Q1 2021 Genworth Financial Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Genworth Financial's first quarter 2021 earnings Conference. My name is Sean 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 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 conference over to Tim Owens, Vice President of Investor Relations. Mr. Owens You May proceed.
Yeah.
Thank you operator.
Morning, and thank you for joining Genworth 's first quarter 2021 earnings call.
Our speakers are remote this morning, so please excuse any sound quality or technical issues that may arise.
Our press release and financial supplement were released last night and this morning, our earnings presentation was posted to our website and will.
And we 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.
Due to applicable security law and publicity restrictions our comments regarding preparations for an IPO of our U S mortgage business will be limited to our prepared remarks.
Following our prepared comments, we will open up the call for a question and answer period.
And Additionally, our speakers Rohit Gupta, Chief Executive Officer of Genworth mortgage insurance will be available to take your question.
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 and our earnings release and.
Related presentation as well as the risk factor on 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.
And our financial supplement earnings release, and Investor materials, non-GAAP measures have been reconciled to GAAP, where required in accordance with FCC rules.
So 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 very much Tim good morning, everyone and thank you for joining our first quarter earnings call.
And I'm pleased to report the Genworth delivered strong operating results and the first quarter.
And while making significant progress against our strategic plan.
Today, I will provide a brief overview of performance across our businesses as well as the progress we've made on our strategic initiatives since our last update and.
And we'll also spend a few minutes on Genworth and go forward strategy and Dan Sheehan will discuss the quarterly performance drivers in more detail.
Genworth delivered net income of $187 million for the quarter and adjusted operating income of $168 million driven by strong performance across U S mortgage insurance.
As well as in our long term care insurance business.
For a semi reported operating income of $126 million compared with $95 million and the prior quarter and $148 million and the prior year.
Relative to the fourth quarter U S and Mysore seasonally lower new insurance written.
Higher earned premiums driven by insurance and force growth and.
And a 16% decrease and new delinquencies and.
Results reflected a loss ratio of 22%.
This compares favorably to the prior quarter due to a higher reserve strengthening and the prior quarter and lower losses from new delinquencies.
U S life reported operating income of $62 million for the quarter compared with $125 million and the prior quarter and a loss of $70 million on the prior year.
Results were primarily driven by LTC insurance, which reported adjusted operating income of $95 million, reflecting low new claim incidents and very high claim terminations likely driven by COVID-19, and importantly, LTC earnings continue to benefit from in force rate actions.
We are optimistic about the potential for broad economic recovery and expansion and the U S. Over the next several years as a result of the vaccine rollout record total fiscal stimulus program and accommodative monetary policy from the fed.
And certainly still remains in the near term however, and we are continuing to take a prudent approach to managing capital and carefully monitoring developing experience as a result, we increased our U S M I and LTC reserves during the quarter.
Overall, I'm very encouraged by our strong operating performance and the excellent execution from our teams over the past year as we've all had to contend with the challenges associated with COVID-19, our performance positions Genworth well as we move forward with plans to unlock shareholder value.
Turning to our strategic plan earlier this month, we announced the termination of our merger agreement, which on an ocean liner.
And now for four and a half years of extraordinary efforts from both sides to close the transaction. This was a disappointing outcome. However, as I've shared on prior earnings calls Genworth is much stronger today than it was four years ago with significantly better prospects as.
As a result of a very good operating performance for <unk>.
Actions to enhance liquidity and reduce debt and excellent progress to further reduce risks associated with our legacy LTC insurance blocks for a multiyear rate action plan and benefit reductions I believe we are well positioned to create future value as a standalone company.
We are laser focused on pursuing the strategic options that provide the capital and resources, we need to further reduce holding company debt and share.
And Genworth can meet its ongoing financial obligations and chart a path to growth.
We're taking decisive actions and I'm very confident for Genworth improved financial position will enable us to me and our future holding company obligations.
We've made significant progress on generating liquidity and reducing debt and the first quarter through the sale of our ownership stake in Genworth, Australia, and the retirement of $729 million of outstanding debt.
