I'll turn the call back over to Cynthia.

Operator

Ladies and gentlemen, this concludes Genworth Financial's 1st quarter conference call. Thank you for your participation. At this time, the call will end.

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