We also implemented expense reductions, resulting in $50 million of annualized savings and continue to prepare for the planned U S. M.
And my I P O.
We ended the first quarter with a strong liquidity position and we expect to generate additional liquidity for future steps under our plan.
We have a strong track record of managing Holdco debt, we have a clear path to address the remaining debt during September and we are also confident and our ability to repay the balance of our obligation to accept this year more than a year ahead of our originally scheduled maturity day.
After our September maturity is fully retire debt.
We will have reduced holding company debt by $2 2 billion or over 50% since 2013.
Deleveraging will remain a top priority moving forward.
And we execute on our strategic plan and Dan will cover our plans to address upcoming obligations and more detail.
Related to our obligation to Axa I also want to note that Axa has initiated a lawsuit and the U K against that and they're seeking to recover payouts. It made for policyholders for missile payment protection insurance.
Most recently <unk> filed the particulars of claim and a summary of particulars documents, which outlines its allegations and claims and this action.
Under our agreement with Axa, Genworth and entitled to certain recoveries actually may receive from sand and terror.
As I've said in the past there are numerous examples of distributors and banks paying for the PPI and the selling complaints and we remain optimistic about the potential for recoveries, but beyond that we cannot comment further on this litigation.
Yeah.
Next I'd like to spend a few minutes outlining the next steps and our strategic plan with.
With respect to <unk>, we remain focused on preparing for a public offering of a portion of our interest subject of course to market conditions as well as the satisfaction of various conditions and receipt of required approvals.
We are currently and registration with the SEC and.
And as a result of applicable marketing and other restrictions I cannot provide any details about or discuss the timing of the planned offering.
We will be very limited and our comments about U S and my today other than reviewing its quarterly results.
As part of our strategy our strong preference is to maintain sufficient ownership of U S and why so as to preserve the option to distribute the remainder to genworth shareholders and a tax free spin offs and the future.
After the IPO, we have no current plans to further sell down our stake and U S and mind and based on our expected debt reduction plan and strong cash flow profile, we have no need to do so to meet our upcoming debt obligations. That's all I can say specifically about the IPO process for now.
As we work on the U S MRI IPO and reduce our debt to a more manageable level. We're also pursuing the next chapter and our U S life insurance business. In particular, we are committed to developing and refining sustainable long term care insurance business models we.
We are taking a three pronged approach to maximize the value of our LTC business and to monetize our deep expertise in this area.
First and most importantly, we are continuing to mitigate our downside risk through our LTC multiyear rate action plan and.
And reduced benefit options.
Both of those will continue to reduce our risks we have made exceptional progress on this effort through the end of the first quarter, achieving over 15 billion and net present value from LTC premium increases and benefit reductions since 2012.
Second we are also exploring opportunities to partner with well regarded third parties to launch a new long term care insurance business and the United States. There's a huge need for long term care solutions and the U S with 54 million Americans, aged 65 and older at the end of 2019 and with that number expected to increase.
To $95 million by 2016.
And there are very few players and the LTC insurance market today due to severe financial challenges arising from legacy LTC business.
We are evaluating opportunities to monetize our LTC expertise and on intellectual property and partnership with strong third parties.
The number of new LTC products and services Genworth.
Worth and our potential partners believe this can be a profitable business and the future while addressing a societal need.
The key to success and the future is to learn from the past.
And to design, new LTC products and services with lower and more predictable risk.
We'll also be working with any other IC and state regulators and change the future LTC regulatory model to allow for timely and prudent management of LTC and Bruce.
Third we are working with China Osha line to develop a strategy to address the significant need for long term care solutions and China.
We continue to explore joint venture opportunities building on the strong relationship mutual trust respect and potential LTC business plans, we've developed through working together over the last several years.
The leadership team and I are excited and energized as we move forward with our overall strategic plan, we are remaining nimble and taking decisive actions to maximize the value of our businesses.
We have the right initiatives in place and the right team to lead the execution of our strategy.
We refreshed our board of directors during the first quarter with the addition of Joe Goodman, managing director at for US Advisors LLC powered mills, a former superintendent on New York Insurance Department, and Ramsey Smith, founder and CEO of Alex.
And that FY on it.
These three new independent directors bring a wealth of diverse experience and skills I'm delighted to have them on our board and look forward for their contributions.
In conjunction with this news, we announced that our board share Jim Rapey, along with directors, David Moffett, and Tom Maloney and tend to retire from the Genworth Board. Following the completion of their current terms and may.
I would like to thank Jim for his exceptional leadership as board chair over the last nine years, Tom and David were chairs, our risk Committee and compensation Committee, respectively and <unk>.
And I provided many years of service and excellent contributions to Genworth. The remaining Genworth Board members and I are very grateful that Jim Tom and David We're willing to remain on the board, while we worked through the strategic challenges of the last few years.
Finally, before I turn the call over to Dan I'd like to highlight that Genworth published its first ever sustainability report on April one.
We all faced our share of challenges in 2020, but as a company genworth continue to deliver on our promise to help families become more financially secure debt.
For alliance and prevent and prepare for what the future may bring at the same time, our commitment to advancing sustainability has never wavered and we recognize that the success of our businesses over the long term is linked to our efforts to help build a better society and a better tomorrow for our various stakeholders by care.
And for people and our planet I encourage you to read more about our focus areas and impact and our April report.
In summary.
We are highly focused on executing our strategic priorities and.
Clearly with respect to our interest and U S M I.
And to improve our legacy LTC insurance book refining our go forward plans for new LTC businesses, and the U S and China, and making progress on deleveraging, the holding company and with that I'll turn it over to Dan.
Thanks, Tom and good morning, everyone and.
I'm pleased with the continued progress made during the quarter with strong earnings and capital ratios and our U S mortgage insurance business and results from our LTC multi year rate action plan.
And our holding company, we continued to deleverage, including fully retiring the February debt maturity.
Paying a material portion of the act so obligation and reducing the amount outstanding on our September 'twenty. One maturities. We also ended the quarter with more than $750 million and holding company cash we reported net income available to genworth shareholders for the quarter of $187 million and adjusted operating income of $168 million.
Included in net income for the quarter was $33 million and mostly mark to market gains and a $13 million benefit and discontinued operations primarily related to tax items on prior to divestitures.
These items were partially offset by $21 million and severance cost related to our previously announced restructuring.
The U S mortgage and housing market continues to perform very well with increasing home prices are large origination market and continuation of decreasing new delinquencies from their earlier peak.
We view the stimulus initiatives forbearance extensions and the strong home price appreciation as positives for delinquency and pure development and ultimate claims.
Overall financial results for <unk> and the first quarter were once again driven by growth of our insurance and force and lower levels of new delinquencies compared to the prior quarter.
For the quarter U S semi reported adjusted operating income of $126 million and a loss ratio of 22%.
New insurance written and U S and <unk> was $24 9 billion and the quarter up 39% versus the prior year, primarily driven by higher mortgage originations and a larger private mortgage insurance market.
Although most of our peers have not reported we estimate our market share will reflect a modest sequential overall market share gain and the quarter for.
A low interest rate environment, and resulting high levels of refinance activity continued to drive low persistency levels and our insurance portfolio.
Lower persistency has impacted our business in several ways, including partially offsetting portfolio growth from and IW, increasing single premium cancellations.
Accelerating the amortization of our existing reinsurance transactions and shifting our portfolio concentration to newer book years.
Single premium cancellations continue to remain elevated benefiting premiums during the quarter by $26 million, which was down slightly from the $30 million and each the third and fourth quarter last year.
In addition, we seeded 16 million of premiums related to our credit risk transfer program and the quarter, which is higher by $1 million sequentially given the expansion of our credit risk transfer program.
While new delinquencies are approximately 10000 during the first quarter was still elevated versus pre COVID-19 levels. They were down 16% sequentially with approximately 54% reported and forbearance plans.
New delinquencies resulted in $44 million and loss expense in the quarter and our expected ultimate claim rate was approximately 8%.
Tours of approximately 13500 were down 19% sequentially and continued to outpace new delinquencies.
We ended the quarter with approximately 41000 total delinquencies or delinquency rate of four 5% and total approximately 70% of our delinquencies are and forbearance and 90% of mark to market loan to values, reflecting at least 10 per cent borrower equity using December 2020 home prices.
Our servicer reported forbearance trends continue to decline from peak levels in May 2020, and ended the first quarter with four 9% or approximately 45000 of our active policies reported and a forbearance plan with 36 per cent of those and forbearance still reported as current.
During the quarter, we increased our reserves for pre COVID-19 delinquencies by $10 million per pretax the reserve increase primarily reflects our expectation that these pre COVID-19 delinquencies will have a modestly higher claim rate and the company's prior best estimate given the slower emergence of cures.
And U S life segment reported adjusted operating income was 62 million and the quarter compared to adjusted operating income of $129 million and the prior quarter and an adjusted operating loss of $70 million and the prior year.
Our U S life businesses continue to experience elevated mortality that we believe is attributable in part to the COVID-19 pandemic.
And long term care adjusted operating income was $95 million and the first quarter compared to 129 million and the prior quarter and $1 million and the prior year.
Underlying results continue to reflect the cumulative benefits of our approximately eight year track record of achieving significant LTC premium rate increases and benefit reductions.
Claim terminations were higher and the first quarter versus the prior quarter and prior year, we do not require a death certificates for LTC terminations, but we assume that the elevated terminations were primarily driven by COVID-19.
We believe that the elevated claim terminations this quarter and during the pandemic are temporary and have primarily impacted our most vulnerable claimants.
We increased our claim reserves by 67 million pre tax this quarter, continuing our view on <unk>.
<unk> claim population is less likely to terminate and the pre pandemic average and.
In addition, new claim submissions continue to remain lower than expected driving additional favorable IV and our development of 29 million pre tax during the quarter.
We currently believe that the pandemic driven decrease and incidence is temporary and that our incidents experience will ultimately resembled previous trends.
Shifting to enforce rate actions for LTC. The overall benefits from in force rate actions have remained strong for the quarter Genworth received approvals impacting approximately 396 million of premiums with a weighted average approval rate of 40%.
And on accumulative net present value basis from 2012 through <unk> 'twenty, one we've achieved approximately $15 2 billion of <unk>.
Proved LTC premium rate increases and benefit reductions.
We expect strong approvals throughout 2021 based on our filings during 2020.
Turning to life insurance overall mortality for the quarter continued to be elevated versus historical trends and was up versus the prior quarter and year for.
First quarter included an estimate of approximately 35 million after tax and COVID-19 related claims based upon death certificates received to date.
Even absent these COVID-19 related claims mortality remained elevated during the quarter consistent with trends observed throughout the pandemic.
Term life insurance products continued to be negatively impacted by shock lapses. Although this impact will continue to lessen through 2021.
Total term life insurance DAC amortization reduced earnings by $13 million after tax versus $18 million after tax and the prior quarter and $27 million and the prior year.
And fixed annuities adjusted operating earnings of $30 million for the quarter was higher compared to the prior quarter and prior year, driven by higher mortality and favorable equity markets and interest rates.
And the run off segment, our adjusted operating income was $12 million for the first quarter down slightly versus the prior quarter and up from last year due to improved equity markets and interest rates.
Rounding out the results corporate and other is adjusted operating loss was $32 million and was down from last quarter and the prior year, primarily driven by lower corporate expenses and interest expense our deleveraging efforts this quarter and moving forward are projected to decrease the losses and the segment and the quarters ahead.
Turning to capital levels and U S. M. I, we finished the quarter with an estimated pmiers sufficiency ratio of 159% for approximately $1 8 billion above published requirements.
The improvement and our Pmiers sufficiency versus the prior quarter was driven primarily by the completion of an insurance linked note transaction on season loans, which provided approximately 500 million of P. Myers credit at quarter end.
Subsequent to the quarter, we also executed and Ireland on a portion of our 2020 book, which will provide approximately $300 on a pre virus credit if.
If we gave effect of this transaction and the first quarter of 2021, our Pmiers sufficiency would've increased to 176% for approximately $2 1 billion above the published P. Myers requirements. These transactions, which are part of our credit risk transfer program are designed to provide cost effective capital relief and.
And reduce loss volatility.
We expect capital and Genworth life insurance company or Glick as a percentage of company action level RBC to be approximately 255% up from 229% at year end.
U S life statutory income and the first quarter benefited from earnings and LTC from trends and termination and incidents as well as from in force rate actions.
As we've discussed in the past we have no plans to infuse additional capital into or extract capital from our U S life insurance businesses.
Going forward the U S life insurance businesses will continue to rely on their consolidated statutory capital of approximately $2 3 billion as of the end of the first quarter significant.
Significant claim and ALR reserves and prudent management of in force blocks and Actuarially justified rate actions to satisfy obligations to our policyholders.
For holding company cash we ended the quarter and a very strong cash position for $757 million and cash and liquid assets or approximately $495 million above our targeted cash buffer.
This excludes approximately $284 million and cash held at <unk> intermediate holding company Genworth Mortgage Holdings, Inc. GMA Chi.
Page 16 of the Investor presentation provides the quarterly activity, including proceeds of $370 million from the sale of our interest and the Australia business and intercompany tax payments of $87 million, reflecting strong underlying taxable income from our U S insurance subsidiaries.
The $729 million and debt reduction during the quarter income.
The February debt maturity of 338 million.
Acts of prepayments of 245 million triggered by the Australia business sale and open market repurchases of 146 million of the September 'twenty one maturities.
As we look forward in 2020, one with our cash on hand, and the planned sale of a portion of our interest and U S. M. I. Our current plans include prepaying. The remaining acts the obligation of approximately $345 million and the current outstanding balance on the September 'twenty, one maturities are $513 million.
This will leave for 100 million due in both August 23, and February 24 to be covered by cash on hand, and the resumption of U S and my dividend.
After the February 2020 for maturity on our remaining holding company debt is $300 million, due and 2034 and $600 million due in 2066.
As Tom indicated given the strength of our expected cash position and the meaningful benefits provided by tax consolidation. We have no further plans to sell U S. M. Ay beyond what is currently contemplated.
And closing we've taken numerous steps to improve the liquidity and financial flexibility of our holding company and the position of our businesses.
Pleased with our financial progress and remain focused on providing value to all key stakeholders.
One final note as Tim noted earlier due to applicable securities law restrictions our comments regarding the status of preparations are other matters related to a planned offering of a portion of our interest and our U S mortgage business will be <unk>.
Limited to our prepared remarks.
With that we will now open the line for questions.
Thank you.
So if you would like to ask a question. Please signal for question and Star one on your telephone keypad.
If you are using a speaker phone. Please make sure on your mute function is turned off to allow your signal to reach our equipment again press star one on your telephone keypad to ask a question.
We will now pause for a moment to know everyone and opportunity to signal for questions.
Okay.
Okay.
Yeah.
Okay.
Okay, ladies and gentlemen is for no further questions in the queue.
And remind me do you actually have a caller name. So we will take our first question for Peter Troisi of Barclays. Please go ahead.
Hi, good morning, everyone.
Thanks, very much for the comments about.
And how you.
How are you planning on and approaching the the debt and and paying it down I guess my question is it seems like you are going to use it.
Existing cash.
And existing cash flow or cash flow from existing businesses to effectively repay all the debt.
But down the road, if you no longer own U S M or have a large stake in it.
And we're where will the cash flow come from to repay the debt.
Peter that's a good question and it's clear that.
The U S life companies.
The legacy companies.
We will not be able to to pay dividends.
And on and as we said and Dennis said, we have no.
Plans to put any money into those but we are hopeful that with <unk>.
Joining venture opportunities and the U S and China with partners and so we'll be sharing the capital investment, but we would hope that over time, those will be successful businesses and the new companies and not the legacy companies.
That has.
For a variety of long term care insurance products and services at some point down the road, we'll be able to pay dividends, but for the foreseeable future. The only dividends, we would receive would be coming from U S. Semi based on our ownership and use them on Dan do you want to add anything to that.
No I think you've covered it pretty well Tom.
Peter anything on it yet.
Yeah, No a couple of quick follow ups. It seems like then that you are contemplating and your cash forecasting as it relates to debt repayment youre contemplating some cash flow coming out of the the life businesses, which will be used to repay debt as it is that right.
No we right now.
And we don't expect any dividends from our life companies, which I'll call the legacy companies and the future depending on whether we go forward with.
And the joint ventures that I briefly discussed and still early days on those we would hope for those would be profitable.
Down the road and when they reached the required level profitability, they would be able to pay dividends.
But there is no current.
Yes.
Sorry, John I would just add Peter that although wildly as long as the U S life company has taxable income.
Benefit from the consolidation the same as we do with U S M I.
And that and that income will offset losses at corporate for debt service and other matters and and in fact through that process. We will create cash flow from both U S and I on the life companies that will be used to pay our debt service payments as well.
Yeah that makes sense and we've seen those cash tax payments benefit holding company cash over the over the past few quarters.
Is there is there are.
Away for us to gauge.
The size and frequency of those cash tax payments to the holding company over time.
And so that one Dan.
Thanks, Doug.
And we don't provide forward guidance on it.
On earnings, but what I would say is that so long as we have positive earnings coming out of life business and positive earnings come on coming out of U S. L. M. I, it's sort of simple math and say what do we have left in terms of debt service payments.
And we have a little bit of other costs at corporate but not a lot.
And just do the math and flow it through your model.
Okay. Thanks, very much for the answers.
Thanks Peter.
Thank you. So we will now take our next question from Joshua ask credit sites.
Hey, good morning, Thanks for taking some share.
And if you can can you folks for merit.
We can.
Yeah, Okay great.
You give us a quick update to the extent you are able to with regards to any conversations you might have had with the GSE or anything you've heard for.
From the GSE is with regards to when they intend to start allowing.
Allowing capital distribution out of mortgage insurance operating company.
And it will start with row here and then Dan.
Sure. Thanks, Tom Hi, Joshua So we currently are operating under GSE capital preservation requirement through June 21, and all of my companies and under the same requirements for any dividends from operating companies have to be pre approved by the <unk>.
We are and ongoing discussions with <unk> and FHFA all the time about how they're thinking about forbearance and how theyre thinking about pandemic recovery, but until they make a final decision. We don't have any for the guidance, we provided on how they're thinking about capital or dividend and the future.
Yes.
Dan understood I appreciate it.
No I think that was pretty comprehensive thanks rohit.
Okay. Thanks, guys.
Ladies and gentlemen, as there are no further questions I will now turn the call back over to Mr. Mcinerney for closing comments.
Thank you very much the on and thank you for all of you for joining the call today.
While we are certain there are many more questions relating to our planned IPO of U S. M. I <unk>, we really appreciate that everyone on the call today respected our inability to discuss the IPO beyond our prepared remarks, given the S. One registration filing with the SEC.
Having said that on it and I hope for as you got from Dan and my remarks, we are excited about Genworth next chapter.
And we look forward to continuing to update you as we execute our plans going forward.
Thank you again for your interest and support of Genworth and with that I'll turn the call back over to Phil.
Ladies and gentlemen, this concludes Genworth Financial's first quarter conference call.
Thank you for your participation and at this time the call will end.